Nearly five years since the recession ended in June 2009, economic policy discussions continue to focus on dubious short-term countercyclical measures to "stimulate demand." The Economic Report of the President for 2014 wastes an entire chapter rehashing the jobs supposedly "saved or created" by the 2009 fiscal stimulus and Federal Reserve easing. That analysis relies on notoriously inaccurate forecasting models to take credit for the entirely prosaic facts that (1) the last recession eventually ended just as all previous recessions did, and that (2) employment subsequently rose a bit.
This evades the key issue: Did fiscal or monetary stimulus actually "stimulate demand"?
In recent years the U.S. has experimented with demand-side stimulants on an unprecedented scale. Monetary stimulus involves pushing interest rates down to subsidize big borrowers (mainly governments and banks) at the expense of small savers (seniors). That was the reason the Fed shoved the federal-funds rate down to near zero. Even quadrupling the Fed's assets had no clear and significant impact on the sluggish growth of nominal GDP.
The 2008-09 financial crisis greatly expanded the power of the Federal Reserve under Chairman Ben Bernanke. Now that his term is ending, the focus is on the choice of a successor. That choice, however, diverts attention from a more serious issue: namely, the institutional flaws in the present U.S. monetary regime and its bias against capital freedom.
Today, we have a monetary system in which the dollar is a pure fiat money and the Fed is a purely discretionary monetary authority operating outside the bounds of a monetary constitution. The Fed's near-zero interest rate policy and quantitative easing have distorted asset prices, increased risk-taking, and laid the basis for another panic once interest rates begin to rise.
It is disingenuous for Chairman Bernanke to say, as he did in May at a banking conference in Chicago, that the Fed is “watching particularly closely for instances of ‘reaching for yield' and other forms of excessive risk-taking, which may affect asset prices and their relationships with fundamentals.”
Virginia is one step closer to breaking ties with the country's monetary system.
A proposal to study whether the state should adopt its own currency is gaining traction in the state legislature from a number of lawmakers as well as conservative economists. The state House voted 65-32 earlier this week to approve the measure, and it will now go to the Senate.
While it’s unlikely that Virginia will be printing its own money any time soon, the move sheds light on the growing distrust surrounding the nation’s central bank. Four other states are considering similar proposals. In 2011, Utah passed a law that recognizes gold and silver coins issued by the federal government as tender and requires a study on adopting other forms of legal currency.
Virginia Republican Del. Robert Marshall told FoxNews.com Tuesday that his bill calls for creation of a 10-member commission that would determine the “need, means and schedule for establishing a metallic-based monetary unit.” Essentially, he wants to spend $20,000 on a study that could call for the state to return to a gold standard.
The gold standard is a system under which a country ties the value of its currency to gold, setting a fixed price at which gold can be bought or sold by the government.
It’s starting to look like Virginia could yet emerge in a leading role among the states in respect of monetary reform. The lower chamber of its general assembly has passed a bill to underwrite a study of the feasibility of a monetary unit based on a metallic standard. It is one of a number of states that are reaching deep into the Constitution of the United States to protect themselves in an era when the value of the dollars issued by the federal government is collapsing.
We wrote about the situation in the Old Dominion two years ago, in an editorial called “Virginia’s Golden Opportunity.” The measure was still in its earliest stages, but it was important in and of itself and also because Virginia is such an important state, particularly in respect of the Constitution. The chairman of the convention that wrote the Constitution, George Washington, the so-called “father of the Constitution,” James Madison, and the author of the Declaration of Independence, Thomas Jefferson, were, after all, all Virginians.
They were also of the view that gold and silver are the true money. Washington warned that paper money always has the effect “to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice." Jefferson called specie — meaning gold and silver “the most perfect medium because it will preserve its own level; because, having intrinsic and universal value, it can never die in our hands, and it is the surest resource of reliance in time of war.” Madison had a similar view.
This is why, when the Constitution was written, it prohibited the states from coining money or emitting paper money or making “any Thing but gold and silver Coin a Tender in Payment of Debts.” This means that Virginia can’t make its own coins, but it can make gold and silver coins legal tender within the state. More than a dozen states are exploring doing just that, spurred, at least in part, by the American Principles Project and also by the collapse in the value of the fiat dollars being issued by the Federal Reserve.
What can we learn from the Republican Party? Not much, according to November’s election and a swathe of Democrat campaigners – but the party’s decision to examine the possibility of returning to the gold standard snatched headlines and excited economists.
Gold already acts as a safe haven for investors looking to duck economic fallout – according to Lloyds TSB, the metal has enjoyed a 428 per cent price rise between 2002 and 2012, something it puts down to economic uncertainty, rising oil prices and a weak US dollar.
Now, a Republican gold commission is expected to consider linking the metal to the American greenback to form the basis of the currency’s value.
The case for the proposed move has been robustly made: politician and long-standing gold standard advocate Ron Paul has argued that while America is “deeply in debt” – American public debt recently passed the $16 trillion mark – Washington’s approach to tackle this has been to “spend more money, borrow more money and print more money”.
This hints at some of the appeal of the gold standard – if a currency were based on a finite amount of gold, governments would only be able to print money equivalent to the value of gold in their vaults, enforcing greater fiscal discipline.
This would see the end – or at least a severe curtailment – of money-printing regimes such as the Bank of England’s quantitative easing programme, which saw £375 billion pumped into the economy as of September, and Barack Obama’s $787 billion fiscal stimulus.