Archive for the ‘Inflation’ Category

The official CPI based price inflation rate on a year-over-year basis rose again in the month of August to 3.77% compared to 3.63% in July, 3.56% in June, 3.57% in May, 3.16% in April, 2.68% in March, 2.11% in February, 1.63% in January, 1.5% in December, 1.1% in November, and 1.17% in October. From the low in November, year-over-year CPI growth has increased by 243%!
Inflation is now spreading beyond food and energy and to the areas the Fed focuses on with core-CPI, which deceptively excludes food and energy. Core-CPI has now risen 10 months in a row and core-CPI is about to break the Fed’s unofficial 1.5% to 2% target range, which will hopefully convince the Fed to finally believe there is an inflation crisis, something NIA members knew back when the Fed was still worried about deflation.
Core-CPI was up 1.95% in August on a year-over-year basis compared to 1.77% in July and 1.64% in June. Because the BLS likes to round all CPI numbers, core-CPI on a year-over-year basis is now officially 2% and at the top end of the Fed’s unofficial target range. Back in October of 2010, year-over-year core-CPI growth reached a low of 0.6%.
From October until today, core-CPI growth on a year-over-year basis has risen from 0.6% to 1.95% for a gain of 225%. From October until today, regular CPI growth on a year-over-year basis has risen from 1.17% to 3.77% for a gain of 222%.
Changes in year-over-year core-CPI growth excluding food and energy were actually higher since October than changes in year-over-year regular CPI growth, which shows that the Fed will soon no longer be able to ignore skyrocketing price inflation. NIA believes real U.S. price inflation now exceeds 8% on a year-over-year basis.

Reagan inherited economic problems and fixed them. Obama’s strategy is to blame Bush and Standard & Poor’s.

The Wall Street Journal     August 8, 2011 

A welfare state that led to permanent austerity would betray the principles that have made American culture exceptional.

The Wall Street Journal         July 25, 2011 

By ARTHUR C. BROOKS

The battle over the debt ceiling is only the latest skirmish in what promises to be an ongoing, exhausting war over budget issues. Americans can be forgiven for seeing the whole business as petty, selfish and tiresome. Conservatives in particular are beginning to worry that public patience will wear thin over their insistence that our nation’s government-spending problem must be remedied through spending cuts, not by raising more revenues.But before they succumb to too much caution, budget reformers need to remember three things. First, this is not a political fight between Republicans and Democrats; it is a fight against 50-year trends toward statism. Second, it is a moral fight, not an economic one. Third, this is not a fight that anyone can win in the 15 months from now to the presidential election. It will take hard work for at least a decade.Consider a few facts. The Bureau of Economic Analysis tells us that total government spending at all levels has risen to 37% of gross domestic product today from 27% in 1960—and is set to reach 50% by 2038. The Tax Foundation reports that between 1986 and 2008, the share of federal income taxes paid by the top 5% of earners has risen to 59% from 43%. Between 1986 and 2009, the percentage of Americans who pay zero or negative federal income taxes has increased to 51% from 18.5%. And all this is accompanied by an increase in our national debt to 100% of GDP today from 42% in 1980.

Nicole Gelinas of City Journal and Jerry Kremer of the Huffington Post on the possibilities for a debt deal.

Where will it all lead? Some despairing souls have concluded there are really only two scenarios. In one, we finally hit a tipping point where so few people actually pay for their share of the growing government that a majority become completely invested in the social welfare state, which stabilizes at some very high level of taxation and government social spending. (Think Sweden.)

In the other scenario, our welfare state slowly collapses under its weight, and we get some kind of permanent austerity after the rest of the world finally comprehends the depth of our national spending disorder and stops lending us money at low interest rates. (Think Greece.)

In other words: Heads, the statists win; tails, we all lose.

Anyone who seeks to provide serious national political leadership today—those elected in 2010 or who seek national office in 2012—owe Americans a plan to escape having to make this choice. We need tectonic changes, not minor fiddling.

Rep. Paul Ryan’s (R., Wis.) budget plan is the kind of model necessary. But structural change will only succeed if it’s accompanied by a moral argument—an unabashed cultural defense of the free enterprise system that helps Americans remember why they love their country and its exceptional culture.

America’s Founders knew the importance of moral language, which is why they asserted our unalienable right to the pursuit of happiness, not to the possession of property. Similarly, Adam Smith, the father of free-market economics, had a philosophy that transcended the mere wealth of nations. His greatest book was “The Theory of Moral Sentiments,” a defense of a culture that could support true freedom and provide the greatest life satisfaction.

Yet today, it is progressives, not free marketeers, who use the language of morality. President Obama was not elected because of his plans about the taxation of repatriated profits, or even his ambition to reform health care. He was elected largely on the basis of language about hope and change, and a “fairer” America.

 

Alberto Ruggieri

 

The irony is that statists have a more materialistic philosophy than free-enterprise advocates. Progressive solutions to cultural problems always involve the tools of income redistribution, and call it “social justice.”

Free-enterprise advocates, on the other hand, speak privately about freedom and opportunity for everybody—including the poor. Most support a limited safety net, but also believe that succeeding on our merits, doing something meaningful, and having responsibility for our own affairs are what give us the best life. Sadly, in public, they always seem stuck in the language of economic efficiency.

The result is that year after year we slip further down the redistributionist road, dissatisfied with the growing welfare state, but with no morally satisfying arguments to make a change that entails any personal sacrifice.

Examples are all around us. It is hard to find anyone who likes our nation’s current health-care policies. But do you seriously expect grandma to sit idly by and let Republicans experiment with her Medicare coverage so her great-grandchildren can get better treatment for carried interest? Not a chance.

If reformers want Americans to embrace real change, every policy proposal must be framed in terms of self-realization, meritocratic fairness and the promise of a better future. Why do we want to lower taxes for entrepreneurs? Because we believe in earned success. Why do we care about economic growth? To make individual opportunity possible, not simply to increase wealth. Why do we need entitlement reform? Because it is wrong to steal from our children.

History shows that big moral struggles can be won, but only when they are seen as decade-long fights and not just as a way to prevail in the next election. Welfare reform was first proposed in 1984 and regarded popularly as a nonstarter. Twelve years of hard work by scholars at my own institution and others helped make it a mainstream idea (signed into law by a Democratic president) and perhaps the best policy for helping the poor to escape poverty in our nation’s history. Political consultants would have abandoned welfare reform as unworkably audacious and politically suicidal. Real leaders understood that its moral importance transcended short-term politics.

No one deserves our political support today unless he or she is willing to work for as long as it takes to win the moral fight to steer our nation back toward enterprise and self-governance. This fight will not be easy or politically safe. But it will be a happy one: to share the values that make us proud to be Americans.

Mr. Brooks is president of the American Enterprise Institute and author of “The Battle: How the Fight Between Free Enterprise and Big Government Will Shape America’s Future” (Basic Books, 2010).

 

The Gang of Six puts forward some ideas worth pursuing.

•                By PEGGY NOONAN    

• The Wall Street Journal   JULY 23, 2011

It’s good, it represents progress, build from it. That would be a helpful approach to the Gang of Six proposal on the debt. Don’t deep-six it because it’s flawed. Flawless isn’t going to happen. There will be a big election in 2012. A lot can be settled then, and after.

The Gang of Six—three Democrats and three Republicans in the Senate—this week put forward a plan aimed at reducing the national debt by almost $4 trillion over the next 10 years. It includes $500 billion in immediate cuts, and it repeals a costly provision of ObamaCare. It would lower the top individual tax rate to 29%, push corporate tax rates down to 29% from 35%, and abolish the Alternative Minimum tax. On long-term spending, the plan includes a legislative supermajority and sequester feature. In the words of a senator involved in the bargaining, “For the first time, we have some real teeth” in spending controls.This is all pretty good. It moves the ball forward in the right ways.As for the flaws: A lot is left up to committees and future action. A lot is left vague. But a critic of the plan, the Cato Institute’s Dan Mitchell, highlighted with justice one of its central advantages: It “is not fueled by class-warfare resentment.” These days that always comes as a surprise and a relief. And it might have come at a cost to the Democrats in the bargaining sessions.The primary good of the plan is that it represents the work of three serious liberals and three serious conservatives who together are moving in the right direction, not the wrong one. They admit the spending crisis is a crisis; they appear to admit that we cannot, at least now, tax our way out of it. This seems small but isn’t. Agreement on these essentials is an antidote to feelings of widespread public hopelessness: “Washington can’t do anything.” That hopelessness damages us more than we know, both at home and in the world. We have to look competent. We have to look like we can reform ourselves. The other day there was an apparently incorrect report that the Republicans and the president had neared a debt-ceiling deal. The markets immediately jumped. Everyone wants Washington to work. People hunger for it.

The plan has already garnered a lot of opposition, much of it fair, but to quickly push it aside would be a real missed opportunity. Those who critique the plan can help it. Its cuts in entitlements and its attempts to reform them are unclear and appear insufficient. If the Senate passed a final proposal along Gang of Six lines, House Republicans would have to make the bill more concrete, more reliable in its mechanisms. And they’d probably have to make deeper cuts. Overshadowing all negotiations is the persistent threat of a credit downgrade. The senator at the bargaining table said that if a final bill doesn’t contain “at least $4 trillion in cuts,” we will get a downgrade, which would carry costs greater than the cuts in the Gang of Six plan.

Attempts to find a final compromise are delicate, with a lot of moving pieces. But the Gang of Six proposal is cause for encouragement. It could not be turned into specific legislation quickly. Gang of Six member Kent Conrad said Thursday morning it could take six months to get it all done and through the appropriate committees. But President Obama signaled this week, for the first time, that he might back a temporary debt-ceiling increase to allow work to continue.

That’s good. But a note on his efforts in the drama. It is time for the president to get out of the way.

For the longest time he wouldn’t engage, and now he’s engaged. For the longest time he didn’t care about spending, and now he cares about spending. Good, both in terms of policy and for him. But his decision to become engaged has become a decision to dominate, to have his face in front of the television cameras with his news conferences, pronouncements, and what his communications people are probably calling his “ownership” of any final agreement. He’s trying to come across as the boss, the indispensable man, the leader. And, of course, the reasonable one.

That’s all very nice and part of Political Positioning 101, but at this point it’s not helping. He’s becoming box-office poison. His numbers are falling. The RealClearPolitics composite job approval poll rating has him down six points since June 2, when the debt-ceiling crisis began. That fall, from 52% to 46%, exactly tracks his heightened media presence and his increased attempts to be seen as dominant. Public Policy Polling, a Democratic firm, said that if he ran for president today he’d lose, that his job-approval numbers are “worse than they appear,” and that he continues to have real trouble with undecided voters.

