Jeff Bell, director of policy of the Washington-based advocacy group American Principles and director of its GoldStandard2012 project, writing in the Washington Examiner:
What cannot be argued is that in the post-1971 system, the role of the Fed is to set short-term interest rates. The open market committee’s announcement last week means that by the middle of 2013, the Fed expects to be enjoying its fifth year of vacation from its one universally acknowledged job.
Short-term interest rates are and will continue to be nonexistent for the foreseeable future. This means that when it comes to the post-1971 paper dollar system, the wheels have completely fallen off.
These 40 years haven’t been all bad, or else the paper standard couldn’t have lasted this long. Because of the iron will in the 1980s of two extraordinary leaders, President Reagan and Fed chairman Paul Volcker, the double-digit inflation of the 1970s was halted and the world enjoyed a quarter century of extraordinary economic growth.
With Reagan’s simultaneous victory in the Cold War, for the first time in history virtually the entire world adopted capitalism and hundreds of millions of people in China, India, and elsewhere advanced from subsistence living to the middle class.
Unfortunately, iron-willed leaders are not always available. Those who succeeded Reagan and Volcker allowed the debt-driven paper system to inflate—and burst—a steadily worsening succession of financial bubbles: Asia in 1997, Long-Term Capital in 1998, internet/telecom in 2000.
Increasingly, the Fed responded to liquidity crunches by cutting short-term interest rates too low, and keeping them there for too long.
Most devastating of all, of course, was the bubble in U. S. residential real estate—publicly advocated by hyper-Keynesian Paul Krugman in his New York Times column of August 2, 2002, urged on by the best-connected Bush appointee as Fed governor, Ben Bernanke, in 2003, and (perhaps reluctantly) facilitated by the Greenspan Fed beginning that same year.
The bursting of the real-estate bubble in 2007, by which time Bernanke had succeeded Greenspan as Bush-appointed Fed chairman, presented the paper standard with by far its gravest crisis.
All along, the role of the dollar as the world’s reserve currency and final money—a central fact before 1971 as well as since—has been both a blessing and a temptation.
A blessing, in the sense that worldwide acceptance of the dollar facilitated the globalization of capitalism, especially after the end of the Cold War. But a temptation, in the sense that it encouraged the U. S. to run enormous trade and budget deficits, enabling us to finance them without instant inflation and without raising interest rates to the stratosphere, as any non-reserve currency nation would be forced to do in comparable circumstances.
In going to zero interest rates 32 months ago, the Bernanke Fed has been the ultimate exploiter of this anomaly. But while it may have kept the U. S. economy out of another sharp contraction, the virtual nonexistence of interest rates puts enormous pressure on small and medium-sized banks and (therefore) on small business—this country’s main engine of net job creation.
Bernanke’s endless injections of newly printed dollars prop up the bond and stock markets, thus enabling big business to thrive, but even successful small businesses have seen their ability to access lines of credit decline by two thirds, according to Stanford economist Ronald McKinnon.
In these circumstances, a significant decline in unemployment will be very difficult to achieve. Ironically, the Fed’s zero-interest-rate extension last week, cheered on as usual by the Obama administration, may prove to be a death sentence for the president’s re-election.
Could the Fed still choose to return to a normal interest-rate regime, thereby renewing the small-business lending so critical to job creation? In theory, yes.
In reality, according to conservative economist Lawrence Lindsey, himself a former Fed vice chairman, almost certainly no. By now, the sharp expansion of U. S. debt makes the debt-finance implications of normal interest rates prohibitive on the fiscal side.
So monetary policy is at an impasse, certainly for Keynesians like Obama, Krugman, and Bernanke. For Republicans, the most reasonable way out will increasingly be seen as a return to the gold-backed dollar we so thoughtlessly discarded 40 years ago.
‘S okay by me.
So long as we don’t have to allow Iran to get nukes, or the filthy Jews rot in their racist Zionist pit of hate, to get it done.
Which reminds me: what do you get when you cross a gorilla and 27% of the Iowa Straw Poll voters?
A: a bugfuck crazy gorilla who you wish would really just go find a bugfuck crazy jungle, where it could engage in spirited play in a bugfuck crazy tree.
Are there any small nations which have pegged their currency to gold?
It’s a shame that Paul has polarized these two great existential threats like he has. And that he’s cartooned the problem with money into the problem with Ron.
Yup. It’s odd that he can so completely understand the one and so thoroughly fail to grasp the other.
Excellent feature there. Fuck those bourgeois, nouveau riche bastards. We got ours and plan to keep it that way. Locked in, forever. Yes we
candid.Ron Paul for Sec. Treas. Problemo solved!
remember them chocalate coins wrapped in gold wrappers?
or candy cigarettes?
i miss america
And when I hear bugfuck crazy gorilla, I think of the other bugfuck crazy gorilla, the one with the
bugfuck crazyBetty Davis eyes.I mispelled Bette, didn’t I?
