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How Central Planners Corrupted the World

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The impossible happened in the late-1970s.  Inflation and unemployment simultaneously went vertical.  Leading economists were baffled.  This contradicted their academic training.

The Phillips curve said there?s an inverse relationship between inflation and unemployment.  When unemployment goes down, inflation goes up.  Conversely, when unemployment goes up, inflation goes down.

Economist William Phillips first sketched his curve using wage rates and unemployment data in the UK in the years 1861 to 1957.  The depiction of explicable order was impressive.  And it provided an economic model central planners could use to somehow optimize inflation and unemployment rates through economic intervention.

How could it be, in the late-1970s, that both inflation and unemployment went up in tandem?  According to the Phillips curve they were mutually exclusive.

In reality, the Phillips curve was elegant nonsense.  Like most elegant nonsense, it was right until the precise moment it was wrong.

When unemployment began creeping up in the 1970s the U.S. Treasury, with backing from the Federal Reserve, did what Keynes had told them to do.  They ran deficits to stimulate the economy and spur jobs creation.

Per the tenets of the Phillips curve, with rising unemployment the central planners could have their cake and eat it too.  They could print money without price inflation.

Yet something entirely unexpected happened.  Instead of jobs?they got inflation.  Then, when they tried it again, they still didn?t get jobs.  Rather, they got more price inflation.

Phillips? study will forever stand as a shining example for why economic theory cannot possibly be derived from empirical data.  The 1970s experience took its deliberate curves and twisted them inside out.

Coronavirus Salvation

The 1970s episode of rising inflation and high unemployment also demonstrated the economy is hardly predictable. One decade people borrow money and spend it.  The next, they save and pay down debt.  No graphical curve can predict what way people?s behavior will swing from one period to the next.

Moreover, any pre-1971 dataset used to discern a relationship between inflation and unemployment was rendered useless once the last vestiges of gold were removed from the monetary system.

Logically, when the unemployment rate goes up the economy sinks.  But when the unemployment rate goes down, shouldn?t the economy go back up?  Not always.

From January 2010 to January 2020 the U.S. unemployment rate slid from 9.8 percent to 3.5 percent.  But the economic boom over this time was hardly a boom at all.  GDP growth was lethargic ? averaging 2.3 percent over the entire decade.

Perhaps this had something to do with the labor participation rate?s general decline over this period.  The official unemployment rate may have gone down.  However, that didn?t mean more people were working.

Or maybe the weak GDP growth during the 2010s was the result of countless other factors?  Who knows?

The fascinating thing about the economy is not that it?s predictable.  Or that it?s not predictable.  It?s that it appears to be almost predictable.

More fascinating are the abundance of academic impostors that view the economy as a combustion engine.  Some even win the Nobel Prize for their ventures into nonsense.

Armed with line graphs, curves, and plotted dots, statist economists attempt to explain how the great big economic machine works.  What?s more, they justify and employ intervention to improve it.

High unemployment.  Slow growth.  Mandatory hunkering.  Poverty.  Terrorism.  Global warming.  Teachers.  Liquidity traps.  Drugs.  Polar bears.  Roughnecks.  Sustainability.  Shell Oil.  Workplace equity.  Meatpackers.  Kamala Harris.  Meanies.  Russians.  Right wingers.  You name it?

No challenge is too great.  The central planners at the Fed are working overtime to somehow bring heaven to earth.

Alas, their stimulus efforts stimulate greater chaos and distortions while concentrating wealth and power for the elites.  And now the Fed?s and Washington?s extreme interventions in the name of coronavirus salvation have doomed the earth?s creatures to a decade ? or more ? of misery that will far and away dwarf the 1970s.

How Central Planners Corrupted the World

On Wednesday, the Bureau of Labor Statistics reported that consumer prices, as measured by the consumer price index (CPI), have increased 7.0 percent over the last year.  This marks the largest 12 month surge since the period ending June 1982, when the CPI hit 7.1 percent.  And if the CPI was still calculated in the same way it was in 1982, it would be over 15 percent.

President Biden wants to scapegoat rising consumer prices on greedy price gouging meatpackers and oil companies.  These industries have come under Biden?s line of fire.  He wants to distract and divert the attention of the public from Washington.

