Capitol Ideas I Inflation, Confiscation, and Gold
Bethell, Tom
Inflation, Confiscation, and Gold by Tom Bethell T his month we'll put on our thinking caps and take a look at inflation. Ever since the spring of 1993, when the price of gold began to rise, it has...
...R ecently we have seen a revival of the nonsensical idea that inflation is caused by people working...
...Following World War I, the British Treasury made the same mistake...
...Not bad...
...and to the end of wage and price controls...
...It was "meant" to play a monetary role, I believe, and it still does...
...But people working presumably add to the store of useful things...
...It has occurred repeatedly throughout history, and should always be attributed to government, which does, after all, monopolize the issue of legal tender...
...Federal Reserve officials then buy back some of these bonds from the banks...
...I n Western countries today, particularly the U.S., the inflationist tendencies of officials have a formidable opponent in the alertness of customers and the increased sensitivity of markets...
...One way to bring inflation to an abrupt end would be to de-index the pensions of federal employees...
...When unemployment is low, workers cease to moderate their wage demands, leading to "wage-push" inflation...
...When the loans are made, bank deposits increase overall, and the "money supply," Ml, M2, and so on, increases accordingly...
...Banks buy them, because they like the interest...
...A big problem is that the relevant officials in Washington don't know what they are doing, he feels...
...Alan Reynolds, director of Economic Research at the Hudson Institute, is less sanguine...
...For example," he explained, "greater concern for unemployment rather than inflation...
...0 The American Spectator September 1994 17...
...Ever since the spring of 1993, when the price of gold began to rise, it has threatened to return...
...It's not as easy as it was in the 1970s to fleece bondholders, and the accessibility of gold markets puts us back on a quasi-gold standard, whether Washington likes it or not...
...Its medical equivalent would be the belief that fever causes disease and that the best way to cure it is to tamper with thermometers so that the mercury level can't rise...
...Its price sends a signal that cannot be ignored...
...They can simply print as much money as they want...
...With what money...
...Nations on the gold standard must conduct their monetary affairs prudently...
...But in the U.S., monetization of government debt is the "root cause" of inflation...
...Today they are worth at most $100...
...Gold has a number of vital characteristics, the most important being that governments can't print it and people never throw it away...
...By a continuing process of inflation," Keynes wrote in The Economic Consequences of the Peace, "governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens...
...This is nothing so much as a rejection of economic thought and the attempt to replace it with police power...
...Paul Volcker would never have said that...
...What makes Fed governors think that work causes inflation...
...Four years later, 2,000 rubles are needed to buy one dollar...
...The street rebels were nostalgic all right, but (I would bet) more for their lost purchasing power than for Communism...
...The latter was true—pensions have been adjusted, but still halved by the inflation, I am told by the Hoover Institution's Mikhail Bernstam...
...Right now, we do not have any significant inflation in the United States," he says...
...Jim Grant of Grant's Interest Rate Observer sees an accumulation of "monetary tinder," with the nation awaiting only the match...
...Nonetheless, my impression is that the Fed has lost power...
...Greenspan may not entirely have forgotten his Randian youth...
...Such is the world we live in...
...Prices fell to one-half their 1815 level, debts were magnified, debtors jailed, creditors prospered, and "hard times" gave capitalism a bad name...
...At the end of 1992 his firm predicted the 1993 gold price surge, and he sees it continuing, "over $450 by next year, and it could hit $500 before it's all over...
...In the next day's Wall Street Journal you can read that in the week ending July 6, 1994, for example, the Fed "bought outright" $1.889 billion-worth of government debt...
...Inflation is obviously soaring, and by the end of the year no doubt the figures I have just provided will seem quaint...
...Greenspan is "a standard central banker and a Keynesian...
...The New York Times said that Yeltsin had brought "capitalism to Russia," and "a loss of economic security for many...
...6 6 onetizing the debt" works like this...
...Postwar, governments have made the mistake of restoring gold convertibility at its pre-war exchange rate...
...After the battle of Waterloo, the Britain of Charles Dickens's youth experienced a deflation of unprecedented severity...
...Therefore changes in the level of production have very little effect on the ongoing price, which means that it's virtually wholly a monetary demand phenomenon...
...Soaring long-term interest rates would spell the end for Clinton...
...In a matter of months the price rose from $325 to $400 an ounce, then settled back to about $380, where it has remained for the past year...
...There is a lot of talk about pending inflation, but it has not shown up in the figures and, on the basis of what has been happening to monetary growth, there is no basis for believing that it will show up...
...The bond market dropped, with long-term interest rates rising to their November 1992 level...
...It was this expropriation, together with the breakdown of order, that encouraged politicians (such as Vladimir Zhirinovsky) to promise a restoration of the glory days...
...Then came another "food shock" in 1978-9, then another energy shock...
...I mention this because the economic roots of historical events—inflation, taxation, and the insecurity of property in particular—are routinely overlooked, and the recent Russian experience may be a good example...
...Readers might want to stock up with a few gold coins...
...If we ask why prices have risen almost fourfold since 1971, the nontechnical answer is that the banking system has `monetized' over $2 trillion in Treasury debt since then," Lewis Lehrman and John Mueller wrote in a recent issue of Tom Bethell is The American Spectator's Washington correspondent...
