Here We Go Again

June 26, 2013

The week before last, Federal Reserve Chairman Ben Bernanke emerged from a Federal Open Market Committee (FOMC) meeting and proclaimed that the FOMC came to the conclusion that it may be “appropriate to moderate the pace of (bond) purchases later this year” if the economy continues to improve.  Mind you, he didn’t say the Fed would syphon liquidity out of the economy, simply that it might cut back on its buying of bonds if conditions warranted it.

What happened next was remarkable.  The price of gold dropped $100 an ounce, silver was down 8 percent, the yield on 5 year U.S. Treasury bonds surged by its largest percentage ever, and over a two day period the Dow lost more than 500 points.

Arguably, Bernanke and the FOMC are America’s version of the old Soviet Politburo – central economic planners that thwart the will of the market.  By having ultimate and unfettered control of monetary policy this small economic oligarchy has practically complete control of our economy. The question is, why do we tolerate this?

It’s not just what the Fed chairman says that is a problem; it’s what he does that is even more intolerable.

Albert Einstein use to say, insanity is “doing the same thing over and over again and expecting different results”.  Under this definition, Bernanke is insane.

He has made no bones about the fact that his policies since 2008 were meant to make Americans feel more prosperous so they would start spending again and stimulate the economy back to good health.  In essence, his goal was to re-inflate the housing and stock market bubbles.  According to recent statistics he has done just that.

Nationally, the median price for existing single-family homes was $178,900 in the fourth quarter of 2012, up 10 percent over the same period in 2011.  This marked the greatest year-over-year price increase since the fourth quarter of 2005.

Southern California, Silicon Valley, Washington D.C., and New York City are all experiencing huge real estate booms with prices for pre-construction condos in Manhattan increasing on a bimonthly basis.

There is even a farmland bubble taking place in the Midwest and Mountain states with non-irrigated cropland prices increasing on average by about 18 percent.

In terms of the stock market, it’s no secret that the Dow has surpassed its previous high.  Given Bernanke’s remarks and the subsequent crash of the Dow last week, there is clearly causation between Fed pumping and stock market performance.

But, in all of this “good” news there are reasons to believe that Bernanke’s policies are leading us to another crisis.  Unemployment and underemployment are still high and incomes are down, so where is the money coming from to cause real estate prices to rise dramatically?    It is from speculators and Wall Street firms eager to invest the cheap money they’ve gotten from the Fed.  The problem is that all that cheap money will cause over-investment in the housing market – the production of more homes than are needed.  Once that happens and interest rates rise the bust will come leaving mom and pop homeowners once again holding mortgages against falling property values.

And there is a big reason to be concerned about the booming stock market.  Buying stock on margin reached an all-time high in April at $384.3 billion.  Historically, whenever margin debt has exceeded 2.25 percent of GDP the market has crashed.  This happened in 1929, 2000, and 2007.  Does this mean the market will crash soon?  No one knows for sure, but one thing is certain, Bernanke’s easy money has clearly re-inflated the stock market bubble, setting up mom and pop investors for another dramatic crash.

Thus, Bernanke has been successful in attaining his goal of re-inflating both the housing and stock market bubbles.  However, his policies have not produced an economic recovery as he believed.  In fact, they have brought us to the brink of another crisis.  It’s no wonder since he employed the same approach that produced economic crisis in the past.

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Focus on Minimum Wage is Misplaced

May 17, 2013

In spite of the abysmal unemployment problem in the United States, President Obama was in Texas last week touting his plan to raise the minimum wage to $9 an hour.  Recently, New York, Chicago, St. Louis, and Detroit have seen fast food workers walk off the job and strike demanding higher wages.  Specifically, in Detroit, the Michigan Workers Organizing Committee, a coalition of labor, religious and community organizers is calling for a national minimum wage of $15 an hour.

The common denominator for everyone who wants to raise the minimum wage is the claim that the current government mandated floor price for hourly workers is too low for them to make a decent living.  Then there are the recipients of low wages, who claim their value, after years of faithful service to an employer, is much higher than the wages they receive.  For them, raising the minimum wage is the only way they can potentially get what should be coming to them – a higher rate of pay.  At the end of the day, proponents of raising the minimum wage assert that it is simply a matter of fairness to give those at the bottom rungs of the socio-economic ladder a little more.

