Speaking to the Council on Foreign Relations, President Clinton
proposed
more spending, regulating, and monetary manipulation as the keys to
fixing
up the world economy. More ominously, he called for the creation of a
new
international financial “architecture,” which, he implied, would be a
permanent bailout fund for deadbeat governments the world over.
Since Clinton has had other things on his mind, one can suppose that
he
was acting as a spokesman for larger financial and banking interests.
Indeed,
the day after the speech, a manifesto by George Soros appeared in the
Wall
Street Journal that underscored Clinton’s main points, but with greater
attention to detail. Soros wants a global FDIC, possibly with the power
to
create money.
And this is supposed to cure what ails the world financial system?
Don’t
bet on it. These “solutions” will actually perpetuate the very source of
the problem. The drastic devaluations, the stock market crashes, and the
burst
bubbles of the last five years are not due to the inherent instability
of
markets, but to destabilizing effects of government manipulation.
Clinton began his speech by drawing attention to inflation, which he
considers long gone and utterly unrelated to global financial
instability.
In fact, inflation and financial instability flow from the same source.
Thirty years ago, at a critical turning point, Bretton Woods began to
unravel. Fearing the loss of its entire gold stock to foreign
redemption,
the Nixon administration eventually suspended gold redemption at the
same
time it imposed wage and price controls and told Fed chairman Arthur
Burns
to step on the monetary gas.
Thus was born one of the most disastrous experiments in monetary
planning
of all time. Currencies were decoupled from their historic linkage to a
physical anchor. And for the first time in history, central bankers and
governments the world over were unshackled from the outside monetary
discipline that the gold standard, even the unstable one created in the
post-war period, had imposed on them.
The dollar would be backed by only the promise of politicians and
central
bankers to make good in the long run. Of course, the promise didn’t pan
out. Inflation taxed away the purchasing power of the 1969 dollar,
reducing it
to 22.6 cents today. This has resulted in incalculable losses,
encouraged
fiscal profligacy and debt accumulation, and dramatically redistributed
wealth from savers to debtors.
The price has been a shrinkage in savings, a reduced incentive for
capital
accumulation, and thus lower incomes and less economic growth. Inflation
also changed the psychology of personal, government, and corporate
finance.
Excessive speculation was encouraged.
Chronic price inflation began to abate in the early eighties, but not
Fed
manipulation, so the problem of loose credit began to show up in other
ways. Starting with the domestic rescue and restructuring of the S&L
industry,
officials came to believe in the magical power of the financial bailout.
Bad investments and overbuilt capital sectors would be propped up by
fiscal
intervention, debt conversion, and credit guarantees.
The troubles with the S&L industry came to be duplicated on an
international level, first in Mexico and then in Asia, and now,
increasingly, in South America. The details are different, but the
overall
structure is the same. A certain sector of the economy becomes
overvalued
and bloated relative to the underlying savings and consumer demand
available to support it over the long run. At the root is always
excessive and
unchecked bank lending, subsidized by political design.
The experiment in free-floating, global fiat currencies has nearly
unraveled many times in the past. It has also resisted every attempt to
try
to bring it under control (remember the pitiful efforts of Treasury
Secretary James Baker to fix exchange rates in the 1980s?). What we are
witnessing now is the definitive judgement that such unsound currencies
are
no basis for consistent and stable international economic development.
Clinton shows no awareness of the roots of the current global crisis.
He
referred to the problems of “financial turmoil,” but equally to the
problem
of “declining economic growth.” His solution (to “spur growth”) confuses
the condition with the cause. It amounts to a vain hope that problems
can be
literally papered over rather than fundamentally solved.
It’s hard to believe that anyone would deny, at this late stage, that
making the IMF the world’s lender of last resort, much less creating a
new
and flexible world currency (the “Soros”?), generates a moral hazard
for governments. It also wastes tax money, rewards looters, and invites
political corruption.
Yes, the transition out of recession into recovery can be painful.
But the
option of more debt, more bailouts, and more putting off the inevitable,
is
frankly unthinkable, except for an administration that seems to have a
knack for denying reality in the hope that it will go away.
