Tuesday round up.

On Forbes, Jeff Bell and Rich Danker make a strong case for the economic and political viability of a gold-backed dollar.

Yet most sympathetic politicians, policymakers and academics shy away from embracing gold. A common refrain is lack of voter knowledge, and there is some truth to this. In focus groups of Democrats and Republicans that we observed over the summer in Cincinnati, most participants had come of age after Bretton Woods and therefore had no living memory of gold playing a central role in monetary policy. But they did comprehend the gold standard when it was explained to them (a third session in Cincinnati with Tea Party activists elicited surprising levels of historical knowledge and support).

Even if they have never heard of the price-specie-flow mechanism, voters have an increasing sense of how the gold standard works because there is an intuitive association of gold with money. A system that last fully operated before World War I is more transparent and understandable than the monetary regime we live under today, dictated by central bankers making policy according to their macroeconomic preoccupations. The monetary authorities themselves do not understand the impact of their decisions on the wider world, where foreign central banks recycle excess reserves into U.S. dollar-denominated debt that artificially boosts asset prices and generates recurring bubbles below the radar of inflation.

At Alhambra Investments, Joe Calhoun sees economic negatives outweighing positives, unless spending and the tax system are reformed.

On The Kudlow Report, former Atlanta Fed President William Ford explains that rising interest rates could render the U.S. central bank insolvent:



Apropos my recent article, The Washington Times reports on President Obama’s meeting with President Sarkozy of France to discuss the dollar and the euro.

Mr. Sarkozy repeatedly has warned of the dangers to international firms posed by disparities between the euro and the dollar, and has suggested that reliance on the dollar as the world's sole reserve currency exacerbated the financial crisis.

The French leader has called for "updating" the global monetary order — something he's now pursuing as he holds the revolving presidencies of the Group of Eight and the Group of 20 nations. But, at least in his public comments alongside Mr. Obama, he avoided pointed rhetoric challenging the dollar's status.

"I've always been a great friend, a tremendous friend of the United States, and I know how important a role the Unites States plays in the world, how important the U.S. dollar is as the world's No. 1 currency," Mr. Sarkozy told reporters following an Oval Office meeting with Mr. Obama.

At the International Economic Law and Policy blog, Simon Lester reports on papers by John Williamson of the Peterson Institute, and conservative Keynesian Martin Feldstein of Harvard, on how to deal with trade imbalances (here and here).

The WSJ editorializes on a new study illustrating why trade deficit fears are overblown.

From The WSJ, former Fed Chairman Alan Greenspan advocates higher taxes and denies any mistakes in monetary policy during his tenure:



Cato’s Dan Mitchell suggests taxpayers will flee tax Illinois’s tax increases.

At Foreign Affairs, Columbia’s Robert C. Lieberman argues government policy favors the rich getting richer.

Monday round up.

On NRO, Larry Kudlow counters Charles Krauthammer on the tax cut deal.

Rush Limbaugh notes the attacks on supply-side economics.

At The Kudlow Report, Larry discusses Fed policy:




On Forbes, John Tamny profiles the producer of the forthcoming Atlas Shrugged film.

At New World Economics, Nathan Lewis analyzes government spending.

In i view magazine, Ermira Kamberi examines Robert Mundell’s call for a global currency.

On MSNBC, Joe Scarborough sees the tax agreement as a victory for “Jack Kemp style supply-side economics,” but bemoans the deficit.

At The WSJ, Stephen Moore reports some conservatives may oppose the tax deal over higher estate tax rates.

On RCM, Benn Steil explains how floating currencies create bubbles and break down the global economy.

Consider first how the United States and China would interact under a classical gold standard. If the United States sent a dollar to China, China would have to redeem that dollar for American gold. A fall in the U.S. gold stock would necessitate a rise in U.S. interest rates, which would reduce credit growth, reduce prices, and reduce the trade deficit. This is the mechanism by which the gold standard automatically corrected global imbalances.

Compare this with today's actual monetary structure. When the United States sends a dollar to China, China immediately returns it in the form of a low-interest-rate loan. That dollar is then recycled through the U.S. financial system, causing further credit growth and, critically, no countervailing Federal Reserve action.

The bubbles and imbalances that have marked the past decade-as they did the 1920s-are features of a monetary regime which operates in precisely the opposite fashion as the one which operated during the great globalization of the late nineteenth century. America is not, as Fed chairman Ben Bernanke would have it, a passive victim of "a global savings glut." It should not, therefore, be surprising that bubbles will continue to emerge in one asset market after another, and will continue to burst with damaging consequences.