Well, there are a lot of problems with the above reasoning.  In the first place, only two percent of wage earners in America work for minimum wage.  While workers under 25 years of age account for just 20 percent of hourly paid workers, they make up close to 50 percent of those earning the federal minimum wage or less.  In other words, very few workers are affected by the minimum wage and those that are tend to be young, first time wage earners.  You know, the teenager working at McDonald’s after school.  Naturally, older folks with familial responsibilities should find it hard to live making the current minimum wage.  The system is not really set up for them.

Then there is the economic problem caused by the minimum wage, namely unemployment.  Now, I know that there have been studies on both sides of the issue.  But, it is an economic fallacy to believe that the minimum wage does not cause unemployment.  Basic supply and demand tells us that as the price for a good or service increases, demand decreases.  Conversely, as price falls, demand increases.  By its very definition, the minimum wage is a price fix for labor above the market rate.  Thus, as the minimum wage level is greater than the equilibrium wage or wage level where demand equals supply, fewer workers will be demanded and a consequent surplus of workers will result.  Put another way, unemployment caused by the minimum wage is the difference between the amount of workers demanded and the amount supplied at the minimum wage level.  To decrease unemployment (surplus of workers) wages have to drop, just like the price of a good, to reach the clearing equilibrium price.  Naturally, this is impossible under federal and state laws, so unemployment persists until the minimum wage is overtaken by the market wage rate.

Instead of raising the minimum wage to help the working poor make ends meet, the focus should be on the cause of price inflation – the Federal Reserve Bank (the Fed).  Since 1971, when President Nixon ended the convertibility of the dollar to gold that foreign creditors enjoyed, the Fed has monetized over $16 trillion in U.S. government debt and created trillions more dollars out of thin air helping the American banking cartel increase its profits.  The result has been an 82 percent loss in the value of the dollar and consequent general price inflation.  For instance, in 1971, a basket of groceries that cost $30 would cost $173 today.  It’s no wonder minimum wage workers are hard pressed to make ends meet.

In the final analysis, only a return to sound money will ultimately help those currently working for minimum wage.  It wasn’t perfect, but a return to the pre-1971 gold exchange standard would eliminate the need to constantly raise the minimum wage, cure our chronic youth unemployment problem, and be a “matter of fairness” for all wage earners.

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina


The Dow is an Indicator of Price Inflation

March 17, 2013

Proponents of the Austrian School of Economics have been predicting that Obama’s lavish spending and Fed Chairman Ben Bernanke’s money printing through his various quantitative easing schemes would cause price inflation in our economy.  For their part, Keynesians have been highly critical of Austrians for this prediction claiming that current government fiscal and monetary policy will not lead to price inflation.  They claim we have had 4 years of stimulus spending (however not enough for their liking) and quantitative easing, yet if you look at the government numbers on price inflation prices are not rising.

Well, I suppose if you trust in government like Keynesians do, you will follow its rigged statistics without asking questions.  Over time the Bureau of Labor Statistics (BLS) has changed how its price inflation number is calculated.  For a full review of how it has changed consult statistician John Williams’ site Shadow Government Statistics.  Consistently, the BLS’s current calculating method has yielded a price inflation number averaging between two and three percent.  However, if price inflation were still calculated the way it was before 1980, the price inflation average would be closer to ten percent.  If it was calculated the way it was between 1980 and 1990 the number would be closer to six percent.

Comparing price inflation numbers of the 1970s with today is like comparing apples and oranges.  Washington has changed the parameters of the measure making a comparison useless unless, like John Williams, you calculate the number using the old formulas.

The same is true about the current euphoria over the Dow’s breaking of its all-time high.  In nominal dollars the Dow is at an all-time high.  But, what good is it if the value of the Dow has lost its purchasing power?

