Tom Woods defends his honor against what was apparently a hit piece in Liberty magazine. Bruce Ramsey was reviewing Woods’ book Meltdown, as well as a book by two other authors, and wrote: “You immerse yourself in the facts, see what the connections are, and let the story itself tell you what the explanation is. This is what Muolo and Padilla try to do. It is what many libertarians ought to learn how to do.” Ramsey’s point was that Woods–an ideological libertarian–came on the scene already knowing “the government did it” and just found the facts that suited his preconceptions.
Tom does a good job rebutting that charge, as you can see if you click the link. Part of the response involves a point that we learned from Mises: you can’t look at history and let the facts speak for themselves. (As I said in an earlier article, if you try that, your biases will end up doing the talking.) The very act of choosing the facts to inspect is guided by your theories of the subject in question. To give a silly but perfect example: If we want to explain the housing boom, why not pore over NASA records regarding Neptune’s orbit from 2002-2006? Those are facts of that period. I sure hope you don’t walk into this project already “knowing” that Neptune had nothing to do with it, crank!
Anyway, on Brad DeLong’s blog today I spotted a good example of this. He links to this FT article on China’s economic growth, and Brad excerpts the following:
China’s economy accelerated significantly in the second quarter, with gross domestic product expanding by 7.9 per cent, ahead of analysts’ consensus estimates. Li Xiaochao, a spokesman for the National Bureau of Statistics, said the economy “had stabilised with increasing positive changes”, as the new data were announced on Thursday. The surge in growth was driven by the government’s aggressively loose fiscal and monetary policies, introduced late last year, with most of the funding coming from record lending by state banks.
The economy grew by 6.1 per cent in the first quarter, leading many China economists to believe that the government would not be able to meet its year-long growth target of 8 per cent. But the government’s pump-priming has turned the economy around, prompting rapid revisions by many investment bank economists, and the World Bank, to upgrade China’s outlook. Mr Li said that fixed asset investment rose strongly, up 33.5 per cent in the first half of the year compared to the same period in 2008.
Inflation, the Chinese government’s biggest policy headache until the middle of last year, remained under control, with the consumer price index falling by 1.1 per cent in the first half of the year and 1.7 per cent in June alone. Many local economists believe that the central government will not begin to rein in the stimulus programme until inflation begins to pick up, or at least turns positive…
Now just look at that last paragraph again. Doesn’t that strike you as a bit odd? I thought the very very worst thing in the world, was to get caught in a deflationary spiral. The Chinese CPI reportedly fell 1.7 percent in June alone, and it’s down 1.1 percent over the first two quarters of 2009. Haven’t we had it beaten into our heads that Asians and deflation don’t mix? And yet, real GDP reportedly grew at a 7.9% rate in the 2nd quarter. (Note that I keep saying “reportedly” because I have no idea how much credence to give these numbers. I don’t trust the BLS figures for the US, so I am extremely skeptical about what nominally communist ministries tell us.)
So does DeLong come up with some convoluted story as to why deflation isn’t such a big deal after all? Nope, he ignores that part of the story completely. He offers no commentary except the headline: “China’s Larger Stimulus Program Appears to Be Working”
"Hmm, the Russian president is showing the press a new global currency? That’s kind of frighten–LOOK! BOOBIES!!"
Now kids, I realize some of you may think I’ve gone off the deep end lately. But let’s suppose for the sake of argument that we really are getting close to some major financial action, and that the elite need to keep everybody distracted RIGHT NOW. So you’ve got the Michael Jackson stuff, which–come on–is talking up a ridiculous amount of coverage.
And oh yeah, for a few days now CNBC has been pushing pornography. (It’s both the big ads and the “news” stories.) Doesn’t that seem a bit odd?
