That’s the subject Paul Krugman addresses in his NYT Op/Ed piece today. In fact, he implies that even talking up the possibility of inflation comes solely from bad political motives, mostly from people who don’t grasp The Fierce Moral Urgency of Change™.
Why shouldn’t we worry about inflation, according to Prof. Krugman?
Now, it’s true that the Fed has taken unprecedented actions lately. More specifically, it has been buying lots of debt both from the government and from the private sector, and paying for these purchases by crediting banks with extra reserves. And in ordinary times, this would be highly inflationary: banks, flush with reserves, would increase loans, which would drive up demand, which would push up prices.
But these aren’t ordinary times. Banks aren’t lending out their extra reserves. They’re just sitting on them — in effect, they’re sending the money right back to the Fed. So the Fed isn’t really printing money after all.
But, let’s grant that the current monetary moves aren’t immediately inflationary. What happens when the economy recovers and the banks do begin to spnd those extra reserves? Krugman attempts some sleight of hand, in an effort to make it appear that he addresses that concern.
Still, don’t such actions have to be inflationary sooner or later? No. The Bank of Japan, faced with economic difficulties not too different from those we face today, purchased debt on a huge scale between 1997 and 2003. What happened to consumer prices? They fell.
Yes, they did. But since Japan hasn’t had a real economic recovery even today, and is entering its third “Lost Decade”, that really isn’t a compelling argument. Since 1999, Japan’s rate of GDP growth has averaged 1.31%, which is less than half of the average GDP growth rate of 3% a mature economy should experience. Indeed, over the last decade, Japan has experienced exactly 5 quarters where GDP growth was at 3% or more. In that same period, there have been 9 quarters when GDP contracted. The highest annual rate of growth was in 2000, when the annual GDP growth was 2.85%.
So, let’s not pretend we know how the inflationary pressures fall out in Japan once a recovery hits…until there actually is a recovery.
ON the other hand, since our policymakers seem hell-bent on following the same path the Japanese did in the 1990s, the return of inflation when the economy recovers might turn out to be worry we can avoid until sometime in the relatively distant future.
You really can’t blame her for trying to put – excuse the expression since it seems to have become cliche – lipstick on a pig, but Nancy Peolsi’s attempt to change China’s mind concerning curbing its CO2 seems to have been an abject failure.
Pelosi called them “hopeful”. That’s diplo-speak for “absolutely nothing substantial changed from the previously held position”. The fact that they even saw her would be deemed as “hopeful” but certainly not substantive.
Rep. James Sensenbrenner (R-WI) sums up the trip:
“It’s business as usual for China,” said Mr. Sensenbrenner, the ranking Republican on the House Select Committee for Energy Independence and Global Warming. “The message that I received was that China was going to do it their way regardless of what the rest of the world negotiates in Copenhagen.”
“Their way” consists of giving lip service to curbs while demanding the “rich nations” pay the freight for curbing such emissions in China (and the rest of the “emerging nations”). China refuses to jeopardize its economic growth for something it obviously believes is much less of a threat than others do. And why should they when it appears the upcoming conference plans on exempting them anyway?
We, on the other hand, seem bound and determined to try to do what would be tantamount to the task of cleaning up the ocean up by putting economy wrecking filters only on our shore line. Little or no effect. China and India share similar philosophies on this question and are emerging as the number one and two emitters on the planet. I think they’re right. The threat, if there is one, is minimal at best. Wrecking one’s economy to hopefully make a less that one degree Celsius change at some distant point in the future (maybe) seems to me to be the height of folly.
But that’s certainly where our politicians seem to be headed. And, to compound the problem, they’ve adopted a “damn the torpedoes, full speed ahead” philosophy, ignoring the 10 year cooling trend torpedo as well as the “China and India” aren’t going to play along” torpedo.
No one wants dirty air or dirty water – no one. But this hysterical reaction to what seems to be a natural earth cycle and the human hubris which claims we both effect and can change that cycle is going to put us all in the poor house unless some sanity (like in China) prevails.
Compare and contrast this rehabilitation effort of Timothy Geitner:
After his hellish opening weeks, Treasury Secretary Timothy Geithner started inviting White House economic officials across the street to his conference room for hours-long working dinners that have helped get — and keep — the whole team on the same page.
Geithner, a former president of the New York Federal Reserve who once looked like he was floundering in one of the administration’s most scrutinized jobs, is emerging in a new position of strength with the media and the markets, just as he launches President Barack Obama’s high-stakes effort to re-regulate the nation’s financial markets.
The secretary’s advisers acknowledge that his newfound political standing is tied, in part, to the state of the economy, which is now showing early signs of improvement. But Treasury officials also have updated their playbook after his Feb. 10 speech on financial recovery, which was panned by the press and blamed for a 381-point slide in the stock market.
They decided to “let Tim be Tim” and accepted the fact that his strength wasn’t giving a speech in front of a bunch of flags. Rather, they let reporters see him in off-camera, pen-and-pad settings, where he fielded questions with the confidence that his staff saw behind the scenes. He aced an interview with PBS’s Charlie Rose, thriving in a relaxed setting where he could explain issues at length.
… with this bit of economic reality:
China has warned a top member of the US Federal Reserve that it is increasingly disturbed by the Fed’s direct purchase of US Treasury bonds.
Richard Fisher, president of the Dallas Federal Reserve Bank, said: “Senior officials of the Chinese government grilled me about whether or not we are going to monetise the actions of our legislature.”
“I must have been asked about that a hundred times in China. I was asked at every single meeting about our purchases of Treasuries. That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the United States,” he told the Wall Street Journal.
The Oxford-educated Mr Fisher, an outspoken free-marketer and believer in the Schumpeterian process of “creative destruction”, has been running a fervent campaign to alert Americans to the “very big hole” in unfunded pension and health-care liabilities built up by a careless political class over the years.
“We at the Dallas Fed believe the total is over $99 trillion,” he said in February.
“This situation is of your own creation. When you berate your representatives or senators or presidents for the mess we are in, you are really berating yourself. You elect them,” he said.
His warning comes amid growing fears that America could lose its AAA sovereign rating.
I guess since the media tried to talk down the economy for the previous eight years, they may as well try and talk it up now that their boy is in the White House. The shame of it is that as the economy worsens, a lot of people are going to be shocked.
I watched this story percolate throughout the day, wondering if there was anything of substance to it. Even now I’m not entirely sure how much is pure speculation and how much can be decisively proven. If any of it turns out to be true, however, then the repercussions could prove politically fatal. Doug Ross has the scoop:
A tipster alerted me to an interesting assertion. A cursory review by that person showed that many of the Chrysler dealers on the closing list were heavy Republican donors.
To quickly review the situation, I took all dealer owners whose names appeared more than once in the list. And, of those who contributed to political campaigns, every single one had donated almost exclusively to GOP candidates. While this isn’t an exhaustive review, it does have some ominous implications if it can be verified.
However, I also found additional research online at Scribd (author unknown), which also appears to point to a highly partisan decision-making process.
I have thus far found only a single Obama donor (and a minor one at that: $200 from Jeffrey Hunter of Waco, Texas) on the closing list.
Chrysler claimed that its formula for determining whether a dealership should close or not included “sales volume, customer service scores, local market share and average household income in the immediate area.”
In fact, there may have been other criteria involved: politics may have played a part. If this data can be validated, it would appear to be further proof that the Obama administration is willing to step over any line to advance its agenda.
Doug notes some anecdotal evidence to back up his theory, and reading through the various personal accounts from dealerships who claim to be successful, and yet who are being shut down, lends some credibility to the idea. As does the fact that the closing list is reportedly populated almost exclusively with Republican donors and/or those who gave money to Obama’s Democratic rivals. But the real test is in a comparison of the lists of dealerships staying open and those that are closing against a campaign donor database (which I haven’t done, but feel free to scrutinize them for yourself).
