Listen to the Wiser Tanks, Bernanke

We're now getting inflation-hawk, strong-dollar talk from the front-line think tanks. It's time for the Federal Reserve to wake up.


[Thanks to the Minneapolisfed.org, strangely enough, for the image. They've missed the most vital strong points and weaknesses of a strong dollar.]

Steve Hanke at Cato talks about the Fed's poor record, and John Chapman at the American Enterprise Institute gives his opinion in the Wall Street Journal about the Phillips Curve's long-term invalidity.

But is the Fed listening?

No, because they seem to be going along with the idea that a strong dollar is not in our interest (in spite of what government officials say in public).

Keynes is back, at least at the Fed.

It's All the Greenspan-Put-Helicopter-Ben-Fed's Fault

I love it when someone more influential than I says what I've been saying in my little blog.

Today, it's the editorial commentator at the Wall Street Journal.

He lays fault for the current commodity bubble directly at the feet of the Fed.

He blames:

1. Political pressure (i.e. Fed weakness); and

2. Intellectual mistakes (i.e. the Fed's bad economic science).

I agree. You've been reading my arguments over the past months and years along these lines.

I would add that Bernanke is personally responsible, due to his reliance upon a faulty interpretation of the 1929 Great Depression as described in his own academic work.


[Thanks to Artlebedev.ru for this great illustration of the Naked Emperor.]

He is wrong and the Austrians are right about 1929, as was Edward C. Harwood.

But patience, patience my friends. We must have faith that good science will win in the end--the long-term end, I mean, which could be well after our own lifetime expires.

Is Hoarding Food a Better Investment Than the Savings Bank?

Brett Arends at the Wall Street Journal is advising us to place our small change into food in this article today, on the argument that a further rise in prices might be steeper than the interest on that money market fund you own, never mind your classic savings account, or even CDs, or short-term treasuries.

It's true that some food prices have doubled and tripled around the world over the last few months, and it seems difficult to believe that this won't affect us here in the US.

Arends mentions the causes for this food frenzy:

(1) Increased demand from China and India, which contain billions of increasingly wealthy but not yet overfed people. That sounds like a good thing from a humane point of view.

(2) Increased demand for biofuels, which some people seem to have forgotten are made of those very things that the global poor eat to survive. (Gore and environmentally-friendly governments of this world, what were you thinking? Perhaps your own enrichment with your carbon-trading and bio investments?--which is a non-sequitur, because the use of biofuel is not even proven to be carbon-thrifty.)


[Thanks to adminstaff.vassar.edu for the image of Irish food riots of 1846.]

Arends forgets another possible cause:

(3) The loss of value of the principle global monetary reference currency, the dollar, which is being sacrificed by American politicians to "save the economy" (read "bankers and speculators").

What could arrest this food-price-spiral phenomenon is a sudden reversal of the trashing of the dollar, which trashing the monetary authorities have engineered and which is causing currency and commodity speculators to have a field day.

Indeed, some Wall Street pundits are conjecturing that the Federal Reserve will lower interest rates only a quarter point at the end of the month, and that they intend to communicate (otherwise known as "jawboning") their intention to hold rates in the near future, so as to judge whether their actions have been efficacious and to see whether general price inflation is going to need repression via rate hikes or not.

Whether this will be more than posturing is the unknown. Rate hikes seem a very remote possibility at the moment, given our popularist political climate and the people's unawareness of government's role in all of this. (See this previous post as an example of what I think about that.)

Ah, isn't economic life fascinating.

Some Good Economics Commentary Coming out of AIER

Many think tanks churn out pages and pages of commentary on a daily basis. Of course, the ones advocating "My Side" of the issue are doing a fine job, and those on the side of the "Enemy" are producing hogwash. (And for the most part I do believe that.)

The difference? The good ones are basing their research on at least a modicum of science. The bad are simply writing their propaganda and then finding the pseudoscientific justification for it.

But that's what this tug-of-war of ideas is all about, and may the best player win.


[Thanks to quiltersmuse.com for the image.]

One of the organizations founded on a model of scientific inquiry as opposed to nice-sounding nonsense is the American Institute for Economic Research established by Edward C. Harwood.

Since Harwood's death in 1980, the Institute has preserved the most important aspect of its identity: Its lack of bias and its reliance upon data and the evidence. If the figures to support an argument are not there, they will refrain from making the argument; and this takes a strength of discipline that many economists and thinkers in other fields do not possess.

