Taylor's (and Friedman's) Error

In a book review by Clive Crook in todays Financial Times, we read about the new work Getting Off Track by John Taylor, creator of the "Taylor Rule" for monetary policy. According to Taylor, if the Federal Reserve had followed his famous Rule instead of their own discretion over the last decade, we wouldn't be in the mess we're in today.

Taylor's Rule gives a mathematical formula for the calculation of monetary policy. As Crook describes it:

"The rule says central banks should set the short-term interest rate equal to one-and-a-half times the inflation rate; plus half of the gap between actual and trend gross domestic product; plus one. For example, if the inflation rate is 5 per cent and the output gap 3 per cent, the Taylor rule says make the interest rate 10 per cent: one-and-a-half times 5, plus a half of 3, plus 1."

His idea is similar to the formula of Milton Friedman, which at one point economists called the "k-percent rule." Friedman would have had the Fed increase the money supply annually by a fixed percentage. He is essentially Taylor's precursor.

Both economists advocated a fixed, formulaic determination of the expansion of money supply because they were wary of a discretionary monetary policy open to the whims of central bankers and the politicians who appoint them.

Where both these illustrious gentlemen err is in their naive belief that any political appointee(s) would be capable of limiting themselves to a non-discretionary monetary policy once they have the power not to.

In a July 2006 e-mail exchange with the Wall Street Journal's Tunku Varadarajan, Friedman wrote: "There are certainly occasions in which discretionary changes in policy guided by a wise and talented manager of monetary policy would do better than the fixed rate, but they would be rare." WSJ Archives.

Rare indeed. Didn't he realize that "rare" is in the eyes of the rate-setter?

Friedman's incongruous naivety is at odds with his skeptic personality. In his own book Capitalism and Freedom, he says:

"As matters now stand, while this rule [the k-percent rule] would drastically curtail the discretionary power of the monetary authorities, it would still leave an undesirable amount of discretion in the hands of Federal Reserve and Treasury authorities with respect to how to achieve the specified rate of growth in the money stock, debt management, banking supervision, and the like."

So why does he even bother with the k-percent rule in the first place?

Both Friedman and Taylor seem to be aware of the fallibility of agency intervention into the supply of money; and yet, inexplicably, both seem in the end to take for granted that the agency in question will be willing to renounce discretion when push comes to shove.

This is equivalent to sitting two-year-old Dick and Jane in a room with a big box of chocolates, telling them they can have only one each, then leaving the room. It just won't work.


[Thanks to www.lib.udel.edu, the Univ. of Delaware Library, and The New Fun with Dick and Jane, Chicago: Scott, Foresman and Co., 1956.]

And it's not Dick or Jane's fault. Dick and Jane are only two years old. Monetary policymakers are just humans. Humans are control freaks. They are tinkerers. It is a rare economist who, once appointed to the position of Federal Reserve Board Member, can look deep down inside existing economic science and declare the truth of what he finds, i.e. that no one knows how to control monetary policy, with or without a formula.

For one illustration of the mindset of our FRB Members, read this speech by Governor Mishkin. It's an eye-opener, revealing just what the more rational economists like Taylor and Friedman are up against. These Governors see themselves as monetary artists, not scientists.

For a second example of Federal Reserve mindset, take a look at this astonishingly self-serving article by Alan Greenspan in the Wall Street Journal last month. We perceive between the lines that there's a nasty feud going on between Taylor and Greenspan, and rightfully so. Taylor is Jane's older brother (he's six) and Greenspan is little Dicky.

Now children: I guess we'll just have to take that box of chocolates away, now won't we? (Gold standard and sound commercial banking, anyone?)

The PPIP Drip

Another version of my April 4th cartoon, suggested by a friend. Which one do you prefer? (Click on the image for a larger version.)

PPIP: The Right Medicine?

These tense times need comic relief. (Click on the image for a larger version.)

Economics: A Science for Schizophrenics

An editorial in today's Wall Street Journal brings home a fact that I've known for a long time: Economists tend to be schizophrenic.


[Thanks to Greenpacks.org for the photo.]

The article mentions Larry Summers's double talk. Summers commented on Obama's latest budget by saying, "There are no, no tax increases...." The article points out that there are tax increases, namely the death tax that will be returning to its 2009 parameters, instead of disappearing as it was scheduled to do in 2011. That wouldn't be more than a fib, but the story gets worse.

In 1980, Summers co-authored a study at the National Bureau of Economic Research supporting the elimination of the estate tax.

Go figure. Schizophrenia, anyone?

Another example of economic split personality is one of my favorites: Milton Friedman, a Nobel Prize-winning genius, a great man, and one of our best economists--but just a bit split when it came to monetarism, as noted by lesser economist Edward C. Harwood.

Friedman would say things like this, quoting from "Capitalism and Freedom":

"The Great Depression in the United States, far from being a sign of the inherent instability of the private enterprise system, is a testament to how much harm can be done by mistakes on the part of a few men when they wield vast power over the monetary system of a country. It may be that these mistakes were excusable on the basis of the knowledge available to men at the time--though I happen to think not. But that is really beside the point. Any system which gives so much power and so much discretion to a few men that mistakes--excusable or not--can have such far-reaching effects is a bad system. It is a bad system to believers in freedom just because it gives a few men such power without any effective check by the body politic--this is the key political argument against an 'independent' central bank. But it is a bad system even to those who set security higher than freedom. Mistakes, excusable or not, cannot be avoided in a system which disperses responsibility yet gives a few men great power, and which thereby makes important policy actions highly dependent on accidents of personality. This is the key technical argument against an 'independent' bank. To paraphrase Clemenceau, money is much too serious a matter to be left to the Central Bankers."

