My Predictions

Although I originally began this blog with the idea of keeping track of inflation and potential results for prices and prosperity in general, I haven’t engaged in prediction. My focus has been on commentary. We are, however, at a point that offers some interesting prospects for the future and I though it might be interesting and possibly helpful to suggest a possible set of outcomes.

Specifically, at this point in late 2012 the governments in the major economies have either implemented or are poised to implement some massive monetary flooding, which they call “easing.” The U.S. Federal Reserve officials have announced an open ended $40B a month scheme that will continue until either employment begins increasing or the end of time, whichever comes first. In Europe, the European Central Bank is ready to create unlimited amounts of money, claiming that it has to reduce the spread in government bond prices (between Spain and Italy, who have had to pay high interest rates, and Germany’s very low rates). China is expected to begin more “easing” in that it is currently seeing a much deeper and more significant drop in economic activity than the government seemed to expect. Apparently they thought that they were a separate, insulated entity. In response, just as any Western mixed economy government would do, the Chinese are moving toward spending newly made-up money. Japan has just begun its own easing program and England began theirs a few months ago. There is a great orgy of money creation in progress.

Those countries with “strong” currencies are also involved. They really don’t want to see their competitive position undercut by having other currencies diving in comparative cost, making their own products much more expensive on the world market. One example is that Switzerland’s central bank been buying euros for several months to keep their currency in line. As has been said by others, there is something akin to the arms race growing where every country inflates their currency in competition with the others. This process could also lead to protectionism, with higher tariffs and import controls.

As long as our economic problems are seen as the consequences of low consumption or low demand (and demand is seen as just money and not production related), we can always expect that the government response will be to create more money. There is some fear of the new money increasing consumer prices beyond a certain level (generally at an annual rate of 2% - some poison is good for you apparently). This concern is an interesting hold over from a point where government economists had a closer contact with reality. But there is little concern about the prospects for unacceptable levels of price inflation. It is the case that the upward pressure on prices from constant increases in the money supply tends to be less when production levels are low.

Consequently, we can expect that we will soon see a lot more money being created and put into the larger, more industrialized economies and interest rate will remain extremely low.

The amount of money that actually comes into the U.S. economy is a question for which I have no good answer. There is certainly some, but not as much as you might think when you hear the Fed brag about its easing. The money created by the Fed for QE1 and QE2 is mostly still sitting at the Fed in the deposit accounts for member banks receiving 0.25% a year.

 

The money supply has continued to grow, but the pace is not as fast as one might expect.

 

You can see in the graph that the average dollar amount of growth every year has been somewhat consistent. That means that the percentage rate of growth is falling. To just keep the constant percentage rate, this graph would need to show a much larger constantly increasing dollar amount, as the total grew each year.

As a result, consumer prices have moved upward modestly in the last few years (by comparison) and asset prices are mixed (housing downward and equities upward, but less than the CPI). Only bond prices have moved upward, as the Fed has moved to force down long-term interest rates as well as short-term. Long-term rates are very low, especially considering the need for capital in our economy. There is no connection today between savings, investment, interest rates, and the capital markets.

In these conditions, I wonder what the Fed believes that more “quantitative easing” or lower interest rates, could achieve. They talk about lowering unemployment as if the problem is that jobs are not being created for of financial reasons. Here we have an excellent example of theoretical, rationalist thinking that doesn’t consider even the possibility of looking at the real world. At present, there is no connection between the interest rate (including the supply of money) and investment/growth decisions. For a business, the difference between 3% and 2.5% on a long-term, profitable investment is insignificant. The real question for businesses is whether the project could be profitable. Some companies have invested when they have cash on hand. Many are considering a merger or acquisition, which doesn’t add to our productive capacity (although it might improve efficiency). But U.S. companies see no justification in future profitability to make the investment needed to put over two million people to work. The Fed and the Government, and Romney and the Republicans just don’t see that.

Another upcoming set of events in the U.S that could have a negative impact on our economy is the end of the Bush tax cuts and the spending cuts required by law. These events, both scheduled for January 1, 2013, won’t improve the capital and investment situation, although the rate of growth of government debt will slow some. At least in the short-term, if the tax cuts do end and the rate of spending slows, the immediate result will be a drag on the U.S. economy.

