Power & Market
No Recession in Sight
The same people claiming inflation was transitory are the same ones telling you there is no recession. Isn’t that strange?
This Wednesday’s press conference, following the Fed raising rates by 75-bps, shows how critical the act of sticking to script is for the purpose of public policy. Jeff Cox at CNBC pointed out the latest elephant in the room:
They're being told by folks like you and the administration that we're not in a recession, we're not heading for a recession, frankly, coming from the same people that told them inflation was transitory.
Then he asked point blank:
So what would you tell the public to reassure them now that you feel confident in your forecast going forward and the Fed is ready to respond to a potential downturn in the economy?
Powell’s immediate response:
All I've really said is I don't think it's likely that the U.S. economy's in a recession now.
He still claims that bringing inflation down, as well as the so-called “soft landing,” are real possibilities. The potential of a recession came up several times during the session, with Powell committed to staying somewhere between neutral to unsure, or simply not answering the question.
When Steve Liesman, also at CNBC, asked whether Powell shares Biden’s confidence that there is no recession, Powell responded, but not to the question. Liesman was able to ask again, head on:
[INAUDIBLE] the question was whether you see a recession coming and how you might or might not change policy.
Forcing the response:
So, we're going to be-- again, we're going to be focused on getting inflation back down. And we-- as I've said on other occasions, price stability is really the bedrock of the economy. And nothing works in the economy without price stability…
…it continues but he still managed to not answer the question nor use the word recession.
In another reply, Powell moved from a recession being “not likely” to making a more direct statement:
So, I do not think the U.S. is currently in a recession. And the reason is there are just too many areas of the economy that are performing too well.
So, I don't think the U.S. economy's in recession right now.
Time will tell. But remember, the last recession, declared in July 2021, officially ended in April 2020 according to the National Bureau of Economic Research (NBER) press release.
If this is the standard of care the NBER takes before declaring a recession, then sometime near the end of 2023 this issue should be resolved. Most likely, it’s only a matter of time until CNBC will have a similar headline as it did on July 19 of last year:
It’s official: The Covid recession lasted just two months, the shortest in U.S. history
The official name of the next recession is yet to be seen; however, it should be called the Central Bank Crisis since the central bank caused the inevitable crisis. Recession or no recession, housing is still at all-time highs. The cost of living continues skyrocketing. The stock market is still destined to meet its date with price discovery. All manners of the system, whether the Federal Reserve, Office of the President, or politicians plotting the newest (inflationary) spending bill are committed to keeping their precious plans afloat.
At this point, trust and credibility on both sides of the political aisle should be at historic lows. This debate on whether or not a recession has arrived is just the next in a proverbial revolving door of distractions for public consumption. Powell, as a political chess piece, sticks to his script as diligently as ever.
No, Inflation Is Not a Product of Corporate Greed
Seventeen months ago, as the keys to the oval office changed hands, for all of the political animus and theatrics, one thing seemed a given: the US economy would roar back to vitality in historic fashion, a point of optimism in a nation of discord and incertitude. Yet hope would give way to ambivalence, which, in turn, gave way to serious doubt. Today, a pathetic 23 percent of Americans feel economic conditions are even “somewhat good.” The primary reason for such abysmal economic sentiment? Inflation.
As consumer prices have accelerated out of control over the past year, a new political narrative on inflation has emerged, one that alleges corporate impropriety as the primary catalyst. The motive for such a messaging shift from select members of the political apparatus is clear: a need to shirk accountability for evidently inflation-inducing policies. Unfortunately, the corporate greed narrative has apparently paid dividends to its progenitors, garnering increasing acceptance among the body politic at large. Indeed, according to one poll from Data For Progress, a majority of likely voters now believe price-gouging is a major contributor to heightened inflation. However, that inflation is brought about by corporate greed is a sophistic political lie in every respect.
Yes, corporations are greedy. People are greedy. It turns out that greed is a natural characteristic of the human condition. It always has been. Why, then, has inflation only recently exploded after 40 years of calm, now clipping along at better than four times the Federal Reserve’s target annual rate of two percent?
In May 2020, the Consumer Price Index (CPI) grew just 0.1% year-over-year. Are we to believe that corporations were simply feeling particularly benevolent, only to reverse course in dramatic fashion the very next year? Of course, that is preposterous.
But the prevailing evidence that peddlers of the corporate greed narrative have repeatedly cited is the reality that corporate profits are at historic highs. This is, in fact, true. But it is entirely irrelevant to inflation itself and is not even indicative of any measurably intensified greed.
The Producer Price Index (PPI), which measures cost increases for businesses, is up 10.8 percent from last year. With consumer prices rising at 8.3 percent over the same period, this frankly means that American businesses en masse are likely not even passing on the full extent of the higher costs they themselves are paying, to consumers. So how can this be, even as corporations are raking in record profits? The answer lies in a distinction that the corporate greed crowd will never make: the distinction between corporations and businesses.
In fact, just five percent of businesses are corporations. While the CPI measures the general prices that businesses are charging, corporate profits figures only measure the profits of large corporations. Yet it is chiefly small businesses that cannot afford significant increases in the cost of doing business because they have fewer resources than their larger corporate counterparts. Thus, it is highly probable that small businesses, which account for nearly half of American GDP, are primarily driving broad price increases, on no account of elevated greed, but rather as a result of an increase in their own cost of doing business.
Former Labor Secretary Robert Reich is perhaps the most prominent purveyor of the corporate greed doctrine of inflation. If anyone can point to resounding evidence of malign corporate price-gouging, it should be Reich. In an article laying out his argument for “corporate power” being the catalyst behind record inflation, Reich condemns multinational coffeehouse chain Starbucks for announcing price hikes earlier this year despite being “so profitable.”
What the twice Ivy-educated pundit fails to mention is that Starbucks’ Q1 2022 earnings were cut by more than half when compared to Q4 2021, despite revenue holding steady. Q2 2022 earnings dropped below that of even Q1. What’s more, the company reported lower earnings in 2021 than it did back in pre-Covid 2018, despite having higher revenues. Reich even conveniently ignores the fact that Starbucks recently revealed it would be raising its minimum wage to $15 per hour nationwide beginning this summer.
Evidently, Starbucks isn’t the insatiably gluttonous enterprise that Robert Reich would like you to believe it is. And this seems to be a common theme with many of the companies that he and others proffer as evidence of nefarious profiteering. But it still doesn’t answer for why corporate profits are at historic highs. First, it is important to understand that corporate profit margins are not significantly higher than they were pre-Covid. With that established, it is likely that inordinate growth in consumer spending since the Covid recession is largely to blame for record profits. Needless to say, when Americans drop unprecedented quantities of cash on consumer products, companies whose costs don’t rise significantly fare pretty well.
Certainly, it is understandable how the corporate greed dogma has caught on with vast swathes of the American public. Rancorous anti-corporate sentiment has been prevalent in America for years, and corporations, as such, make for quite convenient political scapegoats. But any effort to broadly place culpability for inflation on the private sector is demagoguery at best, and almost always attempted by ultracrepidarian activists rather than studied economists.
The reality is that the true offender behind record inflation is the US government. The Federal Reserve has inflated the money supply by over 40 percent since the beginning of 2020, allowing congress to hand out checks to the public and driving an unhealthy initial spike in disposable income. As consumers spent off this superficial wealth, prices soared and disposable income tumbled. Consequently, today, as inflation ravages the wallets of everyday Americans, disproportionately impacting low-income families, the personal savings rate has plunged to just half of what it was in early 2019 and is now rapidly approaching all-time lows.
American citizens are being forced to spend larger portions of their income on basic necessities and mundane lifestyle items, leaving less–or no–room for economically stimulating investment or leisure. The great evils of government–not corporation–inflation are every day becoming increasingly apparent.
No One Should Have This Much Power
If you’ve never given much consideration to the power of central banking, it’s time to make that a priority. June 15 marks the start of the Fed’s balance sheet reduction. It’s important to understand what’s in store regarding the upcoming crisis and who’s to blame.
Look at some of the ideas produced by the Federal Reserve System. In the paper, authored by four economists, titled Substitutability between Balance Sheet Reductions and Policy Rate Hikes: Some Illustrations and a Discussion:
Overall, the model predicts that reducing the size of the balance sheet by about $2.5 trillion over the next few years, as opposed to maintaining the size at its peak level, would be roughly equivalent to raising the policy rate a little more than 50 basis points on a sustained basis.
Their model equates shredding a quarter of the Fed’s nearly $10 trillion balance sheet to no more than a 0.50% increase in interest rates. However, the real-world economy seldom, if ever, fits into their economic models.
Then there is the St. Louis Fed illustrating the projected monthly balance sheet run-off:
Even in one of the very many Fed surveys, they expected a reduction of:
$2.8 trillion in total runoff or about a third of the balance sheet over 3 years.
Unfortunately, none of these projections are going to come to fruition. While one can never say never, a confident probability of approaching zero percent can be assigned. It begins with just one chart:
With gray bars denoting formal recessions, the last time the Fed reduced treasury holdings was from 2018 to 2019 by roughly $400 billion and from 2007 to 2008 by around $300 billion!
Of course, the Fed, mainstream economists and those on TV never discuss the Austrian Business Cycle or how the Fed causes booms and busts. But take note that in the last two instances where treasury holdings were reduced, there was a significant decline in the stock market, an eventual market crash, a recession… and lastly, further expansion of the balance sheet to climb out of the recession.
Naturally, the mainstream narrative was that COVID caused the last crash and evil bankers (excluding central bankers) caused the previous crash.
Consider where we are now in the boom-bust cycle. We’re waiting for the appearance of a gray bar in 2022 or 2023; but those take time and recessions are called after the fact. The Fed will begin shrinking tomorrow. Should history be our guide, the reduction will not last 1 to 3 years. The stock market will continue to decline, leading to another crash. There will be a recession (we may already be in one), and the Fed will eventually announce the resumption of balance sheet expansion.
Consider “boom” periods like 2010 when the Fed owned less than $800 billion of US Treasuries. Rather than reduce holdings, they increased them to $1.6 trillion by 2011. And again, during an alleged period of prosperity, they further increased holdings to $2.4 trillion by 2014.
What the Fed could not do in a strong economy can scarcely be done in a weak one. True, the Fed will reduce its asset holdings; however, this is transitory. Any talk of asset reduction being remotely close to a trillion dollars, let alone two or three trillion, becomes, for lack of better words, laughably absurd.
“But inflation is high” some may say. Also true, inflation measurements are considered astronomically high by American standards. But this sentiment misconstrues the role of the Fed, erroneously believing they possess the knowledge to fight (price) inflation, or even the will to do so.
Once this current round of Quantitative Tightening fails, should inflation still persist to levels deemed unacceptable by society, there will be a new narrative explaining why we need high inflation, or why high inflation is preferred to a depression or other catastrophe. Ultimately, it doesn’t matter what inflation numbers we see. The balance sheet can only go one way, and that is up. The entire history of central banking and unbacked fiat currency supports this.
If the government provided you the ability to legally counterfeit currency, the only restraint being your own will, would you ever stop? This is the case with the Federal Reserve. They will never stop growing the balance sheet. A currency monopoly on the US dollar is more powerful than a nuclear bomb. No one would ever freely give up that power; no one should even have that power.
Nuclear Giants and Ethical Infants
It is commonplace to hear about how much more we know than our ancestors. And many have long taken that to imply that we are more advanced than they were, or that the accumulation of knowledge will continue to improve (progress, if you claim to be a progressive) over time. However, while that is undeniable in some areas, the opposite might be true in others, making it entirely possible we have regressed in more important ways than we have progressed.
Leonard Read made this important but typically overlooked argument in his “Nuclear Giants and Ethical Infants,” in the August, 1964, The Freeman. His insights there about what we know less of, at the same time we know far more of other things, and the implications about America’s educational system, deserve recalling, given how coercive and controversial that system has become today.
[We have] a superfluity of technical know-how relative to general wisdom or understanding…a dangerous and grotesque imbalance.
Our educational emphasis is more on accumulating know-how than on gaining wisdom or understanding…We have know-how galore…But where is the understanding to balance the know-how?
Are we not, as a nation, on the same reckless course that has brought about the fall of one civilization after another? Self-responsibility--amidst an abundance of know-how and a paucity of wisdom, understanding, conscience, ethics, insight--has given way to government responsibility for our security, welfare, and prosperity.
Unwisely, we increase the curbs on individual initiative…The directive of one’s behavior is less and less what conscience dictates as right.
A rapidly expanding know-how, unless balanced by a commensurately expanding wisdom, assuredly spells disaster.
What is the kind of wisdom Read is referring to here? Because we are very different in many ways, the key to a more moral or ethical society is individual integrity, or “fidelity to one’s highest conscience,” subject to our common “moral obligation not to impair the life, livelihood, or liberty of others.” Such wisdom requires that individuals exercise their own decisions about how best to live, rather than having decisions imposed on them by some collective determination.
The first stage of wisdom requires that we understand the virtues and how to live them. Integrity, that is, fidelity to one’s highest conscience, is foremost and basic…[but] note the millions of individuals who actually believe that the rest of us would fare better were we a reflection of themselves.
[Consider] only two individuals, you and me…I know more about myself than anyone else does…you know yourself better than I know you.
You and I are not alike…My aptitudes, faculties, potentialities, likes and dislikes, yearnings, inhibitions, ambitions, capabilities and inabilities to learn about this or that, are not at all like yours. As to our common ground, each of us has a moral obligation not to impair the life, livelihood, or liberty of others. Beyond this…we are at variance in every particularity.
What does this have to do with our schools? It goes to the very heart of seeking wisdom.
Examine my possible educational relationships to you…the proper role is to let you draw on such know-how and understanding as I may possess and as you may determine. Education is a seeking, probing, taking-from process and the initiative must rest with the seeker…your progress depends on your desire to learn…Mine is, at best, only an exemplar’s role: it is to improve myself to the utmost and thus to persuade solely by precept and example.
When you are at liberty to glean from me or any others as you may choose…You will gravitate in due course toward that balance of know-how and wisdom needed for the fulfillment distinctive to your own person.
My second possible role is that of demigod…I shall compel your (or your children’s) classroom attendance, write your curriculum in accord with my notions of your needs and force it upon you and, lastly, I shall coercively extort the financial wherewithal from all and sundry to defray the costs of imposing my own peculiar brand of knowledge upon you.
The approach of the demigod…is antagonistic to the advancement of wisdom.
Coercion…is, by definition, repressive and destructive…Acquiring understanding or wisdom springs from the volitional faculty.
If…the forcible casting of you (or your children) in my image is wrong… government schooling…is precisely the same thing, except on the grand scale.
Someone might well object to such a claim by saying, “surely you can’t mean that you believe our massive public expenditures on education produce nothing of value” (as if that was the relevant standard). But even to that misdirecting question, Read had an interesting response.
A great deal of first-rate education goes on in our government school systems; but…in spite of, not because of, the coercive or governmental aspects. Untold millions of teachers and students, in many of their day-to-day relationships, are on a voluntary, not a coercive basis; to a large extent the students are selecting their teachers. But wherever coercion insinuates itself into schooling…an imbalance of know-how and wisdom will become evident. Wisdom will decrease, not increase.
From that basis, Read argues that government intrusion into education is at the heart of our “imbalance of know-how and wisdom,” based upon a false premise that if someone doesn’t impose an appropriate education on people, they will not be trustworthy to choose for themselves.
Billions of dollars are forcibly collected from all of us--limiting our individual pursuits--and used to pay for government’s know-how pursuits…Compulsion--government intervention in the educational market--accounts, in no small measure, for the imbalance of know-how and wisdom.
We have many private educational institutions…But so-called private institutions in a statist society are not…free market in character…they are licensed and regulated and increasingly financed by their statist “competition”…education is preponderantly statist…so much of the nation’s resources are converted to know-how pursuits.
Inquire how we in the U.S.A. got off on the wrong foot. History reveals the original “reasoning” to have been somewhat as follows: America is to be a haven for free men. To accomplish this, we must have a people’s, not a tyrant’s government. However, such a democratic plan will never work unless the people are educated. But free citizens, left to their own resources, will not accomplish their intellectual upbringing. Therefore, “we” must educate “them”: compulsory attendance in school, government dictated curricula, forcible collection to defray the costs.
Imagine: We will insure freedom to “the people” by denying freedom to them in education, for if their education is entrusted to freedom they will remain uneducated and, thus, will not be able to enjoy the blessings of freedom!
So how can we recover the wisdom that has been lost to coercive education?
How can we ever expect a people brought up on coercion to be free of demigod mentalities? Does a coercive educational system have the intellectual soil and climate where freedom and wisdom may flourish?
[We have] hooked up coercion to the spirit of inquiry…[but] any light coercion produces is not in the form of wisdom.
Once on this coercive trek toward…toward know-how in everything and understanding in nothing...you and I and others need to recover from our demigod pose…to reject compulsion and to accept liberty in education.
How…can a people be free or wise unless they are brought up in, steeped in, believe in, and understand that growth in wisdom presupposes freedom of the individual to pursue what is wise?
Read followed up “Nuclear Giants and Ethical Infants” with “The Case for the Free Market in Education,” in the following issue of The Freeman. There, he echoed the faith in freedom that logic and history had taught him was justified in so many areas, as applying to education as well.
Remove the police force--government as boss--and education is restored to the free, competitive market.
Assume that you are no longer compelled to send Johnnie to school; no government committee will prescribe what Johnnie must study; no government tax collector will take a penny of yours or anyone else’s income for schooling. This, it must be emphasized, is the free market assumption.
[Ask people] if they would let their children go uneducated were all governmental compulsions removed… “I would no more let my children go without an education than I would let them go without shoes and stockings.”
Were there to be no more police-force-as-boss in education…Any person who understands the free market knows…there would be more education and better education.
It is a…blindness to the enormous evidence in support of freedom…that accounts for much of the lost faith in educational productiveness were the educational system relieved of restraints and compulsions.
Those who want education…will have education…Remove all police-force-as-boss, and we remove education’s chief obstacle.
Americans are highly dissatisfied with their educational systems, with controversies raging over The 1619 Project, Critical Race Theory, how to remake math to incorporate “social justice” and much more. Few have seen that such problems derive from government’s coercive involvement as Leonard Read, however. If we would replace the perpetually disappointing faith in force, “education’s chief obstacle,” with Read’s faith in freedom, which has been demonstrated over and over and over, we would move to a world with more wisdom and less controversy over what self-identified demi-gods should force others to be taught. That sounds like a win-win situation to me.
Name, Image, and Likeness
It’s the best time of the year: college football season. However, this is a particularly unique college football season because this year, for the first time ever, players will be able to be paid for their name, image, and likeness. This is the culmination of a long raging debate over whether or not college football players should be paid for the work they do. Arguments for paying players claim that they rake in cash for their schools, they give their schools valuable exposure, playing for the team is hard work, sports detract from studies, athletes need spending money, and the potential for injury compensation is a must. However, while these are initially convincing, upon further examination they are somewhat lacking. It is true that these athletes provide valuable exposure for their schools, but it is equally true that the universities provide valuable exposure for the athletes. However, the strongest critique that comes from those opposed to paying players is that these players are already receiving scholarships and are thus already being paid. The belief is that none of these arguments for paying players are in dispute because players are already being paid. For this reason, while we describe the argument as whether or not we pay players, the real debate is whether or not we pay players enough in the form of scholarships. This is what makes this college football season so exciting for economists, as this question can finally be addressed.
Because we as Austrians understand that value is subjective, we therefore also understand that we cannot say whether or not a scholarship is the appropriate amount to pay a college athlete. The answer to that has to come from the market process of economic calculation. Each player who takes the action to play football in exchange for a scholarship demonstrates that he values the scholarship and perhaps the potential future offered there more than he values the time spent and effort exerted playing football. In an unhampered market, as these decisions are made at different levels by different individuals; we see economic calculation take place and we see prices that we expect as market rates begin to form. As Ludwig von Mises explains in Socialism: An Economic and Sociological Analysis,
Every man who, in the course of economic activity, chooses between the satisfaction of two needs, only one of which can be satisfied, makes judgments of value. Such judgments concern firstly and directly the satisfactions themselves; it is only from these that they are reflected back upon goods.
In order for us to understand the values appropriate for college football players, we must allow for calculation so that we can see these judgments reflected back upon the players. However, a flaw has always existed for calculation in the world of college athletes. Mises goes on to explain that for calculation to exist, units must exist—prices must exist. Scholarships serve that purpose for us here. However, scholarships have a distinct ceiling of being able to offer at most the price of attending the university. Calculation has never been able to occur at a higher price point than that of tuition. Until now, the best of college football players have received these scholarships; however, it is entirely possible that they could find an incredibly higher value on an unhampered market. For the first time in the history of college sports, we will finally be able to run this experiment, as the ceiling of scholarships is finally gone.
However, the fact that athletes may be compensated for their name, image, and likeness still leaves one wanting in terms of calculation, as it only allows one form of competing on the market above the price of tuition, and that is in sales based on your fame. However, a lineman may not end up having the same demand for commercial appearances as a quarterback, despite the fact that it's possible a quarterback may only be so successful because he has such an exceptionally talented offensive line. Thus only certain members of the community may contribute to the new calculation that is taking place. For that reason, I will conclude with a few options that would allow for more effective economic calculation to allow us to understand better how much any given athlete brings to a school. First and foremost, it’d be helpful if schools were allowed to directly pay players and thus enter the competition themselves. This would lead to the school being allowed to calculate and we’d see the most direct valuations of what the player brings to the school. Additionally, if the National Football League did not require experience playing in college to enter the draft—as several other sports allow—we would see even more competition in the marketplace. Most importantly, this suggestion would allow us to evaluate the degrees, exposure, and potential that the schools offer the players, because right now every player is forced to receive this exposure and pursue a degree, whether they want it or not. Each of these suggestions has its own ethical arguments for and against it, but from a perspective of economics, this is the only way to better answer the question of how much athletes deserve to be paid. If we want to honestly understand this question, we must listen to what Florida state representative Chip LaMarca, said while running the bill to allow compensating players in Florida, “You either allow someone to enter the free market, or you don’t. I don’t think you put training wheels on them.”
New York Can't Run an Election. Why Can't Governments Do Their Most Basic Tasks?
New York City held its Democratic primary for mayor last week, and the initial results favored Brooklyn Borough president Eric Adams by a sizable margin.
But now officials say those results aren’t reliable at all and the Board of Elections botched the vote-counting process.
As the Washington Post now reports:
It turns out that the results the city released also included a number of dummy ballots, used to test the system—ballots that should not have been included in the initial count….
It will still be a few weeks before we know who won the primary, given those absentee ballots (which are likely to aid Garcia) need to be counted.
This is a primary election in a single city, yet based on the level of competence brought to the operation, one would think this were an incredibly complex affair, unknown in the annals of government operations.
(It’s also reminiscent of the botched primary election in Iowa in February 2020, when the Democratic Party had more trouble counting a small number of votes in one of the smallest states in America.)
In the wake of the New York fiasco, not surprisingly, some Americans began to point out that if New York miscounted its votes in a mayoral election, why should we trust that 2020’s presidential election in New York was “secure”?
Perhaps aware of the fact that last week’s election doesn’t look good for the idea of election integrity, the corporate media sprang into action with a plan: blame everything on New York’s board of elections (BOE). This is a New York problem only, we're told. Elections everywhere else in America are in tip-top shape and run by only the highest-quality, most competent people.
To keep up this narrative, the Washington Post today ran an article with the title “New York’s mayoral election is a mess. This doesn’t somehow prove Donald Trump right.”
Now, I don't know if Donald Trump lost due to election fraud, but the idea that elections and election officials are not exactly paragons of efficiency and virtue is plausible, to say the least. Nonetheless, the Post article makes it clear that the BOE is to be thrown under the bus in order to insist that election systems everywhere else are in great shape:
No observer of New York City politics was surprised to learn that the Board of Elections had messed things up. It’s common knowledge the board is at best inept, as a report from the city’s local paper documented in late October. The city’s politics broadly are byzantine and dishonest, often relying on a system of patronage that those in power—generally the system’s beneficiaries—are loath to challenge. It’s an embarrassing situation, but usually one that does its embarrassing thing out of the spotlight of national attention.
Similarly, CNN featured a story today declaring the New York BOE to be “corrupt and incompetent,” with CNN on-screen personality John Avlon insisting in no uncertain terms that the BOE is worthless.
Needless to say, one rarely hears such thundering condemnation of Democrat-controlled institutions at the WaPo or CNN, yet it’s no holds barred at major news outlets today. But it's all necessary to assure the public that New York is the only place in America where election systems are "corrupt and incompetent."
Governments Continue to Botch Their Core Functions
But even if we leave Donald Trump and the 2020 election out of this, the New York affair should be regarded as just the latest reminder that government institutions increasingly can’t seem to be able to carry out what we’re told are their most basic functions.
We’re told that governments must be in charge of elections; that governments will “keep us safe” by catching criminals and preventing crime; that governments must be in charge of the justice system; that governments must be in charge of the schools.
Yet in all these cases, the competence and success with which government agencies carry out these “core duties” is questionable at best.
The court system is slow, overloaded, and involves long wait times. The multiyear wait times needed to get a hearing for suspected illegal immigrants is just the latest example. The right to a “speedy trial” is apparently not much of a right at all.
Meanwhile, the homicide rate continues to head up to the multidecade highest. Millions of Americans are buying guns because they don’t trust government officials to “keep us safe.” This is true both at the micro and macro levels. In many cities, police devote almost no resources to investigating homicides. And then, of course, there is the American intelligence “community” (i.e., the FBI and the CIA), which allowed 9/11 to happen right under its nose. And don’t forget the fact the US just lost two more wars.
Public schools are almost as unimpressive. The US ranks forty-eighth in math and science education. The US is only in the middle in terms of science and reading. Ninety percent of American schoolchildren attend public schools.
Yet while governments in America can’t seem to pull off these most ordinary tasks, they seem to have plenty of time and resources for investigating middle-aged women who “stormed” the US Capitol on January 6. Last Sunday, the US government bombed Syria and Iran—for reasons that obviously had nothing to do with defending the borders of the nation or the rights of American citizens. America’s governments have plenty of resources to pour into bailouts for wealthy bankers and other corporate friends.
But crime? Elections? Schools? Well, that’s all just much too complicated and governments insist we shouldn’t expect too much of them. After all, they assure us, we stingy taxpayers aren’t willing to cough up as much money as we should. The data says otherwise.
So when New York announces that it just hasn’t yet gotten the hang of this whole “elections thing,” just chalk it up to yet another example of how governments are awash in cash, yet never seem to be able to actually deliver the promised goods.
NGDP Targeting Ends in Absurdity
Among economists following an idea known as “market monetarism”, one of their core proposals is that the central bank should “target” a specific annual rate of increase in the nominal GDP figures, which are not adjusted for inflation. Typically, this involves targeting an NGDP annual growth rate of something like 5%. This, it is promised, will go far to ensure that the central bank responds appropriately in its monetary policy to prevent the economic cycle of booms and busts and ensure prosperity.
It doesn’t take much to see, however, that this can easily lead to some rather absurd scenarios. Naturally, we can imagine a scenario where the NGDP target of 5% is exceeded by measures of annual inflation. If we see a price inflation rate of, say, 7% (a high, but not unheard of, figure), then the NGDP target entails shooting for negative real growth. Rather, not only is one solution to high inflation to intentionally shrink the real economy and make everyone poorer, if we end up with a scenario where the economy is shrinking as inflation in prices is high, the NGDP targeting central bank might not notice a problem at all. Which would be good, insofar as central bank interventions seek to prevent the necessary and natural adjustments by individuals to changing economic conditions, except for the fact that inflation is a product of central bank monetary production. Such a central bank would be compounding the shrinking of the economy with an added dose of the destruction of purchasing power, in a cycle that can easily build to national economic collapse.
It does no good to assume that this sort of “recessionary inflation” can’t occur in practice. Even recent history puts the lie to that suggestion. Real GDP decreased 3.5% in 2020, according to the US government statistics, while the inflation rate of the US CPI ended up at 1.4%. Despite shrinking significantly, the NGDP targets are almost spot on in the “recovery”. In 2021, the CPI has just hit 5% year-over-year for May, implying that the ideal real GDP change is none at all in that timespan: which would essentially demand that no recovery from the lows of the government-imposed lockdown of large swaths of the global economy should have been done. This is patently absurd; the mind is completely boggled even thinking about it.
Yet, this is not the only sort of scenario where NGDP targeting leads to absurd conclusions. Even under a more “normal” situation for an economy with these central bank targets, the result of a recession is to intentionally target massive inflation. Assuming a recession of even a 10% drop in annualized real GDP, the annualized inflation rate to “counter” this decline and still hit the target would have to reach around 15%!
An apparently simple solution can be sought here. A lot of these recessionary drops are short-term drops followed by recovery that mostly averages out. So we can just do NGDP-targeting in the long term, right? Instead of month-by-month, we can look at the average rates over the last year or more. This seems fairly intuitive, but it doesn’t actually solve the problem. NGDP-targeting is purported to be a mechanism that will reduce recessions and smooth out the future, but going off of averages from the recent past slows responses and changes. If, hypothetically, action can be taken to prevent or reduce the severity of recessionary drops in economic output, that action must be timed properly, not adopted after the fact when NGDP targets are being blown.
NGDP targets make no distinction between a high price inflation with low or negative real output growth or low inflation with high output growth. Fundamentally, it must be assumed that “real growth” follows a trend baseline (often assumed to be 2 or 3 percent) in “normal” times for it to seem reasonable at all. And with that assumption, what it essentially comes down to is the conclusion that in a “supply shock” (say, for instance, the government forcibly outlawed the operation of half the economy for most of a year), price increases above a couple percent should be lived with and not countered by the central bank.
Recently, we have seen that central banks wouldn’t attempt to do that anyway: faced with a “supply shock” of epic proportions created by the governments of the world, central banks the world over are declaring inflation “transitory” after printing massive sums of money to keep financial markets afloat and provide bailouts to companies that were forbidden by executive decree to operate. If and when this inflation proves to not be “transitory”, but rather a long-lasting consequence of large amounts of money being created at the same time production in many industries was slowed, halted, or redirected by government fiat, it will be far too late for any sort of NGDP targeting. The risk, rather, is that a central bank facing a crisis will throw away its targets (whether of price inflation or GDP) and simply dive into “emergency mode”, creating gobs of currency to provide “liquidity”, dropping interest rates to the floor, and working to stymie market processes of adapting to changes in supply and demand.
Originally published at Disinthrallment.com
Now You Can Join the Fed's Community Advisory Council
There could be a real opportunity to get on “the inside” of the Federal Reserve. Last Monday it was announced:
Federal Reserve Board accepting applications for its Community Advisory Council
Known as the CAC, the Advisory Council:
advises the Board on issues affecting consumers and communities and complements two of the Board's other advisory councils whose members represent depository institutions—the Federal Advisory Council and the Community Depository Institutions Advisory Council.
Think of the CAC as an advisory board which advises the (Federal Reserve’s) board… which helps to advise other boards. The CAC meets in Washington, DC to:
provide a range of perspectives on the economic circumstances and financial services needs of consumers and communities, with a particular focus on the concerns of low- and moderate-income consumers and communities.
Looking back at the last CAC meeting minutes on October 1, 2020 provides an idea of the scope of economic questions the board asks itself:
To what extent are Council members seeing the effects of COVID-19 on small businesses in their communities?
Are permanent closures threatening the entrepreneurial ecosystems of their communities?
What tools or policies can help mitigate these effects?
The minutes seem quite long, having many stats, various ideas and even anecdotal evidence. For the questions above they mention difficulties lower income communities, women, and minorities are all facing, as well as the usage of Paycheck Protection Program (PPP) loans. They even mention:
Another round of PPP is critical to helping save these smaller businesses…
Speaking of which, the PPP weekly report noted that as of April 11, 2021, the $755 billion to date has been approved, as seen below:
This is the liquidity facility which provides forgivable loans. It will continue to be of interest as to how this will end, considering only $64 billion is listed on the Fed’s balance sheet, or just under 10% of all forgivable loans. Whether the loans will be paid or forgiven remains to be seen…
Recommendations, such as “another round of PPP” are the type of work the CAC is encouraged to put forward to the Federal Reserve. Of all the questions the CAC was asked, nothing regarding the sustainability of programs such as the PPP, debt or money supply concerns, the economic impact nor morality of nearly $1 trillion in forgivable loans was ever mentioned.
Unfortunately, billions of dollars are at stake here, requiring “experts” in various fields to recommend how to distribute these dollars; no economic calculations necessary. Perhaps that’s why the application calls for qualifications such as:
knowledge of fields such as affordable housing, community and economic development, employment and labor, financial services and technology, small business, and asset and wealth building, with a particular focus on the concerns of low- and moderate-income consumers and communities. Candidates do not have to be experts on all topics related to consumer financial services or community development...
Applications due by June 11. Should you win the position as CAC member you’ll be able to meet in Washington, on a semi-annual basis, normally for a two-day meeting. If you think you have what it takes to best plan communities across the country, then feel free to apply and good luck.
No, There's No Reason to Feel Sorry for Robinhood
As the dust settles following the GameStop frenzy in late January, it is clear that one of the biggest losers in the controversy in Robinhood. Robinhood is a trading app that markets itself as a platform for ordinary retail investors seeking to buy and sell securities without the cost of an expensive broker. Or, more romantically, Robinhood claims it has "democratized" investing.
But things didn't play out that way for the company. As buying of GameStop shares intensified in January 28, Robinhood (among other brokerages) halted the buying of GameStop (and some other shares, such as AMC) citing an inability to post sufficient collateral at clearinghouses. This is how a recent Forbes article summed it up:
With the ability to easily buy more and more stocks using Robinhood’s app, the pile-on became a gold rush, as more speculators flooded to the platform to get “in” on the bounty. News about the booming GameStop and AMC stocks spread far and wide.
