Zero price-inflation is still bad

As usual, a great blog post from Mises.org:

What the mainstreamers fail to realize is that even zero percent “targeted” (price) inflation is horrible. They do not get this. This is because they mean absolute price inflation in dollar terms. They don’t mean money-supply inflation. With a relatively fixed 100%-standard money supply (say, gold), prices would continually, gradually fall, to everyone’s benefit. Let’s say there would be 5% price deflation every year. Well, if you inflate the money supply at about 5% to achieve 0% price inflation, you are still taxing the populace at about 5%.

—SNIP—

Moreover, not only is central-bank caused price inflation a redistribution of wealth–it’s a redistribution from the average and poor into the pockets of bankers and friends of the state. It is Robin Hood in reverse. It’s a regressive tax; yet the left is all in favor of this, since they do not favor a gold standard.

In addition to this wealth-redistribution, any central inflation of a fiat money supply gives rise to the business cycle, which destroys wealth overall; thus adding yet another overall tax to everyone. This is another tax–10%? 20%? Who knows.

And of course another problem with a targeted price inflation is that price stability itself isn’t even a well defined concept, and depends on an arbitrary (and ever-shifting) basket of prices; and it ignores the Austrian subjectivist approach to value, which shows that value is not only ordinal as opposed to cardinal, it’s not only interpersonally incomparable–it’s intertemporally incomparable even for the “same” individual (or to put it another way, me now is not the same as me later, since only me-now can make judgments in the present, and so on; and value is only coherent in terms of demonstrated preference).

US auto bailout: malinvestment, the failure of Keynesianism

John Tozzi of Business Week asks a good question:

As Auto Deals Add Up, Will Buyers Bite?
A fast-growing package of incentives is slashing the prices of GM, Ford, and Chrysler vehicles. But wary would-be buyers still may not take the bait

That is all you need to read, though. Do not bother with the rest of the article. His analysis does not really matter. We know what is going to happen. Not enough people want to buy these cars.

We are experiencing a great example in the failure of Keynesian theory. Unfortunately, the tax-payer is paying for this nonsense. Here we have the American government trying to “stimulate” the economy of a particular industry. Yet, every American knows damn well that the industry is failing. The end result of the government’s intervention is a delay of the inevitable and an encouragement of malinvestment. This prolongs the recession.

The government does not even have to intervene. With the hope of gaining corporate welfare, cronies will still seek a bailout. The government just has to hint that it will intervene and this will exacerbate the recession.

I might be wrong. Through some miracle, the American auto makers might avoid bankruptcy. At which point the confused socialist (or the crony capitalist, whatever you want to call him) will point to the success of Keynesian economics. My next question is this: What kept the auto makers from offering these great deals before? The answer is Keynesianism.

The psyche of the auto makers incorporates a sense of entitlement from the government. The auto makers are not the only ones like that. Most industries have their fair share of cronies.

Confusion for G20 Summit is a blessing in disguise

It seems like the crony capitalists leading the G20 Summit are confused too. They are calling for a vague hodge-podge of stimulus spending and regulations. I particularly admire the French Threat to walk out of talks.

“He seems to be grandstanding,” said James Walston, professor of politics at the American University in Rome. “They want regulation, but in one day they’re not going to come up with a solution. They will come up with principles that their finance ministers will then have to work on.”

All of this confusion is a blessing in disguise. Efforts to stimulate the economy is a fool’s game at best and an abuse of power at worst. The best thing that can happen is continued stalling in all of these economic interventions.

This summit will pass. The economic depression will pass. People will look back on this episode and will not be able to associate any of these efforts to stimulate the economy with how the economy pulled out.

In the future, the study of econometrics will be tossed into the bin with alchemy and astrology.

“Print money!” – reads just like communist nationalization

Will Hutton from The Observer says that the Bank Of England should print money, create price inflation, nationalize banks and create “good” banks:

Yet to get to such a hopeful point, the cash injected into the system in the months ahead has to be lent, spent and not hoarded. Here the government has to make three more major moves. It has to create some “good” banks fast which will close the gap left by the flight of foreign banks; it should create a National Infrastructure Bank, a Housing Bank and Knowledge Bank, all of which can raise cheap finance by Bank of England purchases of their debt. Then it has to create some demand for loans.

Maybe Hutton has a secret potion that can cure A.I.D.S., fight world poverty and stop the war too!

Keynesianism in a nutshell

Gary North summarizes an economic philosophy that continues to dupe generations:

The Keynesian system boils down to this: G is the significant discretionary factor. G is government spending. Confiscating the money, borrowing the money, and printing the money have no net negative economic repercussions. When there is a recession, increase G. In short, G comes from the tooth fairy.

Flaherty’s stimulus is a total mistake

Talk about the under-statement of the year! The whole stimulus is a mistake.

Greenspan makes a plea for crony capitalism

Greenspan, “who for decades was regarded as the high priest of laisser-faire capitalism,” now makes an about-face and throws a buoy out to corporate welfare:

The former Fed chairman said temporary government ownership would ”allow the government to transfer toxic assets to a bad bank without the problem of how to price them.”

But he cautioned that holders of senior debt – bonds that would be paid off before other claims – might have to be protected even in the event of nationalisation.

”You would have to be very careful about imposing any loss on senior creditors of any bank taken under government control because it could impact the senior debt of all other banks,” he said. “This is a credit crisis and it is essential to preserve an anchor for the financing of the system. That anchor is the senior debt.”

I do not think that cronyism can get less subtle. Some guy thinks that Greenspan “seems to be changing his views incrementally.”

