The Federal Reserve, Roaring Twenties, Stock Market Crash, Banking Crises, Great Depression and John Maynard Keynes

Posted by PITHOCRATES - September 25th, 2012

History 101

The Federal Reserve increased the Money Supply to Lower Interest Rates during the Roaring Twenties

Benjamin Franklin said, “Industry, perseverance, & frugality, make fortune yield.”  He said that because he believed that.  And he proved the validity of his maxim with a personal example.  His life.  He worked hard.  He never gave up.  And he was what some would say cheap.  He saved his money and spent it sparingly.  Because of these personally held beliefs Franklin was a successful businessman.  So successful that he became wealthy enough to retire and start a second life.  Renowned scientist.  Who gave us things like the Franklin stove and the lightning rod.  Then he entered his third life.  Statesman.  And America’s greatest diplomat.  He was the only Founder who signed the Declaration of Independence, Treaty of Amity and Commerce with France (bringing the French in on the American side during the Revolutionary War), Treaty of Paris (ending the Revolutionary War very favorably to the U.S.) and the U.S. Constitution.  Making the United States not only a possibility but a reality.  Three extraordinary lives lived by one extraordinary man.

Franklin was such a great success because of industry, perseverance and frugality.  A philosophy the Founding Fathers all shared.  A philosophy that had guided the United States for about 150 years until the Great Depression.  When FDR changed America.  By building on the work of Woodrow Wilson.  Men who expanded the role of the federal government.  Prior to this change America was well on its way to becoming the world’s number one economy.   By following Franklin-like policies.  Such as the virtue of thrift.  Favoring long-term savings over short-term consumption.  Free trade.  Balanced budgets.  Laissez-faire capitalism.  And the gold standard.  Which provided sound money.  And an international system of trade.  Until the Federal Reserve came along.

The Federal Reserve (the Fed) is America’s central bank.  In response to some financial crises Congress passed the Federal Reserve Act (1913) to make financial crises a thing of the past.  The Fed would end bank panics, bank runs and bank failures.  By being the lender of last resort.  While also tweaking monetary policy to maintain full employment and stable prices.  By increasing and decreasing the money supply.  Which, in turn, lowers and raises interest rates.  But most of the time the Fed increased the money supply to lower interest rates to encourage people and businesses to borrow money.  To buy things.  And to expand businesses and hire people.  Maintaining that full employment.  Which they did during the Roaring Twenties.  For awhile.

The Roaring Twenties would have gone on if Herbert Hoover had continued the Harding/Mellon/Coolidge Policies

The Great Depression started with the Stock Market Crash of 1929.  And to this date people still argue over the causes of the Great Depression.  Some blame capitalism.  These people are, of course, wrong.  Others blamed the expansionary policies of the Fed.  They are partially correct.  For artificially low interest rates during the Twenties would eventually have to be corrected with a recession.  But the recession did not have to turn into a depression.  The Great Depression and the banking crises are all the fault of the government.  Bad monetary and fiscal policies followed by bad governmental actions threw an economy in recession into depression.

A lot of people talk about stock market speculation in the Twenties running up stock prices.  Normally something that happens with cheap credit as people borrow and invest in speculative ventures.  Like the dot-com companies in the Nineties.  Where people poured money into these companies that never produced a product or a dime of revenue.  And when that investment capital ran out these companies went belly up causing the severe recession in the early 2000s.  That’s speculation on a grand scale.  This is not what happened during the Twenties.  When the world was changing.  And electrifying.  The United States was modernizing.  Electric utilities, electric motors, electric appliances, telephones, airplanes, radio, movies, etc.  So, yes, there were inflationary monetary policies in place.  But their effects were mitigated by this real economic activity.  And something else.

President Warren Harding nominated Andrew Mellon to be his treasury secretary.  Probably the second smartest person to ever hold that post.  The first being our first.  Alexander Hamilton.  Harding and Mellon were laissez-faire capitalists.  They cut tax rates and regulations.  Their administration was a government-hands-off administration.  And the economy responded with some of the greatest economic growth ever.  This is why they called the 1920s the Roaring Twenties.  Yes, there were inflationary monetary policies.  But the economic growth was so great that when you subtracted the inflationary damage from it there was still great economic growth.  The Roaring Twenties could have gone on indefinitely if Herbert Hoover had continued the Harding and Mellon policies (continued by Calvin Coolidge after Harding’s death).  There was even a rural electrification program under FDR’s New Deal.  But Herbert Hoover was a progressive.  Having far more in common with the Democrat Woodrow Wilson than Harding or Coolidge.  Even though Harding, Coolidge and Hoover were all Republicans.

Activist Intervention into Market Forces turned a Recession into the Great Depression

One of the things that happened in the Twenties was a huge jump in farming mechanization.  The tractor allowed fewer people to farm more land.  Producing a boom in agriculture.  Good for the people.  Because it brought the price of food down.  But bad for the farmers.  Especially those heavily in debt from mechanizing their farms.  And it was the farmers that Hoover wanted to help.  With an especially bad policy of introducing parity between farm goods and industrial goods.  And introduced policies to raise the cost of farm goods.  Which didn’t help.  Many farmers were unable to service their loans with the fall in prices.  When farmers began to default en masse banks in farming communities failed.  And the contagion spread to the city banks.  Setting the stage for a nation-wide banking crisis.  And the Great Depression.

One of the leading economists of the time was John Maynard Keynes.  He even came to the White House during the Great Depression to advise FDR.  Keynes rejected the Franklin/Harding/Mellon/Coolidge policies.  And the policies favored by the Austrian school of economics (the only people, by the way, who actually predicted the Great Depression).  Which were similar to the Franklin/Harding/Mellon/Coolidge policies.  The Austrians also said to let prices and wages fall.  To undo all of that inflationary damage.  Which would help cause a return to full employment.  Keynes disagreed.  For he didn’t believe in the virtue of thrift.  He wanted to abandon the gold standard completely and replace it with fiat money.  That they could expand more freely.  And he believed in demand-side solutions.  Meaning to end the Great Depression you needed higher wages not lower wages so workers had more money to spend.  And to have higher wages you needed higher prices.  So the employers could pay their workers these higher wages.  And he also encouraged continued deficit spending.  No matter the long-term costs.

Well, the Keynesians got their way.  And it was they who gave us the Great Depression.  For they influenced government policy.  The stock market crashed in part due to the Smoot Hawley Tariff then in committee.  But investors saw the tariffs coming and knew what that would mean.  An end to the economic boom.  So they sold their stocks before it became law.  Causing the Stock Market Crash of 1929.  Then those tariffs hit (an increase of some 50%).  Then they doubled income tax rates.  And Hoover even demanded that business leaders NOT cut wages.  All of this activist intervention into market forces just sucked the wind out of the economy.  Turning a recession into the Great Depression.

