The Ongoing Presidential Policy of Inflation

In every major United States presidential election until the early 1990’s, monetary policy was a major hot button issue. And believe it or not it even captured the popular fancy. For example, The Wizard of Oz written by L. Frank Baum, a populist sympathizer, portrayed the struggles of the movement to add silver to the American currency in his book with metaphors and symbols.

But what most people do not know is that this movement was actually fomented by a group of people who simply owed a lot of money and decided to lobby for a policy of inflation.

As a result, the Federal Reserve Act of 1913 actually began a new era of monetary policy in the United States with one primary motivation in mind: controlling inflation. The politicians, conniving as usual, had figured out an easy way to finance their debt… the printing press.

So those who wanted to rein in the recklessness decided that by making the Federal Reserve independent from Congress, they could prevent skyrocketing inflation. But, as so often occur with “the best laid plans of mice and men,” what actually happened was an inflationary credit boom that created the “roaring twenties” and a bust which the world coined “the Great Depression.”

Now if you think this sounds familiar to the current financial crisis with the housing boom and bust, you are not alone. Nor are you observing an exception to the rule.

The Federal Reserve, since it’s founding, has fostered a constant uncontrollable policy of inflation. But since they claim that they are independent, they insist that the inflation is not due to political pressures.

This, of course, is completely false.

Economist Thomas DiLorenzo finds that the Federal Reserve board has been little more than the President’s handmaiden time and time again. For example, when President Jimmy Carter wanted a strong growth in the money supply to further social welfare programs, Americans saw a jump in inflation to 8.5 per cent. Later, Ronald Reagan, wanted to stop Carter’s damaging policies and stabilize the American economy. He called in newly appointed Fed Chair Paul Volcker. And lo and behold, the “independent” Fed reversed its policies.

So, if the Federal Reserve gives in to the pressures of the President, then why is it that mainstream scholars believe that the Fed is independent? Well, the confusion begins at the divide between instrumental versus goal independence.

It’s true that the Federal Reserve has the independence to set day-to-day monetary policy without any interference, which is called instrumental independence. But the President can heavily influence and direct the goals of monetary policy, thereby making the instrumental independence worthless.

The President does this by exercising his powers of appointing the members to the Board of Governors. This board is comprised of the most powerful players in the Federal Reserve. With only five of the seven positions filled, President Obama now holds an enormous amount of power because he could add two votes to an already small board, making the current members less powerful and insisting his own appointee further his political goals.

Already, with the massive new amounts of spending, there is no doubt that Obama has been leaning on the Fed Chairman Ben Bernanke to help finance all of the new bailouts and outright spending sprees to pay the debt.

The argument is that the United States needs to provide liquidity, or more cash, to the banks so that they can continue lending out money. What is going to inevitably occur, of course, is another boom period followed by a catastrophic bust.

All the while, the American people sit in the dark, while their money is being continually devalued by the Federal Reserve’s printing press, which will cause an artificial unsustainable boom and allow Obama to claim to be economic savior. Then, when the massive bubble eventually—inevitably—bursts, Obama will be either out of office, or (particularly if the mainstream media shameless idolatry continues) simply out of reach.

Perhaps, the last best hope for preventing all of this is the passage of H.R. 1207. The bill now gathering growing support in Congress to audit the Fed already has a staggering 227 supporters. If it reaches 300, Nancy Pelosi will certainly have to hold a vote.

And the beleaguered American people—victims of the “independent” Fed’s obstinacy for well nigh a full century—will finally have a prayer.

Justin Williams is a Contributing Editor of ALG News Bureau.


The Keynesian-Krugman Problem of War

As most of us has heard, there is an ongoing debate about Keynesian economics and whether it is in fact a good idea for the government to run deficits pursuing fiscal stimuli. In a previous article, I wrote what the economic reasoning is behind all of this. Upon further research, I have discovered an important untold part of the Keynesian viewpoint. That is which is illustrated best by Dr. Paul Krugman in his recent article discussing “What will stop the pain?”:

“What, then, will actually end the slump?

Well, the Great Depression did eventually come to an end, but that was thanks to an enormous war, something we’d rather not emulate.”

If you ask even some normal people, you will receive the answer that World War II caused us to get out of the Great Depression. This is inherently false. In fact Cullen and Fishback at NBER made this observation, ” [They] find that in the longer term counties receiving more war spending per capita during the war experienced extensive growth due to increases in population but not intensive growth, as the war spending had very small impacts on per capita measures of economic activity.”

How could this be? Most people when they think of productivity they think of labor and employment. If this was the case then World War II would be a great success. In fact, war times in general would bring a large boost to any economy, as they are a fiscal dream. Why is this not true? The fact is that the goods that they are producing are purely military and are being sent off to be destroyed. This is called the broken window fallacy, which Krugman violated after 9/11 when he said:

“…the attack opens the door to some sensible recession-fighting measures. For the last few weeks there has been a heated debate among liberals over whether to advocate the classic Keynesian response to economic slowdown, a temporary burst of public spending. There were plausible economic arguments in favor of such a move, but it was questionable whether Congress could agree on how to spend the money in time to be of any use — and there was also the certainty that conservatives would refuse to accept any such move unless it were tied to another round of irresponsible long-term tax cuts. Now it seems that we will indeed get a quick burst of public spending, however tragic the reasons.”

It is obvious here that Krugman along with other Keynesians secretly (or not so secretly) find war and destruction to be a good thing for our economy. This begs the question, why doesn’t Dr. Krugman’s plan involve increasing production of anything and blowing it up in the desert? This would be no more productive than World War II. It would just avoid all the pain and suffering.

