THIS IS MY 51ST POST ON UNDERSTANDING MONEY TOOLS
In this Blog let’s select four well known economists and
view their theories on the best way to run a government or country. These men I
am quite familiar with, but unlike most of my Blogs I needed to resort to doing
more fact finding to get my history correct.
With each of these men books and volumes of information have
been written so we will only touch upon their basic beliefs to keep this brief,
and yet transfer a bit of information to you.
Let’s start out with a bit of fun trivia. I had coffee this
morning with a close friend and academic who I love to debate with. We
discussed several topics including the distortions of truths in our media
industry, both right wing and left wing.
I chose education and how much of the information we learned in school
is not accurate. Two topics I immediately went to was the history behind
General Custer/the American Indians and the original political formation of the
United States.
Here is a fun question for you, and one that I lost on a bet
several years ago. “Who was the first president of the United States? ” Everyone answers as we were taught in
school, George Washington. Perhaps wrong?
Yes, the Declaration of Independence was signed in 1776, however George
Washington wasn’t elected president until 1789, 13 years later. There were several presidents before
George. Some say the true political organization started in 1781 with the
Continental Congress under the Articles of Confederation. John Hanson was the
first elected president of the United States under this organization. We had 8
presidents before George Washington, and could perhaps count as many as 14,
depending on how you look at history.
George Washington was president of the “First Continental Congress”
under our Constitution where we separated the executive branch of the
presidency from Congress. We
signed the United States Declaration of Independence in 1776, Did we not have a
Constitution in place until the 12 Bill of Rights were placed into it and then
ratified by all states in March, 1789? Did we not have presidents? Oh well,
there goes accurate history out the window in our school system, or let’s say
incomplete history. (For the inquisitive minds go to Google.com and put in “Who
were the US presidents before George Washington?”)
Let’s start this endeavor with the person best known as the
father of modern economics, Adam Smith, a Scotsman. In 1776 he wrote “The
Wealth of Nations” which was actually 5 books. Before this, we must understand
that Europe had little growth from the year 1000 until the early 1700s. The
period called “The Dark Ages” had nothing to do with light, by the way, but
instead nothing substantial was accomplished. One of the first changes was
patent protection for goods. This was a claim to a uniqueness and gave value to
a product. The two countries that embellished patents were the Dutch in what is
now the Netherlands and England. Adam Smith accounted for many things
including, but not limited to, economics.
For instance, in those times people paid for goods and services with
either gold or silver. Because of corruption and scales being inaccurate a
person couldn’t be certain if they were getting consistent value. Mr. Smith
placed a measured value on these metals to start holding a constant.
Adam Smith was the first to divide labor into various
categories, and place a value on each. He was also noted for assembly line work
and efficiencies. A product could be made quicker and better if a person worked
with others and specialized in an aspect of the whole.
Was he a right-wing or left-wing individual, hard to tell as
times have changed so much that these definitions can’t be related to today’s
world. He did believe in a free market theory, and “laissez faire”. This French term is still used today
and roughly means, “let the buyer beware”, versus governmental intervention. I
am certain the world is even more corrupt today than it was back 250 years
ago….greed then, greed unfortunately now.
Adam Smith believed that monopolies can cause interventions
on pricing. This we see today in the US as our Anti-trust Laws have gone out
the window, especially from the early 1980s until 2000. Mr. Smith believed in supply and demand
for the creation of value.
We’ll move on to another notable economist, John Maynard
Keynes. Mr. Keynes theories were last used big time by George W. Bush in 2007-8
when the banks were failing, and big businesses like in the auto industry were
going down. Mr. Keynes was English and died after WWII in 1946. He believed in
“macro-economics” in doing what is necessary including government intervention
to save an economy and smooth things out. Mr. Keynes believed in a balance of
savings and its relationship to inflation or recession. In previous Blogs we
discussed the importance of monetary controls set in place after the Depression
by FDR in the early 1930s including the Bretton Woods Agreement. Mr. Keynes was
a key figure in creating the Agreement and also England’s social reforms.
Bottom line, free market thinking with government intervention.
Our next move is to another economist of today who believes
in government intervention, Mr. Paul Voelker. Mr. Voelker held the position of Chairman of the Federal
Reserve from 1979 during President Carter’s reign until 1987 through most of
President Reagan’s presidency. Mr. Voelker is a Democrat and continues to act
as an economic advisor today.
Mr. Voelker is a hero to many today with his monetary
intervention to curb the high rate of inflation primarily brought on from
escalating commodities in the late 1970s.
At the time, oil was reaching prices of about $39/barrel; gold, silver
and diamonds were rapidly increasing in value. Inflation was running at 13.5%.
