At barely five feet tall and armed only with a Ph.D in economics, Milton Friedman hardly had the look of a hero set out to save a nation. Yet, Professor Friedman predicted with near perfection the disastrous economic situation the United States is enduring today. He did this with a simple idea â€“ the Quantity Theory of Money.
MV = PQ. This is the simple mathematical formula which explains the death of American prosperity. Where M is the supply of money, V is the velocity that it circulates, P is prices, and Q is the quantity of transactions. Simply put, if the government prints more money, prices go up unless the number of transactions also increases. Too many dollars chasing too few goods, as they say, leads to inflation.
Enter Quantitative Easing, where the Federal Reserve buys government bonds with money that it printed specifically for the purpose of buying government bonds. This is the only way our government can run $1.6 trillion deficits â€“ which, according to President Obama we must do for the next ten years. The bond market would never absorb this many bonds at interest rates this low unless the Federal Reserve were rigging the market, and in recent months they have been purchasing roughly 70% of federal bonds being offered. The money raised is immediately spent by the federal government, sharply increasing both the supply and velocity of money. In 2000, there was approximately $4.7 trillion US Dollars in circulation, now there are nearly $10 trillion.
The quantity of transactions is going down. Donâ€™t take my word for it, either. Look around your neighborhood for all of the houses that have been for sale for months, all the vacant office space, and all the closed restaurants. These are all a component of the decline in the quantity of transactions. Fewer houses bought, fewer goods sold, fewer meals consumed.
Which leaves us with one last variable: Prices. With double the dollars in circulation, being spent by the government as quickly as they can print them, and with fewer transactions in the overall economy, prices must simply explode.
Pull out your old check records or bank statements, and see what you used to spend on groceries and gasoline, and compare them to what you are spending now. The increase is not the cause of supply problems, speculators or gouging: It is inflation, pure and simple.
The end result has been an inflationary depression, with increasing prices and high unemployment. What the country desperately needs is a sound dollar, stable prices and, of course, a sound fiscal policy based on a balanced budget. Thus, fiscal and monetary policies are inextricably linked, with our deficits leading to inflation and inflation making the deficits possible.
Left-wing ideologues like to repeat the old trope that in America the poor get poorer and the rich get richer. Well, sad to say, it is true. But, it is not capitalism that is doing the pillaging; it is our own government. Rising prices means lowering standards of living. Despite the messianic rhetoric of Mr. Obama, it is his deficits, financed by Mr. Bernankeâ€™s printing press, that are robbing the pensioners and the working class of their standard of living.
The Republican that can best articulate this message, without being pulled into the weeds, will take the Presidencyâ€”or at least get my respect.
On a macro level the last few weeks of the Ron Paul Presidential campaign have been a little bumpy. The turbulence was provided by a much publicized exchange with WHO Radioâ€™s Simon Conway and rough national television interviews with MSNBCâ€™s Chris Mathews and Fox Newsâ€™ Chris Wallace. The fact that the Mathewâ€™s interview would be contentious was likely known, but having Chris Wallace, on Fox News Sunday, aggressively infer that the â€œgeneral welfareâ€ clause was valid justification for unlimited Federal government involvement had to come as a shock (I know I was shocked).
If one thought that would dampen his supportersâ€™ enthusiasm, a few minutes spent at the Paul campaign headquarters in Ankeny on Monday would be enough to prove them mistaken. In fact the effort in Iowa seems to be humming along at an impressive pace. In less than two weeks, over a 110 County co-chairs have volunteered, 8 District co-chairs have signed on, and Mr. Paul has picked up his first Iowa legislative endorsement in Glenn Massie (R-Des Moines).
Due to this progress, for the second time in two weeks the candidate himself was on hand to personally thank these volunteers and to take a few questions from the media. During the Q and A session Paul spoke on Israel, reiterating his stance that their dependence on the U.S is effectively making them weaker and not stronger. He also happily acknowledged that more and more Republicans are coming around to his position against our involvements in Iraq, Afghanistan, and Libya. In his view, this shift in thinking is the result of a mixture of disenchantment with realities on the ground and the fact that itâ€™s easier for Republicans to be less supportive now that these conflicts can be seen as â€œObamaâ€™s wars.â€ On the domestic front the only thing worth noting was his comments regarding Mike Huckabeeâ€™s decision not to enter the race. He called this development â€œsignificant,â€ adding that he thinks there is a good chance that he will appeal to Huckabeeâ€™s supporters.
The more time one spends covering the Ron Paul presidential run the more one understands the reasons for his supportersâ€™ legendary levels of enthusiasm. Chief among these is the fact that what they are involved in is far more a movement than a campaign. Unlike what happens around populist candidates, they are not drawn to Paul by his smoothness, style, empathy, or one-liners. They are gravitating toward a philosophyâ€”a philosophy that is not only at odds with nearly every other GOP candidate, but of the Republican Party establishment in general.
Before the event I interviewed Paulâ€™s Iowa Campaign Chairman, longtime Republican leader Drew Ivers, and this topic came up. Referencing this drift away from the Party, Ivers said, â€œI have carried plenty of water for the Republican Party over the years, and I have earned the right to criticize them.â€ When one looks at the legislative performance of the Party as a whole over the last 25 years, itâ€™s hard to argue that this criticism is undeserved. Unless of course we are willing to pretend that the financial collapse of 2008 and the 14.3 trillion dollar debt involved only Democrats.
Aside from making it clear that Ron Paul is pro-marriage and pro-family, the topics which Ivers emphasized revealed another reason why Paulâ€™s staff and supporters have bound together so tightly behind their candidateâ€¦no one else in the race is singing their tune. A perfect example of this is the issue of Federal debt and deficits. Along with all the Republican hopefuls the Paul camp views Federal spending as 2012â€™s central issue, but unlike any of the others they favor a different solution.
Mr. Ivers was speaking for the majority of the eventâ€™s attendees by showing great concern over the Federal Reserve, quantitative easing, and the value of the dollar. For Ivers, and for Paul, the Fed is the way to begin gaining control of run-away spending. Beyond just proposing spending cuts, their solution is to stop the endless spending by stopping the Federal Reserve from endlessly printing money. This type of systemic change is emblematic of many of Paulâ€™s proposals, and is an approach that the Party, likely for political reasons, has never warmed to.
The fact that Mr. Paul is the only established Republican candidate talking about such things as eliminating the Fed, quantitative easing, and immediately ending our foreign deployments has gained him passionate support, but has also left a steep hill to climb.
What Ron Paul and his supporters are seeking is not a mere tinkering with the Republican message. They are calling for a return to a strict Constitutional approach to Federal governance, something that has not been practiced for generations. The political challenge inherent in this is vast, and is certainly one that Drew Ivers is fully aware of. He summarized it quite well by saying that the Country at large has â€œmoved so far to the left that the message seems strange.â€
There are few bonds stronger than that of a shared conviction, and perhaps this more than anything else explains the enthusiasm of Ron Paulâ€™s supporters. For their message to connect they face the Herculean task of convincing a Country to shift its current concept of the role of government, ironically back to its original form.
After spending an afternoon with the staff and volunteers who will be responsible for spreading this message, I can report that in spite of the odds they remain motivated, passionate, and in general completely undaunted by the challenge.
Photo courtesy of TEApublican.
Our grandchildren were over last weekend–two boys ages 5 and 3.Â At one point the 3-year-old was telling me about being disobedient and how Daddy had to give him a big spanking.Â Now I know my son and I’m sure that he was providing gentle discipline, but the point wasn’t lost and can be applied to last week’s election.
Much has been made of the Republican’s gains in the House and Senate, and their effective control of Congress.Â This was clearly a repudiation of the Obama, Reid, and Pelosi policies of economic stagnation.Â Make no mistake about it, this was about the economy.Â The Democrats insistence on spending taxpayer’s money ineffectively, squandering it, actually, passing huge and unpopular bills, and their complete lack of caring about the taxpayer and the cumulative effect on the economy led to their downfall.
Part of this is due to theirÂ arrogance. Part is due toÂ the Democrats’Â lack of understanding of how our economy works.Â America is and always has been a capitalist society.Â Government control and planning is an anethema.Â Our economy works best when businesses and individuals are confident and can make plans to invest, spend, hire and borrow with a degree of certainty.Â America has not had any level of confidence in over two years, since the collapse of Lehman Brothers in September 2008.Â The Democrats, and President Obama, Harry Reid and Nancy Pelosi specifically, have done everything they could to ensure a lack of confidence by ramming through legislation designedÂ to further their agenda and in the process, scaring the living crap out of people.Â Hence the rise of the Tea Party, and the big spanking.
Everything the Democrats have done has suggested higher taxes or significantly additional costs and fees.Â First, they’ve managed to pass a “stimulus” bill that has to be paid for somehow, and that has failed to stimulate much.Â Second, they passed Obamacare that will raise the cost of doing business for everyone, and I mean everyone, and must be paid for with additional taxes.Â Third, they passed a “financial reform” bill that will raise the costs of banking and lending, with the net result of limiting access to credit.Â Finally, their failure to extend the Bush tax cuts raises everyone’s taxes, regardless of income, by a minimum ofÂ $2,000 next year.Â All of this money has to come from somewhere.Â And so people are nervous and nervous people do not spend money.Â Nervous businesses do not hire and invest in infrastructure and equipment.Â And the cumulative effect of all of this is a lack of revenue flowing into the US Treasury.Â You cannot have 9.6% unemployment and expect treasury tax revenues to increase.Â And this is why the Democrats got spanked.
Republican leadership now has to lead or they’ll get spanked.Â They need to undo the uncertainty and instill confidence in the electorate and business.Â This means revising all of the poor legislation that was passed the last two years, if not repealing it altogether.Â This is what they were elected to do.Â If they pass legislation and President Obama vetoes it, then in two years, the voters will have another chance to spank.Â And despite all of his rhetoric, I don’t believe that the President truly gets it.Â There is still an incredible lack of humility emanating from the White House.Â Even this week in Seoul, the President got spanked by the Europeans and Chinese,Â and he refuses to acknowledge his policies aren’t working; rather,Â his policies areÂ ”misunderstood”.
On a separate but related topic, The Federal Reserve and Chairman Ben Bernanke has decided to print another $600 billion and buy back US Treasury securities in a process known as Quantitative Easing (QE).Â Flooding another $600 billion into the economy over the next six months is like pushing on a string.Â Until the government gets its fiscal act together, it won’t do anything other than increase the money supply with no increase in aggregate demand for goods and services.Â This money has to go somewhere, and investors will search for a place where they can get a reasonable rate of return.Â So, after the election, there was a rally in the stock and bond markets, but this week, stocks and bonds sold off, but commodities rallied–specifically oil, cotton, soybeans and gold.Â On Friday, even commodities weakened.Â The stock markets have generally rallied since September 1 because corporate earnings have been solid.Â But earnings are a result of sales, and in order for sales to increase, people have to want to risk spending the money, which brings us back to fiscal policies.
So the next month will determine whether or not the resurgent Republicans and spanked Democrats can and will work together.Â The amazing thing about our economy is that it hasn’t collapsed despite collosal mismanagement in our nation’s capitol.Â Stay tuned.Â Things are about to get very interesting.