Power & Market

Those who don’t learn from the past, as the old adage goes, are doomed to repeat it. Even in the realm of something as seemingly abstract and technical as economic policy, this saying holds true. Prices are soaring in all areas of consumption, from the grocery store aisle to the pump, with the United States experiencing its highest rate of inflation since 1981.

Yet this, in turn, brings up the question of what caused inflation to be even higher over forty years ago. The reason why inflation was so high back then is the same reason behind why we’re experiencing similar levels of it today. That is, an incredibly loose monetary policy employed by the Fed, often as the result of political pressures from the White House.

As we’ll see, however, history also provides a solution to the problem of inflation, but it will require a sense of bravery and resilience particularly in Fed Chairman Jay Powell in a manner that has not been seen in forty years, under then-Fed Chairman Paul Volcker.

Paul Volcker and The Great Inflation

If today’s inflation seems bad, consider the years between 1965 and 1982, a period when inflation averaged 6.7% a year and became so unbearable that the era became known as “The Great Inflation.” This nearly two-decade long spell of soaring prices was certainly the product of many factors, yet the first and most prominent undoubtedly being an excessively loose, and misguided, monetary policy.

Consider the graph below, taken from the Federal Reserve Economic Database:

baum_graph_1.png

The blue line shows percent growth in the money supply while the red line shows the rate of inflation, measured every half-year. Clearly, there’s a general correlation where changes in inflation follow changes in the money supply. The correlation may not be very tight at times, but keep in mind that economists believe that it takes up to six months for inflation to reflect changes in the money supply.

Given this information, it’s clear that the Great Inflation was largely motivated by monetary policy, reflecting both the incompetence and flawed incentives of central banking. Take the beginning of the crisis for example; future Fed Chair Alan Greenspan writes:

In 1964, (President Lyndon B. Johnson) bullied the Federal Reserve into keeping interest rates as low as possible at the same time as delivering a powerful fiscal stimulus by signing tax cuts into law… the combination of tax cuts and low interest rates began to produce inflationary pressure.

Indeed, inflation grew from 4.77 percent annually between 1960 and 1963 to 7.82 percent from 1964 to the end of the decade, yet the outlook only worsened. The large spike in money supply growth starting around 1970 was largely due to President Richard Nixon’s similar tactics of pressuring the Fed into cutting interest rates, especially in the buildup to his re-election in 1972.

The Nixon tapes record several conversations of the President with then-Fed Chair Arthur Burns. These recordings include the President laughing about Burns’ claim that the Fed is independent and exclaiming that “(many elections) have been lost on the issue of unemployment. None has been lost on the issue of inflation.”

Matters were made worse when Nixon readied a series of anonymous leaks about the Fed, including plans to increase White House control over the central bank and even a false story that Burns wanted a pay raise when he actually suggested a pay cut.

Burns caved into this pressure. Interest rates fell from 9 percent at the start of 1970 to 3.8 percent by the first Presidential primary in March 1972, and the money supply grew at an average of 9.7 percent per year. Of course, while Nixon and Burns neglected it, inflation grew from 7.13 percent in 1970 to 10.6 percent in 1973.

As the 1970’s progressed, inflation worsened as it continued to mirror high money supply growth, as the graph confirms, with its height towards the end of the decade reflecting nervous incompetence at the Fed. By 1978, the Fed Chair was G. William Miller, widely regarded to be the worst Fed Chair in history, who barely moved interest rates and allowed money supply growth to continue around 8 percent annually while inflation reached around a staggering 11.5 percent during his tenure.

By the turn of the 1980’s, it had become evident that soaring inflation was both caused and continued by a loose monetary policy, and that something had to have been done to address the situation. Against this backdrop came the revolutionary Fed Chair Paul Volcker, who would provide the ultimate solution to the inflationary problem.

The solution, of course, was rather simple; raise interest rates and decrease the money supply. This piece of Econ 101 logic was certainly known to Volcker’s predecessors at the Fed, but they simply couldn’t go through with it because of sheer political pressure to keep interest rates low.

The previous Fed Chairs, fearing for their jobs and the future of their agency, were essentially forced into neglecting inflation. Soaring prices, of course, is a huge problem to the average voter, but as Nixon reminded Burns, many elections “have been lost on the issue of unemployment. None has been lost on the issue of inflation.”