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LESSONS LEARNED #62: “The government’s great dilemma is that the middle class has both the money and the votes.” -Old Pithy

Posted by PITHOCRATES - April 21st, 2011

We’re Moving on Up

Those on the Left see the world through zero-sum eyes.  Especially taxes.  For example, let’s look at the taxes of a group of 100 people.  These one hundred can be broken down into three groups.  Poor (20), middle class (79) and rich (1).  With the following annual salaries.  Poor ($15,000), middle class ($50,000) and rich ($1,000,000).  Based on the 2008 tax tables (with a top marginal tax rate of 35%), they each pay $4,600, $17,000 and $454,000, respectfully.  The total each group pays, then, is $91,000 (poor), $1,342,000 (middle class) and $454,000 (rich).  Which is 4.8%, 71% and 24%, respectfully, of the total tax paid.  The largest group of people pays the largest percentage of the total tax burden.  The middle class.  (All numbers are approximate.)

Now, let’s do a little zero-sum analysis.  And figure out how to make the rich pay a larger share of the taxes.  Hmmm.  How about we raise the tax rate on the rich?  If we raise the top marginal tax rate to 45%, the taxes the one rich person pays goes from 24% to 28%.  And the taxes the middle class pay goes from 71% to 68%.  So, to reduce the tax burden on the middle class, we simply have to raise the top marginal tax rates.  Simple, right?  Wrong.  Because what happens in reality is the opposite of what most would think.  As you raise the tax rate on the rich, the total tax burden shifts from the rich to the poor and middle class.  Why?  Because of one fundamental flaw in their analysis.  Which is this.

http://www.youtube.com/watch?v=p9y4iXAso4I

Life is not zero-sum.  People don’t always stay in the same economic class.  They work hard.  Earn money through the years.  Some even save enough money to open a business.  And some of these do become rich.  And when they do, they pay a lot more taxes than they did when they were poor or middle class.  And this is the very thing that high marginal tax rates discourage.  Upward economic movement.  As the poor move into the middle class.  And the middle class move into the rich class.  This is why low, not high, tax rates shifts the tax burden from the poor and middle class to the rich.  Because low tax rates make more rich people to tax.

The Roaring Twenties were Kicked off by Tax Cuts

Andrew Mellon was a rich banker.  Who understood business.  Warren G. Harding tapped him to be his Secretary of the Treasury.  World War I was over.  And there was a huge war debt to pay off.  Taxes were high.  And the progressives wanted to raise them higher.  But Mellon was a conservative.  And he knew that you just didn’t stimulate economic activity with high taxes.  And that’s what paid the bills.  Economic activity.  People gainfully employed and paying taxes.  So he cut taxes.  They cut the top marginal tax rate from 77% to 25% (a cut of 68%).  Which gave us the Roaring Twenties.  Electricity, appliances, radio, you name it, the modern age had come.  Everyone was working.  And buying stuff.  Times were good.

Sure, you’re saying, but at what cost?  The economy took off into the stratosphere but the rich got a free ride.  With their tax rate cut of 200%, the poor and middle class must have been stuck with the tax bill.  Right?  Wrong.  With the lower tax rates, the rich found it cheaper and easier to pay taxes than to shelter it.  Also, the lower rates encouraged innovation (i.e., the modern age).  Lots of people got rich.  There was a lot of upward movement through the economic classes.  So there were more rich people paying taxes.  In 1920, the very rich paid approximately 30% of all federal income taxes.  That number jumped up to 62% by 1929.  That’s an increase of 108%. 

If the name of the game is funding government, you got to like what happened in the Twenties.  Because the government got fat on tax receipts.  And the richest of the rich were paying about twice the amount of taxes they were at the beginning of the decade.  That is a huge transfer of the tax burden from the poor/middle class to the rich.  And the federal debt?  It fell from about $26 billion to $17 billion.  That’s a decrease of about 35%.  Lower tax rates, tax burden transferred to the rich and a lower debt.  Wow.  Mellon was right.  Cutting tax rates on the rich works.  And it works very well.

The Eighties Economic Boom was Kicked off by Tax Cuts

Ronald Reagan was another conservative who understood business.  He defeated Jimmy Carter who was trying to win a second term.  But the malaise and stagflation of the Jimmy Carter years made him a one-term president.  To lift the nation out of recession, Reagan did like Andrew Mellon.  And cut taxes.  The top marginal rate dropped from 70% to 28% (a 60% cut).  And economic activity exploded.  Especially in Silicon Valley.  And the world went high-tech.  Electronics and computers entered our lives.  A new modern age had come.  Everyone was working.  And buying stuff.  Times were good.  Again.

At the beginning of the Reagan years the top 1% paid about 19% of all income taxes.  At the end of his second term they were paying about 27.5%.  That’s an increase of 44%.  Once again, tax cutsfor the rich transferred the tax burden from the poor/middle class to the rich.  As in the Twenties, the rich found it easier to pay their taxes rather than trying to shelter it.  Also, the lower rates encouraged a lot of entrepreneurial innovation.  We used the first cell phones and personal computers in the Eighties.  A lot of this innovation started small in someone’s garage.  And ended in an IPO on Wall Street as they took their companies public.  Lots of people got rich.  Creating a surge of upward movement through the economic classes.  Making many more rich people to tax. 

The Reagan years were an economic juggernaut.  A lot of people got rich.  But at what cost?  The debt exploded under Reagan.  So those on the Left jumped on this.  They say his tax cuts mortgaged our future.  Impoverished our children.  By not paying our bills along the way.  To that I say, “Nice try.”  That debt had nothing to do with the Reagan tax cuts.  It was a spending problem.  Federal tax receipts in 1980 were $517 billion.  After Reagan’s tax rate cuts, they jumped to $909 billion in 1988.  That’s an increase of about 76%.  Lower tax rates, tax burden transferred to the rich and a 75% increase in federal tax receipts?  Wow.  Reagan was right.  Cutting tax rates on the rich works.  And it works very well.

Conservative Policies Favor the Poor and Middle Class

So there are two great economic booms created by tax cuts.  Both periods lifted the country to a new modern age.  People’s standard of living improved across all economic classes.  And a lot people moved up through the economic classes.  Which is key to the success of tax cuts.  And the reason why those on the Left ignore this and focus instead on zero-sum policies.  Why?

