U.S. Elections, Economic-Policy Prospects, and the Price of Gold Print ShareThis
America?s Congress is up for grabs in just a few days ? and world financial markets have a serious case of the jitters. No one knows for sure what the make-up of the U.S. House of Representatives and the U.S. Senate will be next year . . . but it?s hard to imagine we won?t be faced with more gridlock and more acrimony on Capitol Hill ? in short, a dysfunctional government that is incapable of dealing effectively with America?s serious economic problems.
With the liberal Obama Administration and a more conservative Congress at loggerheads, it is likely that America?s central bank will, by necessity, be the only agency capable of acting one way or another in the face of continuing recession-like economic performance, especially persistently high unemployment.
America?s voters and politicians are understandably impatient ? and so is the Fed. All of us want to see policies that will quickly right the economy, rev up business activity, and put the unemployed back to work. But, unfortunately, a quick fix is not possible. Structural Problems Require Structural Solutions
Few recognize or will admit that today?s economic problems are structural and were decades in the making, a consequence of excessive consumer and government spending that was bankrolled by household and public-sector borrowing and insufficient productive investment. America spent, not on developing our national infrastructure or developing 21st century industries or training students and the workforce for the jobs of tomorrow.
Instead, we became a nation of shopaholics, buying things we didn?t need with money many of us didn?t really have, while our government spent excessively on the cost of empire and on social programs that were of admirable intention but no one wanted to pay for.
Countercyclical monetary and fiscal policies cannot fix these structural problems. To thrive again, we must reduce our outstanding debt ? measured as a percentage of gross domestic product or national income.
Understandably, our creditors ? both foreign central banks and institutions who hold much of our public-sector debt and the banks who hold much of our mortgage and consumer debt ? are reluctant to pile on more questionable debt. And, our household sector, rightly, is cutting spending in order to lessen their debt burden or build personal savings.
Meanwhile, raising taxes to achieve public-sector adjustment is neither politically feasible ? and as we are beginning to see in Western Europe (Ireland, Portugal, Greece, and France, for example) fiscal restraint can backfire, reversing or slowing the hoped-for economic recovery. Welcome Inflation
So this leaves the job up to the Fed. All the central bank can do is print more money ? what they call ?quantitative easing? as if a fancy name makes it more palatable.
And, if they?re smart, the Fed could channel some of this new money to sectors most in need or most likely to contribute to a revival in the long-term economic health and wellbeing of the nation and give employment a quick boost. For example, they could buy bonds specifically intended to finance highway, railroad, seaport, and airport rehabilitation and expansion . . . or the development of energy-producing projects . . . or increasing wireless bandwidth.
Printing more money may raise the hackles of sound-money advocates and surely won?t be appreciated by foreigners holding U.S. debt ? but inflation may be just the potion that could ultimately restore economic equilibrium by devaluing our debt in real terms and reducing its burden the economy expands more quickly in nominal terms, reflecting not only real growth but also inflation. And, if wages rise with prices, a few years of moderate inflation here at home could be politically palatable.
Importantly, as if to prepare financial markets for future policy adjustments, central bank officials have begun talking about raising the Fed?s informal inflation target from two percent to a formal target somewhat higher and/or explicitly targeting future levels of nominal gross domestic product consistent with higher inflation across the U.S. economy.
Inflation-producing policies, particularly if pursued in unison with the other mature industrial nations (Western Europe and Japan) ? what might be called ?cooperative devaluation? ? would also force these countries? currencies along with the U.S. dollar lower against the grossly undervalued Chinese yuan, leaving Beijing powerless to stop its currency?s up-valuation without taking on increasing and unwanted quantities of depreciating foreign debt and, at the same time, boosting growth in its own domestic money supply.
Managing monetary policy to produce a step up in U.S. consumer price inflation and a depreciation of the dollar against the currencies of countries running persistent current account surpluses ? and channeling resources to those sectors most likely to support a return to America?s long-term economic revival ? makes sense.
One way or another, we believe that the U.S. and other mature industrial economies are facing an extended multi-year stagflation ? sluggish economic growth possibly punctuated with periods of actual recession, much like the decade of the 1970s. And, like the 1970s, also a period of rising of rising commodity prices and high inflation despite high rates of unemployment and low capacity utilization, what is now called ?slack.?
Wise policies may lessen the pain and accelerate the return to economic health. But, whatever policy path we choose, the United States faces difficult times that will be reflected in a continuing long-term appreciation in the price of gold.
