Posts Tagged ‘monetary policy’

Obama is talking a talk that sounds great on the surface but can ultimately lead to a massive loss of jobs in America rather than creating jobs. Bernanke is helping to speed along this economically devastating Administrative policy with equally rash monetary policy. I understand where Obama is coming from. He wants to create jobs in America. The thinking by the Fed is that by the Fed devaluing the USD (US Dollar), American goods will become more affordable to China and other nations. Sounds great! On paper…

However, it is a clear indication that Obama and Bernanke don’t understand the United States’ position in the world economy. An import economy does create jobs, contrary to what the Obama Administration makes it sound like. Yes, manufacturing jobs have been lost in America. However, importing still creates jobs. A lot of jobs for that matter, and higher paying jobs! The major key to being a strong importing nation is having a strong currency. The stronger the USD, the greater the ability to import products from other countries.

The Federal Reserve, under Bernanke, has weakened the USD significantly over the least several years. The Obama administration is trying to create more manufacturing jobs in America on the backs of the import industry. Yes, import jobs will be lost as the USD continues to decline, but the result isn’t going to be layoffs, it’s going to be import businesses going bankrupt.

Now, this isn’t a too big to fail claim about the import industry. This is a claim that America doesn’t have the ability to produce all the same products that China does. What has taken decades to build in China is not going to happen overnight in America. Additionally, the typical Chinese worker makes a fraction of what an American worker would make for the same product. So, either American’s are going to have to take lower paying jobs or the cost of products are going to skyrocket!

Some argue that China is manipulating the RMB (Renminbi/Yuan) so that it’s export business continues to thrive at the detriment of America. There may be some validity to the claim the claim of currency manipulation, but it isn’t much unlike Bernanke’s QE and QE2, which are just fancy terms for devaluing the dollar. That is what Bernanke has done. He was devalued the USD. You can call it Quantitative Easing all you want, but a rose by any other name…

There is a large trade deficit between America and China, but it’s not across the board. For instance, where are Chinese airliners getting their planes? Where are they getting their MRI equipment? The advanced technology comes from America. A weaker dollar will lead to lower real profits by Boeing, GE, and other leading American businesses. Here’s the reality of a weaker dollar. So what if your widget sells for $500 when that $500 is only the equivalent to $300 from just 10 years ago!

A weak currency policy is a terrible monetary policy for America. An Administrative policy supporting exports is a good one when the focus is on exports that those other countries can’t make. Is the US really going to compete with the Chinese with making knock off MP3 players and cell phones that get thrown away every 2 years? Those will only be high paying jobs because the value of the USD will have declined to much to make America competitive with China that we’ll have gotten to the status of a 3rd world economy.

I’m being dramatic for a reason. The world economy has been centered on a strong America and strong USD for decades. The result of a devalued USD and trade restrictions with countries we’ve been importing from for decades is not what anyone in America is going to want. Enormous amounts of wealth has made its way to other nations like China, Mexico, and others. Those countries are seeing improvements in their quality of life. The US should continue to lead the world economy with a strong USD position and strong import position. The whole idea behind imports and exports is that countries export what they do/make best and import what other countries do/make best. The US still does and makes many products, services, and technology better than any other country.

The Solution: The Obama Administration should focus on leading technology industries (instead of rehashing dying industries in America) and creating greater tax incentives to grow those industries (just like Clinton did with the Internet)! Congress should act as well to impeach Bernanke. It is fully within the power of Congress to do so. Further, the Obama Administration can take action in the Treasury Department by not selling bonds to The Federal Reserve. These actions would send a sound message to the world economy that the United States is standing for a strong USD, strong US consumption, and leading the world economy out of this depression with swift action. These actions would take about 9 months to catapult the US economy and world economy out of this depression. The message to the rest of the world is that America wants to continue to *lead* the global economy rather than play a reactive role in the global economy.

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A couple days ago I posted a blog about a twittersation with my buddy Jim about the Gold Standard. One of the great things about blog debates is that it gives you time to really think about your response and fully absorb the feedback from the other person. Had Jim and I tweetbated (I’m just making up twitterisms here…) about this, we probably would have not realized that we are pretty much on the same page. Well, I don’t know if Jim realizes it, but I realize it…

Jim can correct me if I’m wrong, but he is NOT arguing *for* a gold standard (or any commodity standard for that matter). Rather he is arguing for a standard other the debt security. The argument for a debt backed currency is pretty simple. If you can borrow more money, you should have a stronger currency (because people have more faith in your ability to pay that money back), right? Not quite, and this is where Jim and I agree.

It can be argued that economic cycles have been smoothed out by the current system we have in place. However, one can also just as easily argue that a higher level of public education and access to information at a faster pace are the real causes of smoother economic cycles. I digress.

What could be a better system? Certainly a commodity system is antiquated and a debt system has its fair share of issues. With the technology that is available today, a hybrid system is certainly feasible. A large database could be created to compile the commodity quantities for the most relevant commodities (gold should be on the list amongst many other raw goods). The value of those materials is set on a mostly free market, making the valuation of this portion of the economy pretty simple. The import/export ration would certainly play a role in determining the value of an exchange rate and the over all value of a currency. Then you have your money circulation. How much money your national and local banks are circulating must play a pivotal role in determining the over all value of a currency along with the exchange rate with another nation. This would cover the debt model we have now and then some.

