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How long must the U.S. pretend that it and only it may have nuclear weapons and its allies must rely upon it for protection? This policy may have made sense in the years immediately after World War II when there was some reason to hope that few nations would learn the "secret" to building the bomb and, even if they did learn it, they would not have the industrial capacity for a nuclear weapons program. Furthermore, the world’s so-called strategic thinkers believed that the world would be safer the fewer nations that had "the bomb". The entire nuclear non-proliferation industry revolves around this false premise. Thus, we are witnesses to the charade and utter futility of all the major nations—once again!—calling on the United Nations Security Council to pass resolutions condemning North Korea’s nuclear and missile programs, as if any half-wit expected such a resolution to accomplish its intended purpose.
Japan is the world’s second largest economy. Let me repeat that…Japan is the world’s second largest economy, and yet it relies upon the U.S. for protection from a country that does not have the GNP of a major American (or Japanese) city! South Korea’s economy is many times that of North Korea’s. Both Japan and South Korea have the technological capability of defending themselves from all comers, provided that they possess nuclear weapons and the means to deliver them. It is the absence of this capability that emboldens North Korea to believe that it can accomplish through intimidation what it could never accomplish otherwise. North Korea believes that it can drive a wedge between Japan and South Korea and their protector, the United States, by calling our bluff that America will sacrifice its troops and possibly a major American city in order to defend its allies. Well, maybe we will and maybe we won’t. Who can say?
The template for proper national security response by a nation that is less than a superpower is that established by Charles de Gaulle of France. Regular readers of my columns previously read why de Gaulle formed an independent atomic deterrent for France. De Gaulle, one of the clearest-minded of the post World War II statesmen, understood that, in the final analysis, a country must rely upon itself for its own survival. The possession of nuclear weapons made it possible for France to face the mighty Soviet Union on its own, relying upon neither the U.S. nor other European nations in NATO. As de Gaulle so clearly articulated at the time to President Eisenhower, France’s experience in both world wars showed that even friendly nations might refrain from going to war on behalf of an ally, either due to internal political opinion of the time or because a lightning war settled matters before friendly nations could sway the outcome. France cooperated militarily with NATO, but the France of Charles de Gaulle always retained its independence of action, as it does even today.
No nation need fear either Japan or South Korea. Both are friendly, non-aggressive, democratic countries. China and Russia may fuss and fume at a nuclear Japan, especially, but such protests will be purely for internal consumption. Furthermore, more self-reliant allies would secure many peaceful benefits, both to themselves and the U.S. For example, a nuclear-armed Japan and South Korea would allow the U.S. to scale back its military empire at a time of budgetary crisis. Of course, we may maintain security agreements with both countries. But the new arrangements will become more of agreements among equals, at least in the sense that each is free to pursue its own foreign policy in its region of the globe. Reciprocal military support would be clearly defined and not an open-ended and nebulous security pact.
Also, the calculation of our allies’ enemies will have changed. Now North Korea would not be able to manufacture some crisis whereby an irresolute American leader might abandon its less-than-perfectly-stated defense commitments. An attack upon either country would exact a horrific response from the very country attacked. This was the lesson that de Gaulle gave to Eisenhower—that there is no substitute for purely national self-interest. It is vitally important that one’s enemies clearly understand that each nation will fight for itself, without being required to call upon the help of a more powerful ally, and is capable of inflicting serious and unacceptable damage. This is the very essence of peace through strength.
When President Kennedy and British Prime Minister Harold Macmillan suggested that the allies might be required to come to some new accommodation with Khrushchev’s Soviet Union over Berlin, de Gaulle told them to stand firm…that the Soviets did not want war but rather the fruits of war. It was all bluster and threats. The several Berlin crises came to nothing. Thus will be the case when North Korea faces a nuclear-armed Japan and South Korea. Then its bloodthirsty regime will crumble as surely as did the once mighty Soviet Union.
Our insistence upon keeping our two allies in the Western Pacific nuclear weapon-free and dependent upon us for sovereign protection has resulted in the opposite of what we both intended. The weak but bloodthirsty enemy of our allies has become emboldened to military blackmail and, to our shame, we have paid. It’s time for our allies to protect themselves; the world will become a much safer place.
Friday, May 29, 2009
Sunday, May 24, 2009
Save Some Jobs by Destroying Many More
Much of the Obama administration’s rationale for bailing out GM is that such actions will save American jobs. This is just one of the many unfortunate fallacies that stem from our century-old fiat money system.
Prior to the formation of the Federal Reserve System the American populace would have scoffed at such nonsense that the government can or even should tax all Americans in order to save the jobs of some Americans. It would have been apparent to anyone in the age of the gold standard that the government can give away only what it takes from someone else, exacting its overhead cost and throwing uncertainty of the future into the mix to boot. In the case of the GM bailout, the benefit will accrue to the unions, who bear primary responsibility for the systematic destruction of the American automobile industry since the 1930s. But the fact that we are no longer on a gold standard does not eliminate the economic truth that all of us who are not members of the United Auto Workers are being robbed by our government for the union members’ benefit.
The GM bailout perfectly illustrates why government gets away with this assault on the American taxpayers’ pocketbook. The benefit is concentrated and easily identified and quantified. The billions of bailout money will keep plants open and salaries flowing, at least for awhile. Smiling autoworkers--not all of them union members, of course—will be happy that they still have a job. I have no doubt that the mainstream media will interview them and allow them to relate how happy they are with the government’s actions.
But no one can interview the people whose jobs were lost or never created when the capital that would support them has been funneled to GM. GM has first claim upon America’s resources as the first recipients of new, fiat money. No one can interview the people who never got jobs from businesses that never expanded production, because GM has first claim upon America’s resources as the first recipients of new, fiat money. No one can interview the people who were never employed in the first place in businesses that will never be, for GM has first claim upon America’s resources as the first recipients of new, fiat money.
