My Amazon Review of Edward Chancellor's "The Price of Time: The Real Story of Interest"

 

Easy Money: The Root of all Evil

 

Longtime financial commentator Edward Chancellor has written a sweeping socio-economic history of interest rates going back to the ancient Sumerian civilization of over 4000 years ago and the Code of Hammurabi up to the present. Chancellor correctly notes that interest rates represent the “universal price of time” that links the present to the future and is essential in valuing any asset.

 

His concern is that when politicians and central bankers underprice the cost of money all kinds of bad things happen. Those bad things would include asset bubbles, commodity price inflation, income inequality, uneconomic investment, the monopolization of the economy and food riots leading to political destabilization. But what is the correct price? Chancellor relies on the work of Eugen von Bohm-Bawerk, Irving Fisher, Friedrich Hayek, and Knut Wicksell. He leaves out the work of my late and great economics professor Jack Hirshleifer with his “Investment, Interest and Capital.”

 

Simply put on a micro foundation basis the interest rate is determined by society’s rate of time preference and its ability to increase output overtime. Thus, from the point of view of output growth the real interest rate should equate to the real growth in GDP.  However, when money, credit and central banking are introduced you dramatically increase the likelihood of overshooting and undershooting the neutral rate of interest.

 

Chancellor criticizes central bankers for their seeking economic stability via inflation targeting. Low inflation in product markets usually makes sense, but sometimes it masks inflation is asset markets giving rise to bubbles. It here where Chancellor brings in Hyman Minsky’s work on stability leading to instability. Thus, it was the Great Moderation of 1982-2007 that led to the crash of 2008.

 

He is especially critical of Fed chairs, Bernanke, Yellen, and Powell for them violating Bagehot’s rules for acting in a crisis and for all of them keeping interest rates way to low for way to long which gave rise to the maladies listed above. With respect to Walter Bagehot, in a banking crisis the central bank should lend aggressively on good collateral at a penalty rate. To be sure our central bankers lent aggressively, but not all on good collateral and certainly not at a penalty rate which opened the gates to a populist rebellion against the bankers.

 

By keeping interest rates too low for too long, the Fed totally distorted the relationship between the present and the future which made hitherto unprofitable investments lucrative. Thus, instead of investing in new assets businesses and individuals bid up the price of existing assets to the detriment of long run productivity. And remember who owns existing assets, the already wealthy.

 

What Chancellor gets wrong is that he focuses too much on the policy rate. The relevant interest rate is the long-term rate which is tied to the long-term growth in the economy and the long-term rate via the term premium is usually higher than the policy rate. Further, necessary short-term reductions in the policy rate to manage a crisis and/or a recession should not affect long term rates all that much. However, when central banks promise to keep rates low forever, the long-term rate will converge on the short-term rate. Thus, the error of the Fed was not to lower the rates in a crisis but keeping them low well past the crisis.

 

Edward Chancellor has written an important book that reflects Austrian economics over Keynesian economics, but I suspect it will gain popularity overtime as the credibility of our central bankers continues to erode.

For the full amazon URL see: Easy Money: The Root of all Evil (amazon.com)

Biden Throws Gasoline on the Inflation Fire

With today's announcement cancelling up to $20,000 of student loan debt for couples making less than $250,000 ($125,000 for individuals), President Joe Biden gives lie to his stated concern about the Federal deficit. The ceiling is roughly four times the median houshold income in the United States. This program is likely to cost about $500 billion, well above the recently enacted $300 billion tax increase on corporations. Somehow in the eyes of the Biden Adminstration student loan debt is more sacrosanct than other debts contracted by middle-class Americans.Put simply, Biden's actions is a payoff to a noisy Left who doesn't care about the uncredentialed workers who do the day-to-day work of keeping our country running.

As a result the extinguisment of student debt, will likely let loose a torrent of spending just at the very time the Fed is trying to dampen demand to fight the inflation cycle we are now in. Chair Powell's job has been made more difficult.

What is worse is that this is yet another sop to the higher education racket's privileged faculties and its ever growing beauracracy. The reason why student debt is so high, are the rents extracted by those elite groups. By foregiving student loans there is a wink and a nod to incoming students saying don't sweat borrowing the money; it will be forgiven down the line.  The solution to the student debt problem is not debt extinguishment, but rather a fundamental reform of higher education.

A Change in the Weather: Is the Summer Rally Over?

