Stagflation rears its ugly head

“Until recently, the rich world was see-sawing between stagflation and inflation.  When the crisis was at its worst, output took a nosedive but it was deflation, not inflation, that was the greatest concern.  Then economies recovered, as did assets – including commodities, whose prices have pushed inflation out of policymakers’ comfort zone.  Now both sides of the dreaded 1970s portmanteau threaten to come together as production slows down while prices continue apace.  Stagflation has gone from unpleasant memory to present danger.” ‘Editorial, ‘Haunted by stagflation fears’, The Financial Times, April 30, 2011

The evidence acknowledged by the FT editor is fairly compelling. In the United Kingdom, first-quarter growth in 2011 at only 2 per cent per annum, followed on a fourth quarter 2010 contraction, while inflation ran at an annualised rate of some 5 per cent. In the United States, first quarter 2011 growth ran at an annualized rate of only 1.8 per cent, slowing from a 3.1 per cent annualized rate in the fourth quarter of 2010, while inflation, inclusive of commodity prices, exceeded the Fed’s 2 per cent ceiling.

The FT, relying on hydraulic Keynesian thinking, draws sustenance from the fact that both the UK and the US economies are running below full capacity, arguing that loose money is less likely now than in the 1970s to fuel runaway inflation. It forgets, conveniently, that 1970s inflation occurred against high and rising unemployment rates in both countries. ‘Inflation is always and everywhere a monetary phenomenon” (Milton Friedman).

The FT, forgetful as always of recent history, draws further sustenance from the fact that rising commodity prices are driven more by micro-economic forces of demand and supply than by loose money, by Middle East shocks rather than by Bad Ben Bernanke. Do the years 1974 and 1079 not ring any bells in FT ears?  The fact is that economic shocks ripple through any economy. In an environment of loose money, price inflation is the mechanism whereby market equilibria return. That is what stagflation was all about during the 1970s and what stagflation will be all about in the coming decade.

This gives hope that if the rich world suffers a mild case of stagflation, it is a temporary symptom of inevitable economic shifts.” ibid.

I am afraid that such is not the case, Mr. FT editor. Stagflation is a response to loose money and it will be brought to an end, only painfully and with long and variable lags, by a systematic tightening of monetary policy, designed to raise real interest rates to market-clearing levels. Once inflation-expectations are released from their cage, it is the Devil’s own work to put them back in, as Paul Volcker will readily testify. Unfortunately for the world’s economy, Ben Bernanke is no Paul Volcker, though he may stand at the left hand side of Satan.

A constitutional monarchy

Today, at 3 am, as I tune in to watch the grand spectacle of the wedding of Prince William and Catherine Middleton, I reflect on the difference between a constitutional monarchy and a presidential republic. Although I recognize the public choice advantages of the latter – most notably the separation of powers – deep down in my heart I prefer the former. I prefer it not because of its pageantry – though to be sure the Royals are more impressive in their dignity than any American president in the history of the Republic. 

Fundamentally, I prefer the Royals because they work so hard to remain above politics. They will not be bought and sold in the market-place of politics. They will not send their bagmen out to purchase votes and political support through the spoils system that now dominates United States politics. To put it bluntly, there is a political  cleanliness about the British monarchy that is nowhere to be seen within the United States presidency.

Interestingly, the Royals are able to move around the capital, even on days of great pageantry such as this, without the overt police-state provisions that surround presisdential inaugurations. The people who line the streets are not penned in behind huge barriers as they are in Washington, DC. The police presence, though of course it is in place, is much more reserved and largely hidden. The people at large are  free to come close to the Royal Family in a way that no American president can now experience.

In a way, that tells us a lot about the non-partisan nature of the peoples’ regard for their sovereign as compared with the partisan bifurcated relationship between any president and the electorate.

I feel unexpectedly close to my own country today, after so many years in America. That is why I write my short letter from America to my happy band of brothers and sisters.

Has Syria’s Assad suckered Obama and Clinton?

