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Phil-osophically Speaking

The Inflation Paradox

There is, I confess, a kind of perverse pride at work when I consider that my predictions about Obama’s economic policies have been borne out: an environment of minimal growth, alarming indebtedness, higher taxes and steep and protracted unemployment. Still, I would rather be a jovial myopic than a dismal prophet.

But this is not an exercise to flatter my vanity or celebrate my prescience, I can regale you chapter and verse on where I’ve gone awry in the past. Instead I choose to focus on what I got wrong on a subject in which I got nearly everything right. In a word it’s inflation. It’s almost non-existent and in an economy flushed with cash, courtesy of the U.S. Treasury Department, there should be too many dollars chasing too few goods. The effect of such an imbalance is inflation. But we’ve had very little of that and that’s a good thing since inflation is theft; it steals value from people’s savings and savings is a symptom of a healthy economy. 

So what gives; have we been hoodwinked by the mysterious workings of the Federal Reserve Board chaired by one Ben Bernanke? What happened was that after several years of virtually zero interest rates and the economy moving forward like a tortoise with severe leg cramps, the Federal Reserve put the economy on steroids via quantitative easing. This delicate operation increases the money supply by having the central bank purchase bonds or assets from the government. This extra cash is supposed to stimulate spending that will grow the economy. But this old bit of Keynesian theorizing fell flat on its flat face, since every study showed that both consumers and corporations continue to hoard cash. Uncertainty is one of the great restraining forces of the Universe and our economy is up to the gills with uncertainty.

 In its centennial year the Federal Reserve implacably defies the purpose of its creation, which was to be an independent regulator of the money supply among other things. Instead, it behaves like chattel in thrall of its master: Congress and its profligate ways. How else to explain the Fed covering Congressional deficits of more than a trillion a year with worthless paper? These measures, however, delay the inevitable. Financial policy is abstract and complex, but the laws of supply and demand are a force of nature and, much like gravity, it’s bound to have its way no matter what artificial controls the Fed applies. Because of such rude intrusions one begins to understand why Ron Paul and other libertarians want to audit the Fed if not dismantle the Leviathan.

I would not push the envelope so far since the Federal Reserve, like the deservingly maligned United Nations, has its uses, though one has to scratch his head some before discerning what they are. There was a time when the informed, like the suavely persuasive Walter Heller, one of President Kennedy’s principal economic advisors, could argue that the Federal Reserve served a purpose in reacting to external events: A jump in OPEC prices, a surge in consumer spending, the overreacting of capitalism’s animal spirits. It is therefore sensible to have someone at the command post of fiscal and monetary policy to change course and make adjustments. This was a questionable practice even when Heller was around, but now we have the Fed reacting not so much to external events as internal ones in the form of massive government expenditures.   

The Federal Reserve reminds me of what the long time New York Times editorialist James Reston said about Richard Nixon: He inherited some good instincts from his Quaker forebears but by diligent, hard work overcame them. So it is with the Fed as they labor to manage an economy that naturally defies being managed. Just as government policy has an abysmal record with wage and price controls, it’s certain that it will do no better at fixing the rate of inflation and interest rates. My suspicion is, and I believe it’s an informed suspicion, that as soon as there is a bona fide recovery both interest rates and inflation, unless thwarted by a change of heart in the Oval Office, will find their launching pad.

Meanwhile, the démarche of the Fed is to keep buying long-term bonds in an effort to temporarily drive down long-term interest rates. For now the lion’s share of this money is going into stocks, since bonds, money markets and savings accounts yield no revenue. The brush dips into the colors of a dark palette; for while the Federal Reserve generally acted properly in being a lender of the last resort during the 2008 economic meltdown, it caused the Great Depression, not acting decisively enough and by then protracted that god-awful calamity by letting the money contract by one-third in the 1930s. There are other examples including the very recent dot com bubble of 1999-2000, but time and space forbids analysis.

There are unhappy parallels between today’s recovery and that recovery of the 1930s. In short, there was no recovery. During the ’30s, there was more than a doubling of government spending, the imposition of higher taxes, the National Recovery Act and the Wagner Act all increased the cost of doing business and arrested job creation. With the exception of tariffs that were imposed on 20,000 durable goods during that Depression decade it all seems eerily related to today’s deplorable state of affairs. The world still trusts our dollar and that is also helping to keep things afloat but by no means swimmingly. We are more or less treading water. 

Twelve years after the crash of 1929, America was still plagued with 14 percent unemployment. It was only after the war when savings were high, the debt liquidated and taxes cut that the corner was turned. It was a recovery waiting for a work force and it got it with millions of soldiers coming home.  While income taxes rose dramatically in the 1950s (though no one in the highest brackets actually paid those rates) there were no deficits since Eisenhower was an uncompromising deficit hawk and no competition from a world still digging itself out from the ruins of war.

To believe after all this stimulus spending that the road to economic recovery is by more spending would be bizarrely jejune if the enervating effects of the economy were not so punishing.  Every longitudinal study across the globe shows repeatedly that the best way to balance the budget and achieve economic sustenance is to cut spending and not raise taxes. The Obama Administration speaks eloquently about helping the poor, but all its doing is widening the safety net until it becomes unaffordable and unsustainable. If inflation is ever released from its imaginary cage, we will receive our just desserts, which I’m afraid will not be recovery but retribution.


News

The nine-story apartment building at 250 Old Country Road is rising on schedule, according to developers. Lake Success-based Lalezarian Developers is constructing a nine-story, 315-unit complex at the site.

 

Kevin Lalezarian estimated the project is about 20 percent complete.

 

“Our foundation is nearly complete,” Lalezarian said. “Our superstructure is proceeding. That’s the main thing happening right now.”

The Mineola Fire Department is looking to replace its Company Two engine, Truck 168. The truck is 25 years old, consisting of an articulating boom and bucket.

 

A new truck would cost upwards of $1 million, fire reps said.

 

“The current truck has served the village well for many years, but is in need of replacement,” Chief of Department Jeff Clark said.


Sports

The Mineola Hurricanes recently swept the Smithtown Bulls recently pounded the Smithtown Bulls in two games, winning 9-1and 6-1 at Brady Field in Smithtown. In game one, Chris Marotta brought the heat against the Bulls. 

 

Smithtown managed just one hit off of Marotta, who allowed no earned runs, walked two and struck out eight during his five innings of work. The Bulls jumped out to an early 1-0 lead in the bottom of the first inning.

Had college lacrosse burst onto the scene one generation earlier, one local resident would have become a household name within the inner circles.  Settling for three National Championships and a professional contract, however, is not a bad consolation prize.

 

Alex Rosier can now add one more accomplishment to the resume, nearly 20 years after his college career ended. 


Calendar

Town Zoning Meeting - August 13

International Night - August 14

What Matters To You - August 15


Columns

1959: The Year The Music Stopped Playing
Written by Michael A. Miller, mmillercolumn@gmail.com

The Eccentric Heiress Of ‘Empty Mansions’
Written by Mike Barry, MFBarry@optonline.net

Yellow Margarine And A Pitch For The Ages
Written by Michael A. Miller, mmillercolumn@gmail.com