Inflation vs. Deflation

The extremely low interest rates we have these days in the U.S., Europe and Japan are part of the continuing effort by central banks to avoid deflation and promote economic growth.  During the financial crisis that began almost a decade ago now, the Federal Reserve took what would previously have been considered extreme measures to avoid deflation and depression.  Massive deficit spending by the Federal government was another measure designed to stimulate the economy. 

Whether it was because of those measures or just by luck, we did avoid what some people had been saying would be the worst economic disaster in history.

Those measures were the opposite of the response to the 1929 stock market crash and the deflation that followed it.  During that time the Federal Reserve kept a tight clamp on the money supply, and until Franklin Roosevelt and the New Deal came along there was no increase in spending in the Federal budget.

A great many economists have studied the effects of the Federal Reserve’s actions during the 1930’s, and the consensus of opinion is that the Fed did the opposite of what it should have done.  Thus, this time they did the reverse.  We have to admit that the results have been much better.  Rather than the end of the world as we know it, we have had relatively minor and brief discomfort.  We have to say, however, that the full history of this event has yet to play out.

It sometimes seems that there is an excessive phobia on the part of the Fed about deflation and almost a desperation to bring about at least a low level of inflation.  For many of us who had become accustomed to fearing inflation, the desire to have it seems counterintuitive.  Why can’t we have a little deflation?  Give the consumer a break.

Nevertheless, the economy does continue to be anemic and apparently fragile.  If the continuing stimulus provided by the Fed were to go away, the result might not be good. 

However, there are other things going on besides the stimulus by the Fed.  There are continuing deficits in the Federal budget.  There is a continuing torrent of red tape coming out of Washington, the general effect of which is to have a dampening effect on business activity.  The tax code is counterproductive.  There are endless and continuing trade deficits (although economists differ on whether this is good or bad).  Our European trading partners have been weakened by financial and economic problems of their own.  The total effect of all these things is probably too much for any economist to calculate.  Certainly you can find any opinion you want in this so-called science.

It may be that future economic historians will pronounce that the Federal Reserve’s fear of deflation in these times has crossed over into the territory of being an overreaction caused by fear of repeating the 1930’s.  For us consumers, investors and business people, we can only proceed, as usual, without the benefit of hindsight, and try to make the best judgements we can in our personal, investment and business decisions.

Who's a libertarian?

