-- Posted Monday, 17 November 2008 | Digg This Article
| Source: GoldSeek.com
by Howard S. Katz
10-17-08
Dear Wall Street Journal:
Your editorial position on the current financial “crisis” is badly letting the country down.
The present “crisis” began on Sept. 15, 2008 when the New York Times declared, in big headlines, “FINANCIAL CRISIS.” The Times got this idea from President Bush, who in turn got it from Henry Paulson.
This concept has been trumpeted all over the country. It has thrown the financial markets into terror. Both stocks and commodities plunged from late Sept. to late October. The Fed has responded to this terror with the greatest issues of paper money in American history. In the past 9 weeks, Federal Reserve Credit (the Fed’s contribution to the money supply) has increased by 150%. If things go no farther, then, as this new money flows into the monetary base and the money supply proper, we can expect the money supply of the nation to multiply by 2˝ times, with a corresponding increase in prices.
The New York Times did not say what kind of a financial crisis threatened us, one marked by falling prices or by rising prices. We have the right to expect that, when someone goes running around shouting “crisis,” he should be able to tell us what kind of crisis and what is his evidence.
Henry Paulson did not provide any evidence, and President Bush, the New York Times and the rest of the nation’s media did not ask for it. It was exactly as though someone had run through 17th century Salem shouting “witches.”
Since there are always a large number of stupid people who believe anything the media tell them, this media can then point to the behavior of these people to confirm any nutty idea they conceive: the self-confirming theory. A district manager reads in the paper that the country is in crisis and thinks, “I’d better lay off some workers.” The media then point to the resulting rise in unemployment and say, “We told you so.” The same district manager then calls his broker and sells his stocks, or his oil contracts. And the media point to the resulting declines and say, “We told you so.”
A good example of this occurred during the “recession” of 2000-01. The media began to beat the drums: “recession,” “recession,” “recession.” “Business had better cut back on their inventories because the consumer is going to stop spending”. And business believed. Business inventories plunged. Home Depot suffered a 10% decline in same store sales because they had cut inventories so sharply that they ran out of many items to sell.
If you look at the statistics from that period, however, you find that consumer spending did not drop enough to be visible. And this shows the limits of the media’s self confirming theory. It shows up in the headlines for a few weeks, but when you look back on the economic data from the perspective of 6-12 months, the events that made these headlines appear as insignificant fluctuations. What happened in 2000-01 was that business inventories fell out of bed. The two-thirds of GDP which depend on the consumer just kept chugging along. The one-third of GDP which depends on business fell so much that 2 consecutive quarters decline in real GDP were reported. The media went wild with joy. They had their “recession.”
I have a lot of difficulty with this. When the New York Times first reviewed Harry Browne’s book, How You Can Profit from the Coming Devaluation, in the early 1970s, their criticism was that Browne was too pessimistic. I could never figure that out. Some conclusions are optimistic; some are pessimistic. How can you judge the truth of an idea by the emotions associated with it? And yet here was the same media which had condemned the gold bugs for being pessimistic now carrying pessimism to the most extreme degree. Indeed, they gloried in it. They loved their “recession.”
They loved their “recession” so much that they refused to admit that it was gone. The U.S. Bureau of Economic Analysis revised its GDP figures, and the 2 consecutive quarter decline was gone. You can check it out on their web site. But in all the media, the “recession” of 2000-01 still lives. They cannot let it go.
So it may well be with the “recession” of 2008. When the media frighten people and cause a temporary decline in some forms of spending, the result is always that spending rebounds in the next period (e.g., 2001). Consumers want stuff. If they have money, they will buy stuff. Ben Bernanke is making sure that they have money. He is dropping it out of helicopters. As noted, Fed credit is up 150% over the past 2 months, and the rest of the money supply will follow. Most Americans don’t pay too much attention to the media. It can scare them for a few weeks, but then they go back to their old habits. In the next period, they buy more to make up for what they failed to spend in the first.
Many in the gold bug community look to the Wall Street Journal to champion the free market. Certainly this is what the Journal claims. But here we were disappointed. The Journal devoted its 10-30-08 lead editorial to a defense of the insanity.
“The Fed has been flooding the world with dollar liquidity [a fancy phrase for money]…we don’t think Chairman Ben Bernanke has much choice at the moment….He’s also trying to avoid the risk of deflation….”
This is what happened in old Salem. People ran around in a panic screaming the most outrageous things. And, as often happens, when people lose their reason, some human beings get killed. When is the last time we had “deflation” in this country? The last year in which the Consumer Price Index declined was 1955. What did they call that? I think they called it “Happy Days." Since then we have had 52 consecutive years of a rising CPI (going on 53). Back in 2001, the Journal was also screaming about “deflation.” It never happened. And with the (Fed’s portion of the) money supply increasing at a rate of 2˝ times in 9 weeks, it doesn’t stand a snowball’s chance.
If we study economics (real economics, not the nonsense studied by the media reporters), then we find that countries that rely heavily on central banks printing money to “stimulate their economies” do not do terribly well. Germany printed money from WWI up through 1923. At the end, it took a trillion marks to buy what 1 mark had bought 9 years before. The middle class was wiped out, and the dissatisfaction wrought by this policy led many people, a few years later, to vote for Hitler. Other paper money countries, such as 20th century Brazil and post-WWII Italy, have been basket cases.
Where do we find the slightest bit of evidence that printing money makes a nation richer? What are the two most successful economies in world history? They are the United States and Britain in the 19th century. These two countries were on a gold standard. They did not print money. Prices were long term stable. They were known for their saving (not their spending). Everything you are teaching is false. It does not correspond to the facts. You write:
“The challenge for the Fed is when and how fast to remove the dollars it is now pouring into the economy….If it waits too long…it will court the same mistake it made in 2003-2005.”