And if you’ve watched him lately, you know why. When he speaks on the debt negotiations, he is not only extremely boring, with airy and bromidic language—really they are soul-killing, his talking points—but he never seems to be playing it straight. He always seems to be finagling, playing the angles in some higher game that only he gets. In two and a half years he has reached the point that took George W. Bush five years to reach: People aren’t listening anymore.

The other day he announced the Gang of Six agreement with words that enveloped the plan in his poisonous embrace: “I wanted to give folks a quick update on the progress that we’re making.” We’re. He has “continued to urge both Democrats and Republicans to come together.” What would those little devils do without Papa? “The good news is that today a group of senators . . . put forward a proposal that is broadly consistent with the approach that I’ve urged.” I’ve urged. Me, me, me.

That approach includes “shared sacrifice, and everybody is giving up something.” He was like a mother coming in and cheerily announcing: “Dinner’s served! Less for everybody!”

We’re trying to begin a comeback, not a famine. We’re trying to take actions that will allow us to grow.

He’s like a walking headache. He’s probably triggering Michele Bachmann’s migraines.

The Gang of Six members themselves should have been given the stage to make their own announcement, and their own best case.

The president, if he is seriously trying to avert a debt crisis, should stay in his office, meet with members, and work the phones, all with a new humility, which would be well received. It is odd how he patronizes those with more experience and depth in national affairs.

He should keep his face off TV. He should encourage, cajole, work things through, be serious, get a responsible deal, and then re-emerge with joy and the look of a winner as he jointly announces it to the nation. Then his people should leak that he got what he wanted, the best possible deal, and the left has no idea the ruin he averted and the thanks they owe him.

For now, for his sake and the sake of an ultimate plan, he should choose Strategic Silence. Really, recent presidents forget to shut up. They lose sight of how grating they are.

 

By Kelly Evans

Food prices are on the rise. But for consumers it could be far worse.

Fruits, vegetables and dairy have joined oil and grains on the list of commodities whose price is surging. During a similar run-up in 2008, companies largely were able to shift higher costs to consumers. Today, food companies can pass on only a portion of them.

Thursday, H.J. Heinz HNZ +0.30% and Del Monte Foods DLM +0.16% along with grocery company Kroger KR +0.60% will release earnings that could illustrate this point. Heinz, at an industry conference last week, already offered some detail on its fiscal third quarter. The headlines seemed encouraging: Chief Executive William Johnson said earnings came in at about 84 cents a share, four cents above the consensus estimate, and profit margins also beat expectations.

But as Goldman Sachs noted, the earnings look mostly driven by help from a lower tax rate. Moreover, the company’s 2% organic sales growth for the quarter ended in January was short of the 3%-to-4% range most analysts expected. And the company’s food costs continue to climb. Janney Capital Markets analyst Jonathan Feeney calculates they were up nearly 17% year on year in February, partly because of crop freezes that sent tomato prices soaring.

Can Heinz and other food companies raise consumer prices enough to offset cost inflation? So far, the evidence is mixed. Heinz has upped prices on ketchup, Ore-Ida potatoes and a few other products where it feels it has pricing power. “In the U.S., there’s not much [room] left,” said Mr. Johnson last week. So, the company is looking to double its emerging-markets business, where it sees more opportunity for growth, to 30% of revenue by fiscal 2016 from about 16% today.

The reason is clear. In China, for example, incomes are rising rapidly and the middle class is expanding. In the U.S., not so much. UBS Securities notes real disposable income growth is unusually weak at this point of the business cycle. No wonder private grocery chain Wegmans Food Markets just froze prices on more than three-dozen staples like pasta sauce and frozen vegetables, mostly store-brand items.

That kind of competition will make it tougher for brand-name food companies to raise prices. Consumers may be loyal, but they aren’t blind.

For More Info Write to Kelly Evans at kelly.evans@wsj.com

WSJ    APRIL 4, 2011       By GARY S. BECKER, GEORGE P. SHULTZ AND JOHN B. TAYLOR
Assurance that current tax levels will remain in place would provide an immediate stimulus. House Republican budget planners are on the right track.  Wanted: A strategy for economic growth, full employment, and deficit reduction—all without inflation. Experience shows how to get there. Credible actions that reduce the rapid growth of federal spending and debt will raise economic growth and lower the unemployment rate. Higher private investment, not more government purchases, is the surest way to increase prosperity.

When private investment is high, unemployment is low. In 2006, investment—business fixed investment plus residential investment—as a share of GDP was high, at 17%, and unemployment was low, at 5%. By 2010 private investment as a share of GDP was down to 12%, and unemployment was up to more than 9%. In the year 2000, investment as a share of GDP was 17% while unemployment averaged around 4%. This is a regular pattern.

In contrast, higher government spending is not associated with lower unemployment. For example, when government purchases of goods and services came down as a share of GDP in the 1990s, unemployment didn’t rise. In fact it fell, and the higher level of government purchases as a share of GDP since 2000 has clearly not been associated with lower unemployment.

To the extent that government spending crowds out job-creating private investment, it can actually worsen unemployment. Indeed, extensive government efforts to stimulate the economy and reduce joblessness by spending more have failed to reduce joblessness.

Above all, the federal government needs a credible and transparent budget strategy. It’s time for a game-changer—a budget action that will stop the recent discretionary spending binge before it gets entrenched in government agencies.

Second, we need to lay out a path for total federal government spending growth for next year and later years that will gradually bring spending into balance with the amount of tax revenues generated in later years by the current tax system. Assurance that the current tax system will remain in place—pending genuine reform in corporate and personal income taxes—will be an immediate stimulus.

All this must be accompanied by an accurate and simple explanation of how the strategy will increase economic growth, an explanation that will counteract scare stories and also allow people outside of government to start making plans, including business plans, to invest and hire. In this respect the budget strategy should be seen in the context of a larger pro-growth, pro-employment government reform strategy.

We can see such a sensible budget strategy starting to emerge. The first step of the strategy is largely being addressed by the House budget plan for 2011, or HR1. Though voted down in its entirety by the Senate, it is now being split up into “continuing” resolutions that add up to the same spending levels.

To see how HR1 works, note that discretionary appropriations other than for defense and homeland security were $460.1 billion in 2010, a sharp 22% increase over the $378.4 billion a mere three years ago. HR1 reverses this bulge by bringing these appropriations to $394.5 billion, which is 4% higher than in 2008. Spending growth is greatly reduced under HR1, but it is still enough to cover inflation over those three years.

There is no reason why government agencies—from Treasury and Commerce to the Executive Office of the President—cannot get by with the same amount of funding they had in 2008 plus increases for inflation. Anything less than HR1 would not represent a credible first step. Changes in budget authority convert to government outlays slowly. According to the Congressional Budget Office, outlays will only be $19 billion less in 2011 with HR1, meaning it would take spending to 24% of GDP in 2011 from 24.1% today.

If HR1 is the first step of the strategy, then the second step could come in the form of the budget resolution for 2012 also coming out of the House. We do not know what this will look like, but it is likely to entail a gradual reduction in spending as a share of GDP that would, in a reasonable number of years, lead to a balanced budget without tax rate increases.

To make the path credible, the budget resolution should include instructions to the appropriations subcommittees elaborating changes in government programs that will make the spending goals a reality. These instructions must include a requirement for reforms of the Social Security and health-care systems.

Health-care reform is particularly difficult politically, although absolutely necessary to get long-term government spending under control. This is not the place to go into various ways to make the health-care delivery system cheaper and at the same time much more effective in promoting health. However, it is absolutely essential to make wholesale changes in ObamaCare, and many of its approaches to health reform.

The nearby chart shows an example of a path that brings total federal outlays relative to GDP back to the level of 2007—19.5%. One line shows outlays as a share of GDP under the CBO baseline released on March 18. The other shows the spending path starting with HR1 in 2011. With HR1 federal outlays grow at 2.7% per year from 2010 to 2021 in nominal terms, while nominal GDP is expected to grow by 4.6% per year.

Faster GDP growth will bring a balanced budget more quickly by increasing the growth of tax revenues. Critics will argue that such a budget plan will decrease economic growth and job creation. Some, such as economists at Goldman Sachs and Moody’s, have already said that HR1 will lower economic growth by as much as 2% this quarter and the next and cost hundreds of thousands of jobs. But this is highly implausible given the small size of the change in outlays in 2011 under HR1, as shown in the chart. The change in spending is not abrupt, as they claim, but quite gradual.

Those who predict that a gradual and credible plan to lower spending growth will reduce job creation disregard the private investment benefits that come from reducing the threats of higher taxes, higher interest rates and a fiscal crisis. This is the same thinking used to claim that the stimulus package worked. These economic models failed in the 1970s, failed in 2008, and they are still failing.

Control of federal spending and a strategy for ending the deficit will provide assurance that tax rates will not rise—pending tax reform—and that uncontrolled deficits will not recur. This assurance must be the foundation of strategy for a healthy economy.

Mr. Becker, the 1992 Nobel economics laureate, is professor of economics at the University of Chicago and senior fellow at the Hoover Institution. Mr. Shultz, secretary of Labor (1969-70), secretary of Treasury (1972-74) and secretary of State (1982-89), is a fellow at Stanford University’s Hoover Institution. Mr. Taylor is a professor of economics at Stanford and a senior fellow at the Hoover Institution.

U.S. consumers face “serious” inflation in the months ahead for clothing, food and other products, the head of Wal-Mart’s U.S. operations warned Wednesday. The world’s largest retailer is working with suppliers to minimize the effect of cost increases and believes its low-cost business model will position it better than its competitors.

Still, inflation is “going to be serious,” Wal-Mart U.S. CEO Bill Simon said during a meeting with USA TODAY’s editorial board. “We’re seeing cost increases starting to come through at a pretty rapid rate.”

Along with steep increases in raw material costs, John Long, a retail strategist at Kurt Salmon, says labor costs in China and fuel costs for transportation are weighing heavily on retailers. He predicts prices will start increasing at all retailers in June.

“Every single retailer has and is paying more for the items they sell, and retailers will be passing some of these costs along,” Long says. “Except for fuel costs, U.S. consumers haven’t seen much in the way of inflation for almost a decade, so a broad-based increase in prices will be unprecedented in recent memory.”