“Since the outbreak of the Syrian uprising five weeks ago, President Obama has declined to call for Bashar Assad to step down as dictator or criticize his regime on camera.  Secretary of State Hillary Rodham Clinton has let it be known that many American lawmakers ‘believe he’s a reformer.’ Gary C. Gambill, ‘Assad protected by cult of incompetence: Obama buys his ‘reformer’ trope and wants him to survive’ The Washington Times, April 28, 2011

Assad’s father, Hafez Assad – otherwise known as The Lion of Damascus – was a vicious tyrant who murdered tens of thousands of his subjects in repeatedly brutal repressions.  The evil blood of the father clearly flows in the arteries and veins of his equally brutal son, Bashar Assad, who has deployed his own brand of tyranny throughout 11 years of dictatorship.  The major indices of political rights, civil liberties and economic freedoms place Syria at the same depths of depravity in 2011 as in the year 2000 when Bashar (appropriately named one might think)  assumed the tyrant’s mantle. So Obama and Clinton either are smoking something that is illegal, or are dissembling about the true nature of  the Lion’s cub. 

Let me be blunt about the most convincing rationale for the apparent gullibility of the U.S.  President and his Secretary of State. Anti-Semitism is the most likely explanation. Both Barack Obama and Hillary Clinton have a history of hostility to Israel, a hostility that cost both of them votes in the 2008 elections. Both of them tilt towards a Palestine that relies heavily on Syrian support. I fear that both of them have slackened the leash on Iran as on Syria,  primarily to weaken Israel in its ongoing battle for survival in a hostile region. Certainly, new requirements, that U.S.  aid to Israel must be precisely balanced by U.S. aid to Egypt, Jordan, Syria and Saudi Arabia combined, imposes a net cost on Israel for every dollar of aid that it accepts from the United States.

If my suspicions are correct, then Obama and Clinton are flirting with Armageddon in the Middle East.  For Israel surely will react reciprocally, and in kind, to any attack on its sovereignty.  If Obama and Clinton wish for radioactive mushroom clouds over the entire Middle East, then  they are on an effective track to achieve such a dreadful objective. If not, then they should restore good relationships with Israel, and work to bring down the Iranian and Syrian dictators by any means at their disposal.

The Tehran-Damascus axis: the rational target of U.S. aggression

In several columns, I have suggested that the foreign policy of the Obama administration is either irrational or worse. The United States should not be expending blood and treasure to destroy its allies. With respect to Egypt, Tunisia, Yemen, and Libya,  Obama’s meddling to remove key U.S. allies is little short of irrational, from the perspective of United States interests. Its unwillingness to support such key allies as Saudi Arabia and Bahrain in their struggles against Iranian and Syrian infiltration is indisputably insane.

Now let me turn attention to the unwillingness of the Obama administration to tilt the  balance against the two unequivocal enemies of the United States in the Middle East, Iran and Syria. What kind of disturbed mind-set generates such depraved indifference to U.S. interests? Could it be anti-Semitism in the modern (anti-Jewish) sense of that term?

No one doubts that the dictators in Iran and Syria are motivated by anti-Semitism.  In words and in deeds they have systematically pursued the elimination of Israel from the map of the Middle East. Few people can now doubt that the Tehran-Damascus axis is in full play to crush the Persian and Arab spring insofar as it creeps into their terrain. The strategic significance of the Tehran-Damascus axis for Middle East domination  could be overlooked only by a U.S.  administration blind to realpolitick:

“Mr. Ahmadinejad, who believes that the United States is in historic retreat, sees Iran as the successor to the defunct Soviet Union as the principal global challenger to what he says is ‘a world system, imposed by infidel powers.’  The loss of Syria would puncture many of Mr. Ahmadinejad’s aspirations.” Amir Taheri, ‘The Tehran-Damascus Axis’, The Wall Street Journal, April 27, 2011

Syrian opposition sources claim that Tehran has sent snipers to help Mr. Assad kill demonstrators  The Islamic Republic is bound by treaty  to help Assad fight ‘any threats against Syria’s security and stability.’   Iran has also emerged as a major supplier of weapons and materiel to Syria. Iranian mullahs have also issued fatwas declaring the Alawite minority, to which the Assad family belongs,  to be ‘part of Islam’. This despite the fact that Islamic scholars have long viewed the Alawi sect as heretical.

