Richard Salsman, President & Chief Market Strategist of economics consultancy Intermarket Forecasting Inc., has made available a recent research report "ZIRPs Make Credit (and Prosperity) Scarce, Not Plentiful" on RealClearMarkets.
Salsman explains exactly why the Fed's zero-interest-rate policy (ZIRP) has been an utter failure.
ZIRP does not provide economic "stimulus" despite its supporters protestations to the contrary. Like any other price control, ZIRP works by limiting supply, in this case the supply of precious capital needed by the entrepreneur to fund a promising business concept or the management of an existing business looking to finance a new piece of capital equipment, to cite two examples.
The economics is quite basic. Salsman provides an illustrative graph of the supply and demand for credit. If the price of a good (in this case, credit) is held below the equilibrium rate that would exist without central bank manipulation (i.e. in a free market), expect there to be a shortage of credit! This stuff is supposedly taught in introductory microeconomics classes at the college freshman level but is apparently lost on the masterminds over at the Eccles Building.
Savers quite simply will not offer up their capital if the expected return (the rate of interest) does not compensate him for the risk taken. According to Jean-Baptise Say (and quoted by Salsman on page two), "...many will prefer to keep their capital inactive, concealed and unproductive...".
If you are the government or a multinational corporation, financing hasn't been a big problem. However, if you are a small- or mid-sized business, the credit spigot is choked. Impossible to know is the number of businesses that never got off the ground for lack of capital investment during the past six years of ZIRP. They are Bastiat's "unseen".
Something so simple is complete lost on central bankers, our Federal Reserve as well as others around the world. They are so wedded to their Keynesian models that they can't even contemplate that their theories, disproved through historical experience, are just plain silly. Please see the quote from Lawrence Summers that Salsman cites beginning on page six. It says it all...and demonstrates just how worthless a Ph.D in economics obtained from Harvard University is these days.
An excellent article by John Tamny of Forbes Opinions entitled, "The Fed's 'Loose' Monetary Stance is Making Credit Tight" is also cited in Salsman's footnotes and can be found here.
Tuesday, September 29, 2015
Monday, September 21, 2015
Strike Two!
Another GOP debate, another missed opportunity.
Despite the three-hour CNN debate format last week, none of the Republican presidential hopefuls took a swing at Janet Yellen and the Federal Reserve.
Although the debate took place the evening before the Fed decided to maintain its zero-interest-rate policy (ZIRP), the disaster that is the Fed remained a subject apparently unworthy of discussion.
Now I realize that the CNN moderator was unlikely to steer candidates into a discussion of the Federal Reserve's manipulation of interest rates and pursuit of "unconventional" monetary policy, but that doesn't stop the candidate looking to set him- or herself apart from the competition by bringing up the topic.
As I discussed in a previous post, this is an issue just begging to be addressed.
As a professional investor who is essentially required to pay attention to most utterances of voting members of the Federal Reserve's Open Market Committee (unfortunately), I am beginning to sense that even more people are finally catching on that the Fed has absolutely no idea what it is doing. The Fed brass and countless bevy of nameless, faceless Ph.Ds who wallow away in obscurity producing academic studies in Washington, D.C. and the various Fed branches around the country simply will not acknowledge that their models of how the economy functions are utterly worthless.
This is a good sign. As I have stated before, the general public senses something is very wrong with the Fed's conduct of monetary policy. Now if only one of the candidates will be bold enough to take it on.
Of course, I am not the only one writing about the missed opportunity of GOP presidential candidates to highlight destructive Fed policy. Larry Kudlow does so here.
In an excellent "Fact and Comment" essay on Forbes.com, Steve Forbes discusses why the economy will continue to suffer under current Fed policy here.
Despite the three-hour CNN debate format last week, none of the Republican presidential hopefuls took a swing at Janet Yellen and the Federal Reserve.
Although the debate took place the evening before the Fed decided to maintain its zero-interest-rate policy (ZIRP), the disaster that is the Fed remained a subject apparently unworthy of discussion.
Now I realize that the CNN moderator was unlikely to steer candidates into a discussion of the Federal Reserve's manipulation of interest rates and pursuit of "unconventional" monetary policy, but that doesn't stop the candidate looking to set him- or herself apart from the competition by bringing up the topic.
