Search This Blog

Tuesday, September 20, 2011

The New Inflation Debate

So, apparently, the great econoratzi have been having a brand new discussion about inflation.  Paul Volker, whom I usually admire, wrote in an Op-Ed in the Times yesterday, damning the idea before it got out the gate.  Volker is roundly credited with getting rid of the 1970s staglfation brought on by slow growth and high unemployment.

Let's begin at the beginning.  Inflation is currently, and has been for over a decade, at incredible lows:
2001 = 2.83 Bush, G.W.
2002 = 1.59
2003 = 2.27
2004 = 2.68
2005 = 3.39
2006 = 3.24
2007 = 2.85
2008 = 3.85
2009 = -0.34 Obama
2010 = 1.64
Inflation, as tracked above, does not include what they call Headline inflation, which I've written about in the past.  It's a basic market basket of goods that does not include objects that have temporaral fluctuations due to external causes, such as drouts, pestilence, hurricanes, fires, real act of god type shit.  Of course there are other factors which influence those goods too, and demand from third and second world countries is now beginning to hit its stride.  So when NPR reported this morning that food prices have gone up nearly 4%--this is not the inflation that gets tracked by the Fed, or by most inflation tracking indexes.

Moving on.  We all know why inflation is bad, we've all seen the pictures from Weimar Germany, or Russia during the 80s and 90s, wheelbarrows of cash to go to the grocery store.  Governments have one basic way to control inflation, through their Central Bank.  The U.S. did not always have a central bank.  It's been a consistent war.  We had one, then we didn't have one, then we had it again. People don't like Central Banks for the same reason they hoard gold.  The Central Bank issues currency, and as such controls the value of said currency.  They can also withdraw currency, by retiring treasury bonds early, or by not issuing them at all.  This is the only thing the Fed can do really.  It controls interest rate by buying, selling, and creating new bonds.  Quantitative Easing, the Discount Window, other things the fed is known for, can both be folded into this concept.

Given that interest rates are so central to investing and money flow, it became apparent, fairly early on that the Fed can exercise enormous power on the economy.  This makes them an exceedingly cautious entity, which in turn makes those who watch it, desperately follow every inflection, nuance and word choice in their carefully worded statements.  Three years ago, in the heart of the crisis (though even before the crisis) the Fed lowered interest rates to almost zero in an effort to stimulate the economy.  With low interest rates, companies can borrow cheaply, goes the theory.  And with cheap money will go investment, new factories, jobs created, etc.  This has simply not worked out.  For starters, as I said, before the crisis, the free wheeling 2000sandsies the rate was at near zero lows already.  Why?  When the money keeps rolling in, you don't ask why.  Simply, the Fed was in Bed with Wall Street.  The Fed has for three years kicked the can down the road and kept interest rates at historic lows, on the premise that when growth comes, at least it will come cheaper.

Now, with Congress deadlocked, and the President unable to do much until the next election, people are looking again to the Fed for guidance.  Afterall, the Fed is controlled by 12 men, sometimes 16, and getting a quorum of 12 dudes, is a hell of a lot easier than getting nearly 600 of the most contentious, often ignorant, and certainly ignoble bastards to agree on anything is pure fantasy.  But what can the Fed do?  It's entire database of knowledge has shown that lowering interest rates and increasing the money supply is the only thing it can do to the economy.  And interest rates are already at zero.  The answer is two things:  1)  Go for another round of quantitative easing (i.e. inflation) or 2) raise interest rates.  They've done 1) with only marginal effect, and a ton of whining, including a death threat from Rick perry, and there is simply no substantive data on what would happen if they did 2) in the middle of a recession.

About three months ago, they chose a middle ground.  They threatened to raise interest rates, in two years.  As I said, so nervous about the Fed are we, that a mere threat to raise interest rates, immediately unleashed a firestorm of criticism.  From even the one dissenting Fed Director, the most conservative, the Federal Reserve of Minneappolis.  I don't know why Minnesota has a federal reserve bank, really I don't.  Not the most exciting state in the union.  Anyway, the purpose, as I understand it, of this threat, was to tell businesses--get on with it.  You're not going to have this great interest rate forever.  Interestingly, the take away of one economist on NPR this morning was to say, "oh great, things will be the same for the next two years, no need to rush."  That's a paraphrase of course.  I did not take this away at all.  If a company is planning a merger, or a to ramp up production, it will take at least six months, if not a full year of planning.  That said--it's all hay anyway, because the Fed really only said it might raise rates in two years.

