Friday, March 16, 2012

What does the money-printing binge of the Obama administration portend for the future?

The monetary base had changed slowly and steadily before the current crisis, and the Fed’s actions that caused its explosion during the past three years have no precedents in nature or magnitude. Indeed, if a monetary economist had been given (by divine miracle) a preview of the chart above in, say, 2007, he would probably have concluded that the Fed’s managers were destined to go mad in the near future. I daresay no economist expected such an action (or set of actions). Now that it has occurred, however, it places the Fed in an unprecedented—and extremely dangerous—situation.

So far the potential hyperinflation that this explosion of the monetary base might normally have been expected to produce has not occurred because the banks have simply absorbed almost all of it in the form of increases in their reserve balances at the Fed. As the chart below shows, commercial banks historically held their excess (that is, not legally required) reserves close to zero, because such reserves had no yield and hence entailed an opportunity cost equal to the yield the banks could realize by using those funds to make loans and investments. With the onset of the crisis, however, the demand for bank loans has fallen greatly and the banks’ fears about the safety of loans and their worries about their balance sheets have grown, with the result that as the Fed has pumped money into the financial system by purchasing securities, the sellers have deposited the proceeds of those sales in their banks accounts and the banks have parked the money at the Fed, which sweetened the deal slightly, beginning in late 2008, by paying a small rate of interest (which soon settled at 0.25 percent). Thus, more than $1.5 trillion now sits in excess reserves at the Fed.

Because the banks have acted so bizarrely during the past three years, the money stock has not grown very much. As the chart below shows, M2 increased substantially during the macroeconomic contraction, then leveled off in late 2009 and early 2010 before resuming a more rapid rate of increase in late 2010. Between September 29, 2008, and February 20, 2012, M2 increased by 22.6 percent. This increase in just 41 months is not negligible, but it is only a tiny fraction of the increase that would have occurred if the banks had acted in a normal way during this interval.

The increase in M2 that has occurred since the onset of the recession has had little effect on the general price level because the public’s demand for money to hold has increased substantially. Equivalently, we may say that the velocity of monetary circulation—the ratio of GDP to money stock—has fallen substantially. As the chart below shows, M2 velocity has fallen by about 16 percent since the recession began, and it now stands at the lowest value it has attained since the 1950s. We live in unusual times, indeed. An increase in the public’s demand for money to hold also occurred in previous postwar recessions, but not to the extent that it has occurred recently.

In view of the foregoing evidence, what should we conclude about the likely fiscal and monetary legacies of the current crisis? First, the federal government is unlikely to reduce the budget deficit very much as long as it can continue to sell its bonds at anything near their current high prices (and consequently low yields). Even if foreigners grow skittish about the dollar’s exchange value or regain their courage enough to make more investments in their home countries rather than parking their money in Treasuries, the government will continue to run extraordinarily large budget deficits—and therefore to sell extraordinarily large amounts of bonds—as long as it can sell its debt to the Fed; that is, as long as it can effectively monetize the debt.

The Fed shows complete willingness to continue bankrolling the Treasury. The Fed’s gigantic accumulation of Treasuries—more than $1 trillion in the past three years—speaks much louder than anything Ben Bernanke might say about an “exit strategy.” Indeed, the Fed seems to have painted itself into a corner. If the public begins to wind down its current extraordinary demand for money to hold and pushes the velocity of monetary circulation back toward its pre-recession levels, the Fed will face accelerating general price inflation. To slow this inflation, it will need to sap money from the financial system. But how can it simultaneously withdraw money (to slow inflation) and inject money (via purchase of new federal debt)? Moreover, as the commercial banks begin to feel more comfortable about their balance sheets, they may dive into their mountain of excess reserves at the Fed and increase the volume of their loans and investments, which will add additional fuel to the fire breaking out because of increasing monetary velocity. How the Fed will resolve this dilemma I do not know. At present, the Fed’s managers talk as if the problem either does not exist or will be easy to deal with when the need arises, but such talk amounts to whistling past the cemetery.

The ratchet in the government’s outlays probably will not be eliminated in the near or intermediate term. The president, Congress, and the leadership of both major parties are firmly wedded to the government’s spending as much as it can get away with. Political leaders talk about reining the government’s profligacy, but their actions belie their words. Every cow in the budget turns out to be sacred when someone tries to wield an ax.

The prospect in the aftermath of the crisis—which, to be sure, is not yet over and may take a nasty second-dip before it ultimately passes—is for significantly bigger government in fiscal terms (and, as I shall argue elsewhere shortly, in regulatory, statutory, and ideological terms as well). Federal taxes may return to their postwar average of 18 percent of GDP, but with the federal government’s outlays stuck at 23 or 24 percent of GDP, we will have to endure deficits of 5-6 percent of GDP for a long time.