As I discussed in a previous post, this is an issue just begging to be addressed.
As a professional investor who is essentially required to pay attention to most utterances of voting members of the Federal Reserve's Open Market Committee (unfortunately), I am beginning to sense that even more people are finally catching on that the Fed has absolutely no idea what it is doing. The Fed brass and countless bevy of nameless, faceless Ph.Ds who wallow away in obscurity producing academic studies in Washington, D.C. and the various Fed branches around the country simply will not acknowledge that their models of how the economy functions are utterly worthless.
This is a good sign. As I have stated before, the general public senses something is very wrong with the Fed's conduct of monetary policy. Now if only one of the candidates will be bold enough to take it on.
Of course, I am not the only one writing about the missed opportunity of GOP presidential candidates to highlight destructive Fed policy. Larry Kudlow does so here.
In an excellent "Fact and Comment" essay on Forbes.com, Steve Forbes discusses why the economy will continue to suffer under current Fed policy here.
Tuesday, September 15, 2015
Is Capitalism Moral?
Over at Cafe Hayek, Don Boudreaux links to a Prager University video narrated by the excellent Walter Williams, professor of economics at George Mason University.
In just over 5 minutes, Williams explains in a devastatingly simple manner why the free market system is the morally superior form of economic organization.
"In a free market, the ambition and the voluntary effort of citizens, not the government, drives the economy." -Walter Williams
Access the link here.
In just over 5 minutes, Williams explains in a devastatingly simple manner why the free market system is the morally superior form of economic organization.
"In a free market, the ambition and the voluntary effort of citizens, not the government, drives the economy." -Walter Williams
Access the link here.
Monday, September 14, 2015
Jeb Bush Announces Tax Simplification Plan
Jeb Bush announced his tax overhaul plan in an op-ed in the Wall Street Journal on September 9.
My perspective is that any simplification of the byzantine, anti-growth U.S. tax code, short of throwing it away altogether, is a good thing.
But make no mistake, as much as I support any effort to cut taxes, its benefit to the economy still pales in comparison to the prosperity that would be unleashed if the U.S. dollar was relinked to gold. Bush makes no reference to the dollar or monetary policy in his piece. Cue the sigh.
Bush wants to reduce the number of marginal tax rates from seven to three. Disappointing to say the least! Can't we have something bolder? One flat rate perhaps? Progressivity punishes success. How about making the case that the tax code should not contain any disincentives to achievement?
A cut in the corporate tax rate to 20% from 35% is also much too modest. How about just eliminating it altogether? That also does away with the gimmicky one-time tax repatriation benefit he proposes. Let's make the U.S. a magnet for capital investment from around the world. With that investment comes all the benefits we crave such as higher levels of employment, greater productivity, and rising wages.
That said, if the tax must stay then a transition to a territorial system that Bush proposes at least ensures corporate income is taxed in the country that is actually earned. This is a major improvement over current law. The U.S. is the only major developed nation that taxes income without regard to where it is actually earned.
I champion Bush's elimination of certain itemized deductions, including the state and local taxes deduction and the business interest deduction. The deduction for state and local taxes simply subsidizes profligate governments, such as California, New Jersey, and New York. The deduction of business interest distorts business financing decisions by favoring the issuance of debt over equity.
Unfortunately, he preserves the charitable contribution deduction and the worst one of all, the mortgage interest deduction. Americans are incredibly generous people and don't require a taxpayer subsidy to support worthy charities, places of worship, or those in need. The deduction of mortgage interest is bad policy simply because it subsidizes homeownership. The last thing we need is to have even more precious capital sunk into non-productive assets such as housing. It also is unfair to those taxpayers who decide that renting is a better option.
My favorite part of Bush's plan is the elimination of the estate tax. It is a compliance nightmare, raises very little revenue for the government, and is patently unfair.
Bush wants to expand the Earned Income Tax Credit (EITC), a sop to the political left, and is just another form of income redistribution. Persons who do not pay income taxes should not be receiving cash payments from those that do.
Finally, there is no mention of cutting or eliminating the capital gains tax, easily the most destructive tax of all. Capital investment is a vital ingredient to the creation of jobs. The tax code should treat the gains from risk-taking activity as lightly as possible.
