Of Stagflation and Recovery

April 28, 2022 Leave a comment

Photo by FortyTwo on Unsplash

Governments create inflation.  Since governments maintain a monopoly on money creation and exercise it constantly, the results of their policies are their own, whether they wish to own them or not.  Having said that, though government got us into this inflationary mess, more government is not going to get us out.  Yet, less government might.

The current administration—including the Federal Reserve—is in a tight spot.  Many repeatedly predicted that the unwholesome monetary and fiscal policies to respond to the equally unwholesome policies of dramatic economic shutdown of the 2020 Great Cessation would eventually lead to inflation.  So they have, even worse than what we saw in the 1970s.  The incoming Biden Administration persisted in blowing air into the inflationary balloon distended the year before.

This is not a partisan statement.  We have seen two Republican administrations doom themselves at the polls by engaging in ruinous economic policies because it was an election year.  Within memory of 2020 policymakers, the outgoing Bush Administration in 2008 mishandled the sure-to-be recession coming from the bursting of the housing bubble by panicking Congress into passing the TARP legislation, which fright drove investors to the sidelines.

True, the price rise from the 2020 massive fiscal and monetary stimulus did not appear as quickly as worriers, like me, expected.  Recipients of government largesse were not spurred to spend it as spontaneously as predicted.  Neither did negative real interest rates prod much borrowing, but it did punish savers.  While economic activity remained suppressed, people for a time sat on their money with little to do.  Eventually, puzzles all finished, people started coming out as 2021 wore on.  Congressional leadership called for more stimulus whilst the flood of funds from earlier stimulus at last began to flow.

The tight spot for the current administration is how to bring down inflation without bringing down the economy.  Of course, the economy will come down if they do not, because inflation eats away at the insides of economic activity.  Current White House leaders are sensitive about comparisons with the Carter Administration, yet there is talk of following the failed Carter example of trying to drive the economic car with one foot on the brake and the other on the accelerator.  That is the program for Carteresque stagflation, a stalled economy wrapped in continued high prices.

What we should have learned—and many have—is that the way to end inflation without getting into stagflation is not more government stimulus.  It is to end disincentives to business activity.  Reduce regulatory burdens and people will find ways to solve problems and get things done.  Inflation is caused by too much money chasing too few goods and services, stagflation impeding production of goods and services.  Reducing regulatory burdens and barriers to business activity addresses both problems by promoting productivity, innovation, and expansion, which increase supply at lower costs, reward creativity, and encourage new ideas in a virtuous economic circle.  It worked in the 1980s.  It can work 40 years later.

Filed under creativity, economic growth, Federal Reserve, Great Cessation, inflation, markets, money, productivity, recession, stagflation Tagged with , , , , , , , , ,

Of the Federal Reserve and Dreams of Success

March 23, 2022 Leave a comment

Photo by Tyler B on Unsplash

It may be easy, but I think unfair, to fault the Governors of the Federal Reserve System.  Their task is more than they can handle, and yet they are required to do it.  More accurately, I should say that their tasks are more than they can handle, and yet they are required to do them.

When the Fed was created, more than a century ago, a big concern was that it would be dominated by the financiers of New York and the politicians of Washington.  Hence, rather than a central bank, it was born as a system of a dozen regional banks, with a limited focus, to offset the liquidity risk inherent in banking.

Over time the Fed has not stayed that way.  Today, the Federal Reserve is effectively the biggest bank in the world.  Financiers in New York have an outsized influence, but the influence of the politicians in Washington may be greater.  Otherwise, how could a federal republic tolerate a handful of people at a single agency having so much sway over the daily lives and future prosperity of the individuals, families, communities, and businesses in the 50 States of the Union?  Accountability to the elected cannot long be withheld.

