Liquidate the Debt!

Continuing on the discussion of the Gold Standard, we have Ron Paul's statements on debt, the lynchpin to the Gold Standard's failure.



I'm not always sure what Ron Paul means by that, and I'd appreciate better clarification. I often worry that it means defaulting on US debt, since this is what Paul seemed to want during the debt ceiling debate. I believe that would cause a lot more harm than good. Since interest rates continue to be low, even though (or maybe because, causality on this isn't always clear) the US is one of the last developed economies that hasn't dropped back into a recession, the US could borrow and spend its way out of the depression.

That doesn't mean borrow and spend forever. But it does mean doing something other like stopping the 15,000 + government layoffs happening every single month.

The chart is indexed, instead of based on a specific value. Pay attention to the trend. Via Matt Yglesias.

If the Federal government would have stepped in and financed state governments further, we'd have saved the jobs of 1.3 million federal workers. That's more than a percentage point in the unemployment rate.

There's a limit to this, of course. You could say that this would last until the private economy adds an average of 300,000 jobs for 6 months straight. By then, recovery should be well set in.

Like the WWII debt, which was never technically paid off, over a long enough horizon, that debt wouldn't matter too much in the long run. If you finance it at 30 years with the tiny interest rates on long-term US bonds, enough growth and moderate inflation would make it go away. As I've written before, it's debt to gdp ratio that matters most, not the nominal value.

I do believe that private debt overhand continues to be a problem and it is a big problem in many other countries. The Obama administration has tried and failed twice to bring some form of mortgage relief to borrowers. I'd be interested in seeing how Paul would manage to do that, since private debt is obviously a huge depressor on private spending right now.

Crucified on a Cross of Gold

A good argument on implementing the gold standard from Jim Grant, which he gave during a visit to the New York fed. He points at the inflationary price stability is artificial, arbitrary and too dependent on central bank enforcement. It's the same kind of superficial stability that Taleb always rails against.

He very convincingly points out that in the absence of debt, there is no reason not to expect prices and wages to adjust both up and down as necessary. This would eliminate the deflation threat that the Fed is so clearly terrified of.

More importantly, he argues that stabilization efforts have a nasty side effect: the explosion of debt, which on its own becomes a much bigger threat to greater economic development. Its also evident that debt is one of the most effective tools to transfer wealth from the poor to the rich, creating a malignant cycle. More inequality feeds more debt feeds more inequality.

Of course, there's two problems. First, as Europe points out so well, wages are very sticky. It's damn near impossible to get them to adjust down, no matter how much pressure you put on them. Grant's argument depends on labor contracts that don't fix wages for years into the future. I just can't imagine any situation where people would find this acceptable.

Even worse, Grant's whole argument is only possible in the absence of debt, something that's appeared in almost all societies since the dawn of civilization itself. It's great to think of an infinitely flexible economy, but that's just not how the real world works. We need to borrow money from time to time, and paying it back locks us into a specific payment regime for years into the future. If deflation strikes, debtholders are in a lot of trouble.

This example is part of the incredible naivete and wishful thinking of the goldbugs. Yes, under the weird world where long-term contracts don't exist, a gold standard would be nice. Unfortunately, the world is messy, and a gold standard would just make it messier.

On that note, since we do live in a debt-ridden world, it wouldn't hurt to go through debt forgiveness a little more often.* Of course, this would depend on a more balance of power between creditors and debtors. And since creditors are usually wealthy and debtors are usually poor, that's definitely not going to happen any time soon. But a boy can dream.

*For the actual poor, not the well-off and well-employed who "suffer" monthly payments to Sallie Mae.