The following is a superb article from yesterday's WSJ. Judy Shelton's
discussion takes us only halfway there, however. If the US States-led
campaign succeeds in re-establishing the US$ against gold then there is the
further danger that in trying to stabilize the dollar the price might be
fixed either too high or two low. If the price is pitched too high then the
home population suffers from continuing recession. If too low, then it will
be regarded as predatory inflation by other countries and invites reprisals.
If, however, a new world currency is established (such as proposed by
China, Russia, Middle East countries) and fixed against gold (or some other
important commodity), then individual national currencies, left free from
government control, means that individual governments will then have to
impose discipline on themselves. This they are unable to do at present
because there's such an easy recourse to printing money (Quantitative
Easing). When the present crisis affecting all Western countries comes to a
head -- as it surely must before too long -- then this will be the only
solution left.
Keith
The recovery starts with sound money
By Judy Shelton
The Wall Street Journal
Thursday, May 27, 2010
The euro is beset with fiscal calamities that threaten its downfall, and
markets in the U.S. are roiled by uncertainty over the government's
financial regulatory legislation. But don't worry. Treasury Secretary
Timothy Geithner meets with European finance officials today to discuss the
economic situation.
According to a Treasury Department statement, they will focus on "measures
being taken to restore global confidence and financial stability." So
everything is under control.
Right.
What government policy makers in the U.S. and Europe fail to realize is
that far from being seen as capable of delivering economic salvation, they
are increasingly perceived as primary contributors to global financial
ruin. Whether it's the fiscal recklessness of spendthrift politicians or
the refusal of government officials to acknowledge failings -- distorting
mortgage markets through Fannie Mae and Freddie Mac, skewing assessments of
credit risk through loose monetary policy -- the influence of government
over the real economy is proving disastrous.
No wonder people are flocking to gold as they flee government-supplied
money. Neither the dollar nor the euro inspires much global confidence;
despite the dollar's relative safe-haven status, neither currency holds out
the promise of financial stability.
How can the real economy, i.e., the private sector, where genuine wealth is
actually produced, continue to function in the absence of reliable money?
Europeans will be wary of the euro from now on, given that the European
Central Bank has relaxed its standards for safeguarding monetary integrity
by absorbing Greek debt. Meanwhile, the perilous fiscal condition of the
U.S. has convinced many that our government will resort to future inflation
to reduce its own untenable debt burden.
It's hard to see how economic recovery can proceed when citizens suspect
that the monetary foundation beneath them is crumbling away. The
willingness to work and sacrifice for the sake of future prosperity is a
universal human quality -- the hallmark of entrepreneurial faith -- but
people must believe there is a link between effort and reward. Money forges
that link by providing a dependable store of value; in doing so, it
performs a vital social function.
The private sector is fully capable of recovering from economic downturn if
individuals have a meaningful tool of measurement for evaluating
alternative choices in a competitive environment. Comparisons based on
accurate, free-market price signals yield optimal economic outcomes. But
what we are witnessing today is a clash between the real economy's will to
resurrect itself and the persistent failure of government, here and abroad,
to deliver an appropriate platform of sound money based on sound finances.
Even as the first inklings of rebounding growth can be discerned --
increased retail sales, higher corporate profits -- it takes only the
latest headline about government failure to come to grips with deficit
spending and accumulating sovereign debt to snuff out any potential market
rally. Pledges to achieve balanced budgets by some distant future date do
little to convince people that anything has really changed.
Tough rules to enforce fiscal discipline were part of the original plan for
persuading Europeans to abandon national monies in favor of adopting a
common currency. Limits on deficit spending and government debt were
clearly stipulated in the Stability and Growth Pact -- no more than a 3%
budget deficit, maximum debt equal to 60% of GDP. But these criteria were
quietly jettisoned years ago and have now been flagrantly breached en masse
by European nations responding to the financial crisis with bailout
packages and fiscal stimulus.
In the U.S., frustrations over Washington's seeming inability to resist
fiscal profligacy have found voice in the tea party movement. As national
sentiment grows in favor of limited government and constrained powers,
legislation has been introduced in nine states to nullify federal legal
tender laws; the Fed's monopoly on supplying the money U.S. citizens must
use is being challenged by authorizing payment in gold and silver.
Invoking the 10th Amendment strictures of the Constitution, proponents
argue that the Founding Fathers never intended to grant federal government
both the right to borrow money as well as the power to manipulate the value
of the monetary unit of account. Money linked to gold and silver retains
its value, which prevents the medium of exchange from falling victim to the
federal government's inherent conflict of interest if it can fund its own
debt with money created from thin air. Updated for our times, a number of
the legal tender proposals specify that citizens would be allowed to tap
electronic exchange-traded funds (ETFs) backed 100% by gold or silver to
conduct digital transactions with state government.
The idea of rising above the administrative dictates of fallible government
to reclaim the virtues of sound money is profoundly liberating -- and could
prove economically empowering. Who believes that officials in Brussels or
Frankfurt will safeguard the value of euro-denominated savings in the face
of political pressures? Who expects the "Financial Stability Oversight
Council," led by the Treasury secretary as prescribed in the regulatory
overhaul bill, to spot the next asset bubble before it ruptures with
catastrophic financial consequences for American retirement accounts?
The transition to a firmer monetary footing to support entrepreneurial
capitalism could be initiated by linking major global reserve currencies to
gold and silver -- commodities long associated with monetary functions. It
would logically begin with the dollar. As a first step, U.S. citizens could
ask Congress to authorize the limited issuance of gold-backed Treasury
bonds that would provide for payment of principal at maturity in either
ounces of gold or the face value of the security, at the option of the holder.
The level of public confidence in fiat dollar obligations versus gold would
be revealed through auction bidding, with yield spreads clearly reflecting
aggregate expectations of their comparative values. In the same way that
inflation-indexed Treasury bonds measure expectations about future changes
in the Consumer Price Index, gold-backed Treasury bonds would provide a
barometer of the Fed's credibility.
By linking the dollar to gold, Americans would establish a vital beachhead
for sound money and provide a model that other nations could emulate.
-----
Ms. Shelton, author of "Money Meltdown" (Free Press, 1994), is a senior
fellow at the Atlas Economic Research Foundation and co-director of the
Atlas Sound Money Project.
Keith Hudson, Saltford, England
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