From Cato, Greg Mills suggests that Africa is poor because its economies are illiberal.

On Bloomberg, Kevin Hassett argues Ireland should be allowed to default.

AEI’s resident floating currency advocate says – surprise! – the euro in its present form is doomed, because it restricts nations from devaluing their currencies and therefore defaulting on their debt.

In The Washington Times, Patrice Hill reports on economists who say the US-China current account deficit costs America jobs.

From earlier this year, on the Freeman, David Henderson explains trade deficits are irrelevant.

Wednesday update.

At Forbes, Lawrence A. Hunter provides a terrific supply-side history and strategy for stabilizing the euro/dollar exchange rate.

The WSJ editorializes that China’s financial system is increasingly strained by its peg to the dollar:

But on its central bank bills and repos, it [China] is borrowing at short-term rates of about 1.5% to 2%. On the asset side of its balance sheet it is earning less than 1.5% on five-year U.S. Treasurys. If the Fed succeeds in pushing down U.S. borrowing costs further, and inflation in China forces more interest rate increases, the spread on $2 trillion of foreign reserves is going to become costly. Not to mention that the yuan is appreciating against the dollar….

In the near term, tightening credit could also expose the weaknesses in China's corporations and put the banks under strain. As long as the lending spree keeps going, companies appear healthy, banks' margins are fat and nonperforming loan ratios are low. The PBoC recently raised borrowing rates by 25 basis points, and the markets expect another rise before the end of the year. Lending quotas, China's main tool for controlling credit growth, could also be cut. For many companies, this could come as a rude shock.

For a long time, the question put to China bears has been what would spark a crisis. Capital controls mean that there is little possibility of capital flight, and the government stands behind the state-run banks so there seems to be no systemic risk. While we wouldn't be so bold as to predict a crash, inflation is one way in which China's goldilocks economy could come to an end and the bears be proven right.

Bloomberg reports the weak dollar is, as predicted, sending investment funds out of the U.S.

On The Kudlow Report, Sen. Judd Gregg (NH) discusses the Fed’s actions:




Caroline Baum points out the illogic of devaluing the dollar to improve the trade deficit.

Also in The Journal, an editorial warns against forcing an EU bailout of Ireland:

Ireland, at least, is taking the overspending problem seriously. It would be in much better shape if not for that open-ended guarantee to bank creditors. Repeating Ireland's mistake on a continental scale won't save the euro, and could harm it. This week, German Chancellor Angela Merkel said that "if the euro fails, then Europe fails." But the euro is a currency union, not a debt union—at least it wasn't until last May.

Mrs. Merkel has it backwards. If the euro zone, in violation of the treaty that created it, effectively assumes the debts of all its members, it would do more damage to the credibility of the currency bloc than a haircut for its lenders. If Ireland, like Greece, cannot pay its debts, it needs to restructure them, and the sooner the better.

The Atlas Foundation Sound Money Project releases Judy Shelton’s Guide to Sound Money.

In The WSJ, Seth Lipsky anticipates Ron Paul’s ascendency to chairman of the House subcommittee that oversees the Fed:

Most exciting is the prospect that Dr. Paul will be able to bring into the national conversation such figures as, say, Edwin Vieira Jr., the visionary lawyer who has become the sage of the idea of constitutional money. That's a reference to the unit of account to which the Founders were referring when they twice used the word "dollars" in the Constitution, and which they codified in the Coinage Act of 1792 as 371¼ grains of pure silver, the same as in a then-ubiquitous coin known as the Spanish Milled Dollar, or its free-market equivalent in gold.

If Dr. Paul does accede to the chairmanship of the monetary subcommittee, he will, in but a few months, gavel it to order on the 40th anniversary of the summer in which President Nixon closed the gold window and brought an end to Bretton Woods. Yet a few weeks ago, former Fed Chairman Alan Greenspan himself, speaking at the Council on Foreign Relations, warned that "fiat money has no place to go but gold." Even the president of the World Bank, Robert Zoellick, has just called for restoring a role for gold in the monetary system.

The great debate is finally starting up again. Who better to host it in Congress than the diminutive doctor who, more faithfully than anyone else on the Hill, has for more than a generation stood for the idea of sound money?

The NY Sun echoes Lipsky’s op-ed.

