Inflation climbs to 3.6% in May. Palin was right!

On June 15, the Bureau of Labor Statistics released the inflation data for May. If you didn't hear about the new data, you are not alone -- the mainstream media buried the story. Why? Inflation hit 3.6% in May, even though gasoline prices actually fell that month. Inflation has been rising since November, as shown in the graph below:

These rising prices were largely caused by Federal Reserve Chairman Ben Bernanke's rapid expansion of the U.S. money supply, known as QE2 (Quantitative Easing 2). But inflation wasn't supposed to get this high. Back in November, Bernanke told his fellow central bankers that the Federal Reserve's Open Market Committee (FOMC) was aiming for an inflation rate no higher than 2%. Specifically, he said:

This policy tool will be used in a manner that is measured and responsive to economic conditions. In particular, the Committee stated that it would review its asset-purchase program regularly in light of incoming information and would adjust the program as needed to meet its objectives. Importantly, the Committee remains unwaveringly committed to price stability and does not seek inflation above the level of 2 percent or a bit less that most FOMC participants see as consistent with the Federal Reserve's mandate.

Bernanke is like a driver who steps on the brakes, then floors the gas pedal, then steps on the brakes again, then floors the gas pedal again. His tenure at the Federal Reserve has been marked by the erratic swings in the U.S. money supply, shown in the graph below:

From May 2010 to May 2011, Bernanke had his pedal to the metal. He grew M1 (the amount of money in cash and in checking accounts) at a 13.4% rate. Due to lag time, this didn't get inflation climbing rapidly until February. Now that inflation has gotten started, it may be hard to stop because it can get a momentum of its own.

Back in November, Governor Palin took on QE2 and President Obama's defense of it. Her predictions have turned out to be correct. When making her case against QE2, she argued that it could cause inflation, but would not much help U.S. net exports and business investment, the two factors needed to grow the U.S. economy.

Indeed, worsening net exports (exports minus imports) have been keeping the United States stuck in its current economic stagnation. When imports go up relative to exports, Americans get more debt and lose jobs, whereas when exports go up, relative to imports, Americans get more income and gain jobs. The decline in net exports may be slowing or preventing the U.S. economic recovery.

Bernanke hoped that QE2 would weaken the dollar which would turn U.S. net exports around. But Palin predicted that any positive effects would be temporary. In November she wrote:

Will driving the dollar down in this way do anything to boost U.S. exports? The short answer is not really. A weaker dollar will temporarily boost exports by making our goods cheaper to sell; but inevitably other countries will respond in kind, triggering the kind of currency wars economists are warning us about.

Indeed, so far Palin has been correct. QE2's effect upon net exports appears to have been temporary. Although U.S. net exports worsened more slowly in November and December, they resumed their economy-sapping slide in February, as shown in the graph below.

Business investment is another key to economic growth, it combines the money spent by businesses on new tools and structures, such as when businesses develop new energy resources or build new factories. When businesses spend money on tools and structures, they put Americans to work making the tools and building the structures. Later, the improved tools and structures give American workers more productive work, resulting in higher wages. Bernanke had hoped that QE2 would stimulate business investment. But, in November, Palin predicted that QE2 would have little effect upon business investment. She wrote:

Will QE2 then at least boost domestic investment? No, again. As I explained in my speech in Phoenix, the reason banks aren't lending and businesses aren't investing isn't because of insufficient access to credit. There's plenty of money around, it's just that no one's willing to spend it. Big businesses especially have been hoarding cash. They're not expanding or adding to their workforce because there's just too much uncertainty created by a lot of big government experiments that aren't working. It's the President's own policies that are creating this uncertainty.

Indeed, as the graph below shows, the rate of growth in real fixed investment slowed in the fourth quarter of 2010 and the first quarter of 2011, despite QE2:

Palin argued that QE2 was a dangerous experiment that risked inflation. She urged Obama to instead balance budgets, cut taxes and reduce burdensome business regulation. In November, she concluded:

If the President was serious about getting the economy moving again, he'd stop supporting the Fed's dangerous experiments with our currency and focus instead on what actually works: reducing government spending and boosting business investment through good old fashioned supply side reforms (cutting taxes and reducing overly burdensome regulations). Simply running the printing presses in order to avoid paying off your debts is no way for a great nation to behave.

In May, she added balanced trade to her recipe for economic recovery. After meeting with Donald Trump, she said:

"What do we have in common? Our love for this country, a desire to see our economy put back on the right track," Palin told reporters. "To have a balanced trade arrangement with other countries across this world so Americans can have our jobs, our industries, our manufacturing again. And exploiting responsibly our natural resources. We can do that again if we make good decisions."