With the technology available today, this type of system would make it much easier to spot potential banking and other economic issues that may surface in the future across multiple countries. I’ll even argue that this database should be a semi-open system, allowing virtually anyone to have access to the data to build models against it. This open system would provide considerable leaps forward in the development of economic and business systems, particularly for third world countries. It could also provide governments with the ability to spot opportunities in their economies and with their trading partners so that they can provide incentives in budding industries.

I’m just brainstorming at this point, and these ideas are very raw inside my head… But now they are down on paper, err, cyber paper?

This blog is for my buddy Jim.

When I switched my major from business to economics, I had no idea the change it would bring to my life. Perhaps I was naive. I thought economists were a bit more progressive. I thought that economists were legitimate “thinking outside the box” folks. So, when I received a B on a paper about how a sustained rise in energy prices would lead to unchecked inflation because this idea was “completely ridiculous”, I was a bit disheartened. I wrote this paper circa 2003, long before the effects of rising energy prices were felt a couple years ago. But I digress.

Getting back to the gold standard… This caveman style of money fits right up there with having king rule. It is practically the same principle. He with the most gold rules. The gold standard comes from the innate human desire for shiny objects. A piece of shiny yellow metal that has relatively little utility compared with other natural resources, should not dictate the value of a country’s currency.

Now, back in the day (when the world was obsessed with shiny yellow metals), a gold standard would make sense. During those times, it was important. Today, gold has limited economic use. The high price of gold today is merely because of speculation about the USD and belief that the antiquated gold standard has merit.

The reality is that a country with little gold but an abundant supply of other natural resources and production and consumption of goods and services or advancements in science is far more valuable than a country that has tons of gold and little to no production.

Back in the day, kings didn’t have vast computer systems and economic tracking abilities. So, they did things the easy way. I’ve got gold. I’ve procured more gold. I am a better king. Today, we could smart bomb the king and take all his gold. The gold wouldn’t make our currency more valuable, but the smart bomb would.

Economic, political, social, medical, banking, and other infrastructure systems should (and arguably MUST) evolve with technology. Currency values can and should be defined by the value of a country’s output and consumption. Awaiting Jim’s Austrian theory of economics response 😀

I majored in economics because I thought it was a fascinating subject. Years ago (circa 2003) I was taking an economics class at Strayer University and handed in a paper explaining that our economy was seriously threatened by energy-based inflation. Up until this point in my education, I had received an A on every test and every paper, but this paper on energy-based inflation would the first B grade I received on any economic paper. The professor even mentioned that he was going to give me a C but that I had worded my argument so well that I deserved a B.

His argument was that energy prices generally remain stable and that companies will compensate for any prolonged increase in energy prices. Failing to see the long-term trend towards higher energy consumption was my professor’s largest mistake in the analysis of my paper. He also failed to understand the world demand on supplies of energy. So, alas, I get to say I told you so! 😀

I’ve written a brief explanation of energy-based inflation on Words Cause. The idea is pretty simple. Energy is required at every stage of a product or service, which means that a sustained and rapid increase in the price of energy would severely damage the US economy. Over the last several years, my theory has essentially proven itself to be
correct. Energy prices continue to rise, causing inflationary pressures that the Federal Reserve is powerless to affect.

The Federal Reserve can’t do anything about energy-based inflation. Contracting the money supply will only choke the economy (which is what we’ve seen over the last 2 years since Bernanke has been Fed Chairman). Increasing the money supply will quickly be absorbed by a rapid increase in the price of energy (resulting in ripple inflation). Watch what happens with the recent decrease in interest rates.

So what would be the solution? I’ll outline my solution later this week on Words Cause.

Bernanke’s rookie year was a bit rough for the nation. His second year hasn’t had much success either. However, it appears that he is coming out of the textbook world of economics and into the real world. Yes, the world where living, breathing humans with names actually lose their jobs and houses rather than his previous world where there is a % increase in unemployment.

My favorite quote from Bernanke was the following:

To be useful, a fiscal stimulus package should be implemented quickly and structured so that its effects on aggregate spending are felt as much as possible within the next 12 months or so.

Clearly, this is in stark contrast to his molasses monetary policy, which consists of waiting. And waiting. And waiting some more. Essentially paralyzed by inflationary fears.

What is interesting about Bernanke’s leadership in the FED is that it puts much more control of the economy into the hands of the Federal government as opposed to our central bank. This is a scary notion. Political winds change, shift, dwindle in a relatively short period. The result is much more sporadic economic conditions and less economic stability. If not offset by consistent Federal Reserve Policy, the US Economy will be severely upset by fiscal policy.

Bernanke has recently indicated that the FED is looking to take aggressive action, indicating to many that a half point cut in interest rates should be expected at the end of this month. Provided that the FED does indeed shift from the monetary drip policy to at least a trickle as indicated, the US economy might be able to shed off some of the damage we can anticipate from the recent change in China’s labor law.