Planet GOP

I noted yesterday that Mike Huckabee seemed to me to be the only Republican in touch with the mood of the country. I should have added Ron Paul to that list. Paul, to his credit, talks about the existence of problems in the economy and sells himself as a person who would implement policies to alleviate ordinary people's economic situation.

When I first heard anecdotal evidence and then saw some Iowa entrance poll data that indicated that some folks are backing Paul on economic grounds, I was a bit mystified. But as with Huckabee, it goes back to the vacuousness and weirdness of the mainstream campaigns. Paul gets up there onstage and suggests that fiat money is the cause of high oil prices because we're devaluing our currency. This is flat-out wrong and suggests a strange ignorance on the part of a monetary policy obsessive (to make a long story short, there's a reason we distinguish between "real" and "nominal" prices and the "real" ones are the real ones that matter; meanwhile, international oil transactions are conducted in dollars anyway). But for that matter, he also thinks the gold standard would reign in health care inflation.

It's all hollow and absurd, even more so than Huckabee's populist case for a 30 percent national retail sales tax that he'll pretend is only a 23 percent tax. But the point is that both Paul and Huckabee try to connect to people feeling economic pain while Rudy McRomney seem to be living on a weird planet where none of these problems exist. Certainly, they don't deign to try to expose Paul and Huckabee as selling snake oil and propose something more constructive; they're just ignoring it.

Comments

I'm a Brit, and although I know what GOP stands for, I say it out loud and it still sounds like a Doctor Who villain ('the Gop').

Posted by Ovid | January 6, 2008 12:41 PM

Add.: I'm assuming that's not how it's actually pronounced...

Posted by Ovid | January 6, 2008 12:50 PM

From the department of unintentionally semihumorous mispellings, I believe it's "rein in," as in horses, not "reign in," as Queen Elizabeth used to do in various parts of the world.

Posted by Gene O'Grady | January 6, 2008 1:00 PM

It's amazing how far Republican politics has gone towards assessing the "character" of individual people (both candidates and voters) rather than using electoral politics to bring about policies.

I think the root cause is the state of professional prognostication on the other side, namely that Jonah Goldberg, Peggy Noonan, Rush Limbaugh, and the like cast themselves with the candidates rather than with the voters, seeing their role as convincing the masses to stick with the currently-powerful. Thus, they end up as part of the move to obscure the fact that Republican candidates, like all politicians, are power-hungry selfish bastards who choose one or another strategy to gain power.

Whereas the prognosticators ought to be around to help the voters ascertain the candidate whose chosen path to power happens to coincide with the voters' best interests, the right-wing crew acts alternatively as part of the GOP's captive apparatus. For that reason, you get phenomena like the Bush 2004 campaign not having a policy section of its website or, for that matter, a substantive platform of any kind. Those things are just not a part of the Republican playbook any more because the only goal of the strategy is sustaining the powerful for the sake of power.

Adding, we Democrats have the same problem with our prognosticators, but it sooner led to us not trusting them any more.

Posted by Marshall | January 6, 2008 1:04 PM

Gee -- Oh -- Pee.

Posted by Kelly Coyle | January 6, 2008 1:05 PM

Fat lot of good it will do either of them, until they start showing signs of actually winning the Republican nomination. A bit too early to call for Huckabee. Tapping into the mood of "real people," this year, tends to connote the anti-war, "middle class" centrist liberal/independent majority, not GOP primary voters. How many corn-fed Iowa evangelicals are there in the other early states, is the question.

Posted by Bill | January 6, 2008 1:06 PM

From the department of unintentionally semihumorous mispellings,

(sic)

Posted by Bill | January 6, 2008 1:08 PM

although I know what GOP stands for, I say it out loud and it still sounds like a Doctor Who villain ('the Gop')

The present-day Republican party is behaviorally very similar to a Doctor Who villain, so this is not completely incorrect.

Also, I just want to say that in my experience (15 years), Apple computer mice do tend to fail a lot. I realize that the thread discussing this was a couple days ago, but I figured I'd post it here where more people would notice.

Posted by James Gary | January 6, 2008 1:10 PM

For that reason, you get phenomena like the Bush 2004 campaign not having a policy section of its website

Marshall is right. Movement conservatism has all the intellectual content of being a fan of, say, the Milwaukee Brewers, whose website also does not have a policy section, and for the same reason.

It's the twenty-first century. Throw away your Edmund Burke and get a big foam "We're #1" finger.

Posted by Davis X. Machina | January 6, 2008 1:16 PM

"international oil transactions are conducted in dollars anyway"

Megan McArdle made the same argument, and I described it as vapid then - so let me try to explain why this is so wrong.

Let's say you're a Middle Eastern oil baron. You might conduct your transaction in dollars, but you know dollars are worth less because of currency exchanges. Don't you, ya know, ask for MORE of them for your oil then?

The idea that what currency the transaction is done in can eliminate the cost of currency devaluation is nonsense. Pure nonsense. Otherwise we could reduce the real value of oil to near-zero by printing large amounts of currency and handing it out.

And the real vs nominal thing matters to, because wages are often tied to nominal value, not real value. Correcting wages to real value tends to lag far longer than other market impefectections.

Posted by Justin | January 6, 2008 1:19 PM

When was the last time you've seen the National Review-type establishment Republicans go after one of their partisans like they've gone after Huckabee and Paul? In terms of departures from orthodoxy, he's far closer to the party line than Schwarzenegger or Susan Collins.

I think Lowry et. al. are going after Paul and Huckabee because their success is proof most of the party isn't buying the three-decade-old Laffer Curve hokum anymore. Standing athwart history, etc...

Posted by rj3 | January 6, 2008 1:42 PM

I think Lowry et. al. are going after Paul and Huckabee because their success is proof most of the party isn't buying the three-decade-old Laffer Curve hokum anymore. Standing athwart history, etc...

Actually, I'd say it's much simpler than that. In different ways, neither Paul nor Huckabee are neocons, though both are clearly conservatives, and very close to the central strains of the Republican rank-and-file.

Since National Review was taken over by the neocons some years ago and subsequently purged of all dissenters, they're not happy about this...

It's roughly analogous to how the powerful neocon elements within the Democratic party (as exemplified by TNR) reacted to the rise of Howard Dean

Posted by RKU | January 6, 2008 1:59 PM

Justin:

Yes, oil prices are going up. But oil prices are going up against every currency, not just dollars. Oil prices are going up against Euros, Pounds, Yen, and everything else.

The issue isn't that the supply of currency is going up. It is that the supply of oil is stagnant and is likely to go down in the future, and the demand for oil is going way up.

The dollar loses a small percentage of its purchasing power every year, just like every other currency. In return for that, we get the ability, through the federal reserve, to manage the money supply without significant political experience, smoothing out the business cycle and avoiding recessions. We also get the ability to bail out the banking system and prevent runs. And we get a money supply that is able to expand as the economy expands, thereby avoiding deflation and stagnation. And we get a money supply that is able to stimulate economic growth through the lending system. And finally, we get a money supply that won't be thrown into crisis if new supplies of whatever metal it is based on are found.

It's an excellent trade-off. Ron Paul's monetary policies are a classic example of an attempt to fix something that works fine.

Posted by Dilan Esper | January 6, 2008 2:14 PM

I agree with Justin, and I am not a Paul partisan. If you issue more and more dollars, have low interest rates, run a large budget deficit and current account deficit, you put a lot more dollars into the world economy. That huge volume of dollars chases a more static stock of real goods causing a higher dollar price on commodities and real assets. You essentially get pockets of inflation for items subject to global trade, a run up in the dollar prices of certain items that does not necessarily reflect a growing real value but instead the need to exchange increasingly larger amounts of debased currency to obtain the same value.

This is also part of what happened domestically in housing where a huge amount of dollars were made available for the particular purpose of purchasing homes.

With the huge current account deficit and foreign governments now holding trillions of dollars, we see a run up in the dollar price of global commodities.

Paul may be wrong about many things, but he is not "flat out" wrong that the price of oil has something to do with the how the dollar has been debased.

Posted by Doug | January 6, 2008 2:15 PM

>...meanwhile, international oil transactions are conducted in dollars anyway...

