Intellectual Corruption, Progressive Politics and Central Banks: A Rant

Preamble:  My apologies in advance for the length of this post.  It’s longer than I would have wished.  But when you write something that flies in the face of the consensus opinion, and particularly when you write something that disputes settled, received wisdom … what “everyone knows” … it simply requires more detail and more argument.  What seems like it  should be wrong is instinctively resisted; defeating that instinctive rejection requires a more carefully developed train of thought.  Which is what I’ve attempted here.  CTE

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We need to clear up a few concepts around the topic of central banks and money printing.  The level of intellectual corruption caused by political ideology and decades of propaganda is becoming worrisome.  The distortion caused by this corruption has turned reality on its head, making it impossible to hold a rational conversation on the subject of QE and LTRO … or on the latest super-cool acronym, “OMT”, for the ECB’s newly announced “Outright Monetary Transactions” program … and other subversion of the money supply.  There is so much smoke we can’t locate the fire to put it out.  So let’s agree on this one basic idea for starters.

A constant, policy based 2% inflation rate established and acted upon by the Federal Reserve is immensely damaging to the economy, leads to bubbles on a persistent and regular basis.  2% inflation is an ideological goal, but an unsound one fiscally and monetarily.

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As a mental experiment:  If I told you prices, on average, across a broad field of things you want to buy would fall by, say, 1% over the next four years … some things would rise in price on scarcity, of course, and some fall as they become commoditized, but on average price levels would fall by 1% between 2013 and 2017 … you’d wait a day or a week or a month or a year to buy most of what you need.  You’d obtain what you need as you needed it.  That would be a reasonable mindset for you to adopt.

To the rational mind this is called “a small but steady increase in the purchasing power of money”.  The longer you waited, the more your money would buy.  You would feel safer, less iffy economically than you do now.  You would not buy things you didn’t need ”just in case” the price jumped up tomorrow.  IOW, your consumption over the next four years would more or less equal your needs over that term.  Which again to a rational mind sounds like a solid equilibrium; balance between real supply and real demand, stripped of the vagaries and paranoias of speculation and defensive purchasing.  There would be no need to defend yourself against your own money!To central bankers and other governmental socialists, planners and regulators intent on “managing” an economy, however, this gradual appreciation of the currency is propagandized as “the horrors of monetary deflation”.  Keynesian economists, especially those who populate academia and the central banks of the world, abetted by international agencies like the IMF and World Bank, are repelled by visions of a steady increase in purchasing power of any currency.  They are repelled by such “horrors” for two primary reasons.

First, it’s politically and ideologically offensive to them.  When money gradually gains purchasing power those who already have money are advantaged; the wealth they hold becomes more valuable.  Thrift is rewarded … which is reprehensible to progressives, in and of itself.  Inflation is a tax on established wealth.  And progressives love the idea of taxing the rich.  Ergo, a steady and persistent inflation of, say, 2% is a good thing intrinsically.

OTOH, those who live paycheck to paycheck also gain.  The fixed number of dollars in their paychecks are worth more, week after week and month after month.  There’s no opposition to this, per se.  But for progressives there is an unacceptable offset.

Raises in an economy where prices drop 1% over four years will not be driven by seniority nor tenure, and therefore raises can’t rationally be negotiated by unions.  Raises in a currency-stable environment are driven by individual skill value and by productivity.  The emphasis is not on union affiliation but on personal capability; raises come when better skills arise through mastery.

Specifically, wages are tied solely to competitive productivity levels.  This is morally indefensible.  Across any given industry wages for individual workers and the skills they posses will always reflect those competitive forces.  IOW, raises aren’t automatic, routine and COLA-driven, which causes labor unions a great deal of pain and union-sponsored politicians the loss of major sources of campaign funding.  This is spun by progressives as the “devaluation of labor”.

