Tags: Anemic Fiat Dollars

Ben Bernanke and the Second Deficit


Arguing that the Fed should embrace a more aggressive growth agenda, David Leonhardt writes in the New York Times:  

By any standard, joblessness is a bigger problem than inflation.  

Never mind those pesky Austrian-econ types and their argument that many of our economic problems are caused by artificially low interest rates (cheap money = boom built on sand = bust). That “by any standard” stuck in my head.  

As Rush Limbaugh says when he sees something interesting in the New York Times: I wonder if that’s true?  

Because inflation acts slowly and because its costs are dispersed, most people do not much notice it when the rate is very low. But inflation is a pernicious tax on savings and investment. How much does it cost us?  

Since inflation reduces both the value of savings and the value of debts (since you get to pay off your debts in devalued dollars, which seems to be the main attraction of inflation for Uncle Sam), you don’t consider inflation against present income, but against net worth. In 2010, , the net worth of the United States was about $70 trillion. That’s household wealth, savings, investments, non-farm non-financial businesses, tangible assets like real estate, etc., minus household debts, business debt, etc. A very low rate of inflation — say a measly 2 percent — therefore costs a big fat $1.4 trillion a year, i.e., it’s a second deficit. (I know that this is an imperfect measure for lots of reasons, but it gives a good idea of the scale  of the thing.)  

So, about that $1.4 trillion: Is that a smaller problem than unemployment “by any standard”?   In the most recent BLS report, Joe Government put the number of unemployed Americans at about 13.7 million.   Meaning that the cost of 2 percent inflation every year is, give or take a little, about equal to what we’d spend writing a check for $102,189.78 to every unemployed American. That’s a bunch of jack.  

I’m a poet, not an economist, but I find it hard to buy the argument that we must — must — devalue all of our savings every year (which is what inflation does) in the name of monetary stability. I think a trillion bucks is too much to pay for monetary stability, especially when it doesn’t offer all that much, you know, monetary stability.

Of course there are trade-offs from inflation: but practically all of the costs fall on savers and investors, and all of the benefits accrue to debtors and spenders. I do not much like those incentives.

Two percent inflation costs $1.4 trillion a year: Don’t forget the second deficit.

—  Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, just published by Regnery. You can buy an autographed copy through National Review Online here.

Tags: Anemic Fiat Dollars , Debt , Deficit , Despair , English-Major Math , Inflation

First PIMCO, Then OPEC, Then . . . ?


This remind you of anything?

March 14 (Bloomberg) — Oil exporting countries are cutting holdings of U.S. government debt as energy prices rise, helping depress the dollar, the worst performing major currency of the past six months.

Treasuries owned by oil producers and institutions such as U.K. banks that are proxies for Middle East nations fell 9 percent in the second half of 2010 to $654.6 billion, the first decline in the final six months of a year since the Treasury Department began compiling the data in 2006. The sales may continue, if history is any guide, because Barclays Plc says Middle East petroleum exporting nations have traditionally placed only 25 percent of their savings in dollar-based assets.

PIMCO, OPEC: not buying what we’re selling.

And does anybody think that the No. 3 U.S. government debt buyer, Japan, is going to be in the market for a while?

Here’s a little piece of knowledge:

“I moved my clients out of any mutual funds that held Treasuries 12 to 18 months ago, including the Pimco Total Return Fund,” said Steven Tibbitts, owner of Tibbitts Financial Consulting, a $50 million advisory firm.

In place of Treasuries, he has moved clients into floating-rate-bank-loan funds and international bonds, including emerging-markets debt.

“It’s not a matter of whether rates rise, because they will, and when they do, it will be negative for longer-term bonds, especially longer-term government bonds,” Mr. Tibbitts said.

Question: Who thinks the U.S. government will still have a AAA rating in five years? Answer in the comments and tell me why/why not.

—  Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, just published by Regnery. You can buy an autographed copy through National Review Online here.

