Scott Brown and the Tea Party

This is in response to today's commentary at The Daily Bell

http://www.thedailybell.com/1219/Senator-Scott-Browns-Disturbing-Story.html

"While the perspective of American punditry is that the Tea Party movement has been co-opted by the Republican party, we would humbly submit that this is not a true reading of the situation. The inchoate Tea Party movement may have been formalized and reconfigured to make it palatable, but the underlying frustrations remain the same and cannot be palliated by political formulations and rhetoric."

The Tea Party as a structure, an entity, is being co-opted -- to the extent that an entity that is yet to take any significant unifying form can be co-opted. I agree that the underlying frustrations have not (and cannot) be co-opted, but the political outlet for these is at risk.

Also, I do not yet accept the idea that the frustrations of the Tea Party are focused around smaller government and less intrusion. I think there is a segment of that -- those that came to the movement from the Ron Paul 2008 candidacy -- but many seem to be of the view that the new programs are putting at risk the old program...so stop the new programs and don't mess with my old program.

"Government, keep your hands off my medicare."

When students agree to give up subsidized schools, and seniors agree to give up medicare and social security, we may be on to something. When the Tea Party as a smaller / shrinking government movement lasts for at least ten years and effects local and national elections with better candidates than Scott Brown, we might have something.

The best we have going for us is that the promises will be broken. Then people will look to local solutions vs. national (or international) ones. That the promises will be broken is certain.

China on the Brink? at the Daily Bell

In reply to the Daily Bell article:

http://www.thedailybell.com/1194/China-on-the-Brink.html

The validity of the Austrian Theory of the Business Cycle (do we really have to call it a "theory" anymore?) does not only apply to the west. China will bust because it has to.

The Chinese leadership is faced with a few options, all bad. They can certainly continue to do what they are doing (no, I don't believe there is such a thing as a soft landing when you have pumped as much as they have pumped).

They also aren't sitting around waiting for the G8 or G20 or any other "helpful" organization of the west to solve the world's (China's) problems.

They are locking up resources around the world. These contracts are likely priced in dollars -- something the Chinese have plenty of and don't want to hold. At some point, China can declare the Yuan partially backed by gold -- even 15% - 25% would be sufficient. This strengthens the Yuan and makes it easier to buy those resources now priced in cheaper dollars. Yes a) their reserves lose value (this will happen no matter what), however if these reserves still buy resources, do they care? and b) this will send China into a recession/depression (this will also happen no matter what).

What comes out the other side is a stable internal economy with a strong currency that allows the Chinese to buy commodities at favourable prices...helping to keep internal price inflation down and keeping the masses somewhat settled.

They could do this in conjunction with Russia (though not mandatory) as Russia brings additional muscle and significant natural resources. The US won't go to war over this (the DB has done a good job of pointing out the minimal chances of nuclear war in our future by nation-states).
Not a great solution, not even a good solution, but maybe the best of many bad solutions and a solution that gives the Chinese a chance post the trauma.

Yesterday the DB asked if the Chinese elite are married to the west. I think not. I think when the Chinese elite were courted, they did the "winkie-winkie," but didn't make any promises. The west, having no alternative, decided they would take the chance and hope the flirting would lead to marriage. The Chinese feel no obligation to this johnny-come-lately anglo elite -- they have been around 6000 years compared to a few hundred. They will be around long after, they figure.

My guess is China has figured out they have gained everything they are going to gain from the US, it is time to move on. No need to buy the cow, so to speak. Yes, the flirtation came at some cost -- but none long term -- and oh by the way brought a few benefits.

Dr. Fekete, I agree on this one

Again, unable to post at the Daily Bell...so here it is:

http://www.thedailybell.com/1193/Antal-Fekete-Floating-Exchange-Rates-Scheme-to-Embezzle-the-Dollar-Balances-of-Surplus-Countries.html

I have strongly disagreed with Dr. Fekete's commentary here at the Daily Bell in the past, and have commented accordingly. This time, I agree. Morally and philosophically he is correct - by what "right" does the US have to dictate to its largest creditor that the creditor destroy the value of the debt owed?

None, of course, in a moral world.

However, I will posit that eventually, China will have no choice but to act and in fact will take actions that offer the least of several bad alternatives.

