Jonah Goldberg has a pretty good piece up about praising politics and divisiveness as being a part of the solution. It’s a common theme with him and he handles it in his typically thoughtful way. As much as I can’t stand politicians I can see his point. Politics is awful, but the alternative is violence. And while the good guy - bad guy simplicity of that may sound appealing compared to the ‘knife in every back’ nature of political decision making... the truth is that it really isn’t.
The central political divide of our country has to do with finance and economics. Liberals (or progressives or whatever) believe that the best way to handle an economic crisis is with top down, ‘command and control’ sort of policies. They think you should give experts a gun and let them decide for the people instead of telling them decide for themselves. Tax ‘the rich’ to pay for benefits for everyone else, and on the whole the world will be a better place.
Personally I think the evidence that contradicts that is completely overwhelming, but it’s been around a long time and hasn’t convinced any of the progressives.
In the meantime, more or less since Reagan, conservatives have supported the idea of economic liberty as a path toward prosperity. Republicans (particularly those in office) have been more self serving, but the conservative ideals they claimed to hold all included the idea of increased economic liberty for the little guy and a smaller government with limited responsibilities.
Things have remained the same for liberals for a while. They still hate the rich, and still think ordinary people are too stupid to run their own lives. But since the housing crash, the conservative side of the discussion has changed in important ways. It now includes a lot of economic populism, mostly revolving around the Fed. Ron Paul thinks we should disband the Fed and go back on the gold standard. A commodity based currency has its virtues, but it won’t lead to a lack of inflation as many believe. In fact, the gold standard may cause at least as many problems as it solves. The unintended consequences will be broad and deep.
There is another idea rattling around having to do with the federal debt limit. The image being painted is that the car is speeding toward the cliff at 100 miles per hour and refusing to raise the debt limit would be like slamming on the brakes. The problem is that’s not a very good analogy. A better one would be that the car is speeding toward the cliff at 100 miles per hour and refusing to raise the debt limit would be like getting out of the car.
A default on US debt would be the result of failing to raise the debt limit. And we shouldn’t pretend that something like that isn’t serious. And all the tricks and trifles in the world won’t save our economy after something like that. Unemployment would skyrocket and economic growth would evaporate.
But most important, it won’t actually help. It won’t lead to more economic liberty. In fact, it’s entirely possible that it will lead to martial law, strict price controls, and rationing of essentials. The world that comes from a default on US debt will look more like 1984 than if we elected a whole law school full of Obama’s to public office.
We aren’t saints in the private sector, but in many respects honesty is still considered a virtue. It’s usually in our interest to mean what we say and vice versa. Not so in politics and I think that’s what screws people up. Politics is almost exclusively about lies, deceit and manipulation of others. The most honest man in congress is almost certainly the least successful.
So if all this noise is about the debt limit is just politics and posturing, then that’s fine. I was making this case to a coworker yesterday and I was trying to explain the kind of forces that will be brought to bear if it looks like the discussion will go badly. “Just imagine” I said, “George Zoros’s tough guy dangling Obama out a third story window by his ankles, and in the window beside it, some lobbyist from the political right doing the same to John Boehner. They’ll make a deal.”
They will make a deal because everything they are depends on it. In the post default world guys like our politicians aren’t worth much of anything. So they'll make a deal just ot protect their own ...positions.
7 comments:
It's interesting how contextual the meaning of "populism" is. William Jennings Bryan was considered a populist because he wanted to go off the gold standard. Now you're calling Ron Paul a populist for wanting to get rid of fiat money and back on gold.
Well I certainly don't mean to imply that Ron Paul has populist motives. I certainly don't believe that - I think he's driven by a principled argument. But I don't think the same of the people who support him.
Here’s an example of what I mean Matt.
Let’s talk about this idea of an audit of the Fed, an idiotic populist idea if ever I’ve heard one. Why do I say something like that? Because the process is not designed to enlighten at all. What can come from that? What do you imagine will happen when the congressional committee discovers that US dollar swaps with a notional value in the umpteen trillions of dollars have been issue to foreign entities?
Can you imagine the talking heads on FoxNews saying that the notional value may be a big number but that it doesn’t really matter with regard to a US dollar swap? Can you imagine them saying that with an economy our size you can expect larger dollar positions like that from time to time? Do you see them talking about how many standard deviations the total cumulative position is above or below trend for the Fed or talking about the Value at risk?