Iran and Syria also share a joint interest  in the promotion of Hezbollah in Lebanon and of Hamas in Palestine. The recent arrival of a flotilla of Iranian warships in the Syrian port of Latakia almost certainly is a prelude to the establishment of a full-scale air and naval base in the Mediterranean. And one does not need to guess at whose heart that dagger will be pointed.

While Obama, Cameron and Sarkosi flex their puny muscles against erstwhile Western allies in North Africa and the Middle East, a new brand of national socialism menaces the Middle East and threatens to darken the sub-continent with the Sign of the Swastika.  Wake up, America, and quash this evil before it takes the world to the brink of Armageddon.

Obama high fives: Egypt set for Islam fundamentalist majority

“Egypt’s young liberal middle-classes are discovering that they were not the only forces set free by the downfall of President Hosni Mubarek.  One leading liberal politician told me last week that he had been barely aware of Salafism until after the revolution. Suddenly, Salafi spokesmen are all over the media and are organizing politically.  By some reckonings they could get 5 per cent to 10 per cent of the vote in parliamentary elections planned for September.  The Muslim Brotherhood, the more established and less fundamentalist Islamist organization, is generally reckoned to be good for at least a third of the vote.  Add in a couple of fringe Islamist parties and you could be looking at an Islamist majority in Egypt’s first parliament. ‘Entirely plausible,’ says a western diplomat in Cairo, as he sips his coffee.” Gideon Rachman, ‘Egypt’s liberals are losing the battle’, The Financial Times, April 26, 2011

It is a major battle to lose, that is for certain!  The new parliament will have the power to rewrite Egypt’s constitution and so to shape the future of the country for decades to come. If the Islamists win, it is on the cards that this will be the first and last democratic election in the nation’s history. It is also on the cards that a theocracy would have significant appeal across the nation. For some 40 per cent of the nation subsists on less than $2 per day; and some 30 million Egyptians, out of a population of 74 million, are completely illiterate.

So the Muslim Brotherhood forced the military into a referendum that has led to early elections.  Since the military has acquiesced in shutting down organizations previously supportive of Mubarek, the Muslim Brotherhood will supply the only political organization for the September elections. The liberals lost catastrophically 23 per cent to 77  per cent  in the referendum, their first political test against the Brotherhood. If they lose  by a similar margin in September their female members will have to run for covers, as they will have to run for deep cover.

The Salafists preach a fundamental version of Islam. They are eager to see all Egyptian women wearing the niqab – the all-encompassing veil that leaves only a slit for the eyes.  They object to all kinds of music. They are not at all averse to hand-chopping and other seventh-century Islamic delicacies. I somehow doubt that the rule of law and the protection of individual liberties will rank highly on their scale of preferences.

In truth, the Salafists resemble the Taliban, in many unpleasant ways. Osama bin Laden – if he still lives – will be smiling broadly as he looks out over American folly from some remote cave on the Afghanistan-Pakistan border.

A clear and present danger

President Barack Obama, Secretary of State Hillary Clinton, and Secretary of Defense Robert Gates,  together have allowed the foreign policy of the United States to disintegrate into chaos.  This chaos, in the midst of international political turmoil, constitutes a clear and present danger to all American citizens.

The problem, inevitably, stems from the Obama White House, and is epitomized by a lazy, weak and essentially indecisive President, who shows little or no comprehension of the complex realpolitik requisite for effective superpower leadership in a world characterized by asymmetric power, a world in which the strong are easily brought to their knees by the weak, in the absence of a clear and ruthless pursuit of national self-interest.

Confronted by a medley of uprisings in the political cauldron of the Middle East – some populist, some would be terrorist initiated, some initiated against U.S. allies, some against U.S. enemies – President Obama and his foreign policy team have responded with varying degrees of decisiveness, with no apparent comprehension of where America’s interests lie, and with a clear demonstration of the decline in U.S. military authority. 