And the beat goes on. Two days after having a bunch of fair weather friends tell me, “Normally I love your stuff Bob, but Mish is right–we can’t have inflation until the deleveraging is complete,” the media tells us “Inflation Remains Tame” even though prices went up 0.7% from May to June. (Since when is an 8.7% annualized inflation rate “tame”??) Of course, the real number was 0.9%, and they seasonally adjusted away 20 bps. A few observations:
* Now the grace period is over. Every single month this year, the BLS has reported a lower inflation number than the actual increase in the CPI. Now that in and of itself isn’t sinister, so long as they now overreport the numbers from July through December. (That’s the whole rationale of seasonal adjustment, that prices tend to rise in the first half of the year, and so the BLS spreads it around more evenly among the months so as not to give a misleading impression in the early months when prices shoot up.) But since the desire is to keep inflation expectations low–among other things, it allows Bernanke to continue with his insane policies–I predict that they won’t bump up the actual numbers in a symmetrical fashion in the coming months. Rather, they will revise the adjustments from the first half of this year, saying, “Oh, we actually did have real inflation back in the first two quarters. So now we’ll book the price rises to those previous months, meaning that the price rise of 1.2 percent in September is real; we don’t need to bump it up to a seasonally adjusted 1.6 percent hike.”
* For those who don’t know how to do exponentiation, the actual 0.9% price hike from May to June corresponds to an annualized price inflation rate of 11.4%. I’m not sure how that’s possible, because everybody from Paul Krugman to the Austrians who email me, assures me you can’t have inflation when there’s “excess capacity” in the system. Why, just this morning even our beloved Robert Wenzel wrote in a post that hyperinflation and depression were on opposite ends of a spectrum. (I think it was a brief lapse for the great Wenzel; earlier he has been good by pointing out that Zimbabwe shows you can get big unemployment and big inflation at the same time.)
* Of course, you can’t cherry pick a single month. Rather than looking at just what happened from May to June, let’s go from Dec 08–when prices bottomed out–to June 09. That is half a year, kids, so surely that’s a decent length of time for the trends to assert themselves. This is no mere blip. And during this six-month interval, when “right wingers” like Mankiw and left wingers like Krugman are telling us we need to fear a deflationary black hole, the actual, unadjusted CPI rose 2.6%, translating into an annualized price inflation rate of 5.3%. Can someone remind me what Bernanke’s “comfort zone” is on inflation? I’m pretty sure 5.3% inflation is way way above it. At what point is he going to start sucking reserves out?
* For those who like pictures, try this:
So what’s my explanation of the above? Simple. Because of the panic that began in September 2008, everybody wanted to hold more cash. Bernanke accommodated them by expanding M1 at double digit rates. However, the demand for cash outstripped even this huge growth in supply, and prices had to fall a few points to restore equilibrium. But this process ended back in December. Since then, we are back on the normal inflationary path. The kicker is, banks have an obscene amount of excess reserves. Once people besides me (and a few others who “don’t get deleveraging”) realize that our future portends INflation, not deflation, banks are going to get those reserves into something that yields more than 0.25% (or whatever rate Big Ben is paying them). And then you’re going to wish you had more gold and silver coins under your bed.
* Last point: In fairness, the humongous 0.9% jump in prices last month was not across the board; it was focused in energy and a few other sectors. You can see the breakdown here. So someone pushing the Mishian approach could wriggle out of it, I suppose, and say that this is just due to blips in oil, and isn’t representative of “the trend.” Yet that picture above sure looks like a trend to me.
While it’s fun, geeky, and necessary to argue about credit vs. money, I think we should also occasionally take a big step back and look at the broad themes. In a recent post, I said that the best way to predict what was coming–and how to protect your household–was to imagine that you were in control of the world governments and central banks, and had no conscience. I challenged Robert Wenzel to throw us a bone, but apparently if you want something done…
One disclaimer before I get going. I am not saying the following are my official predictions, and of course a lot of what I do below is post-dicting (not predicting). Furthermore, I am aware that an insane person has quite rational beliefs and theories; it’s just that he sees spurious patterns everywhere. (That’s what really happened to John Nash, if you read the book and don’t trust Ron Howard’s entertaining but absurd interpretation.) But even if the below is a little off in some of the specifics, it is the type of analysis of which we need a lot more. If the below is right, if only in spirit, then it’s pointless for us to ponder what the “right” Fed move is, vis-a-vis the payment of interest on reserves. Bernanke isn’t implementing what he thinks is best for the US economy, and so that academic question is as relevant as arguing about whether the Fed should allow casual Fridays at its offices.
