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Author: TPPurdy Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 10561  
Subject: Re: The threat of deflation Date: 9/20/2002 11:23 AM
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Fiscal Policy is The Problem


I think you are on the right track, just barking up the wrong tree. I agree that Greenspan has a lot less influence then people like to think, and I do agree that we are in trouble. However, I think you miss the real issue when you proclaim the glories of hard money. The problems we are facing today are not new. They have happened many times through out history even under hard money regimes. Indeed, the problems of excessive debt and credit are the primary reason why we are not under a hard money regime now.

Do you remember William Jennings Bryan?

He had a series of complaints not unlike yours. He felt that the economic elites who where setting economic policy in his day were leading the country to ruin. He, like you, was particular concerned about credit, rising bankruptcies, and increasing inequalities. But the economic elites in Bryan's day where all hard money men and it was precisely the static nature of monetary policy that he thought was so oppressive. Bryan did not succeed in his day, but we did get off the gold standard eventually. Largely, for the same reasons that Bryan wanted to destroy the gold system. We wanted an easy way out of our debts.

I bring up Bryan for a number of reasons. First, I think it should be understood that no matter what type of monetary system people are under there are always people who believe that some other system would be better. People always want a miracle cure for their problems. But Bryan should also alert us to the fact that the problem of excessive credit can be found in any monetary system in any time period. The reason the he argued so fiercely against hard money was that he wanted an easy way out of the debt burdens that so many people were suffering under.

Myself, I think what kind of monetary systems you live under is irrelevant. Economies have had real growth when there was inflation and deflation. Monetary balance has never been perfect no matter what time period you look at. True, when economies collapse monetary policy tends to go haywire, but I think people are getting cause and effect confused.

I do not deny that some monetary systems are better than others, but I think what really matters is fiscal policy. And I don't just mean the government's fiscal policy; I include your average John Doe and large corporations in that equation as well. The decision to be prudent or a spendthrift is a basic decision that everyone must make no matter if the money they are spending is paper or gold. And it is this decision that makes or breaks economies.

You are right to point out the record amounts of debt that America holds, whether it is the government, consumers, or big business. No one in America is saving. As a consequence, we are very dependent on foreign capital. Your mortgage has been securitized and sold to Japanese's insurance companies; your credit card debt is back by bonds sold to German pensions.

What can Greenspan do about this? He can lecture and he can hector, but not much else. If interest rates stay high (and they are kind of high, historically speaking), more and more people are going to go bankrupt. If he lowers them a lot, all those foreign investors may decide that America is an unprofitable place to invest and pull their money out. That will cause interest rates to rise as well. But this bind is not a result of being trapped in some evil monetary system. Rather it is result of deliberate policy choice to spend like crazy that was made by all of us.

Don't try to tell me that if we were only on a hard money policy people choices would be different. The whole reason Bryan wanted the free coining of silver is because people (especially farmers) where suffering under their debt loads. The whole reasons we got of the gold standard was because we wanted an easy way out of our debt. Of course, we did not find that getting off the gold standard made getting out of are debts any easier. You always have to pay the cost of your fiscal choices, no matter what the monetary policy is.
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