Of course, Greenspan is never going to assume any blame for inflating the money supply. Here is how he deflects things:

Responding to questions after the speech, Greenspan blamed insufficient regulatory oversight in part for failing to recognize the degree of risk that was accumulating in the banking system.

‘Behind the Curve’

“The regulatory structures, especially internationally, were way behind the curve,” he said.

He is just singing the same old socialist song: any problem is a result of a lack of regulatory oversight blah blah blah. That is what the socialists want to hear. We need more government.

Well, Mr. former-Chairman of the Fed, did those regulatory structures just creep up on us all of a sudden? I think not. Even if a lack of regulatory oversight is the source of the problem, it is still your fault. You should not have been so loose with the money supply. The source of the problem is the printing of money which fuels malinvestment.

This is an astounding economic experiment to witness. Unfortunately, we have to endure it. This must really confuse the socialists. On the one hand, they are getting their state control in the financial market but on the other hand, it is the rich crony elite who are benefiting and not the proletariat. God help us! Are the Americans just making economic policy up as they go along? Throwing money around willy nilly until the only strategy left is to nationalizing the banks! Cui bono?

Fiscal Stimulus = Pork Barrel Politics and Government Waste

The devil is in the details when considering whether recent government stimulus packages in Canada and the United States are really about stimulating the economy or pork barrel politics. Here is an excellent example straight from President Obama’s nearly trillion dollar stimulus:

The Milwaukee Public School system, for example, would receive $88.6 million over two years for new construction projects under the House version of the stimulus — even though the district currently has 15 vacant school buildings and declining enrollment. Between 1990 and 2008, inflation-adjusted MPS spending rose by 35%, per-pupil spending increased by 36% and state aid grew by 58%. Over the same period, enrollment fell by a percentage point and is projected to continue falling, leaving the system with enough excess capacity for some 22,000 students.

[...]

The Milwaukee situation is instructive for another reason. The city is home to the country’s oldest and largest school voucher program, which provides public funds for children to attend private schools. Families who participate in the means-tested voucher program receive $6,700 per pupil, while the city spends more than $13,000 per student. In addition to saving the taxpayers money, voucher students graduate at higher rates and outscore their counterparts on reading and math exams, which is one reason waiting lists for the program are common.

Yet language in the stimulus bill expressly prohibits any dollars from going toward financial assistance to students attending private schools. In other words, Milwaukee can use the money to build schools it doesn’t need, but not to expand education programs that are producing better outcomes for disadvantaged kids. The Senate version excludes provisions in the House bill for teacher merit pay and charter schools now serving more than a million students, two more education reforms that are gaining popularity nationwide despite opposition from teachers unions and local school boards. [emphasis mine]

I don’t presume we’ll need to look very hard at the Conservative stimulus in Canada to find our own versino of government waste.

Mark Carney and the Calculation Problem

The Bank of Canada has just slashed its lending rate to 1.5% this week as a strategy to fight the recession.  I think advocates of such market intervention should be expected to answer the questions: “Why is this a good strategy?  How does this work?” I have yet to see a good answer to those questions.

Let me first clarify my biases and convictions: I do not think lending money at cheaper and cheaper interest rates “works” at all. Monetary inflation is both the source of the problem and it will only exacerbate the recession. I do not even think the money market should be monopolized by the government. My point in this post is to suggest that even if inflating the money supply can pull people out of a recession, it is invariably bad policy because of systemic reasons.

Time

Unless our government bureaucrats have a magic crystal ball, intervention can not be on time. We are seeing that right now. The Bank of Canada finally announces that we are in a recession but only after statistics pour in indicating rising jobless rates and falling economic activity. This also seems to be the modus operandi of the central bank:

“They are indicating that if the economic data warrants it they are prepared to move further, but they would need to see a worsening of economic conditions,” said Paul Ferley, assistant chief economist at Royal Bank of Canada in Toronto, the country’s biggest lender.

The astute or experienced businessman might ask: How is this intervention going to help AFTER people are laid off? or AFTER a firm shuts down a division or goes bankrupt?????? I think the answer is quite sad in two ways:
1) it does NOT help them
2) it only helps the other firms
A devilish advocate of government intervention may suggest that such a market dynamic is good because it subsidizes more efficient firms and weeds out inefficient ones. However, a stronger firm that can survive a recession should not be entitled to cheaper loans. That firm should not be entitled to anything more than the added volume scooped up from the failing competitors.

Magnitude

How much should the central bank cut or raise the lending rate? That question is always asked before every scheduled announcement and nobody has the answer. Entrepreneurs and financial planners can either wait on the edges of their seats or act upon an educated guess of what the rate cut will be. Like every market activity, the announcement is always a surprise. Whatever the rate happens to be, it will please some people and it will displease others. This last rate cut by the Bank of Canada was deeper than anybody expected by a long shot. That means that planning is completely on hold until the announcement and entrepreneurs who try to act in anticipation will invariably make a mistake more often than not.

Goals

One last thing that is overlooked about the central bank is its purpose. Over its history, the central bank has switched between price stability and economic stimulus as its goals. The two are very different and you can not have both. The central bank is now picking winners and losers. By making credit available at cheaper rates, the bank is inflating the money supply and this makes losers out of the poorest of the poor. The poor pay through price inflation — the hidden tax that actually funds this “stimulus” attempt. The winners are the people who get the cheaper credit at the beginning of the money injection.

There is no way the central bank can be certain the rate cut suits its own stated goals either in its timing or in its magnitude. One thing that is certain: the lending rate of the central bank is not a free market activity.

« Previous Page