Let’s look at USDA retail price data for beef for example.  Currently, the value of the Dow will buy 3,332 pounds of beef at the retail level.  But at 14,500 points that is about 20 percent less beef than the Dow could buy in January 2000 when its level was at 10,600 points.

But, what’s that, you are a vegetarian so the increased price of beef doesn’t matter to you?

Okay, well, the Dow’s value could currently purchase 15.35 tons of bananas.  That sum would keep any troop of monkeys occupied for a while.  But, it is the same amount of bananas the Dow could have purchased in February 2008 when it was only at 12,266 points and 60 percent less in 1999 when the Dow was around 10,000 points.

And who could argue against the fact that the price of gasoline affects the prices of all other goods and an increase thereof is the most harmful to the working class.  Once again, price inflation can be seen by comparing the Dow’s current high with its previous value.  At today’s current high value, the Dow could purchase 3,812 gallons of unleaded gasoline in the U.S.  This is about the same amount it could have bought in January 2012 when the Dow was only worth 12,633 points.  The short window of time, 15 months, is indicative of how price inflation does exist in a big way in our economy.

In the final analysis, Austrians are right and Keynesians are wrong.  There is significant price inflation in our economy that has been caused by Obama’s prolific spending and Bernanke’s reckless money printing.  In fact, the numbers are indicative that price inflation has been with us for a lot longer time.  When will Keynesians realize this? Perhaps they will when the BLS publishes a true price inflation statistic.

Article first published as The Dow Is an Indicator of Price Inflation on Blogcritics.

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina


My Cousin the Keynesian

March 6, 2013

I have this cousin, let’s call him Giovanni.  He is a great guy – industrious, hospitable, great family man.  He is my go to source when it comes to information and analysis about sports in general and baseball in particular.

It is an entirely different story when it comes to economics.  Oh, he is financially successful, but like most Americans he doesn’t understand how the market works.

Now, I am not talking about the “free” market, just the market, which exists everywhere and in every place.  The market is the arena of commerce and whether it is free or not depends on government allowances in the various geographic areas of the world.

So, technology has made it possible for Giovanni and me to rekindle our familial relationship that was forged many years ago through the trading of Matchbox cars.  Well, actually, he is so much older than I am that he made and brought them to me when his family visited ours.  I told you he was a great guy.

He is also good at chasing me through cyberspace by email, facebook, and on open threads of sites where I post my blog to argue economics with me.

Last Friday, he emailed me an article titled “A Breakthrough Speech on Monetary Policy”.  The author, Anatole Kaletsky, is an award-winning journalist.  The “Breakthrough Speech” in question was delivered by Adair Turner, Chairman of Britain’s Financial Services Authority and one of the most influential financial policymakers on the planet.

Clearly both men are dyed-in-the-wool Keynesians because Turner’s speech and Kaletsky’s article both recommended that politicians and central bankers print up lots of money and dole it out to consumers in order to stimulate the economy to end the economic stagnation that the West currently finds itself in.  Specifically, Kaletsky believes the Fed should take the $85 billion it is currently spending to buy government bonds from banks and instead distribute it to every man, woman, and child in America.  He believes, “There can be little doubt that this deluge of free money would stimulate consumer spending and revive employment,” thus ending the West’s economic doldrums.  Further, Kaletsky believes this proposal would not cause price inflation because, “links between monetary financing and hyperinflation are theoretically dubious and historically unjustified”.

So, after digesting this economically nonsensical article, I owed Giovanni a response.

Firstly, I indicated to him that monetary inflation does lead to price inflation unless perhaps productivity keeps up with increased money supply.  Just in the 20th Century, one could look to the Weimar Republic and many Latin American countries from time to time.   Zimbabwe is the most recent example.  In fact, all of history is littered with societies that attempted to inflate their way out of depression and instead brought about hyperinflation.

Secondly, I told him that personally I would gain greatly from Kaletsky’s proposal, but that it would harm the economy in the long-run and further destroy an already disappearing middle class.  Given many Americans spendthrift mentality, could you imagine what would happen if they received “free” money each month from the government?  First off, Uncle Sam would never be able to rescind the policy.  It would be like trying to cut Social Security benefits.

