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.Abstract
Runaway inflation is not a monetary phenomenon, the
claims of monetarists notwithstanding. It is an interest-rate phenomenon
predicated on the linkage. The price level and the rate of interest resonate
with the oscillating money-flows between the bond and the commodity markets.
This economic resonance, under the concerted pounding by speculators,
ultimately reaches the state of runaway vibration. When the fragile
confidence in the value of irredeemable currency snaps, commodities are
bought up and all bids for bonds are withdrawn. The rate of
interest, together with the price level, reach astronomical heights.
There is no scientific way to predict whether the denouement of the present
plight of the world will take the form of a deflation or that of a runaway
inflation.
Sinking of the
sinking fund
Bondholders of old, typically widows and orphans,
were buying the bond because they wanted to earn interest income and, at the
same time, they wanted to preserve the value of their capital. They had no
reason to be concerned about the danger of their investment losing value due
to a rise in the rate of interest. There was no such danger. Issuers of bonds
were required to make provision for a sinking fund. The manager of the
sinking fund would step in and buy the bond every time it was offered below
face value in the open market - as much and as long as it was necessary in
order to restore market value to face value. Those were the happy days of the
gold standard when interest rates were stable. In today's environment it
would be suicidal for issuers of bonds to offer this protection to
bondholders. Sinking funds would be exhausted in no time, due to gyrations in
the rate of interest, reflecting the uncertain value of the currency in which
the bond is denominated.
The exile of the Constitutional Monarch, gold, also
meant the sinking of the sinking fund. No longer is a vehicle available to
those who are in need of a steady income and have no expertise in trading
derivatives in order to protect the value of their capital. Savers have been
disenfranchised and left out in the cold. The bond market no longer serves
the interest of widows and orphans. It serves exclusively that of the bond
speculator - a new parasitic species that did not exist under the regime of
the gold standard.
In praise of
speculation
It may come as a surprise that the role of
speculation is the same as that of engineering. Both are responses to the
presence of uncertainty in human affairs. The engineer establishes safety
standards for his projects. He is not designing buildings that can withstand all
earthquakes. His buildings are designed to withstand earthquakes that have a
high probability to occur.
Speculation addresses uncertainty about the price of
produce due to the fickleness of nature, especially the weather. The
speculator buys low during the seven fat years, and tries to sell high during
the seven lean years. He may also sell short, that is, sell forward inventory
he hasn't got but hopes to get at a cheaper price before the date of delivery
arrives. In either case, the speculator is performing a useful public
service. During the fat years he is helping producers who, without the
benefit of speculation, would be forced to sell below cost. During the lean
years he is helping consumers who, without the benefit of speculation, would
be forced to pay outrageously high prices or do without. Of course, the
speculator can go wrong and lose his bet; this happens when he buys before
the fall (or he sells before the rise) in prices has run its course. However,
it is important to note that the benefits to producers and consumers are not
affected. Only the capital of the speculator is at stake, not the welfare of
the public. If he makes too many bad bets, then the speculator will lose his
entire capital. But this, too, is beneficial to the public: capital is passed
from less to more competent hands, to speculators who are better at judging
the future course of market conditions. Speculation is beneficial to society
as long as speculators address only nature-given risks, use their own capital
in their enterprise, and do not try to unload their losses to the public.
It is important to understand that speculation does
not, nor can it ever, address risks created artificially by man. In
particular, speculation cannot address successfully the risks created by
government and the banks. When risks are artificially created in order to
enable venturesome people to place bets in the hope of a large payoff, we
talk about gambling. To confuse it with speculation is a very common
mistake. Unfortunately, the confusion is not always due to ignorance. Often
it is due to obfuscation. Take the example of government and academic
economists making a case for the derivative business using the language of
speculation. They speak admiringly of the sophistication involved in trading
financial futures, and options on financial futures. However, derivatives:
futures and options on foreign exchange, bonds, and bills, interest rate
swaps, and a host of other derivatives of financial instruments that are
invented almost every day, this entire business, squarely belongs to the
category of gambling. It does not belong to the category of speculation. The
reason is simple: the risks, whether it is a foreign-exchange risk, an
interest-rate risk, or a combination of the two, have been artificially
created when the gold standard was abolished.
