Guest Post: Ron Paulicy

October 10, 2007 at 9:32 pm 16 comments

I am not a fan of the 24-month presidential campaign, though some are even longer. To be honest, I think we’ve all overdosed on presidential politics already. Turn on any cable news network right now and you can probably see two people shouting over each other, trying to provide some sort of insightful analysis. The sad part is that we rarely understand the policy that is being debated. While everyone is entitled to an opinion, when it comes to some things you need more than just your opinion. You need facts. As LeMare pointed out on the issue of free trade, people have gotten policy-stupid. So, for a brief moment I would like to take my own shot, not at an individual, but at a platform. I know what you’re thinking: can’t IRF just tell me who to vote for? No Billy, no (but there’s a hint on the right side of the page). So, forgive me. Maybe you can read this while watching Danny Bonaduce drop Jonny Fairplay. Or, skim through and get to the end.

 

I love gold. The gold standard, for those of you who slept through class, is a system which fixes the value of domestic currency to a specified amount of gold. So, if for example $100 dollars equals 1 ounce of gold, the holder of $100 can at any point go to the central bank and exchange his dollars for real gold. If the dollar loses value through inflation, people will go exchange it for gold until the supply of dollars falls enough to raise its price again. Basically this restricts the central bank from printing money too quickly, and ties inflation down in the long run.

 

There is one significant problem with this. If you want gold to protect you from the dollar losing value, then so does your neighbor. We all remember who our neighbor is from the New Testament, right? So you can have a run on the dollar, which pushes the value of the dollar up beyond its original value. This is then deflation. In fact, you don’t even need a real event to cause a run. Speculative investors or money hoarders can do the same thing. In the real world, you wouldn’t actually be exchanging your dollars in response to every move in the value of the dollar. The central bank instead would contract the money supply, to accomplish the same goal. This tightening can raise unemployment and lower the growth rate of the economy.

 

Ben Bernanke, you’ve heard that name, and others have argued persuasively that countries that stuck with the gold standard through the Great Depression experienced longer and deeper recessions than those that abandoned it. While the dollar deflates, people wait to spend, since things will be cheaper tomorrow. I thought he said the Fed caused it. Yes, he even apologized. The Fed tightened interest rates when they needed to be lowered during the Great Depression. They did it to defend the gold standard, thinking it would get people to invest dollars rather than redeeming them for gold. So, that’s a strike against.

 

Then there’s this, the relationship between money growth and inflation is unstable. Financial innovations, like internet banking, make money growth very dynamic and make targeting the money supply extremely difficult, and ill-advised. Empirically the relationships of money aggregates and inflation have broken down in the U.S. financial system.

 

(If you skimmed ahead, please stop here.)

Fans of this presidential candidate complain that he is being overlooked by the media, as if there were a great conspiracy to keep him silent. Well, today the Politico ran a full page article on his policies, and MSNBC’s Tucker Carlson gave him a five minute interview on his show. Hopefully, this mystery author has provided a glimpse into why some candidates don’t get the attention of the mainstream media. I can only hope that a new “Letters” emerges to argue, though I don’t think I will rebut. We have real substantive issues to debate, so let’s tackle those. Now, have you heard about Brittany going tanning after she lost her boys???

Sincerely,

Mr. Greenback

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Entry filed under: Commentary, Current Events, Living History, News, Politics. Tags: , , .

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16 Comments Add your own

  • 1. lemare  |  October 11, 2007 at 10:00 am

    Wouldn’t Alan Greenspan know more about the economy (I always trust a man who reads and writes in the bathtub) than a Texan doctor?

    Reply
  • 2. Lowdogg  |  October 11, 2007 at 10:32 am

    Ron Paul’s isolationist policies are all I need to set him aside.

    Reply
  • 3. JL  |  October 11, 2007 at 12:15 pm

    Since others are following the Britney debacle, did you hear today she blew off the emergency custody hearing she had requested? She’s continuing to do the impossible and make KFed shine, shine, shine.

    Reply
  • 4. Sportsattitude  |  October 11, 2007 at 1:10 pm

    Kudos to Danny Bonaduce for taking care of someone even more annoying than himself. I would be interested to hear how many folks bathe rather than shower, and within that context, how many read and write freely. I would also be interested in who Britney is supporting in the upcoming election, and if she will be performing at her chosen candidate’s convention, etc. If anyone knows these answers, please advise.

    Reply
  • 5. Jdon  |  October 11, 2007 at 2:00 pm

    Bathing just seems a little counterproductive. You sit in a big tub of water until all the dirt runs off into the very pool of water you are sitting in. I know Lemare loves her baths but maybe we should all give the shower a second chance.

    Reply
  • 6. lemare  |  October 11, 2007 at 3:28 pm

    I’ve heard the “LeMare Soup” arguement before, Joe Miller. But I am temporarily living in an establishment where showering is required rather than baths, and it is ROUGH. I die a little each day.

    And who are YOU to pretend you’re smarter than Alan Greenspan?

    Reply
  • 7. jdon  |  October 11, 2007 at 4:43 pm

    Look, your squawking at a guy who once filled a bathtub with pisatchio pudding. Sure it felt good squishing down in it, but I hardly did it for the sake of sanitation. I like my baths just as much as the next man, but when I need to get clean, stewing in our own juices is hardly our best resource.

    Reply
  • 8. TRussell  |  October 11, 2007 at 5:45 pm

    I am interested to see if the “breakdown” in the relationship between money supply, inflation, and economic growth is due to a true breakdown or other external influences meddling in the relationship.

    Can you please elaborate also on Ron Paul’s stance on the “hidden tax”. I believe it has something to do with inflation due to higher interest rates from too much debt. Is that the right track?

    Reply
  • 9. Sportsattitude  |  October 11, 2007 at 7:14 pm

    “Stewing in our own juices…” OK, I’m never taking another bath again.

    Reply
  • 10. Mr. Greenback  |  October 11, 2007 at 9:32 pm

    TRussell

    The breakdown is a true breakdown, basically the usefulness of the monetary aggregates (M1, M2, M3) affecting inflation has broken down since the early 80’s. As I mentioned, a lot has to do with increasingly complex financial innovations. This affects how people hold money, which makes these aggregates more volatile relative to inflation. As a result, the Fed no longer measures M3, which RP believes is a big mistake. But, if there were somehow meddling, it would be hard to dislike it given the moderation in inflation and business cycles over the same period. Again, this is in the US.

    I think when he talks about the hidden tax it is just inflation. Inflation as a tax is called seignorage. Its not the same as running a deficit, or holding debt. Seignorage is a tax and occurs when the government simply prints itself more money. It doesn’t need to run a deficit to use seignorage.

    RP actually thinks that there is too much inflation currently because the Fed has kept rates too LOW. Since he believes that the Fed can’t create real growth he sees this only as inflation. He blames the subprime meltdown on the low rate because it created an overextension of credit from interest rates being below the market rate.

    Reply
  • 11. Mikel  |  October 12, 2007 at 11:31 am

    From Washington Post this AM: And Rep. Ron Paul (R-Tex.), whose presidential campaign frequently attacks excessive spending by Congress, requested more than five dozen earmarks this year worth tens of millions of dollars for causes as diverse as rebuilding a Texas theater, funding a local trolley and helping his state’s shrimp industry.

    Reply
  • 12. EQVH  |  October 12, 2007 at 2:26 pm

    It seems to me that we do not learn from our mistakes of history, Fiat money is not the answer.With no solid backing and being easily counterfeited, the American “continentals” quickly lost their value, giving voice to the phrase “not worth a continental”.
    Gold, silver, and land all these have real intrinsic value it is very hard to counterfeit. Money ought to be a receipt for these real things.

    The U.S. Constitution (Section 10) forbids any state from making anything but gold or silver a legal tender. Ron Paul is simply sustaining his oath.
    American founding fathers (except Hamilton) knew the dangers of having powerful banking institutions that can change the value of your savings. “I believe that banking institutions are more dangerous to our liberties than standing armies….If the American people ever allow private banks to control the issue of currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers conquered.” Thomas Jefferson.
    Proponents of the Gold standard: Ezra T Benson, would be elected Joseph Smith, Milton Friedman, Friedrich Hayek, Ludwig Von Mises, Ronald Reagan (who Ron Paul supported)

    Reply
  • 13. Mr. Greenback  |  October 12, 2007 at 8:17 pm

    So, why not learn from one of the lessons of the Great Depression? Adherence to a gold standard lengthens and deepens recessions. While you may claim that an expansionary reaction to a recession is purely inflationary, you would be hard pressed to deny the short term trade off between inflation and unemployment. This is derived from the aggregate supply model with imperfect information, put forward by said Friedman.

    But here’s the real problem. The argument you advance comes from what is called the quantity theory of money, that is that Money supply X Velocity of money =Price level X Y(output). Monetarists claim that if you hold Y constant, then a change in the money supply will result in an increase in the price level. This works, they claim, because V is constant, or insignificant.

    However, as mentioned earlier, this relationship has broken down between the money supply and the price level. Why? Because the Velocity of money is not a constant, nor negligible, as monetarists would assert. Velocity responds to changes in the Money supply, which breaks down the argument. Attempts to execute monetarist theory in countries failed in the 80’s, which proved it could not work in all cases. Which as a policy tool, makes it less reliable.

    Reply
  • 14. ian in hamburg  |  October 13, 2007 at 1:20 am

    Why are you asking for a new “letters” when the old one is still around? 😉

    I go by “ian in hamburg” now, though.

    About the gold standard: it served the country well and would still be a valid way to anchor a currency. Look at Hong Kong. The HK dollar is pegged to the US. So for every 7.8 HK dollars in circulation, the HK Monetary Authority (their de facto central bank) holds one US dollar. It was implemented at a time when the future of the former British colony was very much in peril, and the local currency threatened with free-fall. HK has had inflation in the meantime, but the peg to the dollar has stayed the same. An increase in productivity helped offset any weakening of the HK dollar’s relative position, and overseas investors weren’t scared off by the prospect of inflation.

    I love economics but I’ve never studied it, so I can’t get into detail about things or talk as if I do actually know what I’m talking about.

    Besides, whenever an ecomonist comes out with a theory, the news the next day will make him alter it to fit the new reality. Do you read The Economist? Great magazine. Back when oil was 10 bucks a barrel they were predicting it to drop to 5, and their cover story had great reasons why it would stay that low. A few short months later, it was already headed to the levels we see now.

    Caveat lector.

    Reply
  • 15. lemare  |  October 13, 2007 at 8:04 pm

    Letters/Ian in Hamburg, what a pleasure to have some spirited debate back to IRF!

    Reply
  • 16. www.treatingdepressionnow.info » Guest Post: Ron Paulicy  |  October 15, 2007 at 9:29 pm

    […] JL wrote a fantastic post today on “Guest Post: Ron Paulicy”Here’s ONLY a quick extractBen Bernanke, you’ve heard that name, and others have argued persuasively that countries that stuck with the gold standard through the Great Depression experienced longer and deeper recessions than those that abandoned it. … […]

    Reply

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