Author Archive for Joseph Salerno – Page 3

Cronies of Hillary

In the past week Hillary Clinton netted a tidy $400,000 from two speaking engagements at Goldman Sachs-sponsored events.  In July and September of this year she spoke at events hosted by private-equity firms KKR and Carlyle Group, respectively.  Crony capitalism just keeps rollin’ along.

“We All Know Who Janet Yellen Is . . .”

“. . . and That’s Terrifying,” writes Brendan Brown in the title of his recent Forbes op ed. According to Brown, Yellen is simply another in the line of deflationphobes and monetary authoritarians who have run the Fed in the last 20 years and are eager to please their political masters. Yellen’s choice as Fed chair thus presages an agonizing era of asset bubbles and crashes, stagnant recoveries, and an age of 1970s-style galloping inflation. Brown eloquently makes the case:

A doctrine of monetary authoritarianism has emerged through the past two decades which features the targeting of inflation (at 2% p.a.), a deep phobia of deflation, the systematic denial of asset price inflation and its monetary origins, an embracing of regulation as a key tool of macro-economic management and so-called prudential control, and the legitimization of currency warfare (by the US).

The doctrine is deeply flawed.  Its pursuance has produced violent cycles of asset price inflation and deflation including the greatest financial panic and greatest recession in modern times and now the weakest economic recovery ever from great recession.  Ahead looms the probability of a 1937-style crash and recession.  And beyond that there is the specter of another age of high inflation. . . .

And so it is with the doctrine of monetary authoritarianism which pervades the Federal Reserve and is fully endorsed by its present political master, the Obama Administration.  There are no grounds at all to imagine that the new nominated chief, Professor Yellen, will demonstrate any flexibility in applying the doctrine let alone experiencing a “road to Damascus” moment in which she doubts its validity.

So what drama can we expect in the theatre of the Yellen Fed?

Most likely it will open with some economic disappointment.  The US economy may well enter one of its frequent growth cycle lulls (indeed it may already have done so).  She will postpone QE tapering – indeed postponement could become indefinite.  No doubt one element in the decision of the White House to nominate her was the belief that she could engineer a powerful growth cycle upturn ahead of the crucial mid-term Congressional elections (November 2014).


Bruce Bartlett’s Nutty Government Default Hysteria: Here’s Another Economist for His Hit List

In a remarkably rambling article, minor Beltway pundit and dabbler in economics, Bruce Bartlett (M.A. History, Rutgers University) has taken to listing and trying to smear real scholars in economics who do not share his hysterical government default-phobia. Well, I have another eminent economist who may be a candidate for his hit list.

Ohio State economist J. Huston McCulloch actually challenges the conventional wisdom that the U.S. government has never, ever defaulted on its debts. McCulloch points out that the U.S. did indeed default on its debt in 1861 and again in 1933. In 1861, the U.S. Treasury issued “United States Notes” to aid in financing the Civil War. These Treasury notes, known colloquially as “Greenbacks,” promised to pay the  bearer in “lawful money,” gold or silver at the government’s discretion, on demand. At the end of 1861, however, the government renounced its promise and suspended redemption as of January 1, 1862, putting it technically in default until 1879 when the notes were again made redeemable in gold. In 1933, President Roosevelt reneged on the promise to pay the interest and principal on Treasury bonds in gold at the rate of $20.67 per ounce, which once again put the government in technical default. In 1935, the right to redeem the bonds in gold was restored to foreign bondholders only, but at the depreciated rate of $35.00 per ounce, an option which was never offered to U.S. bondholders.

More important, the whole notion that an honest and explicit debt default by the U.S. government is an unprecedented event and the worst possible outcome in the current situation is ludicrous given that the U.S. has been continually and surreptitiously defaulting on its debt since World War 2 via inflationary finance. As McCulloch argues:

Governments often effectively default on their debts through inflation. Under a fiat money regime, they can always print enough legal tender money to pay off their debts. The only catch is that the money will not be worth as much as it was before. If it tries to cover too much deficit spending in this manner, more than a few percent of GDP, the inevitable result is hyperinflation in which money quickly becomes virtually worthless.

Disastrous though an explicit Treasury default would be, bringing down the entire economy with a hyperinflation or even a partial inflationary default would be even worse. But if we keep charging current deficits to future taxpayers at our current rate, the inevitable result will be a revolt in which they either explicitly repudiate all or part of the debt, or, worse yet, inflate it away.

