Politics

Would Creating Hyperinflation be Treason ?

by

Last week Rick Perry made a comment that got wide attention in mainstream media.

Mr. Perry brought the Fed directly into the campaign debate Monday night by saying it would be “almost … treasonous” for the central bank to play politics by expanding the money supply.

“If this guy prints more money between now and the election,” Mr. Perry said in Cedar Rapids Monday night, without naming Mr. Bernanke, “I don’t know what y’all would do to him in Iowa, but we—we would treat him pretty ugly down in Texas.”

Today, on Meet the Press, Peggy Noonan showed that she is completely clueless on this subject by going off on a riff about how a president has to appear “nice.” She never did address the subject.

Others, who appear to know more about monetary policy had a somewhat different take.

Thomas Gallagher, a principal and economic policy analyst at the Scowcroft Group in Washington who advises Wall Street firms, said Mr. Perry’s comments will be the first thing many investors learn about his candidacy. And the comments are “drawing a fair bit of attention.”

“Voters may not care as much, but investors, like the chattering class, expect a candidate to know what he’s talking about when he talks about the Fed,” he said. “It’s one thing to oppose what the Fed is doing, but it’s another to call it almost treasonous.”

I don’t know that treason was the right word to use but the point is that the Fed is feeding inflation which is far more apparent to those of us who buy our own groceries than most politicians. Ron Paul has been railing at the Fed for years and he is gaining allies.

Libertarian Rep. Ron Paul, who fell 152 votes short of winning the Iowa GOP’s straw poll on Saturday, has been railing against the Fed for years, and former House Speaker Newt Gingrich has joined in with an “Audit the Fed” petition. Other conservatives complain that the Fed’s policy of using monetary policy to stimulate the economy, which it indicated last week it might renew, could be sowing the seeds of inflation.

I would say we are past the “seeds” stage.

The US Treasury has been the largest buyer of new Treasury bonds. How can this be ? The Federal Reserve is printing more money that is then used to buy the debt. Is this an example of the elusive perpetual motion machine ?

Ӣ Turning government bonds into circulating money is called monetizing the national debt.

”¢ Quantitative easing is a euphemism for creating money out of thin air. In the vernacular, we call it “printing money,” even though it really has nothing to do with the U.S. Bureau of Engraving and Printing.

”¢ The way it’s supposed to work is that the Fed buys securities in the open market, paying with a government “check.” (That’s how the money is created.) The sellers deposit those checks into their banks. The banks redeploy those deposits as loans to consumers and business. The money supply expands and, in turn, so does the economy.

What effect will this have on the dollar ? The economy hasn’t exactly expanded while this has been going on.

One factor may be saving us the worst of the effects of this reckless policy. Troubles in Europe and elsewhere in the middle east have caused many investors to engage in a “flight to quality,” although I wouldn’t call the dollar “quality” right now. The Euro, however, seems to be in even worse trouble.

We’ll see what effect Perry’s comment has on his candidacy.

Cokie Roberts Blurts Out the Truth

by

I watch the Sunday talk shows, usually flipping back and forth between them. I was struck today by a comment made by Cokie Roberts on ABC’s This Week. In the discussion of the downgrade of US Treasury bonds, she was arguing with a tea party affiliated Congressman from Utah named Chaffetz and she made the following statement: (The comment begins at 8:55)

The reason why they (S&P) like France and England is because they have parliamentary government,   because the majority gets what it wants. There is no divided government where both parties have to agree.

I thought that an astonishing but revealing statement. First, Britain and France have not been exemplars of fiscal probity the past 50 years, with the exception of Margaret Thatcher’s era. She even mentioned that England now has an austerity program. Also, she didn’t mention that Obama had undivided government for two years and spending increased 24%. In fact, there has been no national budget for two years, probably because the Democrats did not want to expose their plans prior to the 2010 election.

Her second comment was also revealing:

The problem is with the US Constitution.

There, in a nutshell, is the Democrats’ complaint. The Constitution restricts the ability of one political party to spend at will without regard of the consequences. God knows we have had excessive spending since 1965 in this country under both parties and with the Constitution intact. But, for Democrats, that has not been enough. I don’t think I have seen a more revealing comment.

An Explanation for Obama’s actions

by

The debt ceiling debate has dragged on creating frustration and some anxiety about the economic consequences of default. President Obama has even threatened to withhold Social Security checks, claiming there would be no money for payment. Through most of this he has seemed to me to be unserious about the matter and using it chiefly to try to improve his chances for re-election. Fred Barnes has now come up with what I consider a good explanation for his behavior, including the last moment maneuvers yesterday.

First, the trade treaties:

The path to ratification by Congress was greased after President Obama renegotiated trade treaties with South Korea, Colombia, and Panama. Obama would supply Democratic votes. Republicans were already on board, President Bush having put together the treaties in the first place. It had the look of a done deal.

It wasn’t. In May, the White House suddenly insisted the treaties be accompanied by roughly $1 billion in Trade Adjustment Assistance, or TAA as it’s known in Washington. Organized labor was demanding TAA funds be set aside for workers whose jobs might be lost as a result of the treaties. Obama took up the cause.

Then there was the oil pipeline from Canada:

The Keystone XL pipeline from the oil sands in Canada to refineries on the Gulf Coast is another win-win issue for Obama, if only he’d embrace it. Canada is America’s leading foreign supplier of oil. The more Canada exports to the United States, the less we’re forced to rely on unfriendly folks in the Middle East and on Latin American countries (Mexico, Venezuela) whose oil production is declining. With the new pipeline, Canada would increase its exports by as much as 700,000 barrels a day. (The United States consumes 10-11 million barrels daily.)

