Romney Must End His Silence On Monetary Policy
Mitt Romney has improved in recent Presidential polling, but odds-makers still have him losing in November. Currently, Ladbrokes heavily favors President Obama's reelection with odds of 8/13, while Intrade, the historically accurate political futures market, rates Mr. Obama's chances near 54%. However, economic growth will be the decisive issue this fall, and a sure path to victory for Mr. Romney is to convince voters that his is the better strategy for sustainable prosperity. To do this he needs to make monetary policy and a strong dollar cornerstones of his economic growth platform, alongside fiscal and regulatory initiatives he's already talked about.
So far, the former Massachusetts governor has been largely silent on money and the Federal Reserve. He's stated he would replace Fed Chairman Ben Bernanke, and he regards China as a "currency manipulator" (as if the U.S. is not?). Notably absent from his 59-point plan, campaign materials, website, and speeches, however, is any discussion of sound money as critical to prosperity. Instead, Mr. Romney offers specifics on tax, spending, trade, regulatory, energy, and labor initiatives. This needs rectification because indeed, a loose Fed bears material guilt for the housing bubble, and the dramatic decline in the dollar's value over the last decade is a prime reason for the current anemic recovery and poor future prospects. Even worse, as the world's still-dominant reserve currency, a weak dollar lessens prosperity everywhere else, ultimately, by engendering instability.
Monetary policy is rarely addressed in modern politics because of its abstruseness; indeed, John Maynard Keynes observed that debauching the currency was a sure road to economic ruin, but "not one man in a million" would realize the real culprit while it happened. In the post-Greenback Era, only twice, in 1896 and again in 1980, were monetary matters a contentious issue during a Presidential campaign.
In 1896, double-digit unemployment and falling prices for over-leveraged farmers led William Jennings Bryan's call for bimetallism to inflate away debts. President McKinley won the election, however, defending sound money as a lynchpin of liberty and prosperity.
In 1980, 13% inflation, 21% interest rates, and high unemployment led Ronald Reagan to focus on monetary issues. He advocated tight money to thwart inflation, strengthen the dollar, and encourage job-creating investment in long-term projects anchored by a strong currency. Mr. Reagan also commissioned examination of a return to a gold-linked dollar which, while politically infeasible then, nonetheless signaled to global investors a renewed commitment to monetary stability in the U.S., helping to fuel a strong recovery alongside a rising dollar.
Thus, there's precedence for monetary policy captivating voter interest in tough economic times, and Mr. Romney should emphasize sound money now for three reasons:
The Obama and Bush Treasuries have fostered a weak dollar for over a decade, policies the Fed ratified. After a stronger dollar undergirded prosperity throughout the ‘80s and ‘90s, since early 2002 the dollar has fallen 24% against the world's major currencies (its recent rise has more to do with troubles abroad, than any renewed confidence in a strengthening U.S. economy). Mr. Bernanke believes that quantitative easing, done to promote fiscal stimulus and exports, has been harmless, since domestic inflation is low, and bank balance sheets have healed.
The latter assertion is dubious, but regardless, the policy has fueled serious problems. Real private capital formation - the primary source of job creation -- is back to 1999 levels, an unprecedented reversion that's never before happened, post-war. And investment is still down more than 16% from its 2006 peak, one reason for the anemic recovery (the Fed's zero-interest rates, designed to induce spending and investment, haven't helped).
Further, excessive dollar creation since 2002 has systematically falsified interest rates and distorted asset prices and investment, stoking the housing disaster and now new asset bubbles in commodities and the bond market. The Fed's credit expansion has also driven excess liquidity globally where currencies are linked to the dollar (e.g., China), breeding inflation, food riots, and lower living standards. Serious capital misallocation has resulted, and harmed millions of savers.
In short, massive monetary pumping in recent years has created a globally unstable situation that will be hard to unwind without negative consequences for GDP growth, employment, financial markets and investment, and trade flows. Bluntly, along with perverse fiscal and regulatory policies, U.S. monetary policy in recent years has inhibited economic growth, and while the Fed seeks absolution from any current blame with their assertion that there is "no inflation problem" now, the reality is, their profound interventions in recent years have crushed fixed-income recipients and seriously distorted capital allocation as much as they have engendered investor confusion, if not fear. This will have global ramifications in the years ahead, has slowed recovery in the here and now, and in the case of the U.S. bond market specifically, the Fed has helped to fuel a bubble that cannot end well.
Central bank "independence" and statutory mandates need examination. The American people do not apprehend that the Fed now essentially supports the Treasury's needs, and ratifies spending that should properly be funded through higher taxes or borrowing from capital markets that would hike interest rates. This causes distortions in relative prices, interest rates, and resource flows, leading to entrepreneurial investment errors and, ultimately, the boom-bust cycle itself. Far from being a stabilizing influence on the economy, tandem Fed/Treasury manipulations have often been progenitors of instability.
Further, the Fed's dual mandate to promote both stable prices and full employment, by definition politically-borne, is often steeped in conflict, causing destabilizing interventions. And appurtenant to Keynes' warning regarding the silent debauchery of currency, "price stability" usually means at least 2-3% inflation for Mr. Bernanke, wiping out real gains from productivity that would accrue to savers, creditors, and indeed all users of dollars. The primary beneficiary of this hidden wealth transfer is the federal government: sorely needed now are a transparent fisc and re-commitment to a sound, manipulation-free dollar.
The dollar's reserve currency role and fundamental reform must be addressed. The value of a nation's currency is a function of both its scarcity, controlled in modern times by central banks, and attendant government policies that determine investor confidence.
Post-Bretton Woods, the U.S. dollar has been the world's reserve currency. This has conferred benefits - by increasing demand for all dollar-denominated assets - but also comes with responsibilities that recent Administrations have abrogated. Sound money is dependably-valued money, and by encouraging pricing and accounting accuracy and thus investment, it's a fundamental driver of economic growth. Its abandonment in favor of politically manipulated money has led to a secular decline in purchasing power, banking crises, and of late, a global disaster that has meant misery for untold millions. Laurence Kotlikoff of Boston University points out that the real fiscal gap facing the United States is north of $200 trillion (when counting both entitlements and all other spending); given this, Mr. Romney would do the nation and the world a huge service by making the dollar's future role a paramount election issue.
Indeed, the promise of a Commission on Monetary Reform in his first month in office, with the mandate to draw up new money and banking arrangements to promote monetary stability through a dependably-valued currency, would be a well-received campaign plank this fall that would allow for serious discussion of the foregoing issues.
Specifically, it's time to examine the Fed's role and responsibilities, and whether a fiat currency divorced from gold is feasible or prone to breakdown. A banking system with competitive note issue and gold-linked money, for example, would never have over-issued and fueled Fannie/Freddie madness, causing massive waste of scarce capital. And unlike bailout-prone central banking, competitive note-issuing carries no moral hazards. Further, it's untrue that weak and vacillating currencies promote exports and prosperity; Japan's miracle growth occurred as the yen rose against the dollar (from 360 to 83:1), for example, and the number of countries which have achieved sustainable prosperity with an unsound currency is exactly zero.
Back in March Mr. Romney significantly upgraded his tax plan, showing a willingness to learn from feedback. It isn't too late to propose pro-growth monetary reforms, rooted in a pro-investment strong dollar. Sound money is not a sufficient condition for prosperity, but it is necessary. The American people instinctively understand this, and will back political leadership favoring it.