This is flat-out wrong and suggests a strange ignorance. The US has militarily threatened every country that ever wanted payment in non-dollars: Iraq, Iran, and Venezuela come to mind quickly. See "Iranian Bourse" for more info.

When all international oil purchases in dollars, dollars are in demand. The US inflated the dollar at will, then expected the rest of the world to back our fiat currency through the medium of oil purchase. It was a rigged game and the US economy got fat and stupid while playing it.

With a relatively strong Euro, the game has changed, and we directly wage war with the oil producers because they have the good business sense to demand payment in a robust currency.

Posted by salvarsan | January 6, 2008 2:27 PM

But for that matter, he also thinks the gold standard would reign in health care inflation.

If I'm not mistaken, Paul thinks ending the income tax will reign in Health Care inflation (for once Gold doesn't have anything to do with it).

The rest of this is basically correct. Paul (and to a far, far lesser extent Huckabee) are correctly diagnosing and addressing very real problems the others are sadly silent about. Unfortunately, some of Paul's solutions exist against evidence.

Since National Review was taken over by the neocons some years ago and subsequently purged of all dissenters, they're not happy about this...

The British conservatives (Derbyshire, Stuttaford) at the National Review have begun to dissent. It'll be interesting to see if this is, indeed, the case.

Posted by Shinyk | January 6, 2008 2:28 PM

There is a middle ground between the monetary obsessive, fiat money-fractional reserve bank hating gold bugs and the conventional wisdom on the workings of the financial system.

Inflation is always a monetary phenomenon. For the most part the inflation of the last two decades has been predominately centered on the inflation in price of financial assets. ie stocks, bonds and their derivatives. (The increase in prices of financial assets is always presented as an increase in 'value'. From the day Greenspan took over till the day he left the S&P rose at a 9.7% annual rate. During the same period M3 rose at a 9.7% rate. The exactness is coincidence. The linkage is without dispute)

The inflation of these prices was a policy decision made by Greenspans Fed with the full backing of the entire political elite. We are now seeing the deflation of these values and the systematic wreckage will show how misguided and corrupt the system was and it will seriously and permanently weaken Americas relative strength.

The financial world intersected with Main Street with the mortgage and real estate mania. A mania which was brought on deliberately by the financial and political elites as the last gasp of keeping the liquidity spigots wide open.

Paul makes the mistake of wanting to throw out the baby with the bathwater. Proper regulation and rational policies are what is necessary to keep the monetary and financial systems as healthy as possible. Of course no system is perfect or perfectable. His perscriptions, like eliminating the Fed are impossible as they are silly. Still, severe criticism of the workings of the Fed and the financial systems must be brought forward.

It is a terrible shame that progressives often hold an ignorance of monetary and financial matters as a badge of honor. Thus ceding these worlds to players themselves and the politicians they pay.

Posted by rapier | January 6, 2008 2:30 PM

Well,

The biggest problem with the policies of the current Republican party is that the policies, if actually laid out in any coherent manner, would cause their “Huckabee” Republican base to reconsider. So, since Reagan, the entire conservative movement has been more about the cult of personality.

But lets face it, if there were one base from which hero worship makes sense from a pure political/tactical point-of-view, the Christian Right would be such a base. They are a group that craves the strong father-figure/leader anyways, and typically take the “have faith” approach to politics/religious leaders. So these people are easily persuaded by the “he’s a guy just like us” form of politics.

Posted by Brad | January 6, 2008 2:39 PM

Rapier:

The reason the political elite went along with this “financial asset inflation” situation, was because they needed a way to put make-up all over the free-trade policies which were undermining our economy. The only way to cover for the decline in economic activity from productive, income producing assets (i.e. – manufacturing plants etc…) was to add stimulus in the form of asset appreciation in non-productive assets (i.e. – residential real estate, bonds, stocks).

We now have run out of make-up, and are left, realizing we have no more core wealth generating assets/activities in this country on a level that can continue to support our standard of living. We folks – we sold out.

Posted by Brad | January 6, 2008 2:46 PM

they needed a way to put make-up all over the free-trade policies which were undermining our economy

Don't know if this applies to you, but

How does the self-described "Krugman wing" of the Democratic party square a free-trade-as-devil belief with the fact that Krugman's a free-trader?

