STAFF NEWS & ANALYSIS
DB Briefs: Government Knows Best / Thai Rice Causes Inflation? / The Federal Reserve Is Necessary?
By Staff News & Analysis - August 17, 2011

AT&T Purchase of T-Mobile May Spur Regulation … AT&T’s pursuit of U.S. government approval for its $39 billion planned purchase of T- Mobile USA Inc. may spur more regulation for the entire telecommunications industry. … “Once you have a monopoly, you have pricing power, you need rules,” Howe, the report’s co-author, said in an interview. Without more regulation, “your choice is lawlessness.” – Bloomberg

Asia Inflation May Rise With Thai Rice Price … Yingluck Shinawatra became Thailand’s first female prime minister by pledging to lift rural incomes through higher rice prices. The rest of Asia may now have to pay for her campaign promise. … “High rice prices will translate into higher inflation pressures in Asia, at a time when most inflation readings are flirting near the higher end of central-bank target or forecast ranges,” said Chua Hak Bin, a Singapore-based economist at Bank of America Merrill Lynch. “Once the global backdrop stabilizes, inflation could come back strongly.” … Food makes up more than 30 percent of inflation indexes on average in Asia. – Bloomberg

In Rick Perry’s World Without a Fed, He Can Barter for U.S. Votes … Asked about the Federal Reserve…[Texas Governor Rick] Perry said of Fed Chairman Ben S. Bernanke: “If this guy prints more money between now and the election, I don’t know what you all would do to him in Iowa, but we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treacherous — or treasonous.” … If he believes this, he either doesn’t understand the Fed’s function, or is a peculiar kind of monetary extremist. … If the Fed didn’t print any more money at all, we’d soon be relying on a cumbersome and rather inexact form of exchange known as the barter system. – Bloomberg

AT&T Purchase of T-Mobile May Spur Regulation

AT&T’s pursuit of U.S. government approval for its $39 billion planned purchase of T-Mobile USA Inc. may spur more regulation for the entire telecommunications industry. … “Once you have a monopoly, you have pricing power, you need rules,” Howe, the report’s co-author, said in an interview. Without more regulation, “your choice is lawlessness.” – Bloomberg

Dominant Social Theme: Without government regulation, the public would be helpless victims of monopoly businesses.

Free-market Analysis: In a truly free market, monopolies are fragile and fleeting, and they never have the license to gouge that the Justice Department would have you believe.

A monopoly is constrained by indirect competition from substitutable products and services. Mobile phones face competition from landlines, VOIP (internet phone service) and computer email, which means that all internet providers and channels (including satellite) are part of the competitive mix.

A monopoly is constrained by the threat of new entrants. Any monopoly that set its price substantially above its marginal cost for providing the product or service would be inviting fresh, competitive faces into its industry seeking a share of the extraordinary profits. Their arrival would be the beginning of the end for the monopoly.

There’s only one monopoly that is free of these constraints. It is the monopoly provider of violence and coercion, aka the government.


Asia Inflation May Rise With Thai Rice Price

Yingluck Shinawatra became Thailand’s first female prime minister by pledging to lift rural incomes through higher rice prices. The rest of Asia may now have to pay for her campaign promise. … “High rice prices will translate into higher inflation pressures in Asia, at a time when most inflation readings are flirting near the higher end of central-bank target or forecast ranges,” said Chua Hak Bin, a Singapore-based economist at Bank of America Merrill Lynch. “Once the global backdrop stabilizes, inflation could come back strongly.” … Food makes up more than 30 percent of inflation indexes on average in Asia. – Bloomberg

Dominant Social Theme: Rising prices cause inflation.

Free-Market Analysis: No, it doesn’t work that way.

Let’s start with the rice. The Thai government will purchase rice from farmers at a high price. So farmers will grow more rice, perhaps much more. Thailand is already a big rice exporter, and it is about to boost its export volume with all the extra rice that will come with subsidized price paid to farmers. But to export more rice, the Thai government will have to accept a lower price, i.e., consumers in other countries will be paying less. The bottom line is: good news for Thai rice farmers; very bad news for Thai taxpayers. Good news for rice eaters everywhere.

But even if the subsidy to Thai rice farmers did somehow raise the price to Asian consumers, it would not raise the general level of prices; that is, it would not cause price inflation. The general level of prices would be unmoved because if consumers are spending more for rice they must be spending less on other things, which would put downward pressure on the prices of those other things.

There is only one reliable cause of price inflation — the production of new money. It is only an increase in the money supply (such as what most central banks accomplish daily) that enables the public to spend more on everything. No new money, no price inflation — no matter what wasteful policy the Thai government adopts to attract votes from rice farmers.


In Rick Perry’s World Without a Fed, He Can Barter for U.S. Votes

Asked about the Federal Reserve…[Texas Governor Rick] Perry said of Fed Chairman Ben S. Bernanke: “If this guy prints more money between now and the election, I don’t know what you all would do to him in Iowa, but we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treacherous — or treasonous.” … If he believes this, he either doesn’t understand the Fed’s function, or is a peculiar kind of monetary extremist. … If the Fed didn’t print any more money at all, we’d soon be relying on a cumbersome and rather inexact form of exchange known as the barter system. – Bloomberg

Dominant Social Theme: Only a dolt thinks we could get by without the Federal Reserve.

Free-Market Analysis: The Federal Reserve began in 1913. American prosperity and economic growth began much earlier, in 1623, when Plymouth Colony abandoned communal ownership and production in favor of private property and a free market.

Since the arrival of the Federal Reserve, the U.S. has suffered its worst round of bank failures (three seizures, from 1931 to 1933), the Great Depression of the 1930s, the Great Inflation that began in 1971 (which has reduced the value of a dollar by 90%) and now the Great Recession. Not quite an indispensible institution.

The notion that without continued money creation we would revert to barter is a howler. The U.S. has had periods of a stable money supply or even a slowing shrinking money supply, such as the years between the end of the Civil War and the 1896 discovery of gold in the Klondike. Barter did not reappear, but the general level of price did tend to decline.

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