Get ready for the inflation carnage

What makes them odd choices is that the events of the past five years don’t make Keynes look good. Other schools of economic thought come to mind instead. One is the public choice school, which holds that Keynesianism uses crises as pretext to enlarge governments.

Recent history also validates Austrian economics. This camp asserts that government involvement in markets is inherently dangerous. Austrians were among the first to warn that the hybrid status of government sponsored enterprises like Fannie Mae and Freddie Mac could lead to disaster

- Amity Shlaes

i don't know, notadmin. what i took away from that article is that the recent chinese boom was due to stimulus, and until they restructure their society to become less dependent on a potentially fragile export market they aren't a sure thing, at least in the short term.

food/energy, i'm just not sure. i don't know what the emerging market countries are capable of doing on their own to meet a demand increase, i haven't seen any data yet.

at some point it does seem intuitive that rising energy costs would finally get us off our complacent behinds and lead to new energy technologies. which would be a productive use of capital, as well. but i've been thinking that since the 1970s, so i'm not holding my breath there.

i don't see assets generally appreciating in the near term, still too much deleveraging that needs to occur. we do seem to be doing our best to follow japan's not-so-stellar model.

Oh, LICC: Now a business columnist with a degree in English, Amity?!

You're getting boring. Did you know that Plato espoused the virtues of homosexual paedophilia? That doesn't make it right.

This is a trip: "This camp asserts that government involvement in markets is inherently dangerous."

Do you know where we would be if it weren't for the bank bailouts?

Fool.

It's time to give up quoting quotes that satisfy you emotionally, and come up with some real numbers and research to back it up. There's some in Milton, none in Amity Shlaes.

Milton Friedman won the Nobel Prize in Economics and was the most influential economist of a generation. Unfortuantely econonomics has become highly politicized, so today he's disparaged. He's greately aided the understanding of our economy and monetary system. Today he would lose out to Al Gore.

Keynes was a left wing wall flower and a member of the deranged Bloomsbury group of inter-World War British pacifists. He was an arrogant theorist who truly believed in the magical elixir of large government and in the technocratic dream of controlling billions of personal, business and economic decisions, to programmatically construct a perfect world order. Keynes gave intellect and jargon filled cover and rationale to politicians and demagogues who would cite his book, 'The General Theory of Employment, Interest and Money', to justify state interventionism.

According to this theory which has failed in practice every time it has been tried, governments can stimulate an economy through granting consumers, workers and businesses sums of borrowed money. This is termed a 'stimulus'. This debt or current deficit financing stimulus, is then paid back or retired, when the economy strengthened by consumer spending and business investment, produces a surplus of tax revenues. The stimulus is needed, so argued Keynes, to overcome business cycles, downturns and unexpected events which would decrease jobs, increase unemployment and impact state revenues. By macro and micro-managing economic and production processes, the state, so thought Keynes, would avoid cyclical variations and ensure that the lowest level of unemployment could be maintained. Government power was thus indispensable to full employment and income equality.

There are many problems with such a counter-rational plan to economic management. None of Keynes' core assumptions make sense when they are analysed either separately or together. Business cycles have historically been caused by governments, and they are usually a response to government policies to increase the size of the state through trade barriers, higher taxation, more spending, more regulation and programs of fear and compliance. The Great Depression, the 70s Stagflation and the current financial crisis are all obvious examples of this fact. Government causing economic malaise would appear to mean that government programs are not the solutions required to either get out of an economic downturn, nor to prevent future derailments from taking place.

The main impact of Keynesian economic stimuli is to increase debt; raise future tax rates and distort the normal functionings of economic markets and personal and corporate decision making. Governments choose winners and confirm losers. The winners will include companies which get bailed out, those receiving welfare, unions and others having their jobs protected, those receiving redistributed incomes and those paid off for political support. The losers invariably include firms both domestic and international who want fair and free trade; higher income families; small businesses who are classified under high income categories; future generations who must pay off the debt; and consumers who pay a higher costs for all products and services.

