Posted on 05/25/2010 7:17:02 AM PDT by SeekAndFind
In today’s New York Times, Ross Douthat takes on Rand Paul and paleoconservatism on the Civil Rights Act and other issues. “Like many groups that find themselves in intellectually uncharted territory,” writes Douthat, “they have trouble distinguishing between ideas that deserve a wider hearing and ideas that are crankish or worse. (Hence Ron Paul’s obsession with the gold standard and his son’s weakness for conspiracy theories.)”
Douthat is being a bit unfair here. Paleoconservatism isn’t intellectually uncharted territory; whatever its faults or merits, its acolytes built the philosophical foundations of Cold War conservatism. But I don’t want to digress into a pedantic discussion of the intellectual foundations of paleoconservatism. Rather, I want to take on the idea that advocacy of the gold standard is a crankish obsession, one that is intellectually (and perhaps morally) on par with opposing the Civil Rights Act.
If the gold standard is merely a crankish obsession, then the ranks of obsessive cranks include not only Ron Paul but also Friedrich Hayek, Robert Mundell, Jude Wanniski, Robert Bartley, Jack Kemp, and Steve Forbes. That is to say, most of the leading exponents of supply-side economics. (Note that this roll call includes two Nobel laureates.) Indeed, sound-money policies have been at the core of conservative monetary policy from the beginning. It wasn’t too long ago that opponents of the gold standard, like William Jennings Bryan, were thought of as the cranky ones.
It is true that the gold standard is an unfashionable idea in Washington, but it is a mainstream one within the financial community. This is unsurprising on both fronts. The financial community is the consumer of government debt, and is therefore intensely attuned to the relationship of monetary policy to the value (i.e., default risk) of that debt. Investors see over and over again the pattern by which governments depart from hard-money policies (such as the gold standard) in order to engage in deficit spending, and then devalue their currencies in order to reduce the value of the debts they then incur. It is a story that all too frequently ends in credit default and economic collapse. The financial community sees no reason why the United States should be immune from the laws of economics.
On the other hand, the political class is attuned to the value of increasing government debt; that is, of building and rewarding political constituencies with high state spending and low taxation. So it is natural that a return to the gold standard is considered eccentric in Washington.
This is not to say that there aren’t thoughtful, disinterested critiques of the gold standard; there are (Milton Friedman comes to mind). But if we continue on our present fiscal course, it is only a matter of time before the bond vigilantes now ravaging Greece make their way across the Atlantic. When that happens (if not before), countries like China and Russia will take concrete steps to dissociate themselves from the U.S. dollar. Given that few other currencies are ready to take the dollar’s place, don’t be surprised if their next move is a transition back to a metals-based monetary system.
If we returned to the gold standard right now a dollar would be worth around 2 cents.
We are always on the Standard and the Obamabuck is really worth about 3 cents.
This is essentially meaningless. This is the Bernie Madoff School of Economics.
A gold standard would probably help tie value to something real.
There is the beginnings of a hue and cry.
The gold standard will be imposed else where first and America will follow with some bimetallic version.
It but a matter of time before the present devaluations are realized to be the defacto gold standard.
The sumtotal of the basket of currencies is the total supply of gold.
Milton Friedman opposed the gold standard. That’s all I need to know.
Perhaps you should ask why? The $35 price of gold was undervalued about 17 % when Nixon abandoned it. Had he not done it, his total supply of gold would have been gone within a week.
Like it or not, a goldless America would have been a worthless America
The gold standard is a monetary straight jacket. Friedman believed the money supply should grow at a constant rate to account for economic growth. That is impossible in a gold standard.
I wonder what his reasons were....
I think he believed it would limit the money supply. Wealth created in many forms not just gold. By limiting money to gold you could have deflation occuring just as frequently as inflation.
“you could have deflation occuring just as frequently as inflation.”
But isn’t deflation simply an across-the-board rise in the standard of living? A precipitous deflation admittedly would pose dislocations, but a gradual deflation would be no different than the decline in prices observed in the second half of the 19th century in the U.S. The chief virtue of a gold standard is that it provides a brake on the ARBITRARY inflation that results from politicians wanting to have their cake (i.e., the votes bought by dispensing public “goodies”) and eat it too (i.e., avoid the unpopular tax increases required to pay for such goodies). History has shown time and again that politicians are adept at overpromising, but far less disciplined about seeing that lavish promises are paid for.
