Commentary on the Never-Ending Economic Crisis
I hardly consider myself a neo-con, but their flagship publication, Commentary, has some awfully good stuff occasionally. In the January 2010 issue, David M. Smick dissects the current monetary and public debt mess in great detail. It condenses about twenty magazine stories and a couple of books into a long essay . . . and it ain't pretty. You need a paid subscription to access the entire article, but I've gone ahead and cut-and-pasted highlights here:
The puzzling stock market rebound:
It is also hard to see why, since hitting bottom in March 2009, the Standard and Poor's stock index has rebounded more than 60 percent, NASDAQ by more than 70 percent, with emerging-market stock indexes jumping over 90 percent. The U.S. financial-services industry is up an incredible 125 percent since March 2009. Global equity markets are booming. This suggests better times ahead. The question is where? In the United States, or elsewhere in the world? The question is also whether this powerful equities rally is based on sound economic fundamentals. Clearly a certain type of financial bet, called a “dollar carry trade,” is at work: investors borrow money in dollars at low interest rates to buy assets with higher yields, often offshore. Here's the danger: carry trades have a history of appearing suddenly and then vanishing just as suddenly.
The amazing public debt:
Take a look at the Congressional Budget Office's most recent projections. Within a decade, the CBO says, the U.S. government will be borrowing $722 billion just to service its debt. And that doesn't include the likely borrowing needed for shortfalls in Social Security and other entitlement programs. The U.S. is about to enter a fiscal trap, chasing its tail just to pay off its creditors. That is an experience heretofore confined to Third World regimes. Their currencies lose all credibility, and they suffer from high and crushing interest rates, only to end up wards of the International Monetary Fund.
The specter of hyperinflation (unlikely, but we're sailing unchartered waters of monetary policy, so nobody knows):
Public-opinion polls tell the tale. Americans are experiencing deep feelings of anxiety, and not solely because of short-term concerns about recession, double-digit unemployment rates, or lack of health care. They are worried about a pending national fiscal nightmare that could doom the U.S. economy to slow growth and second-rate status. Our public debt already amounts to nearly $40,000 for every living American, or $160,000 per family. And the burden is quickly rising.
Because the U.S. fiscal situation is unlikely to significantly improve any time soon, some analysts are predicting that hyperinflation is just around the corner. The Federal Reserve will be forced to monetize today's mountain of debt. This is the thinking of the so-called Austrian School of Economics–that regardless of the size of the output gap, inflationary expectations will soar once the economy begins to recover simply because of the Fed's huge monetary overhang.
These analysts make an interesting case. The inflation argument could be compared to having a cinderblock attached to a large rubber band at one end of a long conference table. At the far end of the table, you keep pulling on the band, but the block won't budge. Then you hit a tipping point and the block flies across the room, hitting you in the face.
End the Fed
I subscribe to Forbes. Not only do they have insanely-low introductory offers, but I think it gives me a mainstream dose of economic news, which hopefully off-sets some of the outside-MSM/gold-buggish/we're-doomed news that I gravitate toward.
In the January issue, they have a short review of Ron Paul's End the Fed. I expected a cynical appraisal, but it wasn't. Not at all:
Let Federal Reserve Chairman Ben Bernanke enjoy his Time-ly accolades, because history will judge that Paul had it right when it came to the Fed and its often misbegotten monetary policies.
Paul has aroused the fear and ire of the Federal Reserve with his bill calling for the Government Accountability Office to audit the Fed. This tenacious Congressman makes the point that independence should not be confused with a lack of accountability. One doesn't have to agree with Paul's ultimate conclusion that the Fed should be done away with to realize that this powerful institution is a kingdom unto itself. The Fed can bring about depressions (many historians agree with Milton Friedman's belief that the Fed was the chief cause of the Great Depression), horrific periods of inflation, as it caused in the 1970s, as well as the current economic crisis, which the Fed fueled with its excessive easing of monetary policy several years ago. Without the excess liquidity, the housing bubble could never have happened. Yet Congress exercises no oversight of the Fed. In fact, no one outside the Fed has the right to examine to whom it lends money or the agreements it makes with other central banks around the world. . . .
[W]hat shouldn't be controversial is his belief that gold should be the ultimate anchor for money. Politicians always end up trashing paper money. Paul correctly hammers home the point that the Federal Reserve's repeated attempts to smooth business cycles and create perpetual prosperity have backfired badly and destructively. As for the Fed's ability to manage money, Paul simply notes that since the Fed's inception the dollar has lost more than 95% of its value.
