A Few Timely Stories

Several stories have caught my eye of late that cause me to fear that inflation may be coming very, very soon. First, in an unusual move, AIG has been spending its bailout money:

Goldman Sachs Group Inc and a parade of European banks were the major beneficiaries of $93 billion in payments from AIG -- more than half of the U.S. taxpayer money spent to rescue the massive insurer.

The article focuses on outrage that politically well-connected banks got taxpayer money, but to me this screams "inflation!," which is not mentioned. Thus far, almost all of the TARP and other funds have remained deposited with the FED, so the money is not circulating or being multiplied by the fractional reserve system. $93 billion is a lot of money to enter the money supply at once (about 10% of the AMB of early September 2008). There are two possible destinations for the money: lending into the money supply (inflationary), or placing it on deposit with the FED (non-inflationary, at least in the short term). I'm not seeing it show up too much in M1, so it appears that most of it is not entering circulation. But then, why would Goldman Sachs put money on deposit with the FED? Presumably they gave AIG a good reason/promise of high return, so it would not make sense to put the money on deposit with the FED. Maybe they have future plans for it. Or maybe the FED charts just haven't been updated yet. Next, more bad news:

The Treasury Department will purchase up to $15 billion in securities backed by Small Business Administration loans in an effort to unfreeze the secondary market for SBA loans.

This should increase SBA lending to small businesses by enabling lenders to sell their existing loans on the secondary market, according to the White House. This will free up capital to make new loans.

This is exactly how Fannie Mae and Freddie Mac drove up housing prices. It is a stupid idea. However, Treasury cannot print money, so the spending will be funded by taxes and deficits. Therefore, it is not a net increase of the money supply, but a diversion of funding from taxpayers pockets (private markets) to subsidize small businesses (private markets) through force of government (fascism). A thought for the Obama administration: why not just give a tax cut? Answer: probably because the government wouldn't get to pick winners and losers. Patronage. It's what politics is all about. Bernanke decided to make certain how he would be remembered by historians:

Treasury prices declined Monday, pushing yields higher, as Federal Reserve chief Ben Bernanke's outlook that the recession could end this year supported global equity markets and reduced the desire for the relative security of U.S. government debt.

Just like every other public official who presided over a crisis: clueless. I don't understand why Bernanke would do this. Despite not being an Austrian, he should not be considered a stupid man. He did not need to suggest that the recession could end this year, and I'm pretty sure he knows it won't. It really wasn't necessary. This statement will probably come back to haunt him. And before you start to get too optimistic, a quick history lesson. The same thing was widely believed about another key year:

“The depression has ended.” Dr. Julius Klein, Assistant Secretary of Commerce. - June 9, 1931

Don't believe a word of it. Finally, a little old-fashioned exploitation:

Thang Hong Luu pledged his parents’ house in Vietnam as collateral to raise enough money to take advantage of a job opportunity in America.

He says he paid a $10,000 fee to be chosen for a 2½ -year stint as a welder that he thought would earn him more than $100,000 — money that seemed out of reach in Vietnam.

But in February, eight months into his work contract, he was told he’d have to go home, he said.

This is already pure evil. A Houston company offers welding jobs to poor Vietnamese, asking for a very large (for said workers) fee up front, then is forced to break its contract when the Federal Government refuses to extend their visas. But its not just that. This deal, offered to desperately poor people, was a total rip-off:

Luu says the companies charged him and his fellow workers a fee of between $6,500 and $15,000 to be chosen for the U.S. jobs; told them not to speak to outsiders because Americans disliked citizens of communist countries; and overcharged them for housing and transportation... ...Luu’s contract with Coast to Coast notes he would earn $15 an hour for the first 40 hours and an additional $22.50 an hour for overtime.

He also agreed to pay Coast to Coast $500 a month in rent, $85 a month for transportation and a management fee of $2 per hour worked, according to a copy of his contract.

He said he didn’t know when he signed the contract that he’d be sharing an apartment with three other workers.

I'm not someone who normally thinks it's kosher to jump between mutually agreeing contracting parties, but it's hard to argue that there is no coercion or fraud involved in such a contract. I have to think that the policies of the Vietnamese government loom large in the back of the workers minds in the signing of such contracts. Worse, such awful circumstances tend towards corruption once here in the states, as employers know their workers are in a bind and find contractual infringements are easy to get away with. My hackles were particularly raised when I encountered the following:

The workers were here on H-2B visas that allow foreign workers to take positions, generally for up to 10 months, that U.S. companies cannot fill.

Couldn't fill the position?! What American in his right mind would agree to such a contract?! What a joke! This company wasn't trying to fill these positions. I'll bet I couldn't fill a position that required 12 hour days with no compensation, and a 12-stroke lashing at noon. That shouldn't get me the right to import foreign workers to fill the position. If you can't fill the position, RAISE THE SALARY! Thanks to repeated encounters with this kind of thing, I'm increasingly coming down against free-trade. I know what it is supposed to be, but it seems to me that in actual practice, it boils down to de-facto offshoring of the slave-master's whip, among other disgusting practices. Work for me, do whatever I say, or I'll ship you back to that awful place you came from. Work for me, or he'll beat the snot out of you. It also seems to me that this is just another way our government tries to inflate/steal without consequence. One of the key steps that brings about the end of the business cycle is the bidding up of the price of labor (wages). This is what eventually feeds the rise in consumer prices as the newly printed money moves down the production structure and forces the central bank to tighten monetary policy. If wages are artifically suppressed by expanding the labor pool with third-world labor, the central bank can continue to inflate awhile longer before triggering a rise in the CPI. (And yes, there really is something to the complaints of "liberals" that "conservatives" suddenly become upset when wages rise, but don't mind outrageous compensation of executives just because executives' wages don't much impact the CPI. The reality is, both really are inflation; one is just showing up sooner and isn't considered inflationary because the CPI isn't a good measure of inflation. It really isn't fair. "Conservatives" do try to suppress wages. "Liberals" should become Austrians.). I'm conflicted on this. I'm instinctively pro-free trade, but force and fraud are the antithesis of what I consider to be ethical behavior. I hate to encourage it. It seems to me that the de-facto argument here once again goes against first instincts, as it did in the immigration debate. I'm not sure where I stand anymore. However, I do know I'd have good company in my corner if I decided to become anti-free trade. It's a tough question. I respect both sides.