You would not have deflation because the quantity of money would not be dropping. You would see prices drop as productivity improved just as the price of computers has steadily dropped.
People seem to be happy that inflation has been relatively controlled the last couple decades and this is what Friedman preached. But the steady increase in the money supply has covered up what would otherwise have been significant price decreases. In other words, inflation has probably been far worse than it would appear.
Friedman believed that the Fed should maintain price stability and that is what it has targeted since the early '80's. Believers in real money support stability in the value of the currency -- prices of goods and services will rise and fall with supply, demand and production improvements.
Technology improved so rapidly, though, that even an exploding money supply couldn't disguise it.
Everyone seems frightened to death over a scenario where prices continually dropped. I can't understand why. It would mean that the purchasing power of their money was increasing.
I think you’re thinking of a different type of deflation -—which stems from excess supply. It’s not “good” per se, but when it’s based on more efficient production, it’s not symptomatic of an economy that’s in bad shape.
But that’s not the kind of deflation what worries people.
I think people are more concerned, not with prices dropping but with a phenomenon called a DEFLATIONARY SPIRAL.
A deflationary spiral is a situation where decreases in price lead to lower production, which in turn leads to lower wages and demand, which leads to further decreases in price.
Since reductions in general price level are called deflation, a deflationary spiral is when reductions in price lead to a vicious circle, where a problem exacerbates its own cause.
If you are in debt, your debt increases because prices and incomes don’t rise to offset it. Corporate and business debts also go up in comparison to revenues, which fall due to declining prices. The debt payment becomes more and more onerous. Company profits are not likely to be very strong in current dollars, which results in —— LAYOFFS, which results in -— HIGH UNEMPLOYMENT, which results in COLLAPSING DEMAND.. which spirals.
People who are unprepared for deflationary spiral have a huge amount of debt, which is wonderful in periods of inflation, but terrible in periods of deflation. Take mortgage debt as an example. Let’s say that in the high-inflation 1970s, you put down 20 percent on a house and borrowed 80 percent. If you got a 10 percent mortgage rate, and the house appreciated 15 percent in the first year—not unusual back then—you made 35 percent on your money that year.
By contrast, let’s assume prices are falling 2 percent a year in deflation. Real estate prices typically track inflation. If you put down 20 percent, and borrow 80 percent at 4 percent interest, but the house price declines 2 percent in the first year, you lose 26 percent on your money.
*THAT* is what people fear most and that is what happened the past 2 years.
Yes, I think that correct. You can’t throttle the whole economy to be limited merely by how much of some mostly useless yellow metal we can dig out of the ground.
Even under a “gold standard” governments can still borrow and get deep in debt. Limiting government debt would accomplish more and be more realistic. A balanced budget amendment, even better.
Gold is truly the ultimate in “fiat” currency. It has no intrinsic value. You can’t eat it, drink it or make shelter out of it (OK... if you have a lot of it, maybe you could). Gold only has value because people ~believe~ that somebody else will accept it as currency in exchange. It’s only advantage as a store of value is its limited supply. But it’s supply changes not based on productivity or other market factors. Its supply changes ad-hoc as deposits are discovered. That can be disruptive too.
I think we’re better off trying to focus on debt. Then the currency won’t need to be just printed wildly to pay down such debt and it’s value will be more stable.
Correct. However not only as productivity increased, but drop in demand of products as well. These drops in demands can be caused for the right and wrong reasons.
There is another problem with gold and that is the fact that it is a commodity and has industrial uses, especially in electronics. The money supply could tighten and then you would have unwanted deflation.
The reverse could also happen. There is in fact a tremendous amount of gold in the oceans. At present it is not easily or economically feasible to “mine” it, but let's say someone develops a cheap efficient method of doing so. You would then have inflation.
So the actual money supply(ie gold) could be affected by things other than monetary policy. Is this what we want?
The bottom line I think is that a countries currency should be based on that countries ability to produce wealth. Furthermore the Fed's job is to protect the currencies value and not be politicized as it has been since the Clinton years. But, hey that's just me.
Regards,
Boiler Plate
Goldbug (aka, per this article, “obsessive crank”) ping
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