If I were extremely rich and powerful, and had absolutely no conscience, this is what I might do:
* I’d have a very popular and trusted Fed chair all of a sudden prime a massive bubble in the world economy. Then, just as it was about to crash, I’d make him take the fall and install a new chair.
* The qualities I would seek in the new Fed chair would be threefold. First, he’d have to be a complete tool. Second, he’d have to be a very competent economist. And third, he’d have to be an expert on how to turn a huge financial crash into a worldwide economic depression.
* Now the fun stuff. When everyone started flipping out, I’d use the crisis to bail out my associates at the big banks and investment firms who had had to go along with my reckless plan. Obviously I would zap anybody who hadn’t been playing ball with me, and give trillions to those who had the foresight to tell I was the coach of the winning team.
* For some time I would have known that the US government was getting too big for its britches. As its global supremacy grew, there would be a greater and greater chance that the American presidents and senators I installed might decide they didn’t like my plan after all (even though that was the deal when I hired them). So I would gradually shift my power base elsewhere, and I would leave the US government in such a mess that it would take decades to recover.
* In order to contain the US government, I’d get its military bogged down in foreign adventures. I’d do what I could to spur dictators (whom I couldn’t directly control) into developing nuclear weapons. (My plan there would be simple: I’d invade those dictators who disarmed like I demanded, and I’d give money to those dictators who repeatedly flouted my ostensible demands and openly developed an offensive nuclear program.)
* On the economic front, I’d cripple the US economy relative to its major rivals by slapping on a huge new system of energy regulation. Once I had let that particular genie out of the bottle, I wouldn’t need to worry about economic growth from the US for decades.
* Now just before jumping ship, I would crank up the printing presses and have the federal government incur unprecedented new debt. It would be one last parasitic HURRAH before my colleagues and I plunged the US government into truly Banana Republic status, and destroyed the dollar. In order to cover our tracks, I’d make sure that the crash originated from foreign speculators who “attacked” the dollar. I might even plant stories suggesting that Bernie Madoff (whose Ponzi scheme we had nurtured for years, knowing it would be a great pretext for further power grabs in the financial markets) had orchestrated the speculative attack from prison.
* In order to make the dollar truly crash, I’d have my tool at the Fed pump in an absurd amount of new reserves, and then have him keep them bottled up in the banks by paying interest. I’d dangle that sword in front of the markets for several months, until they became desensitized to it. Yet deep down all the traders would know, in the back of their minds, that if they all began to anticipate a fall in the dollar, then it would immediately become a self-fulfilling prophecy. As the yields on dollar-denominated bonds suddenly went through the roof because of the speculative attack, the banks would rush to exchange their bottled reserves for Treasurys. The money supply held by the public would begin expanding at double-digit weekly rates, at the same time that foreign central banks would dump their dollar holdings.
* Of course, there would be resistance to my plans. Most obvious, the other major financial players–US commercial and foreign central banks–would normally be unwilling to go along with my suggested course of action, since they would be devastated by the dollar’s collapse. In order to get them to follow my lead, and do what I wanted at the precise time I wanted, I would have to divide the spoils with them. I would give government guarantees to all the major US domestic players, to make sure they were whole when the smoke cleared, and that any of their losses were transferred to the US taxpayers. I’d also give plenty of advance notice to the central bankers, to give them time to expand their holdings of gold and hence offset their losses from the dollar crash. Also, I would remind China and Russia that their economies would benefit tremendously (at least in a relative sense) from the new regulations being slapped on to the American economy.