Consumer prices — or the consumer price index — rose 0.5% in February, the most since mid-2009, largely because of surging food and gasoline prices. Core inflation, which excludes volatile food and energy costs, rose a more modest 0.2%, though that still exceeded estimates.

The scenario hits Wal-Mart as it is trying to return to the low across-the-board prices it became famous for. Some prices rose as the company paid for costly store renovations.

“We’re in a position to use scale to hold prices lower longer … even in an inflationary environment,” Simon says. “We will have the lowest prices in the market.”

Major retailers such as Wal-Mart are the best positioned to mitigate some cost increases, Long says. Wal-Mart, for example, could have “access to any factory in any country around the globe” to mitigate the effect of inflation in the U.S., Long says.

Still, “it’s certainly going to have an impact,” Long says. “No retailer is going to be able to wish this new cost reality away. They’re not going to be able to insulate the consumer 100%.”

You are on the back of a tiger. You had no say in the matter. You are part of the international economy, and central bankers run it. First they inflate. Then there is a boom. Then there is price inflation. Then they stop inflating.

Then there is a recession. To keep it from becoming a depression, they inflate. Year after year, decade after decade, generation after generation, this is what central bankers do. This time, the tiger is really, truly dangerous. The central bankers have lured the world’s highly leveraged speculators and their multinational bankers into wildly speculative ventures that can keep them growing richer only by threatening them with bankruptcy if the central bankers ever attempt to climb off the tiger’s back. How did we get into this situation? F. A. Hayek’s book, A Tiger by the Tail: The Keynesian Legacy of Inflation (1972), discusses central banking as the source of price inflation, booms, and busts. The book was a compilation of his predictions about this over the previous 35 years. He saw in 1972 that this would get worse. It surely has. The book is online for free.

All over the world, central banks are inflating madly. They have not offered any theory for their actions. There is no such theory. Nothing in Keynesian theory ever hinted at the need for central bank policies that are now in full force. This is ad hockery on a scale unprecedented in peacetime, other than in defeated nations immediately after a total military defeat. The absence of any theory to explain America’s position on Asian currencies can be seen by the schizophrenic policies recommended by the U. S. Government. There are two major currencies in Asia: the yuan and the yen. The United States government has two diametrically opposed policies regarding the central bank policies of China and Japan. Yet the policies are the same. The results of these policies are the same: lower interest rates and increased Asian exports. The Federal government benefits from these policies: Asian central banks’ purchases of Treasury debt at low rates. I know of no better example of Jesus’ words (though not the context): the right hand does not know what the left hand is doing. The public, which is utterly ignorant of basic economics, let alone monetary policy, fiscal policy, international trade, and the Austrian theory of the business cycle, is unaware of this schizophrenia. You had better understand it. BIG, BAD CHINA For years, Washington has been screaming bloody murder about China’s yuan policy. It’s a manipulated currency, we are told. The Chinese central bank is holding down the value of the currency by inflating, we are told. This has to stop, China is told. Who says this? Senator Charles Schumer of New York is a major figure. But the Secretary of the Treasury, Timothy Geithner, has been even more vociferous about this. There is no question that the People’s Bank of China has inflated in the range of 20% per annum for years. The Chinese central bank is the world’s leader in monetary inflation. It has financed the boom in China by a policy of goosing the economy with low interest rates. If we believe the Austrian theory of the business cycle, we should expect an economic crash in China when the central bank finally ceases to inflate because prices are rising. The central bank says that it has been raising interest rates by fractional percentages over the last 12 months, but the yuan’s exchange rate with the dollar has not changed much. China’s central bankers have climbed on the back of the tiger, and they have persuaded the businessmen of the nation to join them. They cannot get off without a crash. The only question is when it will occur. The People’s Bank of China has bought U.S. Treasury debt with its inflated money. This has helped to fund the massive Federal deficits of the Bush-Obama era. The Chinese central bank sits on top of some $3 trillion worth of foreign reserves, mostly IOUs from Western governments, all paying little interest. These purchases of Western government IOUs have reduced interest rates on government debt in the West. The politicians have benefited. But they are an ungrateful bunch. They complain in public about the low-yuan policy. Then they send their foreign ministers to China to beg the Chinese to keep buying their debt. Geithner excoriates China for its low-yuan policy. Clinton goes to China in order to beg the government to tell the central bank to keep buying T-bills. The right hand knoweth not what the left hand doeth. Or, better put, the American government talks on both sides of its mouth. Or, finally, “White man speak with forked tongue.” This is because the government is beholden to multiple interests. Geithner represents the manufacturing interests. Clinton represents the business community as a whole. There is no theory or policy that will let the government borrow at low rates from China if China stabilizes its currency. China will face a recession.

Domestic purchasing power Keynesianism will trump mercantilist Keynesianism. Western manufacturers have been put out of business by this arrangement, because China’s central bank policy has kept the yuan lower than it would otherwise have been. Western consumers have been benefitted greatly. They have been the beneficiaries of increased exports from China. This has kept consumer prices higher in China, harming Chinese consumers who are not involved in the export trade, which means most Chinese consumers. But China’s exporters as a minority special interest have done wonderfully. This is mercantilism in action. Mercantilism has not changed in 400 years. When the crash hits China, Chinese manufacturers will do poorly for a time. That will be the fault of the central planners in both China and the West, all of whom pursue low-interest rate policies that create a temporary boom, followed by a crash. That was Ludwig von Mises’ insight in 1912, and it is still valid. BIG, NICE JAPAN In contrast to Geithner on China is Bernanke on Japan. On Friday, March 19, the G-7 nations announced a coordinated plan to drive down the yen’s price in Western currencies. The yen fell against the U.S. dollar by about 3% in one day, an unheard-of move in currency prices. Think about this. The G-7 nations’ central banks intervened to keep down the value of the yen. But they gripe because China’s central bank keeps down the value of the yuan. What’s going on here? Whenever we see the central banks of the West coordinate their policies in an unannounced move, three words usually suffice to explain it: big bank bailout. David Stockman, Reagan’s Director of the Budget and long-term critic of the Federal Reserve, has explained what was at stake: bank profits. It has to do with the yen carry trade. I have told my readers to go long the yen ever since March 2009. I had several reasons. The yen carry trade was one of them. The yen carry trade is the product of he Bank of Japan’s policy to hold down interest rates to zero. This has been easy, because the collapse of the boom in 1990 created demand for any asset that would hold its value. Investors have bought government debt. They have an anti-entrepreneurial mindset based on their fear of the economic future. Western speculators have borrowed yen at almost zero percent to buy higher-yielding bonds in the West. In other words, they went short the yen. They assumed that the yen would not rise, or even fall, in relation to foreign currencies. I told my subscribers to invest on the assumption that this assumption was wrong. It has proven to be wrong for two years. But the earthquake speeded up the process of the yen’s rise.

The crisis triggered a familiar investment reaction: repatriation of currency. Japanese wanted yen to cover them in the crisis. I told my subscribers on March 13, the day after the earthquake, that this would happen. On Monday, March 15, investors sold the Nikkei. They also sold foreign currencies to buy yen. The Bank of Japan frantically pumped in a staggering $700 billion worth of yen in the next three days: Monday to Wednesday. This had no visible effect. The yen kept rising. On Thursday, the yen shot up. Those traders who had been short the yen in their carry trades faced a disaster on Friday. The forex (foreign exchange) market was about to crush them. What to do? Then Captain Bernanke and his loyal cavalry rushed to the rescue of the carry traders, who had been funded by the big banks. Stockman describes it well. So Thursday evening’s short-covering panic in the yen forex markets, and the subsequent panicked response by the central banks, wasn’t just a low frequency outlier – the equivalent of an 8.9 event on the financial Richter scale. Rather, it is the predictable result of the lunatic ZIRP [Zero Interest Rate Policy] monetary policy which has been pursued by the Bank of Japan for more than a decade now – and with the Fed, Bank of England and European Central Bank not far behind. The joint announcement by G-7 bureaucrats of combined intervention dropped the yen sharply and let the carry traders postpone the day of reckoning. In short, the BOJ is sitting on a financial fault line. Thursday afternoon’s rip to 76 yen to the dollar was not the work of a fat finger; instead, it represented a real-time measure of the furies bottled up in the financial system due to Japan’s foolish rental of its “funding currency” to global speculators. Having long ago urged the BOJ to embrace this absurd monetary policy, it is not surprising that Bernanke and his confederates have come to the rescue – for the moment. Let me review. Big, nice Japan is the Japan of the carry trade, the friend of Western currency speculators and the large banks that lend them money to engage in the carry trade.

Big, nice Japan has made Western speculators rich. But they started to get less rich as a result of a steadily rising yen. The earthquake and repatriation caused them to start getting poorer, fast. In contrast is big, bad China. China’s yuan in not an openly traded currency. So, it could not become a part of the carry trade. Western speculators could not borrow money at near zero percent from the People’s Bank of China to buy Western bonds. The PBOC lent its money directly to Western governments, not Western private speculators. It cut out the middlemen. So, Western central bankers are on the side of big, nice Japan. The Bank of Japan desperately flooded the economy with newly created yen, but this had no measurable effect. The Bank tried to keep the yen low, so as to stimulate Japanese exports. It failed for three days. On the fourth day, the yen moved sharply upward. The G-7 intervened. Will the intervention last? I don’t think so. Neither does Stockman. It is only a matter of time, however, before the yen explodes under the next bout of short seller’s pressure, and then the lights will really go out on Japan Inc. In the meanwhile, ordinary people the world around will get less food per dollar from Wal-Mart and speculators, basking in the wealth effect, will have even more dollars to spend at Tiffany & Co. (TIF). Why will this policy fail? Because Western central banks cannot create yen. They can intervene to lower the price of the yen only by selling yen. When they run out of yen to sell, the yen will resume its ascent, unless the Bank of Japan continues to inflate. If it does, this will create an inflationary crisis in Japan. For two decades, the Bank of Japan has resisted this. CENTRAL BANKERS ARE MYOPIC The central bankers of Japan for a decade did not inflate wildly, unlike the central bankers of China. They climbed on the back of the tiger in the 1980s. When they attempted to get off, the economy went into a recession. The stock market, at 39,000 in December of 1989, is now under 10,000 for the third time. The commercial banks refuse to lend. They are loaded up with bad real estate loans, and have been for two decades. You cannot get off the back of the tiger gracefully. Greenspan tried after 2004. He handed the reins over to Bernanke in February 2006. In less than two years, Bernanke came face to face with the tiger. In the final quarter of 2008, the Federal Reserve more than doubled the monetary base. Bernanke swapped liquid T-bills with the big banks. The big banks gave the FED toxic assets at face value. You can see it here. Bernanke has tried to get off the back of the tiger, beginning in February 2010. He allowed the monetary base to shrink. But he climbed back onto the tiger’s back in January 2011 with QE2, a term he prefers not to use. This new policy is a policy of open inflation. You can see the extent of this increase – huge – here.

