Zero inflation holding the economy together

Free trade will give it a strong boost by Lawrence (Larry) Kudlow at Kudlow and Company

Visit Larry at the Kudlow and Company Website

Meet Larry Kudlow

Don’t expect any miracles from the economy. But don’t expect a collapse either.

In political terms, it’s kind of a Mexican standoff. Team Obama says they saved us from another Great Depression. And they point out that 3.1 million jobs have been created in the last 12 months.

Republicans counter that this is the slowest post-WWII recovery on record and that real GDP is roughly $2 trillion below potential. They add that the labor-force participation rate is 62.7 percent, a 39-year low, and that there are at least 15 million people who work but can’t get jobs.

Yet both sides may actually come together for a major pro-growth initiative: an Asia-Pacific free-trade deal that will lower tariffs and other barriers. Lower tariffs are lower taxes.

Democratic labor unions don’t like this. Neither do isolationist Republicans. They both think American wages and jobs will be damaged. But as House Ways and Means chair Paul Ryan argues, free trade is a positive sum -- both sides benefit -- not a zero sum.

Export-related jobs typically create higher wages. And one-in-five American jobs depend on trade. Moreover, the spread of market capitalism and free trade in China, India, Vietnam, South America, and parts of Africa has lowered dollar-a-day abject poverty by 80 percent over the past three decades. (Pope Francis, take note.) And with hundreds of millions of people entering the global middle class, America’s low-cost producers are seeing their markets expand.

Of course, a strong corporate tax cut, on a territorial basis, with easy repatriation of overseas profits, would give U.S. businesses large and small even lower costs and greater competitiveness. But the corporate tax cut is not going to happen -- at least until after the 2016 election.

So we’re left with a trade deal that may well happen. President Obama is working with Republicans to persuade Democrats to come on board with trade. Obama deserves credit.

Meanwhile, back to the economy, real-GDP (RGDP) growth was barely above water at 0.2 percent in the first quarter. Bad winter weather undoubtedly played a roll. But consider this: A year ago we had a decline in economic growth of 2 percent -- again, largely due to the weather -- but the next two quarters rebounded by nearly 5 percent.

So if you look at four-quarter trends for perspective, RGDP actually rose 3 percent over the past year. And business investment increased nearly 5 percent, despite a big cutback in energy-company capex.

In addition, exports over the past year increased 3 percent and imports 5.5 percent. People keep telling me the strong dollar is killing our exports. But they forget two things: King Dollar has led to across-the-board price drops, boosting consumer and business real incomes. And if exports keep slowing, blame the lack of production out of Europe, China, Japan, and elsewhere.

And you can’t overlook the very core of the American economy: private consumption plus private investment (C + I). It’s been rising at roughly 3.3 percent year over year for the past several quarters. Not bad. And profits and stock markets hover near record highs.

Then there’s the most underrated factor in today’s economy: zero inflation. This is totally pro-growth. It’s a tax cut.

The Fed’s monetary machinations haven’t worked. The M2 money supply has hovered around 6 percent for years, with nominal GDP (NGDP) around 4 percent. The monetarist experiment went nowhere. And that’s a good thing, as excess bank reserves never circulated through the economy and the velocity (turnover) of money continues to fall. But the strong greenback is holding prices down, including energy. Gold prices have been stable for years.

So NGDP at 4 percent with zero inflation leaves room for 4 percent real growth. It’s a good spot for the economy. But if the Fed had its way and raised inflation to 2 percent, RGDP might be crowed out to 2 percent or less. Why do we want that?

Paul Volcker used to argue that low inflation increases real growth. He was right. But Ben Bernanke and Janet Yellen argue that higher inflation increases real growth. They are wrong.

American economic growth has fallen way behind its long-term performance trend. Instead of 2 percent growth we need 4 or 5 percent.

This leads me to a final thought: It was Arthur Laffer and Robert Mundell who created the ultimate pro-growth mix of monetary and fiscal policy. Keep the dollar sound for price stability and reduce marginal tax rates to rejuvenate supply-side incentives.

That mix worked in the JFK 1960s and in the Reagan-Clinton 1980s and 1990s. Add in a strong dose of free trade and deregulation, and the Laffer-Mundell hypothesis will return us to our long-term economic path and renew American leadership worldwide.

Question is, will the GOP take that growth model and run with it?

