Here We Go Again

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.

Focus on Minimum Wage is Misplaced

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

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