-C. Read

Really, LICcounty -- homosexual paedophilia?

Brian Reidl from Heritage Institute wrong an excellent article recently on the fallacy that government spending, or what is termed Keynesian deficit spending, run by God-heads, is beneficial (see Reidl
http://www.frontpagemag.com/Articles/authors.aspx?GUID=220a4261-b3c8-4338-a5be-62bcc3f3b8d3). In this article he makes the following important points about demand-side management and the Keynesian fetish for economic control.

“Government cannot create new purchasing power out of thin air. If Congress funds new spending with taxes, it is simply redistributing existing income. If Congress instead borrows the money from domestic investors, those investors will have that much less to invest or to spend in the private economy. If Congress borrows the money from foreigners, the balance of payments will adjust by equally reducing net exports, leaving GDP unchanged. Every dollar Congress spends must first come from somewhere else.

This does not mean that government spending has no economic impact at all. Government spending often alters the consumption of total demand, such as increasing consumption at the expense of investment.”

When stimulus packages are created the money has to come from someone via taxes, or be printed. Both are net negatives to the economy. Economic growth only results from producing more goods and services (not from redistributing existing income), and that requires productivity growth and growth in the labor supply as productivity not only increases wealth but also wages and wage opportunities.

Historically of course government spending has reduced productivity and long-term economic growth due to some obvious reasons. As government spends more it raises taxes which reduces profits, productivity and wage and job creation. As government incurs more debt through stimulus and demand side packages it reduces the incentive to produce and displaces money by removing the more productive private sector from the economic equation and replacing it with a far less effective state dollar, taxed or printed on government printing press. The inefficiency of government policy in health, housing, education, and general industry are obvious creating huge costs which must be borne by ordinary taxpayers – ineffective solutions at a higher price one can say.

And as Reidl sources and proves:
“Mountains of academic studies show how government expansions reduce economic growth:
1.Public Finance Review reported that "higher total government expenditure, no matter how financed, is associated with a lower growth rate of real per capita gross state product."
2.The Quarterly Journal of Economics reported that "the ratio of real government consumption expenditure to real GDP had a negative association with growth and investment," and "growth is inversely related to the share of government consumption in GDP, but insignificantly related to the share of public investment."
3.A Journal of Macroeconomics study discovered that "the coefficient of the additive terms of the government-size variable indicates that a 1% increase in government size decreases the rate of economic growth by 0.143%."
4.Public Choice reported that "a one percent increase in government spending as a percent of GDP (from, say, 30 to 31%) would raise the unemployment rate by approximately .36 of one percent (from, say, 8 to 8.36 percent)."

It is obvious that Keynesian economics and demand management are tools for fools. Wealth, a better society, a cleaner world, a higher level of development is not coerced by government. It only occurs when free people operating in free markets are allowed to interact and determine the price and supply of various goods and services. Government involvement ensures the opposite and is a theory mired in cultish theological absurdity.

-C. Read

I guess LIC just copying things he found in Google is an improvement from him trying to do his own "analysis"...

"Milton Friedman won the Nobel Prize in Economics"

"and was the most influential economist of a generation."

Debatable, but he was influential, as he should have been. But his theories should not be taken as The Last Word in economics - as I said, it is generally recognized that at the extreme limits of an economic situation, he was, in fact, correct, and that is borne out by the data. What has NOT worked is what the Rand Pauls of the world have done with his theories, and what dogmatic libertarians do with it: the gold standard does not work. A central bank is necessary. Regulation of markets is necessary.

What Freidmanism is NOT is a comprehensive theory of economics. The neoclassical / monetarist ideas about inflation are just as wrong as Keynes was on fixed exchange rates. The data just don't bear them out.

And neither does complete deregulation of the economy, or lower taxes as the cure for all ills. It just doesn't work.

"Today he would lose out to Al Gore."

