Kohtz.org

Ben Bernanke is the head of the Federal Reserve. He, like most of his predecessors (if not all), believes in price stability. No inflation or deflation of prices.

Here is what Ben Bernanke believes in his own words.

"In particular, I will argue for what I believe has become the consensus view, that the mandated goals of price stability and maximum employment are almost entirely complementary. Central bankers, economists, and other knowledgeable observers around the world agree that price stability both contributes importantly to the economy's growth and employment prospects in the longer term and moderates the variability of output and employment in the short to medium term."

The Federal Reserve was created in 1913. Here are the price stability numbers before AND after the Federal Reserve was created.

1800-1913: $100 becomes $58.10. Deflation of -0.48% a year
1914-2008: $100 becomes $2124.41. Inflation of 3.25% a year

Although there was deflation prior to the Federal Reserve, something that the Fed wants you to think is bad (do any history books talk about the horrible deflation of the 1800's?), prices were much more stable. So, if Ben Bernanke truly believes in what he says, he should close up shop and dismantle the Federal Reserve. I don't see it happening.

More on the numbers.

Oddly, the latest and easiest to access free money giveaway by the government lasted about a week. - Cash for clunkers program may be running on empty If you didn't get your government subsidized vehicle, it may be too late. HAHA! Good one.

Since no government program can ever end quietly, lawmakers are trying to find more money for the program. Apparently the $1 billion the government gave to the car company it owns, along with it's competitors, just wasn't enough. So, we go deeper into debt in a time when it looks like debt is going to sink us.

As far as where to find the money, "'I can think of no better use for unspent stimulus dollars that are gathering dust than financing 'Cash for Clunkers,'' said Rep. Fred Upton, R-Mich. Michigan lawmakers planned to meet on Friday to discuss the program." In order to have money actually gather dust, it has to exist. The one thing our government does not have, is money sitting around in piles. We can't print it as fast as the government spends it.

UPDATE: Called Fred Upton's office, told him how ridiculous his statement was. Gathering dust. So much for fiscally responsible republicans.

Rep. Fred Upton
Washington D.C. Office
2183 Rayburn House Office Building
Washington, D.C. 20515
Phone: (202) 225-3761

UPDATE 2: Half way there... House approves $2B more for 'cash for clunkers'

James Bullard, president of the Federal Reserve Bank of St. Louis, wants the Federal Reserve and Ben Bernanke to start thinking about how it will contain inflation now that the economy is showing signs of recovery. Bernanke keeps saying that inflation wont be a problem because once the economy begins to recover, the federal reserve will be able to mop up any excess liquidity with the tools it has at it's disposal. An analogy I like is from Peter Schiff, "liquidity is a lot like liquid, it's a lot easier to spill than to un-spill."

Mr. Bullard wants to know what tools Bernanke plans on using, and how he plans to use them. He's pessimistic such a plan will be forthcoming. "I think I'm an army of one on that,"
Via Bloomberg - Tightening Credit Becomes Bernanke Bind in Bond Purchase Unwind

The problem is that mopping up excess liquidity generally means using the tool of higher interest rates. The more liquidity there is to mop up, the higher the interest rates will have to be. With the goal of keeping the interest rate near zero to help the recovery, this seems like quite the conundrum for Ben. Especially since almost all economists agree that in order to fight inflation, the Fed will have to be preemptive. This means raising interest rates before the recovery is in full swing, but doing so in such a way as to not stop the recovery. Another "tool" the fed has been using is expanding its balance sheet by buying up toxic assets. When it's time to reabsorb the money they spent on those assets, it's going to be very difficult to find buyers for bonds backed by subprime mortgages, auto loans, credit card debt and student loans.

So will the fed have what it takes? From the Bloomberg article..

Don't count on the Fed to get it right, says economist Allan Meltzer of Carnegie Mellon University in Pittsburgh. The central bank has often lacked the resolve to pursue unpopular policies to keep prices in check, says Meltzer, who's the author of two volumes chronicling the Fed from 1913 to 1986.

"The Fed throughout its history has carried out a strategy of taking care of today's problems, not looking to the future," Meltzer says.

