From Alliance Defense Fund and Gateway Pundit:
From CNBC and Alliance Defense Fund:
Monetary system is self-destructing: CNBC video interview with Ron Paul
Ron Paul on CNBC Squawk Box 11/08/10
Excerpts:
Paul: “What really astounds me is how tolerant [the people in Congress and the financial markets] are. Where did this authority come from? In the old days I used to think that Congress authorized money and appropriated money and spent the money, but, now, somebody outside the government . . . can spend trillions of dollars and not think anything about it . . . Inflation is fraud, it’s theft, it’s stealing, it’s taxation without representation.” . . .
Interviewer: “Isn’t your exit strategy as tumultuous as the Fed’s would be?”
Paul: “I believe in transitions, but what I fear is there will be no transition if you have . . . a major dollar crisis, so I’m trying to head that off.” . . .
Paul: “There’s no way in the world we can deal with our budgetary problems if we aren’t willing to . . . cut the warfare state and welfare state and live within our means.”
Related:
Rand Paul: GOP must consider military cuts
Published Monday, November 8, 2010 7:15 AM
And this, related, from the AP and Alliance Defense Fund:
Nov 8, 5:55 PM EST
Fed official raises doubts over bond-purchase plan
By JEANNINE AVERSA
AP Economics Writer
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WASHINGTON (AP) -- A Federal Reserve official with close ties to Chairman Ben Bernanke expressed doubts Monday about whether the Fed's new $600 billion bond-purchase program would succeed in boosting the economy.
Kevin Warsh, a Fed governor, also warned of "significant risks" associated with the program, including the potential for triggering excessive inflation later on.
The Fed's program, announced last week, is intended to push interest rates on loans even lower than they are now. The Fed hopes cheaper loans will spur Americans to borrow and spend more. A stronger economy could, in turn, prompt companies to hire more and invigorate the economy.
But Warsh said he doubted the program will have "significant" or "durable benefits" for the economy. He made the comments in a speech to the annual meeting of the Securities Industry and Financial Markets Association in New York.
Despite his reservations, Warsh was among 10 Fed officials who voted for the $600 billion program. The sole dissent came from Thomas Hoenig, president of the Federal Reserve Bank of Kanas City.
Warsh's comments point to the uneasiness about the risks the central bank is taking with the new program - even among some Fed officials who supported it. Warsh, a Bernanke lieutenant, has never dissented from a Fed vote.
Warsh warned that the Fed might have to reconsider its program if the dollar continues to fall or if commodity prices continue to rise, raising inflation across the economy.
The Fed last week said it will monitor the effect of the bond-buying program on the economy. It left the door open to scaling back the purchases if the economy grows more than expected or if high inflation becomes too much of a threat. On the other hand, the Fed indicated it would boost its purchases if economic conditions weakened.
"The Federal Reserve is not a repair shop for broken fiscal, trade or regulatory policies," Warsh said. "Given what ails us, additional monetary policy measures are, at best, poor substitutes for more powerful pro-growth policies."
Warsh suggested that Congress reform the tax code to provide more incentives for businesses to step up investment. He indicated that such an approach is a more effective way to strengthen the economy.
Taking a different stance, James Bullard, president of the Federal Reserve Bank of St. Louis, argued in a speech Monday in New York that the "benefits outweigh the risks." He also voted for the $600 billion program last week.
Bullard said he worries that the weak economy might lead to deflation - a destructive drop in the prices of goods and services, wages and in the values of homes and stocks. The Fed's bond-buying program should help prevent any deflationary forces from taking hold, he said. Bullard did acknowledge that the program risks spurring too-high inflation.
With the Fed's efforts to stimulate growth, its balance sheet now stands at $2.3 trillion. That's nearly triple its amount before the recession. Adding the new bond holdings will push it to nearly $3 trillion.
Hoenig and Warsh say they worry that the vast sums the Fed is pumping into the economy could unleash inflation. Bernanke, though, has argued that such fears are overblown. He says he's confident the Fed can soak up all the money once the economy is on firmer footing - before inflation gets out of control.
During the 2008 financial crisis, Warsh worked with Bernanke to craft programs to get credit - the economy's oxygen - to flow again. Banks had essentially stopped lending to each other and to their customers, helping plunge the economy deeper into recession.
Richard Fisher, president of the Federal Reserve Bank of Dallas, who took part in the Fed's discussions last week but isn't a voting member, called the $600 billion program "wrong medicine" for what ails the economy. Fisher, who made his comments in a speech in San Antonio, said he worries that the Fed looks as though it's printing money to pay for the federal government's debt.
And he frets that the plan could lead to new bubbles in the prices of commodities, stocks and other assets.
"Financial speculation and excess ... is beginning to raise its hoary head," he said.