Posted by Shinyk | January 6, 2008 3:42 PM

Actually Paul gave equal, if not more, weight to Bush's foreign policy ("threatening Iran", Iraq invasion) as being responsible for the spike in Oil prices. Hard to argue with that point.

Posted by Sam | January 6, 2008 3:49 PM

Dilan Esper,

All the world currencies are fiat currencies and would not be expected to serve as a store of value over time, but could do better than the dollar in the short run due to greater mismanagement of the dollar. Click my name or the following link for an interesting chart showing the price of oil from 2004 to 2007 in world currencies and gold. As Paul would have predicted. The price in gold is the most stable, however supply demand dynamics have raised the price even in terms of gold.

http://picodopetroleo.net/temp/CurrencyJuly07/CurrenciesVsBrent_July.png

Posted by Doug | January 6, 2008 4:00 PM

Maybe the other candidates didn't criticise the Paulabee (or "Huck'paul", so we've a choice between an Australian critter or a Klingon rite) proposals because they're planning to use variants of them themselves later on. This is especially easy if the campaign is (as many here would seem to believe) about personalities rather than policies: each candidate believes his persona is the one the party will approve, and the policies can be adjusted as needed to bring along the most supporters of other candidates.

Remember that it was a little embarassing for Geo. H.W. Bush to endorse Reaganoid policies he'd called "voodoo economics" during the nominating campaign.

Posted by Dabney Braggart | January 6, 2008 4:03 PM

Re: The issue isn't that the supply of currency is going up.

The prolem isa really that some big financial Powers That Be, including our Wall Street banks, have discovered that oil too can be a speculative asset, and so we have a bubble in oil just as we did in housing until recently. Abetting this bubble is the US government flailing around in the Middle East like a bull in a china shop. If we could magically end the tensions in the Middle East (or at least reduce them to the levels of a decade ago) the oil bubble would burst and the price of oil might sink back to around $50 or even lower.

Posted by JonF | January 6, 2008 4:51 PM

Last I heard, all the major OPEC countries (Saudi Arabia aside) were thinking of switching transactions to the EURO. Saddam went ahead with it, and was deposed. A de-linking of oil and US$ would obviously create an entire set of new problems, but you can only band-aid the bleeding for so long.

Posted by Harrison | January 6, 2008 6:11 PM

I agree with Justin, and I am not a Paul partisan. If you issue more and more dollars, have low interest rates, run a large budget deficit and current account deficit, you put a lot more dollars into the world economy. That huge volume of dollars chases a more static stock of real goods causing a higher dollar price on commodities and real assets. You essentially get pockets of inflation for items subject to global trade, a run up in the dollar prices of certain items that does not necessarily reflect a growing real value but instead the need to exchange increasingly larger amounts of debased currency to obtain the same value.

This isn't borne out emperically. Most goods subject to international trade are plentiful and cheap. Oil is an exception, and that is due to supply and demand issues relating to oil (we are peaking in supply and demand from China and India is soaring). It has little to do with the expansioin of the money supply.

The reason the political elite went along with this “financial asset inflation” situation, was because they needed a way to put make-up all over the free-trade policies which were undermining our economy. The only way to cover for the decline in economic activity from productive, income producing assets (i.e. – manufacturing plants etc…) was to add stimulus in the form of asset appreciation in non-productive assets (i.e. – residential real estate, bonds, stocks).

That's not true. We live in a global economy, and the manufacturing sector, globally, is doing fine. Meanwhile, first world countries have comparative advantages in delivering services and the knowledge economy. That is an inevitable result of the increased interconnectedness of the world.

Again, the money supply has nothing to do with any of it.

All the world currencies are fiat currencies and would not be expected to serve as a store of value over time, but could do better than the dollar in the short run due to greater mismanagement of the dollar. Click my name or the following link for an interesting chart showing the price of oil from 2004 to 2007 in world currencies and gold. As Paul would have predicted. The price in gold is the most stable, however supply demand dynamics have raised the price even in terms of gold.

But that proves my point. If oil goes up even against gold, it is the scarcity of oil in relation to demand that is causing the price spikes, not our monetary policy.