Beyond that, there is no doubt, that unlike the banks, leveraged to the hilt American consumers would spend all of their new found riches on a plethora of consumer goods.  The economy would experience another phony boom based on monetary inflation.  Employment would improve for a while.  The new money would bid up the price of goods and services thereby causing domestic price inflation.

Personally, my real estate investments would increase in value allowing me to sell them to some economically naïve person with free government money in his pockets.  The value of my gold holdings would increase exponentially.  I would be sitting pretty, protected from the impending economic bust that was made inevitable by the phony inflationary boom.

As prices rise, so would interest rates.  All the investments begun at lower interest rates would become more expensive.  Many would not be sustainable at the higher cost of money.  Sound familiar?  It should because this is what happen in the 1990s with the dot.com bubble and what also happened in the 2000s with the housing bubble.

As defaults on loans increase, unemployment picks up and the market is thrust into another downturn.   I am sure at that point Giovanni and other Keynesians will blame the free market.  But, of course, the only thing that was free in all this was the money the Fed gave to consumers.

Predictably, his response to my response was that I am living in a fantasy world.  Unfortunately, he is wrong.  The devastation that millions of hard-working Americans would experience if the above plan is enacted wouldn’t be a fantasy. It would be a tragedy.

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina


Gap Between Rich and Poor Rooted in Government Policy

January 24, 2013

Anyone who proclaims the American economy is recovering from the financial crisis of 2008 is either lying or not paying attention.  The good people at the Economic Collapse Blog have aggregated 37 statistics that strongly indicate the economy continues to worsen under the financial leadership of President Obama and Federal Reserve chairman Ben Bernanke.  In particular, the figures indicate that it is the lower economic classes which have been most severely devastated by four years of reckless federal spending, bailouts for the well-connected, and artificially low interest rates.

For instance, since 2008 15 million more Americans rely on food stamps.  According to the Census Bureau, 146 million of us, nearly half of the U.S. population, are poor or low-income.  The Civilian Employment/Population ratio, which is the broadest measure of employment in the country, is the lowest it has been since the early 1980s.  Median household income has retreated to its 1995 level.  Lastly, the economy is not producing jobs for U.S. college graduates as 53 percent of them under the age of 25 are either unemployed or underemployed.  Given that many graduated with huge college debt, what could the future hold for these folks?

But, don’t despair.  Some in our society are doing quite well because of the federal largess thrown their way.  Most of them just happen to be located around New York City and the District of Columbia.  You see, the U.S. stock and bond markets are at, or near all-time highs.  Real estate in Manhattan and Washington, D.C. has bounced back nicely and are both at all-time highs.  Even the Contemporary Art market in the Big Apple has seen sales skyrocket in spite of higher prices.

But, this is predictable given that New York and the nation’s capital is where the Wall Street/Washington Axis of Financial Evil is headquartered.  It is where that axis prints the new money and injects it into the economy through its well-connected surrogates – i.e the “too big to fails”.

And it is all done in the name of stabilizing prices so the rest of us don’t suffer so much.  How nice it is that the powers that be are looking out for us working folk!

Don’t be fooled for a moment.

The financial establishment in this country, which includes the Federal Reserve and its “too big to fail” cronies, knew exactly what it was doing.  Through monetizing federal debt, a series of quantitative easing schemes and holding interest rates below market prices the banking establishment has succeeded at stabilizing the cost of living above market levels.  Put another way, if left to its own devices with no monetary easing from the Fed, the market would have rid itself of all the mal-investment built up from the previous Fed induced false boom period (housing boom).

Consequently, housing prices would be lower, commodity prices would be lower; in fact general price inflation would be lower.  The cost of hiring new workers would be lower causing an employment recovery.  Savers would have gotten a decent return on their money.  In short, working class Americans would have seen an enhancement in their standard of living.

On the flip side, many rich folks would have been devastated.  Their stock and bond portfolios would have been decimated.  Many would have lost their jobs through bankruptcy and restructuring.  The value of their homes wouldn’t have been restored on the backs of working men and women.