I am not convinced that the supposed mandatory cuts in spending are particularly important economically. Some people try to make this situation seem cataclysmic by quoting a cut of over a trillion dollars. That is fraud, since that is a ten-year number. As is always the case with government cuts, they are loaded mostly into the latter years. I think that the 2013 number is closer to $69B, which is for the full year. When you are talking about a multi-trillion budget and a deficit of over a trillion dollars, sixty-nine billion is an accounting error.

But saying “cuts” is intended to be misleading. The Congress didn’t pass a cut in spending. They authorized a reduction in the expected growth of spending. It was a cut from what they thought current laws would require the government would spend. There is not going to be a cut in spending. Let me repeat: These are not cuts in spending but small reductions in the growth of spending. Even so, there may be some companies that will feel an impact in their expected revenue from government contracts. But, economically, compared to the total level of spending and the prospect of more “easing”, big deal.

Combined, the tax cut, possible cuts in the growth of spending, and the Fed’s money flood, mean that there will be less money in people’s pocketbooks, but more, potentially, in the banking system. Remember that the way the Fed’s money gets into the economy is via bank loans. If the banks continue to maintain their stricter standards there is not going to be a significant increase in bank loans. In fact, the current trend is for lower corporate profits, meaning that businesses will be less credit worthy than before (and stock prices should decline, instead of booming). In addition, ever since the beginning of the “Great Recession,” bank regulators have been constantly checking on the “quality” of bank loans. Unless regulators are willing to loosen the strings, banks aren’t taking any riskier loans. I don’t see much of the Fed’s new money getting into the economy. That is not to say that there won’t be an effect. As in the past, there is a tendency to some money to find its way into assets.

In addition, the final Dodd-Frank regulations have yet to appear and the costly ObamaCare provisions are coming into effect. All businesses, but especially banks, are legitimately confident that their costs will increase significantly and their range of action considerably curtailed. Startup businesses have declined. dramatically. For the economic/cultural pessimist, there is much support in the U.S.

In Europe, the central bank is being pushed into acting because the market for Spanish and Italian government bonds demands much higher returns to compensate for higher risk. Personally, I think that there is no uncertainty. Neither Spain nor Italy will be able to repay their bonds in the coming years. (I equate being given worthless money with not being paid.). So the higher rates are certainly justified. But enough of the euro country governments don’t like that. The higher rates mean that Spain and Italy would have to face their insolvency soon, which would be a big problem for the other euro government countries. So the euro block is pushing the central bank to create money to avoid reality. In this case the money will go directly into government spending and will have very negative consequences. Not the least consequence will be a lessening of the pressure on Spain and Italy to solve their problems. (Spain is expected to need the euro bank bailout. No one is currently talking about Italy, but its economy is heading the same direction.) By creating money to buy government bonds the European Central Bank is defaulting on the loans by directly creating inflation and thus reducing the purchasing power of the money that bought the bonds. Everyone in Europe is ignoring that fact. In addition, there will be a lot of upward pressure on prices and everyone will feel the cost. But, most of all, the importance of freeing their economies and being fiscally responsible can be evaded. The ultimate result will be greater disasters.

I expect that China’s new money will be similar to earlier efforts, which went primarily into government owned and controlled businesses, shrinking the portion of the economy that is private. It may also be more of a “consumption” orientation, which will mean less of a push in industrialization, and a move toward Western ideas of a consumer driven economy. That government decision would necessarily reduce the growth rate even without the normal consequences of asset booms and busts.

If more “easing” won’t help solve the unemployment problem (who cares about actual production?) and thus won’t help with economic activity, what will it do?

Well, the U.S. economy isn’t going to grow much, if at all. In fact, it could contract. If the new money just sits at the Fed as before, we needn’t worry about hyperinflation. The money supply will grow, but not significantly faster than before, although those numbers should be watched carefully.

I heard someone point out that since the first “easing” the Dow has risen 4000 points and since the second “easing” nearly 3000. I am sure that the Dow and other indexes will raise some more. The Dow has already gone up a few hundred points since the Fed announcement. What would a push by the Fed be without a serious increase in asset prices? Commodity prices could also rise. Some are saying that industrial commodities, such as copper, will not because industrial production is tending to fall. But the money being created will go somewhere. You just need to keep an eye out to see where that is.

So, if you want to put your money somewhere, based upon recent history, there you are! Just be careful about your timing and don’t lose perspective about the causes of the asset price rise and its duration. Be ready to short.

Of course, economic events are really harder to predict than that, especially in a controlled economy. Something will happen that we don’t foresee and things will happen differently than we expect. One thing we do know, whatever happens, it’s unlikely to be good.

