The Inflation Monster and Its Owner
by Llewellyn H. Rockwell, Jr.
When central bankers blast central banks for being reckless, you know the problem is serious. Indeed, it seems that everyone suddenly really cares about inflation. Everywhere you go, this is the talk, at the grocery, the gas station, among your neighbors. Price increases have been persistent in major sectors such as medicine and education for decades, but today the trend is conspicuously hitting the stuff that people buy every day. So the reminders are ubiquitous, and public anger is growing.
As the president of an institute that spends a vast amount of its resources on the issue of monetary policy and reform, I see this as both good and bad news. When no one else seems to care about these issues, we promote research and publish books that consider this topic from every angle. If you were going to reduce all these efforts to a single phrase, it would be: it's the government's doing. And the answer in a single phrase is: let the market, not government, manage the money.
But just as in the 1970s, and before people began to accept 3–5% annual price increases as part of the natural law, people today are still enormously confused about the cause. There is no obvious foreign demon to blame for our economic troubles. People generally suspect that something is wrong in Washington, but such is always the case. The most immediate culprit in people's mind is actually the merchant, or perhaps a cartel of merchants.
Already, enterprises are posting signs to explain the higher prices in terms of their higher costs. Panera Bread is taking the offensive by explaining that the higher price of wheat is to blame. That is true enough, but it's not the whole truth. Other retailers speak about the low dollar on international exchange – again true enough, but not the whole truth. Of course, the anger at oil executives is as predictable as it is unjustified.
In economics, finding the relationship between cause and effect isn't as easy as tracing through a sequence of events. There is a time lag, of unpredictable length, between the monetary expansion of the Federal Reserve and the response in producer and consumer prices.
There is also the major problem that when the experts speak about these issues, they talk about the price level as if it were like the sea level, or something else that rises and falls like the volume on an iPod. The truth is that the price increases following a monetary expansion affect different prices in different ways, and, again, in an unpredictable manner.
Past bouts of expansion have created bubbles in the financial sector, plus other sectors such as housing, and state-dominated sectors like medicine and education. But a high dollar internationally, the growth of the international division of labor, as well as technological advance, kept the prices of consumer goods down, even falling. All these effects have been absorbed already, and the falling dollar relative to other international currencies has meant a higher price on imports. Lower productivity contributes as well, as does the general recessionary environment. So the downward price pressure on consumer goods is at an end.
Among the few who understand the role of money, there is the terrible problem that has grown up around the financial institutions created after deregulation. In short, hardly anyone knows what monetary instrument to measure to discover whether the Fed is creating a lot or a little new money. The only really reliable statistic is posted on Mises.org: the true money supply, which counts only immediately available money. It is here that we find the culprit: the great monetary expansion under Alan Greenspan that lasted from 2001 until 2005.
Despite all the complications, the fundamental cause is the Fed itself, which purports to be the great savior of the money system but in fact is its destroyer. By flooding the economy with ever more paper money, it reduces the value of our money – an insidious tax that the governing elites levy in ways that keep the people in the dark.
And here's the heck of it. When the Fed expands the money supply, it can funnel money to the elites long before the people are forced to pay the price. As Rothbard explains, those who get the money first are permitted to use it before prices rise for everyone else. By the time the new money circulates through the economic system and hits everyman’s pocketbook, the elites who received the first round of injections have made off like bandits.
At times like these, there is a role for good economists to explain the true source of inflation to the public. In the 20th century, we were blessed by scholars like Rothbard, and public intellectuals like Henry Hazlitt who wrote for every possible venue to explain that "when the supply of money is increased, people have more money to offer for goods. If the supply of goods does not increase – or does not increase as much as the supply of money – then the prices of goods will go up. Each individual dollar becomes less valuable because there are more dollars. Therefore more of them will be offered against, say, a pair of shoes or a hundred bushels of wheat than before."
The problems the Fed faces today are eerily similar to those of 1930 and following. The boom was caused by a loose money policy by the Fed, and the inevitable bust has come. But now everyone looks to the Fed to provide the answer. In the early 1930s, the Fed tried very hard to inflate the currency, but it could not manage to accomplish it through the credit markets alone. When bankers are reluctant to lend to shaky enterprises, and worried businessmen are reluctant to borrow, there is no other way to flood the markets. Today's Fed has been exceedingly reckless in trying to forestall this program. It has engaged in direct bailouts of investment banks, and it is offering super-subsidized loans to banks by the tens of billions. This is Ben Bernanke's little trick to use the banking sector more fully in his inflationary schemes.
If Bernanke loses, we all lose. But if Bernanke wins, we lose even more. More inflationary finance can only make the present situation worse.
Some people speculate that we are going to see not inflation but deflation due to the barriers faced by the Fed. My only comment on this is: we should be so lucky. The Great Depression would have been worse without its only saving grace: all goods were cheaper than before. The major mistake of Hoover and FDR was in thinking that low prices were somehow the cause of the depression rather than the effect.
Will Bernanke make that mistake again? Anything is possible. Paul Volcker – who solved the last dollar crisis by shrinking the money supply – just gave a major speech in which he blasted the reckless manner in which Printing Press Ben is conducting policy.
Presidium Moves to Raise Oil Output
By Anatoly Medetsky
The Presidium of the Cabinet emerged from its first-ever meeting Monday with good news for the oil industry, approving long-sought tax benefits aiming to ward off a production slump by promoting exploration and greenfield development.
A scaled-down version of the Cabinet, the Presidium will send its proposals to the State Duma later this week and expects the resulting legislation will take effect at the start of next year, said Deputy Finance Minister Sergei Shatalov.
In a key decision hailed by the industry and analysts, Prime Minister Vladimir Putin and other Presidium members endorsed tax holidays of up to 15 years for offshore oil fields, Shatalov said.
Companies involved in the entire process would qualify for the 15-year tax holidays, while those beginning production at an already identified greenfield would have a break of 10 years before taxes kicked in, Shatalov said.
Rosneft and Gazprom, through its oil arm Gazprom Neft, would be the winners if these proposals become law, as existing legislation designates the two state-controlled companies to lead work on offshore projects.
Another proposal approved Monday calls for a tax holiday of up to seven years for the development of greenfields in the northern Yamal Peninsula and Timan-Pechora provinces, Shatalov said.
The duration of the tax-free period could be shortened in cases where companies had produced a certain amount of oil at a particular field, Shatalov said. He said the total for offshore projects was 35 million tons and that a figure for the Yamal and Timan-Pechora fields would be decided in the next 10 days.
Dmitry Dolgov, a spokesman for independent LUKoil, said production could be expected to rise by as much as 10 percent, based on a five-year tax holiday, Bloomberg reported. He did not provide an estimate for the 10- and 15-year breaks.
Tax holidays of this type are currently only in place for greenfields in eastern Siberia, where they cease once the total oil produced reaches 25 million tons.
In another decision related to the oil industry, the Presidium supported a reduction in the mineral-extraction tax for oil companies in an attempt to offset steep rises in productions costs, Shatalov said.
Finance Minister Alexei Kudrin estimated that the oil industry would save 100 billion rubles ($4.2 billion) in taxes next year if the proposal, which he announced in March, became law. Putin backed the idea during his confirmation speech in the Duma earlier this month.
Although the cuts may only represent a fraction of the industry's total tax bill, analysts have said the savings will be vital if the sector is to have the necessary funds to finance new development and battle stagnating output. A slate of investment banks and oil companies, including Rosneft, have been calling for a tax cut since last year.
The proposal to cut taxes on existing production would raise the starting point for the levy on oil revenues from the current $9 per barrel to $15 per barrel.
The other major tax for the industry, the oil-export duty, will remain unaffected by Monday's decision.
A spokesman for Rosneft, which works in Yamal and Timan-Pechora, said the company was "extremely" pleased by the Presidium's announcement. It will be able to spend the money to increase exploration and production, said the spokesman, Nikolai Manvelov.
"Thus, the company receives an extra chance to invest in the development of its business," he said.
The State Statistics Service reported last week that crude oil production from January to April in Russia, the world's second-largest exporter of the commodity, was down by 0.3 percent from the same period last year.
Deputy Prime Minister Igor Sechin, however, expressed confidence in an interview earlier this month that output would again be above last year's levels by the end of this year.
The government is hurrying to lighten taxes in the sector because it was alarmed to see a country with huge oil reserves suffer a slide in production, said Anton Konchin, an analyst at UniCredit Aton.
"Let's hope that it's still not too late to reverse the disappointing production curve," Konchin said.