We will also have to endure a huge, ever growing amount of federal debt and, sooner or later, a grave threat that the Fed, in monetizing additions to the debt, will be unable to keep the lid on accelerating general price inflation. Therefore, probably the best we can hope for is stagnation: slow or no real economic growth, probably accompanied by chronically large numbers of unemployed and underemployed persons sustained in part or entirely at taxpayer expense. The worst outcome would be hyperinflation, which would be utterly ruinous. The most likely outcome in my view is for a long period of stagflation: little or no real economic growth, accompanied by troublesome (and probably quite variable) rates of general price inflation—something like the 1970s, though with less real growth. How this scenario fits into the currently more globalized economy is anyone’s guess. Much depends on how irresponsible foreign leaders will be in their policy actions—and we may count on most of them to be as horrible as possible. In these circumstances, Americans will have to put up not only with unsatisfactory performance of the economy, but also with great uncertainty about what the next quarter or the next year may bring. All in all, our most likely prospect seems fairly ugly, but with luck we may escape complete ruin.



Compliant Americans

Last month, at a Raeford, N.C., elementary school, a teacher confiscated the lunch of a 5-year-old girl because it didn't meet U.S. Department of Agriculture guidelines and therefore was deemed nonnutritious. She replaced it with school cafeteria chicken nuggets. The girl's home-prepared lunch was nutritious; it consisted of a turkey and cheese sandwich, potato chips, a banana and apple juice. But whether her lunch was nutritious or not is not the issue. The issue is governmental usurpation of parental authority.

In a number of states, pregnant teenage girls may be given abortions without the notification or the permission of parents. The issue is neither abortion nor whether a pregnant teenager should have an abortion. The issue is this: What gives the government the authority to usurp parental authority?

Part of the problem is that people who act as instruments of government do not pay a personal price for usurping parental authority. The reason is Americans, unlike Americans of yesteryear, have become timid and, as such, come to accept all manner of intrusive governmental acts. Can you imagine what a rugged American, such as one portrayed by John Wayne, would have done to a government tyrant who confiscated his daughter's lunch or facilitated her abortion without his permission?

I believe that the anti-tobacco movement partially accounts for today's compliant American. Tobacco zealots started out with "reasonable" demands, such as the surgeon general's warning on cigarette packs. Then they demanded nonsmoking sections on airplanes. Emboldened by that success, they demanded no smoking at all on airplanes and then airports and then restaurants and then workplaces -- all in the name of health. Seeing the compliant nature of smokers, they've moved to ban smoking on beaches, in parks and on sidewalks in some cities. Now they're calling for higher health insurance premiums for smokers. Had the tobacco zealots demanded their full agenda when they started out, they would not have achieved anything.

Using the anti-tobacco crusade as their template and finding Americans so compliant, zealots and would-be tyrants are extending their agenda. Why not control what we eat? San Francisco, Chicago and several other cities have outlawed or are seeking to outlaw serving foie gras in restaurants. Here's my challenge to these people: Don't be a coward and use the state to accomplish your agenda. If you see Williams eating foie gras, just come up and take it off his plate.

Other food tyrants want to stop us from eating Dove and Haagen-Dazs ice cream, Mrs. Fields cookies and McDonald's Chicken McNuggets. San Francisco has already banned McDonald's from selling Happy Meals with toys in them as sales pitches to children. Seeing San Franciscan compliance may have been the source of inspiration for the North Carolina schoolteacher who took the 5-year-old girl's lunch.

Americans have become compliant in nation-crippling ways. Over the past several years, gasoline prices have been shooting through the roof, but not to worry. President Barack Obama's current secretary of energy, Steven Chu, said in December 2008, "Somehow we have to figure out how to boost the price of gasoline to the levels in Europe." That translates to $8 or $9 a gallon. During a recent hearing on the Department of Energy's budget, Rep. Alan Nunnelee, R-Miss., asked Secretary Chu whether it is the DOE's "overall goal" to lower gasoline prices. "No," Chu responded. "The overall goal is to decrease our dependency on oil, to build and strengthen our economy."

Because Americans are so compliant and willing to suffer silently at the gasoline pump, the Obama administration is willing to press on as handmaidens of environmental extremists who want to halt the exploration of our country's vast oil supplies, which are estimated to be triple those of Saudi Arabia. The Obama administration would rather pour more taxpayer dollars into risky alternative crony energy suppliers and electric cars. The OPEC nations have to be laughing at us, and I wouldn't be surprised if it were revealed that they are making under-the-table payments to environmental wackos.



Just another deceitful Leftist

CNN's Soledad O'Brien isn't used to criticism. In the world of media elites, she's a beloved figure and an award-winning news anchor. But last week, she revealed her true, decidedly non-neutral colors. And she's not happy about the hoi polloi questioning her hallowed journalistic objectivity.
On Thursday, O'Brien interviewed Joel Pollak, editor-in-chief of the late Andrew Breitbart's online empire. Breitbart's released a 1991 video of Barack Obama (then a 30-year-old law student) at a Harvard rally embracing radical racialist Derrick Bell and his push for more aggressive race-based hiring at Harvard. Bell is a proponent of critical race theory (CRT), which posits that America remains a hopelessly racist country dominated by Jews and white supremacists.