I finally read Atlas Shrugged.  It was a good read.  I wanted to see how the story came out.  I liked the protagonists, but they were a little bit on the superhuman side, like comic book heroes. 
     The bottom line is, the book preaches a philosophy, and that philosophy apparently continues to have an influence on social and political debate today, particularly amongst libertarians, including the libertarian wing of the Republican Party.
     The book makes some excellent points, but its major premise--that one's own self-interest is the only legitimate motivation--is about 87.5 per cent wrong, in my opinion.
     Self-interest is indeed a legitimate motivation, and the author is correct to defend it as such.  But people are legitimately motivated by other things as well.  Most people would lay down their lives for their children, and many do give their lives for their country.  Policemen and firefighters risk their lives for total strangers. We could argue about what they should be motivated by, but the fact is that people do have various  motivations, and the mixture of motivations varies from one person to the next.
    A problem arises, in a socio-political context, with a common human motivation: to help others.  Ayn Rand, the author of Atlas Shrugged, believes this is a bogus motivation that has been drilled into us by pernicious moral preachers over a period of centuries.  However, many people actually do want to help others, and it is not because it has been drilled into them.  It is their actual motivation.  That's just how they are.
     Nevertheless, Ms. Rand correctly points out a number of serious problems that can arise in connection with this simple desire to help.
     The human condition is complicated and often difficult.  We all need help from time to time, and some of us need more help than others.  The difficulty arises in figuring out what actually does help and what just makes things worse.
     There is also the question of the actual motivation of some of those who say they want to help.  This is an often-overlooked factor of human motivation.  It has something to do with the "smiling faces" factor.  You know that song: "smiling faces sometimes, they don't tell the truth." 
     Politicians are notoriously bad on this subject.  They will say anything to get elected.  Do they care about the people who are looking to them for leadership?  Some do, some don't.
     There seems to be a lot of talk lately about income inequality.  It seems to be generally assumed by everyone that it is a bad thing if some people make a lot more money than others.  Why?  Is it written somewhere that everybody should make about the same amount of money?  Oh yeah: "All men are created equal."  Are we to take that to mean that everybody is literally the same as everybody else?  Is it supposed to translate into income equality as well as equality in the eyes of the law?
     Some people say that it is just basic fairness that people's incomes should be somewhat close to each other.  But who is it fair to?  It seems fair to those who have their incomes supplemented.  But is it fair to those from whom money is taken?
     You say, oh well, they can afford it.  But a lot of money is also taken from people who can't afford it.  And you say, well, we should take more money from those who actually can afford it.  Sounds easy, right?
     The question is, who does it help?
     Are we making the government the brokerage house of help?  Do we really think that the government is the best arbiter of who needs help and for what?  Are there no other sources of help?  What about the vast network of charities that exist in our society?  What about neighbors, family, friends?
     You may say, well those things are puny compared to the vast needs.
     But the point is, first of all, no one is going to starve.  Secondly, we have voted voluntarily (though I would say misguidedly) to redistribute some of our wealth.  The vast majority of people are pretty generous.  If we decided on a method of help that cut out the government as the middle man, we could make it work.
     First of all it would be much more intelligent. Bureaucracies are notoriously stupid and blind. The way our government distributes money is often arbitrary and unfair.  People who don't deserve money get it, and people who do deserve it often don't get it.
     How much better it could be, for example, if folks in need were helped by people in their own neighborhoods who knew them and could see first hand whether their need was real?  Come to think of it, so much help does come in that way.  Despite all the governments' largess, local resources step in when the big shotgun in the sky misses the mark with the money it spews out.
     Secondly, how much harm does it do to the society and the economy when we remove resources from the control of people who know how to use them and put them into the hands of people (i.e., bureaucrats) who don't understand them and don't know how to use them?  The government certainly doesn't understand the vast resources placed at its disposal, and it does not use them well.
     Thirdly, if we help one set of people, does it necessarily follow that in order to do that we have to harm another group?  I.e., are "the rich" a mean, greedy bunch of oppressors from whom we need to be set free?  Are they selfishly keeping too much of their "ill-gotten" gains, and are we justified in tapping a little of it for ourselves?   
     This opens up another can of worms (so to speak).  Shall we consider that a whole group of people is uniformly bad?  This is an error (unless we were talking about the mafia, prison populations or other groups that are obviously primarily criminals). 
     Are all rich people bad?  Are all corporations evil?  Even bankers--are they all bad? I think if you were to go on a case by case basis, you would find that these postulates are incorrect.  Do they perform a needed social service?  I think they do.
     In Atlas Shrugged, Ayn Rand makes a very persuasive case in favor of the social value of people who invent things and lead corporations.  In political debates, this is often short-handed to: they create jobs.  They raise everybody's standard of living.
     How much more would living standards rise if such leaders were not fettered by confiscatory income taxes, onerous regulations and general hostility?
     Of course, it is obviously true that there are some bad apples.  There is no doubt about that.  The intelligent thing to do would be to identify and appropriately punish the bad apples and let the good ones thrive.  Our current approach, on the contrary, is to assume that white-collar crimes committed by a few are common to the whole group, and to pass laws that are supposed to prevent the crimes form happening.  However, criminals always find ways to commit crimes; thus the whole cycle keeps repeating itself.  We end up with endless laws and regulations that excessively hamper law-abiding and honest people without doing much to prevent crime.
     And of course to prevent people from having money we can vote to take it away from them.  But as time goes by, and inflation puts us all in higher tax brackets, eventually the vast majority of the population is being sucked dry.  The government has vast resources to dispose of, and it does a bad job of it.  And we are trillions of dollars in debt!

Late January

   The stock market is not off to a great start so far, but one month does not make a trend.  The prognosticators I trust say the future looks bullish for stocks.  (But of course, with stocks anything can happen.)
   The declining price of crude oil continues to be a talking point in economic circles.  Is it a watershed event?  The US has come back from being an import-dependent nation to being once again one of the top producers of energy.  Will this take power away from OPEC nations?  Some of their less-stable members are certainly in for some rough going because of the low oil prices.  Saudi Arabia continues to produce and export as usual, adding to the global oversupply and putting more downward pressure on prices.  On the demand side, China's economy has slowed, and Europe is hovering around zero growth.  Thus they use less oil, putting more downward pressure on prices.
    Can the new US producers of oil who came into being in a high-oil-price environment cope with a prolonged period of lower prices?  Is Saudi Arabia continuing its usual production in hopes of driving some of the new players out?
   So far the story has been of US innovation, technology, private property rights, etc.  We have the potential now of becoming almost energy independent.  It will be interesting to see what shakes out from these changes.
   A final point is that the Federal Reserve may be on the verge of letting interest rates rise again.  There is usually an effect on the stock market from such a move, but it could be that it will be gradual enough that it will not be significant.  However, it could be a nerve-wracking transition.
   Is the economy strong enough to withstand higher interest rates?  Should we take it as a good sign that the Fed thinks thinks the economy is that strong?  Are we turning the corner towards "normalcy"?

