Supply-Side Forum

This is a forum to discuss Supply Side Economics and related issues.

Monday, August 21, 2006

New Supply-Side Forum

The new site is up! Bob has done a wonderful job. He also says we can start posting there. He asks us to remember that it is a work in progress.

Bob has some great ideas about how we can add a lot of interest to the site, and perhaps creat some broader interest outside of our small group. I'll let him introduce those to you on the new site.

For now, thanks, Bob. It looks great!

Thursday, August 17, 2006

Reynolds Rips Darda exaggeration: Part two::By Alan Reynolds

Reynolds doesn't pull any punches in dismantling Darda's article.

"All that extraneous chatter about rising velocity or whatever is just an unhelpful distraction."

I tend to think Reynolds wins this round.

Wednesday, August 16, 2006

Minimum wage.

At the Weekly Standard, Whitney Blake looks at the myths surrounding the minimum wage. I wonder to what degree the present inflation is moving higher minimum wage supporters to push the issue harder this year.

Bernanke and growth.

At NRO, John Tamny examines the assumptions behind Fed policy.

Current monetary system.

Bill Bonner, at, recounts the 35 years of "goldlessness."

Forum Plans III

OK, I've just signed up for the hosting, downloaded the board software, and put together some rudimentary front pages. Once I get everything going (should take a few days) I'll let you know where to go. We can work out the details together once the forum is up and working.

I must say that this is a bit scary but it's exciting too, so let's have at it!

Tuesday, August 15, 2006

Networked Journalism

I touched on this on the entitlements thread, but I think it deserves its own post.

From PressThink:

The Era of Networked Journalism Begins

Today marks a key moment in the evolution of the Web as a reporting medium. The first left-right-center coalition of bloggers, activists, non-profits, citizens and journalists to investigate a story of national import: Congressional earmarks and those who sponsor and benefit from them. (read the whole thing)

In the PorkBusters phenomenon, we are seeing the start of what looks to me like the real potential of the web for monitoring government.

The web is a tremendous information tool. PorkBusters is showing us how it can be used to shine light in where the governmental cockroaches live.

Most people are not criminal by nature. However, most people these days also have very weak personal ethical standards, and politicians especially so. Thus, making government as transparent as possible is the best tool we have for bolstering that flimsy ethic. For the non-criminal, just being forced to operate in the open where others can observe our actions, is enough to keep us on a fairly straight line. It might even deter a few of the criminal types.

I think this is a very big deal.

Copper: Inflation or Corner?

I just ran across this April 24 post by Pierre Gave of GaveKal on the GaveKal forum. I don't have any way of verifying the facts, but I have a great deal of respect for Gave Kal.

"From many quarters, some within the financial community and others within the copper consuming industry we have come to the following conclusion - and this is not a first in base metals history.

A group of funds started to take pyhsical metal (cu) off the market in 2nd half 2004 and have continued to do so and more recently with the other metals. They then called on some of the large producers and told them they had put cu or whatever metal into play and would buy up the available stocks on the exchanges. They have in effect created a corner. Money is pouring into these funds at rates that are astonishing. IN effect the funds are pyramiding themselves taking on ever larger positions at ever elevated prices as their assets under manegment continue to soar. We estimate that the inner group of funds, numbering some 6-8, have a firepower for the base metals complex alone - asstes + leverage (times 5) of at least $500bn with the hangers on on top of that figure.

Never in the history of copper have prices risen to such a multiple of marginal costs (the 9th decile). Prices always revert to the mean. For copper, we will probably see solme 20MT of copper futures having to be sold - 10MT of fund longs and 10MT of delta selling yet to be done. How this comes about and what the risks to the financial system will be set out in a note that I hope goes out today which is being co-authored by a very experienced metals trader who has been on the right side of previous price debacles (Hamanaka in mid-1990s and tin crisis in mid 1980s - whow every mid-decade!)"

Note that copper topped (so far) a couple of weeks after this post.

This indicates the potential perils of commodity-based monetary policy in these days of massive hedge fund capital resources sloshing around the world. It also makes me wonder if something similar is occurring in Gold.


Ed wrote: "For forward lookers, the GVM, six months ago predicted that the high range of the CPI for June would be 4.3. The GVM prediction for the National CPI-U for July will be 4.6%. Not a happy fed number!"

