More Nonsense with the Phillips Curve

At the New York Times, Neil Irwin wrote an article that discusses the Federal Reserve's dependence on the long discredited Phillips Curve.

Caroline Baum also posted a related article at Economics21.

The Phillips Curve is a key tenet of Keynesian thought. It purports to show an inverse relationship between the the rate of inflation and the rate of unemployment. 

One would think the stagflation era of the late 1970s and early 1980s, when the U.S. economy experienced high levels of both inflation and unemployment, would relegate the Phillips Curve to the dustbin of history. Unfortunately Keynesians never give up that easily. According to Irwin, Fed chairwoman Janet Yellen said the Phillips Curve "is a core component of every realistic macroeconomic model."

Little wonder the U.S. economy is mired in such a pathetic "recovery" with geniuses like Yellen and her ilk burdening the economy with policy nonsense that goes by the acronyms ZIRP (zero interest-rate policy) and QE (quantitative easing).

Yellen is convinced that if the unemployment rate falls below the "natural" rate of unemployment (whatever that is), inflation is likely to accelerate. The thinking here is that low rates of unemployment will drive up wages and eventually result in higher prices for goods and services. Such a theory assumes that labor markets are inflexible and that companies can't access abundant sources of labor overseas.

The really perverse aspect of the Phillips Curve is that it assumes that too many people working and prospering is inflationary. Actually, the truth is just the opposite. With such thinking, is it any wonder that economic output is significantly below its potential?

As Ralph Benko notes at The Pulse 2016, The House of Representatives passed legislation (H.R. 3189, Fed Oversight Reform and Modernization Act of 2015) on November 19 that promises to reform the way the Fed sets monetary policy. Naturally, Janet Yellen is vehemently opposed and President Obama promises a veto if the bill makes it through the Senate and reaches his desk.

Of course, any reform that minimizes the impact of the Fed's flawed economic models, such as the Phillips Curve, is most welcome. If it prevents further Fed market manipulation in the form of ZIRP and QE, the economy can only benefit.

The Left Fires Intellectual Spitballs at the Gold Standard

ThinkProgress recently posted an article ("Ted Cruz Embraces Fringe Monetary Policy That Went Out of Style in the 1930s") by Alan Pyke lampooning Ted Cruz's advocacy of a monetary system tied to gold at the Republican debate on October 28.

Tom Woods and two guests, Austrian-school economists Joseph Salerno and Jeffrey Herbener, rip apart Pyke's ill-informed analysis in entertaining fashion in an episode of the Tom Woods Show podcast.

Not that Pyke made it very difficult to do so.

The Austrian-school view of money does differ from the supply-side view in many respects, but Woods et al. are still staunch supporters of sound money.

Although supply-side economics is most often associated with tax-cutting, the supply-side literature is rich in its advocacy of sound money, i.e., a stable currency backed by gold.

Using long discredited arguments and the usual caricatures, Pyke apparently hasn't read any of the recent literature on the successful history of gold standard systems such as two books written by expert Nathan Lewis, Gold: The Once and Future Money and Gold: The Monetary Polaris.

In addition, recent books by Steve Forbes (Money) and John Tamny (Popular Economics) discuss the critical importance of stable money in promoting production and exchange.

The political left has to realize that saying "everyone agrees the gold standard was terrible" as Pyke does is simply shoddy analysis. Just because many of today's gold standard advocates are not academics with economics Ph.D's from elite universities does not mean that they are to be simply ignored. The burden is clearly on those who believe an all-powerful central bank is necessary to "manage" the currency and the economy. The evidence is not on their side.

Gold Finally Muscles Its Way Into the GOP Policy Debate

Since the last Republican debate on October 28, there has considerable buzz in supply-side circles regarding the brief, but notable comments by U.S. Senator Ted Cruz in support of linking the U.S. dollar to gold (as well his support for "Audit the Fed" legislation) at the CNBC sponsored forum.

Ralph Benko provides commentary at The Pulse 2016 and Forbes Opinions.

Judy Shelton, co-director of the Sound Money Project for the Atlas Network, offers her thoughts at thehill.com.

The New York Sun gives credit to CNBC's Rick Santilli for asking Senator Cruz (and U.S. Senator Rand Paul) to comment on the Federal Reserve and monetary policy. The Sun correctly identifies monetary policy as the greatest issue of the election and in the final two paragraphs asks a number of critical questions that need to be answered. These are questions that the policy elite refuse to address.

Steve Forbes wrote a great piece in Forbes using the occasion of the Cruz's comments to offer a simple to understand explanation of why a gold standard is so vital to economic prosperity. If only this man could be U.S. Treasury Secretary!

It would indeed be a shame if Cruz and Paul do not carry the momentum of this issue into the next debate that is being sponsored by the Fox Business Network on November 10. The Democrat Party frontrunners Hillary Clinton and Bernie Sanders are quite comfortable with the status quo of having a handful of masterminds at the Fed manipulating interest rates and "managing" the economy.

It is a winning issue for the GOP. Let's hope for even more substantive discussion of this issue in upcoming debates and out on the campaign trail.

From ZIRP to NIRP

Richard Salsman, President and Chief Market Strategist at Intermarket Forecasting Inc., has written a pithy commentary in the Financial Post suggesting the Federal Reserve is open to a negative interest rate policy (NIRP) if it determines that economic conditions warrant such action.

The final few sentences are key:

"In finance there’s a standard “risk-reward trade-off.” With ZIRPs [zero interest-rate policy] and NIRPs, policymakers effectively seek to eradicate return, then wonder, in disbelief, why an economy lacks risk-taking and entrepreneurial spirit, and why banks, firms, and household alike persist in hoarding cash."

A reader from Calgary, Alberta posted a laughable comment stating that the article is ignorant of basic economic facts. Such a comment could only be written by someone so steeped in Keynesian nonsense that he believes corporate investment is weak because of "the persistent low rate of inflation (and the fear of deflation)". The reader obviously didn't grasp the passage cited above.

Quite simply, the Federal Reserve (and other central banks) cannot distort (e.g. artificially depress) one of the most important prices in the world (the benchmark overnight lending rate) and not expect serious consequences to the economy. Just because the Fed has managed to keep short-term interest rates at abnormally low levels does not mean the credit is cheap and plentiful. Price controls do no such thing. As long as central banks continue to manipulate vital market prices via a "ZIRP" or "quantitative easing (QE)", the economy will be robbed of vigor. Those with resources to lend will not offer those resources up to borrowers absent a return on that capital reflective of the risk taken. Capital will not migrate to its highest and best uses absent market-based price signals. This is pretty basic stuff and completely lost on most of the pathetic economics profession.

Note: For more information on Intermarket Forecasting Inc., please click here.