Economists blithely assume that, just as in the case
of wheat, so also in the case of bonds, price fluctuations can be smoothed
out by allowing speculators to buy low and sell high. However, this reasoning
is fallacious, as we shall see. Economists should know better and make the
distinction between speculation and gambling clear. If they don't, not only
do they make a serious theoretical mistake, but they also call the integrity
of their own profession into question. They should not be accomplices to a
scheme which exposes society as a whole to very great economic dangers.
Responsibility
of the economists
Why is it unethical for an economist or a financial
journalist to compromise standards of precision in their language of
communication? By wiping out the distinction between speculation and
gambling, they are lying to the public who rely on them for correct information
and interpretation. They pretend, for example, that bond futures trading is
just as essential to the welfare of society as wheat futures trading is. The
proof that this is false is in the fact that there were no bond futures under
the gold standard, while wheat speculation goes back to the Genesis (see the
story of Joseph deciphering the Pharaoh's dream). The introduction of
derivatives does not show that our society has become more sophisticated.
What it shows is that our society is so far from being sophisticated that it
does not even notice when it is being victimized by the crudest of swindles.
The destabilization of foreign exchange and interest rates through the
abolition of the gold standard was not done in the interest of society. On
the contrary, it was done in order to benefit a small minority of people by
enabling them to milk the vast majority dry of its substance.
The speculator is pitting his wit against the blind
forces of nature. His profits, if any, are well-deserved. In the case of foreign
exchange or bond trading the 'speculator' is pitting his wits against the
wits of bureaucrats working for the government. Those bureaucrats are not
risking their own funds. The bets they make are covered by the taxpayers. We
may admit that, on occasion, these bureaucrats make winning bets. But it
would be a great mistake to believe that the payoff from those bets would
benefit the taxpayers in any way, or that the profits and losses incurred by
the government even out in the long run. The evidence available shows that,
in the long run, there are consistent and very substantial losses which the
taxpayer is forced to make good. Incidentally, the fact that profits and
losses don't even out is not surprising: the bureaucrats making the bets on
behalf of the government work for fixed salaries. Even if they were paid a
bonus, it would never match the compensation of the foreign exchange or bond
'speculator'. The whole scheme is a fraud, with zero public benefit. The
public is plundered as it is made to underwrite the risks of a (for them)
completely unproductive gambling activity on private account. Take the words
of arch-speculator George Soros for it, who could, single-handed, force the
devaluation of the British pound.
If it wasn't for the scientific obscurantism of the
economist profession, an impartial inquiry would have found that our present
monetary arrangements involving irredeemable currency are untenable. These
arrangements are based upon privileges granted without countervailing
responsibilities. In more details, unwarranted privileges have been extended
to the treasury and the Federal Reserve banks (which they ought not to have
under the U.S. Constitution), namely, the privilege to issue liabilities such
as bonds, bills, and bank notes without countervailing responsibilities, such
as the obligation to redeem (as opposed to 'rolling over') those liabilities
at maturity. This also involves an outrageous double juridical standard. If a
private party issued liabilities under the same pretenses,
then it would be charged with fraud and be dealt with according to the
Criminal Code. The monetary provisions of the Constitution of the United
States (which, incidentally, have never been repealed showing that, indeed, a
coup d'etat has taken place overthrowing Constitutional
order) are very clear on the point that the government has not been granted
power to organize its bills of credit into currency, or to pay its debt in
any other manner than paying specie. It is to the eternal shame of their
profession that the economists were not in the vanguard demanding such an
impartial inquiry, on the contrary, they were most
prominent among those who wanted to stifle the budding debate aiming at the
clarification of the issues involved.
Responsibility
of the politicians
Why would the government tolerate the plunder of the
majority for the benefit of a minority? Granted that not all politicians have
the intellectual powers to muster the technicalities of central banking,
money creation, and the derivative business, we may be sure that at least
some have. It is surprising that in the ranks of those few who have there
have been no defections. We can only guess that the potential defectors who
were ready to denounce the scheme of plunder and pilferage have been
blackmailed. They must have been told that they would be blamed for the
'systemic failure' of the monetary system that would surely follow hard upon
the heels of any unauthorized disclosure.