The bulk of the U.S. trade deficit (i.e., of our negative net exports) is with China. When Trump was testing the waters for a possible presidential run, he made President Obama's incompetent negotiations with China a cornerstone of his campaign. With Chinese aggregate demand growing rapidly and U.S. aggregate demand stagnant, economists would normally expect the Chinese trade surplus with the United States to be shrinking. But President Obama has let the Chinese government reduce U.S. net exports to China month after month, as shown by the new 12-month lows reached in recent months in the graph below:

Obama negotiates with China from a position of weakness. He goes into each meeting ruling out the possibility of the U.S. putting tariffs upon Chinese products, even though the Chinese government has already placed high tariff and other barriers upon U.S. products. The U.S. need not negotiate from a position of weakness. Under world trade rules, it is entitled to impose trade balancing tariffs whenever it is running chronic trade deficits. Our proposal for scaled tariffs would let the United States (and any other country harmed by large chronic trade deficits) achieve higher net exports with or without the cooperation of its trading partners.

The mainstream media pretend that Palin is stupid. But she is actually blessed with a very rare commodity these days - economic common sense. She is the only potential presidential candidate currently advocating the three basic principles that would restore economic stability and long-term growth to the American economy: (1) balanced monetary growth, (2) balanced budgets, and (3) balanced trade.

I don't think I've heard Palin come out in favor of trade barriers or tariffs, and I hope I never do. I sincerely hope she knows better, and that she's too smart to advocate economically stupid policies.

Though it appears to be a "pro-Palin" article, it's really a "pro-tariff/trade barrier" article. On that account, the article and the authors need to be severely criticized.

Indeed, worsening net exports (exports minus imports) have been keeping the United States stuck in its current economic stagnation.

Complete baloney. The authors are parroting know-nothings like Donald Trump, thereby proving that they themselves know nothing.

When imports go up relative to exports,

Huh? Not possible. WE PAY FOR IMPORTS BY MEANS OF EXPORTS. Every dollar a U.S. housewife spends on a Chinese-manufactured consumer good in Wal-Mart, winds up in China where it is completely useless until that Chinese person spends it on some U.S. manufactured good. Hello? Howard and Raymond Richman? A citizen of China cannot spend that dollar on tea in Shanghai or a dumpling in Beijing. That dollar is only worth something -- exchangeable for some good -- in the U.S.

Conclusion: every dollar we spend on a Chinese-manufactured good is returned to us by China's spending on U.S. goods.

Ah, but here's the so-called problem:

In the hypothetical above, the U.S. housewife spends 100% of that dollar on a Chinese-manufactured consumer good (e.g., diapers); but the Chinese exporter, who winds up holding that U.S. dollar, might decide that he only wants to spend half of that on a U.S.-made consumer good -- e.g., a candy bar -- and the other half (the other 50 cents) he would like to spend, instead, on buying a share of stock in the candy bar corporation. Guess what? According to the way "Current Accounts" are reckoned -- "net consumer goods exports minus net consumer goods imports -- the U.S. has a 50-cent trade deficit. Despite the fact that 100% of that dollar was spent back in the U.S., though half of it went toward a consumer good (the candy bar) and half toward a producer's good (stock in the candy bar corporation). Similarly, China has a 50-cent trade surplus. But . . .SO WHAT. The U.S. "capital accounts" is now running at a surplus (by fifty cents, invested by China), and the Chinese capital accounts is now running at a deficit (by exactly 50-cents: the amount China invested in U.S. producer goods, instead of buying consumer goods).

Is it good that China invests in U.S. productivity? Yes. Does it matter WHO invests in U.S. productivity? No. Does more investment in U.S. productivity -- e.g., real estate, machinery, stocks, bonds, R&D, etc. -- enlarge America's "tool box" -- tools capable of producing things -- thus making us a more productive, economically richer nation? Yes. Does enlarging U.S. productivity eventually cause an increase in U.S. production of consumer goods, thus leading to lower prices of consumer goods for all Americans? Yes. In general, isn't MORE STUFF at LOWER PRICES (meaning: greater choice combined with greater purchasing power) the essence of what we mean by the term "economic progress"? YES.

Sorry, Richmans, but all of this is Economics 101.

Now, according to the O'Reilly's of the world, who are acquainted with these facts, the problem with the so-called "trade deficit" stems from the fact that one of the U.S. investments the Chinese are buying with the U.S. dollars we send them for their cheap goods is U.S. Treasury Bonds -- U.S. government-generated IOUs. The fear seems to be that China will end up "owning" the U.S. when it comes time to pay off on those bonds.