Also on Kudlow, Stephen Moore worries that tax rate extensions may fall through:

Wednesday round up.

The President’s deficit commission recommends spending cuts along with lower tax rates and elimination of deductions.

From August, Louis Woodhill exposes the commission’s low growth assumptions.

On The Kudlow Report, Don Luskin comments on how to play loose money and fiscal austerity:




At Forbes, Brian Wesbury and Robert Stein argue against quantitative easing.

In The FT, Alan Greenspan doubts the wisdom of a weaker dollar.

The WSJ editorializes in favor of trade liberalization to improve global imbalances.

A country's trade balance is simply an accounting identity that by definition matches the flow of goods and capital. Some countries export goods (a trade surplus) and also export capital to help other countries pay for those goods (a capital deficit). Others import goods (a trade deficit) while importing the capital with which to buy them (a capital surplus). Japan and Germany fall in the first category, the U.S. and India in the second. Either is perfectly normal.

The real problem is that for several decades many economies, especially in East Asia, have attempted to thwart these natural flows by running both trade and capital surpluses, and thus accumulating extraordinary levels of foreign currency reserves. Japan has done this for so many years that it is running a capital account deficit even as it sits on an enormous pile of U.S. Treasurys. China and South Korea do the same today.

This is where freer trade becomes so important. Trade barriers have long been a central policy tool for governments trying to keep their economies oriented toward exports. Trade barriers raise domestic prices by depriving consumers of the benefits of competition, while also artificially limiting their consumption options. Meanwhile, consumers and businesses aren't sending as much capital overseas to pay for imported goods.

On The NY Sun, Seth Lipsky defends Robert Zoellick from critics.

Cato’s Dan Mitchell worries the Fed is turning the dollar into a joke.

At NRO, Larry Kudlow links to Dan Mitchell’s latest video opposing tax increases:




In The Washington Examiner, Ralph Benko suggests ways to help the economy.

Wednesday items.

On NRO, Larry Kudlow suggests the negative yield on inflation-adjusted securities is signaling inflation.

Cato’s Dan Griswold rebuts myths about free trade.

On Carpe Diem, Mark J. Perry explains that current account deficits are balanced by capital account surpluses:


At Café Hayek, Don Boudreaux defends free trade.

On Forbes, Brian Wesbury and Robert Stein argue bullish investments have been more profitable than bearish.

On The Kudlow Report, Don Luskin debates the Fed’s feint towards lighter than expected monetary stimulus:



The WSJ notes that low-tax states have better economies than high-tax states.

On Townhall, Thomas Sowell recalls past tax cutting successes.

On NRO, Michael Tanner urges Republicans to focus on deep, painful spending cuts.

Weekend round up.

In a must-read WSJ piece, Judy Shelton interviews supply-side founder Robert Mundell. The Atlas Sound Money Project features the full text:

“Are you thinking,” I venture, “that maybe it’s time to start figuring out the design for a new international monetary order? Should the U.S. offer new proposals regarding exchange rates and monetary policy?”

Mr. Mundell, who is Canadian, looks troubled. “I don’t think the U.S. has any ideas, they don’t have strong leadership on the international economic side,” he replies. “There hasn’t been anyone in the administration for a long time who really knows much about the international monetary system.”…

“The U.S. berates China for its exchange rate policy, which Washington doesn’t like,” Mr. Mundell says, noting that discriminatory tariffs against China might not be legal under the treaty provisions of the World Trade Organization. “But one-sided pressure on China to change its exchange rate is misplaced.”

Shaking his head, Mr. Mundell asserts: “The issue should not be treated as a bilateral dispute between the U.S. and China. It’s a multilateral issue because the U.S. deficit itself is a multilateral issue that is connected with the international role of the dollar.”

He goes on to explain that the dollar bloc includes China and other Asian countries—except Japan—but that the euro now constitutes the rest of the world.

“The euro today is the counter-dollar,” he says. “The most important initiative you could take to improve the world economy would be to stabilize the dollar-euro rate.”

The WSJ editorializes on Fed Chairman Bernanke’s lack of attention to the falling dollar.

We were more struck by what Mr. Bernanke didn't say. In a nearly 4,000-word speech about inflation, the Fed chief never once mentioned the value of the dollar. He never mentioned exchange rates, despite the turmoil in world currency markets as the dollar has fallen in anticipation of further Fed easing. He never mentioned rising commodity prices or soaring gold, and his only reference to the recent increase in the price of oil was by way of dismissing it in the context of overall low inflation.