Stockman has described the situation well. There is no economic theory guiding Bernanke and the Federal Open Market Committee. Indeed, the evidence that the Fed no longer has any clue about the transmission pathways which connect the base money it is emitting with reckless abandon (e.g. Federal Reserve credit) to the millions of everyday pricing, hiring, investing and financing outcomes on Main Street sits right on its own balance sheet. . . . In truth, the Fed’s current money printing spree has no analytical foundation, and amounts to seat-of-the-pants pursuit of a will-o’-wisp – the idea of a perpetual bull market. Like the BOJ, the Fed has thus made itself hostage to the global speculative classes, and must repeatedly inject new forms of stimulus to keep the bubbles rising.

This is what we should expect. It is what we have seen throughout the history of central banking. It surely is the history of the FED, ever since it opened its doors in 1914. Its decision-makers have inflated, then stabilized the monetary base, and then watched in horror as the booms turned into busts. Their solution: another round of inflation, and another ride on the back of the tiger. CONCLUSION The earthquake, Tsunami, and nuclear plant crisis combined to persuade Japanese investors to sell their assets and get into cash. For them, cash means yen. This threatened to create losses for the speculators and their banks. The Bank of Japan, the Federal Reserve, and the G-7 bureaucrats decided in the business week of March 15 to keep the yen carry trade from unwinding. They see their task as thwarting the results of Japanese investors. The central bankers are unofficially pledged to save the big banks whenever required, no matter what the cost. So, they placed us all even more firmly on the back of the monetary tiger. We will not get off gracefully. Most people will lose their retirement portfolios at some point when the tiger finally threatens to become hyperinflation. They have no clue that this is in store for them. The public’s long-run interests will be sacrificed to the tiger in order to save the big banks in the short run. Such it has been since 1914. Such it will still be in 2014.

By: John Melloy
One would think that after the worst financial crisis since the Great Depression, Americans could at least catch a break for a while with deflationary forces keeping the cost of living relatively low. That’s not the case.

A special index created by the Labor Department to measure the actual cost of living for Americans hit a record high in February, according to data released Thursday, surpassing the old high in July 2008. The Chained Consumer Price Index, released along with the more widely-watched CPI, increased 0.5 percent to 127.4, from 126.8 in January. In July 2008, just as the housing crisis was tightening its grip, the Chained Consumer Price Index hit its previous record of 126.9.
“The Federal Reserve continues to focus on the rate of change in inflation,” said Peter Bookvar, equity strategist at Miller Tabak. “Sure, it’s moving at a slower pace, but the absolute cost of living is now back at a record high in a country that has seven million less jobs.”
The regular CPI, which has already been at a record for a while, increased 0.5 percent, the fastest pace in 1-1/2 years. However, the Fed’s preferred measure, CPI excluding food and energy, increased by just 0.2 percent.
“This speaks to the need for the Fed to include food and energy when they look at inflation rather than regard them as transient costs,” said Stephen Weiss of Short Hills Capital. “Perhaps the best way to look at this is to calculate a moving average over a certain period of time in order to smooth out the peaks and valleys.”

Inflation spooked the nation in the early 1980s. It surged and kept rising until it topped 13 percent.

These days, inflation is much lower. Yet to many Americans, it feels worse now. And for a good reason: Their income has been even flatter than inflation.

Back in the ’80′s, the money people made typically more than made up for high inflation. In 1981, banks would pay nearly 16 percent on a six-month CD. And workers typically got pay raises to match their higher living costs.

No more.

Over the 12 months that ended in February, consumer prices increased just 2.1 percent. Yet wages for many people have risen even less — if they’re not actually frozen.

Social Security recipients have gone two straight years with no increase in benefits. Money market rates? You need a magnifying glass to find them.

That’s why even moderate inflation hurts more now. And it’s why if food and gas prices lift inflation even slightly above current rates, consumer spending could weaken and slow the economy.

“It feels far more painful now than in the ’80s,” says Judy Bates, who lives near Birmingham, Ala. “Money in the bank was growing like crazy because interest rates were high. My husband had a union job at a steel company and was getting cost-of-living raises and working overtime galore.”

Bates, 58, makes her living writing and speaking about how people can stretch their dollars. Her husband, 61, is retired. They’ve paid off their mortgage and have no car payments. But they’re facing higher prices for food, gas, utilities, insurance and health care, while fetching measly returns on their savings.

“You want to weep,” Bates says.

Consumer inflation did pick up in February, rising 0.5 percent, because of costlier food and gas. Still, looked at over the past 12 months, price increases have remained low. Problem is, these days any inflation tends to hurt.

Not that everyone has been squeezed the same. It depends on personal circumstances. Some families with low expenses or generous pay increases have been little affected.

Others who are heavy users of items whose prices have jumped — tuition, medical care, gasoline — have been hurt badly. But almost everyone is being pinched because nationally, income has stagnated.

The median U.S. inflation-adjusted household income — wages and investment income — fell to $49,777 in 2009, the most recent year for which figures are available, the Census Bureau says. That was 0.7 percent less than in 2008.

Incomes probably dipped last year to $49,650, estimates Lynn Reaser, chief economist at Point Loma Nazarene University in San Diego and a board member of the National Association for Business Economics. That would mark a 0.3 percent drop from 2009. And incomes are likely to fall again this year — to $49,300, she says.

Significant pay raises are rare during periods of high unemployment because workers have little bargaining power to demand them.

They surely aren’t making it up at the bank. Last year, the average nationwide rate on a six-month CD was 0.44 percent. The rate on a money market account was even lower: 0.21 percent.

Now go back three decades, a time of galloping inflation, interest rates and bond yields. When Paul Volcker took over the Federal Reserve in 1979, consumer inflation was 13.3 percent, the highest since 1946. To shrink inflation, Volcker raised interest rates to levels not seen since the Civil War.

As interest rates soared, CD and money-market rates did, too. The average rate on money market accounts topped 9 percent. Treasury yields surged, pushing up rates on consumer and business loans. The 10-year Treasury note yielded more than 13 percent; today, it’s 3.5 percent.

By 1984, consumers were enjoying a sweet spot: Lower prices but rising incomes and still-historically high rates on CDs and other savings investments. Consumer inflation had slid to 3.9 percent. Yet you could still get 10.7 percent on a six-month CD.

Even after accounting for inflation, the median income rose 3.1 percent from 1983 to 1984. At the time, workers were demanding — and receiving — higher wages.

More than 20 percent of U.S. workers belonged to a union in 1983. Labor contracts typically provided cost-of-living adjustments tied to inflation. And competition for workers meant those union pay increases helped push up income for non-union workers, too.

Last year, just 12 percent of U.S. workers belonged to unions. And among union members, a majority now work for the government, not private companies. Wages of government workers are under assault as state governments and the federal government seek to cut spending and narrow gaping budget deficits.

Workers’ average weekly wages, adjusted for inflation, fell in February to $351.89. It was the third drop in four months.

The result is that even historically low inflation feels high. So “when you mention low inflation to real people on the street, they immediately roll their eyes,” says Greg McBride, senior financial analyst at Bankrate.com.

Falling behind inflation is something many people hadn’t experienced much in their working careers until now. In the 1990s and 2000s, for instance, most Americans kept ahead of rising prices. Inflation averaged under 3 percent.

And inflation-adjusted incomes rose steadily from 1994 to 1999. Once the 2001 recession hit, incomes did falter. But after that, they resumed their growth, rising each year until the most recent recession hit in December 2007.

Rates on six-month CDs were also much higher than they are now: They averaged 5.4 percent from 1990 to 1999 and 3.3 percent from 2000 to 2009.

These days, though, Americans face the certainty of higher prices ahead.

Whirlpool, Kraft, McDonald’s, Clorox, Kellogg, and clothing companies such as Wrangler jeans maker VF Corp., J.C. Penney Co., and Nike say they plan to raise prices. Whirlpool, which makes Maytag and KitchenAid appliances, says it’s raising prices in response to higher raw material costs.

Kellogg, which makes Frosted Flakes and Pop Tarts, is increasing prices on some products to offset costlier ingredients. Kellogg is responding to soaring costs for commodities including wheat, corn, sugar, cotton, beef and pork.

Vickens Moscova, a self-employed marketer in Elizabeth, N.J., says he’s paying more for staples like cereal, bread, eggs and public transportation. Yet he’s making little from his savings.

“It is a huge pinch,” says Moscova, 25.

Though higher gasoline and food prices may lift the inflation rate in coming months, the Fed says it doesn’t think inflation will pose a long-term threat to the economy. The central bank projects that inflation won’t exceed 1.7 percent this year.

But if oil prices, now around $101 a barrel, were to go much higher, economists say heavier fuel bills would cause people and consumers to cut back spending on cars, appliances and other items.

Another recession would be possible if prices began to approach $150 a barrel. Back in 1983, a barrel of oil cost just $29.40 — or $65 in today’s prices, adjusted for inflation.

All that said, today’s consumers are fortunate that today’s lower rates mean one major household cost remains far lower than in the 1980s: a mortgage.

Thanks, in part, to the Fed’s efforts to push down loan rates starting with the financial crisis, the average rate on a 30 year fixed mortgage is below 5 percent.

The comparable rate in 1981? 18 percent.

March 17, 2011 by Daniel Zurbrügg

Among the “must reads” for people trying to gain insight into the long-term structure of economical developments is Mancur Olson’s book, The Rise and Decline of Nations, published more than 30 years ago. Olson was a great economist and social scientist who showed how interests and incentives of individuals drive and influence the development of a country. This often results in a less than ideal resource allocation and over time can result in very harmful effects for a country that can even lead to a complete collapse.

Olson’s findings help us to understand the problems of many Western nations today and how they will face a lot more headwinds in the future. Chronic overspending and changing demographics will cause many Western nations to “fall” or at least enter a period of deep structural change, thus bringing along many painful adjustments.

While today’s structural problems among Western nations are different than they were a decade ago or even centuries ago, the fundamental reasons that lead to a decline of a nation have not changed at all since the fall of the old Roman Empire,  the breakup of the Soviet Union or other troubled economies. However, today’s situation is more complex because of globalization.

