After we came out of the church, we stood talking for some time together of Bishop Berkeley’s ingenious sophistry to prove the nonexistence of matter, and that every thing in the universe is merely ideal. I observed, that though we are satisfied his doctrine is not true, it is impossible to refute it. I never shall forget the alacrity with which Johnson answered, striking his foot with mighty force against a large stone, till he rebounded from it — “I refute it thus.” — Boswell, Life of Samuel Johnson
Paul Krugman may be America’s greatest living reactionary polemicist. He is an elegant writer and irredentist adversary to free market proponents of policies of economic-growth-with-an-equitable-Gini-coefficient-distribution-of-income. Krugman’s clever invective-suffused narrative is mesmerizing. Its Achilles heel? His narrative is, fatally, short on facts.
Restoring order to oil markets, stability to gasoline prices and legitimacy to government and markets requires a fundamental reform of our paper-dollar monetary system.
Do you know why the price of oil is above $100 a barrel and the price of gasoline is near $4 a gallon? Some blame oil companies. Others cite the threat of a military encounter that would disrupt the flow of oil from the Middle East. Speculators, too, are blamed for ostensibly bidding up the price of oil.
Yet, the basic reason for higher energy prices is being overlooked. Oil prices are up because the value of the dollar is down. Our common sense hides this source of higher prices because we view the dollar as fixed and prices as moving. Changes in the relative prices of goods and services occur because of shifts in supply and demand. But the value of the paper dollar also changes, usually in ways that are imperceptible over short periods of time. To see how the falling dollar has increased the price of oil, it helps to view price changes over a ten-year period. Since 2002 the price of a barrel of oil has increased nearly fourfold, to $103 on Apr. 20 from $26 in 2002. But if the dollar since 2002 had been as good as the:
• Chinese yuan, the price of oil today would be $78 and a gallon of regular gas would cost about $2.95;
• euro, the price of oil today would be $74 and regular gas about $2.80;
• Japanese yen, the price of oil today would be $67 and regular gas about $2.60;
• Swiss franc, the price of oil today would be $60 and regular gas about $2.40.
Even these results miss the full decline in the dollar--s value. Because of the dollar's role as the world's reserve currency, all other currencies have been caught by the downward pull of the debauched dollar.
What, then, would the price of oil be if since 2002 the dollar had been as good as gold? The price would be down $6, to about $20 a barrel, and the price of gasoline would be near a buck a gallon.
The debauch of the dollar also erodes our prosperity and our security. Since the final link between the dollar and gold was severed in 1971, the paper-dollar system has produced slower growth, higher average unemployment, deeper recessions and more frequent financial crises.
The Federal Reserve Open Market Committee (FOMC) has made it official: After its latest two day meeting, it announced its goal to devalue the dollar by 33% over the next 20 years. The debauch of the dollar will be even greater if the Fed exceeds its goal of a 2 percent per year increase in the price level.
An increase in the price level of 2% in any one year is barely noticeable. Under a gold standard, such an increase was uncommon, but not unknown. The difference is that when the dollar was as good as gold, the years of modest inflation would be followed, in time, by declining prices. As a consequence, over longer periods of time, the price level was unchanged. A dollar 20 years hence was still worth a dollar.
But, an increase of 2% a year over a period of 20 years will lead to a 50% increase in the price level. It will take 150 (2032) dollars to purchase the same basket of goods 100 (2012) dollars can buy today. What will be called the “dollar” in 2032 will be worth one-third less (100/150) than what we call a dollar today.
The Fed’s zero interest rate policy accentuates the negative consequences of this steady erosion in the dollar’s buying power by imposing a negative return on short-term bonds and bank deposits. In effect, the Fed has announced a course of action that will steal — there is no better word for it — nearly 10 percent of the value of American’s hard earned savings over the next 4 years.
Why target an annual 2 percent decline in the dollar’s value instead of price stability? Here is the Fed’s answer:
“The Federal Open Market Committee (FOMC) judges that inflation at the rate of 2 percent (as measured by the annual change in the price index for personal consumption expenditures, or PCE) is most consistent over the longer run with the Federal Reserve’s mandate for price stability and maximum employment. Over time, a higher inflation rate would reduce the public’s ability to make accurate longer-term economic and financial decisions. On the other hand, a lower inflation rate would be associated with an elevated probability of falling into deflation, which means prices and perhaps wages, on average, are falling–a phenomenon associated with very weak economic conditions. Having at least a small level of inflation makes it less likely that the economy will experience harmful deflation if economic conditions weaken. The FOMC implements monetary policy to help maintain an inflation rate of 2 percent over the medium term.”
In other words, a gradual destruction of the dollar’s value is the best the FOMC can do.
First, the Fed believes that manipulation of interest rates and the value of the dollar can reduce unemployment rates.
The American public does not like the fact that Fed chairman Ben Bernanke has vastly expanded the size and scope of the nation’s central bank and bailed out Wall Street while Main Street suffered. Congressman Ron Paul (R-TX), chairman of the Subcommittee on Domestic Monetary Policy, has even argued for a return to the gold standard and ultimately the end of central banking in favor of free-market money.
Although the Federal Reserve is assumed be independent, the reality is that it is subject to strong political pressure, just like any other government agency. In an election year, with high unemployment and a sluggish economy, there will be more voices calling for stimulus than for constraint. Another round of quantitative easing—that is, the purchase of government bonds and mortgage-backed securities (MBS)—is likely, with the objective of reducing longer-term interest rates to induce spending and growth.
That strategy has not worked thus far. Moreover, expanding the Federal Reserve’s already bloated balance sheet could further undermine its credibility in terms of safeguarding the future value of the dollar. The Fed faces a very dangerous tradeoff: risk higher inflation by expanding the monetary base (currency plus bank reserves) in a vain attempt to lower unemployment.
The Federal Reserve’s dual mandate is to achieve both price stability and full employment. However, history has shown that when the Fed fails to achieve price stability, the result can be stagflation, as in 1970s—not real economic growth and full employment.
After expanding its balance sheet from less than $1 trillion before 2008 to nearly $3 trillion today, the Fed has had little impact on the rate of unemployment but has greatly altered the allocation of credit and distorted the yield curve. It is ironic that while Congress criticizes China for manipulating its exchange rate, little is said about the Federal Reserve’s manipulation of interest rates and asset prices.
It is unnatural to have interest rates close to zero and to distort the yield curve by pegging longer-run bond prices at artificially high levels and suppressing yields. Keeping rates low to finance government debt is not a recipe for long-run growth or for credible U.S. monetary or fiscal policy. Purchasing MBS to fuel the housing market merely delays the readjustment of relative prices that needs to occur before the U.S housing market can return to normal.
Rather than engaging in pure monetary policy to ensure long-run price stability and prevent erratic changes in nominal GDP, the U.S. central bank has engaged in fiscal policy by allocating credit to favored groups and thus politicized monetary policy.
Moving forward, it is likely the Fed under chairman Bernanke will continue to bow to political pressures to stimulate the economy, allocate credit, and distort relative prices. The dismal situation in the eurozone, the long-term deficits in the United States, and the lack of pro-growth tax reform and other structural changes mean the Fed will be held responsible for performing miracles. But there are limits to what monetary policy can accomplish.
Theory and practice both tell us that printing money cannot generate economic growth or lower the natural rate of unemployment, but it can cause inflation. An excess supply of money can also distort relative prices and misdirect investment. The Federal Reserve helped create the bubble in the housing market by keeping interest rates too low for too long and is now creating another bubble in the bond market. Pegging the federal funds rate close to zero for another three years and twisting the yield curve to lower longer-term rates will continue to misprice credit, penalize saving, and encourage risk.
This far-flung capital of Nevada's Gold Belt is booming — very, very reluctantly.
With the price of gold in the stratosphere, the mine-chiseled corner of northeastern Nevada is scrambling to fill thousands of jobs, while newcomers to the barren region beg for somewhere to sleep. The motels: sold out. The apartments: good luck. The RV parks: get in line.
Nevada churns out more gold than all but four nations. The Elko area's 7.4% jobless rate is about half that of the once-thriving Las Vegas region.
But you'll find little of the gold-rush euphoria here that has long defined the American West. These days, Elko knows better.
Nevada is stippled with so many mining camp ruins — more than 100 in Elko County alone, locals say — that "ghost-towning" is a weekend pastime. Only a decade ago, tanking gold prices saddled the region with abandoned homes and shredded dreams.
Now the Elko city government is mostly socking away cash and putting off hiring, even for a police force strained by a transient population. Even among workers who feel blessed to cash paychecks, there is a sense of unease. Why buy a home here if the gold rush could vanish tomorrow?
That feeling is palpable at the Iron Horse RV Resort, where Ron and Judy Fletcher have been parked in Lot 70 for more than a year, ever since Ron's company told him: Move to Elko. Now.
Ron, 67, sells pump seals to mines. So the Fletchers squeezed their lives into an RV and motored from Spokane, Wash., to this mountain-ringed swath of cattle, alfalfa and cowboy poetry enthusiasts.
"This is where the work is," Judy, 61, said inside their 38-foot trailer, their black poodle-Chihuahua mix, Izzy, sprawled on her lap. "As much as we don't want to be here, we want to be employed."
A city born as a transportation hub in the 1860s and possibly named by a railroad official with a fondness for elk, Elko has survived a roller-coaster history. Its fortunes are tied to the seesaw industries of mining, ranching and tourism, though gold is clearly king.