The funds supporting the work they produce come from readers and from reader donations, not from any particular wealth source with an agenda, like so many of the tanks around, e.g. George Soros's Open Society Institute, or the Pew Charitable Trusts.

AIER's present management has begun to bring their platform into the 21st century and now maintains a rapidly improving website, adding just recently a daily commentary column like this one about the true stats on American manufacturing and jobs in the manufacturing sector. You might be surprised by the conclusion to which the unbiased evidence points.

Add them to your daily read. The RSS feed is hidden here, top left corner.

So Who's the Heroic Patrick Moore of the Global Warming Movement?

This man has been an unsung hero for many years now, and this piece in today's Wall Street Journal tells his story.


[Thanks to Wired.com for the photo.]

See also this extract about him.

Like many of us, his heart drove him to espouse the protection of nature and the environment. But unlike most, his intelligence drove him away from the group he had helped to form, Greenpeace, because he observed that his colleagues were letting their emotions take over from the evidence.

It takes courage to renounce one's former partners, especially when one is alone. So who will be the person who stands away from the Global Warming hysteria and starts telling the truth from the inside?

Watch Out for Leftist Bullets Through the Health Savings Account

Government intervention is the bane of the existence of people like me but the silver bullet for people like the socialists, otherwise known as progressives.


[Thanks to street-directory.com.au for the picture.]

They can kill a good idea before you can congratulate yourself.

Widespread adoption of a good version of the Health Savings Account [HSA] would be the best idea that came down the pike since ... well, I'm not sure since when, because there haven't been many good ideas from the government sector in my lifetime.

The HSA is the answer to our exploding medical costs, because it returns the consumer to his position as market player in the health care system, thereby providing the competition that the system now lacks. (See this previous post for a discussion of the healthcare issue.)

But like all good ideas, legislators have been busy trying to kill it, according to this article at the Wall Street Journal.

Don't you fall for the progressives' whining cry for "supervision" or "oversight" of the insureds' use of their own medical savings account funds.

Are we now going to have to submit to the Medical Expense Police every time we write a check for a medical prescription? Can you imagine the cost, even if some company has come up with a computer system to track us all? Will we soon be subject to filing our income taxes through companies like Evolution Benefits?

Do we have to scream "Big Brother" again? Yes, we do, folks. Start howling to your legislators.

If we don't make a fuss, the leftists will put that silver bullet right through the HSA, just like they did the holding of gold (long-term profits from the sale of gold are not taxed at the long-term capital gains rate but at the full rate), the ETA (the treatment of the ETAs is also subject to penalizing tax consequences), the inflation-indexed treasury bond (also subject to taxation penalties), insurance and utility industry activity (subject to state and federal legislation that destroys any semblance of a free market), charity (government has taken over the charitable role and destroyed the ethic that used to exist), property rights (government can now seize your property not just for roads, libraries and parks, but just to make money), and ... well, I could go on and on.

Food Riots, Some Causes

Some good sense coming out of Vincent Reinhart in this article in the Wall Street Journal today.


[Thanks to Lostgirlsworld.blogspot.com for the image.]

He blames four phenomena:

1. Loose monetary policy, with our Federal Reserve setting the interest rates at 2.25%, which is lower than the CPI, thereby encouraging price inflation. [And I'll add, the Fed about to lower it some more, according to market perceptions.]

2. Resulting dollar weakness being coupled with unbalanced exchange rate intervention by certain countries like Saudi Arabia, China, India, Korea, and Taiwan, all holders of huge quantities of US dollars in their reserve accounts and all witnessing the corresponding inflating of their own currency and prices. As an aside, their dollar intervention also forces the other currency market players to play with the currencies that can be played with, like the Canadian dollar, the euro, and the Japanese yen, increasing the value of these currencies and upsetting the respective export markets, adding insult to injury. Fortunately, these latter players can take advantage of their improved currency's buying power vis-a-vis dollar-priced commodities.

3. Government intervention in the marketplace, this time involving ethanol and poorer-nation reactions to increasing food prices with subsidies of foodstuffs and restrictions of their export markets--always counterproductive.

4. Exploding demand for food and oil by China and other parts of Asia, coincidental with the increase in prices and dollar devaluation.

Net result? Food fights.

Bob the Speculator vs. Sally the Silent Saver

Here's another example in the series "How the Public Isn't as Stupid as You Think."

It would seem from the Washington press that a majority of voters would support government bail-outs of the Bob-types. I would warn legislators to be careful about judging which side is the majority.