Now the U.S. and Europe might be at the start of a long-term decline and with it their currencies, both of which are the world’s most important reserve currencies. The chart below shows that the importance of the United States dollar, measured as a percentage of global currency reserves, has been steadily declining since the late 90s.

Almost 90 percent of the world’s currency reserves are held in U.S. dollars and euros, both of which are at risk to face a long-term structural devaluation. In light of this, it is obvious that a growing number of investors and governments with net currency reserves would like to diversify away from these two reserve currencies.

There are clear signs that this rebalancing has already started and that the combined percentage share of the two largest reserve currencies is going to fall further. How low can this go on in the next five or even 10 years is the question? My honest answer is that I don’t know, but I believe that even a shift of 15 percent to 20 percent would be enough to exercise serious downward pressure on these two currencies for years to come.

Besides the shift in the distribution of reserve currencies, which will have an impact on the value of individual currencies, there is another interesting development happening. The U.S. dollar seems to lose its role as a “crises” hedge; that means that even in times of falling markets or geopolitical turbulence, the greenback is not able to benefit, at least not as much as it used to, meaning investors are not looking to move funds back into the dollar in a flight for safety and liquidity.

Let’s look at the two recent examples: The first one is the situation in the Middle East and Asia, where tensions have been spreading in the last couple of weeks. The chart below shows the currency exchange rate AUD/USD. The Australian dollar is widely used as a carry trade by investors because of the significantly higher yields in Australia. So recently, despite the devastating damages by the flooding in Australia and the very serious tensions in the Middle East, the exchange rate AUD/USD remained relatively flat.

The second example is from the terrible events in Japan in the past week. Despite the potentially far-reaching consequences of these events, the U.S. dollar has not been able to benefit because investors seem to be reluctant to move money to the U.S. dollar even when things look more uncertain.

And not to forget, in the case of the Japan earthquake, it was the third largest economy in the world that got hit along with the Japanese yen, one of the major currencies. It’s indeed very interesting and maybe even a bit surprising that the U.S. dollar has not been able to benefit much from this. It certainly tells a lot about the fundamental weakness of a currency.

The Chinese Premier Hu Jintao recently said that the era of a U.S. dollar-dominated currency system is coming to an end and that this will force a change to the international currency system. The recent structural weakness of the U.S. dollar and the euro shows that we are moving in this direction and that we are probably in a late stage of development of today’s world currency system.

The rise and fall of a nation and its currency follows a very long and powerful underlying cycle with very unique dynamics. While sound economic and political leadership can certainly dampen the negative effects, each prospering society will eventually enter a period of slow growth or even stagnation.  Also with the rise and fall of nations comes the structural appreciation or devaluation of these nations’ currencies. Depending on where they are in terms of their long-term economic cycle, it has very important implications for investors.

Today’s problems in Japan, Western Europe and the United States have a lot in common and, while we all hope for things to change to the better, it’s wise to prepare for the worst. In this case, that means a prolonged period of disappointing economic growth, large and growing debt burdens and increased social economic tensions between different nations and even within each nation. Even the tensions and the political turmoil in the Middle-East and the Northern African region can, to some extent, be attributed to such an underlying structural cycle. Things can only get so bad until people have nothing to lose anymore and start taking control of their own destiny.

In light of the comments above and the lessons learned from history, today’s financial and economical problems in the West need to be seen in a different context. The weakness of currencies like the euro and the U.S. dollar might not just be a temporary phenomenon, but much more likely the early phase of a long-term structural adjustment that will include below average growth and a devaluation of their currencies versus many other major currencies, including many emerging market currencies.

In regards to all of this, I think the question that we need to ask today is whether the current debt crisis in the U.S., Europe and other major economies is really indicating that things will worsen from here and that we have moved beyond the point of no return.

I think the problem today is that governments have spent way too much money in the last couple of decades and that today’s highly alarming debt burden in many countries are only the tip of the iceberg. Some people might argue that the debt in percentage of gross domestic product is really quite manageable but the problem is that on top of the current debt, we need to take into consideration unfunded future obligations that will drive up the government’s debt level even more. This is especially bad for some Western nations like Spain and Italy, who have a rapidly aging population and therefore fewer and fewer young people that can support retirees.

The conclusion of this article is that investors need to rethink their investment strategies, especially with regards to their currency allocation. The two dominant reserve currencies in the world, the U.S. dollar and the euro, are both showing signs of structural weakness, might both face significant devaluation in coming years and this will result in increasing money flows to countries that experience faster economic growth and lower debt levels. This will clearly be a benefit for emerging market currencies and currencies of major economies that have less structural problems.

The Wall Street Journal   MARCH 17, 2011   By MORTIMER ZUCKERMAN

Who can blame consumers for holding back when 50 million Americans depend on taxpayer-supported programs? The modern-day soup line is a check in the mail.

There’s an acidic remark by Dorothy Parker, the New Yorker wit of the 1920s, that just about sums up our present economic predicament. She was asked if she’d heard the news that President Calvin Coolidge was dead and responded: “How can they tell?”

How can we tell that our long-awaited recovery is alive? Once the pulse began to beat a little more strongly last year it was assumed that we were on course to something like full health. Recently attention has been mostly focused on the various deficits, the debt ceiling, and the budget battles. They’re all matters of concern but all of them will be more menacing if the nascent recovery is stalled or even reversed. Is that happening? Or are we on an ascent at last with 192,000 new jobs added to nonfarm rolls last month?

Three elements offer clues: consumer spending, housing and unemployment.

Importantly, the bubble of exuberant consumerism that powered the U.S. economy for the last 10 years of the 20th century and for most of the first years of the 21st century has burst. In reaction to economic hard times, American consumers are planning for the worst rather than hoping for the best, and they continue to pay down household debt instead of spending cash.

Who could blame people for holding back when we see roughly 50 million Americans on one or more taxpayer-supported programs, be it food stamps or unemployment benefits? This downturn may not have the 1930s feel of despair, but in large part that is because, as the economist David Rosenberg of the wealth-management firm Gluskin Sheff put it, “The modern day soup line is a check in the mail.”

An unprecedented number of Americans are borrowing against their 401(k)s, canceling their life insurance policies, and forgoing physicals. And that isn’t all. The American consumer today is fearful of the impact of higher food prices, higher gasoline prices, higher insurance costs, higher everything. The inflation of food and fuel alone has absorbed the December tax cuts agreed to by Congress and the administration.

So where has the recent modest growth in the economy come from? It is primarily due to massive amounts of federal government stimulus and a huge inventory swing, both of which will peter out this year. Only the wealthiest 10% of the population, whose stock portfolios have come roaring back, are doing well, but their spending is not enough to spur the economy or create much additional hiring.

Why are all the vital signs discouraging? Quite simply, it is because households are still carrying far too much debt on their balance sheets. Relative to income, debt today is approximately twice as high for families as it was in the 1980s. Total borrowing in relation to disposable, personal after-tax income leaped to approximately 136% in the first quarter of 2008 from 60% in the early 1980s before it began to recede. It has now declined to 117% of income compared to the pre- bubble norm of 70%. To return to that level, debt would have to be reduced by another $6 trillion. Similarly, the debt-to-asset ratio in relation to household assets is currently 20%, but the pre-bubble norm was 12.5%. The deleveraging process still has a long ways to go.

As more U.S. households pay down their debt, the slowdown in consumer spending will continue. The savings rate, which had averaged 8.6% during the 1980s and 5.5% in the 1990s, dropped to an alarming 2.8% in the 2000s. No longer are households engaging in mortgage equity cash-outs to the tune of over $80 billion per quarter, as they did in 2006. Cash-out refinancing today has dropped by 90%, contracting the available funds that helped power the pre-2007 spending binge.

Not surprisingly, middle-class Americans are growing increasingly leery of debt. This trend will continue as more families realize their retirement nest egg is going to be a whole lot smaller than they expected. Credit cards provide a marker. In a survey taken towards the end of last year by Javelin Strategy & Research, only 45% of households used credit cards in 2010, compared to 56% in 2009, and 87% in 2007.

Virtually every index of consumer sentiment supports this sense of consumer restraint. In a recent poll taken by the Pew Research Center, 71% of American consumers say they are buying less expensive brands, 57% say they have trimmed or eliminated vacations, 11% have postponed marriage or children, and 9% have moved in with their families, reducing spending on alcoholic beverages, clothing and restaurants. In other words, roughly 25 million unemployed or partially unemployed Americans are focusing on basic necessities. They make up a part of the 42 million Americans on food stamps.

Quite simply, American households are seeking to become net savers, not net borrowers. This is hardly surprising when real median household incomes are down over 4% from the 2000-2009 decade, according to recent research conducted by Mr. Rosenberg at Gluskin Sheff. Net worth has declined by more than $100,000 for the average household compared to just three years ago, and total household net worth is $12 trillion lower today than at the pre-recession peak—an unprecedented decline of 18.5% over three years. The bulk of this loss comes from diminished home equity, and with more than six million homes in inventory or in foreclosure, prices have been declining again for the past six months.

In short, the triple whammy of weak consumer sales, a weak housing market, and a deeply anemic job market is still very much with us. There are no quick fixes to the post-bubble credit collapse. The painful process of deleveraging is far from over. Current debt loads are not sustainable either by incomes or asset values, which are falling.

That’s why our economic pulse is so weak. Real GDP growth is less than half of what one would ordinarily expect to see coming out of such a deep downturn. And there has been virtually no recovery at all with respect to housing, income levels and employment.

The government’s February jobs report reaped a slew of cheerful headlines. But much of the bounce came in construction, where workers were kept idle by January’s snowfalls. Job gains for the past three months averaged just 135,000—we need 150,000 a month just to keep pace with population. And government figures don’t take into account the two million plus discouraged workers who’ve dropped out of the labor force over the past year and a half and are still unemployed. If counted, the jobless rate would have been 11.5% in February.

Government programs may have provided an early, if minor, lift to the economy, but clearly they have not sustained it. One possible engine of recovery may be the improving profitability of corporate America, if the cash finds its way into increased capital spending and employment. But with companies uncertain about the future, that’s not happening.

Like it or not, our increasingly anemic recovery may yet require the jolt of a substantial new stimulus. For any such defibrillation shock to be effective—or politically feasible—it must not spook the bond market. That means the patient must be assured of longer-term reductions in the major expenditure programs of the national government. Until we have a credible and convincing plan, it seems we’ll have an economy that is neither certifiably dead nor robustly alive.

