In his latest blog post, Paul Krugman asserts that the “not
crazy” conservatives are lonely. He – as
he tends to be wont to do – draws a convenient caricature of conservatism –
especially conservative monetary policy.
What the caricature does, though, is open up some of the underlying
philosophical divides which are anything but ‘crazy’. We see this in how Krugman views the macro
economy through a lens of either a ‘Strong Welfare State’ or ‘Weak Welfare
State’:
(Krugman’s View)
|
Strong Welfare State
|
Weak Welfare State
|
Pragmatic Macroeconomics
|
Democratic Party
|
‘Reformicons’
|
Fantasy Macroeconomics
|
Macroeconomic Populists
|
Republican Party
|
First let’s dispense with the $10 vocabulary of the faculty
lounge. Macroeconomics is basically what policies are pursued with respect
to the money supply (monetary policy) and how/by whom that money is spent
(fiscal policy). Conservative monetary
policy generally calls for a restrained money supply. Conservative fiscal policy then follows: That
money exists first for objectively productive uses in the private sector – also
known as the creation of wealth. It
exists only secondly as a tool of the State to accomplish political goals.
I'll add something here that I argue, against conventional conservative rhetoric. The money supply should not exist at all for the card-counting at the Blackjack table that is speculation. I write more about that here.
I'll add something here that I argue, against conventional conservative rhetoric. The money supply should not exist at all for the card-counting at the Blackjack table that is speculation. I write more about that here.
But Krugman’s matrix is actually very helpful because it
opens the opportunity to succinctly explain the conservative alternative: The
Strong Opportunity State vs. The Weak Opportunity State.
(Conservative View)
|
Weak Opportunity State
|
Strong Opportunity State
|
Other-Centered Macroeconomics
|
Liberals (center-left)
|
Conservatives (center-right)
|
Self-Centered Macroeconomics
|
Progressives (far-left)
|
Progressives (far right)
|
In order to understand this, we do need to enter the world
of the faculty lounge for a moment. But
this would be the Philosophy faculty. We
do not, however, need much of their $10 vocabulary.
First Principle
The most significant unit of society is the individual (not
the State) in whom reside rights which precede the State, “…among which are
Life, Liberty and the pursuit of Happiness.”
For the philosophy student, the difference is immediately recognized as
that between John Locke and Thomas Hobbes.
Locke provided Thomas Jefferson with the underlying rationale for much
of what we find in the Declaration of Independence. Hobbes (in his Leviathan) believed the State was sovereign (and thus its people
were subjects). This manifests itself in
different ways. In a monarchy, the
sovereign is obviously the monarch and the power of the State is wielded by the
palace. In Progressive Statism/Corporatism,
the sovereign is a combination of bureaucracies (sovereign in their own sphere)
and favored corporations. But in ‘Statism’
more broadly the same thing is true of the people – they are subjects rather than citizens.
Second Principle
Progressives are not the same as Liberals (or
Conservatives). Woodrow Wilson (D) and
Theodore Roosevelt (R) were both Progressives.
What marks Progressivism as a political philosophy is an overt rejection
of the idea that the Constitution is (and should remain) a declaration of ‘negative
liberties’ – in other words what government cannot
do to you. Progressives would have it be a declaration
of ‘positive liberties’ – what government must
do for you.
The Origin and Purpose
of Money
These two fundamental principles (the State vs. the
Individual & negative liberties vs. positive liberties) then determine how
one views money. It is either first a tool of the State (for
professor Krugman – to assuage the “Conscience of a Liberal”) or a utility contrived
by the people to facilitate transactions in the economy. Here is where we have to look to history.
After shooting his wad (the Crown’s wealth) on the First
Bishops War, King Charles I wanted to go fight the Second Bishops War (over who
got to appoint bishops in Scotland). But
having no more money to pay his soldiers, the king summarily confiscated the
gold in the Royal Mint – which belonged to the English merchants, not the Crown
– as a forced loan.
He paid it back, but the merchants grew tired of being
dragged into these fights. So they
looked to trusted goldsmiths to hold their gold. They received ‘promissory notes’ from them in
return. Soon those notes began
circulating in the economy in place of the gold – it’s a lot easier to carry
around a ‘note’, after all. This is the origin of our Federal Reserve Note. (It also has a lot to do with why we do not
have a king.)
The goldsmiths, though, were not immune to temptation. They noticed that the notes were not coming
back for redemption but rather circulating in place of the gold. So they issued ‘extra’ notes and lent them
out at interest. This is the origin of
our ‘fractional reserve’ banking system.