Volcker resisted, however, and even as President Jimmy Carter publicly criticized his tight policy and President Ronald Raegan’s Chief of Staff James Baker privately pressured Volcker into giving up, the Fed Chair tightened interest rates from 10.94 percent at his arrival in August 1979 to an unprecedented 19 percent by the turn of 1981.

Volcker demonstrated a sense of bravery and commitment never before seen at the Fed, resisting political pressures and nerves to address rampant inflation. Consequently, inflation began its gradual decline, by some estimates reaching healthy levels of around 3 percent by 1983.

Jay Powell and Inflation Today

In the words of famed economist Milton Friedman, “Inflation is always and everywhere a monetary phenomenon.” What the brief history lesson of the US’s last encounter with high inflation shows is that the primary culprit behind soaring prices is the Fed itself, and not necessarily because Fed officials don’t care about inflation or don’t know how to fix it, but because they fear the political repercussions of addressing it.

All it took was one brave Fed Chairman, Paul Volcker, to finally put an end to the dilemma, but since then inflation has obviously reappeared. The Fed’s response to the brief recession triggered by government lockdowns saw the injection of over $4 trillion in additional money into the economy, and an almost 20 percent increase in the money supply in 2020 alone. High levels of inflation have, of course, followed this.

Now, it’s up to Fed Chair Jay Powell to right the wrongs of his leadership two years ago. Although the logic is simple, raising interest rates and choking inflation is no easy task, and Powell will certainly be on the receiving end of pressure both from Biden and Congress.

This makes the present moment all the more critical as the US faces the possibility of an inflation-induced recession. Jay Powell will need to replicate the bravery found in Paul Volcker forty years ago.

Central bank “stimulus” is a nonsensical policy approach which caused prices to surge over the last two years. Look at the charts below:

The Fed’s balance sheet is currently at $8.9 trillion:

fed_balance_sheet.png

Since January 2020 it has increased by nearly $5,000,000,000,000, meaning the central bank created 5 trillion dollars so the world could “buy more stuff.”  The $8.9 trillion balance is not money in the Fed’s bank account; rather, entities such as large banks and financial institutions owe this money to the Fed (i.e., accounts receivable). Typically, the new money raises the prices of stocks, bonds and real estate first.

Also consider M1 and M2, as they are the most commonly used measures of the money supply.

m1_money_supply.png

The above is the M1 money supply, currently at $20.6 trillion. Part of the large spike is due to a revision of the definition of M1 occurring in May 2020. However, since then, M1 increased by over $4 trillion dollars, still a large amount.

From January 2020, the M2 money supply increased by over $6 trillion, per below:

m2_money_supply.png

Included in these trillions of newly created dollars are various Fed/Government programs, such as the Paycheck Protection Program, which has forgiven over $700 billion of “loans” to business owners. As I wrote in April of 2020, they were literally “paying people not to work.”

There were also several stimulus check programs congress approved that approached $1 trillion.

It cannot be stressed enough, these trillions of dollars were created “out of thin air,” and given to people across the country. A large portion of the money went into the traditional inflationary channels such as big Wall Street firms to inflate asset prices, but several trillions of new dollars also went to pay individuals on Main Street. The money received by individuals could have been spent anywhere: crypto, gold, guns, gambling, drugs, alcohol, eating out at restaurants, clothes, or on Austrian economic books.

The thought of receiving “free money” from the government may initially sound appealing. But eventually the money mirage stops and society discovers these government giveaway programs carry grave consequences such as currency debasement, and therefore, more poverty. Ironic because the stated aim of these policies is to help society; yet the result is the exact opposite.

The COVID monetary relief schemes couldn't have been more poorly timed as large swaths of the economy were shut down in 2020. Imagine the unsurprising result: increasing the money supply (via stimulus checks) increases the cash balance for millions of people, enticing recipients to spend more money. But shutting down the economy decreases the amount of goods available to purchase. In such a world, prices invariably rise.

