Monthly Archives: October 2014

Le Cliché de Proust

ClicheJeremiah hates literary references. We read recently about a zoologist studying tigers, “in the forests of the night.” No kidding. This was in Intelligent Life, the aspirational magazine for rich people who want to be smart.

The stilted reference to Blake reads like someone who has reached intermediate proficiency in French, and is suddenly full of je ne sais quoi – or the sophomore philosopher who knows a little of existentialism and not much about existence.

A liberal education should supply material for a career of original thinking, not ornaments for the banal.

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Of Flat Lines and Derp

Paul Krugman is here again with his favorite straw man argument. Krugman is smart and everyone else is stupid because QE has not resulted in hyperinflation. He doesn’t say “stupid,” though. He says “derp,” which means “I have statistics which seem to support my prejudices and you don’t.”

InflationApparently, hyperinflation is the only negative outcome recognized by the good doctor. He presents a lovely FRED chart proving his point. CPI has been flattish for six years, while money supply has grown. Can you think of any negative outcomes, other than inflation? Here is one hint, from FT, and another from Jeremiah. The quote below is from an ECB study.

An increase in the monetary base tends to … benefit primarily those on higher incomes, who hold a larger amount of overall savings in equities, and thus benefit from greater capital income.

Krugman’s chart shows only that his prescribed policy has avoided one particular negative outcome. It does not prove that the policy has actually worked, nor does it address the many other negative outcomes. Krugman’s acolytes are nonetheless hailing this one chart as the decisive defense of QE.

So, has the policy achieved its stated goal of increasing employment? Let’s look at another FRED chart. It looks a lot like the CPI chart, doesn’t it? Based only on these two variables, you would conclude that QE has had no effect at all.

EmploymentAt this point, we are obliged to point out that both these charts are bunk because the fivefold increase in money supply is obscuring smaller changes in the dependent variables. Accordingly, we drop it and display only employment and inflation. We already know what the history of QE has been over the period, and now we can see that inflation has indeed risen while employment has remained flat.

Both

Finally, we observe that Krugman, a college professor and an economist of some note, is here coining a childish new term of abuse for his opponents – while engaging in exactly the sort of factless advocacy he presumes to criticize.

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Fixing the Euro

Everybody knows what’s wrong with Euro. It’s not even worth posting a link. Okay, here’s one link to FT. Everybody knows what’s wrong with the Euro, and how to fix it. The problem is that the fix is totally unrealistic. Here, we look outside the box for a different solution.

The problem with the Euro is that a common monetary policy does not suit all participants. France could use looser money as stimulus and to monetize some debt. Germany and the northern countries have much less debt and lower bond yields. They don’t need their currency devalued.

Common monetary policy only works if the participants have similar fiscal policy. This is why the Maastricht treaty set limits (which were ignored) on national debt and deficits. France is a deficit country, with debt at 94% of GDP. Germany, at 78%, is a fiscal discipline country.

The popular solution is “ever closer union,” which means taking fiscal policy away from the nation states, with the European Parliament setting the budget for all. There would even be a Europe tax, levied over the heads of national governments, to pay interest on Euro bonds.

This is a swell idea, if you’re the kind of person who prefers giant federal governments to quaint national ones. Unfortunately, about 500 million people suspect an undemocratic plot to disenfranchise them and abridge their national identity.

Furthermore, everyone knew in 1992 that the Euro would not hold together unless the nation states surrendered to European fiscal authority. One could even say that the common currency was a Trojan horse for “ever closer union,” lying in wait for a crisis like 2008.

I am sure the euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created – Romano Prodi

So, we wondered why the revolutionary governments of Virginia, Georgia, et al., would surrender their monetary independence to the new federal government of the United States in 1787. Surely, the democratic impulse was at least as strong in early America as in modern Europe.

Indeed, the currency trap has operated in America exactly as it is operating in Europe, with the states subordinated to federal policy. It took almost two hundred years, though, for monetary policy to be invented.

This brings us to our iconoclastic solution for the Euro. Peg it to gold, or – since gold is a barbarous relic – palladium. Instead of a Euro budget to mesh with monetary policy, take the power entirely out of federal hands. Think of the management effort that would be saved.

No one could whine about fiscal discipline dictated by Germany. Once the peg were set, discipline would come from the bond market. National leaders would have full responsibility for their own budgets, and no excuses.

See also: Why EU superstate conspiracy theories are nonsense

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Bogus Capitalism

HappyBankerThe expression “crony capitalism” is misleading. Capitalism is all about competition, which drives innovation and keeps prices low. Cronyism means using government connections to stifle competition. This leads to confusion on both sides of the aisle.

Republicans believe uncritically in helping business, which often means protecting entrenched companies from the rigors of competition. Democrats generally want more power to regulate companies, which only produces more opportunities for rent seeking.

The result is a vicious cycle, in which big government abets monopolistic companies. Here are a few of the cases we’ve looked at recently:

Here is how the cycle works. Someone says capitalism isn’t working – we need to step in and regulate, bail them out, form a new agency, or whatever. Connected companies then soak up the bailout money and capture the regulator – at the expense of taxpayers, consumers, et al.

This drives our economy farther down its thirty year death spiral, and soon someone observes that capitalism isn’t working, again. Wash, rinse, repeat.

Jeremiah’s reaction to “capitalism isn’t working,” is incredulity. Capitalism? Where?

See also: You Say You Want a Revolution

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