GayPatriot

The Internet home for American gay conservatives.

Explaining Obama’s economy

by

Readers of GP’s Economy category know that I like to write about how money-printing, now called “Quantitative Easing” (QE), actually drags on the economy (rather than stimulating it). In the long run, QE is just a ripoff to inflate asset bubbles for the Point-One Percent – and stick the rest of the economy with the fallout.

The topic is obscure, but it explains much of what has gone wrong in the U.S. economy as well as Europe, Japan, etc. (Overgrowth of the State explains the rest.) But today, I’ll spare you my verbiage and refer you to Pater Tenebrarum’s. Key passage:

When central banks or commercial banks add new money to the money supply, not one iota of real wealth is created…

However, monetary pumping does disturb the finely tuned dynamic processes [of the economy], as it distorts interest rates and prices. Economic calculation is then falsified and malinvestment invariably ensues. Have the housing bubbles in e.g. Spain and the US not shown this quite clearly?…The emergence of such illusory profits leads to the consumption of capital..

Eventually it turns out that companies actually lack the funds to maintain their real capital. This is what we mean when we refer to the pool of real funding being under pressure: the capital structure has been damaged. Actors in the economy need to…”repair” [the economy’s real capital]…Then the economy is in “recession”, but this is really a healing process. It takes time to heal.

Additional money printing actively sabotages this healing process. It achieves nothing but even more impoverishment in the end, especially if it succeeds in igniting another boom by redistributing existing wealth and spurring more capital-consuming activities…

Inflationism is apparently more popular than ever. It doesn’t seem to matter how often and how consistently it fails to produce the desired results, there are always more people in the world who have an epiphany about saving the economy by printing money…[until] the economy has become so structurally damaged…that if banks indeed were to lend out more money [as the money-printers desire], they would be almost guaranteed to lose most of it.

If you have the patience, Read The Whole Thing.

Addendum: By the way, the Swiss don’t get it, after all. Last Sunday, 78% of Swiss voters were against having a sound currency. (Updates my earlier post, Do The Swiss Get It?)

UPDATE: The Japanese people suffer from their latest version of QE, even as their Nikkei stock index sits at seven-year highs. In the end, the U.S. will fare no better (and probably worse).

You’re not spending enough!

by

In saner times of yore, people who spent their entire income were put down as spendthrifts, and people who didn’t were praised as savers.

It was well understood that savers financed the world’s productive capital and so helped to create the Industrial Revolution. The IR used capital to boost the productivity of labor, so that human beings could enjoy good stuff like higher living standards, longer lives, middle-class education and retirement, an end to infant mortality and child labor, etc.

In today’s crazy times, language is turned on its head (to keep the craziness going as long as possible). Savers are now called hoarders, people who hoard money.

Earlier this month, the Federal Reserve Bank of St. Louis published an analysis of our moribund economy, called What Does Money Velocity Tell Us about Low Inflation in the U.S.? The key sentences:

…the unprecedented monetary base increase driven by the Fed’s large money injections through its large-scale asset purchase programs [ed: Quantitative Easing, or “QE”] has failed to cause at least a one-for-one proportional increase in nominal GDP… [ed: though it has certainly boosted the financial markets for “the one percent”]

During the first and second quarters of 2014, the velocity of the monetary base2 was at 4.4, its slowest pace on record. This means that every dollar in the monetary base was spent only 4.4 times in the economy during the past year, down from 17.2 just prior to the recession…the sharp decline in velocity…has offset the sharp increase in money supply, leading to the almost no change in nominal GDP…

The answer lies in the private sector’s dramatic increase in their willingness to hoard money instead of spend it. Such an unprecedented increase…has slowed down the velocity of money…

(Emphasis added.) Get it? If only people would spend all their money, again and again – rather than hoarding it because they need it for bills, or worry about the future – THEN the economy would grow. THEN the Dear Obama-Yellen’s plans would work.

In reality, the economy is restrained by excessive debt and even more, by lack of freedom. As government gets bigger and consumes (or takes over) more of the economy, the private sector shrinks. As government plans, regulates and intervenes more heavily, the private sector gets sicker, lazier and more fearful. Just as Big Government creates more problems than it ever solves, the opposite – Freedom – ultimately solves more problems than it creates.

But that’s not what Establishment economists, politicians, bureaucrats and media want people to know. They’d rather blame, in this example, people who “hoard”. Look for the scapegoating of so-called hoarders to become a drumbeat, as the economy continues to languish into the 2016 election.

If we hit a new financial crisis, they’ll also be sure to scapegoat mysterious “speculators”, as President Nixon did in the 1971 crisis. But they’ll never put the blame where it belongs: on 8+ decades of money-printing and Big Government.

