Five of America’s Most Important Foundational Values

Economics Without The B.S.**: 

[**  Double entendre intended.]

I was responding to a post where someone asked what are America's five most important foundational values.  So with the holiday for the Fourth coming up, this is what I came up with.

1.     Our Founders redefined democratic governance.  We are not on the model of an Ancient Greece democracy, not a one hundred percent democracy; but, incorporate democratic elements mixed in with some non-democratic elements so that the will of the people can be formed and expressed in a fragmented society composed of economic and civic behavior which affects the governing process.  Where Ancient Greece defined a direct democracy, we have the indirect participation of the populus in the manner of which we are governed.  In other words, we are dynamic society, not a status quo society.

2.    With that said, our Founders created a fragmented governing structure which avoided the concentration of power in one or two bodies – a federal system composed of the national government with state and local governing bodies, defining a constitutional republic, a representative governing system – to complement that democratic governing process that makes it subject to change; thus inhibiting status quo thinking.

3.    Ideally our primary values are an interplay between individual liberty and equality.  These values can complement one another, but they can also come into conflict with one another.  In other words, the individual, and not the family, is at the core of our basic values.  We do cherish family values, but those are decided by individuals.  I might add with regard to the second point – our fragmented federal government structure between the national, state, and local governments – that the individual has rights, natural rights recognized in the Constitution, that are beyond the reach of government bodies and these individual rights come into play as individuals participate in civic affairs as well as their economic endeavors.

4.    Our Founders permitted an economic system – free enterprise, including the right to property – which allowed for individuals to build collateral and wealth, but also in which successful business outcomes tend to concentrate power.  Our free enterprise economic system co-exists vis-à-vis with a fragmented governing structure that makes it difficult to concentrate power.  This is one other aspect of our dynamic society.

5.    Unknowingly, and unintentionally, but never-the-less still somewhat visionary, many of our founding generations viewed the countryside [rightly or wrongly] as their tabula rasa for creating a “New World”.  In a short time we would come to view ourselves as a vast continental nation with a manifest destiny.  And as destiny would have it, shortly after our constitutional founding we found ourselves undergoing the fortunes of industrialization (which was just beginning to be experienced by other nations) while we expanded over the continent.  Being one vast continental nation undergoing industrialization (unlike Europe, and not similar to China, India, or Russia) allowed us to prosper as one market system which benefited from the formation and deployment of capital wealth.  Couple this with our democratic values, a dynamic political process and society, some struggle, and you have a society with an enormous material well-being, and still viewing itself as a creative leader in the vanguard among others.

 

Comments:

 

1.   I agree those could be argued as 5 of the most important. What I find surprising is that there was no mention of God or Judeo-Christian values, other than the mention of Manifest Destiny, and there was no mention of how Natives and Africans fit into America’s founding values.

My response:  No you did not find those things in my comment. What you find is the mention of individual liberty and equality; and over the course of our history that writ has been extended to include those left out by the Founders. That concept of individual liberty includes how we worship.

I think we are all aware of the shortcomings of our Founders, they were not perfect. I have mentioned many, many times before that by the 1820s the country was changing and becoming more democratic than what the Founders intended. Never the less, as the country liberalized to extend the writ of justice, it was based on what the Founders originally said and reinterpreted to bring it up to “modern” standards. This is the dynamics in our system established by the Founders. We have a system that is open to change. We are not a status quo society.

 

The Trade-off Between Economic Stability and Economic Growth

 

The Trade-off Between Economic Stability and Economic Growth

Economics Without The B.S.**: 

[**  Double entendre intended.]

 

https://www.wsj.com/articles/rising-interest-rates-hit-landlords-who-cant-afford-hedging-costs-11673900169?st=8bw3rzwf8t6pbf0&reflink=desktopwebshare_permalink

This is a good article in the Wall Street Journal that illustrates what I see as a problem in our economy -- financing long-term investments with short-term loans. It is a way of showing we have an investment community that is more situated in what is called "rentier capitalism", earning income on the cash flows of an asset/investment rather than an emphasis on increasing the productive output of a capital investment that grows an economic opportunity that is new, what was more likely in an industrial economy.