As an interesting side note, since the Federal Reserves inception in 1913, the dollar has lost 95% of it's value due to inflation. With the unprecedented spending by Congress and the Federal Reserve, my guess is Ben Bernenke will not have the willpower or ability to stop the inflation that is on the way.

"Municipalities across the USA are turning to more aggressive parking enforcement and higher parking fines to shore up declining revenue."
(Via USA Today - Cities spike parking fines to boost revenue)

People in government always assume that raising the penalty or increasing enforcement (more tickets) will increase their revenue. The whole point of fines and tickets are to deter people from committing these misdemeanors. If a city increases fines and enforcement too much, they might actually find that the deterrent works and their revenues go down. It reminds me of some communities removing red-light cameras to increase traffic ticket revenues.

Aside from the obvious ethical questions of creating laws or endangering people's lives to raise money, cities might find that lowering the ticket prices would actually increase revenue. Make the fine worth it to people to stay an extra hour doing whatever they are doing without plugging the meter.

I was doing a little research on our founding fathers in regards to limited government for a response to a friends suggestion that some of our founding fathers wanted a strong federal government. I respect my friend a lot, and while this is somewhat true (some wanted a stronger federal government more then others), I wanted to argue that their definition of a strong federal government would have been vastly different then ours.

Anyway, in my research I found the following quote which somewhat amazed me. My argument was that Madison feared that the term "general welfare" in the constitution left room for misinterpretation, and that people would use this to increase government, even though that was not the intent.

"If Congress can employ money indefinitely to the general welfare, and are the sole and supreme judges of the general welfare, they may take the care of religion into their own hands; they may appoint teachers in every State, county and parish and pay them out of their public treasury; they may take into their own hands the education of children, establishing in like manner schools throughout the Union; they may assume the provision of the poor; they may undertake the regulation of all roads other than post-roads; in short, every thing, from the highest object of state legislation down to the most minute object of police, would be thrown under the power of Congress.... Were the power of Congress to be established in the latitude contended for, it would subvert the very foundations, and transmute the very nature of the limited Government established by the people of America."

This is what happens when the government owns a company.

"The House approved a measure last week that would force GM and Chrysler to restore about 3,000 dealerships expected to be closed through the bankruptcies. The Senate has not yet considered the plan."

The surprising thing to me is that Obama is trying to stop it.

"Ron Bloom, the leader of the White House's auto task force, told a House Judiciary subcommittee that the plan would set a "dangerous precedent" and raise legal concerns that could force the companies to intervene into a completed bankruptcy."

That's good they can see that I guess. I wonder what checks and balances in the constitution decide who gets to make decisions when it comes to running the business side of things. Oh wait. Government ownership of car companies isn't in the constitution. Never mind.

The Tenth Amendment of the Constitution states, "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people."

A new law in Montana states, "A personal firearm, a firearm accessory, or ammunition that is manufactured commercially or privately in Montana and that remains within the borders of Montana is not subject to federal law or federal regulation, including registration, under the authority of congress to regulate interstate commerce."

Basically, using the actual Constitution, the state of Montana is telling the Federal Government it has no authority to make laws regarding firearms within the state of Montana. The ATF and the U.S. Government disagree.

This will be very interesting to watch. Unfortunately, it's not being covered by the media for some reason, even though similar laws are popping up all over the country. States rejecting the assumed authority of the Federal Government could have far reaching effects on all sorts of laws, including the sale of medical marijuana in California and other states.

I received an email today from Peter Schiff via a mailing list I'm on. He's thinking about running for senate. He was one of the few economists who predicted the housing bubble and financial meltdown, mostly because he follows the Austrian School of Economics. If he runs, he'll go up against Chris Dodd who's on the Banking, Housing and Urban Affairs committee in congress. Needless to say, I'm supporting Schiff even though I don't live in his state, and I think anyone else unhappy with what's happened in the the banking and housing sectors should too.

More proof of inflation. NH man charged 23 quadrillion dollars for smokes. If this doesn't convince people inflation is already here, I don't know what will.