Year End 2014

Stock Market
     December is always (with very few exceptions) a good month for the stock market.  Next month might not be as good (but you never know).  The Federal Reserve intends to keep interest rates low.  That means investors will continue to have an incentive to keep their money in stocks rather than in interest bearing accounts, for the simple reason that the dividend yield on stocks is much higher than the (practically non-existent) interest yields.
The Economy
     Rising stocks usually go together with a growing economy.  There are exceptions to that, too, but that is the usual rule of thumb.
     Low interest rates tend to boost the economy.  Business and consumer loans are cheaper, saving money for everyone.  The down side is that retired people who hoped to live on interest income are getting practically nothing.
     The fall in oil prices also saves money for consumers and businesses.  The result should be more disposable income, which should lead to more growth.
     Europe is once again a drag on the international economy.  Growth rates there are hovering around zero.  China's growth has slowed from its former double-digit pace.  Russia's economy is on the brink of a free-fall, because it depends so much on selling oil at high prices.
     The fact that the Federal Reserve is still keeping rates so low indicates that they are still concerned that our economy could relapse into recession.  One wonders what their approach will be if the fall in oil prices leads to falling prices in the economy in general.  They believe that falling prices indicate economic weakness.  However, it is possible for the supply of commodities to rise, and manufacturing efficiency to increase, even in a growing economy, leading to declining prices. Still it is true that there is plenty of economic weakness in the world.
     The continuing large Federal budget deficits and the spiraling national debt are causes for concern.  Most of us have been putting off thinking about them till later on down the line.  However, at some point the US economy will have to stand on its own and stop relying on deficit spending and interest rate subsidies.  The fact that those things are still going on indicates that the economic disruptions of the previous decade are not actually over yet, despite the growing economy.  The crisis will not really be over till the Fed's interest rate policies are back to normal and budget deficits are at least back to pre-crisis levels.
     Two things need to happen for that to occur:  (1) economic growth, and (2) the will to cut the deficit.
     Economic growth is occurring, but it is not strong, and it suffers from various drags and hinderences, many of which arise from policies of the current administration in Washington.  Of primary concern is the torrent of new red tape spewing out of various bureaucracies.  Included in the regulatory orgy are attempts to regulate carbon emissions and assaults on traditional sources of energy, especially coal and oil, which are basically regarded as evil.  We certainly want to find cleaner ways to fuel our economy, but probably cold-turkey is not the best way to do it.
     Tax policies, also, could be better, to say the least.
     There is a definite anti-business bias in the policies of the current administration.  Sometimes the administration seems to show signs of recognizing some economic realities, but its political base goes crazy every time that happens.
     In regard to cutting the deficit, that is a deep-seated problem.  It currently seems to be divided along party lines, but we have only to look back to the Bush administration, during which there were times when Republicans controlled both Congress and the White House, to see that the pressures to overspend are very pervasive.  However, we can hope that if the party that currently talks loudly about cutting the budget gets the power to do so, things will at least get a little better in that area.
     All-in-all, there is hope but continued need of caution.
   

Bull Session

[The following are hypothetical opinions of imaginary characters, for your amusement.]

               “With all your prating about democracy, you know full well that it is a bundle of lies.  Real democracy, full democracy, can never work,” said Fal Ban Oh, the Chinese sophomore.

                “Certainly it can work.  If the people are really empowered, they will make the right choices,” said Charles Orson, law student from Vermont.

                “Bullsh**,” said Sal Gregory, the business student from Ohio.  “’The people.’  What a crock.”

                “Oh, so you think we’d be better off if we were run by a communist politburo?”

                “It’s working well for us,” said Oh.

                “You can’t call them communists,” said Charles.  “They’re exploiting their own people, like the capitalists did here 100 years ago.”

                “So what are you then,” Sal said, jabbing an index finger towards Charles, “the true communist?”

                “No, I’m not a communist.  I believe people should be free, and if they are they will rise to their true potential.”

                “Ha!” Sal retorted.  “What a bunch of la-de-da pie in the sky.”

“Well, it’s never really been tried.”

“What?  What have we been doing here for the past 200 years?”