I'm thinking the GVM will be wrong on the high side this month. That's not just because of the low PPI numbers. I got to looking at the CPI numbers today after the PPI came out and noticed that for the YOY CPI to go up at all the monthly figure has to come in above +0.6 which is the number that will drop out from last year. I just don't see a number that high this month. As a matter of fact, looking at the next three months in the same manner, I would expect the YOY figures to be declining, because of the high dropout numbers. In other words, the current CPI numbers may well rise from last month's +0.2, but the YOY number will still go down unless we get a far higher than expected (by me anyway) +0.6 or higher. To reach Ed's 4.6 number the July number would have to be +0.9, which I just don't see.

Monday, August 14, 2006

Entitlement Reform

This looks like good news. Is it possible that the Republicans could finally grow a tiny bit of fiscal responsibility?

"The Bush administration has begun sounding out lawmakers and other key figures about mounting a new bipartisan effort to rein in the costs of Medicare, Medicaid and Social Security after the midterm elections, according to officials in the administration and on Capitol Hill.

Good articles.

An excellent article on why oil prices are so high, from the weekend Wall Street Journal.

Last week Alan Reynolds second-guessed Fed policy, while at NRO, Tom Nugent defended the central bank.

And today, the Wall Street Journal had an op-ed criticizing the Fed:

How the Fed Lost Its Groove
By Henry Kaufman

In its most recent directive, the Federal Open Market Committee restated the Fed's long-standing and laudable goals: to seek "monetary and financial conditions that will foster price stability and promote sustainable growth in output." But the Fed's monetary tactics are flawed, and work against these objectives.

Fed strategy of the last few years stands on three tactical legs. First, its responses to economic and financial developments have been measured; second, its intentions and actions have been transparent; and third, it has relied on an econometric model for projecting future developments. These approaches would be reasonable, rational and effective -- if not for the uncomfortable fact that markets have learned how to circumvent them.

Consider the steady ratcheting up of the Federal funds rate -- from 1% to 5.25% over the last several years. Has this reined in debt expansion and credit availability? Non-financial debt in the U.S. expanded at a rate of 6% in 2001, grew by 10% in 2005, and has been swelling at an even faster rate this year. At this pace, debt is growing an astounding 50% faster than GDP.

Meanwhile, outstanding credit derivative contracts increased from about $4 trillion at the end of 2003 to more than $17 trillion at the end of 2005; and the large volume of financial market activity so far this year suggests that outstanding derivative contracts are even higher now. The recent surge of these instruments is not just about reducing risk; it is fueling speculation.

What about the flattening of the yield curve? By historical standards, yield spreads (between high-grade and low-credit-quality debt) are very narrow. It costs somewhat more to borrow today than it did two or three years ago, but credit remains readily available.

While the yield curve has flattened, moreover, there has been a substantial increase in the profitability of major financial institutions. This is extraordinary: Historically, the profitability of financial intermediation gets squeezed as the differential between yields on short and long obligations disappeared.

Major financial intermediaries have found ways to overcome the retarding impact from Fed fund rate increases. They have actually increased their volume of outstanding assets, liabilities, off-balance sheet commitments, and profits.

How can this be? The Fed policies of measured response and transparency have improved the capacity of financial intermediaries to gauge the market impact of central bank actions. In this kind of environment, financial intermediaries employ a variety of "value at risk" analytical techniques, along with a wide range of credit instruments, to quantify risks within narrow bounds.

Ironically, the predictability born of the Fed's measured response and transparency encourages risk taking and speculative trading. As the Fed lowers uncertainty about the near term, investors grow bolder.

Today's large financial institutions set profit objectives that motivate lending officers, investment managers and traders to increase loans, investments and trading opportunities. Is there a large conglomerate financial institution around today that does not set revenue and profit targets for each of its subsidiaries above those of the previous year? I think not. This is another way that the Fed's measured response and transparency policies spur credit creation -- and as debt balloons beyond reason, inflation and volatility will follow.

The third leg of the Fed's policy stool -- heavy reliance on an econometric model -- is also wobbly. Such models are formulated on the basis of past economic and financial variables that do not adequately incorporate structural changes in business and financial behavior. Their underlying economic equations and statistical projections offer, for the most part, false comfort. The econometricians trained in this kind of model building, some of whom shape economic policy, should understand the limitations. Instead, they seem to have become entranced by their own magic.

