The Economic Ignorance of the Modern Right

[Pliny]

The problem is that taking penicillin gets rid of infection... but it doesnt CAUSE the next infection.

And thats exactly what the overly liberal use of monetary easing does. Sure, it lessens the severity of a recession and aids in the recovery, but it also guarantees another even larger recession in the future. For example, all the easy credit that they used to fix the economy after the .COM bubble burst, was used to inflate the realestate bubble leading the 2007 meltdown.

Entirely correct.

August you still haven't gotten that an increase or decrease in the money supply is the single factor in determining a corresponding rise or drop in the general price level. If you see no inflation just take a look at gold. In 2003 it hit $300. It is now above $1700. It's not a rise in the general price level but is a marker as fiat currencies flee to hedging on the precious metals market. How much currency has disappeared into gold, silver and platinum at a difference of $1400/oz in less than ten years?

As far as the coming tsunami, people are starting to realize that they aren't going to realize a return on their investment in public debt. Japan's government just hit the trillion yen debt mark in their economy. Greece and Spain have no hope of ever paying off their debt - and in my opinion, nor does the USA.

[August1991]

August you still haven't gotten that an increase or decrease in the money supply is the single factor in determining a corresponding rise or drop in the general price level.

Even Milton Friedman did not make such a declaration.

If you see no inflation just take a look at gold. In 2003 it hit $300. It is now above $1700.

Pliny, you fail to note that the price of gold was over $600 in 1980.

http://research.stlo...OLDAMGBD228NLBM

And that was in "nominal" terms.

-----

Returning to my OP, America's Right Wing, Republicans, Steyn, Paul Ryan, the Tea-Partiers, Fresh Water economists etc have yet to explain why there is no inflation in America despite the immense increase in the money supply. Bernanke has printed a whack of cash, Obama has spent it, and yet there's been no inflation. Heck, there's been no rationally expected inflation. Prices (nominal interest rates) on 30 year bonds have barely changed.

Why?

Edited February 2, 2013 by August1991

[bush_cheney2004]

Why?

The reason there is no inflation (in the U.S.) is because there is no money supply "velocity"....it is not turning over very fast. Banks and corporations are just sitting on mountains of cash. Some of this is required because of increased banking reserves, but with the U.S. unemployment rate still high and Americans de-leveraging debt in droves, there is far less demand to move money around, no matter how much Bernanke has "printed".

The U.S. is looking at a "lost decade", same as in Japan. And Jimmy Carter is not the president.

[August1991]

The reason there is no inflation (in the U.S.) is because there is no money supply "velocity"....it is not turning over very fast.

BC, your answer begs the question.

The U.S. is looking at a "lost decade", same as in Japan. And Jimmy Carter is not the president.

I don't know about Carter but according to Keynes (and Reagan), the US economy requires a strong fiscal policy - Bernanke can't do more.

Maybe Obama should order up an aircraft carrier or two, and a fleet of supersonic, stealth bombers. As Krugman argues, the US federal government is a tank with a pension plan.

[bush_cheney2004]

...Maybe Obama should order up an aircraft carrier or two, and a fleet of supersonic, stealth bombers. As Krugman argues, the US federal government is a tank with a pension plan.

No can do....government spending is going down, not up. Consumer spending is flat even though incomes are up. Much harder to get a home loan or car loan without stellar credit ratings. The money supply is "in irons".

[August1991]

No can do....government spending is going down, not up.

I suspect that US federal government spending will rise slightly, tax revenue will stay constant and so the US federal government debt will rise, slightly.

US federal government debt reached about 110% of GDP in 1947 or so. It is now about 70% of GDP, and it will go higher. God knows if it will go to 110% of GDP. Possibly, and it may go well beyond to 200%. Heck, the State of California may default on its bonds.

These are rough waters but the US federal government is not a ponzi scheme. The US Constitution has survived worse.

[bush_cheney2004]

I suspect that US federal government spending will rise slightly, tax revenue will stay constant and so the US federal government debt will rise, slightly.

The CBO disagrees, as several outlays will be reduced as Afghanistan winds down, cuts to Medicare reimbursements happen, unemployment freebies expire, and sequestration (or an alternative) is implemented. Tax holidays also go away starting CY2013.

http://www.cbo.gov/publication/43539

Edited February 4, 2013 by bush_cheney2004

[Michael Hardner]

The reason there is no inflation (in the U.S.) is because there is no money supply "velocity"....it is not turning over very fast. Banks and corporations are just sitting on mountains of cash. Some of this is required because of increased banking reserves, but with the U.S. unemployment rate still high and Americans de-leveraging debt in droves, there is far less demand to move money around, no matter how much Bernanke has "printed".