On Fox, Steve Forbes suggests the mortgage market has been nationalized:



At Bloomberg TV, David Malpass calls the U.S. a currency manipulator and says the current administration is following GW Bush’s weak dollar policy. Interestingly, he suggests the weak dollar since 2004 has driven investment capital overseas, contributing to a rising trade deficit, the opposite of the mainstream view. He also predicts the Bush tax cuts will not be extended.

Seeking Alpha summarizes a recent presentation on the economy by Dr. Victor Canto.

On CNN, Stephen Moore debates economic policy:



Foreign Policy analyzes the power struggle among China’s rulers.

Cato’s Dan Mitchell suggests Calvin Coolidge was the best President of the last 100 years.

Friday round up.

Don Luskin advises the President to keep taxes low.

At Forbes, David Malpass outlines a pro-growth agenda.

On Fox Business News, David Stockman says the taxes should rise.

At RCM, John Tamny predicts a return to a gold-backed currency.

A Heritage Foundation report opposes pressuring China to revalue the yuan.

In The NYT, Alan Tonelson and Kevin Kearns argue America's stimulus is flowing offshore.

Wells Fargo reports the trade deficit fell last month.

An Econlog podcast suggests Fed policy is the new central planning.

On The Kudlow Report, Kudlow debates rolling back Obamacare.

Friday round up.

On The Kudlow Report, Stephen Moore discusses the economy:

At Canada's National Post, Tim Mak explains Art Laffer's support for a carbon tax.

In The WSJ, Robert C. Pozen suggests yuan appreciation will not raise U.S. exports.

From last December, Reuven Brenner and David Goldman argue that the best way to increase China's consumption is through a formal yuan/dollar link.

The United States should establish a fixed parity for the dollar with the currencies of its largest trading partners, starting with China. By stabilizing the dollar against the yuan and, eventually, other currencies, the United States can create a shield behind which the capital markets of developing countries can flourish and capital can continue to flow to the United States. Developed nations can protect themselves against sudden shifts in the flow of capital, but poor nations with nascent capital markets cannot. Currency stability is the first precondition for the creation of capital markets in the developing world.

The WSJ editorializes in support of Beijing's latest step towards yuan convertability.

David Goldman sees disinflation impacting stocks and bonds.

At Reuters, James Pethokoukis exposes the deficit's true size.

NRO rebuts claims that the Reagan and Obama economies are similar.

From 1998, Jude Wanniski recounts the Paul Volcker deflation of 1981-82.

The Heritage Foundation's 2010 policy guide omits sound money.

Thursday round up.

At his blog, historian Brian Domitrovic offers a great explanation of how floating currencies caused Japan's Lost Decade, and today threatens China.

Cato's Dan Mitchell responds to Ezra Klein's recent discussion of the Laffer Curve.

On The Kudlow Report, U.S. Rep. Barney Frank supports ending Fannie Mae and Freddie Mac.

David Frum's website interviews Art Laffer regarding tax increases for the rich.

Art Laffer disputes the President’s view that Social Security does not face a crisis.

In The WSJ, the Council on Foreign Relation's Benn Steil and Paul Swartz suggest current monetary tactics will force the Federal Reserve to float interest rates (full text here).

From the archive, Jude Wanniski advocates the Fed float interest rates in favor of a dollar price rule versus gold.

Robert Reich opposes Mitt Romney's supply-side proposals, saying low demand is the problem.

Swiss America Trading’s CEO explains why businesses and investors are sitting on their money.

Say what you will about Reich’s economics, he does have a good sense of humor:

At AEI's The American, Mark J. Perry explains why trade deficit statistics are unreliable.

At Cafe Hayek, Don Boudreaux rebuts The NYT's claim that a rising trade deficit is harmful.

Tuesday update.

On The Kudlow Report, Steve Forbes debates Social Security reform:

In his column, Forbes opposes high-speed rail.

Larry Kudlow examines the summer's economic troubles.

Joseph Calhoun analyzes dollar volatility.

Since 1995 the US dollar index first rose by 50%, fell by 40%, rose by 24%, fell by 16%, rose by 20% and finally fell 10%. Furthermore, the swings have become more frequent recently. The initial 50% rise took 7 years (1995 to 2002; roughly the internet bubble) with never more than a 8% correction. The 40% fall took six years (2002-2008; roughly the housing and commodity bubble) with the biggest countertrend move being 15%. Then during the recent crisis and the aftermath, Fed policy allowed the dollar to rise 24% in 8 months, fall 16% in 9 months, rise 20% in 8 months and finally fall 10% in just 3 months.