Clearly, Friedman didn't believe a central bank could carry out its intended function because of an inherent defect in its makeup, i.e. its dependence upon humans.

That doesn't prevent him from recommending, in the same work, indeed in the same chapter, that human legislators be given the power to control the money supply: "... [I]t seems to me desirable to state the rule [the legislative rule for monetary policy] in terms of the behavior of the stock of money. My choice at the moment would be a legislated rule instructing the monetary authority to achieve a specific rate of growth in the money supply."

The rest of his work is so monumental that we could almost forgive him, if it weren't for the fact that the whole world took his admission of the validity of centralizing the control of money supply as a justification for their central bank--which is what got us where we are today. Sorry, Milton, but it's partly your fault.

Our third example of inconsistency is the original Accident of Personality himself, Alan Greenspan. In his chapter entitled "Gold and Economic Freedom" published by Ayn Rand in her "Capitalism: The Unknown Ideal," Greenspan says the following about the faulty reasoning of the Federal Reserve in 1927:

"The reasoning of the authorities involved was as follows: If the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates. The 'Fed' succeeded: It stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market--triggering a fantastic speculative boom."

Strange words from a man who did exactly that in 2004.

Perhaps you can now understand why I named my economics blog after Sybil, the star among multiple personalities.

Fed Credit: The Latest And Perhaps Next-To-Last Bubble

I can't claim to be the origin of the Fed Credit Bubble idea, because it occurred to me as I read a fantastic piece by one of my favorite analysts, Doug Noland of Prudent Bear.

We've just come out of a huge bubble that consisted of inflated real estate investment and speculative finance credit. The bubble burst and the market began to correct itself, menacing to take a lot of nations' economies with it.

The reaction of our economic leaders was and continues to be to try to maintain a minimum of stability by propping up the various players on the world financial stage as they began to totter, one by one: first the real estate sector with aid to Freddie Mac and Fannie Mae, then the banking sector by saving Bear Stearns and loans to other institutions, then the insurance sector by bailing out AIG, then the automobile sector with handouts to GM and Chrysler, more money and loans to the banking and real estate sectors, more to AIG, recently some more to auto supply companies, more to AIG, and now the credit card and other large ticket item credit sector--an endless list, it would seem.

The central banks of the world, to a varying degree, are performing their propping-up role as the ultimate insurance company, the lender of last resort; and the US Fed, given the universal role of the US dollar as reserve currency, is the one that will be the buck-stops-here Last Lender of All Last Resorts.

As Noland points out, however:

"Our federal government has set a course to issue Trillions of Treasury securities and guarantee multi-Trillions more of private-sector debt. The Federal Reserve has set its own course to balloon its liabilities as it acquires Trillions of securities. After witnessing the disastrous financial and economic distortions wrought from Trillions of Wall Street Credit inflation (securities issuance), [it is possible that] the Treasury and Federal Reserve have set a mutual course that will destroy their creditworthiness - just as Wall Street finance destroyed theirs."

He's saying that the Fed is going to create the Bubble of All Bubbles, right there in its own house.


[Thanks to Bouncehousesnow.com for the picture]

But just how much air can the US Fed balance sheet withstand, without bursting its own skin? The inflationist central banks are acting on the assumption that they can right the "market failure" (see PS below) through this "temporary" remedy, that the market cannot right itself alone, or at least not without disastrous consequences. But aren't they trying to add air to an already burst bubble?

Instead of curing the problem, they are acting contrary to the market's instinctive corrective hiatus and will end up distorting events even further. How can arbitrarily selective bailouts and the forced financing of government projects--projects that otherwise most likely would not have been financed--do anything except further distort the admittedly slow and cumbersome but essential market reevaluation process?

"[T]he seductive part of [the optimistic] view is that unprecedented policy measures may actually be able to somewhat rekindle an artificial boom – perhaps enough even to appear to stabilize the system. But seeming 'stabilization' will be in response to massive Washington stimulus and market intervention – and will be dependent upon ongoing massive government stimulus and intervention. It’s called a debt trap. The Great Hyman Minsky would view it as the ultimate 'Ponzi Finance.'”

Precisely. The ultimate Bubble, created by those who are supposed to help us avoid them altogether.

So how will the world react when this latest bubble bursts? At some point, investors looking to preserve the value of their wealth will realize that there is no investment denominated in an existing national currency that does the trick, and they'll turn to gold, always the last fat lady to sing before the curtain falls and reality sets back in. (By now, you've figured out that I'm somewhat of a gold bug.)

_______

PS: We have no market failure here. On the contrary, the market is functioning perfectly. It is waiting to discover the real price of toxic assets, if only the government and its allies would let it. Rather, it is the market players who have failed us, and more specifically those who would pretend to manage our monetary units. For more on the true source of the real estate and credit bubbles, find yourselves a copy of the March 16, 2009 Research Reports out of the American Institute for Economic Research (annual subscription), and read the piece by Walter M. Cadette entitled "Greenspan the Goat."

Future Inflation: Taking Lessons From Those Who Know

When I think of the potential for future inflation from the combined current actions of the Treasury and Federal Reserve, I need a little comic relief.



[Click on the image for a larger version.]

