of my readers were neither the captain of the football team nor
queen of the prom. Yet millions of American teenagers today would
like to have the opportunity of being either — or, in the case of
athletically gifted girls, both.
for the top spots in life begins early. The late, great humorist
Jean Shepherd, who wrote the screenplay for "A
Christmas Story" (1984), which was a composite of several
of his short stories, had a theory that the reality of social hierarchy
intrudes at a young age for boys: sandlot baseball. The order of
who gets picked tells every boy about differences in performance.
The outcome doesn’t change over the years.
is filled with stories of people who peaked too early, beginning
with those archetypal early peakers, Adam and Eve. "It was
all downhill after that" surely was applied first to them.
Achilles and Hector were another pair of early performers who didn’t
have staying power.
suppose the supreme model of the early peaker in our day is Elvis
Presley, which is why the "Elvis is alive" legend persists,
even among people who really don’t believe it. As a very young man,
Elvis had had it all, or so it seemed. Then he faded, rebounded,
and then faded again. He is now a posthumous legend, with his very
own commercially successful shrine.
a PBS show that I had not seen until this week, "He
Touched Me: The Gospel Music of Elvis Presley," one of
the performers being interviewed said that Elvis’ death was like
President Kennedy’s: people remember where they were when they heard
about it. My pastor had this fact driven home to him last August,
the 25th anniversary of Presley’s death, when for some
reason, he happened to ask a new member of the church if she could
recall where she was when Elvis died. "Yes," she answered,
"I can. I gave him his last bath, and then I tagged his toe."
As a young woman, she had been on duty at the Memphis funeral home
where his body had been taken.
many teenage boys of my generation wanted to be Elvis? A lot of
them. To be known as the king! All those screaming girls! This was
the decade before groupies became a social phenomenon, proving to
teenage boys and even older men what they had long suspected: electric
guitars can be used as fishing polls.
as time goes by, people grow up. They learn the truth of the tortoise
and the hare. Fast-starters rarely win the marathon, and life is
a marathon. When we are young, we are interested in the sprinters.
That’s where the action is. The fans at cross-country meets are
few. I learned this early. My high school had the best cross-country
program in the state — and, a year after I graduated, the nation
— in part because the coach made the team train by running in the
sand, pre-season. But hardly anyone on campus even knew there was
a sport called cross-country. It was boring: again, rather like
most of life.
time to time, manias take place. People forget about boring, steady-Eddie
investing. They get caught up in the greed that is fostered by a
bubble. Then reality intrudes. Investors return to faith in long-term
the economy falls, as it did in the 1930’s, faith in long-term growth
is replaced by a loss of hope. Our generation doesn’t remember this.
the boom is on, the policy-makers don’t warn us that the bubble
will burst. When it does, they deny all responsibility for (1) having
created the bubble; (2) not having announced a warning.
when investors have lost their collective shirts, policy-makers
start a new marketing campaign that promises what investors want
to hear. In this case, investors want to hear about guaranteed growth
at lower rates.
old line about compound interest being the eighth wonder of the
world testifies to our awareness of the truth. Yet, given the spending
habits of most Americans, this lesson has not been learned. People
start out on the wrong side of the credit table. They borrow young
to buy depreciating assets. They play catch-up for the rest of their
lives. "What’s in your wallet?" ask the characters in
the Capital One credit card TV ads. The safest answer is this: "A
debit card." Debit cards don’t allow you to borrow, only spend
what you have already deposited.
Schaub became a multi-millionaire in real estate by following
the advice of his course: making it big on little deals. It’s the
careful purchase of income-producing real estate, bought at 10+%
discount from someone with a housing problem you can solve.
for the millionaire next door is by careful attention to detail,
constant improvement in service, and a seemingly unteachable knack
for seeing what consumers are willing to pay for. Success is the
ability to stay in the game longer than your competitors.
fast-starters imagine that success is easy. Then they lose their
abilities. Or they lose the attention of their customers. In all
three respects, "The Rolling Stones" are unique: their
fans stayed fans, and most of the Stones stayed alive.
you are not a rock star by age 40, you aren’t going to be one. But
there are other ways to become a success. Most people don’t expect
to become a success. Those few who do face great temptations.
hammers most fast-starters is when Easy Street turns into a dead
end. That’s what happened to the NASDAQ in 2000. There may still
being terminally naive investors who think that this event was not
permanent. They don’t pay any attention to demographics: an aging
population that will have to sell its stocks to gain income. They
don’t look at the fact that Federal Reserve policy is today as expansionary
as it was in the bubble era, 1995—2000. They don’t understand
that FED monetary policy will either inflate prices, thereby wiping
out savers through currency depreciation, or else will keep interest
rates low, thus wiping out savers through money-market returns below
government tax-and-spend policies combine with central bank monetary
policies to create a boom, the results undermine thrift, create
a boom-bust cycle, and subsidize debt. The future of the economy
is undermined. This is because the basis of long-term economic growth
— accurate entrepreneurship and high rates of thrift — is undermined.
monetary policy lures entrepreneurs and consumers into making mistakes.