From 2003, Robert Mundell proposes an international currency.

In The Washington Times, Richard Rahn derides government policy.

At Counterpunch, Paul Craig Roberts paints a gloomy picture of U.S. economic, defense and foreign policy.

At The Fiscal Times, Mark Thoma worries that the Fed will monetize some of the federal debt.

Cato's Daniel Griswold rebuts trade deficit worriers. (H/T: Cafe Hayek)

Wednesday articles.

Bret Swanson analyzes China's internet development.

David Goldman explains why he is bearish on bank stocks.

Stephen Spruiell interviews Allan Meltzer on inflation.

Amity Schlaes suggests expansive government threatens prosperity.

In Forbes, Brian Wesbury and Robert Stein argue trade deficits aren't a threat.

At The Freeman, Mark W. Hendrickson opposes protectionism.

Washington Post blogger Ezra Klein comments on Sen. McConnell's view that the Bush tax cuts didn't diminish revenue.

At Newsweek, Daniel Gross claims growth will help solve the deficit.

Wednesday articles.

David Warren of The Ottawa Citizen defends Art Laffer's analysis.

In Politico, Alan Reynolds compares the economies of Ireland and Greece.

Don Boudreaux explains why trade deficit phobia is protectionist.

Reihan Salam considers Jeffrey Sachs' argument that we are in a post-Keynesian era of austerity.

Kevin A. Hassett analyzes the tax on carried interest.

Was George W. Bush a supply-sider?

At the Library of Economics and Liberty, David Henderson recently reviewed Bruce Bartlett's book, "The New American Economy."

The whole piece is worth reading, but Henderson makes one particularly important point.

Bartlett's... facts show that Bush missed the fundamental insight about supply-side economics, which is the importance of getting marginal rates down. As Bartlett notes, "Bush himself was responsible for watering down the supply-side elements."

Doubling the child credit, in particular, is the opposite of a supply-side policy. Bartlett writes, correctly, "the vast bulk of Bush's tax cuts in dollar terms involved rebates and tax credits that had no supply-side effects whatsoever."

This is a vital point, and good for Bartlett and Henderson for highlighting it.

Two of the three tax cuts signed in the G.W. Bush Era were not supply-side in that they were not long-term reductions of marginal tax rates on income or capital. The cuts of 2001 and 2008 were designed as short-term rebates to stimulate consumption, i.e. demand, by putting "more money in people's pockets."

In the supply-side view, such tax cuts are a waste of money as they cost Treasury billions and clutter the IRS code without reforming the tax system to incentivize new economic growth or investment.

Any how, only the 2003 tax cut was a true supply-side bill, thanks to the efforts of House Ways & Means Committee Chairman Bill Thomas, and the sluggish economy accelerated. Despite the tax bill's $650 billion price tag, the fiscal deficit fell from 2004-2007, and President Bush was re-elected.

While tax policy is vital to understanding the Bush era, both Bartlett and Henderson ignore the supply-side policy mix's other half, sound money, which was notably absent.

From 2001-08, the dollar fell against other major currencies:



And gold rose four times, from $250 to $1000:



In hindsight, it is obvious U.S. monetary authorities in the GW Bush years pursued a weak dollar policy, a Keynesian idea intended to promote exports. Such currency manipulation is fundamentally at odds with the supply-side principles of fixed exchange rates among world currencies and a stable gold price.

As Nobel Laureate Robert Mundell has explained, trade deficits in an open global economy balance when a current account deficit's flipside is a capital account surplus, as has been the case for America for most of its history. By definition, in an open-economy model, all trade balances.

Today, it is clear that the weak dollar dollar policy was the great economic mistake under President Bush, as it pushed the housing boom into a bubble, raised oil prices to record levels, and damaged trade partners. Mundell believes the dollar's instability was the primary culprit in the 2008 financial crisis and resulting recession. He argues Europe's current economic problems are a direct result of the dollar's instability too.

It should be clear then, that the G.W. Bush years were not a period of supply-side policy, especially for monetary policy. If anything, the era confirms the danger of deviating from the supply-side formula.

(Note: John Tamny has made many of these arguments previously. As have Bret Swanson and David Malpass.)