In our labor union beholden progressive governments this is a sacrilege; a moral atrocity.  It’s just intolerable, this systemic benefit to the “rich” and productivity-rationalized labor pricing.  So “the horrors of deflation” are to be fought and defeated at all costs; propagandized and vilified at every turn.  Thus does a seemingly small 2% inflation rate become a moral good as well as an economic necessity.  First for loudly proclaimed reasons of “social equity”.  Second for quietly embraced reasons of government control.

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Think of an economy that does not exist:  when a currency is increasing in value it tends to draw private investment into an economy rapidly.  That first wave of private investment will draw a second, which will draw a third, which will draw even more.  Even when all currencies are being inflated, capital will opt for the most stable of the lot.  In third world countries this incoming cash can take the form of problematic ”hot money”; as quick to leave as it was quick to arrive.  But in larger more established economies this inflow of necessity finds stronger, more stable, more deeply planted investments.  The private markets seek out and reward large currencies that at least retain their purchasing power, just as those private markets avoid currencies that don’t.

This graphic is incredibly telling.  Take your time with it.  It’s no aberration that the nations on this graphic below that lie farthest ‘north’ and ‘east’ are those with the most stable currencies and highest degree of competitiveness in their economies.  Norway.  Switzerland.  Sweden.  Singapore.  Australia.  Strongest currencies; strongest competitors; strongest economies.  You purple-faced, raging progressives might also note with some chagrin: these are hardly fascistic societies.

The rancid old progressive trope that a currency that isn’t persistently inflating is a depression waiting to happen is utter, total and complete nonsense.

I put forth as a prime economic truism that strong, durable economies are built on strong currencies, with the corollary that no strong, durable economy has ever been sustained on a weak currency.

Think about that a moment, please.  Think about what this graphic is saying, because it flies in the face of everything you read in the financial media and everything that comes from the Keynesian “experts”.  It flies in the face of everything the Federal Reserve and the European Central Bank are doing right this minute.

I posit:  weak, unreliable currency => weak economy devoid of either domestic or international investment.  Strong, reliable currency => strong economy attractive to all investment domestic and foreign.  If this is so obviously the case, why is it that virtually every central bank in the world is in a race to devalue their currencies; in a competition to keep their currency “cheap”; in a race to the bottom?

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My answer to that question is straightforward.  A flood of private investment coming into a strong currency undercuts government “investments”; makes government money less important to the health of the economy and the population; devalues dependency creation as a political tool; makes government-dispensed corporate welfare less effective as a lever of command and control; undercuts unionization by making laborers individually more valuable.  Regulator’s rules and bureaucrat’s diktats are neutered.  Or worse from their point of view, ignored.

A rush of private investment makes commercial development more driven by Adam Smith’s “animal spirits” than by Marxian industrial policy.  To a progressive politician and regulator private investment is therefore seen not as a wealth-creating bonanza but as an intolerable assault on their authority.

In short, a sound currency in the 21st Century is seen as a threat to government preeminence, market control, regulatory dominance and political power.

Yet so completely have we all assumed the language of socialism in discussion of the actions of the central banks that even to suggest … as I am here … that a strong currency exhibiting a gradually increasing purchasing power is a good thing and the proper target of central bank policy gets one derided as an crank; an obvious naif and a laughable fool.

A stated policy target of 0% to minus 1% inflation over extended time, over a business cycle for instance … which is to say expansion of the money supply slightly slower in scale than the expansion of “real” GDP on average … is in my mind a much more beneficial approach than the stated Federal Reserve policy target of 2% inflation continuously, through good economic times and bad.  2% inflation forever and always serves no economic purpose, only political and ideological desires.

And what would that 0% to -1% policy deliver we don’t have now?  Think back to that mental experiment I asked you to engage in at the top of this post.  It would deliver equilibrium between real, substantial demand and real, substantial supply.  IOW, it would eliminate the constant string of speculative bubbles we’ve endured.