The historical record offers a litany of monetary foibles and follies akin to the Federal Reserve's current off-kilter approach. In the 1920s, it tolerated over-speculation for too long, then helped usher in a depression by overreacting. In the 1970s, the Fed failed to discern that lifting interest rate ceilings gave banks the freedom to pass on the cost of money to borrowers. Borrowers' costs rose sharply, their profits declined, and their credit quality deteriorated. The Fed also miscalculated during this period when -- in tracking inflation -- it focused on indices that excluded the cost of energy and food.

Yet another tactical error, which extended through much the 1970s and 1980s, was the Fed's policy of targeting the growth of the money supply. This eventually was jettisoned as it became more and more difficult to differentiate between money and credit.

Last week, during his Congressional testimony, Fed Chairman Ben Bernanke reaffirmed that he will be using the Fed tactics that are so problematic. Measured response was very much in the tenor of his presentation; so too was his adherence to an economic model that is basic to the Fed's business forecast and monetary policy -- although Mr. Bernanke included the typical caveat that economic forecasting is far from a science. He made some nuanced comments that suggest a pause down the road for the rise of the federal funds rate. He did not comment on the extent to which the structural changes in the financial markets are modifying economic and financial behavior.

The market's response to Mr. Bernanke's testimony was decisive: Bonds and stocks rallied sharply. To market participants, the downside to risk taking was sharply reduced for the near term -- a factor which, regardless of fed fund rate changes, will only encourage substantial growth of debt.

Mr. Kaufman is President of Henry Kaufman & Company, Inc., an economic and financial consulting firm, and author of "On Money and Markets: A Wall Street Memoir."

Saturday, August 12, 2006

Jude's Writing

Has anyone questioned the Poly guys about what will happen to Jude's papers that were posted on the site? As I browsed the blogs on people interested in economics I thought these people should read Jude's writing. That is when it struck me that if the Poly site goes down we might lose access to Supply Side University. Any thoughts?

Friday, August 11, 2006

FED Pause and Inflation

On the Poly site we had a discussion about how much of the POG was monetary and how much was a crisis premium for world events. I believe that the recent reaction of gold to the FED announcement of a pause in interest rates and to the Lebanon crisis and the terrorist plot in the UK all seem to indicate that the primary driver in the POG is monetary, meaning fiscal events that have primarily a monetary effect as opposed to events that are significantly crisis effects.

Both the POG and the price of oil have been trending downward since the FED announcement. This is consistent with investers recognizing that a lower FED interest rate will allow the market rate to settle and business to increase sopping up excess currency.

It seems clear now that when the FED increases interest rates it creates a condition exactly the opposite of what it states is its intention.

Propserity and morality.

An interesting book review from Reason. It tracks Jude Wanniski's argument that economic stress leads to increased social pathologies. Unfortunately no mention of inflation's role.

Darda on the Fed.

Michael Darda had a Wall Street Journal op-ed yesterday, "How Inflation Gets Fed."

Forum Plans II


I have been informed that that TalkShop computer will be indisposed for the foreseeable future. Therefore I am looking into cranking up a more standard discussion forum (one of the more web-based php-type packages: you may remember the one Poly had for a while during its shakeup a couple of years back).

I'll need a domain and a website as well, so if anyone already hosts their own sites I'll take any advice you wish to forward (and I'm soliciting advice from lots of other folks I know, too).

Specific questions for the group are: Do you have any suggestions for a domain name that the forum will be hosted under (I'm looking at packages of 3-5 domain names so I'll have a couple for my own use and one for this use), and do you have any desire to see other information posted in conjunction with the forum (RSS feeds of commodity prices, articles written by members or other interested/ing parties, links, downloads, and what-have-you)?

Wednesday, August 09, 2006

Today's articles.

At National Review, John Tamny examines Treasury Secretary Paulson. has Gary North asking, "Inflation or Deflation in 2007?"

And, the Wall Street Journal attacks the Phillips Curve but argues for further rate increases:

9 August 2006
The Wall Street Journal

A Pause That Digresses

The Federal Reserve has seemed unsure how to proceed on monetary policy for several months, and yesterday it proved it. The Fed's Open Market Committee decided not to raise interest rates again -- not because inflation is contained but because it says the economy is slowing.

Uh, oh. Here we go again, back to the era of the Phillips curve, the economic theory that postulates a trade-off between inflation and unemployment....

