Sunday, November 07, 2010
We had to spend most of 2001-2008 hearing from Democrats about how dreadful it was that George W. Bush was pissing off our "traditional allies" by dint of his "unilateral" foreign policy. This was never actually true for any real country other than France or Germany, and query whether Germany even counts as a "traditional ally," but the facts mattered little to the narrative. John Kerry and Hillary Clinton and Barack Obama said it, and the press, by and large, bobbed its head up and down.
Now the Obama administration is doing the same thing, this time by acting unilaterally in fiscal policy and pushing the Fed to do the same in monetary policy:
Last Wednesday was a hinge point in history. The United States decided to drop all pretence of being interested in leading – or even being part of – a coordinated global policy response to the most serious economic crisis in more than 70 years.
America is now isolated and the rest of the world is furious. The widespread use of capital controls and even a lurch into 1930s-style protectionism are both far more likely than just a few days ago.
The Federal Reserve's words may have been anodyne. "We will adjust the programme as needed to best foster maximum employment and price stability," said the US central bank's Open Market Committee. But by announcing another round of "quantitative easing", America is rightfully incurring the wrath not only of the emerging giants of the East, but the eurozone too.
Of course, no where will you read in the New York Times or see on any non-Fox network that the Obama administration has shown contempt for international opinion or our "traditional allies." But that is what it has done. Now, being a retrograde "national greatness" wingnut I don't care what dem ferners think, but in principle the transnational progressives who control Washington do. Where's the outrage?
The tragedy is that it is in the service of a bad policy. The QE2 is pushing on a string, and will lead only to the depreciation of our currency and wealth-destroying inflation. Interest rates are as low as they are going to go. The economy is not sluggish because money costs too much or is otherwise too scarce, and in any case wasn't the last crisis caused by too much credit? No, the economy sucks because people are pessimistic. They are pessimistic because they know that most companies are shrinking, or shrinking from opportunities to grow. We corporate tools and our small business brethren are hunkering down, hoarding cash, and reducing debt even though interest rates are trivial, rather than speculating on new ventures. Why? Because we do not know whether our decisions will be condemned as anti-social or illegal after the fact or regulated in to unprofitability on a moment's notice. We live with this uncertainty, which makes us pessimistic and defensive, because the current federal government has been waging a regulatory and rhetorical war against virtually all enterprise that does not meet some obscure liberal test for social respectability. End the war on enterprise, stop and reverse the regulatory madness, act as though you actually want the private economy to grow, and we -- meaning American business people -- will make it grow. As we always have done.
When liberals criticised Bush for alienating our traditional allies, they meant the UN. I'm not just being cute here. When you ask the questions to find out exactly what they are objecting to, the UN keeps popping up in the answers. Same for "world opinion." It's the UN, and the people who still think that organisation is an only mildly flawed force for peace in the world who were offended by Bush.
Smart POWER is such a joke.
Hillary Clinton and Barack Obama have made a mess of it.
Same as the Democratic Partisans did with the CARTER Malaise and the Clinton Negligence prior.
Remember when Hillary Clinton took her first trip as SEC of STATE? Going to China, to announce to the World, the Obama Administration would not make Human Rights a priority?
Soon Russia, Iran, Venezuela, Syria, North Korea, the Taliban, etc., were laughing at the Obama Administration.
It is no surprise we see a rise in Domestic Terror attacks on US Soil since Obama took the Office.
Thanks Democratic Party...
And now Obama is in India, following GW Bush who began this alliance with an history treaty - trying to use India as a check to China and others. What a shock.
Teleprompters in INDIA?
Anon Attorney here. I have some quibbles with this piece, TH.
First, to be perfectly fair QE2 is a product of the Federal Reserve, which is politically independent from the Obama administration. You can't pin this one on Obama, at least directly.
Second, while I agree that QE2 is an abomination, as was QE1 and as will be QE3 through QEn, we really don't have much choice as long as we remain committed to the policy of protecting the banking industry from the failure it so richly deserves. I've been writing comments to this effect on this blog for over a year now. The collapse of the real estate bubble rendered all our major banks, pension funds, and financial institutions insolvent, not to mention state, local, and even the federal government. There are only two ways out: default and liquidate or devalue the dollar. We chose door number two, making QE1 through QEn inevitable. (If you have invested accordingly you have made a killing--you can thank me later).
Finally, I have to say that I find it a bit ironic that your blog is posting this inasmuch as all the writers on this blog have been staunch defenders of Wall Street Banks and the bailouts thereof. QE1 through QEn are the necessary byproduct of your policy positions.
In the end the choice was this simple: either the banks die or the dollar dies. Take your pick. We chose to save the banks and kill the dollar. Invest accordingly.
Anon Attorney: "In the end the choice was this simple: either the banks die or the dollar dies."
No, there is a third (and better) alternative, as our gracious host has indicated -- the attorneys die.
To be more precise, kill the morass of regulation which is killing jobs in the US. Re-industrialize the US. Grow the economy. Much easier to pay the bills if the economy is growing.
Of course, Sierra Clubbers and their attorneys wont like it. Tough! They have done too much harm already.