Tags: Anemic Fiat Dollars , Bonds , Debt , Deficits , Despair

Contra Kristol, Contra Gold


I think that the great Bill Kristol is wrong in his call for a “modernized international gold standard” — whatever that might look like — as  part of a program to end the U.S. dollar’s status as the world’s reserve currency. A couple of things:

First, the dollar’s status as a reserve currency is not inherently related to the question of an international gold standard. Whether we have fiat dollars, dollars backed by gold, or dollars backed by something else, nations that hold large foreign-currency reserves may or may not choose to hold as many dollars tomorrow as they hold today. Large institutional investors, be they sovereign-wealth funds or other top-tier players, may wish to hold something backed by gold, in which case they have an obvious alternative: gold. (Or gold-related securities.) Dollars are freely traded on  global exchanges; gold is freely traded on global exchanges; there is never any question about the value of a dollar vis á vis gold. Yes, the value of the dollar fluctuates, and so does the value of gold. There is no inherent economic advantage in uniting those fluctuations; the main attraction of the gold standard is its alleged power to cause governments to conduct their fiscal affairs intelligently and honestly. Alas, it does not.

The question of what a “modernized international gold standard” would look like is worth asking, inasmuch as expecting a motley selection of self-interested sovereign nations to adhere to a rigid international standard that does not serve their political goals has some precedent — the euro’s deficit rules, the Kyoto  Protocols, etc. — and that precedent suggests this: Ain’t never gonna happen. All standards are gameable by sovereign states. Gold standards do not deliver on their promised benefits, and create problems of their own.

I also think Mr. Kristol is wrong when he writes: “It’s the dollar’s status as a reserve currency that has allowed the U.S. government to amass huge debts, debts which the legislatively imposed debt ceiling has been unsuccessful in limiting.” There are lots of countries that manage to amass massive debts without issuing a currency that serves as a world reserve.

The dollar probably will continue to act as the world’s preferred reserve currency, with that position diminishing slowly over time as attractive alternatives prove their mettle (if not their metal). Likewise, U.S. Treasuries probably will continue to be the standard of safety, with that position eroding over time as well. Those are not necessarily bad things or good things. What would be a bad thing is a sudden run on dollars and Treasury bonds, a financial black swan emerging from our troubled accounts. But, if anything, large dollar holdings by China and other governments give them an incentive to help prevent or ameliorate such an event. Hu is long the dollar, after all. Awful long.

In general, I think we put too much weight on things like Chinese dollar reserves, or the fact that the global oil trade is conducted in dollars, and the like. Our real economic problems are far simpler: We spend too much, borrow too much, carry too much debt, have a poorly structured tax system and an overextended national-defense presence, are governed by a Congress of children, and refuse to believe that the laws of supply and demand apply to U.S. dollars and U.S. Treasury bonds.

—  Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, just published by Regnery. You can buy an autographed copy through National Review Online here.

Tags: Anemic Fiat Dollars , Debt , Deficits , Despair , Picking Fights

Kevin Drum vs. the Commodities Market


Kevin Drum makes a good and plausible point about my OPEC post: OPEC may not be able to increase its oil output, even if it wanted to. Drum concludes that oil prices therefore are no reflection of the debased dollar. Okay, so what about: cotton, corn, wheat, urea, gold, soy, silver, wholesale food, etc.? Orange juice prices are up 30 percent; is there some kind of OJPEC of which I am unaware?

Tags: Anemic Fiat Dollars

The OPEC Bailout Is Not Happening


Good news for Generic Republican, who already has established himself as a legitimate contender for the White House in 2012: OPEC is not bailing us out. The oil cartel is making it known that it is cool with $100 oil and will not act unless prices move significantly higher and stay there. Oil, like most commodities, has been rising steadily as governments around the world keep their printing presses running to dump new money into the global economy.

Oil producers have a real good to sell, one with intrinsic value. They do not want to be paid in devalued currencies. Neither do producers selling precious metals, fertilizer, farm products, etc., which is one reason why wholesale food prices are going zoom, zoom, zoom.

Oil at $100 and unemployment ~10 percent is bad news for Obama’s re-election hopes, of course. (It should go without saying that it is bad for America, too, and that I do not wish for economic suffering to be visited upon my fellow citizens in order to hamper the Obama administration.)  But you know what’s even worse than $100 oil? $150 oil, which the CEO of Gulf says would not surprise him. There will be tremendous political pressure put on OPEC and the other producers if that happens. But why would OPEC want to bail us out? What is in it for them? Devalued U.S. dollars? If the Obama administration will not get behind a solid dollar for sound economic reasons, maybe narrow political self-interest will be enough.

