Issues, News and Views
IMPORTANT ISSUES FACING AMERICA
2018/12/19 - Are you weary of the Mueller investigation? Tired of Comey? Bored of Cohen? Fed up with the injustice and politicization of the DOJ? Are you wondering when, or even if, the mainstream media will ever regain its collective mind and cover topics that are actually important to America, and relevant to its citizens?
So, in the interest of the spirit of giving in the holiday season, Chalprem herewith gives you a survey of the most pressing issues facing our nation, the topics the media ought be focused on in the new year and through to the next election.
China was the greatest and longest lived of the world’s superpowers, except that its fall happened just as the United States was emerging as a nation. We have no history, or national consciousness, of a great Chinese power. But they sure do. And they want it back.
Over the past two centuries China had devolved into a mess, and we were only too happy to help them sort things out. We gave them a lot more than an inch, but now they are taking a lot more than a mile. They have their own "manifest destiny" in mind.
The General Secretary of the Communist Party of China, Xi Jinping, is the personification of this mercantilist predatory revanchist regime. They are Communists, and to Communists, every economic endeavor is a zero-sum-game. For every winner there is a loser. So if we gain, then by definition they must be losing. There is no win-win. Thus, we must lose, so that they can win.
President Trump is absolutely right to tighten the screws on China. The time was ten years ago but Obama was a disaster. So the time is now. China must be held to trade policy that is free, fair and reciprocal. And if they are unwilling to cooperate with the global community – and that is not in their nature – then they must be shunned by the global community.
This is going to be a long, hard fight, but the global community desperately needs China to transform from a malevolent actor to a cooperative one.
The United States government has a spending problem is close to putting us into a debt death spiral. In spite of a growing economy which ought to be reducing strains on our finances, spending just keeps going up and up. And even though our economy is growing at a solid pace, spending is growing even faster, and our debt is growing even faster than the size of our economy.
The fact is clear: Congress simply cannot help itself. Even the Republican House majority elected in 2010 on a platform of fiscal prudence couldn’t help itself. So there is absolutely zero chance that Nancy Pelosi’s hardcore leftist tax & spend caucus will do anything but help itself to the national treasury.
President Trump absolutely must put his foot down. Tell Congress that he will only sign into law spending bills that fall under a cap. Any spending beyond a preset limit will not get signed, and a government shutdown is a foregone conclusion.
Taking a hard stand against excessive spending will also help with interest rates. The Fed is concerned about excessive fiscal stimulus, and if spending was brought under control the Fed would be less inclined to raise interest rates.
Janet Yellen's Fed made a major mistake in raising interest rates far too late, and now Jerome Powell's Fed is compounding the error by raising rates too quickly - too frequent, in increments too severe.
What would be wrong with raising rates 1/8% at a time every 6 months, rather than by 1/4% every 3 months? The fact is that the economic ship changes course very slowly, and Powell may already created the sand bar upon which the economy will run aground next year. But he won't know until it is too late. Then, after dooming millions to misery, he will cut rates and take credit for saving our economy. Horrible.
Worse, it is not clear that Powell even knows what causes inflation. He seems clueless at times. In his press conference today he stated he will keep raising rates as long as the economy is growing. Except that growing economies don't cause inflation. Deregulation is an example of an excellent Trump policy that is both conducive to growth, while simultaneously exerting downward price pressures. How someone in Powell's position doesn't see that is absurd.
President Trump is correct in the sentiments he has expressed regarding the Fed and rates, but wrong in using Twitter to make these complaints. A regular meeting between Fed and Administration officials to coordinate policy would be helpful to avoid the current situation of ineffectually pulling in opposite directions and offsetting magnitude.
There are many sources of volatility in our economy and the markets - good things such as deregulation, but also bad things such as oil price volatility, geopolitical risks, and necessary evils like the trade spat with China. Powell should not be adding fuel to the fire by rapidly and recklessly raising rates.
The topic of inflation, interest rates, and the potential damage that could be done to the economy and the well-being of Americans would be a good one for the media to displace the Mueller nonsense. Yet you know the fake news media will be unfair to the President, and oppose him just for the sake of opposing him, while being devoid of any understanding of the economic implications of what they would be blabbering about.
KOREA, IRAN AND VENEZUELA - THE REVISED AXIS OF EVIL
Chalprem has the longstanding view that Korea's northern regime is dangerous and that reintegration of the breakaway northern territory into the Republican of Korea is a highly desirable geopolitical objective.
