Dear Mr. Hannity--I listen to your TV program as well as your radio broadcast and enjoy them both. I agree with you most of the time. I enjoyed your exchange with Robert Kuttner but want to take issue with a point with which I disagree--your support for President Bush's economic policies. I think that your position is a mistake from both "conservatives principles" and tactical viewpoints.
I disagree with Mr. Kuttner on many things but agree with him on this point. The Bush administration has permitted the Greenspan and Bernanke Fed to behave like a hyper-Democratic government agency. This was true antecedent to 2000, since the days of President Reagan and Chair Greenspan, and it has not gone away.
If you are a conservative then you probably believe in less government. Artificial stimulation of misdirected (or as von Mises put it malinvested) economic activity is one of the most wasteful and inefficient forms of government intervention. This has been the policy that the Republicans have pursued since the 1980s (and indeed, in the 1970s under President Nixon) and it is antithetical to conservatism if you are adhering to the small government, Jacksonian variant. Of course, it is also possible to be a big government Whig economic conservative, along the lines of Rockefeller and GW Bush, but that viewpoint has come to be viewed as a form of liberalism or left-wing Republicanism rather than the conservatism of Barry Goldwater, Milton Friedman and Friedrich von Hayek.
In any case, if you are an advocate of big government monetary expansion, support for big business, government intervention in the economy and Keynesian economics, which are the policies of George W. Bush, you should say so. I don't think that all Republicans or conservatives agree with you. I find this especially troubling because Fox has limited its exposure of conservatives to the Whig-American Enterprise Institute-Progressive conservatism, which is not what many of your viewers believe, and I think there is a sleight of hand going on. You should clarify your position on this issue.
I would hope that you reject big government, and therefore the monetary policies of the past 25 years. I do not believe that government should intervene on behalf of the rich, Bear Stearns, Fannie Mae, or Lehman Brothers. Nor do I believe in welfare. Many of the Fox pundits believe in welfare for the rich, and this is a serious weakness in your presentation.
In addition, I do not think the cause of John McCain and Sarah Palin is helped by association with the Whig-AEI-Progressive approach to the economy. Americans are by many measures worse off. The average hourly wage has been declining since 1971, when President Nixon took us off the gold standard. It is tragic if you allow the Democrats to steal this issue because of short-sighted fixation on big money donations from the board members of AEI. In the long run there is going to be backlash against the feudal, inflationary economy of post-1968 Republicanism, and if the Republicans don't start re-thinking their position on hard money they ultimately will be thrown out of office.
Showing posts with label American Enterprise Institute. Show all posts
Showing posts with label American Enterprise Institute. Show all posts
Friday, September 12, 2008
Monday, May 28, 2007
How to Re-Monetize Gold
Lenny Rann responds to my earlier blog as follows:
Rann writes:
>"We have exceeded the ability to regulate our currency along the gold standard, we have produced too much to cover with such a scarce resource. Much that we produce are not commodities that exist in the natural world, i.e. the richest man in the world made it on intellectual property. Today, copper and steel seem to define the relationship between liquidity and commodity prices (inflation?) Please see the five year chart for the following copper producer (PCU) and steel manufacturer (SID) http://finance.yahoo.com/q/bc?t=5y&s=PCU&l=on&z=m&q=l&c=sid. Whether we are in a metal commodity bubble, I don't know. Almost all of my holdings are in metals and mining, but I am reducing my positions and moving back to petroleum."
It doesn't matter what resource is used as a standard. But the problem isn't that gold fluctuates too much; that there is too much productivity; or that the economy is too complicated for the dollar to be backed by gold. The problem is that we have increased productivity too little to merit the increases in the number of dollars.
You could use platinum, iron or silver, as a monetary standard, but historically gold has been used and people feel comfortable with it. You could use other things as well, say oil, it's arbitrary in the sense that people expect coins to be shiny. The government still makes them shiny because people feel comfortable with shiny coins. Coins could be orange, but people would be uncomfortable.
Gold is a good choice because people feel comfortable with it.The issue is whether to have a standard or not. It doesn't matter if commodities fluctuate in price. They don't fluctuate in only one direction, so over the long run there is more stability with a commodity standard than without one. The arguments against a standard are just an excuse because some people want inflation. The people who favor inflation are: commercial bankers, investment bankers, hedge fund managers, corporate executives, left wing academics, Keynesian economists, the American Enterprise Institute and debtors. The people who shouldn't want inflation are wage earners and savers.