Nationalization, By Any Other Name

The word "nationalization" has put fear and trembling into the American marketplace, and understandably so. It rings of socialism, of the European model, of the Third-Way progressive compromise. It's the death knell of the American form of free-market capitalism that is the foundational pillar beneath our symbolic hegemony over the rest of the world.

Apparently our current administration and its Congress don't believe this for a minute, because they haven't yet caught onto the fact that the word needs more than just denial; it needs replacement.

So far, they have been very quick to grasp the emotional impact behind words, to wit their choice of name for their stimulus package, The American Recovery and Reinvestment Act of 2009. We all know that this latest effort is really The Wild Attempt to Save Our Butts From Depression Act of 2009, but to use such blatant language would be ... well, depressing. Our savvy legislators know this, so they found a nicer name for it.

In the same vein, I wonder why no one has yet come up with the suggestion that our government's bailout actions--looking more and more like nationalization--be renamed something more palatable, rather than simply denying that nationalization is what's going on.

Let's take the example of Citigroup. So far, the government:

1. Has pumped billions of taxpayer dollars into their finances to avoid its collapse;

2. Will convert some $25 billion of preferred shares to common stock, effectively diluting existing shareholders' stake by 74%;

3. Has discussed "whether to require the removal of Citigroup Chief Executive Vikram Pandit" but decided that it is "impracticable to oust him" mainly because there's no one to replace him;

4. Is forcing the replacement of every Board member;

5. Is watching every move Citi makes, and management is trying desperately to mind their Ps and Qs.

(Source.)

If that isn't nationalization, I'm not sure what the word means.

Webster's relevant definition is:

"2. to transfer ownership or control of (land, resources, industries, etc.) to the national government"

So let's stop kidding ourselves. A rose, by any other name.... But wait. In fact, as any politician knows, Shakespeare was wrong. You can change the scent of a rose; all you have to do is call it something else.

So instead of watching the public wallow in self-pity as the US government denies nationalizing Citigroup, they need to find another name for it. Something "du jour," something we can empathize with and latch onto.

How about "recycling"? After all, isn't that what we do with smelly trash these days? We pull out what is useful, save it, and bury the rest. The government has no intention of "nationalizing" Citigroup; they simply want to carve out the rot and sell what's left back to its private shareholders, right? So let's not hear this "n" word anymore.


[Thanks to Ncdc.gov.uk for the photo.]

Why a Spending Bill Won't Cut It

Last night, I had to chuckle and cry at the same time as I watched Rachel Maddow's "Bull Puckey" speech.

Rachel's declarations about the job-creating values of spending are about as insightful as Janeane Garofalo's outburst on the radio in 2005, paraphrased thus: "... those free-market wackos with their 'invisible hand' mumbo jumbo."

Both ladies' understanding of the workings of the market typify the overconfidence of those who jump to conclusions without looking at the whole story.

Rachel claims that spending in and of itself is sufficient to create jobs and get the country out of a recession. Obama has embarrassed himself by making the same point. They have both overlooked that the statistical link between government spending and long-term job creation doesn't exist. To illustrate:

Spending:

Let's take an extreme and therefore abstract example. We can hire 15 million workers (10% workforce unemployed) to dig holes and fill them up. Cost: $800,000,000,000. 100% job creation. After the job is done, they go back on unemployment. Job creation for one year: 15 million. Job creation after one year and a half: Zero. Capital available for permanent job creation: X minus $800 billion. And don't give me the argument that the government intends to do more than just dig holes and fill them up. Building bridges and roads that we can't pay for is just as bad.


[Thanks to Swop.net for the photo.]

Permanent Job creation:

At the other extreme, let's say we do nothing, and therefore the government does not sap the marketplace of $800 billion. Cost: Zero. The money is thus available to businesses, small and large, to rev up their engines as this recession starts its uptick. Jobs created during one year: Admittedly, perhaps zero. Jobs created after one year and a half, or sometime thereafter: 7 million, year after year, as unemployment falls back to around 4% or less. These jobs are permanent.

The lenders of the $800 billion know this, as we will soon find out when the US government finds it harder and harder to finance its debt. Why isn't this difference clear to the President and to his supportive progressives? Because these people are short-sighted, and they grasp at whatever supports their political culture instead of looking at all the facts.

Rachel quotes Moody's statistics. Example: "Most Stimulative Spending: Non-refundable tax rebates: $1.00 = $1.02/economic activity. Infrastructure: $1.00 = $1.59/economic activity." These stats make no mention of the duration of job creation in each instance, what kind of jobs are created, and what money was used to do it. Statistics can be the best liars when you don't tell the whole story.

More twisted logic:

- Who will be employed on the construction sites of the Spending Package's bridges, railroads, and roads? Will the government try to pick and choose among the unemployed? Can legislators get the most expensive unemployed (Wall Street workers, lawyers, and others like them) onto the dirt? Does the construction industry worker deserve a job more than an investment banker or lawyer?

- Rachel says that people on unemployment don't spend. Isn't she forgetting that they receive unemployment benefits that are paid out of future income from existing tax structures and not borrowed 100% from the world's capital pool? Then she turns around and almost makes the argument that we should all go on Food Stamps. This is strange thinking.

- We are all (including me) complaining about the big bonuses and the Las Vegas junkets, but isn't this also spending a la Rachel? Aren't we forgetting that jets are made by American workers, that pilots fly those jets, and that lots of people work in Las Vegas? We are also forgetting that the rich spend a portion of those bonuses and invest the rest in things like the stock market, i.e. in the very same instruments that are in all of our 401(k)'s, which could use a little help right now. (Don't get me wrong, those bonuses give me goose bumps; but I believe their size was determined by excessive money and credit supply and by the competitive marketplace, not only by individual greed. See this post, for example.)

