That how Brian Domitrovic, the only American who understands completely how and why supply-side economics actually works, characterizes our new monetary policy:
The idea is that if all the spending and regulation of the last few years has only resulted in nil growth, stubborn unemployment, whopping budget deficits, and a banking sector nobody believes in, at last increase American jobs and wages through…exports. If the dollar goes down against the major currencies, exports will go up, the logic goes, and same thing if the trade “penalties” get their desired effect.
In other words, the Fed and the president are now outsourcing—yes, that word— to the rest of the world the burden of getting the domestic American economy recovered.
But of course the world has asked for no such thing. A binge of U.S. exports would be reflected in foreign places by money flowing out-of-country to the U.S. and concomitant declines in employment. We’re talking about places like China and especially Europe having to transfer some of their currently distressed living standards to the American people, all because Obamanomics and the earlier Fed feats turned out to be a failure.
“Currency war” is the term Rickards uses to describe this sort of gamesmanship, which obviously can be played most effectively by powerful counties and at the expense of the less powerful. The president’s supporters have made much of Obama’s foreign policy “reset” with Russia, Europe, Iraq, and the Arab world, and the man won the Nobel Peace Prize, but sure enough he is now embarking on one of the most classic ploys to force the world at its own expense to support the American lifestyle.
Of course there’s official denial all over the place. But a big secret like this one is hard to keep. Rickards has fun with the slips that have come from the administration. He quotes the Fed vice-chair Janet Yellen (Obama’s appointee) referring to quantitative easing two years ago: “The purpose…is not to push the dollar down. This should not be regarded as some sort of chapter in a currency war.”
But once loosed from her appointment as Obama’s economics chair, Christina Romer said soon after: “Quantitative easing also works through exchange rates…The Fed could engage in much more thorough quantitative easing…to further lower…the dollar.”
OK, so it’s a currency war, one now really jacked up with QE 3 and the tough trade talk. Sometimes, Rickards is keen to point out, currency wars yield to shooting ones. For all our domestic woe these years of the Great Recession, the full potential wages of the failure of Obamanomics are only now beginning to come into focus.
Listen, Mitt, read and learn, make it your own, and use it October 3.
September 25th, 2012 | 10:01 am
Well, I hope if Mitt does, he is able to simplify it and keep it straight who is doing what to whom. The ordinary voter (including me) does not have the background to make much sense of this as it stands and wants an explanation of why stocks, and those who buy them are doing so well, and the rest of us who have trouble buying gasoline and groceries aren’t doing very well at all.
September 25th, 2012 | 10:11 am
What if Mitt could make it clear that that class divide is the result of Democratic policy?
September 25th, 2012 | 11:17 am
Stocks are at record highs because corporate profits are at record highs. Corporate profits are at record highs because corporate expenses (e.g., labor and supply costs) are low. Corporate expenses are low because of efficiencies brought about by asking fewer workers to do more work for less money. If I can replace you with a robot, an iPad, or a cheap laborer, then my profits rise, my investors are happy, and my stock rises. Minimize costs = maximize profits = maximize stock value. This is how Romney made his living.
September 25th, 2012 | 11:46 am
That’s a big ‘what if,’ Peter.
When has Romney ever effectively communicated any big idea to the American people, or made anything clearer through speaking about it?
There are probably instances, but none come to mind.
Clearly the debates are now crucial.
I’m pretty sure Mitt doesn’t want to try and tackle explaining the Fed and QE3 to an American audience.
I asked this a few weeks ago and didn’t get much of a response–does anyone have any idea what’s going on with David Brooks these days? His column now seems devoted to pointing out the weaknesses in Romney and the signs of hope to be discovered within the Democratic party.