According to the Wall Street Journal, "The Economy Is Even Worse Than You Think." A few reasons that caught my eye...

"The average length of official unemployment increased to 24.5 weeks, the longest since government began tracking this data in 1948. The number of long-term unemployed (i.e., for 27 weeks or more) has now jumped to 4.4 million, an all-time high."

Not only are people losing jobs, those that have can't find new ones. The federal minimum wage increase is not going to help this. We need some serious deflation to make labor a lot cheaper which the government, unions, etc will not let happen. Deflation hurts people with debt the most, which is pretty much everyone including the government. So the government creates stimulus, wages stay high, and people remain unemployed because companies can't afford to pay them. The only other way out of a situation like this is for the government to try and re-inflate the economy. Throughout history, has never worked. Inflation brings it's own host of problems with it that are probably more detrimental then deflation. Instead of low prices and an excess of goods and services, inflation results in high prices and shortages. Whenever someone gets any money, they go out and spend it on whatever they can find. This drives up prices and reduces inventory. Anyone who had any sort of savings will essentially lose it as its purchasing power erodes. If you think social security and medicaid aren't enough, wait till everyone's retirement accounts are worthless too.

"The average worker saw no wage gains in June, with average compensation running flat at $18.53 an hour."

This is proof of the need for deflation. Since wages can't go down (and are actually increasing), companies do what they can by asking people to take unpaid leave and not giving out raises. Companies want to hire people, more people often means more productivity, but the price has to be right or it doesn't make sense. Currently there is no way to get to this price point except through inflation.

"The goods producing sector is losing the most jobs -- 223,000 in the last report alone."

We're never going to get out of the recession without producing goods. Financial wizardry is not exportable with the exception of recessions and loss. What is exportable are goods. If we produce goods, other companies will buy our goods. This brings us wealth.

The one bright note in the article says, "Households overburdened with historic levels of debt will also be saving more. The savings rate has already jumped to almost 7% of after-tax income from 0% in 2007, and it is still going up." This is the right path for the future of our economy - if the Federal Reserve will just get out of the way. The years of borrow and spend have come to its rightful end.

In 1928, an article in the Literary Digest entitled "Hoover's Plan to Keep the Dinner-Pail Full," espoused, "labor is jubilant, because leaders believe that the next President (Hoover) has found . . . a remedy for unemployment which, at least in its philosophy and its groundwork, is identical with that of labor."

What they were referring to was a plan by soon to be President Hoover for government stimulus designed to "prevent depressions." A few supporting governors referred to it as "prosperity insurance," a "prosperity reserve," or as a "pact to outlaw depression." The plan was that Hoover as President should wield a stabilization public works reserve of $3 billion - a massive sum of money for the time.

Today we can see the results. Massive government spending under Hoover, and then Roosevelt, led to the longest depression in history. Prior recessions and depressions that were handled in sound laissez faire fashion - wages and prices were allowed to fall, malinvestment was liquidiated, and government spending was reduced - lasted only a few years before full recovery began.

Recessions are always caused by the same thing. Inflation of the money supply in one form or another. The easier money is to get, the more people bid up prices for whatever the bubble of the day is (railroad stock, silver, war, social programs, dot com companies, housing, etc). Prices and wages rise until people discover that there IS an end to the everlasting prosperity, and the recession sets in. Trying to keep the bubble afloat through government spending or inflationary monetary practices only prolongs the eventual crash that must happen. As we can see throughout history in various recessions and depressions (1819, 1837, 1873, 1893, 1907, and 1921), the best way to handle the situation is to let them be. They work themselves out as painful as it might be for those affected. It's when we try to "outlaw depression" that we get a Great Depression situation. The longer we prevent the economy to right itself, the longer the depression goes on and the more unemployment we have.

George Will writes an interesting article today on the stimulus, government logic, and the possibility of the VAT in our future. What caught my eye about the stimulus (or lack there of) was the following...

But before embarking on Stimulus III, note that only about 10 percent of Stimulus II has yet been injected into the economy. This is not the administration's fault, the administration's defenders say, because government is cumbersome, sluggish and inefficient. But this sunburst of insight comes as the administration toils to enlarge governmental control of health care, energy, finance, education, etc.

via Higher Taxes, Anyone?

