CHAOS-ONOMICS: Strangely Attracted to the Truth
Apr 28
chaos-onomics.com
I don't want Europe setting itself up in opposition to America . . . I think it will be dangerous and destabilising...you end up reawakening some of the problems that we had in the cold war with countries playing different centres of power off each other.
UK PM Blair
When I was a boy my mother used to facetiously warn me, after catching me make a face at someone, that I had better be careful, my face might get stuck that way. I sometimes wonder, when reading the public pronouncements of the "powers that be", if they worry that their mendacity might become equally "sticking" or if they are simply ignorant of the world. Consider the opening quote from PM Tony Blair taken from a story detailing his discussion with French President, Chirac. Does he really expect people to believe that nations don't play countries off against each other? Isn't Iraq supposed to be an example for the rest of the world? Isn't that an example of a few countries playing Iraq against other segments of the Islamic World? Or perhaps he is simply giving the double standard party line, we, the "good guys" can play countries off against each other because we are righteous while you, the bad guys, cannot.
The double standard seems to show up quite often of late. Ever since Nixon defaulted on US externally held debt in 1971, default being that event when the debtor nation refuses to honor their specific obligations such as payment in Gold, the US government has often engaged in financial double standards. While the Asian crisis was raging, the IMF and World Bank, led by the US, strongly urged the "crisis" nations to balance their fiscal budgets and shift their external accounts to surplus, which, by and large, they did.
Meanwhile, when faced with a similar crisis in the US, the IMF and World Bank focus on the recuperative powers of easy money.
The graph of the combined states' budget balances, above, depicts the outcome of yet another double standard, that which exists between the states and the federal government. As most US residents are likely aware, the states and the feds base their income tax calculations on the same data. The press is filled with tales of the fiscal woes of the states including one story of every third light bulb in Missouri state offices being unscrewed, to save money. The feds, though, have no such worries as they can simply print more when they need, albeit after going through the necessary rituals to appease the gods.
This economic double standard is evident elsewhere in international finance as the US$ vs. Euro debate makes clear. In a sense one could read Blair's argument with Chirac as economic rather than political, that is, focused on the issue of seignorage, not Iraq.
While Mr. Blair's Rodney King-type, "why can't we all just get along" speech might play well in the press it seems to me that there is a reason why we can't all "get along". The system isn't working as well as it did and the guys running the show refuse to change direction. Perhaps, just as Arthur Laffer famously argued about taxes, the costs of US seignorage are simply too high and even the banking sector might be better off cutting these costs. Of course, seignorage costs are not as transparent as taxes. Instead of a tax bill, fiat money issuance debases the money in people's pockets silently. Yet, it is still a cost, and one which weighs heavily on the global economy.
How do we reduce the seignorage costs? In my view, one can either shift to a hard money standard, or follow the path blazed by Paul Volcker and make the US$ behave more like Gold by raising rates to market clearing levels. Absent moves of this nature, I don't think the hoped for economic rebound will be materializing any time soon.
On a closing note, while the press coverage stresses the similarities of the two Argentinean Presidential candidates who will be progressing to a run-off, there are distinct differences. Carlos Menem is the choice of the IMF while Nestor Kirchner advocates defaulting on external debt and domestic wealth redistribution. A Kirchner win is yet another sign of the declining powers of the international financiers. |