The GM bailout ignores the fact that capital resources are scarce. Government spendthrifts are led to this conclusion, if they ever think in such terms at all, because government can print all the money that it wishes to spend. This is the case only because our fiat money system creates the illusion that government spending is not paid by the populace. Because it prints all the money it wishes, government does not have to increase taxes or borrow honestly at high rates of interest. Under a gold standard there is no such illusion. Because gold is a part of the market economy itself, government cannot hide who must bear ultimate responsibility for what it spends—the people themselves through higher taxes now or more debt now and even higher taxes later. There is no escaping from financial truth. The GM bailout would be seen for exactly what it is—a transfer of wealth from the profitable and productive segments of the economy to an unprofitable and unproductive segment of the economy. Such a transfer destroys; it does not save anything.
The GM bailout, like the bank bailouts of the Bush administration, illustrates why government will never be the source of financial reform. Government is the biggest beneficiary of its ability to print money. It can lavish other peoples’ wealth on politically connected, high profile workers and appear to be generous and even wise for having done so. It can bail out those who cannot pay their mortgages and appear generous and even wise for having done so. It can send stimulus checks to low and middle income Americans and appear generous and even wise for having done so. Government gets to act like the ignorant Bonnie and Clyde characters of the 1930s reign of lawlessness, who claimed that they weren’t robbing people only banks…and the banks were owned by faceless rich people anyway who deserved to be robbed.
But robbery does not produce anything, whether from a Bonnie and Clyde or a duly elected government official. Those who worked and saved find their capital confiscated via the stealth tax of inflation for the benefit of those who squandered a rich heritage and show little hope that they have changed their ways. And what if they have? It is not government’s job to pick winners and losers. It is government’s job to protect our property. But instead of protecting us, government has become the thief itself.
Prior to the formation of the Federal Reserve System the American populace would have scoffed at such nonsense that the government can or even should tax all Americans in order to save the jobs of some Americans. It would have been apparent to anyone in the age of the gold standard that the government can give away only what it takes from someone else, exacting its overhead cost and throwing uncertainty of the future into the mix to boot. In the case of the GM bailout, the benefit will accrue to the unions, who bear primary responsibility for the systematic destruction of the American automobile industry since the 1930s. But the fact that we are no longer on a gold standard does not eliminate the economic truth that all of us who are not members of the United Auto Workers are being robbed by our government for the union members’ benefit.
The GM bailout perfectly illustrates why government gets away with this assault on the American taxpayers’ pocketbook. The benefit is concentrated and easily identified and quantified. The billions of bailout money will keep plants open and salaries flowing, at least for awhile. Smiling autoworkers--not all of them union members, of course—will be happy that they still have a job. I have no doubt that the mainstream media will interview them and allow them to relate how happy they are with the government’s actions.
But no one can interview the people whose jobs were lost or never created when the capital that would support them has been funneled to GM. GM has first claim upon America’s resources as the first recipients of new, fiat money. No one can interview the people who never got jobs from businesses that never expanded production, because GM has first claim upon America’s resources as the first recipients of new, fiat money. No one can interview the people who were never employed in the first place in businesses that will never be, for GM has first claim upon America’s resources as the first recipients of new, fiat money.
The GM bailout ignores the fact that capital resources are scarce. Government spendthrifts are led to this conclusion, if they ever think in such terms at all, because government can print all the money that it wishes to spend. This is the case only because our fiat money system creates the illusion that government spending is not paid by the populace. Because it prints all the money it wishes, government does not have to increase taxes or borrow honestly at high rates of interest. Under a gold standard there is no such illusion. Because gold is a part of the market economy itself, government cannot hide who must bear ultimate responsibility for what it spends—the people themselves through higher taxes now or more debt now and even higher taxes later. There is no escaping from financial truth. The GM bailout would be seen for exactly what it is—a transfer of wealth from the profitable and productive segments of the economy to an unprofitable and unproductive segment of the economy. Such a transfer destroys; it does not save anything.
The GM bailout, like the bank bailouts of the Bush administration, illustrates why government will never be the source of financial reform. Government is the biggest beneficiary of its ability to print money. It can lavish other peoples’ wealth on politically connected, high profile workers and appear to be generous and even wise for having done so. It can bail out those who cannot pay their mortgages and appear generous and even wise for having done so. It can send stimulus checks to low and middle income Americans and appear generous and even wise for having done so. Government gets to act like the ignorant Bonnie and Clyde characters of the 1930s reign of lawlessness, who claimed that they weren’t robbing people only banks…and the banks were owned by faceless rich people anyway who deserved to be robbed.
But robbery does not produce anything, whether from a Bonnie and Clyde or a duly elected government official. Those who worked and saved find their capital confiscated via the stealth tax of inflation for the benefit of those who squandered a rich heritage and show little hope that they have changed their ways. And what if they have? It is not government’s job to pick winners and losers. It is government’s job to protect our property. But instead of protecting us, government has become the thief itself.
Thursday, May 21, 2009
Inflation Will Harm the Economy, Not Spur Recovery
On Wednesday, May 20th Rich Miller of Bloomberg News reported that two well-known economists--former White House adviser Gregory Mankiw and Harvard professor Kenneth Rogoff--recommended higher inflation to spur the U.S. economic recovery. One would think that after so many decades of boom/bust business cycles and depreciation of the dollar to a mere fraction of its worth even Harvard economists would rethink their Keynesian philosophy. Inflation can occur only through the medium of exchange, of course, as too much money chases too few goods. It is caused by an expansion of the money supply, which one must assume is the desired mechanism for Mssrs Mankiw and Rogoff. But expansion of the money supply is what got us in this mess in the first place. The artificial lowering of the interest rate spurred more long-term projects than could be completed with the limited resources at hand. More money will perpetuate and exacerbate this malinvestment by keeping capital destroying businesses in operation for a few more months. But more money will not cure the underlying problem. On the contrary, it will make it worse and make the necessary recession longer and deeper, meaning it will take years rather than months and cause higher unemployment and more loss of capital than would otherwise be the case. The recession, of which higher unemployment is a manifestation, is an essential and inescapable process that must occur for the REAL economy to recover. Money losing businesses must close their doors and people must find work in profitable firms. Ours is a profit and LOSS system. The losses tell us just as much as the profits, for losses prevent us from destroying our capital. But Mssrs Mankiw and Rogoff--and so many other ill-informed economists like them--would have the U.S. consume all its capital rather than suffer the temporary adjustments needed to return the economy to long term growth. Like Nobel Laureate Paul Krugman, they demand instant gratification--the future be damned! But we must live in the future, and its foundations must be built now. It is time to get back to basics and cast off these false economic ideologies that promise so much and cause so much damage.