A permit to build the pipeline was requested nearly three years ago by TransCanada. Because it would cross an international border, approval must be granted by the State Department. This was expected to be a snap, particularly after gasoline prices reached $4 a gallon. White House aides thought so, and Secretary of State Hillary Clinton indicated she was ready to approve it.

Then the environmental lobby, led by the Natural Resources Defense Council, began a campaign against approval, and the Environmental Protection Agency joined in. It criticized the State Department’s first environmental impact statement, which found the pipeline would have little effect on the environment. Clinton buckled, and a second impact statement was ordered. Last month, EPA said the new study was “inadequate.”

Both of these initiatives promised thousands of new jobs and would seem to be helpful to Obama in his quest for a second term. In both cases, a left wing member of his base intervened and his support collapsed.

Now, the debt ceiling:

The Speaker and the President had nearly agreed on a plan that included $800 billion in “revenue enhancements” but did not raise rates. What happened ?

House Speaker John Boehner’s (R., Ohio) office is pushing back against White House claims that the new revenue in the “framework” being discussed in the now defunct negotiations would have been generated by letting current tax rates expire. “That is simply false,” writes Boehner spokesman Michael Steel.

In reality, Steel writes, the White House offered a “ceiling” of $800 billion in new revenue over 10 years that would be achieved through comprehensive tax reform (e.g., eliminating loopholes, credits and deductions) in a way that would stimulate economic growth. This would not constitute a tax increase.

Following the release of the Gang of Six proposal, however, the White House then insisted on an additional $400 billion in actual tax increases, for a total of $1.2 trillion in revenue that would become the new “floor” for revenues. Additionally, the administration backed away from several aspects of the tax reform package they had already agreed to, including a protection against tax hikes on small businesses and a guarantee that they would only be three tiers of tax rates, the highest of which would be below 35 percent.

In regard to Social Security, the two sides had agreed on a change in the way the government calculates inflation (the so-called “chain CPI”) that would extend the program’s solvency. However, the White House reneged on a previously agreed-upon solvency target and offered a weaker target that would yield 25 percent less in savings.

What had happened was that the “Gang of Six” report was released and the revenue (tax) increases there looked better to Obama so he reneged on the pending deal with Boehner. There was also considerable discussion that Democrats were furious with him because he had not insisted on tax increases. Revenue from loophole closing was not enough.

No. I think what happened is Congressional Democrats got a whiff of a possible deal where you get entitlement cuts and tax reform, say, next year — which might increase revenue or might not — and they panicked because a) they have a religious belief in raising the taxes. If you don’t have that, you can’t have a deal, so it created a kind of a theological panic.

Obama, it seems, cannot stand up to the rest of his party. He will negotiate but once some interest group objects, he is gone. No deal.

It’s a good thing the Soviet Union is gone.

Why I like Coolidge and why we are not recovering.

by

I spent the past six months reading about Calvin Coolidge. I was interested in why the 1920s were a period of great prosperity and why the severe recession/ depression of 1920-1921 was so short. At its peak, there was 25% unemployment. Gross domestic product dropped by 6.9% in one report.

The recession of 192021 was characterized by extreme deflation — the largest one-year percentage decline in around 140 years of data.[2] The Department of Commerce estimates 18% deflation, Balke and Gordon estimate 13% deflation, and Romer estimates 14.8% deflation. The drop in wholesale prices was even more severe, falling by 36.8%, the most severe drop since the American Revolutionary War. This is worse than any year during the Great Depression (adding all the years of the Great Depression together, however, yields more severe deflation). The deflation of 192021 was extreme in absolute terms, and also unusually extreme given the relatively small decline in gross domestic product.[2]

The Harding-Coolidge administration took office in March 1921 and the recession was over in months. Why ? Governments were smaller then and had less influence on the economy. The Wilson Administration has been widely described as the equivalent of a fascist regime with its war time controls and economic meddling. Again from the Wikipedia article:

Read more

Coolidge- Summing up

by

I promise this is the last post of this series.

Coolidge believed that the wedding of government and business would lead to socialism, communism or fascism. Hoover considered Henry Wallace a fascist for supporting the McNary-Haugen bill. Hoover, ironically, was to bring on the Depression by progressive measures that might have been called a form of fascism. The farm bill would be re-introduced under Hoover and die. Only during the New Deal would it find enough support to become law. The summer of 1927 was peaceful and prosperous. It was the summer of Babe Ruth’s 60 home runs. The Yankees would win the World Series and end up with a winning percentage of 0.714, still unsurpassed. In September, Gene Tunney defeated Jack Dempsey in the fight marked by the “long count.” The “Jazz Singer” came out that fall, the first talking feature picture. Charles Lindbergh flew the Atlantic in May of 1927. He and Coolidge were much alike yet different. Both were shy and diffident but Lindbergh was happy to cash in on his fame while Coolidge refused all offers after he left office.

Coolidge arranged for Lindbergh to return to the states aboard the US cruiser, Memphis, where he was met by a crowd and by cabinet members, then there was a huge parade through New York City. Lindbergh and his mother stayed with the Coolidges at the temporary White House where Dwight Morrow, close friend of Coolidge from Amherst, introduced the young aviator to his daughter Ann. Aviation stocks, along with many others, soared and the Dow Jones Average by year end was at 200, the record high.

In his December 6, 1927 State of the Union message, he mentioned an economic slowdown and asked for the same things he had been requesting; sell Muscle Shoals, help farm cooperatives and keep spending down. In May of 1928, he complained to reporters about Congressional spending. “I am a good deal disturbed at the number of proposals that are being made for the expenditure of money. The number and the amount is becoming appalling.” He managed to get another tax cut passed including a cut in the corporate tax rate. The surplus that year was $398 million.

Read more