September 25th, 2012 | 11:54 am
“Minimize costs = maximize profits”
Um, you realize this has nothing to do with reality, right? If it were true, everyone would be making minimum wage. Corporations do in fact want to maximize profits, but that doesn’t correlate at all with minimizing costs. Sorry to burst your bubble…
I’m not an economist either, Mr. Marshall, but it seems to me that the fed wants you not to hold any cash. Stocks are going way up mostly due to their not being cash (I stopped keeping track back in 2010 or so, but for the previous year or so there was a nearly perfect correlation between the decrease in the strength of the dollar and the rise of the stock market), as are other assets such as crude oil. Buying stuff like food and gas becomes harder because the cash you have to use to do so is being devalued.
September 25th, 2012 | 12:49 pm
Ok, Agatha, that’s one half of my question, now how about the other half? Every indicator but the stock market has shown middling progress, why? Moreover if consumer consumption is depressed (both here and in Europe) what is it that these companies are making so efficiently, and who is buying them?
I’ll let you have a crack at it before presenting my own answer.
September 25th, 2012 | 3:08 pm
Look at the composition of the Dow, and the answer is very clear. Oil, financial services, big pharm, technology, international manufacturing, cheap food/clothing, and a bit of entertainment. All multinational and with the exception of The Mouse, huge demand for all of the above…regardless of place or position. Now, if you drop down to the mid- and small-cap indices, you won’t see the same kinds of gains.
As for the minimum wage, what do you think union busting is all about? I don’t want to pay you any more than the least that I can get away with. I can and will replace you immediately if you start cutting into my bottom line. It may not be noble or ethical, but it’s definitely economics.
September 25th, 2012 | 4:20 pm
Agatha, your understanding of labor economics, is to be kind as possible-comical.
Anybody who has ever had to hire and fire people knows that you don’t “pay the least I can get away with”, because human beings aren’t fungible or donkeys. If you follow that prescription you end up with high turnover (both from a high washout rate as well as high voluntary separation), excessive training costs, low morale, and a myriad of other things that will cause you to incur higher operating costs than you would if you didn’t follow that dictum.
If such a thing was ever true, it isn’t today, when information about alternative employment is a few taps on a smart phone away.
Finally, more often than not, technology replaces human beings when it is better, not cheaper. Cars are assembled using robots because robots can produce near perfect results every time-but they most assuredly aren’t “cheap”.
September 25th, 2012 | 4:51 pm
I’ll answer my own question. First, I would note that the last two gasoline price spikes constituted the two largest single transfers of wealth upward in human history with no serious change in either the supply or the demand for gasoline. It was pure gouging made possible by an inelastic demand.
Now, where did the money go? To the major oil companies, of course. What did they do with it? Well, certainly they didn’t just pass it on to their shareholders in the form of dividends or stock splits. The money the shareholders made came from the speculative processes of the market, buying and selling stock among each other that the oil companies had already been paid for at time of issue.
Some of it probably went to more exploration and other recapitalization projects. But the actual dollar volume was so enormous that no company could possibly expend it all on recapitalization.
Where did it go? Well it sure wasn’t stuffed into the CEO’s mattress nor did it stay in the corporate headquarters in stacks of large bundles of 100 dollar bills.
Where did it go? Back into the equities market to make the oil companies extra money not related to pumping oil or selling gasoline. Thus the net effect was the same as if everybody who owned a car had invested the money, but the oil companies acquired both the capital and the profit.
It absolutely dropped out of the real world of demand for goods and services and into the rarified abstractions of finance.
This is the process that has beggared everybody and this is why Brian feels cash poor and it is not due to the actions of the Fed. Ever since the downturn and housing bust of 2008, corporations of all kinds have been swimming in money and reinvesting it back into equities rather than recapitalizing and expanding operations.
The same holds true for major banks, who are directly speculating in the equities market (they once were prohibited by law from doing this, and with good reason) or lending money to other investors rather than to people buying houses, cars and so on. They are, as well, still skimming the loan interest from ordinary debtors who have been relieved of huge amounts of discretionary cash by such things as gasoline price spikes.