Equity bubbles … 1987, 1999, 2012.  Hard asset bubbles like the housing bubble we’ve just suffered through.  Sovereign debt bubbles like the one we are currently in, and which will burst eventually, potentially inflicting monsterous damage on the global econony.  Commodity bubbles in oil and gold and other useful and useless “real” assets; art and antique cars and collectables of all kinds if you can remember the 1970s clearly.

Holdilng a currency in exactly a 0% to -1% range isn’t possible, of course.  Holding +2% isn’t either.  Central banking is an art, not a science.  But my point is that over time, over market cycles, a target of 0% to -1% would be a positive influence on the thinking within central banks and more importantly a positive influence on the actions and the capital investments private market job creators would make.

It is precisely long term predictablility and long term currency stability that is most glaringly lacking all through the western democracies, is it not?  The one thing ALL western democracies have in common is a commitment to inflation as a core policy, as an economic management tool, and as a political ideology.  I say that instability is directly caused by the inflationary mindset, the decisions that arise out of a 2% goal.

Just to be clear, I’m not talking “depression” here.  I’m not saying that if the economy gets into a 2% or 5% or 10% deflation trend the Federal Reserve should not act.  It should act in ways that will reestablish equilibrium and stabilize the currency at the target 0% to -1% ranges.  I’m not advocating a mindless central bank.

I’m not suggesting a deflationary spiral is a good thing.  It is not.  Part of the intellectual corruption, part of what “everybody knows” shines through when a gradually rising purchasing power is equated with a gradually shrinking economy.  The two are not automatically linked, though Keynesians will cynically declare that they are (cynical because they know better).

We’ve had a modestly appreciating currency several times in America’s history, and each time we did it’s linked with a vibrant and expanding GDP.  The 1920s.  The 1950s.  The latter half of the 1990s … the era the Democrats all rave about, Clinton’s era, was one in which the inflation rate was low and falling as the GDP growth rate was rising, which is a good first proximation for the increasing purchasing power I’m trying to clarify here.  In each of those eras, robust economies accompanied a strong $USDollar.  I would go further and argue that we had robust economies BECAUSE we had a strong $USDollar.

And to quickly dispense with another old progressive trope:  The Depression of the 1930s is often trotted out as an example of the horrors of a stable currency.  It was not.  It was in fact an example of the horrors of a clueless central bank and even more clueless political class.  Keynesian political cant and propaganda aside, the Great Depression was not caused by a sound $USDollar.  Nor a sound £UKPound nor any other sound currency.  It was caused by the stupidity of politicians “managing” western economies, and it’s good to remember that.

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To sum up:  All of the “printing money is a good thing” intellectual corruption you read in the press and hear in the video media is a gross distortion of reality, and because it’s a virus that’s spread globally it is a threat to our global economy.

The goal of every central bank on the planet right now … most notably the European Central Bank headed by Mario Draghi and the US Federal Reserve led by Ben Bernanke …is to debase, devalue, weaken and thereby inflate their currencies.  For reasons ideological and political a weak currency, constantly being devalued, is passed off as being indicative of ”sound monetary policy”.

If this policy seems to you at this point to be slightly insane … if the notion that the way you strengthen an economy and refire the commercial engines of a nation is to weaken, devalue and inflate that nation’s medium of exchange seems intellectually bankrupt … if the success of a few ‘outlier’ strong currency countries like Sweden and Australia, nations that indisputably link a strong currency with a robust economy, isn’t an aberration but can be duplicated … then you now see the issue clearly.  The smoke has cleared and you have found the fire.

Printing more money, OMT in Europe and QE3 in the US, will repair the economy not at all.  It will increase business investment not at all.  In fact, it will drive even more investment to other shores.  It will not create permanent jobs.  The ECB’s new OMT (or OMG, as my beautiful wife first understood it) sovereign bond buying scheme is just another stopgap.  The Fed’s widely hoped for QE3 will create more problems than it solves.  Only fools and central bankers and Keynesian economists and Paul Krugman (but I repeat myself) believe otherwise.

 

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