Money Supply

I cannot pretend to have much more than a weak grasp on the economy with a big "E" but I thought that this article deserved calling attention to. Having said that, I am open to being wrong about the applicability or value of this article.

Monetarism. Ronald Reagan was elected in 1980 on a platform of tax cuts, deregulation and a return to stable money. Though he never achieved his goal of a dollar redefined in terms of gold, Reagan’s stated policy of stable, non-inflationary money led to a collapse in the price of gold before and after his election. Then followed a turnaround from accelerating to decelerating inflation.

This is notable considering commentary from the late Milton Friedman, the father of modern monetarism, in 1983 and 1984. A believer that M1 (currency in circulation and money in checking accounts) told the tale of inflation and economic growth, Friedman pointed to 27 percent annual M1 growth in 1983, and predicted an inflationary outbreak. And then, analyzing a slowdown in M1 growth later in the year, he predicted that a recession would reveal itself around the 1984 presidential elections.

Even though the U.S. economy had begun a bull run in late 1982 that coincided with increasing dollar strength, Friedman’s adherence to measures of supply had led him to make two predictions that proved incorrect. He later admitted, “I was wrong, absolutely wrong” and “I have no good explanation as to why I was wrong.”

And then... or I guess really we have now as an example.

I think this part of the article is the gut of it:

In the end money is significant only as a measuring rod enabling the trade of real items. So if the dollar had a stable value, it’s safe to say that many around the world would be eager to hold, and transact in, dollars. And for those presently holding gold, there would be a big rush out of the yellow metal in favor of a currency defined in terms of the metal.

Not only would M1 go through the roof, which would scare those in thrall to monetarism, but rates across the yield curve would likely fall given the dollar’s newfound reliability as a store of value. Rate-target advocates would see low rates as a signal of “cheap” money, but with the dollar possessing a gold definition, that wouldn’t be the case at all.

In short, the world would be awash in dollars, awash precisely because the greenback would attain its greatest use as a stable “ruler” of sorts fostering all sorts of dealmaking and trade. The supply of dollars would be irrelevant so long as Treasury backed its definition.

Conversely, consider a dollar lacking such a definition. Imagine a Treasury that has no opinion when it came to the dollar’s value, that it should be free to float to various price points free of intervention, verbal or otherwise. And imagine that over a 7-year period the dollar’s value bounced from 1/253rd of an ounce of gold, to 1/480th oz. in October of 2005, to 1/1000th oz. last July, to 1/780th of an ounce as of this writing. The policy just described is ours today.

It’s fair to say that such a currency lacking any kind of definition or monetary authority support would quickly lose utility. Remember, money is a measuring stick. When its measure is variable and directionless, it would be understandable that irrespective of supply, it would have diminishing use in a world economy that values certainty.

Hard to put it much clearer than that. I think the "measuring rod" has become the all shock and no awe policy of the government to hand out (funny) money to the institutions that hopped onto the free-market dollar-horse and rode it till it dropped from exhaustion. Not sure we can ever turn back from that nor do I know the implications of such a move (insert Ron Paul). We prostituted out our economy for the quick buck and we gotta follow through or the pimp will end our career.

Our only hope is that the intertwining of our economy and that of our Big Daddy (ahem, China) is sound enough to precipitate any brinkmanship or true gaming. Me thinks all have come to enjoy the fun promiscuous capital to a state of dependency. It seems Obama will have a tough row to hoe as China has been long outside the mental capacity of the current administration (as far as I can tell).

Well, maybe lots of business deals. Which does lead to the aforementioned intertwining. Anyone up for arguing that it was intentional? Continuation of Nixon?