Bruce, are you paying attention to this economics lesson?

Why Would Somali Militants Attack a Kenyan Shopping Mall?

The U.S. government and the establishment media are in a quandary. How are they to explain the heinous attack on a Kenyan shopping mall by Al Shabab a militant Somali group with links to al-Qaida which left 59 innocent civilians dead and another 175 injured, with the victims ranging in age from  2 to 79 years old? After all, since the horrific events of September 11, 2001, U.S politicians of all stripes have repeatedly hammered home the message that “fundamentalist” Islamists hate us and want to kill us simply because we are free and prosperous. But Kenya is neither. According to the  Index of Freedom in the World that attempts to measure economic, civil, and political liberties, Kenya ranks 91 out of the 123 countries included in the index. As for prosperity, based on the CIA World Factbook 2012, Kenya’s per capita GDP was estimated to be $1,700 per year which ranks 192 out of 225 countries.

Could it be that Al Shabab was telling the truth about the reason for its murderous assault yesterday when it tweeted: “For long we have waged war against the Kenyans in our land, now its time to shift the battleground and take the war to their land.” After all 4,000 Kenyans troops invaded and have been occupying part of Somalia since 2011. But then this raises the uncomfortable possibility that terrorist attacks by militant Muslim groups on the U.S and its interests throughout the world were not motivated by envy and hatred of our freedoms and high standard of living. Maybe, just maybe, Ron Paul was right and they were provoked by incessant U.S. meddling in the Middle East since World War 2 through numerous wars and economic embargoes including on food and medicine and the billions of dollars sent to payoff and prop up tyrannical and oppressive regimes that do U.S bidding, e.g., the Mubarak dictatorship in Egypt.

Plundering The Provinces

While incomes and living standards in the rest of the U.S. have been declining since the beginning of the new millennium thanks to the ever-increasing depredations of Big Government, Central Banking  and Crony Capitalists on productive Americans, things have been going just swimmingly in the Imperial City of Washington, D.C. According to the Census Bureau’s American Community Survey, average household (inflation-adjusted) income has jumped by 23.3% to $66,583 in D.C. between 2000 and 2012. During the same period median household income for the rest of the country has fallen by 6.6%, from $55,030 to $51,371. Disaggregating the data for the rest of the U.S., only 4 states enjoyed gains while 35 states suffered declines in real income.

When we expand the survey area a bit to include the D.C. suburbs in Maryland, Virginia, and West Virginia, where most of the high-level Federal bureaucrats, government contractors, and lobbyists working in D.C. reside, median household income leaps to $88,233. This puts the D.C. metro area at the very top of the list of the 25 most populous metro areas in the U.S. in terms of median household income, revealing an even more glaring and growing income disparity between the political predators and their cronies on the one hand and the private producers of wealth on the other.

The establishment media and many economists and other social scientists continually bemoan the varying income differences generated by voluntary and ever changing consumer choices on the market. In fact, these differences are not a problem at all,  but rather the necessary and benign outcome of a dynamically efficient market economy, which rewards all market participants according to their productivity in serving consumer wants. Furthermore, the obsession with “income inequality” obscures the enormity and the very existence of the real problem, which is ”income plundering” of the productive class by the political class. The latter class is composed of politicians, bureaucrats and their allied special interests in the private sector. In the U.S., the political class regularly and forcibly extracts a massive amount of income from productive workers, investors, and entrepreneurs via taxation and money creation (“quantitative easing” and “zero interest-rate policies”) and funnels these stolen funds into its own pockets and those of privileged financial institutions, giant agribusiness corporations, government military contractors, construction unions, etc. Recently, in the U.S. this plundering of productive incomes has grown to an enormous scale, enabled by the huge Federal budget deficits financed by the Fed’s money printing. Plutocratic exploitation, therefore, and not any kind of market failure, is the explanation of the impoverishment of the productive middle class which has been manifested so dramatically in the past decade.

Surprise, Surprise: Consumers Do Not Believe the Fed’s Inflation Projections

University of Michigan Survey Research Center surveys consumers monthly.  The Index of Consumer Expectations is one of two indexes compiled from consumer answers to these questions.  One of the routine questions posed relates to expected inflation for next year and for 5 to 10 years from now.  Judging by the average response to this question recent consumers clearly do not believe that the Fed either is aiming at or is capable of hitting its announced inflation target of 2 percent.  For one year out, the index of inflation expectations has averaged 3.2 percent over the past year and 3.1 over the past 5 years.  Consumer expectations of long-term inflation are roughly the same, averaging 2.9  percent over the past year and 3.0 percent over the past 5 years.