Saturday, May 16, 2009
The World Does Not Need a Reserve Currency
In last week’s essay I explained that the failure of the U.S. to uphold its commitments under the Bretton Woods Agreement to redeem the dollar for gold at $35 per ounce was the primary cause of the great inflation in all the world’s currencies. Just to recap events: In 1944 the allied powers agreed that the dollar would serve the same role as gold for the purposes of international currency settlements after World War II. At that time the U.S. owned (or safe kept for allied governments who were at war and whose territories were threatened by invasion) most of the gold reserves of the allied central banks. As long as the U.S. would keep its dollar to gold ratio at the agreed-upon $35 per ounce ratio, central banks around the world could settle their trading accounts in dollars. These central banks would maintain an agreed-upon ratio of dollars to their local currencies just for this purpose. The world would be on a "gold exchange standard". If one country inflated its currency, its trading partners would demand dollars in exchange far in excess of the profligate country’s ability to pay. It would be forced to deflate. Just as the case under a true international gold standard, that country’s prices would fall, its exports would increase, thus generating dollar reserves and all would be back to equilibrium. The key to this whole program was the promise of the United States itself not to inflate. But, of course, this is exactly what it did.
Theoretically, the U.S. should have been placed in the same position as any other country that inflated its currency--instead of running out of dollars, the U.S. would run out of gold. Its gold reserves did dwindle, which should have set off alarms at the International Monetary Fund, which was charged with the job of auditing the gold supplies of the U.S. and ensuring that it honored its obligations. But the IMF did not do its job. Why? This enters the arena of psychology, but I imagine that the Cold War had something to do with it. The U.S. alone was capable of protecting the Allies from the growing Soviet threat. Perhaps the Allies and the IMF felt an obligation not to criticize their protector. Who knows? But once France got the atomic bomb and a president—Charles de Gaulle—who felt comfortable acting as an equal on the international stage, it no longer felt that it needed to cow tow to the U.S. So in 1963 France demanded to be repaid in gold for its ever-increasing stockpile of dollars. This should have instilled much needed fiscal and monetary discipline in the U.S., but it did no such thing. President Johnson committed the U.S. to fighting a foreign war AND instituting new welfare entitlements—his "guns and butter" policy. In 1969 President Nixon could have reversed this policy, but he feared that the inevitable recession would mean the loss of a second term, so he simply reneged on Bretton Woods and "closed the gold window" in 1971. So much for U.S. honor and prestige!
The world kept spinning ‘round, though, and the dollar continued to be used as a reserve currency--there simply was no other. In the 1980s President Reagan and Federal Reserve Chairman Paul Volcker put America’s economy on a two decade long, inflation-free growth path. It appeared that the world could indeed operate with a fiat reserve currency; that is, one not tied to gold. But administrations change and now it is apparent to our trading partners that our continued inflation means that the dollars they hold will become increasingly less valuable. We are cheating our trading partners.
China was so concerned that it floated the idea of creating an IMF-issued "super reserve" currency to replace the dollar. Although the Chinese government later claimed that it wasn’t really serious, no one believes them. But China has pegged its yuan to the dollar at too low a (yuan) rate. Many state-owned industries in its export-oriented economy would go bankrupt if China revised its exchange ratio with the dollar. This would mean lower spending in China and probably would trigger a recession. So China demurs…at least for awhile.
But the answer to the problem--that has been brewing for more than six decades now--is NOT to cobble together some new Frankenstein monster than no one will be able to control. The answer is right before our eyes—return to gold. Each country should set its own ratio of local currency to gold and settle all trades in the actual commodity. Then no country—not the U.S., not the European Community, not China, nor Japan—will be able to inflate its currency without destroying its ability to import goods. It will run out of gold for settlement purposes and be forced to deflate. No special governmental agreements are needed. Gold would settle just as checks settle today—by debiting and crediting each nation’s gold accounts wherever they may be. Just as no business can operate with zero money—it is forced to economize—no nation would be able to import continuously by papering the world with its currency, as the U.S. does today. As the profligate nation’s gold reserves dwindled, its ability to import would dry up; prices would drop, making its goods a bargain for export; its gold reserves would start to climb and all would be well. Just as explained by Jean Baptiste Say, all trade tends toward equilibrium.
IMF bureaucrats managing a super currency will be no more reliable than were U.S. bureaucrats managing the dollar. They, too, will succumb to political pressure to over-issue an IMF reserve currency, and the entire world will be off and running in an inflationary binge that will destroy world trade. As Professor Thorsten Polleit of the Frankfurt School of Finance and Management says, we all must make our peace with gold. It is in the best interest of the common man, because no one can manipulate it. Gold is money and money is gold. Gold is inflation and deflation proof, because it is not built upon debt, as is the current case with all the world’s fiat currencies. So it cannot be inflated when banks lend against a small reserve and it cannot suffer deflation when those loans are not repaid. This is the cycle through which we have just passed—money supplies inflated by profligate lending and now money supplies deflated when those loans go sour. This cannot happen with gold as long as governments strictly enforce currency convertibility and shut down banks that engage in fractional reserve banking.
