Whereupon I Disagree With David Frum

There are any number of Republicans and conservatives who fear and despise David Frum. I am not not among him. Being something of a contrarian my own self, I admire that he stands up to the increasingly nonsensical group think in what passes for conservatism today and for making the point that the party of Lincoln, Goldwater and Reagan should not be run by disc jockeys and a half-witted former governor without the intestinal fortitude to even complete her term.

There was a time when intellectualism wasn't the enemy and pointing that out wasn't something that would wind up alienating your allies. Once up a time, talking points were a tool, and not an end in themselves. It wasn't all that long ago that hysterically decrying provable facts and logic were less of a political platform and more symptomatic of a deep mental illness.

Most importantly, individualism used to be a bedrock element of conservatism, which it isn't anymore. Most Republicans and virtually all of the Tea Party only know what they know because some scumbag lobbyist paid them to believe it in the first place. If you look around the media and the "conservative" blogosphere these days, you see that individualism is something to be punished and scorned. So-called conservatives are acting in exactly the same way that they routinely abuse liberals for. It's hypocrisy at its finest.

I give Mr. Frum a great deal of credit for having the balls to stand up to what is an almost malignant orthodoxy and taking the resulting damage to his career with good cheer. Most of my readers probably don't like what he has to say, but they should respect his courage in saying it. It almost certainly would have been far easier for him to start echoing Glenn Beck in January of last year, and he didn't do it, even though that's where the winds were clearly blowing.

But I have my areas of disagreement with him, specifically on the posts at FrumForum that can be found here and here.

In short, David and American Enterprise Institute economist John Makin are calling for greater inflation, which contrasts with the only sensible economic policies the United States has had since 1981. Federal Reserve chairmen Paul Volker and Allan Greenspan dedicated their careers to battling inflation, which may have been the only thing that kept an economy based on low taxes and high spending afloat for as long as it was.

Both men lived through what Robert Samuelson called The Great Inflation and Its Aftermath: The Past and Future of American Affluence that lasted from approximately 1965 through 1982. The Great Inflation was largely caused by tax cuts, a war that wasn't paid for, massive new social spending and the efforts of five administrations to create full employment (which was generally accepted at the time to be an unemployment rate of 6% of lower.) It was a brutal time to live. Because inflation discouraged saving, it encouraged the culture of consumer debt that is almost precluding a recovery from America's current economic distress.

I will concede that inflation is a great way to shrink the debt. However, it is also a form of theft. Lenders did not give the United States money only to be repaid in less valuable dollars. Countries that essentially devalue their currency to escape debt have traditionally had trouble borrowing more money unless the United States guarantees their loans. Who precisely would guarantee America's future borrowing if they inflate their way out of their current debt isn't addressed by Messers Frum and Makin.

In his current column in The Week, Frum makes an assertion that has already been disproven in regards to inflationary practices at the Fed.

In 2008 and 2009, the Federal Reserve operated on an epic scale. The Fed bought a trillion dollars’ worth of mortgage-backed securities. To pay for those securities, the Fed created a trillion dollars worth of cash money – money injected into banks and then (supposedly) through the banks into the general economy.

That supposedly is the tricky part. The Fed has to rely on the privately owned banks to circulate money through the economy – and the banks can only circulate if individuals and companies want to borrow. Right now, nobody with any credit-worthiness is in the mood to borrow. Newly created money sits (metaphorically) in the vaults of the banks, awaiting customers who never come.

But it is also true that in 2010, the Fed reduced its operations. At the beginning of 2010, it owned a little over $2 trillion worth of securities, and it owns a little over $2 trillion worth of securities today.

Untold trillions of dollars were moved from the Treasury and the Fed to the banks in 2008 and 2009. Instead of lending that money to business, the banks instead bought Treasury Bills, which was a pretty good scam when you consider that the Fed and Treasury money was sent out the banks at nearly zero percent interest and T-Bills yield at three percent. The banks, Goldman Sachs and JP Morgan, in particular, stand to profit by increasing America's debt.

In their interview, Frum and Makin agree on another unknowable idea.

Makin and Frum seem to agree that the Federal Reserve needs to take steps to increase the money supply and boost the rate of inflation. “A lot of people’s instinct is, ‘inflation is bad, maybe deflation is good’. The answer is, no… deflation encourages people not to spend, and that’s going to make the slowdown even worse,” said Makin.
Makin said that a targeted inflation rate of around 2% would be preferable, which would increase economic certainty.

The risk of hyperinflation is not upon us, predicted Makin. “If the yield on thirty year treasury bonds, which had been 4.5% in the spring, is now 3.7%… there can’t be much concern about inflation in that environment… the evidence is that inflation is going down, and getting dangerously close to deflation.”

There's no way of knowing whether a small rate of inflation couldn't suddenly explode into hyperinflation. I certainly don't think that presidents Kennedy, Johnson, Nixon, Ford and Carter wanted what became 13% inflation, but they couldn't curb it without creating what they thought would be politically unacceptable levels of unemployment. Reagan was the first president who seemed to understand that temporarily astronomical unemployment was, in the long-term, better than ruinously high inflation, and that might have been his single wisest decision as president.

The point is that inflation is highly unpredictable. The decisions at the Fed, which raised interest rates fairly significantly when the economy was overheating - particularly under Greenspan - prevented its return, although they also arguably destroyed the reelection prospects of President George H.W Bush.

I believe that the second President Bush's economic policies would have already triggered another round of rapid inflation if the economy hadn't crashed when it did. The platforms of both Barack Obama and John McCain relied on even further deficit financing and, in the absence of the collapse, would have probably triggered higher rates of inflation eventually.

The Great Recession makes my theory unprovable, but it's just as likely as the pie-in-the-sky predictions of partisans on either side of the political divide.

Having said that, Messers Frum and Makin are actively looking for solutions to what ails America, which can't be said for anyone in the Democratic and Republican parties, both of whom are what is more commonly known as "the problem" and married to fictions that only appeared to work in the past. I do congratulate them for that.