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And this, also related, from: Gateway Pundit and Alliance Defense Fund:
Robert Zoellick is Magnificently Right
Monday, November 8, 2010, 3:35 PM
David P. Goldman
(Crossposted from blog.atimes.net)
The World Bank president got it exactly right:
HONG KONG (MarketWatch) –- The president of the World Bank said in a newspaper editorial Monday that the Group of 20 leading economies should consider adopting a global reserve currency based on gold as part of structural reforms to the world’s foreign-exchange regime.
World Bank chief Robert Zoellick said in an article the Financial Times that leading economies should consider “employing gold as an international reference point of market expectations about inflation, deflation and future currency values.”
Zoellick made the proposal as part of reforms to be considered at this week’s G-20 meeting in Seoul.
“Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today,” said Zoellick.
He said such a reform would reflect economic realities and should be considered as a successor to the existing global currency paradigm known as “Bretton Woods II.” Bretton Woods II refers to the system which began in 1971, when U.S. President Nixon ended the dollar’s link to gold as established under the Bretton Woods agreement.
Zoellick said a return to some sort of currency link to gold would be “practical and feasible, not radical.”
“This new system is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves towards internationalization and then an open capital account,” he said.
A currency agreement combining structural reforms, currency stabilization and a convertible Chinese yuan were the key proposals that Francesco Sisci and I made in Asia Times exactly two years ago, and Reuven Brenner and I offered in First Things a year ago (subscription required).
Adding the dimension of a gold reference point is brilliant. During the late 1980s, we supply-siders promulgated a “Ricardian” gold standard, in which central banks would buy and sell currencies in order to stabilize the gold price in each currency (they wouldn’t have to own a great deal of gold to do this). It is not a gold fractional reserve system, in which claims on the banking system are payable in bullion, but a gold price reference, as Zoellick indicates.
We used to argue that gold was a good long-term indicator of the price level and that a stable gold price portended price stability. That is a naive view I abandoned fifteen years ago. If that were true, then we should have experienced a great deflation as gold fell from $800 at Christmas 1979 to well under $300 an ounce between 2000 and 2002.
Gold, I argued in a 1996 paper for Laffer Associates, should be thought of as a put option on the currency; the opportunity cost of holding gold instead of interest-bearing assets (plus storage costs) are the option premium. If central banks managed their currencies well, gold would trade at its commodity value, that is, around the marginal cost of production, which is now $600 to $700 for the largest mining companies. But if there is a risk that paper currencies will devalue by some extreme margin, it is worth holding gold as a hedge. We cannot price the option using the usual Black-Scholes formula or its variants because we do not know the volatility of a currency over the long term; this is a political matter and inherently uncertain. But if we think that monetary policy is headed to a disaster (QE2 will end up like the Titanic, in short), we will pay more for gold.
Effectively, Zoellick’s proposal to use gold as a reference would require central banks to manage the tail risk of monetary outcomes. The value of money depends on more than the short-term interest rate set by a central bank; it depends on the expected return to assets priced in that money. The entire range of policy instruments come into play. As Zoellick writes in his Financial Times op-ed,
When the G7 experimented with economic co-ordination in the 1980s, the Plaza and Louvre Accords focused attention on exchange rates. Yet the policy underpinnings ran deeper. The Reagan administration, guided by James Baker, the then Treasury secretary, wanted to resist a protectionist upsurge from Congress, like the one we see today. It therefore combined currency co-ordination with the launch of the Uruguay Round that created the World Trade Organisation and a push for free trade that led to agreements with Canada and Mexico. International leadership worked with domestic policies to boost competitiveness.
As part of this “package approach”, G7 countries were supposed to address the fundamentals of growth – today’s structural reform agenda. For example, the 1986 Tax Reform Act broadened the revenue base while slashing marginal income tax rates. Mr Baker worked with his G7 colleagues and central bankers to orchestrate international co-operation to build private-sector confidence.
Simply put, a central bank can afford a looser monetary policy if the economy is growing and demand for money increases.
He proposes:
What might such an approach look like today? First, to focus on fundamentals, a key group of G20 countries should agree on parallel agendas of structural reforms, not just to rebalance demand but to spur growth. For example, China’s next five-year plan is supposed to transfer attention from export industries to new domestic businesses, and the service sector, provide more social services and shift financing from oligopolistic state-owned enterprises to ventures that will boost productivity and domestic demand.
With a new Congress, the US will need to address structural spending and ballooning debt that will tax future growth. President Barack Obama has also spoken of plans to boost competitiveness and revive free-trade agreements.
The US and China could agree on specific, mutually reinforcing steps to boost growth. Based on this, the two might also agree on a course for renminbi appreciation, or a move to wide bands for exchange rates. The US, in turn, could commit to resist tit-for-tat trade actions; or better, to advance agreements to open markets.
Second, other major economies, starting with the G7, should agree to forego currency intervention, except in rare circumstances agreed to by others. Other G7 countries may wish to boost confidence by committing to structural growth plans as well.