For what it's worth, Milton wasn't a politician, if I recall, and Al Gore has a degree in journalism.

The U.K. has produced notable economists over the years, but John Maynard Keynes, the guru of government intervention, was one of truly global significance.

So it may be fitting that the U.K. will also become the deathbed of Keynesian economics.

Britain has been following the mainstream prescriptions of his followers more than any developed nation. It has cut interest rates, pumped up government spending, printed money like crazy, and nationalized almost half the banking industry.

Short of digging Karl Marx out of his London grave, and putting him in charge, it is hard to see how the state could get more involved in the economy.

The results will be dire. The economy is flat on its back, unemployment is rising, the pound is sinking, and the bond markets are bracketing the country with Greece and Portugal in the category marked “bankruptcy imminent.” At some point soon, even the most loyal disciples of Keynes will have to admit defeat, and accept that a radical change of direction is needed.

- Matthew Lynn

In reality, Britain has the worst of all possible worlds: a stagnant economy, a crippling budget deficit and rising prices.

The Keynesian consensus is that things would have been far worse without the stimulus provided by government. And if the economy isn’t pumped up with inflated demand, it will collapse back into recession. If it’s not working, that just proves the stimulus should be even larger.

It is the argument quacks always push: If the medicine isn’t working, increase the dosage.

And yet, reality has to intrude into this debate at some point. The deficit can’t get much bigger, interest rates can’t be cut much lower, and sterling can’t lose much more value.

Stimulating the economy isn’t working.

In fact, it’s only making it worse. Consumers and businesses don’t want rising taxes. A falling currency pushes up the cost of everything the U.K. imports, stoking inflation. Savers get decimated, and yet the banks remain reluctant to lend because they rightly believe the economy is in the doldrums.

- Matthew Lynn

I think LICC should start his own religion in Waco, Texas. Sarah Palin could be the High Priestess, and Dick Armey the altar boy. George II could make cameo appearances to explain how he paid for Medicare Part D.

There could be a Reading Circle led by Laura "I Killed Someone While Driving Drunk" Bush: everybody could go around the circle reading their favorite quotations from people who just make stuff up. Sort of like a game of Duck, Duck, Goose, or Musical Chairs, the game would end when they got to the first person who couldn't even make his own stuff up, but cheated by copying everybody else.

That person would be: LICC!

LICcounty, eez zees zee troos?

inflation? riiiiiiight

When the Fed speaks deflation they are speaking about asset values and leverage in the system. Food,energy,health, education.. all our basic stapes are rising add to that taxes which are in the CPI. And for the lsat several months rents have been increasing. The Fed does not care about the price level.

So why is the Fed talking up deflation?
Two reasons
1) Election season is coming up and the President wants unemployment brought down even if this is beyond the Fed's power. Deflation is an excuse for Monetary Stimulus even if it's innefective.
2) Fed is worried about declining asset values which hurt banks capital and the Federal Reserve
very much works for the big banks

Wrong, the Fed is talking about overall deflation in terms of the CPI and PPI, period. What a gigantic lie you pulled out of your ass.

The Fed will say they consider the CPI, which they know is flawed.

http://www.ritholtz.com/blog/2004/04/fun-with-hedonics-or-how-i-learned-to-stop-worrying-about-cpi-and-love-inflation/

Between seasonal adjustments, hedonics and geometric approach, we don%u2019t ever have to see a rip-roaring CPI. If a head of lettuce went to $40 bucks overnight, they could seasonally adjust it lower in a heartbeat by claiming that we had an unusually rainy summer. They could then signal that the lettuce is genetically improved and as such there is a quality issue here which lowers that price considerably. As a last resort, here come the geometrics where they could just underweight food to whatever minor influence they want it to have.

Voila, that $40 buck head of lettuce really cost you 29 cents. Of course, this is part of the %u201Cvolatile%u201D (which currently means one-direction, up, these days) food and energy categories which are completely ignored, owing to their unpredictable nature. This has given rise to the perfect excuse, the core rate, which at present is officially honky-dory. But you can apply the same insanity to any item. Go on. Pick one. See what I mean? Sheesh.

