Although he occasionally notices stuff that other financial bloggers have missed, Karl Denninger apparently subscribes to the motto: “Speak loudly and carry a small stick.”
Here’s what Denninger has to say about it:
Ron Paul has told us time and time again that he’s for “sound money.” That is, money that doesn’t change in value. Monetary policy that abides the actual statements in The Federal Reserve Act of 1913 (which, incidentally, The Fed has wantonly violated ever since with their so-called “inflation target”, whether explicit or otherwise.)
In fact, Ron Paul has consistently railed against that very inflation in essentially every case where he’s had Bernanke in front of him in a committee.
So let’s think through Mr. Paul’s “creative” solution. Destroying the bonds The Fed holds while leaving the “excess reserves” that are on deposit, which The Fed creates with a push of a button to pay for those bonds, is in fact exactly identical to unbacked emission of currency.
That is, raw printing of money.
(Incidentally, that’s illegal under The Federal Reserve Act as well, but heh, who cares about the law, right?)
I have repeatedly and very publicly held that Mr. Paul has no clue what the hell he’s talking about when it comes to these matters. That gold-backed currency does nothing to address the problems we face, and the empirical evidence backs my position (panics and wild bouts of both inflation and deflation under a metallic monetary standard.) I further have charged repeatedly that Mr. Paul, despite multiple opportunities to grill Bernanke on the simple and easily-understood violation of the standard of stable prices in the Federal Reserve Act, has utterly failed to do so.
Now you know why: He doesn’t believe in stable prices and a stable and strong currency as he in fact is now suggesting intentional monetary inflation in an outrageous amount through this so-called “solution.” This is exactly the sort of crap FDR ran in the 1930s – in fact, it’s functionally identical to FDR’s “executive order” gold devaluation!
To those who have supported Mr. Paul all these years, you’ve now seen his true colors. Will you be man (or woman) enough to admit that he never actually understood what the hell he was screaming about, nor did he ever have an actual intent of restoring “sound money” to America?
Well, since you ask, no Mr. Denninger, I will be neither man nor woman enough to admit such a thing. In our book, Carlos Lara and I had a similar proposal (namely for the shareholders of the Fed to just eat the capital write-down of the Treasury debt on the Fed’s balance sheet). Maybe we were horribly mistaken, but we sincerely thought it was a decent component of a strategy to restore sound money.
Denninger seems to think that a proponent of the gold standard and sound money–of all people!–ought to understand that we need some assets backing up our dollar bills, otherwise the Fed would have just been printing money. But what does Denninger think happened, say, in World War I, when the belligerents went off gold? Didn’t their central banks buy a lot of debt issued by their governments, to fund the war effort?
Or in the fall of 2008, is Denninger saying that it would have been inflationary and anathema to Ron Paul’s stated ideals, if Bernanke just literally handed over $1 trillion to investment bankers…but it would be OK if Bernanke instead handed over $1 trillion, in exchange for mortgage-backed securities that the market valued at the time at (say) $300 billion?
As with a lot of these things, the way to evaluate a non-optimal policy suggestion is to stack it up against a specified alternative. Yes, Ron Paul’s recent idea would be “inflationary” if the alternative would be a government running huge budget surpluses, so that the Fed could retire its holdings and shrink the monetary base over the next few years.
But that’s not at all what the likely alternative is. Rather, they are going to raise the debt ceiling, and Bernanke is going to print up another few hundred billion dollars out of thin air to absorb some of the new debt issued.
No worries though–those dollars will be backed up by IOUs that taxpayers will be forced to honor. Phew! I would hate for prices to go up on their own, without me being taxed too.