Long-term, the consequence of all of this “easing” is to probably bring the day of reckoning closer, possibly by years. With unemployment staying down, Social Security and Medicare spending will continue to widen the gap between tax income and spending. The demands upon the Treasury will increase, meaning more debt. The low levels of production will mean that wealth is not being created and our personal wealth and standard of living will continue to fall.

I think that money can be made from the chaos and misallocation of resources. You just have to pick your method based upon the circumstances and pay attention to the situation.


P.S. I just listened to Yaron Brook on the Mike Slater show (via a notification from Lassiez-Faire). He says so much of what I just mentioned. I really did work it out before. But he says it well.

Austerity versus Growth in Europe

In my last post I discussed the immediate lesson we could learn from the “austerity” programs occurring in Europe today. In this post I want to talk about some of the events in Europe and suggest some future results.

No doubt my readers aren’t really taken in by the emphatic declaration by European socialist politicians that the government planning must include growth, and not just reductions of government spending, otherwise known as “austerity.” All of this is government speak, that is, none of these terms mean what they rationally means when it comes out of the mouth of the European politician or bureaucrats. It reminds me of Clinton’s first term, when someone convinced Bill that investment was a vital element in the economy. For the next year or so every government initiative that Clinton proposed was called an investment. Every action that the European politician wants to take will be called a growth program.

We should know that the Europeans do not know and go out of their way to evade what it is that causes increases in production and wealth. In their minds the cause of all that is good is the government. They do not understand why their economies aren’t performing as they want them to. They don’t understand that all of their laws have cut down economic activity. In the way of what they are calling reforms they have done very little to make actual growth possible. I read somewhere recently that Greek bureaucrats require an overwhelming amount of stuff form someone applying for a business license, including a stool sample. On the episode of “No Reservations” filmed in Lisbon, I leaned that Portuguese agriculture was forced to stop profitable farming in several crops by EU protectionist regulations (protecting the French and Italians). The number of regulations and interference in business in Europe on the EU, country, and state level is many times what it is in the U.S. None of this is being addressed. What has been “reformed” to some small degree in a few countries is a few regulations that made it impossible to fire someone. There is probably more, but minor, and unreported in the general media.

Austerity has been the watchword in Europe recently. Let’s be clear on what that means. It means that the national government’s budget deficit has to be kept below a certain percentage of the country’s GDP, on the order of three percent, according to the recently passed EU law. It doesn’t actually mean that a surplus has to be achieved or that the country’s government debt has to be reduced. It only means that the debt can’t grow at more than a certain rate, which is deemed to be a level that an economy can comfortably service (which probably assumes interest rates kept artificially low). If a country was actually productive, keeping government spending to that level might not pose much of a problem, until the economy wasn’t productive any more. However, for different reasons in each country, with the exception of Germany and the smaller northern euro zone countries, they have been spending much more and driven their debts much higher (Italy’s debt wasn’t that high, but its deficit was, driving interest rates higher). Since their economies are very dependent upon government spending, when the spending slowed the economy began to contract, people’s income dropped, and greater numbers became unemployed. People became unhappy.

Within this context it makes sense to want to see the economy grow. Economic growth would create more jobs and ultimately move the economy to prosperity. Growth basically comes from letting people produce and seek higher income and wealth. That is not what the European politician calling for growth has in mind. He still sees the government as the prime mover. He wants to increase government activity and government spending. He wants to move away from austerity toward what was going on before this mess. He wants to pretend that the mess doesn’t exist. He wants that favorite of all government boondoggles and fountain of spoils, infrastructure projects. But building a bridge is not growth. (BO wants to fix schools and put in wiring for the internet.) So far, the programs that I have heard proposed will not cause economic growth.

The populations in Europe are apparently supporting these “pro-growth,” socialist politicians. France just elected one. Greece will at least come close to pushing out the politicians who voted in austerity. The Greek alternative is someone who wants to renege on the country’s sworn commitments. Spain is trying, but failing to reign in its spending and the population is angry about the results of that attempt. And in a recent German state election, a couple of socialist parties opposed to austerity won a solid election against the person leading Europe away from government spending, the German PM. Even one of the most emphatic pro-austerity governments in northern Europe, the Netherlands, has announced that it isn’t able to keep its spending below the required cap. They are going to have new elections soon and may become an over-spender.