The Presidium approved the oil-industry proposals as part of a discussion of tax policies for the next three years. Other decisions included raising the allowable corporate research-and-development exemption, simplifying small business taxes and offering new tax breaks for spending on education, health and housing.
The measures to promote research and development at companies, which could take effect next year, include a 50 percent increase in the amount companies can spend tax free on research and development, Putin said in opening remarks at the meeting.
Small businesses will have their work reduced by the proposal to allow them to file their accounting records once a year, instead of on a quarterly basis as at present, Putin said.
"I want to emphasize that the small business sector is especially sensitive to the quality of tax administration," Putin said. "And we need further actions to improve it."
The Cabinet is also to submit a raft of amendments reducing income tax on people raising children to the Duma later this week.
The proposed tax cuts would be tied to the portion of their incomes that people spend on education, health care and housing, Putin said.
Money spent by companies on the training and education of employees would no longer be taxed, Putin said, and the tax-free portion of employer health insurance contributions would be doubled.
A portion of loans provided to help employees pay mortgage interest will also be given tax-free status, he said. Indiana Jones Irks Communists
By Anna MalpasSt. Petersburg communists are campaigning against the new Indiana Jones movie, complaining that its portrayal of the Russian villains is insulting and historically inaccurate.
"We are really outraged by this film, which has nothing to do with reality," Veronika Klinovitskaya, a spokeswoman for the Communists of St. Petersburg and the Leningrad Region, said by telephone Friday.
"Indiana Jones and the Kingdom of the Crystal Skull" features Jones, a swashbuckling archaeologist played by Harrison Ford, competing with Soviet agents and soldiers to obtain a precious artifact. Cate Blanchett plays a KGB agent with paranormal powers.
The film is the fourth chapter of the highly successful Indiana Jones franchise, and it came out in Russian theaters on Thursday.
Set in 1957, "Crystal Skull" marks the first time that Jones has done battle with Russians. In two of the previous Indiana Jones films, the villains were Nazis.
The communist group, which is not affiliated with the official Communist Party, posted a statement on its web site Thursday calling the film "a belch of the Cold War" and a "vile lampoon."
The film depicts Soviet soldiers and agents "in a caricatured and unattractive way" and encourages "idolization of the United States," the statement says.
Klinovitskaya criticized the "disgusting" portrayal of Soviet soldiers and said Blanchett's depiction of a KGB agent was "warped."
She also questioned the historical timing of the film, which is set in the same year that the Soviet Union sent the first man-made satellite into orbit. "It was a great year for the Soviet Union," she said.
The group is going to attend film showings and make noise in protest, Klinovitskaya said.
It is also printing 10,000 leaflets and e-mailing the film's stars, Ford and Blanchett, whom the site calls "puppets of imperialism."
Members may also contact the film's director, Steven Spielberg, Klinovitskaya said. "We haven't found his address yet."
Alexander Yushchenko, a spokesman for Communist leader Gennady Zyuganov, said the protesters "aren't Communists" and that he could not comment until he had seen the film.
In an interview published last week in Komsomolskaya Pravda, Spielberg described himself as "Russian" since his family originates from Ukraine.
He said the villains had to be Russians. "The Second World War had finished, and the Cold War began. America didn't have other enemies at that time."
Asked why Blanchett's character has the unlikely sounding name of Irina Spalko, the paper reported that he laughed and said, "Blame the scriptwriters."
Nobody was available for comment Friday at the film's Russian distributor, Universal Pictures International.
Meanwhile, critics are divided on the film's presentation of Russians.
A critic on Gazeta.ru called Cate Blanchett's portrayal of Spalko "caricatured," adding that he hoped "she didn't sell herself cheaply."
But a reviewer in Izvestia commented that: "We shouldn't be offended. We are the only people in the world who can understand Blanchett's heart-rending shrieks."
Socialism and the Chinese Earthquake
by Llewellyn H. Rockwell, Jr.
When buildings collapse following an earthquake anywhere in the world, the first instinct is to presume Mother Nature is at fault. The second is to wonder why the buildings weren’t built to account for the risk of earthquakes. The third step is where people go really wrong. They blame the builders for failing to observe building codes and the government for failing to enforce them.
This is the state of commentary on the hellish situation in Dujiangyan, China, where tens of thousands of people died – including thousands of children in as many as 7,000 schoolrooms.