New lingo for you: BRICS Development Bank

by

Did you know that since 2009, the BRICS countries (Brazil, Russia, India, China, South Africa) have had a summit each year where, basically, they plot a new world financial system with a greatly reduced role for the West, and the U.S. dollar?

This will be a long explanation. I’ll keep it as neutral as I can (not expressing outrage in any direction).

The dollar is (or has been) the chief currency of international trade and finance. The international oil trade, for example, is settled almost entirely in dollars. This is part of why America has gotten away with decades of trade deficits.

A trade deficit means, among other things, that other countries want to give us real goods (produced by their workers) in exchange for our paper money. That’s intuitively unfair; it gives us extra goods from other countries’ production. Why would other countries do it? Because, up to now, they’ve liked getting the dollars. They have wanted to have dollars in their back pocket (say for buying oil, etc.).

And that’s part of the reason (just one part!) why U.S. inflation statistics have stayed moderate, in the face of the Federal Reserve’s policy of massive “QE” or money-printing. Other countries have absorbed some of our excess dollars. To the extent that such a country wants to keep its currency’s value in line with the (declining) dollar, it must create more of its own money, sort of matching its dollar inflows. That inflicts inflation on its people. In effect, the U.S. has been able to export inflation to other countries.

It’s a cushy arrangement for the parts of the U.S. that live off the Fed’s money-creating machine (or get effectively bailed out by it). In other words: cushy for the U.S. Big Government – Big Banking complex.

Those Americans who know about it, often take it for granted. They’ll say things like “Oh, of course we can get away with it. The dollar is too entrenched for other countries to get rid of it. Of course other countries want our dollar, and they will keep wanting it, no matter if we keep over-printing it.”

But history shows that no country stays at the center of world trade and finance (enjoying exorbitant privileges) for more than 50-80 years. This post is about the fact that America is, in historical terms, nearing the end of its run.

The first BRIC summit was in 2009. As The Guardian puts it:

…Brazil, Russia, India and China expressed mounting dissatisfaction with the inertia in [current world financial] institutions (the International Monetary Fund and the World Bank) and agreed to “advance the reform of international financial institutions, so as to reflect changes in the global economy.” Russia’s president, Dmitri Medvedev, said the main point of the meeting was to show that “the Bric should create conditions for a more just world order.”

“A more just world order.” Get it?

It’s code for knocking down Western influence, including the U.S. dollar. Thus ending the privileges just described; the privilege of the U.S. endlessly bailing itself out by creating new money and then exporting the inflation (or some of it) to other countries via trade deficits, which give Americans cheap foreign goods. Or the privilege (for Europe) of an IMF that bails out profligate European countries, such as Greece, and helps buy Ukrainian revolutions on Russia’s doorstep.

The BRICS countries know they can’t change things overnight. But each year, they move the ball forward a little. Last year’s summit (2013) saw an announcement that they would create a BRICS Development Bank, designed to duplicate the functions of the IMF and World Bank on the BRICS’ terms. The 2014 summit should see the announcement of some progress. For example, in September, they agreed on how the bank should be capitalized at $100 billion.

Some Westerners think the duplication-of-effort is stupid (for example, see Laurson and Pieler, at Forbes). Or they scratch their head over why it’s happening and whether the 5 BRICS countries will keep it together. Such criticisms miss the point.

The point is that the IMF and World Bank serve Western interests; and the BRICS countries, who are the up-and-coming powers, are tired of it. They will create duplicate institutions in some form, so as to be able to leave the Western-oriented ones or at least bypass them. Not surprisingly, non-Western observers get it.

We are moving to a world which increasingly rejects Western influence, especially American financial and political influence. For example, last October, Chinese media openly called for a “de-Americanized world”.

I blame 20 years of bad U.S. policies which have debauched the dollar, abandoned freedom, and given America a phony economy of endless deficits and debts, welfare, bubbles and bailouts. Policies which President Obama has obstinately made much worse. But however that might be, the “de-Americanized world” is coming. It is no surprise to see India and China tilting Russian in the Ukraine crisis.

In the bigger picture, it will mean foreigners needing a lot fewer U.S. dollars. When that happens, America’s inflationary chickens will come home to roost. As foreigners return their dollars to America in contempt, we won’t be able to run trade deficits anymore, and the dollar’s international buying power will go down. The cost of imported goods will skyrocket, and U.S. inflation with them. America will face some tough times.

Why QE hurts the economy

by

Most of us know the term “QE” as the central bank’s euphemism for creating lots of new money, but if you are not sure, I have an explanation here.

Recently, President Obama nominated Janet Yellen as the new Fed chairman. She is expected to continue or increase QE. At her confirmation hearing, she said:

I consider it imperative that we do what we can to promote a very strong recovery. It’s important not to remove support [QE], especially when the recovery is fragile and the tools available to monetary policy, should the economy falter, are limited given that short-term interest rates are at zero. A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases [QE]. Supporting the recovery today is the surest path to returning to a more normal approach to monetary policy.

