San Fran Fed Finds Problem with Econometric Multipliers

LvMIC:

Despite the obvious bias which engulfs the incestual working relationship between the Federal Reserve System, the U.S. financial sector, and the U.S. government, occasionally some grains of truth trickle out from these Ministries of Truth.  In a new report by Daniel J. Wilson out of the Federal Reserve Bank of San Francisco, it turns out that fiscal stimulus, get this, might actually vary upon effect in implementation and thus the multiplier effect!

The severe global economic downturn and the large stimulus programs that governments in many countries adopted in response have generated a resurgence in research on the effects of fiscal policy. One key lesson emerging from this research is that there is no single fiscal multiplier that sums up the economic impact of fiscal policy. Rather, the impact varies widely depending on the specific fiscal policies put into effect and the overall economic environment.

With this kind of groundbreaking research being produced by PhD’d economists operating as fellows or researchers at Fed banks, what other explanations or theories could we possibly need?  The serious question still remains on how is this a new discovery?  Money doesn’t transverse through millions of economic hands in a predictable fashion.  The idea that economists aided by mathematical formulas and supercomputers are able to foresee how market actors will proceed in spending funds confiscated and given away by the political class is afflicted with conceit.  Human action can’t be observed as a constant such as in the physical sciences.  Murray Rothbard explains in The Mantle of Science:

Finally such staples of mathematical economics as the calculus are completely inappropriate for human action because they assume infinitely small continuity; while such concepts may legitimately describe the completely determined path of a physical particle, they are seriously misleading in describing the willed action of a human being. Such willed action can occur only in discrete, non-infinitely-small steps, steps large enough to be perceivable by a human consciousness. Hence the continuity assumptions of calculus are inappropriate for the study of man.

This, of course, doesn’t stop some economists from presuming the infallibility of their formulas.  It’s already well known that President Obama’s first stimulus package, put into effect in early 2009, did not meet its goal of keeping unemployment below 9%.  The standard response from Keynesian proponents of fiscal stimulus to counter a cyclical downturn was that “the government didn’t spend enough.”  That is, it didn’t spend enough to jump start the fiscal multiplier and get those animal spirits shopping.
But as Wilson reveals, the alleged fiscal multiplier is hardly ever accurate:

What does this literature tell policymakers and others trying to assess the impact of fiscal policy changes? It is an inconvenient reality that this literature provides an enormous range of multiplier estimates, ranging from –1 to 3. However, this range is not so much a reflection of disagreement over an underlying parameter as it is a reflection of one of the key lessons of this research—that there is no single multiplier that can be applied mechanically to all situations. The impact depends on the type of fiscal policy changes in question and the environment in which they are implemented.

The sphere of human action is ever changing; of course there can be no one true multiplier.  With fiscal stimulus acting as the equivalent of a dart board for bureaucrats and economic mathematicians to calculate a multiplier, is it any wonder that grand promises of free lunches are never delivered upon with the enactment of a large increase in government expenditure?

As Frank Shostack shows (channeling Say’s Law), the free lunch doesn’t exist and any “extra” spending generated by fiscal stimulus backed by multipliers must come at the expense of future or existing production:

In the Keynesian multiplier story the initial consumer expenditure creates new income for the next person, who in turn creates income for another person and so on. However, to have income for consumption one must first produce something useful that can be exchanged in the market.
Through the production of goods an individual can secure the produced goods of other individuals in an economy. His production backs up, so to speak, his demand for the goods he wants to secure. For instance Bob the farmer secures one loaf of bread from John the baker by paying for the loaf of bread with five tomatoes. Bob also secures a pair of shoes from Paul the shoemaker by paying for the shoes with ten tomatoes.
Let us examine the effect of an increase in the government’s demand on an economy’s overall output. In an economy, which comprises of a baker, a shoemaker and a tomato grower, another individual enters the scene. This individual is an enforcer who is exercising his demand for goods by means of force.
Can such demand give rise to more output? On the contrary, it will impoverish the producers. The baker, the shoemaker, and the farmer will be forced to part with their product in an exchange for nothing and this in turn will weaken the flow of production of final consumer goods. Again, as one can see, not only does the increase in government outlays not raise overall output by a positive multiple, but on the contrary this leads to the weakening in the process of wealth generation in general.