>> No, there is a third (and better) alternative, as our gracious host has indicated -- the attorneys die.
>> To be more precise, kill the morass of regulation which is killing jobs in the US. Re-industrialize the US. Grow the economy. Much easier to pay the bills if the economy is growing.
Anon Attorney here again. I'm a patent attorney with two engineering degrees, so much of this rhetoric is music to my big floppy engineering ears. These steps are necessary but not sufficient. By all means, kill all the lawyers and deregulate like mad, but you still have a financial sector that is deeply underwater on real estate losses (the vast majority if which have NOT been recognized). Supporting the financial sector sucks capital, the lifeblood of business, out of the real economy in which the rest of us work. It is Wall Street vs. Main Street, and Wall Street is winning.
We are making precisely the same mistakes as Japan made in the wake of their real estate bubble collapse, but we don't have the luxury of an export-oriented economy which generates a trade surplus which can be used to fund the effort to support asset prices. Ergo, the Fed has to print the money, destroying the dollar in the process.
I would take a slightly different view than TH regarding why the economy sucks. Corporations are not investing in risk ventures because there is simply no reason whatsoever to do so in the present financial environment. The Federal Reserve's dollar destruction policy is driving capital into hard assets, primarily commodities and precious metals, as a hedge against worldwide currency devaluation. If a fund manager can generate 20-40% returns investing in commodities and PMs they are not going to invest in productive business ventures which generate jobs.
My money has been out of the stock market and in commodities and PMs for almost 2 years. I am making a killing, but to be perfectly honest I'm sick about it. The engineer in me would much rather be making an honest 6-12% gain (in real dollars) investing in companies that create value and jobs. Unfortunately, that's not possible in this financial environment.
"as all the writers on this blog have been staunch defenders of Wall Street Banks and the bailouts thereof"
I wouldn't put myself in this category, nor some others here, although I grant we've been in the minority.
"You can't pin this one on Obama, at least directly"
This stuff can get complicated with second and third-order effects that can prove the most significant of all. I don't pretend to understand it perfectly.
That said, Little Timmy is financing Obama's current trillion dollar deficit gap by walking down the street to Bernanke's Fed to pick up nearly a trillion in dollars in exchange for nearly a trillion in USA IOUs. The Fed actually makes money on this trade -- it earns interest on the Treasuries it bought, while the dollar "liabilities" bear no interest -- although its balance sheet gets bigger. The USA gets an extra trillion in aggregate demand.
Who knew it could be this simple? We should have been doing this years ago. Thank you Paul Krugman for enlightening us.
Actually, I've been saying Bernanke can do this for two or three years -- no more. Then we're Argentina.
We can't put this all on Obama ... but he's been pouring gasoline on the fire. As I write, he's saying that we're going to double our exports over the next five years as the way to reduce our unemployment. I can't wait for what the other members of the G20 have to say about this.
"We chose to save the banks and kill the dollar."
I don't disagree. Bernanke would say he's trying to avoid the horror of deflation ... it's happening anyway.
But if we don't save the Too Big to Fail Banks, Main Street might get hurt badly. It's the Unknown Country. I've defended Original TARP, because of this, but we still haven't dealt with the intertwined mess of residential mortgages, flawed securitizations and the derivatives that reference them. WTF?
Our original federal government had two main functions that it took over from the states: border control/defense and managing the dollar. I submit its failing at both. I get no benefit from any of the other things that the federal government has taken on, although I get a bill. I'm not alone in this.
"We are making precisely the same mistakes as Japan made in the wake of their real estate bubble collapse,"
Agreed. I posted the following here back on Aug 2. It's still relevant:
"Happy economies are all alike; every unhappy economy is unhappy in its own way"
I have no crystal ball, but I've long thought that we've been heading to a cross between Peron's Argentina, Japan's deflationary lost decade, and post-Empire Britain. In the end, it'll be uniquely American.
Obama is Peron without the gold braid. Argentina started with money in the bank, post WWII. Peron pissed it away with grandiose plans for nationalized industries (including energy and autos) and guaranteed "rights" for everyone. Leftists say it failed because Peron didn't go far enough.
Despite its democratic machinery, Japan is (and always has been) a Borg state. When faced with over-leverage and too much debt, it chose a path that favored the old and the Establishment at the cost of stasis.
Post-Empire Britain wound up an over-extended debtor. While WWI was a war of choice for Britain, WWII wasn't -- so I have some sympathy. Post 9/11 we should have kept our powder dry, as I've ranted about here before.
But the future isn't written.
Presently we’re only "Chapter 11 Reorganization" broke, which means it’s fixable. We're still capable of being a going concern. But lots of entrenched interests would need to take big discounts.
The fiscal numbers involved are too big to think that we can solve this with normal bargaining between Democrats and Republicans, certainly not with Hopenchange as broker.
If we don't fix it, we'll wind up "Chapter 7 Liquidation" broke. That'll either result in an even bigger Borg state, or our getting whatever's behind door number three. We've got five to seven years to do this I expect, maybe less if there are adverse exogenous developments.
The Republicans will once again get a seat at the table after November. Then they'll have to figure out to use it.