Because the Left knows their economic policies don’t work.  But that’s okay with them.  For their policies aren’t about the economy.  Or your well being.  They are about political power.  There are more poor and middle class people than rich.  No matter how far you slash the top marginal tax rate.  So that’s where the votes are.  And a good way to get those votes is with class warfare.  The rich have an unfair advantage.  And with your vote, they will right that wrong.  Sounds good.  Especially if you’re not rich.  Or don’t know the history of high marginal tax rates.  Of how they transfer the tax burden from the rich to the poor and middle class.

Of course, there’s a problem with this strategy.  It transfers more and more of the tax burden to the people you need votes from.  And the more you choke off economic activity by taxing the rich, the more you starve the treasury of tax dollars from the rich.  Which means you have to come up with more and more clever ways to bleed the middle class.  And they don’t have a problem with this either.  What they have a problem with is that the middle class may figure this out one day.  And vote conservative.  Whose policies actually favor the poor/middle class.

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LESSONS LEARNED #44: “Liberal Democrats have to lie because there are more taxpayers than tax consumers.” -Old Pithy

Posted by PITHOCRATES - December 16th, 2010

Lying to Make Future Liberal Democrat Voters

Ask anyone some questions about the Great Depression and they’ll probably get them wrong.  Why?  Because their history teachers revised history to make government look better.  Government wore the white hats.  And business wore the black hats.  Because their teachers were public school teachers.  And the teacher unions are one of the strongest unions in the country.  The government takes care of them.  And, in return, the public school teachers takes care of government.  By turning out as many future liberal Democrat voters as they can.

So what did our teachers teach us about the Great Depression?  Evil rich people caused it.  By speculating in the stock market.  And it was their speculation that caused the Great Crash which caused the Great Depression.  Rich business people bad.

Then Franklin Delano Roosevelt (FDR) rode into Washington and saved the day.  FDR expanded federal power and went to work to fix things.  He punished the rich (raised taxes).  Created a huge federal bureaucracy to manage the economy.  And spent money like there was no tomorrow.  Public works programs.  Even gave us Social Security.  He made everything better.  Big hearted government people good.

That’s the history in our history books.  The only problem is that it’s wrong.

Tax Cuts and the Roaring Twenties

This is the story told because it favors those who favor expanding government.  Big Government wants to tell us what’s best for us.  And our public schools want to shield our children from their parents.  Because they (and Big Government) are smarter than parents.  So they revise history.  And lie to our kids.

Really?  Come on, they’re not really lying to our kids.  I mean, what reason could they possibly have to lie to our kids?  Just look at the demographics.  The far Left, those in government who like to spend money and tell us how to live our lives, are about 20% of the population.  The other 80% have real jobs and pay taxes.  And this is a problem.  How do you convince 80% of the people (who pay taxes) to pay more taxes so the government can spend it against their wishes?  All the while having the government telling these taxpayers how they should live their lives?  Easy.  You lie.  And you lie to their kids.

There was an economic boom before the Great Depression.  The economy was roaring so strong that they called it the Roaring Twenties.  And it had nothing to do with speculation.  We were building automobiles.  Electrifying the country.  Selling electrical appliances.  And building radios.  This was no speculative bubble.  It was real and strong economic growth.  And guess what kicked it off?  Tax cuts.

Higher Tax Rates Shelter Wealth instead of Creating Jobs

They don’t talk about this in the history books.  Because no public school teacher or government bureaucrat likes tax cuts.  Because economic growth created by tax cuts sends a very simple yet powerful message.  We don’t need Big Government.

Following World War I, government was a bureaucratic behemoth.  With a huge federal debt.  Fighting world wars can do that.  The Progressives, who gave us Prohibition and other nanny-state-like things, liked that big bureaucracy.  They liked activist government.  But even they knew that a high debt was not good.  And being the zero-sum economists they were, they knew only one way to reduce that debt.  Higher taxes.  And their candidate for the 1920 election, James M. Cox, promised to do just that.  And he lost the election.  Proving that Progressives don’t understand economics.  Or the American people.  Those Americans who have jobs, at least.

Warren G. Harding won that election.  And his secretary of the treasury, Andrew Mellon, understood economics.  To find a better secretary of the treasury you have to go all the way back to our first one.  Alexander Hamilton.  Mellon understood business.  And understood rich people.  High tax rates did not bring in more tax money.  Why?  Because rich people know how to shelter their wealth.  But give them a lower tax rate where they can make and keep what they earn, they’ll invest that money and create jobs.  They’ll pay more in taxes (even at a lower tax rate) because they’re not sheltering their wealth.  Their employees will pay more in taxes because they’ll have jobs.  And this is what happened during the Roaring Twenties.  People were working.  Making durable goods (cars, electrical appliances, radios, etc.).  Times were good.  Very good indeed.

Government Activism Gives us the Great Depression

The United States became an economic juggernaut during the 1920s.  The Americans were eclipsing the Europeans.  We were not a superpower yet.  But the Europeans saw the writing on the wall.  They wanted to form their own union of European states to compete against the economic powerhouse that was the United States.  We were kicking ass and taking names.  And no one could hold a candle to us.  We were unstoppable.

Then Herbert Hoover became president.  He was a progressive republican.  He liked activist government.  Hoover was a Big Government Keynesian and wanted to use the powers of government to end the business cycle.  He believed high wages meant high prosperity.  And in parity between farm and nonfarm prices.  He was everything FDR would become.  In fact, the Hoover administration started a lot of the FDR New Deal programs.

Farmers had mechanized their farms.  They plowed more fields than ever.  And grew more than ever.  With bumper crops prices fell.  Normally not a problem.  You just sold more.  But the war was over.  European farmers were farming again.  Not only did they not need our crops, they slapped tariffs on our exports to protect their farm prices.  So farmers couldn’t sell enough to make a profit at the lower prices.  Farmers went bankrupt.  Farm loans went unpaid.  Farm banks failed.  The Federal Reserve failed to provide liquidity to help other farm banks in trouble.  More failed.  This rippled into the nonfarm banks.  Which contracted the money supply.  Business started to hoard their cash because of the tight credit market.  They cut back on production.  Laid people off.  Then the Smoot-Hawley Tariff went to committee in Congress.  Business responded, knowing that that higher tariffs on imported goods they used would increase their cost of production.   They hoarded more cash.  Cut back on production.  Congress passed the Smoot-Hawley Tariff.  Other nations respond by imposing their own tariffs.  This resulted in a trade war.  Business sales fell.  Production fell.  More banks failed.  Hello Great Depression.