So, fast forward a couple of months to the beginning of March, when huge tariff increases are due to be imposed on imported Chinese goods. What if no deal has emerged, that the Chinese seem intent on slow=walking the process until they run out the clock on the Trump Administration?
President Trump's political life expectancy is a matter of doubt. Can he survive to the end of his first term? If he does, can he be re-elected? And if he is re-elected, can he survive to the end of his next term?
Both of these aspects - Chinese foot-dragging, and Trump's unstable political status - would be immeasurably aided by a termination of the Kim regime. The President sorely needs a game-changer, and there's nothing like a war to change the game.
Xi Jinping and the Communist extremists in his totalitarian regime would of course be furious if war broke out on the Peninsula, but if we're sitting here without a deal in mid-March, then it should be clear that China does not take us seriously, and they are just playing games.
One thing is certain, it would be a lot more comforting to listen to the media celebrate the actual demise of Kim Jong-un's Presidency, rather than blithering about their hard-sought-after demise of Donald Trump's Presidency.
It's just another reason why the outgoing House Republican losers deserved to lose.
INFLATION, THE FED... AND THE COMING POWELL RECESSION?
2018/11/16 - It's important to understand what inflation is, and what it is not. Price inflation is a general rise in price levels. On the other hand, a supply event, a demand event, or policy event, that leads to a rise in the price of a particular good or service, or group of goods and services, is price escalation.
Suppose for example that a government mandates an increase in wages. The increase in an employer's costs will be passed through to its customers. The resultant price increase is price escalation, and it is caused by a policy event. Yes, the event does cause prices to rise, but in this case it is not inflation, it is escalation.
If OPEC were to cut its oil production, you would expect the price of oil to rise, and you would expect the impact to ripple throughout the economy. But again, neither the rise in the price of oil nor the subsequent price ripple, however, are inflation; they are escalation.
Imposing tariffs on certain goods will cause the prices of those goods to rise, and so will the prices of products made from those goods. Again, this is not inflation, this is escalation.
Inflation is a monetary phenomenon. Money is a lubricant to our economy that eliminates the difficulties of matching supply and demand in a barter economy.
Suppose a butcher desires bread from a baker, but the baker does not need the butcher's meat, rather, he needs candlesticks, the maker of which needs meat, not bread. Even though this small "economy" is capable of producing all the goods and services demanded by its population, it grinds to a halt because no trade possibility exists where each of the two sides can supply what the other demands.
The answer to this dilemma, of course, is money. The butcher has some money which he uses to buy baked goods; the baker uses the money he got from the butcher to buy candlesticks; and the candlestick maker uses that money to buy meat from the butcher.
If there is too little money in the system the transactions will be small. The butcher will only be able to buy a small amount of bread, and will be forced to wait until he sells some meat to the candlestick maker before he can buy more bread. So the economy moves slowly through several rounds of small transactions until the supply and demand are cleared.
On the other hand if there is too much money, then prices will inflate. If the butcher seems to have an ability to pay more for bread, the baker, who has a limited amount of bread available for sale, can be expected to raise his prices to match what the butcher might be willing to bear.
The job of a monetary authority - in the case of the United States, the Federal Reserve - is to ensure that there is sufficient money supply to conduct the nation's business, but not so much that prices becomes unstable. This is known as the Fed's "Dual Mandate": full employment, and price stability.
Note that inflation is caused by excessive money, and it means that there is a general rise in the prices of goods and services throughout the economy, not just the goods related to a specific input that has experienced some type of event, or "shock" as economists like to call it.
Money is like oil in an engine, it allows the machine to run smoothly. But beyond that, more oil provides no marginal benefit, it just adds weight and wastes space. Same with money, once there is enough to keep the economy rolling, more money causes price inflation until the relative monetary excess dissipates. The Fed cannot make the nation wealthier by printing more money, it can only create inflation.
The Fed controls money supply and is tasked with a responsibility to manage general price-level inflation; it is most certainly not tasked with the responsibility to control prices of specific items, such as oil. The Fed is simply not equipped to efficaciously manage escalation, item-specific shock-induced price increases. And without the appropriate tools or weapons, it should not even try to do so.
But what happens when there are a number of events – when there is significant policy instability – causing many prices to increase simultaneously, making it appear that there is general price-level inflation when in fact there is none? The answer is, a Fed policy disaster in the making.
Consider the case of an increase in the minimum wage – the broad economic impact is less labor demanded at that new higher minimum. Fewer people will have jobs, but those that manage to keep theirs will get the higher wage; and consumers will pay higher prices for less of the product.
In such a case a Fed rate hike will not cause that new higher minimum wage to come back down, however, it will cause a general economic slowdown and loss of employment throughout the economy, with those managing to hold on to their jobs in this second round of cuts this time receiving a lower wage.
The point is that poor economic policy needs to be corrected with good economic policy. Monetary policy does not counteract poor economic policy or other economic or geopolitical shocks. The tools of monetary policy should be used to correct monetary inflation, and not used to correct price escalation caused by shocks or their ripple effects.
Consider a second case, the hyper-regulatory approach of the Carter and Obama Administrations. Regulations have the effect of driving up costs both directly on the regulated products, and indirectly on goods and services made from those regulated products. The ultimate impact is that fewer goods and service will be produced, leading to economic slowdown, loss of profits for investors, reduced employment for workers, and higher prices for consumers.
These higher prices, however, are not inflation, and a monetary response by the Fed, such as raising interest rates, will not only NOT solve the problem of the high cost of regulatory compliance, it will compound the predictable "unintended consequences" of lower profits, loss of jobs.
Back in the economic dark ages of the 1970's there was a now totally-debunked economic theory, frequently referred to as the Phillips Curve, that there was a trade-off between inflation and unemployment, and that you had to pick your poison – high unemployment was the cost of low inflation, or, high inflation was the price of low unemployment.
That theory was debunked by arguably the worst President in the history of the United States, Jimmy Carter, whose stagflation – a stagnant economy coupled with double-digit inflation – proved you did not in fact need to pick your poison, you could enjoy both, together, at the same time! Hurrah! Yes, you can have a peaceful coexistence of high unemployment and high inflation.
Fortunately, President Reagan's supply-side policies of less regulation proved that the exact opposite was also true – that low unemployment and low inflation could coexist, that we could experience falling inflation even in a red-hot economic environment.
President Trump has proved that Reagan's deregulatory policies were no fluke. After years of regulatory overburden courtesy of President Obama, Trump's deregulatory agenda had ignited economic growth without triggering inflation. The economic impact of deregulation is higher efficiency, output, profits, employment, wages, and, lower prices. Regulation results in stagflation; deregulation results in prosperity.
That is not to say that regulation is inherently evil, it's not. Every game has its rules, and without some rules there is no game. You need some rules to create the game, but there comes a point where a game is ruined by too many rules, and or the inconsistent or pedantic enforcement of those rules. And the problem with bureaucrats is that they are paid to make rules. And more rules, and to keep making rules.
And it is not a question of whether any of these rules are necessarily bad, but just that the sheer volume of regulations becomes a burden that cannot be borne, an economic millstone, an affliction that sucks the life out of the entrepreneurial spirit. Government bureaucrats have absolutely no conception of the existence of "entrepreneurial spirit", they quite naively destroy that spirit, and indeed the economy, while genuinely believing that they are actually doing something that passes for "good". They don't know that they don't know.
Left wing legislators erect a multitude of offices, and send hither swarms of officers to harrass the people and eat out their substance.
But we digress. Regardless of any other aspects, Reagan/Trump deregulation and the consequential emancipation of the entrepreneurial spirit is an economic superfood that engenders a strong economy without inflation. The last thing we need is a fossil from the Phillips Curve epoch to misinterpret the strong economy as a necessarily inflationary environment and feel provoked to invoke a regime of monetary cooling.
Yet Fed Chairman Powell seems intent upon performing his best Don Quixote impersonation, misinterpreting some unrelated benign phenomenon as a mortal enemy deserving of his utmost misguided efforts to conquer. Yes, we see prices going up on various items, but these are related to item-specific price shocks, not general inflationary pressures, and therefore the solution is not monetary policy. Any attempt at a monetary solution will be a counterproductive failure.
All of which begs the question, if monetary policy is not the solution to non-monetary price escalation, then what is? Got any better ideas, Einstein?
And the answer is yes, depending on the problem, but generally the dichotomy of the Carter-Reagan years teaches us that the solutions are market-based supply-side policies. Free markets are the democratic result of transparent economic realities of scarcity and need, and that the people are ill-served by governments delusional of their ability to dictate alternative positive outcomes.
Take oil as an example. Ten years ago, in the years and months leading up to the Great Recession, $140 oil was creating what was being the called "The Greatest Transfer of Wealth in Human History", with that wealth being transferred from us, and being transferred to the terror states of OPEC. If that sounds bad it's because it was, it should come as no surprise that "The Greatest Transfer" was followed immediately by "The Great Recession".
