Alexander Solzhenitsyn, the dissident Russian author who wrote “”One Day in the Life of Ivan Denisovich” died today. This book was my first introduction to Stalinist USSR and the horrors of totalitarianism. While I disagreed with some of his political philosophy, overall he had a huge impact on my world outlook.
An excellent blog post by Mish at Mish’s Global Economic Trend Analysis (say that five times fast) exposes the fallacies that lie behind the FDIC and modern banking. My favorite line:
Sheila Blair [head of the FDIC] should come out and say, “The money in your savings account, well none of it is there. By the way, only 10% of the money in your checking account is there either”. Now that would be an education.
The only point on which I disagree with Mish is that he doesn’t recommend getting rid of the FDIC altogether, but would like to keep it around to insure checking deposits. However, with a 100% reserve requirement for demand deposits (as he does recommend) based in gold or other hard assets (my requirement), there wouldn’t be a need for the FDIC.
Anyway, 5 monkeys for Sheila Blair.
According to conventional wisdom, health care in the U.S. is sub par. Our free market system has failed, and we need to move towards managed care similar to what exists in Canada or the U.K.
However, a recent article in the Wall Street Journal suggests we shouldn’t be so quick to change:
The study finds that the U.S. leads in the field of breast and prostate cancer. France excelled in women’s colorectal cancer and Japan in men’s colorectal cancer. The news isn’t all good here: great discrepancies exist between white and African-Americans. That said, the United States clearly leads other nations in overall survival.
I wonder where Michael Moore will go if he gets cancer?
Sadly, this satirical article nails the truth better than any other economic or political commentary I have read to date:
“Recession Plagued Nation Demands New Bubble to Invest In“
According to Jim Rogers, yes. Click here for his interview this morning on Bloomberg.
(p.s. For those still reading, thank you for your patience. I was away visiting a family member undergoing a “big surgery” as the doctor so eloquently put it. All went well.)
I am visiting a family member who is undergoing surgery next week, so I apologize for the lack of posts. Please don’t leave me!!! 
I apologize in advance for this bit of ego indulgence, but just want to mention that my letter to the Financial Times was published in today’s newspaper (June 19th).
A comment I posted in regards to Martin Wolf’s article “How imbalances led to credit crunch and inflation“:
First, I would like to thank Martin for drawing our attention to the correct definition of inflation. The confusion among the public and experts alike has serious consequences for economic policy and behavior.
Inflation indeed is a monetary phenomenon caused by an increase in the money supply. However, I don’t believe Martin goes far enough to explain exactly what this means and the impact on monetary policy.First, price increases do not cause inflation. This confuses cause with effect. Inflation (again, the increase in the money supply) causes price increases. Moreover, a one time jump in commodity prices may indeed signal inflationary pressures caused by a one time increase in the money supply, though we would then expect to see a medium to long run increase in the price of all goods.
On the other hand, a sustained change in the relative prices of goods is not inflation, but is caused by an underlying change in the supply or demand for specific goods. Reduced coffee production with unchanged world demand will result in an increase in the price of coffee relative to other goods.
While I agree with Martin that many emerging economies such as China have kept the value of their currencies low versus the dollar in order to increase exports, I disagree that the resulting trade deficit causes a decrease in U.S. domestic output. First, as some goods may be purchased by U.S. consumers from Chinese producers at a lower price than their domestic counterparts, consumers save money. This in turn frees up money to purchase other goods that may be produced domestically or to invest in new business opportunities, the result being (in the medium to long run) that new U.S. businesses will crop up and grow in the U.S. Simply, the U.S. gains from China’s inflationary policies while the Chinese consumer suffers.
As far as monetary policy, an increase in interest rates will have little to no benefit for consumers in regards to relative price changes, as the price of all goods, and hence incomes, will decrease. It will, however, curb the growth of the money supply and thus reduce inflation if it exists.
This leaves us with a conundrum: how do central banks know if an increase in prices is due to inflation or changes in supply and demand, given that both may occur at the same time? Simply, they don’t. Hence the extreme difficulty (and perhaps folly) of manipulating interest rates to control prices.
Justin D. Rietz
BA, Economics, Stanford University
MBA, UC Berkeley Haas School of Business
I’ve said this before, but inflation in the strict sense is not what is generally held to be inflation, even among most economists. Here is my letter to the editor that I sent to the Financial Times in response to an article titled “Stagflation, the latest Asian export“:
Sir, Stephen Roach (“Stagflation, the latest Asian export”, June 13) makes several mistakes regarding inflation that appear all too often in articles and commentary in the Financial Times and other notable financial publications.
Inflation is a rise in the general price level of goods caused by an increase in the money supply. As such, an increase in the price of certain goods caused by a change in supply and/or demand is not, by definition, inflation
This has important public policy consequences. Raising interest rates to combat the increased prices of certain goods due to supply or demand changes will not solve anything. Prices as well as incomes will fall, yet the relative prices of goods will remain the same. Consumers are left in the same financial position as before the rate increase. However, if inflation in the strict sense does exist, an increase in interest rates may be helpful.
This leaves us with a conundrum: how do we separate inflation from relative price changes in order to determine the appropriate central bank policy? Perhaps the answer is to change the equation and remove the central bank variable. Without a central bank to increase the money supply, inflation may not occur in the first place.
Besides “recommending” that the Federal Reserve keep the bailout window open for investment banks, John Thain, the CEO of Merrill Lynch (hey wait, isn’t ML an investment bank…?) made the following brilliant statement today:
“The market environment has been even more difficult than we thought”
Actually, I don’t think it is an issue of what they were thinking, but if they were thinking anything at all.
Comment (0)