Mr. Zuckerman is chairman and editor in chief of U.S. News & World Report.

The Wall Street Journal   MARCH 2, 2011 By BARRY EICHENGREEN

For decades the dollar has served as the world’s main reserve currency, but, argues Barry Eichengreen, it will soon have to share that role. Here’s why—and what it will mean for international markets and companies. The single most astonishing fact about foreign exchange is not the high volume of transactions, as incredible as that growth has been. Nor is it the volatility of currency rates, as wild as the markets are these days.

Instead, it’s the extent to which the market remains dollar-centric.

Consider this: When a South Korean wine wholesaler wants to import Chilean cabernet, the Korean importer buys U.S. dollars, not pesos, with which to pay the Chilean exporter. Indeed, the dollar is virtually the exclusive vehicle for foreign-exchange transactions between Chile and Korea, despite the fact that less than 20% of the merchandise trade of both countries is with the U.S.

Chile and Korea are hardly an anomaly: Fully 85% of foreign-exchange transactions world-wide are trades of other currencies for dollars. What’s more, what is true of foreign-exchange transactions is true of other international business. The Organization of Petroleum Exporting Countries sets the price of oil in dollars. The dollar is the currency of denomination of half of all international debt securities. More than 60% of the foreign reserves of central banks and governments are in dollars.

The greenback, in other words, is not just America’s currency. It’s the world’s.

But as astonishing as that is, what may be even more astonishing is this: The dollar’s reign is coming to an end.

I believe that over the next 10 years, we’re going to see a profound shift toward a world in which several currencies compete for dominance.

The impact of such a shift will be equally profound, with implications for, among other things, the stability of exchange rates, the stability of financial markets, the ease with which the U.S. will be able to finance budget and current-account deficits, and whether the Fed can follow a policy of benign neglect toward the dollar.

The Three Pillars
How could this be? How could the dollar’s longtime most-favored-currency status be in jeopardy?

See the share of global foreign-exchange transactions involving the dollar, and the dollar’s share of official global foreign-exchange reserves.
To understand the dollar’s future, it’s important to understand the dollar’s past—why the dollar became so dominant in the first place. Let me offer three reasons.

First, its allure reflects the singular depth of markets in dollar-denominated debt securities. The sheer scale of those markets allows dealers to offer low bid-ask spreads. The availability of derivative instruments with which to hedge dollar exchange-rate risk is unsurpassed. This makes the dollar the most convenient currency in which to do business for corporations, central banks and governments alike.

Second, there is the fact that the dollar is the world’s safe haven. In crises, investors instinctively flock to it, as they did following the 2008 failure of Lehman Brothers. This tendency reflects the exceptional liquidity of markets in dollar instruments, liquidity being the most precious of all commodities in a crisis. It is a product of the fact that U.S. Treasury securities, the single most important asset bought and sold by international investors, have long had a reputation for stability.

WSJ’s David Wessel sits down with three senior experts in international finance – Edwin M. Truman, Joseph E. Gagnon and Eswar Prasad – for a discussion on the major issues facing currencies and the global economy.
Finally, the dollar benefits from a dearth of alternatives. Other countries that have long enjoyed a reputation for stability, such as Switzerland, or that have recently acquired one, like Australia, are too small for their currencies to account for more than a tiny fraction of international financial transactions.

What’s Changing
But just because this has been true in the past doesn’t guarantee that it will be true in the future. In fact, all three pillars supporting the dollar’s international dominance are eroding.

First, changes in technology are undermining the dollar’s monopoly. Not so long ago, there may have been room in the world for only one true international currency. Given the difficulty of comparing prices in different currencies, it made sense for exporters, importers and bond issuers all to quote their prices and invoice their transactions in dollars, if only to avoid confusing their customers.

Now, however, nearly everyone carries hand-held devices that can be used to compare prices in different currencies in real time. Just as we have learned that in a world of open networks there is room for more than one operating system for personal computers, there is room in the global economic and financial system for more than one international currency.

OECD Secretary-General Jose Angel Gurria sat down with Dow Jones FX Trader during the meeting of G20 finance officials in Paris to talk about global imbalances and the euro zone’s debt crisis.
Second, the dollar is about to have real rivals in the international sphere for the first time in 50 years. There will soon be two viable alternatives, in the form of the euro and China’s yuan.

Americans especially tend to discount the staying power of the euro, but it isn’t going anywhere. Contrary to some predictions, European governments have not abandoned it. Nor will they. They will proceed with long-term deficit reduction, something about which they have shown more resolve than the U.S. And they will issue “e-bonds”—bonds backed by the full faith and credit of euro-area governments as a group—as a step in solving their crisis. This will lay the groundwork for the kind of integrated European bond market needed to create an alternative to U.S. Treasurys as a form in which to hold central-bank reserves.

China, meanwhile, is moving rapidly to internationalize the yuan, also known as the renminbi. The last year has seen a quadrupling of the share of bank deposits in Hong Kong denominated in yuan. Seventy thousand Chinese companies are now doing their cross-border settlements in yuan. Dozens of foreign companies have issued yuan-denominated “dim sum” bonds in Hong Kong. In January the Bank of China began offering yuan-deposit accounts in New York insured by the Federal Deposit Insurance Corp.

Allowing Chinese companies to do cross-border settlements in yuan will free them from having to undertake costly foreign-exchange transactions. They will no longer have to bear the exchange-rate risk created by the fact that their revenues are in dollars but many of their costs are in yuan. Allowing Chinese banks, for their part, to do international transactions in yuan will allow them to grab a bigger slice of the global financial pie.

Admittedly, China has a long way to go in building liquid markets and making its financial instruments attractive to international investors. But doing so is central to Beijing’s economic strategy. Chinese officials have set 2020 as the deadline for transforming Shanghai into a first-class international financial center. We Westerners have underestimated China before. We should not make the same mistake again.

Finally, there is the danger that the dollar’s safe-haven status will be lost. Foreign investors—private and official alike—hold dollars not simply because they are liquid but because they are secure. The U.S. government has a history of honoring its obligations, and it has always had the fiscal capacity to do so.

But now, mainly as a result of the financial crisis, federal debt is approaching 75% of U.S. gross domestic product. Trillion-dollar deficits stretch as far as the eye can see. And as the burden of debt service grows heavier, questions will be asked about whether the U.S. intends to maintain the value of its debts or might resort to inflating them away. Foreign investors will be reluctant to put all their eggs in the dollar basket. At a minimum, the dollar will have to share its safe-haven status with other currencies.

A World More Complicated
How much difference will all this make—to markets, to companies, to households, to governments?

One obvious change will be to the foreign-exchange markets. There will no longer be an automatic jump up in the value of the dollar, and corresponding decline in the value of other major currencies, when financial volatility surges. With the dollar, euro and yuan all trading in liquid markets and all seen as safe havens, there will be movement into all three of them in periods of financial distress. No one currency will rise as strongly as did the dollar following the failure of Lehman Bros. There will be no reason for the rates between them to move sharply, something that would potentially upend investors.

But the impact will extend well beyond the markets. Clearly, the change will make life more complicated for U.S. companies. Until now they have had the convenience of using the same currency—dollars—whether they are paying their workers, importing parts and components, or selling their products to foreign customers. They don’t have to incur the cost of changing foreign-currency earnings into dollars. They don’t have to purchase forward contracts and options to protect against financial losses due to changes in the exchange rate. This will all change in the brave new world that is coming. American companies will have to cope with some of the same exchange-rate risks and exposures as their foreign competitors.

Conversely, life will become easier for European and Chinese banks and companies, which will be able to do more of their international business in their own currencies. The same will be true of companies in other countries that do most of their business with China or Europe. It will be a considerable convenience—and competitive advantage—for them to be able to do that business in yuan or euros rather than having to go through the dollar.

U.S. Impact
In this new monetary world, moreover, the U.S. government will not be able to finance its budget deficits so cheaply, since there will no longer be as big an appetite for U.S. Treasury securities on the part of foreign central banks.

Nor will the U.S. be able to run such large trade and current-account deficits, since financing them will become more expensive. Narrowing the current-account deficit will require exporting more, which will mean making U.S. goods more competitive on foreign markets. That in turn means that the dollar will have to fall on foreign-exchange markets—helping U.S. exporters and hurting those companies that export to the U.S.

My calculations suggest that the dollar will have to fall by roughly 20%. Because the prices of imported goods will rise in the U.S., living standards will be reduced by about 1.5% of GDP—$225 billion in today’s dollars. That is the equivalent to a half-year of normal economic growth. While this is not an economic disaster, Americans will definitely feel it in the wallet.

On the other hand, the next time the U.S. has a real-estate bubble, we won’t have the Chinese helping us blow it.

Dr. Eichengreenis the George C. Pardee and Helen N. Pardee professor of economics and political science at the University of California, Berkeley. His new book is “Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System.” He can be reached at reports@wsj.com.

Newsmax Wires Wednesday, 16 Feb 2011

Fresh from being savaged by Republicans for his proposed $3.7 trillion 2012 budget, members of his own party are deserting President Barack Obama for crafting a spending plan that does not do enough to rein in federal spending and cut the deficit. The budget also is under attack from liberals who say the burden of spending cuts has been placed on the backs of the poor.

Republicans mocked Obama’s budget immediately after it was released on Monday. “The president punted on the budget, he punted on the deficit,” said House Budget Committee Chairman Paul Ryan, R-Wis. “That’s not leadership, that’s an abdication of leadership.”

“In our nation’s most pressing fiscal challenges, the president has abdicated his leadership role,” Ryan said. “When his own commission put forward a set of fundamental entitlement and tax reforms . . . he ignored them.”

Republicans were soon joined by unhappy Democrats of all stripes. Some lawmakers think the measure is too timid, liberal members are worried about programs for the underprivileged, and Democrats with an eye on their re-election campaigns are trying to save programs dear to their constituents.

During a Senate Budget Committee hearing, Sens. Kent Conrad, D-N.D., and Chris Coons, D-Del., were critical of the proposal. Committee Chairman Conrad said Obama should have gone after entitlement programs like Medicare and Social Security.

Coons, a member of the president’s debt commission, unloaded on Office of Management and Budget Director Jack Lew for not following through on such debt commission recommendations such as reforming the tax code, Medicare, and Social Security, The Hill newspaper reported.

“I think in large part, the strongest work of the commission is absent in this budget,” Coons said according to The Hill.