That’s where the trouble started.
Robinhood doesn’t directly execute customer trades.
Instead, it directs the transactions through a clearinghouse, which pays for the trades as the information it gleans lets it more effectively direct its own trading decisions.
Buyers and sellers are quickly matched digitally. However, the “settlement” of the trade—the actual transfer of payment and shares between parties—typically takes two days after the transaction. So clearinghouses require brokers, such as Robinhood, to have enough money on deposit to ensure that a trade can clear—even if the broker is waiting for a separate payment from a client to finish processing.
Given high demand for the shorted stocks and the climbing prices, Robinhood’s deposit requirements suddenly jumped ten-fold, according to a company blog post.
So Robinhood “put temporary buying restrictions in place on a small number of securities that the clearinghouses had raised their deposit requirements on.”
The fact that this move also helped billionaire short sellers at hedge funds was not lost on the general public, and the many immediately began to accuse Robinhood of intervening to help Wall Street oligarchs at the expense of ordinary investors.
Was this the case?
It doesn't matter all that much. What matters is that Robinhood was unable or unwilling to serve its customers in the way that Robinhood claimed it always would.
According to Robinhood's narrative, its management had no other choice. And this has led some commentators to defend Robinhood, claiming that it was a victim of circumstance and it wasn't really conspiring against ordinary investors.
But so what?
Even if Robinhood was being perfectly honest with everyone, the fact that it had to cut off its own customers from promised services reveals to us that Robinhood's management is at the very least incompetent and was unable to plan for future events which would have been anticipated by truly insightful or competent entrepreneurs.
The company's ineptitude was showcased in a recent discussion between Rob Portnoy and Robinhood CEO Vlad Tenev. Tenev bragged that the company's block on further GameStop purchases meant "we were able to protect the firm." But Portnoy correctly pointed out that if "protecting the firm" means "screwing over" the customers, there's something very wrong going on over at Robinhood. We have a word for "protecting the firm" by harming customers. It's "exploitation," or "ripping people off." In response, Tenev threw out some bromides about how "if the market breaks down" they can't serve their customers. This assumes, of course, that letting investors buy what they want constitutes a "breakdown" in the marketplace. That's a rather bizarre assertion. Ultimately, even if we assume Robinhood was in no way conspiring against anyone, the fact remains that—as pointed out on CNBC—Robinhood put itself in a scenario it should not have put itself in.
In other words, doing business with Robinhood now is an "enter at your own risk" sort of proposition. It's clear that in spite of all of Robinhood's claims about offering the everyman a way to participate in the markets, investors who do business with Robinhood can't trust that it will actually deliver the services it claims it will deliver.
That's as good a reason as any to forever ditch any company that acts with such ineptitude in giving the customer what he or she wants.
New Unemployment Increased to 1.4 Million Last Week as Recovery Falters
Listen to the Audio Mises Wire version of this article.
New unemployment claims increased during the week of July 18, rising to 1.41 million over the previous week's total of 1.3 million (seasonally adjusted).
Last week was the first week of increasing job losses after sixteen weeks of gradual declines since March. Job losses peaked during the week of March 28 when a stunning 6.8 million workers filed for unemployment benefits.
Since then, weekly totals of newly unemployed had gradually declined until last week's increase.
In total, since mid-March, more than 52 million workers—41 percent of the working age population between 25 and 56 years of age—filed for unemployment benefits.
As of the week of July 11, "continued claims" for unemployment were sought by 16.1 million workers nationwide. Continuing claims had peaked at 24.9 million unemployed during the week of July 4. A decline in continuing unemployment from 24 million to 16 million shows some progress, but a "normal" total for continuing claims in recent years is less than 3 million. Arguably, "excess unemployment" at the moment totals at least 13 million.
The rising unemployment comes partly as a result of state governments forcing the closures of some businesses, or restricting operations, in the name of mandatory social distancing.
Not only has this reduced possible working hours for employees, but it has likely reduced business owners' efforts to expand their businesses due to the extreme uncertainty that accompanies "emergency orders" now issued by governments. These orders are not subject to debate or any meaningful legislative process, making them far more unpredictable than ordinary legislation.
Revenue has declined precipitously for many businesses in recent months.
The approximately 16 million workers who continue to collect unemployment benefits will face a big problem next week as the additional $600 unemployment benefit will run out. CNBC explains:
Tens of millions of Americans who lost their jobs because of the coronavirus pandemic have been able to collect an extra $600 in weekly federal unemployment benefits over the past few months on top of the standard amount given by their state. For many households, the enhanced benefits have been a financial lifeline amidst record job loss and a burgeoning recession.
But on July 31, that enhanced benefit will end — and that could have dire consequences for millions of households.
Political pressure is mounting to continue the benefit, and to pass another stimulus and relief package overall. Given that tax revenues have collapsed, this will require essentially "printing" the money necessary for an expansion of the "CARES" Act. The US is now on track to produce more than $3 trillion in deficit spending for the 2020 fiscal year, which ends on September 30.
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