In its statement, the Fed conceded that "readings on core inflation have been elevated in recent months," and that this may continue. However, the Fed is guessing that "inflation pressures seem likely to moderate over time," thanks to previous monetary tightening "and other factors restraining aggregate demand." That last bit is the Phillips curve giveaway, suggesting that slower economic growth, such as in the housing market, will reduce inflation along with it.

Let's hope Mr. Bernanke is right about the future direction of prices. But as we all learned the hard way in the 1970s, inflation can increase even when growth slows if the Fed has printed too much money and pricing pressures continue to pass through the economy.

And yesterday's data for second-quarter productivity and labor costs were far from reassuring on that score. Nonfarm business productivity growth slowed to 1.1% at an annual rate, even as hourly compensation (up 5.4%) and unit labor costs (plus 4.2%) climbed sharply. Including upward revisions for previous periods, unit labor costs are now 3.2% higher than a year ago; that's the fastest rate of increase since 2000 when monetary policy was considerably tighter than it is now. When labor costs outstrip productivity gains by that much, it's called inflation.

Perhaps all of this is what Richmond Fed President Jeffrey Lacker was looking at as he cast a dissenting vote yesterday in favor of raising the Fed funds rate (now at 5.25%) another 25 basis points. Come next month, Mr. Lacker will look like a prophet if Mr. Bernanke is confronted with further price increases that force the Fed to resume tightening. This may also explain yesterday's sullen reaction in financial markets to the Fed's "pause," as stocks fell on the news. Typically stocks rally at the end of the Fed's rate-rising cycle, but investors don't seem to be convinced that the Fed is really done.

The larger context here is that the Fed is struggling to make up for its easy-money blunders of 2004 and 2005 without tipping the economy into recession. Like much of the rest of the economic establishment, the Fed underestimated the economy's strength in the wake of the Bush tax cuts of 2003. It kept money too easy for too long, and the inflationary pressures it created are only now showing up with a vengeance in the consumer price and labor cost indices.

While this was mainly Alan Greenspan's last hurrah, Mr. Bernanke was along for part of that ride as a member of the Open Market Committee. The Fed's mistake then has made his job that much more difficult now. Mr. Bernanke no doubt hopes that yesterday's pause is one that refreshes; we fear it has only postponed the ultimate day of reckoning.

Monday, August 07, 2006

Two new inflation articles.

At TCSDaily, Jerry Bower continues his argument against a major inflation indicated by gold.

And at the WS Journal, Martin Feldstein says the Fed should risk recession to get inflation under control.

The Coming Crash

The Coming Crash

Here’s what I see happening. Can anyone tell me why we are not headed for an epic crash?

The housing market in the Baltimore/DC area (and probably in many other overly-frothy areas) is starting to come unglued. Owners of speculative, highly-leveraged mortgages are starting to miss payments (and even making “jingle payments”- sending in their keys and walking away from mortgages they can’t make on equity positions where they’ve hit zero or are upside-down), producers of housing stock are either placing their condo units up for rent or even missing payments of their own, and owners are slashing selling prices like crazy (a trend likely to accelerate, particularly when the school year starts).

The reported federal deficit is ~$318B but that is inclusive of >$400B in SS and Medicare surpluses which will disappear to zero and go negative in 8-10 years (we aren’t even mentioning the several $Trillions of additional unfunded liabilities in those programs being stacked up year after year). It seems to me that this situation will turn ugly for those in power (regardless of party) as the reported deficits can no longer be hidden.

Lots of suppliers in the defense and homeland security establishment are currently being starved as new contracts are held back both because of the cost of the silliness in the Middle East and to make the budget deficits look better going into the next election. These companies represent a huge source of employment for many classes of decently-paid technical personnel (of a sort that industry doesn’t need, instead either needing other skills or simply fewer technical employees overall).

Owing to the serious monetary and fiscal/regulatory mistakes of the past ten years (and more) there appears to be massive malinvestment overhang worldwide, but especially in places like China where the steel and cement industries among others are tremendously overbuilt. The government there recognizes the problem but has been unable to clear but a sliver of the excess capacity. That has to fall apart and be worked off at some point.

It seems to me that the house of cards has to collapse, probably within five years. It’s too big to be inflated away any longer. Whatever parties are in power are going to take it on the chin (among other places) but the current opponents will have no real answers since most parties more or less operate the same way, just waiting for the log to roll back around.

It could be fun to watch, in a morbid sort of way. Anyway, tell me why all this isn’t going to fall apart?

