Wednesday, June 25, 2014

Blame the Fed

With President Obama stomping all over the world, destroying wealth like Godzilla, and making deadly foreign enemies and domestic political enemies of Democrats, it’s easy to blame him for our economic problems. And there’s a lot of truth in that. Personal Liberty Digest reports, “‘From 2009 to 2013, regulators have published $494 billion in final rules,’ Sam Batkins, director of regulatory policy at the American Action Forum, wrote in the report. ‘This figure dwarfs the gross domestic product (GDP) from countries like Sweden, Peru, and Ireland. With more than $87.6 billion in proposed rule costs this year, burdens will continue to increase in 2014.’”
Obama has also increased taxes and spending, which takes resources away from the productive private sector and squanders them in the parasitic political economy. Economist Robert Higgs explains, “Private investment is the most important driver of economic progress. Entrepreneurs need new structures, equipment, and software to produce new products, to produce existing products at lower cost, and to make use of new technology that requires embodiment in machinery, plant layouts, and other aspects of the existing capital stock.”
Higgs tells why Obama compounds the lack of investment problem with regime uncertainty. “Regime uncertainty pertains to more than the government's laws, regulations, and administrative decisions. For one thing, as the saying goes, ‘personnel is policy.’ Two administrations may administer or enforce identical statutes and regulations quite differently,” he writes. “A business-hostile administration such as Franklin D. Roosevelt's or Barack Obama's will provoke more apprehension among investors than a business-friendlier administration such as Dwight D. Eisenhower's or Ronald Reagan's, even if the underlying ‘rules of the game’ are identical on paper.”
But while Obama visibly stunts economic growth, the Federal Reserve (Fed) is quietly doing even greater damage. Since the 2008 financial crisis, the Fed has printed untold trillions of dollars in an attempt to recreate the bubble that popped in 2008, as if that is a good idea. Most central banks followed suit, and they’ve succeeded to an extent. US and world stock markets are near record highs. Yields on bonds remain low. The number of millionaire households is soaring. Demand and therefore price for luxury items, especially New York City condos, has skyrocketed. Even the International Monetary Fund has warned of a global housing bubble. Because the Fed has printed an unprecedented amount of money, this bubble is unprecedentedly large.
When the Fed prints money, it doesn’t reach everybody at the same time. It first goes to the big New York banks. The bankers spend it first, which drives up prices for luxury items, especially condos in New York. The money meanders through the economy, inflating the bank accounts of rich people first, and causing prices to rise. Poor people see little of the money, but they have to pay the higher prices. Printing money also steals people’s savings. The result is a fantastic transfer of wealth from poor people to rich people.
Our rulers tell us this creates jobs, but they lie. The poor jobs report in May exposed the lie that harsh weather kept the economy down during the winter. Because of all this printing of money, our economy remains stagnant. Official unemployment remains over 6 percent, but that’s only because seven million people have dropped out of the workforce since Obama took office. And the jobs that have been created are low paying jobs compared to the jobs destroyed.
Economist Frank Shostak explains in order to begin growing again, the economy must liquidate unproductive businesses, but the Fed won’t let that happen. “Most commentators are of the view that the Fed’s massive monetary pumping of 2008 has prevented a major economic disaster. We suggest that the massive pumping has bought time for non-productive bubble activities, thereby weakening the economy as a whole,” he writes. “Contrary to popular thinking, an economic cleansing is a must to ‘fix’ the mess caused by the Fed’s loose policies. To prevent future economic pain, what is required is the closure of all the loopholes for the creation of money out of ‘thin air.’”
Banker Patrick Barron describes central bank policy, “[Central banks] are following Keynesian dogma that increasing aggregate demand will spur an increase in employment and production. So far all that these central banks have managed to do is inflate their own balance sheets and saddle their governments with debt.”
Barron concludes, “New fiat money cannot conjure goods out of thin air, the way central banks conjure money out of thin air… In fact rather than stimulate the economy to greater output, bank credit expansion causes capital destruction and a lower standard of living in the future than would have been the case otherwise. Governments and central bankers should concentrate on restoring economic freedom and sound money respectively.”
Like all bubbles, this bubble will pop. It’s inevitable, and it’s global. Because it’s the biggest bubble in US history, it will produce the biggest crash in US history. The only unknowns are when the crash will strike in earnest and whether it will be inflationary or deflationary.

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