We are faced with the amazing scenario in which the leading, European, social welfare, big party politicians are trying to keep their countries from going into bankruptcy, which is to say that they are at least paying attention, and the voting public is rejecting them and voting in complete, not just partial, idiots. Who would have expected the politicians to show some responsibility?

Why isn’t it working? Why can’t the politicians convince the public to go along with the “austerity?” There are two reasons. First, the public has been taught for years, by their parents, their schools, their churches, and their politicians that the government is the fount of all that is good and that private enterprise is evil. They believe that the government can just make things up and provide them with the long life of leisure and pleasure that they have been promised. They just don’t understand why things should change now.

One wonderful example of that is the apparent conflicting poll results in Greece. According to polls taken after the last election and the realization that no government could be formed from the relative strength of the parties, the Greek public wants to put into power a person who will reject all of the agreements connected to the bailout that result in “austerity” (the polls have fluctuated as to who is leading). On the other hand, the Greeks by a large majority want to keep the euro, which they would have to give up if they elect the guy they seem to like.

Then, you ask, why do the Greeks want to stay in the euro zone? Again there are two answers, a bad one and a better one. The bad reason is that the Greek prosperity of the last decade began with their entrance to the euro zone. Having the same currency as the Germans, the Greeks were able to borrow to support the government’s crazy spending at very low rates. Their wages climbed to become thirty percent higher than German wages. They think the euro lays golden eggs!

The second, better reason for wanting the euro is that the common currency does facilitate trade. If governments behaved at all sensibly, a common currency in open trading blocs is an excellent idea. The problem in Europe is that each country insisted on having certain protections. It isn’t actually a free market but a highly controlled one. Really, the common market, the EU, is an illusion.

Getting back to the initial discussion, the second reason why the voters want to reject the “austerity” candidates is that “austerity” as a government program is a failure. It is a failure because all it is doing is collapsing their economies. As I have implied above and in my last post, their economies have insufficient capacity for the readjustment of prices and wages and to move assets into productive endeavors. In short, their economies are not capitalistic but controlled.

We have seen the European politicians struggling for an extended period of time to cope with their problem. We have seen several announcements that they have taken major steps and that things would be better only to see the exact same problem continue: concern by lenders that they aren’t going to be paid back. Hundreds of billions of euros have been given or committed to several different countries. The European Central Bank injected nearly one trillion euros into the banking system in loans at 1% interest which resulted in almost no new commercial lending and about five months of better terms for loans in Spain and Italy. The collapse of inter-bank lending, which was supposedly the justification for the loans, has continued to be a problem. Interest rates controlled by the European Central Bank continue to be near 1% and yet the entire bloc is heading into recession, including Germany. Nothing that has been done has dented their problems. Covered them over for a short period of time, perhaps, but done nothing to move the European Community toward growth and prosperity.

The voters do not understand the importance of capitalism, but they do see that with “austerity” their prospects are very poor. Jobs of all kinds are disappearing, wealth is leaving the country when it can, and no one has the leeway to do anything about it. There appears to be a fatalism about their daily lives. They foresee nothing good happening in the foreseeable future. Unfortunately, that is what happens when you give government all the power.

So we see that Europe seems to be faced with the alternative of severe recession with “austerity” with no real way out and going back to the government spending that got them into trouble in the first place. Surely, this problem will be blamed on capitalism and politicians who want to have greater control will be successful. Ignorance of capitalism will lead to contraction, probably bankruptcy, and further reduction of freedom. The effects of decades of social welfare state policies will become obvious.

I am not one for disaster scenarios. When people write about upcoming collapse of our economy I tend to yawn. Yet very bad things are happening. Greece is in a depression, although no one else is willing to say so. Spain isn’t that far away from a depression and they haven’t even gotten to the bottom yet. Neither of those countries are particularly large and so far they have had friends who have been able to keep them afloat. Then we must realize that Italy and France are tittering. Italy has set a course that will keep it going for a while, but France has just rejected “austerity” and has already begun new commitments for ongoing spending. Their choice seems to have been made. It isn’t good. I suggest we all reread The Ominous Parallels by Leonard Peikoff to get an idea of what could happen.

So, then the question becomes, what are we going to do? We don’t want to live through the same thing here. Obviously, in order to avoid it people will have to learn what capitalism is, in some detail. I think that many people are willing to listen. ARI has several good programs and books that do that. Let’s help them. The more voices explaining capitalism the better.