The habit of personal thrift is either broken by interest returns
that do not pay anyone to save, or else is it converted into rampant
speculation, as it was in 1995—2000, which always leads to
massive losses in the recession phase.
order to keep the economy from suffering the recession that is necessary
to force down the prices of capital goods to meet expectations regarding
consumers in the future, the central bank floods the economy with
new money, in order to keep consumers buying and businessmen investing.
At present expansion rates, the money supply will double every nine
or ten years, i.e., money growth is in the 7% to 8% range per year.
of zero maturity:
consumers are buying, but businesses still resist investing. Businessmen
are still not confident that this economic recovery, weak as it
is, will be sustained.
NEW, IMPROVED SALES CAMPAIGN
the FED continue to inflate the money supply? In a speech that has
been widely quoted in the narrow hard-money newsletter camp, Federal
Reserve Board member Ben Bernanke made it clear that the FED sees
deflation as being a remote possibility. He made it clear that the
FED will do whatever is in its power to keep price deflation from
taking place. But neither is price inflation a threat, he said.
This is because central bankers and politicians are wise, and they
have the tools to control prices without creating shortages.
widespread "inflation pessimism," however, during the
1980s and 1990s most industrial-country central banks were able
to cage, if not entirely tame, the inflation dragon. Although
a number of factors converged to make this happy outcome possible,
an essential element was the heightened understanding by central
bankers and, equally as important, by political leaders and the
public at large of the very high costs of allowing the economy
to stray too far from price stability.
short, the free market now has the central planners that it has
always needed to make it work properly, according to the textbook
version of capitalism. These central planners control the money
supply. Unlike socialist central planners, our central planners
use the monetary carrot rather than socialism’s stick for missed
what of price deflation? Is it a threat? No. The policy-makers
have taken care of that threat, too. Above all, commercial bankers
are wise, and central bankers are both wise and powerful. They
control the money supply.
is deflation a threat to the economic health of the United States?
Not to leave you in suspense, I believe that the chance of significant
deflation in the United States in the foreseeable future is extremely
small, for two principal reasons. The first is the resilience
and structural stability of the U.S. economy itself. Over the
years, the U.S. economy has shown a remarkable ability to absorb
shocks of all kinds, to recover, and to continue to grow. Flexible
and efficient markets for labor and capital, an entrepreneurial
tradition, and a general willingness to tolerate and even embrace
technological and economic change all contribute to this resiliency.
A particularly important protective factor in the current environment
is the strength of our financial system: Despite the adverse shocks
of the past year, our banking system remains healthy and well-regulated,
and firm and household balance sheets are for the most part in
good shape. Also helpful is that inflation has recently been not
only low but quite stable, with one result being that inflation
expectations seem well anchored. For example, according to the
University of Michigan survey that underlies the index of consumer
sentiment, the median expected rate of inflation during the next
five to ten years among those interviewed was 2.9 percent in October
2002, as compared with 2.7 percent a year earlier and 3.0 percent
two years earlier — a stable record indeed.
second bulwark against deflation in the United States, and the
one that will be the focus of my remarks today, is the Federal
Reserve System itself. The Congress has given the Fed the responsibility
of preserving price stability (among other objectives), which
most definitely implies avoiding deflation as well as inflation.
I am confident that the Fed would take whatever means necessary
to prevent significant deflation in the United States and, moreover,
that the U.S. central bank, in cooperation with other parts of
the government as needed, has sufficient policy instruments to
ensure that any deflation that might occur would be both mild
here we have it. There won’t be deflation. There won’t be inflation.
There will be only safe, secure, long-term economic growth without
frightening price swings. In other words, what is being promised
is what the planners think will sell.
sources of deflation are not a mystery. Deflation is in almost
all cases a side effect of a collapse of aggregate demand — a
drop in spending so severe that producers must cut prices on an
ongoing basis in order to find buyers. Likewise, the economic
effects of a deflationary episode, for the most part, are similar
to those of any other sharp decline in aggregate spending —
namely, recession, rising unemployment, and financial stress.
that he offers no explanation for this collapse in prices. It just
comes out of nowhere. This is the Topsy theory of the business cycle.
This theory is very popular among central bankers. They do not ask,
as Ludwig von Mises asked 90 years ago, "What factor is so
central to the economy that most entrepreneurs make the same mistake
at the same time?" His answer: the monetary system. So, we
should start looking for changes in the money supply — a system
controlled by central bankers — to identify the cause of deflation.
His conclusion: price deflation is caused by a recession, which
in turn results from a prior inflation created by central bank monetary
expansion. This is not a popular theory. It is merely accurate.
HAVE NOT YET BEGUN TO INFLATE!"
then moves to the issue that has persuaded a lot of hard-money editors
to conclude that the FED is running out of options in the fight
against price deflation: an interest rate of zero.
a deflationary recession may differ in one respect from "normal"
recessions in which the inflation rate is at least modestly positive:
of sufficient magnitude may result in the nominal interest rate
declining to zero or very close to zero. Once the nominal interest
rate is at zero, no further downward adjustment in the rate can
occur, since lenders generally will not accept a negative nominal
interest rate when it is possible instead to hold cash. At this
point, the nominal interest rate is said to have hit the "zero
. . To take what might seem like an extreme example (though in
fact it occurred in the United States in the early 1930s), suppose
that deflation is proceeding at a clip of 10 percent per year.
Then someone who borrows for a year at a nominal interest rate
of zero actually faces a 10 percent real cost of funds, as the
loan must be repaid in dollars whose purchasing power is 10 percent
greater than that of the dollars borrowed originally. In a period
of sufficiently severe deflation, the real cost of borrowing becomes
prohibitive. Capital investment, purchases of new homes, and other
types of spending decline accordingly, worsening the economic
deflation and the zero bound on nominal interest rates create
a significant problem for those seeking to borrow, they impose
an even greater burden on households and firms that had accumulated
substantial debt before the onset of the deflation. This burden
arises because, even if debtors are able to refinance their existing
obligations at low nominal interest rates, with prices falling
they must still repay the principal in dollars of increasing (perhaps
rapidly increasing) real value.
the federal funds rate at 1.25%, are we facing a deflationary scenario,
when money growth is insufficient to stimulate consumer demand?
Deflationists think so. Bernanke discusses this possibility.
central banks conventionally conduct monetary policy by manipulating
the short-term nominal interest rate, some observers have concluded
that when that key rate stands at or near zero, the central bank
has "run out of ammunition" — that is, it no longer
has the power to expand aggregate demand and hence economic activity.
It is true that once the policy rate has been driven down to zero,
a central bank can no longer use its traditional means of stimulating
aggregate demand and thus will be operating in less familiar territory.
The central bank’s inability to use its traditional methods may
complicate the policymaking process and introduce uncertainty
in the size and timing of the economy’s response to policy actions.
Hence I agree that the situation is one to be avoided if possible.
he think this will happen? No. He freely admits what we in the inflationist
camp have been saying ever since the inflation vs. deflation debate
broke out in hard-money circles back in 1974.
a principal message of my talk today is that a central bank whose
accustomed policy rate has been forced down to zero has most definitely
not run out of ammunition. As I will discuss, a central bank,
either alone or in cooperation with other parts of the government,
retains considerable power to expand aggregate demand and economic
activity even when its accustomed policy rate is at zero.
FED, he says, can buy long-term bonds, thereby lowering the price
rates over the maturity spectrum of public and private securities
should strengthen aggregate demand in the usual ways and thus
help to end deflation. Of course, if operating in relatively short-dated
Treasury debt proved insufficient, the Fed could also attempt
to cap yields of Treasury securities at still longer maturities,
say three to six years. Yet another option would be for the Fed
to use its existing authority to operate in the markets for agency
debt (for example, mortgage-backed securities issued by Ginnie
Mae, the Government National Mortgage Association).
short, the real estate boom will get all the money it needs to be
FED can also make zero-interest loans to banks, he said. Will banks
take free money? Count on it. Next, the FED can buy foreign nations’
Fed can inject money into the economy in still other ways. For
example, the Fed has the authority to buy foreign government debt,
as well as domestic government debt. Potentially, this class of
assets offers huge scope for Fed operations, as the quantity of
foreign assets eligible for purchase by the Fed is several times
the stock of U.S. government debt.
did not even discuss the possibility of direct purchases by the
FED of corporate equities.
comes to the conclusion that I came to in 1962: the central bank
will inflate, no matter what, when faced with widespread price deflation.
deflation can be highly destructive to a modern economy and should
be strongly resisted. Fortunately, for the foreseeable future,
the chances of a serious deflation in the United States appear
remote indeed, in large part because of our economy’s underlying
strengths but also because of the determination of the Federal
Reserve and other U.S. policymakers to act preemptively against
it comes to fiat money, the old slogan applies:
more where that came from."
are not facing long-term deflation. We are facing a new round of
price inflation as a result of existing monetary inflation, with
more to come if necessary to avoid falling prices.
there is one sector of the economy in which consumers are willing
to take on new debt and buy more stuff, it is the housing market.
If it collapses, a depression is likely. If the FED chooses to supply
funds for Fannie Mae and Freddy Mac, the FED can keep this bubble
going for a long time. It will become lender of last resort for
the housing market.