* And at last, we come to the remaining obstacle to my plans: the charming American public. Even though they are ultimately the only force on earth that could physically stop me, I’ve known for years how to keep them in line. Through just a few companies, my associates and I dominate all of the major media, and we can keep them distracted about celebrity funerals and racist judges while the final elements of my plan are implemented.
* Just to make sure that I kept the American public in line, I would have a black man in the White House when the crash occurred. This would keep the blacks from rioting, for their pastors and grandmothers would tell them they couldn’t let the first such administration go down in history as a failure. And if the president himself started to protest to me, saying he hadn’t agreed to all of this? I would gently remind him what happened to the last president who had gotten so popular that he thought he could buck the system. I’d also point out that his own second-in-command was just the kind of amoral power seeker who would have no qualms becoming president through any means possible.
* Of course, at some point I might really have to drop the hammer on the dispersed and unorganized band of rebels who would catch on to my plans, and start raising a ruckus. Fortunately by then I would have perfected the Predator drones and my worldwide system of secret prisons.
* Scott Sumner calls for the Fed to create “the mother of all stock bubbles, permanently.” Sumner can be provocative, but this time he’s gone too far.
* In a spooky post, Roger Koppl explains that we are all fascists now.
* I don’t have time to read this right now, but Bob Roddis sends this very interesting link to Antony Sutton’s Wall Street and FDR. If you don’t believe that the 1930s were a series of honest mistakes by policymakers, then I think you’ll like Sutton.
* MercedesRules sent me this article (picture below) of Russian President Medvedev showing what could very well be the new global money. The gold bugs point out that he’s holding what looks to be about a half-ounce of gold, whereas it is “officially” worth $3,900. As I said to MercedesRules, “Do they know something?”
Scott Sumner is a tragic hero. Check out his awesome FAQ (which he confusingly calls “FAQs”); so much brilliance and yet it goes awry because of his obsession with NGDP (nominal gross domestic product) growth.
Let me give you a good example. In a recent (and characteristically awesome) post, Scott goes through and documents just how nuts some economists were before Milton Friedman learned us all that inflation is always and everywhere a monetary phenomenon. Seriously, check out this insane quote from Joan Robinson:
“An increase in the quantity of money no doubt has a tendency to raise prices, for it leads to a reduction in the rate of interest, which stimulates investment and discourages saving, and so leads to an increase in activity. But there is no evidence whatever that events in Germany followed this sequence.”–Joan Robinson, circa 1938
Now this is important for our story, look at Scott’s (perfectly correct) reaction to this insanity:
So easy money couldn’t possibly have caused the German hyperinflation because German interest rates were not very low. And everyone knows that easy money is associated with low interest rates. I won’t insult the intelligence of my readers by explaining what is wrong with her reasoning.
But perhaps we shouldn’t be too hard on poor Joan Robinson. Unlike some of the more wimpy Keynesians, she at least had the courage of her convictions. If interest rates are the right indicator of monetary policy; then doggone it money must have been really tight in Germany during the early 1920s. Let’s not be distracted by a few wheelbarrows full of cash.
Great stuff, Scott, but of course it seals your doom. Note, everyone, that Scott did not say, “Let’s not be distracted by million-percent nominal GDP growth.” No, in order to slap Robinson upside the head and prove to her that the German central bank was engaging in very loose policy, he pointed to the (possibly apocryphal) wheelbarrows of cash.
Later on in the post, Scott says:
This morning I noticed that I was linked to by a blogger way over in England. It seems he wanted to find an economist who was crazy enough to think that Fed policy has recently been tight, despite the low interest rates, and I was the only one he could think of. You’ll have to admit that it would be odd to cite an authority as obscure as me, if there were more famous economists making the same point.
Yes Scott, you are indeed crazy for thinking it was tight monetary policy in the fall of 2008 (!!) that caused all of our recent problems.
But perhaps we shouldn’t be too hard on poor Scott Sumner. Unlike some of the more wimpy Friedmanites, he at least has the courage of his convictions. If nominal GDP growth is the right indicator of monetary policy, then doggone it money must have been really tight in America the last 10 months. Let’s not be distracted by two FRED graphs.
