For some years conservative economists have voiced opinions that the easy money policies of the Federal Reserve and the increasing deficit spending by the United States will damage the economy. As the years pass and without clear connection between these policies and their costs or consequences, these calls have begun to sound more like the girl that cried wolf. However, unless one believes in perpetual motion or alchemy, there must be costs to policies that in essence print money.
Forbes Editor-in-Chief Steve Forbes has said of money:
Money is simply a tool that measures value, like a ruler measures length and a clock measures time. Just as changing the number of inches in a foot will not increase the building of houses or anything else, lowering the value of money will not create more wealth. The only way we will ever get a real recovery is through a return to trustworthy, sound money. And the best way to achieve that is with a gold standard: a dollar linked to gold. Continue reading
Mega-bank, Bank of America, has agreed to pay a $17 billion fine for its role in the mortgage crisis that led to the 2008 financial meltdown. Those who cheer the huge fine miss the larger picture. Certainly many banks used dubious tactics and business practices that helped lead to the 2008 meltdown. However, willing partners included the US government that pressured banks into giving mortgages to individuals who could not afford them, and the Federal Reserve whose easy money policies were major factors in creating the housing bubble. These issues, along with banker greed and borrowers, were significant factors in creating the bubble and subsequent meltdown. Continue reading
Shortly after the 2008 economic meltdown, the US government and Federal Reserve (Fed) justified radical economic policies by claiming such actions would improve the overall economy. Through the use of massive deficit spending, these interventions included artificially low interest rates, bailouts, and huge spending programs. There is evidence that the interventions have not been productive in the long term.
CNN Money reported in early 2014 that the number of American millionaires has been soaring. Prior to 2008 there were about 9.2 million household millionaires in the US. Immediately following the downturn that number dropped to less than seven million, but now exceeds the 2007 bubble economy with 9.6 household millionaires. Continue reading
One of the brilliant economic minds of the 20th century was Dr. Milton Friedman. He had a rare combination of advanced economic knowledge and common sense.
Dr. Friedman lectured in the late 1970s on the subject of equal pay, whether by gender, race, etc. Friedman proffered the view that when the government mandates equal pay, it removes economic penalties from employers for discriminatory behavior. In the absence of equal pay laws, should an employer penalize an employee based on a nonproductive discriminatory practice, that employer will also be penalized via having higher costs and therefore lower profits versus a nondiscriminatory employer. Friedman concluded that: “I do not believe that it is desirable that we move in the direction of having a government bureaucrat decide whether A may hire B or not, whoever A and B are … and in consequence I think programs of this kind are both reducing our freedom and reducing equality. And they will … disadvantage … the very groups [they] intended to help.” Continue reading
The financial services industry played a significant role in creating the historic economic meltdown of 2008. The industry typically made significant profits on helping companies and countries obtain debt. The overselling/use of this debt was a key ingredient of the meltdown.
Large investment banks assisted countries increased debt with ever more sophisticated ways of selling bonds to a naïve public. When interest rates went up as risk of these countries’ default increased, the value of the bonds significantly dropped. This then placed major commercial banks in illiquid positions that required bailouts. Continue reading
Whenever the government intervenes in the economy, there are consequences. Many are negative given the inevitable distortion they cause to supply and demand. Since the interventions often include expensive programs supported by deficit spending, the focus of consequences is typically on the sovereign debt side. However, the actions have tentacles into the private sector side as well.
The Fed’s low interest rate policies were implemented to increase economic activity. The hope was that these rates would offer incentives for consumers to consume products and services, and for corporations to invest in capital expenditures to increase productivity and therefore promote further economic growth. Unfortunately, this has not occurred. Instead, the increased liquidity has created asset bubbles including in equities with valuations currently at record levels. Continue reading