Nonsense. Is China forcing the U.S. Treasury to create and sell IOUs? No. Big Government is creating them and offering them for sale because it's on a disgusting spending binge. It's government's fault for printing them up and selling them; it's not China's fault for buying them. In fact, it's better for the U.S. if China buys them than if American dollars are diverted from more productive uses into Treasuries. The problem here is U.S. government spending, not Chinese purchases of our IOUs.

Americans get more debt …,

This is pure gibberish. The debt that the authors mention comes from the U.S. government's issuing DEBT, i.e., IOUs, payable out of future income of Americans. This debt has zero to do with trade, per se. The only reason the U.S. government is issuing IOUs is to pay for its spending. End the spending, end the debt.

and lose jobs

More gibberish. More economics 101. When American consumers save money by purchasing cheaper Chinese goods, there's more money left over for them to spend on anything else, including U.S.-made goods or U.S. investments. Jobs are not lost; they are restructured into a different composition of jobs -- the pattern of employment changes; some industries declining as others rise. Capital and labor will flow from those industries that are declining into those industries that are starting to flourish. For example: when housewives across the U.S. prefer to spend one dollar buying Chinese-made diapers (instead of, let's say, 5 dollars on U.S.-made diapers), this is obviously bad for the U.S. diaper manufacturers, some of whom will go out of business. But now that those housewives have 4 extra dollars to spend that they didn't have before, they have additional demand for OTHER THINGS. Who will produce those "other things" and sell them to those housewives? I don't know. Might be Americans if they can compete efficiently -- if the new "other things" industries don't get hamstrung having to deal with (i) labor union costs, or (ii) minimum wage costs, or (iii) inflation, or (iv) a general business climate of uncertainty. It should be pretty obvious that (i) thru (iv) are caused by government hampering of voluntary trade, and not by voluntary trade itself.

whereas when exports go up, relative to imports, Americans get more income and gain jobs.

The authors are ignorant of economic history, let alone economic theory. During the Great Depression, the U.S. had a TRADE SURPLUS, i.e., exports were up relative to imports, yet the country lost jobs -- 25% unemployment! -- and the economic downturn reduced everyone's income, both nominally and in real terms.

The decline in net exports may be slowing or preventing the U.S. economic recovery.

The U.S. economy has a number of structural problems (see (i) thru (iv) above), but free, voluntary exchange with trading partners isn't one of them. Not mentioned by the authors, but easily confirmed by surfing to the BLS site, is that U.S. worker productivity is not only the highest it has ever been, but it is the highest in the world. Part of the loss specifically of manufacturing jobs is because of that productivity: more and more, and better and better technology invested per worker. In the year 1700, about 95% of the U.S. population was employed in "the agricultural sector", i.e., on farms. Today, a little over 2% of the U.S. population is employed in that sector. Hey, Howard and Raymond Richman! What happened to all those American agriculture jobs? Did we "lose" them to foreign competitors because of "unfair trade practices"? Does anyone complain about the loss of those agriculture jobs? NO! We didn't "lose" them to anyone. We "lost" them to economic progress: more and more, and better and better technology: chemical fertilizers, pesticides/herbicides, mechanized farm equipment, genomically-enhanced produce, etc. As productivity-per-agricultural-worker increased, the economic need to have so many workers employed in agriculture declined drastically. Where did those workers go? They eventually learned new skills and found their way into the Next Big Economic Thing in the U.S.: industry and manufacturing. And just as there was no good economic reason that a large agricultural sector should have been declared sacrosanct and made permanent through trade barriers or other practices whose purpose is to lower individual worker productivity, so, too, there is no good economic reason that a large industrial manufacturing sector should be declared sacrosanct and made artificially permanent by means of trade barriers or other practices whose purpose would be to lower individual worker productivity.

Sorry, folks, but what happened to U.S. agricultural jobs -- lost to higher and higher productivity due to more and better capital invested per worker over time -- is now happening to U.S. manufacturing jobs. The fact that the U.S. is great at performing high-end skilled labor such as writing software and designing smart-phones in no way means that, economically, we ought to be physically manufacturing computers and smart-phones, too. That's also Economics 101.

For more reliable information on the so-called trade deficit with China, see this recent article in the Freeman by economist Robert Murphy:

Don't Worry About the Yuan

And watch this Cato Institute video of Donald Boudreaux, professor of economics at George Mason University:

Why We Needn't Fear the Trade Deficit

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