- We want to put American manufacturing back on track by recommending we all "buy American." Aren't we forgetting that if we refuse to buy foreign products, foreigners will refuse to buy ours? And that this type of thinking is what ultimately repressed the world economy in the 1930s?

- We want China to allow their currency to rise in value, but aren't we forgetting that for this to happen, China has to stop buying our debt? Do we really want that?

Much illogic should be examined here.

Why Isn't the Market Listening?

You've probably seen the Disney film, Fantasia, in the segment called The Sorcerer's Apprentice. Mickey Mouse is the apprentice, and he decides to use some of the sorcerer's magic while the boss is away. The experience is glorious, until he realizes that he can't control it any more and he finds himself drowning in a self-created flood.


[Thanks to Wikipedia.org for the illustration by S. Barth.]

Jean-Claude Trichet, the European Central Bank president, must see the market as a kind of sorcerer who is on his way home to save the day. As the Financial Times tells us (here and here), Mr. Trichet has called on financial markets to "help policymakers rebuild the levels of confidence in the banking system required to kick-start economic growth around the world." He "gave a stark warning to financial markets yesterday to stop putting pressure on banks to hold more capital."

But the market is not the sorcerer. It is the water--neither good nor bad, just flowing, or flooding, or drying up, doing what water does.

Trichet's jawboning reveals that politicians and their appointees, the quasi-government officials, are not part of the solution; they're part of the problem. They are Mickey.

It should be no surprise, then, that Mickey decided in 1913 to take over the powers of the sorcerer by turning a market-suggested financial-market-system convenience--the Federal Reserve clearing house set-up--into a powerful and politically expedient government-like macromanager of our money supply. Nor should it be a surprise when he ends up destroying our economy in the process. (See my article on the Fed, Page 1, Page 2, and Page 3 for more.) He's got the broom now, and things are getting out of hand. Mickey can call on every power he possesses, the water will never heed him.

We shouldn't be disappointed when ordinary humans fail at sorcery. It's not really their fault. Our government agents are themselves part of a bigger "market," in a sense. When we go to the polls and vote for more government intervention in our life, we are expressing our political "market" preference for government sorcery.

In our current crisis, here's an example that shows the pickle their in. This article in the FT says:

"Amid the recrimination and hand-wringing over the causes and consequences of the financial crisis, bankers and policymakers at the World Economic Forum in Davos have identified a new threat to global prosperity: the rise of financial protectionism. The huge state-backed bank bail-outs in Europe and the US, while necessary to prevent a collapse of confidence in the financial system, have forced banks to withdraw from overseas markets in order to concentrate their limited resources at home. ... The sharp reversal of capital flows appears at least partly due to political pressure on banks, especially those that have received large doses of state support, to sacrifice international operations in favour of maintaining lending to domestic consumers and companies. For governments attempting to explain their decision to commit hundreds of billions of taxpayers' money, this is an understandable response."

Likewise, when our factory workers start to hurt, the government becomes protectionist on that front as well. In 1930, Roosevelt's Congress, in response to public pressure to "do something," forced the market to "buy American" by passing the Smoot-Hawley Tariff Act. This Tariff turned out to be one of the main reasons the country didn't recover from the Great Depression until a decade later.

Here's more evidence of the public's growing protectionist spirit in the form of restrictions on purchases of steel with the stimulus package. (At press time, Obama seems to be rethinking this, but he will have to disappoint his base to do anything about it.)

Another example of forthcoming problems for the Sorcerer's Apprentice: The stimulus package won't work the way it's intended. You can't force banks to lend by throwing money at them, because as one banker put it, paraphrased by the Financial Times, "it is difficult to make loans to companies and individuals as most new lending would be loss-making and end up burdening their balance sheets with further writedowns." (FT Article.)

You can't buck the market. Nor can you force home buyers to buy when they know darn well prices will go down even more. Furthermore, when the government borrows money to spend on its own projects, it takes it away from the very people it is trying to help: capital-starved small businesses.

If we step back for a better perspective, clearly we are confronted with a culturo-political phenomenon: People have turned to government to cure a problem of government's own making. That's like asking Apprentice Mickey to solve the water problem.

There is one natural market phenomenon that will get Mickey back onto dry land in the longer run. It is a return to some form of a gold standard. This standard evolved in the marketplaces of the world over the centuries, and it would exist today if government agents had not decided to force their citizens to abandon it by declaring paper money to be our only legitimate legal tender.

Reality Check: The Government Stimulus and Bail-Out Plan

Today is a cartoon about the government stimulus and bail-out packages. I think it's self-explanatory. (Click on the image for a larger version.)

Italy Suggests Global "Legal Standard": A Viable Financial Measuring Stick?

In today's Financial Times, we find an article by Guy Dinmore entitled "Italy calls for 'legal standard' on world finance."

Italy's finance minister Giulio Tremonte thinks he can persuade the G7 to adopt a new global financial standard--"just as once there was a gold standard"--to discipline world financial markets. He thinks he has the support of France's Sarkozy and Germany's Merkel.

The idea is to bring "tighter financial regulation" through a "legal standard" that would be "the minimum basic set of rules on propriety of international activities and transparency which the whole international community is expected to respect."

Hm. Nice idea. But...

