Thursday, November 25, 2010

Traditional Thanksgiving Carving of the Currency

Happy Thanksgiving everyone! Time to count our blessings. The Dividist is particularly thankful that after only two years, the electorate has seen fit to restore divided government, a full two years before he thought it possible. The Dividist is less thankful about what our leaders are doing to our currency.

Our new tradition on Thanksgiving is to watch the carving of our currency, as it is sliced by Washington DC fiscal policy and diced by Fed monetary policy.

Your Thanksgiving dollar dinner is served:

For our main course, let us check in with Peter Schiff, who you may recall was right in 2006-07 predicting the impending recession and crash of the real estate bubble caused by inflationary monetary policy at the fed, misguided public policy in Washington, lax lending by the banks, and criminal fraud on Wall Street. He was also right in 2008 when he warned President-elect Obama about the folly of trying to borrow and spend ourselves into prosperity. Monotonously he was right again exactly one year ago in 2009 when he told us to keep buying gold at the record price of $1,186 /oz (15% lower than Wednesday's close of $1,372/oz) as a hedge against the devaluing dollar.

Serving up the meat and potatoes - Schiff on the insanity of Congress mandating a two headed Fed charter. They are required to manage monetary policy to maintain a stable currency, and also to promote maximum employment by umm.. devaluing the currency:

The Chimera of the Fed's Schizophrenic Mission - Peter Schiff
"Prior to 1977, the Fed only had one job: maintaining price stability. However, the stagflation of the 1970s inspired politicians to assign another task: promoting maximum employment. This “mission creep” has transformed the Fed from a monetary watchdog into an instrument of social policy. We would do well to give them back their original job.

The imposition of the “dual mandate” was informed by the Keynesian belief that inflation and unemployment don’t mix. An economic concept known as the ”Phillips curve” postulates that low levels of one cause high levels of the other. But, like many things in modern economics, the curve is a fiction. There is no real reason why low inflation would produce unemployment or full employment would create inflation...

The real reason that prices rise, for both goods and wages, is that the Fed creates inflation. This policy undermines the economy by destroying both current savings and the incentives to accumulate future savings. Since savings finance capital investment, lower savings equal weaker economic growth.

So, the best way for the Fed to create maximum employment is to focus on the single mandate of price stability. While a few elected officials seem to be figuring this out, most are just as clueless as the Fed. Unfortunately, even if Congress succeeds in changing the Fed’s mandate, there is not much chance that monetary policy will change significantly. Keynesian thinking is so ingrained in Bernanke and his colleagues that they will exploit any wiggle room in their directives to jump back in the driver’s seat and send us ever faster toward the edge of an economic cliff."
For a side dish, Peter Schiff checks in with CNBC and browbeats the usual suspects on Fast Money:

For dessert, we recommend a particularly amusing and insightful animation created by Ornid Malekan to explain the Fed's recently announced second serving of an aggressive quantitative easing policy - aka QE2. (using the XTranormal text to movie tool):

Tasty. The most amazing thing about this video - it is closing in on almost 3 million views after being posted on YouTube for only 3 weeks. After knocking this out in an afternoon, its creator is in demand by the media, being interviewed by the likes of Slate and CNBC.

C'mon. A six minute long primitive animation about economics, Fed policy, and Quantitative Easing - going viral? Three million views? How does that happen? The Dividist has no explanation.

Finally, for a relaxing after dinner smoke - "The Bernanke" hits the road to defend the QE2 policy to the world. Good luck with that, Ben.

Divided and Balanced.™
Now that is fair.


Taylor Wray said...

Time will tell, but I think your thesis about divided government being more functional and efficient is going to seriously fail during the next two years.

mw said...

Thanks for the comment. This will probably surprise no one - but I am going to respond at length.

Two points.

First, It depends on what you mean by "functional and efficient".

Second, I've never actually framed my support of divided government in that specific context.

If by "efficient", you mean something measurable like productivity in passing legislation, oversight investigations, etc. - Then I would refer you to David Mayhew's "Divided We Govern", which is directly on point, and has exhaustively studied productivity in divided vs united government in the modern era - finding no correlation. "Functional" is of course a little mushier term. My personal preference is that I would prefer no legislation to bad legislation. I consider both Obamacare and the Stimulus to be extraordinarily bad legislation that would have been significantly improved if the Democrats were forced to compromise with Republicans and not able to steamroll it on a partisan vote.

The way I do frame my support of divided government is not as an end in itself, but as a means to achieve objectives that I support about how our government should behave. I've repeated this enough, that I think I may need to enshrine it as The Dividist Creed:

If you believe that the Federal government should be limited in scope, provide for common defense, fight fewer wars, protect and respect individual rights, spend and tax in a fiscally responsible manner, provide effective oversight of elected and appointed representatives, legislate carefully and slowly, pass only laws that are tempered in the fire of partisan debate, and act in a manner that reinforces and not undermine the checks, balances, and separation of powers enshrined in the constitution, Then you should vote for divided government. You should vote for divided government because scholars, political scientists, economists, historians, and constitutional lawyers have documented as historical fact, that a divided government state supports exactly those objectives while one party rule does not...

Your mileage may vary on these objectives. I've no doubt that we will move more more in alignment with these objectives over the next two years than we did in the last two.

I did think there was a reasonable possibility that the divided government thesis would go by the wayside when Obama was elected. If he governed the way he ran (as a moderate and promoting fiscal responsibility) it would have.

The Bush administration (including the last two years of divided government) was so fiscally irresponsible that I though it would be impossible for Obama and the Democrats to be worse. I was wrong. They managed to make those last two years of divided government under Bush look good.