Archive for the ‘Inflation’ Category

THE CRISIS OF THE EUROPEAN UNION

Friday, September 2nd, 2011

IMPRIMIS – HILLSDALE COLLEGE

Vaclav Klaus

July/August 2011

Václav Klaus
President,
Czech Republic

The Crisis of the European Union: Causes and Significance

Václav Klaus, the president of the Czech Republic, spoke to friends of Hillsdale College in Berlin during Hillsdale’s 2011 cruise in the Baltic Sea. The speech was delivered at Berlin’s Hotel Adlon on June 11, 2011.

As some of you may know, this is not my first contact with Hillsdale College. I vividly remember my visit to Hillsdale more than ten years ago, in March 2000. The winter temperatures the evening I arrived, the sudden spring the next morning, and the summer the following day can’t be forgotten, at least for a Central European who lives—together with Antonio Vivaldi—in le quattro stagioni. My more important and long-lasting connection with Hillsdale is my regular and careful reading of Imprimis. I have always considered the texts published there very stimulating and persuasive.

The title of my previous speech at Hillsdale was “The Problems of Liberty in a Newly-Born Democracy and Market Economy.” At that time, we were only ten years after the fall of communism, and the topic was relevant. It is different now. Not only is communism over, our radical transition from communism to a free society is over, too. We face different challenges and see new dangers on the horizon. So let me say a few words about the continent of Europe today, which you’ve been visiting on your cruise.

You may like the old Europe—full of history, full of culture, full of decadence, full of fading beauty—and I do as well. But the political, social and economic developments here bother me. Unlike you, I am neither a visitor to Europe nor an uninvolved observer of it. I live here, and I do not see any reason to describe the current Europe in a propagandistic way, using rosy colors or glasses. Many of us in Europe are aware of the fact that it faces a serious problem, which is not a short- or medium-term business cycle-like phenomenon. Nor is it a consequence of the recent financial and economic crisis. This crisis only made it more visible. As an economist, I would call it a structural problem, which will not, by itself, wither away. We will not simply outgrow it, as some hope or believe.

It used to look quite different here. The question is when things started to change. The post-World War II reconstruction of Europe was a success because the war eliminated, or at least weakened, all kinds of special-interest coalitions and pressure groups. In the following decades, Europe was growing, peaceful, stable and relevant. Why is Europe less successful and less relevant today? (more…)

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THE FED VS THE RECOVERY

Saturday, August 27th, 2011
The Wall Street Journal

  • AUGUST 26, 2011

How is increasing the price of imported oil and industrial commodities supposed to make U.S. industry more competitive?

One year ago, on Aug. 27, 2010, Federal Reserve Chairman Ben Bernanke explained the rationale for a second round of quantitative easing. “A first option for providing additional monetary accommodation is to expand the Federal Reserve’s holdings of longer-term securities,” he said, thereby supposedly “bringing down term premiums and lowering the costs of borrowing.”

Yet the bond market promptly reacted by raising long-term interest rates. The yield on 10-year Treasurys, which was 2.57% at the time of his Jackson Hole, Wyo., address, climbed to 3.68% by February 2011 and did not dip below 3% until late June when QE2 was coming to an end. The price of West Texas crude oil, which was $72.91 a year ago, remained above $100 from March to mid-June and did not come down until QE2 ended and the dollar stopped falling.

When Mr. Bernanke spoke, the price of a euro was less than $1.27. By the week ending June 10, 2011, 15 days before QE2 ended, the dollar was down about 15% (a euro cost $1.46). In that same week, The Economist commodity-price index was up 50.9% from a year earlier in dollars—but only 22.8% in euros. How could paying much more than Europe did for imported oil, industrial commodities, equipment and parts make U.S. industry more competitive?

The chart nearby subtracts the contribution of government purchases (such as hiring and construction) from real GDP growth to gauge the growth of the private economy. The generally negative contribution of government purchases (column two) does not mean government spending has slowed, as some contend. Instead it reflects the fact that federal and state spending has been increasingly dominated by transfer payments (such as Medicaid, food stamps and unemployment benefits) which do not contribute to GDP, and in some cases reduce GDP by discouraging work.