In summary, Bush's tax plan has some admirable elements but is unfortunately too timid. It lacks the boldness that would help begin to set his candidacy apart from his main rivals.
Dan Mitchell provides his thoughts in a blog post at the Cato Institute here.
The WSJ's editorial page staff gives the Bush plan a thumbs up here.
My perspective is that any simplification of the byzantine, anti-growth U.S. tax code, short of throwing it away altogether, is a good thing.
But make no mistake, as much as I support any effort to cut taxes, its benefit to the economy still pales in comparison to the prosperity that would be unleashed if the U.S. dollar was relinked to gold. Bush makes no reference to the dollar or monetary policy in his piece. Cue the sigh.
Bush wants to reduce the number of marginal tax rates from seven to three. Disappointing to say the least! Can't we have something bolder? One flat rate perhaps? Progressivity punishes success. How about making the case that the tax code should not contain any disincentives to achievement?
A cut in the corporate tax rate to 20% from 35% is also much too modest. How about just eliminating it altogether? That also does away with the gimmicky one-time tax repatriation benefit he proposes. Let's make the U.S. a magnet for capital investment from around the world. With that investment comes all the benefits we crave such as higher levels of employment, greater productivity, and rising wages.
That said, if the tax must stay then a transition to a territorial system that Bush proposes at least ensures corporate income is taxed in the country that is actually earned. This is a major improvement over current law. The U.S. is the only major developed nation that taxes income without regard to where it is actually earned.
I champion Bush's elimination of certain itemized deductions, including the state and local taxes deduction and the business interest deduction. The deduction for state and local taxes simply subsidizes profligate governments, such as California, New Jersey, and New York. The deduction of business interest distorts business financing decisions by favoring the issuance of debt over equity.
Unfortunately, he preserves the charitable contribution deduction and the worst one of all, the mortgage interest deduction. Americans are incredibly generous people and don't require a taxpayer subsidy to support worthy charities, places of worship, or those in need. The deduction of mortgage interest is bad policy simply because it subsidizes homeownership. The last thing we need is to have even more precious capital sunk into non-productive assets such as housing. It also is unfair to those taxpayers who decide that renting is a better option.
My favorite part of Bush's plan is the elimination of the estate tax. It is a compliance nightmare, raises very little revenue for the government, and is patently unfair.
Bush wants to expand the Earned Income Tax Credit (EITC), a sop to the political left, and is just another form of income redistribution. Persons who do not pay income taxes should not be receiving cash payments from those that do.
Finally, there is no mention of cutting or eliminating the capital gains tax, easily the most destructive tax of all. Capital investment is a vital ingredient to the creation of jobs. The tax code should treat the gains from risk-taking activity as lightly as possible.
In summary, Bush's tax plan has some admirable elements but is unfortunately too timid. It lacks the boldness that would help begin to set his candidacy apart from his main rivals.
Dan Mitchell provides his thoughts in a blog post at the Cato Institute here.
The WSJ's editorial page staff gives the Bush plan a thumbs up here.
Wednesday, September 9, 2015
BloombergView's McArdle Repeats Typical Keynesian Falsehood
Megan McArdle recently wrote a column over at BloombergView, "Printing Money Goes Haywire in Venezuela" that contained a dangerous falsehood that seems to be accepted as common wisdom by too many economists these days. Dangerous in that it leads policymakers to do stupid things such as manipulate interest rates or currency values.
McArdle writes:
The Keynesians believe in something called "NAIRU" or the "non-accelerating inflation rate of unemployment". When the actual unemployment rate falls below this nonexistent measure, Keynesians worry about the economy "overheating". To their way of thinking, inflation is a function of too much economic growth which eventually leads to labor and capacity shortages.
However, for whatever reason these economists ignore the stagflation era of the late 1970s/early 1980s when the U.S. economy had both high unemployment AND high inflation, something the Phillips Curve says cannot occur because of the aforementioned inverse relationship.
The bottom line is that faster economic growth (and wage growth for that matter) is never a reason for inflation to accelerate. In a market economy, price signals work their magic to help alleviate any shortage of labor or capacity.
If a local factory in the U.S. is facing a shortage of skilled workers, higher wages serve as a lure for labor to migrate into that market. Also, a company can access labor from around the world if there is a shortage of workers with particular skills. Price signals are powerful and work extremely well when government doesn't interfere with them by creating artificial barriers to the movement of labor and capital across borders (both nationally and internationally).