The president’s budget also includes $2.5 billion in cuts to a heating assistance program for the poor, cuts to NASA, cuts to the Community Development Blocks grants program, and cuts to Pell Grants — all of which have drawn the ire of liberals.

Senate Appropriations subcommittee chair Sen. Tom Harkin, D-Iowa, said when it comes to cutting programs that help low-income Americans that “There can be pain, but I want to make sure it’s not just on them. I want to make sure there’s Wall Street pain, there’s Pentagon pain, that there’s wealthy pain,” The Nation reported.

The Vermont congressional delegation, including Sens. Bernie Sanders, I-Vt., and Patrick Leahy, D-Vt., and Rep. Peter Welch, D-Vt., said in a joint statement that “we cannot balance the budget on the backs of senior citizens on fixed incomes, low-income families with children, and persons with disabilities.”

The statement went on to say the heating program “provides critical heating assistance for senior citizens, persons with disabilities, and low-income families with children . . . The last thing we should be doing is making it harder for the most vulnerable people in this country to stay warm in the winter.”

The criticism knocked the president, whose $3.73 trillion budget includes cuts that are geared to reduce the deficit by $1.1 trillion in the next 10 years, into a defensive stance.

“What my budget does is to put forward some tough choices, some significant spending cuts so that by the middle of this decade our annual spending will match our annual revenues,” he said in a surprise news conference Tuesday. “We will not be adding more to the national debt. It’s — so, to use a sort of — an analogy that families are familiar with, we’re not going to be running up the credit card anymore.

The president was reduced to pleading with the press corps for patience, arguing that his budget was just the beginning of the process.

“Now, part of the challenge here is that this town — let’s face it, you guys are pretty impatient. If something doesn’t happen today, then the assumption is it’s just not going to happen, all right,” he said.

Obama said, “we’re going to be in discussions over the next several months. I mean, this is going to be a negotiation process.

“And the key thing that I think the American people want to see is that all sides are serious about it and all sides are willing to give a little bit, and that there’s a genuine spirit of compromise as opposed to people being interested in scoring political points,” he said.

“Now, we did that in December during the lame duck on the tax cut issues. Both sides had to give. And, you know, there were folks in my party who were not happy and there were folks in the Republican Party who were not happy. And my suspicion is is that we’re going to be able to do the same thing if we have that same attitude with respect to entitlements,” the president added.

Eager to please their conservative tea party supporters, Republicans are championing $61 billion in cuts to hundreds of programs for the remaining seven months of this federal fiscal year. AmeriCorps and the Corporation for Public Broadcasting would be completely erased, while deep cuts would be carved from programs for feeding poor women and children, training people for jobs, and cleaning the Great Lakes.

Obama’s plan mixes tax increases on the wealthy and some businesses, a five-year freeze on most domestic programs, and boosts for elementary schools, clean energy, and airport security.

The outline is a first step in what is likely to be a bitter partisan fight as Congress translates it into a parade of tax and spending bills.

Despite its savings, Obama’s budget projects a record $1.65 trillion deficit this year, falling to $1.1 trillion next year and easing thereafter. Even so, it stands to generate a mammoth $7.2 trillion sea of red ink over the next 10 years, a number that would be even larger had the president not claimed over $1 trillion in 10-year savings by winding down the wars in Iraq and Afghanistan.

Glaringly missing from the president’s budget was a substantial reshaping of Social Security, Medicare, and other massive, automatically paid benefit programs that bipartisan members of his deficit-reduction commission had recommended last year. That leaves the nation under a black fiscal cloud as its aging population, prolonged lifespans, and ever costlier medical procedures leave the government with enormous IOUs.

Overall, Obama’s budget claims $1.1 trillion in deficit reduction from tax increases and spending cuts over the next decade while protecting some — but not all — programs that Democrats cherish.

By 2021, Obama projects that $844 billion out of the $5.7 trillion federal budget would go toward paying interest on the government’s debt. Such interest payments would exceed the size of the entire federal budget in 1983.

Read more on Newsmax.com: Now, Even Democrats Turn on Obama Over Budget
Important: Do You Support Pres. Obama’s Re-Election? Vote Here Now!

By Stephen Dinan – The Washington Times

President Obama‘s budget, released Monday, was conceived as a blueprint for future spending, but it also paints the bleakest picture yet of the current fiscal year, which is on track for a record federal deficit and will see the government’s overall debt surpass the size of the total U.S. economy.

Mr. Obama‘s budget projects that 2011 will see the biggest one-year debt jump in history, or nearly $2 trillion, to reach $15.476 trillion by Sept. 30, the end of the fiscal year. That would be 102.6 percent of GDP — the first time since World War II that dubious figure has been reached.

And the budget projects the government will run a deficit of $1.645 trillion this year, topping 2009’s previous record by more than $230 billion. By contrast, 2007’s deficit was just $160 billion altogether.

Still, amid the other staggering numbers in the budget Mr. Obama sent to Congress on Monday, the debt stands out because Congress will need to vote to raise the debt limit later this year, and because the numbers are so large.

In one often-cited study, economists Carmen Reinhart and Ken Rogoffhave argued that when a nation’s gross debt passes 90 percent it hinders overall economic growth. The government measures debt several ways. Debt held by the public includes the money borrowed from Social Security’s trust fund.

Actual debt held by the public will reach 72 percent of GDP in 2011 and will climb as the Social Security trust fund’s finances continue to deteriorate.

Republicans argued Monday that the Obama administration‘s new budget fails to appreciate the depth of the country’s fiscal plight.

“I still don’t see a sense of urgency from the president about the massive federal debt,” said Sen. Lamar Alexander, Tennessee Republican. “His budget calls for too much government borrowing — even though the debt is already at a level that makes it harder to create private-sector jobs.”

White House budget Director Jacob “Jack” Lew said the goal was to get to a point where the debt is at least stabilized by the middle of the decade.

“The government will no longer be adding to our debts, and as a share of the economy, we’re going to stabilize the deficit,” he told reporters. “We’ll, in short, be paying for what we spend every year. The goal, to put it simply, is for the deficit to be in the range of 3 percent of our economy by the middle of the decade.”

And indeed that’s what the numbers show. Nominal debt will peak in 2013 at 106 percent of the economy before dropping to 105.2 percent in 2015 and 2016, though only if the economy booms.

While the Obama administration assumes a fast economic rebound after two years of sluggish growth, the nonpartisan Congressional Budget Office last month offered a more pessimistic view, saying that this recovery will be slow for years to come.

But the recovery could have other, less-beneficial effects, including higher interest rates. The government currently is benefiting from rates that are a fraction of their historic level, which means substantially lower borrowing costs for corporations and individuals.

Lawmakers said those low interest rates can’t last. Sen Tom Coburn, Oklahoma Republican, said for every point that interest rates increase, the government would be paying an extra $140 billion a year on its debt right now.

Michael R. Blood – Associated Press Writer – 2/5/2011 6:55:00 AM

SANTA BARBARA, Calif. – America is on a “road to ruin” because of misguided policies in Washington and needs to get back in step with the values of Ronald Reagan, Sarah Palin said at an event honoring the former president’s legacy.

The 2008 Republican vice presidential nominee delivered a stinging critique of Washington during her speech Friday, part of the national celebration marking the centennial of Reagan’s birth on Feb. 6.

Revisiting themes familiar from her 2008 campaign, she said the nation was being shackled by high debt and taxes, dense government regulation and rising spending, often for programs that don’t work. She said a rush toward green energy was overlooking the nation’s oil and natural gas reserves, a choice that will cost jobs and drive up pump prices.

She blamed Washington leaders _ an apparent reference to the Obama administration _ for doing “everything in their power to stymie responsible domestic drilling.”

“This is dangerous. This is insane,” she said. “This is not the road to national greatness, it is the road to ruin.”

She alluded to President Barack Obama’s State of the Union address last month, saying it amounted to a statement that “the era of big government is here to stay.”

Palin was asked to talk about Reagan’s 1964 speech, “A Time for Choosing,” which he gave on behalf of then-Republican presidential candidate Barry Goldwater. In it, he talks at length about the dangers of high taxes and encroaching big government, as well as the necessity of strong national security.

She said the stark choices the nation faces are not unlike those Reagan talked of in the 1960s, only the economy of today is worse, from home foreclosures to high unemployment.

She said Reagan saw the danger of President Lyndon Johnson’s Great Society programs, and “he refused to sit down and be silent as our liberties were eroded by an out of control, centralized government that overtaxed and overreached in utter disregard of constitutional limits.”

“We could choose one direction or the other, socialism or freedom and free markets,” Palin said.

Palin received a roaring ovation, but one of Reagan’s son told The Associated Press in an interview that he doesn’t see anything in common between his dad and the former Alaska governor, who was invited to speak by the event’s sponsor, the conservative Young America’s Foundation.

“Sarah Palin is a soap opera, basically. She’s doing mostly what she does to make money and keep her name in the news,” Ron Reagan says.

“She is not a serious candidate for president and never has been,” said Reagan, a political independent whose politics lean left.

But former Reagan speechwriter Kenneth Khachigian praised the choice of Palin to discuss Reagan’s legacy.

Palin was a teenager when Reagan took office in 1981 and like many young people “their lives and philosophy and political fortunes were shaped by the Reagan era,” Khachigian says. “She can reflect on that as well as anyone could.”

Palin was introduced to the nation at the Republican National Convention in 2008, and her folksy, wisecracking style sometimes earned her comparisons to Reagan, who was known for his wit and appeal beyond the traditional Republican base, especially with blue-collar Democrats. She frequently referred to Reagan on the campaign trail, and in her debate with Vice President Joe Biden reprised Reagan’s famous rejoinder from his 1980 debate with Jimmy Carter, “There you go again.”

But Palin, now closely aligned with the tea party movement, has become for some a polarizing political figure.

Tea partiers rail against soaring public debt and sprawling government programs like Social Security and Medicare. But public debt roughly tripled on Reagan’s watch and he did not attempt to dismantle Social Security or Medicare during his term, says Reagan biographer Lou Cannon.

“He was no tea partier,” Cannon says.

The Young America’s Foundation was founded in the 1960s to promote conservative ideas on college campuses, and it purchased Reagan’s former ranch in 1998. The foundation is not connected with the Reagan Presidential Library in Simi Valley.

The Wall Street Journal

FEBRUARY 5, 2011

By ALLAN H. MELTZER

Inflation is on the horizon, and now is the time for the Fed to head it off.

