Qe Then And Now

THERE ARE two reasons for the Federal Reserve’s decisions to print lots of money. The good reason is that the real-estate crash still hasn’t cleared. That is, too many mortgaged homeowners are still under water and the real-estate estate market is all locked up with a huge overhang of foreclosures. When too many debtors are under water and can’t make their payments then the economy is going to stagnate.

People like to make this complicated, but it isn’t. Capitalism works on credit. Credit means faith, faith that the other guy can meet his obligations in the market. When you are afraid that the other guy is going to welsh on you, then you stop trading in the market.

The bad reason for the Fed’s QE2 policy is that President Obama needs a good economy when he goes to the voters in 2012. When bad politicians need to goose the economy in time for the next election they traditionally opt for the quick fix of easy money.

We’ve seen all this before, of course. President Nixon successfully used easy money to goose the economy prior to the 1972 election. In 1971 the president was concerned that the economy was not coming out of the 1969-70 recession fast enough. So he closed the gold window, imposed wage and price controls, and gunned the money supply. Here is what happened

Year	CPI %	M2	M2 new $ billion	M2 change %	GDP $ billion	GDP change %
1968	4.2	385.17	566.8	6.52	3765.4	3.09
1969	5.37	401.29	587.9	3.72	3771.9	0.17
1970	5.92		626.4	6.55	3898.6	3.36
1971	4.47		710.1	13.36	4105.0	5.29
1972	3.21		802.1	12.96	4341.5	5.76
1973	6.22		855.3	6.63	4319.6	-0.50
1974	11.04		901.9	5.45	4311.2	-0.19
1975	9.13		1016	12.65	4540.9	5.33
1976	5.76		1151.7	13.36	4750.5	4.62
1977	6.5		1269.9	10.26	5015.0	5.57
1978	7.59		1365.6	7.54	5173.4	3.16
1979	11.35		1473.3	7.89	5161.7	-0.23

As you can see, President Nixon’s policy got the economy through the election with gangbusters growth of over five percent real GDP in 1971 and 1972, but inflation soared once the president started to relax the wage and price controls, and by 1974 the US was back in recession again. Then we had another inflationary boom in the Carter years and another big recession in 1980-82. It took a Federal Reserve Board chairman with cojones and an amiable dunce of a B-movie actor in the White House to stop the rot.

The problem for President Obama is that the economy will probably not react to economic abuse as meekly as in 1971-72. The reason is that back then the US government had numerous instruments of financial repression that are not available today. Americans couldn’t own gold back then. They couldn’t easily switch out of dollars. There were Depression era financial regulations still in place that made it easy for the government and hard on the consumer and the investor. Plus, of course, back in 1971 the US dollar was the unquestioned global reserve currency.

Today the average investor can own gold, can own foreign currency and equities, and can switch in and out of them at the drop of a hat. That just means that when the end comes for Obamanomics, it will come quickly. The trouble for Obama and the Democrats is that the end might come before the election.

When the end comes Democrats are going to find out that it is Democrats who are going to have to pay the price for the follies of big government. It’s about time. Big government is bad for the economy and bad for the welfare of individual Americans. But up to now, Democrats have avoided paying for the messes of big government, because whenever the economy has turned sour they have demanded “equal sacrifice.” Equal sacrifice is a weasel word; it means that the guys that caused the problem should not have to pay for it.

One of the reasons that “equal sacrifice” won’t work this time is that Republicans all of a sudden have their own Saul Alinsky. When Gov. Chris Christie (R-NJ) publicizes school superintendent Lee Seitz by name for trying to re-up his contract before New Jersey’s superintendent pay cap takes effect, you realize that he is following in the steps of the master. Remember?

“RULE 12: Pick the target, freeze it, personalize it, and polarize it.” Cut off the support network and isolate the target from sympathy. Go after people and not institutions; people hurt faster than institutions.

Greedy bankers, please give a hand to your new partners-in-crime: greedy educrats.

Looking forward to 2013, we will either see a new president cutting spending after two years of stagflation or we will see President Obama facing a nasty recession and a committee of wise men telling him that the only way out is to cut spending.

So the only question for 2013 will be how much we are going to cut public sector pensions, how long we are going to freeze public sector wages, and how deep we are going to cut the vast universe of wasteful government programs. You can go to usgovernmentspending.com to check on all that. The big programs are pensions, health care, and education. Each of them amounts to about $1 trillion a year. That’s where the money goes. Everything else is chump change—including interest payments, at least for now.

The real biggie, down the road, is cuts to Medicare. What will grandma say when they come to cut her Medicare?

Christopher Chantrill blogs at www.roadtothemiddleclass.com. His Road to the Middle Class is forthcoming.

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Faith & Purpose

“When we began first to preach these things, the people appeared as awakened from the sleep of ages—they seemed to see for the first time that they were responsible beings...”
Finke, Stark, The Churching of America, 1776-1990

Mutual Aid

In 1911... at least nine million of the 12 million covered by national insurance were already members of voluntary sick pay schemes. A similar proportion were also eligible for medical care.
Green, Reinventing Civil Society

Education

“We have met with families in which for weeks together, not an article of sustenance but potatoes had been used; yet for every child the hard-earned sum was provided to send them to school.”
E. G. West, Education and the State

Living Under Law

Law being too tenuous to rely upon in [Ulster and the Scottish borderlands], people developed patterns of settling differences by personal fighting and family feuds.
Thomas Sowell, Conquests and Cultures

German Philosophy

The primary thing to keep in mind about German and Russian thought since 1800 is that it takes for granted that the Cartesian, Lockean or Humean scientific and philosophical conception of man and nature... has been shown by indisputable evidence to be inadequate.
F.S.C. Northrop, The Meeting of East and West

Knowledge

Inquiry does not start unless there is a problem... It is the problem and its characteristics revealed by analysis which guides one first to the relevant facts and then, once the relevant facts are known, to the relevant hypotheses.
F.S.C. Northrop, The Logic of the Sciences and the Humanities

Chappies

“But I saw a man yesterday who knows a fellow who had it from a chappie that said that Urquhart had been dipping himself a bit recklessly off the deep end.” —Freddy Arbuthnot
Dorothy L. Sayers, Strong Poison

Democratic Capitalism

I mean three systems in one: a predominantly market economy; a polity respectful of the rights of the individual to life, liberty, and the pursuit of happiness; and a system of cultural institutions moved by ideals of liberty and justice for all. In short, three dynamic and converging systems functioning as one: a democratic polity, an economy based on markets and incentives, and a moral-cultural system which is plural and, in the largest sense, liberal.
Michael Novak, The Spirit of Democratic Capitalism

Action

The incentive that impels a man to act is always some uneasiness... But to make a man act [he must have] the expectation that purposeful behavior has the power to remove or at least to alleviate the felt uneasiness.
Ludwig von Mises, Human Action

Churches

[In the] higher Christian churches� they saunter through the liturgy like Mohawks along a string of scaffolding who have long since forgotten their danger. If God were to blast such a service to bits, the congregation would be, I believe, genuinely shocked. But in the low churches you expect it every minute.
Annie Dillard, Holy the Firm

Conversion

“When we received Christ,” Phil added, “all of a sudden we now had a rule book to go by, and when we had problems the preacher was right there to give us the answers.”
James M. Ault, Jr., Spirit and Flesh

Living Law

The recognition and integration of extralegal property rights [in the Homestead Act] was a key element in the United States becoming the most important market economy and producer of capital in the world.
Hernando de Soto, The Mystery of Capital

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