Tuesday, October 11, 2011

Monetary Policy, pt II

More an addendum to the last post, especially regarding to the connection between monetary policy and fiscal policy.

David Frum has gotten into the act over last week or so, specifically criticizing the hard money tendencies of the Republican Party. Now, in the main I agree with Mr. Frum. In particular, I support Mitt Romney relative to Gov Perry in no small part because of the reasons mentioned by Mr. Frum. But the issue is a little more complicated than Mr. Frum allows, for reasons that are worth being made explicit to illustrate the connection between monetary policy and trust in governance.

It is a very fundamental requirement of any successful economy to have a credible currency and loose money threatens the integrity of the currency. There are the well-known historical cases of the Weimar Republic and Zimbabwe where the economies were brought to ruination because of a debased currency as well as many other less spectacular examples. The Establishment is completely dismissive of these concerns but frankly the comparisons are less outlandish for me. Let's listen to the Establishment from an outsider's point of view.

The outsider hears, "We're going to do the same things that caused economic collapse in Weimar Germany and Zimbabwe but we're not going to suffer the collapse like they did because we're smarter and we'll execute better. We'll be able to do this in spite of the fact that there are no immediate plans to meaningfully cut government spending and consequently no apparent opportunity to go back to a tighter monetarily policy. Trust us." Given that Americans' trust in institutions is at all time low, is it really surprising that this train of thought isn't getting much traction? On the other hand, even if a tight money policy is not promoting growth or employment, at least it is preserving the dollar as a store of value.

On a side note, it is worth noting that of the Republican Presidential candidates, Rep. Ron Paul is the most extreme hard-money candidate. The gold standard is not necessarily spoken of as a hard money policy but undoubtedly it is. This is a feature for many Paul supporters but I suspect this just flies over the heads of many others. Because nobody actually expects Paul to win the nomination, the isolationist/non-interventionist types don't have to trouble themselves too much about it. There's not anything particularly good or bad about this, except to point out that it's not just the media who believes Rep. Paul has no chance to win the nomination. In their heart of hearts, the Ronulans know it too.

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