A great problem has been that the elected do not refrain from giving the Fed more things to do.  Its one first task has lost its focus by becoming three.  By law, the members of the Board, joined by the presidents of the 12 Fed banks, are to conduct themselves “so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”

What if they cannot succeed?  Then we fault them for failures while still pretending that they can.  We hide the goal posts in fog.  What is “maximum employment”?  Can it be today’s 62% of the adult population when we began the 21st Century at 67%?  What are “stable prices”?  Does “stable” mean that the price of food tomorrow will be the same price it is today, or is “stable” the Fed’s official goal that things will cost 2% more each year, so that my young son’s retirement will require nearly twice as much as mine does?  Then there is the third, often forgotten requirement, that interest rates be “moderate.”  For 10 years the Fed kept quiet about that legal mandate, keeping interest rates very close to zero, a huge transfer of wealth from savers to borrowers, Uncle Sam being the world’s biggest borrower.  Is it surprising that the federal government’s debt grew during those 10 years to $30 trillion and still swelling?

What is the Fed to do?  We cannot reproach its current team, because they cannot succeed.  No government agency, regardless of excellent economists and the best computers, can manage it all.  If you read the statements, they carefully admit, essentially, “we don’t know how to succeed, but the law says we have to do something, so we will try this and that and see how it goes.” Meanwhile, it has not been going so well.  To paraphrase liberally from psychiatrist Anthony Daniels, we should not be so beguiled by the dreamy tasks we have placed on the Fed that we cannot bear to lighten the load merely because it is not working.

Filed under banking, Congress, deficit spending, economics, Federal Reserve, inflation, interest rates, jobs, money Tagged with , , , , , , , ,

Of Rule by Experts and Rule by Law

February 22, 2022 Leave a comment

Photo by Adam Szuscik on Unsplash

In the 1990s I was part of a congressional delegation to Argentina, when the Argentine economy was growing strongly and steadily, and inflation was low, the currency convertible 1-for-1 with the dollar.  Trade barriers were being lowered, commerce was booming.  I recall asking Argentines what could possibly darken what seemed to be a bright future.  They were quick to reply:  “Here in Argentina we have no rule of law.  You can have no confidence in getting justice from the courts.”  Not long after, political shenanigans to reward one part of the electorate by a transfer of wealth from others threw the Argentine economy into turmoil.  Momentary good policy is a tough path to walk across bogs of inadequate legal safeguards.  Freedom has rested upon rule by law rather than rule by men.

Fundamentally, the American Revolution was an assertion of the rule of law.  Most of the Declaration of Independence is a litany of abuse by the English rulers.  The Revolution was intended to take power away from man and men and rest it upon laws and rights, soon to be secured by the world’s first written Constitution.

The Progressive Movement, which thrived over a century ago, was a retreat, aggressively stepping backwards to the rule of men as an impatient alternative to the rule of law:  the Rule of Experts.  Their new view—really a very old view dressed up in modern rhetoric—was that there are benevolent experts, to whom we can safely yield our governance, for such understand the process of modern government better than ordinary people do.

It sounds akin to the ancient theory of Divine Right of Kings, that the worldly monarchs are chosen by God and invested with greater wisdom and perspective than the average man and woman.  To their benevolent expertise and fatherly care was entrusted the governance of the rest of us.

Today’s benevolent experts are invested by their colleagues with varieties of credentials certifying their expertise.  Not very democratic, they make no secret of their impatience with the Congress and other constitutional brakes on arbitrary authority.

Just as not all men are always just, not all men are reliably wise.  The American Founders thought to address this problem by the separation of powers, dividing political authority among three branches in the Federal Government and the States.

The current regulatory program rests heavily on the notion that benevolent experts should be entrusted with authority for the big questions and increasingly smaller questions, too.  It has evolved by progressively engulfing the constitutional separation of powers, merging legislative and executive—and often judicial—authority in “independent” regulatory agencies headed by unelected officials.  The unelected federal regulator writes the details of mandatory regulations, charges violators, assesses guilt, and applies penalties.

Professedly efficient, it does not work well in practice.  First, the regulators are not dispassionate umpires, limited to calling the balls and strikes.  They are also players in the game, having their own set of particular interests and incentives that they take care of first.

Second, reliance on benevolent experts assumes what is an unproven, undemonstrated level of knowledge, insight, and forecasting skills.  Regulators are not dumber than the rest of the population, but they are no smarter either.  It is just that life is too complex and the society of the living is proving too much to be run by any designated group of humans and their computers.

A third flaw is mission creep.  Even if the tasks are too great or require too much knowledge, insight, foresight, and other skills in unachievable degree, the regulators still take them on, with each failure met with calls to increase resources and power of the agency.  

An example is the Federal Reserve (commonly called the “Fed”), created with a specific and rather narrow purpose, to make enough funding available for the banking system in times of financial stress.  Before long, the Fed gained control of monetary policy and the practice of controlling interest rates.  Later, it was tasked with promoting maximum employment.  In 2010 the Fed’s role in supervising banks was enlarged to supervising any financial business considered to be systemically significant.  Each augmentation has drawn the Fed away from its narrow, objective task. 

This expansion of authority affects every business and every home.  The Federal Reserve is the world’s biggest rigger of interest rates.  Its prolonged policy of keeping short-term rates at or slightly above zero has resulted in penalizing all savers and those who live off of their savings, transferring trillions of dollars of wealth to borrowers, the biggest borrower being the Federal Government.

A partial but simple solution toward strengthening the rule of law and reducing exposure to the caprice of men would be returning to elected representatives the making of laws.  It is a messy process, exactly the messy process that the Founders intended to preserve freedom from the encroachment of arbitrary and oppressive government.  The regulators, which are theoretically part of the executive branch, should be limited to the duty of implementing the laws that the elected and accountable representatives make. 

If Congress were required to write the rules and mandates, and delegate only the implementation, the mandates of government would be circumscribed by the exposure of a legislative body held directly accountable for what it has wrought.  It is easy for legislators to complain about bad regulatory decisions, but too often, these are decisions that Congress never should have delegated to regulators in the first place.

Filed under bureaucracy, Congress, Constitution, Declaration of Independence, Federal Reserve, freedom, interest rates, progressives, rule of law, Supreme Court Tagged with , , , , , , , , ,

Of More Money and Higher Prices

January 21, 2021 Leave a comment

Photo by Shane on Unsplash

We have a new occupant of the Oval Office.  I did not hear his inaugural address, uncertain who would forget it more quickly, myself or its deliverer.  Inaugural addresses are highly forgettable literature, Lincoln’s first and second addresses (the second especially) the only ones that anyone can seem to remember, and worthy they are as exceptions to the genre.

I have been remembering the mountains of money that the government has been spending that it does not have, wondering where it is coming from even more than where it is going.  It is hard to find anyone who can tell you much with certainty about either.  The current attention is more focused on plans to spend yet another two trillion dollars that the government does not have on things that are not very clearly explained.  This would be on top of the most recent trillion dollars approved by Congress drawn from an empty well to be spent watering many a hidden garden.

I can understand the first round or two of multi-trillion dollar government expenditures.  Since government caused the collapse of a strongly growing economy by shutting down commerce and locking up the population, a strong argument can be made that paying these victims is not exactly a bailout as it is compensation.  To quote Will Rogers, if Stupidity got us into this mess, then why can’t it get us out? 

A serious problem seems to be that once you get into the game of paying people more to stay at home than they can earn on the job, how do you bring the game to an end.  The plan of the new Oval Office occupant seems to be to go into extra innings but continue serving spiritous refreshments well past the seventh inning.  How will the people get home safely once the game is over?

The classic formula for inflation is to have too much money chasing too few goods and services.  The kindling for a roaring inflation would appear to be carefully set. The Treasury and the Federal Reserve have been dramatically expanding the money supply, with the Federal Reserve supporting the market for the government’s electronic debt (not much money is printed on paper anymore) by purchasing gobs of Treasury securities from banks, paying the banks with electronic credits on their accounts held at the Federal Reserve, which the banks cannot find much to do with.  At the same time, many governors continue to issue orders to suppress the supply of goods and services.  As Elon Musk reportedly said last year, if you don’t make stuff, there is no stuff.

If this worry is well-founded, then why have we not yet seen any inflation, government spending surges and the Great Cessation having been Federal and State policies for nearly a year?  A very good question, the answer to which may be found in the savings rate.  While a lot of electronic money has been going into people’s bank accounts, people have been shy about spending it.  The personal savings rate jumped in 2020 from about 7% to nearly 35%.  Worried people hoard more than toilet paper.  And a lot of things that people might spend money on, such as travel, suddenly were not available.  I was surprised last year when our car insurance company sent us a rebate:  insurance losses were down because people were traveling less.