Removing the closure of the economy from the equation, the problem with central bank stimulus still exists. If the government gives $1,000 to enough people, this new money enters the economy, increasing demand for goods. One of the many factors mainstream economists fail to include in their models are the stages of production. In the real world, production takes time. It is not instantaneous. It also carries a cost. Even if the economy were running “smoothly,” entrepreneurs could not automatically increase the supply of goods to meet the new (monetary induced) demand. To increase production, they’d have to incur more upfront costs, drawing upon savings, credit or obtaining alternative financing methods.

Shutting down the economy while giving stimulus checks only added gasoline to the dumpster fire. Forget about Trump or Biden. The Powell era of central banking must stand as one of the worst, if not the absolute worst, eras of American economic history. Increasing a nation’s money supply to stimulate demand historically impoverishes nations. Yet, that is precisely what they did.

Javier Milei is leading the polls as a precandidate for the 2023 presidential election in Argentina.

Let that sink in: Javier Milei, a libertarian economist, whose views in the past 10 years have shifted towards Austrian economics and anarcho-capitalism, a social media viral sensation, and for the last year, a congressman in the Argentinian Chamber of Deputies, elected as part of a conservative-libertarian coalition, is leading the polls as a precandidate for next year´s presidential election in his country, meaning he could potentially become its next president.

For anyone in the conservative and the libertarian spheres, both in the United States and overseas, this should be a huge surprise and an even greater cause for joy and hope for our political future.

It means our ideas have been successfully spread, and that their influence has expanded outside of what we could have thought was their natural environment in North America.

A lot of people and of institutions would like to claim Milei’s victory and his growing numbers of popular support in his country, as well as his popularity in other countries in the Latin American region, as a result of their work, their resources, and their lucky bet on a loud intellectual with crazy hair.

But the truth is that Milei’s case is nothing but the result of years and years of work, immense networks of people working to promote different ideas, a local tradition upon which to build a platform, the right opponents in the right circumstances, and of course, the internet.

A few years ago, for people outside the United States, Milei would have been nothing but another foreign right-wing politician, maybe aligned with the neoconservative elites in Washington DC, maybe another case of successful grooming of foreign elites as imperial prefects for the American government in their Latin American provinces.

But Milei is not part of the Argentinian traditional elites. He does not come from the same old families that have been involved in Argentinian politics for decades. He does not belong to the ruling Peronismo (in whatever form or shape it adopts, from left to right to woke), and furthermore, he actually has opposed the socialist Peronistas in government, as well as their ineffective opposition, represented by moderate right-winger Mauricio Macri (with who he has become close recently) for pretty much all of his fairly recent public life.

Milei did not have the chances of many other foreign politicians to study in the United States, and benefit from the funds and networks available to the client elites of America in their allied countries.

He got all his degrees in economics from local Argentinian universities, and yet, the Washington Post has articles about him published by their foreign press correspondents, and for many Argentinians, Milei could be their last political hope for a serious change, as their poverty rate, and their rage, continues to grow under the inflationary and price control policies imposed by the socialist and woke government of Peronista president Alberto Fernandez.

With all things considered, Milei’s success is probably the beginning of the Paleo revival outside of the United States, and for American conservatives and libertarians, this should be a real eye opener of what a good political strategy really meant for both movements back in the day and what it could actually mean today.

The thing about Milei is that he may be an Austrian and an anarcho-capitalist libertarian, but his platform and his main supporters come from all different backgrounds in the Argentinian right, from traditionalist Catholics and Nationalists, such as Juan José Gómez Centurión, a Falkands War veteran and candidate in the 2019 Argentinian presidential elections, who supported him in his 2021 legislative campaign, to anti-woke liberal conservatives, such as Agustin Laje and Nicolás Marquez, a duo of fellow social media influencers, known for their Ben Shapiro-esque pro-life rants against pro-abortion and radical feminist activists.

During all of these years, leading up to the current political moment, in which Milei has approximately 20% of the Argentinian population’s support for his presidential bid, ‘El Peluca’, as he is affectionally known for his uncombed hair, has adopted what could only be considered as Rothbard & Rockwell’s Paleo strategy from the 90s, incorporating right-wing populism into a dual conservative and libertarian platform, openly talking against the ruling Argentinian elites in his appearances in talk shows, and promoting their general despise as part of the same caste, even if they belong to different parties.