 What worse lesson could there be for a world that relies on U.S. authority and yet would love to see that authority publicly humilated?  Could there be any worse comparison between the United States at the dawn of the twenty first century and the Roman Republic at the peak of its success in the first century B.C.; or more specifically,  between Barack Hussein Obama and Gaius Julius Caesar?

President Obama has intervened in the Middle East to bring down Hosni Mubarek, a key U.S. ally in the fight against terrorism.  He has dithered and delayed while the Egyptian army has removed all effective opposition to the Muslim Brotherhood, who are now all but certain to rule Egypt under the authority of Islamic extremism. Essentially, by this move, President Obama has aborted economic reform in Egypt and encouraged the re-socialization of its markets.

President Obama has intervened in Libya in a weak attempt to bring down Muammar Gaddafi, a relatively new U.S. ally in the fight against terrorism. With an unequivocal demonstration of U.S. military weakness, the President has created the conditions for civil war in an oil producing nation, cranking up the price of oil worldwide, and driving the U.S. dollar down on its path to insignificance.

President Obama has failed signally to provide U.S. support for key U.S. allies against the war on terrorism in Saudi Arabia, Bahrain and Yemen, against Iranian-sponsored Shia uprisings that, if successful, would choke the United States by oil embargoes. Yet, he has provided implicit support for the evil regime of President Assad in Syria, perhaps the Arab world’s bloodiest dictatorship.

Worst of all, President Obama has cravenly refused to intervene in Iran to support a popular uprising against a government explicitly dedicated to the destruction of the United States and its key Middle Eastern ally, Israel.  By his inaction, he is exposing his own country to ultimate devastation by an Iran-led and/or an Iran-supplied nuclear attack on New York and Washington, DC.

November 2012 cannot come quickly enough, in such circumstances, if Americans themselves can only waken up from their post -1989 torpor to recognize the clear and present danger that confronts them, and the specific domestic source from which it springs.

Judge not, that ye be not judged

“Judge not, that ye be not judged.  For with what judgment ye judge, ye shall be judged: and with what measure ye mete, it shall be measured to ye again.  And why beholdest thou the mote that is in thy brother’s eye, but considerest not the beam that is in thine own eye?  Or how wilt thou say to thy brother, Let me pull the mote out of thine eye; and, behold, a beam is in thine own eye?  Thou hypocrite, first cast out the beam out of thine own eye; and then shalt thou see clearly to cast out the mote out of thy brother’s eye.”  Matthew, Chapter 7, Verse 1

“I want to talk a little more this holiday weekend about what I suppose is a growing theme in this column, and that is an increased skepticism toward U.S. military intervention, including nation building.  Our republic is not now in a historical adventure period – that is not what is needed.  We are or should be in a self-strengthening one.  Our focus should not be on outward involvement but inner repair.  Bad people are gunning for us, it is true.  we should find them, dispatch them, and harden the target…We should not occupy their lands, run their governments, or try to bribe them with bonhomie.  We think in Afghanistan we’re buying their love but I have been there.  We’re not even renting it.” Peggy Noonan, ‘What the World Sees in America’, The Wall Street Journal, April 23, 2011

Peggy Noonan brutally  chronicles the beam in America’s eye: filthy decaying cities, filthy decaying cultures, the abandonment of small children by their mothers, television shows that flirt with child pornography, commercials that advertise Viagra pills. The world now sees that beam with growing bewilderment and disgust, as well it might, and as Americans should themselves:

“You, the Kabul businessman, expected some raunch and strangeness but not this – this Victoria Falls of dirty water!  You are not a philosopher of media, but you know that when a culture descends to the lowest common denominator, it does not reach the broad base at the bottom, it lowers the broad base at the bottom.  This ‘Jersey Shore’ doesn’t reach the Jersey Shore, it creates the Jersey Shore.  It makes America the Jersey Shore…We have work to do at home, on our culture and in our country.” Peggy Noonan, ibid.

Let these two warnings frame our thinking this Easter Sunday about the relevant role of  this country – once-blessed by Divine Providence, but now cursed by nightmares of Manifest Destiny –  in the affairs of other nations.