I don't write as a partisan. I'm just a concerned citizen and father with a half a clue about what's going on.
Let me take the other side of this perspective and defend QE2.
It's all well and good to describe inflation as bad and this is Fed money printing gone mad, etc. Check.
This is a little like complaining about TARP, which I have defended int he past because really, truly, we bailed out savers with TARP. Without savers, there's is no financial system. So I was and am ok with TARP. And we scared the interplanetary BSD risktakers enough with Bear Stearns and Lehman.
So why QE2?
Simply, if you have a levered economy, and we do, there are only 2 ways out of overleverage really. The first is default; the second is inflation.
They are both bad. They are the product of excess credit creation. But in the end, the Fed has concluded, and I probably concur, that inflation is probably less bad than massive forced liquidations.
Massive forced liquidations would be, in a certain sense, kinda fun for those of us who enjoy vulture investing and aren't levered. We would buy (as we did for about 6 months from November 2008 to April 2009) great assets super, duper cheap.
On the other hand, the human cost of massive, forced liquidations is exceedingly rough. Many innocent and prudent people get squashed there too, not just the imprudent. Again, many savers would get crushed. Lenders gnerally take property away from borrowers. Those with sufficient capital will enjoy massive windfalls at the expense of those without it, regardless of prudence, guilt or innocence. And the restructuring costs in terms of unemployment would be far higher.
By contrast, inflation is much more pernicious. It erodes the value of credit to the benefit of borrowers. And since most of US society, from the government on down, is a borrower, inflation in doses will be societally much less painful.
This is especially so because, as the world's largest economy, upon which the rest of the world depends and to which the rest of the world pays tribute (we have the world's reserve currency after all), we will "export inflation" as we spread this round the world.
Exported inflation, in the end, will in my estimation go down far better than exported deflation (re-read the 30's history again).
So, I'm not jumping on the Bernanke bashwagon yet. Let's see when he stops the party.
It gets even more blatant - Obama is lecturing the Indians on their failure to stand up against Burmese repression.
You know, like he himself didn't do regarding Russia bullying Georgia or Iranian repression of dissidents, or for that matter Chavez crushing dissent.
I used to think Hillary had a tin ear, politically. Obama makes he rlook like Bismarck.
CardinalPark says "pick your poison" and that inflation is the lesser evil.
Bernanke says he wants low single digit inflation. But will we get double digit instead? Following CP's logic, a low inflation rate doesn't de-lever us enough. But it's hard to keep a lid on inflation, once it starts.
Much may depend on how things like the CPI get calculated. State pensions etc are often indexed, but the CPI has issues. From what I hear, gas at the pump could go to $6.00 without the CPI going up at all.
Many Americans now own over-priced assets bought with too much leverage. Thus, KKR and Blackstone are in the same boat with subprime "home owners." [Insert Titanic metaphor here.] If inflation kicks in, outcomes may depend more on capital structure specifics (e.g. fixed v floating) and ability to refinance in a low-rate environment than underlying fundamentals.
There's a broader theme: winners and losers over the next decade may be determined more by "arbitrary" market forces than by "underlying fundamentals." Will this be kinda like the 1970s ... or worse?
"Let's see when he stops the party."
Can Bernanke stop if Obama & Co keep running trillion dollar deficits?
How big can the Fed balance sheet grow -- why not $10 trillion?
At what point do real rates rise, leading to really bad Stagflation.
Make my day! Current Reuters headlines:
1) China says U.S being irresponsible over QE
2) Russia says G20 should have been consulted by Fed
3) Obama says U.S. low growth or no growth danger to world
Since Obama is the single biggest cause of US "no growth", does this mean he's a danger to the world?
The good news is that we'll all soon be millionaires.
One other thing to add -
You know, we've done this before. Following our spending binge of the 60's - the Great Society - we devalued the dollar and inflated by ending the fixed convertibility of the dollar for gold, I think at $36 per ounce. the French essentially bgan exchanging their dollar reserves for gold and we had no choice but to close the gold window.
Subsequently, gold, oil and other commodities shot up in price as the dollar wa devalued by 10:1.
That's pretty much what we're doing now. In those days, it was De Gaulle. This weekend it was the German finance minister. But the effect is similar. They own huge portions of their reserves in dollars and treasuries and know they're about to take a BEATING.
Reuters: Palin Tells Bernanke "Cease and Desist"
Tea Party favorite Sarah Palin weighed in on Monday on the global debate over the Federal Reserve's $600 billion plan to buy up government debt, suggesting Fed Chairman Ben Bernanke should "cease and desist."
"We shouldn't be playing around with inflation," Palin, who is widely seen as a prospective 2012 Republican presidential candidate, said in remarks prepared for a Monday speech in Phoenix.
"We don't want temporary, artificial economic growth bought at the expense of permanently higher inflation which will erode the value of our incomes and our savings. We want a stable dollar combined with real economic reform. It's the only way we can get our economy back on the right track."
Representative Paul Ryan, expected to become chairman of the House budget committee when Republicans take control of the chamber in January, said on Sunday the advantages of the central's move to inject more money into the U.S. economy "are very low."
"I think its going to give us a big inflation problem down the road," Ryan said.