Yellen’s comments are tragic because QE cannot and does not promote economic recovery. It does the opposite. Why is that?

Jobs come from something called the division of labor. It’s the fact that people can produce more when they specialize intelligently. A “job” is really a package of specialized tasks that an employer needs someone to do because the specialist can do more for less (or can help the whole organization to do more, etc.).

The superior productivity of specialized labor comes, in turn, from something called capital.

  • Productive capital is the accumulation of knowledge, tools, machines, organizations and infrastructure that enables human labor to be productively specialized.
  • And financial capital is the accumulation of money (cash, shareholders’ equity, savings, etc.) that will buy or develop productive capital and direct its motions.

It is crucial to understand that not all capital is created equal. It takes work, sacrifice, talent and vision to form productive capital. Capital can be invested badly (called malinvestment, which flourishes under QE and 0% interest rates). Thus, raw investment spending levels do not matter. Financially sustainable jobs come only from the capital which has been invested well, for productive success.

QE undermines productive capital. When Obama/Bernanke/Yellen print money, they devalue money; they make it buy less than it would otherwise. So the financial capital of successful business people doesn’t go as far. QE, and 0% interest rates, also kill the return on capital: the incentive to use it very carefully (productively). Thus, QE messes up the economy’s capital, making financial capital perversely less effective for good projects and more available for bad projects, a toxic mix that injures the division of labor (the creation of economically efficient, valuable jobs). It’s as if the economy is on a narcotic and gradually getting more stupid.

The way it looks to businesses is: They thought they had some good capital, but now their capital doesn’t go as far. Everywhere they look, costs are a little higher than projected (or much higher, in the final stages of QE). Simultaneously, at 0% interest their marginal (unproductive) projects look better than those projects are. For both reasons, businesses’ capital is wasted. It somehow doesn’t go as far on their good projects – at the same time they’re tending to either idle it, or blow it on bad projects.

Businesses then need to squeeze out greater financial profits just to maintain their capital base. They do it by hiring fewer people. Some businesses seem very healthy (high-profit) after their job cutbacks. But fewer new businesses are started, and the healthy ones tend to grow by merging with (or buying out) competitors, which lowers employment. The overall economy either stops growing, or grows in unhealthy directions. The unemployed survive on government aid (which is surprisingly plentiful), while stories abound of people who ‘score’ with speculative investments, which tend to rise.

Does all that sound like the world we live in? Yes! Remember: The price of gasoline, the stock market, and the welfare/disability rolls have all roughly doubled in Obama’s reign so far. While new jobs have been far harder to come by. QE enables (at least) those disparate effects.

To be clear, QE is not the only reason Obama’s recovery has been lame. Other Obama policies also increase the cost of employing people, and other costs that businesses face. But QE doesn’t help; it adds to the economy’s burdens.

If you can think of a country that has emerged into vibrant economic recovery because of their doing large-scale QE, please post it in the comments. I haven’t been able to think of an example. And Japan, which has been doing QE since the 1990s and now faces rising costs, clearly isn’t an example. Neither will we be one.

Recovery for the One Percent (take 3)

by

I got onto this idea last May; for take one click here, and for take two click here. My key notion:

Even as I read about the stock market making new highs, I keep reading about more Americans on food stamps than ever before, more Americans quitting the workforce, old people who can’t get a decent income…business people who can’t start businesses…This is in Obama’s fifth year. Whom is Obama’s economic recovery for?…

Obama’s policies benefit the Big Government – Big Banking – Big Labor elites – in that order of seniority…[so] Why aren’t we all laughing in Obama supporters’ faces, when they pretend to stand for the People?…

Part of President Obama’s toolkit to benefit the One Percent is the Federal Reserve’s ‘Quantitative Easing’ policy, which I have explained (and slagged) many times; for example, here and here.

Nothing has changed since May. Now a former Federal Reserve official, Andrew Huszar, explains – and apologizes:

Confessions of a Quantitative Easer

I can only say: I’m sorry, America…I was responsible for executing the centerpiece program of the Fed’s first plunge into the bond-buying experiment known as quantitative easing. The central bank continues to spin QE as a tool for helping Main Street. But I’ve come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.

As I’ve been saying for years! Except that, even more than a Wall Street bailout, QE is also a Big Government bailout. Whether the Fed buys Wall Street’s mortgage bonds, U.S. Treasury bonds, or anything else, the new money sooner or later funds the government’s spending and deficits, including Obama’s $6 trillion (and rising) of additional U.S. debt.

Although Huszar’s piece neglects the Big Government angle (focusing almost exclusively on the Wall Street angle), it gives some interesting color and is worth reading in full.

UPDATE: If you prefer wonky video, CNBC interviews Huszar here.