TJP

The ability of Republican politicians to control the political narrative is amazing. The Democrats are constantly on the defensive; so much so, that many Democrats now support Republican views. The inability of the Democrats to develop coherent narratives that could contrast Republican views will lead to further Democratic losses in the 2012 election.

What do the Democrats stand for? At home, it appears that their principal narrative is liberalizing marriage and abroad the continuance of Bush’s wars. Their credibility on the economy has been shattered, and the administration's view on the economy is in a state of flip flap.

Early on, the administration and Democrats believed that government spending would lead to economic recovery. Today, the administration is a supply side convert, for Mr. Obama businesses is now the answer to economic recovery. Thus, he has embraced supply-side economics.

Additionally, the administration is now adapting the Republican narrative of deficit reduction; instead revenue increases through economic growth. Therefore, it appears that the Democrats and the administration are followers of the GOP, not leaders.

The supply side narrative is dishonest; supply does not create its own demand. If consumers do not have sufficient income, they will not be able to purchase enough goods and services and therefore recovery lethargic.

The availability of income is a necessary condition for economic recovery. Income depends on the money supply as well as technological progress.

For instance, the value of the quantity of goods and services produced (PxQ) has to less or equal to the available money supply (M). Therefore, the money supply plays a vital role in the economic recovery and job creation.

The Federal Reserve (Fed), as well as banks and the public determine the monetary base, or high power money, which is equal to currency in circulation (CU) plus reserve requirements (RE) in bank vaults and at the Fed.

The Fed can increase or decrease the monetary base through open market operations, by buying or selling securities. The Fed decreases the money supply by selling securities (taking money out of circulation) and increases the money supply by buying securities (putting money into circulation).

When the Fed decreases the monetary base or prevents it from increasing, the value of goods and services in the economy may exceed the money in the economy (M<PxQ). If it does, either price or the quantity of goods and services produced has to decrease, or both.

Prices, however, are generally downwardly sticky; they do not decrease rapidly. However, producers can easily reduce quantity of goods and services by curtailing production and reducing employment.

When the Fed increases the monetary base, the money in the economy may exceed the value of goods and services in the economy and either price or the quantity of goods and services produced has to increase, or both.

It is clear, therefore, that control of the economy reside principally with the Fed and commercial banks. However, when the Fed increases the monetary base, banks have to be willing to lend to the public to increase the velocity of money. Normally this would occur if banks do not earn interest on reserves.

However, when the Fed reduces interest rate and pays interest on banks’ reserves, it provides a disincentive for bank lending.

And, we do not hear a Democratic narrative clamoring for greater liquidity for Main Street. That is why we need third competitive political party that will stand up for the average American.

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