The equities market itself has evolved into a closed system whose primary purpose is no longer capitalization of companies to sell goods and services. It is now the means for those same companies to buy and sell each other’s stocks to each other and then reinvest the profits generated by the movement of the money. This is fed regularly by us all in commodities where the demand is inelastic.
Three of the industries highlighted by Agatha are either in markets with inelastic demand (oil, medicine, food, and clothing) or which are
September 25th, 2012 | 5:01 pm
slowly becoming more absorbed into the closed circle of equities exchange (financial services). Only technology and entertainment are the only ones driven by the discretionary income of the ordinary person and truly subject to the control of supply and demand.
As far as I am aware, the only comparable time to this in US history has been the middle years of the Great Depression 1933-1937. In 1937 there was another equities crash as bad or worse as 1929. And this cycle was broken only by the massive government spending and demand for goods in World War II.
And a similar effort by the current government to directly stimulate consumption is the only likely solution now.
September 25th, 2012 | 9:28 pm
Aside from the fact that supply side economics is a joke…I suppose it is possible to be an expert in it, and thus know how to put its patent into copyright so to speak, or to explain its mechanics with a modicum of creativity fixed in a tangible medium of expression. So it is possible to know how supply side economics “works” without having any real clue about the economy.
One hilarious side effect of reading some of the Greatest Economists, is realizing that they are either entertainers or mathmaticians, and in rare cases both, and from time to time will even admit as much.
But everything Domitorvic says is strangely perverse (as translated by Dr. Lawler). Most especially so in the parts that are rhetorical/normative. But even the mechanics are highly arguable.(and I would like to argue them, but it is a smaller point).
A big point that is/was agreed upon by say Keynes and most american economist looking at Germany and thinking thru the difficulties in the treaty of Versailles… was that a nation does not get rich by exporting goods and gainning foreign currency (unless this currency is backed by Gold?)…which was a point of disagreement with the French, and French Exceptionalism won the day after World War I (and to this day no one will take the french seriously, unless one is speaking of trademark, high quality Champagne or existentialist philosophy dealing with the nature of Pyrrhic victories). There is minor truth concerning the wages and jobs claims… but essentially a good that is exported is one sent away. In fact for Keynes at least the only way to make Germany pay for world War I (the harshness of which he advised against)…was to export from germany. Goods had to leave Germany and go to france and the U.S. Because “Goods” equal true wealth. The discussions of the truly great economists of this era are worth reading, because they were not as yet as diluted by the comodification of “copyright” (or original expression of creativity) as a good in itself. Today you might as well watch Mad Men or Jim Cramer(who isn’t a horrible economist).
But basically Lawler’s explanation is too French. So right off the bat Keynes (and a substantial portion of non-Keynesian microeconomic and macroeconomic theory) disagrees with him. Or at least in a non-partisan way I suspect the economic consensus is very strongly against this rogue proposition(albeit there would be very strong opposition to my considering this a non-copyright formulation, that rose to the level of a proposition) “but sure enough he is now embarking on one of the most classic ploys to force the world at its own expense to support the American lifestyle.”
Everyone would disagree here because this would be a reverse of the poorly designed German impovrishment caused by the Treaty of Versailles. That is in order for it to have worked the french would have had to send the mark back to germany and imported german goods. i.e. the Germans would be forced to export. The exportation would be the cause of the inflation according to Keynes. Because it would result in an excess of German currency in Germany chasing fewer goods(because german goods and materials would be sent to France and the U.S.)
In any case the Keynesian explanation of this was more detailed and pretty good and proved prescient, that is true Political Economy via a Churchill Standard. (and also a decent american rule: Call your shoot in Horse, or else folks will just think you tripped and got lucky). The Weimar republic impovrished itself (via the treaty of Versailles, not by debasing its currency…but by over exporting.) Over-exporting leads to a weaker currency, as there is a greater quantity of the currency in a geographic area(nation), and simulataneously fewer goods in that nation. So exporting is never (especially in and for a currency no longer backed by gold) a means to improvrish others (those you export goods to).