The fact is that the trading of derivatives absorbs
a huge amount of currency. This currency is already in existence. It cannot
be wished away. We are talking about a high multiple of the amount needed in
the real economy (that is, money needed to produce and distribute
goods and services without which society cannot function). What will happen
if all this currency, from one day to the next, becomes surplus? If
irredeemable currency is outlawed, the derivative markets will fade away
along with the drying up of volatility. The casino is closed, hence the chips
are worthless. Many trillions of dollars would become superfluous and have to
go begging. The dollar would lose its value. Worse still, along with it, all
wealth denominated in dollars would also lose its value. People belonging to
the middle classes in America (and, for the stronger reason, also in the rest
of the world) would lose their life-savings, just as they did in the Weimar
Republic of Germany in 1923. By now it is recognized that runaway inflation,
more than any other factor, was responsible for the birth of Hitler's Third Reich.
The potential defectors from government, who would have been willing to
expose the regime of irredeemable currency for what it is, shirked their
responsibility and remained silent. They did not want the stigma of having
helped spawn latter-day-Hitlers all over the world.
Resonance in
economics
But even if it is maintained through the 'conspiracy
of silence', the regime cannot endure. The issue is not just scientific
obfuscation, or the fact of an ongoing plunder of the majority by a minority.
More serious still is the fact that society is being exposed to very great
dangers which one only in a million can recognize. Great economic forces are
at work that are potentially very destructive and, when let loose, will cause
very great economic pain. (In what follows I shall drop the quotation marks '
' when referring to bond speculators).
Speculators don't buy the bond because they want to
earn the interest income. They buy it because they want to ride the rising
trend in bond prices (i.e., they want to profit from the expected fall in
interest rates). Speculators don't sell the bonds because they are ready to
employ capital, thus raised, in the real economy. They sell it because they
want to capture the difference between the higher rate of interest on the longer,
and the lower rate on the shorter term debt; or the difference between the
higher yield in one country and the lower in another. In the former case the
bond speculators want to ride the yield curve; in the latter, the bandwagon
of the carry-trade. The long and short legs with which they enter or exit the
bond market are not alternating randomly. Bond speculators march in
lockstep.
Since Roman times, manuals for military commanders
have included the interdictum that an
infantry unit crossing a bridge must not march in lockstep. The reason for
this rule is that the periodic thrusts of pounding boots could resonate with
one of the harmonic frequencies of the bridge. This resonance would then
cause runaway vibration, culminating in the destruction of the bridge.
Runaway
vibration
The phenomenon of vibration is studied in physics.
The most common varieties are even vibration (oscillation) and damped
vibration, according as the amplitude remains constant or it is decreasing exponentially.
But there is also a third variety, not as well known, called runaway
vibration, where the amplitude is increasing exponentially. The collapse of
the Tacoma suspension bridge in the State of Washington in 1940 was an
example. Gusting winds caused the bridge to vibrate at one of its harmonic
frequencies. The increasing amplitude of the runaway vibration ultimately
caused the suspension cables to snap, and the whole structure was plunged
into the river. The event has been preserved on film - it must be seen to be
believed. In general, the small parcels of energy represented by each thrust
would get dissipated harmlessly through damping. In the case of resonance,
however, not only are they not dissipated, they are allowed to be built up to
a formidable force capable of causing huge destruction.
Resonance in economics, no less than in bridge
design, is a problem to reckon with. I have discussed linkage in my talk
Kondratieff Revisited. The price level and the rate of interest move together
up or down, as they resonate with huge oscillating speculative money flows to
and fro between the bond and commodity markets. Bond speculators try to
maximize their profits. For them the problem is correct timing: they want to
be the first to switch positions when the expected turn of the flow of money
materializes. This is just the point where the runaway vibrator starts
spinning out of control. As soon as speculators find that point, the
oscillating speculative money-flows will become too big and too destructive for
anybody to control, and they will drown the economy.