Federal Reserve Chairman Ben Bernanke

reynolds_photo

(more…)

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OBAMANOMICS VS REAGANOMICS

Friday, August 26th, 2011
  • The Wall Street Journal

  • AUGUST 26, 2011

One program for recovery worked, and the other hasn’t.

By STEPHEN MOORE

If you really want to light the fuse of a liberal Democrat, compare Barack Obama’s economic performance after 30 months in office with that of Ronald Reagan. It’s not at all flattering for Mr. Obama.

The two presidents have a lot in common. Both inherited an American economy in collapse. And both applied daring, expensive remedies. Mr. Reagan passed the biggest tax cut ever, combined with an agenda of deregulation, monetary restraint and spending controls. Mr. Obama, of course, has given us a $1 trillion spending stimulus.

By the end of the summer of Reagan’s third year in office, the economy was soaring. The GDP growth rate was 5% and racing toward 7%, even 8% growth. In 1983 and ’84 output was growing so fast the biggest worry was that the economy would “overheat.” In the summer of 2011 we have an economy limping along at barely 1% growth and by some indications headed toward a “double-dip” recession. By the end of Reagan’s first term, it was Morning in America. Today there is gloomy talk of America in its twilight.

My purpose here is not more Reagan idolatry, but to point out an incontrovertible truth: One program for recovery worked, and the other hasn’t.

The Reagan philosophy was to incentivize production—i.e., the “supply side” of the economy—by lowering restraints on business expansion and investment. This was done by slashing marginal income tax rates, eliminating regulatory high hurdles, and reining in inflation with a tighter monetary policy.

Ronald Reagan talks taxes, 1981.

stevemoore

The Keynesians in the early 1980s assured us that the Reagan expansion would not and could not happen. Rapid growth with new jobs and falling rates of inflation (to 4% in 1983 from 13% in 1980) is an impossibility in Keynesian textbooks. If you increase demand, prices go up. If you increase supply—as Reagan did—prices go down. (more…)

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THE NIXON SHOCK HEARD ‘ROUND THE WORLD’

Tuesday, August 16th, 2011
The Wall Street Journal

  • AUGUST 15, 2011

By severing the dollar’s convertibility to gold in 1971, the president ushered in a decade of inflation and economic stagnation.

On the afternoon of Friday, Aug. 13, 1971, high-ranking White House and Treasury Department officials gathered secretly in President Richard Nixon’s lodge at Camp David. Treasury Secretary John Connally, on the job for just seven months, was seated to Nixon’s right. During that momentous afternoon, however, newcomer Connally was front and center, put there by a solicitous president. Nixon, gossiped his staff, was smitten by the big, self-confident Texan whom the president had charged with bringing order into his administration’s bumbling economic policies.

In the past, Nixon had expressed economic views that tended toward “conservative” platitudes about free enterprise and free markets. But the president loved histrionic gestures that grabbed the public’s attention. He and Connally were determined to present a comprehensive package of dramatic measures to deal with the nation’s huge balance of payments deficit, its anemic economic growth, and inflation.

President Nixon poses after delivering a nationwide television address loaded with economic news on Aug. 15, 1971.

lehrman_photo

Dramatic indeed: They decided to break up the postwar Bretton Woods monetary system, to devalue the dollar, to raise tariffs, and to impose the first peacetime wage and price controls in American history. And they were going to do it on the weekend—heralding this astonishing news with a Nixon speech before the markets opened on Monday.

(more…)

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REPUBLICANS AND THE THATCHER LEGACY

Friday, July 1st, 2011
The Wall Street Journal

  • JUNE 30, 2011

Mitt Romney has adapted her ‘Labour Isn’t Working’ slogan, but would he emulate her steely leadership?

In 1978, with the British economy in crisis and unemployment hovering at 1.5 million, or 5.1% of the working-age population, Margaret Thatcher’s Conservative Party turned to its advertising gurus, Charles and Maurice Saatchi, to ram home the message that the socialist policies of the Labour government had failed. With garbage piling up in the streets due to public-sector trade union strikes, inflation rates of 24.2% in 1976 and 15.8% in 1977, and a sense of permanent, structural malaise settling over the nation, the Saatchis produced an iconic poster of a long dole line tailing off into the distance, under the message: “Labour Isn’t Working.”

The prime minister, James Callaghan, complained about the poster in parliament, and the chancellor of the exchequer, Denis Healy, complained about the Tories “selling politics like soap powder.” That guaranteed the poster further publicity, and the following year Mrs. Thatcher won the general election, a victory that the Conservative Party treasurer, Lord Thorneycroft, put down to the poster.

And now, three decades later, Mitt Romney has adapted the same image (with full attribution) for his campaign. “Obama Isn’t Working,” declares Mr. Romney’s poster.

The former Massachusetts governor is right to try to make unemployment the central campaign issue. No American president since Franklin Roosevelt has been re-elected with an unemployment rate higher than 7.2%, and the current rate is 9.1%. If one then adds the 2.5 million people who have been out of a job for so long that they are no longer looking for work, and the 8.7 million who are making do with part-time work but want full-time jobs, then that rate rises to a lamentable 16.5%. Small wonder, then, that Mr. Romney has turned to the stark visual image championed by the Thatcherites as he seeks to blame the president for the long dole lines. (more…)

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THE DEFICIT IS WORSE THAN WE THINK

Wednesday, June 29th, 2011
The Wall Street Journal

  • JUNE 28, 2011,

Normal interest rates would raise debt-service costs by $4.9 trillion over 10 years, dwarfing the savings from any currently contemplated budget deal.

Washington is struggling to make a deal that will couple an increase in the debt ceiling with a long-term reduction in spending. There is no reason for the players to make their task seem even more Herculean than it already is. But we should be prepared for upward revisions in official deficit projections in the years ahead—even if a deal is struck. There are at least three major reasons for concern.

First, a normalization of interest rates would upend any budgetary deal if and when one should occur. At present, the average cost of Treasury borrowing is 2.5%. The average over the last two decades was 5.7%. Should we ramp up to the higher number, annual interest expenses would be roughly $420 billion higher in 2014 and $700 billion higher in 2020.

The 10-year rise in interest expense would be $4.9 trillion higher under “normalized” rates than under the current cost of borrowing. Compare that to the $2 trillion estimate of what the current talks about long-term deficit reduction may produce, and it becomes obvious that the gains from the current deficit-reduction efforts could be wiped out by normalization in the bond market.

To some extent this is a controllable risk. The Federal Reserve could act aggressively by purchasing even more bonds, or targeting rates further out on the yield curve, to slow any rise in the cost of Treasury borrowing. Of course, this carries its own set of risks, not the least among them an adverse reaction by our lenders. Suffice it to say, though, that given all that is at stake, Fed interest-rate policy will increasingly have to factor in the effects of any rate hike on the fiscal position of the Treasury.

The second reason for concern is that official growth forecasts are much higher than what the academic consensus believes we should expect after a financial crisis. That consensus holds that economies tend to return to trend growth of about 2.5%, without ever recapturing what was lost in the downturn.

(more…)

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THE FED IS IN A BOX

Monday, June 20th, 2011
The Wall Street Journal

  • JUNE 15, 2011

Notable & Quotable

Lawrence B. Lindsey on how the Federal Reserve has forced itself into keeping interest rates low.

  • Economist Lawrence B. Lindsey writing in the Weekly Standard, June 13:
Right now, thanks in large part to Federal Reserve policy, Uncle Sam can borrow at an average cost of just 2.5 percent. The average borrowing cost over the last three decades was 5.7 percent. Our debt is now $14 trillion and scheduled to grow to $25 trillion by the end of the decade. If interest rates normalize over that period the added interest costs in 2021 alone will be $800 billion—more than 20 times the mere $37 billion in budget cuts that tore up Congress in March. It would take virtually all of the cuts in the Ryan budget just to cover that added interest, much less to start bringing down the national debt. Unfortunately, the Fed is now in a fiscal box. A normalization of interest rates would break the Treasury. Hence, a normalization of rates really can’t happen—we’re stuck in a world in which the Fed must keep rates artificially low in order to prevent a budget disaster.

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DOLLAR’S DECLINE SPEEDS UP, WITH RISKS FOR U.S.

Saturday, April 23rd, 2011
The Wall Street Journal

  • APRIL 23, 2011

The U.S. dollar’s downward slide is accelerating as low interest rates, inflation concerns and the massive federal budget deficit undermine the currency.

[DOLLAR]

With no relief in sight for the dollar on any of those fronts, the downward pressure on the dollar is widely expected to continue.

The dollar fell nearly 1% against a broad basket of currencies this week, following a drop of similar size last week. The ICE U.S. Dollar Index closed at its lowest level since August 2008, before the financial crisis intensified.

“The dollar just hasn’t had anything positive going for it,” said Alessio de Longis, who oversees the Oppenheimer Currency Opportunities Fund.

The main driver for the dollar’s decline is low interest rates in the U.S. compared with higher and rising rates abroad. Lower rates mean a lower return on cash—and the pressure from that factor could intensify next week when the Federal Reserve’s rate-setting committee is expected to signal that U.S. short-term rates will likely remain near zero for many months to come. On Wednesday, Fed Chairman Ben Bernanke is scheduled to give the central bank’s first-ever press conference following a policy-setting meeting. (more…)

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FLEEING THE DOLLAR FLOOD

Saturday, April 23rd, 2011
The Wall Street Journal

  • APRIL 21, 2011

The world tries to protect itself from U.S. monetary policy.

  • Members of the International Monetary Fund emerged from their huddle in Washington last weekend resolved to keep every option open to slow the flood of dollars pouring into their countries, including capital controls. That’s a dangerous game, given the need for investment to drive economic development. But it’s also increasingly typical of the world’s reaction to America’s mismanagement of the dollar and its eroding financial leadership.

The dollar is the world’s reserve currency, and as such the Federal Reserve is the closest thing we have to a global central bank. Yet for at least a decade, and especially since late 2008, the Fed has operated as if its only concern is the U.S. domestic economy.

The Fed’s relentlessly easy monetary policy combined with Congress’s reckless spending have driven investors out of the United States and into Asia, South America and elsewhere in search of higher returns and more sustainable growth. The IMF estimates that between the third quarter of 2009 and second quarter of 2010, Turkey saw a 6.9% inflow in capital as a percentage of GDP, South Africa 6.6%, Thailand 5%, and so on.

This incoming wall of money puts the central bankers in these countries in a bind. If they do nothing, the result can be asset bubbles and inflation. Brazil (6.3%) and China (5.4% officially but no doubt higher in fact) are both enduring bursts of inflation, as are many other countries. These nations can raise interest rates or let their own currencies appreciate, at the risk of slower economic growth. Rather than endure that adjustment, many countries are resorting to capital controls and other administrative measures to try to stop the inflow. (more…)

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UNIVERSITY OF TEXAS’S GOLD BUY IS A GAME-CHANGER

Wednesday, April 20th, 2011
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by: Ananthan Thangavel April 19, 2011  | about: GLD

Over the weekend, an announcement was made that the University of Texas endowment fund had decided to take delivery of $1 billion worth of gold. This was an absolutely huge development on multiple fronts.

First, the UT endowment fund’s gold purchase was a radical deviation from the standard institutional portfolio, the possibility of which we have considered for some time. Since UT has about $20 billion in assets, a $1 billion gold allocation would indicate 5% of its assets in gold. The standard institutional allocation to gold is 1%; a 5% allocation is a huge increase. If (or in our opinion, when) other institutions adopt a similar stance, the price of gold will skyrocket.

Second, the endowment’s purchase of this large an amount of gold gives a huge vote of confidence to gold and precious metals as an investment. For the past few years, financial media has lined up “experts” to tell us all about how gold is an irrational and poor investment, including figures as large as Warren Buffett’s right hand man, Charlie Munger.

Well, the UT endowment fund is neither dumb nor stupid, and it helps that it’s not poor: It’s well-funded institutional investors who are making a tactical investment decision, not a short-term trade. As Kyle Bass, the hedge fund manager who advised UT to purchase the gold, explained, the gold was purchased as a hedge against money-printing and currency debasement worldwide. (more…)

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