The View from Abroad

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

The View from Abroad

My Cousin the Keynesian

I have this cousin, let’s call him Giovanni.  He is a great guy – industrious, hospitable, great family man.  He is my go to source when it comes to information and analysis about sports in general and baseball in particular.

It is an entirely different story when it comes to economics.  Oh, he is financially successful, but like most Americans he doesn’t understand how the market works.

Now, I am not talking about the “free” market, just the market, which exists everywhere and in every place.  The market is the arena of commerce and whether it is free or not depends on government allowances in the various geographic areas of the world.

So, technology has made it possible for Giovanni and me to rekindle our familial relationship that was forged many years ago through the trading of Matchbox cars.  Well, actually, he is so much older than I am that he made and brought them to me when his family visited ours.  I told you he was a great guy.

He is also good at chasing me through cyberspace by email, facebook, and on open threads of sites where I post my blog to argue economics with me.

Last Friday, he emailed me an article titled “A Breakthrough Speech on Monetary Policy”.  The author, Anatole Kaletsky, is an award-winning journalist.  The “Breakthrough Speech” in question was delivered by Adair Turner, Chairman of Britain’s Financial Services Authority and one of the most influential financial policymakers on the planet.

Clearly both men are dyed-in-the-wool Keynesians because Turner’s speech and Kaletsky’s article both recommended that politicians and central bankers print up lots of money and dole it out to consumers in order to stimulate the economy to end the economic stagnation that the West currently finds itself in.  Specifically, Kaletsky believes the Fed should take the $85 billion it is currently spending to buy government bonds from banks and instead distribute it to every man, woman, and child in America.  He believes, “There can be little doubt that this deluge of free money would stimulate consumer spending and revive employment,” thus ending the West’s economic doldrums.  Further, Kaletsky believes this proposal would not cause price inflation because, “links between monetary financing and hyperinflation are theoretically dubious and historically unjustified”.

So, after digesting this economically nonsensical article, I owed Giovanni a response.

Firstly, I indicated to him that monetary inflation does lead to price inflation unless perhaps productivity keeps up with increased money supply.  Just in the 20^th Century, one could look to the Weimar Republic and many Latin American countries from time to time.   Zimbabwe is the most recent example.  In fact, all of history is littered with societies that attempted to inflate their way out of depression and instead brought about hyperinflation.

Secondly, I told him that personally I would gain greatly from Kaletsky’s proposal, but that it would harm the economy in the long-run and further destroy an already disappearing middle class.  Given many Americans spendthrift mentality, could you imagine what would happen if they received “free” money each month from the government?  First off, Uncle Sam would never be able to rescind the policy.  It would be like trying to cut Social Security benefits.

Beyond that, there is no doubt, that unlike the banks, leveraged to the hilt American consumers would spend all of their new found riches on a plethora of consumer goods.  The economy would experience another phony boom based on monetary inflation.  Employment would improve for a while.  The new money would bid up the price of goods and services thereby causing domestic price inflation.

Personally, my real estate investments would increase in value allowing me to sell them to some economically naïve person with free government money in his pockets.  The value of my gold holdings would increase exponentially.  I would be sitting pretty, protected from the impending economic bust that was made inevitable by the phony inflationary boom.

As prices rise, so would interest rates.  All the investments begun at lower interest rates would become more expensive.  Many would not be sustainable at the higher cost of money.  Sound familiar?  It should because this is what happen in the 1990s with the dot.com bubble and what also happened in the 2000s with the housing bubble.

As defaults on loans increase, unemployment picks up and the market is thrust into another downturn.   I am sure at that point Giovanni and other Keynesians will blame the free market.  But, of course, the only thing that was free in all this was the money the Fed gave to consumers.

Predictably, his response to my response was that I am living in a fantasy world.  Unfortunately, he is wrong.  The devastation that millions of hard-working Americans would experience if the above plan is enacted wouldn’t be a fantasy. It would be a tragedy.

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina

The View from Abroad

This Time it’s Bernanke’s Housing Bubble

“That men do not learn very much from the lessons of history is the most important of all the lessons of history.”  These are the simple, yet exceedingly relevant for our times, words of the famous English writer Aldous Huxley.

If only Federal Reserve chairman Ben Bernanke would acquaint himself with this quote.