[Thanks to Paganshopping.com for the image.]

It just may be that the Sally-types are not prone to answering poll questions. I know I'm not.

Fortunately, not all of us are silent anymore. Our YouTube example is only one illustration of what happens when a tool like the internet gives voice to the heretofore mute ones.

And look at me. Even I would be voiceless today if it weren't for the internet.

But now, it's "Silent Ones, unite!" We may have more power than we think.

Finding the True Cause of the Health Care Problem

Jonathan Kellerman has written a nice piece on the insurance industry, comparing insurers to Mafia Dons.

In a sense, he's right. The way the system works in the U.S. at the moment is neither socialized medicine nor free market, and this bastardized network we work under is almost as bad in its effects on its customers--both patients and doctors--as centralized health can be.

As Kellerman says, the insureds (or often their employers) are squeezed on the premium end, and on the payment end the supplier of services (the doctors) are frazzled to death by the bureaucratic hassle, delay, and restrictions. Insurers do seem to have an unbelievable amount of power to drive us all nuts while not performing as we believe they should (even causing deaths by denying coverage as the presidential candidates are constantly reminding us).


[Thanks to dealingwithheadaches.com for the image.]

The reasons? Kellerman only hits their periphery. He blames the insurance companies and makes no mention of the real culprits, Medicare and our numbed premium- and service-pricing incentive structure.

In the American health industry, both direct government interference and its indirect handicapping of a market mechanism collude to kill the vital factor in all free-market operations: Open and fair competition.

Medicare, as the government agency responsible for setting the rates for most services, has the power to pay for them, but it lacks the tools, knowledge, and/or willpower to control the pricing of it all--something even socialized-medicine countries do better.

Unfortunately, the real cost of centralized control of pricing, even if it is done "correctly," is the poor quality of the services afforded in government-provided health care countries like Canada and England. This is due to the underlying economic principle governing price controls, which says that when you limit the price of something, that something will become rare. Remember the gasoline lines after Nixon imposed price controls in the 1970s.

The second, more indirect way the government destroyed the pricing mechanism is by creating tax deductions for employers to pay health premiums. The actual beneficiaries of health coverage no longer have direct participation in pricing of premiums or services, and they have become insulated against price increases and the profit theft Kellerman describes.

Most of Kellerman's article is great. I would only change his prescription for a cure. He advocates less health insurance. I would rather find a way to allow the system to cure itself by eliminating the two government faux pas mentioned above.

I think this can be done by transferring the funds to pay for premiums from the employer to the insureds themselves, so as to include the latter in the pricing transaction. In this way, a competitive market would evolve. Most likely, insureds would prefer to purchase less expensive catastrophic coverage and pay for maintenance visits themselves. Not only would this limit the national budget for health insurance, but it would lower the general price level for services as people began to compare prices and weigh the benefits and cost of their health-care choices.

As for the indigent, Kellerman says this:

"A small percentage of indigent individuals won't be able to afford even low-cost procedures. For them, government-funded county facilities are the answer, because any decent society takes care of the weakest among us."

I would keep the government out of it and allow private hospitals to regain the position they once held as the givers of charitable health services. The generosity of the American people being what it is, the funds would appear like magic.

Kellerman also says:

"If substantial numbers of health-care providers shook off the insurance monkey on their back, en masse, and the supply of providers was substantially increased by opening more medical schools, the result would be a more honest, cost-effective system benefiting everyone. Except the insurance companies."

I would change the focus of his ire. It is not the insurance companies or the medical schools that are at fault, really. His solutions infer a Daddy-Government, top-down solution.

I would rather blame the government for (1) mismanaging the pricing of health services they reimburse; and (2) creating the incentives for employer-paid health coverage through tax deductions, which put too many middlemen into the health care market transaction and destroy the competition that controls prices. This would allow the market forces to work their magic from the bottom up.

Make these three changes--(1) turn government-funded charitable health services over to private hands; (2) revise Medicare's procedures (privatizing it being pie in the sky); and (3) turn employer-provided coverage choices over to the insureds--and I think things would correct themselves in short order. The Health Savings Account system already in place is a step in the right direction.

China and India's Threat to the West

The Drudge Report steered me to a most interesting Daily Mail article about China, by Anthony Browne.


[Thanks to coverbrowser.com for the image.]

Browne notes that "Napoleon III compared China to a sleeping giant and warned: 'When China awakes, she will shake the world.'"