That is the Weimar republic would have never gone broke without debts owed in gold, and without exportation. (to simplify this was the Keynesian/Churchill starting point).
In truth the U.S. has probably impovrished the world (but this is so rediculous pricing in our incredible Liberalism post-World War II, and thus actual american exceptionalism) via the mechanism of over-importing. That is we have been able to treat other nations more like Keynes would have treated the Weimar republic, nation building first followed by the capacity to import.
That is Germany and Japan can only pay us back by becomming highly productive nations that export to us. That is the route we took anyways. So we are enriching ourselves via exports, but the main and I think the strongest argument of the deficit hawks in terms of having to pay back debt…occurs not on the level of tax payers reimbursing the federal government…(this for further disagreement I think is more or less only limited by a congressional policy decision to raise the debt cap). but in terms of having at some point to re-import our dollars by sending goods (exports) overseas.
So the real way we will have to pay for the deficit, that is pay in some arguably unfair way for rebuilding Japan and Germany…is via importing dollars and exporting products. Because currently we are exporting dollars and importing products.
If you ask me, I think the dollar is currently strong (on an objective basis), and the strength of the dollar is basically tied to our capacity to consume or import, without necessarily exporting “goods”, but only I.O.U’s, i.e. dollars.
While it is arguable, I would say that the fact that we import more than we export means the dollar is too strong, on a non-factoring for “trademark/reputation” basis. So the dollar trademark, or the strength of the dollar is also in many ways american exceptionalism. And this american exceptionalism (as all trademarks or property interests in reputation are) is borne of history. In any case a point that I think is incontrovertable is that importing more goods than you export, under a fiat money system is itself the most classic ploy to force the world at its own expense to support the American lifestyle!
You are living under a brand, that is capturing the premium for a warranty for quality and true exceptionalism. And that warranty is the promise to deliver “progressivism” or even better american goods(tech/patent infused) (from some sector of the economy that is alienable) at some point in the future. So the capacity to export at a future date is part of the promise, that stands behind a dollar (which is just a future potentiality to fill a desire or need).
So while I disagree or would like to see further explanation for the mechanics of QE-3… trying in some ways to increase our exports is part of being able to live up to that promise.
Increasing our exports if such is actually possible would probably do the most to close our huge production capacity gap. But at some point it would be inflationary… But the fact that we have food inflation, is mostly due to the fact that this is the sort of export that other nations are demanding. Technically the best Keynesian stimulus would do both, even if export stimulus would cut into unemployment stimulus by combining to reach an inflationary point sooner…(if that makes much sense).
September 26th, 2012 | 1:23 am
Joseph, exactly when has the government stimulating demand worked sufficiently to get an economy out of a recession? WW II fails as there were a matrix of factors involved including decimation of all other industrialized nations except the US making the US the center of global industry, the release of pent up demand suppressed by a decade of geopolitical turmoil in Europe. WW II is a poor argument for Keyensian pump priming.
September 26th, 2012 | 1:24 pm
Pseudoplotinus, the initial stimulation of the economy occurred in 1942-1946. Consider: several million out of work men returned home from military service to find plenty of jobs waiting for them, far more than we’re present in 1940-41. Europe was not in the least involved in this.
Demand is demand, it buys the same goods and services whether it is orchestrated by the government or is the spontaneous eruption of millions of individual consumers. Neither is more “artificial” than the other. The money changes hands in the same way, and the goods get made and merchandised in the same way. Extreme demand calls forth more production which in and of itself stimulates further demand for energy and raw materials and this can continue as long as the demand continues until the market is saturated and demand recedes.
Now I have heard this argument a devastated Europe before. But consider that if Europe and the Far East could not compete with us as suppliers, they also had little or nothing to offer us in the way of demand for our goods.