You know it.  We know it.  Biden?s scapegoat storyline is one great big giant lie.

Biden knows, along with Fed Chair Jay Powell and Treasury Secretary Janet Yellen, that Washington?s fiscal and monetary policy collusions are 100 percent responsible for price inflation.  Of course, you?ll never hear this from Anderson Cooper.  In fact, there?s a lot you won?t hear from the mainstream press.

For example, consumer price inflation is not rising prices.  It?s declining money.  Because money, like gumballs and tennis shoes, is subject to supply and demand.  When the quantity of money goes up, the value of each money unit goes down.

The Fed?s and the Treasury?s fake money policies ? somewhere on the order of a combined $8 to $10 trillion over the last 24 months ? have wrought raging price inflation (i.e., mass dollar debasement).  They?ve also wrought extreme wealth disparity and a grossly stratified society.

During his July 2019 congressional testimony, Fed Chair Powell remarked that the relationship between unemployment and inflation has, ??gotten weaker and weaker and weaker to the point where it?s a faint heartbeat that you can hear now.?

At the time, Powell was providing justification for cutting the federal funds rate when the unemployment rate was just 3.5 percent.  The official CPI, in July 2019, was rising at an annual rate of just 1.8 percent.  So, apparently, the Phillips curve was dead.

But now, after trillions of dollars of fake money stimulus, and with the CPI at 7 percent while the unemployment rate?s at 3.9 percent, the Phillips curve is apparently no longer dead.  Actually, according to several eggheads, it has been hibernating?

In a recent Financial Times article titled, The flaws in the Fed?s approach to inflation, former Fed Governor and Columbia Business School professor Frederic Mishkin stated:

?Research that I presented with co-authors at the US Monetary Policy Forum several years ago suggests that the Phillips curve is not dead, but rather is hibernating.?

Go figure.  The Phillips curve is alive, then it?s dead, then it?s hibernating.  This model is about as good as flipping a three sided coin.

The point is, central planners are barbaric.  They have no business in a civilized society.  Their actions are based on garbage and backed by force.  And through their money printing and interest rate price fixing schemes they?ve corrupted the world and concentrated wealth and power for the elites.

Meanwhile, they?ve unleashed a wave of price inflation that will soon surpass their late-1970s / early-1980s handiwork, as it rockets towards the 19.66 percent CPI that was hit in 1917.

Are we having fun, yet?

[Editor?s note: The central planners at the Fed have destroyed the dollar and birthed the wrath of raging price inflation.  Don?t let these failed policies take your life savings and investments down with them.  Instead, you can exploit these failings to your advantage and build geometric wealth.  Discover how, and get started today!]

Sincerely,

MN Gordon
for Economic Prism
 
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_Kishore Mahbubani:_

*Travel is back!*

I say this with confidence because I have been to Europe on three separate trips (Davos in May, Venice and Zurich in June). And just before Davos, I was in the United States for three weeks. It was difficult to get seats on flights (and, by the way, this column was written on SQ345 from Zurich to Singapore).

Why do I say all this? Having visited both the US and Europe in recent weeks, I can say with some confidence that the West is a deeply troubled place. The populations are angry. And the best-educated Western elites, who are supposed to lead their societies in the right direction, are instead leading them in the wrong direction. As a friend of the West, I would like to suggest a wiser course of action.

This wiser course of action is based on a simple principle: the perfect is the enemy of the good. The West should accept imperfect solutions which will make their people happier. Equally importantly, it will also help the billions of poor people in the Third World who are suffering from higher food and energy prices.

Here, I would also like to inject an important point from moral philosophy. At the end of the day, we have to give moral priority to the sufferings of the poor, the bottom 10 or 20 per cent of the world's population. Indeed, it would be cruel and callous to ignore their sufferings.

This is why the greatest American political philosopher of recent times, John Rawls, emphasised that the most just society was the one that took care of the bottom 10 per cent. As he outlined in his seminal work, A Theory Of Justice, any social or economic inequalities, if they are to satisfy the principles of justice, "are to be to the greatest benefit of the least-advantaged members of society".

Three critical factors

And why are the very poor suffering? It's the result of three critical factors.

