Phil:

Of course not. I always like when someone brings up a point that I probably talked about in my other posts. If I could, I would include everything from my past posts in once central post and just do addendums to it. I have talked about unions and the broken corporate contract with employees. I just did not write about it here.

October is a big month for my family. We have a date in federal court and the state is being told they must answer our allegations beyond the garbage they have said withing the state. It is unusual to be granted a Federal Court Hearing for oral argument. Erwin Chem said it was good news. We are hopeful.

Thanks Phil :)

maybe it's time to hear from the amateurs. Of course, Run and Gregor have their heads screwed on much tighter than the economists currently putting out fires which they were responsible for starting in the first place. Their cluelessness or mendacity knows no bounds. Had Run or Gregor been running the show, we wouldn't have had the war and probably not the 1% interest rates and housing bubble. We would be closer to full employment, but this wouldn't necessarily be inflationary, since the budget would be in balance...just as Clinton left it. I don't think Run or Gregor are inflation doves all the time, and Run has a point that tightfistedness could now tip the country into depression. Some of us might welcome that depression, and might think that finally some needed changes would take place. But there would be more hardship, more crime, and ultimately, more welfare and cheapening of the money. For that matter, Bernanke may only be doing what anyone could, given the backdrop of a housing-debt mania. Greenspan and Bush/Congress are most responsible here. To the extent that a faltering economy hurts their reputation and leads the voters to consider how to prevent it from happening again, I'm all for sweating out the fever, rather than having the perpetrators take one palliative remedy after another--at the public's expense. So I take moral hazard quite seriously. I think this is what we have in common. I also agree with all your suggestions; I think you have it just about right. I'd also cut back on military spending.

Plutocracies are undemocratic, so plutocrats and plutocrat wannabes need to be kept on the shortest leashes possible.

We have done a miserable job of this, and I feel we lost this effort in 1976 when the SC ruled that money was free speech and in 1984 when Reagan was re-elected in a landslide after consistently running $200 Billion annual deficits.

Resultant COLAs have to correspond to inflation and the SS system's ability to pay out cash.

The bold part would seem to be an escape clause. Was that intentional?

Money supply should follow a slow but steady growth pattern.

I gather you're opposed to the recent 18% growth rate in M3, as reported on some websites. Well, this is called bailing out the system, priming the pump, Keynsianism, or whatever you want to call it. They always do it because nobody likes recessions.


Leroy and I have agreed that some bank interest should be exempt from taxation. Rev and I have agreed that cap gains and dividends should be taxed as ordinary income. The conservative experiment failed; it got us into this mess. I also agree with you that nominal bank interest below the true rate of inflation is injury, and the taxes placed on it are insult. I also agree that money flows into commodities when it can't get a positive return on savings, bonds, stocks, and real estate. Another bubble in the making?

Seriously, I'd expect war goods. It would be a certainty if Israel or USA-Turkey bomb Iran. World demand will surge for jets, radars, shells, missiles, ships, subs, Humvees, protective suits and masks, cameras, etc.

High-class real estate is doing well and COULD soar again.

The key influence is where the money (being printed) gets a thrill. Working stiffs don't participate in the Global markets of the rich, except as customers in the aggregate. Where will that aggregate be drawn? Will that aggregation shrink?

The question of what can be the next bubble is very telling. Exploring it is worthwhile. A new bubble COULD BE impossible right now. But, don't forget that energy could re-triple.

Genedio says that Run made 6 points, to wit:

1. OPEC doesn't care about interest rates, and thus, the value of the dollar; oil prices are independent of the dollar.

LeRoy: I agree with Genedio that this is demonstrably mistaken. Indeed, there should still be accessible here in Bottom Line a post I made about a month ago on the rather tight (inverse) correlation between the dollar and oil prices. As that post suggested, correlation is not cause, but you can't dispute the correlation: it is simply there. In the last week or so, there has been a strong correlation between oil prices and the U.S. stock market: when oil prices went down, the stock market went considerably up...and of course vice-versa. And Genedio somewhere else in this thread pointed out that various OPEC officials and oil ministers clearly disagree with this assertion.

2. If the Fed used food and energy to set its interest rates, we would have another depression.

LeRoy: If the Fed was using food and energy to set interest rates, they would, of course, be much higher than they are right now. Would that trigger a depression? Well, a very serious recession, no doubt, at least of the magnitude of the one in the early 1980s. [And likely worse.] But, then, as a consequence, a lot of these problems would be corrected, and, once the pain was over, we would be in a lot better shape. I am fond of quoting Schumpeter on this: "A recession is a good cold douche for the economy." I am also fond of making an analogy with a fellow with a bad toothache who keeps postponing an urgently needed trip to the dentist, simply because he is afraid of dentists. Surely he will feel much better after he gets that infected tooth pulled, no? The alternative to this I regard as wishful thinking: we can just keep 'muddling through', hoping the pain goes away. It won't; just like the fellow with the bad tooth, it is more likely to get worse. Nor would I want a dentist who tells me to expect to be sitting in the chair for twelve hours, because he is going to pull the tooth very slowly, to minimize the pain; I would go find a different (and more aggressive) dentist.

3. We have no control over food and energy inflation, hence the Fed shouldn't concern itself with headline inflation.

LeRoy: This I also regard as plainly wrong. For one thing, some part (we don't know exactly how much) of our food inflation has been caused by the foolishness of our subsidized ethanol programs. As Genedio knows, I regard the focus (fixation?) on core inflation to be absurd. Core inflation is inflation with all the inflation stripped out, as many have noted. Although we obviously are in dire need of a more intelligent energy program (and both the major candidates are falling far short on this, I might add), I continue to regard our current monetary policy as one of the primary causes of commodity inflation, along with growing physical scarcities. (And again, we don't know how much of the price increases to attribute to each of these factors; wish we did!)

4. We shouldn't worry about Uncle Sam defaulting on Treasury bonds; if it happens, that's the end of the world as we know it. Implication: what's a little inflation among friends?

LeRoy: The more Americans talk like this, the more concerned and alarmed all the non-American central bankers become. The more countries talk about de-linking from the dollar. And the faster we approach the financial abyss that would mark the end of the global dollar standard. A week or so ago, The Wall Street Journal had a scary little article, tucked way back in their Money and Investing section, which suggested there is evidence that some international investors are in the process of raising the probability of U.S. default. That should tell the railroad engineer that he'd better be slamming on the brakes; there's a cliff up dead ahead.

5. Banks making bad loans will get those loans returned to them for "further work", i.e., selling them off to gullible idiots or just sitting on them and waiting.

LeRoy: Another variant of 'the Greater Fool Theory'. How many greater fools are left out there? Pssst....Anyone wanna buy some bad bank debt? Just sitting on them and waiting is what will get us into a situation of zombie banks and a long Japan-style stagnation....only it would be worse for us, as we do not have the household savings and trade surplus that Japan had (and still has).

6. The cost of a F&F bailout is peanuts compared to the war.

LeRoy: Neither is desirable. The '$3 trillion dollar war' has contributed mightily to this economic mess. The sooner we extricate ourselves from it, the better. Bailing out Fannie Mae and Freddie Mac has the huge moral hazard problem written all over it. We are back to the Comrade Paulson and Comrade Bernanke story of socialism for the rich.

I wasn't so much disagreeing with your assessment of Run's points...I was disagreeing with your characterization of him as being more concerned about the folks making $175K a year than the poor saps making $20K a year. I continue to think he is more concerned about unemployment than he is about inflation. In part, that difference simply reflects a value judgment, which means there is no easy way to say who is right and who is wrong. But I think that the last fifty years of economic history have demonstrated that there is no necessary long-run trade-off between unemployment and inflation...which is why I am willing to take the harsh steps and the harsh medicine to stop inflation now...and worry about unemployment later.

Run, I cannot address all your points in one post, as it would be so long that folks would not read it...so I will break up your post and try to address them individually...and may not even get around to all of them. Regarding unemployment, you say:

If you believe unemployment is still 5.5%, I can offer you a nice, century old bridge in NYC with a view of Sov's residence. Participation Rate has still not returned to what it was in 1996 before the economy took off or immediately after the 2001 recession, when it is traditionally at it lowest. BLS theory claims it is babyboomers retiring, women leaving the work force, etc. Most babyboomers are just starting to retire on their meager funds now and will probably not enjoy the same type of retirement that people like Sov and Phil enjoy.