It is clear that elementary principles of resonance
were completely ignored by the designers of the world's present monetary
system. Following Keynes, they blindly assumed that speculative buying and selling
bonds and foreign exchange takes place at random (as does the thrust of
pounding boots on the bridge if the infantry unit obeys the rules) and, on
average, speculative buying and selling balance out one another. It is true
that speculators do act randomly in markets where risks are nature-given. But
this is no longer true when risks are man-made. As pointed out above, in that
case speculators march in lockstep. They are either net long or net short,
according to the prevailing market trend which they all want to ride and
amplify. As a consequence, speculators periodically cause great damage. In
the worst-case scenario, they could destroy foreign exchange values. Every
episode of a currency devaluation (of which we had hundreds in the 20th
century) is a proof of that. They could also wipe out bond values. Every
episode of a runaway inflation (of which we had dozens in the 20th century)
is a proof of that. But the danger has never been so
great as it is today, when the entire world has embraced irredeemable
currency uncritically. The linkage may turn the inflation/deflation cycle of
Kondratieff into a runaway vibrator. The ever wider fluctuations in the rate
of interest and price level threaten the entire world economy with
destruction. This is the threat of runaway inflation on a global scale,
something that the world has never before experienced.
Yet the calamity is entirely preventable - given the
proper monetary system that takes the phenomena of economic resonance and
runaway vibration fully into account. The gold standard was such a monetary
system before the banks and the government started sabotaging it. It
stabilized the economy by stabilizing foreign exchange and interest rates.
This eliminated fluctuations in the foreign exchange and bond market without
which speculators could not operate. A runaway vibrator in prices and
interest rates was forestalled. A gold standard, if re-introduced, would do
it again.
The mechanism
of runaway inflation
Virtually all historic runaway inflations have taken
place in the wake of wars or revolutions, in an economic setting that
involved physical shortages of consumer goods or the physical destruction of
production facilities. This confused the issue, and made it possible to
explain the phenomenon in terms of linear models such as the quantity theory
of money. It has also provided grounds for optimism that, with prudent
monetary policy and strict controls over the rate of increase in the stock of
money, runaway inflations in the future can, at least in peacetime, be
avoided.
Unfortunately, the optimism is not well-founded. The
explanation of the phenomenon of runaway inflation in terms of linear models
is fallacious. Nor can the proposition that runaway inflations may not occur
in peacetime be established inductively. The historic runaway inflations were
all confined to individual countries engaged in experiments with irredeemable
currency, while most other countries remained on a metallic monetary
standard. For this reason explanations of past episodes of runaway inflations
in terms of the quantity theory of money are irrelevant.
The fact is that linear models are useless in
studying runaway inflations. The phenomenon itself is non-linear in nature,
as it is the culmination of a runaway vibration. Keynes was a keen observer
of the 1922-23 episode of runaway inflation in Germany. He was so convinced
that the process was cyclical rather than linear that he reportedly risked
large sums of money in order to convert his insight into cash. He was betting
that every time the Reichsmark was oversold, there
would be a bounce-back. For a time, indeed, he was making money on the long
side. But disaster struck as he placed one bet too many. When Keynes bought Reichsmarks the last time, the bounce-back came to an end
so swiftly that he had no time to exit. He was trapped in a losing position.
The collapse that followed was so complete that Keynes reportedly lost all
the capital he had committed to the venture.
A deeper theoretical understanding of the phenomenon
of runaway inflation shows that destruction on that scale is not possible
except in the case of runaway vibration. The quantity theory
of money (and, more generally, monetarist precepts) are entirely
inadequate and can't deal with the problem. Runaway inflation is not a monetary
phenomenon. It is an interest-rate phenomenon, more precisely, an economic
resonance phenomenon involving the rate of interest. Recall that the linkage
is responsible for tying the price level and the rate of interest together.