O'Brien lost her cool when Pollak shed light on Bell's fringe legal theories. Acting more like an Obama campaign surrogate than a disinterested host, she angrily jumped on Pollak's mention of CRT. "That is a complete misreading of critical race theory," she shrieked. "That's an actual theory. You could Google it and some would give you a good definition. So that's not correct!"

When viewers took to Twitter to pepper O'Brien with follow-up questions about critical race theory, the CNN star had a twit fit. She invited a liberal professor, Emory University's Dorothy Brown, on her television show to back her up and then lashed out: "See? That was our critical race theory 101. Stop tweeting me. We have moved on, people."

Not so fast, sister.

Turns out that O'Brien, a Harvard grad, has a rather emotional connection to Bell. As documented at my new Twitter curation/aggregation site, O'Brien tweeted that it was a "rough day" for her when Bell passed away last fall. She wrote that she had "just started re-reading" one of his books and mourned again: "RIP Prof. Bell." O'Brien also shared tributes to Bell from fellow Harvard prof and friend of Obama Charles Ogletree. That's the same Professor Ogletree who bragged that he "hid" the Obama/Bell video during the 2008 campaign.

O'Brien failed to disclose her pro-Bell bias to viewers before her segments.

O'Brien also failed to disclose that the liberal prof who denied on her show that critical race theory had aaaaaanything to do with bashing America as a white supremacy-ruled government actually wrote the exact opposite. In one of her own books, Brown asserted that the purpose of CRT was to "highlight the ways in which the law is not neutral and objective, but designed to support White supremacy and the subordination of people of color." Oops.

O'Brien is entitled to her opinions, of course. The problem is that she masks her political activism under the banner of corporate media "diversity." Of multicultural heritage, O'Brien has won countless accolades for her "Black in America" and "Latino in America" documentaries for CNN. The medical school at historically black Morehouse College created the "Soledad O'Brien Freedom's Voice Award" to honor "outstanding catalysts of social change." The first recipient of the activist award? Soledad O'Brien, of course.

O'Brien is also a card-carrying member of two racial/ethnic-centered journalism lobbying groups: the National Association of Black Journalists and the National Association of Hispanic Journalists. These organizations are inherently politicized entities that enforce a skin color-deep ideological solidarity and push a social justice agenda of advocacy journalism. I know because I've fought their collective herd mentality for the past 20 years.

Liberal minority journalists have themselves acknowledged their slavish fealty to Obama and his progressive agenda. During the 2008 campaign, the NABJ, NAHJ and Asian American Journalists Association held a "journalists of color" confab where then-candidate Obama was welcomed with Justin Bieber-style mania. One journalist squealed, "He touched me!" after Obama's address, which was interrupted multiple times with standing ovations, cheers and whistles by the press.

Organizers were so concerned about public displays of Obamedia affection that they issued several warnings to their news professional members that the speech would be broadcast live on (Soledad O'Brien's) CNN. "Professional decorum" was encouraged. One wire story even fretted: "Can minority journalists resist applauding Obama?"

Nope, liberal minority journalists simply can't resist carrying water for Obama. That's because their journalistic unity demands political unanimity. If you don't accept the left-leaning agenda of "social change" journalism, you're enabling racism. If you don't support the pursuit of racial hiring goals as a primary journalistic and academic goal, you're selling out.

Now you know the reason for O'Brien's thin-skinned reaction to Obama's critics. When you vet the president, you vet the media. And they don't like the narrative table-turning one bit.



Just another media liar

by Michael Ledeen

Some weeks ago, Chris Matthews mentioned me in passing as one of those who wants to attack Iran militarily. So I wrote to his producer, pointed out that I had long opposed military attacks on Iran, had written three books and scads of articles and blogs saying that, and would therefore be grateful if Mr Matthews would take a few seconds to correct the record on air. After all, that’s where he uttered the false statement to begin with.

He replied with a snail mail, which simply said “this is what I based it on.” The envelope contained a bit of transcript from an old show of his (ten years ago) in which we talked about Iraq, and I had said that Iran was the really serious problem and we should address it. Nothing about attacking Iran. Nothing about bombing Iran.

So I sent him another email via his producer, pointing out that I had been prescient on his show, thanking him for taking the time to send an actual letter, and pointing out that the transcript did not address the question I had raised, namely that he had falsely said I wanted to attack Iran. I again asked that he correct the record, and to help him clear his mind, I sent him a copy of Accomplice to Evil, which laid out my opposition to military action very clearly.

No reply. So a bit over a week ago I emailed the producer saying “time’s up,” and that if he wasn’t going to do anything, I would correct the record myself. The producer emailed back, asking me if I had received the snail mail. I said I had, but it didn’t have anything to do with the subject, and for extras was ten years old.

That’s about it. I don’t suppose it’s surprising. I just want to state the facts: I am opposed to military attacks against Iran, I think we should be supporting the opposition there, and I think I’ve shown that Chris Matthews isn’t much interested in getting it right. He got it wrong, and stayed with it.

Par for the course, n’est-ce pas? Another reason not to watch television. Stick with PJ Media. We try harder to get it right, and if we get it wrong, we try to correct it pronto.




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