Free Markets, Free People

Daily Archives: November 7, 2010


Now he’s done it…

It has become an article of faith in modern economics that the gold standard just isn’t suitable for modern economies.  Since the Great Depression started the movement away from the gold standard, we have moved towards a system of freely convertible fiat currencies whose values are, in the main determined by the ability of central banks to maintain control of inflation.  Any talk of returning to the gold standard, therefore, is derided as some sort of fanatical return to a failed past.

Now, to be sure, there are problems with gold as money. Some of them are perceived problems, others are real.

Ultimately, gold, as a currency, tends to be deflationary. A country’s money supply is limited by the amount of gold on hand. Absent an increase in the amount of gold, any increase in real output must cause prices to decline.

Also, any balance of payments deficit reduces the country’s gold supply. For instance, during the Depression, England had a horrific balance of payments problem. The country was paying out so much money in foreign payments, that it was literally draining all the gold out of Britain.  The only real remedy to this was to massively deflate British prices…in the midst of an already deflationary recession.

Monetary shocks are easily transmitted from one country to another via gold. Since countries who participate in the gold standard have fixed links,  inflation or depression in one country can be quickly transmitted to another.  For instance, the discovery of a large gold mine increases the supply of gold, without affecting real output.  That inflationary effect is quickly felt throughout all the countries who share the standard.

But–and this is a big “but”–the change from a gold standard to freely convertible fiat currencies has solved those old problems by introducing entirely new ones.  Governments and central banks have embarked on massive programs of public indebtedness, the inflationary–and sometimes hyperinflationary–printing of fiat currencies, and the wholesale selling of sovereign debt to foreign countries who may not have, as their primary interest, recouping the money on their investments, but rather the manipulation of an enemy’s economy, should it become necessary.

These problems bring us to Robert Zoellick, the head of the World Bank. In an Op/Ed in the Financial Times addressing our current economic woes, he suggests something that will no doubt be much discussed. In a discussion of how to create a monetary regime to succeed the clearly dying Bretton Woods II paradigm in which we’ve operated since 1971, he suggests, among other things:

This new system is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves towards internationalisation and then an open capital account.

The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.

If I’m not mistaken, the head of the World bank just called for the creation of a new gold standard for international trade.

This should be interesting.


Observations: The QandO Podcast for 07 Nov 10

In this podcast, Bruce and Dale discuss Tuesday’s midterm elections, and Friday’s unemployment report.

The direct link to the podcast can be found here.

Observations

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Quote of the day – Bob Herbert Tea Party edition

The "Rodney Dangerfield" of movements gets ignored by liberal Bob Herbert. After he says both sides are clueless in DC, and leadership is "AWOL", he says this:

What this election tells me is that real leadership will have to come from elsewhere, from outside of Washington, perhaps from elected officials in statehouses or municipal buildings that are closer to the people, from foundations and grass-roots organizations, from the labor movement and houses of worship and community centers.

The civil rights pioneers did not wait for presidential or Congressional leadership, nor did the leaders of the women’s movement. They plunged ahead with their crucial work against the longest odds and in the face of seemingly implacable hostility.

Sounds like a perfect description of the Tea Parties and what they’ve faced from the left – to include Bob Herbert.

Irony – something about which the left remains clueless.

~McQ


The Relevant Progressive President gambit

I think Toby Harnden of the UK Telegraph best captures what is going to happen with Obama and the Democrats as we go forward.  A couple of quotes say it best.  However, first Harnden addresses the Obama press conference following a stinging rejection of Democrats and the fact that Obama seemed clueless about the cause of the defeat – or, if not clueless, at least not prepared to accept the real reason for the defeat:

The one thing Obama was not prepared to admit was that his policies, which have led to a massive expansion of government power and the national debt, could in any way be at fault. The problem with health care reform, he said, was that the process used to achieve it was "an ugly mess" – no mention that it was hugely unpopular and pushed through on a partisan vote without a single Republican legislator’s support.

The reason that is important is what it portends for the future under Obama.  Harnden recalls Clinton’s reaction to the losses he suffered and how he decided, almost instinctively, to move to the center and “counterpunch” from there. 

Obama is not about to move to the centre. Whereas Clinton was an instinctive "Third Way" centrist from the South who had wandered too far Left, Obama is a standard-issue liberal of the type found in Ivy League commons rooms. Nothing in his career indicates he is ready to cut deals with political opponents. He is sure what he believes is right; if you don’t agree with him, he pities you for being so slow to understand.

It is his innate arrogance that will be his undoing.  He is going to try, as did Truman, to blame a Republican Congress for lack of progress.  Truman actually had a Republican Congress and so the strategy worked.  As I’ve said in the past, not gaining the Senate is almost a blessing in disguise for the GOP because the same sort of strategy will not work for Obama.

Harnden also makes a great point about the Tea Party and how establishment liberals are ready (and happy) to dismiss them because they “failed” to elect all their candidates.

The defeat of candidates like Christine O’Donnell of Delaware and Sharron Angle of Nevada has helped fuel a complacent Washington consensus that the Tea Party failed. Never mind that his grassroots anti-tax, small-government "constitutional conservatism" movement provided the energy and momentum behind the biggest congressional election victory in 62 years.

The true nature of the Tea Party is much better represented by the likes of newly-minted senators Marco Rubio, Mike Lee and Rand Paul than the frankly wacky O’Donnell and Angle. It was hardly surprising that a spontaneous, chaotic movement managed to throw up some oddball candidates. The Tea Party is likely to readjust accordingly next time.

What the Tea Parties are likely to do now is begin the hunt for suitable candidates that reflect their principles and don’t carry the baggage of the insurgent candidates they were stuck with in various races.  The left has wanted to dismiss this movement from its inception and is ready to do so again right now.  Big mistake.

But again, the main point Harnden makes is one I agree with – Obama doesn’t accept the reasons for defeat and is unlikely to change in any substantial way to address the new reality:

Obama believes he can get by on Being Barack Obama. Last Tuesday was a setback like nothing else he had experienced in life and it appears to have left his enormous sense of self-assurance undiminished.

A majority of Americans voted against Obama’s agenda that day and Republicans dearly want to make him history. It is far too soon to write off Obama’s chances of re-election but his rhetoric of bipartisanship and forging consensus has been shown to be a sham, leaving his Left-wing core exposed.

But the first step to keeping him in the hole he has dug for himself is a counter-intuitive one. Republicans intend to capitalise on Obama’s vanity and highlight his default ideology and determination to push "progress".

He is about to become the Relevant Progressive President.

Exactly.  The GOP must pound on and point out the “progressive” ideologue that is the president.  They must keep him relevant in that way so they can run against his liberal ideology in 2012.  Obama gives every indication, at least at this point, that he’ll cooperate.   And such cooperation, given the results of this election, indicate a one-term presidency.

And that’s a good thing.

~McQ

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