 

It makes the investors constantly vulnerable to the fluctuations of short-term interest rates; in effect the viability of their investment is subject not only to the productiveness of the asset but also the constant variability of the short-term financing.  When enough businesses operate this way, dependence on short-term financing of long-term investments, it puts pressure on our Fed and government policy for encouraging low interest rates, which in my opinion offsets higher rates of economic growth.

 

In other words there is a trade-off between lower interest rates, more moderate growth rates, in effect economic stability, with higher rates of growth which can result in a tolerance for more speculative ventures.  It is a trade-off between stability and growth, in effect between stability and societal change -- trying to find the sweet spot between the two at any point in time subject to change.

 

Another way of looking at it is how much vitality in a society -- acceptance of change -- is related to more vitality in economic activity by encouraging higher rates of growth? And since the U.S. provides the economic leadership in the world and the dollar is the primary reserve currency for international financial transactions and commerce, how much effect does U.S. policy have on other less developed nations and the rest of the world?

 

 The importance that finance has played in making investments and structuring the financial aspects of the investment, something that has become more prominent since World War II, has, along with changes in the tax code, made the finance discipline even more important in business and society than it previously was.  This is one reason why we have had the growth of the Financial Sector and Service Sector and the decline of the Industrial Sector since the 1960s when we were more of an industrial society. And we have had lower rates of economic growth since the 1960s, even in our good years like the 1990s.  So how do we get the change our society needs to stay creative and innovative in meeting the wants and needs that arise as we go from generation to generation?

Mare Liberum; Mare Nostrum; Mundus Nostrum

 

Inflation and Monetary Policy

 

Inflation and Monetary Policy

 

Economics Without The B.S.**: 

[**  Double entendre intended.]

 

How effective has Monetary Policy been in fighting inflation and promoting good economic growth?

Inflation and the Price of Oil

Inflation and the Price of Oil

 

Economics Without The B.S.**: 

[**  Double entendre intended.]

 

What is the relationship between the price of oil and the Consumer Price Index?...especially as we become more and more a Service Sector economy?

https://fred.stlouisfed.org/graph/?g=M6eO

https://fred.stlouisfed.org/graph/?g=M78M

Ukraine -- What now?

 Ukraine -- What now?

I’m reading several news accounts today of how the U.S. is to blame for Russia/Putin’s action with Ukraine.  They say it started with the U.S. attempt to expand NATO when the Soviet Union collapsed.  Oh really?

 

As I recall almost thirty years ago – the mid-1990s – as we were dealing with a newly created Russia and the questioning if NATO was still needed, what shall we do with NATO?  Some of the idealistic talk was that if a new free Russia could liberalize it could join with the rest of Europe economically and a cooperative military arrangement could be made that would work with NATO.

 

This talk was not that all idealistic; it was acted on.  While Russia was not ready to join the European Union (EU) economically, it was invited and did become a participating member of the G-7, making it the G-8 in 1997.  With upgrades to its economy, it could be ready to join the EU.

 

Of the former East Bloc of the Soviet Union, all of those countries started their application to the EU between 1993 and 1996 and got their membership after 2000.  Russia never applied or started an initiative to join the EU. 

 

In 1999 the Czech Republic, Hungary, and Poland became members of NATO – none of them border on Russia proper; Poland borders on Kaliningrad which is part of Russia but separate from the main territory because it is wedged between Poland and Lithuania.  So no NATO nation was on the Russian border when Putin came to power in August 1999 and became President of Russia in May 2000.  The Baltic States and other nations on Russia’s border joined NATO 2004 and after.

 

My point is this:  Russia, in the mid-1990s, had two paths to follow.  It could liberalize and join Western Europe, or it could remain as it has historically, an East European power.  It choose the later, not the former; and when Putin came to power, he doubled down on this.  Putin had an opportunity to truly revolutionize Russia’s outlook for the future; but choose otherwise.  Germany had a similar opportunity after WWII in the 1950s – to take its traditional role of a Central European power, counter-balancing its interests East and West; or turn to the West and join in an alliance.  Konrad Adenauer, the leader of West Germany in 1949, choose a new path for Germany’s future.

