The Scandal of Money: Why Wall Street Recovers but the Economy Never Does - George Gilder (2016)
Chapter 5. The High Cost of Bad Money
The government monopoly of money leads not just to the suppression of innovation and experiment, not just to inflation and debasement, not just to financial crises, but to inequality too.
—Matt Ridley, The Evolution of Everything (2015)
This decade of the financial crisis—the “Great Recession,” with constant rumors and alarms of war—saw an epochal confrontation between the dollar and gold. At first, through 2011, gold surged and the dollar merely survived. Goldbugs claimed vindication.
In a series of ardent books and speeches, the brilliant libertarian polemicist Peter Schiff predicted the total destruction of the dollar and the massive appreciation of precious metals.1 The Internet seethed with predictions of the collapse of all fiat, or paper, currencies.
Many of the warnings were intended to sell various gold-based products. But the doomsayers were honest in their belief that the dollar could not survive the Fed’s fivefold increase in its dollar holdings of “high-powered” reserves. Many imagined that China and other holders and users of massive dollar reserves would join to overthrow the American dollar’s hegemony as the world’s reserve currency.
And then, against all odds, at least as understood by hard-money economists and bullion enthusiasts, what eventually cracked and crashed was not the dollar but gold. From 2012 to 2014, the precious metal lost 40 percent of its value against the dollar, which went on an awesome tear against nearly all the world’s currencies and commodities. Today it handles more than 60 percent of world trade, denominates more than half the market capitalization of world stocks, and partakes in 87 percent of global currency trades.2
To advocates of paper, the lesson seemed unanswerable. Even in a global monetary crisis, exacerbated by wildly loose monetary policy in Washington, with quantitative easing following stimulative buying, and with an explicit zero-interest-rate policy, the full faith and credit of the U.S. government behind the dollar roundly trumped the intrinsic value and scarcity of gold.
Paul Krugman gloated mercilessly in his New York Times column. He seemed to have a point. He rubbed in his argument by regularly quoting Milton Friedman’s case for floating currencies.3 Friedman held that floating currencies could respond to real changes in the economy far faster and more easily than real factors could adjust to a fixed standard. With an acute imbalance of trade, it was radically more efficient to change simply one outside price—the exchange rate of the currency—than to change every internal price, every wage, every pension and salary, the cost of every item in the grocery store, and every rent payment—one at a time—across an entire economy.
Radical surgery becomes imperative when a nation adopts economic policies that disable its businesses in international competition. Rather than merely devaluing the currency so the nation could import fewer foreign goods and export more goods overseas (thus rebalancing its trade), a nation under a gold standard would have to change its most self-defeating policies. Otherwise the miscreant country would have to force down all at once its wages, salaries, costs, prices, and government spending—nearly impossible in democratic politics.
Krugman clinched his argument by comparing the experience of the United States with that of Europe during the Great Recession. Europe attempted to enforce the rule of a single currency, the euro, on seventeen nation-states. No floating permitted. This campaign seemed to mimic on a continental scale the effect of a gold standard globally. Krugman pointed out that American states vary as drastically in their economic performance as European states do—Texas and North Dakota booming with energy gains while Florida and Nevada crash with the popping of their real estate bubbles—but the states that suffered the most from the crash benefited from federal cushions supplied by more prosperous states.4
Federal welfare, medical, education, Social Security, unemployment, disability, and disaster relief benefits, as well as dozens of other subventions, compensated for recessionary tax revenue losses and cutbacks in state programs. The $800 billion Troubled Asset Relief Program bailed out state governments. Meanwhile, in the eurozone, countries such as Greece, Ireland, Spain, and Portugal faced acute shrinkage of their social services and welfare systems in exchange for relatively modest aid from Germany and other solvent European economies. When the dollar surged against nearly all other currencies in 2014 with no resulting inflation, the ideas of Krugman and his allies seemed to have prevailed.