My apologies my friends, you wanted the NEW debate, and we've only just got here.  The new debate is that some (very few) economists have been suggesting that we actually let inflation rise.  The rationale is simple.  Low inflation is great for people who own debt, because most debt is locked in, mortgage rates, tuition loans, etc.  That means the debtee gets almost a real dollar for every dollar owed.  Add inflation and suddenly, the debtor has more money to pay the loan payments, which per agreement, remains the same.  This is an interesting thought--and for those following the European crisis, is the central problem that Europe faces--they're out of money.  If Greece was on the drachma, they could devalue their currency, and therefore avoid default.  It wouldn't look great, and it would cause massive inflation, but the inflation could be fixed, and it's still better than default.  And the bondholders would still get paid--to be sure, they'd be getting cents on the dollar--but again, still better than default.  And it's not permanent.  A ten-year bond could well rise in value after two years of an inflationary period.

Volker rang out yesterday with condemnation stating that inflation, is afterall, very hard to control.  And it could easily get built into the system.  Such that raising inflation to 3 or 4% wouldn't eventually do much, and we would be tempted to allow inflation to raise again.  Another economist on NPR this morning said much the same, that for rising inflation to accomplish its aim, it would have to go as high as 10-15%, which is indeed, a very dangerous level.  The highest inflation has been in 60+ years was in the last year of the Carter administration (when Volker was appointed) and that was a whopping 13.58%.

Anyway, it's an interesting idea, and the only point I wished to make about this whole thing is that it seems to me that interest rates being near zero, no longer has the stimulative effect that it's credited with.  The rate should get raised, and the rate should fluctuate naturally with the economy, so that it remains a valuable tool when necessary.

Thursday, September 15, 2011

It's not an Entitlement, it's a Responsibility

Again and again, I keep hearing politicians and media analysts talk about entitlements: "Democrats in Congress have to look at entitlement spending," "entitlement spending is out of control" yada yada yada.

This is one more example of Dems and Liberals letting the adversary control the dialogue. Entitlements. No one likes entitled people, they step all over you, and think the whole world is theirs to piss on. Bad entitlements. The term is so vague, and so misapplied that its a wonder liberal media analysts never challenge their opponents on it. I hear it on Chris Mathews, I hear it on Bill Maher, CNN. It's always used by the otherside, and the Liberals just nod their heads and shrug ponderously. They know its the wrong word--but they don't fight it.

Here it is people, let me lay it out to you, in stark, Ravingleftatic terms.

1. Entitlement spending doesn't exist.
2. Zero dollars are spent on entitlement spending.
3. Billions of dollars are given up by the IRS for inheritance taxes that have been mutilated--that's an actual entitlement.  (Root: titled, as in landed gentry, as in aristocracy, as in Republican.)
4.  The government has a responsibility to protect its people
5.  That protection goes in this order.  Freedom from want, Freedom from fear, and Freedom of worship, and Freedom of speech. (That's right, I changed FDRs order--Freedom from want, and freedom from fear trump freedom of speech and worship.)
6.  Unemployment, Social Security, Medicare-Medicaid, Food Stamps, Housing programs, these are the government's responsibilities toward it's people in alleviating the first first of those mandatory protections.
7.  Entitlements are what the government does for it's wealthiest--let's them off the hook.
8.  Responsibility is what the government has for its poorest.

Wednesday, September 14, 2011

Standard & Poor, is literally, more or less, that

I'm listening to the July 26th PlanetMoney podcast, which actually hearkens back to a podcast from May of 2010, in which they interview the sovereign ratings guys at Standard & Poors.  I don't have too much to say on this.  But this was from the horse's mouth.

S&P bases their sovereign ratings on two people visiting a country for a week.  That pretty much means that every American tourist in history is qualified to do ratings for S&P.

To be fair, they're not riding the Eye, or visiting the Eifel Tower and eating a crepe, they're visiting ministers of finance, and conducting interviews with central bankers.  To be fair, the guys they send are fair to midling brilliant, economists, accountants, and analysts, etc.  To be fair, mostly the ratings are based on reams of data that they go through in their cozy 49th floor offices in New York.  To be fair, all the ratings agencies have proprietary software that's designed to predict using specially designed metrics, on a level far above that of you, or I.

But enough fair:  A scientist conducting an experiment will take weeks, months, with controls and double-blinds.  They'll have their data peer-reviewed by other scientists.  They'll submit it to prestigious journals, which will have the data reviewed again before publishing.  Good research takes time.  Good research requires cross checks, and several sets of eyes. 

And once the two guys come back, they get another three people from S&P around the world, they give brief presentations, discuss and then vote.  Sounds like the whole thing gets done in a day.  Interestingly, the follow up interview said that this was not always the case, sometimes there are more voters, sometimes it takes a month to make the decision.

Tuesday, September 13, 2011

Social Security is NOT a Ponzi Scheme

I had a rough night last night, and I may not be at my rhetorical best, but this claptrap over Social Security is maddening to the point of apoplexy.

No, you turds.  Social Security is not a Ponzi scheme, is nothing like a Ponzi scheme, it never has been, and it never will be.