There are many people who both benefit and lose from inflation. People who are bad stock market investors lose, because inflation causes unpredictable shifts in the stock market which make many people do irrational things like withdrawing their money when the market bottoms. Also, people are often both real estate owners who hold a fixed-rate mortgage and also are wage earners. Inflation will help them via the fixed rate mortgage but it will hurt them because it reduces the real value of their wages.
The last three decades have seen flat wages (which began in the 1970s, right after the gold standard was abolished) coupled with widespread home ownership. So the effects of inflation are complicated. The poor who can't borrow are hurt the most. The very wealthy are helped the most. Risk-averse savers are hurt. Risk-taking investors with good market timing and people who take large mortgages at fixed rates relative to their incomes are helped. Wage earners are hurt. Stock holders are helped.
The chief thing that changes when you don't have a gold or other standard is that the central bank has the flexibility to increase the money supply faster than the rate of increase in productivity. M3, the now-discontinued measure of global supply of US dollars, has been increasing at 8% per year, three times the rate of US productivity increases. If the Fed could match increases in the money supply to productivity increases in the US economy it would be ideal. But they cannot because of political pressure from the financial community, the business community and Keynesian and left-wing academics. Also, the Fed makes many mistakes.
The effects of money supply increases are felt in the long run and can potentially become catastrophic for the United States and its citizens.The shift from the gold standard to pure paper money was completed in 1972, under President Nixon, and workers' real wages started stagnating almost immediately thereafter.
According to David Wozney, a poster on Howard Katz's Gold Bug blog , "A 'Federal Reserve Note' is not a U.S.A. dollar. In 1973, Public Law 93-110 defined the U.S.A. dollar as consisting of 1/42.2222 fine troy ounces of gold."
I read on the web that there are 368,250 bars of gold in Ft. Knox, with each bar weighing 400 oz. 400 x 368,250 x $750 (approximate price) = $110.5 billion. The government stopped publishing M3, which included foreign deposits, but it is likely in the area of $11.3 trillion. That means that while the government has defined a dollar to be 1/42.2 oz. of gold, according to one observer it has gone ahead and printed 185,000 dollars for every ounce of gold that exists anywhere in the world.
Eventually, dollar holders may realize that the dollar has no validity. It has not been backed up "by the US economy"; it has not been backed up by the good faith of the US government (which has been increasing global money supply at 8 percent per year while US productivity has been increasing at 2.5 percent per year); and it has not been backed up by gold.
I would assume that to re monetize gold you need to redefine the dollar as 1/750th oz. of gold, or the current market value, and use the amount in Ft. Knox as fractional reserves.
Rann writes:
>"We have exceeded the ability to regulate our currency along the gold standard, we have produced too much to cover with such a scarce resource. Much that we produce are not commodities that exist in the natural world, i.e. the richest man in the world made it on intellectual property. Today, copper and steel seem to define the relationship between liquidity and commodity prices (inflation?) Please see the five year chart for the following copper producer (PCU) and steel manufacturer (SID) http://finance.yahoo.com/q/bc?t=5y&s=PCU&l=on&z=m&q=l&c=sid. Whether we are in a metal commodity bubble, I don't know. Almost all of my holdings are in metals and mining, but I am reducing my positions and moving back to petroleum."
It doesn't matter what resource is used as a standard. But the problem isn't that gold fluctuates too much; that there is too much productivity; or that the economy is too complicated for the dollar to be backed by gold. The problem is that we have increased productivity too little to merit the increases in the number of dollars.
You could use platinum, iron or silver, as a monetary standard, but historically gold has been used and people feel comfortable with it. You could use other things as well, say oil, it's arbitrary in the sense that people expect coins to be shiny. The government still makes them shiny because people feel comfortable with shiny coins. Coins could be orange, but people would be uncomfortable.
Gold is a good choice because people feel comfortable with it.The issue is whether to have a standard or not. It doesn't matter if commodities fluctuate in price. They don't fluctuate in only one direction, so over the long run there is more stability with a commodity standard than without one. The arguments against a standard are just an excuse because some people want inflation. The people who favor inflation are: commercial bankers, investment bankers, hedge fund managers, corporate executives, left wing academics, Keynesian economists, the American Enterprise Institute and debtors. The people who shouldn't want inflation are wage earners and savers.
There are many people who both benefit and lose from inflation. People who are bad stock market investors lose, because inflation causes unpredictable shifts in the stock market which make many people do irrational things like withdrawing their money when the market bottoms. Also, people are often both real estate owners who hold a fixed-rate mortgage and also are wage earners. Inflation will help them via the fixed rate mortgage but it will hurt them because it reduces the real value of their wages.
The last three decades have seen flat wages (which began in the 1970s, right after the gold standard was abolished) coupled with widespread home ownership. So the effects of inflation are complicated. The poor who can't borrow are hurt the most. The very wealthy are helped the most. Risk-averse savers are hurt. Risk-taking investors with good market timing and people who take large mortgages at fixed rates relative to their incomes are helped. Wage earners are hurt. Stock holders are helped.
The chief thing that changes when you don't have a gold or other standard is that the central bank has the flexibility to increase the money supply faster than the rate of increase in productivity. M3, the now-discontinued measure of global supply of US dollars, has been increasing at 8% per year, three times the rate of US productivity increases. If the Fed could match increases in the money supply to productivity increases in the US economy it would be ideal. But they cannot because of political pressure from the financial community, the business community and Keynesian and left-wing academics. Also, the Fed makes many mistakes.
The effects of money supply increases are felt in the long run and can potentially become catastrophic for the United States and its citizens.The shift from the gold standard to pure paper money was completed in 1972, under President Nixon, and workers' real wages started stagnating almost immediately thereafter.
According to David Wozney, a poster on Howard Katz's Gold Bug blog , "A 'Federal Reserve Note' is not a U.S.A. dollar. In 1973, Public Law 93-110 defined the U.S.A. dollar as consisting of 1/42.2222 fine troy ounces of gold."
I read on the web that there are 368,250 bars of gold in Ft. Knox, with each bar weighing 400 oz. 400 x 368,250 x $750 (approximate price) = $110.5 billion. The government stopped publishing M3, which included foreign deposits, but it is likely in the area of $11.3 trillion. That means that while the government has defined a dollar to be 1/42.2 oz. of gold, according to one observer it has gone ahead and printed 185,000 dollars for every ounce of gold that exists anywhere in the world.
Eventually, dollar holders may realize that the dollar has no validity. It has not been backed up "by the US economy"; it has not been backed up by the good faith of the US government (which has been increasing global money supply at 8 percent per year while US productivity has been increasing at 2.5 percent per year); and it has not been backed up by gold.
I would assume that to re monetize gold you need to redefine the dollar as 1/750th oz. of gold, or the current market value, and use the amount in Ft. Knox as fractional reserves.
Friday, May 25, 2007
Corporate versus Private Welfare: The Case of Inflation
Is it better to advocate welfare for corporations via loose Fed policy and inflationary interest rates, or is it better to advocate welfare for individuals who are otherwise in poverty? The concept of the marginal utility of money suggests that it makes more sense to advocate welfare for the poor than welfare for the rich. The poor value an incremental dollar more than the rich do, therefore society's welfare is increased to a greater degree by assisting the poor than by assisting the rich.
Given just these two points of view, (1) that government ought to act to support the wealthy, or (2) that government ought to act to support the poor, the latter view is preferable. As I have previously blogged, Fed policy tends to support the wealthy. This has been true historically, and it especially has been true today. As the Carlyle Group's chief investment officer William E. Conway has pointed out in a private internal memo:
>"As you all know (I hope), the fabulous profits that we have been able to generate for our limited partners are not solely a function of our investment genius, but have resulted in large part from a great market and the availability of enormous amounts of cheap debt. This cheap debt has been available for almost all maturities, most industries, infrastructure, real estate, and at all levels of the capital structure. Frankly, there is so much liquidity in the world financial system, that lenders (even “our” lenders) are making very risky credit decisions. This debt has enabled us to do transactions that were previously unimaginable (e.g., Hertz, Kinder Morgan, Nielsen, Freescale), and has resulted in (generally) higher exit multiples than entry multiples."
Mr. Conway is not alone in benefiting from cheap debt, which is due to Fed policy and amounts to a form of welfare. Rather, almost the entire board of directors of the American Enterprise Institute benefits from cheap debt. The AEI's board is entirely composed of executives of major corporations who benefit from cheap debt because they enjoy increased compensation from inflated stock values.
Doug French of the Ludwig von Mises Institute has an excellent blog today about Tulipmania in Holland in the 1630s. Much like today's stock market, hedge fund and real estate bubbles, applauded by AEI and Weekly Standard's Irwin Stelzer, French traces the history of the monetary inflation in Holland due to discoveries of silver and gold in the New World and Holland's policy of free coinage of money, which drew bullion from Japan, the New World and elsewhere in Europe. He shows that monetary inflation caused Tulipmania, one of the earliest speculative bubbles.