The U.S. is looking at a "lost decade", same as in Japan. And Jimmy Carter is not the president.

BC - you have filled in the missing piece of the puzzle for me. In effect, there is an oversupply of cash and at some point inflation will come - at least it seems to me. We're in uncharted waters here, again it seems to me. What will happen ?

[bush_cheney2004]

BC - you have filled in the missing piece of the puzzle for me. In effect, there is an oversupply of cash and at some point inflation will come - at least it seems to me. We're in uncharted waters here, again it seems to me. What will happen ?

You are correct in expecting that inflation should come...big time...as M1 (U.S.) has never been jacked up this much and this fast in modern times. But there are competing forces in play that are delaying the inevitable, and until all of this (mostly government) manipulation expires and consumers stop deleveraging, we will continue to wait for the expected inflation.

I would add that it is misleading to expect the same conditions as in the 1970's and early 80's, but those of us who lived through it can't help but make such a comparison. But there also is no energy crisis to prime the inflation pump.

My own bank has admitted they don't really need/want any more of my cash, and pays a token interest rate to reflect this reality.

[August1991]

The problem is that taking penicillin gets rid of infection... but it doesnt CAUSE the next infection.

Huh? Are you so sure of your statement?

But further, if use of an antibiotic increases the chance of a bacterial infection, is that reason to stop using antibiotics?

----

Doctors would say that antibiotics work, but we should use antibiotics only when appropriate. I'd say the same of Keynesian expansionary policies.

To argue against Keynesian policies is tantamount to arguing against antibiotics (or bloodletting) on the grounds that the human body is natural, and has no need of unnatural intervention.

Edited February 6, 2013 by August1991

[Pliny]

To argue against Keynesian policies is tantamount to arguing against antibiotics (or bloodletting) on the grounds that the human body is natural, and has no need of unnatural intervention.

No. it's like arguing in the King's court that Copernicus was wrong.

[Pliny]

Even Milton Friedman did not make such a declaration.

Pliny, you fail to note that the price of gold was over $600 in 1980.

http://research.stlo...OLDAMGBD228NLBM

And that was in "nominal" terms.

-----

Returning to my OP, America's Right Wing, Republicans, Steyn, Paul Ryan, the Tea-Partiers, Fresh Water economists etc have yet to explain why there is no inflation in America despite the immense increase in the money supply. Bernanke has printed a whack of cash, Obama has spent it, and yet there's been no inflation. Heck, there's been no rationally expected inflation. Prices (nominal interest rates) on 30 year bonds have barely changed.

Why?

Wait for the boom first. When new money is created the bankers and politicians get first dibs. They will create a boom that will eventually spread once the money is spent into the economy. They created the housing boom, the tech boom and of course the resulting recessions, then they are attempting to spend their way out of them. We now see a boom in the stock market and in Washington, DC itself. it is eerily similar to another boom that occurred in 1929. Everything at that time, according to financial analysts and economists looked rosy.

I just saw a screw-driver set at Home Depot for $11.98 made in China. It looked like a decent set but I would have been wary about buying it because it was so inexpensive. The grade of steel looked good but you can't tell until you buy. At $11.98 it may have been worth it to find out. Don't ask where the inflation is when goods from China can be sold so cheaply. Eventually, the Chinese will realize that the US dollar is more common than grains of rice and worth about as much.

And just for you I will mention that gold was over $600 in 1980. Was that all from inflation? No. It was from people hedging themselves against inflation.

It didn't fall back to $70 you will note. The amount it stayed above $70 is pretty much an indication of the actual amount of inflation. When interest rates were raised money, spent on hedging against inflation went back into savings accounts, and the demand for dollars was restored.

Gold doesn't have to rise at every point in its trend. It was $35 in 1970. It is currently $1670 or thereabouts. If you bought in 1970 it might be good to cash in now. A lot of the rise in gold price is in it's use as a hedge but a good portion of it is actual inflation. If it dropped to $1200 tomorrow then hedgers would have abandoned it but that doesn't refute the fact it is still more now than even in 1980.

[Peter F]

Inflation will come when the Americans decide to kill the debt. At the moment debt doesnt seem to be much of an issue for them.

[August1991]

I just saw a screw-driver set at Home Depot for $11.98 made in China.

As John Lennon once wondered, Imagine.

Eventually, the Chinese will realize that the US dollar is more common than grains of rice and worth about as much.

As we realized that a phone booth is as common as a cellphone. Once upon a time, America made IBM Selectrics. The Chinese will learn as we did.