No. They won’t say any of that. But you can bet that there will be some great big number written across the top of Glenn Beck’s blackboard that day. He won’t understand what the number is, or what it means, but he won’t stop talking about it either. And the more he talks, the less people will understand it and the more upset they’ll be. He, and the congress will be going along with it all not to reveal the truth, but to obscure it for the purpose of achieving a political goal that they don’t believe they could get otherwise.
I give Ron Paul a pass on the issue because I think if you asked him if he wants to go through that process to get rid of the Fed, he’d almost certainly say yes. But I don’t give the same credit to someone like Sarah Palin, who I think would get behind a Fed audit strictly to enrage the mob.
(And for the record, I like both Sarah Palin and Ron Paul, and I’m a fan of Glenn Beck. But on this issue I think all three of them are dead wrong.)
After doing a little research on the history of the US Dollar:
Up until the reign of FDR, the public had a choice of money. Gold (gold certificates), silver (silver certificates and every day coinage from the dime to the dollar coin), Federal reserve notes, and the United States Note (true fiat money issued by the Treasury). Silver backed the every day spending money of the public. Even FDR did not remove silver. That happened when LBJ pulled silver from the currency (coinage became known as the 'Johnson Slug'). This was also the beginning of the massive welfare spending and inflation.
I would like to see gold and silver brought back as legal tender. The public then will have a choice should they lose faith in the fiat money printed by the Fed. Bringing specie back into our money system will act as a check and balance against the Fed.
I break with the hardcore libertarians who want gold and / or silver only. Some form of fiat or fractional reserve currency (my preference) will need to be issued by some government entity (I would prefer the Treasury issued notes over having the Fed). When the economy grows faster than gold and silver can be pulled from the ground, the currency will appreciate. This will punish those who take on long term debt (i.e. starting a business) as it will increase their debt load. Some form of fiat money or fractional reserve currency will be needed to prevent deflation of the type that happened during the Long Depression.
Ultimately, I want a currency policy that makes for a stable dollar (as stable as possible). The closest I have seen this in history was during the 1920's.
I think you're seeing the real issues there. In my experience, the people that advocate the purely libertarian gold/silver based currency exclusively haven't really thought it through.
A fiat currency offers advantages for maintaining liquidity but the cost of that is that there are insufficient constraints on inflation. Inevitably political pressure pushes the value of the currency lower.
The long term trick is really (as you said) establishing the incentives for maintaining stable pricing. There are lots of great ideas out there that will serve that end, but simply switching to a gold standard won't do it alone.
There are lots of great ideas out there that will serve that end, but simply switching to a gold standard won't do it alone.
Steve Forbes for years has advocated tying the Federal Reserve Note to the price of gold. This could be done with a computer program instead of a board of Fed governors. If the gold price goes up, the Fed would take steps to pull dollars from circulation.
I don't think Forbes' idea will work for the following reason: After the smoke clears from the coming economic debacle, the faith in fiat money will be irreparably damaged (I am more pessimistic on the entitlement situation than you).
Looking back into the past (post Civil War) provides a possible solution: In 1865, the economy was in shambles, a large percentage of the most productive class at the time (military age men) were dead or missing limbs, and the currency consisted of United States Notes that nobody had faith in (the govt. suspended payments in gold and silver).
To address the situation, the Treasury committed itself to backing the US Notes, over time, with gold. As the Treasury built up its reserves (via taxation, economic growth, new gold and silver finds out West), it slowly allowed the convertibility of the Fiat money into specie. The US Note eventually traded on par with the gold because even though the Treasury didn't have the gold to back the notes in circulation fully, people HAD FAITH that at some point the note would be as good as gold at some point in the future.
I would like to see the Treasury issue notes backed by a fractional reserve of gold and / or silver, with a commitment to maintain a certain ratio of notes vs. reserves. Should reserve rise, the Treasury would convert notes to gold and/or silver certificates / coinage. If too many notes start to circulate (the market price of the note to gold inflates), the Treasury would slow down the printing presses.
That's my $0.02 worth on the whole currency debate.
All well reasoned points, but the truth is that it only really skims the surface of the debate.
I have a buddy (an economist you may have seen as a guest on Squawk Box) who can go on about this for hours. I kind of prefer to leave the debate to people like him who have the myriad of details at their fingertips.
The Gold standard solves some problems, creates others, and has a ton of unintended consequences. A commodity basket does the same. So does every other option I've ever heard of.
I leave it to greater minds than mine to solve.
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