When has the Fed ever removed dollars once they were printed up? When the Reagan Fed doubled the money supply in 8 years, was that money ever removed? No chance. And why is this called a “mistake?” Hamlet said, “If this be madness, yet there is method in it.” A lot of Henry Paulson’s friends made a lot of money in 2003-2005. The ordinary people got poor. Goldman Sachs got rich. Maybe the Fed’s policy of that time was not a mistake. Maybe it was intentional. When a fellow counterfeits money, he gets rich, and you get poor. That’s not a mistake. It’s a crime.
Is the Journal aware that GDP was invented by a Russian immigrant who worked his way into the New Deal in the 1930s? He never proved that GDP measured economic growth. He just did a lot of mathematical mumbo-jumbo.
If someone invents a new thermometer, he has the burden of proof to show that it works. If it reads hot in winter and cold in summer, then his thermometer is no good. This is the case with GDP. What is the period of greatest growth in real GDP? It is the period 1942-1945. Yet this was a period when no one in the country could buy a new house or new car. Butter was rationed. Meat was rationed. The gasoline allotment was 3 gallons a week. And when the price controls were removed, the data showed a sharp drop in real wages. By what insanity is this called economic growth? When I consider the irrationality of the current economic debate, I want to call most of these people idiots. In fact, I want a better word than “idiots.” Aha, I have it, and I want to thank Daniel Gaynor and Dave Alexander for giving me the word “nincompoop.” They win a year’s subscription to the One-handed Economist. (Thank you to all who entered the contest. The decision was necessarily subjective; so don’t feel bad if you didn’t win.) At any rate, those people in the current economic debate are nincompoops!
I am one of a small group of economists who, in 1970, predicted the rise in gold. I am proud to have been one of the early gold bugs of that era. There is a group of people in the country who have long economic titles. They are very pompous about these titles and show them off at every opportunity. The people with the titles could not see that gold was going up in 1970 (ditto, ditto, today). The Economist suggested a price for gold of $2/oz. The Chairman of the House Banking Committee predicted a price of $6-$8/oz. That is to say, everyone who had a title was wrong. The longer their title the stupider they were.
Where did these people get their titles? They didn’t get them from Adam Smith. These people have never read Adam Smith. THEY GIVE THEM TO EACH OTHER. They find that this impresses stupid people.
A scientist judges how much you know by whether your predictions come true. When Galileo’s prediction about the weights dropped from the tower came true, the other physicists acknowledged that he was right. But when the prediction of the Austrian school economists about gold in 1970 came true in spades, the establishment refused to admit that the Austrians were right. Ludwig von Mises, the leader of the Austrian school, was the only economist in the country to predict the “depression” of the 1930s. So why doesn’t the Journal study the real economists? Why do you study a collection of phonies and frauds whose predictions continually prove wrong? Could this have anything to do with the fact that the Journal’s predictions continually prove wrong?
Look, right now the Fed has lowered the nominal T-bill rate to one quarter of one percent. Since prices over the past 12 months have risen by almost 5%, this is a real T-bill rate of negative four and a half percent (plus). You claim to be for the free market. Do you know what the free market rate of interest was through American history? From the time the Constitution was adopted in 1788 until the day we left the gold standard in 1933, the real interest rate (both long and short end) was very close to 5%. You could fall asleep like Rip van Winkle, and when you woke up, the interest rate would be the same. So it was for 145 years.
Now we have an institution in society whose principal goal is to manipulate the rate of interest away from its free market rate. You repeatedly claim to support the free market. But having an institution in society charged with violating the free market does not seem to bother you. Where are your free market principles when they are needed?
I noted that real interest rates at the present time (short end) were negative four and a half percent. Do you have any concept what a negative real interest rate means? When you lend money to someone, he gets to use your capital before you do. It is only right that he pays you for this privilege. Or, as Ludwig von Mises taught, interest is the price we pay for time.
What do negative real interest rates mean? They mean that the lender pays “interest” to the borrower. This is insane. In theory, borrowing would go to infinity. And while in practice you can’t get to infinity, then in practice some pretty crazy things happen.
Negative interest rates first appeared in American history (by my calculation) in 1998 (long end). I warned in my newsletter that negative interest rates would in theory lead to infinite P:E ratios on stocks. Lo and behold, what happened in 1999? There arose a group of stocks (the dot-coms) with infinite P:E ratios. Where was the Journal vis a vis the dot-com bubble? At that time, you were with Glassman and Hassett predicting “Dow 36,000” by 2004. Score one wrong prediction for the Journal and one right prediction for the One-handed Economist.
And where were you again in 2002 when Greenspan lowered nominal short rates to 1% (and real short rates to negative)? Where were your free market principles? The result for the country was the housing bubble and later the sub-prime crisis. And where are you now with real interest rates far and away the most negative they have ever been in American history?
“we don’t think Chairman Ben Bernanke has much choice…”
For shame. For shame.
Sincerely,
Howard S. Katz
If the Wall Street Journal cannot stand for the free market and cannot make correct economic predictions, then what good is it? I recommend that people buy the One-handed Economist instead. The Journal is $600/year (newsstand). The One-handed Economist is $300/yar. The Journal is wrong. The One-handed Economist is (usually) right. The Journal claims to be for the free market but isn’t. The One-handed Economist has always been for the free market. If you want a free taste of what we are about check out our web site, www.thegoldbug.net (no charge). And if you want to know the best place to put your money, throw out your Wall Street Journal, get a 1 year subscription to the One-handed Economist and put the extra $300 in your pocket for that rainy day when all that Bernanke-created money causes a real economic crisis.
-- Posted Monday, 17 November 2008 | Digg This Article | Source: GoldSeek.com