French points out that:
"Total balances more than doubled from less than four million florins in 1634 to just over eight million in 1640. More specifically from January 31st 1636 to January 31st 1637 — the height of the tulipmania — Bank of Amsterdam's deposits increased 42 percent...free coinage, the Bank of Amsterdam, and the heightened trade and commerce in Holland served to attract coin and bullion from throughout the world...In 1648, when the Peace of Westphalia acknowledged the independence of the Dutch republic, the latter stopped the "free" coinage of silver florins and only permitted it for gold ducats, which in Holland had no legal value. This legislation discouraged the imports of silver bullion, checked the rise of prices, and put an end to the tulip mania."
Unlike the Bank of Amsterdam, it is unlikely that the Fed will signficantly reduce its counterfeiting any time soon. The AEI need need not fear.
I opened with the wrong question: "Which is preferable, welfare for the rich, i.e., cheap debt, or welfare for the poor?" I would suggest neither. It is difficult to arrive at a political position in today's world, which is driven by two species of ideologues: Republicans who favor monetary expansion, low marginal taxes, crony capitalism and welfare for the rich; and Democrats who favor monetary expansion, crony capitalism higher marginal taxes, and welfare for the very, very rich in the name of the poor. I suppose the Republicans are somewhat better and somewhat more honest, but only barely so.
Given just these two points of view, (1) that government ought to act to support the wealthy, or (2) that government ought to act to support the poor, the latter view is preferable. As I have previously blogged, Fed policy tends to support the wealthy. This has been true historically, and it especially has been true today. As the Carlyle Group's chief investment officer William E. Conway has pointed out in a private internal memo:
>"As you all know (I hope), the fabulous profits that we have been able to generate for our limited partners are not solely a function of our investment genius, but have resulted in large part from a great market and the availability of enormous amounts of cheap debt. This cheap debt has been available for almost all maturities, most industries, infrastructure, real estate, and at all levels of the capital structure. Frankly, there is so much liquidity in the world financial system, that lenders (even “our” lenders) are making very risky credit decisions. This debt has enabled us to do transactions that were previously unimaginable (e.g., Hertz, Kinder Morgan, Nielsen, Freescale), and has resulted in (generally) higher exit multiples than entry multiples."
Mr. Conway is not alone in benefiting from cheap debt, which is due to Fed policy and amounts to a form of welfare. Rather, almost the entire board of directors of the American Enterprise Institute benefits from cheap debt. The AEI's board is entirely composed of executives of major corporations who benefit from cheap debt because they enjoy increased compensation from inflated stock values.
Doug French of the Ludwig von Mises Institute has an excellent blog today about Tulipmania in Holland in the 1630s. Much like today's stock market, hedge fund and real estate bubbles, applauded by AEI and Weekly Standard's Irwin Stelzer, French traces the history of the monetary inflation in Holland due to discoveries of silver and gold in the New World and Holland's policy of free coinage of money, which drew bullion from Japan, the New World and elsewhere in Europe. He shows that monetary inflation caused Tulipmania, one of the earliest speculative bubbles.
French points out that:
"Total balances more than doubled from less than four million florins in 1634 to just over eight million in 1640. More specifically from January 31st 1636 to January 31st 1637 — the height of the tulipmania — Bank of Amsterdam's deposits increased 42 percent...free coinage, the Bank of Amsterdam, and the heightened trade and commerce in Holland served to attract coin and bullion from throughout the world...In 1648, when the Peace of Westphalia acknowledged the independence of the Dutch republic, the latter stopped the "free" coinage of silver florins and only permitted it for gold ducats, which in Holland had no legal value. This legislation discouraged the imports of silver bullion, checked the rise of prices, and put an end to the tulip mania."
Unlike the Bank of Amsterdam, it is unlikely that the Fed will signficantly reduce its counterfeiting any time soon. The AEI need need not fear.
I opened with the wrong question: "Which is preferable, welfare for the rich, i.e., cheap debt, or welfare for the poor?" I would suggest neither. It is difficult to arrive at a political position in today's world, which is driven by two species of ideologues: Republicans who favor monetary expansion, low marginal taxes, crony capitalism and welfare for the rich; and Democrats who favor monetary expansion, crony capitalism higher marginal taxes, and welfare for the very, very rich in the name of the poor. I suppose the Republicans are somewhat better and somewhat more honest, but only barely so.
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