McArdle:
...It turned out that we didn't have any economic magic tricks up our sleeve; economic policy is not even as advanced as we thought in 2008. Stimulus may somewhat ease the pain of a recession, but it is at best an expensive palliative, not a way to shorten the illness. And Reinhart and Rogoff seem to be right that financial crises are long, painful, and accompanied by persistently high unemployment. FDR's biggest policy contribution to GDP growth in the early years was going off the gold standard, followed by shoring up the banking system, and the FDIC; these are not remedies that are open to Obama, since we already did them eighty years ago. ...
Obama will take the fall, willingly or not, just as Hoover did. And, by the way, in BOTH cases it can be said that they tried to 'fix it.' But both will fail.
HT: AmSpecBlog
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9 comments:
Huh?
Going off the gold standard was a massive strategic currency devaluation which boosted exports and inflation expectations in a deflationary environment. Obama most certainly has these powers at his disposal today. It's called the printing press via expansionary fiscal policy. McArdle is basically saying that strategic devaluation is very effective. Agreed.
...and Obozo is flogging the crap out of that horse. Too bad the horse is dead, eh?
He's got a long way to go as far as I'm concerned.
The problem with the printing press approach is that it will destabilize the dollar as the reserve currency, as well as destroying the wealth of the American citizens (which is mostly held in dollars, or assets valued in dollars).
What might be feasible is to go back on the gold standard. You could do it on terms that amounted to what you are calling a strategic currency devaluation; but you would avoid at least the first of the negative effects because the gold standard would put a floor under the devalued dollar. As a reserve currency, the stability of a peg to gold would give the dollar a continued attractiveness in that regard (especially given that gold seems to be turning into the new global reserve currency, and certainly the other reserve currency).
You'd still be destroying American wealth -- at least for those Americans with any savings. For those Americas with net debts, it'd be Christmas.
Grim,
The problem I have with return to the Gold Standard is that you remove the ability of the government to provide liquidity in times of severe crisis. There's a strong case to made that adherence to the gold standard is what made the Depression great. When you lose exchange rate flexability, the only alternative to an economic shock is a collapse in GDP, deflation and mass unemployment (which doesn't necessarily fix your deficit problem either). The EU periphery nations are modern examples of what happens when you lose the ability to devalue. There is no other alternative but to contract and eventually default on your obligations.
"The problem with the printing press approach is that it will destabilize the dollar as the reserve currency,..."
Ask yourself these questions: 1. What currency/sovereign debt market is large enough to eclipse the U.S. Treasury? 2. Of those options, which currency is in a better economic position than the U.S. government?
Only the Yen, the Euro, the Pound and the Ruble are large enough. No thanks.
The Yuan is not fully transferable and the debt markets of Norway, Sweden, Switzerland and Canada aren't big enough. Likewise, the gold futures market is very tiny and highly speculative.
I don't think you lose the ability to devalue currency by pegging it to gold, any more than you lose the ability to devalue any one thing by pegging it to something else. You continue to have influence with the money supply.
Let us say that, in a barter economy, I peg eggs to cheese. You need three eggs a day, and are willing to trade a certain amount of cheese (let's say a pound of fresh, soft cheese).
However, later I find that other neighbors move in who are willing to trade things I want more than cheese. So, my three eggs are pegged to your pound of cheese; but if eggs are no longer available, because they are being traded for meat, you may find yourself trading two pounds of cheese to the neighbor who bought the eggs from me for a pound of beef.
All the peg does, in this case, is put a floor under the dollar. This could be undone later, really; but in the current crisis it would serve to reassure China and other international actors that our devaluation wasn't going to wipe out their holdings. That would be stabilizing, both economically and geopolitically.
"I don't think you lose the ability to devalue currency by pegging it to gold,..."
You most certainly do. You lose the ability to lower interest rates/increase the money supply.
"but in the current crisis it would serve to reassure China and other international actors that our devaluation wasn't going to wipe out their holdings."
Keep in mind that the PRC does not buy/sell Treasuries for their investment characteristics. They do so in order to strategically devalue the Yuan vs. the dollar to boost exports. We do not need to reassure the PRC that our devaluation will "wipe out their holdings". They already know full well that buying Treasuries is a losing proposition from an investment stand point.
And I'm just not sure what the benefits of, "putting a floor" under the dollar are, given the current crisis. We don't have an inflation problem, we have a demand/growth problem. A strong(er) dollar policy runs contrary to our interests in my opinion.
I'm familiar with the argument you're making, which has a respectable pedigree -- indeed, it dates at least to the debates about the war debt of the newly-freed American colonies.
Nevertheless, I don't agree. Money-theorist economics assumes that wealth is generated (at least in part; but some of the stronger claims seem to be absolutist about this) by the manipulation of the amount of debt and money available. That is not right. Wealth comes from production -- a fact that Marx understood better than these modern economists, with his labor theory of value (which was also Adam Smith's before him, and John Locke's before them). Marx's problem was that he tried to make labor account for all wealth, whereas in fact it accounts for only some increases in wealth. Marx was smart enough, though, to know that it wasn't money that creates wealth. This is a point on which earlier theories were just better than the current theory. I will demonstrate what I mean with an example.
If I have a factory or a farm that is producing wealth for me, I can take on a debt in order to expand my operations. According to monetary theory, wealth is created because I take on a debt to the bank, increasing the bank's wealth. In fact, wealth is being created whether I take on the debt or not -- it is the factory or the farm that is creating the wealth. All the debt does is allow me to expand the wealth-creating instrument faster than I could have done otherwise.
Now, if that is the case, the function of money is not to create wealth, but to serve as a store of value and an accounting mechanism for trade. Proper monetary policy would therefore be to sustain the stability of your store of value, so that trades and debts in that money are stable and reliable for those making such trades or taking on such debts. The political policies associated with such stability are counterindicated by all the best advice of modern economists, and therefore opposed to what the politicians would do if they could come to an agreement.
Creating a stable currency that is reliable is, for a nation, what establishing that you will honor your word is for a man. It is the basis of wealth, in that it shows that you can be relied upon to behave with honor.
The argument that it is not in our interest to do so is true just exactly as the argument that it is sometimes in our interest to violate our word. Yes, in the short term, it may seem to be.
As for losing the ability to devalue the currency, you don't lose the ability to do so by pegging it to a market-traded good; you just lose the direct control. The market sets the price of the other good, though, and so if your peg is too high it will get reset. It just won't be reset by your central office's predictions and decisions; it will be reset by those who are professional traders seeking to profit from it.
What is the difference between that and the Fed? They are not a government agency as such, after all, but a network of professional traders; it is just that, unlike in a market, they have privileged access along the lines of a guild system. I see no reason to believe we get a better result that way than we would with an honest market: indeed, it seems much more likely that you will get the kind of artificial bubbles that arbitrage-traders love, because they are a source of vast profits.
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