The bond speculator rushes in like an elephant into the china-shop and starts
causing great damage. The bond speculators' concerted action causes the
oscillation in the money-flows between the commodity and bond markets to get
out of control. The vibration is no longer damped (as it would be under a
gold standard). Instead, it follows the pattern of a runaway vibrator
characterized by an amplitude increasing
exponentially. The energy-level of such a runaway vibrator also increases
exponentially. At one point during the inflationary spiral it will exceed the
centripetal forces that keep the economy together. The financial system
snaps. The price level and the rate of interest reach astronomical heights,
destroying currency and bond values.
Why is a gold standard an effective brake on
economic resonance, capable of preventing runaway vibration? Because under a
gold standard bond values or the rate of interest cannot go to zero. Compare
that with the regime of irredeemable currency where both can occur. A
government bond is merely a promise to replace one piece of paper with
another at maturity. What is there is to stop the value of bonds or the rate
of interest from going to zero, once the runaway vibrator starts spinning?
The pious wishes of central bankers? Or the altruism of bond speculators?
The debt
incubus
Milton Friedman insists that the 1930 Great
Depression in America was caused by the 'collapse of the stock of money'. He
says that it could have been prevented by a more adept monetary policy: the
Federal Reserve banks should have put more money into circulation through
open market purchases of government bonds. Our position is diametrically
opposed to that of the monetarists. The long-wave inflation/deflation cycle
is not a monetary phenomenon. It is an interest-rate phenomenon. The Great
Depression was an instance of debt-explosion, caused by the vanishing of the
rate of interest.
Several authors have pointed out that, as a matter
of record, the Federal Reserve banks did in fact create money through open
market operations in the 1930's. However, the money so created was not used
in a way consistent with monetarist precepts. It was not used in commodity
speculation that would have met with the approval of the monetarists.
Instead, it was used in bond speculation. Businessmen were lethargic and did
not see any profit potential in building up inventory. They refused to take
the loans offered by the banks. By contrast, bond speculators were frenetic.
They were full of exuberance (which in retrospect was not so irrational after
all). They saw enormous profit opportunities in what amounted to risk-free,
government-subsidized bull market in bonds. Speculators correctly diagnosed
the meaning of Roosevelt's monetary tinkering: the policeman on duty to keep
the rate of interest away from zero has been fired. Now the sky is the limit
for bond prices!
You can take the proverbial horse to water, but you
cannot make him drink. Likewise, the Federal Reserve banks can put all the
money in the world into circulation, but still have no control over the
direction in which the new money will flow. In the 1930's newly created money
flowed to the bond market. This deepened the crisis in pushing bond prices
ever higher and the rate of interest - together with the price level - ever
lower.
What Friedman calls a 'collapsing stock of money'
was, in fact, the irresistible whirlpool of the bond market sucking up money
from the remotest corners of the economy. The bond market acted like a giant
vacuum cleaner running amok. The more money the Federal Reserve banks created,
the more destructive the sucking-effect became in draining money away from
the real economy. Interest rates kept declining throughout the 1930's. The
consequences were devastating.
Every time the rate of interest falls, the present
value of the outstanding debt rises (because a larger capital sum can now be amortized by the same stream
of money payments, as shown by the increase in bond values). Even though the
outstanding debt in the 1930's may look to us paltry by today's standards, as
the rate of interest goes to zero, its present value will still go to
infinity (because there is 0 discount on the stream of interest payments)..
And as it did, debt and inventory liquidation swept through the country. The
pressure on business to liquidate debt and inventory became unbearable. Those
firms that could not reduce debt and inventory fast enough were mercilessly
forced into bankruptcy. The same was true of households and mortgages on
homes. The deflationary spiral, acting like a giant twister, uprooted fortunes,
farms, firms, and families.
The dangers facing the world economy in the opening
decade of the new century and millennium are even greater than those of the
1930's. Indebtedness in the world is greater and more widespread. The rate of
interest started its descent from a much higher level, making the bull market
in bonds that much more ferocious. Government leaders and captains of the
economy see no great danger in the decline of the rate of interest. They
congratulate themselves on their success in 'having licked inflation'. But
the prolonged decline in the rate of interest has its own dangers, very
different from the dangers of inflation. The debt burden on the world economy
is very great already, but it could still grow if the decline in the rate of
interest resumed its previous course. Should this modern Tower of Babel, the
debt-structure of the world, crash, it would bury the prosperity of the world
under the rubble.