My first reminiscence was about the UN, an optimistic creation that came about in another time of abject pessimism. The second was the Bank of International Settlements, intended to regulate foreign exchange after it became apparent that the world was abandoning the gold standard. My third was the Doha round of talks, meant to free trade relations as the international community struggles with the seeming impossibility of applying free-market theory to the real world.

I stopped there. No point in prolonging the agony: These three international cooperative efforts--but not only these three--have been failures. I wonder where Italy's finance minister gets the courage to attempt another such unrealistic idea.

According to the article, he thinks that the trading nations of this world would abide by "a mix of voluntary and binding codes" that "would be closely monitored with a wide range of tools, including peer review, naming and shaming, indicators and 'black listing ... for "rogue" economies.'"

OOooooooo. These sound ree-e-e-e-eally scary (not).

The Organization for Economic Cooperation and Development is helping work out the details. They will suggest "an anti-bribery convention, principles on corporate governance including state-owned enterprises, guidelines on multinational enterprises, standards of transparency and cooperation on tax, principles on disclosure of financial information, existing G7 task force recommendations on money laundering, and standards on international property rights."

Remember, every nation would have to participate to make it work. I wonder how many legislators of participating G20 countries would tremble at the thought of being named and shamed--places like China, Russia, Argentina, ... why, even Europe and the US.

As recently as yesterday, the USA--the supposed bastion of the free market--raised the (already existent) import tariffs on French Roquefort goat cheese. (See this article in the French newspaper Le Monde.)


"What?!? Qu'est-ce que tu dis?!?"

[Thanks to Lepetitcochin.fr for this picture of their cute little French goats, admittedly from Poitou and not Roquefort.]

Did you know Americans already pay a 100% import duty on Roquefort cheese, and that it will now go up to 300%? And that you will now have to pay 100% duty on French "meat, fruits and vegetables, mushrooms, cereals, chewing gum, chocolate, chestnuts, fruit juices, mineral waters, and fat products"?

Of course, this will spark a lawsuit by the European authorities at the World Trade Organization (WTO) against the US. Their statement (my translation): "It is clear that this decision of the American administration signifies that we will have no other choice but to begin preparations to bring this matter to the WTO. Important efforts have been made to find a set of rules that could be accepted by the various parties in the current conflict. This task has now been rendered more difficult."

Oh, I forgot to tell you that the EU had previously banned US beef on the (unsubstantiated) grounds that the hormones in it are dangerous.

Just like a couple of five-year-olds.

Does Mr. Tremonti really think a "legal standard" will do the trick? I doubt it. His ideas are in a huge bag labeled "Wishful Thinking," especially when you consider that the supposedly most capitalist countries of them all can't even stop bickering about beef and cheese (never mind get rid of subsidies of American sugar, rice, et al., or agree to abide by some vague and relative international financial "legal standard").

The irony is that the international community is passing by the very thing that has any chance in hell of carrying some weight: The gold standard itself, or some modern form of it designed to avoid the pitfalls that caused its demise in 1971.

The gold standard, as contrasted to a "legal standard," is tangible, physical, and precise. It is literally measurable, not just approximate. It is based upon something with a specific density, weight, and chemical composition, whereas a legal standard is based upon morality; and everyone knows that morality is relative when it comes to politics.

That the world might obey such a solid, modernized gold standard is perhaps also a pipe dream. I'm not saying that it would not need legal backing; quite the contrary. It will indeed need sharp judicial teeth. But those teeth would at least have a solid-gold jawbone as a foundation, and not just international good will, which would be a standard with about as many rotten holes as Roquefort cheese.

Mulally Calls for Government Thugs to Beat Up Taxpayers

I complained in this post about "the American businessman's apparent dearth of guts in the face of cumbersome big government, about their lack of idealism and economic philosophy when the going gets tough. 'If we can't beat 'em, we'll just have to join 'em,' they seem to mumble as they sidle up to the nearest legislator, checkbook in hand, instead of taking the more honorable and idealistic high road of public political debate."

Ford's CEO Alan Mulally has just confirmed my low impression of such businessmen's philosophico-moral compass by "urging US politicians to consider the hitherto taboo idea of raising petrol taxes as a way of encouraging fuel conservation." (Quote from an article by Bernard Simon in today's Financial Times.)

So the automakers are environmentally conscientious fuel conservationists? I don't think so.

What Mulally really wants is for the Washington politicians to imposed a tax on gasoline to entice--oh, let's just say it: strong-arm car purchasers into buying government-mandated hybrids, thus preserving Mulally's job.

What prostitutes many large corporate managers have become. Instead of protecting the future of business in America by fighting government mismanagement with a little courage and a handful of sound convictions, they choose to put their self-respect aside, along with their moral common sense, and jump into the orgiastic Big-Government fray.

Now, for those social liberals who hesitate to cast moralistic stones at prostitutes, you must acknowledge that the idea of selling access to one's body for money evokes some discomfort, at least in most of us; and we should also admit to the existence of culturally ingrained and/or biologically instigated emotional ties inhibiting the freedom of our physical relationships to a subjective degree. To deny this and defend absolute licentiousness would be to deny the observable, esteemed human pair-bonding behavior and the family solidarity it engenders.

A similar malaise should stem from this kind of corporate libertine behavior; and yet as soon as a government gets too big for its britches, all too many in positions of corporate leadership put shame aside and start to lower their own.


[Thanks to Pantsoffroad.co.uk for the image.]

What a pity. The cabal of entities trying at present to to feed at the taxpayer trough could instead be so much more effective (never mind be able to look at themselves in the mirror) if they would band together, keep their pants on, and take the high road.