 

Russia lost its G-8 membership when it invaded the Crimea in 2014.  History has no subjunctive case.  Here we are.  Now what?

More on the current inflation

 

More on the current inflation

 

Economics Without The B.S.**: 

[**  Double entendre intended.]

 

The world community experienced a shock to the economy when the pandemic hit in March/April of 2020 – a major contraction of economic activity.  Had central banks, around the world along with our Fed, not intervened, there would have been a large deflation across the international economy, to include the United States.  That would have affected asset prices, probably on a broad category – physical and financial assets.  One can only speculate what that impact would have been, remembering that asset prices underlie the foundation for credit, as collateral, and the importance of credit to keep liquidity flowing to support economic activity/behavior.  Not to mention that a prolonged deflation could result in cuts to income – derived from wages and salaries – something Americans have not experienced in many generations.

 

Instead of dealing with a deflation, and the possibility of a deflationary spiral, central banks did intervene; and, in the case of the United States, where we also had a very large fiscal intervention, we were able to stabilize the price level to some extent where we are dealing with some degree of inflation at present without knowing its severity.  The broad category of asset prices has held firm or have even risen substantially.  Credit markets were disrupted, but the Fed has intervened to support specific sectors of the credit market.

 

Only to that extent can this inflation be considered a monetary phenomenon.  When the international economy shutdown, that caused physical harm to the economy – unemployment, a substantial reduction in the output of goods and services, and business closures.  In other words, greatly reduced economic activity of actual physical/real people and structures (businesses, equipment), and the flow of goods through the vast distribution system.

 

The injection of monetary and fiscal stimulus bolstered segments of the economy.  But it has been uneven.  This has resulted in imbalances among the sectors of the economy and especially between the demand for goods and services and the ability of the broad economy to respond, to fulfill that demand.  The supply is lagging the demand.

 

That gap between supply and demand is affecting prices.  You see this gap in the uneven recovery by comparing Personal Consumption Expenditures (PCE) with the broad Industrial Output. 

https://fred.stlouisfed.org/graph/?g=JACK

Industrial Production and PCE

https://fred.stlouisfed.org/graph/?g=Jm29

Capacity Utilization

And you see the effect on price when you compare the Consumer Price Index (CPI) to the Producer Price Index (PPI) – it is the PPI with the wild swings that tells the story.  In the post-2008 Financial Crisis years, the PPI took wild swings while the CPI remained steady; the price increases in the wholesale system were absorbed within the economy and not passed on to consumer, as reflected in the gradual increases in the CPI.  This time the price increases in the PPI are not being absorbed within the economy, they are being passed on to consumers, as reflected in the CPI.  The PPI leads the CPI and is driving the CPI.

https://fred.stlouisfed.org/graph/?g=JvxR

PPI and CPI

The inflation behavior now is due to the PPI swings and the behavior in the productive sectors and the supply chain/distribution system that services the productive sectors.

 

That we are in an inflationary time period, and not a deflationary time period, is a monetary phenomenon.  But that is a one-time event.  The inflation we are now experiencing is due to imbalances within the physical economy – namely the recovery of the production and distribution sectors lagging, failing to satisfy, the demand for goods and services.

 

In this current inflation Aggregate Demand is leading Aggregate Supply, and the lag in production and distribution results in the PPI leading the CPI.  This inflationary cycle is not due to monetary factors, but due to the real, physical economic structure and process – the flow of goods and services have been disrupted.  There is little the Fed can do about that; and probably little Central Planning by the government can do.

 

Take care of the Big Picture – dealing with the pandemic and restoring an operational framework – and let the individual agents (big businesses and small businesses, and the folks who make up the labor force) figure things out for themselves.  Sooner or later order shall be restored, and we will probably be operating at a higher price level, but without the inflationary pressures and back to some sense of stability.