The Fed also doesn't even recognize true inflation, which is not an increase in some statistical measure of inflation such as the consumer price index (CPI) or GDP price deflator. Those are crude concepts at best and almost meaningless at worst.
True inflation is a decline in the value of the dollar from a previously stable level. The best measure of that value is gold (or alternatively a broad basket of commodities). Gold is far and away the preferred measure because is not consumed the way wheat, crude oil, or pork bellies are. Every ounce of gold ever mined is essentially still in existence today. When we see the price of gold moving in value, in reality it is not the gold price that is moving as much is it the value of the currencies in which it’s priced that is changing. Therefore, when gold's price in any currency rises substantially, that signals the unit of account is weakening and inflation is on the rise.
A "little bit of inflation", such as a 2% target (something the Fed defines as "price stability"), is very destructive to savings and capital formation. Inflation at 2% represents a halving of purchasing power within a generation. That can hardly be considered stable.
Any unit of measurement, such as the minute, foot, or pound, must be stable if it is to be useful. What good is the foot as a measure of distance if is allowed to "float" in value? One day it represents 12 inches, the next day 8 inches, and perhaps 15 inches next week. You might still be able to construct a building with a floating "foot" but you'll build fewer of them and the quality of the ones you do manage to build will be suspect.
The same concept applies to money. Quality money is that which is defined relative to something stable such as gold. A gold-defined dollar provides the market with a stable unit of measure, free from harmful fluctuations that we define as inflation or deflation. Therefore it is most conducive to capital formation and long-term investment.
Since job creation requires capital investment, a return to the gold standard system is the surest path out of the economic rut that plagues the economy.
It can be done and fortunately Nathan Lewis shows the way here and here.
McArdle writes:
"The core thing to understand about inflation as a policy tool is that in general, steady-state inflation doesn't do you any good; what you need is accelerating inflation. A little bit of inflation is actually OK -- it allows the economy to naturally cushion economic shocks that would otherwise lead to unemployment."Like some kind of creature in a bad horror movie the long discredited Phillips Curve, which McArdle implicitly references in the quote, simply won't die. To review, the Phillips Curve purports to show an inverse relationship between the rate of inflation and the rate of unemployment. In order to lower the unemployment rate, central bankers need to allow inflation to rise. And vice-versa. To bring down inflation you need to have more people thrown out of work.
The Keynesians believe in something called "NAIRU" or the "non-accelerating inflation rate of unemployment". When the actual unemployment rate falls below this nonexistent measure, Keynesians worry about the economy "overheating". To their way of thinking, inflation is a function of too much economic growth which eventually leads to labor and capacity shortages.
However, for whatever reason these economists ignore the stagflation era of the late 1970s/early 1980s when the U.S. economy had both high unemployment AND high inflation, something the Phillips Curve says cannot occur because of the aforementioned inverse relationship.
The bottom line is that faster economic growth (and wage growth for that matter) is never a reason for inflation to accelerate. In a market economy, price signals work their magic to help alleviate any shortage of labor or capacity.
If a local factory in the U.S. is facing a shortage of skilled workers, higher wages serve as a lure for labor to migrate into that market. Also, a company can access labor from around the world if there is a shortage of workers with particular skills. Price signals are powerful and work extremely well when government doesn't interfere with them by creating artificial barriers to the movement of labor and capital across borders (both nationally and internationally).
The Fed also doesn't even recognize true inflation, which is not an increase in some statistical measure of inflation such as the consumer price index (CPI) or GDP price deflator. Those are crude concepts at best and almost meaningless at worst.
True inflation is a decline in the value of the dollar from a previously stable level. The best measure of that value is gold (or alternatively a broad basket of commodities). Gold is far and away the preferred measure because is not consumed the way wheat, crude oil, or pork bellies are. Every ounce of gold ever mined is essentially still in existence today. When we see the price of gold moving in value, in reality it is not the gold price that is moving as much is it the value of the currencies in which it’s priced that is changing. Therefore, when gold's price in any currency rises substantially, that signals the unit of account is weakening and inflation is on the rise.