And just for you I will mention that gold was over $600 in 1980. Was that all from inflation? No. It was from people hedging themselves against inflation.

And what was the price of gold in 1980 in real terms?

[in 1980, if you had $600, would you rather buy gold or the Dow Jones? Or would you rather wait and buy one of those new iPods?]

Edited February 9, 2013 by August1991

[cybercoma]

Inflation will come when the Americans decide to kill the debt. At the moment debt doesnt seem to be much of an issue for them.

Inflation won't come because both the political Left and Right are more concerned with controlling inflation than unemployment.

[Peter F]

Right now that is so, just wait though.

[Pliny]

Inflation won't come because both the political Left and Right are more concerned with controlling inflation than unemployment.

It's the job of the Federal Reserve to control inflation and ensure there is no deflation. It's an economic policy not a

left/right policy. They are pumping the economy to try and prime it but that will create inflationary symptoms, that is , a rise in the general price level. They are not currently worried about inflation as much as they are about a slumping

economy. It seems their policies are working against each other and creating enough uncertainty in the economy to keep it stagnant. No one is sure about the cost of Obamacare, what level of increases in taxes Obama wants (for the rich), and all the political posturing regarding the debt ceiling, sequestration, spending, currency wars, etc.

[Pliny]

And what was the price of gold in 1980 in real terms?

[in 1980, if you had $600, would you rather buy gold or the Dow Jones? Or would you rather wait and buy one of those new iPods?]

As far as buying and holding goes, gold seems the better option. If I waited to buy an Ipod it would cost me less than

half of my gold. I would still have about a thousand dollars in purchasing power left. If I had stayed with the Dow Jones I would have conservatively realized about an 5% growth, losing in the housing bubble and spending the last few years

making up for the losses. It may have wound up about the same as gold. But remember, investing in gold is mostly a hedge against the devaluation of currency (inflation) or ultimately a collapse. One thing I can always bet on with the current economic system is inflation at some rate so my gold will always increase in dollar terms leveling my purchasing powerover time. I don't have that guarantee with the Dow Jones.

[Bonam]

Gold is not guaranteed to hold its value, either. What if we find a cheap industrial transmutation process? What if we build a space elevator and start mining asteroids for plentiful and readily available gold? What if someone just finds a giant gold deposit and starts digging it up and substantially increases supply? What if there is a cultural shift to no longer value gold for jewelry? What if gold is replaced by another material in the industrial applications in which it is currently required, drastically lowering demand?

Gold could be wise to hold as one type of asset in a diversified portfolio, but it is not by itself a guarantee of anything.

[Pliny]

Gold is not guaranteed to hold its value, either. What if we find a cheap industrial transmutation process? What if we build a space elevator and start mining asteroids for plentiful and readily available gold? What if someone just finds a giant gold deposit and starts digging it up and substantially increases supply? What if there is a cultural shift to no longer value gold for jewelry? What if gold is replaced by another material in the industrial applications in which it is currently required, drastically lowering demand?

Gold could be wise to hold as one type of asset in a diversified portfolio, but it is not by itself a guarantee of anything.

True. It is just a better option than paper or an electronic entry only for the fact that it has never been worth zero.

If that day should ever come then some other commodity would replace it, I imagine. It is just not wise for money to be

debased so far it becomes a mere symbol of itself.

I think people recognize the danger of individuals with the power to create the symbol out of thin air. Give me the

power to create a nation's money supply and I care not who rules - as the saying goes.

[ReeferMadness]

The reason there is no inflation (in the U.S.) is because there is no money supply "velocity"....it is not turning over very fast. Banks and corporations are just sitting on mountains of cash. Some of this is required because of increased banking reserves, but with the U.S. unemployment rate still high and Americans de-leveraging debt in droves, there is far less demand to move money around, no matter how much Bernanke has "printed".

The U.S. is looking at a "lost decade", same as in Japan. And Jimmy Carter is not the president.

I don't agree with you often, b_c, but I think you've got it right. Inflation is caused by increased demand for goods and services. That demand can only be the result of people's income rising in real terms (not happening) or people going deeper into debt (can only go on for so long).

The "endless growth" economic paradigm has hit a wall.

[Pliny]

I don't agree with you often, b_c, but I think you've got it right. Inflation is caused by increased demand for goods and services. That demand can only be the result of people's income rising in real terms (not happening) or people going deeper into debt (can only go on for so long).

The "endless growth" economic paradigm has hit a wall.

Where have you read that inflation is caused by increased demand for goods and services? Inflation is defined as a general rise in the price level of goods and services. Increased demand will certainly raise the price level of a good or service but not the general price level of all goods and services. If there is not a rise in the money supply the general price level of goods and services cannot rise. The only thing that affects the price level of all goods and services is a change in the supply of the exchange medium.