The roads are a bit more congested these days, and the economy is showing strong signs of trying to recover.  Even the savings rate is coming down, dropping to about 13% as 2020 approached its close.  More activity is good, but what is the Federal Reserve going to do if more people spend more savings faster than more goods and services are provided?  How will the Federal Reserve respond to another couple trillion dollars of deficit spending to stimulate an economy that is already on a recovery trajectory and families continue draining their savings?  They could allow interest rates to rise, to encourage people to keep some of their money in savings accounts that have paid less than a penny a year per dollar saved.  Recent Federal Reserve comments, though, declare that is not on the table.

In the late 1970s, when Jimmy Carter was president, economists invented the term “stagflation,” as inflation was high and the economy was in the doldrums.  Joe Biden was a relatively new Senator back then.  Maybe he will remember those days.  That economic pattern served no one well.

Filed under banking, deficit spending, economic growth, economics, Federal Reserve, Great Cessation, inflation, money, personal finance, Treasury debt Tagged with , , , , , , , , ,

Of Bears and Working

March 23, 2020 Leave a comment

Photo by Sandy Millar on Unsplash

I can support a cute idea like this.  One of our neighbor dads plans to take his children “on a bear hunt.”  Dad has planned ahead.  He asked neighbors who have them, to put a teddy bear in the window to be spotted by his children as they walk around the block.

Being empty nesters, our home is more often host to grandchildren; few of many bears remain in our house.  Once we had dozens—of teddy bears.  We now have more than a dozen grandchildren, and I am fine with the trade.

Speaking of trading, I suppose that we could put in the window a print out of today’s stock market, sliding deeper into bear market territory, responding to yet another attempt by the Federal Reserve to stimulate market confidence.  A more than casual observation might be that these government intervention moves can do more to spook investors than reassure them.  Usually declared while the markets are closed, the moves appear lately to be followed by a sharp market sell-off.  No criticism of their intentions, but when the 5 governors at the Federal Reserve (Fed for short) are pitted against the billions of people who make trillions of economic decisions each day, the Fed is frequently worsted.  No matter how good computers are, the economy is too complex for any of the models upon which any team of experts relies.

So, no picture of the bear market for the window.  We do not wish to scare the children or their dad.

Fortunately, we did find a teddy bear in the house, left by our youngest (who still has lots of his stuff here).  The bear now sits on our front porch, awaiting discovery.  On his lap he holds a sign, one that our daughter gave us some years ago to announce the pending arrival of her first child.  The sign reads, “Grandkids welcome.  Parents by appointment.”

No, the sign was not mandated by the CDC or the governor.  Humans need social interaction.  That fact is not apparent in the government orders to isolate people indefinitely.  Dad may not go to work, children may not go to school, so it is great to see fathers and sons and daughters taking pleasant walks.  At some point, someone is going to need to pay bills to buy things produced by somebody somewhere.  I wonder whether the complex models on which the governors rely are a match for the billions of human interactions in which their millions of citizens need to engage in order to live and be happy.

Filed under economic growth, family, Federal Reserve, jobs, markets, quarantine, statism Tagged with , , , , ,

Of the Federal Reserve and Taking from Savers

April 4, 2015 Leave a comment

Ben Bernanke has a blog. You can find it here, courtesy of the Brookings Institution. Of course, what would the former Chairman of the Federal Reserve Board write about, other than decisions he made as Chairman, and why people who take issue with them are wrong? One would expect no less, and reading the light he sheds on previous decisions—offered in Fedspspeak at the time that they were made—is surely the chief lure of Ben Bernanke’s blog. Allowed to communicate in regular English, not worried about how Fed Watchers might construe or misconstrue everything he says and does not say, Ben is more able to speak his mind clearly.

The former Fed Head chose for his first blog post a vigorous defense of price controls on interest rates. In the process Bernanke demonstrates the assumption that we are safe letting government economists control the economy—an assumption continually disproven by real-world experience.

