Where Will Stimulus Money Come From And What Will It Cost
We know the answer is not "from 2009 taxpayers" because the tax rates aren't going up; the stimulus package contains tax cuts. I don't trade bonds, but I have been wondering who is going to lend the U.S. government an "extra" trillion bucks for the expected 2009 deficit. I have been thinking the answer is Treasury will print a lot of it, but I don't know how Congress works out which bills will be borrowed and which bills will be printed. If the money is to be borrowed, expect to see more and more of your taxes consumed in interest payments: as government must borrow more and more from lenders less and less excited about lending (perhaps, out of concern for inflation), government will be paying more and more for those loans.
Controlling Currency Value With Fixed Exchange Standards
Interestingly, I heard an allegation that a major foreign currency was being toyed with by its overseers as a possible candidate for going back onto a gold standard. Frankly, I think that would be a nutty thing to do (will you spend government resources accumulating gold, or building infrastructure?), and deflationary (over time, as gold becomes more dear, it will get harder and harder to print new gold-backed bills to keep up with the growth in the economy, meaning that more people will be sharing the same nearly-fixed fund of currency), meaning that risking currency on a business venture would seem less attractive than in an inflationary environment (in which one hopes not to hold pure cash very long, because it is a deteriorating asset in an inflationary environment). Thus, I think the hope of attracting foreign investment and currency-purchasing by going onto a gold standard would be countered by the tendency to hold and not invest deflationary currencies. In short, moving to a gold standard would slow the circulation of money and harm the economy depending on the currency.
Maybe moving to a potable-water standard makes sense (especially in the desert, where it'd be particularly valuable) -- you can, after all, replace it with some work -- but going to a standard that requires taking useful industrial metals out of circulation is nuts. And think how you will move an existing currency onto the gold standard: every time you print a new bill with which to buy gold, you are digging yourself deeper into the need to buy more gold. This can only work if your purpose is to establish the gold standard at a price considerably lower than current prices, so that the government can print a lot of cash and, after inflation, still have a currency value similar to the value of the underlying gold. The problem with this is, of course, that the moment it becomes public that you intend to double your current volume of outstanding paper money (which you'd need to do to back all the existing bills: you'd buy gold with all the new bills, and end up with a currency backed with gold at half the value of the currency you had when you started), everyone will know how inflationary this is and will bail on the currency. The currency's value will drop to half before you finish buying your gold.
(Note: as described here, currency backed by gold might not really mean anything except in an ad campaign; the wealth of the economy is not based in bills printed by the government (and subject to backing with gold), but in funds created in the process of issuing credit to loan customers. The banking system predominating in the world ensures inevitably that more money is "owned" -- not just in paper bills, but as predominantly occurs, in electronically-managed account balances at financial institutions -- than can possibly ever be presented to claimants. While paper bills may be backed by gold, very little of the money in a modern economy exists in the form of paper bills. The fractional reserve banking system ensures that a gold standard capable of surviving a run is logically impossible. But that requires thinking.)
Why We Will Not See A New Gold Standard (according to me)
So (just for example) backing the Euro with gold at €2,000.00 per ounce would require the folks who print Euros to be buy enough gold to back the entire circulating volume of currency in one of the world's largest markets, which would have the effect of driving the value of the Euro down until it was very close to €2,000.00 per ounce (assuming they could do it in secret, so others didn't devalue the currency rushing out of it ahead of them). And then, what benefit do you have? The value of everyone's Euros has been diluted by about half, so your voters and taxpayers and wage earners aren't happy. The prospect for printing more Euros is poor after the gold standard has been announced, because it will require acquiring more gold (and now we know why Mercantilist governments were so oppressive in their dealings abroad: they were trying to maintain gold-backed currencies during a time of rapid economic growth), so euro holders and users will face the prospect of deflation as population growth drives up demand per outstanding Euro. Long-term deflationary trends will be easy to understand, so people will not want to borrow in Euros if they can help it (they will be paying back money that is worth more than at the time they borrowed it) and they will not want to invest Euros in equities (which places at risk capital that otherwise would appreciate just sitting there). Yes, interest rates might be low -- because inflation risk is low -- but how quickly will this economy grow?
By contrast, there are tremendous growth opportunities in volatile-currency countries that haven't got a gold or silver standard. People seeking high rates of return may prefer to go someplace the public's investment has made commerce easier, instead of simply gaming the value of the currency. Imagine a country with a low incidence of armed thieves attacking transits along the roads and waterways; where taxes are known in advance; where intra-market borders are essentially irrelevant because they can be crossed by anyone without presentation of taxes, passports, or import/export documents even if you are not a citizen of one of the states in the market; where with knowledge of only one or two languages you can access hundreds of millions of buyers/sellers; where millions of households are created each year; where the ease with which one is allowed to discharge employees in tough times makes it an easy decision to hire people when it's necessary to ramp up production or service capacity; and where the government has the world's longest-running track record for making good on debt obligations, even extending to honoring debts incurred funding the revolution that established the government. Just imagine you could do business in a fantasy-land like this.
Why would you go someplace else first for business?
Multiple-Currency Vendors
Last point: Assume the purpose of moving to a gold standard is to attract foreign purchase of the currency, thus to attract investment. Before the movement of Europe to the Euro, I visited a little town in Austria. There, one could find shops (heck, even ice cream sandwich vendors on foot, now that I recall it) that would accept Austrian shilling, or German marks, or even United States dollars -- at a rate posted on a piece of paper by the cash register (or recited by the vendor on foot). The fact that a particular visitor had only marks or dollars wasn't a problem; the store would happily do business (and make change). Presumably, the store gave change in your preferred currency and only had to exchange its net transactions.
