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Phil-osophically Speaking

The Inflation Paradox

There is, I confess, a kind of perverse pride at work when I consider that my predictions about Obama’s economic policies have been borne out: an environment of minimal growth, alarming indebtedness, higher taxes and steep and protracted unemployment. Still, I would rather be a jovial myopic than a dismal prophet.

But this is not an exercise to flatter my vanity or celebrate my prescience, I can regale you chapter and verse on where I’ve gone awry in the past. Instead I choose to focus on what I got wrong on a subject in which I got nearly everything right. In a word it’s inflation. It’s almost non-existent and in an economy flushed with cash, courtesy of the U.S. Treasury Department, there should be too many dollars chasing too few goods. The effect of such an imbalance is inflation. But we’ve had very little of that and that’s a good thing since inflation is theft; it steals value from people’s savings and savings is a symptom of a healthy economy. 

So what gives; have we been hoodwinked by the mysterious workings of the Federal Reserve Board chaired by one Ben Bernanke? What happened was that after several years of virtually zero interest rates and the economy moving forward like a tortoise with severe leg cramps, the Federal Reserve put the economy on steroids via quantitative easing. This delicate operation increases the money supply by having the central bank purchase bonds or assets from the government. This extra cash is supposed to stimulate spending that will grow the economy. But this old bit of Keynesian theorizing fell flat on its flat face, since every study showed that both consumers and corporations continue to hoard cash. Uncertainty is one of the great restraining forces of the Universe and our economy is up to the gills with uncertainty.

 In its centennial year the Federal Reserve implacably defies the purpose of its creation, which was to be an independent regulator of the money supply among other things. Instead, it behaves like chattel in thrall of its master: Congress and its profligate ways. How else to explain the Fed covering Congressional deficits of more than a trillion a year with worthless paper? These measures, however, delay the inevitable. Financial policy is abstract and complex, but the laws of supply and demand are a force of nature and, much like gravity, it’s bound to have its way no matter what artificial controls the Fed applies. Because of such rude intrusions one begins to understand why Ron Paul and other libertarians want to audit the Fed if not dismantle the Leviathan.

I would not push the envelope so far since the Federal Reserve, like the deservingly maligned United Nations, has its uses, though one has to scratch his head some before discerning what they are. There was a time when the informed, like the suavely persuasive Walter Heller, one of President Kennedy’s principal economic advisors, could argue that the Federal Reserve served a purpose in reacting to external events: A jump in OPEC prices, a surge in consumer spending, the overreacting of capitalism’s animal spirits. It is therefore sensible to have someone at the command post of fiscal and monetary policy to change course and make adjustments. This was a questionable practice even when Heller was around, but now we have the Fed reacting not so much to external events as internal ones in the form of massive government expenditures.   

The Federal Reserve reminds me of what the long time New York Times editorialist James Reston said about Richard Nixon: He inherited some good instincts from his Quaker forebears but by diligent, hard work overcame them. So it is with the Fed as they labor to manage an economy that naturally defies being managed. Just as government policy has an abysmal record with wage and price controls, it’s certain that it will do no better at fixing the rate of inflation and interest rates. My suspicion is, and I believe it’s an informed suspicion, that as soon as there is a bona fide recovery both interest rates and inflation, unless thwarted by a change of heart in the Oval Office, will find their launching pad.

Meanwhile, the démarche of the Fed is to keep buying long-term bonds in an effort to temporarily drive down long-term interest rates. For now the lion’s share of this money is going into stocks, since bonds, money markets and savings accounts yield no revenue. The brush dips into the colors of a dark palette; for while the Federal Reserve generally acted properly in being a lender of the last resort during the 2008 economic meltdown, it caused the Great Depression, not acting decisively enough and by then protracted that god-awful calamity by letting the money contract by one-third in the 1930s. There are other examples including the very recent dot com bubble of 1999-2000, but time and space forbids analysis.

There are unhappy parallels between today’s recovery and that recovery of the 1930s. In short, there was no recovery. During the ’30s, there was more than a doubling of government spending, the imposition of higher taxes, the National Recovery Act and the Wagner Act all increased the cost of doing business and arrested job creation. With the exception of tariffs that were imposed on 20,000 durable goods during that Depression decade it all seems eerily related to today’s deplorable state of affairs. The world still trusts our dollar and that is also helping to keep things afloat but by no means swimmingly. We are more or less treading water. 

Twelve years after the crash of 1929, America was still plagued with 14 percent unemployment. It was only after the war when savings were high, the debt liquidated and taxes cut that the corner was turned. It was a recovery waiting for a work force and it got it with millions of soldiers coming home.  While income taxes rose dramatically in the 1950s (though no one in the highest brackets actually paid those rates) there were no deficits since Eisenhower was an uncompromising deficit hawk and no competition from a world still digging itself out from the ruins of war.

To believe after all this stimulus spending that the road to economic recovery is by more spending would be bizarrely jejune if the enervating effects of the economy were not so punishing.  Every longitudinal study across the globe shows repeatedly that the best way to balance the budget and achieve economic sustenance is to cut spending and not raise taxes. The Obama Administration speaks eloquently about helping the poor, but all its doing is widening the safety net until it becomes unaffordable and unsustainable. If inflation is ever released from its imaginary cage, we will receive our just desserts, which I’m afraid will not be recovery but retribution.


News

The debate over New York State Common Core standards continues, with students from the Mineola School District showing a mild resistance to the exams.

 

According to the New York State Allies for Public Education, Mineola had some of the lowest numbers, with eight students opting out of the English Language Arts test. However, not a single Mineola student missed the math test. In East Williston, the opt out rates were 75 students in ELA and 60 in math.

Gitangalie Palombo, an Elmont yoga instructor, will open Fly High Dance and Fitness on the second floor at 111 E. Jericho Tpke. after her plan was approved by the Mineola Village

Board last week. She expects to open by January 2015. Sherwin Williams occupies the main floor.

 

“We want to be a great addition to the community,” she said. “I hope Fly High brings a new flare to the area.”


Sports

The New York Cosmos hosted the Mineola Athletic Association’s Soccer Club recently for its penultimate fall 2014 home game. More than 140 members of the MAA soccer club and their families came out on a chilly October evening to show their love of the game. Twenty-two Mineola boys and girls had the honor of escorting the New York Cosmos and Ottawa Fury players onto the field in the traditional “Walk of Champions.”

 

The Mineola spirit must have inspired the home team, as spectators enjoyed the exciting 2-1 Cosmos victory, with the game-winning goal coming in stoppage time.


As a current member of the Mineola High School Varsity Soccer team, senior, Catherine Cunningham has been dominating the scoring for the Mustangs.  She has 12 goals and two assists in the last seven games. 

 

In her last week of play alone, she amassed six goals in just three games. As a captain for the last two years, Cunningham has been an All-Conference and All-Class player, leading her team to two victories so far this season. 


Calendar

Exercise Class - October 22

International Night - October 23

Village Halloween Party - October 24


Columns

1959: The Year The Music Stopped Playing
Written by Michael A. Miller, mmillercolumn@gmail.com

The Eccentric Heiress Of ‘Empty Mansions’
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Yellow Margarine And A Pitch For The Ages
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