John Hussman: Fiscal Policy Is the Key 16 comments
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Excerpt from the Hussman Funds' Weekly Market Comment (6/9/08):
To offer some idea of how little even central bankers actually know about monetary policy, consider the following chart from the “Transmission Mechanism” page of the European Central Bank's website. The chart is intended to offer a “stylised illustration” of how the ECB's monetary policy actions might have an effect on inflation. Note that while “Official Interest Rates” are depicted in dark blue, indicating a high degree of certainty since they can be set directly, the shading immediately becomes lighter and lighter, indicating vague links and theoretical relationships. Somehow the “Price Developments” box at the bottom is given a hazy medium-blue shading, despite the fact that all roads to it are uncertain. But this is largely a matter of pride – it would be a bit odd for the ECB to depict even price developments in a very light shade of blue, because it would call the ECB's own effectiveness into question. Suffice it to say, however, that even central bankers have very little certainty about how their actions are predictably linked to anything.
My own view is that all of this focus on monetary policy misses the boat. Monetary policy is effectively subordinate to fiscal policy. No amount of monetary discipline can offset an undisciplined fiscal policy. The government budget constraint (Spending = Taxes + Treasury issuance to public + Increase in monetary base) is not a theory but an accounting identity. Moreover, since base money and Treasury debt are largely portfolio substitutes (and are priced to reflect identical marginal utilities), it turns out that government spending is a much stronger determinant of persistent inflation trends than money itself.
As you can see from the chart above, current inflation pressures are not surprising given the lack of fiscal discipline over the past several years (the persistent weakness in the U.S. dollar is no surprise either, and is likely to worsen). To reiterate my comments from September 10, 2007:
Inflation occurs when fiscal policy creates more government liabilities (either money or debt) than people are willing to hold at existing prices. If investors are scared about credit risks, they generally seek government liabilities as a safe haven, so you typically get deflationary pressure during credit crises. In contrast, if the government produces a lot of liabilities in an unproductive economy (as the Germans did in the 1920's, paying striking workers in the Ruhr even though they weren't producing anything), you get high inflation. It would not have mattered had Germany paid workers with bonds instead of money – bond prices would have declined, raising interest rates, lowering the willingness of people to hold non-interest-bearing currency, and causing a hyperinflation nonetheless. Inflation is first a fiscal phenomenon, tempered by economic activity and credit conditions, and affected only at the margin by “monetary policy.” The government budget constraint (spending = taxes + debt + money creation) ensures that monetary policy cannot be independent of fiscal policy. All monetary policy does is to vary the mix of debt and money within that equation.
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This article has 16 comments:
Fed Reserve --> Roaring 20's --> Great Depression --> New Deal/Social spending --> deficit spending
Plus fractional reserve banking is inflationary in itself since your local bankers can inflate the money supply about 10 or more times deposits. Don't blame the victims of central banking.
The enemy is not us. It is and has been since 1694, the central bankers.
IF this is true, then it probably matters WHAT the government spending is for.
For example, is the government spending on long-term capital infrastructure improvements that will create a framework for 21st Century "Green" jobs in the coming years?
Or is the government spending on a endless quagmire with no metrics in place to measure success or failure?
In other words, is the government throwing trillions of dollars down a rathole rather than improving capital infrastructure?
Inflation can be caused by:
1) 'Tax Cut and Borrow' economic policies causes "prices to rise to pay for the growing interest on the growing debt".
2) Trashing the dollar (keeping interest rates artificially low for too long) "causes inflation, as governments will have to deal with differences in the import/export level".
3) Unneccessary $3 Trillion Wars as "governments must both recoup the money spent and repay the funds borrowed from the central bank. War often affects everything from international trading to labor costs to product demand, so in the end it always produces a rise in prices".
www.wisegeek.com/what-...
Also, consider the correlation of fiscal and monetary policymakers actions when both are attempting to use discretionary policy, and their inability to implement policy changes effectively due to transmission lags.
Lastly, you're fighting a losing battle against proving that central banks create an environment prone to inflation. Basic game theory is all you need and a graph of aggregate demand and supply to see that the fed, or any central bank, will have to fight a losing battle against price expectations and real economic growth.
Democrat control of Congress=more spending
a liberal (insert party here) President= higher taxes/or tax cut expirations
low interest rates/loose money
So that is the polar opposite of what generates low inflation, higher consumer discretionary income, and stable pricing.
Investments then should be gold, real estate, and the swiss franc? :-)
copper-coated lead might not be a bad investment either
reead cognates comments for the correct formula at:
www.economist.com/opin...
also work your butt off for Dr. Ron Paul so he might win in 2012.
Besides, when the government decides to spend on "green", we get ethanol subsidies, or some other boondoggle. The market must decide what green techs work best, not government. They get it wrong every time.
The politicians love this system because they have the perfect excuse and it works. They work very few hours, get big paycheck, huge pensions and live like rockstars.
The two party system should be outlawed. Each man stands on his own platform.
Unfortunatly we Americans treat our politicians just like our sports teams. We are loyal for life. It's ignorance
"We have met the enemy and he is us" That quote is from a cartoon character named Pogo. He has more intelligence than our congress and probably the majority of the American people.
Every incumbent should be removed immediatly before it's to late.
I have a bumper sticker, it says:
When in doubt, vote them out.
Outlawing the parties would run counter to the constitution in too many ways. Changing the ballot format would accomplish the desired result without curtailing anyone's freedom.
Debt incurred to finance transfer payments (interest, pensions, etc.) is of dubious quality.. Any enterprise, private or public, is in dire straits if it has borrowed in order to make such payments.
In the context of the above analysis, what are the conclusions to be drawn with respect to the management of the burden of the national debt?
Prorating the federal deficits over the entire spectrum of federal expenditures, it can be said that virtually all of the current deficits are attributable to defense spending, military and civil service pensions, interest on the debt, and welfare and unemployment benefits. Social security is not included in the above list since only a very small proportion of social security benefits are financed from nonsocial security taxes. From an economic standpoint, only interest is “untouchable”.
the monies represented by the deficits are spent on projects which increase productivity and reduce waste, the deficits are beneficial no matter how financed. The initial inflationary effects of bank financing are quickly overcome by the larger output and lower unit costs. Debt incurred which reduces unit costs of production and promotes the health and welfare of the population obviously is “good” debt.
Debt incurred to finance transfer payments (interest, pensions, etc.) is of dubious quality.. Any enterprise, private or public, is in dire straits if it has borrowed in order to make such payments.
In the context of the above analysis, what are the conclusions to be drawn with respect to the management of the burden of the national debt?
Prorating the federal deficits over the entire spectrum of federal expenditures, it can be said that virtually all of the current deficits are attributable to defense spending, military and civil service pensions, interest on the debt, and welfare and unemployment benefits. Social security is not included in the above list since only a very small proportion of social security benefits are financed from nonsocial security taxes. From an economic standpoint, only interest is “untouchable”.
Combine these factors with the constant roll-over of some of the long-term debt and it becomes obvious that the burden of higher interest rates will be compounded. The burden becomes a function of the major portion of the debt, not just the current deficits. The burden, in fact, becomes exponential. In other words, if the trend is not stopped, the debt inevitably has to be repudiated.
With the federal debt now approaching 9.2 trillion and the projected interest expense for FY2006 = $406 billion, and current and prospective deficits approximating $250 billion, it should be obvious –if the debt is not to be repudiated and all dollar obligations consequently made worthless – the deficits must be markedly reduced.
Yes, this is the best rational for fractional reserve banking. But it can be summarized as this: "Yes, we are STEALING but we will use the money to invest in things that will benefit the victims." The folly of this is being illustrated by the massive amount of mal-investments being liquidated now and to be liquidated.
Further, another "investment" fractional reserve banking finances is war. Add to that the business cycle and it is long since overdue that central banking be sent back to hell.