Nevertheless, the following bit of research from Red State strikes an ominous chord:
Eric Dondero recognizes some of the dealers’ names on the hit list:
“Vern Buchanan is a Republican Congressman from the Tampa Bay area. Robert Archer is the son of former Republican Congressman Bill Archer. John Culberson, a libertarian-leaning Conservative, is now the Congressman for that West Houston District. He was heavily supported in his election efforts by the Archers Family.”
“Additionally, James Crowley, owner of a Chrysler Dealership in Escondido, California is on the list to be closed. Crowley is a big backer of libertarian-leaning Republican Cong. John Campbell of Orange County.”
The list is heavy with influential Republicans and libertarians. Another name on the list is Ray Huffines, who owns a large dealerhsip in the Metro-Dallas/Ft. Worth area. The Huffines family have been major contributors to Rep. Ron Paul (R-TX) over the years.
It’s hard to know what to make of all this, but at first blush it certainly looks like the decisions to close dealerships may have been influenced by the political affiliations of the dealers. Under regular circumstances that would elicit a big shrug, but when Chrysler’s decisions are basically being made for them, well, that’s a whole ‘nother kettle of fish (via Reliapundit):
A lawyer for Chrysler dealers facing closure as part of the automaker’s bankruptcy reorganization said on Tuesday he believes Chrysler executives do not support a plan to eliminate a quarter of its retail outlets.
Lawyer Leonard Bellavia, of Bellavia Gentile & Associates, who represents some of the terminated dealers, said he deposed Chrysler President Jim Press on Tuesday and came away with the impression that Press did not support the plan.
“It became clear to us that Chrysler does not see the wisdom of terminating 25 percent of its dealers,” Bellavia said. “It really wasn’t Chrysler’s decision. They are under enormous pressure from the President’s automotive task force.”
Given the other sorts of thuggery that have been alleged in these Chrysler proceedings, this should come as no shock. But the fact that these closings will have to be approved by the creditors in the bankruptcy case lends a certain bit of intrigue to this case and raises a lot questions in my mind.
Assuming that the closings are motivated by political payback from Obama, how will that plan affect the stakeholders in the new company? If there really are profitable dealerships being shutdown just because they gave money to the wrong candidates, then it stands to reason that the remaining dealers will be something less than the cream of the crop, and therefore the new Chrysler will have a less than optimal distribution chain for its products. It’s not entirely clear why shutting down dealerships helps Chrysler anyway, since they are essentially the real customers of the carmaker, but it seems to me that those who plan to profit from the new venture would have something to say about the plan in the bankruptcy case. Presumably, they will want to protect their investment by challenging any plan for closings that does not maximize their return. If and when they do, it could get very interesting for Obama (again, assuming that any of this is true).
It should be noted that until some further confirmation surfaces, this story should be treated with a healthy dose of skepticism. Indeed, if it weren’t for the rather dictatorial way the Obama administration has dealt with the entire automaker bailout fiasco, these allegations of political payback would ring pretty hollow. Yet, considering the past bullying, the story definitely merits further consideration, so keep your eyes and ears open for more.
The more I listen to Obama, the more of an ideologue I realize he is and how willing he is to use any opportunity to “justify” his agenda, even those that don’t fit. For instance:
In a sobering holiday interview with C-SPAN, President Obama boldly told Americans: “We are out of money.”
C-SPAN host Steve Scully broke from a meek Washington press corps with probing questions for the new president.
SCULLY: You know the numbers, $1.7 trillion debt, a national deficit of $11 trillion. At what point do we run out of money?
OBAMA: Well, we are out of money now. We are operating in deep deficits, not caused by any decisions we’ve made on health care so far. This is a consequence of the crisis that we’ve seen and in fact our failure to make some good decisions on health care over the last several decades.
This is about as twisted a bit of reasoning as I’ve seen in a while. We’re “out of money” because of “health care decisions?”