Washington Post progressive, Michael Gerson, rips Atlas Shrugged

“The movie ‘Atlas Shrugged,’ adapted from Ayn Rand’s 1957 novel by the same name, is a triumph of cinematic irony.  A work that lectures us endlessly on the moral superiority of heroic achievement is itself a model of mediocrity.  In this, the film perfectly reflects both the novel and the mind behind it.” Michael Gerson, Adolescent ‘Atlas’: Ayn Rand’s bad philosophy makes for bad politics, too’, The Washington Post, April 22, 2011

Wisdom advises us that those who can, write major books, whether fiction or non-fiction, and that those who cannot, scribble unpleasant newspaper columns. I wonder whether Michael Gerson’s mean little columns will make headline reading 50 years on?  Atlas Shrugged was the nation’s best selling book in 2009!  So much for where the market-place pinpoints mediocrity!  Should The Washington Post persist in hiring columnists of the calibre of Michael Gerson, it will not survive, even in its natural habitat of  Washington, DC.

Let Michael Gerson tell us in his own words what rattles him in Ayn Rand’s famous message:

Reason is everything.  Religion is a fraud. Selfishness is a virtue.  Altruism is a crime against human excellence.  Self-sacrifice is weakness.  Weakness is contemptible.  The Objectivist ethics, in essence, said Rand, ‘hold that man exists for his own sake, that the pursuit of happiness is his highest moral purpose, that he must not sacrifice himself to others, nor sacrifice others to himself.’  If Objectivism seems familiar, it is because most people know it under another name: adolescence.” Michael Gerson, ibid.

Well, I have news for Michael Gerson, who clearly is unaquainted with the words of  the Founding Fathers:

“We hold these Truths to be self-evident, that all Men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the Pursuit of Happiness – That to secure these Rights, Governments are instituted among Men, deriving their just Powers from the Consent of the Governed, that whenever any Form of Government becomes destructive of these Ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying down its Foundation on such Principles, and organizing its Powers in such Form, as to them shall seem most likely to effect their Safety and Happiness.” The Declaration of Independence, July 4, 1776

It is not at all surprising that Ayn Rand, a Jewish immigrant who had fled the tyranny of the USSR, would develop a philosophy that closely mirrors the philosophy of the American Founders, as expressed in the golden words of Thomas Jefferson. It is equally unsurprising that a Washington Post progressive columnist, writing for a readership that thrives on the unconstitutional evolution of big government would pour contempt on her philosophy. For this is a back- door route to pouring scorn on the Founding Fathers whose wisdom challenges the very nature of  the progressive movement that supports his livelihood.

 

Three federal spending proposals in historical perspective

Since the beginning of 2011, Americans have been exposed to three differing federal spending proposals for the coming decade, two from President Obama (February 14 and April 13) and one from the House of Representatives (April 5). The highest-flying proposal is Obama I and the lowest is that from the House.  Obama II essentially bisects the difference.

John B. Taylor provides an excellent historical basis for reviewing the three competing proposals:

“A simple chart, like the one nearby, would greatly clarify the debate.  It shows total federal government spending year-by-year for the two decades starting in the year 2000.  Spending is shown as a percentage of GDP, which is a sensible and quite common way to assess trends.  When the percentage rises, government spending rises relative to total income or total goods and services produced in our economy.” John B. Taylor, ‘Obama’s Permanent Spending Binge’, The Wall Street  Journal, April 22, 2011

I cannot reproduce Professor Taylor’s chart in this column, and in any event, many readers may be more comfortable dealing with the numbers themselves than in reading them off the chart. So let me replicate in words what Professor Taylor has taken the time and trouble to set out for our consideration. Let us split the twenty years into two decades, the first looking back and the second looking forward, so that we can compare the three forward-looking proposals against the relevant recent past.

In 2000, before George W. Bush accessed the presidency, federal spending was 18.2 percent of gross domestic product. With federal tax revenues fractionally higher at 18.5 percent,  the budget was in surplus (ignoring unfunded liabilities). Through the eight years of a big-spending, Keynesian-driven, deficit-financing president, federal spending increased steadily to 19.6 percent of gross domestic product. Nevertheless, between January 2009, when President Obama accessed the presidency, and early 2011, federal spending has jumped dramatically, from that already-high baseline, to some 24.4 percent of gross domestic product. Such a latter increase represents a truly dramatic rise in the role of government in the United States economy.