Floating or
sinking?
All this raises very serious questions about the
future of the regime of irredeemable currencies. Milton Friedman admits that
the present international monetary system, based on nothing more substantial
than the irredeemable promises of spendthrift governments with a penchant for
default, has no historical precedent. He also grants that the ultimate
outcome of this experiment is shrouded in uncertainty. Yet at the same time
he takes an optimistic outlook as he asserts: "It is not possible to say
that Irving Fisher's 1911 generalization that 'irredeemable paper money has
almost invariably proved a curse to the country employing it' will hold true
in the coming decades" (Money Mischief, New York: Harcourt-Brace,
1994, p 254.) Well, it is possible to say it, and someone should!
Friedman's optimism concerning the future of the
regime of irredeemable currencies (provided that monetarist stratagems for
controlling the rate of increase in the stock of money are adopted) is not
well-founded. The rate of increase in the stock of money cannot be controlled
by the central bank or the government, because of the fragility of the line
separating irredeemable currency from debt. When that line breaks,
speculators will threaten to overwhelm the central bank as they start dumping
debt instruments. The central bank is helpless. It cannot allow the credit of
the government be ruined by a collapsing bond market. But in supporting bond
prices the central bank will cause the stock of money to snowball.
Friedman is the godfather of floating. He advocated
the abandonment of the regime of fixed exchange rates long before the word floating
could be uttered in polite company. In retrospect, it would be more
appropriate to call Friedman's a system of sinking exchange rates as
countries, one after another, succumb to the temptation to engage in competitive
currency debasement. Indeed, it is hard to see how economists still find it
possible to defend this destructive system, in view of the immense damage it
has already done to the world economy.
Friedman's main argument in favor
of floating (as he presented it in the 1950's) was that it would furnish an
automatic adjustment mechanism to correct trade imbalances. As trade deficits
emerged, he argued, the currency of the net importing country would
depreciate against that of the net exporting country. The rising cost of
imports to the former and the falling cost of imports to the latter would
then eliminate the trade imbalance and wipe out the deficit. There is no need
to deny that Friedman's argument is intellectually seductive; let's see what
actually has happened in practice.
The American dollar was in a steady decline against
the Japanese yen for a 25 year-period starting in 1970, when the exchange
rate was 360 yen to the dollar and the annual trade deficit of the U.S. with
Japan was $1.2 billion. A quarter of a century later, in March 1995, the yen
was worth four times as much in dollars (at 90 yen to the dollar) and
the U.S. trade deficit with Japan was fifty times as great (at $66
billion). Trade figures with Germany tell a similar story. This raises the
question: how much more beating would the dollar have had to take before
Friedman's adjustment mechanism had kicked in and corrected the adverse trade
imbalance?
Debasement of
the currency is self-mutilation
It should be abundantly clear that the debasement of
the dollar undermined the productivity of the American producers, causing the
U.S. trade deficit to grow. To understand this you must look at the currency
in the hands of the exporter, not as a weapon with which you can beggar your neighbor, but as a sharp tool with which you can outproduce him. If you want to do the latter, you don't
blunt the edge of your tool. To use another simile, debasement of the
currency is self-mutilation. You don't mutilate yourself before the race you
want to win. It is preposterous to suggest that one can become more
competitive by debasing one's currency. The practice of crying down the value
of the dollar is every bit as corrosive and addictive for the American
economy as narcotic drug is for the human organism. It may produce a euphoric
sense of well-being, but this effect is ephemeral. Not only can it not solve
problems, it indeed will compound them.
A stable currency is a major tool in the hands of
those producers who are lucky enough to have it, making them more productive
as against producers laboring under the yoke of a
depreciating currency. Producers with a stable currency cannot be driven to
the wall by a depreciating currency in the hands of their competitors. For
one thing, the interest-rate structure is lower in the country with a stable
currency, spelling higher and more stable capital values. Moreover, producers
armed with a stable currency retain their ability to control costs, because
the danger is reduced that the imported components of their products will get
dearer. By contrast, their competitors with a depreciating currency are bound
to lose control over costs as the price of the imported components of their
products will steadily rise. In today's global economy to assert that a
weakening currency is a deficit-remedy and a weapon in the trade-war is
nothing but Orwellian doublespeak.