Caroline Baum of Bloomberg addresses the question of why consumers have ignored the Fed’s widely ballyhooed inflation target of 2 percent  and the fact that CPI inflation has averaged only 1.5 percent over the past five years.   Her answer is enlightening:

Consumers either don’t listen, don’t care or derive their expectations from their own shopping cart. Food and gas comprise a big part of the household budget, and energy prices, at least, have been rising much faster than inflation. Just as consumers vote their pocketbook, they use their pocketbook to make judgments on where inflation is today and where prices are headed.

This is exactly correct.  In a classic passage written in 1949 (Human Action, pp. 23-24), Ludwig von Mises made this point and emphasized that consumers’ rough and ready assessments of the prevailing  inflation situation are just as “scientific” as the arbitrary statistical constructs contrived by government economists to “measure” inflation.  Wrote Mises:

The pretentious solemnity which statisticians and statistical bureaus display in computing indexes of purchasing power and cost of living is out of place.  These index numbers are at best rather crude and inaccurate illustrations of changes which have occurred.  In periods of slow alterations in the relation between the supply of and the demand for money they do not convey any information at all. In periods of inflation and consequently of sharp price changes they provide a rough image of events which every individual experiences in his daily life.  A judicious housewife knows much more about price changes as far as they affect her own household than the statistical averages can tell.  She has little use for computations disregarding changes both in quality and in the amount of goods which she is able or permitted to buy at the prices entering into the computation.  If she “measures” the changes for her personal appreciation by taking the prices of  only two or three commodities as a yardstick, she is no less “scientific” and no more arbitrary than the sophisticated mathematicians in choosing their methods for the manipulation of the data of the market. . . . In practical life nobody lets himself be fooled by index numbers.

Whether or not the Fed is pursuing a blatantly political agenda by manipulating inflation statistics is wholly besides the point, which is that inflation is a multi-dimensional phenomenon including systematic changes in: relative prices;  the qualities of goods and services;  the structure of interest rates; and temperatures on various asset markets.   Even if we focus (too) narrowly on markets for goods and services, as mainstream economists do, there is no such thing as a uniform  ”price level”  moving up and down.  There are only individual money prices changing at varying rates, at different times, and even in different directions.  As long as mainstream macroeconomists and central bankers fail to understand this lesson, we will continue to have recurrent booms and bubbles inevitably followed by financial meltdowns and grinding recessions.


Poverty Just Ain’t What It Used To Be

A newly released report by the U.S. Census Bureau indicates that most Americans  living below the bureaucratically designated “poverty line” enjoy most modern conveniences.  For example more than 80 percent of U.S. households below the poverty line have a: refrigerator (97.8%); stove  (96.6%); television (96.1%); microwave oven (93.1%); air conditioner (83.4%); VCR/DVD player (83.2%); and cell phone (80.9%).  In addition, more than half of  households beneath the poverty level also have a:  clothes washer (68.7%); clothes dryer (65.3%);  computer (58.2%); and landline telephone (54.9).  Now, when we use these figures as a standard of comparison, most middle-class Americans families in, say, 1960, were living well below the poverty line.  But this comparison obscures the important point that capitalism long ago solved the problem of poverty in a meaningful sense and in doing so radically transformed the very concept of poverty.

In order to understand the original idea of  poverty, we need to go back to the era before the  economic and social system of capitalism produced the much maligned  ”Industrial Revolution” that began to  transform Western Europe in the late 18th and early 19th centuries.   Writing in the mid-20 century, Ludwig von Mises vividly described the plight of the true poor in the era prior to the emergence of industrial capitalism.  According to Mises, in the allegedly paradisiacal pre-modern agricultural society with a growing population:

[T]he outcome is the emergence of a huge mass of landless proletarians.  Then a wide gap separates the disinherited paupers from the fortunate farmers.  They are a class of pariahs whose very existence presents society with an insoluble problem.  They search in vain for a livelihood.  Society has no use for them.  They are destitute.