Today -- the era of computerized cash registers and automated inventory control -- multiple currency points of sale are a no-brainer to put into service, even if you want to have currencies change daily and reflect stores' potential exchange costs. "Oh, you want to pay in pesos? It's right there on the screen, with the exchange rate. What's that? Prefer renminbi?" This begs the question, I think, whether in an era of credit cards and automatic instantaneous currency conversion it even matters in what currency your own accounts are denominated.
If the world's lenders were to become excited about some new gold-backed currency arrangement in another major market, there's no barrier that I can think of to stores accepting orders in the new currency, making change in the new currency, and so on. People borrow and repay obligations in several currencies already, and there's no reason that the new currency (with its associated interest rates) would not be immediately useful in any market on the planet. Heck, it'd probably give rise to another revolution in financial services, in which brokerage firms would offer foreign-currency accounts and handle exchanges much more cheaply than is currently offered by U.S. banks. On the other hand, if actual cash neede to change hands a lot, one might find U.S. banks offering better foreign-currency services.
The More Things Change ...
But probably not. A new gold-backed currency would not be exploding in numbers of circulating bills, for the reasons discussed above. Lack of availabilty would drive people, in fact, to other currencies over time. On the bright side, a gold standard might force European governments to treat their taxpayers' money as if valuable and begin spending less of it, but maybe that's wishful thinking. The enormous cultural divide between American levels of government oversight and European and Indian levels of entanglement of government into every level of personal and professional enterprise renders the two virtually uncomparable, and it would be foolish to try to preduct how deflationary pressures would impact E.U. spending policies.
A Little Musing On Government In America
Recently, I read District of Columbia v. Heller (the opinion, not just the syllabus or a third-party discussion of it), and it was interesting to see the two sides of the debate try to make an argument in their favor the amount of time we've seen pass between the adoption of the Second Amendment and the first case that actually discussed what it meant to individual rights. Scalia mentioned other rights expressed in the Bill of Rights that were first explained by the Court in the twentieth century and said, essentially, that until we had a case we naturally didn't have a decision.
And why is it, you think, that the Supreme Court hasn't been called on to speak on the Second Amendment with more clarity in the last couple of centiries?
Over a century ago, in Champion v. Ames, the United States Supreme Court first held Congress had the power under the Commerce Clause to ban an article of commerce simply because Congress didn't like the idea of people trading the article. In Champion v. Ames, the article in question was lottery tickets. The logic in Champion v. Ames wasn't the "it might in the aggrete have a substantial effect on interstate commerce" reasoning we've since seen from the Supreme Court (as lambasted by Thomas in his concurrence in United States v. Lopez). Instead, the logic in Champion v. Ames was that the Court had upheld a similar law in Phalen v. Virginia, thus the path was clear to uphold this law, too if Congress felt like passing it.
The problem with Phalen v. Virginia was that it was not a case about Congress passing legislation under a grant of power to the federal government in the Commerce Clause. Phalen v. Virginia was about whether the state of Virginia had the power to regulate morals by banning an ostensibly noxious class of business from operating in its borders. The issue in Phalen wasn't whether Virginia had the power to regulate morals (the longstanding rule is that this is part of the general police power of a state, and supports things like making bigamy a felony, outlawing prostitution, refusing to enforce wagering contracts, and making it illegal to use narcotics recreationally); the issue in Phalen v. Virginia was whether Virginia, having set up a lottery commission to raise funds, somehow violated the Constitution's prescription against state laws impairing the obligation of contract when it later banned all lotteries in Virginia.
States do not get their power from the Commerce Clause, and the logic that would support or limit state regulatory power has nothing to do with the logic that would uphold an Act of Congress as within its constitutional power. Maybe if Congress passed a law that said diseased cattle, because they endanger commerce itself, cannot be sold in interstate commerce, then Congress would regulate commerce. Merely deciding that cannibis or Kalashnikovs are offensive doesn't seem to offer the Commerce Clause much power to prevent Congress from assuming a general police power of the sort intentionally denied Congress when the Constitution was drafted and adopted.
Since the Commerce Clause's migration into a general police power appears to have originated in a case that mistakes Commerce Clause analysis for an analysis of whether a state law is appropriate under its police power, we should be completely unsurprised that the law has developed as it did. Champion v. Ames was obviously decided wrongly, as it applied to Congress the reasoning properly applied to morals leglslation by a state.
The reason we're learning (just in recent decades) more about what the Constitution means is that -- a century after Champion v. Ames -- Congress is now fully persuaded that is has the power to wield a general police power and is passing laws accordingly. (On the radio last week, I heard a member of the House of Representatives -- not Texas' but the one in D.C. -- explaining how she was intruducing a bill to regulate service contracts between local utility providers and their customers during weather emergencies. Under what authority, pray tell, would Congress do that?) Because Congress is now attempting to involve itself in fields and subjects that would never have possibly occurred to any judge might be lawful a hundred and fifty years ago, it's clear we'll see more and more cases explaining why the exercise of a police power (though masquerading as the power to "regulate commerce") might still be limited because it also violates amendments restricting Congress within the powers its authors thought limited.
Because Congress under Champion v. Ames (and its numerous progeny) has in effect a general police power, we will also see the only truly secured rights in this country become the rights expressly identified in the amendments to the United States Constitution, which Madison didn't think required the amendments because the activities that offend most of the rights aren't within Congress' power to begin with. The Ninth Amendment (which states that the expression of certain rights shall not disparage others retained by the people) will be interesting to watch as Congress proceeds toward a general regulatory monopole in the federal government.
The upshot?
The United States may turn into an overregulated India-style socialist bureaucracy in which private enterprise is in effect run by government officials permitting every breath taken by private enterprise. This, not currency issues, will be the end of American competitiveness.
No comments:
Post a Comment