He makes some fine points that bear listing:

1. China and India are emerging out of their third-world status and growing at a speed up to four times that of the US or UK. Examples: "China is spending 35 times as much on crude oil as it did eight years ago, and 23 times as much on copper. As it builds gleaming skyscrapers on its fields, China alone consumes half the world's cement and a third of its steel."

2. The once-self-sufficient Western World can no longer ignore them.

3. China and India's economies are growing rapidly, while we in the West are struggling with a liquidity and/or solvency and/or monetary-policy crisis that will reduce our current GDP to something approaching zero.

4. Their increased consumption is spurring an impressive surge in demand for all raw materials that is contributing to the rise in commodity prices around the world. (I note here that I believe their exploding demand is only one contributing factor behind those price increases, the other factor being the inflating and consequent loss of credibility of many of the world's fiat [unstandardized] paper currencies.)

5. China and India's cultures put much less emphasis on individual liberty and property rights than we do in the West. Example: "At home, [China] holds mass executions of criminals with bullets in the back of the head while transplant surgeons stand by to harvest their still pulsating organs." They have fewer qualms about siding up to brutal dictatorships, such as those found in Africa and South America in their search for trading partnerships.

6. A long-suppressed nationalistic mood is stirring in China and India, and their present government structures are not unamenable to excessive executive power.

7. China and India are taking advantage of the education prospects offered by the West, but they are no longer emigrating to the same degree as in the past. Business and employment opportunities are emerging at home.

Two things come to mind that Browne may have omitted. First, on the positive side, the Chinese and Indians love and respect gold. I would conjecture that they are more aware of its role in monetary history, and they just may find a way to shore up their currencies so as to make them viable competitors for today's two fiat anchors, the weakening dollar and the untested euro.

Secondly, and on the more negative side, Chinese and Indian cultures' long standing lack of respect for human rights may be a stumbling block to their advancement. Cultural stickiness has a way of undermining the game plans of even the most visionary of ideas, to wit America's loss of a good portion of the moral and political underpinnings of the U.S. Constitution. And our struggle to maintain the ideals of our Founding Fathers may be nothing compared to the battle both India and China will face, as push comes to shove between, on the one hand, those concepts of individual freedom, equality of opportunity, and property rights that are the source of the Western World's three centuries of progress, and on the other hand, the centuries of class repression that have weighted upon these Eastern cultures.

But I am an optimist at heart and can imagine that, with the speed and openness of today's flow of information, they will evolve as fast as they possibly can.

G7 and Paulson Jaw-Boning About the Dollar

If Paulson's past statements are anything to go by ("The US believes in a strong dollar [snigger, snigger]"), you can bet the dollar is headed for lower territory.

According to this article in the Wall Street Journal, the G7 have decided to complain about the dollar's poor performance.

What neither the article nor Paulson tells us is that the Federal Reserve and/or Treasury Department and their agencies have been purposely trashing the dollar over the last few years, in a misguided effort to pump up the US economy a la Keynes, and more recently to reverse the trade deficit. (See this previous post for the details on the Peterson Institute's activities in this regard.)

Only problem is: (1) They keep stating simultaneously and hypocritically that America believes in a strong dollar, just as they trash it some more; and (2) the weaker dollar they wanted is not curing the trade deficit after all, because we're a nation of net importers and their dollar trashing is--*duh*--raising the prices of our imports.

So just because they've come out today bellowing that "that's enough! The dollar has gone down below out tolerance level" doesn't mean that they mean it. This jaw-boning will probably have limited effect. After all, they're not magicians.


[Thanks to buycostumes.com for the photo.]

More Greenspan Gobbledegook

This man is a great disappointment to me. Several decades ago, he was one of the few economists who made good economic sense, defending the gold standard and decrying excessive money and credit creation through centralized government monetary intervention.

Then he changed. During his tenure as Chairman of the Federal Reserve prior to Dr. Bernanke, he mastered what became known as "Fed-speak," muddled punctual declarations specifically intended to confuse, presumably to cover up the interventionist Fed's real intentions.


[Click on the image for a larger version.]

(For a couple more cartoons on the subject, see this one and this one.)

After all those years of blatant disregard of his own prior wisdom, he is now busy trying to defend his record, as we can read and hear in this latest interview in the Wall Street Journal.