The Immediate Important Lesson From Europe

We can learn many lessons from what is happening in Europe and what will be happening over the next decade or two. We will see in very explicit detail that democracy is at root a destructive system as it attempts to consume very productive asset it can get its hands on. We shall see that borrowing to spend and consume is inherently a dead-end. We shall see again that government controls do not stop destructive behavior and that few know what good behavior is then. Etc.

But we are now witnessing something that I didn’t expect. We are seeing how not to achieve a turn around in an economy. “Austerity” is a failed program.

Okay, first let’s consider what “austerity” is. It is not actually austerity. The term was first picked up from the context of an over-indebted person. If he wanted to get out of his situation, without going back on his word to pay those people who lent him money, he had to reduce his spending and pay off his debts. Then he would be financially healthy and could begin building wealth.

So, the idea went, governments could reduce their spending, too. Except they failed to remember two different aspects of the individual’s context: first, that the individual had to continue to work, i.e., produce. Production is still the key. Second, they failed to remember that the individual had to spend less than his income. Governments regard “austerity” as merely spending less than they were or perhaps spending less than they were planning, although still increasing their spending. I haven’t seen any of the European governments talking about a budget surplus and paying off their debt.

But, the most important lesson to be learned is the first: Production is the key. What I mean is that just spending less in those countries has no positive effect on the economy, only less of a negative effect. What has a positive effect is the creation of goods and services, i.e., production. Those countries aren’t producing more. Actually, since they have grown the government so much, less spending translates immediately into less purchases and a constriction of business. Business has been forced to depend upon government spending. When that spending disappears, businesses do less business, are less profitable and tend to fail. That is what we are seeing across Europe, especially in the countries with the worst situations.

Those economies haven’t gotten to where they are because of the government spending by itself. The major cause of the poor performance of those economies is government controls. Controls limit what businessmen can do and their ability to produce. Government controls are the lid on man’s productive capacity.

As long as the government controls the economy, and the European Union has a staggering level of controls, those economies are going to suffer. In fact, what we see today is the simultaneous reduction of government spending with the increase in numbers and degree of control. We see tighter and tighter restrictions being placed on business and finance, further weakening their ability to produce while the governments are trying to at least slow the rate of their indebtedness. It won’t work.

This is a lesson for us all. We need to realize that as bad as the debt situation is, and as bad as it can get, and that by itself debt can destroy our economy, that it is not the primary issue and should not be our primary target. At least it shouldn’t be.

We must also recognize that if we only talk about debt and the need to reduce spending as our immediate objective we will not succeed in moving any society towards our viewpoint. They see what “austerity” achieves. No one should want any part of that, including us.

No, our focus should be on production. Our campaign should be to unleash the productive abilities of the United States, to reverse governmental economic controls. to free our businessmen. Freedom. That should be our program.

I do not want for a minute for you to think that I am the originator of this insight. As in most all of my understanding of the world, I learned this from Ayn Rand. She did not write about this issue, but she was asked about it more than once in public forums. It is to our benefit that we can read today what she said in response to those questions in Ayn Rand Answers, pages 46-50. Also look at her answer regarding unemployment benefits on page 124. She isn’t in favor of government spending or any activity that isn’t directly protecting individual rights. She wants to stop inappropriate government spending. But she recognizes that what must be done first is to free the economy. Without that first step, and giving it the time to begin producing (probably shorter than we might think), we will see our economy contract just as the European economies are.

My position in this article isn’t new, but I hadn’t realized until recently that the European “austerity” program was exactly that being proposed by my critics. These are the people who argue that the US government spending had to be stopped as soon as possible. The immediate target of these proponents of “austerity” was Social Security and unemployment benefits. I responded that what would happen is just a lot of misery and the destruction of legitimate business, which is just what is happening in Europe, especially Greece and Spain. If “austerity” were begun in the US today, the results might not be as bad. But no good would be achieved as long as government controls were kept in place.

The only direct, economic destructive element of government spending is that it soaks up savings, which is needed for business investment. But the economy can find capital when it has potential profits in sight. We would learn that finding capital would not be an issue. Today, the drag on the US economy isn’t a lack of capital. Banks will tell you that they have plenty to lend. Businesses have plenty of money to invest if they chose. (I am not really conflating fiat money with capital.) Companies could find capital today if they were confident in the future. With all of the proposed additional controls and the fear of BO’s plans for our future, they are wise to avoid the crazy risk inherent in our political situation. And thus the economy stalls. It isn’t the deficit they are afraid of, but government force.