What total nonsense. This is a politician using a crisis unrelated to “health care decisions” to push his ideology (i.e. that it is government that is the answer in all areas of life). As Glenn Reynolds says:
“I’ve bankrupted the nation, so now your only hope is to pass my healthcare plan.” That goes beyond chutzpah to the edge of pathological dishonesty. Except, I guess, that it’s not pathological if you get away with it. And so far, he has.
Very true – but at some point, as his favorite pastor likes to say, the chickens have got to come home to roost.
From the same interview:
SCULLY: States like California in desperate financial situation, will you be forced to bail out the states?
OBAMA: No. I think that what you’re seeing in states is that anytime you got a severe recession like this, as I said before, their demands on services are higher. So, they are sending more money out. At the same time, they’re bringing less tax revenue in. And that’s a painful adjustment, what we’re going end up seeing is lot of states making very difficult choices there..
Painful choices? But for the federal government – unprecedented spending spree. The cognitive dissonance there is mind boggling.
Amidst all the “happy talk” about signs that the economy is “turning around” we see more troubling signs that it is, in fact, being badly mishandled:
The US Treasury is facing an ordeal by fire this week as it tries to sell $100bn (£62bn) of bonds to a deeply sceptical market amid growing fears of a sovereign bond crisis in the Anglo-Saxon world.
The interest yield on 10-year US Treasuries – the benchmark price of long-term credit for the global system – jumped 33 basis points last week to 3.45pc week on contagion effects after Standard & Poor’s issued a warning on Britain’s “AAA” credit rating.
The yield has risen over 90 basis points since March when the US Federal Reserve first announced its controversial plan to buy Treasury bonds directly, a move designed to force down the borrowing costs and help stabilise the housing market.
The yield-spike may be nearing the point where it threatens to short-circuit economic recovery. While lower spreads on mortgage rates have kept a lid on home loan costs so far, mortgage rates have nevertheless crept back up to 5pc.
The housing market hasn’t yet bottomed out and Britain isn’t the only country whose credit rating Standard & Poors is reviewing. If we can’t sell debt instruments there are only a couple avenues left to us aren’t there? And, as noted, both would certainly “short-circuit” any economic recovery.
I hesitate to call it bankruptcy when it is really a sham of a bankruptcy. In fact, it is the same sham that Chrysler has undergone:
The government previously indicated that it planned to take at least 50 percent of the restructured company, and likely would take the right to name members to its board of directors, as it has at Chrysler, where the government will control four of nine seats.
The United Auto Workers retiree health fund is set to own as much as 39 percent of the restructured GM, in exchange for giving up its claim to at least $10 billion that the company owes it. Yesterday, the union announced that it reached an agreement with GM that will reduce the company’s labor costs.
Still unknown is what part the Canadian government might play in the ongoing GM restructuring.
GM operates several plants north of the border. The Canadians agreed to invest about $3.5 billion in the Chrysler restructuring and control one of the nine board seats.
Sound familiar? So government will now have 5 of 9 board seats, the union has a huge share of the company and bondholders?
The chief obstacle to an out-of-court settlement for GM remains: There has been no agreement between the company and the investors who hold $27 billion worth of GM bonds.
Under orders from the Obama administration, GM has offered to give the bondholders a 10 percent equity stake in the restructured company in exchange for giving up their bonds.
That’s the offer made and, as you might imagine, bondholders are resisting this. That, of course, gives the administration the same excuse it used to take Chrysler to bankruptcy under its apparently newly written rules which gave government the lion’s share of ownership.
As you might imagine, not everyone is happy. And since this “bankruptcy” is now being politically managed, more politicians are getting into the act.
For instance, on the subject of cutting Chrysler dealerships:
There are also challenges outside court. Chrysler has moved to close 789 dealerships on June 9. But Sen. Kay Bailey Hutchison (R-Tex.) has introduced legislation that would withhold federal funding if the automaker does not give dealers an extra 60 days to close down operations and sell remaining inventory. Her amendment has won the backing of a number of other senators.
Should such legislation pass, you can expect something similar with GM.
