Friday, November 23, 2012

The inflation road

So what does the re-election of Barack Obama mean in the broader scheme of things? I was impressed by a short, economic-historical analysis Matthew Stevenson did for Reuters focusing on the fatal flaw of the progressive agenda: its economic foundation (or lack thereof).

Stevenson alludes to the long-standing struggle between those committed to a stable currency and inflationists, a struggle which has been at the heart of many presidential contests.

In this instance, clearly '[t]he victors were the forces of cheap money. William Jennings Bryan would be proud - as would bimetallists and Weimar Republicans.'

'Inflation won because it is the panacea for all that ails the body politic: a short-term cure-all that promises economic growth, the possibility of paying off national and international debts, new-found prosperity for the middle classes and liquidity for the impoverished, who otherwise would be voting in the streets with rocks and burning tires.

'... Cheap money defers many liabilities. Real wages for industrial workers have declined since the 1970s. True unemployment – including those too discouraged to look further and others working part-time for unlivable wages – is closer to 22 percent than the official figure of 7.9 percent. The national debt, $16.3 trillion, exceeds the gross national product. With unfunded entitlement programs, such as Medicare and Social Security, the government is eventually on the hook for a further $46 trillion, which it would rather not pay with pieces of eight.

'The hard-money men have not been able to win many elections since the 19th century, arguing as they do for reductions in the monetary supply; an asset-backed currency (preferably with gold) and policies that lead to deflation...

'The magic of inflation, before it turns everything to dust, is that it papers over a number of financial problems. The United States government is now able to run monumental trade and budget deficits, fight multiple foreign wars, vote tax cuts, extend unfunded pension and healthcare benefits to citizens over age 65 and spend money with Medici-like munificence on myriad federal programs by printing money or borrowing in national and international capital markets.

'Were the dollar unacceptable as a reserve currency in investor portfolios here and abroad, these financial sleights of hand would have ended long ago. Imagine the consequences if the Chinese demanded gold, diamonds or barrels of oil as collateral for their U.S. dollar bond investments. Already, the dollar is badly depreciated against many currencies ...'

Stevenson suggests that the official inflation figures grossly understate actual inflation and cites 'four-year college tuition at $200,000, one-bedroom New York appartments for $1 million, gasoline at $3.46 a gallon and carts of groceries that routinely cost at least $250.'

Inflation 'allows the political classes to maintain the illusion of power and authority. Without the ability to print and circulate paper money to balance the books ... U.S. presidents would be riding Greyhound on their appointed rounds, not the magic carpet of Air Force One.'

Furthermore, inflation allows politicians to create 'a veneer of fairness' but 'it is a direct tax on the savings of American citizens, especially those of the middle classes who lack hedges against its effects ...'

'[T]he economic carnival will end when the dollar is no longer acceptable as a reserve currency, first in international markets and later domestically.'

The only reason the Chinese hold debts denominated in dollars, Stevenson notes, 'is because it helps them maintain the artificially low exchange rate of the renmimbi.'

'Whether or not the United States goes over the fiscal cliff, it will remain unified as a nation of debtors for whom the goal is always to repay their loans with debased currency.'

Matthew Stevenson has a nice turn of phrase and a good sense of history. I agree with the general thrust of what he says even if a few of his assertions are problematic. There is no doubt in my mind that the massive U.S. national debt is eventually going to bring the country down, but exactly how and when is just not predictable. (To his credit, Stevenson leaves the timetable open.)

Had Romney prevailed, I would have watched and waited and wondered whether, after all and against the odds, America could come back.

But it's gone now, headed for inevitable, irrevocable decline. It was probably too late to start to turn things around anyway. But that we will never know for sure.