First Do No Harm? First Don't Go Bust!
The most beautiful music in Greek mythology was made by the Sirens of Capri.
They would sing enticing songs to sailers far away from home, promising wisdom and knowledge...
Larry Kudlow has a column on 'Townhall' today entitled 'Do No Harm', concerning likely interest rate movements after today's meeting of the Federal Reserve.
Almost at the start, he writes,
"Katrina’s effects will probably slow the expansion of gross domestic product by a percentage point or more in the third quarter, resulting in a real growth rate around 2 percent. Economic activity should pick up in the fourth quarter, though, as post-storm repair and rebuilding efforts contribute positively to both output and employment. "
Such a rosy perspective on the economic aftermath of natural disasters would seem to be directly contrary to Walter Williams' often-expressed opinion on what constitutes good economics.
While constantly pushing factors such as the consumer price index, bond yields and the dollar exchange rate as indicators of a "non-inflationary monetary environment", he cannot ignore the high price of gold as a signal for future inflation, and given that he wrote "(even) the oil spike is abating", the column was possibly written before yesterday's surge.
However, Kudlow does acknowledge the nature of the difficulty faced by the Fed:
"The Fed, nonetheless, has a close call. It may decide that the temporary loss of economic output from the Gulf Coast could set up an inflationary threat from too much liquidity chasing a short-term loss of goods. This could explain the recent gold price increase, and it might induce the central bank to withdraw excess liquidity by raising the key interest rate to 3.75 percent from the prevailing 3.5 percent."
Some might think it odd that Kudlow might not mention factors such as unrestrained public spending only sustained by the continued goodwill of the central banks of China and Japan, the fighting of a war, the wilful failure to maintain America's domestic earning base by permitting the offshoring of industries and the continued exclusion of Americans from their own workforce through the abuse of visas and illegal immigration as other factors which might indicate inflationary forces at work - but not me.
But that's Larry over the back.
And his solution to the coming inflationary crisis is vintage Kudlowmania-
"Fortunately, President Bush has signaled his aversion to any tax increases to finance emergency Katrina assistance. So the tax-cut extensions for capital gains and investor dividends appear likely to pass in next month’s budget act. This pro-growth policy will be bolstered by Bush’s use of Jack Kemp’s enterprise-zone tax-and-regulation-free policies to rebuild New Orleans and the Gulf area. These measures will quickly restore private capital formation and lost output and help bring monetary policy back into non-inflationary balance as the availability of more goods will absorb excess liquidity. "
Precisely how are the tax-cut extensions going to help the old ladies on welfare in New Orleans? How will they possibly be beneficiaries of 'growth'? Yet more cheap Chinese crap in the shops? Because I presume that China will be the point of origin of the 'more goods'?
Hopefully, the use of 'enterprise-zone tax-and-regulation-free policies' in and around New Orleans will not include the sanctioned theft of peoples' homes - although somehow I doubt it.
'Private capital information'? 'Lost output'? In a city full of welfare poor like New Orleans? In a country whose government survives on the credit of foreigners?
Whatever Larry Kudlow's constituency is, it isn't people who have to worry about paying their bills or making ends meet. I wouldn't be surprised if, when the whole edifice comes crashing down, Kudlow would try to find an upside, saying that America had become a great place to 'invest'.
Kudlow writes to the rich, for the rich and for nobody else. One would have thought that the primary role of the Federal Reserve would not be to follow the Hippocratic Oath 'First, do no harm'; instead, it ought to be, 'first, don't go bust'.
Kudlow's 'Townhall' colleague Bruce Bartlett offers a very different perspective today, entitled 'What to do at Treasury'. Bartlett reports that it has been suggested that Andrew Card, the current White House Chief of Staff, will replace John Snow as Treasury Secretary.
"Many experts are now deeply concerned about the stresses and strains in the financial sector of the economy and fearful that a crisis could emerge at any moment. The huge budget and current account deficits, rising energy and gold prices, a bubble in the housing market, out-of-control hedge funds and a corporate pension system in the process of collapse are just some of the things that could trigger a financial crisis. Should that happen, I fear that Andy Card would be as out of his depth as Michael Brown was in New Orleans. "
Although the Sirens were beautiful singers, the sailers they lured were dashed to their deaths on Capri's rocky shores.
Beware the song of Sirens.