Strong-dollar
policy
The weak-dollar policy was in fact abandoned in
March, 1995, in
favor of a strong-dollar policy. At the same time,
all pretenses were given up that American producers
ought to be competing in the world market. Let the trade deficit go to outer
space if it must, thereafter the paper mill on the Potomac river, not the
exporters, will take care of the import bill. The paper mill alias Federal
Reserve System will also finance the globalization (read: Americanization) of
the world economy. American multinational companies no longer compete in the
world market with products made in U.S.A. They compete in every domestic
market with products made in the same country by them. The capital spending
of large American companies no longer benefits American production facilities
at home: it benefits American production facilities abroad. American workers
and foreign manufacturers are victimized by this policy. It is amazing that
both acquiesced in the plan to globalize the world economy at their expense,
by jeopardizing their most vital interests. American jobs are exported, while
foreigners are forced to give up ownership of their industry in exchange for
confetti money. There is no rational explanation for this irrational behavior other than assuming that neither the American
workers nor the foreign industrialists understand the concept of
'globalization'. Nobody wants to expose the mendacity of the strong-dollar
policy, just as nobody wanted to expose the mendacity of the earlier
weak-dollar policy. Actually, both make the dollar weaker as both carry the
seeds of self-destruction within.
Only a stable-dollar policy has a chance of success.
Between Scylla
and Charybdis
We have two scenarios to choose from: global
deflation and global runaway inflation. It is impossible to say which one is
uglier, Scylla or Charybdis. Perhaps it is a mistake to formulate the problem
in terms of these alternatives because, really, there is only one problem:
the debt incubus saddling the world and sapping the vitality its economy.
Deflation and runaway inflation are different only in form; they are
identical in substance which is the threat of shaking off the debt incubus.
The former does it by wiping out the value of debt through defaults, the
latter, through debasement. Both threats are wrought with danger for the
world population at large. It is not possible to predict which of the two
will actually occur. The only certainty is that the debt incubus will be
shaken off by hook or crook, at the cost of immense economic suffering -
unless world leaders take proper measures in time to fend off the impending
disaster. Luckily, the measure that will fend off one will also fend off the
other. And this measure is the restoration of the gold standard.
The proposition that the gold standard is
deflation-prone cannot stand scientific scrutiny. It is often charged that
there is not enough gold to back all the bonds that the world needs to
finance itself. But this statement leaves out of purview the gold price which
determines how much credit can be built on each ounce of the precious metal,
and also how much of the mines' ore-reserves are payable. It also confuses
the concepts of stocks and flows by assuming, wrongly, that the backing for
all the outstanding gold bonds has to be available and in hand at all times.
The truth is that the world needs only so much gold in any given year as is
needed to meet the demand for the retirement of gold bonds maturing in that
same year. Another charge is the chimaera of gold hoarding. But the
assumption that gold hoarding would sooner or later wreck the gold standard
if one was established leaves out of purview the rate of interest. We know
that gold hoarding is just a protest vote against the loose credit policies
of banks. There was a saying in London during the halcyon days of the gold
standard to the effect that "the Bank of England could pull in gold from
the moon" provided that it raised its rate of interest high enough. The
gold standard is not deflation-prone - it just demands that promises be kept.
Whenever banks and the government break their promises to pay gold, and then
pat themselves on the back for being shrewd in outsmarting their creditors,
gold grows nervous and goes into hiding. Looking back to the 20th century, we
can see lots of reasons for gold to be nervous. The governments of the world
still owe an apology for acting in such bad faith for so long, where promises
to their citizens and creditors are concerned.
The right question to ask is not whether we should
combat the danger of deflation or that of runaway inflation. The right
question to ask is this: how can we restore honorable
dealings between the government and its citizens, and how can we restore
faith in the promises of the government, after a century of chicanery at the
highest level?
13 July 2001
Dr. Antal
E. Fekete
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