Obama is no more responsible for this situation anymore than Bush. The fault, as I have said so many times before, lies entirely with lousy economics. There are two dangerous fallacies at work here: the first one is the belief that the interest rate can be manipulated in a way that can generate sustained economic growth; the second fallacy is that central banks need to maintain a stable price level. Both fallacies are guaranteed to keep the boom-bust cycle going.Unfortunately, I can hardly comment on his skewering of the Aussie commentariat. I wanted to do a post on that one but it is a bit over my head. I'm not too proud to admit once again: I'm an amateur. Suffice it to say, most fallacies can be understood by taking money completely out of the picture. How does it make sense to employ people unproductively? That's what Obama's green jobs would do. Bruce Bartlett's quote is telling in this regard:
A small fall in the CPI has some commentators even warning about deflation. Bruce Barlett went so far as to say that "I think deflation is our economy's fundamental problem".Here is the full quote from Bartlett:
I think deflation is our economy’s fundamental problem. Unlike in the early 1930s, however, it is not caused by a shrinkage of the money supply, but by a sharp decline in velocity — the speed at which people and businesses spend money. Since velocity is the ratio of the money supply to GDP, it means that the same quantity of money will support a smaller nominal GDP. This will require either a decline in prices or a fall in output. Right now we are seeing both.
The Fed, to its credit, is attempting to expand the money supply to compensate for the fall in velocity. But it is hampered by the extremely low level of interest rates on Treasury securities. On Friday the yield on three-month T-bills was 0.01 percent. This indicates the existence of a liquidity trap. It means that the Fed cannot expand the money supply by buying Treasury bills since there is at this point essentially no difference between a Treasury bill and a dollar bill. The Fed must become more creative and buy longer-term securities and others that have higher yields. Fed Chairman Ben Bernanke has indicated a willingness to do so, but it will still take time for new money to circulate and stimulate consumer spending, business investment, and bank lending.One must always remember: the function of money is to facilitate rational exchange in the marketplace, and not much more than that. Economics is about getting the stuff we need. We can't eat little green pieces of paper. Mr. Bartlett, not a stupid man, obsesses over a trivial short-term price fluctuation, like so many other commentators, and about this or that policy and the flow of money. I do not mean to diminish the importance of money and how it flows, but before we obsess over it as the "fundamental problem," we ought to ask ourselves a "fundamental question." How can a trivial, short-term change in number attached to a good be a "fundamental problem?" An outright shortage of food would be a "fundamental problem." An outright evaporation of all energy supplies would be a "fundamental problem." Real, fundamental economic problems are massive misallocations of resources. Those are the real problems. The price changes he sees as the market responds are a reflection of this. We've talked about some of them: the irrational location of most of the world's manufacturing base in Asia, excessive supplies of housing in the US, poor domestic energy infrastructure, etc. All of these problems, the "true fundamental problems," were caused by wholesale manipulation and distortion of price structures over long periods of time. These price distortions were primarily caused by the manipulation of interest rates and the money supply by the world's central banks. So Mr. Bartlett and his fellow Keynesian's suggestion that fiddling even more with the money supply and interest rates, etc. should solve the problem by restoring prices to where they once were ought to strike us immediately as absurd. Those prices got us the economy that we have today. The one that doesn't work. How will this move manufacturing plants and factories to their proper, economically efficient locations? How will this get oil out of the ground? It won't. The physical resources of the global economy are poorly structured. At this point it is not an accounting problem, though it was certainly caused by an accounting problem. It is now a physical problem. Creative accounting cannot solve a physical problem. Only physical means can solve a physical problem. This means it will take time to remedy. There are no quick, painless solutions. Time, and accurate price structures are what is needed. These will provide accurate incentives for entrepreneurs to direct labor towards the hard work that needs to be done. Prices should be allowed to move as they will. If that is down, so be it.