A particular focus of much coverage has been the Xianjian Primary School, where hundreds of kids died. A parent of one of the children told the New York Times: "This is not a natural disaster. This is not good steel. It doesn't meet standards. They stole our children."
Now people are demanding that the local government be held accountable.
The problem is that these buildings were not up to standards, but the more fundamental question is why they were not. It is not merely a matter of obedience. It is a matter of economics. The people who build buildings need to be held liable for the structural integrity of the buildings. But of course a lack of accountability is a famed feature of all governments everywhere, in contrast with private enterprise.
China has undergone a private-enterprise revolution in the last decade and a half, one that has transformed the country and dramatically raised the living standards of the population. But the system that built the schools that collapsed is as stuck in the past as the system of Chinese communism itself. The government orders schools to be built and they must be built, period.
What if the resources aren't available? What if the workers lack the skill to accomplish the task? What if the machines that are to build them do not work properly and lack replacement parts? What if resource supply should be allocated differently according to the needs of the people? Under socialism, economics is beside the point. The schools must appear. This is the way the system works.
Consider the four-story Xinjian school. The building smashed to the ground, even as a nearby 10-story hotel was completely undisturbed by the earthquake. What are the details behind the construction of Xinjian?
As quoted from the Times:
When Xinjian was built in 1992, many parents worked for the Dongfeng Cement Factory. Company bosses donated 40 tons of cement. But that was not enough. "Everybody knew they didn’t have enough cement," said Dai Chuanbin, an older man familiar with the project. "So they used a lot of sand."
Parents say the township government cut costs further by hiring farmers to do the work instead of trained construction crews. One former school official recalled that workers poured the foundation during such heavy rains that it collapsed. Another foundation had to be poured.
The school opened in 1993 and would quickly be overrun with students. The detached annex was rebuilt in 1998 after inspectors deemed it substandard. Ms. Deng, the former principal, recalled that nearby construction work in May 2006 caused the flooring in the main school building to shake violently. But she said she never had reason to believe the building was structurally unsound and never filed any written complaints with higher officials.
Many people in fact complained and suspected grave trouble. But so far as the government knew, the plan had been fulfilled. The school existed and that's all that mattered.
Another problem was introduced by the lack of steel rod reinforcement for the concrete. It was added according to plan, but the rod was way too thin relative to the thickness of the walls themselves. When they came under pressure, they bent like paperclips and the concrete crumbled all around.
Looking at the pictures taken by photographers at the Times, one wonders how the building was able to stay up at all.
Conservation isn't always a good thing, now is it? But where to use resources and where and how to conserve them? This is the essential economic problem that socialism cannot solve. And why? Because, as Mises explained in 1920, the key to rational economic planning is the price. And not just any price but a true price brought about via trading under private property. The price of capital goods like concrete and steel is the tool by which these resources are apportioned. It is not enough to merely wish something into being. The project in question must be economically viable, which means that it must be profitable or least paid for in some way.
When the dictates of government officials replace the price system, the result can appear to be passably presentable. The schools existed. The teachers taught. The buildings stood. But the earthquake came, and the illusion was revealed at the expense of so many lives. These are lives stolen by socialist central planning.
We have public schools in the U.S., so why don't we face the same problems? One reason has to do with the relative scarcity of materials and skill. Public buildings in this country are islands of socialism in a sea of free enterprise, so the materials and workers are there. The plans of central bureaucrats are more realizable simply because there are vast capital reserves on hand, though we should remember that when the politicians speak of our "crumbling" schools and infrastructure that it is the politicians themselves are responsible. The public sector ordered them built and built them.
And what about building codes and their enforcement? It is a great myth that these are somehow responsible for the soundness of our buildings. Private enterprise meets the demand for safety as well as it meets any consumer demand. Your house doesn't fall in because of building codes but because the builders are liable for mistakes and because there is competition among them to build better buildings. What's more, private enterprise regulates itself, with a vast array of regulatory codes that are self-enforcing (Underwriters Laboratory, for example, is entirely private). So why do the government codes exist? Mostly they are used by large companies to erect barriers to entry by smaller firms.
But let us not get too far afield from the core point. The remnants of socialist central planning killed the kids. Yes, the government is to blame. The survivors and their families are right about that. But they have another enemy as well. It is the deadly ideology that set out to put government in charge of economic life, which includes building structures to house children for educational purposes. They can add the tragedy of the Xianjian Primary School to the list of deaths caused by socialism.
