Wednesday, March 30, 2016

Cry Baby Trump

Donald Trump continues to act like the spoiled child that he is. The online edition of this morning's New York Times led with Trump's reversal of his earlier pledge to support the Republican nominee with the following:

Asked at a forum hosted by CNN if he still pledged to support the nominee if someone else wins, Donald J. Trump said, “No, I don’t anymore,” adding that he had not been treated fairly.

Poor baby especially coming from someone who has hardly treated his opponents and several of their spouses fairly. It is beginning to look like that when you strip away Trump's tough guy veneer, there is a frightened child who when he doesn't get his way he picks up his marbles and goes away. If he thinks he is being treated badly by his opponents and the Republican Party establishment, just wait until he gets in the ring with Putin. CNN's Anderson Cooper had it right when he said Trump was acting like a 5 year old.

Monday, March 21, 2016

My Amazon Review of Nancy Forbes' and Basil Mahon's "Faraday, Maxwell and the Electromagnetic Field: How Two Men Revolutionized Physics"

The Electromagnetic Underpinning of Economic Growth

The world doesn’t need another review of Nancy Forbes’ and Basil Mahon’s wonderful book. However, after thinking about it, I believe that the explosion in economic growth from 1870-1970 discussed by Robert J. Gordon in his “The Rise and Fall of American Growth” would never have happened were it not for Michael Faraday and James Clerk Maxwell. 

What Forbes and Mahon describe are the lives of Faraday and Maxwell and how through their experiments they came to discover some of the most fundamental secrets in nature. What Maxwell does in his 1873 “Treatise and Electricity and Magnetism” is to put a mathematical foundation underneath Faraday’s brilliant experiments. The rest is history. The world became electrified, radio and mass communications became of age and only 32 years later, building on their foundations, Einstein publishes his essays on relativity and the photoelectric effect.

The science is so monumental that it offers support for Gordon’s thesis that the economic growth achieved from 1870-1970 was based on a series of one-off events.

For the full Amazon URL see:

Wednesday, March 16, 2016

The Fed Will Get the Inflation it Wants

Bye bye data dependence. The data were there for the Fed to make
hawkish comments; core inflation is moving up (now 2.3% yoy on core CPI) and the economy is operating at full employment. Nevertheless the Fed chose to punt by cutting back on its outlook for future rate hikes. Why? It looks like the FOMC members want to over-shoot their 2% inflation target and light a fire under wages. They will soon get their wish.

In response materials and energy led the charge on the stock market, the dollar weakened and the yield on the 2-year note collapsed. It would seem to this observer that TIPS make a great deal of sense today.

Wednesday, March 9, 2016

America Turns Inward

If we didn't need any more evidence the results of yesterday's primaries indicate that the American electorate is turning inward. The rise of Trump and Sanders proves that there is a strong anti-free trade consensus. Although Sanders and Trump voters vote with their pocketbooks in favor of free trade every day at Wal*Mart, at the ballot box they resoundingly vote against it. These facts will be confirmed when the Trans Pacific trade deals goes down to defeat, if it is ever voted on.

Moreover with Trump appearing to be a direct descendant of the isolationist America First movement of the early 1940s and with Sanders firmly believing in the American retreat of his socialist roots, the world will soon become a more dangerous place. We have written many times before that we are in the process of reliving the 1930s and unfortunately the evidence grows with each passing day. We are getting pretty close to gangs of Trump and Sanders supporters fighting it out in the street. Simply put, the political situation is getting very ugly. Soon the markets will reflect it.

Sunday, March 6, 2016

My Amazon Review of Scott Sumner's "The Midas Paradox: Financial Markets, Government Policy Shocks and the Great Depression"

He Doesn’t Love Gold

Scott Sumner has written a fascinating book on how interaction between the operation of the gold standard and the labor policies of the New Deal influenced the course of The Great Depression. I only wish he had a better editor who would have tightened up a writing style that tends to wander in a way that mixes up the important from the unimportant.

His critical variable is the gold reserve ratio of the United States individually and the collective gold ratio of the then developed world. He makes a strong case that as the gold ratio rose policy tightened and as it fell policy loosened. Unfortunately aside from a few instances there was very little in the contemporaneous press, which he quotes extensively, that discussed this issue. Thus it seems policy makers were flying blind.

Similar to most economic historians of The Great Depression the seminal event that turned the economy around was Roosevelt’s abandonment of the gold standard in 1933-34 and then revaluing gold from $20.67/oz. to $35.00/oz. It was that action that enabled the Fed to open up the monetary floodgates. In Sumner’s view had the New Deal left well enough alone the economy would have fully recovered by 1935.

However, offsetting the gold policy, the National Industrial Recovery Act of 1933 triggered a 22% increase in wages during the summer of 1933 that completely stalled the industrial recovery that was well underway in the spring of 1933. He then goes on to discuss, in the tradition of Cole and Ohanian the additional wage shocks that came from the Wagner Act of 1935 and the Fair Labor Standards Act of 1938.

He makes a major point in discussing why the monetary ease of early 1932 failed and it was that failure that turned Keynes away from his belief in the efficacy of monetary policy. To Sumner the Fed’s policy was not credible because under the gold standard it was not able to continue its bond buying program. Only after gold was revalued did the Fed have the greenlight to engage in quantitative easing, to use today’s term.

I wish he would have spent more time on the Treasury’s gold sterilization policy of 1935-37 which Douglas Irwin mentions as the leading cause of the 1937-38 collapse. Nevertheless there are many fascinating nuggets in this book such as the role of the Young Plan bonds issued by Germany had on the financial markets of 1931-32. To my mind Sumner has written a very important book on what made the Great Depression great.

For the Amazon URL see: