Our project director Rich Danker has been published today by RealClearMarkets.com:
The U.S. Isn’t Greece, and That’s a Problem
The dollar’s domination of the world’s monetary system has tremendous consequences for the U.S. economy and fiscal policy. Yet leading officials and commentators in Washington repeatedly overlook this effect when grappling with economic news. “Deficit fears don’t appear to bother the bond market,” was the headline on the front page of the Washington Post in June. The article implied that our creditors are naive for accepting low returns on Treasury bonds because America is running the risk of being hit with a debt crisis similar to what happened in Greece, whose government came close to defaulting on its obligations last spring./Meanwhile, Federal Reserve Chairman Ben Bernanke is happy to take credit for what he sees as low inflationary expectations. “The spread between nominal and inflation index bonds remains quite low, suggesting just 2 percent inflation over the next 10 years,” he told the House Budget Committee earlier this summer. Bloomberg BusinessWeek magazine declared that Bernanke “tamed the bond vigilantes.”/How can the U.S. government’s debt be selling so briskly when its finances are in such bad shape? In short, how come we haven’t become Greece? The dollar’s role as the world’s major reserve currency makes this paradoxical situation possible. Foreign central banks’ insatiable demand for dollar reserves, mostly in the form of interest-bearing Treasury bonds, has allowed the government to continuously deficit-spend at a discount to what other nations must pay to do it. Year after year the world has been there to finance Washington’s self-indulgence because it uses our debt as a reserve asset and instrument for finalizing international payments. The arrangement of the global monetary system encourages a massive issuance of U.S. government debt, which Congress uses to pay for its budget deficits.
The absence of any fixed definition of the dollar, such as in gold, means that its value is solely dictated by the actions of the government. Yet that reality never figures much into our politics. Vasko Kolhmayer has an insightful column about this in Canada Free Press, where he hammers home the fact that money is too important to be left to the politicians:
Our currency’s fate has been sealed the moment it came under governmental control. Most conservatives are blind to this and assign blame wrongly. They assume that irresponsible politicians are responsible for the dollar’s travails. We tend to think that once we vote the good guys in everything will be all right. But this is the same as to say that the Soviet Union and the Eastern Block did so poorly, because the wrong people were in charge.
He’s exactly right: we can’t simply wait around for better stewards of the dollar to come along. We’ve been waiting for nearly forty years, and the floating dollar arrangement has continuously disappointed. The job of dictating the nation’s monetary affairs is too big for one man or one institution, which are prone to large-scale mistakes. We must return control of the nation’s money supply to the people.
Rich Danker, project director of Gold Standard 2012, introduces our ideas briefly in a new video.
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Paul Krugman, like nearly every other elite economic commentator, refuses to consider the dollar’s role as the global reserve currency in domestic financial affairs. This had led him to come to the ridiculous conclusion that government bondholders want Washington to spend even more money! Krugman is looking at the record-low interest rate the 10-year U.S. Treasury bond is traded at and taking it as a sign that the bond market wants more stimulus spending from Washington. This twist of logic completely ignores the fact that our debt is used around the world by foreign central banks as a reserve asset, and the euro crisis has led them to buy more of it in a flight to safety. Furthermore, as the article that inspired Krugman acknowledges, the expansion of bank reserves by the Fed has createdmore inordinate demand for Treasuries. The bottom line is that investors at home and especially abroad are stuck holding dollar-denominated debt as a consequence of U.S. monetary policy. Excessive government spending of the kind Krugman favors more of is a disturbing consequence rather than the preferred outcome of it.
John Tamny, editor of RealClearMarkets.com, has written an eloquent column in Forbes about the perverse affects of the floating dollar. One point he raises is that these affects undeservedly give free-market capitalism a bad name, when it is in fact the monetary system that produces them. Consider his example from the financial crisis:
Many decry the proliferation of derivatives, but the simple truth is that if they didn’t exist, a floating dollar means we would have to invent them. In what is effectively a dollarized world, as long as the money measure fluctuates in value, producers will have to hedge the price of everything given how little they can trust any commodity to hold its price over long periods. For those who doubt the floating dollar’s substantial role here, they need only ask why futures trading was so quiet prior to 1971, not to mention why the price of oil was flat right up to 1971.
Tamny’s central point is that unstable money distorts global capitalism because it retards the trust necessary to facilitate desirable transactions. Exchanges under floating currencies inevitably leave winners and losers based upon the value of money rather than the exchange itself. Currency fluctuations usually result in trade hostility (consider the U.S. vs. China), which saps growth. Tamny’s recommendation? Fixed exchange rates with money defined in terms of gold.
I’ve written before about my regard for Sam Gregg’s scholarship. Yesterday, writing for the Public Discourse, he writes “In charting our future monetary policies, we should remember the trade-offs of competing alternatives.” Let’s take a look at what he means.
In recent months, we have witnessed fierce arguments between, on the one side, those who defend the current system of “fiat money,” in which, as John Maynard Keynes stated, money “is created and issued by the State, but is not convertible by law into anything other than itself, and has no fixed value in terms of an objective standard,” and, on the other, those who support a return to the gold standard or even privatized money.It is important to remember that monetary policy reflects the state’s choice to prioritize one set of economic possibilities (e.g., long-term monetary stability) over other options (e.g., the government’s ability to use its money-supply monopoly to bolster employment during recessions). These trade-offs, however, don’t just involve technical economic arguments. They also come down to questions of principle. [Read more.]
“… under the pre-1914 gold standard, modern China could not have built up and maintained its presently large currency reserves. Similarly, neither the Bush nor Obama Administrations would have been able to run huge deficits. Nor would it have been as easy for American consumers to acquire such irresponsibly high personal debt levels.”
Even before 1914, governments knew that abandoning the gold standard would allow an expansion of credit and public spending not possible under the pre-1914 gold standard.This situation was exacerbated by two factors. First, in the conditions of democracy, monetary authorities became more susceptible to popular pressures to use monetary policy to provide short-term fixes to immediate economic problems. Second, the rise of neo-Keynesian economic theories encouraged politicians and central bankers to adopt monetary policies and interventionist strategies that routinely violated the gold standard’s disciplinary boundaries.
Gregg’s conclusion:
[It] cannot, however, be denied [...] that the case for the gold standard goes beyond efficiency arguments. It embodies an emphasis on limiting arbitrary state action, promotes the longer-term economic well-being of less powerful groups, encourages prudence and a concern for lasting stability over urges “to just do something” (however ineffective or counterproductive), and generates a concern for the national and international common good over more narrow sectional interests.
Such principles and commitments should surely be demanded of any monetary system.
Read the full essay at the Public Discourse.
Now why on earth did the Democrats decide to tuck this amendment into their health care overhaul legislation?
Those already outraged by the president’s health care legislation now have a new bone of contention — a scarcely noticed tack-on provision to the law that puts gold coin buyers and sellers under closer government scrutiny.
… Section 9006 of the Patient Protection and Affordable Care Act will amend the Internal Revenue Code to expand the scope of Form 1099. Currently, 1099 forms are used to track and report the miscellaneous income associated with services rendered by independent contractors or self-employed individuals. (ABC News)
I would like to see those who offered the amendment defend why they believe Americans ought to report their gold transactions to the government. What does the government have to fear if Americans choose to hold gold, except that its citizens may have something of intrinsic value in addition to their greenbacks?
The UN is now confirming the growing realization around the world that the dollar’s role as the reserve currency is a major problem for economic stability. In its World Economic and Social Survey 2010, the UN explains what is wrong with the status quo: it causes economic adjustment pains, it weakens the dollar over time, and it encourages central banking practices that cause volatility in the U.S. and abroad.
CNN’s Jack Cafferty, who picked up on this story, notes that “There’s been increased debate about using the dollar for international trade ever since the U.S. economy slumped into a recession.” In fact, Russia and China have also called for reforming the international monetary order. They’re joined by the UN in calling for a basket of currencies to replace the dollar. But such an arrangement would only redistribute the economic burden that the U.S. is beset with. The world needs a reserve asset that is no particular country’s liability, and gold is best-suited for this role. Now that it is coming to grips with the problem of global monetary policy, the international community should look to gold as the optimal solution.
I have great respect for Sam Gregg and for his work at the Acton Institute. He is a refreshingly renaissance approach to economic matters – often discussing them in the light of cultural, historic and literary themes. Economics, after all, often has the reputation of being the “dismal science”, but Gregg’s multidisciplinary contextualizing of economic questions goes far in lightening the path.
Take for instance his latest commentary entitled, “Money, Deficits, and the Devil: A Cautionary Tale“. While I must limit myself to discussing the economic lessons he provides at the end, the lead-up to his thesis which involves a cautionary re-telling of Goeth’s Faust is not to be missed.
But to the moral of the story:
… Goethe’s insights go to the heart of some of our most intractable long-term economic problems.
One concerns the impact of fiat money. Technically speaking, fiat money is a currency that a government declares to be legal tender, even though it has no intrinsic value. Throughout history, fiat money has been the exception rather than the rule. Most currencies have been based on physical commodities, particularly gold. By contrast fiat money is ultimately based upon enough people having faith that a given currency will be accepted for the purpose of economic transactions.
Such faith, however, is easily shaken. The euro’s recent tribulations are a good example of what happens when people begin losing their faith in a fiat currency. The expression “as good as gold” underscores the confidence people have always attached to commodity-backed currencies, especially in difficult economic times.
The second problem concerns the temptation faced by governments as they struggle to solve their deficit problems. In 2009, America’s federal government posted a $1.4 trillion deficit. That’s 10 percent of U.S gross domestic product, a level not witnessed since World War II. Given a choice between cutting spending, borrowing, or inflating the money-supply, the third option appeals to many politicians. Moreover, like Goethe’s emperor, it’s exactly what many Western governments did between 1945 and 1980: short-term relief was bought at the expense of long-term fiscal stability.
But perhaps the biggest lesson from Goethe’s Faust is that self-deception is intrinsic to all foolish acts. Whenever governments choose comforting economic illusions over difficult economic truths, then, like Mephistopheles, they will employ dubious means such as state-engineered inflation or public-sector indebtedness to make ill-conceived economic policies seem less burdensome to those who will in the long term eventually have to pay the price.
An advance look at our press release which is set to hit the wire soon – post your reactions in the comments and please tell your friends!
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