A "little bit of inflation", such as a 2% target (something the Fed defines as "price stability"), is very destructive to savings and capital formation. Inflation at 2% represents a halving of purchasing power within a generation. That can hardly be considered stable.
Any unit of measurement, such as the minute, foot, or pound, must be stable if it is to be useful. What good is the foot as a measure of distance if is allowed to "float" in value? One day it represents 12 inches, the next day 8 inches, and perhaps 15 inches next week. You might still be able to construct a building with a floating "foot" but you'll build fewer of them and the quality of the ones you do manage to build will be suspect.
The same concept applies to money. Quality money is that which is defined relative to something stable such as gold. A gold-defined dollar provides the market with a stable unit of measure, free from harmful fluctuations that we define as inflation or deflation. Therefore it is most conducive to capital formation and long-term investment.
Since job creation requires capital investment, a return to the gold standard system is the surest path out of the economic rut that plagues the economy.
It can be done and fortunately Nathan Lewis shows the way here and here.
Sunday, September 6, 2015
John Tamny on The Tom Woods Show
You will find me posting links to The Tom Woods Show on a regular basis simply because Tom has such excellent guests, interesting topics, and is a great interviewer.
Tom is proponent of the Austrian school and not a supply-sider per se. Of course, the two schools of thought share much in common. The main difference being in how the role of money in the economy is viewed. A topic for another day.
This show goes back to last April when John Tamny of Forbes Opinions and RealClearMarkets discussed his recently released book, Popular Economics. It is a book I can't recommend highly enough. John deftly handles a number of economic controversies using examples from the worlds of business, entertainment, and sports. And there is nary an equation in the text. It's a quick read but after completing the book I can honestly say you will know more about economics than Janet Yellen, Paul Krugman, Joseph Stiglitz, or Ben Bernanke!
You can order the book through Amazon at the link I have provided on the right hand side of the page under "Book Recommendations".
John Tamny on The Tom Woods Show
Tom is proponent of the Austrian school and not a supply-sider per se. Of course, the two schools of thought share much in common. The main difference being in how the role of money in the economy is viewed. A topic for another day.
This show goes back to last April when John Tamny of Forbes Opinions and RealClearMarkets discussed his recently released book, Popular Economics. It is a book I can't recommend highly enough. John deftly handles a number of economic controversies using examples from the worlds of business, entertainment, and sports. And there is nary an equation in the text. It's a quick read but after completing the book I can honestly say you will know more about economics than Janet Yellen, Paul Krugman, Joseph Stiglitz, or Ben Bernanke!
You can order the book through Amazon at the link I have provided on the right hand side of the page under "Book Recommendations".
John Tamny on The Tom Woods Show
Thursday, September 3, 2015
Where is the Sound Money Candidate?
With 17 candidates presently vying to be the Republican Party's presidential nominee in 2016, I find it amazing that no one has taken up the issue of sound money and the urgent need to reform the Federal Reserve System.
It's out there just waiting to be seized upon and the candidate that does so effectively will clearly set himself apart from the pack.
Sure, discussing monetary policy may not exactly fire up a crowd looking for the usual red meat such as building a wall on the southern border or getting tough with the government of Iran. But I believe the public instinctively knows something is terribly wrong with our present monetary system.
The Federal Reserve has pursued all manner of "unconventional" policy in the form of acronyms such as ZIRP and QE. ZIRP, or "zero interest rate policy" has essentially suppressed short-term interest rates at abnormally low levels, crushing the very savers whose capital is needed to fund promising entrepreneurial ideas that advance our economic well-being. QE, or "quantitative easing" represents the purchase of Treasury and mortgage-backed securities in the Fed's lame attempt to "stimulate" the economy via currency depreciation.
Politicians that even mention the need to reignite economic growth from its present moribund level, such as Jeb Bush or Mike Huckabee, never connect the issue of weak growth with our unstable dollar.
Monetary policy seems to be an issue that candidates consider to difficult to grasp or address in a way that resonates with voters. However, Ron Paul really didn't have that problem during his political career. He made monetary policy a key component of his legislative agenda. Paul was a student of the topic and a passionate advocate for reestablishing a gold standard. He effectively questioned the existence of the Federal Reserve itself. He showed the way. It can be done.