When in the ages preceding the rise of modern capitalism the statesman, the philosophers, and laws referred to the poor and to the problems of poverty, they meant these supernumerary wretches.  Laissez-faire and its offshoot, industrialism, converted the employable poor into wage earners.  In the unhampered market society there are people with higher and people with lower incomes.   There are no longer men who, although able and ready to work, cannot find regular jobs because there is no room left for them in the social system of production.  But [laissez-faire] liberalism and capitalism were even in their heyday limited to comparatively small areas of Western and Central Europe, North America, and Australia.  In the rest of the world hundreds of millions still vegetate on the verge of starvation.  They are poor or paupers in the old sense of the term, supernumerary and superfluous . . . .

Thus before modern capitalism one could not be living “below the poverty line,” because poverty was an absolute and irremediable condition  in which the pauper  had no regular income and no prospects of ever earning one.   In order to keep body and soul together,  the pauper had to subsist on alms or on robbery.  It was capitalism that put paid to the universal belief that the poor would always be with us–and permitted a vacuous idea like the “poverty line” to gain currency.

Planet Ponzi

“The quantitative easing program is like a giant roach motel with a big welcome sign.”  So says fund manager Mark Feierstein, author of Planet Ponzi, in this short video interview. Although no Austrian, Feierstein has insightful things to say about the U.S. government’s lying statistics and the dire prospects for a world awash in Fed-generated debt. He also is not afraid to use the “D” word, as in Italy and Spain, with negative economic growth and 28% and 55% youth unemployment respectively, are in a depression.

The Impending Collapse of the Global “Bernanke Bubble”

The flood of dollar-denominated debt has risen in Turkey, Brazil, India, and South Korea since Bernanke turned on the monetary spigot in 2009. Now it appears, according to a perceptive article by Landon Thomas, Jr. in the New York Times, that the end of the boom may be in sight as rumors swirl that the Fed will soon be tightening money. As Tim Lee of Pi Economics remarked: “What we are witnessing is a huge bubble, a Bernanke bubble if you will.” And he believes that it is nearing it bursting point.

In recent days nervous investors have begun to pull funds out of developing Asian economies in anticipation, jolting stock and currency markets in India, Indonesia, and Thailand. In the pst few months, the Turkish lira has depreciated by 4.5% against the dollar, while Turkey’s dollar-denominated debt stands at $172 billion or 22% of its GDP. Goldman Sachs forecasts a further 15% fall in the Turkish lira, spurring a financial crisis as it becomes more and more expensive to buy dollars to service these loans, most of which are short term. Other previously fast-growing economies with large accumulations of dollar-denominated debt such as Brazil, India, and South Korea are also struggling right now and will likely be caught up in the impending financial crisis.

Furthermore — and not at all surprisingly — the real assets created by these loans were malinvestments that will not lead to sustainable growth and prosperity in the recipient economies and therefore will not generate a sufficient flow of income to service the loans. As Mr. Thomas points out,

Some of the biggest beneficiaries of the Fed’s largess were . . . among the politically connected elite in emerging nations like Turkey, where vanity towers, glitzy shopping malls and even grander projects to come — a third bridge across the Bosporus and a vast new airport — have become representative of the nation’s new dynamism, economic as well as geopolitical.

The silver lining in all this doom and gloom is that another global financial meltdown will deal a heavy, and possibly fatal, blow to both the Fed and the credibility of Ben Bernanke’s work on crises and depressions which has become the centerpiece of modern macroeconomic orthodoxy. This will clear the field for the return to prominence of the Austrian theory of the business cycle of Mises, Hayek and Rothbard.

Nonsense on Religion and Monetary Policy

Mark Gongloff of the Huffington Post responded to a surpassingly silly post of Christopher T. Mahoney’s, former vice chairman of Moody’s. Unfortunately, Gongloff’s post is almost as silly as Mahoney’s.

According to Mahoney, Protestants stink at monetary policy, you know, because of the whole Protestant work ethic thing that if you get something for nothing then it must be sinful. Thus Protestants believe that expansionary monetary policy and “reflation” are sinful precisely because they can costlessly cure depression and unemployment. Mahoney concludes therefore, “The only people who understand monetary policy are Jews and Catholics.” But instead of challenging Mahoney’s ludicrous premise that inflation is the miracle cure for what ails the U.S. economy, Gongloff offers as counterexamples Friedrich A. Hayek, who was born a Roman Catholic, and his Jewish mentor, Ludwig von Mises, whose valiant fight for complete separation of money from the control of politicians was also presumably driven by a theological aversion to inflation. But the narrow-minded dogmatists are not, of course, Mises and Hayek, but those like Gongloff and Mahoney who insist against all reason and experience that the creation of money miraculously begets real goods and services and ushers in an earthly paradise of plenty.