Tax Cuts Stimulate Economic Activity

This is the part they don’t teach you in history class.  It was government involvement that killed one of the strongest bull markets in history.  And would prolong the Great Depression.  The growth of government and the anti-business climate created great uncertainty.  And that didn’t go away until World War II.  When James Byrnes (head of the Office of War Mobilization) allowed business to make fat profits if they could deliver the vast quantity of war material needed to defeat Hitler, Mussolini and Tojo.  And they did.  The Arsenal of Democracy won World War II.  Private business doing what they do best.  Business.

But liberals like to spend money.  Our money.  And tell us what’s best for us.  To do that, though, they need us to vote for them.  And telling us that they want to take more of our money while telling us what’s best for us won’t make us vote for them.  It didn’t help Cox to tell the truth in 1920.  And no other presidential candidate since.  Because the 20% of the population that agrees with them isn’t enough to win an election.  You need some of the 80% who have jobs and pay taxes.

History has shown tax cuts stimulate economic activity.  They did when Warren Harding cut taxes.  When JFK cut taxes.  And when Ronald Reagan cut taxes.  This truth doesn’t make a good argument for raising taxes, though.  So our public schools and Big Government revise that part of history.  And lie to our kids.  Until they bleat “Business bad.  Government good.”  Like good future liberal Democrat voters.

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LESSONS LEARNED #34: “Sure, until you win the lotto you’re all for sticking it to the rich.” -Old Pithy

Posted by PITHOCRATES - October 7th, 2010

Buddy Can You Spare a Dime

In the old days, we used to jail people who didn’t pay their debts.  Even in the United States.  A couple of signers of the Declaration of Independence even served time in a debtors’ prison.  We took it seriously.  Honoring your debts.  For those who didn’t, they found themselves inside a jail until they did.  Or until they died.

We jailed some people over small sums.  The severity of the punishment (broken families, disease, starvation, privation, physical abuse, etc.) was often extreme in comparison to the size of the debt owed.  In time we would move away from such barbaric justice.  No, in the modern, caring world, we don’t torment those who are down on their luck and find themselves penniless.  You see, the modern world is a caring world.  We abhor the sufferings of our fellow man.  So we show them kindness.  Charity.  We forgive them their debts and help them rebuild their lives.  Well, most of us do.

If you find yourself owing the IRS, you better pay up.  For they will send you to prison.  And take whatever you have.  They will destroy your life.  And your family.  Because they want to make something perfectly clear.  You don’t f*ck with the IRS.  They play to keep.  All the time.

The War on Alcohol

The 18th Amendment prohibited “the manufacture, sale, or transportation of intoxicating liquors within, the importation thereof into, or the exportation thereof from the United States and all territory subject to the jurisdiction thereof for beverage purposes.”  The government may have shut down supply, but the market remained.  Enter criminal gangs.  Who furnished the supply to meet the demand.

None did it better than Al Capone.  His gang ruled Chicago.  People admired him.  After all, he wasn’t hurting anyone.  He was just giving the people what they wanted.  A way to relax and blow off steam.  Like we do today when we enjoy an alcoholic beverage with our friends.  But the gang violence grew.  The pictures following the Saint Valentine’s Day Massacre were just too gruesome.  Soon thereafter the FBI branded Scarface as public enemy #1.

Bootlegging, prostitution, murder, extortion…Capone broke a lot of laws.  But he crossed the line.  He committed a crime that was so heinous that it would land him ultimately in Alcatraz, America’s most secured federal prison.  That crime?  Income tax evasion.

On the Road Again

Willie Nelson is a big time Democrat.  He’s into saving the environment.  Animal rights.  Legalizing marijuana.  Helping the farmers.  And he’s a regular peacenik.  So you’d think he’d be a big fan of Big Government.  Well, yes and no. 

He became very wealthy by the 1980s.  And like a good Democrat, he tried to shield some of that wealth from the IRS.  He parked some of it in some talk shelters.  Then came along Ronald Reagan.  He understood what Andrew Mellon understood (Secretary of the Treasury for Warren G. Harding).  High tax rates made rich people hide their money.  Lower tax rates encouraged rich people to invest their money.  When Mellon cut the tax rates wealthy people paid more taxes and less wealthy people paid fewer taxes.  The progressive tax system worked even better at lower tax rates.  Tax revenue increased as the wealthy invested their money instead of finding creative ways to hide it.  It worked for Reagan, too.  He even closed tax shelters as a further incentive for the wealthy to invest their money to grow the economy and create jobs.  That worked, too.  Savvy wealthy people everywhere were putting Americans back to work.  Only one small problem.  The not so savvy wealthy were caught unawares.

Willie Nelson didn’t move his money from his tax shelters.  When Reagan disallowed those shelters, his money sat there accruing federal taxes.  And interest and penalties.  He blamed and sued his accountants.  The accountants countered that they only did the accounting and taxes.  They were not investment advisors.  Anyway, the IRS seized his assets.  He went on the road again and often to pay off his tax bill.  His total bill came to about 16 million in back taxes, interest and penalties.  Which he paid.  As he no doubt would have from the get-go if he had sought appropriate counsel to help him negotiate the 1,000+ page U.S. tax code.

Easy Money – For the IRS

There are many stories like Willie Nelson’s.  Even Treasury Secretary Timothy Geithner, the smartest man in America, couldn’t figure out his own taxes.  (But we were to excuse him for this because no one else was as qualified as he was to write and administer the U.S. tax code).  But it’s not only the not-so-savvy celebrity rich and the intellectually challenged intellectuals who have trouble with the U.S. tax code.  The poorest of the poor who never had money can sometimes run afoul of the IRS.

Playing the lotto.  Millions do.  Most lose.  And they’re lucky that they do.  Many lotto winners have their lives take a turn for the worse.  Friends and relatives you don’t know are reacquainting themselves with you.  Well, not you so much as your new found wealth.  Con men target you.  Charities.  Neighbors.  Some spend the money fast.  Or recklessly.  Develop drug addictions.  Get robbed.  Even murdered.  There are a lot of stories out there.  Just search the Internet.

When you win the lotto, you can take a lump-sum payment.  Or you can take a series of payments.  Either way the IRS taxes this as income.  And the amount of these payouts will most probably push you in the highest income tax bracket during the period of these payouts.  So the IRS likes lotto winners.  Your odds of winning are slim to none but someone always wins.  And that’s a tax bonanza for the IRS.  Not-so-savvy people who become rich overnight.  The full force and power of the U.S. government falling on some poor schmuck who probably never had a tax liability in his or her life.  Money just doesn’t get any easier. 

Capital Gain or Income?

Some may sell the rights to their future payments.  It’s sort of like selling a rental property.  For example, take a house that rents for $1,000 per month and sells for $150,000.   The buyer gets those future rent payments.  The seller gets the money back that they paid for the house and, hopefully, a capital gain (i.e., they sell the house for more than they paid for it).  The seller pays a capital gains tax on their capital gain.  They do not pay any further income tax on the rental income that the buyer now collects.

Some lotto winners see selling their rights to future payments in the same light.  And that they should only pay a one-time capitals gain tax (at a lower capital gains tax rate) in lieu of the higher income tax rate.  The IRS begs to differ.  And they usually get their way.

Sadly, some buyers advised those selling their rights that they could pay the lower capital gains tax rate.  Which they did.  And faced heavy tax bills for back taxes, interest and penalties as a consequence.  Once again, easy money for the IRS.  You can search the Internet for stories like these, too.

Pay or Else

Whether a gangster, a celebrity, a Democrat brainiac or a low-income lotto winner, we all share something in common.  Whatever our politics, when it comes to our money, we all try to avoid paying our ‘fair share’ of taxes.  We may demand that other rich people pay their taxes, but we will do everything we can to avoid paying our taxes.  But we play a dangerous game when we do.  For those who do and lose, they learn a painful lesson.

You don’t f*ck with the IRS.

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Let the Lying Begin

Posted by PITHOCRATES - September 8th, 2010

Labor Day has passed.  And you know what that means?  That’s right.  The kids are back in school.  But it’s not all good.  It also marks the beginning of the election season.  And the lying has already begun.  Well, it’s been going on since, well, the late 18th century.

The economy sucks.  There are no jobs.  But that’s no surprise, is it?  A Keynesian in the White House.  Keynesians in charge of both houses of Congress.   And if there is anything a Keynesian knows how to do is to kill an economy.

Andrew Mellon advised Warren Harding to cut taxes.  He did.  And we got the Roaring Twenties.  FDR gave us a decade long depression with his economic policies.  LBJ’s Great Society gave us, ultimately, the stagflation of the 1970s.  Ronald Reagan’s tax cuts gave us the ‘Decade(s) of Greed’.  The Left condemned the first decade.  But they praised the second decade.  Lucky Clinton.  Well, until that blue dress.

Keynes got it right.  Sort of.  You stimulate the economy with fiscal policy.  But not by tax and spending.  You stimulate by making the business environment more favorable for business.  This creates jobs.  Lowers unemployment.  And brings in great big piles of money to the government.

But what you will hear this election season is that we’re not going back to the failed economic policies of the past.  We’re not returning to ‘trickle-down’ economics.  And they’ll say that with righteous indignation.  Even though the economy was a helluva lot better with those ‘failed’ policies.  You know why?  Those policies work.  Their policies don’t.  But their policies give them more power.  Policies that work don’t.  And they know that.  So they lie.  To better themselves at our expense.

You’d think they’d be happy just to get the great big piles of money with a bustling economy.  But they’re not.  They want the power.  To satiate their great big egos.  And to establish themselves as a permanent upper class.

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LESSONS LEARNED #27: “Yes, it’s the economy, but the economy is not JUST monetary policy, stupid.” -Old Pithy

Posted by PITHOCRATES - August 19th, 2010

WHAT GAVE BIRTH to the Federal Reserve System and our current monetary policy?  The Panic of 1907.  Without going into the details, there was a liquidity crisis.  The Knickerbocker Trust tried to corner the market in copper.  But someone else dumped copper on the market which dropped the price.  The trust failed.  Because of the money involved, a lot of banks, too, failed.  Depositors, scared, created bank runs.  As banks failed, the money supply contracted.  Businesses failed.  The stock market crashed (losing 50% of its value).  And all of this happened during an economic recession.

So, in 1913, Congress passed the Federal Reserve Act, creating the Federal Reserve System (the Fed).  This was, basically, a central bank.  It was to be a bank to the banks.  A lender of last resort.  It would inject liquidity into the economy during a liquidity crisis.  Thus ending forever panics like that in 1907.  And making the business cycle (the boom – bust economic cycles) a thing of the past.

The Fed has three basic monetary tools.  How they use these either increases or decreases the money supply.  And increases or decreases interest rates.

They can change reserve requirements for banks.  The more reserves banks must hold the less they can lend.  The less they need to hold the more they can lend.  When they lend more, they increase the money supply.  When they lend less, they decrease the money supply.  The more they lend the easier it is to get a loan.  This decreases interest rates (i.e., lowers the ‘price’ of money).  The less they lend the harder it is to get a loan.  This increases interest rates (i.e., raises the ‘price’ of money). 

The Fed ‘manages’ the money supply and the interest rates in two other ways.  They buy and sell U.S. Treasury securities.  And they adjust the discount rate they charge member banks to borrow from them.  Each of these actions either increases or decreases the money supply and/or raises or lowers interest rates.  The idea is to make money easier to borrow when the economy is slow.  This is supposed to make it easier for businesses to expand production and hire people.  If the economy is overheating and there is a risk of inflation, they take the opposite action.  They make it more difficult to borrow money.  Which increases the cost of doing business.  Which slows the economy.  Lays people off.  Which avoids inflation.

The problem with this is the invisible hand that Adam Smith talked about.  In a laissez-faire economy, no one person or one group controls anything.  Instead, millions upon millions of people interact with each other.  They make millions upon millions of decisions.  These are informed decisions in a free market.  At the heart of each decision is a buyer and a seller.  And they mutually agree in this decision making process.  The buyer pays at least as much as the seller wants.  The seller sells for at least as little as the buyer wants.  If they didn’t, they would not conclude their sales transaction.  When we multiply this basic transaction by the millions upon millions of people in the market place, we arrive at that invisible hand.  Everyone looking out for their own self-interest guides the economy as a whole.  The bad decisions of a few have no affect on the economy as a whole.

Now replace the invisible hand with government and what do you get?  A managed economy.  And that’s what the Fed does.  It manages the economy.  It takes the power of those millions upon millions of decisions and places them into the hands of a very few.  And, there, a few bad decisions can have a devastating impact upon the economy.

TO PAY FOR World War I, Woodrow Wilson and his Progressives heavily taxed the American people.  The war left America with a huge debt.  And in a recession.  During the 1920 election, the Democrats ran on a platform of continued high taxation to pay down the debt.  Andrew Mellon, though, had done a study of the rich in relation to those high taxes.  He found the higher the tax, the more the rich invested outside the country.  Instead of building factories and employing people, they took their money to places less punishing to capital.