We spend a lot of time thinking about our competition with China in producing goods and services; but it is equally important, probably more important, that we compete with the Chinese and the other rising economies as consumers of goods and services. The United States is still the big boss in terms of global energy demand, but small, steady changes elsewhere are making it a new game. The energy autarkists who like to rave about the evils of “Arab oil” (never mind that the biggest part of our oil imports are Canadian and Mexican) fail to appreciate that with every passing month it matters a little bit less to the Arab world whether we buy their oil or don’t. Clout has a shelf life, and money talks. What is our money saying, vis-à-vis oil, food, metals, etc.? I think it’s saying “Help me!” in that tiny, terrifying little voice at the end of the original The Fly.

Back to Obama: I’m starting to think that we despairing deficit hawks have to be more politically engaged. I’ve operated for the past several years under the theory that when it comes to the big, macro debt-and-deficit issues, it does not much matter who holds political power: I did not see much evidence that a Republican Congress or a Democratic Congress was going to act before the market acts, forcing fiscal discipline on the United States by jacking up borrowing costs. Yes, there are differences, but the differences between the parties is very small compared with the difference between either of the parties and what reality requires.

But I am starting to reconsider that. The Republican party still is not serious about the fiscal issues, but there is an element within the party that is, and it needs to be encouraged and empowered. Somebody has a chance to own this issue. Who will?

—  Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, just published by Regnery. You can buy an autographed copy through National Review Online here.

Tags: Anemic Fiat Dollars , Inflation , Politics

Monopoly Money


We’ve got goldbugs at the World Bank!

The soaring price of gold reflects international unease about the strength of large developed economies that must be taken seriously by the Group of 20 leading nations, according to Robert Zoellick, president of the World Bank.

Mr Zoellick on Wednesday said the increasing use of gold as a monetary asset was an “elephant in the room” that was being ignored by policymakers in the debate over how to correct global trade and fiscal imbalances.

. . .  Mr Zoellick dismissed criticism of his proposal in Monday’s Financial Times for a new international monetary system involving multiple reserve currencies and including a role for gold as a reference point for market expectations of inflation and future currency values.

He said critics had misunderstood his proposal as a call for a return to the gold standard – the framework of fixed exchange rates backed by gold which was replaced after the second world war by the Bretton Woods system of fixed but adjustable exchange rates.

Looked at another way, the price of gold is not soaring; the price of dollars, yen, and euros is tanking. (And not just in terms of gold.) Monetary-policy authorities are in a race to the bottom, devaluing national currencies in response to weak growth: Every country thinks it can be China and export its way out of making hard economic decisions. All you need to make that model work is an impoverished population, a government-dominated economy, and a for-profit police state. Super.

Count me as against a new Bretton Woods, even one incorporating some sort of gold-derived controls, and in favor of the free-market alternative to international monetary-policy shenanigans: privatizing money.

Conservatives usually are fans of privatization and foes of government price-fixing. We do not like government-monopoly schools or government-monopoly health-care systems. So why do we assume that we must always have government price-fixing and government-monopoly supply-management in the most fundamental commodity of all: money?

We want money to do a couple of things: The first is facilitating exchange, the second is providing a relatively stable store of wealth. The dollar excels at the first but not at the second: What other asset do you hold expecting an annual loss of around 3 percent, forever? None, is my guess. You’re telling me we cannot come up with a non-government alternative for that relatively straightforward task?

Technology and financial innovation are going to catch up with, and surpass, the state’s monopoly on money; if I had to guess, I would predict that it will happen in the near future, though not in the United States, where private-currency innovators are preposterously prosecuted  as counterfeiters. My bet would be on a far-sighted innovator based in a market-minded financial upstart like Singapore or South Korea. But why not here? We have 900 kinds of shampoo and one kind of currency — government monopoly money. In what other marketplace does a government monopoly provide the best value?

I don’t get the gold fetish, and I suspect that a currency tied to a single commodity or metal would not be the most stable option. But a currency based on a market-basket of commodities (gold, crude — take your pick, and the more the merrier) could provide a very stable store of value with a basis in something more concrete than the acumen of Ben Bernanke and his fellow committee members, smart guys though they are.

Am I crazy? Let me know in the comments.

– Kevin D. Williamson is deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, to be published in January.

Tags: Anemic Fiat Dollars , Monetary Policy , Radical Ideas , the Fed

European Central Banks Halt Gold Sales


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