Libertarian Leanings

Invasion!

Talk about an invasion of privacy!

INFLATION

Arthur Laffer predicts inflation.  It's all about the money supply.

'About eight months ago, starting in early September 2008, the Bernanke Fed did an abrupt about-face and radically increased the monetary base -- which is comprised of currency in circulation, member bank reserves held at the Fed, and vault cash -- by a little less than $1 trillion. The Fed controls the monetary base 100% and does so by purchasing and selling assets in the open market. By such a radical move, the Fed signaled a 180-degree shift in its focus from an anti-inflation position to an anti-deflation position. The percentage increase in the monetary base is the largest increase in the past 50 years by a factor of 10 (see chart nearby). It is so far outside the realm of our prior experiential base that historical comparisons are rendered difficult if not meaningless. The currency-in-circulation component of the monetary base -- which prior to the expansion had comprised 95% of the monetary base -- has risen by a little less than 10%, while bank reserves have increased almost 20-fold. Now the currency-in-circulation component of the monetary base is a smidgen less than 50% of the monetary base. Yikes! [...] It's difficult to estimate the magnitude of the inflationary and interest-rate consequences of the Fed's actions because, frankly, we haven't ever seen anything like this in the U.S. To date what's happened is potentially far more inflationary than were the monetary policies of the 1970s, when the prime interest rate peaked at 21.5% and inflation peaked in the low double digits.'

If the chart above is a true indication I don't see how we're going to avoid inflation.  According to Mr. Laffer the big jump in the money supply is from a huge increase in bank reserves which he says are "excess reserves."   That means those reserves won't languish in bank vaults but will hit the street as loans, increasing the currency-in-circulation.  The impact is likely to be huge. Update: Russia may unload some U.S. Treasuries from its reserves and replace them with International Monetary Fund bonds. Alexei Ulyukayev, first deputy chairman of Russia’s central bank, said some reserves may be moved from Treasuries into IMF debt, reiterating comments made last month by Finance Minister Alexei Kudrin. Ulyukayev’s remarks were confirmed by a Bank Rossii official who declined to be named, citing bank policy. Treasuries fell, pushing 10-year yields toward the highest level in seven months, in response to Ulyukayev’s statement. The dollar fell against the euro on speculation that Russia will reduce its holdings of U.S. debt. The government is going to pay higher interest rates in order to finance Obama's unprecedented yet planned massive deficit spending.

Updated Unemployment Graph

Via Hot Air, Here's another flavor of the unemployment graph accompanied by a video presentation showing Obama's stimulus has done more harm than good.  I don't know how much more "rescue" we can stand from this guy.

What The Tea Parties Are All About

According to Charles R. Kesler Obama's prime goal is to build an enduring Democratic majority that will impose a more socialized democracy upon America.  In the course of achieving it, Obama has made unprecedented intrusions into the free market.  Coupled with his wild "stimulus" spending, this will very likely hamstring the American economy for years to come.  A struggling economy, however, is the least of our worries.

'What Obama hopes for is a similar breakthrough for the forces of liberalism in this generation.

An enduring Democratic majority is not out of the question. The wild scramble to stop the economic and financial downturn may well leave America with a politically controlled economy that would corrupt the relationship between citizens and the federal government – sapping entrepreneurship and encouraging new forms of dependence on the state, as in much of Europe. That would be consistent with the more socialized democracy that liberalism has been striving for ever since the Progressive Era.

Obama likes to emphasize that America is more like the world than we realize, and must become still more like it if the US is to remain the world's leader. Despite his summoning oratory, his sense of American exceptionalism thus is far less lofty, far more constrained, than Reagan's or FDR's. The greatest stumbling block to Obama's ambition is likely to be the inability of this exceptional president to persuade Americans to follow him into so unexceptional a future.'

I would take issue with Mr. Kesler's characterization of our crisis as a "wild scramble to stop the economic and financial downturn."   There is certainly a wild scramble but the objective is not to stop the downturn.  The downturn itself serves Obama's purpose.  It provides cover for much more government intrusion for the ostensible purpose of creating social justice.  The real danger we face will come if he continues to be successful legitimizing the destruction of personal and economic freedoms which are the source of American power.

As with the GM bailout, which is less a bailout of GM than of the United Auto Workers, the Obama administration will continue to make the best of this crisis.  A continuing downturn provides opportunity to spend massively on the Democrats' favored constituencies.  According to Kevin Hassett, it's not just failing firms like GM and Chrysler that Obama plans to rescue.  He plans to rescue the successful ones as well.