The below picture is from Monday’s WSJ article about unions and Wal-Mart:
So, should we be concerned that the jacked officer’s uniform appears to have “SMASH” under the badge?!
I flew back from FreedomFest Sunday, but believe it or not I actually have to work to earn money, and so I haven’t had time to blog about the festivities till now. Some remarks:
* Tom Woods and Gene Epstein absolutely destroyed John Fund and Warren Coats regarding their Friday debate, “Fed Up With the Fed: Should We Abolish?” Tom gave a good opening, and at the end the crowd erupted into applause. Then Coats got up to give the opening speech for the “No” side, and he started out by saying, “Yes, the Federal Reserve has made mistakes. Alan Greenspan held rates too low for too long. After the crisis hit, Ben Bernanke committed the dangerous precendent of buying mortgage-backed securities and hence politicizing the markets…” and he just keeps listing all the way the Fed stinks. And then he ran out of time and had to sit down!! (I’m not kidding.) John Fund opened with a line of Shakespeare and did some damage control, such that I imagine the people in the crowd who always longed to sit at the cool table in high school may have been swayed. But all in all, Tom and Gene just owned their opponents. (Of course, it was a lopsided event; the crowd was packed with Ron Paul fans.)
* Earlier that day, Rob Bradley (full disclosure: the guy who recruited me for IER) was in a debate (on “Conscious Capitalism) against John Mackey, founder of Whole Foods. It was interesting; I was watching the founder of the organization that gives me a bunch of money, debate the founder of an organization that takes a bunch of my money. But it was a big lovefest; all four people in the debate agreed 99% with each other, and I think they even used that number themselves. One very interesting disclosure was that Mackey said environmentalism had nothing intrinsically to do with his management philosophy, and that if someone were a skeptic on climate change then that was fine. I’m going to bring that up the next time the Whole Foods clerk asks me to start using their “green” bag.
* You won’t believe this, but see for yourself on the left side of page 11 [.pdf] of the conference schedule. On Saturday 10:30 am, I was slotted to speak on my book, and at the same time in the main arena, Mr. Schiff from Euro Pacific Capital was speaking. And you know what? I managed to pack out my room, with a good 35 people or so. I’m serious. (You need to follow the link to get the joke.)
* I caught most of the talk by Thomas Krannawitter, who is Tom DiLorenzo’s arch nemesis on the topic of Abraham Lincoln. TK was hired by Hillsdale during my last year (I think) teaching there, and I immediately liked him because, despite the PhD, he is a normal guy. During his talk he said something like, “So where is this alleged right of state secession coming from? As Lincoln pointed out, if a state could secede from the Union, then what about a county from the state? A neighborhood from the county? Indeed, followed to its logical conclusion, a secessionist would need to be an anarchist.” Later TK and I were both near each other signing books. I asked Tom something like, “Suppose you were confronted with an anarchist who didn’t like Lincoln. Would you have anything to say to him, besides your view that anarchy wouldn’t work?” And I think Tom basically said, “Yeah, there’s no logical contradiction there, I just think he would have a hard time proving that it would be a workable society without the rule of law.” I’m pretty sure Tom didn’t know my background [.pdf] on this, and I’m also pretty sure he didn’t know who David Friedman was, sitting two spots to my left. Tom could have held his own debating us, but I’m just saying it was ironic because I don’t think he realized he was within ten feet of the Hall & Oates of anarchist theory. (Calm down, I’m Oates in that analogy.)
* Regarding the above point, no I didn’t get to talk to David Friedman. In between us was Quee Nelson, who was kind enough to give me a free copy of her book criticizing postmodern philosophy. I only read about 40 pages on the plane, but it was really good. If you are a secular rationalist and yet think freight trains really exist, I highly recommend the book.
OK back to the coal mines… (Speaking of which, after Waxman-Markey saves the planet from destruction, will wise alecks say, “OK back to the solar panel factory”?)