______________________________________________

Become a Truth Serum Partner Now

Ruling the Fed

Republicans attacking Janet Yellen should be careful what they wish for by Larry Kudlow at Kudlow and Company

Find Out More About Kudlow and Company

Fed chair Janet Yellen testified this week on the state of the economy. The only interesting thing to come of it was some sharp-edged criticism by Republican members of the House Financial Services Committee.

That includes committee chair Jeb Hensarling, who said, “Fed reforms are needed . . . Fed reforms are coming.”

Meet Mr. Lawrence (Larry) Kudlow

Senator Rand Paul, for one, is pushing a bill to audit the Fed, by which he means auditing the Fed’s policies and discussions. But Yellen and other Fed big shots fiercely oppose any rules that might be imposed on the central bank by Congress.

Now, down through the years, the Fed has always resisted rules in the name of independence from political pressure. But there’s an interesting backstory here.

In the early 1970s, President Nixon allegedly (it’s never been proven) ordered then-Fed chair Arthur Burns to goose the money supply to spur the economy and help the Nixon reelection effort.

This story becomes even creepier, since Nixon and his entourage destroyed the dollar and launched double-digit inflation by breaking the gold-dollar link established in 1944 at Bretton Woods.

So the Fed has a point about politics.

Later in the 1970s, however, a Democratic Congress voted for the Humphrey-Hawkins bill, which mandated the Fed to keep both unemployment and inflation down. That became law. And of course, for most of the ’70s and early ’80s, the dollar sank lower while unemployment and inflation ratcheted higher.

That prompted Republicans to jawbone the Fed to establish money-supply targets, which followed the dictum of Nobelist Milton Friedman (who wanted to replace the Fed with a computer).

For a while, Fed head Paul Volcker published money-supply targets. But Ronald Reagan told Volcker to do whatever was needed to conquer inflation while he and Congress reduced marginal tax rates and reignited economic growth. The Fed had no new rules. But for 20 years, the economy worked beautifully.

Then the rule story shifts to the financial meltdown of 2008, when the Fed went wild. It pushed the target rate to zero and flooded the banking system with over $4 trillion in new reserves. That really didn’t work. Most of the Fed’s money creation went unused; it was turned around by banks and placed on deposit at the Fed.

Former Dallas Fed president Bob McTeer points out that the money supply never ballooned out of control and the Fed didn’t pump up anything, because the velocity (or turnover) of money collapsed.

Economist John Ryding calculates that over the past six years, while the Fed’s balance sheet grew near 17 percent a year, the M2 money supply increased only 6 percent annually, in line with the long-term trend, while money velocity fell 2 percent yearly and nominal GDP grew by roughly 4 percent. There was no Big Bang, and also no inflation.

Today, Janet Yellen may rightly or wrongly be associated with liberal Democrats, but a key point is that she talks dovish and acts hawkish. She shut down so-called QE reserve creation, a surprise to many.

And lately, the U.S. dollar has gone up while oil and commodity prices have gone down. As a result, an improving economy is trying to reach 3 percent growth.

So Republicans attacking Yellen and calling for higher interest rates should be careful what they wish for. A strong dollar and low energy costs have put the economy in a good place.

Now, if President Obama would agree with the GOP to slash the corporate tax, the economy might grow at 4 or 5 percent with a stronger dollar and even lower commodity prices. Wouldn’t that be ironic? Too bad Obama won’t agree to a serious corporate tax cut.

As for rules and the Fed, there are a bunch of proposals out there: There’s the inflation-fighting Taylor rule, which seemed to work in the 1980s and ’90s. There’s a gold-commodity-King Dollar price rule (which I favor) that also worked in the ’80s and ’90s.

There’s the new-monetarist nominal-GDP-growth rule, although the trouble here is that velocity keeps falling and money GDP has gone nowhere. Alan Greenspan (!) is actually telling people that gold is the only true currency. And Professor Taylor himself is suggesting that the Fed could create its own rule, any rule, but would have to answer to Congress if it ever went off it.

At the end of the day, the economic incentives from lower tax rates and regulatory burdens are the right levers to promote faster growth. And central banks should focus on sound currencies and price stability.

Looking at a renewed King Dollar and low U.S. inflation, the Fed seems to have done its job.

So either:

1) it’s a miracle or
2) the Fed actually knows what it’s doing

You choose.

_____________________________

Become a Truth Serum Partner Now

Economy grows in spite of Obama

Obama grows in spite of Obama from the political art studios of A.F. (Branco) and featured at Comically Incorrect.com

Get Your Daily Dose of Humor from A.F. (Tony) Branco

Check out some of the websites listed below that publish the A.F. (Tony) Branco Political Cartoon features.