Thursday, August 03, 2006

Supply-Side Forum

Another post from Sean Rushton:

At NRO, Jerry Bower argues against gold as the monetary Polaris. Arguments to the contrary?

Forbes on Bernanke

Sean Rushton asked for this to be posted:

Fact and Comment
Steve Forbes


Dunce Cap

Fed Chairman Ben Bernanke's Congressional testimony a few weeks ago was a disappointment. Investors and executives better expect more turbulence and higher interest rates.

The man is still underestimating inflation -- despite the sky-high levels of prices for gold and other commodities. More disturbingly, the Fed boss hinted that inflationary pressures would be easing because of a slowing economy. Bernanke and the Federal Reserve bureaucracy still seem to cling to the notion that growth causes inflation. It doesn't. Excess money creation does, as Milton Friedman conclusively demonstrated decades ago. The destructive idea that there's a tradeoff between inflation and economic growth has unnecessarily retarded our expansion and capital markets in the past. Experience has shown this idea to be nonsense. Both the 1980s and 1990s saw vigorous growth and declining inflation.

Bad ideas are sometimes harder to kill than obsolete government agencies.
Ben Bernanke's education in central banking, alas, is going to be a long one. So far this student is proving to be a slow learner.

FOMC Forecasts

Here's the chart, Judith:

Chart from Pimco.

Trade Deficits

It has long been my opinion that the trade deficit numbers are a figment of the accounting system and statistic gathering methods, not reflecting reality.

Now Hausmann and Sturzenegger at the Harvard Kennedy School of Government have done a beautiful bit of research showing how this is true.

It turns out that if you do the accounting right, there have been no net U.S. trade deficits. The unaccounted exports are knowledge, liquidity and insurance, with knowledge being the biggest factor.

Read the whole paper, it is excellent and very readable for non-economists.

Thanks to EconLog for the link.

Wednesday, August 02, 2006

Forum Plans

When I saw the news that Polyconomics was ending, my first thought was that I didn't want to lose the group that has been established at Talk Shop.

I tried to find a comparable message board software that I could get up and running instantly, but looking over the array of available options, it seemed that the best solution would be to set up a temporary site where we could all keep in touch while we re-create what we had.

Robert Churchill is exploring one option which would be ideal. If that fails, however, there are a lot of message board software packages available either free or at low cost. If anyone has any particular knowledge or preference in that area, all suggestions are very much appreciated. The WebBoard software itself, though ideal, since that is what we are all used to, is too expensive IMHO, for us to purchase.

My concept of the new forum is not one where I take over the role of Jude, in case any of you were worried about that. I'm not interested in dominating, or in controlling the discussion. I think there should be one or more administrators who are willing to keep the discussion at a relatively high level, but I don't have to be one of them. If there has been any failing of Talk Shop, it has been in this area. Again, IMHO, the lack of this type of posting discipline has been responsible for driving away some of our more knowledgeable and valuable members who, understandably, were unwilling to suffer through all the trash postings. That was, in part, why I left for a time.

I know there is a risk that without the backup of the Supply Side University materials, and the Memos, etc, that this will deteriorate over time. I hope not, however. And knowing the risk, perhaps we can prevent it.

Supply-Side Sells

The Club For Growth is probably the purest supply-side policy advocacy group in American politics. The good news is that they are quietly assembling a very impressive track record of winning elections by candidates that they back.

My conclusion from this is that supply-side issues sell well to the public, if they are actually explained and advocated. The Republican Party should take note of this. These ideas sell. There is no need to go to socialism-lite to attract moderates. They can be attracted with supply-side growth-promoting policies.

Tuesday, August 01, 2006


Ed Breen wrote a comment on the other thread that I wanted to post as a new topic. This will have to do until I can figure out how to get everyone registered to post on their own. I'm very much learning this software.

Ed Wrote:
David, thank you for the space. What do you think of the PCE today, looks like the Core year on year may be 2.4. The GVM was looking for 2.1. This does not help BB pause in August...and the economy is approaching a break point.

Monday, July 31, 2006

Welcome Talk Shoppers

Hello, all.

I know the format is not ideal here, but we can use this as a temporary means of staying connected. If there is continuing interest, then we can set up a site with a better message board format.

As it is set up, I am the only one who can post original posts, though anyone can comment. If you would like to be signed on so that you can also post, e-mail me and I will set it up.

I hope there is interest in this, because I would hate to see our good Talk Shop group disappear.