So why doesn’t the world return to gold? Because governments benefit the most. The fiat money that we all use may be manufactured in infinite amounts by governments. Would we expect a counterfeiter, who was protected by law in his ability to print money, to deny himself its benefits? Of course not. Governments are no different. They are the primary beneficiaries of their fiat money monopoly. They may spend as they please. They are not obliged to tax the people or borrow honestly from them. It is a heady and corruptive power that appeals to the tyrants among us. No, reform must come from the people. Either that or reform will come only after a total collapse of our monetary system, which would cause untold hardships and possibly even massive death around the world as the ability of the people to engage in indirect exchange was destroyed. So monetary reform is no academic issue. It is a life and death issue.
A good start to reform would be for the citizens to become informed of monetary matters. Demand that real economics be taught in our schools. Demand that our politicians stop lying to us about the causes of our problems. End the demagoguery that seeks out enemies in the business class and attempts to place guilt upon the public, calling us "addicted to spending" and/or too "consumer oriented". This is nonsense. The people are perfectly capable of determining and guiding their own financial futures as long as the medium of exchange allows them to plan and understand the reality of their situation. Our government is the problem. We should demand that it confine its actions to those enumerated in the Constitution. Our founding document, the highest law of the land, does NOT give the government the power to print money. It assigns government the RESPONSIBILITY of protecting us from counterfeiters; it does not give government the power to BECOME A COUNTERFEITER. Enforce the Constitution. End the Fed. Return to gold. Restore our freedoms and our rights. Is this really such a radical demand?
Theoretically, the U.S. should have been placed in the same position as any other country that inflated its currency--instead of running out of dollars, the U.S. would run out of gold. Its gold reserves did dwindle, which should have set off alarms at the International Monetary Fund, which was charged with the job of auditing the gold supplies of the U.S. and ensuring that it honored its obligations. But the IMF did not do its job. Why? This enters the arena of psychology, but I imagine that the Cold War had something to do with it. The U.S. alone was capable of protecting the Allies from the growing Soviet threat. Perhaps the Allies and the IMF felt an obligation not to criticize their protector. Who knows? But once France got the atomic bomb and a president—Charles de Gaulle—who felt comfortable acting as an equal on the international stage, it no longer felt that it needed to cow tow to the U.S. So in 1963 France demanded to be repaid in gold for its ever-increasing stockpile of dollars. This should have instilled much needed fiscal and monetary discipline in the U.S., but it did no such thing. President Johnson committed the U.S. to fighting a foreign war AND instituting new welfare entitlements—his "guns and butter" policy. In 1969 President Nixon could have reversed this policy, but he feared that the inevitable recession would mean the loss of a second term, so he simply reneged on Bretton Woods and "closed the gold window" in 1971. So much for U.S. honor and prestige!
The world kept spinning ‘round, though, and the dollar continued to be used as a reserve currency--there simply was no other. In the 1980s President Reagan and Federal Reserve Chairman Paul Volcker put America’s economy on a two decade long, inflation-free growth path. It appeared that the world could indeed operate with a fiat reserve currency; that is, one not tied to gold. But administrations change and now it is apparent to our trading partners that our continued inflation means that the dollars they hold will become increasingly less valuable. We are cheating our trading partners.
China was so concerned that it floated the idea of creating an IMF-issued "super reserve" currency to replace the dollar. Although the Chinese government later claimed that it wasn’t really serious, no one believes them. But China has pegged its yuan to the dollar at too low a (yuan) rate. Many state-owned industries in its export-oriented economy would go bankrupt if China revised its exchange ratio with the dollar. This would mean lower spending in China and probably would trigger a recession. So China demurs…at least for awhile.
But the answer to the problem--that has been brewing for more than six decades now--is NOT to cobble together some new Frankenstein monster than no one will be able to control. The answer is right before our eyes—return to gold. Each country should set its own ratio of local currency to gold and settle all trades in the actual commodity. Then no country—not the U.S., not the European Community, not China, nor Japan—will be able to inflate its currency without destroying its ability to import goods. It will run out of gold for settlement purposes and be forced to deflate. No special governmental agreements are needed. Gold would settle just as checks settle today—by debiting and crediting each nation’s gold accounts wherever they may be. Just as no business can operate with zero money—it is forced to economize—no nation would be able to import continuously by papering the world with its currency, as the U.S. does today. As the profligate nation’s gold reserves dwindled, its ability to import would dry up; prices would drop, making its goods a bargain for export; its gold reserves would start to climb and all would be well. Just as explained by Jean Baptiste Say, all trade tends toward equilibrium.
IMF bureaucrats managing a super currency will be no more reliable than were U.S. bureaucrats managing the dollar. They, too, will succumb to political pressure to over-issue an IMF reserve currency, and the entire world will be off and running in an inflationary binge that will destroy world trade. As Professor Thorsten Polleit of the Frankfurt School of Finance and Management says, we all must make our peace with gold. It is in the best interest of the common man, because no one can manipulate it. Gold is money and money is gold. Gold is inflation and deflation proof, because it is not built upon debt, as is the current case with all the world’s fiat currencies. So it cannot be inflated when banks lend against a small reserve and it cannot suffer deflation when those loans are not repaid. This is the cycle through which we have just passed—money supplies inflated by profligate lending and now money supplies deflated when those loans go sour. This cannot happen with gold as long as governments strictly enforce currency convertibility and shut down banks that engage in fractional reserve banking.
So why doesn’t the world return to gold? Because governments benefit the most. The fiat money that we all use may be manufactured in infinite amounts by governments. Would we expect a counterfeiter, who was protected by law in his ability to print money, to deny himself its benefits? Of course not. Governments are no different. They are the primary beneficiaries of their fiat money monopoly. They may spend as they please. They are not obliged to tax the people or borrow honestly from them. It is a heady and corruptive power that appeals to the tyrants among us. No, reform must come from the people. Either that or reform will come only after a total collapse of our monetary system, which would cause untold hardships and possibly even massive death around the world as the ability of the people to engage in indirect exchange was destroyed. So monetary reform is no academic issue. It is a life and death issue.
A good start to reform would be for the citizens to become informed of monetary matters. Demand that real economics be taught in our schools. Demand that our politicians stop lying to us about the causes of our problems. End the demagoguery that seeks out enemies in the business class and attempts to place guilt upon the public, calling us "addicted to spending" and/or too "consumer oriented". This is nonsense. The people are perfectly capable of determining and guiding their own financial futures as long as the medium of exchange allows them to plan and understand the reality of their situation. Our government is the problem. We should demand that it confine its actions to those enumerated in the Constitution. Our founding document, the highest law of the land, does NOT give the government the power to print money. It assigns government the RESPONSIBILITY of protecting us from counterfeiters; it does not give government the power to BECOME A COUNTERFEITER. Enforce the Constitution. End the Fed. Return to gold. Restore our freedoms and our rights. Is this really such a radical demand?
Monday, May 11, 2009
How to Lose Friends with Monetary Policy
The unforeseen evil consequence of our government’s constant meddling with monetary affairs extends to causing increased animosity with our trading partners. Of course, America is not alone in this regard, for all governments today feel that it is their right and duty to manipulate their nations’ money supply, interest rates, and banking laws for the benefit of the nation. America, however, is in the (temporarily) unique position to force its trading partners bear much of the cost of such manipulation, due to the use of the dollar as a reserve currency. Since international trade settlement, especially for big-ticket items like oil, is conducted in dollars, each nation must hold more dollars than it would otherwise. This situation is a carry-over from the unique position of the United States at the end of the Second World War. At that time America held the most above ground gold reserves in the world and our nation’s infrastructure had escaped the destruction of war. The Bretton Woods agreement of 1944 enshrined the dollar as a reserve currency. America agreed that it would tie the dollar to gold at thirty-five dollars an ounce; all the rest of the world’s currencies would be tied to the dollar at some agreed-upon exchange ratio. Foreign governments could hold dollars instead gold to satisfy the necessary settlements of trade. This arrangement was called the "gold exchange standard".
The gold exchange standard certainly seemed to be a more efficient system than transporting gold from one central bank to another in order to settle accounts, something that the anti-gold clique, headed by John Maynard Keynes, harped about constantly. As long as America kept its dollar-to-gold ratio in tact, every currency would be subject to the discipline of the gold standard without all the fuss of handling the physical commodity itself. And therein lay the problem—America did not keep its dollar-to-gold ratio in tact. Almost before the ink was dry on the agreement America started printing more dollars. Within three decades America was forced to abandon the Bretton Woods Agreement, because we could not honor the redemption claims of foreign governments. Few Americans understood the full impact of this shameful action, but it was not lost on our trading partners. One of the first foreign statesmen to call the world’s attention to America’s dishonorable failure to uphold Bretton Woods was President Charles de Gaulle of France.
Charles de Gaulle was perhaps the only statesman of the modern era who understood economics, especially monetary affairs. His long-time economic confidante, Jacques Rueff, was a highly regarded Austrian School economist. De Gaulle was skeptical of the Bretton Woods Agreement. Having witnessed a large percentage of his countrymen collaborate with the enemy during the war, he well knew the weaknesses of men when placed under extreme pressure, either to save their necks or exercise political power. Therefore, he placed more confidence in the discipline of gold than the promises of men. Why hold dollars as surrogates for gold when the real thing was readily available? Nevertheless, this is the so-called system that the world had adopted when he came out of retirement in 1958 to save France from the insurrection of the Algerian officers and re-write France’s constitution to form the Fifth Republic, still the constitutional order of France. (This episode itself bears the hallmark of an adventure story played upon the world stage in which one man, by force of personality alone, saves his country from disaster for the third time. He saved French honor during the war—the Petain government in Vichy was a Fascist puppet and Germany was forced to occupy France as a conquered nation--and from a communist takeover immediately after France’s liberation.)
After de-colonizing French Algeria, de Gaulle turned his attention to France’s economy. In his presidential memoirs, cut short by his death in 1970, de Gaulle gave as clear an explanation as any textbook in explaining how the United States had managed to export inflation to its trading partners by failing to keep the dollar-to-gold ratio at the level agreed upon at Bretton Woods. One must read selected passages in de Gaulle’s own words in order to understand the international political damage that had been done:
"…there was the monumentally over-privileged position that the world had conceded to the American currency since the two world wars had left it standing alone amid the ruins of the others…the world’s entire stock of gold was piling up in the United States. The countries of the West…had no choice but to accept…the ‘gold exchange standard,’ according to which the dollar was automatically regarded as the equivalent of gold. It was so, in fact, as long as the Federal Government limited its issue of banknotes in direct proportion to its gold reserves…But the vast sums lavished by Washington…had drawn America into a process of galloping inflation…Moreover, America carried sufficient political and economic weight for the International Monetary Fund…not to insist that it be maintained….In France itself, the surplus dollars…since this foreign currency was converted into francs on the spot…resulted in an artificial increase in our total money supply."
In 1963 the French government demanded that America redeem eighty percent of what it owed France in gold. Eight years later America reneged on its promise to redeem the dollar for gold. Bretton Woods collapsed, unleashing government profligacy funded by unprecedented currency debasement.
One of our largest trading partners, China, has pegged its currency to the dollar at a fixed exchange rate, meaning that the Bank of China buys dollars with yuan, which American companies then spend in China. Resisting downward pressure on the dollar, which would mean exchanging fewer yuan for each dollar than the market would command, China has imported American inflation just as did France in the years after Bretton Woods. One could insert "yuan" for "franc" in the quote above, for the process is exactly the same. What can China do with its depreciating dollars? It should float the yuan and accept the recession that this would bring to the Chinese economy, an economy that is much too dependent upon exports, as witnessed by the government’s reluctance to end supporting the dollar at its currently high value. Its only other course of action is to exchange dollars for hard assets before the world recognizes what it is doing. It could buy gold internationally, and there is some indication that it is doing this at a slow process so as not to panic the markets, or it could buy American assets…not treasury bills, but real American assets such as land and companies. Repatriating massive amounts of oversees dollars would cause hyperinflation in the U.S., says Professor Jorg Guido Hulsmann of the University of Angers, France. The scenario from such an action is hard to fathom, but the possibility exists for chaos with our country and instability abroad. Who said the study of economics was dull?
The gold exchange standard certainly seemed to be a more efficient system than transporting gold from one central bank to another in order to settle accounts, something that the anti-gold clique, headed by John Maynard Keynes, harped about constantly. As long as America kept its dollar-to-gold ratio in tact, every currency would be subject to the discipline of the gold standard without all the fuss of handling the physical commodity itself. And therein lay the problem—America did not keep its dollar-to-gold ratio in tact. Almost before the ink was dry on the agreement America started printing more dollars. Within three decades America was forced to abandon the Bretton Woods Agreement, because we could not honor the redemption claims of foreign governments. Few Americans understood the full impact of this shameful action, but it was not lost on our trading partners. One of the first foreign statesmen to call the world’s attention to America’s dishonorable failure to uphold Bretton Woods was President Charles de Gaulle of France.
Charles de Gaulle was perhaps the only statesman of the modern era who understood economics, especially monetary affairs. His long-time economic confidante, Jacques Rueff, was a highly regarded Austrian School economist. De Gaulle was skeptical of the Bretton Woods Agreement. Having witnessed a large percentage of his countrymen collaborate with the enemy during the war, he well knew the weaknesses of men when placed under extreme pressure, either to save their necks or exercise political power. Therefore, he placed more confidence in the discipline of gold than the promises of men. Why hold dollars as surrogates for gold when the real thing was readily available? Nevertheless, this is the so-called system that the world had adopted when he came out of retirement in 1958 to save France from the insurrection of the Algerian officers and re-write France’s constitution to form the Fifth Republic, still the constitutional order of France. (This episode itself bears the hallmark of an adventure story played upon the world stage in which one man, by force of personality alone, saves his country from disaster for the third time. He saved French honor during the war—the Petain government in Vichy was a Fascist puppet and Germany was forced to occupy France as a conquered nation--and from a communist takeover immediately after France’s liberation.)
After de-colonizing French Algeria, de Gaulle turned his attention to France’s economy. In his presidential memoirs, cut short by his death in 1970, de Gaulle gave as clear an explanation as any textbook in explaining how the United States had managed to export inflation to its trading partners by failing to keep the dollar-to-gold ratio at the level agreed upon at Bretton Woods. One must read selected passages in de Gaulle’s own words in order to understand the international political damage that had been done:
"…there was the monumentally over-privileged position that the world had conceded to the American currency since the two world wars had left it standing alone amid the ruins of the others…the world’s entire stock of gold was piling up in the United States. The countries of the West…had no choice but to accept…the ‘gold exchange standard,’ according to which the dollar was automatically regarded as the equivalent of gold. It was so, in fact, as long as the Federal Government limited its issue of banknotes in direct proportion to its gold reserves…But the vast sums lavished by Washington…had drawn America into a process of galloping inflation…Moreover, America carried sufficient political and economic weight for the International Monetary Fund…not to insist that it be maintained….In France itself, the surplus dollars…since this foreign currency was converted into francs on the spot…resulted in an artificial increase in our total money supply."
In 1963 the French government demanded that America redeem eighty percent of what it owed France in gold. Eight years later America reneged on its promise to redeem the dollar for gold. Bretton Woods collapsed, unleashing government profligacy funded by unprecedented currency debasement.
One of our largest trading partners, China, has pegged its currency to the dollar at a fixed exchange rate, meaning that the Bank of China buys dollars with yuan, which American companies then spend in China. Resisting downward pressure on the dollar, which would mean exchanging fewer yuan for each dollar than the market would command, China has imported American inflation just as did France in the years after Bretton Woods. One could insert "yuan" for "franc" in the quote above, for the process is exactly the same. What can China do with its depreciating dollars? It should float the yuan and accept the recession that this would bring to the Chinese economy, an economy that is much too dependent upon exports, as witnessed by the government’s reluctance to end supporting the dollar at its currently high value. Its only other course of action is to exchange dollars for hard assets before the world recognizes what it is doing. It could buy gold internationally, and there is some indication that it is doing this at a slow process so as not to panic the markets, or it could buy American assets…not treasury bills, but real American assets such as land and companies. Repatriating massive amounts of oversees dollars would cause hyperinflation in the U.S., says Professor Jorg Guido Hulsmann of the University of Angers, France. The scenario from such an action is hard to fathom, but the possibility exists for chaos with our country and instability abroad. Who said the study of economics was dull?
Saturday, May 2, 2009
The Network of Fallacies Supporting Government Stimulus
The U. S government is attempting to reverse the economic downturn with a two-pronged policy of monetary inflation and fiscal stimulus. In previous essays I have exposed the role of the central bank in supporting the very monetary system—fiat money, produced in unlimited amounts by our fractional reserve banking system--that has triggered the Austrian business cycle, AKA the boom/bust business cycle. Once begun there is no way that the bubble, so induced by the expansion of credit not supported by real savings, can continue indefinitely. The bubble must burst and a recession must follow, which is simply saying that losing businesses must close and capital and people must find new, more market-oriented employment.
Nevertheless, our Federal Reserve Bank has expanded its lending—illegally, I might add—to non-member institutions such as insurance companies in addition to its massive expansion of reserves to the banking system. It has not worked and it will not work.
The Fallacy of Insufficient Consumer Spending
But in addition to this money expansion, the government has proposed a massive spending program, although the term “program” is too kind a word for this mishmash of boondoggle earmarks to all the left’s favorite socialist programs. Supposedly, it doesn’t matter where or how the money gets spent. Oh, no. All that matters is that it gets spent on something, anything, well…anything that meets the left’s agenda anyway. Solar panels and windmills are fine; drilling for oil in Alaska and off our coasts is not. The theoretical justification in this assault upon the pocketbook and common sense of the taxpaying American lies in a network of complementary economic fallacies that have become ingrained in university campuses and the halls of government. The short explanation is that insufficient consumer spending causes all recessions; therefore, the government must step into the breech and pick up the slack. For those who love formulas—which includes most university economic departments—here is their favorite formula: C + I = GNP. Consumer spending plus investment equals gross national product.
Of course, if one accepts this formula as representing reality, then it is easy to see that if consumer spending drops—C goes down—and investment does not pick up the slack—perhaps it goes down, too!—then GNP goes down. But, is that the cavalry I hear? Yes, it is the federal government, armed with its checkbook drawn against its account of newly created fiat money at the central bank. All government (G) has to do is increase its spending. The new formula becomes: C + I + G = GNP.
But the law of diminishing marginal utility tells us that government spending can never deliver the same satisfaction to the market as private decisions. We may acquiesce in some government spending as the necessary cost of civilization—for example, spending on public safety and an efficient and honest system of courts—but other government spending preempts private choice by purchasing goods and services for us. In addition to the presumption that such spending is good for us despite the fact that we can choose to purchase these goods and services ourselves, if we so desire, government spending is inefficient for it lacks the profit motive and the all-important feedback mechanism of the market. Ludwig von Mises explained that such government interference in the market place cannot succeed in satisfying human wants, due to the absence of socialist calculation. For example, choosing which services, quantities, techniques, etc. for the proposed universal healthcare system is beyond the capability of any planning agency. Therefore, a better formula to the one above would show that for each dollar extracted by the government from the private sector is returned to it in the form of something less than a dollar’s worth of satisfaction. This would be the new formula: (C + I – G) + .8G = GNP. The greater the government spending (G), the lower GNP becomes. In addition, investment declines, which restricts future growth, and it becomes ever more difficult to save enough capital to replace the depreciating existing capital stock. Welcome to the new Great Depression.
The Fallacy of the Paradox of Saving
A fellow traveler in this network of fallacies is the so-called Paradox of Saving. This is the under-consumption idea wrapped up in pseudo-scientific garb. Now the individual becomes subservient to the collective, for this fallacy states that what may be good for the individual—in this case saving—can be bad for society. Individual saving causes the dreaded decrease in total demand for goods and leads to a never-ending downward spiral from which the economy never recovers.
The idea that consumers lack the means to buy all of industry’s production is centuries old, but it took on new life in the 1920s and 1930s. In the 1920s Americans Waddill Catchings and William Trufant Foster wrote numerous essays on the subject and gained notoriety by offering a substantial reward to anyone who could successfully refute their thesis, as judged by a panel of referees. Future Nobel Laureate Friedrich Hayek was teaching at the London School of Economics at the time and did not learn of the challenge until it had expired: nevertheless, he wrote the definitive refutation. Defending Say’s Law—that supply and demand always tend toward equilibrium—Hayek explained that producers will drop the price of their goods to match supply; the market will learn from this error; and, no large scale malinvestment will emerge. All depends, of course, on the unhampered free market. Government interference to prop up prices or subsidize continued malinvestment would prolong and deepen the necessary market correction.
Unfortunately, John Maynard Keynes made the Paradox of Savings fallacy even more attractive by advocating massive government interventions at a time when most of the economic profession was becoming more socialist oriented. Government planning of production and control of prices during the recently ended Great War (World War One) had offered the heady allure of power to formerly obscure economists. This destructive partnership of interventionist economic theory wedded to activist politics survives to this day.
The Fallacy that a Growing Economy Depends upon a Growing Money Supply
But where will government get the money those socialist economists demand must be spent? Will not government be forced to raise taxes or increase debt, sapping the very purchasing power of the private sector that they are so determined to supplement? Will not each boost of government spending reduce consumer spending even more until the government has socialized the entire economy? This appears to be an insurmountable problem. This is the fear of the Austrian School economists. No, say the interventionist economists, for another fallacious theory rides to the rescue—that economic growth depends upon an increased money supply. In his masterful book The Ethics of Money Production, Professor Jorg Guido Hulsmann calls this “The most widespread monetary fallacy…” This fallacy gives the central banking authorities theoretical permission to print money and spendthrift politicians a duty to spend it. Neither taxes nor the interest rate need by raised, which might alarm the public to the danger that exists. But the danger will become apparent in the future when the additional money works its way through the economy, causing price increases as it travels, and leaving behind a devastated structure of production that cannot meet the needs of the market. The nation is left with an even greater inventory of unsold goods, such as houses it neither desires nor can afford and cars that are shoddy and overpriced compared to those produced by more market oriented companies. The only lasting legacy is that of increased public debt, an inheritance that guarantees a lower standard of living for our children, grandchildren, and generations beyond.
Austrian School economists proved that any quantity of money is sufficient for a growing economy. The money stock is part of the market economy and, as such, is subject to the same laws as any other marketable good. Its supply depends upon its demand. Of course, only commodity money is consistent with a free market economy, requiring no monetary authority to manage it. Say’s Law—that supply and demand tend toward equilibrium—applies to money as it does to all other goods in a free market. Fiat money, managed by a central bank, is incompatible with the free market. Our boom/bust business cycle and periods of rapidly rising prices, to be followed by rapidly falling prices, are symptoms of this incompatibility of the free market with unfree money.
This network of economic fallacies that give support to increased government spending must be challenged by free market economists armed with the truth of the superiority of freedom and liberty in all things.
Nevertheless, our Federal Reserve Bank has expanded its lending—illegally, I might add—to non-member institutions such as insurance companies in addition to its massive expansion of reserves to the banking system. It has not worked and it will not work.
The Fallacy of Insufficient Consumer Spending
But in addition to this money expansion, the government has proposed a massive spending program, although the term “program” is too kind a word for this mishmash of boondoggle earmarks to all the left’s favorite socialist programs. Supposedly, it doesn’t matter where or how the money gets spent. Oh, no. All that matters is that it gets spent on something, anything, well…anything that meets the left’s agenda anyway. Solar panels and windmills are fine; drilling for oil in Alaska and off our coasts is not. The theoretical justification in this assault upon the pocketbook and common sense of the taxpaying American lies in a network of complementary economic fallacies that have become ingrained in university campuses and the halls of government. The short explanation is that insufficient consumer spending causes all recessions; therefore, the government must step into the breech and pick up the slack. For those who love formulas—which includes most university economic departments—here is their favorite formula: C + I = GNP. Consumer spending plus investment equals gross national product.
Of course, if one accepts this formula as representing reality, then it is easy to see that if consumer spending drops—C goes down—and investment does not pick up the slack—perhaps it goes down, too!—then GNP goes down. But, is that the cavalry I hear? Yes, it is the federal government, armed with its checkbook drawn against its account of newly created fiat money at the central bank. All government (G) has to do is increase its spending. The new formula becomes: C + I + G = GNP.
But the law of diminishing marginal utility tells us that government spending can never deliver the same satisfaction to the market as private decisions. We may acquiesce in some government spending as the necessary cost of civilization—for example, spending on public safety and an efficient and honest system of courts—but other government spending preempts private choice by purchasing goods and services for us. In addition to the presumption that such spending is good for us despite the fact that we can choose to purchase these goods and services ourselves, if we so desire, government spending is inefficient for it lacks the profit motive and the all-important feedback mechanism of the market. Ludwig von Mises explained that such government interference in the market place cannot succeed in satisfying human wants, due to the absence of socialist calculation. For example, choosing which services, quantities, techniques, etc. for the proposed universal healthcare system is beyond the capability of any planning agency. Therefore, a better formula to the one above would show that for each dollar extracted by the government from the private sector is returned to it in the form of something less than a dollar’s worth of satisfaction. This would be the new formula: (C + I – G) + .8G = GNP. The greater the government spending (G), the lower GNP becomes. In addition, investment declines, which restricts future growth, and it becomes ever more difficult to save enough capital to replace the depreciating existing capital stock. Welcome to the new Great Depression.
The Fallacy of the Paradox of Saving
A fellow traveler in this network of fallacies is the so-called Paradox of Saving. This is the under-consumption idea wrapped up in pseudo-scientific garb. Now the individual becomes subservient to the collective, for this fallacy states that what may be good for the individual—in this case saving—can be bad for society. Individual saving causes the dreaded decrease in total demand for goods and leads to a never-ending downward spiral from which the economy never recovers.
The idea that consumers lack the means to buy all of industry’s production is centuries old, but it took on new life in the 1920s and 1930s. In the 1920s Americans Waddill Catchings and William Trufant Foster wrote numerous essays on the subject and gained notoriety by offering a substantial reward to anyone who could successfully refute their thesis, as judged by a panel of referees. Future Nobel Laureate Friedrich Hayek was teaching at the London School of Economics at the time and did not learn of the challenge until it had expired: nevertheless, he wrote the definitive refutation. Defending Say’s Law—that supply and demand always tend toward equilibrium—Hayek explained that producers will drop the price of their goods to match supply; the market will learn from this error; and, no large scale malinvestment will emerge. All depends, of course, on the unhampered free market. Government interference to prop up prices or subsidize continued malinvestment would prolong and deepen the necessary market correction.
Unfortunately, John Maynard Keynes made the Paradox of Savings fallacy even more attractive by advocating massive government interventions at a time when most of the economic profession was becoming more socialist oriented. Government planning of production and control of prices during the recently ended Great War (World War One) had offered the heady allure of power to formerly obscure economists. This destructive partnership of interventionist economic theory wedded to activist politics survives to this day.
The Fallacy that a Growing Economy Depends upon a Growing Money Supply
But where will government get the money those socialist economists demand must be spent? Will not government be forced to raise taxes or increase debt, sapping the very purchasing power of the private sector that they are so determined to supplement? Will not each boost of government spending reduce consumer spending even more until the government has socialized the entire economy? This appears to be an insurmountable problem. This is the fear of the Austrian School economists. No, say the interventionist economists, for another fallacious theory rides to the rescue—that economic growth depends upon an increased money supply. In his masterful book The Ethics of Money Production, Professor Jorg Guido Hulsmann calls this “The most widespread monetary fallacy…” This fallacy gives the central banking authorities theoretical permission to print money and spendthrift politicians a duty to spend it. Neither taxes nor the interest rate need by raised, which might alarm the public to the danger that exists. But the danger will become apparent in the future when the additional money works its way through the economy, causing price increases as it travels, and leaving behind a devastated structure of production that cannot meet the needs of the market. The nation is left with an even greater inventory of unsold goods, such as houses it neither desires nor can afford and cars that are shoddy and overpriced compared to those produced by more market oriented companies. The only lasting legacy is that of increased public debt, an inheritance that guarantees a lower standard of living for our children, grandchildren, and generations beyond.
Austrian School economists proved that any quantity of money is sufficient for a growing economy. The money stock is part of the market economy and, as such, is subject to the same laws as any other marketable good. Its supply depends upon its demand. Of course, only commodity money is consistent with a free market economy, requiring no monetary authority to manage it. Say’s Law—that supply and demand tend toward equilibrium—applies to money as it does to all other goods in a free market. Fiat money, managed by a central bank, is incompatible with the free market. Our boom/bust business cycle and periods of rapidly rising prices, to be followed by rapidly falling prices, are symptoms of this incompatibility of the free market with unfree money.
This network of economic fallacies that give support to increased government spending must be challenged by free market economists armed with the truth of the superiority of freedom and liberty in all things.
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