Warren G. Harding won the 1920 election.  And he appointed Andrew Mellon his Treasury secretary.  Never since Alexander Hamilton had a Treasury secretary understood capitalism as well.  The Harding administration cut tax rates and the amount of tax money paid by the ‘rich’ more than doubled.  Economic activity flourished.  Businesses expanded and added jobs.  The nation modernized with the latest technologies (electric power and appliances, radio, cars, aviation, etc.).  One of the best economies ever.  Until the Fed got involved.

The Fed looked at this economic activity and saw speculation.  So they contracted the money supply.  This made it hard for business to expand to meet the growing demand.  When money is less readily available, you begin to stockpile what you have.  You add to that pile by selling liquid securities to build a bigger cash cushion to get you through tight monetary times.

Of course, the economy is NOT just monetary policy.  Those businesses were looking at other things the government was doing.  The Smoot-Hartley tariff was in committee.  Across the board tariff increases and import restrictions create uncertainty.  Business does not like uncertainty.  So they increase their liquidity.  To prepare for the worse.  Then the stock market crashed.  Then it got worse. 

It is at this time that the liquidity crisis became critical.  Depositors lost faith.  Bank runs followed.  But there just was not enough money available.  Banks began to fail.  Time for the Fed to step in and take action.  Per the Federal Reserve Act of 1913.  But they did nothing.  For a long while.  Then they took action.  And made matters worse.  They raised interest rates.  In response to England going off the gold standard (to prop up the dollar).  Exactly the wrong thing to do in a deflationary spiral.  This took a bad recession to the Great Depression.  The 1930s would become a lost decade.

When FDR took office, he tried to fix things with some Keynesian spending.  But nothing worked.  High taxes along with high government spending sucked life out of the private sector.  This unprecedented growth in government filled business with uncertainty.  They had no idea what was coming next.  So they hunkered down.  And prepared to weather more bad times.  It took a world war to end the Great Depression.  And only because the government abandoned much of its controls and let business do what they do best.  Pure, unfettered capitalism.  American industry came to life.  It built the war material to first win World War II.  Then it rebuilt the war torn countries after the war.

DURING THE 1980s, in Japan, government was partnering with business.  It was mercantilism at its best.  Japan Inc.  The economy boomed.  And blew great big bubbles.  The Keynesians in America held up the Japanese model as the new direction for America.  An American presidential candidate said we must partner government with business, too.  For only a fool could not see the success of the Japanese example.  Japan was growing rich.  And buying up American landmarks (including Rockefeller Center in New York).  National Lampoon magazine welcomed us to the 90s with a picture of a Japanese CEO at his desk.  He was the CEO of the United States of America, a wholly owned subsidiary of the Honda Motor Company.  The Japanese were taking over the world.  And we were stupid not to follow their lead.

But there was no invisible hand in Japan.  It was the hand of Japan Inc.  It was Japan Inc. that pursued economic policies that it thought best.  Not the millions upon millions of ordinary Japanese citizens.  Well, Japan Inc. thought wrong. 

There was collusion between Japanese businesses.  And collusion between Japanese businesses and government.  And corruption.  This greatly inflated the Japanese stock market.  And those great big bubbles finally burst.  The powerful Japan Inc. of the 1980s that caused fear and trembling was gone.  Replaced by a Japan in a deflationary spiral in the 1990s.  Or, as the Japanese call it, their lost decade.  This once great Asian Tiger was now an older tiger with a bit of a limp.   And the economy limped along for a decade or two.  It was still number 3 in the world, but it wasn’t what it used to be.  You don’t see magazine covers talking about it owning other nations any more.  (In 2010, China took over that #3 spot.  But China is a managed economy.   Will it suffer Japan’s fate?  Time will tell.)

The Japanese monetary authorities tried to fix the economy.  Interest rates were zero for about a decade.  In other words, if you wanted to borrow, it was easy.  And free.  But it didn’t help.  That huge economic expansion wasn’t real.  Business and government, in collusion, inflated and propped it up.  It gave them inflated capacity.  And prices.  And you don’t solve that problem by making it easier for businesses to borrow money to expand capacity and create jobs.  That’s the last thing they need.  What they need to do is to get out of the business of managing business.  Create a business-friendly climate.  Based on free-market principles.  Not mercantilism.  And let that invisible hand work its wonders.

MONETARY POLICY CAN do a lot of things.  Most of them bad.  Because it concentrates far too much power in too few hands.  The consequences of the mistakes of those making policy can be devastating.  And too tempting to those who want to use those powers for political reasons.  As we can see by Keynesian ‘stimulus’ spending that ends up as pork barrel spending.  The empirical data for that spending has shown that it stimulates only those who are in good standing with the powers that be.  Never the economy.

Sound money is important.  The money supply needs to keep pace with economic expansion.  If it doesn’t, a tight money supply will slow or halt economic activity.  But we have to use monetary policy for that purpose only.  We cannot use it to offset bad fiscal policy that is anti-business.  For if the government creates an anti-business environment, no amount of cheap money will encourage risk takers to take risks in a highly risky and uncertain environment.  Decades were lost trying.

No, you don’t stimulate with monetary policy.  You stimulate with fiscal policy.  There is empirical evidence that this works.  The Mellon tax cuts of the Harding administration created nearly a decade of strong economic growth.  The tax cuts of JFK were on pace to create similar growth until his assassination.  LBJ’s policies were in the opposite direction, thus ending the economic recovery of the JFK administration.  Ronald Reagan’s tax cuts produced economic growth through two decades. 

THE EVIDENCE IS there.  If you look at it.  Of course, a good Keynesian won’t.  Because it’s about political power for them.  Always has been.  Always will be.  And we should never forget this.

www.PITHOCRATES.com

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LESSONS LEARNED #3 “Inflation is just another name for irresponsible government.” -Old Pithy

Posted by PITHOCRATES - March 4th, 2010

PEOPLE LIKE TO hate banks.  And bankers.  Because they get rich with other people’s money.  And they don’t do anything.  People give them money.  They then loan it and charge interest.  What a scam.

Banking is a little more complex than that.  And it’s not a scam.  Countries without good banking systems are often impoverished, Third World nations.  If you have a brilliant entrepreneurial idea, a lot of good that will do if you can’t get any money to bring it to market.  That’s what banks do.  They collect small deposits from a lot of depositors and make big loans to people like brilliant entrepreneurs.

Fractional reserve banking multiplies this lending ability.  Because only a fraction of a bank’s total depositors will ask for their deposits back at any one time, only a fraction of all deposits are kept at the bank.  Banks loan the rest.  Money comes in.  They keep a running total of how much you deposited.  They then loan out your money and charge interest to the borrower.  And pay you interest on what they borrowed from you so they could make those loans to others.  Banks, then, can loan out more money than they actually have in their vaults.  This ‘creates’ money.  The more they lend the more money they create.  This increases the money supply.  The less they lend the less money they create.  If they don’t lend any money they don’t add to the money supply.  When banks fail they contract the money supply.

Bankers are capital middlemen.  They funnel money from those who have it to those who need it.  And they do it efficiently.  We take car loans and mortgages for granted.  For we have such confidence in our banking system.  But banking is a delicate job.  The economy depends on it.  If they don’t lend enough money, businesses and entrepreneurs may not be able to borrow money when they need it.  If they lend too much, they may not be able to meet the demands of their depositors.  And if they do something wrong or act in any way that makes their depositors nervous, the depositors may run to the bank and withdraw their money.  We call this a ‘run on the bank’ when it happens.  It’s not pretty.  It’s usually associated with panic.  And when depositors withdraw more money than is in the bank, the bank fails.

DURING GOOD ECONOMIC times, businesses expand.  Often they have to borrow money to pay for the costs of meeting growing demand.  They borrow and expand.  They hire more people.  People make more money.  They deposit some of this additional money in the bank.  This creates more money to lend.  Businesses borrow more.  And so it goes.  This saving and lending increases the money supply.  We call it inflation.  A little inflation is good.  It means the economy is growing.  When it grows too fast and creates too much money, though, prices go up. 

Sustained inflation can also create a ‘bubble’ in the economy.  This is due to higher profits than normal because of artificially high prices due to inflation.  Higher selling prices are not the result of the normal laws of supply and demand.  Inflation increases prices.  Higher prices increase a company’s profit.  They grow.  Add more jobs.  Hire more people.  Who make more money.  Who buy more stuff and save more money.  Banks loan more, further increasing the money supply.  Everyone is making more money and buying more stuff.  They are ‘bidding up’ the prices (house prices or dot-com stock prices, for example) with an inflated currency.  This can lead to overvalued markets (i.e., a bubble).  Alan Greenspan called it ‘irrational exuberance’ when testifying to Congress in the 1990s.  Now, a bubble can be pretty, but it takes very little to pop and destroy it.

Hyperinflation is inflation at its worse.  Bankers don’t create it by lending too much.  People don’t create it by bidding up prices.  Governments create it by printing money.  Literally.  Sometimes following a devastating, catastrophic event like war (like Weimar Germany after World War II).  But sometimes it doesn’t need a devastating, catastrophic event.  Just unrestrained government spending.  Like in Argentina throughout much of the 20th century.

During bad economic times, businesses often have more goods and services than people are purchasing.  Their sales will fall.  They may cut their prices to try and boost their sales.  They’ll stop expanding.  Because they don’t need as much supply for the current demand, they will cut back on their output.  Lay people off.  Some may have financial problems.  Their current revenue may not cover their costs.  Some may default on their loans.  This makes bankers nervous.  They become more hesitant in lending money.  A business in trouble, then, may find they cannot borrow money.  This may force some into bankruptcy.  They may default on more loans.  As these defaults add up, it threatens a bank’s ability to repay their depositors.  They further reduce their lending.  And so it goes.  These loan defaults and lack of lending decreases the money supply.  We call it deflation.  We call deflationary periods recessions.  It means the economy isn’t growing.  The money supply decreases.  Prices go down.

We call this the business cycle.  People like the inflation part.  They have jobs.  They’re not too keen on the deflation part.  Many don’t have jobs.  But too much inflation is not good.  Prices go up making everything more expensive.  We then lose purchasing power.  So a recession can be a good thing.  It stops high inflation.  It corrects it.  That’s why we often call a small recession a correction.  Inflation and deflation are normal parts of the business cycle.  But some thought they could fix the business cycle.  Get rid of the deflation part.  So they created the Federal Reserve System (the Fed) in 1913.

The Fed is a central bank.  It loans money to Federal Reserve regional banks who in turn lend it to banks you and I go to.  They control the money supply.  They raise and lower the rate they charge banks to borrow from them.  During inflationary times, they raise their rate to decrease lending which decreases the money supply.  This is to keep good inflation from becoming bad inflation.  During deflationary times, they lower their rate to increase lending which increases the money supply.  This keeps a correction from turning into a recession.  Or so goes the theory.

The first big test of the Fed came during the 1920s.  And it failed. 

THE TWO WORLD wars were good for the American economy.  With Europe consumed by war, their agricultural and industrial output decline.  But they still needed stuff.  And with the wars fought overseas, we fulfilled that need.  For our workers and farmers weren’t in uniform. 

The Industrial Revolution mechanized the farm.  Our farmers grew more than they ever did before.  They did well.  After the war, though, the Europeans returned to the farm.  The American farmer was still growing more than ever (due to the mechanization of the farm).  There were just a whole lot less people to sell their crops to.  Crop prices fell. 

The 1920s was a time America changed.  The Wilson administration had raised taxes due to the ‘demands of war’.  This resulted in a recession following the war.  The Harding administration cut taxes based on the recommendation of Andrew Mellon, his Secretary of the Treasury.  The economy recovered.  There was a housing boom.  Electric utilities were bringing electrical power to these houses.  Which had electrical appliances (refrigerators, washing machines, vacuum cleaners, irons, toasters, etc.) and the new radio.  People began talking on the new telephone.  Millions were driving the new automobile.  People were traveling in the new airplane.  Hollywood launched the motion picture industry and Walt Disney created Mickey Mouse.  The economy had some of the most solid growth it had ever had.  People had good jobs and were buying things.  There was ‘good’ inflation. 

This ‘good’ inflation increased prices everywhere.  Including in agriculture.  The farmers’ costs went up, then, as their incomes fell.  This stressed the farming regions.  Farmers struggled.  Some failed.  Some banks failed with them.  The money supply in these areas decreased.

Near the end of the 1920s, business tried to expand to meet rising demand.  They had trouble borrowing money, though.  The economy was booming but the money supply wasn’t growing with it.  This is where the Fed failed.  They were supposed to expand the money supply to keep pace with economic growth.  But they didn’t.  In fact, the Fed contracted the money supply during this period.  They thought investors were borrowing money to invest in the stock market.  (They were wrong).  So they raised the cost of borrowing money.  To ‘stop’ the speculators.  So the Fed took the nation from a period of ‘good’ inflation into recession.  Then came the Smoot-Hawley Tariff.

