A Solid Gold Fix for the National Debt
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The Fiscal Times
June 28, 2011

How does America, looking up from the bottom of a $14.3 trillion sinkhole, claw its way out of debt? For starters, says perennial Wall Street bear James Grant, go back to the gold standard.

In an interview with The Fiscal Times, the editor of investment newsletter Grant’s Interest Rate Observer, says: “No other reform would accomplish so much to hasten the return both of growth and fiscal balance. The reserve currency franchise, which America uniquely possesses, is a kind of global credit card on which the outstanding balance never seems to come due and payable. This country needs a debit card--and the gold standard is that debit card.”

Grant, author of a new biography, Mr. Speaker: The Life and Times of Thomas B. Reed, The Man Who Broke the Filibuster, says there are lessons to be learned from how Reed and Congress in the late 19th Century dealt with fiscal issues eerily similar to the ones we face today. In the 1870s and 1880s, with the Treasury depleted after the Civil War and a need to jumpstart the economy, many  lawmakers believed that printing paper money– more and more of it –was a quick fix to the government’s fiscal woes. Others wanted a return to the gold standard.

Grant would clearly have been aligned with the latter camp. He has never wavered from his belief that a reliance on easy money and credit will be the cause of our economy's ultimate demise.

“The names have changed but the circumstances have, to an uncanny degree, remained the same,” Grant says. “What Thomas Reed and his congressional colleagues dealt with is what they called the tariff and what we call globalization. They dealt with the silver question; what we call today monetary policy and inflation. They, too, dealt with a seemingly intractable fiscal issue. They called it the surplus. And we call it the deficit.”


The Fiscal Times (TFT): Where are we in the economic cycle? Is the worst yet to come and how bad will things get?

James Grant (JG): We’re past the recession – statistically. We are probably past the recovery. And we ought to be in the throes of a self-sustaining expansion. But it feels as if we’re in a dream and we’re trying to run, but our feet are stuck in the mud.  In times past, the worst of recessions would snap back with a recovery but this particular recovery, or non-recovery, is remarkable for its lack of oomph. It maybe speaks to the poverty of the policies that are being used to stimulate us out of our sorrows.

TFT: Will the federal government spend us into oblivion? What, in your mind, constitutes the point of no return?

JG: I don’t know if there’s an actual point of no return. But we are certainly coming up on the point of diminishing returns. The return for dollar of debt incurred seems to be small. I’m not sure about the economic contribution of the last $100 billion worth of debt we’ve incurred. Has it helped? I can’t put my finger on any beneficiaries.

TFT: What do you think of the Fed’s “quantitative easing” policy, buying Treasury securities to keep interest rates low?

JG: I think it’s ill-advised. What the Fed is doing creates dollars out of thin air. It buys securities with dollars that didn’t exist before it conjured them. That’s how a paper money system works. What’s new today is the sheer scale on which it operates.

TFT: To what extent is Wall Street to blame for the current situation?

JG: To be sure, Wall Street did not cover itself in glory in 2003, 4, 5, 6, and 7. There was widespread dereliction of duty, unpardonable ignorance, and outright rampant incompetence. The federal response to this has been what? It’s been to suppress the federal funds rate down to zero. To print vast sums of new dollars and to micromanage the banking system through Dodd- Frank. Each of these measures is rife with unintended consequences. I expect that the unintended consequences of zero rates and vast money-printing will be destabilizing and perhaps inflationary … and in any case will be dramatic.

TFT: So what do you think the government should be doing to address the country's economic predicament? Cut spending, raise taxes?

JG: Congress might begin by brushing up on the Constitution and recalling its duty to "coin money and regulate the value thereof." Specifically, it should take steps to restore a dollar convertible into gold.

TFT: Besides, perhaps, “Don’t say I didn’t warn you,” what would Reed have to say about America’s current economic predicament?

JG: Reed was the least nostalgic and backward-looking of the politicians of his day. He always believed that the best was yet to come. I think he would be first and foremost quite pleased with the sheer abundance of material well-being in this world of ours. It’s not universally distributed, but no one of that era could walk into a modern-day Wal-Mart or Target and not be bowled over by the cornucopia. He’d look at digital communication and find in it the validation of his huge and unchecked optimism. But with regard to America’s fiscal situation, it would take him a while to absorb the information. How we could run fiscal deficits of 11 percent a year–-how is that possible?

Reed was the Speaker of the House during the famous 51st Congress, in which the government of the United States authorized spending $1 billion. The Jeffersonian Democrats were just horrified– it seemed the gates of hell had opened in their midst. Reed would be pretty shocked not just at the arithmetic of our fiscal mess but maybe more so at the seemingly unchecked scope of government intervention and manipulation into American affairs. This Dodd-Frank bill in which the government is now going to micro-manage so many aspects of the financial business would have seemed odd to him. Reed would be dismayed at the scope of government intrusion into private dealings and the lives of individuals in this country.

Related Links:
How Will the Debt Limit Game of Chicken End (The Fiscal Times)
How the Fed Could set Off a New Recession (The Fiscal Times)
Dollar Value: New Low Threatens Long-Term Growth (The Fiscal Times)