First, the massive stimulus packages post-Covid-19, especially in the US, have unleashed global inflation. As Martin Wolf wrote in the Financial Times, "The combination of fiscal and monetary policies implemented in 2020 and 2021 ignited an inflationary fire".

Second, the illegal Russian invasion of Ukraine, followed by the massive Western sanctions on Russia, have led to a massive spike in energy prices.

Ironically, despite (or perhaps, because of) these sanctions, the European Union, has paid more money for Russian gas. Since the war began on Feb 24 this year, the Europeans have paid more than US$60 billion (S$83 billion) for Russian oil and gas, while complaining that India and China were buying too much Russian oil. This led to the now famous quip from the Indian Foreign Minister, Dr S. Jaishankar, who said "our total purchases for the month would be less than what Europe does in an afternoon".

Third, the Omicron virus, a tricky virus, has broken through the defences of China's zero-Covid policy. This led to massive shutdowns, including in Shanghai from March. Since China is the factory of the world, supply shocks have also contributed to global inflation. In short, we have had an almost perfect storm.

What should be the rational response? To find a perfect solution? Or to accept an imperfect solution that alleviates the sufferings of many people, including the people of Ukraine and the massive number of poor people in the world?

The West has been pushing for a perfect solution. The rest of the world would prefer to see their sufferings decrease from an imperfect solution.

What's the perfect solution? This is what the West is pursuing in Ukraine: total withdrawal of Russian forces from Ukraine. No compromise.

Certainly, if the West could accomplish it, it should go for it. But what are the prospects of the West achieving this perfect solution in Ukraine? The answer is zero.

In short, the apparently rational West is pursuing an impossible solution. And in the process, the people of Ukraine are suffering. And, equally importantly, the Western search for a perfect solution is causing enormous suffering for a massive number of poor people.

World Trade Organisation (WTO) director-general Ngozi Okonjo-Iweala said: "The war in Ukraine has created immense human suffering, but it has also damaged the global economy at a critical juncture. Its impact will be felt around the world, particularly in low-income countries, where food accounts for a large fraction of household spending... Smaller supplies and higher prices for food mean that the world's poor could be forced to do without."

Call a ceasefire

So what is the imperfect solution for Ukraine?

The first step is to call for an immediate ceasefire. Why? Each day that the war continues, hundreds are dying. Plus, if Ukraine is going to feed the world again in 2023, it needs to get fertiliser so its farmers can start planting in 2022. More food in 2023 equals less suffering for the global poor.

The second step is to start talking to Russia. There should be two levels of talks. The first should be between Ukraine and Russia. The second should be between the West and Russia. And what would be the outcome of these two steps? Ukrainian lives would be saved. And the whole world would breathe a sigh of relief.

Then comes the hard slog. Given the huge chasm between Western and Russian positions on Ukraine, there will be no immediate long-term solution. But we're more likely to get one if talks begin. And we're more likely to get one if we can get more countries in the world to talk to Russia.

This is why it's a huge strategic mistake by the West to get Indonesia, as the host of the G-20 meeting on Nov 15-16, to disinvite President Putin from this meeting. And it would be an even bigger mistake for the West to boycott this G-20 meeting if Mr Putin attends.

There's one statistic that every Western leader should memorise and repeat each night before going to sleep: the West comprises 12 per cent of the world's population. The rest make up 88 per cent.

If Mr Putin comes to Jakarta in November, as he should, he will hear the views of the West. And he will hear the views of the rest. Mr Putin is not likely to listen to the West since there's zero trust between Russia and the West. But he will listen to the rest. The West is therefore stabbing itself in the foot by calling for Mr Putin to be disinvited.

And why is the West pushing for Mr Putin to be excluded? Here we come back to the main theme of this essay: because the West is pushing for the perfect solution of trying to defeat Russia. But this perfect solution will never come about.

Hence, the West should listen to Indonesia and all the non-Western members of the G-20 (who effectively represent 88 per cent of the world's population) and try to find some kind of a compromise solution for Ukraine. Such a compromise solution will save the lives of Ukrainians. And it will alleviate the sufferings of the hundreds of millions of poor people in the world.

In short, the pragmatic solution is also the ethical solution.

_Kishore Mahbubani, a veteran diplomat, is a distinguished fellow at the Asia Research Institute at the National University of Singapore._
 
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