• Editorial cartoonist
• Net Right Daily
• Legal Insurrection
• Liberty Alliance
• ConservativeDailyNews.com

______________________________________________

Become a Truth Serum Partner Now

 

Worrying about China

Worrying About China from Warning Signs by Alan Caruba at Facts-not-Fantasy

If there is one thing various experts and pundits like to do most it is to worry about all manner of speculative threats.

I can recall when much of their focus was on the Soviet Union until 1991 when it collapsed along with the decline in the cost of oil. The fall of the Berlin Wall in 1989 signaled that it was no longer the feared power it had been.

Despite its invasion of Ukraine to annex the Crimea, the Russian Republic is in the same position its predecessor was because, once again, the price of a barrel of oil is falling.

Turns out that the fracking technology that many environmentalists fear has also produced large increases in both oil and natural gas here in the U.S., that have created an oil glut that is driving its price down.

Largely unnoticed, however, have been the growing ties between Russia and China. They haven’t been this friendly for a very long time. Even so, Communist China does not give any indication that it regards the U.S. as an “enemy” in the way Vladimir Putin does the European Union and NATO.

Facts-not-Fantasy

China has recently emerged as a larger economic power than the U.S., earning $17.8 trillion in terms of goods and services, compared to the U.S. $17.4 trillion. Not a great difference, but surely a symbolic one. China is a curiosity in that it has an authoritative Communist government and a burgeoning capitalist economy.

In 2013, China took steps to expand property rights (something that does not exist in Communist nations), expand fair and transparent market regulation, and prices set by the market.

When you have to govern more than 1.3 billion people, you have to find a way to lift as many as possible out of poverty. China’s problem is that many of them are elderly thanks to its one-child policy. In 2013, China took tentative steps to loosen its one-child policy and it’s a good guess they will get rid of it entirely at some point in the near future.

Examples of its economic power often make page one of The Wall Street Journal such as a December 9 article reporting that “In the past two years, Chinese investors have bought stakes in New York’s most valuable office power, one of its largest development projects and the country’s most expensive hotel ever sold.”

Should we worry about this? No, a few decades ago, such stories were about Japan’s purchases of American properties and that nation has been in an economic stagnation for quite a while.

Back in 2008, Robert Samuelson, a Washington Post columnist, was worrying that “The real threat from China lies elsewhere. It is that China will destabilize the world economy. It will distort trade, foster huge financial imbalances, and tripper a contentious competition for scare raw materials.” That’s a pretty good description of what is being said about the United States today!

A new study by the Rand Corporation, “Blinders, Blunders, and Wars: What America and China Can Learn”, devotes a chapter to U.S.-China relations saying “Whether and how the United States and China can settle their differences without war is among the most important questions of the twenty-first century.”

That has got to be one of the most presumptuous questions asked by the respected think tank. It borders on foolishness because there is no good reason why either nation would engage in a war on one another.

There is no question that China, the largest nation in Asia, has been flexing its muscles, building up its military capabilities, and seeking to expand its authority over the China Sea and adjacent areas. Any nation of its size would be expected to do the same thing.

Even Russia is keeping its neighbors on edge with its Ukraine incursion, knowing perhaps that neither NATO nor the European Union would go to war over its complete takeover. The threat is there, but that does not mean it will occur.

The good news from Rand is their observation that war between the U.S. and China “could be catastrophic” and therefore “both powers are strongly inhibited from starting one.” You do not need to be a think tank expert to figure that out, but the Rand study also says “The danger of Sino-U.S. war by misjudgment is related to but different from that of Sino-U.S. war by accident.”

The study’s reason for this is that “China sees America’s East Asian alliances as throwback to Cold War thinking and, more alarmingly, as indicative of America’s new intent to align the region against China.”

That’s think tank talk for China’s paranoia based on centuries of control and exploitation by outside forces such as the former British Empire, subjugation by the former Empire of Japan, and its fear of America’s longtime naval presence in the Pacific.

China most certainly has nothing to fear regarding war with the current U.S. administration that doesn’t want to even admit that it has reengaged in the war occurring in Iraq. In a similar way, the U.S. has no reason to disturb its financial dependence on a China that owns much of its debt.

Think tanks like Rand will not cease to worry about all the options and events that affect the China-U.S. relationship, but for the near future, there are other factors such as the threat the Islamic jihad represents. The only constant in international affairs is change.

______________________________________________

Become a Truth Serum Partner Now