Timothy Birdnow

Meet the new boss, same as the old boss?

The article observes:

I am going to say this again and will until I am blue in the face SPENDING DOES NOT CAUSE INFLATION except in very specific cases and for a short time. Lowering interest rates will not cause inflationary pressure. I don't know how to make this point any plainer.

The concept that spending by consumers causes inflation is straight out of Keynes. It is Demand Side Economics, something disproved time and again by the implementation of Supply Side Economics under Reagan, under Clinton, under Bush, and under Trump.

Demand side economics argues that when consumers ask for more than the market has to supply we have inflation, and the key to controlling inflation is to control spending. But what does that mean? It means no economic growth because people aren't spending enough for the market to actually grow. It is exactly what we mean when we talk about "sustainability" - it is a balancing act whereby we keep demand down and supply just barely meeting that demand. It assumes people are not actual people but mere consumers and they will be satisfied with less if the gods ofc the copybook headings say so.It does not see human beings living their lives but rather an amorphous blob of f"consumers". Control of demand is seen as the key to a healthy economy; too much demand and the economy suffers from inflation.

I remember years ago Rush Limbaugh used to play a Cornpone Southern Democrat named Ernest Hollings complained about people buyng what they wanted "too much consumin' going on!" Hollings fretted over people living their lives.

That's because he and his compatriots were all Keynsians who thought that the market actually gets it wrong and must be managed.

Reality is on the side of the Supply-siders who argue that the market will adjust to demand if you let it and that inflation is in fact a monetary problem, not a consumption problem. Always at it's core there is the Federal Reserve tampering with the money supply. We've seen a rise in inflation recently for instance because the Fed instituted another round of "qualitative easing" meaning they are buying the U.S. debt with money they are printing. That extra money goes into circulation and debases the currency. In the old days this didn't happen because money had to be backed by gold, and later gold and silver.

In fact the big argument at the end of the 19th and early 20th century was about "free silver". The Populist Party made that a central plank of their platform. William Jennings Bryan, the cowardly lion (Bryan was the template L. Frank Baum used for the Cowardly Lion in his novel The Wizard of Oz and the Yellow Brick Road was the Gold Standard) made his fame with his "cross of gold" speech where he said Mankind should not be crucified on a cross of gold". Why was Bryan so jacked up about the gold standard? Because the U.S. government set the price of gold at $20.67 and refused to change it for decades - and that led to deflation of the currency as the demand grew for gold. Gold had become the backing of most currencies around the globe.

Deflation is very destructive. It locks up credit, which hurt farmers who always have to borrow money for new equipment and to buy seed. It hurts factories and manufacturers. It helps bankers who lend money with a value of x and get money back with a value of Y, so the banks get fat and rich and the borrowers get poor. Oh, and workers got pay cuts rather than raises.

So Bryan and the Populists wanted "free silver" aka going to a bi-metallic standard so there would be some inflation. They didn't understand the destructive nature of inflation then as nobody had experienced any outside of wartime. Inflation helps borrowers - you pay less back then you borrow as the money is worth less. But it means rising prices.

The bi-metallic standard would only cause some inflation because silver was worth less than gold, but it still caused inflation because more money was on the market.

The 20th century saw the end of any backing at all for money after Richard Nixon took us off the gold standard for good. Now we have "fiat currency" which is backed by nothing but the good word of the Federal Reserve, who prints all our money. The Fed giveth and the Fed taketh away.

(In theory we have the "petro-dollar" with oil backing our currency but there is no real-world connection between our money and oil - it's just a way of saying our money has value because of how much oil it can buy. Oil is sold based on the U.S. dollar and it's hard if not impossible to buy oil with Rubles or Rupies or Yen. But our currency is not attached to it.

So the fundamental assumptions of the Federal Reserve board and especially the Chairman is critical to how our monetary policy will work and how our economy operates. If Chairmab Warsh is a Keynsian we will see stagnant economic growth and modest but increasing inflation just as we have done under Powell or under Hollerin, er, Yellen, and under the last half dozen Keynsian directors.

Trump has proven in times past to be a bad judge of such things. He appointed Powell after all, and he appointed a lot of guys who screwed him royally, people like Jeff Sessions for AG and then replacing him with Bush loyalist William Barr, both of whom screwed him over. He appointed Christopher Wray to the FBI and Wray went full TDS on his boss, and almost brought the President down. There are many other examples. Trump has a bad tendency to not think ideologically and he gets burned. I fear he may have appointed another Jerome Powell in this instance.

This quote from the cheerleading article spoke volumes:

In other words this guy has never done anything outside of the ivory tower and government. Zero. Zip. Nada. the Null set. He is a pure academician who invested some money maybe but has no real practical experience.

Just the kind of guy who would fall for Keynsianism and government interventionism.

BTW the Great Depression is often blamed on "laissez Faire" economics but the reality is the Federal Reserved caused it by pumping up the money supply then suddenly contracting it, shocking the markets. At the same time the Republican President Herbert Hoover was running vast public works programs and spending money like crazy. In fact, Roosevelt ran against him FROM THE RIGHT, arguing Hoover spent too much money on the Depression works programs. The Great Depression was caused by the very things that we now believe fixed it - and are the go-to moves by our government during economic downturns, thus making the "great recession" out of a one-industry correction.

We do not need another academic in such a position. I fear Warsh is going to disappoint us as did Mr. Powell. Trump has GOT to learn to think ideologically and not just look at credentials.

The New York Post writer says Warsh is no tool. Seems to me the author is the tool here. I don't know what Warsh is yet but it doesn't look very promising to me.

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