海角大神

With the campaign carnival stopping in Nevada this week for Saturday鈥檚 Republican caucus, the Las Vegas Sun鈥檚 J. Patrick Coolican takes Ron Paul to task for Paul鈥檚 call to end the Fed and return to gold. Coolican writes:

To start with, inflation is not a problem right now. The Fed has effectively controlled inflation since Paul Volcker, who was appointed by President Jimmy Carter, began to rein in inflation 30 years ago. (Most important, inflation rates have been stable and predictable, which allows for economic planning by firms and households.)

Let鈥檚 see, Tall Paul left the Fed in 1987. Using even the establishment鈥檚 numbers via 鈥淭he Inflation Calculator鈥� what cost a $1.00 in 1987 cost $1.89 in 2010. So the value of the dollar has been cut in half just since 1987 using the most conservative numbers. What鈥檚 stable and predictable about cutting the value of the dollar in half?

Coolican doesn鈥檛 understand what all the fuss is about concerning the tripling the Fed鈥檚 balance sheet (he writes that 鈥渢he Fed has tripled the money supply鈥� since 2008 which isn鈥檛 right M-2 is up 29%). He says prices have increased 1.5% per year. What鈥檚 the problem?

Even according to the government CPI increased 3% over the past 12 months. If one calculates CPI the old fashioned way as John Williams does on Shadowstats.com, price inflation is running at more than a 10% clip.

Coolican then enlists the services of UNR economist Elliott Parker, who says monetary matters were a mess before the steady hand of the Fed came to be in 1913. 鈥淚t鈥檚 an absurd argument because before the Fed prices were unstable in the short term, and long term there was a long period of deflation,鈥� says Parker.

Look at any historical long-term chart of the CPI and it鈥檚 a flat line until heading skyward starting in 1971. And what鈥檚 so bad about falling prices for a long period of time. That鈥檚 how we all become better off is when goods and services become more affordable through technological improvements.

The long depression Parker talks about (1870s to 1900) was actually a period of great prosperity. This period of the classical gold standard was marked by gently falling prices leading to increased productivity, raised living standards, and the first glimpses of globalization.

Jim Grant of Grant鈥檚 Interest Rate Observer writes, 鈥測ou can look far and wide without finding a decade so ebullient, prosperous and 鈥� in so many ways 鈥攕o modern as that of the 1880s.鈥�

While prices fell, the US economy prospered. Industry expanded; the railroads expanded; physical output, net national product, and real per capita income all roared ahead. For the decade from 1869 to 1879, the real national product grew 6.8% per year and real-product-per-capita growth was described by Murray Rothbard, in his History of Money and Banking in the United States: The Colonial Era to World War II as 鈥減henomenal鈥� at 4.5% per year.

And no there was no Fed back then to bail out Wall Street, so malinvestment was liquidated quickly and in turn the economy recovered quickly. So while Coolican says, 鈥淭he world would have collapsed without aggressive action by the Federal Reserve.鈥� The financial world needed to collapse and hasn鈥檛 been allowed to as the Fed continues to prop it up. Thus, the pain continues.

Coolican and Parker think falling prices create less incentive to produce. But they leave out the cost side. As costs fall through innovation, profit margins remain. All inflation does is hide inefficient producers. As for the worry of wages falling, it鈥檚 not the amount of your wages, but how much will your wages buy.

But the hundreds of years of evidence supporting gold money doesn鈥檛 convince Parker. He says, 鈥淏ut there is no evidence that getting rid of the Fed and replacing it with private banking along the lines of a gold standard would help the economy at all. None. In fact, the idea scares the hell out of me.鈥�

Another reminder of the quality economics training that students are receiving at our nation鈥檚 universities.