Interesting article, but not terribly useful or pragmatic. I was also hoping for a little more self-awareness. The author is essentially railing against the US policy of printing money to get out of crisis (which is a valid point) by advocating a solution that would send the entire world economy into a recession that would make this one look like the 2001 dip. Because it's the WSJ, I guess I should have expected at least some conservative rhetoric, but I found it a little too naive.
What would have been a more interesting question to consider is what can be done to address the trade deficit and inflation problems with our current monetary system. Although it's valid to suggest that minimum viable product wouldn't work for macro and international economics, it has a lot less practical application.
I think the article serves as a call for urgency for the approaching inflation. One of Grant's biggest followers is Seth Klarman. Klarman runs the Baupost Group, which is a hedge fund comprised mostly of endowment fund money. His fund is using interest rate caps and swaptions to hedge inflation instead of using TIPS.
I don't know if calling Grant naive is correct. He has been ahead of the curve on spotting bubbles in the past and runs a well reputed magazine ($850/year subscription)
can you back up your statement that his proposed solution would send the entire world into a recession? I always find it interesting that people say this and yet don't give any reasons why. I'm not financial genius myself but surely just collateralizing the dollar with something automatically cause a recession. What exactly is the mechanism you think would cause this? Asking cause i genuinely don't understand myself.
It's bizarre these so-called conservatives at the WSJ have abandoned Chicago style economics for gold-bug reactionary alarmism.
The monetarist theory--now the dominant theory of monetary policy--is that one of the biggest, most economically important features of a recession is a flight to liquidity. In such a situation, the demand for tangible money--and, under US law, there is none more tangible than the dollar--will drastically jump, despite a limited supply. Nobody doubts the tangibility of the dollar when they are forced to pay taxes, and if they do, they might find themselves in a cell with a tangible lock and 6 by 6 tangible feet.
The correct thing to do, then, is to expand the money supply. This might happen by a seemingly alarming amount, especially given the highly leveraged nature of our economy. But otherwise a flight to liquidity will shut down the financial system, cause huge losses in "safe" bank accounts and funds, cause massive deflation as money becomes scarce, and cause a nasty depression--which is what happened from 1929 to 1932.
The money supply has expanded from about $800 billion to $2 trillion. Alarming? Maybe, but
1) we're not seeing inflation yet
2) most economists agree that the Fed contracting the money supply was a major cause of the 1929 Depression
3) the Fed is perfectly willing to stall the economy to prevent inflation, which is what they did in 1979 when a shameless monetarist finally was given power. See: http://en.wikipedia.org/wiki/Paul_Volcker#Chairman_of_the_Fe... . It's worth noting that Volcker is one of Obama's chief economic advisors: the guy in charge of economic recovery board.
4) the amount of paper cash has increased by a "mere" 120 billion or so. Most of the remaining cash is sitting in Federal Reserve bank accounts, not being used.
So I wouldn't dump greenbacks yet. If you're like most people few of your assets are in greenbacks anyway.
Finally, if I keep seeing articles like this, I'm buying puts on gold. You heard it here first, folks.
If you claim that you haven't seen inflation, then I am going to guess that you are not the one in the household that is buying groceries. Example: Wheat-based products like pasta used to sell on sale for 50 to 80 cents /lb; now a sale price is $1/lb; or an increase of over 20% over the past 2 years.
Why not? For the average citizen prices at the local store are the thing that immediately effects their daily lives and will in turn cause them to change their spending habits accordingly subsequently effecting other parts of the economy beyond basic needs.
Because how much you spend for wheat is not what inflation is (unless the only thing money was used for was to buy wheat). The price changes of any one good is an inaccurate look at inflation. Oil tripled last year but that doesn't mean we went through 300% inflation.
Ok, but I don't measure inflation solely by wheat prices. The government puts a Fisher index on personal consumption expenditures, which include a lot of non-wheat items.
The government doesn't use food or fuel to track inflation prices anymore. They were thrown out for being "volatile," price-wise - to make it all look rosy when it definitely was not. (One would, logically, think that if food and fuel prices are volatile, that would indicate that something is sour in the fridge, so to speak)
Again, the Fed uses a Fisher index on personal expenditures (the PCEPI), not any basket of goods. Their inflation numbers track everything that people buy for themselves.
Core inflation and CPI are different beasts, not used by the Fed.
It sounds like a lot of guessing to me. I still don't understand why expanding the money supply is the right thing to do. I grant you that the demand will increase but why is meeting that demand a good thing?
The other option is deflation and lot's of it, which causes most people with long term loans to default. The great depression saw ~50% deflation which means all your debt and debt servicing costs double. Which causes most people to walk away from any loan they can which creates a huge downward spiral.
Interest rates are zero but global credit outstanding is still crashing. Monetarism is dead. Mises has been proved right. "There is no means of avoiding a final collapse of a boom brought about by credit expansion".
We are in for a period of deflation despite the central banks' best efforts. After the deflation, hyperinflation isn't out of the question if governments give up on credit money and just start spending freshly printed cash.
a keynesian will say that if you need to stimulate the economy, government spending will help get us out of crises.
the problem that arises with a collateralizing program, like the gold standard is that the monetary supply would be inherently confined by physical discoveries and captures of gold. If it is the Great Depression and you cannot find any more gold, you'd be pretty screwed.
The argument is that if it's a strict commodity currency, there's no Great Depression. No cheap money boom, no depressions. Free market interest rates naturally rise and fall to control the extremes of the business cycle.
What would have been a more interesting question to consider is what can be done to address the trade deficit and inflation problems with our current monetary system. Although it's valid to suggest that minimum viable product wouldn't work for macro and international economics, it has a lot less practical application.