For three years, between 2001 and 2004, in an effort to boost the economy after the 911 terrorist attacks, his predecessor at the Fed, Alan Greenspan, kept the Federal Funds Interest Rate under two percent.  As a result, cheap money and low introductory teaser rates fueled the largest housing boom in American history.  Then, like all fake boom phases, when interest rates rose it came to an end.  The necessary correction phase started and all the mal-investment of the boom phase was no longer sustainable under higher rates.  Foreclosures increased.  As housing prices fell back to earth, underwater mortgages and abandoned homes were everywhere.  Many still find themselves unemployed and destitute.

Now, instead of letting the market go through a much needed correction after the crisis began, new Federal Reserve chairman Ben Bernanke pursued a policy bent on “stabilizing” the value of assets.  Since 2008, Bernanke’s Fed has kept the Federal Funds Interest Rate close to zero percent and it has increased its balance sheet by just under three trillion dollars by purchasing Treasuries and mortgage-backed securities from member banks.

Some economists believe Chairman Bernanke’s policies have created a housing recovery.  These economists believe this because they haven’t learned from history, especially recent history.

But, according to David Stockman, the former head of the Office of Management and Budget under Reagan, what Bernanke’s policies have created is simply another housing bubble.  He sees a similar combination of artificially low interest rates and speculation producing the current housing boom just like the boom during Greenspan’s tenure.

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.

And there are local pockets of even greater price increases in real estate going on.  There is a farmland bubble taking place in the Midwest and Mountain states with non-irrigated cropland prices increasing on average by about 18 percent.  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.

It is ridiculous to believe that what we are seeing is anything other than another housing bubble.  Unemployment and underemployment are still very high.  Many employed middle income buyers are still reeling from the last bust.  The huge price increases we are seeing is the work of speculators fueled by Bernanke’s easy money policies.

The bust will come when rates rise, the mal-investments of the boom become unsustainable at the higher rates, and the speculators liquidate their positions leaving small investors holding the bag.  It will be 2008 all over again for many, except this time it will be Ben Bernanke’s Housing Bubble.

Article first published as This Time it’s Bernanke’s Housing Bubble on Blogcritics.

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina

The View from Abroad

Disingenuous Reporting on the Gun Issue

If there ever was a situation tailor made for Second Amendment rights it is the ongoing manhunt drama in California following the killing of three people and the injuring of another by former Los Angeles police officer Christopher Dorner.  Dorner (33) has promised in notes he left behind to perpetrate “warfare” on police officers and their families.  Desperate and heavily armed, authorities are not certain what he is capable of.  One report says residents of rural southern California towns are barricading themselves in their homes, some armed to the teeth, in the event Dorner attempts to break into their homes.

Now, you would think that the mainstream media in an effort to provide “fair and balanced” reporting would seize the opportunity and report at least this one time that this is what James Madison had in mind when he wrote the Second Amendment.  That is that people have a natural right to self-defense when a madman is on the loose.  But, this lack of reporting, as well as other examples of outright chicanery in reporting, is indicative of the MSM’s agenda when it comes to guns.

For instance, there was this headline in the Huffington Post on January 27, 2013, “Ronnie Chambers Death:  Mother Loses Fourth Child to Gun Violence…”  What followed was a video of the grieving mother (Shirley Chambers) and an article explaining how her fourth child was gunned down “while sitting in a car”.  The author of the piece gave no other details about the circumstances surrounding any of the shootings of her four children.  In fact, readers were left with the impression that each one was an innocent bystander.  What was inferred was that something must be done to stop wanton gun violence before more innocent children are killed – i.e. gun control.

The purpose of the piece was clearly to horrify readers’ sensibilities toward the mother’s loss, get them caught up emotionally, and bring them around to the belief that if only guns could be banned the violence on our streets would disappear.

But, upon further investigation, this observer found that Ms. Chamber’s children were anything but innocent bystanders.  Two of her children died as a result of arguments with individuals they knew.  One seemed to be a targeted killing by, perhaps, a rival gang.   And the last of her children to be gunned down, had been arrested in the past a remarkable 29 times and had four felony convictions!  This refutes the Huff Post’s inference that the victims were innocent and merely at the wrong place at the wrong time.