 After advancing four straight weeks taking the S&P 500 up 17% of its June low, socks retreated 1.3% in the past week. However, beneath the surface the damage was far greater with the leading edges of the bear market and the recent rally falling by a far greater amount. For example, Cathy Wood’s Ark Innovation ETF is now off 13.5% from its recent high and Bitcoin, the poster child of the bull and bear market, is down a similar 12.5%. As we noted previously crypto currency has been deeply embedded in both the bull and bear cycles. (See:  Shulmaven: The Crypto Crash and the Bear Market in Stocks)

 

When we wrote two months ago, we thought the bear market was entering its “anger phase.” (See: Shulmaven: The Bear Market Enters the Anger Phase ) It seems that lasted for only about a week as stocks embarked on the previously discussed 17% rally. For awhile it seemed that all anger had left the market as high valuation money losing companies led the charge and the “meme” stock mania returned in near full force.

 

Nevertheless, under the surface all is not well. The great bond rally that took 10-year yield down from 3.48% in June to 2.60% in early August has reversed with the yield closing at 2.99% on Friday. Further the market seems blind to the fact that inflation is not quiescent. As of July, the CPI is up 5.4% from the start of the year and by December, using some very modest assumptions, it will still be up 6.5% on a year-over-year basis. Similarly, with the core CPI is up 3.7% thus far this year, it more than likely than not, it will close out the up around 6.3%. 

Further you have to remember that if the CPI were calculated on the same basis as it was in the 1970’s, inflation would have peaked in the 12%-13% range, not the 9.1% reported. With data like this, the Fed will continue to tighten policy making it more likely than not, the terminal funds rate will exceed 4% and we have yet to see the full force of its quantitative tightening program which will start in a few weeks. That action will double its balance sheet shrinkage from $45 billion/month to $90 billion/month. We will learn much from the Fed this week when Chair Jay Powell delivers his remarks at the annual Jackson Hole Conference.

 

So just as summer turns to fall, the recent rally is likely over, and the anger phase of the bear market will resume. My guess is that we are heading for a retest of the June lows. Only then will we move to the final acceptance stage of the bear market.

My Amazon Review of Matthew Continetti's : The Hundred Year War for American Conservatism"

 

Triumph and Tragedy

 

As I write this Liz Cheney, the scion of Reagan Republicanism and what used to be the heartbeat of American conservatism, lost her primary battle to a Trump acolyte in Wyoming. Simply out, the Republican Party is no longer a conservative party, but rather a cult of personality populist party. This is the end point of Matthew Continetti’s hundred-year history of American conservatism. Continetti, now a fellow at the American Enterprise Institute, has been a writer/activist on the conservative scene for two decades and is the son-in-law of William Kristol, a leading neoconservative and one of the foremost anti-Trumpers on the Right.

 

Continetti begins his history in the 1920’s when the conservative Republican Party stood for protectionism, anti-immigration and more or less and isolationist foreign policy. Sounds familiar, doesn’t it. However, there is a major difference from today that Continetti doesn’t mention. That is in the 1920’s conservatives were an optimistic bunch believing in the new technologies of automobiles, electrification, radio, aircraft, and talking pictures that was underpinning an economic boom. Thus, when the Great Depression came, it was truly a shock turning optimism into pessimism about the future of the country under the New Deal.  

 

As a result, conservatives stayed in the political wilderness for years as the Democratic Party and liberal Republicans dominated the scene. However, beneath the surface a disparate group of conservatives rallied around anticommunism and the leadership of William Buckley and his National Review. Elitist to the core Buckley and crew became the backbone of conservative revival, but beneath the surface their remained vestiges of racism, antisemitism, and authoritarianism. Those would resurface many years later.

 

When liberalism cracked up under the strains of the Vietnam War and the stagflation of the 1970’s, conservatives were ready to seize the mantle of power. Instead of the dour conservatism of say, 1940’s Bob Taft, conservatives were led by the sunny optimism of Ronald Reagan who offered economic growth at home and the defeat of communism abroad. Reagan united social, economic, and foreign policy conservatives under one banner. However, the Soviet Union collapsed in 1991 and with that the unity of the conservative movement fell.

 

In fact, one year later, in a forerunner to Trump, Pat Buchanan mounted a populist challenge to President George H.W. Bush and soon Ruch Limbaugh would dominate the airwaves of talk radio.  For a time, the conservative establishment held these forces in check, but failures in the Iraq War and the Great Financial Crisis destroyed its legitimacy. All the while a populist revolt was brewing against trade, immigration, and foreign wars that Continetti and his intellectual buddies in the think tanks and K-Street were oblivious to. They were too busy talking to each other rather than going out into the country to visit the dive bars and fast-food joints of the Midwest and the South. They soon would have discovered that there was a revolt brewing against the know-it-all coastal elites of both parties who in the words of Hillary Clinton, called them “deplorables.”  I hate to break it to Continetti, but all too many conservatives felt the same way.

 

Continetti’s goal is to blend historical conservatism to the new populism. My guess is that train has passed the station, at least for now. When CPAC features Hungarian autocrat Victor Orban as a speaker, you know the world has changed. Thus, it looks like that conservatives will once again be spending long years in the wilderness. If it is to recover it will have to come with an optimistic vision similar to what happened in the 1920’s and the 1980’s.

For the full Amazon URL see: Triumph and Tragedy (amazon.com)

 

My Amazon Review of Michael Benson's "Gangsters vs. Nazis"

 

The Jewish Gangster Army

 

In the late 1930’s Nazism was on the rise, even in America. There were two very active Nazi groups, the German American Bund and the Silver Legion who spewed out Hitler’s hateful rhetoric. Alarmed by the growing Nazi menace New York Judge and former congressman Nathan Perlman calls the gangster Meyer Lansky to ask for help. As evil as the Mob was, sometimes the Lord works in mysterious ways. This is where Michael Benson’s story begins.

 

Yes, Perlman was a judge, and it seems that he had every major Jewish gangster in America on speed dial, to use an anachronism. How a sitting judge had such access one can only speculate, but given his closeness to the Mob, it wouldn’t be surprising if he were on their payroll. Benson is silent on this issue.

 

What Perlman asks of his literal murderers’ row of gangsters is to directly take on the Nazis and break up their rallies. These would include the aforementioned Meyer Lansky, Bugsy Siegel, Leo “Lepke” Buchhalter, Longy Zwillman, Moe Dalitz, and Mickey Cohen. He was indifferent to the fact that most of their rallies were lawful. Nevertheless in New York, Newark, Chicago, Minneapolis, Cleveland, and Los Angeles the mob breaks up Nazi rallies with brass knuckles, baseball bats, pipes, stink bombs, and sawed-off pool cues. Also in the mix was the famed Jewish boxer, Barney Ross. Although quite illegal and certainly offensive to civil liberties sensitivities, it showed the world that Jews were no longer the cowering masses of the shtetl, but they actually could fight. This would be proven out in the resistance to the Nazis in occupied Europe and the in the nascent Jewish army in Palestine.

 

One interesting sidelight that Benson points out is that one of the Chicago mobsters was a man named Sparky Rubinstein. He would later turn up 25 years later as the Jack Ruby who assassinated Lee Harvey Oswald. Part of the antisemitic milieu of the 1930’s the radio priest Charles Coughlan. His publication was called “Social Justice.” This is a real irony for me in that social justice has become the new religion in much of America’s Jewish community.

 

With antisemitism on the rise today on both the Left and the Right, Benson asks who will defend the Jewish community today?  My criticism of the book is that sometimes it gets too detailed and is too pedantic, but it is still a great story.

For the full Amazon URL see: The Jewish Gangster Army (amazon.com)

My Amazon Review of Mark Leibovich's "Thank you for Your Servitude"

 It’s a Miracle we Survived

 

Former New York Times reporter and current Atlantic writer Mark Leibovich has offered up a readable, humorous, and a downright scary account of the Trump years, which are unfortunately still with us. He spends most of his time not on Trump, but rather on his bootlicking lackeys in the Republican Party and a coterie of sycophantic hangers on in search of lucre. It is a miracle the country survived Trump’s four years in office.

 

What becomes very clear is that the Republican Party has become a party of moral eunuchs. With the few honorable exceptions of the late John McCain, Mitt Romney, and Liz Cheney the party luminaries cowered before the great orange one. It makes you want to puke just to think about all of these grifters at the seat of power living large and paying tribute at the Trump International Hotel.

 

I met Donald Trump at a business breakfast at the Plaza Hotel in 1992. It was obvious to me that he was a complete slime and what boggles the mind is how he conned the Republican electorate which then forced his acceptance on the grand poohbahs of the party, who were in on the joke all along. Yet, they did nothing. It was all about power.

 

What is most troubling is thus far from there has been no real explanation how this spoiled child of privilege has such a hold a large chunk of low-income white Americans. Trump doesn’t have a clue about the lives they live, and he really can’t stand them. The standard explanation on the Left is racism, but that does not account for Trump’s and the Republican Party’s growing support in the Latino community.

 

My explanation is that Trump channels their disgust with America’s cultural elite who constantly look down on their folkways by thinking of them as, using Hilary Clinton’s word, “deplorables.”  Afterall it is hard to support a Democratic Party that foists pronouns and the ill-conceived term Latinx down the throats of the general public. Thus, it pains me to say it, a Trumpy Republican can win again.

For the full Amazon URL see: It's a Miracle we Survived (amazon.com)