Rather than justifying the multiplier effect, Wilson’s report is demonstrative of the kind of muddled thinking and practice behind such a concept.  There can never be a true multiplier just as there can never be a perfectly static economy.  The process of the market is dictated by human action outside the bounds of predictive mathematics.  You don’t need to peruse a bunch of time studies to figure out what should be common sense.

Just don’t expect this truth to stop the countless retorts of “we didn’t spend enough.”

Joe Stiglitz Thinks the ECB is Beholden to Special Interests...

LvMIC:


Though I find it excruciatingly hard to agree with Nobel Laureate Joseph Stilgitz on anything, I can’t say he is wrong on his latest hunch.  In his Project Syndicate column today, Mr. Whither Socialism suspects that perhaps the European Central Bank doesn’t have the “public’s” interest at heart in its attempt to resuscitate the Euronzone and guide Greece through what looks like an impending default.  He writes:

The ECB’s insistence on “voluntary” restructuring – that is, avoidance of a credit event – has placed the two sides at loggerheads. The irony is that the regulators have allowed the creation of this dysfunctional system.

The ECB’s stance is peculiar. One would have hoped that the banks might have managed the default risk on the bonds in their portfolios by buying insurance. And, if they bought insurance, a regulator concerned with systemic stability would want to be sure that the insurer pays in the event of a loss. But the ECB wants the banks to suffer a 50% loss on their bond holdings, without insurance “benefits” having to be paid.

There are three explanations for the ECB’s position, none of which speaks well for the institution and its regulatory and supervisory conduct. The first explanation is that the banks have not, in fact, bought insurance, and some have taken speculative positions. The second is that the ECB knows that the financial system lacks transparency – and knows that investors know that they cannot gauge the impact of an involuntary default, which could cause credit markets to freeze, reprising the aftermath of Lehman Brothers’ collapse in September 2008. Finally, the ECB may be trying to protect the few banks that have written the insurance.

Surprisingly, Stiglitz recognizes the need for a “deep restructuring” of Greece’s debt; no doubt alluding to a hard default.  Where he was making this call two years ago when the crisis started gaining steam in the home of democracy, no one can say.  In reality, Stiglitz at first denied Greece would need a bailout and then became a supporter of the measure to prevent a default.  So much for appraising the behavior of culpable political institutions.

As anybody who has looked into the history of central banking knows, these established systems of regulation are never the product of an altruistic political class but merely an implicit maneuver to cartelize the banking system in favor of banker elites.  Like Hayek said, “Socialism has never and nowhere been at first a working-class movement.”

From the beginning of the Eurozone crisis, those who understood the symbiotic relation between central banks, their respective governments, and the financial institutions which fund the state, realized that the exercise in bailout futility, otherwise known as kicking the financial can, was done on part not to bailout countries such as Greece and Italy but to save the banks which hold large portions of their debt.  In short, the governments weren’t being bailed out, the banks were.  Stigliz finally seems to get it:

In fact, the ECB may be putting the interests of the few banks that have written credit-default swaps before those of Greece, Europe’s taxpayers, and creditors who acted prudently and bought insurance.

Better late than never.

Despite his economic accolades, Stigliz may finally be grasping on to the true nature of central banking:

The final oddity of the ECB’s stance concerns democratic governance. Deciding whether a credit event has occurred is left to a secret committee of the International Swaps and Derivatives Association, an industry group that has a vested interest in the outcome. If news reports are correct, some members of the committee have been using their position to promote more accommodative negotiating positions. But it seems unconscionable that the ECB would delegate to a secret committee of self-interested market participants the right to determine what is an acceptable debt restructuring.

News to the Columbia U. Professor, power centers attract powerful special interests.  Angels don’t occupy public offices; those who take great pleasure in wielding coercive authority over their fellow man do.
Though Stiglitz believes the Eurozone crisis is a product of a lack of regulation (by easily bought bureaucrats, which he grudgingly admits), he is correct that a hard default is the correct path through the storm.  If the EZ wants to retain any credibility of free market capitalism, losses must be taken by those who took the risk. 