Also from the Huffington Post was the blog by Josh Horwitz, the Executive Director of the Coalition to Stop Gun Violence, entitled “LaPierre Reveals True Purpose Behind Assault Weapons”.  In the piece, Horwitz takes exception to NRA CEO Wayne LaPierre’s Senate testimony that the purpose of the Second Amendment was to ultimately provide Americans with the means to protect themselves from their own government.  Horwitz went so far as to label LaPierre’s position “insurrectionist”.  He accused LaPierre and others who hold the same belief that they were “ready to wage war on our government”.

Once again, emotional scare tactics were employed by a Huff Post columnist to drive home the point that guns should be banned.  The insinuation is that LaPierre and others who hold the view that Americans need guns to protect themselves from their own government are on the far fringes of society.  In fact, they are the loony tunes to be feared.

What Horwitz intentionally ignores are those that came before us, who were revered, and who held the same belief that an armed citizenry is the greatest defense against tyranny.  Thomas Jefferson said, “What country can preserve its liberties if its rulers are not warned from time to time that their people preserve the spirit of resistance? Let them take arms.”  In the Federalist Papers #46, James Madison proclaimed, “Besides the advantage of being armed, which the Americans possess over the people of almost every other nation…(where) the governments are afraid to trust the people with arms.”

Lastly, there is this quote from 20^th Century liberal Democrat and former Vice President of the United States, Hubert H. Humphrey:  “Certainly, one of the chief guarantees of freedom under any government, no matter how popular and respected, is the right of the citizen to keep and bear arms. … The right of the citizen to bear arms is just one guarantee against arbitrary government, one more safeguard against the tyranny which now appears remote in America but which historically has proven to be always possible.”

By ignoring history, Horwitz seeks to taint his readers’ understanding of the gun issue.  But he is not alone in this endeavor.  The government run schools and most of Hollywood employ the same tactics.  Their goal is to convince the public that we need more gun control.

But, for those of us that understand the true meaning of the Second Amendment, we can take solace knowing that the disingenuousness of the gun grabbers is not working because Americans have responded by setting back to back monthly records for arms sales.

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina

The View from Abroad

Highways and Roads in a Free society

As a libertarian I believe that you have a right to live your life as you see fit as long as you don’t violate somebody else’s right to do the same.  Libertarianism represents the only non-coercion political/economic philosophy in the universe.  All other political/economic philosophies, democracy, republicanism, monarchy, dictatorship, socialism, and communism employ the brute force (violence) of government to enforce compliance of one group’s wishes on another group.
Many Americans believe that libertarianism is an unworkable framework because without government to provide and enforce laws society would be in chaos.  Additionally, opponents of greater freedom question how the services currently provided by government would be handled in a free market environment.

It is understandable that many Americans hold these doubts about libertarianism.  As a society, we are socialized through the government dependent schools, universities, and mass media to accept that we need big government to protect us from the excesses of capitalism and freedom in general.  If that doesn’t get the job done, those members of society that have for a long time held statist views, and are therefore closed to thinking for themselves, ridicule those of us for believing such “nonsense” in an effort to get us to conform.  After all, normal human behavior requires that we want to be liked or at the very least not thought to be a weirdo.

 

One of the biggest questions raised against a totally free society is, who would build roads and regulate their use?  Where would we be without government provided speed limits, traffic signals, and road construction?

Well, in the early 1800s, America actually had a huge network of private roads and highways.  According to Thomas J. DiLorenzo, hundreds of private road building companies invested over $11 million in turnpikes in New York, $6.5 million in New England, and over $4.5 million in Pennsylvania.  By 1840, this resulted in the private production and operation of about 3,750 miles of road in New England, 4000 miles in New York, and 2400 miles in Pennsylvania.  In fact, in real dollar terms, this production exceeded the interstate highway program financed and run by the federal government after World War II.

And we still have private roads in America today.  Besides examples like the Reedy Creek Improvement District and Dulles Greenway, the National Bridge Inventory, which is a database compiled by the Federal Highway Administration lists approximately 2200 privately owned highway bridges in forty-one states!  Many of these thruways charge tolls which are fairer because they are user fees.  All are proof that government is not necessarily needed to build and maintain roadways in America.