China will eventually back its currency with gold, silver, and/or other assets. China is currently securing these assets via contracts around the world. These are likely priced in USD. When they go to a gold backed Yuan, the Yuan will rise and the dollar will sink, making these commodities much cheaper for China to pay for.

They may bring Russia along for the ride, as Russia has plenty of resources for which they will want some currency besides the dollar in exchange, and Russia has a military that, when added to China's (although China could also somewhat go it alone) would deter any possible threat from the US. So Russia will trade protection for pricing in a (relatively) hard currency.

To China, the Anglo American power elite is a short term blip on a 6,000 year radar.

I believe I read it at the DB first, perhaps Mr. Suess - we are very likely in the midst of the real WWIII, and the battle will be played out financially, as the Bell has pointed out the world cannot afford to play this out militarily.

Dr. Ebeling at The Daily Bell

The original editorial appears at the Daily Bell. Once again, I could not post.

http://www.thedailybell.com/1192/Richard-Ebeling-The-Hubris-of-Central-Bankers-and-the-Ghosts-of-Deflation-Past.html

I have two comments regarding Dr. Ebeling's commentary:

1) While I can appreciate his differentiation of different types of deflation, I will paraphrase (and modify) Milton Friedman, "Deflation is always and everywhere a monetary phenomenon." Just follow the money (supply), don't worry about the other stuff.

Deflation would be the natural state absent manipulation and with sound currency. With increases in productivity, all would share the benefits. In our system, the benefits of productivity have all been siphoned off the top, witness that disposable income and other various measures of productivity benefits have been at best unchanged in 40 years. Where has all the productivity gone? We know, of course.

2) I don't believe the big banks are holding excess reserves for the benefit of 0.25% interest income. They could lend risk free for a year or two to the US for a much better rate than that (I don't want to elaborate or debate on the concept of "risk free" sovereign debt at the moment, I know the risks of this).

They don't lend because they are scared. By "they" I mean the cartel that includes the FED and the large NYC banks. They want liquidity because they know the mess they are in. They might trust the US government to pay them back in a year or two, but they don't trust that they will remain liquid in the meantime.

In this light, I would rephrase my answer to a question posed to me by the Daily Bell a couple of days ago (paraphrased): is it too late for the FED to reign in price inflation? Technically, no, if they eventually suck up the excess reserves. Of course, this won't happen because the banks (while by definition are always insolvent) are even more insolvent today. They (the FED and the banks) KNOW this liquidity is necessary.

It will eventually leak out, and it will unleash a good bout of price inflation.

Rick Rule at The Daily Bell

This post is in response to the interview with Rick Rule at The Daily Bell. I attempted to post it on the site, but again had difficulty.

The original Daily Bell article can be found here:

http://www.thedailybell.com/1184/Rick-Rule-on-Bail-Outs-Business-Cycles-and-10-More-Years-of-a-Golden-Bull.html

In deference to Weeble, I will keep my post short. I also will second (or third, or fourth) Weeble's comment that the Daily Bell writes wonderfully well. I myself have nitpicked one or two items that seemed flawed philosophically, however after the hundreds of articles I have read, to nitpick one or two makes clear the exemplery quality of the work.

Inflation or deflation -- as the Daily Bell makes clear -- define the terms. In the only true (Austrian) sense, it is defined via the money supply. In this case, we have inflation, and will only have inflation. The central banks will create more money and as long as CPI doesn't grow they won't slow down. The worst (best), they eventually slow down when the CPI takes off. They will not stop or certainly not reverse.

If defined via the CPI or some such, again we have only had inflation and will only have inflation. Even Japan (the darling of the deflationist camp) has never had more than a percent or two of price deflation in a year or two over the last 20 years...statistically insignificant.

Where I believe there is merit in the deflation camp is in asset prices and certain other areas wherever fiat has ruled: housing prices, college tuition, various financial assets, etc. I don't believe gold will be affected in this, or if so to a relatively minor degree.

Now, if one really believes in deflation (any of the above definitions) why would you own gold? By definition, with deflation your dollar (or swissie or euro) will buy more (of whatever) tomorrow than today. What reason would I have to own gold -- subject to various tax and control issues, when I can hold currency that will increase in value at no cost, no tax ramifications, no political risks?

There is no reason if you believe in deflation. Deflation does not destroy the currency. If you believe it will destroy the currency, then by definition you believe we are headed for inflation, not deflation. A destroyed currency cannot buy what it used to buy (if it can even buy anything at all). This is inflation in any definition you want to choose.

Ambrose Evans-Pritchard, you almost fooled me

The title was so promising: "Time to shut down the US Federal Reserve?"

http://tinyurl.com/29uygzw


I thought finally, Ambrose has combined his already wonderful commentary and analytical skills with good policy prescription skills. While he has always been very strong on calling out the establishment in a very clear, effective manner, he has been equally weak in his recommendations for actions of a different sort. Like almost all commentators, Ambrose offers prescriptions right down the middle of the Keynesian, mercantilist camp. Maybe a little more creative, but in the same ballpark.

So I see the headline of this commentary and I believe for a moment that maybe Ambrose finally has seen the light -- the cause of our boom and bust, the cause of bringing the world to its knees, the cause of transferring greater amounts of wealth to fewer and fewer people must be shut down. Bring it on Ambrose, only you can write this column so eloquently. Get rid of fiat money, no more lender of last resort, no more 100 to 1 leverage ratios, no more fractional reserve banking -- and best of all, a hard money standard. WE WANT GOLD backing our currency. GO AMBROSE!

Ambrose can write this so much better than I can -- I was giddy with anticipation to read the entire article.

"Kartik Athreya, senior economist for the Richmond Fed, has written a paper condemning economic bloggers as chronically stupid and a threat to public order. Matters of economic policy should be reserved to a priesthood with the correct post-doctoral credentials, which would of course have excluded David Hume, Adam Smith, and arguably John Maynard Keynes (a mathematics graduate, with a tripos foray in moral sciences)."

Well, not exactly the start I was looking for, but who am I to judge the writing style of Ambrose. Besides, the world would probably be better off if we excluded one or two of those guys from the priesthood.

The sub-quotes below are Ambrose quoting Kartik:

" 'Writers who have not taken a year of PhD coursework in a decent economics department (and passed their PhD qualifying exams), cannot meaningfully advance the discussion on economic policy.”

Don’t you just love that throw-away line 'decent'? Dr Athreya hails from the University of Iowa.

'The response of the untrained to the crisis has been startling. The real issue is that there is an extremely low likelihood that the speculations of the untrained, on a topic almost pathologically riddled by dynamic considerations and feedback effects, will offer anything new. Moreover, there is a substantial likelihood that it will instead offer something incoherent or misleading.”
You couldn’t make it up, could you?

'Economics is hard. Really hard. You just won’t believe how vastly hugely mind-boggingly hard it is. I mean you may think doing the Sunday Times crossword is difficult, but that’s just peanuts to economics. And because it is so hard, people shouldn’t blithely go shooting their mouths off about it, and pretending like it’s so easy. In fact, we would all be better off if we just ignored these clowns.'"

This isn't right! This is Ambrose upset at the FED because they are upset with him...and others like him. A fistfight of the opinionated.

Now, I won't spend time to take on Katrik -- that is much too easy and I expect many are doing it even this minute. Suffice it to say, the entire thought that we should rely on the economic wizards to save us from the catastrophe they alone have created (well, with the help of the politicians) is laughable.

But Ambrose, for a moment, you gave me hope. Unfortunately the moment was fleeting. Then you jumped right into the policy prescriptions you would have gone for, or critiques you have of the FED's chosen path. For example, rates were kept too low for too long (a gimme), M3 was allowed to grow too fast, then too slow (or shrink), Quantitative Easing wasn't done right. And then this:

"The root error of the modern academy is to pretend (and perhaps believe, which is even less forgivable), that economics is a science and answers to Newtonian laws."

No, Ambrose. The root error of the modern academy (and economy) is to pretend (and perhaps believe, which is even less forgivable), that a handful of "experts" (or bloggers) are qualified to price fix the most fundamental item that a free-market capitalist system requires -- that is the price and quantity of money. It is central planning of the kind that we used to laugh about when the Soviets tried it -- but even they never spread the disease as fully around the world as the FED has -- or as you continue to do.

So when I read your version of what the FED did wrong and should have done differently, I think -- who are you? Just another guy with an idea. What makes you so smart that you are qualified to centrally plan and price fix the most critical factor in a modern economy fully dependant on a complex division of labor...money?

No one is qualified. No small group is qualified. The market is quite capable of properly pricing money as it is capable of pricing other goods.

It is a scheme, Ambrose. Set up to transfer wealth from the 99.9% to the 0.1%. It has worked well for 100 years. Until it dies the death it deserves, it will continue to serve this function. In every crisis, more wealth is transferred. You treat it as if a few tweaks in the policy prescriptions are what is necessary. In reality, what is required is a stake through the heart.

Given the mess that has been created, it will die from a self-inflicted wound.

Hyperinflation or Hyperdeflation

This post is in repsonse to Dr. Fekete's recent article posted at The Daily Bell: http://www.thedailybell.com/1048/Antal-Fekete-Hyperinflation-or-Hyperdeflation.html

I attempted to reply on the site, but failed...several times.

I was subsequently encouraged by others who comment on the site to try again. I did, and failed...again (see in the comments section): http://www.thedailybell.com/1157/Antal-Fekete-Architecture-for-a-New-World-Financial-System.html

In any case, here are my comments to Dr. Fekete's article regarding Hyperinflation or Hyperdeflation:

There are too many fallacies in this commentary to list; I will only touch on a few:

1) "People postpone buying indefinitely because they expect prices to fall further."

In the one market where prices regularly have come down -- that is technology and consumer electronics -- do we see people postponing purchases forever? Especially as these goods are almost completely discretionary, it would seem easy to delay. I am amazed that Apple has sold a single iPod to date. I have been postponing that Blackberry purchase for ten years. Meanwhile, I have a nice hole in the wall of the family room because I haven't bought that flat screen TV yet -- I am waiting for that last price decrease. Of course not true – all of these products have done quite well in the market despite regularly falling prices and higher capability.

2) "This defeats the arguments of Turk and others who try to refute the case for deflation by pointing to high or rising costs of food and energy."

So, if we ignore the items where prices are increasing, we have prices decreasing....

3) "You cannot make a case, as Turk is trying to do, out of the fact that the price of crude oil doubled as compared to its recent low. Another fact, more startling, is that the price of crude oil has declined 45 percent as compared to its all-time high. We must see the general decline in world prices, even though in some cases they may be disguised as a loss of pricing power of the producers."

Both examples are flawed -- to pick a recent high or low to make a case is invalid. However, any long term graph of the price of oil in US Dollars makes clear that there is price inflation, not deflation.

4) "Deflation is the measure of wealth in the process of self-destruction — wealth gone for good."

What is this definition? One can speak of monetary inflation or deflation (that is, changes in the quantity of money), or price inflation or deflation (changes in the average prices). In either case, I am wealthier in deflation, and poorer with inflation. My dollar can buy more in a climate of deflation. By either definition, I am wealthier.

In the era of modern central banking, there is only inflation. One cannot even credibly use Japan as a proxy. Check the numbers; they have had some minor pluses and minuses -- but nothing coming close to wholesale deflation of prices. Plus or minus two percent per year is within error -- given the manipulation and randomness of the statistics used.

Central banks want inflation. This has proven difficult to achieve lately, however do not discount for a minute the desire to get it. There are still many tools available for banks and governments to get this wish. As long as we do not have price inflation in the standard government statistics, they will feel free to keep pumping. So they will keep pumping until they get price inflation. Any shrinking in credit markets only gives room to pump further.

The FED’s balance sheet tripled during the crisis of 2008/2009. Who says they will not keep tripling it until price inflation gets in the way? There is no argument one can make for the FED to not buy junk debt from the banks at face value in order to save the banks…until we get to price inflation or mass inflation. Nothing has stopped them from buying a lot of junk so far.

They may only stop to avoid hyperinflation, as this will destroy the banks. Let’s hope they do.

That's it. I will add, that since I first tried to post my comments there is now talk of the FED increasing its balance sheet to $5 trillion. As long as their yardstick is inflation as measured by the CPI, they will be under no constraints to continue pumping until they get serious inflation as measured by the CPI. And, as they cannot control things as well as they like, by then it will be too late to stop the runaway train.

All aboard!