Milei’s case rests in contrast with Ecuadorian president Guillermo Lasso, who coincidentally, also comes from a libertarian background, and who only got elected in a population-wide effort to impede former president Rafael Correa’s protégé Andrés Arauz, a Keynesian economist with MMT affinities who actually proposed to de-dolarize the Ecuadorian economy and go back to printing money to be elected, as its election would probably have meant the end of the few market institutions present in Ecuador.

In his first year of government, Lasso’s brand of beltway libertarianism has proven to be ineffective to rule efficiently, given that Ecuador is currently under a national security crisis, represented by constant prison riots and massacres with increasing numbers of casualties, drug-related violence affecting the social structures of the country, and a political crisis, with a minority bench in the National Assembly, and compromise leaders, such as former Legislative President Guadalupe Llori, unseated and under impeachment threats by members of a coalition of parties that include the conservative Social Christian Party (which was kicked out of the coalition that got Lasso elected right after the election) and of course, the remaining majority of Rafael Correa loyalists.

Moreover, some of his most trusted advisors and high-ranking government officials, such as Aparicio Caicedo, a Cato Institute affiliated scholar turned public intellectual, or Bernarda Ordoñez, a known feminist activist, have been harshly criticized in local media for their lack of touch with the actual social and political situation in Ecuador: the first, for his apparent lack of empathy towards the poorer classes, and the second for her insisting promotion of hardly unnecessary progressive agenda, who recently renounced from her office as cabinet-ranking Secretary of Human Rights over her and Guillermo Lasso’s conflicting views over the ongoing national security crisis.

While Lasso has been characterized as a conservative by English speaking media in numerous occasions, especially for his personal pro-life stance in the abortion legalization issue, his policies have proven so far to be neither conservative, with his backing of nationally state-enforced rulings on same-sex marriage and even abortion itself, nor libertarian, with public spending and tax increases, in what many people think are his conflicting economic views, on one hand promoting free markets, and on the other brokering deals for IMF loans.

Lasso also got elected on an explicitly anti-populist platform, painting the Ecuadorian left as invariably populist, in what many other beltway libertarians in Latin America, such as Gloria Alvarez or Axel Kaiser have done in the past.

However, what differentiates Lasso from Milei is that the former, by adopting a mainstream, non-populist, establishment libertarian and right-liberal strategy has alienated himself from his country’s problems and even from his apparent personal political beliefs, whereas the latter, by adopting the culturally conservative aspects of Argentinian society, has got his popularity and his support, as well as the one of libertarian ideas he promotes, skyrocketing, to the surprise and fear of the elites in Argentina and in the United States.

Lasso’s decline is a textbook example of the retreat of beltway libertarians: once you get into power, you forget the ideal of freedom that got you into the fight, but Milei’s success is a reminder of what Lew Rockell said in his manifesto titled The Case for Paleo-Libertarianism:

If the American people continue to connect libertarianism with repellent cultural norms, we will fail. […] Do we want to remain a small and irrelevant social club like the LP? Or do we want to fulfill the promise of liberty and make our movement a mass one again as it was in the 19th-century? Culturally meaningful libertarianism has arrived during the greatest turmoil on the Right since the1940s. Libertarians can and must talk again with the resurgent paleoconservatives. We can even form an alliance with them. […] Together, we have a chance to attain victory.

If Milei gets elected to the Argentinian presidency next year, he will prove one again that right-wing populism was the correct strategy for the Paleo movement from the very start, and if that happens indeed, it will finally mean that Rothbard was right when he wrote in his essay Right-Wing Populism: A Strategy for the Paleo Movement that:

For sensible people and paleo-libertarians, the time has come to re-enter the real world, and to help forge a coalition that will create a successful right-wing populist movement which will, by necessity, be in large part libertarian.

To go over the heads of the media and political elites, to reach the working and middle class directly, to spread the ideas of liberty and the knowledge of how they have been oppressed, requires inspiring and charismatic political leadership. It requires, in addition to intellectual cadre, political leaders who will be knowledgeable, courageous, dynamic, exciting and effective in mobilizing and building a movement.

It requires leadership able to seize the moment to act, leadership with the moxie and the fortitude to surmount the slanders and smears that will inevitably be directed against it.

