Daily Archives: November 12, 2010
In the Financial Times today, Martin Wolf comes out swinging (free registration required) against those who are afraid the Fed’s Quantitative Easing programs carry a danger of sparking serious inflation.
The essence of the contemporary monetary system is creation of money, out of nothing, by private banks’ often foolish lending. Why is such privatisation of a public function right and proper, but action by the central bank, to meet pressing public need, a road to catastrophe? When banks will not lend and the broad money supply is barely growing, that is just what it should be doing (see chart).
The hysterics then add that it is impossible to shrink the Fed’s balance sheet fast enough to prevent excessive monetary expansion. That is also nonsense. If the economy took off, nothing would be easier. Indeed, the Fed explained precisely what it would do in its monetary report to Congress last July. If the worst came to the worst, it could just raise reserve requirements. Since many of its critics believe in 100 per cent reserve banking, why should they object to a move in that direction?
Now turn to the argument that the Fed is deliberately weakening the dollar. Any moderately aware person knows that the Fed’s mandate does not include the external value of the dollar. Those governments that have piled up an extra $6,800bn in foreign reserves since January 2000, much of it in dollars, are consenting adults. Not only did no one ask China, the foremost example, to add the huge sum of $2,400bn to its reserves, but many strongly asked it not to do so.
Everything he says is correct, but that’s not really any help, because the implications are pretty severe, even if he’s completely right.
First, let’s assume the Fed can, via repos or changes in reserve requirements, sterilize the increase in the money supply. The problem then becomes when does the Fed do this sterilization. let’s go back to 1981-1982. When the Fed was looking at monetary aggregates in the wake of the 1981 recession, they saw the money supply growing far faster than their target. At the time, the Fed’s primary tool was securities sales and purchases to control the rate of growth in the money supply directly, while letting the markets set interest rates. (Today, the fed primarily uses changes in the Discount Rate and Federal Funds target rate to run monetary policy.)
When the Fed saw those big increases in money supply, they immediately moved to sterilize the increases, to keep inflation in check. Sadly, the lack of velocity in the money supply, i.e., its actual rate of use in transactions, was near zero. as a result, the Fed’s tightening threw the economy into another recession, with unemployment rising to 11%. The policy may have been correct, but the timing was wrong.
So, what guarantee do we have that the Fed will perform sterilization at precisely the right time? If they move too early, the economy shuts down, a la 1982. Too late, and inflation takes off. Then the Fed would really have to tighten, which would probably result in another recession to wring out the extra inflation.
The trouble with the Fed is that monetary policy moves take 6-18 months to fully percolate through the economy. And they make these decisions based on economic data gathered in previous months. It’s like driving down the street by looking only at the rear-view mirror.
That makes proper timing by the Fed…hard.
Perhaps the Fed will operate as if run by infinitely wise solons, who know precisely when to sterilize their quantitative easing, either through repo operations, or raising the banks’ reserve requirements appropriately.
If it doesn’t, however, we’re looking at either another steep recession, or a bout of serious inflation, follwed by another serious recession to tame the inflation.
Oh, and even if the Fed is that good, it doesn’t address the problem of how the Chinese will react to any increased currency risk they face by holding dollar-denominated securities if the value of the dollar falls in the FOREX. As Mr. Wolf admits, the Fed’s mandate has nothing to do with the foreign exchange value of the dollar. So, maybe, the Chinese will decide to sell as much of their holdings in Treasuries as they can. That implies a serious decline in treasury prices, and a concommittant rise in bond yields, i.e., interest rates. Aaaand, we’re back to a possibility of a steep recession again Especially if they do it while the Fed is already in the middle of money supply sterilization operations.
So, I guess the question is, “How much to you trust in the ability of the Federal Reserve to do exactly the right thing, at exactly the right time?” And, “How much do you trust the Chinese to go along with all this?”