It might be argued that the correct approach to cutting spending would include some advanced warning. Perhaps people should be given a year or two to get their lives in order in preparation for changes in government spending. Yet, that still doesn’t address the underlying problem. If there isn’t sufficient economic activity, sufficient investment, sufficient production, sufficient productive jobs, advanced warning would provide no benefit. There are no economic alternatives to prepare with. Advanced warning only is beneficial if the person affected has alternatives to what he is currently relying upon.

At this point the response that I receive is that I am evading the moral issue of the theft of the property of those who are paying the taxes (either direct or indirect from the borrowing and inflation). It is wrong, I am told, for the theft to continue. It should be stopped immediately.

Aside from the fact that Ayn Rand did not advance this point when she had the chance, and aside from the fact that I am not disagreeing with either the immorality of the taxes or the spending, and aside from the fact that I vehemently argue that the spending and borrowing has to stop, and aside from the fact that I recognize the moral hazard from the dependency upon government spending, I reject the argument that the morality requires us to act without considering the immediate consequences and how very bad ones can be avoided.

I would argue that Objectivist morality is fundamentally a morality of consequences, that is, of causes and effects, of ends and means. If implementing a moral decision means the destruction of those who are the intended beneficiaries, the innocent and the productive in this case, then there is something wrong with the reasoning. And destruction of the productive and innocent is definitely a result of “austerity.” It isn’t just the person receiving the government handout who is suffering but the entire economy, the productive and innocent. Real, honest businesses are going under. People who made rational decisions within the context of their country are loosing all they possess. It is these people who a morality of self-interest and the social-economic system of capitalism is suppose to protect. It is they who should flourish. “Austerity” is destroying their lives as thoroughly as socialism itself. Therefore, “austerity” is the wrong approach.

While government spending upon anything but the protection of individual rights is automatically a violation of rights and a move toward the destruction of those rights, the spending itself isn’t a major catastrophe, in the sense of the immediate, economic consequences. Just as with a household, it isn’t the spending per se, it is the spending in relation to the income, which means the economy’s production. If the spending is higher than the production allows (not even considering the savings necessary to increase production), then there will be problems. That is true for either a household or a business or a government. It is worse when the overspending is for unproductive consumption, which is always true of governmental spending. “Infrastructure” is consumption. Something constructed by the government might sit there for a while, like a bridge, but it is not paying its own way and replacing itself, as a business investment would, is consumption.

Of course, governmental spending is often accompanied by restrictions on the population because the government wants to keep its monopoly, i.e., only the government can build roads, etc. If there was competition, the incompetence of the government would be clearly demonstrated. Look at the U.S. Post Office.

No, government spending isn’t the cause of a country’s economy failing to grow.

On the other hand, the best any of the commentators that I have read have made only the slight suggestions that regulation has any effect on production and prosperity. It is recognized that regulation has a cost in time and money, but not on an economy’s ability to produce and grow. This is a complete blind spot. I attribute this lack of knowledge to the general rationalist trend found in economics and business schools. Looking at how things actually work is not an acceptable practice. At least at one point in time efficiency studies were all the rage. If there are still such studies they most likely don’t question government mandated business practices. They just treat regulations as acts of nature.

However, the point is that government regulation is treated as just a part of life and is not questioned and its consequences are not considered. This last point is true in a wider scale than you probably realize. Few look to see if the supposed good consequence of government regulation actually happened. No follow up studies are done to evaluate the success of the regulation. Those consequences are assumed and bragged about but never proved or evaluated. Recently, I received an email from Ending Big Government, the website set up by Yaron Brook and Don Watkins in connection with their new book, Free Market Revolution: How Ayn Rand’s Ideas Can End Big Government. This email was entitled “Story about Stories” in which people who were impacted by government regulations explained what was happening (See here). This is a great idea. The consequences of regulations have to be concretized for people. They have to see in detail that regulation is destructive in order to understand that it has to be stopped. For example, people don’t know how extensive, intrusive, expensive, and anti-productive the FDA regulation is. These details need to be made public. The media won’t do it. The Republicans won’t do it. Who will?

So, let me suggest that you continue to watch Europe attempt to practice “austerity” and how they go into recessions. I think that Spain is already in a depression, or will be soon. Greece certainly is. Think about the consequences as the government just spending less. Think about why their economies can’t seem to grow. What is stopping them?

Next week I hope to finish up a post that will be more specific about Europe and the backlash against “austerity.” I think that we will see another lesson there as well.

Inflation and Economic Update, April, 2010

This week we saw big headlines touting the growth in spending by consumers on stuff. This is big news to the “mainstream” economists and drove the stock market higher. Prosperity, economic growth, they say, is beginning.

At the same time, employment has not begun to increase, new unemployment claims continue at high levels, the government keeps extending benefits for the unemployed, production has gone up a very small amount, and bank lending of all kinds has continued to decline.

Housing in an interesting sector. Last month’s housing purchases were significantly higher, much higher than expected. The increase in home purchases, of course, was trumpeted by the administration and its media cheerleaders as a great success. Ignored by them was that the tax credits for home buying that the administration had pushed through were set to expire soon, at the end of April, a few days from now. People were rushing to take advantage of the government giveaway (i.e., the government would take less of your money in taxes). April’s figures for home sales will look good, too. Just wait until after May. Reality will set in. Without artificial support, the housing market will tend back to its original course downward in terms of sales and prices. In the meantime, foreclosures are increasing.
So, why do they say that the economy is recovering?

One of the unquestioned tenants of mainstream economics is that consumer spending is a primary driver of an economy. If “consumers” are spending, then the economy will grow and wealth will increase. I put “consumers” in quotation marks because the mainstream economists disconnect the “consumer” from any kind of productive activity. A job, they reason, is merely the process by which a consumer receives his money to spend. That is why government jobs, subsidies, handouts, dole, public works, infrastructure construction, and government money projects ad nauseum are all equated with jobs in private, productive companies. It isn’t that anything is produced, it is that people have money to spend. They don’t think that government spending per se is important, just that it gets money into the hands of consumers, who are the motive power in our economy.

Ayn Rand, in “Equalitarianism and Inflation” published in the Ayn Rand Letter in June and July, 1974, offered to bring in savages from around the world to help out in the spending.

If asked, they might say that the increased demand will elicit more production. They will suggest that the increase will come from the manufacturer bringing on unused productive capacity. Bernanke, from the Fed, would say that when production has reached full capacity, we could see some prices begin to rise, but he will also, deep down, expect to see more capacity created, somehow. It is not clear to them. It isn’t real. Most important, it isn’t production that is important, but spending.

So, since consumers last month started spending more, the mainstream economists believe that the economy is recovering.

But, you ask: Where is this money coming from? What does it really mean?

I think that there are two sources for this upsurge in spending. First, it does look as if the economy is bottoming out, and people are a little relieved that the downward spiral is not continuing. That relief, plus the government and cheerleader hype, make people feel as if they do not need to keep a lid on their plans and personal spending. Things have worn out, things are out there beckoning to be bought, people miss their old lifestyle of buying, buying, buying. Off they go and spend some money. So, some of the increase in consumer spending is coming from people who had recently been paying off loans or saving, but are now putting money into the consumer market. This isn’t necessarily bad (nor good), but if these are productive people, their spending isn’t directly harmful. I don’t think that we have a means to tell if this is a large portion of the upsurge in spending.

The rest, and an important part of the upsurge in consumer spending, comes from non-productive people, and is therefore, harmful. This is money from all of the government programs, including, but not limited to: unemployment benefits, “shovel ready” programs, graft, handouts (individual or corporate), new government employees, corporate bailouts, and on and on and………. We have more dollars chasing a limited amount of goods, and prices will tend upward.

I saw a presentation by an inflation watch group that claimed some food prices had climbed over 50% recently. The price for oil is continuing upward, especially as the large developing countries actually develop for a change and new car sales continue rising there.

Boom-bust cycles are fed by credit expansion. There is no credit expansion right now. We are not going to see asset booms for a while. Someone said we have a boom in government. We do. The government is spending. To the extent that the money is made-up stuff, we have a direct feed into prices and they will rise. When the money funding the government comes from previously exported dollars (i.e., China buying Treasury Bonds), it is made-up money, and prices will rise. To the extent that the money comes from our own economy, it is savings that is being consumed rather than invested for wealth creation, and we will continue to stagnate. Neither is good. Back to the 70’s, back to stagflation. Since BO and his gang do not look at history, we could see price controls again. We could see the FBI back in corporate offices again. We will see more attacks on capitalism and more destruction of our way of life, of our freedom.