Economics Politics

The Major Mistake of Both Ron Paul and Paul Krugman


Vis a vi Monetary Policy:

The major mistake of the “Monetarists” like Krugman is that they believe Monetary stimulation stimulates growth. It doesn’t. All that it stimulates is stagflation. I’m a Paulista, but the one thing I would disagree with him is that there is a way to know how much liquidity the economy needs: The Price of Gold. The price of Gold is the most accurate barometer of supply/demand of money, ie allowing enough liquidity for growth, but not too much for inflation.

So what is needed both to insure that there is enough liquidity for growth but not too much for inflation is neither a “Hard” Gold standard, nor the current “fiat” target interest rate policy. What is needed is a “target the price of Gold” standard. So you don’t have a dollar backed by Gold: (This could lead to a dearth of liquidity during economic growth, and an actually run on the physical gold supply which is the reason Nixon took us off the Gold standard in 1971) What you have is a Fed that targets gold, uses it as a barometer. When the price of Gold rises, that is a clear indicator that the economy has too much liquidity. When the price of Gold dips too low (like it did in the late ’90s, remember $10/barrel oil? This was also a major factor contributing to the demise of Web 1.0 because there was massive growth, but no liquidity.) that is a clear signal that there is not enough liquidity.

So what we need is not to End the Fed, but rather a new mandate: Keep the Price of Gold in a tight trading range by printing money when it dips below the range and in reverse, selling bonds to mop up excess liquidity when the price of Gold rises above the tight trading range.

Economics Politics

How to Return to a Gold Standard Without Disrupting Liquidity Needs

Follow the Yellow Brick Road...

All you need to do is change the Fed’s mandate from targeting interest rates to targeting Gold. The Fed can easily keep the price of Gold within a tight trading range by increasing liquidity when the Price of gold dips below the prescribed range (indicating deflationary pressures) and conversely selling bonds to mop up excess liquidity when the price of gold goes above a set trading range. This would create a “De Facto” gold standard and uses gold as a barometer for how much liquidity the economy needs at any given point in time. Because of it’s nature, Gold is the best monetary barometer available, much more accurate than the human guessing game which believes that growth causes inflation and that liquidity stimulus can somehow create growth. Both of which have the unintended consequences of creating inflation during downturns and starving the the economy during growth spurts.

With the technological advances of the last 50 years, we should be living in a “Golden Age” of living standards, but instead we seem to be living through unending economic disaster.

The cause of this is not the economy itself, but instead the unit of account.

Imagine trying to have a sporting match, conducting mathematics or science without a unit of account. It couldn’t be done. And the same goes with economics. Without a standard unit of account, a stable economy is not possible. And that’s what we are living through.


Talking Heads: Quit Calling Ron Paul an Isolationist

Just because he doesn’t want to bomb other countries. Just because you don’t want a ‘World’ government, a centralized control system that takes away the liberties of the individual, doesn’t make one “Isolationist.” He wants to be friends with other countries, trade with them, visit them, have them visit us, respect their sovereignty. That’s the opposite of “Isolationist”! That’s engaging the rest of the World in friendly, sincere way. And not wanting to be some kind of control freak of a country which in essence is no different from bigotry and Imperialism.

“Calling Ron Paul an isolationist is like calling your neighbor a hermit because he doesn’t come on your property and break your windows” -Chris Lyspooner

Will Democracy Kill the Iowa Caucuses?

Do words and principles matter?

I saw a headline on Drudge this morning entitled “Iowa Gov: Ignore Paul Win.” which links to a Politico article entitled “Will Ron Paul kill Caucuses?”
So, does the Iowa governor decide who the nominee is? Or is this a democracy? The caption of the photo says, “GOP elites in Iowa are worried about the ramifications of a Ron Paul victory there. | AP Photo”
What are they worried about? That democracy may prevail? The jist of the article is that a Ron Paul victory there would discredit Iowa as a whole, and especially as the “lead off” state in the Primaries.
So let me get this straight: They’re worried about their status as being a lead off state, but what is the point of being a lead off state if you’re not allowed to have a choice of whom to vote?

Would you rather be the lead off state in a totalitarian regime or the last state in a true democracy?

Would you rather be the lead off state in a Propaganda machine, or the last state in a country that values real principles over sound bites?

Is Ron Paul an ‘Isolationist’?

Towards the end of the article, Politico makes the statement “Paul’s isolationist foreign policy views came to the fore at the Sioux City forum.”
That really caught my ire. Because rather Democrat or Republican, the Establishment seems to label anyone who doesn’t want to use force or “bully” the rest of the World an “Isolationist.”
Is that their definition of Isolationism: Not using force to coerce the rest of the World? Respecting other countries’ sovereignty, treating them as equals? Wanting to be friends and have free trade?
That’s the opposite of isolationism. That’s having the rest of the World really respect you and your principles.