Perpetuating moral hazards by papering over the bad decisions of market participants creates further disasters down the road.  But with a hard default must come a triggering of credit default swaps which the ECB wants to prevent.  Credit default swaps, for all their demonization by the anti-Wall Street crowd, are merely a means for investors to hedge themselves against potential default through risk assessment.  Take away this function and the market will find inevitably find another way to protect itself against recklessly spending governments.  For all the faith thrown bestowed upon faceless regulators by those who wish the hand of government in every affair of life, these bureaucrats have specialized in always chasing the last market innovation.  Despite increases in staff and funding, regulators simply don’t have the vast amount of knowledge to attempt to plan an economy.

The economic fact is that credit default swaps don’t cause fiscal destabilization.  The profligate spending of governments and continual interest rate manipulations by central banks are what wreak havoc on normal working order.  Markets are self correcting when left to their devices.  An emboldened political and regulatory class that sees itself as omniscient in the face of the complex phenomena known as an economy only ever burdens this process.  Allowing the triggering of credit default swaps, like the financial meltdown in the fall of 2008, won’t be the end of the world.  Even Stiglitz recognizes this:

The one argument that seems – at least superficially – to put the public interest first is that an involuntary restructuring might lead to financial contagion, with large eurozone economies like Italy, Spain, and even France facing a sharp, and perhaps prohibitive, rise in borrowing costs. But that begs the question: why should an involuntary restructuring lead to worse contagion than a voluntary restructuring of comparable depth?

If an auto insurance company sees a large, but uncorrelated, jump in claims, the government shouldn’t step in to protect its losses by stopping a payout to insurance holders for the sake of financially saving the company.  Those who insured themselves were acting prudently; why should they by punished?  What kind of message does this send for future drivers?

Stiglitz naively believes that “democratic” institutions are too beholden to wealthy special interests.  Until he realizes that institutions given monopolies on a specific industry or over force and legal arbitration themselves attract the most unscrupulous of men, he won’t see the true cause of societal impoverishment and decay.

Marc Faber Mentions Canada Housing Bubble

LvMIC (considering I blog here predominantly, I figure it's important to cover the looming housing bubble in Canada):

In another interview filled with dire predictions of money printing and inept central banking, the always great Marc Faber makes a passing mention of housing bubble in Canada- see around the 4:00 mark.


Faber:

Previous to that I was in Canada.  In Canada, in the cities, you have boom conditions and real estate prices are very high, four or five times as in Arizona.  In Arizona you can buy a beautiful house for $150,000.

In a recent Bloomberg article, Andrew Mayeda mentioned the similarities between the U.S. housing market during the heyday of the boom years and Canada’s market today (my emphasis added):

Canadian lenders are loosening standards, offering mortgages similar to U.S. subprime loans that pose an “emerging risk” to financial institutions, according to the country’s banking regulator.
Banks and other lenders are becoming “increasingly liberal” with mortgages and home-equity credit lines that don’t require individuals to prove their income, according to 152 pages of documents obtained by Bloomberg News under freedom of information law from the Office of the Superintendent of Financial Institutions. The mortgages, typically granted to the self-employed and recent immigrants, “have some similarities to non-prime loans in the U.S. retail lending market,” the documents show.

When Bank of Canada head Mark Carney and his board of central planners flooded the market with liquidity in 2008, the easy credit appears to have financed a speculative bubble in housing.  Since November 2007, the variable mortgage rate in Canada has dropped from about 6.25% to a low of 2.25% in May of 2009 and has increased slightly to 3% as of January of 2012.  In the same time period, the 5 year fixed rate has dropped from 6% to 3.79%.  At the same time, M3 money supply in Canada has jumped from $1,110,823,000,000 in 2007 to $1,448,852,000,000 in 2011- an increase of about 30%.