This is what should have happened.  After all, they caused the crisis along with their accomplices in government.  Didn’t they deserve the consequences of their actions?  That is capitalism.  That is the American way.

Article first published as Gap Between Rich and Poor Rooted in Government Policy on Blogcritics.

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina


The Military Budget is Another Bubble

October 30, 2012

As students of the Austrian School of Economics understand, financial bubbles are caused by central bank monetary policy and government intervention in the economy.  The housing boom and subsequent crash in the first decade of this century is an excellent example of the Austrian Business Cycle Theory (the Austrian School’s explanation for booms and busts in the economy).

For more than 4 years between June of 2001 and September of 2005 the Federal Reserve kept its Federal Funds interest rate under 4 percent.  Artificially low mortgage rates resulted.  This coupled with large investments by the Bush Administration for low income homebuyers created the largest housing boom in American history.  As interest rates were gradually increased by the Fed, reaching a decade high of 5.25 percent in June 2006, investments in housing that were made at lower interest rates became unsustainable at higher rates.  As adjustable rate mortgage rates rose, defaults increased eventually causing home prices to plummet.  The housing bubble had burst.

Of course, pundits, politicians, mainstream economists, and others dependent on big government for their sustenance blamed the free market and deregulation for the housing boom and bust.  Yet, time and again in the Twentieth Century, from the stock market crash of 1929 to the dot com bubble of the late 1990s, the fingerprints of Fed manipulation and monetary price fixing have been all over every economic downturn and crisis.

Now, there are other bubbles in our economy that have yet to burst.  These are the bubbles that are insulated from bursting by politics.  They include higher education and defense spending.

In terms of defense spending, the political forces that protect it are currently working overtime to maintain that bubble.  In January, under provisions of the Budget Control Act of 2011, defense budget cuts totaling about $50 billion a year for the next 10 years go into effect.  Opponents of the cuts, like Senator Lindsey Graham are claiming “It would be like shooting yourself in the head. It would be the most destructive thing in the world.”  John McCain has even warned that the cuts would leave us unable to defend the country!

Then there are the threats of wide spread layoffs by defense contractors and the devastation to local communities like Newport News, Virginia that defense budget cuts would bring.  Corporate officials and community leaders have teamed up to decry the cuts based solely on the harm they would do to their bottom lines and tax bases without any regard for whether as a nation we should spend the money on more armaments.

After all, defense spending accounts for close to 20 percent of all federal spending.  The U.S. spends more on defense than the next 13 highest spending countries combined!

This enormous government bubble has been financed for years by deficit federal spending monetized by the Federal Reserve – in other words debt.  Since at least Reagan, military spending has been erroneously used as a fiscal stimulus to the economy, financing millions of jobs in the military-industrial complex.  And it has been used to launch several seemingly endless wars and other lethal adventures worldwide.

The country doesn’t need that much military and can no longer afford it.  As the real fiscal cliff approaches, political defenders of the military-industrial complex are going to find it more and more difficult to protect their bubble.  With hundreds of trillion of dollars in future unfunded liabilities on the books of the federal government, the only answer for Washington is to continue to print more money.  Eventually interest rates will rise increasing the interest payments on the debt.  More printing will occur perpetuating a financial spiral which will destroy what’s left of our economic system.  Cutting a measly $50 billion a year from military spending now should be a no-brainer.  But it probably won’t happen because anymore politics takes precedence over reason in Washington.

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina


The So Called Presidential Debates are a Waste of Time

October 10, 2012

Like most Americans, I didn’t watch the staged media spectacle better known as the Presidential Debate.  It is not just because I didn’t have a dog in that fight; it is because to me the quadrennial political mini-series is nothing more than a rigged, wasteful use of an hour and a half of prime time television.

First of all, it is not really a debate but a glorified press conference.  Journalists hurl softball questions at the candidates giving each the opportunity to regurgitate their perfectly rehearsed sound bites.  Wouldn’t it be more worthwhile if Obama and Romney were allowed to go toe to toe by stating their positions, asking each other questions, and arguing the merits of their positions without any filtering from an aloof journalist moderator?  Better yet, wouldn’t it be more worthwhile if other candidates were allowed to participate and give Americans a chance to hear views other than the sanctioned Establishment line.

