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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 Village of Mineola’s Zoning Board last week approved Winthrop University Hospital’s plan to revamp the “Welcome to Mineola” sign atop the Station Plaza Diner at the Long Island Rail Road Station.

The village code prohibits rooftops signs, but the zoning board has relief powers.

 

“I spoke with the building commissioner and he said that he’s satisfied; that it’s structurally sound and stable,” Zoning Board Chairman John Macedo said. “If he’s satisfied, I’m satisfied.”

The Village of East Williston was recently ruled against in the second round of lawsuits with neighboring Village of Williston Park involving the latter’s water rates—establishing a 13 percent increase from $3.83 per 1,000 gallons of water to $4.33.

 

Village of East Williston Mayor David Tanner said that the lawsuit, “still does not resolve the underlying problem between the villages, which is we feel that we’re being charged too much for water—the cost is excessive.”

 

Tanner said the village is still calculating the financial impact will be, and that the village has been making payments in escrow for every water bill received.


Sports

Runners from all over Long Island came to run at the fourth annual Katie Oppo Memorial 5K on Sunday, June 15. The runner first across the finish line was Mineola resident Michael Mariotti, general manager, owner and host of the famous local restaurant Cafe Continental in Manhasset. 

 

The day was glorious as the runners and walkers began their trek through Flower Hill from the starting line at Flower Hill Park. Organizers of this year’s event made the race a USATF Certified 5K race, timed by Long Island Race Timing. 

Hurricanes Fall To Saints

Mineola Hurricanes lost a battle of the bats on Sunday, June 29, at St. Joseph’s Field in Kings Park, falling short in a 9-8 ball game against the St. Joseph’s Saints in the first game of a doubleheader.

The top of the first saw the Hurricanes take an early 2-0 lead. The runs came home for the Hurricanes when T.J. McManus scored on an error and Connor Eakin scored on a fielder’s choice. The Saints never surrendered the lead after the first inning, scoring five runs on two errors and an RBI single by Jonathan.


Calendar

Family Night - July 25

Satisfaction - July 26

Million Dollar Baby - July 29


Columns

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

The Eccentric Heiress Of ‘Empty Mansions’
Written by Mike Barry, MFBarry@optonline.net

Yellow Margarine And A Pitch For The Ages
Written by Michael A. Miller, mmillercolumn@gmail.com