In short, if Ron Paul, or anyone else, doesn’t win in a fair and free election, that’s fine with me. But if people don’t vote for who they want, and instead only vote for their leaders, whether in the media or political establishment, “ordain” or “nominate” then how is that a democracy? If someone says to themselves, “I’m not voting for him because they say he can’t win” how is that a democracy?

Update: 12/27/11:  I saw this article today come through my Facebook feed:

Ron Paul building a solid Michigan base

Encouraging title and article, but also what caught my eye as it relates to this post is the first replier to the article said this to the author: “Ms. Schultz, please learn the difference between non-interventionist and isolationist; Ron Paul is the former. He’s the opposite of isolationist.”

I was glad to see someone shared and understood my same view that I wrote above, i.e., not only is he not an ‘isolationist’ he’s the opposite! More likely to earn us goodwill around the World. Amazing what some principles can do.

I replied to him:  “Exactly. The press seem to think not wanting to attack another country or otherwise manipulate them with money or threats to do our bidding is “isolationist.” Being friendly with other nations, which is what Paul wants, treating them respectfully, respecting their sovereignty, and otherwise ‘engaging’ them as equals and partners, instead of places that are somehow ‘beneath’ us is the opposite of ‘Isolationist’ and might actually garner some real respect. As well as being the moral thing to do.”

Economics Politics

There is a Time For the Fed to Create Liquidity

Maybe the only thing I disagree with Ron Paul about, is that there is a time when the Fed should create liquidity, and that time is when, like in the 90’s due to the Internet and Communications revolution, there is a period of incredible growth. A growing economy needs liquidity like a growing body needs food.

The problem is, that it’s exactly during periods of growth that the Fed turns the spicket off and starves a growing economy of the liquidity it needs. This is one of the major reasons that Web 1.0 crashed.

And then during times of recession like the past few years the Fed does the opposite. It adds liquidity, which causes inflation and “stag-flation.”

This is why we don’t need so much a “Gold Standard” in as much as we need a “De-Facto” Gold standard, meaning Gold should be used as the barometer for when liquidity should be injected and or  “mopped up.”

Using the price of Gold as a barometer, the Fed, or whoever directs monetary policy, should keep the price of Gold in a tight trading range by adding liquidity when the price of gold dips below a certain target, and mopping up liquidity when the price of gold rises above the target.

This does two virtuous things: It gives a growing economy the right amount of liquidity it needs to sustain, and it also permanently ends inflation and deflation.

Other than that I totally agree with Dr. Paul that the Fed, as it acts now, should be ended, or given the tight mandate of using a Gold barometer for monetary policy.

Economics Politics

The Only Part of the Equation that Ron Paul is Missing

Ron Paul is correct that gold is important. It’s very important. The only part of the equation that Ron Paul is missing is the demand for money. Inflation is caused by two factors: how much money is printed and how much demand there is for money (growth increases the demand) If you had enough growth it would soak up the excess liquidity and there wouldn’t be inflation.

The reason Gold is so important to this picture is because it’s intrinsic value (for a variety of factors) is the most resistant or stable to economic or political factors. So what we need is not necessarily a “Gold Standard” but rather a de facto gold standard that uses the price of gold to indicate how much cash to print. In another words, the Fed’s policy should be to keep gold in a very tight trading range. When the price of gold goes above that range, that indicates that there is more cash in the system than the system can handle or demands (like now!) and the fed should sell bonds to soak it up. If and when the price of Gold goes below the target, that’s when they should print, because that indicates the economy is demanding more liquidity.

When the fed does the opposite, which it usually does, because it ignores the gold signal, then you get the worst of both worlds: too much liquidity and no demand for it, which equals “stagflation”

Growth is stimulated through fiscal policy (lower taxes, regulation) and inflation could be controlled through a correct monetary policy, which would be to target gold. So there is no reason at all for inflation, even during tough economic times. You can’t print your way to prosperity. You have to increase productivity and add real value.

A “De Facto” gold standard would not deprive the economy of the liquidity it needs to grow, as the the opponents of such a policy argue as a scare tactic against it. Instead, it would give the economy exactly the amount of liquidity it needs to grow without any inflation. So, in a sense we could get rid of the Fed, or at least downsize it. (No more billion dollar Fed buildings needed!) Because basically it would only take one guy and a computer to effectively execute and maintain such a monetary policy.