For about a decade, the United States economy was a closed system, making its own goods and buying its own goods. Matters such as supply, demand, and economic stimulation are not contingent on the size of the market at national and world levels, an isolated United States market behaved according to the same principles as the pre-WW II world market with Britain and Germany both competitive as fellow capitalist suppliers and as sources of demand for our goods beyond our shores as well.
Further, the government stimulation of our economy didn’t stop abruptly in 1945. To begin with, we poured an enormous amount of aid into Europe, both to aid our allies such as France, and aid to simply make it possible for us to govern Occupied Germany and Occupied Japan, which required the restoration of some minimum of totally devastated infrastructure. (Exactly what we didn’t do in Iraq, by the way.).
All of this aid required massive government demand from the suppliers in America. We didn’t just throw money at Europe and Japan and tell them to go buy what they wanted. We shipped them goods procured by the U.S. Government from U.S. suppliers.
Moreover, five years after 1945 we were involved in another war with the same stimulating effect as WW II on a smaller scale.
And from that day to this we have maintained a standing army that even now is far larger than anyone would have dreamed of before 1940. All fed, clothed, housed, and armed by the U.S. Government buying from U.S. suppliers.
The government stimulation from WW II essentially never stopped–even under Saint Ronald Reagan–and since 1950 we have fought four more major wars requiring enormous government expenditure.
Today’s conservatives are like fish who don’t believe in water because it is so pervasive that they can’t tell the difference until a hook yanks them out of it.
September 26th, 2012 | 1:39 pm
It also occurs to me to note that the one serious attempt to curb ALL government spending occurred under the Republican administration and Republican Congress of President Eisenhower. And it was followed by the very sharp recession of 1957, the first major downturn since 1940 (!)
If we do go over the “fiscal cliff” of massive cuts across the board in government, or if by some chance Paul Ryan’s ideas are ever implemented, all of us will be yanked out of the water to squirm and die on dry land. By then Conservatives will understand that they were previously in an ocean of water. At least I hope they do.
September 26th, 2012 | 6:14 pm
Joseph, that is a rather long winded way of saying that you couldn’t come up with an example of a successful stimulus program apart from WWII. In the future, when supplying an example to support your theory of effective government stimulus choose an example that actually was a case of government stimulus. Neither WWII nor the Korean War were.
Your observation that Europe had nothing to do with the absorption of WWII vets ignores the fact that pent up demand existed in America as well. During WWII the savings of the typical American increased, for a number of reasons including the fact that the wartime economy was heavily rationed resulting in a severe limitation of goods that actually could be bought in the wartime economy.
It’s true that America was engaged in deficit spending in the war effort but this doesn’t make it a stimulus. Rather it was an example of military scale investment toward the purpose of ending/containing threats to democracy. Its purpose wasn’t domestic-economic but geopolitical. Granted the geopolitical achievement had huge value-added effects which, we now know in hindsight, helped set the stage for a thriving global economy. But this latter effect was practically accidental to the actual purpose of those conflicts.
This is in contrast to actual government stimulus programs which rely on the rather feeble ability of government officials to anticipate what goverment investments will actually serve a value to the economy. Hence the parade of Solyndra’s the present administration has produced at the expense of tax payer funds.
In other words, counter to your declaration above, not all demand is created equal. This should really be apparent now after the real estate bust. For it was during the boom that demand was at the highest because housing was believed to actually have a certain perceived value. After 2008, that perception clearly proved to be false. The lesson that should have been learned is that demand is only legitimate when what is demanded actually possesses the value that created the demand in the first place. Housing didn’t in 2006, Solyndra didn’t in 2009, and GM didn’t in 2010.
When government developes a crystal ball that actually allows it the powers to see into our economic future, I might change my mind. But then again the crystal ball would probably be the product of a government program.
September 27th, 2012 | 1:58 pm
“the restoration of some minimum of totally devastated infrastructure. (Exactly what we didn’t do in Iraq, by the way.).”
This is completely and totally divorced from reality.
As for the rest of it…meh. Why bother?
Links
Blogs
Find Us
Contact