An Exclusive Interview with John Mueller, part 1

It is a delight to interview John D. Mueller, one of the most important aides to Rep. Jack Kemp and an intimate participant in the formulation and implementation of what became known as "Supply Side Economics," whose implementation was a critical factor in propelling the world GDP from $11T to >$61T (not adjusted for inflation yet nonetheless a dramatic age of prosperity).

 Photo of John Mueller courtesy of EPPC

Mueller is described at the Ethics and Public Policy Center as:

the Lehrman Institute Fellow in Economics and Director of the Economics and Ethics Program at the Ethics and Public Policy Center. Mr. Mueller specializes in the relation of modern economic theory to its Judeo-Christian and Greco-Roman origins, its practical application to personal, family, and political economy, and the interaction of economics, philosophical worldviews, and religious faith.

Mr. Mueller is also president of LBMC LLC, a firm in Washington, D.C. specializing in economic and financial-market forecasting and economic policy analysis. He has more than 30 years’ experience in those fields. Besides investment managers, Mr. Mueller has advised many American and foreign economic policymakers on monetary policy and exchange rates, policies for reducing unemployment, and income-tax, welfare and Social Security reform. He is author of Redeeming Economics: Rediscovering the Missing Element (ISI Books, 2010). From 1979 through 1988, Mr. Mueller was economist and speechwriter to then-Congressman Jack Kemp, mostly as Economic Counsel to the House Republican Conference (caucus) of which Kemp was chairman. In that capacity he drafted bills originating some key features of President Ronald Reagan’s tax cuts of 1981 and Tax Reform Act of 1986 and of Kemp’s 1988 presidential campaign. Mr. Mueller graduated in 1974 from Haverford College.

Herewith the first part of this interview:

Q:  What do you consider the most valuable properties of the classical gold standard to be?

A: The classical gold standard's record is unparalleled in at least three ways. First, it has the best combination of any U.S. monetary regime of long-term price stability and highest average real GDP growth, and lowest volatility in both the CPI and real GDP growth. Second, it's the perfectly written balanced-budget amendment. The U.S. Constitution never had a balanced-budget amendment, because the precious-metal standard, while not forbidding federal borrowing, requires that debts be repaid in the money of close to the same value And third, it created the conditions under which the U.S. became economically pre-eminent, overtaking Great Britain. In fact, it permitted any participating nation to balance its books with the rest of the world by remaining competitive in producing the goods in which it had a comparative advantage. Hence ending the gold standard has led to chronic episodes of commodity inflation (or less often, deflation), loss of Federal budget discipline and a sharp decline in the U.S. international investment position.

 Q:  You have coined a reference to the prevailing monetary regime as "the World Dollar Standard."  What are a few of its most salient properties.

A: I'd say it's the world paper dollar standard. Under the gold standard, the dollar was simply a weight of gold: about 1/20th of an ounce starting in 1791, then about 1/35th of an ounce in 1933. Under the interwar system formalized in the 1922 Genoa agreement, while the dollar was still gold, dollar and sterling IOUs were systematically substituted for gold reserves in international payments, and the expansion of foreign official dollar IOUs caused 1920s booms in commodity prices and the U.S. stock market, followed by deflationary busts in the 1930s, when those securities were liquidated.  Under the Bretton Woods system established  in 1944. dollar IOUs were redeemable in gold, but only for foreign central banks, not U.S. residents, and the expansion of foreign official dollar reserves permitted roughly a doubling of the U.S. CPI price level, until the dollar's redeemability in gold was suspended in 1971. Since then, the world paper dollar standard has combined the worst features of earlier U.S. monetary regimes. On the one hand, the dollar is ultimately redeemable only in paper Federal Reserve notes, just like the Continental dollar or the Civil War greenback; at the same time, thanks to the massive expansion of foreign official dollar reserves, the world's financial system is massively leveraged on those Federal Reserve notes (and their close cousins, bank reserves held at the Fed).

Q:  What is the "World Dollar Cycle," referencing the intersection of politics and commerce of the World Dollar Standard? How, generally, does it work?

A: I used the term to explain the economic results of the asymmetrical political incentives involved in the world paper dollar standard. The cycle was particularly pronounced in the 1980s and 1990s. Loss of Congressional budget discipline, in collusion between tax-cutting Republicans and free-spending Democrats, combined with tight Federal Reserve policy, caused the dollar to rise against other major currencies; which triggered protectionist initiatives in Congress; to which the second Reagan administration's Treasury responded by engineering a sharp decline of the dollar through various international accords. But the dollar's decline caused other major export-oriented economies like Japan to purchase more U.S. public debt, thereby expanding what I have called the World Dollar Base (the sum of U.S. currency and bank reserves plus official foreign dollar reserves); which in turn led to commensurate financial speculation and ultimately commodity inflation (usually starting in food and then energy commodities); to which the Fed responded by raising interest rates, triggering the 1991-91 recession. The fact that it's a cycle can be seen by charting long-term interest rates vs. the trade-weighted value of the dollar. After failing to persuaded U.S. policymakers to change policy, Lew Lehrman, Jeff Bell, I and Frank Cannon incorporated Lehrman Bell Mueller Cannon, Inc. (now LBMC LLC) to predict the impact of the World Dollar Cycle on U.S. and world markets.

Q:  What is "the mystery of the missing money" and its solution?

A: That was the title of an article I wrote back in 1990 to investigate the widespread fear that most U.S. currency was unaccounted-for, presumably because it was being used abroad. What I found was that most U.S. currency has always been unaccounted for, as far back as we have records, but that the total amount has always been pretty predictable, based on the size of the U.S. economy and the level of short-term interest rates. So because it's not really mysterious, the mystery doesn't really require a solution.

Q: In describing this, you have stated that international central banks behave, de facto, as if they were District Federal Reserve banks, members of the Federal Reserve System. What are some of the implications of this?

A: It's another analogy. Perhaps it's more accurate to say that central banks backing their currencies with dollar assets behave like District Federal Reserve Banks issuing their own currencies that float against one another. The actual District banks accept each other's currencies as equal to their own.

Click here to read Part 2....



Kathleen M. Packard, Publisher
Ralph J. Benko, Editor

In Memoriam
Professor Jacques Rueff

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