'I’ve finally figured out the Obama economic strategy. President Barack Obama and his team have been having so much fun wielding dictatorial power while rescuing “failed” firms, that they have developed a scheme to gain the same power over every business. The plan is to enact policies that are so anticompetitive that every firm needs a bailout.

Once that happens, their new pay czar Kenneth Feinberg can set the wage for everybody and Rahm Emanuel can stack the boards of all of our companies with his political cronies.'

Economics 101 students already understand that the policies Obama advocates won't revive the economy.  Why would he do that?  What will assuredly be a bust for the economy will be a boon for the Democrats who yearn for more complete control.  The tea parties are grass roots protests that hope to prevent that from happening, hope to preserve our liberty.

Charles R. Kesler is a senior fellow at The Claremont Institute, editor of the Claremont Review of Books, and a professor of government at Claremont McKenna College.

Kevin Hassett is director of economic-policy studies at the American Enterprise Institute, a Bloomberg News columnist, and an adviser to Republican Senator John McCain of Arizona in the 2008 presidential election.

The Unemployment Graph

I don't think I should pass up the opportunity to put up this graph that's been making the rounds.  It originated with the Obama administration who published it to argue that unemployment, as illustrated by the pale blue line, would be much worse without the administration recovery plan than it would be with the plan.  The "with" line is in dark blue. 

The actual unemployment numbers are plotted in red.  Hell of a job, Barry.

Via Innocent Bystanders.

GMTRAK

Well, what do you know.  I'm not the only one thinking that Obama administration plans for GM are right on target for turning it into the new AMTRAK.

'The bailout objective is not the economic or financial success of GM, any more than the $3.5 trillion budget can be expected to revive the U.S. economy. By tripling the deficit in one year and setting up at least a decade of continuing budget deficits, the Obama administration is setting us on an inflationary course. Couple that with administration plans to boost marginal tax rates and you have a recipe that combines inflation with sluggish growth . The White House is not unaware. But in keeping with Rahm Emanuel's counsel, Obama is making the best of this economic crisis in order to make other fundamental changes.

GM exemplifies one of those changes. More federal intrusion into the marketplace. Rather than putting it back on its feet, the bailout will turn GM into another Amtrak, but on a much grander scale. Amtrak has been on federal life support since it began in 1971. According to the Boston Globe, Amtrak's total annual budget is $3.2 billion. Federal subsidies cover nearly half, at $1.49 billion.

GM is bigger.  So far GM is into the government for $15.4 billion in aid, but according to Bloomberg the U.S. has no plan to continue subsidizing GM. 

'The role of the U.S. in GM is to develop a plan whereby the automaker can be self-reliant and not need federal aid to survive, White House spokesman Robert Gibbs said yesterday.'

We would do well to remember that pronouncements from the Obama administration almost invariably come with an expiration date.'

I wrote that cynical stuff back on the 29th of April.  On Friday, June 5th, Dr. James Langenfeld, a director at the economics consulting firm LECG who also teaches at Loyola University Chicago, argued the same point.  But he did it with much less pessimism than I.  So much so that he was actually able to entertain this question:

'Can the administration avoid falling into a long-term commitment to GM?'

Let's get serious here.  Before we consider that question we have to ask ourselves, do we think, in our wildest fantasies, that the administration wants to avoid a long-term involvement in the management and support of GM?  Dr. Langenfeld believes, in this best of all possible worlds, that it does.

'One real unknown is whether substantially the same management that put GM where it is today has the ability, imagination, and drive to return GM to its long-lost entrepreneurial roots. If so, and the government can avoid making political rather than economic decisions, then GM should survive and the Obama administration will get its wish to be out of the car business. If not, who will make the decisions to replace GM’s management? Congress? A new car czar? There is no good choice here, and we may very well end up with GMtrak.'

Dr. Langenfeld seems to be warning us that GM could wind up like AMTRAK as an unintended consequence of the economic stimulus.  George Will, on the other hand, seems to believe it is what the government intends.  In today's Washington Post column, Mr. Will points out the huge disparity between Obama administration pronouncements and Obama administration actions. 

'But the government is GM's largest shareholder, customer, tax collector, regulator, partner in determining employees' compensation, protector of dealers and pension guarantor. GM's other large owner, the United Auto Workers, is increasingly a government dependent.

Yet Steve Rattner and Ron Bloom, two of the president's fixers of Detroit, recently wrote in USA Today that government "will play no role" in running GM. They were not under oath.