“You think they’ve been free?  They’ve been slaves to low-paying jobs.  They haven’t had health care, and the education they get is crap.”

“Who’s this ‘they’?  The people?  The masses.”

“No, not the masses.  Just regular people.  Like us.”

“Hey, I’m just a regular person as much as anybody else, but I know that if I want anything decent in life, I’ll have to work for it.”

“F*** everybody else?”

“No.  They can work, too.  They’re welcome to work as much as I am.”

“Flipping burgers? Picking grapes?”

“They don’t have to settle for sh** like that.”

“Oh don’t they?  You think the economy is so great, they can just put on a tie and walk into corporate headquarters and get a $100,000 a year job?”

Sal pressed his lips together and blew a raspberry at him.

“I mean, the point is…” Charles paused and regrouped.  “There’s millions of unemployed people who would love to not have to settle for flipping burgers.”

“Tell ‘em to go to North Dakota.”

“Yeah, sure.  Just pack up and move to some crazy boom-town and live in a dormitory?”

“Life ain’t always easy or fun.”

“So, f*** ‘em?”

“Ahh, bullsh**.  So what are we supposed to do?  Just give everybody everything, then nobody will have to work if they don’t want to?”

“They’ll work if they can get a decent job.”

“Why should they if they have everything given to them?”

“Well, obviously they wouldn’t get everything.  Just enough to have a minimum standard of living.”

“Oh, sure, and how much is that?  And who’s going to pay for it?  Me, I suppose, with sky-high taxes!”

“Well, if you’re making good money, you could afford it.”

“Oh, yeah, and I’m working and slaving away, and half my income goes to people who are sitting on their asses.”

“They wouldn’t just sit there if they could get a decent job.”

“Wanna bet?”

“You have no faith in people, do you?  Ya gotta believe they would want to do better than a minimum standard of living.”

“Lots of people would.  Not everybody.”

“Most people.”

“So that leaves only a few million, I suppose, sitting on their asses.  Just a few billion dollars drained into their fat, lazy mouths.”  Charles sat back and took a few gulps of his beer.

“You Americans are so closed-minded” said Oh, who had been sitting back watching the two.  “You can’t see past your little political arguments.  In China we are looking towards the future of our country.  We are part of something greater than ourselves.”

“That’s nice,” said Sal.

“You should try it, you Americans.”

“We believe in America, of course,” said Sal.  “At least I do.”  He smirked and raised his beer can towards Charles, who gave him a half-hearted sneer.

“You say you believe in America.  First of all, I don’t know how you can, except that you don’t know any better.  You were born here, you were raised here and have been fed American myths all your lives.  You don’t appreciate the fact that from our viewpoint and that of most of the rest of the world, you have done terrible things.”

“Oh, and I suppose Mao tse tung and Stalin were your favorite philanthopists,” said Sal.

Oh ignored that and went on.  “And you say you believe in America, but you are all just ‘me, me, me.  What can America do for me, and why should I do anything for it?’ Both of you.  You don’t know what it means to serve a greater cause than yourselves.”

“Hmm, the greater good, and all that,” said Sal.  “Well, you know, in America we believe that if individuals follow what’s good for them, in the end it turns out that it benefits America as a whole.  Anyway, we are all about the individual—rights, freedoms, etc.”

“Me, me, me,” Said Oh.

“Well, you guys have been doing much better since you started going our way a little bit.  More free markets, free trade and all that.”

“Of course.  But we never stopped believing in our country.  We will always believe in it and that everything we do is for its greater glory.”

“Everything?  So people who move from the country to the cities don’t think about finding work to feed their families?”

“Listen, let me tell you something about all that,” said Oh.  He was sitting on the edge of a plain old wooden straight-backed chair.  He took a gulp of his Amstel Light.  “Whatever we do, we do for China.  What we were doing before was not working.  So we are doing something different.  Our leaders were smart enough to see that some of your cut-throat ways gave you great power.  We need power.  We need it to defend ourselves against you.”  He poked his finger towards Sal.  “And you, too.”  He poked it at Charles, who looked offended.

They all sat there a minute considering Oh’s comment.  Oh sat back in his chair, looking a bit uncomfortable with his outburst.

“Well,” said Charles, “it’s true we have offended you...”

“You have no idea!” said Oh.

“Wait a minute,” said Sal.  “It wasn’t us.  We fought the first revolution against colonialists.”

“Then you became just like them!”

“Listen,” said Sal.  “The world would be a much more f***ed-up place without America.  We’re like George Bailey—you know, in ‘It’s a Wonderful Life?’  What would the world be like without America?  The world might be shocked if they could find that out.”