Tax cuts, relief from onerous regulations, and dismantling restrictions on international trade are certainly key supply-side components of improving economic prosperity but pale in effectiveness compared to monetary reform that results in a stable dollar (preferably linked to gold).
There are a number of legislative efforts underway to both audit the Federal Reserve System, aka Federal Reserve Transparency Act of 2015 (S. 264) and to establish a commission to investigate the effectiveness of the Federal Reserve's monetary policy over its first 100 years of existence, aka Centennial Monetary Commission Act of 2015 (H.R. 2912).
The fact that Fed Chair Janet Yellen and numerous other Fed officials vehemently oppose both pieces of legislation speaks volumes about how nervous the Fed bureaucracy is over congressional scrutiny of its conduct of monetary policy and banking regulation.
Both efforts should be enthusiastically embraced by all GOP presidential wannabes. Rand Paul re-introduced the Audit the Fed bill in early 2015 as S. 264 but has curiously gone silent on the issue during his presidential campaign. Senators Ted Cruz and Marco Rubio are co-sponsors but unfortunately have said little about it.
The unstable dollar creates economic chaos in numerous ways, such as stultifying long-term capital investment and impeding the efficiency of global trade flows to name just a few.
It is crucial that the next President make monetary policy a key priority if the U.S. (and global) economy is to break free of the pathetically meager levels of growth experienced in recent years.
Who will pick up the ball and run?
It's out there just waiting to be seized upon and the candidate that does so effectively will clearly set himself apart from the pack.
Sure, discussing monetary policy may not exactly fire up a crowd looking for the usual red meat such as building a wall on the southern border or getting tough with the government of Iran. But I believe the public instinctively knows something is terribly wrong with our present monetary system.
The Federal Reserve has pursued all manner of "unconventional" policy in the form of acronyms such as ZIRP and QE. ZIRP, or "zero interest rate policy" has essentially suppressed short-term interest rates at abnormally low levels, crushing the very savers whose capital is needed to fund promising entrepreneurial ideas that advance our economic well-being. QE, or "quantitative easing" represents the purchase of Treasury and mortgage-backed securities in the Fed's lame attempt to "stimulate" the economy via currency depreciation.
Politicians that even mention the need to reignite economic growth from its present moribund level, such as Jeb Bush or Mike Huckabee, never connect the issue of weak growth with our unstable dollar.
Monetary policy seems to be an issue that candidates consider to difficult to grasp or address in a way that resonates with voters. However, Ron Paul really didn't have that problem during his political career. He made monetary policy a key component of his legislative agenda. Paul was a student of the topic and a passionate advocate for reestablishing a gold standard. He effectively questioned the existence of the Federal Reserve itself. He showed the way. It can be done.
Tax cuts, relief from onerous regulations, and dismantling restrictions on international trade are certainly key supply-side components of improving economic prosperity but pale in effectiveness compared to monetary reform that results in a stable dollar (preferably linked to gold).
There are a number of legislative efforts underway to both audit the Federal Reserve System, aka Federal Reserve Transparency Act of 2015 (S. 264) and to establish a commission to investigate the effectiveness of the Federal Reserve's monetary policy over its first 100 years of existence, aka Centennial Monetary Commission Act of 2015 (H.R. 2912).
The fact that Fed Chair Janet Yellen and numerous other Fed officials vehemently oppose both pieces of legislation speaks volumes about how nervous the Fed bureaucracy is over congressional scrutiny of its conduct of monetary policy and banking regulation.
Both efforts should be enthusiastically embraced by all GOP presidential wannabes. Rand Paul re-introduced the Audit the Fed bill in early 2015 as S. 264 but has curiously gone silent on the issue during his presidential campaign. Senators Ted Cruz and Marco Rubio are co-sponsors but unfortunately have said little about it.
The unstable dollar creates economic chaos in numerous ways, such as stultifying long-term capital investment and impeding the efficiency of global trade flows to name just a few.
It is crucial that the next President make monetary policy a key priority if the U.S. (and global) economy is to break free of the pathetically meager levels of growth experienced in recent years.
Who will pick up the ball and run?
Wednesday, September 2, 2015
A Note on Savings and Consumption
Steve Patterson, a non-economist, refutes the Keynesian "paradox of thrift" as a fallacy in a concise article and video posted at the Foundation for Economic Education (link).