Okay, well, what about local roads in residential and business districts?  In a libertarian society all land would be owned privately.  Thus, roads would no longer be public, but private property with certain deed restrictions for easements and right of way privileges.  The land would be owned by business proprietors and homeowners.  They would have an incentive to maintain it as a right of way because otherwise the value of their property would decrease or in the case of a business, sales would plummet.  Freeing property owners from paying property taxes eliminates the middleman (inefficient bureaucracy), and frees up more money to go directly into road repair.  If you don’t think property owners would maintain their right of ways, think of the endless number of them who pave their own driveways and then seal them each year.

In my own case, my house is located in a rural part of North Carolina on the side of a mountain.  The properties of my neighbors and me extend into our street. Consequently, I own a portion of street which is allocated as a right of way.  Even though I pay property tax to the county, it does not maintain this right of way.  Instead, the property owners on our street must maintain it.  Every year, I spend about $300 as my contribution to maintaining the road.  That’s a small price to pay if I didn’t have to pay the larger county tax amount.  Now, it is true that some folks on the street do not contribute anything to road maintenance.  But I am no worse off with that than I am with paying taxes for public schools in the county that I will never use.

As to what would happen if we didn’t have government provided speed limits, stop signs, and traffic signals?  There is a misconception that a libertarian society would be devoid of rules.  Of course, you could still have speed limits, stop signs, and traffic signals on your road, otherwise for safety reasons motorists might not traverse it.  Again, if you were a homeowner this would decrease your property value and also provide an unsafe circumstance for your own property including your house and vehicles.  Unsafe business districts would be littered with the shattered dreams of bankrupt enterprises.

In the last century how many Americans have attended local city council meetings to petition their local municipality to install stop signs or traffic signals at busy intersections?  How many homeowners with children or pets have requested that speed limits in their neighborhoods be reduced?  When there is a need people react.  It is naive to believe that people who have a stake in their communities and a financial interest thereof would not fill the void left by government relinquishing its responsibility over roads.

Lastly, we have built the roads and instituted rules for the same.  How would those rules be enforced?  I suppose local police agencies could still have jurisdiction.  But what is more likely is for homeowner and business associations to hire private security companies to handle patrolling and enforcement of the property rights of land owners.  After all, if someone litters on my property it is a violation of my property rights not a crime against society.  Thus, violators could be apprehended either physically or through identifying perpetrators to a local magistrate for the administration of justice.

At the end of the day, no libertarian believes their ideas for society would be perfect.  But we do believe they would be possible and better than what we have now.  Private ownership of all material things is always better.  It has been proven that the freer a society is the more prosperous it is.  One need only to look at the history of America.  We have more government restrictions on our freedom now than ever before and our decline is imminent.  What is needed is an intellectual awakening in America.  This awakening must open our minds and seek to question the tired mantras of statist institutions like schools and the mass media.

Article first published as Highways and Roads in a Free Society on Blogcritics.

The View from Abroad

Anyone who proclaims the American economy is recovering from the financial crisis of 2008 is either lying or not paying attention.  The good people at the Economic Collapse Blog have aggregated 37 statistics that strongly indicate the economy continues to worsen under the financial leadership of President Obama and Federal Reserve chairman Ben Bernanke.  In particular, the figures indicate that it is the lower economic classes which have been most severely devastated by four years of reckless federal spending, bailouts for the well-connected, and artificially low interest rates.

For instance, since 2008 15 million more Americans rely on food stamps.  According to the Census Bureau, 146 million of us, nearly half of the U.S. population, are poor or low-income.  The Civilian Employment/Population ratio, which is the broadest measure of employment in the country, is the lowest it has been since the early 1980s.  Median household income has retreated to its 1995 level.  Lastly, the economy is not producing jobs for U.S. college graduates as 53 percent of them under the age of 25 are either unemployed or underemployed.  Given that many graduated with huge college debt, what could the future hold for these folks?

But, don’t despair.  Some in our society are doing quite well because of the federal largess thrown their way.  Most of them just happen to be located around New York City and the District of Columbia.  You see, the U.S. stock and bond markets are at, or near all-time highs.  Real estate in Manhattan and Washington, D.C. has bounced back nicely and are both at all-time highs.  Even the Contemporary Art market in the Big Apple has seen sales skyrocket in spite of higher prices.

But, this is predictable given that New York and the nation’s capital is where the Wall Street/Washington Axis of Financial Evil is headquartered.  It is where that axis prints the new money and injects it into the economy through its well-connected surrogates – i.e the “too big to fails”.

And it is all done in the name of stabilizing prices so the rest of us don’t suffer so much.  How nice it is that the powers that be are looking out for us working folk!