LeRoy: I do not 'believe' that unemployment is still 5.5%. As you know, the Bureau of Labor Statistics keeps several different measures of unemployment, and some of them (the U6 measure, e.g.) are showing unemployment at nearly ten percent. I entirely agree with your view that we have had a very unhealthy labor market for the duration of the Bush II administration...and I attribute that to the economic mismanagement of this bunch of incompetents. I agree with your interpretation of the labor force participation rate, and with the importance of that statistic. I think it is inarguable that many baby boomers are going to have no choice but to postpone their retirement, and, even so, many of them will not enjoy the comfortable retirement they were expecting. Whose fault is that? In part, of course, it is again the fault of the Bush administration policies. We have had frightfully lousy fiscal and monetary policies for the last almost eight years, not to mention the complete lack of any sensible energy policy. But, to a large extent, the baby boomers themselves deserve a large share of the blame. The great majority of them have simply not been saving enough on their own to finance their retirement. They were expecting Uncle Sam to pick up the entire tab, and/or they were expecting their houses to make them rich. In short, they were just not paying attention. They were not being smart. I cannot help them with that. The great majority of the baby boomers got caught up in the mass consumerism psychology that has afflicted America for the last generation at least. They were all trying to keep up with the Joneses. Now the Joneses are broke, from too much credit card debt and falling home values. I feel sorry for them, but reserve the right to criticize them all the same.

Run then says: Any inflation we experience will not be led by rising wage demand as we saw in the seventies, which also makes this period somewhat different than then. It is an excellent counter to inflation as a large labor pool holds wage demand in check.

LeRoy: I agree with you that there seems to be very little risk of a wage-price spiral such as we saw in the 1970s. And I agree with your assessment that this is because labor has much less bargaining power (e.g., through unions) than it did in the 1970s. But consider what this means! It means that Bernanke et al are planning to 'control' inflation by allowing real wages to undergo a serious decline in this country. In fact, I have heard some Fed officials recently downplaying the risk of inflation getting 'out of hand' precisely because real wages are falling, thus reducing the purchasing power of the vast majority of American workers. No wonder consumer confidence is plummeting! I can hardly regard this as being some kind of paragon of good economic policymaking, to say that we should be happy to see a sharp decline in real wages, because it will make a rapid inflation less likely.

I prefer to control inflation with more restrictive monetary policies, rather than rely on sharply declining real wages.

"... a post I made about a month ago on the rather tight (inverse) correlation between the dollar and oil prices. As that post suggested, correlation is not cause, but you can't dispute the correlation"

That much is true, but one must also note that the rise or fall of oil prices is a fairly large multiple of the value of the dollar, so there is really much more at work here than sellers trying to get equitable compensation when they are paid with elastic money.

"3. We have no control over food and energy inflation, hence the Fed shouldn't concern itself with headline inflation.

LeRoy: This I also regard as plainly wrong."

I think there is a truth hidden in this: The Fed has little or no control over food and energy inflation. When banks borrow from their depositors at a half percent, it seems to me that adjusting the overnight rate charged banks can only elicit some kind of blind reaction like "call and response". On the other hand, Congress and the Administration (too bad there is a Presidential veto power, or Congress could act alone) can reshape the income tax table to make it much more progressive (I like that word!), with the lower end falling to allow a little slack in lower income budgets while the upper end climbs sharply, reaching 100% so that no sort of adjustment in wages, dividends, or bonuses will add a penny to the highest incomes. If the overall take is sufficient to balance the budget, then that is the strongest action anyone can take (other than price fixing) to stabilize both prices and the strength of the dollar.

I can't speak for Sov, but I know I am deeply troubled by the obvious mishandling of the economy by just about everybody who is privileged to have some sort of influence on it. Either directly or indirectly, the shakey condition of the stock market affects me since essentially every source of income my wife and I have (except for Social Security, which has its own stresses) is dependent on the market, including the fixed pension benefits since they are payed out of invested funds.