The heart of Keynesianism is that the consumer drives economic activity via consumption and that an economy suffers when individuals "save too much". However, this is just not so. One simply cannot consume before producing something to exchange first or obtaining the ability to consume from another (such as a family member, bank, or other financial intermediary). If you doubt me, quit your job and see how long you can live on your own after you have burned through your savings. Good luck with that.
The act of savings can never detract from demand. Savings gets channeled to others with capital needs such as an entrepreneur funding a start-up enterprise, a business looking to expand a manufacturing facility, a local school district constructing a new building, or a young couple buying their first home.
Savings never sits idle. Banks and other financial intermediaries have every incentive to put that capital to work to earn the institution a spread between the rate it can loan the funds at minus what it must pay to obtain them. This is why a popular explanation among many economists that a "glut of savings" is the reason global interest rates have been at abnormally low levels is so absurd.
The heart of Keynesianism is that the consumer drives economic activity via consumption and that an economy suffers when individuals "save too much". However, this is just not so. One simply cannot consume before producing something to exchange first or obtaining the ability to consume from another (such as a family member, bank, or other financial intermediary). If you doubt me, quit your job and see how long you can live on your own after you have burned through your savings. Good luck with that.
The act of savings can never detract from demand. Savings gets channeled to others with capital needs such as an entrepreneur funding a start-up enterprise, a business looking to expand a manufacturing facility, a local school district constructing a new building, or a young couple buying their first home.
Savings never sits idle. Banks and other financial intermediaries have every incentive to put that capital to work to earn the institution a spread between the rate it can loan the funds at minus what it must pay to obtain them. This is why a popular explanation among many economists that a "glut of savings" is the reason global interest rates have been at abnormally low levels is so absurd.
"To accumulate capital, we must reward the saver and encourage him to save. The man who accepts the responsibility of denying himself the pleasure of current consumption in order to save and accumulate capital is the real hero and patriot who is conferring vast blessings upon his fellows." Howard Kershner, Dividing the Wealth (Devin-Adair), p. 32.
Tuesday, September 1, 2015
Welcome to The Supply-Side Revivalist!
My primary reason for writing this blog is to provide an ongoing forum to discuss and promote supply-side economics.
I plan to post original commentary, critique the work of others, provide book reviews, post links to interesting articles/videos, and respond to reader replies.
My intention is to post commentary on a regular basis. However, as my family and career come first there may be some lengthy periods between posts.
Like 99.9% of students who studied some economics in college, I learned the subject from a “demand-side” perspective (predominantly Keynesianism with a bit of Monetarism as well). The demand-side stresses the primacy of the consumer. I left college believing that the market economy is inherently unstable and that wise minds (e.g., politicians, bureaucrats, and policymakers) are required to “manage” the economy and remedy market “failures”.
In college, I received absolutely no exposure to the Classical school that was essentially rebranded as supply-side economics sometime in the mid- to late-1970s. Interestingly, this omission occurred despite the prominent role supply-side economics had played in policymaking during the Reagan Administration in the years before I started college in 1986.
I also never received any introduction to the free-market Austrian school. As incredible as it seems, I didn’t know the names Hayek and Von Mises until many years later.
Apparently the free market was déclassé and remains so to this day in much of academe [notable exceptions include George Mason University, Grove City College, and Hillsdale College].
I was well into my career as an investment management professional when I began to question the usefulness and efficacy of demand-side economics as a tool to help make better investment decisions. The problem became apparent. Demand-side theories simply don’t explain what happens in the real world.
Fortunately, the supply-side framework does have explanatory power and can be used to help forecast markets.
During my self-education beginning in the early- to mid 2000’s, I was greatly influenced by many classical political economists and philosophers of the 17th and 18th centuries such as John Baptiste-Say, Frederic Bastiat, Adam Smith, David Ricardo, and John Stuart Mill.
I learned supply-side economics from key pioneers who are unfortunately no longer with us including Jude Wanniski, Robert Bartley, Jack Kemp, and Warren Brookes. Wanniski’s Supply-Side University, still available on-line at Polyconomics.com, remains a treasure-trove of knowledge for the aspiring learner. I still visit the site on a regular basis.