Here's an example of his relatively new-found illogic as expressed through Greg Ip's paraphrasing:

"At the time [during his tenure], Mr. Greenspan expected his [low interest rate] policy to boost housing because the rest of the economy was relatively unresponsive to lower interest rates. Based on decades of his own research, he believed a buoyant housing market would spur consumers to borrow against home values and spend more. This would not produce a housing bubble, he predicted, because it was difficult to speculate in homes and the memory of the 2000 tech-stock bust remained fresh. [Italics added]

I would love to see some serious economists "have at" the former Chairman's specific research that gave rise to this second prediction. Since when is it difficult to speculate in homes? Real estate speculation has been part of the economic landscape both in good times and bad, and long before governments learned to inflate their currencies--and believe me, that was many, many centuries ago.

Here's the next paragraph:

"Mr. Greenspan now admits he was wrong about the improbability of a housing bubble. Yet he has long maintained that bubbles are an unavoidable feature of a dynamic economy. He pulls out a 1999 speech and shows, underlined in green marker, passages in which he warned of recurring but unpredictable patterns of overconfidence followed by investor panic. He does not share some foreign central bankers' belief that their job is to defend against excessive asset-price inflation: No sensible policy, he maintains, could have prevented the housing bubble."

I guess that means that if perchance his results don't tally with his expectations, then it must be the fault of some underlying economic axiom we could call the "Bubble Unavoidability Theory." Funny, I never heard of that one, and just because it's Greenspan who formulated it out of the blue does not a valid theory make.

Mr. Greenspan, if I were you, I'd get out a little of that humility syrup that you were taking back in the 1960s. And while you're at it, pull out and reread your old writings, put your thinking cap back on, and hie thee back to the research drawing table.

Government Intervention Amuck No. 13: Efforts to Avoid the Depression

Doug Noland continues to be one of my favorite pundits. He may not be scientific in the sense some use the term, but he looks at all the figures and draws conclusions that concord with mine.

His latest piece at Prudent Bear says it so well, I'd advise you to read it.

As a summary for those who don't have time, our government is scrummaging around in this economic mess we're in, in order to try to save us from ourselves. They will be unsuccessful in the long run, even though in the short run it may seem to work.

In other words, in my view, we are headed within an unknown time frame for either a good recession/depression, or a good run on the dollar.

Take your pick. And yes, it's our government agents' fault. (See my previous posts throughout the last four years to grasp my "analysis" of the reasons for this.)

And as a postscript, I agree with Noland that Bernanke's conclusions about the Great Depression are wrong.


[Thanks to cards4magic.com.uk for the image.]

One who got it right was Edward C. Harwood. (See this previous post and the first ones of this blog.)

Other economists with a good grasp of monetary science are those academics call "the Austrians," people like Hayek, Von Mises, Schumpeter.

Government Intervention Run Amuck No. 12: Bear Stearns Buy-Out

It's amazing how the examples of our government-genie's clumsiness seem to jump off the pages at me on a daily basis.


[Thanks to mwctoys.com for the image.]

I opened today's Wall Street Journal to fall upon this headline.

The Bear Stearns collapse and the subsequent scrambling of the Fed, Congress, J.P. Morgan and the victim Bear Stearns itself, are a great example of how too much government power gets us in trouble as a nation.

I ask you: What business does the government have (whether it be the government-proper or one of its side-kicks like the Federal Reserve) fixing the price of a failing market participant on the brink of bankruptcy? What superior knowledge will permit the government or its agencies to pick the right price?

The answer, of course, is none. They have no business, they have no knowledge, and they are fixing prices--something they profess to be loathe to do.

Not only that; they're doing it with the collusion of the two parties--or least the door is open to that accusation.

And now they're stuck with trying to explain their decision, and they will find this to be a most difficult task. They have chosen some participants over others, putting themselves in the position of the God of Markets. As such, they will recuperate the full force of all the accusatory fall-out that would normally have disinflated itself ricocheting off only non-actionable "market forces."

Here's an example of today's self-defensive jaw-boning:

"'There was a view that the price should not be very high or should be towards the low end...given the government's involvement,'" said Treasury Undersecretary Robert Steel.

The price had been set at $2, but now it five times that, for no apparent reason other than to squash dissent, to find a compromise.

So now, instead of having a bankruptcy (which is what the market would probably have required) and a few days of discomfort, we now have lawsuits, justifications, rationalizations, suppositions and hypotheses about dire consequences that they have no way of foreseeing.

Just another lesson in what is apparently going to be a very long list in my series illustrating government clumsiness.