I hold the opinion that a period of dangerously high inflation could be on the horizon. Collectivist governments (and I would certainly put our current administration in that category) have historically tended towards inflationary policies – oftentimes to a disastrous extent. The Federal Reserve’s current lack of independence and the massive amount of debt being incurred by the federal government worrying me.
Mark Perry, however, points out a possible ray of light – at least for the short term. Annual M2 money growth is at its lowest point in 14 years.
Investopedia defines M2 as:
A category within the money supply that includes M1 in addition to all time-related deposits, savings deposits, and non-institutional money-market funds.
A decrease in the growth of savings will reduce the amount of money banks and other financial institutions are able to lend, thus reducing the money supply. So these numbers could lead to the conclusion that, at least in the short term, inflation may not be a problem. Though this decline in M2 growth could also be looked at as evidence that inflation is very likely. As inflation severely impacts savings and investments, a likely move by anyone predicting inflation would be to save less. So while a lower M2 growth is not what one would expect in an inflationary environment, it could actually be an early warning sign from the financial markets.
With stock prices rising, many commentators bandy Wall Street’s performance as an indicator of economic recovery. But these heralded returns may not live up to the hype. Unlike other economic indicators, stock market returns are not adjusted for inflation, as E.S. Browning writes in The Wall Street Journal.
Controlling for inflation takes extra work and makes stock gains look punier, so it is easy to see why stock analysts almost never do it. The media almost never do it either. But other things do get measured in real dollars. When economists report whether the economy is growing, they account for inflation. When analysts judge long-term gains in commodities such as gold or oil, they often adjust for inflation.
Because analysts almost never do the same with stocks, it leaves investors with an exaggerated view of their portfolios’ performance over time.
Former President Bill Clinton recently weighed in on the current proposal for health care reform. I’d like to break down his statement and point out some of the more glaring fundamental flaws in his thought process.
I basically said that I think it’s an economic imperative. We’re in an economic crisis, we’re trying to bring America back, and I have always been concerned that, you know, 16 percent of our people don’t have health insurance and 30 percent are without it at any given time during the year.
Our current economic predicament was caused by the thinking that “economic imperatives” exist for government. In order to bring America back, government needs to stand aside and do absolutely nothing. As for the figures regarding percentage of citizens without health insurance, I would like to point out two things. One: health insurance is not the same as health care. Two: even if some citizens lack health care, that does not create a moral imperative on the part of others to provide that care for them.
But the main thing, since we’re focused on the economy, is that we are spending 16.5 percent of our income on health care. The next most expensive country is Switzerland at 11.5. The next most expensive is Canada at 10.5. All of our competitors are between 9 and 10 percent. That means every year, it’s like we write a check to all of our economic competitors for $800 or $900 million. And they cover everybody — we only cover 84 percent, and we don’t get better outcomes. We get worse outcomes.
This would make sense, if a government-run health care system would decrease costs and increase quality of care. Unfortunately, there is no evidence that socialist health care systems maximize utility. It is also worth noting that this talk of writing checks to trading partners is evidence of a zero-sum economic mentality of the type that fosters protectionist policies.
So the point I tried to make is that this is an economic imperative. To just give you one example, before the economic collapse of Sept. 15, 2008, with the Lehman Brothers failure, median income after inflation in our country was $2,000 lower than it was the day I left office in 2001 — that’s back in the dark ages. I mean, we went through all those years, and one big reason is, after inflation, health care costs doubled.
Inflation: another problem caused primarily by government intervention in the economy.
So my argument was, this is an economic imperative as well as a health care imperative. Second thing is that on the policy, there is no perfect bill, because there are always unintended consequences. So there will be amendments to this effort, whatever they pass, next year and the year after and the year after. And there should be. It’s a big, complex, organic thing.
If a bill is not perfect in that it violates individual rights and involves government stepping outside its proper bounds, then it should never be passed. No societal progress is worth the cost of even one violation of individual freedom. It is “big, complex, organic” legislation (such as the programs of the New Deal) that shackle our economy and stunt our growth.
But the worst thing to do is nothing. That was my argument on the economics and on health care.
This single statement sums up the liberal/Keynesian economic philosophy. But no political rhetoric can change the fact that the very best thing a government can do for an economy is nothing.
While I believe Keynesian economics to be both flawed and immoral, John Maynard Keynes gives a very chilling account of how inflation can destroy a capitalist system.
Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.
Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become “profiteers,” who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
The Associated Press reports:
Colorado will become the first state to reduce its minimum wage because of a falling cost of living.
The state Department of Labor and Employment ordered the wage down to $7.24 from $7.28. That’s lower than the federal minimum wage of $7.25, so most minimum wage workers would lose only 3 cents an hour.
Colorado is one of 10 states where the minimum wage is tied to inflation. The indexing is thought to protect low-wage workers from having flat wages as the cost of living goes up.
“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens”
~ John Maynard Keynes
The Wall Street Journal has produced an excellent op-ed on Bernanke’s Assurances. For me, the following excerpt is the most forboding piece of the article:
The problem is that Mr. Bernanke has long dismissed both the value of the dollar and commodity prices as guides to monetary policy. Like the Fed staff, he focuses on unemployment and the “output gap,” which is the difference between actual and potential economic growth. Both are lagging economic indicators, which is why the Fed so frequently is behind the curve with its monetary decisions.
Ignoring economic theory and empirical data, logic alone dictates that unemployment and output must necessarily be lagging indicators. The economy will enter a recovery period well before actual growth appears and firms begin to hire again. In the meantime, the Fed will have time to create another inflationary bubble. And, for my own part, I’m not sure the U.S. can take another recession following on the heels of the once we’ve already experienced. That is, of course, assuming that our economy can recover under the socialist and Keynesian policies under which it labors.