Tuesday, March 15, 2005

Economics Lesson No. 5: Where Lies Hope for a Solution?

If you have read the previous Economics Lessons, you may be saying to yourself, "If the US Government has decided that we don't need a measuring standard for our dollar, then that must mean it's not necessary anymore and we're fine without it." Hopefully, I can help you understand how all those academicians and politicians could commit such an egregious error as to declaim that we no longer need a money standard and that gold is an idea whose time has come and gone (a "barbarous relic," I believe was the term of one of the most egregious of them all, John Maynard Keynes.)

It's called ego. Ego has been the Achilles heel of more than one. I might even go so far as to conjecture that it is the downfall of all of us, even me. The sad truth is that our more learned leaders really don't have a clue, but have left their modest common sense at the doorstep of the Hallowed Halls of Power. The price for entering inside those doors is the abandonment their sense of awe and humility. They become so caught up with their image and with the daily rat race of preserving tenure and status and power that they lose the capacity to think straight and forget what it's like to live a normal life.

Take the example of Chairman Greenspan, at the Federal Reserve. From some of the older speeches of this learned gentleman, one can see his vast accumulation of knowledge and innate good judgment; however, the man has changed his tune since he acceded to a position of power. (See my article The God Must Be Crazy at the Tech Central Station website.)

Another example is Professor and Nobel Prizewinner Milton Friedman. Here is someone whose contribution to the field of economics is immeasurable; yet he remains an enigma. On the one hand, he champions such efforts as Hernando de Soto's defense of property rights in Peru (see this web page), and those of Michael Hodges, a sincere, concerned citizen who has spent thousands of hours compiling graphs that you and I can understand, to illustrate the very dangers I've been describing in my posts. At the same time, it is to this same learned Professor that we owe our Federal Reserve's present inflationary policies. Hard to comprehend.

A kind of irrational assurance (hubris) is typical of those who attain positions of status and power - or at least it's the excuse I can find for them; and encouraged by elitists such as these, most central governments today are handing their citizens an inflationary, pyramid-scheme bill of goods. I guess it's "Apres nous, le deluge!" (That was allegedly Louis XV's way of saying, "As long as the despicable masses allow us government officials to get fat and sassy with their money, to hell with them and their progeny!")

If you're asking yourself how things got this way, I'll explain it simply by saying that it is not totally their fault. We the electorate are the ones who have hired the naked emperors as our royalty; they are only doing what comes naturally, i.e. biting into the apple. The real cause of the predicament is our sheepish blind reliance upon frail spirited politicians and defective academic thinking machines as though they were gods, when in fact they are mere human beings just like Adam and the rest of us.

I'm hoping against hope that some country somewhere will reinstate sound monetary and banking policy, but they would do so at their own risk in today's competitive climate. The only country that might undertake that risk with relative confidence is the USA, but (1) it would require the collaboration of at least Europe and Asia, and (2) it would jeopardize the existing power structures. Both of these conditions mean it'll probably never happen - unless the house of cards comes crashing down and we have a financial crisis on our hands.


Blogger Contrary Guy said...

Just discovered your blog, and look forward to more posts in the future... good stuff!

9:39 AM  
Blogger sala said...

In an era where there is no gold standard, or infact no monetary standard at all for the dollar, maybe the dollar's leadership will be replaced by another currency. Maybe the lack of a common standard coupled with poor dollar fundamentals will lead to a currency war. And a fundamentally stronger currency like the Euro or Yuan will replace the dollar's hegemony. Perhaps this is how the "ego" you talk about will be flattened.

P.S. Kathy, thankyou for your posts, they are very thought provoking.

12:30 PM  
Anonymous Anonymous said...

canada will hit 25% federal debt/gdp by 2010 if gdp grows by 5% per annum and debt stays the same - ofcourse this does not incl provincial debt which WILL be growing over the near-term - so that's your virtuous example, but for countries/empires with global heft and global activities (banking, military, shipping, commerce, cultural) there are n ways/needs to spend on, and canada is clearly not in that league.....

10:07 AM  
Anonymous Steve Miller said...

This summer while at AIER one of the other visiting fellows and I had this conversation (I'm paraphrasing):

He: What textbook do you use for Macro?
Me: Gwartney & Stroup -- it treats Keynesian Macro briefly just to mention it, but mostly deals with labor markets, monetary policy, fiscal policy, growth, economic freedom, and public choice.
He: What does public choice have to do with Macro?
Me (stunned GMU econ student): Everything? It has everything to do with fiscal policy, which surely has implications for economic freedom and thus, growth. And of course public choice problems exist where monetary policy is concerned.
He: Really? Why should that be? The Fed is independent! There's no conflict of interests when you think about it.
Me: Wow. You should say that to John Wood or Walker Todd. I want to be there when you do.

5:19 PM  

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