Led by the dollar, floating paper currencies both outperformed gold and trumped the European experiment with many nation-states forced to adapt to a single standard of value. As Krugman argued, gold is simply a single standard applied to the world. Surely, Krugman said, citing Milton Friedman, the unitary gold standard would wreak global havoc like that inflicted by the unitary euro standard.5
So why do we push to end the current monetary regime? The reason is not irrational nostalgia for a misremembered “golden age.” The reason is a decade and a half of economic failure so crippling and pervasive that it has led to a global revulsion against capitalism. Leading economists such as the former Treasury secretary Lawrence Summers and Robert Gordon of the National Bureau of Economic Research have concluded that the world’s economies are entering an era of “secular stagnation,” not merely a cyclical slowdown but a permanent decline of entrepreneurial innovation and technological advance.6 Peter Thiel, by all odds the world’s most visionary venture capitalist–philosopher, has declared that of four possibilities for the world economy—recurrent collapse, plateau, extinction, and technological takeoff—“the hardest one to imagine [is] accelerating takeoff toward a much better future.”7
Deepening the global economic doldrums is a forced transfer of wealth from Main Street to Wall Street so gigantic that it has sharply skewed global measures of the distribution of wealth and income, bringing to a halt fifty years of miraculous and broad-based advances in global living standards. At the root of these catastrophes is a drastic abuse and debauch of money and banking led by U.S. and European megabanks.
The expansion of federal regulations and other laws has increased federal control of credit, skewing it away from technology and manufacturing and into real estate. The Basel process in Europe has extended these policies overseas.
In a hypertrophy of finance, an ever-increasing share of global profits has migrated to incestuous exchanges of liquidity by financial institutions transfixed by the oceanic movements of currency values. Trivializing banks, government policy has transformed them from a spearhead of investment in business to an obsequious role of borrowing money from the Fed at near-zero rates and lending it to the Treasury at rates as high as 2 percent, yielding a tidy risk-free profit expandable through leverage protected by implicit and explicit government guarantees.
Intimidating the financial sector with constant litigation and addicted to fees and fines, regulators have turned banks into well-fed court eunuchs, periodically whipped and blandished and finally stultified. During the spurious expansion of the early 2000s, government policies, together with supportive litigation by nonprofits, pushed U.S. banks to bet the bulk of American investment capital on housing, essentially a consumption good already in oversupply. Banks and policy-makers then spread this error to Europe, pushing mortgage-backed securities on Irish, Spanish, and even German banks.
For these egregious errors, private and public, U.S. bankers collected $2.2 trillion, mostly in bonuses over a seven-year period.8 Also profiteering on the crisis was Washington, which expanded regulations and controls under the amorphous Dodd-Frank blob of laws and even enriched housing subsidies under Fannie Mae and Freddie Mac. In October 2014, as if nothing at all had been learned, the required down payments for taxpayer-guaranteed mortgages were dropped back down from a meager 5 percent to a risible 3 percent.
Meanwhile, as David Malpass has documented, crucial U.S. manufacturing and technology companies have been on a capital starvation diet since 2008 as private sector credit has shrunk as a share of GDP.9
Government money has shielded banks from many of the effects of these blunders and from mild but persistent consumer price index (CPI) inflation. But average American households have gone through an economic wringer with surging medical, education, food, utilities, and even—with ups and downs—fuel costs.10 Doggedly opposed by the administration and the academy, fracking technology together with the strengthening dollar offer economic relief, but the damage has been done. The real incomes and net worth of the middle class have incurred a steady deterioration with falling labor hours, anemic employment growth, flat productivity, and the breakdown of families.
This persistent disaster would not have been possible without the concession by conservatives (with the delighted concurrence of liberals) that money is the one great exception to their general opposition to government monopoly—that among all the powers of the earth, only the power over money does not corrupt. Milton Friedman was wrong to think that control over the money supply empowers governments beneficently to stabilize its value. Instead, governments exploit their monetary control to steer money and credit away from productive enterprise and toward pet projects, political donors, and perverse policies.
This monetary coup, changing money from the medium of economic activity to the message itself, has thwarted economic growth, punished savers, and rewarded prestidigitory finance over innovation. Casting a shroud of uncertainty over all valuations, monetary manipulations shorten the time horizons of the economy. In information theory, the dominant science of our age, when a medium sends messages of its own—static on the line—it’s called noise. Noise in the channel reduces the channel’s capacity to transmit accurate information.
Obfuscating all economic activity, government money causes inequitable redistribution of wealth. Unlike mere inequality, these arbitrary government favors and privileges for producers of everything from ethanol and windmills to mortgage-backed securities and oceanic currency shuffles are actually destructive to the morale of capitalism and to the economic growth that fuels the opportunities of the middle class. This result is not surprising or even accidental. The actual purpose of both Keynesianism and monetarism, as well as every coin-clipping king or emperor in the history of the world, is to transform money, a measure of wealth, into wealth itself. It is driven by the delusionary dream that the government can create economic wealth for its rulers to spend. But changing the measuring stick has never improved the process of building economic value or anything else that has to work.