And who knows? From within this more noble ilk might we elect our next small-government president.

Resuscitating Keynes: Oh No, Not Again

Dr. John Maynard Keynes must get tired of being dug up over and over again by economists looking for a mentor in times of crisis.


[Thanks to "Return of the Living Dead" for the image.]

I must say, his mistaken formulas sure do have staying power.

Dr. Martin Wolf, writing today in the Financial Times, goes digging again; but it's useless. Why? Because we are not all Keynesians now, even if a US president and Milton Friedman once said we were, probably in a moment of frustration.

In fact, the opposite is true: Keynes's unfounded notions of pushing on a string will subject us all to its deleterious effects today, just it did our ancestors back in the 1930s.

Bailouts, debt financing, government spending, inflating the money supply to save debtors and attempt the futility of restoring failing demand--all have been tried, and all have done much more harm than good.

No, Dr. Keynes did not teach us the following "three broad lessons" in spite of what Dr. Wolf says:

Non-Lesson No. 1

"... [Keynes believed] we should not take the pretensions of financiers seriously. ... Not for him, then, was the notion of 'efficient markets.'"

This is a non sequitur if I've ever seen one. Keynes may have been cynical about bankers; but I bet he'd love to rise from the dead to confirm that he always believed in efficient markets. Where does Wolf get the connection?

Non-Lesson No. 2

"The economy cannot be analysed in the same way as an individual business. For an individual company, it makes sense to cut costs. If the world tries to do so, it will merely shrink demand. An individual may not spend all his income. But the world must do so."

Wolf talks of "the world" as if we were all parts of one entity acting in concert. In fact, each nation is acting as an individual; and each nation's government should act as an individual, i.e. should cut costs, indeed must cut costs when the money is no longer there to pay for them.

A government can only spend money it doesn't have in three ways: borrow it, confiscate it through taxes, or create it. Because we are already a debtor nation we should not do the first; the second will exacerbate the current shortage of discretionary income; and the third will eventually cause the dollar to collapse, thereby leading up to the confiscation of all dollar-holders' purchasing power--not something to do when foreigners hold a good chunk of your debt.

Of course demand is shrinking. You may not have noticed, but the bubble has burst. The demand we once had was a mirage. And you can't revive a nation's economic demand by stuffing it with borrowed or artificial money like the foie gras of some goose--or rather, you can, but it won't work because this goose is dead. You'll get nothing to show for your efforts except a bag of ruffled feathers.

And Dr. Wolf is forgetting that it is not for lack of will that we or our governments cannot "spend all our income." It is the "income" that simply isn't there, unless we attempt to fabricate it out of more monetary helium, which is how we got the bubble in the first place. (See my article, plus page 2 and 3 linked on my blog, for my view on how this happened.)

Non-Lesson No. 3

Now, this is the one that really gets my blood boiling, so I'm going to have to breathe deeply as I punch my keyboard.

"In the 1930s, two opposing ideological visions were on offer: the Austrian; and the socialist. The Austrians--Ludwig von Mises and Friedrich von Hayek--argued that a purging of the excesses of the 1920s was required. Socialists argued that socialism needed to replace failed capitalism, outright. These views were grounded in alternative secular religions [my italics]: the former in the view that individual self-seeking behaviour guaranteed a stable economic order; the latter in the idea that the identical motivation could lead only to exploitation, instability and crisis."

I don't have enough room here to analyze the error in Wolf's statements about the Austrians, but I'll say that the Austrian view of the 1920s is shared by more than one empiricist. I'll just name one: Edward C. Harwood of the American Institute for Economic Research.

To call the Austrians a "secular religion" may have a scrap of truth to it; but that doesn't mean they are wrong about their analysis of the 1920s. Dr. Wolf's criticism is more a statement about their description of their own methodology, rather than their theories; and in fact, the Austrians are quite empirical in their methodology in spite of themselves.

Even if they weren't, the Doctor mustn't throw out the baby.

More erroneous statements

Both Wolf and Keynes continue to err with the following affirmations:

- "[Keynes recognized] that the minimum state was unacceptable to a democratic society with an organised economy." Nothing could be further from the truth. Such a minimum state is unacceptable only to those who claim humans have the capability of organizing such a society's economy, which we can't, to wit our present mess.

- "Keynes would have insisted that ... [m]arkets are neither infallible nor dispensable. ... [T]hey can also go seriously awry and so must be managed with care." Keynes may indeed have so insisted; but no one has yet proven that humans can manage markets, in fact quite the contrary; the more we try to macromanage them, the more markets rebel.

- "The election of Mr. Obama surely reflects a desire for just such pragmatism." The election reflects no such thing. It reflects a slight majority's secular-religious belief in the spread-the-wealth Obama-Messiah, and/or shows an aversion to Bush and anyone like him.

- "The shorter-term challenge is to sustain aggregate demand, as Keynes would have recommended." You cannot sustain what doesn't exist. You can try to recreate it; but you will fail, just as Roosevelt did back in the 1930s. (See "pushing the string," above.) Roosevelt, with Keynes's encouragement, began the monetary inflating that is the scourge of the fiat-money 20th Century.

- "Also important will be direct central-bank finance of borrowers." This is a good way to transfer solvency problems from the private sector to the taxpayer; nothing more, nothing less.

- "A debt-for-equity swap is surely going to be necessary." Bailouts for special interests; nothing more, nothing less--and one of those special interests is politicians themselves, because it reinforces the electorate's belief in the politicians' capacity to "do something about it."

And on and on the good Doctor goes, making one Keynesian mistake after another.

Wolf finishes with a most sappy and hubristic "We must do better. We can do so, provided we approach the task in a spirit of humility and pragmatism, shorn of ideological blinkers."

Oh, gag me with a spoon. Who is the secular-religious one now?

Keynesian economists lack an understanding of simple market dynamics, and of how far the world has distanced itself from them. To blame the free market for 1929 or for our current turmoil is like blaming a train wreck on the train itself, instead of on the inebriated engineer.

Pushing on a String: The Cartoon

Ben Bernanke, our current Fed Chairman, has spent much of his academic life studying the Great Depression only to conclude that, unlike the rest of mankind, he can push the string in spite of underlying fundamentals.

(Click on the image for a larger version.)

Fed Comes to Debtors' Rescue

The Fed announced today that it will allow its target rate to reach zero percent.


[Click on the image for a larger version of my latest cartoon.]

Up until now, the Fed has tried to bend its legal parameters just enough to absorb some of the bad debts of our banks and financial institutions in exchange for good credit, in order to prevent what they fear would be an economic crisis. (And for the moment, these are just fears.)

Today they announced that they will proceed forward with their intention to buy Treasuries outright, in an effort to replace the credit they think we are desperate for.

From today's statement:

"As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities."

Just as debtor nations have done in the past, the USA has once again decided to turn on the printing presses to save debtors. From my understanding of this commentary by Walker Todd of the American Institute for Economic Research, or of this one, the steps the Fed is about to take are inflationary. The Fed seems to be doing what it can to fight deflation through inflating the money supply, a counterproductive measure at best.

What the Fed should be (and probably is) afraid of is not so much deflation per se, but rather a deflationary spiral that causes fragile yet economy-essential entities to collapse. The problem is that they can't act on the deflationary spiral without stopping the deflating itself.

They will end up artificially propping up already inflated bubble-prices that are trying to right themselves through the deflating process.

Something I think we all forget is that when prices go down (i.e. deflate, in the loose sense of the term), we all get richer. When gasoline, bread, meat, lettuce and rice get cheaper, our purchasing power increases.

Inflation does the opposite. It favors debtors and makes the rest of us--and even the debtors themselves--all the poorer by decreasing our purchasing power relative to our income.

When you have an inflating of the money supply in a deflationary environment, you get the equivalent of a bubble under the surface, i.e. an unstable propping up of prices concomitant with the reduction of real wages.

Inflating may save the debtors, but it will only do so through the impoverishment of all of us.

Stephanie Pomboy: My Kinda Bear

I'd never heard of Stephanie Pomboy until this morning when I read this interview with her in today's Barron's. Now I have a second bear with whom I see eye to eye. (The first is Doug Noland at PrudentBear.com, although I have no idea what the latter invests in.)


[Thanks to Janusmagnus.be for these cute bears.]

She is founder and president of MacroMavens, a company providing "macroeconomic research and commentary to the institutional investment community." The company strives "to identify major economic trends early while avoiding the typical overemphasis on short-term swings."

Isn't that what any wise investor should be trying to do? No one with a 401(k) should be speculating in any way, shape, or form; and that is what they are doing, albeit unwittingly, by ignoring the macroeconomic ebb-and-flow underneath us all.

She believes we should be "long 'socialism,'" that there will be more government intervention, or as she jokes, "partnering with the government." She thinks the next industry to receive a guarantee will be the municipal bond market.

She sees only two potential outcomes of our present interventionist fling: Higher interest rates or devaluation of the currency. She picks the latter, seeing a weaker dollar as being the choice Bernanke's Fed will make. As soon as interest rates start to climb significantly, they will begin a program of Treasury purchasing to prevent it, which will in turn lower the dollar.

It is this potentiality that makes her a believer in gold, for the medium-term profits and protection of capital. I would add that gold plays a role as a thermometer of monetary inflating. (My mantra, remember: You can take gold out of the standard, but you can't take the standard out of gold.)

Barron quotes her:

"We are going to see a secular rotation from paper assets to hard assets like gold. The whole global competitive currency devaluation, including that of the dollar, plays right into that." [--Yes!--] "I do worry about preservation of capital from the standpoint of how many more unconventional policy actions we are going to have. If I'm correct about the economic deleveraging still ahead and that it will continue for many years, that's a legitimate concern. That's why I'm long gold. I view it as the best way to protect my capital."

Yes yes yes.

As she says on her own website and as quoted in The Weekly Standard in January of 2004, “'Far beneath the surface,’ she writes, ‘the tectonic plates under the U.S. economy have begun to shift, revealing a molten lava river of inflation below….'"

How right she is. I've been railing against inflation since I was born, and more recently since March of 2005 on this blog. The 20th Century's experiment with fiat currencies will very likely fail, as they always have in the past.

In the meantime, hold onto your ingots.

Seeing the Humor in Obama's Bold New Economic Recovery Plan

Couldn't resist this one after reading about Obama's bold new economic plan.


[Click on the photo for a larger version.]

The Ghost of Times Past. The New Deal all over again. I guess we never learn.

In other news today, I read some interesting figures in an article by Martin D. Weiss, Ph.D. Although I'm not sure I can agree with his advice (he says we should all sell everything and buy Treasuries, keeping the faith that the dollar will maintain its credibility through this crisis), he points out this:

"By mid-year 2008, there were $52 trillion in interest-bearing debts in the United States, including mortgage loans, credit cards, corporate debt, municipal debt and federal debt; the federal government needed about $50 trillion for Social Security, Medicare and other commitments kicking in at a quickening pace; and U.S. commercial banks held another $182.1 trillion in side bets called “derivatives.” Grand total in the U.S. alone: $282 trillion. The numbers are not directly comparable, but just to give you a sense of the magnitude of the problem, that’s 402 times more than the $700 billion bailout package."

These are some pretty astounding figures.

(There's another fellow, Michael Hodges, who gives some great charts and data and whose horn I have been tooting for years now. See his wonderfully informative website.)

The rest of Weiss's article makes a lot of sense and even seems to point to the fact that the dollar is in great danger. But then he gives his recommendations to remain in dollar-denominated instruments.

If there is danger of a flight from the dollar and other paper currencies, as he warns Congress, isn't gold the only thing left?

For more about his warning, read the white paper he submitted to Congress on 9/25/08 (corrected 10/1/08) and other papers he links to therein.

Automakers: Where's John Galt When You Need Him?

Neither Rick Wagoner, Alan Mulally, nor Bob Nardelli, the three CEOs of the biggest automobile companies in the US, could play a credible John Galt in th upcoming movie version of Ayn Rand's novel.

As Wikipedia describes the hero of Atlas Shrugged:

"Galt is discovered to be a creator and inventor who embodies the power of the individual. He serves as a counterpoint to the social and economic structure depicted in the novel. The depiction portrays a society based on oppressive bureaucratic functionaries and a culture that embraces the stifling mediocrity and egalitarianism of socialistic idealism. He is a metaphorical Atlas of Greek mythology, holding up the world and namesake for the title Atlas Shrugged.

"An engineer by trade, Galt's actions include withdrawing his talents, 'stopping the motor of the world,' and leading the 'strikers' (in this case the captains of industry) against the 'looters' (in this case the mob rule of strikers and the common man)."

No, none of our three CEOs is going to play this heroic role, at least not this time around. They are incapable of fighting the unions on their own, one-on-one. And let's face it: They're probably making an astute business move in the context of the present economic climate. All three giants banded together, plus the government, against the UAW, now that's going to be a match worth watching. If only the government didn't have such a bad record of messing things up.

What a pitiful trio they are as they raise their right hand in unison before a grandstanding Congress, begging for help, the picture of utter defeat--or at best of pragmatic, cynical groveling. You almost could have heard them mumbling through their teeth-clenched grin, as they step out of their symbolic hybrid driver's seat: "There is no level to which I will not stoop."


[Thanks to Gentlegiantsrescue.com for the picture.]

They might have a more successful acting career if they tried out for the other Galt, Henry, the main character of Garet Garrett's 1922 book The Driver.

In Garrett's story, Henry Galt is "an entrepreneur, ... blinded by the intense wealth and power ..., [against whom] the general population and government turn, ultimately destroying him instead of celebrating his success."

Ayn Rand was an optimist; Garrett apparently a pessimist.

Is there any hope left for the American entrepreneur in this strange new country in which we live? Since 1913 government has been screwing around with our monetary unit. Now we have to undergo the embarrassment of watching as they nationalize our banking system, our mortgage financing, and soon our auto industry.

What got us here?

I maintain that it is not corporate greed. The root cause is not, as President Bush claims, housing; nor is it the securitization process.

It is not China; it is not speculation per se. It is not Wall Street. It is not the wealthy, or special interests.

The cause of this crisis--i.e. what turned what would normally have been a healthy business cycle contraction into a recession, and perhaps a depression, are the over-expanded governments of the world, and most particularly their mishandling of the money supply. It's that simple.

For some of the tenets of my argumentation, see my previous blog posts, as well as this and this, (my article page 1 and 2); and this, this, and this (another one, pages 1-3).

Let's hope that Congress doesn't use the upcoming bailout of the Big Three as an excuse to pass the compensatory and ironically named "Employee Free Choice Act," which would take away an employee's right to a secret ballot, thereby pushing the U.S.A. towards the U.S.S.R.A. by allowing unions to put pressure on employees to agree to (and finance) the unionization of their workplace.

Queen Wears Same Dress Twice: Recession Proven

Yes, according to an article appearing in LeMonde.fr, a French newspaper website, "the Queen wore the same red coat that she wore for a ceremony at the Sandhurst military academy in the autumn of 2005. During a ball in Slovenia, she wore the same twenty-year-old evening gown.... The Duke of Edinborough had readjustments made to a pair of pants dating back to 1957. The well-published night club excursions of the Princes William and Harry have become more rare. 'The economic situation is atrocious': Her Majesty, who never comments on the news, lost her cool during a ceremony at the London School of Economics, asking her hosts, 'Why didn't anyone realize what was going on?'"


[Thanks to Martinaitchison.co.uk for the great artwork.]

Very good question, Your Highness.

The answer is that many people did realize what was going on. They just didn't have the guts and/or the power to stop it. See some of my previous blogs and links to the Bank of International Settlements' ruminations about the problem since the early 2000s.

We learn a number of interesting things in the French article. For example:

- The Queen is only 264th on the list of wealthy Brits.
- She has no checking account, no credit cards, no money on her person.
- Her fortune is worth about 320 million pounds (about $477 million).
- A new book by Jon Temple, Living Off the State, accuses the royal accountants of confusing the State's assets with their own private interests.

Ah, the English. The royal family can always bring us a smile, even in the direst of times.

Greenspan's Song

For a little comic relief, read this neat poem by Rob Peebles over at Prudent Bear.

Live, love, laugh. For tomorrow we pay.