...Markets seem to suspect that Washington is quietly backing a new burst of inflation, while hoping that the bond market doesn't notice...
...Inflation," ran a New York Times headline on July 9. Think of the economy as a pair of scales with "things" on one side and "money" on the other...
...John Mueller of Lehrman Bell Mueller Cannon, Inc...
...In thepress coverage last fall, there was rarely any mention of the ruined ruble, its injustice and its radicalizing effects...
...It will be interesting to see who is right...
...That should tip the scales the other way (unless they're working for the government...
...This time the error gave gold a bad name...
...A pipe dream, I know...
...It found its worst expression in Nixon's wage and price controls of 1971—economic policymaking at its post—World War II nadir...
...The activities of private-sector counterfeiters are admittedly inflationary, but small scale by comparison with government printing operations, and illegal to boot...
...He sees inflation increasing in 1995 and '96...
...Put yourself in the position of a retired Muscovite, who patiently endured the travails of Communism and even managed to save some rubles—initially worth $10,000, let us say...
...Inflation steals our savings, upsets economic calculation, punishes bondholders, and bails out debtors...
...It especially benefits the biggest debtor of all—the government—and can be thought of as government's preferred way of repudiating its debts...
...When governments pay their people with paper money directly, they don't have to go through the Western rigmarole of issuing bonds and then buying them back with computer-originated cash...
...says that more inflation has already been "baked in the cake" by monetary expansion...
...In 1982, a Princeton economist named Alan Blinder attributed the inflation of the 1970s to: bad weather, leading to a "food shock" (rising food prices), followed by an "energy shock...
...Personal savings are down, tax rates up...
...It is compact, scarce, portable, indestructible, and nice to look at...
...Metaphors, such as "overheating...
...Its value declines accordingly...
...And if we ask why Federal deficits have mushroomed in the meantime, the answer is that our legislators have gotten used to a monetary system which permits public debt to be monetized on such a vast scale...
...The Fed should "switch from merely manipulating interest rates" to restricting the purchase of government debt...
...People are paid in cash and they are inclined to keep their savings at home...
...In 1990 I visited Moscow and later wrote (TAS, June 1990): "You can now legally exchange one dollar for six rubles, but taxi drivers and risk takers on the streets will give you twelve, and according to an estimate by an economist I met, the [real] market rate is now about 20 to one...
...With too much money on one side, the scales tip and that's inflation...
...Government securities bought outright...
...For one thing, the great currency expansion of recent years is not inflationary because it is mostly carried abroad and used as a store of value in countries, such as Russia, where the local currency has already been ruined...
...Just in one week...
...For a long time liberals wanted to believe that greedy businessmen raising prices were the true cause of inflation, and that wage and price controls were the solution...
...And, of course, savings were wiped out...
...The figures are admittedly hard to interpret...
...At the time of the assault on the Parliament building last October, we were told that the streets were full of disaffected people, "yelling slogans and flying the Red communist flag," including many pensioners and war veterans...
...Warning: Milton Friedman, the Nobel Prize–winning economist and monetarist, does not think the Fed has been too expansive...
...Soldiers must be paid, and it is convenient to pay them with paper and t6 suspend its convertibility...
...Adjustable-rate mortgages—in May, a HUD official told me, 36 percent of new mortgages were adjustable rate—have weakened the home-owner "constituency" for inflation...
...That should have disqualified the man from further consideration as 16 The American Spectator September 1994 a serious economist...
...In the same year he told an interviewer that "sympathy for the underdog" was the "fundamental bedrock" of his ideology, and his world-view stemmed from that...
...This is what has happened in Russia since 1990...
...It's a store of value measure which has shown a fairly consistent lead on inflation expectations, and has been over the years a reasonably good indicator...
...The old folly, that a less valuable dollar can fuel an export boom, remains an article of faith among Democratic policymakers...
...alert to the possibility that people will express their dissatisfaction by exchanging paper for gold...
...It does this better than commodity prices or a lot of other things...
...Russia and other former Soviet lands have cash economies: individual checking accounts and credit cards are all but unknown...
...Perhaps that's why Fed chairman Alan Greenspan has on his desk a plaque proclaiming "The Buck Starts Here," as Bob Woodward tells us in his new book...
...The banks then have this amount of money as new reserves and can use it several times over to make new loans to customers...
...It's all nonsense—just one more way of blaming the private sector for the government's irresponsible monetary expansion...
...He anticipates a "bull market for things," as opposed to paper...
...H istorically, inflation has accompanied war because the sovereign becomes a major paymaster...
...With dollars created ex nihilo in the Fed's computers...
...Every Thursday the Fed publishes its balance sheet, including details of "U.S...
...And the dollar has declined sharply...
...The savings of ordinary Russians have been destroyed...
...The federal government spends more money than it takes in, as we all know, and it makes up the difference by borrowing money from the private sector and issuing to lenders interest-bearing pieces of paper called bonds...
...Gold is a different type of commodity because virtually all of the gold that has ever been produced still exists," Greenspan told Congress in February...
...their LBMC Report...
...Recently he was confirmed by the Senate as vice chairman of the Federal Reserve Board...
...A Surge in Hiring Adds to Concerns on U.S...
Vol. 27 • September 1994 • No. 9