More alarmist myths bite the dust. The claim that rain forests would be damaged by warming:
The threat to tropical rainforests from climate change may have been exaggerated by environmentalists, according to a new study. Researchers have shown that the world’s tropical forests thrived in the far distant past when temperatures were 3 to 5C warmer than today. They believe that a wetter, warmer future may actually boost plants and animals living the tropics.
There are many climactic models today suggesting that … if the temperature increases in the tropics by a couple of degrees, most of the forest is going to be extinct. What we found was the opposite to what we were expecting: we didn’t find any extinction event [in plants] associated with the increase in temperature, we didn’t find that the precipitation decreased.
Or the claim that melting glaciers would threaten 2 billion people:
The spectre of imminent thirst and/or starvation for billions by 2035 from melting glaciers would appear to have been confirmed as the worst kind of alarmist scaremongering.
Sea level increases and more violent hurricanes?
First, there is still no proof the Earth is experiencing “dangerous” warming. Temperatures have levelled off since 1998. Many measuring locations are also located in unsuitable areas. Furthermore, the methodologies of averaging temperature are inconsistent and full of problems. This is why “Global Warming” was replaced as a slogan by “Climate Change” (nobody denies that climate changes), and more recently by “Climate Disruption” (which is impossible define or prove).
Second, the increased temperature is supposed to increase sea level mainly by melting the ice-caps, which is impossible. Thermal expansion of the oceans seems to be of little consequence at present because the satellite measurements show the oceans are cooling. Le Mesurier gilds his picture with a few asides on “extreme climatic events” in general and hurricanes in particular. Recent studies, however, show no increase in hurricane activity in the last 40 years.
But remember, the "science is settled".
Then there’s the drive for “green jobs” , “green technologies” and how that’s faring:
MORE than $1 billion of taxpayers’ money was wasted on subsidies for household solar roof panels that favoured the rich and did little to reduce Australia’s greenhouse gas emissions, a scathing review has found.
Despite a $535 million loan guarantee from the federal government, Solyndra, a maker of solar panels in the southeast San Francisco Bay Area city of Fremont, will close one of its manufacturing plants, lay off 40 permanent and 150 contract workers, delay expansion plans of a new plant largely financed with the government-guaranteed loan and scale back production capacity more than 50 percent. Despite the hype and tax money, Solyndra seems unable to compete with Chinese manufacturers, whose prices are lower. This is the latest bad news for the company touted by Mr. Schwarzenegger and President Barack Obama as one of the green industry’s supposed shining lights.
Because, you know, government’s do this stuff so much better than private markets.
Thought you’d want to know.
It is nanny-staters like Joe Ozersky who drive me up a wall. They represent that group of people with mindset that common Americans simply don’t have the ability and wherewithal to run their own lives or those of their families. And, as expected, they applaud government’s unrequested and unwanted intrusion in their lives to control aspects (or modify behavior) that they simply cannot fathom real Americans doing. Or at least not doing to their satisfaction.
Ozersky has decided obesity is a problem (he apparently was a fat kid who ate lots of hamburgers). Ozersky has decided that one of the main reasons for the problems is fast (processed) food and in particular McDonald’s Happy Meals. So Ozersky is just tickled to death that the intrusive board of supervisors in San Francisco has chosen to ban Happy Meals. He correctly identifies the source of such intrusion:
Last week’s elections may have seemed like a repudiation of liberalism, but the San Francisco board of supervisors appeared unfazed. The city’s governing body went ahead and fired a bunker buster into the Happy Meal, decreeing that restaurants cannot put free toys in meals that exceed set thresholds for calories, sugar or fat.
One of the reasons liberalism, or in its new incarnation, "progressivism" is in such disrepute is because of foolishness like this. Ozersky’s next line claims "libertarians are livid".
Everyone should be "livid". Since when is it up to a city board of supervisors – elected to keep the peace and make sure the garbage is picked up on time – to decide what is or isn’t appropriate to feed one’s child?