Don’t be fooled for a moment.

The financial establishment in this country, which includes the Federal Reserve and its “too big to fail” cronies, knew exactly what it was doing.  Through monetizing federal debt, a series of quantitative easing schemes and holding interest rates below market prices the banking establishment has succeeded at stabilizing the cost of living above market levels.  Put another way, if left to its own devices with no monetary easing from the Fed, the market would have rid itself of all the mal-investment built up from the previous Fed induced false boom period (housing boom).

Consequently, housing prices would be lower, commodity prices would be lower; in fact general price inflation would be lower.  The cost of hiring new workers would be lower causing an employment recovery.  Savers would have gotten a decent return on their money.  In short, working class Americans would have seen an enhancement in their standard of living.

On the flip side, many rich folks would have been devastated.  Their stock and bond portfolios would have been decimated.  Many would have lost their jobs through bankruptcy and restructuring.  The value of their homes wouldn’t have been restored on the backs of working men and women.

This is what should have happened.  After all, they caused the crisis along with their accomplices in government.  Didn’t they deserve the consequences of their actions?  That is capitalism.  That is the American way.

Article first published as Gap Between Rich and Poor Rooted in Government Policy on Blogcritics.

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina

The View from Abroad

A Different Perspective on Guns

As someone who has lived in four different countries and traveled to several others over the last eleven years, I can tell you that no people who I have encountered continually demand that their government institutions solve every problem imaginable like Americans do.  From the dangers of electric garage doors to the eradication of bed bugs, there seems to be nothing that Washington isn’t charged with fixing.

Then, there are those horrific incidents of violence perpetrated by a mentally unstable person that sends many Americans into a tizzy and raises their collective voices for Washington to do something urgently.  Cries of, “this can never happen again”, call out for new laws and measures to prevent future tragedies.

And so, we have the latest episode of hysterics over the tragedy that was the Sandy Hook Elementary School killings.

To be sure, whenever any young children lose their lives it is a tragedy.  Whether they are in the classrooms of America’s schools, in cars on America’s streets, or collateral damage from an American drone strike over Pakistan, the loss of the young and innocent hits each of us where we live.

But, in the case of the reaction to the latest tragedy, the last thing Washington should do is pass any new gun control legislation including legislation banning so-called “assault rifles”

A little perspective is needed to understand why.  Less than 400 people a year are killed with rifles of all kinds.  According to FBI numbers from 2005 to 2011, hammers and clubs killed more people than rifles in America.  Logically then, shouldn’t hammers and clubs be banned before rifles?  At the very least, shouldn’t a license be required to own one?  Furthermore, why would anyone but construction contractors need to own sledge hammers? Are they not the hammer equivalent to an assault rifle?  Could you imagine going to Lowes to purchase a hammer and having to undergo a background check and a seven day waiting period?  Yet, this is the conversation our leaders are having about rifles, which again, kill fewer people than hammers and clubs each year.

But there is more.  America has not experienced a direct danger from a foreign adversary since the War of 1812 (One could argue that Pearl Harbor was about the Japanese only wanting to cripple our Pacific fleet to allow Her free rein over the islands of the Pacific Ocean).  Yet we have sent millions of young people into harm’s way to “defend” our freedom and have lost hundreds of thousands doing so.  Were the lives of those young people less worthy than the youth lost at Sandy Hook? – Of course not.  But, our leaders tell us that freedom has costs and the hundreds of thousands of young men and women that gave their lives “defending” our freedom is a large part of that cost.

So, I submit to you that those twenty children who lost their lives at Sandy Hook Elementary are also a part of the cost of defending freedom.  At the end of the day, individuals have a natural right to self-defense.  They have a right to defend themselves against criminals, foreign invaders, and their own government if it becomes tyrannical enough.  Why should law-abiding citizens be asked to unilaterally disarm because a deranged individual used a gun to murder children? It is nonsensical.

Besides, we have tried prohibition before, first with booze in the 1920s and currently with drugs.  It did not prevent people from getting a drink or a joint.  Why would we think it would be different with guns?

Lastly, children die in car accidents, drown in bathtubs, and are poisoned by ingesting prescription drugs all the time.  Does this warrant the banning of these items?  Of course not, because they are vitally important to modern life just like the means to protect oneself is.

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina