A view from the Beltway provides us with a glimpse into the Keynesian mindset
that is determined to drive our economy into the ground. The obsession with
maintaining constant price levels through manipulation of the money supply and
artificially low interest rates creates the very conditions causing our current
malaise. Heaven forbid that low-performing businesses be forced to reconsider
their positions! We must pull out all the stops to prevent obsolete or
undeserving businesses from closing down! That's the very mentality that
supports "too big to fail" and "too big to jail." The concept of "creative destruction" is antithetical to Keynesians,
even though it's the one thing that could bring us out of the doldrums and
create productive and profitable businesses. Keynesian doctrine is the source of
"zombie" businesses that deserve to put out of their misery.
I don't know what they taught you when you were taking macro-economics, but
when I took macro-economics, the formula for determining the money supply was P=
mV/Q (where P= general price level, m=the supply of money, V= the velocity of
money and Q = the supply of goods and services. Since the Fed cannot control Q
(which fortunately changes slowly) or V (which changes quickly) the only thing
the Fed can do is change m to keep P as stable as possible. Since decreases in P
or even a completely stable P have a nasty habit of causing low margin
businesses to go bankrupt, the Fed has set an unofficial goal of 2-3%
inflation.In spite of many people's fears there is little
reason to believe that the Fed has changed that basic policy, when the Fed
announces that they are raising the money supply, it simply means that they are
adjusting for fewer business transactions. Sorry to ruin the fun of a good
conspiracy theory, but what you are seeing is simply math at work.
Roland,If I knew the timeline I could retire on my own island chain.
But more seriously I think that the Euro is not necessarily down for the count
and predicting China to be too far back in the pack to matter is a losing
bet.Sure. This won't be in the next 5 years. But 10 or 15 is
possible. I think it depends on if and how fast we get our own house in order,
how fast the Europeans do the same, and when China will actually adopt the rule
of law. But either way we need to start now thinking of how to deal with our
debt so that we don't lose reserve status (with the resulting increase in
costs). We have a bad habit of kicking the can down the road. This is not a
nice road.I agree wholeheartedly reference the importance of the
trade deficit. I have never understood why this is ignored.Eric,Yes, for now. But I think we have seeds in the ground and water on the
way. We either start dealing with it now or have 10 times the problem later.
You know I am a worrier . . .
This letter is a bit confusing. There are two types of inflation: 1) price
inflation and 2) inflation of the money supply. There's no doubt the supply
of money has inflated over the years, especially what is called M2 money. The
Federal Reserve stopped publishing M3 rates after 2006 for reasons known only to
them. As for price inflation, the method of calculation has everything to do
with whether or not it is under control or not.Price inflation is
something politicians or Federal Reserve chairmen want to appear favorable when
they're in charge. Consequently, the methodology for calculating price
inflation has been modified to either a) give a more accurate understanding of
the inflation rate or b)to obfuscate it.Shadow Statistics website
has tried to clarify what the actual price inflation rate is today by using
methodology in effect in both 1980 and 1990. Based on 1980 methodology, our
current price inflation rate is about 9%. The 1990-based rate is about 5.5%. So
is inflation rate essentially nil now? Yes, in the minds of central bankers. The
rest of us who live in the real world know better.
You do know that inflation right now is essentially nil, right?
To Twin Lights: Define "eventual". I think we're looking at a
minimum of at least twenty years before China's currency could present a
challenge. I agree with you on the need to get our long-term debt under control.
As far as currency values are concerned, however, the trade deficit is more
important that the budget deficit. We have work to do on both.
Roland,I agree with you. For now. But an eventual challenger is
inevitable. Irrespective of this letter (which I really could not follow all
that well) our long term debt policies should not suppose that we will forever
have that status.
Contrary to the assertion in the letter, there is no move to replace the dollar
as the world's reserve currency. It was thought that at some point the Euro
could be a challenger, but that is obviously no longer in the cards. The Euro
may not even be around for much longer. There is no other currency that could
even remotely come close to replacing he U.S. dollar.