Ozersky, however, applauds the effort but believes it is just a beginning and, in fact, needs to go further:
No, the problem with the ban is that it doesn’t go far enough. America’s tots aren’t getting supersized simply by eating Happy Meals. In a recent nutrition commentary that is making waves in food-politics circles, in part because NYU’s Marion Nestle posted excerpts of it on her blog, University of São Paulo professor Carlos Monteiro makes the case that "the rapid rise in consumption of ultra-processed food and drink products, especially since the 1980s, is the main dietary cause of the concurrent rapid rise in obesity and related diseases throughout the world." And reversing that trend will be a lot harder than making Happy Meals a little less happy.
But still, you have to start somewhere, and I understand why the San Francisco supervisors picked Happy Meals as their beachhead.
So the war, apparently is on "processed food", all of which Ozersky would prefer to see eliminated. But is processed food really the culprit behind the obesity "epidemic". Ozersky cites Nestle’s work as a definitive yes. However, a nutrition professor recently shot the claim in the head with an experiment he ran on himself:
Mark Haub, who teaches at Kansas State University in Manhattan, Kan., told FoxNews.com he has lost 27 pounds in two months eating approximately 1,800 calories a day – and those calories came from foods like snack cakes, candy bars and even potato chips – basically anything he could get from a vending machine.
Haub said before the diet, he was eating up to 3,000 calories a day and weighed 201 pounds.
Key take away – it isn’t necessarily the type of food that makes you obese – it is the amount of that food, in calories, that does so. Always has been.
The point, of course, is obesity is caused by eating too many calories and not exercising sufficiently to burn off the excess. Banning Happy Meals won’t change that at all. As Tanya Zuckerbrot, a NY dietician noted, “it doesn’t matter if you’re eating Twinkies or Brussels sprouts – it’s all about your caloric intake.”
And unless the state plans on issuing meals and monitoring your every bite, banning a specific meal isn’t going to change the habits that have caused someone to become obese. Nor will bans on salt, sugary drinks or any other choice the nanny-staters think they can take from the public. It is a fairly simple concept to understand – “The laws of thermodynamics dictate that if you consume fewer calories than your body burns, you will create a caloric deficit resulting in weight loss.”
Yet those like Ozersky choose to ignore it in favor of government action to take choices and freedoms away from people. McDonalds is obviously – at least in progressive circles – an evil purveyor of bad “processed” food. And progressives believe it is their sworn duty to protect you from yourself and those corporations which prey on you.
Why? Because you’re brainwashed:
Again and again, efforts to promote fresh fruit and produce in low-income urban areas have failed for the simple reason that Americans have been brainwashed. We have been conditioned, starting in utero, to prefer high-fat, high-salt, high-sugar concoctions rather than their less exciting, more natural culinary cousins.
Really? I simply don’t recall that as being conditioned preference of mine. Instead, visits to places such as McDonalds were irregular and not particularly common. They were “treats” on occasion. But they were hardly conditioning me for such a diet.
Where such conditioning takes place, if anywhere, is in the home. It is there the bulk of all food is consumed and, pretty much, in the quantities desired. It is there where children (and adults) are either encouraged to be active or left to decide for themselves (play outside or do XBox) their activity level.
Banning toys in Happy Meals is simply an intrusion with no effect. It’s an exercise in power, nothing more. It has no beneficial effect and it is another in a long line of government imposed restrictions on freedom.
In his conclusion, Ozersky asks, “And why are eight people in San Francisco the only ones who seem willing to step up and do something unpopular to address such a serious issue?”
Because they’re as enamored with the power they wield as Ozersky seems to be and just as clueless. This isn’t about doing anything to address a "serious issue". This is an exercise in power cloaked in some feel good nonsense. It is about a group of people who feel they are entitled by their position to decide what is or isn’t acceptable for others and how those others should live their lives. This isn’t about doing something good, this is about stretching the envelope and seeing if they can get away with it.
If in fact they are allowed too, you can spend hours imagining what they’ll next decide you’re too stupid to realize or control and need their enlightened and progressive hand to stay you from your self-destructive ways.
Freedom is choice – and this bunch of progressives are all about limiting choice.
ASIDE: check out the comments to the Ozersky article. Heartening.