In any event, there's more to life than stable prices. The federal reserve system and its management of fiat currency keeps inflation very low, but also allows us to achieve a countercyclical monetary policy to fight recessions, and provides the other benefits I noted above.

There's no problem, and therefore no reason to change the system.

One other thing: high oil prices are actually a very good thing. We have needed a big gas tax for years, to fight global warming and decrease consumption. People are shifting from SUV's to hybrids. It isn't causing systemwide inflation. There's nothing wrong here.

Posted by Dilan Esper | January 6, 2008 6:20 PM

"This isn't borne out emperically. Most goods subject to international trade are plentiful and cheap. Oil is an exception, and that is due to supply and demand issues relating to oil (we are peaking in supply and demand from China and India is soaring). It has little to do with the expansioin of the money supply"

We are actually experiencing great price appreciation for a whole range of commodities, soybeans, corn, oil, gold, prime real estate, iron, silver, nickle. Goods manufactured in China are priced low by design and through willingly swallowing up and hoarding the dollars.

But that proves my point. If oil goes up even against gold, it is the scarcity of oil in relation to demand that is causing the price spikes, not our monetary policy.

It doesn't prove your point because no one claimed supply and demand had no impact at all. If the dollar were backed by gold the price of oil would be well below $100 a barrel. That is Paul's point and it is true, not flat out wrong. This is not to say there really is any path back to the gold standard or even that it is a good idea, but it is clear that the federal reserve, whatever its merits also will inflate the currency and erode its value over time, sometimes faster and sometimes slower but always eroding its purchasing power.

Posted by doug | January 6, 2008 7:12 PM

Dilan and Doug are right on.

Also, because oil is priced in dollars, the Sheiks need to push the price per barrel higher in order to maintain their lifestyles. If what oil producers could buy for $5 yesterday costs $10 today, they will try to raise the price of oil to recover their purchasing power.

By lowering interest rates and creating dollars out of thin air, the Federal Reserve is ensuring Americans have to pay more for their oil than strict supply and demand would dictate.

Posted by Murraymises | January 6, 2008 7:21 PM

"Paul gets up there onstage and suggests that fiat money is the cause of high oil prices because we're devaluing our currency. This is flat-out wrong and suggests a strange ignorance on the part of a monetary policy obsessive (to make a long story short, there's a reason we distinguish between "real" and "nominal" prices and the "real" ones are the real ones that matter; meanwhile, international oil transactions are conducted in dollars anyway)."

Well, I will agree that fiat money has little to do with the price of oil... but you should do more research on Dr. Paul, as he may have not been as clear as he usually is on this subject.

There is no doubt and tons of evidence (Allen Greenspan's book, "The Age of Turbulence" is an excellent book showing that evidence) that the fiat money system is causing higher than normal inflation as well as devaluation of the dollar. So Dr. Paul is at least not that far off target.

Unfortunately, I have heard NONE of the other candidates even mention this gorilla in the China shop. Maybe that's why Dr. Paul has such a strong following.

Just something to consider.

Posted by Brian | January 6, 2008 7:57 PM

It doesn't prove your point because no one claimed supply and demand had no impact at all. If the dollar were backed by gold the price of oil would be well below $100 a barrel.

Maybe, but only because that same dollar would be much harder to earn. That's not a worthwhile tradeoff.

We are actually experiencing great price appreciation for a whole range of commodities, soybeans, corn, oil, gold, prime real estate, iron, silver, nickle. Goods manufactured in China are priced low by design and through willingly swallowing up and hoarding the dollars.

The first part is temporary. The second part is wrong.

We are clearly in a period of economic anxiety, so precious metal prices and prices of some commodities are rising because of it. But they stayed stagnant for over two decades before that. The last gold boom was in the late 1970's.

So it really isn't relevant that prices rise in the short term, because they are likely to fall back down.

As for China, China's labor and manufacturing costs are lower. They are not selling at a loss-- they are selling at a profit. As I said, this is to be expected as a result of globalization. China is one of the lowest cost manufacturers. Our output is in the knowledge economy. Nothing particularly revolutionary about any of that.