“You are right about one thing: the world is f***ed up, and as a Chinese citizen I know that China cannot continue to be weak.  It has to become strong to keep from being a pawn in the game.  It is a great country with a great heritage, and it deserves to be great.”

“Cool, I’ll drink to that,” said Charles.

"Here, here,” said Sal, and drained his can.

Some hope

                Although our current political scene is the cause of much despair for many, one can visualize it as (hopefully) a temporary phenomenon which may improve as we continue to recover from the financial and economic traumas of the last few years.  There is a passion on both sides of the political debate which may be fueled in part by a fear of what the future may hold.  If the traumatic events and the dangers continue to recede in our rear-view mirrors, the passion and fears may subside. 

                On the other hand, we cannot be so sure, and we have to be ready to defend common sense, the rule of law, basic rights, human decency and all the things that make us (somewhat) civilized.  And let’s do it in a civil and communicative way.  Let’s not believe rumors we may hear about how bad the other side is.  Listening to rumors is a sure road to mayhem.

Speculation

                Pressure from shareholders seeking dividends and capital gains is a potentially troublesome thing that seems to be at the heart of many of the difficulties with capitalism.  Shareholders want dividends, or they want stock price appreciation, and many of them do not care what companies’ managers have to do to deliver it.  If they have to keep employees skittering along the precipice of poverty, that’s what it takes.  Many shareholders don’t even know what is going on.  They just want their dividends and capital gains. 

                Of the various ways of financing a company, selling shares of stock is not even the most cost-effective method.  It is generally more expensive than selling bonds or simply getting a loan from a bank, especially in today's low-interest environment.  It is also fraught with peril.  The shares go onto markets, where they go out of the control of the company itself.  If somebody with deep pockets wants to go on a campaign of buying up a controlling interest in the company’s stock, he can do it.

The long history of capitalism is littered with examples of stock being sold based on nothing but blue sky.  Today, stock offerings must by law be accompanied by endless disclosures and proofs of its reality.  Nevertheless, scams are still perpetrated.

                Despite all these problems, stock is still a legitimate mode of financing.  It has advantages for the company that sells it.  For example, there is no set time by which the shareholders have to be paid back, whereas a loan or a bond must be paid back on a specified schedule.  It is a proven way of raising lots of capital for expansion and for other purposes (including enriching the company’s founders or its venture capitalists.)

                Unfortunately, for many people buying and owning stocks is like gambling, like the lottery, like playing the horses.  It represents the hope of getting something for nothing—easy money.  Investing in a sensible manner in the expectation of growth and profits of a company is one thing.  Investing in desperation to save oneself from poverty is quite another thing.  There are always people around who will take advantage of someone’s desperation or greed. 

                There are always a few people who can “beat the market.”  They can make a lot of money by “playing” stocks.  It raises false expectations for the rest of us whose only role in the game is to lose money at the expense of the few winners in a speculative game.  For despite all the efforts of governments to regulate the markets, there is always room for manipulation, for empty hype and for playing on greed and desperation.  The many become the prey of the few who know the game.  It happens on a broad scale once in a while, but it happens on a small, single-stock scale all the time.

The Great Depression and the recent “Great Recession” were preceded by periods of excessive speculation.  In the 1920’s, it was stocks.  In the years leading up to 2007, it was real estate.  The mentality develops that prices can only go up, never down.  Until the market proves us wrong.  Whether the speculative excesses actually were the fundamental cause of the hard times that followed is not certain, especially in the case of the 1930’s Depression, but they were a factor.

                The only real way to make money, in the words of the old commercial (ironically, a commercial about investing in stocks), is the old-fashioned way: to earn it.  Once it is earned it can be invested in assets that you hope will not become victim to speculative cycles, and you can take precautions against that happening.  If you want to “play” the market, just be sure you play it with money you can afford to lose.

                The assets you invest in can include stocks if the intention is to invest in the growth and profits of individual companies.  Even then you have to beware of speculative forces and cycles, as well as other potential mishaps that could thwart your intention and turn your investment into a loser.

                Despite all the books and systems about investing in stocks, the best thing to do is just do what you do to make and save money, then let a good investment advisor invest it for you.  (The trick, of course, is finding a good investment advisor.)  And don’t expect him to make you rich; just expect him to get you a reasonable return on your investments.

               An investment advisor cannot ignor speculative patterns if they present an opportunity for profit, but they can carry considerable risk.