The falling market is sort of self-fulfilling since as it dips, the newly retired and retiring boomers are forced to sell increasingly more shares to cover their expenses, bringing about increasingly weaker pricing.

Phil: The falling market is sort of self-fulfilling since as it dips, the newly retired and retiring boomers are forced to sell increasingly more shares to cover their expenses, bringing about increasingly weaker pricing.

LeRoy: Many of the 'newly retired' are now 'un-retiring', for precisely the reasons you give. Becoming increasingly nervous about their retirement portfolios, they are putting themselves back in the labor market, at least for part-time jobs. So said an article in The Rocky Mountain News a few days ago.

As you know, some financial experts worry that the market is ultimately due for a really serious fall, once the Baby Boomers really begin retiring en masse, and have no choice but to start selling off their stock holdings to fund their retirement. I guess we are hoping the Chinese will step in and buy up all those American shares. Fat chance, and we probably wouldn't let them, anyway, out of misguided economic nationalism.

Phil:

Except for the politics of it or the third rail of politics. Some Light reading: <link> Bruce Webb on Social Security

I have read through the entire series and the comments also, this is the truth on Social Security. It took me a week to get through it. It covers low cost, intermediate cost, and high cost (Sov). Take the time to go through it.

Assertion #2. If the Fed used food and energy to set its interest rates, we would have another depression.

LeRoy: "If the Fed was using food and energy to set interest rates, they would, of course, be much higher than they are right now. Would that trigger a depression? Well, a very serious recession, no doubt, at least of the magnitude of the one in the early 1980s. [And likely worse.] But, then, as a consequence, a lot of these problems would be corrected, and, once the pain was over, we would be in a lot better shape. I am fond of quoting Schumpeter on this: "A recession is a good cold douche for the economy." I am also fond of making an analogy with a fellow with a bad toothache who keeps postponing an urgently needed trip to the dentist, simply because he is afraid of dentists. Surely he will feel much better after he gets that infected tooth pulled, no? The alternative to this I regard as wishful thinking: we can just keep 'muddling through', hoping the pain goes away. It won't; just like the fellow with the bad tooth, it is more likely to get worse. Nor would I want a dentist who tells me to expect to be sitting in the chair for twelve hours, because he is going to pull the tooth very slowly, to minimize the pain; I would go find a different (and more aggressive) dentist."

Unless Americans truly have a change of heart about facing the music, biting the bullet, or whatever idiom you might prefer, it is quite likely that a severe recession/depression could lead to more welfare. Far from being a "cold douche", it could also lead to purposeful inflation of the dollar, if the official U3 unemployment rate were to climb into the double digits--as it did briefly in 1982.
(At least I am assuming that the govt. used U3 back then). In short, using the dental analogy, Bernanke's palliatives may be analogous to a dentist taking 12 hours to do very little, but feeding the patient a lot of narcotics to kill the pain. The patient later gets an abcess, and needs radical surgery--which could involve even more narcotics. Eventually, he gets hooked on the painkillers. My point is, not sufficiently easing a probable severe downturn brought about by the most severe financial crisis since the Depression (Roubini) might cause the authorities to later have to react with the really strong medicine. So I'm not absolutely opposed to all of Bernanke's easing, or even all his bailouts--though I think he has gone too far, and has overstepped his legal bounds. This is no doubt why they are talking of giving the Fed more authority Ex Post Facto, as it were. Very sloppy, gentlemen. Of course, Greenspan $ Co. were asleep at the switch. Along with this easing and these bailouts I'd impose some severe restrictions on bank lending. But I haven't seen much evidence of this. It's as if someone checked into the emergency room with a severe overdose of a controlled substance, and the docs treated the patient and released him--with hardly a lecture. Hell, this is the PEOPLE's money the banks are supposed to husband. Maybe it's more analogous to a single mother checking in with an OD on Heroin while she's left her 4-year old home alone.

The Fed is not using ANY measure of inflation to set their short-term interest rate. That rate is fairly arbitrary, set largely by fingershpitzengefehlen. One or two Governors want higher rates because they've heard of inflation.