This is not to say there really is any path back to the gold standard or even that it is a good idea, but it is clear that the federal reserve, whatever its merits also will inflate the currency and erode its value over time

True, but a little inflation isn't a bad thing. The truth is, the Fed does a great job of controlling inflation and softening recessions. And that small amount of inflation purchases sustained economic growth over time. It's good for everyone.

There is no doubt and tons of evidence (Allen Greenspan's book, "The Age of Turbulence" is an excellent book showing that evidence) that the fiat money system is causing higher than normal inflation as well as devaluation of the dollar.

Higher than normal inflation? Inflation has been a nonissue since the early 1980's. Its a few percentage points a year. Nothing big. And our prosperity more than keeps up with it, which is why laptop computers now cost about 1/100 an average middle class family's income.

Devaluation of the dollar? So what! That means we can sell more exports and get more money from tourism. Again, if the currency was crashing down, that would be one thing, but a mild devaluation is not important at all. And the Fed does a great job at softening economic shocks, so we are less likely to ever get a serious devaluation.

Posted by Dilan Esper | January 6, 2008 8:26 PM

I think it is difficult to honestly deny that our monetary policy is the cause of some of the increase in the price of oil. After all, our dollar has fallen in relation to other world currencies (it's worth less than the Canadian dollar, for crying out loud). To deny that this has had some effect is ridiculous.

Maybe, but only because that same dollar would be much harder to earn. That's not a worthwhile tradeoff.

Not necessarily. You are assuming that inflation brings up all prices evenly. If there is 20% overall inflation over 5 years, perhaps wages go up 10% and the profits of hedge fund managers go up 40%, while the price of homes go up 50% and the price of corn goes up 5%.

Not to mention the people who get rich off of currency exchange, which is primarily a parasitic job created by free-floating fiat currencies.

Posted by Glaivester | January 6, 2008 9:02 PM

Not necessarily. You are assuming that inflation brings up all prices evenly. If there is 20% overall inflation over 5 years, perhaps wages go up 10% and the profits of hedge fund managers go up 40%, while the price of homes go up 50% and the price of corn goes up 5%.

You are missing my point. It isn't simply that wages won't go up because prices aren't going up. It is also that constricting the money supply reduces economic growth by reducing the amount of capital available for investment. So what you are likely to see is prices staying level or going down a little but the purchasing power of the average American to go down A LOT because not only is currency more scarce but also because investment is depressed, reducing real GDP.

Not to mention the people who get rich off of currency exchange, which is primarily a parasitic job created by free-floating fiat currencies.

It isn't a particularly large percentage of the economy. Again, if there were evidence of a real problem with this, i.e., significant portions of the economy devoted to currency speculation, I would worry, but there's no evidence of it now.

Again, there's no structural problem with the current monetary system, and therefore no reason to change it.

Posted by Dilan Esper | January 6, 2008 9:41 PM

"That's not true. We live in a global economy, and the manufacturing sector, globally, is doing fine. Meanwhile, first world countries have comparative advantages in delivering services and the knowledge economy. That is an inevitable result of the increased interconnectedness of the world." - Dilan Esper

Dilan: the problem with this is that very few in the first world benefit from this trade-off. Hence the stagnation of wages in this country. Secondly, if you think that comparative advantage in the knowledge/service based economy is going to last, you sir are a fool.

Posted by Brad | January 6, 2008 9:43 PM

"In return for that, we get the ability, through the federal reserve, to manage the money supply without significant political experience, smoothing out the business cycle and avoiding recessions."

Yeah, that's worked really well so far - NOT.

Anybody who believes that printing money is a good idea is an idiot with zero knowledge of the fundamentals of human behavior and economics.

The problem for people now is that generations of distorted economies are simply unfixable without massive pain and dislocation.

So, yes, if we went back on the gold standard, the world economies would collapse. Whole industries that are unnecessary and exist only because of inflated money would go out of business. It would end up being the best thing because they're going to collapse some day anyway. Whether that collapse would be worse than switching to the gold standard is debatable.

In any event, within fifty years or so, technological progress will start to eliminate the notion of "economics" anyway. By the end of the century, certainly, the existence of general nanotech assemblers and AI will eliminate the notion of "scarcity" and the requirement to trade to secure resources.