In fact, as a result of entrusting much of our economic freedom in the United States to government economists, we do not have a free market for interest rates, at least not short term rates, and we pay for that every day. The Federal Reserve sets short term rates in this country, and so far the market has had zero success in moving rates from the near zero interest rate range that the Federal Reserve has decreed and maintained for some years. Keep that in mind the next time you wonder why you earned $1.73 in interest on your savings account last year.

If you borrow money—when you can get a loan—then you might consider yourself lucky. The biggest borrower of all, in the whole world, is the United States Government. Uncle Sam must be feeling very lucky, because he is paying comparatively little on the $18 trillion of U.S. Government debt, increased by another half trillion dollars last year.

If you save money, though, especially for your retirement—and if you have to live off of those savings in retirement—you might not feel so fortunate. By keeping interest rates lower than the market would set them, the Federal Reserve is daily transferring many billions of dollars from savers to the Federal Government. And you thought that only the IRS takes your money.

Let me illustrate with an example. For the last three months of 2014, all of the banks in the United States, all of them together, paid no more than $11 billion to people who had their money in banks. Is that a lot of money? It depends. When that is the interest paid on nearly $12 trillion in deposits, the answer is, no, that is not very much money at all.

Do not blame the banks, though. They are in the saving and lending business, too. Try as they might, with the Federal Reserve controlling interest rates, banks could not pay any more interest to depositors. If a bank did, it would have more money than it could lend as people shifted their deposits where they could get a better return. To pay interest on deposits, banks cannot get much more interest from the loans they make than the Federal Reserve price controls allow, and many relatively good loans present more repayment risk (banks do need to be paid back) than those low interest rates would cover. Low interest earned means low interest paid.

All the banks in the nation have a little over $15 trillion in loans and other assets, on which they earned last year about the same amount as they did five years ago, when they had $2 trillion less in loans and other assets. In an environment of low interest rates, banks have to concentrate their lending on the safest borrowers.

That is how the low interest rates controlled by the Federal Reserve are oppressing the economy. When savers and lenders can only get a few cents on a hundred dollars lent, they place their money with the very safest of borrowers, since they cannot afford to take any losses. Someone who has a really good idea—which like all good ideas may or may not succeed the first time—has trouble getting the money to give his idea a go and hire people to help him try.

Ben Bernanke claims that the Federal Reserve’s near zero interest rate policy—called ZIRP—has been stimulating the economy. If so, where is the stimulation? Why has the recovery been so weak? There has been stimulus, but it has gone primarily to support Federal Government spending and to pay down the debt of the largest and healthiest businesses that can trade in their higher cost loans for the Federal Reserve’s lending bargains. The biggest increases in bank loans have been in Treasury debt and deposits at the Federal Reserve.

Ben Bernanke, in his blog, reminds me of the story of the lawyer representing a client charged with stealing a car and returning it damaged. The lawyer says, first, that his client never had the car; second, that he returned it in perfect condition; and, third, that it was already irreparably damaged when his client took it.

Bernanke begins by explaining that the Federal Reserve does not set interest rates, or that at most its ability to do so is only “transitory and limited.” He pleads that the Fed can only affect short term rates “in the short run.” He does not explain how seven years of ZIRP can be considered the short run. Then he progresses in his blog to describe how the Federal Reserve “influences” interest rates and then how the “Fed’s actions determine” interest rates. His argument, after denying that the Fed can set rates, is that the economy has been so weak that the Fed has had to lower interest rates for the nation’s own good. Bernanke next argues that the economy has remained so troubled (he does not say, despite ZIRP) that the Federal Reserve has had no choice but to continue with ZIRP, concluding that it is the economy after all the forces the Fed to do what it does. Do not blame the Fed Governors, they had no choice but to continue doing what they cannot do because it has not done any good so far. I think you need to have a Ph.D. in economics to make such an argument.

We cannot do it, we did what we had to do, and since it has not helped we cannot stop. I wonder how he reacted to those kind of explanations from his teenagers. Any responsible parent would reply, no, you cannot have the car, give me back the keys.

Filed under banking, economic growth, economics, Federal Reserve, government, interest rates, markets, personal finance, recession, socialism, statism, Treasury debt Tagged with , , , , , , , , , , ,