Third, these steps would assist emerging economies to adjust to asymmetries in recoveries by relying on flexible exchange rates and independent monetary policies. Some may need tools to cope with short-term hot money flows. The G20 could develop norms to guide these measures.
Fourth, the G20 should support growth by focusing on supply-side bottlenecks in developing countries. These economies are already contributing to half of global growth, and their import demand is rising twice as fast as that of advanced economies. The G20 should give special support to infrastructure, agriculture and developing healthy, skilled labour forces. The World Bank Group and the regional development banks could be the instruments of building multiple poles of future growth based on private sector development.
Fifth, the G20 should complement this growth recovery programme with a plan to build a co-operative monetary system that reflects emerging economic conditions. This new system is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves towards internationalisation and then an open capital account.
This is the first really sensible plan to emerge from any of the major governments or international institutions since the crisis began. Zoellick, who was a senior official of the elder and younger Bush administrations, is one of the brighter lights in the Republican establishment. I hope the speech means that he’s running for Treasury Secretary in the next Republican administration. It’s the first real sign that someone on the Republican side has gotten the big economic picture right.
And, lastly, this, also related, from National Review Online:
November 8, 2010 5:00 P.M.
The World Against Bernanke
We just don’t need QE2.
The great Bernanke QE2 debate continues to heat up. In the run-up to the G-20 meetings, China, Russia, Germany, and others are all coming out against the Federal Reserve’s quantitative-easing agenda. They don’t want hot-money excess dollars to flow into their higher-yielding currencies.
The assault against Bernanke’s easy money has reached such a fever pitch that President Obama felt it necessary to defend the $600 billion in new-money printing in a news conference in India.
Meanwhile, World Bank president Robert Zoellick has actually called for putting gold back into global money, in order to use it as an international reference point to measure market expectations over inflation or deflation. The former Treasury and State Department official wants a successor to Bretton Woods. To my way of thinking, Zoellick is dead-on right.
And then there’s Kevin Warsh’s opus op-ed in Monday’s Wall Street Journal. I have written about Warsh in the past, and his sound-thinking views. Taking a bit of a shot at Bernanke’s QE2, the Fed board member basically says: Look, you want better growth, reform the tax code and stop regulating. “The Federal Reserve is not a repair shop for broken fiscal, trade, or regulatory policies,” he writes.
But in the key part of his op-ed, Warsh calls for a strictly limited QE2, not an open-ended commitment. He describes it as “necessarily limited, circumscribed, and subject to regular review.” And he goes on to say that if the dollar decline and run-up of commodity prices continues, these inflation signals should stop QE2, regardless of the unemployment rate.
It’s noteworthy that both Zoellick and Warsh are using gold, commodities, and the dollar as alarm signals — market-based alarm signals — that would warn the Fed if it’s too loose.
Since Bernanke first hinted at quantitative easing in late August, commodity indexes have jumped nearly 20 percent, gold has hit a new record high over $1,400 an ounce, and the dollar has fallen nearly 10 percent against the euro. And riding the crest of easy-money expectations, stocks have increased just less than 20 percent. But is it real? Is it sustainable?
The fact is that Ben Bernanke, who seems wedded to an old-style monetarism, is looking at backward inflation signals such as the consumer price index. And here’s the irony in Bernanke’s monetarism. In the six months prior to April, the M2 money supply was flat. But since April, M2 has turned up rapidly at a 7 percent annual growth rate. So it looks like people are putting money to work as the whole economy may actually be heating up.
And notice that while M2 growth has surged, so have commodities and gold — all while the dollar has been declining.
I’m not going to make a case for old-fashioned monetarism, because we have learned that the velocity (or turnover) of money is unstable. Anyway, it’s the King Dollar value of money that really counts. But I will note that as Bernanke’s new monetarist experiment takes off, higher commodities and a rising money supply at the same time suggest the economic situation is taking a new turn. This new turn is likely to include a faster growth rate, especially if Washington keeps the Bush tax rates down.
And it’s quite possible that business confidence is improving with the election trends having become clear. Early October economic reports from the Institute for Supply Management for both manufacturing and services came in above expectations. The same was true for the October jobs report, with a more than 150,000 gain in payrolls. And car sales, especially light-truck sales, have picked up substantially. According to Auto Nation CEO Mike Jackson, rising pickup sales show that small businesses and entrepreneurs are going to work. (Hat tip to Mark Perry of the Carpe Diem blog.)
And then there are profits. The dominant economic fact behind the rise in stocks and a possible upturn in the rate of economic growth is a continuation of strong business profits across-the-board. This is the best and most durable form of stimulus coming from the private sector.
So I would say to Mr. Bernanke, be careful what you wish for. And I would say to Messrs. Zoellick and Warsh, thank you for your sound-money contributions.
– Larry Kudlow, NRO’s Economics Editor, is host of CNBC’s The Kudlow Report and author of the daily web blog, Kudlow’s Money Politic
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