But back then it was a dirty little secret. Imagine: were this to get out, there would be
a run on the gold because no one wants to be behind the guy who gets the last
of it.
The Vietnam War and the Great Society in the 1960s was
simply a replay of this. Other countries
had dollar reserves. But we started
issuing more of them in the form of credit to the government for “guns and
butter.” Other countries started to
question whether $35/oz. of gold actually meant anything since it did not seem
possible the Treasury had enough gold to ‘back’ this expansion of the money
supply. (Credit, or loans, is part of
the money supply.) And so – not wanting
to be behind the guy who gets the last of the gold – a run on our gold started
until Nixon stopped it in 1971.
This produced a number of effects, all of which are tied to
this one simple truth Progressives refuse to recognize: Banks are largely owned
by shareholders, who demand management return value for their investment. And banks do this – in fractional reserve
banking – by lending out ‘notes’ at interest.
So the more ‘notes’ which are out there (the larger the money supply)
the more profits are made. This is why
the money supply cannot be controlled
by the banks (as it is today under the Federal Reserve System).
It isn’t that fractional reserve banking is bad. It isn’t that banks making profits are
bad. It isn’t even that shareholders
enjoying those profits as dividends are bad.
It IS that all of these things, together with human nature, conspire to
ensure that an unrestrained money supply will lead us to a place where the
banks end up legally obligated to lie to
us – just like the English goldsmiths of old. This is where we are today.
Credit vs. Innovation
in Economic Growth
It also leads us to a place where credit becomes the main
driver of the economy instead of innovation.
In order to understand this, we first have to understand that wealth is created by improving things. If someone builds a better mousetrap, the
profit she makes on its sale are an example of new wealth because she has improved
something. Now she might take out a loan
to stand up a factory and hire employees to produce, deliver and sell her better
mousetrap. But economic growth here is
about the better mousetrap, not the
loan!
But with an unrestrained money supply, credit increasingly
replaces innovation as the main driver of economic growth (or contraction). All one has to do is watch how the stock
market reacts in three-digit swings to what may or may not happen with interest
rates to see that this is where we have brought ourselves.
The Inexorable Rise
of Money in Politics
Lastly, it ends up with ever more money going into
politics. This should not be hard to
grasp: The politicians see the banks doing quite well under ‘fiat money’. They turn to them for two things: 1) to buy
Treasury bonds so they can make promises to voters which otherwise could not
possibly be kept; and 2) for campaign cash so they can keep making those
promises. And, of course, they are quite
happy to allow the money printing to continue.
Far from the Fed being independent of politics, 1971 guaranteed the Fed
will never be independent – the best
example of such was Chuck Schumer looking over his reading glasses in July 2012
and telling then Chairman Ben Bernanke to “get to work, Mr. Chairman!” And so now we know who the “one percent” really are: the financial sector and the
political sector who have now conspired to be the ‘Crown’ and to confiscate the
money supply as a forced loan to keep the politicians in office and the
shareholders in line. The current
administration’s recent floating of the idea of mandatory 401(k) investments in
Treasuries is nothing if not obvious proof of this.
The Strong
Opportunity State & Sound Money
And so the “Strong Opportunity State” for the conservative
is 1) a State with a properly restrained money supply so banks make profits by
way of sound banking rather than expanding
things like derivatives; 2) a State which exists first to secure rights which
precede it and belong to its individuals; and 3) a State which remains
constrained by a declaration of what it cannot do (the Constitution), doing
only those things germane to its enumerated authorities. These limits ensure the people have a maximum
amount of opportunity to innovate and improve things, and to freely exchange the
wealth thus created.
The Strong Opportunity State is not a call for everyone to be on their own. It is not even opposed to a social safety net. It is a State which believes that civil society is always superior to political society for most of the problems that face us – and for all of the problems which are social in nature (e.g. poverty). When people are free to create wealth, and when the money which measures that wealth is oriented toward objectively productive uses (wealth creation) instead of politically preferred uses (a political system built on a foundation of debt) and speculation (banks and their derivatives), there is more than enough for civil society to look after the needy. And those needy then enjoy the dignity of being lifted up by someone who knows their name.
There is only one way to get back to this. There is only one way to have a truly independent Federal Reserve. And this is to tie our money to something held by the Treasury in reserve – held on our behalf. Again, we do not have a monarch who would lay claim to the nation’s money supply. That is by design, of course. That design was meant to ensure that our money supply be a utility to allow the efficient exchange of the wealth of the nation – which it used to measure. Fiat money – the child of Progressive ideas of the State – only means our money supply now measures the public debt instead, the wealth of the few who own that debt, and the ambitions of politicians whose jobs depend on that debt.
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