Then there is the fact that once again the major parties have nominated two candidates for president who are quite similar.  Whether it’s Social Security, corporate bailouts, endless wars, or government spending, Obama and Romney agree more than disagree on most issues.  Isn’t it time that other views besides the one that has gotten us into our economic mess, endless wars, and erosion of constitutional liberties be allowed to be heard?

Lastly, as is always the case in the debates, several important issues were totally avoided.  What about our military’s continued drone war that has left hundreds of civilians dead in Pakistan?  What about the failed War on Drugs that has made America the number one jailor in the world?  Okay, the first debate’s focus was domestic policy, so killing innocent foreigners was outside that realm, but the violence engendered, the lives ruined, and the constitutional liberties destroyed by Washington’s decades’ long insane drug policy could have been broached.

Then there was the avoidance of the gravest issue currently facing our country – namely the role the Federal Reserve plays in our economy.

“Give me control of a nation’s money and I care not who makes the laws.”

Mayer Amschel Rothschild, founding father of international finance (see below)

And yet, in an hour and a half debate on domestic policy, the Federal Reserve, Ben Bernanke, and quantitative easing were not mentioned a single time.  The Federal Reserve, the institution whose job it has been to protect the value of the dollar, has been responsible for the greenback losing 95 percent of its value since 1914.  Ben Bernanke, who has perhaps more influence over the economy than anyone else in Washington, doesn’t seem to have a clue about how the economy works.  He has a history of totally missing the mark with predictions.  This includes everything from, “At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained”, on March 28, 2007 to Fannie Mae and Freddie Mac, “…will make it through the storm” to his stating that “The Federal Reserve is not currently forecasting a recession” on January 10, 2008 as the economy was spiraling into a massive downturn.  These were not little misses.

But perhaps the greatest dereliction of presidential debate moderator Jim Lehrer in the debate was not asking the candidates anything about the Fed’s failed quantitative easing programs.  How can that be since Bernanke just announced that QE3 will last in perpetuity?

The Fed has already expanded the size of its balance sheet by 223 percent so far by buying financial assets from banks.  In so doing, it has injected trillions of dollars into the reserve accounts of those banks.  But, these purchases have not produced a healthy economy like Bernanke predicted.  In fact, Philadelphia Fed President Charles Plosser expressed a negative view of Bernanke policy recently when he indicated that, “Inflation is going to occur when excess reserves of this huge balance sheet begin to flow outside into the real economy”.  For his part, Bernanke has always maintained that he possesses the know-how and tools to siphon out excess liquidity to prevent inflation when the time comes.  But, Plosser doubts the Fed will be able to act boldly enough since it has “absolutely zero experience” unwinding what has been put in place.

Given the state of continuous quantitative easing that our economy has been subject to, its utter failure to accomplish its stated goal, and the dour forecast by the Philly Fed Chairman as to what will result, how was this not an important area of inquiry for Lehrer to pursue with Obama and Romney?

At the end of the day, the so-called presidential debates are a waste of time.  Run by the bipartisan Commission on Presidential Debates, no candidates other than their own Republican and Democratic nominees are permitted to participate.  Given that both are usually quite similar in their positions, the American people are provided with little choice.  Finally, because many critically important issues are avoided, the debates contribute very little to the national dialogue on what needs to happen to turn our country around.  For that hour and a half we would be better off if the networks had aired reruns of the most popular mini-series instead.

(Quoted by Senator Robert L. Owen, former Chairman of the Senate Committee on Banking and Currency and one of the sponsors of the Federal Reserve Act, National Economy and the Banking System, (Washington, D.C.: U.S. Government Printing Office, 1939), p. 99. This quotation could not be verified in a primary reference work. However, when one considers the life and accomplishments of the elder Rothschild, there can be little doubt that this sentiment was, in fact, his outlook and guiding principle)

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina