Ok, I’m sorry. That was shamelessly provocative.
But the Club for Growth certainly does seem to have come out in favor of a new gold standard:
If you want to understand how concern about an unstable dollar could cause a recession, imagine if tomorrow the U.S. Bureau of Standards announced that it was “floating” the foot. Instead of being fixed at 0.3048 meters, the length of the foot would henceforth be set by “the market”. This would impact not only economic arrangements based upon length (property lines, lumber sold by the foot), but also every transaction involving area (flooring is sold by the square foot) and volume (“the gallon” is legally defined as 231 cubic inches).
Even before there was any change in the market length of the foot, there would be a massive redirection of economic energies and focus. Executives would turn their attention from production, trade, and investment to protecting their interests from possible changes in the value of the foot. Transactions would be delayed or cancelled. Just the existence of the possibility that the foot could change in length would cause economic chaos.
Just as “the foot” is our basic unit of length, “the dollar” is our fundamental unit of market value. The smooth, efficient operation of the economy depends upon stable units of measure. Unfortunately, the dollar has become highly unstable.
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The underlying problem appears to be intellectual confusion between “money” and “capital”. Because the Fed is both the monetary authority and a bank (“the lender of last resort”), it deals with both. Unfortunately, right now there seems to be considerable confusion between the Fed’s two roles.
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Can the dollar be saved? Of course it can.
The Fed should announce that it is abandoning the targeting of the Fed Funds rate and will henceforth express its monetary policy in the form of a target range for the COMEX price of gold. It should further announce that it will use Open Market operations to force the price of gold down until it is trading in a range of $505 maximum, $500 minimum.
While the dollar is being stabilized, the Fed can use its capabilities as a bank to relieve any strains that might appear in the banking system. It would do this by selling government bonds and buying other types of financial assets from whatever institutions needed liquidity. The Fed is already doing this to help deal with the fallout from the “sub-prime” debacle.
I humbly predict that this approach would cause gold prices to plummet, the dollar to soar, interest rates to plunge, talk of recession to vanish, the monetary base to expand, and speculators to file for bankruptcy. It would be fun to watch.
Louis R. Woodhill, an engineer and software entrepreneur, is on the Leadership Council of the Club for Growth.
The “floating the foot” analogy is great.
In any case, fortunately for gold bug investors such as yours truly, following a $500/oz gold prescription would require an acceptance of 15 years of failed inflation bookkeeping, an acknowledgment of higher prior inflation (thus wringing another round of entitlement spending hikes from the federal government), and a cast-iron stomach to ride out a 1982-style recession.
It would also require Bernanke to repudiate a professional lifetime.
Federal Reserve hawkishness is not on the horizon–yet.
The WSJ has a predictable, but nonetheless highly worthy editorial as well:
We’re All Keynesians Now
January 18, 2008; Page A12So famously declared Richard Nixon back in 1971, in what we thought was a different economic era. But after yesterday, we’re not sure what decade we’re in. With Federal Reserve Chairman Ben Bernanke and President Bush both endorsing temporary tax cuts and more federal spending as “fiscal stimulus,” an inflation-adjusted version of Jimmy Carter’s $50 rebate can’t be far behind.
Appearing before Congress, Mr. Bernanke told Democrats what he thought they wanted to hear. The former academic economist blessed a “fiscal stimulus package,” as long as it is “explicitly temporary.” How new federal spending can be “temporary,” he didn’t say, as if a dollar collected in taxes or borrowed and then spent can be recalled.
The “temporary” line was thus a dagger aimed directly at the heart of Mr. Bush’s desire to make his tax cuts permanent. The Fed chief did aver that, “Again, I’m not taking a view one way or the other on the desirability of those long-term tax cuts being made permanent.” But of course refusing to endorse something is itself a point of view — a point Democrats were already joyfully repeating yesterday.
Instead, Mr. Bernanke embraced the explicit Keynesian notion that the government should write checks to “low and moderate income people,” who will spend it quickly and thus lift consumer demand. In the academic literature, this is called having a higher “marginal propensity to consume” than the more affluent, who tend to save more.
We’re all for putting more money in the hands of the poor and moderate earners, especially via stronger economic growth that will give them better paying jobs. But the $250 or $500 one-time rebate check they may now receive has to come from somewhere. The feds will pay for it either by taxing or borrowing from someone else, and those people will have that much less to spend or invest themselves. We are thus supposed to believe it is “stimulating” to take money from one pocket and hand it to another.
To put it another way, when the government calculates gross domestic product, it expressly omits transfer payments. It does so because GDP is the total of goods and services produced in the economy, and transfer payments produce no goods and services. The poor will spend those payments on something, but the amount they thus “inject” into the economy will be offset by whatever the government has to tax or borrow to fund the transfers. No wonder stocks sold off yesterday after Mr. Bernanke endorsed this 1970s’ economic show.
A fiscal stimulus that really stimulates would change incentives, and do so permanently so workers and investors can know what to expect and take risks accordingly. One problem with the increasingly “temporary” nature of the Bush tax cuts is that they are beginning to introduce new political risk into economic decisions. Though they expire in 2010, everyone understands that a new President and Congress could act to raise taxes as soon as next year. Mr. Bernanke could have educated the public about this business expectations problem, but then Democrats would have been upset.
And Mr. Bernanke has his own political problems — namely Congressional and Wall Street demands that he rescue mortgage assets by easing money even further, despite an already weak dollar and Wednesday’s December inflation report that prices rose 4.1% in 2007. Yes, “core” inflation rose only 2.4%, but don’t tell that to Americans who are paying the higher food and energy prices that the Fed excludes from “core” readings. As the nearby table with recent polling results shows, three of the four main economic issues cited by Americans are price-related. The public thinks we have an inflation problem even if the Fed doesn’t.
Mr. Bernanke can expect to get pressure no matter what he does, and perhaps he figured the way to get more monetary running room was to give Congress what it wants on spending. If so, it doesn’t inspire much trust in us that he can hold fast on monetary policy either. And speaking of the 1970s, what markets may really fear is that we are entering another period of “stagflation,” slower growth with rising prices, and without political or economic leaders who understand what to do about it.
One truth that Mr. Bernanke did speak yesterday is that it is a mistake to rely on monetary policy alone to spur economic growth. It’s a shame, then, that his testimony makes it that much less likely that we’ll get any genuine “stimulus” from fiscal policy.
Bush’s 2003 capital-gains tax cut was by far the best domestic policy initiative of his term. Almost any intellectually honest economist would agree with the principle that capital-gains taxes are extremely toxic relative to the revenue they provide. Then again, Bernanke is campaigning for re-appointment by a Democratic government.
Bush never did well with bureaucratic appointments.