Similar to Adam Smith’s and John Maynard Keynes’s on how to control economies,
Mr. Voelker intervened from a monetary standpoint and started raising interest
rates to slow down inflation. The Federal Funds Rate reached 20% in 1981. This
pushed the bank lending prime rate to 21.5%. Looking at supply and demand,
fewer people could afford this high rate of borrowing and banks would not lend
money to individuals and small corporations because they didn’t meet lending
requirements. Unemployment soared to 10% very similar to post 2008. My business interests then moved from real
estate to the oil and gas business with Energetics, Inc., and we were immune to
the high prices because of our profitability until about 1984. (Please see
previous Blogs on this.)
Even today, Mr. Voelker’s approach to fighting inflation is
controversial. My personal opinion is that it was wrong. One reason is that it
hurt middle Americans. Yes, it proved “supply and demand correct”, however the
cost of necessities such as food, home buying and mortgages went through the
roof. High interest rate costs were passed on as an expense item by large
companies, so they and the wealthy were little effected. Commodity prices
crashed.
Next let’s discuss a couple free market theorists. Friedrich
Heyek, an Austrian, later became a British and then an American economist. He
was one of the great 20th century economists. Mr. Heyek was a money
supply theorist advising President Reagan and Margaret Thatcher. In 1950 he
taught at the University of Chicago and met a man a bit younger by the name of
Milton Friedman, “Uncle Milty” to many. They were friends but sometimes opposed
in philosophy. A major difference between the two was that Mr. Hayek did not
believe in manipulation of money supply to correct economies like Mr. Friedman
did. With a somewhat pessimistic
nature he believed in waiting before reacting too quickly, and to watch and see
if the markets would naturally correct themselves. Both believed in supply and demand and that free markets
would adjust economies. Mr. Heyek
believed that all citizens of countries were entitled to unemployment insurance
and universal healthcare. He further believed that a country should create a
“safety net” for its people to provide a minimal standard in food, shelter,
clothing, and necessities for life. He was an advocate for same sex marriage,
legalizing drugs and prostitution which was pretty liberal. Maybe the guy
wasn’t all bad! He stated that the
best form of capitalism was seen in Hong Kong, China. I have traveled to Hong
Kong and it is an inspiration to any capitalist reflecting beautiful
architecture and an abundance of money.
He, like Milton Friedman, was invited down to Chile when
President Pinochet took power as a dictator and inflation was running rampant.
His advice to Mr. Pinochet was the same, control inflation through money supply.
(Here is an offshoot to our topic. I went down to Chile in the mid-1990s and
had studied the country well beforehand. Even though President Pinochet was
brutal and a dictator, he brought many good things to bear for his people. Each
citizen has his/her own retirement account and felt comfortable to be able to
retire at retirement age. Pinochet set up the branches of defense after the
world’s best; the navy being trained and patterned after England, the army
after Germany, and the air force after the United States. When I was there
President Frei held the office, a good German. I attended a celebration held in
the city center of Santiago, and the army proudly paraded in Germans dress with
helmets and high leather boots “goose stepping”. Great country to visit and
very nice people.)
Lastly, let’s take a look at Milton Friedman, one of the
“Chicago Boys”. Mr. Friedman died only a few years ago in 2006 and had great
influence over 20th century economics. He taught at the University
of Chicago’s School of Economics. As fore-mentioned he knew Friedrich Heyek
well. He also went to Chile and Argentina and met with the dictators of those
countries who had problems especially with inflation. Milton was another supply and demand, free market economist.
Sometimes free market can best be implemented an autocratic dictatorship.
Mr. Friedman had certain views. One was that every country
has a certain degree of natural unemployment, this being around 4%, as many
people just don’t want to work.
To synopsize here these are a few of his theories:
- Opposition
to a Federal Reserve System that has major controls.
- An
expansion to money supply that brings forth some reasonable inflation.
- Minimal
government interventions.
- An
actual negative income tax; putting as many incentives and money back into the
system. If deflation exists, no incentives.
- Money
and supply system all-important for good values for a country, which can be
traced back to the 1500s.
- If
price deflation exists there is no incentive for people or corporations to
invest in the future.
- He
was a major advisor for President Reagan during his presidency terms.
Now, we will leave these economists behind and talk about
one other topic that concerns economics, and that is “Fascism”. Fascism began in Italy. “Neo-fascism” gained its name after
World War II. It is an economic theory/philosophy that believes in
authoritarian views, especially between the government and private sector. President Franco used Fascism in Spain
after World War II until 1975, and President Peron, a dictator, used it in
Argentina. The basis of the theory is that the “state is all important”.
