24 January 2012

A Third Option


In many ways the monetary policy issue is even more important, simply because we are running out of rope on our national debt-addiction rappelling adventure and the floor is still 100' down.  That's a serious problem -- and "gold standards" do not (in fact cannot!) fix it.  The only fix that works is to demand and enforce a zero-CPI standard with honest statistics, along with an end to federal government borrowing -- period.  "Hard money" .vs. "Fiat money" is immaterial; if you permit fraud in the monetary and credit system, as we have, the rest simply does not matter and yet if you put a cork in the frauds and lock up the scammers then you quickly come to the conclusion that allowing a handful of producers of some metal, the majority of which are foreign entities, is the last group you want running your monetary policy!
The Paulites get this wrong and so does Ron Paul himself despite the historical fact that the United States had massive inflationary bubbles and detonations of them during the time it was on the Gold Standard.  1873 anyone (as just one example.)
The real problem in 1873 as with all other similar blowups was the issuance of bogus debt instruments unbacked by anything.  In the case of 1873 concentration was in railroads and related construction all financed by long-duration bonds (and therefore subject to high degrees of price risk due to their duration) but which were entirely-speculative and in fact for which there was no actual demand in the economy for the services (transportation to be provided by said railroads) at a level sufficient to meet the intended expense.  It didn't help that we were playing games with our exports (and Europe with its imports) much as China and the US are today, effectively hiding the bubble's impact for a period of time and allowing it to inflate to ridiculous size.  When the over-leveraged positions became exposed the game collapsed and the Long Depression followed. [Emphasis original.]

Denninger correctly notes that a gold standard, in and of itself, is not enough to prevent a bubble of any sort.  He also correctly notes that enforcing a zero-CPI standard would fix the current currency mess.  However, what he seems to neglect in his analysis is that the real problem is not with the proposed solutions, but the fact that the government has to enact and enforce them.

This then begs the obvious question:  given the government’s obvious failures to prevent bubbles by keeping money honest, regardless of the money is metal or digital, why then even bother to put the government in charge of the money supply?  They can’t manage it properly when gold is money, and they certainly can’t manage it properly when paper is used as money.  Why then trust them with it?

The better solution is to simply allow currencies to freely compete with each other, which will have a strong tendency to ensure that currencies remain sound, strong, and free from inflation.  By the way, there is one presidential candidate who has proposed legislation that would do exactly this.  We all know who he is.

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