[shuffles off sadly]
if rancid cornhuskerwhore warren buffett really wanted to help he could finance small business loans easy peasy
Remember those black liquorice pipes, with the red candy dots where the fire goes?
I loved them things…
Checked back through a set of links I keep on this subject and found something that people might be interested in. Go here and scroll down to “The Parallel Private Gold Standard”.
That’d be my preference if we were to go down this path.
If you ever have some time on your hands and are looking for something to read google “Scottish free banking era” as well. Interesting stuff.
As best I know, there aren’t any gold-backed currencies currently, sdferr.
The reason I would prefer a parallel or simply competing currencies is that no one has yet solved the issue of changes in gold mining creating inflation/deflation.
One year you discover a huge new deposit of gold and, bam, you just rediscovered inflation. The next year you discover 5% less gold than the year before and, bam, you just rediscovered deflation.
There are no magic bullets.
Yes, and that other minds are vice versa, grasping the Israeli dynamic and knowing and/or caring nothing about the problem with bad money.
Consider Smitty at TOMC, perhaps, who apparently took somewhat passing issue with my link and comment the other day on the possibility of a systemic failure because things are just that screwed up. I guess it’s really hard to be challenged on your assumption that an entire system cannot be corrupted to the point of such a failure such that all you can think to do is react with another round of simple Republican hoorahing — as Smitty says, “man up and re-embrace that exceptional American commitment to liberty.”
You know, leave a blood-sucking, profiteering, anti-liberty system alone but concentrate on government’s first principle, which is deregulating stuff like banks (in an era of false money) and Creating Jobs™, in the belief that anti-Democrat patriotism cures all ills. Actually anti-Progressivism does that and the fiat-reserve system is wholly and amazingly and ruinously progressive.
Here’s to pile on. Not only is the link back to Zero Hedge, this time the content is as apocalyptic as it is observant. Shit is really bad. Deal.
My point isn’t to fear-monger. It’s to point out that progressive money no more works than any other system that puts corrupt minds in charge of natural events and occurrences so as to swamp them. If the right were astute — if the right were the right — it’d stop assuming that a central bank creating bad money by decisions subject to bad politics and besieged by inevitable exponentially-advancing curves is a natural system or a component of a free market in any way.
I was only idly wondering if it’s a good idea, how come little nations aren’t doing it for their own benefit. But I haven’t the background to think through the problems without a great deal of help. (So, idly.)
Yet the price of gold clicks along in surprisingly precise alignment with the inverse of the value of the FRN.
Let banks issue promissory notes on varied reserves (metals, ag futures, cash flow from interest, a giant vault of tasty gummi bears) and suddenly you would have some inherent flexibility to handle real growth and a built-in mechanism to reduce issuance (bank failures).
Would a great variety of backing commodities tend to somewhat alleviate what I’d assume could arise in the way of a misallocation of resources in pursuit of a single backing commodity?
I’d say so, sdferr, but it goes further than that. It’s the diversification of underlying reserves that would keep us from experiencing price shocks from an individual commodity.
Our goal is to have — unit to unit — just about the same amount of currency chasing the same amount of goods as those goods increase and decrease at different rates. Well, the economy is varied. Why not the banking reserves?
Yah, that seems right to me. But I know fuck-all about this stuff, to repeat my disqualifications.
Heh, if I seem as though I know what I’m talking about, sdferr, I can assure you that I haven’t run years of econometric studies on any of this.
Hayek’s warning on the role of economists still applies.
Whew! I saw the title of the post and was worried Jeff had discovered the ‘dillo taking indecent liberties with some jewelry and coins…
If you make your currency exchangable for gold, you would soon have no metal… to peg it to some exchange rate or price fixed for gold, that would not work unless everyone did this. Or at least everyone of size. It’s a puzzler.
Chart the entire global economy from ’71 onwards. Then chart increases in gold mining over that same time period. If they don’t match precisely — and really, why would they?, there is no fundamental link between the two — you’re looking at monetary inflation and deflation.
There is no way around it.
We have a long history of gold-backed currency to look at. There are inflationary/deflationary cycles throughout. There is simply not a “set it and forget it” option available unless the reserve itself somehow tracks extremely well with the overall economy. What one thing could possibly do that? I doubt it exists. Only an extremely diversified basket of reserves could even get close. Option two: a central bank that could be reformed down to nothing more than a set of metrics and rules that automatically increased or decreased currency amounts/interest rates to correspond to actual economic growth.
charts are key
None exist, bh.
Money should be a fraud-proof store of value (if not immune to natural events). The trick is to prevent the conflicts of interest and frauds in the casino known as US monetary policy.
Instead, the current system assures we’ll be plagued with them until we’re robbed blind and the thing crashes. History teaches us that and a cursory view of the nature of this kind of money agrees.
I’m not looking for a perfect solution to the problem of a progressive, policy-managed piece of shit such as the FDN. I’m looking for something, anything, that does a better job of keeping government restrained. This wreck of a system actually requires the rampant gaming of the nation’s very currency in order that it “survive” even if it takes us all out with it when it ceases to.
Agreed.
I guess from my perspective free-banking appears to be the best answer I’ve yet come across. Which would naturally involve a great number of banks issuing largely gold-backed promissory notes. I’d just prefer that those banks also held notes from other banks mainly holding wheat/corn/soybean futures and all sorts of other such things.
El Salvador uses the dollar as their currency. As in, you could hie down there with your greenbacks and spend ’em without any exchange at all.
Now having exhausted my knowledge about world currency, I’ll vacate this thread and leave the rest of you to it.
Great newish website called, wait for it….Free Banking. It’s run by George Selgin and crew. Austrians, who aren’t quite the gold boosters, as say, Murray Rothbard or Von Mises.
Here’s the link:
http://www.freebanking.org/
Cool. Thanks, OI.
The problem with any commodity-backed currency is that you eventually run out of the commodity used to back it. Wealth is not static, it is (mostly) an increasing thing.
I know far less than sdferr on the subject, but isn’t currency backed naturally by GDP?
What I mean is, in a global economy, there’s a reason some of the worlds currencies are weaker than others, and it takes many pesos to buy a soda pop. Any particular currency will have to fluctuate in relation to other currencies, for example, the euro was worth $1.50 in 2004, about 70 cents now. Soon dollars to marks will look like pesos to dollars, and I don’t see how a gold standard addresses the problem of politicians determined to spend the nations wealth, whether that wealth is measured in gold or promises.
With all other units of measure we try to tie to as exact a definition and as consistent as possible. A wavelength, a precise volume at a specific temperature, etc.
The trick is trying to find something with the most absolutely consistent value to define a dollar. I like minimum wage: one dollar is the amount of money it takes to get the laziest, most unskilled worker to perform the most menial task for one hour.
I’d generally agree, but there’s one exception, which is why I’d advocate going on the Beer Standard. Can you think of any other commodity where the supply and demand are so well balanced and constant? And running out of beer is unthinkable!
Exactly! Beer standard!
I ran out of beer once.
Talk about crisis!
I refuse to have my whiskey standard pegged to your beer standard, mister. There will be drunken loutery if you persist in this course of action.
DRUNKEN LOUTERY
“The trick is trying to find something with the most absolutely consistent value to define a dollar.”
Well, whatever value you want to place on a dollar, spending lots more of’em than you got is unwise.
I mean, you don’t throw a family BBQ with a six pack. Not my family anyways. There would be looting.
That’s exactly right. We will never be able to solve the fiscal problems that statists create without a political solution. Create the perfect monetary system and you can still run deficits as long as others will lend to you. And they’ll lend to you because you can tax your citizens.
Towards your earlier question, Lee, the main idea is simply that when you back your currency with something, you actually have to obtain that thing in order to print more money. This makes it harder to inflate away debt.
“when you back your currency with something, you actually have to obtain that thing in order to print more money. This makes it harder to inflate away debt.”
Still seems to me a balanced budget amendment addresses the problem better than adopting a gold standard, with less turmoil to business.
A BBA tied to GDP I meant.
I’d agree, Lee. Fiscal problems are political problems. They need to be solved politically.
I’d like to go towards free banking for other reasons, btw. Namely, I don’t really like the Fed using a sledgehammer everywhere all at once when we really need a million little scalpels doing the work at all times. The economy isn’t some uniform entity with everything hot or cold at the same time. Some things are in a bubble while other things are struggling to hold on. Central banking policy can’t address this very well.
The Federal Reserve definitely needs to be scrapped. I think it would be much better if Congress had to decide whether to print more money, because at least there would be someone to blame then, and someone to vote out. They would probably have to hold hearings on it as well. Right now they act as if they have no control over what’s going on with the money supply, and I guess they don’t.
If you haven’t spent the time to watch this video and you care about money, I think it would be worth your while.
The problem, of course, is that the government, using it’s monopoly on force, can declare anything to be the standard. Witness the suggestion during the debt ceiling debate that because there’s a legal limit on how much paper currency can be printed, but no such limit on coins, that Barack get around the debt ceiling by making $100 coins out of the two trillion in Platinum the country has and spending those.
Heck, I suppose they could have made those coins out of Barack’s compressed shit and spent them by declaring them legal tender.