Congress passed the Smoot-Hawley Tariff in 1930.  But they were discussing it in committee in 1929.  Businesses knew about it in 1929.  And like any good business, they were looking at how it would impact them.  The bill took high tariffs higher.  That meant expensive imported things would become more expensive.  The idea is to protect your domestic industry by raising the prices of less expensive imports.  Normally, business likes surgical tariffs that raise the cost of their competitor’s imports.  But this was more of an across the board price increase that would raise the cost of every import, which was certain to increase the cost of doing business.  This made business nervous.  Add uncertainty to a tight credit market and business no doubt forecasted higher costs and lower revenues (i.e., a recession).  And to weather a recession, you need a lot of cash on hand to help pay the bills until the economy recovered.  So these businesses increased their liquidity.  They cut costs, laid off people and sold their investments (i.e., stocks) to build a huge cash cushion to weather these bad times to come.  This may have been a significant factor in the selloff in October of 1929 resulting in the stock market crash. 

HERBERT HOOVER WANTED to help the farmers.  By raising crop prices (which only made food more expensive for the unemployed).  But the Smoot-Hawley Tariff met retaliatory tariffs overseas.  Overseas agricultural and industrial markets started to close.  Sales fell.  The recession had come.  Business cut back.  Unemployment soared.  Farmers couldn’t sell their bumper crops at a profit and defaulted on their loans.  When some non-farming banks failed, panic ensued.  People rushed to get their money out of the banks before their bank, too, failed.  This caused a run on the banks.  They started to fail.  This further contracted the money supply.  Recession turned into the Great Depression. 

The Fed started the recession by not meeting its core expectation.  Maintain the money supply to meet the needs of the economy.  Then a whole series of bad government action (initiated by the Hoover administration and continued by the Roosevelt administration) drove business into the ground.  The ONLY lesson they learned from this whole period is ‘inflation good, deflation bad’.  Which was the wrong lesson to learn. 

The proper lesson to learn was that when people interfere with market forces or try to replace the market decision-making mechanisms, they often decide wrong.  It was wrong for the Fed to contract the money supply (to stop speculators that weren’t there) when there was good economic growth.  And it was wrong to increase the cost of doing business (raising interest rates, increasing regulations, raising taxes, raising tariffs, restricting imports, etc.) during a recession.  The natural market forces wouldn’t have made those wrong decisions.  The government created the recession.  Then, when they tried to ‘fix’ the recession they created, they created the Great Depression.

World War I created an economic boom that we couldn’t sustain long after the war.  The farmers because their mechanization just grew too much stuff.  Our industrial sector because of bad government policy.  World War II fixed our broken economy.  We threw away most of that bad government policy and business roared to meet the demands of war-torn Europe.  But, once again, we could not sustain our post-war economy because of bad government policy.

THE ECONOMY ROARED in the 1950s.  World War II devastated the world’s economies.  We stood all but alone to fill the void.  This changed in the 1960s.  Unions became more powerful, demanding more of the pie.  This increased the cost of doing business.  This corresponded with the reemergence of those once war-torn economies.  Export markets not only shrunk, but domestic markets had new competition.  Government spending exploded.  Kennedy poured money into NASA to beat the Soviets to the moon.  The costs of the nuclear arms race grew.  Vietnam became more and more costly with no end in sight.  And LBJ created the biggest government entitlement programs since FDR created Social Security.  The size of government swelled, adding more workers to the government payroll.  They raised taxes.  But even high taxes could not prevent huge deficits.

JFK cut taxes and the economy grew.  It was able to sustain his spending.  LBJ increased taxes and the economy contracted.  There wasn’t a chance in hell the economy would support his spending.  Unwilling to cut spending and with taxes already high, the government started to print more money to pay its bills.  Much like Weimar Germany did in the 1920s (which ultimately resulted in hyperinflation).  Inflation heated up. 

Nixon would continue the process saying “we are all Keynesians now.”  Keynesian economics believed in Big Government managing the business cycle.  It puts all faith on the demand side of the equation.  Do everything to increase the disposable money people have so they can buy stuff, thus stimulating the economy.  But most of those things (wage and price controls, government subsidies, tariffs, import restrictions, regulation, etc.) typically had the opposite effect on the supply side of the equation.  The job producing side.  Those policies increased the cost of doing business.  So businesses didn’t grow.  Higher costs and lower sales pushed them into recession.  This increased unemployment.  Which, of course, reduces tax receipts.  Falling ever shorter from meeting its costs via taxes, it printed more money.  This further stoked the fires of inflation.

When Nixon took office, the dollar was the world’s reserve currency and convertible into gold.  But our monetary policy was making the dollar weak.  As they depreciated the dollar, the cost of gold in dollars soared.  Nations were buying ‘cheap’ dollars and converting them into gold at much higher market exchange rate.  Gold was flying out of the country.  To stop the gold flight, Nixon suspended the convertibility of the dollar. 

Inflation soared.  As did interest rates.  Ford did nothing to address the core problem.  During the next presidential campaign, Carter asked the nation if they were better off than they were 4 years ago.  They weren’t.  Carter won.  By that time we had double digit inflation and interest rates.  The Carter presidency was identified by malaise and stagflation (inflation AND recession at the same time).  We measured our economic woes by the misery index (the unemployment rate plus the inflation rate).  Big Government spending was smothering the nation.  And Jimmy Carter did not address that problem.  He, too, was a Keynesian. 

During the 1980 presidential election, Reagan asked the American people if they were better off now than they were 4 years ago.  The answer was, again, ‘no’.  Reagan won the election.  He was not a Keynesian.  He cut taxes like Harding and JFK did.  He learned the proper lesson from the Great Depression.  And he didn’t repeat any of their (Hoover and FDR) mistakes.  The recession did not turn into depression.  The economy recovered.  And soared once again.

MONETARY POLICY IS crucial to a healthy and growing economy.  Businesses need to borrow to grow and create jobs.  However, monetary policy is not the be-all and end-all of economic growth.  Anti-business government policies will NOT make a business expand and add jobs no matter how cheap money is to borrow.  Three bursts of economic activity in the 20th century followed tax-cuts/deregulation (the Harding, JFK and Reagan administrations).  Tax increases/new regulation killed economic growth (the Hoover/FDR and LBJ/Nixon/Ford/Carter administrations).  Good monetary policies complimented the former.  Some of the worst monetary policies accompanied the latter.  This is historical record.  Some would do well to learn it.

www.PITHOCRATES.com

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