RS, how come you're not posting on all the other threads that show how you've been abandoned by your former fellow supply-siders, like A. Greenspan and D. Stockman?

Speaking of inflation, did THOUSANDS of people really touch w67thstreet's wife? That's what he said last week (the post seems to have been deleted). But that many people? Even hundreds might be too much. Unless I misinterpreted what you meant by touching, is she a politician?

One cannot cut taxes and increase spending. It's a disaster.
Just remember Reagan called for a balanced budget amendment and a line item veto. If I recall the line item veto was declared unconstitutional.

So who is this A. Greenspan? And why is anyone listening to him? Is he not the guy that helped blow up the U.S. economy?
How about we just get rid of subsidies and as progress is made begin lowering effective tax rates.

"I do know, based on experience, based on prior experiences not unlike this, that you also run risks, long-term risks, when you leave rates at zero or very near zero for extended periods of time. That encourages a speculative mode, that encourages consumption over savings.

"You need to turn that policy slowly so that the economy can readjust. Monetary policy is a blunt instrument -- it cannot solve all problems. It cannot solve fiscal issues that we have to confront and deal with.

"If you don't do that, what you do is you impede [the recovery]. For example, if you have banks and you say banks aren't lending and there is an issue with demand for loans. But think of it on the supply side.

"If I can go into the market and borrow funds at the Fed Funds rate of almost zero, and then re-lend that to the federal government in 10-year securities for 3 percent, and am also told that that margin will be secure, what will I do with my money? I'm going to get a guaranteed return.

"You encourage that, rather than say, 'Alright, what kinds of loans can we make, how do we do it, and let's look more broadly.' So those are the subtle issues that we need to work our way through."

By guaranteeing "exceptionally low levels of the federal funds rate for an extended period," Hoenig argues that the Fed is essentially guaranteeing Wall Street's profits -- a charge he leveled in a March interview with HuffPost.

"If you know that... you can borrow at zero and lend back to the government at 3 [percent], you are going to do that, and you're going to feel comfortable and confident in doing that," Hoenig said.

The Fed needs to be "mindful of the unintended consequences of doing that for long periods of time."

"It encourages speculative activity [and] it does adjust and affect the risk premiums that are so important for market signals," the policy maker said. "And those are the things that are in front of us all to deal with."

Hoenig points to the 1970s and this decade, two decades in which there were extended periods of negative real interest rates. Defined as the federal funds rate minus the previous year's inflation figure, a negative rate means that a borrower is getting paid to borrow, rather than paying to borrow.

By guaranteeing "exceptionally low levels of the federal funds rate for an extended period," Hoenig argues that the Fed is essentially guaranteeing Wall Street's profits -- a charge he leveled in a March interview with HuffPost.

"If you know that... you can borrow at zero and lend back to the government at 3 [percent], you are going to do that, and you're going to feel comfortable and confident in doing that," Hoenig said.

The Fed needs to be "mindful of the unintended consequences of doing that for long periods of time."

"It encourages speculative activity [and] it does adjust and affect the risk premiums that are so important for market signals," the policy maker said. "And those are the things that are in front of us all to deal with."

Hoenig points to the 1970s and this decade, two decades in which there were extended periods of negative real interest rates. Defined as the federal funds rate minus the previous year's inflation figure, a negative rate means that a borrower is getting paid to borrow, rather than paying to borrow.

Disastrous Consequences

The consequences were disastrous, Hoenig said.

"From the 70s to 80s we had inflation. We had an ag-land bubble, we had an energy bubble, [and] we had a commercial real estate bubble," he said. In this decade, negative rates led to bubbles in subprime mortgages, residential real estate and then commercial real estate.