To simplify things a bit, imagine an economy where they go to war and the factories switch from cars and tractors to tanks. While these tanks are going off to Europe to be destroyed, the prices of cars are going through the roof as supply has stopped. Sure, the inflationary wartime spending has caused people to go to work but they cannot buy anything as prices skyrocket. We have to remember the three ways that you can raise money for this. They are higher taxes, borrowing money, or inflation. Let’s not forget FDR’s ban on gold thus setting up inflation, which Truman inherited. This just acts as a tax and causes a very unstable currency. The other possible method was borrowing, which is just future tax increases. This will not create productive growth.

Many uneducated people on the right cling to this explanation because they feel it’s the only argument they have against the liberals saying it was the New Deal. Both of these groups should wake up and smell the free-market roses. It is ridiculous to think that a centrally planned economy (war-time economy) where massive amounts of people (human capital) along with materials (physical capital) is being destroy and very little non-military goods were being produced (not to mention there was rationing), somehow “stimulated” us out of a recession.


Published in: on February 23, 2009 at 2:32 pm  Leave a Comment  
Tags: , , , , , , ,

To be against Free Trade is like being against technology…

Originally posted on Red Virginia:
When we saw the Ohio Primary come around for the Democrats there was a large movement for renegotiating NAFTA. It was believed that U.S. jobs were being shipped over seas and it was making us worse off. This was an important political move because Ohio, like Michigan is known to be full of factory union workers.

The idea of Protectionism is as about as old as nations. The very first bill that came through Congress was a tariff on imported goods. Many Conservatives do not know where they stand on Free Trade vs. Protectionism. John McCain claims to be a free trader but also claims to not understand Economics. Pat Buchanan is a Protectionist because he doesn’t understand Economics. It was Adam Smith, the father of Economics, that first believed without a doubt that trade is good.

This is a challenge that we as conservatives face with the current recession and the Democrat’s and some Republican’s move to Protectionism. If we allow a President to close the country off to trade, like we did in 1930 with the Smoot-Hawley Tariff, we could find ourselves falling deeper into a recession. We are seeing an economic crisis that looks a lot like the Great Depression but what is saving us is the diversification of our industries due to global trade.

As Conservatives we should support free trade because it not only helps us but helps countries across the world. It allows African farmers to compete in a fair market, when food and growth is a matter of survival. It allows our farmers to train their children to be engineers, scientists, and other high skilled workers. Think of this as a household and as people become more rich they outsource other things so that they have more time to work on higher skilled things. We pay Chinese and Vietnamese to build and assemble the plastic CDs because we are the ones creating the new programs for computers and music that will be put on that CD. It is all about letting the area that can make the good more efficient do it efficiently without barriers. This also happens with technology just substitute Chinese and Vietnamese with GM, Honda, and Toyota and CDs with cars. Now the horse and buggy maker is going out of business. Do we need a tax on the car companies to save this job? I don’t think so.

Most Conservatives get bombarded with the question of “What about sweatshops and holding these poorer countries to the same labor standards we have?” The answer to this is you get paid for how efficient you are. Since most people in poor countries have very little education and experience they aren’t worth as much as a technician at Microsoft. If you were to require these businesses overseas to increase the wages at the factories, it would make the businesses hire less people. What happens to those people? They starve.

You don’t have to be pro-sweat shop. You are anti-starvation. People are working their because it brings them more income than if they were to work in something else (assuming other jobs exist. Eventually, they will do like what we did in the U.S. and lift themselves out of poverty. We had sweatshops and those workers where low skilled because they came from farms where tractors “put them out of a job.” As they raise their wages, it will then become more cost effective to send their kids to school and not into the workforce.

Until then to require them to have the same standards of labor that we have is unfair and will do nothing but allow some to starve. And remember to be against trade is like being against technology.


Book Review: The Forgotten Man

The Great Depression is something that has always been taught in history classes as the time Capitalism failed us and President Roosevelt’s New Deal saved us. This book “The Forgotten Man: A New History of the Great Depression” by Amity Shales tries to combat this.

This book doesn’t try to tell you that a certain economic explanation of why the 1929 crash happened when it did. It instead let’s history tell the tale. It doesn’t take long before you realize that the author has done great extensive research. One thing that is amazing about this book is that it doesn’t take a macro approach to telling the story. Instead this book takes a look at a few individuals while hinting and reminding you of the macro points. Each chapter is outlined with the average Dow Jones and the unemployment rate.

The only drawback to this book is that it is subtle and doesn’t quite fill that much emotion in me until the later part of the book. I would like to read it again because I feel like I did not pay enough attention to the detail. I think partly this has to do with the fact that the people you are dealing with are not people you ever hear about in your history classes. I found myself in deep thought about the Hoover and FDR details of the book when in fact at the beginning it hardly focuses on them. As expected Hoover fades fast and FDR become more strong.

The part of the book I most thoroughly enjoyed was the end with the Presidential campaign Wilkie vs. FDR. This stirred emotions of a grassroots organization that got someone elected to a party’s nomination. This somewhat reminds me of the Ron Paul Revolution and the founding fathers because in fact at first Wilkie did not want to be nominated.

I would highly recommend this book to most people. I feel as if many people would not find it interesting enough because it does a good job of being subtle. This is a must read for any history or economics buff for sure. Even though I admit that someone unlike me who knows nothing of the horrors of FDR might have a life altering moment reading this book.