And some Democrats aren’t particularly happy either:
Judiciary Committee chairman Rep. John Conyers Jr. (D-Mich.) said he hopes to meet with White House officials today to discuss changing Chrysler’s bankruptcy plan and GM’s future. Conyers did not outline what he wanted, but a nine-person panel he assembled for a hearing yesterday offered a hint. Liberal consumer advocate Ralph Nader, a conservative Heritage Foundation analyst and minority auto dealers all criticized the automakers’ restructuring.
Conyers and other committee members attacked the administration for abusing bankruptcy laws, unfairly eliminating dealerships and jeopardizing consumer safety.
Yup, looks like the political bureaucracy is kicking into high-gear and you can just imagine how well this is going to work out, can’t you? That and the fact that contracts will never be viewed in the same light again have to make you fear for our economic future.
Apparently the Fed has decided that their doubling of the monetary base in the last 7 months has done so fantastically, that they’re ready to do more of it.
Some Federal Reserve officials are open to raising the amounts of mortgage and Treasury securities purchase programs beyond the $1.75 trillion that they have already committed to buying, according to minutes from the Fed’s April meeting.
Please pay no attention to the inflation lurking behind the curtain. Our benevolent overlords have everything under control. So, why more monetary loosening.
Officials, meanwhile, projected an even deeper recession than they expected three months earlier and a more sluggish recovery over the next two years as labor markets remain under pressure.
Huh. So much for that “turned the corner’ crap from last month. But that’s OK. because, you see, if you’re in the middle of a bursted bubble cused by overly loose monetary policy in the first place, then the way to get back on track is an even looser monetary policy. That’ll fix you right up, you see.
At least, that’s what the Harvard econo-boys tell us. And they are, of course, the Best and Brightest.
Meanwhile, the DoL reports that weekly claims for unemployment for last week were revised upwards to 643,000, but this week’s numbers were only 628,500. So, that’s a nice little downward tick. Except that we’ve got all those upcoming claims from shutting down car dealerships for Chrysler and GM. Let’s call that 2,000 dealerships with an average of–I’m just spit-balling, here–25 persons per dealership left unemployed. Let’s call it 50,000 new claims ahead.
Is it too big to fail? Megan McArdle believes the possibility certainly exists (I mean was Arnie really in DC yesterday just to see the sights). Says McArdle:
If the government does bail out the muni bond market, how should it go about things? The initial assumption is that they’ll only guarantee existing debt. Otherwise, it would be like handing the keys to the treasury to every mayor, county board, and state legislature, and telling them to go to town.
But once the treasury has bailed out a single state, there will be a strongly implied guarantee on all such debt. So you don’t give them the keys to the vaults, but you do leave a window open, point out where the money’s kept, and casually mention that you’ve given the armed guards the week off.
Of course the right answer is not to bail out either. Failure is a great teacher. And then there’s the moral hazzard angle.
But in this day and age, that’s approach is almost unthinkable apparently. Government, as we’re being told, is the answer to everything.
My fear, based on what the federal government has done to this point, is they’ll “hand the keys to the treasury” on both the muni bond market and the states (with bailouts). They have no business doing anything in either place, but we’ve already seen that the arbitrary assessment that some entity is too big to fail apparently takes priority over economic law.
Once a single state is bailed out, there is nothing to stop other states from making a similar claim on the treasury.
Should such a thing happen in either case (or both), Federalism, which is on its last legs anyway, will be officially dead.
Here’s an interesting little chart I found at Innocent Bystanders. The light blue line is the Obama administration’s prediction of how terrible unemployment would be if we didn’t pass the stimulus plan. The dark blue line is the prediction of how much better things would be we did pass it. The dark red triangles show the actual unemployment statistics.
So, how’s that recovery plan working out for us? Not so good, apparently.
I merely provide the chart for informational purposes. I know it’s useless to make any criticisms of the actual performance of the plan, just as it was useless to predict that this is pretty much what would happen.
Besides, saying, “I told you so”, is so churlish and mean.