Listening to Greenspan was a bore, but a thrill to Ayn Randers, whose aim is to choke the rich with cash to go out and do great things. Listening to Bernanke is an exercise in futility AND a testimony to Congress's inability and incompetence, especially to ask useful questions.

Inflation includes ALL goods and ALL aspects of paper money's erosion. When you argue for leaving out food or energy, you become comedians.

Besides a short-term interest rate, The Fed acts with much greater effect in printing money, which Helicopter Ben is doing from great heights in the megatons

I don't figure here what all of you recommend. There are crosswinds in your collectively "liberal" musings. I've written here about the fundamentals.

You CAN see here that the composite "liberal" desires and thoughts are a muddle, without limits or basic principles agreed-upon. Hence the clear conservative gospel cuts down "the opposition." The cons want:

Give them the money and credit

Screw labor

Screw government

Reward ownership and speculation

Charge the max for rich people's stuff

Get the work done real cheap

Make credit cheap

What? ME Worry?

You guys can't even agree on a decent statistic for inflation. Don't think that's a small thing. EVERYTHING about "economics" depends on inflation.

It includes food, energy, houses, cars, utilities, medical, dental.

Genedio: Run and Gregor have their heads screwed on much tighter than the economists currently putting out fires which they were responsible for starting in the first place. Their cluelessness or mendacity knows no bounds.

LeRoy: May I assume you are not blaming me?

Genedio: I'd impose some severe restrictions on bank lending.

LeRoy: This strikes me as shutting the barn door long after the horses have gotten out. In fact, the barn is on fire, and 'shutting the doors' becomes akin to rearranging the deck chairs on the Titanic. Banks are becoming very skittish about further lending all by themselves, thank you very much. Reports are that it is getting harder and harder to get a car loan, or for a small business to get a loan...and mortgage requirements and documentation needs have dramatically tightened up. This all should have been done years ago, of course. So typical of America: we don't react to a crisis situation until it has blossomed into a catastrophe. It is China, with their overheated economy, that should be (and is, to some extent) putting severe restrictions on bank lending. In America's case, we are going to have a hard time getting banks to lend more freely in the future: I think we are going to have the opposite problem from what we have had for the past eight years. Right now, the Fed is pushing on a string...which is exactly why the very low Fed funds rate isn't doing anyone any good right now.

Genedio paraphrasing Run:

"3. We have no control over food and energy inflation, hence the Fed shouldn't concern itself with headline inflation.

LeRoy: This I also regard as plainly wrong."

Phil: I think there is a truth hidden in this: The Fed has little or no control over food and energy inflation....Congress could act alone) can reshape the income tax table to make it much more progressive (I like that word!), with the lower end falling to allow a little slack in lower income budgets while the upper end climbs sharply, reaching 100% so that no sort of adjustment in wages, dividends, or bonuses will add a penny to the highest incomes. If the overall take is sufficient to balance the budget, then that is the strongest action anyone can take (other than price fixing) to stabilize both prices and the strength of the dollar.

LeRoy paraphrasing Phil: The only way to control food and energy inflation is to move (rapidly) toward a balanced budget, i.e., to rely on fiscal policy rather than monetary policy.

LeRoy: In view of this theory, I am wondering how you would go about explaining the economic history of the early 1980s. Firstly, would you agree with the conventional statistics that show that the rate of inflation fell rapidly in the early 1980s, from what it had been in the late 1970s? And particularly in regard to food and energy prices? In the early 1980s, our budget deficits were growing rapidly, thanks to the economic policies of Ronald Reagan. On your theory, this should have made inflation worse! Conventional economic theory actually agrees with you on this: other things being equal (or constant, as I prefer saying), larger budget deficits should be inflationary. But other things were not constant: the other major change was the highly restrictive monetary policies of Paul Volcker, Chairman of the Fed at the time. This was what brought inflation under control, not the expansionary policies of Reagan. Honestly, Phil, here you are almost sounding like the nincompoops who, to this day, still go around saying, "That Ronald Reagan! He got inflation under control! Saved America from that knucklehead Jimmy Carter!!"

Q: What do you think brought food and energy price inflation under control in the early 1980s?