The central argument made by Perry, and Bachmann (the two least likely people in the GOP debates to have an original idea, much less a logical, or true one--THERE ARE NO BAD IDEAS IN BRAINSTORMING LEMMON) is that Social Security is like a ponzi scheme because you rob Peter to pay Paul.  But this does not a Ponzi scheme make.

There are three things about Social Security that have made it a big fat easy target to the wingnuttery.  1)  The first generation on social security (most of whom are dead now) never paid for it.  2)  Payments toward social security are mandatory.  3)  Money in virtually any other investment vehicle will do better than that invested in SS.

Point 1:  This is true, Social Security was established because the state of eldercare in the United States during the 30s and 40s was absolutely deplorable. On top of the Depression, was the larger issue that saving for retirement is all but impossible for the vast majority of the population.  When 85 to 95% of your income is spent on your day to day existence, even putting the remaining 10% toward retirement is a bit of a pipedream.  So Social Security was established to get that first, elder generation, out of poverty, eating food instead of pencil shavings, and having stable roofs over their heads.  Opponents of SS use this fact to indicate that some people got their's for free.  But the purpose of the program was to take care of those people.  So this wasn't 'free,' it was a government transfer program that was designed to pay for itself.

Point 2:  Opponents of SS have proposed two alternatives to the mandatory social security program.  1)  Opt-outs and 2) means testing.  Allowing either of these into the program would ultimately destroy it--which is precisely what people who suggest this are saying.  Both points sound reasonable, right?  Mandatory payments in the land of the free!?  What a travesty!  Nevermind that the pay as you go system of taxes have proven to be most efficacious and has saved the treasury and IRS billions of dollars in collection fees and litigation.  Tea Partiers love this point, but it's a red-herring, classic misdirection.  These "freedom fighters" don't care about the "violation" of a mandatory payment.  They simply see no reason for the program itself and believe that Point 3 should take prevalence.  So they suggest, why not allow people to opt-out of social security?  Simple fix, right?

Well--not really.  The problem here is a logicial one, and difficult to explain, let alone understand.  The program depends on mandatory payments because of its mandate.  Look.  Thirty years from now, if you haven't been saving, you'd still be entitled to Social Security.  Why?  Because that was the mandate of the law--to protect the elderly.  There is sixty years of caselaw in the system backing this up.  Even were the law to change--anyone who could pay a lawyer would have an actionable claim on SS.  Which means ultimately, that the system would be bankrupt in a generation, when a generation of opt-outers decide they're entitled to that for which they did not pay into.

What about means testing?  I heard the editor of Reason magazine make this argument on Bill Maher's Politically Incorrect.  "Why should a millionaire receive payments?"  This argument too is a red herring.  If the editor of Reason magazine doesn't know that the millionaire receives payments because he's receiving his own money back--than he shouldn't be an editor.  He knows.  Why this argument?  Great soundbyte.  The system is corrupt, millionaires don't need government transfer payments!  The system is based on a certain amount of equity.  It's a retirement program.  It's not a tax or a handout.  The money is yours, you're just getting it back when you're 65. Prince or pauper, so long as you worked a day in your life, you're entitled to some benefit.  (Personally, the only reform to SS that I would countenance would be to up the age.  People are older and working now than they were in the past.  We're healthier, and science has advanced our ability to work well into our early 70s.)  So why should a millionare make payments?  Again, equity, and see my previous paragraph: the more Opt-Outs the more you inherently weakent the system. 

Point 3:  This is one of the more insidious arguments against SS because it's completely true.  Social Security is not an investment vehicle--it's a savings vehicle.  This argument against SS is built on the idea that everyone is making proper arrangements for their retirement, which is patently false.  Let's face it, most people's retirement planning is non-existent.  The right, and Libertarians would like to believe otherwise.  But remember, the right doesn't care if you have money to retire.  They have money to retire, and if you're out on the street at 70, tough luck.  You were an idiot, it's what you deserve.

Never forget this one inalienable fact, Ravingleftatics, the Right would have you believe they care about freedom, about security, about morals, and about justice for all.  This is a deception.  They're only interest is in maximizing their own wealth, their own gain.  They assume everyone is acting the same as them.  They do not believe in collective action, or in altruism--in fact they say its impossible to act selflessly.  This belief is the justification for itself.  If everyone is acting in their own best interest, we'll all get something.  But its a tautology, and its premises are both false and laughably self-serving. 

In their world, it's all a Ponzi scheme, and they're all Madoff, running to the end of the line to get stuff out of other's hands and into their own.  And if you're an investor in their scheme, they assume you're running your own scheme and be damned with you.  And if you're not, well you're a sucker.

So my fine Ravingleftatics, do not believe this bull puckey about Social Security.