Now let us review the implications of Obama I for the coming decade. Obama I essentially would lock in the post-2007 spending binge as a permanent feature of the United States economy. By 2020, federal spending would hold up at some 24 percent of a (hopefully much larger) gross domestic product. President Obama, via Obama I, revealed his preference for a much more socialistic economy than the one that he inherited in January 2009.

Obama II, which responded to the House counter-proposal in an extremely unusual White House revision of its initial budget proposal, projects a slightly more conservative federal spending vision, returning federal spending by 2020 to 22 percent of gross domestic spending, a ratio still significantly higher than the 19.6 percent  that he inherited in 2009. 

The House proposal, in sharp contrast, would simply remove the Obama spending binge, returning  spending to the 19.6 percent of gross domestic product inherited by President Obama in January 2009. If tax revenues rise, in response to economic recovery, to the 18.5 percent of gross domestic product achieved in 2007, the United States would be within 1.1 percent of budget balance. Bracket creep, in a growing economy, surely would close that gap.

Inevitably, the problem of unfunded liabilities would have to be resolved in order to hold to defined spending targets within the context of a greying population. But that is where the budget debate arguably should center. Regarding overall spending targets, the House of Representatives is right, and the President, on both his shots, is wrong.  If Obamonics should prevail, the United States will be set on an irreversible path to a European-style social democracy.

United States’ federal bureaucrats berate the ratings agencies

In response to Standard & Poor’s warning that America’s debt burden is growing at an unsustainable rate, and in reaction to the expressed interest among the ratings agencies to take account of predictable future U.S. government bailout policies when rating the nation’s largest financial institutions – U.S. federal bureaucrats have responded with disdain, if not open hostility. The attitudes of two leading bureaucrats – Treasury Secretary Timothy Geithner and FDIC Chairman, Sheila Bair – reek of self-importance and self-delusion:

“Indeed, Treasury Secretary Timothy E. Geithner strongly disagreed with the rating agency, saying there was ‘no risk’ that the United States would lose its AAA rating…The head of the Federal Deposit Insurance Corp. (FDIC), Sheila C. Bair, recently upbraided the rating agencies for realistically continuing to include the prospect of government bailouts when rating banks.'[T]hey shouldn’t be speculating on whether the government’s going to come in or not,’ she complained. ‘That’s not their job.  I don’t  think it’s appropriate.’ ” Iain Murray, ‘The midnight ride of Standard & Poor’s’, The Washington Times, April 21, 2011

Of course it is the job of the ratings agencies to issue warnings of this kind.  These warnings are based not on pure speculation, but on a careful evaluation of the best available financial and political information concerning present circumstances and future prospects. That the bureaucrats fundamentally responsible for the economic carnage that will occur in the absence of timely reforms resent the threat that downgraded ratings inevitably present is as natural it is misplaced. 

What do Messrs. Geithner and Bair think would happen if countries had an exclusive monopoly over setting their own ratings?  Do these failing bureaucrats really believe that other governments and individual investors world-wide  are so gullible? Like King Canute, do they truly believe that they can require the tide to shift from flow to ebb in response to their personal commands?

Is it appropriate for Standard & Poor’s to warn the world-economy that political divisions in Washington indicate a serious threat that there may be no fiscal reform of any significance before January 2013? One has only to listen to President Obama’s 2011 re-election speeches on this issue to know that Standard & Poor’s intervention is entirely justified.

Is it appropriate for the ratings agencies to take account of the impact of federal government bailouts on the risk-taking propensities of America’s largest banks in the wake of the September 2008 fiasco?  Of course it is!  Such recognition is on a par with speculation among biologists that bears typically defecate in the woods.

“We should be grateful to S & P for its timely warning to Washington and for reminding us of the vital role that rating agencies play in a free economy.  Thus, it is hardly surprising for economic interventionists to loudly complain about them now.” ibid.