It requires ideological and political 'entrepreneurs’ in the best sense, leadership that is willing and able to forge a paleo coalition to split off heartland and paleo-conservatives from Official and neo-conservatives, to raise the banner and to build a real-world movement in which, as in the days of the Old Right, libertarians can play a valuable part.

And if paleo-libertarianism can be reborn outside the United States, it means it can be also reborn in the United States as well.

After the leaking of a draft opinion from the Supreme Court on “Dobbs v. Jackson Women’s Health Organization,” it seems clear that the precedent set in Roe v. Wade and upheld by Planned Parenthood v. Casey is being overturned. In the document, confirmed by Chief Justice Roberts, Justice Alito plainly says that the majority opinion is “that Roe and Casey must be overruled,” and that “It is time to heed the Constitution and return the issue of abortion to the people’s elected representatives.”. 

So, what does this mean for Abortion “rights”? Despite what liberal pundits' hysteria makes it look like, this does not mean that abortion is now banned in the entire United States. What it does mean is that the decision on whether it is banned is determined by each state’s government. 

Essentially, the power to legislate abortion has been handed from the federal government down to the states in a rare victory for states’ rights. Particularly on an issue that divides Americans more than nearly any other issue. 

Forty-nine percent of Americans identify as Pro-Choice and forty-seven percent as Pro-Life. Overall as well, thirty-two percent support abortion being legal in all cases and nineteen percent support abortion being illegal in all cases. Support or lack of it seems correlated to the region the state is in, as Pro-Life states tend to be in the South or Midwest, while pro-choice heavy states are in the Northeast and West coast. 

Twenty-three states already have laws that would trigger if the decision is made final that either impose restrictions on abortion they could not previously impose or an outright ban of abortion, all in either the South or Midwest. Conversely, sixteen states have laws that protect the “abortion rights” which are all on the Northeast and West coasts. 

The pre-existing divide between more rural, Southern, and Midwestern states and more urban, Northeastern, and West coast states is going to be furthered. The difference in policy, even among states that are generally pro-life or pro-choice, will create a new incentive for people in choosing where they live. One based around a moral issue. 

While what set of morals one wants to live under somewhat exists between the states in the varied cultures between them, abortion being a state issue gives an easy signaling device for them. It is a safe assumption that “what is their abortion policy” is a question people will ask when considering where to move.

This is a continuation of the trend of people moving from state to state concentrating certain states on one ideology and culture that is becoming increasingly opposed to other ones. The obvious question that comes from observing this trend is, “Are we going to see secession from this?”

The answer to that question cannot be definitively answered till something happens, but we can draw parallels to the last time the U.S. saw States secede in the Civil War. Historian Alan Taylor describes the U.S. up to 1850 as “built on an unstable foundation of rival regions and an ambiguous Constitution”. 

There were many conflicts between the states before the Civil War and even full-on rebellions such as the Whiskey or Shay’s Rebellion. The States only continued the trend of division among themselves leading up to the Civil War culturally, economically, and politically. 

Slavery would become the issue that is credited with causing the Civil War, but, while playing a part, was not the only reason, nor does it explain all of the divides between the states. In some states like North Carolina, it was never clear whether the general population even cared about the issue as it was a relatively small slave population state. 

Additionally, several Union states kept slavery throughout the war, even after the emancipation proclamation, till it was outlawed by the 13th amendment. Although slavery was not the sole cause of the Civil War, it did become the issue that served as the face of the divide.

Similar conditions do exist today as leading up to the Civil War if you replace the issue of Slavery with the issue of abortion. States before this decision had already been engaged in legal fights with the federal government over abortion. Not only this, several states have made laws to re-enforce “abortion rights” and provide greater access to it. 

It is clear that before and now after the leak states are dividing along this line and it is coming to the forefront of the differences between them. Though we can see that many other divides exist between the states that are only being exacerbated, such as COVID 19-policies and approach to the economy. 

This provides quite substantial evidence for some kind of situation similar to the Civil War secession or a softer secession such as the USSR. One can only wait, but regardless if such a scenario happens Abortion will be at the forefront of the divide between states for the foreseeable future.