"What we are not doing -- what I have no interest in doing -- is running GM," says the president who, when not firing GM's CEO, purging its board of directors and picking new members, is designing new products (imposing fuel economy requirements that will control size, weight, passenger capacity and safety). The president, overcoming his professed reluctance to run GM, resembles the journalist Don Marquis when, after a month on the wagon, he ordered a double martini and exclaimed: "I've conquered my goddam willpower."

Washington mandates that Detroit must build cars for which there is much less demand than Washington demands that there be. Then Washington tries to manufacture demand with a $7,500 tax credit for purchasers of the electric Chevrolet Volt, supposedly GM's salvation. So, GM is to be saved by a product people will not buy without a cash incentive larger than the income tax paid by 83.4 percent of America's families.'

If anything, Will is even more cynical than I am -- a thing I had thought was impossible.  Where I hold out hope that a viable Ford Motor Company might ultimately force government out of 'Government Motors,' Mr. Will expects the G in GM to push its heavy finger down on the regulatory scales to Ford's disadvantage.  It was my view that propping up the UAW on a more permanent basis would be a challenge for the Obama administration.

'The GM crisis represents yet another opportunity that the administration would be loath to waste.  For the immediate future GM has become a vehicle for laundering taxpayer money through the United Auto Workers union into Democrat campaign coffers. The challenge for Obama is to make permanent that revenue stream.'

Mr. Will, on the other hand, sees it as a done deal.

'The government's $50 billion -- so far -- acquisition of the shadow of GM will injure, with unfair financial advantages, the surprisingly healthy U.S. auto company, Ford. Of course, the government does not intend that injury, any more than it intended to cause protests in Mexico over the high price of corn tortillas, a result of Washington's mandate that Americans burn corn (ethanol) in their cars.

Washington's "rescue" of GM began because GM is "too big to fail," and bankruptcy is (well, was) "unthinkable." Big? GM's market capitalization, $375.8 million on Wednesday, is about the size of California Pizza Kitchen's ($340 million) -- is it too big to fail? -- and one-eleventh that of Harley-Davidson ($4.3 billion). Fail? If GM has not already failed, New Coke was a success.

The administration is determined to prop up GM as a jobs program for the UAW and Midwestern states rich in electoral votes. This frenzy will intensify as the administration's decisions deepen the debacle.'

He makes a good point, but then we all do, the three of us.  But from three different places on the scale of cynicism we all arrive at the same destination:  GM is on track to be the new AMTRAK. 

Stimulus

The Heritage Foundation on the subject of the Obama stimulus:

'There are two critical consequences to the economy stabilizing. The first is that the massive liquidity injected into credit markets by the Federal Reserve and central banks around the world transforms from economic medicine to inflationary heroin. Central banks are going to face a difficult task of extracting the excess liquidity before inflation soars and without causing another recession. Doubt about the fight against soaring inflation means higher inflation premiums in interest rates.

The second dangerous consequence is that President Obama is on course to double the national debt in just four years. After years of complaining about annual deficits of $300 billion or $400 billion and their effects on interest rates, liberal commentators are suddenly silent now that the deficit is heading toward $2 trillion under a liberal administration. But now the vaunted “crowding out” effect from government borrowing is almost a certainty, as are the resulting higher interest rates.

Healing financial markets and a stabilizing economy generally translate into higher interest rates for long-term, high-quality bonds like 30-year Treasuries. The effect of the projected massive government borrowing, however, is to drive interest rates as much as a full percentage point higher yet. This will mean higher interest rates for consumer loans, mortgage loans, business loans, etc. Instead of a 6.5 percent mortgage rate, home buyers will face a 7.5 percent rate. The debt-based Obama economic stimulus plan is about to become a major drag on the recovery, just as expected.'

Projecting mortgage rates as high as a mere 7.5 percent strikes me as an extraordinarily optimistic exercise.  Pollyanna-ish, in fact.  In order to keep inflation in check there has to be some stability to the relationship between what there is to buy -- production, economic growth -- and what there is to buy it with -- currency, credit. We have been through a time of economic contraction and are approaching a time of explosive growth in currency and credit. 

During the Bush administration economic expansion kept pace, more or less, with the growth in the money supply, keeping inflation in check.  Tax cuts were a key factor.  The Obama administration's insistence on "fairness", and its intrusions into the marketplace to achieve it, inject investor uncertainty that is going to put a damper on economic growth.  The only significant prospects for growth on the horizon are in the size and reach of government and in the deficits the Obama administration will inflict on us in its grab for political power.  To achieve "fairness" of course. 

The word "stagflation" may regain its former popularity soon.  It first came into favor during the Nixon administration, but found true meaning under Jimmie Carter.  Those were the good ol' days of liberal compassion.  Inflation and interest rates topped 18 percent.