As B_C states there is no velocity, in other words, no demand for goods and services, the preference is to saving. He is wrong, however, in stating that there is no inflation. General prices have risen but because there is no velocity there is not the level of inflation there should be - money is not showing up in the main street economy it is staying in the banks. The point will come when people will want to divest themselves of dollars and at that point is where you will see lots of velocity and lots of inflation.

[August1991]

I was tempted to post this rant in the Read of the Week thread. But then I decided that it was better posted here.

Since the S.&P. 500 first reached its current level, in March 2000, the mad money printers at the Federal Reserve have expanded their balance sheet sixfold (to $3.2 trillion from $500 billion). Yet during that stretch, economic output has grown by an average of 1.7 percent a year (the slowest since the Civil War); real business investment has crawled forward at only 0.8 percent per year; and the payroll job count has crept up at a negligible 0.1 percent annually. Real median family income growth has dropped 8 percent, and the number of full-time middle class jobs, 6 percent. The real net worth of the “bottom” 90 percent has dropped by one-fourth. The number of food stamp and disability aid recipients has more than doubled, to 59 million, about one in five Americans.

NYT

----

Mark Steyn linked to this rant, and so did Paul Krugman. I happen to respect David Stockman (the ranter) and consider his book "The Triumph of Politics" as one of the best descriptions of modern US politics.

Nevertheless, Stockman is simply wrong in this rant.

Reading Stockman, one understands how difficult it was to get people to inoculate against smallpox in the 18th century, or why the Great Depression was so bad in the 1930s. So bad? Nazis, Bolsheviks, socialists and simple leftists established themselves.

Smallpox inoculation became standard in the 1950s - some 150 years after its invention.

-----

Faced with the invention of penicillin, Stockman would claim that this new drug is bad. He would argue that it is better for a person to survive pneumonia or an infection alone without an antibiotic. Stockman would claim that "The infection makes the person stronger" or something.

=====

Then again, Stockman has a point. Penicillin can cure a sick person, but the Left is wrong to think that more penicillin will turn a healthy person into Superman.

And Stockman has another point: if a sailor knows that he can get a shot of penicillin, then what does the sailor do next?

Edited April 3, 2013 by August1991

[Michael Hardner]

I was tempted to post this rant in the Read of the Week thread. But then I decided that it was better posted here.

...

And Stockman has another point: if a sailor knows that he can get a shot of penicillin, then what does the sailor do next?

Auguste - if you re-read your post, you'd see that it's difficult for someone to understand it without going to the link.

It might have helped if you just posted the title: "State-Wrecked: The Corruption of Capitalism in America"

As you posted it, though, it seemed like a simple list of economic facts - which would make the reader wonder why this was controversial.

The full article is actually a condemnation of current governments' reactions to globalization, not capitalism itself. The prescription at the end is tough medicine ...

amendments to give the president and members of Congress a single six-year term, with no re-election; providing 100 percent public financing for candidates; strictly limiting the duration of campaigns (say, to eight weeks); and prohibiting, for life, lobbying by anyone who has been on a legislative or executive payroll. It would also require overturning Citizens United and mandating that Congress pass a balanced budget, or face an automatic sequester of spending.

It would also require purging the corrosive financialization that has turned the economy into a giant casino since the 1970s. This would mean putting the great Wall Street banks out in the cold to compete as at-risk free enterprises, without access to cheap Fed loans or deposit insurance. Banks would be able to take deposits and make commercial loans, but be banned from trading, underwriting and money management in all its forms.

It would require, finally, benching the Fed’s central planners, and restoring the central bank’s original mission: to provide liquidity in times of crisis but never to buy government debt or try to micromanage the economy. Getting the Fed out of the financial markets is the only way to put free markets and genuine wealth creation back into capitalism.

What we need, what we're all waiting for, is for things to turn around. That would mean that those who have money start spending again, and for the economy to start moving forward. That could happen anytime. It's difficult to assess how bad things really are - I think that you're right, though, that this article is likely too negative in its outlook.

[GostHacked]

What we need, what we're all waiting for, is for things to turn around. That would mean that those who have money start spending again, and for the economy to start moving forward. That could happen anytime. It's difficult to assess how bad things really are - I think that you're right, though, that this article is likely too negative in its outlook.

It might be difficult to asses how bad, but it should be be hard to understand that it IS bad, quite bad currently.

And if you are waiting for someone else to get things turned around .. you are going to be waiting a very long time.