The other problem is the state. There was a study done many years ago that if all state and Federal taxes and regulatory expenses were removed, the cost of most products and services would be ten percent of what they are now.

Of course, nanotech will eliminate the state as well.

The bottom line: humans can't survive indefinitely because they can't organize functional societies above a certain level, unlike ants and lower animals. So sooner or later, they're going to either drop to a lower level of standard of living - or they're going to go away.

We Transhumans are going to see to it that the latter happens before the former.

Posted by Richard Steven Hack | January 6, 2008 10:03 PM

You are missing my point. It isn't simply that wages won't go up because prices aren't going up. It is also that constricting the money supply reduces economic growth by reducing the amount of capital available for investment.

No, it doesn't. Money is not capital. When you increase the money supply, all you do is encourage people to eat their savings. They invest in more unsustainable models because they think that more capital exists than actually does, and then they lose that investment when the business can no longer sustain itself.

How do you think that tech stocks in the late 90s kept going up even when they were losing money? Because the easy money policy of the Fed allowed people to kept throwing more money at them long after it became clear that the companies were doomed. Clear, that is, to anyone with some common sense. Most pundits and economists simply insisted that making a profit was no longer important and decided that people couldn't possibly be throwing their money down a Ponzi scheme rathole, so obviously the idea that a business cannot lose money indefinitely must somehow have some weird undiscovered exception.

And then the whole system collapsed.

Matt Yglesias, based on his criticisms of Robert Samuelson, apparently thinks that if the Fed had just plowed more money in, the tech boom would have lasted indefinitely.

Posted by Glaivester | January 6, 2008 11:43 PM

Matt,

A weaker dollar pushes up the price of oil, because oil suddenly becomes cheaper for buyers with non-dollar reserves.

So in that sense, Paul is right: the us governments de-facto weak dollar policy has boosted the price of oil. What that has to do with the gold standard or paul's other crazy obsessions, i have no idea.

Posted by matt d | January 7, 2008 6:56 AM

Anybody who believes that printing money is a good idea is an idiot with zero knowledge of the fundamentals of human behavior and economics.

Richard, I know quite a lot about economics. Specifically, I know a fair amount about how the Federal Reserve actually works. And I am not an idiot.

No, it doesn't. Money is not capital. When you increase the money supply, all you do is encourage people to eat their savings. They invest in more unsustainable models because they think that more capital exists than actually does, and then they lose that investment when the business can no longer sustain itself.

How do you think that tech stocks in the late 90s kept going up even when they were losing money? Because the easy money policy of the Fed allowed people to kept throwing more money at them long after it became clear that the companies were doomed.

That view is ahistorical. The speculative boom-and-bust cycle is something that dates back as least as far as the Dutch Tulip craze centuries ago. It has nothing to do with fiat currency and everything to do with human nature.

As for the effect of money supply on the economy, we have decades of experience and hundreds of macroeconomic models that refute your position. I won't go into a long discourse on this-- you should consult a college textbook on money and banking for that-- but essentially, a gradually expanding money supply does two big things: (1) it encourages investment, because money that is simply hoarded loses some value over time; and (2) it increases the funds available for lending by banks, which ensures that new and existing businesses have available capital to finance their investment and operations.

I know there are theories as to why the money supply SHOULDN'T have this effect, i.e., claims that since fiat money is divorced from any intrinsic value, it doesn't matter whether there is more of it or less of it, but in the real world, the merits of a gradually expanding money supply have been proven time and time again and are reflected in economic models.

And by the way-- those of you who are arguing against the use of monetary policy to counteract recessions and inflation should note this. Yes, there was a dot com bust in the 1990's, and there is a housing bust now. But note. Is the economy truly threatened? Is there any risk of a 1930's style depression? Isn't it quite likely that we may hit a small bump and then go on as we have been for the last 27 years?

Again, this is all about fixing something that is working fine. I would be open to other approaches if there were evidence that it wasn't, but in fact, we have unprecedented stability in our economy. We have never had 27 years like the last 27 years in human history in terms of the long boom cycles and soft dips. There is nothing wrong with the system.

Posted by Dilan Esper | January 8, 2008 12:28 PM