In the 1970s, despite rising inflation, members of the Federal Reserve’s policy committee repeatedly chose to lower interest rates to reduce unemployment. Their Phillips Curve models, which charted an inverse relationship between unemployment and inflation, told them that inflation could wait and be addressed at a more opportune time. They were flummoxed when inflation and unemployment rose together throughout the decade.

In 1979, shortly after becoming Fed chairman, Paul Volcker told a Sunday talk-show audience that reducing inflation was the best way to reduce unemployment. He abandoned the faulty Phillips Curve thinking that unemployment was the enemy of inflation. And he told the Fed’s staff that while he thought highly of their work, he did not find their inflation forecasts useful. Instead of focusing on near-term output and employment, he changed the Fed’s policy to put more emphasis on the longer-term reduction of inflation. That required a persistent policy that President Reagan supported even in the severe 1982 recession.

We know the result: Inflation came down and stayed down. The Volcker disinflation ushered in two decades of low inflation and relatively steady growth, punctuated by a few short, mild recessions. And as Mr. Volcker predicted, the unemployment rate fell after the inflation rate fell. The dollar strengthened.

That was not unprecedented. The Phillips Curve often fails to forecast correctly. Spanish inflation has increased in the last year while the unemployment rate rose above 20%. Britain also has rising inflation and rising unemployment. Brazil lowered inflation and unemployment together. There are many other examples if only the Fed would look at them.

Throughout its modern history, the Fed has made several of the same policy mistakes repeatedly. Two are prominent now. It concentrates on near-term events over which it has little influence, and neglects the longer-term consequences of its operations. And it interprets its dual mandate as requiring it to direct all of its efforts to reducing unemployment when the unemployment rate rises. It does not have a credible long-term plan to reduce both current unemployment and future inflation, so it works on one at a time. This is an inefficient way to achieve a dual mandate. It failed totally during the Great Inflation of the 1970s. I believe it will fail again this time.

Commodity and some materials prices have increased dramatically in the past year. Countries everywhere face higher inflation. Despite the many problems in the euro area, the dollar has depreciated against the euro, a weak currency with many problems, suggesting that holders expect additional dollar weakness. Imports will cost more.

I believe it is foolhardy to expect businesses to absorb all the cost increases by holding prices unchanged. And loan demand has started to pick up, increasing the amount of money in circulation. It is a big mistake to expect that the U.S. will escape the inflation that is now rising throughout the world.

Because the Fed focuses on the near term, it tends to ignore changes in money-supply growth. This, too, is a mistake. Sustained inflation always follows increases in money-supply growth. Sustaining negative real interest rates (i.e., adjusted for inflation), as we have now, will cause this.

The Fed should make three changes. First, it should increase the short-term interest rate it controls to 1%, which would show that it is aware of the inflation risk and will act promptly to counteract it. Current low interest rates are an opportunity for the Fed to start reducing excess reserves.

Second, it should announce a specific, detailed plan that explains how it proposes to reduce about $900 billion of the more than $1 trillion banks continue to hold in excess of their legally required reserves.

Third, it should end QE2, its latest round of Treasury bond purchases. If, last November, the Fed had waited two more months before starting QE2, it would have known that a double-dip recession was not about to happen. Instead of waiting, the Fed responded to the cries coming from Wall Street.

Current slow growth and high unemployment is not mainly a monetary problem. The financial system has more than ample liquidity. Uncertainty about government policy is a much bigger problem. Businesses have had many reasons to be uncertain, to wait for a clearer outlook that would permit them to more accurately estimate future costs and returns to new investment. Better to hold cash and wait.

Until the 2010 election changed their view of the future, there was no way to know how much tax rates would increase, what new, costly regulations would stem from the president’s health-care reforms, the Dodd-Frank financial reforms, and elsewhere. The election reduced these concerns by giving control of the House to a majority that does not share President Obama’s vision that a good society should be directed and regulated from Washington. Last December, when Mr. Obama agreed to extend the Bush tax cuts, he showed that some improvement in outlook was justified. The economy responded.

What we need out of Washington now is spending reduction, lower corporate tax rates, and a three-year moratorium on new regulation. But perhaps most importantly, we need a new Fed policy to prevent 1970s-style inflation. Inflation is coming. Now is the time to head it off.

Mr. Meltzer is a professor of economics at Carnegie Mellon University’s Tepper School of Business, a visiting scholar at the American Enterprise Institute, and the author of “A History of the Federal Reserve” (University of Chicago Press, 2003 and 2010).

BY ALEX BRITTAIN
LONDON—Euro-zone inflation accelerated at its fastest pace since late 2008 in January, but the European Central Bank isn’t expected to raise rates at a meet¬ing Thursday.
Consumer prices in the 17 na¬tions that use the euro rose 2.4% from January 2010, provisional data from the official statistics agency Eurostat showed Monday.
That is above the ECB’s mid¬term target of just below 2%. Prices rose 2.2% in December from the year-earlier month. The last time inflation was higher was in October 2008, when it was 3.2%, Eurostat said.
While the central bank isn’t expected to move on interest rates Thursday due to continued fears over the resilience of the euro-zone economy, many economists think inflationary pres¬sures will spur it to raise them later in the year.
The euro climbed against’ the dollar following the release of the inflation figures.
In a sign that the bloc’s 18-month-old recovery remains far from complete, German retail sales posted a surprising drop in December, dashing hopes that falling unemployment, a booming export sector and rising consumer confidence would translate into a robust holiday shopping season in the region’s largest economy.
German sales slid 0.3% from November, suggesting the econ¬omy probably grew only about 2,5%, at an annualized rate, in the fourth quarter, according to economists at Commerzbank, a weaker result than the roughly 4% annualized growth industry-based surveys projected.
Still, ING Group NV economist Martin van Vliet said the rise in inflation meant the central bank will almost certainly adopt a “hawkish” anti-inflation tone at its news conference following the meeting—but it has no rea¬son to raise borrowing costs just yet, because wages haven’t risen in step with prices.
“So long as long-term infla¬tion expectations remain well-behaved and second-round ef¬fects on wages continue to be ab¬sent, there is little reason for the ECB to start normalizing interest

rates shortly,” Mr. van Vliet said-He said the central bank was “unlikely to pull the trigger on interest rates until [the fourth quarter] of this year.
ECB President Jean-Claude Trichet said in an interview with German television in Davos on Friday that “this is no time for complacency” on the economic situation. His comments suggest the ECB’s increasingly strident tone on inflation won’t translate into tighter monetary policy in the near future.
All the same, inflation is a growing threat to the currency bloc as it struggles with a sover¬eign-debt crisis that has caused some to question the survival of the euro.
During the debt crisis and the banking-sector turmoil that pre¬ceded it, the ECB has sought to keep the economy afloat, holding interest rates at a record low of 1% since May 2009.
In recent months, this loose monetary stance has come under strain as Germany—the regional powerhouse—has returned to strong growth thanks to its export
Sector, which has benefited from a weak euro. But other nations such as Ireland, Greece and Spain have lagged far behind.

,

The Wall Street Journal

OPINION FEBRUARY 1, 2011
By Peter J. Wallison

There’s nothing wrong with these loans, but there’s no good policy reason why taxpayers should subsidize them.

One remarkable feature of the current debate in Washington about the future of Fannie Mae and Freddie Mac is the prominence given to one kind of mortgage—the 30-year, fixed-rate loan. The proponents of a continuing role for government in housing finance are going from office to office on Capitol Hill arguing that, without government backing, American homeowners will not have access to this particular loan. Many legislators believe that the 30-year, fixed-rate mortgage is good for homeowners and good for the government to support as a matter of policy.

There are two questions to ask. Is it true that this loan will only be made to homeowners if the government stands behind it? And is government support for this particular kind of loan good policy?

The idea that government backing is required for a 30-year, fixed-rate loan has some surface plausibility. Many people who don’t follow the financial markets might assume that lending money for that long a period at a fixed rate would be too risky for the private sector.

Peter Wallison of the Financial Crisis Inquiry Commission blames federal housing policies. Also, Global View Columnist Bret Stephens and Matthew Kaminski of the editorial board on the protests in Cairo and around the region.
Anyone can prove this assumption is wrong, however, simply by going to Google and typing in “30-year jumbo fixed rate mortgage.” The word “jumbo” is mortgage market jargon for loans that are too large to be bought by Fannie or Freddie, or insured by the Federal Housing Administration. That means a jumbo mortgage is not backed in any way by the government. But a Google search will return dozens of offers. In other words, government backing is not necessary in order to make this loan available to homeowners.

When confronted with this fact, proponents of government mortgage guarantees will argue that these jumbo fixed-rate mortgages—because they don’t have government backing—are more expensive than those available from Fannie and Freddie.

This is true. The 30-year, fixed-rate mortgages offered by Fannie and Freddie are somewhat less expensive (recently about .5%) than those offered by banks and others without government backing. But that is only because the taxpayers are subsidizing this loan. That subsidy is hidden most of the time, except when—as now—Fannie and Freddie become insolvent and the taxpayers’ subsidy becomes all too visible.

So, one might ask: Is this kind of mortgage loan such a good deal for homeowners that it makes policy sense to have the taxpayers take the losses that inevitably seem to flow from government guarantees? The answer is clearly no.

Analyses of the 2008 financial crisis almost uniformly note that housing price declines were particularly destructive because so few homeowners had substantial equity in their homes. This gave rise to many foreclosures and to strategic defaults, where homeowners walked away from homes that were worth less than the mortgage—i.e., when they were “underwater.”

This brings us to the 30-year, fixed-rate mortgage. This loan amortizes principal very slowly. It is popular because it maximizes the benefits of the mortgage interest tax deduction and keeps the homeowner’s monthly payment low. But it also means that homeowners accumulate equity in their homes very slowly. Most of the monthly payments are interest (very little is principal) for many years.

Following the enactment of affordable housing standards for Fannie and Freddie in 1992, mortgage underwriting standards deteriorated in this country. As I argued in my dissent from the recent report of the Financial Crisis Inquiry Commission, it seems to have been a deliberate policy of the Department of Housing and Urban Development to reduce mortgage standards and down payments in order to assure that mortgage credit was available to a wider section of the U.S population. By the late 2000s, more than one-third of all new mortgages had down payments of 3% or less. Here, too, homeowners have very little equity in their houses at the outset. And building equity takes longer in the case of 30-year, fixed-rate mortgages.

We should have no objection, of course, if homeowners want this type of loan. That’s certainly their right. The question is whether the taxpayers should subsidize them.

Mr. Wallison is a senior fellow at the American Enterprise Institute.