Fortunately, OPEC's high prices and profits triggered our dynamic free enterprise economic system to innovate, to develop and deploy high-tech oil extraction capabilites called "fracking", and the result is we've increased our oil output by over 120% in less than 10 years.
The result is that now nearly energy independent, and we pay a Made in America price with Made in America benefits – when the price of oil goes up American producers benefit, and when it goes down American consumers benefit. Either way, we are no longer at the mercy of Mideast terror states, there is no longer a transfer of wealth to terror states that use the money to topple office buildings, or murder journalists, or threaten the obliteration of Israel.
Fracking is a supply side solution, increasing the quantity of oil supplied to the market which not only increases economic activity, incomes, and employment, it also keeps the price of oil down which is not only good for consumers, it further induces economic activity. Take note – lower prices and lower unemployment, both at the same time. Take that, Phillips!
But there are other supply side solutions to consider. The quantity of a good or service supplied can be incentivized either by reducing impediments, or by initiating and/or expanding incentives. Tax and tariff reductions are supply-side solutions. Productivity gains and technological innovation reduce costs and thus make a product more widely accessible to a broader range of consumers.
Consider Henry Ford's assembly lines. Initially, cars were hand built by teams in a single spot, one at a time. This was inefficient, and so cars were expensive, few were sold, and few workers were employed. Ford's labor saving assembly line techniques reduced costs to the point where cars were affordable to the mass market, so output increases and many were sold, wages and profits rose, employment increased – again, while prices fell and consumer utility flourished. A routine example of supply side solutions doing what they do.
On the other hand, strict labor regulation and enforcement disincentivizes hiring. Think about it - why would you ever hire someone you'd never be allowed to fire?; Meanwhile, reducing legislation and enforcement incentivizes hiring by businesses. Again the impact of all these supply-side solution is that they increase the output of the economy while simultaneously relieving price pressures.
By the same token, proposals like a guaranteed annual income are among the worst policy choices a government or a society can make. People will do what you pay them to do, so if a government offers to pay people to not work, then not work is what people will do. This is bad for a person's character, it is bad for employers who need the labor, it is bad for a society that needs their production, it is bad for governments that need taxpayers rather than taxtakers, and it is bad for consumers who will have to pay more for the goods and services those hand-out recipients would have produced.
Paying people to not show up for work is an anti-supply policy, and thus ranks among the stupidest policy proposals ever conceived by the left, but this should come as no surprise, the Democrats are wrong about just about everything.
But again we digress. This is about inflation versus escalation. Monetary policy cannot effectively combat about price escalation caused by suply or demand events or misguided policy decisions, and any attempt to invoke a monetary solution for a non-monetary problem will only make a bad situation worse. It should seem axiomatic that destroying demand for oil by destroying the economy does not seem to be a wise monetary response - if there can even be one - to OPEC production quota reductions.
There are many forces at work at his time, some at cross-currents with each other, serving to destabilize the economy. Tax cuts and federal deregulation are serving to provide us with non-inflationary economic growth. But the tariff war with China, while strategically crucial, is also creating price escalation in the short run.
Besides the federal government, blue state labor market meddling has the effect of reducing both supply (through, for example, easy welfare) and demand (through, for example, higher minimum wages), while driving up costs and prices. The ongoing oil price-discovery between American frackers and OPEC is creating unpredictable price volatility.
The economy is currently solid and growing owing to favorable supply side policy, but at the same time a number of unrelated shocks are causing noticeable price escalation. It has the look of a classics Phillips Curve set-up – low unemployment with high inflation – but it isn't. It is a strong economy with benign inflation but pockets of escalation. Yet the Fed seems intent on raising rates solely out of servility to the Phillips Curve ideology, when its best course of action is probably to do nothing, and make clear that it intends to do nothing.
The Fed must take great care to differentiate monetary price inflation from non-monetary price escalation. A resolute attempt by the Fed to control non-monetary price pressures using monetary policy will generate collateral damage to the economy – and accompanying human suffering and misery – far out of proportion to the benefits of its policy objectives, even if those objectives could be attained, which isn't even probable.
The Fed cannot control escalation, it can control inflation. Our fear is that the Fed is currently mistaking escalation for inflation, and will fight a destructive losing battle against forces outside its responsibilities and beyond its abilities. The cure would be far worse than the disease.
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