Late Austrian influences include Ludwig von Mises, Friedrich Hayek, Leonard Read, and Henry Hazlitt. Incredible sources of information in the Austrian tradition include the Ludwig Von Mises Institute and the Foundation for Economic Freedom.
Key contemporary influences include the following: John Tamny, Richard Salsman, Nathan Lewis, Steven Forbes, George Gilder, Arthur Laffer, Louis Woodhill, Brian Domitrovic, Ken Landon, Seth Lipsky, Robert Mundell, Reuven Brenner, Ralph Benko, Charles Kadlec, Lewis Lehrman, Larry Kudlow, Judy Shelton, Marc Miles, Vlad Signorelli, Paul Hoffmeister, Dan Mitchell, Walter Williams, Thomas Sowell, Thomas Woods, and Ron Paul.
I will single out John Tamny, who is editor at Forbes Opinions and RealClearMarkets, as the most important source of my understanding and appreciation of supply-side economics. John is easily one of the smartest persons I have had the pleasure of meeting. No one can explain the importance of sound money better than John. I am truly indebted to him for the knowledge he has imparted to me through his columns and public appearances.
It is my sincere hope that you enjoy the content and become a regular visitor!
I plan to post original commentary, critique the work of others, provide book reviews, post links to interesting articles/videos, and respond to reader replies.
My intention is to post commentary on a regular basis. However, as my family and career come first there may be some lengthy periods between posts.
Like 99.9% of students who studied some economics in college, I learned the subject from a “demand-side” perspective (predominantly Keynesianism with a bit of Monetarism as well). The demand-side stresses the primacy of the consumer. I left college believing that the market economy is inherently unstable and that wise minds (e.g., politicians, bureaucrats, and policymakers) are required to “manage” the economy and remedy market “failures”.
In college, I received absolutely no exposure to the Classical school that was essentially rebranded as supply-side economics sometime in the mid- to late-1970s. Interestingly, this omission occurred despite the prominent role supply-side economics had played in policymaking during the Reagan Administration in the years before I started college in 1986.
I also never received any introduction to the free-market Austrian school. As incredible as it seems, I didn’t know the names Hayek and Von Mises until many years later.
Apparently the free market was déclassé and remains so to this day in much of academe [notable exceptions include George Mason University, Grove City College, and Hillsdale College].
I was well into my career as an investment management professional when I began to question the usefulness and efficacy of demand-side economics as a tool to help make better investment decisions. The problem became apparent. Demand-side theories simply don’t explain what happens in the real world.
Fortunately, the supply-side framework does have explanatory power and can be used to help forecast markets.
During my self-education beginning in the early- to mid 2000’s, I was greatly influenced by many classical political economists and philosophers of the 17th and 18th centuries such as John Baptiste-Say, Frederic Bastiat, Adam Smith, David Ricardo, and John Stuart Mill.
I learned supply-side economics from key pioneers who are unfortunately no longer with us including Jude Wanniski, Robert Bartley, Jack Kemp, and Warren Brookes. Wanniski’s Supply-Side University, still available on-line at Polyconomics.com, remains a treasure-trove of knowledge for the aspiring learner. I still visit the site on a regular basis.
Late Austrian influences include Ludwig von Mises, Friedrich Hayek, Leonard Read, and Henry Hazlitt. Incredible sources of information in the Austrian tradition include the Ludwig Von Mises Institute and the Foundation for Economic Freedom.
Key contemporary influences include the following: John Tamny, Richard Salsman, Nathan Lewis, Steven Forbes, George Gilder, Arthur Laffer, Louis Woodhill, Brian Domitrovic, Ken Landon, Seth Lipsky, Robert Mundell, Reuven Brenner, Ralph Benko, Charles Kadlec, Lewis Lehrman, Larry Kudlow, Judy Shelton, Marc Miles, Vlad Signorelli, Paul Hoffmeister, Dan Mitchell, Walter Williams, Thomas Sowell, Thomas Woods, and Ron Paul.
I will single out John Tamny, who is editor at Forbes Opinions and RealClearMarkets, as the most important source of my understanding and appreciation of supply-side economics. John is easily one of the smartest persons I have had the pleasure of meeting. No one can explain the importance of sound money better than John. I am truly indebted to him for the knowledge he has imparted to me through his columns and public appearances.
It is my sincere hope that you enjoy the content and become a regular visitor!
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