"Those are consequences that, in the short-run, you don't think about because what you want to do is get unemployment down, and you want to get it down as quickly as possible," Hoenig said. "So you leave [rates] really low."

In the early part of the decade, the unemployment rate jumped from 3.9 percent to 6.3 percent. The main interest rate dropped to 1 percent.

"The consequences longer term are you create new imbalances that then have to be corrected [which could have a] devastating impact on the economy," Hoenig said.

While Hoenig agreed with the Fed's move to initially lower rates to near-zero, he thinks it's past time to raise them -- or at least communicate to the market that the Fed will soon raise them.

"I understand the need, and was part of the need, to bring interest rates down during the crisis, and that was an important step," he said. "At the beginning of this year I dissented, and I dissented because I felt that we should not allow the language to assure Wall Street -- the financial markets -- of a guaranteed return, that they needed to begin to think about risk and the risk return that is part of an economic system that works effectively."

A rise in rates would help level the playing field between savers and borrowers, and it would "give them the sense that the economy was in the process of healing."

But Hoenig, along with some of his colleagues, will have to wait. The Fed said Tuesday that the "pace of recovery in output and employment has slowed in recent months"; household spending "remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit"; "housing starts remain at a depressed level"; and "bank lending has continued to contract."

The recovery "is likely to be more modest in the near term than had been anticipated." And the Fed will "continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability."

Hoenig was the lone dissenter among the 10 policy makers, according to the committee's statement.

Hoenig "judges that the economy is recovering modestly, as projected. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and limits the committee's ability to adjust policy when needed. In addition, given economic and financial conditions, Mr. Hoenig did not believe that keeping constant the size of the Federal Reserve's holdings of longer-term securities at their current level was required to support a return to the committee's policy objectives."

Speaking to HuffPost, Hoenig acknowledged the pressure the Fed faces in trying to keep prices stable while also pursuing policies that power the recovery.

"The markets always want more stimulus, always want more ease, always want low interest rates," he said. "We all have the view that lower interest rates mean things will get better, and you have that pressure across the economy."

He said the "hard part" of sticking to his forecast of a broad-based recovery is "having the patience to let us grow out of it."

"Are the data today generally in a positive trend? Yes. Are we having some data coming in weaker than we expected or wanted? Yes. Does that mean we ought to become more accommodative or not think about the long-term as the economy builds? No.

"We should learn from the experiences around the bubbles we've seen -- the financial bubbles that have been repetitive throughout the 90s, through the 80s, and into this decade as well.

"I don't want to see unemployment this high," Hoenig said. "But I also don't want to see it this high three or four years from now following another crisis because we were so impatient. That's a very hard trade-off and it's very difficult to explain, but it's what we need to do."

http://www.huffingtonpost.com/2010/08/10/thomas-hoenig-top-fed-off_n_670212.html

If you post that many paragraphs, please post one paragraph with a lot of 'z's so I know which one to read.

Today seems like an appropriate day to reflect on past predictions.

It's not clear on balance. But the scale has clearly tilted a little toward lower inflation this week.

Looks like the Fed may use today's stock market pullback to scare congress into approving QE3, despite the evidence that QE2 failed and only produced higher prices.

Seems you have learned some lessons from our banking system -- extend and pretend.

Factoid: Banks earn 25 bps at the Fed which is what you and I now get if we lock for two years with the treasury.

By the way...
since I first posted this prices have gone gone up and countries are still fighting each other over who gets the lower exchange rate. We're still on track toward low growth and higher prices. Weinmar here we come.

any evidence about the countries who are fighting with each other?

yep...didn't think so.

riversider: shoot your mouth off, no back up, no nothing.

you should run for congress.

As stevejhx pointed out today, Bank of NY Mellon is now charging large depositors ($50MM+) for excessive cash deposits. Deflation?

The Mets would finish below .500 - looking good.

optimists still say we'll get Santana and Davis back.

--ali r.

http://www.businessinsider.com/financial-advisor-insights-october-22-2013-10