With this philosophy in place one can see how Italy and
Germany came together in World War II besides the natural geographical
locations. Hitler believed in
nationalism and unification. There are parallels in many of the European
countries and the United States that existed before and after World War I and
today. This winter being somewhat bored, somewhat interested, I went to my
local library and checked out “Mein Kampf” (In English My Struggle by Adolph
Hitler). Hitler wrote the two
volume book in 1924 while imprisoned and then first published in 1925 and 1926.
It is a rambling writing, but he was in jail, most likely bored with nothing
else to do but write. The book could be consolidated to about 100 pages versus
900 pages, and a worthwhile read.
George W. Bush and the Federal Reserve Bank implemented
Keynesian theories in 2007 after the destruction brought on by Wall Street,
mis-rated mortgage derivatives and poor bank regulations. The strategy was so
different from Paul Voelker’s actions. Government intervention this time
lowered interest rates. Lending
money was, and is, only to the wealthy and large corporations, not to the
middle class therefore there is no money circulating and no inflation, although
money supply has significantly increased We, as a government of power, and
control over the Federal Reserve Bank selected which companies survived and
which did not. Lehman Bros and Bear Stearns of Wall Street went down, Goldman
Sachs which does tons of business in alignment with the US government,
including overnight trading, cannot be touched. No corrupt white-collar worker who I have ever heard of has
ever gone to jail. The tax payers took stock in General Motors. AIG, Moody’s and others got a big
bailout, Chrysler Corp, needed to go private. On and on, not ethical, not
proper, not right but the way it was.
Fascism? Definitely government intervention, and beyond.
Let’s analyze how the US Government intervened in the pure
free market and supply side economics over the past 80 years. In October, 1929
the stock market crashed and we began a worldwide depression that lasted about
10 years. President Franklin D. Roosevelt intervened with government money for
a Works Progress Administration or later called Works Projects Administration
(WPA). This program was designed to put unemployed people back to work on
public infrastructure projects such as public buildings, roads, dams and
bridges. Some of our great reservoirs came from this period such as Hoover Dam
and Lake Meade in Nevada started in 1931. In this “government intervention” we
employed people and it worked.
As previously discussed we had a real bout with inflation in
the late 1970s caused by very high commodity prices and demand for products,
goods and services. In this case
Mr.Voelker intervened and raised interest rates extremely high so that
borrowers of money no longer had the desire to borrow at the rates banks were
willing to lend. In this case there weren’t limitations on the supply of money,
just the cost of money that brought down inflation.
Next case 20 years later and we move to 2007-8. As most of us have witnessed this one
first hand, banks were failing, there was little government regulations over
lending practices and the world had was dipping into recession. We have known this to be “The Great
Recession”. Even tough it is
reported that we came out of the recession several years ago, growth has been
minimal at best, jobs are part time at low wages and we periodically have
quarters of negative growth like first quarter 2014, a negative 1.7%.
George W. Bush followed Keynesian theories and intervened,
in conjunction with the Federal Reserve Bank. The government selected which companies were bailed out with
government money and which were not and let them fail. Unlike Mr. Voelker, Mr.
Ben Bernanke, who took over as Chairman of the Federal Reserve in 2006, decided
to lower Fed Discount Rates to 25 basis points, or 1/4 of one percent. Along
with this there was the need for more money to assist banks and big business,
so the Federal Reserve started printing money in stages known as “Quantitative
Easing”. To date the Federal Reserve has printed approximately $4.5 trillion.
Also, this printing of money diluted the value of the dollar thus making our
manufactured goods in the USA more appealing to other countries.
Very strict banking regulations went into effect for the
average middle class person wanting, or needing, to borrow money. This “easy
money lending” was and is only available to a select few, these being the US
Government, big businesses and the wealthy. The average person has not enjoyed
this ride to wealth as they don’t have the same income levels they did 14 years
ago with little money, or none, to invest after paying for necessities. In fact
many middle age and older people are taking money out of their retirement
accounts to live.
Central Banks around the world have made “easy money”
available now for several years. I watch as poor countries get into debt they
most likely can’t pay back, thus leaving themselves vulnerable to big
corporations and the wealthy. They move in to control assets, mainly
commodities such as oil and natural gas.
This has been a fun Blog for me to write. When you write, it
reinforces your thoughts. We have
seen that free markets really work best under autocratic governments. Without
controls of some sort greedy and monopolistic corporations come into the
picture. Therefore, there is no
possibility for free markets and supply side economics. We most recently saw
what has happened since 2007 with similar tactics as Fascism and government
interventions that diminish the middle class, only aiding the wealthy and big
businesses.
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