Sunday, May 16, 2010

Tax Increase or Gold Standard?

The Midas Letter (h/t Kitco) predicts that there will a bi-partisan consensus as to a massive tax increase following the midterm election this fall. This will harm the United States economy.   Midas writes:

"Washington's elites are quietly preparing a post-election fiscal compromise that will fund much of President Barack Obama's domestic spending agenda with huge tax increases. They aim to create a value-added tax and will argue that there is no alternative even though doing so will leave the United States resembling the stagnant, bureaucratic nations of Western Europe."

This is only a prediction, of course, but would this scenario differ much from the history of the past 40 years?  Ever since Richard M. Nixon abolished the gold standard and Ronald Reagan adopted Keynesian monetary expansion, both New-Deal policies, the Republicans have largely adopted a strategy of "Democratic Party light."  Under Reagan the GOP held the line on domestic spending as a percentage of real gdp but did not begin to reduce total government spending until the end of the Cold War, following Reagan's departure.  Thereafter, there was a small drop in total federal spending, which remained in the 16-18% of real gdp range until the end of the Bush II administration.  In 2009, the Democrats once again proved to be the leaders in government bloat and expanded real spending by more than ten percent, to 20% of real gdp. President Obama should be renamed the Emperor of Bloat.

The 20% expansion of government spending as a percentage of real gdp directly followed the largest expansion of monetary reserves in living memory in 2008.  Perhaps the expansion of the Continental during the Revolutionary War was comparable to the expansion of the monetary base two years ago.  Obama then increased real domestic spending, in part through a painfully nonsensical "stimulus" plan.  Although the Democratic Party's media has downplayed this, as of this month the unemployment rate is higher than it was last year on a non-seasonally adjusted basis. In other words, government has expanded, it has failed to reduce unemployment, and now new investment will be crowded out if the spending increases are validated through tax increases next year.

If the GOP goes along with any sort of tax increase now, and does not demand sharp spending reductions, it does not warrant any further support.  A third party will be needed. Hopefully, this scenario will not play out. If the GOP stops further increases in government and proves that it aims to reduce government, it can redeem itself.  But any sort of bi-partisanship with the pigs in the Democratic Party ought to spell the end of the GOP.  A replacement party will be needed just as the GOP replaced the Whigs in the 1850s.

The Midas Letter suggests an alternative to a tax increase:

"The U.S. could return to a gold standard, a system that would not only prevent the government from running chronic budget deficits but would also curb attempts to manipulate the value of the dollar for political reasons... The first an American commitment to a dollar convertible to gold on a date certain. The second step is allowing the market, in the run-up to that date, to find and fix a dollar price of gold that would encourage other nations to replace dollar reserves with gold holdings as their new monetary base, whether or not they choose initially to join the new international gold standard...Legislation restoring dollar-gold convertibility should be accompanied by passage of a constitutional amendment guaranteeing the American people a right to conduct their economic affairs in gold, regardless of the future status of gold as the official money of the United States."

Which would you prefer--a massive tax increase, or a return to the gold standard?  Write your Congressman, even if they're as incompetent and corrupt as mine. 

1 comment:

Doug Plumb said...

All political theory and thinking assumes that we have a sovereign government. We do not have this. When we elect our representatives they re-present the public to the bankers as slaves, and this is what statutory law is all about.

This is a result of the 1933 bankruptcy. Our governments are no more in control of our countries than the CEO of any other bankrupt corporation is in control of that. In both cases they are beholding to the banks.

Fundamentally, what we need to do is withdraw our consent to be governed by this bankrupt corporation then form a sovereign government.

Then, and only then, can we intelligently debate monetary policy. Until this point any monetary policy will be used or shaped to the benefit of our creditors - the Law Merchants.

Law and money are homogeneous- our law is commercial law, the UCC. The banks control all the countries under the UN and they have their BAR association members administer the law accordingly.

Sovereignty must be regained and part of this includes sending the BAR (British Association Regency) members back to England and re-establishing honest money - in any form.

Until then, (real) governors will continue to operate in the ways of Thrasymachus in Platos Republic. Soon Thrasymachus will no longer need so many people to help his friends and harm his enemies.