Tuesday, May 29, 2007

The Gold Standard

Ron Paul is getting a lot of attention since he's the only Republican presidential candidate who is for ending the war in Iraq. After hearing him in the first Republican debate, I decided to do some checkin up on Ron Paul. While I agree with him on leaving Iraq, turns out he's got some nutty positions. Paul is a strong advocate of returning to the gold standard.

That anyone wanted to return to the gold standard was a shock to me much less a member of political establishment who is taken seriously. For those who don't know, the gold standard requires backing the currency with a fixed amount of gold. Prior to 1971, it was $35 an ounce. The gold standard has the major problem that money supply is no longer on the control of the government but rather subject to how much gold is mined and then turned over to the government in exchange for dollars. A gold standard almost implies fixed foreign exchange rates since if the gold to dollar exchange rate is too low, those who poses gold will sell their gold for British Pounds, Euros, Japanese Yen or whatever currency can be traded for more dollars than the official gold rate.

To fix this problem requires either re-valuations which would be most devaluations or restricting covertablity. That gold was officially $35/ounce in 1971 and is over $650/ounce today tells you something about the devaluations that would have had to occur to stay on the gold standard. Some would argue that inflation is the problem but go look up the GDP deflator and for 1971-2007 and it's anywhere near 20x.

Since the early 1980's the federal reserve system has done as stellar job manging the money supply. Returning to gold would destroy the ability of the fed to manage the money supply. There's a strong arguement advanced by Milton Friedman that insufficient liquidity due to the money supply delflation from people taking their cash out of banks was what made the great depression so severe.

The link above links to a speech of Ron Paul where he goes on to say that the free floating dollar is essentially backed by oil rather gold because oil is priced in dollars and preserving this link is part of the movitivation for the Iraq war. His position is without merit. Yes, the US is running massive trade deficits but borrowing, mostly from foreigners, $2 billion a week to pay for war is not going to improve the dollar's position as a reserve currency. It is possible that by foreign central banks to splitting their official reserve assets between the dollar and euro will hamper the US's ability to continue to run such large balance of payments deficits. Switching to gold is not the answer since it would abruptly force the trade decifit down leading to economic havoc here and abroad. Gold would flow rapidly out of the country since the dollars leaving today would become gold. The money supply would shrink and ugly deflatiohn would result. If you have any debt, including a mortage, you are not going to like deflation.

While I'm happy that Paul is bringing attention to ending the war, if our media was competitent, the issue of Paul's support the anachoristic gold standard should have been brought forward and it has not been.

A War Without End?

With Congressional Democrats apparently capitulating to Bush over the war funding bill, there appears to be no end in sight to the Iraq war occupation. Unless Bush decides to start drawing down next year, I don't see how Bush's "win" today doesn't hand the White House to the Democrats in 2008. It's going to be next to impossible for any Republican to win in 2008 with 100,000 or more troops still on the ground considering all their candidates with the exception of Ron Paul have delcared their unconditional support of the war.

Perhaps the Republican politcos will twist Bush's arm into a temporary reduction in troop levels before the election. Bush could then declare "Mission Accomplished" a second time but I doubt this trick will work. If the Republicans do pull a rabbit of a hat, the war won't end until 2012 at least.

Thursday, May 24, 2007

The real reason tech companies don't the like immigration bill

The H1-B system is boon to tech companies. It's the modern indentured servitude since if H1-B holders quit their jobs and they get deported. Oracle and its bethren are whining about the proposed point system claiming it won't get them the workers they need but their real objection is that they won't get captive workers.

There's an easy and economically sound way to test the hypothesis that H1-B's have extra value because they chain workers to their jobs: auction all the H1-Bs. A treasure-style modified dutch auction would not only raise government revenue but also give us the true value of this visas to employers. If such a plan were proposed I suspect US industry would whine even more than European celluar providers did over the spectrum auctions. Business doesn't really want government to run like a business since they would start having to pay market price for all the favors government now provides them.

Press Conference Wakeup

Woke up to Bush's press conference this morning. I hate press conference mornings since my alarm is just turning on NPR and I'm half wake listening that fool Bush talking. I'm probably on about equal intellectual footing with Bush for the first 5 minutes as I wake up.

My summary is of the press conference is Bush claimed "Do what I say about Iraq or you and your children are going to die" Specifically talking about the reporters childern dying at the hands of terrorists was in particularly poor taste. All Bush has left is some ludicrious claim that pulling out of Iraq in going to lead deaths here. Unfortunately no one asks him why he assumes Al Queda is like a moth to the flame of Iraq and it couldn't both launch attacks in Iraq and here simultaneously. Or better yet reporters ought to ask Bush why he has so little confidence in his own "Home Security" measures that he believe the US can't stop terrorist plots here. Guess the TSA taking away my water bottle really hasn't made anyone safer.