Why can't they see this? Why don't they understand that the more government there is, the more problems we have? It's right in front of their face!

I remember learning in grade school and high school that the reason communism and socialism failed is because of centralized control and government planning. They continue to centralize power and plan the economy to the point of taking control of major corporations. Do they just need to sit in on some grade school classes? or are they so arrogant that they think they can fix every problem for every person?

On July 24th, unemployment will once again begin to rise. The reason? The minimum wage rate goes from $6.55 to $7.25 an hour.

This rise in minimum wage couldn't come at a worse time. Companies that employ minimum wage workers are generally retail stores, restaurants, lawn companies, and a host of other small businesses that rely on consumers for their revenue. Because of the recession, these companies are struggling to pay the employees they have. By increasing the cost of employment, many businesses will be forced to let needed employees go, or face going out of business all together.

Low skilled jobs are essential to our economy. They provide a way for people just entering the labor market to gain experience. As an employee learns their job, they become more productive and develop new skills. The more productive they are, the more revenue they generate for their employer. The more skills they develop, the more their labor is worth. In order to retain their services, an employer will pay more or that employee will look for more lucrative work. Many times the employer can't pay them more because the job is menial, so the employee does find new work. This allows the next person to enter the labor market.

Increasing wages now will completely short circuit this process. The government may be able to mandate the minimum wage, but they can't mandate experience or skills. They can't mandate productivity. Companies that need low skilled workers will soon find out if customers are willing to accept higher prices for their services, if they can survive with fewer employees, or if they will need to close their business all together. In this economic environment, don't count on consumers bearing the burden of this wage hike.

Frank proposes home loan plan for jobless

Congressman Barney Frank wants the government lend unemployed home owners money to pay their mortgage. He's having a congressional hearing about it today. I guess the Federal Reserve System and all the bailouts aren't enough, it's time to lend directly to the American people. Those receiving the government money have to put their house up as collateral. Not sure how that would work as the bank obviously owns the house. If the owner can't pay back the government, do tax payers take over the house and starts making payments to the bank? What does the government do with the house once they take it? Who is going to handle the logistics?

What kind of world do we live in when the largest state in the country is complaining about banks not accepting IOU's as currency? I'm talking about California of course, who's $26 billion budget deficit has led to an empty bank account. So, California is seemingly trying to do what the federal government does, print their own money. Not surprisingly, banks don't want to accept the government's fake money and put real money in their customers accounts. The state complains.

"If they hold to that stance, then there's potential for hardship being suffered by the recipients of IOUs," said Tom Dresslar, spokesman in the California Treasurer's office.

Unless recipients are able to hold IOUs until Oct. 2, the official redemption date, "they'll have to scramble" to feed their families and meet obligations, Dresslar said.

Banks draw line over accepting Calif. IOUs

It seems like a chapter straight out of an Ayn Rand book. How can the government try and turn this around on the banks! Accept some responsibility, fix the budget deficit!

Banks that accept the IOU's have to sit on them until October and wait to get paid. By giving their customers actual money, they are lowering their reserves. Lowing their reserves makes them less able to lend money to businesses, and may make it necessary to borrow money from other banks to keep their reserve ratios at the right level. But California IOU's are very much like all the toxic assets we've been hearing about. What bank would want to borrow another bank money if they have a bunch of IOU's as collateral? And the IOU's bear no interest, so if they do have to borrow money to keep their reserves up, the banks are paying for the states problems. Banks are in enough trouble the way it is.

Every day I read more and more about the economy and the misguided principals of our government leaders - democrats and republicans.

I've been holding off on commenting on these things for quite a while as I really haven't had the time due to getting married and selling my house. That's about to change. :)

I plan on using kohtz.org for my personal thoughts on stimulus and the economy, and vokohtz.org for my non-economic thoughts. I'm also going to try and integrate both sites with each other. Vokohtz.org will emphasize family and show links to kohtz.org, and kohtz.org will emphasize my thoughts on the economy and show links to vokohtz.org. You'll understand when it happens.