As Austrian economist Joseph Salerno documents, this correlation bears a resemblance to the conditions of the housing market in the U.S. (my emphasis added):

From the beginning of 2001 to the end of 2005, the Fed’s MZM monetary aggregate increased by about $1billon per week and the M2 aggregate by about $750 million per week. During the same period the monetary base, which is completely controlled by the Fed, increased by about $200 billion, a cumulative increase of 33.3 percent.

The Fed Funds rate was driven down below 2 percent and held there for almost three years, pegged at 1 percent for a year. Rates on 30-year conventional mortgages fell sharply from over 7 percent in 2002 to a low of 5.25% in 2003 and, aside from brief upticks in 2003 and again in 2004, fluctuated between 5.5 percent and 6.0 percent until late 2005. Perhaps, more significantly, 1-year ARM rates plummeted from a high of 7.17 percent in 2000 to a low of 3.74 percent in 2003, rising to 4.1 percent in 2004 and to slightly over 5 percent in 2005. In addition, credit standards were loosened and unconventional mortgages, including interest-only, negative equity, and no-down-payment mortgages, proliferated.

As I have said before, the housing market in Canada appears to be in a bubble.  Unlike, the blindness that pervaded the housing bubble in the U.S., there is a lot more awareness of the looming downturn this time around.  Even Mark Carney has acknowledged that the housing market may be “overvalued.”  Unfortunately for him, it’s his own policies that have created the boom in the first place.  Should Carney need to reverse the historically low interest rates to curtail higher inflation expectancies, or should the malinvestment finally reveal itself in the form of capital unknowingly consumed due to an inflation fueled equity mirage, Canada will likely fall back into recession.  As the Austrian school teaches, accurate predictions can’t be made in the sphere of human action but trends can be analyzed and applied to possible future events.  The day of reckoning must come for the Great Northern White as Mises pronounced:

Credit expansion is not a nostrum to make people happy. The boom it engenders must inevitably lead to a debacle and unhappiness.

------------------------------------------------------------------------
Also of note, I had an article at the American Thinker today entitled "The Tobin Tax: Stealing From Not Just The Rich."  It's is a reiteration of an older post of mine.

Candian Savers Aren’t the Only Ones With a Sinking Feeling…

LvMIC:


With three straight years of anorexic interest rates, it looks like The Globe and Mail finally realized the winners and losers of central banking:

It’s the saver’s dilemma. Life for these Canadians has become an uncomfortable squeeze between weak returns on their investments, stagnant incomes and the steadily rising cost of everything from food to fuel to housing.

Bank of Canada Governor Mark Carney, among other central bankers, has kept interest rates near historic lows since the onset of the global economic crisis in an attempt to stimulate the flagging economy, and there’s no sign of a rate hike any time soon. But some critics say the playing field is now tipped too far in favour of borrowers rather than savers. Canadians in droves have piled on debt to buy new homes and make other purchases, prompting warnings from Mr. Carney of the dangers of carrying too much debt – even as his policies encourage borrowing and provide little ability for savers to generate substantial low-risk income.

Congratulations to the writers for recognizing that money printing isn’t neutral in its effects.  As Carney and his peers, including helicopter Bernanke who wants zero bound rates till at least 2014, continue to prop up the global financial sector with cheap liquidity, it was bound to have some nasty effects on those who try to live frugally.  What central bankers have effectively done since the financial crisis of 2008 is wage a war on savers while aiding the same profligate spenders whose debt filled escapades drove the boom.  But of course these spenders were only obeying the whim of governments and central banks that took great delight in a seemingly thriving economy and influx of tax revenues.

Like all government action, the proceeds which flow from the coffers of the public chest and hands of easily bought politicians are a boon to some at the expense of others.  The benefits of government are never neutral as money changing bureaucrats merely take wealth from one or more persons and give it to another.  The same concept holds for money printing which can’t enter an economy uniformly due to ever present time and space constraints.  The method for which central banks influence the interest rate and create money is normally conduced in coordination with large financial institutions in their respective countries.  These big banks, such as the 21 primary dealers in the U.S., get the freshly computer generated funds first before anybody else.  Then of course comes the credit expansion which leads to intertemporal discoordination depending on the degree to which the central banks feel like screwing up the economy.

So as The Globe and Mail writers have observed, the ultra low interest rate policies of the Bank of Canada are having a negatively disproportionate effect on savers who wish nothing more than to try and maintain some sense of financial security in the future without having to risk their capital in the more uncertain areas of the market.  Meanwhile, low interest rates embolden spenders who seek high value goods and wish to go into debt to purchase such.  The rational behind the Keynesian cure of recessions lies in the false belief that consumption drives the economy.  Yet this puts the cart before the horse as one must produce first in order to acquire the funds to consume.  Bringing money or credit into existence at the click of a computer mouse creates value only until the illusionary boom ends in a bust lest a complete destruction of the currency.
The saver’s dilemma is not a dilemma limited to those who wish to guarantee themselves a comfortable retirement.  Abstaining from consumption and adding to the supply of loanable funds is the only means by which capital can be available for investment to grow the capacity base of the economy.  Mike the gas station attendant may not have the entrepreneurial insight to make a sustainable market investment but if he wishes to place a portion of his wages into a bank to be recovered sometime in the future at a fixed maturity (in accordance with a 100% reserve requirement) and earn interest while doing so, his money is then available to be lent out by aspiring businessmen.

Carney, Bernanke, and their money printing friends have put the kabosh on this process by doing the only thing they know how to do: print money to suppress interest rates.  This monetary manipulation is never neutral as it creates conflict between the beneficiaries of new funds and those who see the money last.  Per Mises:

The notion of a neutral money is no less contradictory than that of a money of stable purchasing power. Money without a driving force of its own would not, as people assume, be a perfect money; it would not be money at all.

Changes in the money relation, i.e., in the relation of the demand for and the supply of money, affect the exchange ratio between money on the one hand and the vendible commodities on the other hand. These changes do not affect at the same time and to the same extent the prices of the various commodities and services. They consequently affect the wealth of the various members of society in different ways.

The Importance of Individual Methodology as a Tool for Argument

LvMIC:


I got into a verbal discussion/debate with a coworker today.  As anyone who follows the Austrian school or the doctrine of natural rights may know, a casual discussion on the efficiencies of a market can be unpleasant when speaking with someone who holds the unfortunately conventional view that capitalism is defined by systematic exploitation.  Proponents of this Marxist-based ideology typically fall back on declarations that corporations “rip you off” and will do “anything for a dollar.”  Even worse, these statist advocates ceaselessly trumpet the cause of the “public good.”

But therein lies the true fallacy behind this type of thinking as it can easily be refuted through the use of individual methodology; a defining attribute of the Austrian school of economics.

One thought construct utilized in the treatises and work of such prominent Austrian economists as Ludwig von Mises, Murray Rothbard, and Hans Herman-Hoppe is that of the deserted island and Robinson Crusoe.  Human action, the underlying basis for all economics, is best analyzed when put in the context of simplicity and in its barest conditions.  Rothbard described this construct as “highly important” and “indispensable” in its uses.  The very reason that the Crusoe construct is valuable is that while it’s based on an imaginative situation, the lessons derived from its use have greater implications when applied to a market economy.  This is why the Crusoe model is often “derided” by those who take a collective or inherently conflictual view of economics.  The notion that applying individual action or exchanges between individuals to  complex system of billions upon billions of transactions a day takes the proverbial weight out of arguments coming from the point of view of “public” necessities and worker exploitation.
 
By using the Crusoe construct, we can observe how man’s action, completely unobstructed from modern day conveniences, must operate in the context of nature’s dominance.  The choices Crusoe makes in order to better his well being can be deduced to the fundamental Mises axiom “human action is purposeful behavior.”  Carried on to a broad sense, applying individual methodology is a requirement for fully understanding how a market economy can ultimately work efficiently.

Now back to the story of the debate with my coworker.  After the baseless accusations of corporations ruthlessly taking advantage of hapless consumers and slave-like workers, I quickly gave an example of a remunerative transaction by pointing to his wrist watch and offering him a price of $20.00.  I explained that if he went forth with the exchange, then he obviously valued the $20.00 more than the wrist watch and that I valued the watch more than the price I offered.  The transaction must be mutually beneficial for if it wasn’t, then one or both of us would refuse to engage in the trade.

His immediate response was something along the lines of “what if I was greedy and charged $10,000 for the watch.”  After taken aback at his quick and clearly not thought out reaction, I informed him that I wouldn’t purchase the watch for such a large sum and that if he had any desire at all to sell the wrist watch, he would have to lower his price in order for me to meet him at some agreed to margin.  There is no force involved in this self adjusting procedure.

This example is taken from the simple transactions Crusoe and Friday, once introduced to the island, engage in.  Crusoe may have a stash of berries he has accumulated that he may wish to trade for a few of Friday’s recently caught fish.  If each came to an agreement that they will transact at a ratio of 5 berries per 1 fish, then each has their value scaled fulfilled in accordance with their subjective preference.  Applied in the extreme broad sense, it becomes much easier to understand how the global economy composed of 7 billion individuals functions.  What appears to be an overly complex system is nothing more than the culmination of individual transactions.

And then of course was the oft-incurred notion of the “public” good.  According to my coworker, corporations have no incentive toward looking out for the public good; certainly not a new argument used by government apologists.  But as I tried to explain, the notion of the “public” good is simply a metaphysical idea which bears no relation to accurately describing what people may actually desire.  After all, only individuals ever act.  Therefore only their needs can be satisfied by the actions of others.  Mises explains:

First we must realize that all actions are performed by individuals. A collective operates always through the intermediary of one or several individuals whose actions are related to the collective as the secondary source. It is the meaning which the acting individuals and all those who are touched by their action attribute to an action, that determines its character.

Unfortunately, this point did not sink in for my coworker who stuck by his ideals about the common good.  Ironically, our conversation preceding this debate was on the modern state of music which he denounced as basically garbage and lacking in even the remote amount of talent.  According to him, overly produced pop hits shouldn’t get the radio play or attention they garner from the public.  For someone who is clearly out of sync with what the general public demands in the form of popular music, making grand statements on what the public needs is incredibly revealing of an inner contradiction in thinking.  Because I immensely enjoy modern pop music, obviously my coworker does not know what is best for me.  If he doesn’t know what is best for me in this narrow field of preference, then how can he possibly know where billions of other individual preferences lean toward?

Despite my failure in transforming my coworker into a full fledged Austrian disciple, the tool of methodological individualism provided a guiding light through fog and deceitful invocations of the non existent “public” good.  The construct of Crusoe on the island with a subsequent alliance with Friday is insightful not just for individual action but when attempting to comprehend how a market economy operates.  In the end, the debate was fruitful from the standpoint that it made that portion of the workday fly by (while arguing, we both worked on our respective tasks) and as any foray into a specialized task goes, practice makes perfect.  It was certainly more casual than intellectually rigorous but changing minds won’t occur through infighting of blogs and academic journals only.

One mistake I am willing to concede is perhaps I should have picked a different way to describe the adoption of mandatory civil service for all high school graduates rather than “a horribly disgusting idea” and “the equivalent of slavery” when my coworker suggested it.  Though I unapologetically believe those descriptions to be true, there is probably a more sophisticated way to describe what boils down to conscription.

Bill Gross Semi-Endorses Ron Paul for President?

LvMIC:

When Bill Gross speaks, many people listen.  He doesn’t head the largest bond investment company in the world, PIMCO (Pacific Investment Management Company), for nothing. Though not an Austrian or Austrian minded by any means, Gross has been critical of the Federal Reserve and recently made a surprising almost-endorsement of  Congressman Ron Paul for U.S. president (watch around the 6:24 mark):

With someone of Gross’ financial stature, such a mentioning would normally play well for the Texas Congressman.  Unfortunately, the general public is not nearly as money minded as Gross.  This doesn’t mean Gross has perfect market foresight however given his role in the financial mainstream and some recent missed calls but this off hand endorsement of Paul should certainly be examined in the broader sense.

Take a look at this portion of Gross’ recent newsletter (my emphasis added):

Letting your pet retriever roam the woods might do wonders for his “animal spirits,” for instance, but he could come back infested with fleas, ticks, leeches or worse. Fed Chairman Ben Bernanke, dog-lover or not, preannounced an awareness of the deleterious side effects of quantitative easing several years ago in a significant speech at Jackson Hole. Ever since, he has been open and honest about the drawbacks of a zero interest rate policy, but has plowed ahead and unleashed his “QE bowser” into the wild with the understanding that the negative consequences of not doing so would be far worse. At his November 2011 post-FOMC news briefing, for instance, he noted that “we are quite aware that very low interest rates, particularly for a protracted period, do have costs for a lot of people” – savers, pension funds, insurance companies and finance-based institutions among them. He countered though that “there is a greater good here, which is the health and recovery of the U.S. economy, and for that purpose we’ve been keeping monetary policy conditions accommodative.”
My goal in this Investment Outlook is not to pick a “doggie bone” with the Chairman. He is makin’ it up as he goes along in order to softly delever a credit-based financial system which became egregiously overlevered and assumed far too much risk long before his watch began. My intent really is to alert you, the reader, to the significant costs that may be ahead for a global economy and financial marketplace still functioning under the assumption that cheap and abundant central bank credit is always a positive dynamic. When interest rates approach the zero bound they may transition from historically stimulative to potentially destimulative/regressive influences.
Recent central bank behavior, including that of the U.S. Fed, provides assurances that short and intermediate yields will not change, and therefore bond prices are not likely threatened on the downside. Still, zero-bound money may kill as opposed to create credit. Developed economies where these low yields reside may suffer accordingly. It may as well, induce inflationary distortions that give a rise to commodities and gold as store of value alternatives when there is little value left in paper.

Unfortunately, Gross gives a lot of credit to Bernanke for juicing the economy in the video.  But of course papering over a bunch of losses and effectively zombifying banks to prop up the stock market doesn’t fix the core issues of the economy which has become even more dependent on the printing press.  Still, Gross has become wary of the Fed’s actions recently.  He recognizes that suppressed interest rates and cheap money create distortions though probably doesn’t understand the full nuances of the business cycle and its causes.
There is also the fact that treasuries aren’t going up in value anytime soon thanks to Bernanke’s promise to keep rates low till at least 2014.  Though he won’t lose a great amount of money as interest rates remain zero-bound for years to come, Gross admits:

Most short to intermediate Treasury yields, however, are dangerously close to the zero-bound which imply little if any room to fall: no margin, no air underneath those bond yields and therefore limited, if any, price appreciation.

So what are the real implications of Gross admitting that he is “a little Ron Paulish”?  It should come as no surprise to anyone who visits LvMIC that Ron Paul, and the Austrian School from which he is a disciple, is marginalized continuously by the mainstream press and modern academia.  Paul is often slandered and labeled the equivalent of a crackpot and unelectable.  The Austrian school, despite its analytical functions and teachings on economic theory which provide a comprehensive understandability on the causes of the business cycle, is still regarded as fringe.  Yet here is arguably the most respected money manager in the world (again, you don’t control that much wealth for no reason) admitting that he is leaning Paul’s way.  It’s a testament to the kind of impact Paul’s ideas are having on those who hold influence.  As Mises pronounced,

Both force and money are impotent against ideas.

Though he may not fully understand Paul’s views or how damaging the Fed’s policies really are, we can rejoice in the fact that Gross realizes the pathetic contest of Democrats vs. Republicans is not really a contest at all as there lies little room in differences between the two.

Does McDonald's Using "Pink" Meat Filler Matter?

LvMIC:


A few days ago, reality star Jamie Oliver celebrated a victory over one of the world’s most popular food franchises- McDonald’s.  From The Telegraph:

After years of trying to break America, Jamie Oliver has finally made his mark by persuading one of the biggest U.S fast food chains in the world to change their burger recipe.
McDonald’s have altered the ingredients after the Naked Chef forced them to remove a processed food type that he labelled ‘pink slime’.
The food activist was shocked when he learned that ammonium hydroxide was being used by McDonald’s to convert fatty beef offcuts into a beef filler for its burgers in the USA.
The filler product made headlines after he denounced it on his show, Jamie Oliver’s Food Revolution.
Now after months of campaigning on his hit US television show McDonald’s have admitted defeat and the fast food giant has abandoned the beef filler from its burger patties.

From a libertarian, free market perspective, Mr. Oliver’s endeavor is not something at all to despise.  He simply used his television show as an outlet to educate the public on an ingredient McDonald’s adds to its food.  He didn’t force the fast food giant to stop using ammonium hydroxide; McDonald’s simply bowed to public pressure and wanted to save face.  This is how free enterprise keeps itself in check.  There is no need for government oversight or intervention as long as private and specialized watchdogs are around to police certain industries.  Unfortunately, Mr. Oliver is looking to take his campaign one coercive step further:

US Department of Agriculture microbiologist Geral Zirnstein agreed with Jamie that ammonium hydroxide agent should be banned.
He said: ‘I do not consider the stuff to be ground beef and I consider allowing it in ground beef to be a form of fraudulent labelling.

Ironically, Zirnstein might not agree agree that the pink goo is meat but the U.S. government views it as safe.
Ammonium hydroxide may look unpleasant but one should consider why McDonald’s would use such an ingredient in their products.  Take a look at beef prices in the U.S. over the past 20 years.  Though the chart is unable to be replicated here, the price of a pound of beef has increased from about $1.10 in 1992 to almost $1.90 today.  That’s almost a 75% increase!  Meanwhile, according to the inflation calculator at the U.S. Bureau of Labor Statistics, what cost $1.10 in 1992 now costs….$1.76!  Now of course economics is not a game of closed, static experimentation and correlation doesn’t always equal causation but certainly inflation has something to do with increased beef costs.  Other factors can be attributed to the increase in the cost of beef as well such as cattle shortages and less than desirable weather.

But this again begs the question on why McDonald’s would use beef filler.  This answer is quite simple as inflation not only robs savers and acts as a stealth tax but also gives producers an incentive to develop means to offset the increased price of their product by altering the size or makeup to offer a similar product under the guise of it being identical to the original.  This is often called “stealth inflation.”  How better to offset an increase in beef costs than mixing in a cheap substitute?  Government aggregate data on inflation doesn’t ever account for such discrepancies.  As John Williams, purveyor of the alternative government data measurement site Shadowstats.com, points out, such neglect on the part of calculating the true effect of inflation is purposeful:

In the early 1990s, press reports began surfacing as to how the CPI really was significantly overstating inflation. If only the CPI inflation rate could be reduced, it was argued, then entitlements, such as social security, would not increase as much each year, and that would help to bring the budget deficit under control. Behind this movement were financial luminaries Michael Boskin, then chief economist to the first Bush Administration, and Alan Greenspan, Chairman of the Board of Governors of the Federal Reserve System.
The Boskin/Greenspan argument was that when steak got too expensive, the consumer would substitute hamburger for the steak, and that the inflation measure should reflect the costs tied to buying hamburger versus steak, instead of steak versus steak. Of course, replacing hamburger for steak in the calculations would reduce the inflation rate, but it represented the rate of inflation in terms of maintaining a declining standard of living. Cost of living was being replaced by the cost of survival. The old system told you how much you had to increase your income in order to keep buying steak. The new system promised you hamburger, and then dog food, perhaps, after that. (my emphasis added)

Now it isn’t clear how long McDonald’s has been using beef filler in its hamburgers but one can float an educated guess and assume that doing such was done to offset an increase in the cost of beef.  With the abandonment of the filler, there is no telling how long the famous dollar menu will last.

While Jamie Oliver used his professional credentials as a means to influence McDonald’s into changing its business practices (the fast food giant denies this but the PR campaign launched against them suggests otherwise), such is the market process.  Both Oliver and McDonald’s forced no one into changing, listening to them, or purchasing their products.  Unlike the government, neither utilized the threat of violence to garner certain results.  And for that we should rejoice as the situation serves as evidence that peaceful engagement still trumps government intervention in efficiency and empowering consumers.