Gregory
Mankiw, professor of court economics at Harvard and economic advisor to
President George W. Bush, proposed negative interest rates in a recent New York Times article. Mike Shedlock, a prominent
financial commentator has appropriately weighed in 19 March with Time For Mankiw To Resign and again on 21 March
with Economist Mankiw Defends Policy of Theft.
Ivy-League
Court Economist
Interestingly
Mankiw, a monetarist, appears to have the support of Paul Krugman, a
Keynesian, who responded, “Greg Mankiw says yes. Since that
was the answer I arrived at for Japan more than a decade ago, I
have to say that it makes sense in principle.”
MR.
MANKIW’S PROPOSAL
“Imagine
that the Fed were to announce that, a year from today, it would pick a digit
from zero to 9 out of a hat. All currency with a serial number ending in that
digit would no longer be legal tender. Suddenly, the expected return to
holding currency would become negative 10 percent. … The idea of
negative interest rates may strike some people as absurd, the concoction
of some impractical theorist. Perhaps it is. But remember this: Early
mathematicians thought that the idea of negative numbers was absurd. Today,
these numbers are commonplace. Even children can be taught that some problems
(such as 2x + 6 = 0) have no solution unless you are ready to invoke negative
numbers. Maybe some economic problems require the same trick.”
I will
attack Mankiw’s insane proposal from several fronts, missed by most
commentators, but nevertheless extremely important. While I do agree
with revoking legal tender status for all FRN$, not just 10%, I differ with
his proposed procedure and underlying moral reasoning.
LEGAL
TENDER
Notice
that Mankiw suggests that ‘the Fed were to announce that …. would
no longer be legal tender.’ This talk about the Fed determining
what is and is not legal tender baffles me. Perhaps Mr. Mankiw should
open up a copy of the Constitution and read it.
Under
Article 1 Section 8 Clause 5 Congress is given the power to ‘Coin
Money, regulate the Value thereof’. Notice the Constitution does
not say what money is only that it is something that is coined rather than
printed.
The Tenth Amendment states, “The powers not delegated to the
United States by the Constitution, nor prohibited by it to the States, are
reserved to the States respectively, or to the people.” The
Constitution operates on the principle that if a power is not specifically delegated
then it is prohibited.
In
this case the Federal Government is given no authority to make anything legal
tender. The Federal
Reserve Act was enacted by Congress creating the Federal Reserve.
Because Congress does not have the power to declare anything legal
tender and because the Federal Reserve was created by Congress therefore it
follows that the Federal Reserve cannot declare anything legal tender.
The individual States do retain the power to declare things legal
tender but are restricted under Article 1 Section 10 Clause 1 from making any
‘Thing but gold and silver Coin a Tender in Payment of Debts’.
The
creature cannot exceed the creator.
NEGATIVE
REAL RETURNS WILL FAIL
On 18
March 2009 I established the case for why the Federal Reserve’s quantitative easing will fail.
On 1 February 2008 I marked the first snowfalls of the Kondratieff Winter, or Great Credit
Contraction, because of investor’s willingness to accept negative
real returns.
Mankiw’s
proposal will not work yet because although the US Treasury Bubble will burst and there are reasons how and why that will happen it has not happened yet.
Most FRN$ exist not
as physical tickets but
as digital illusions. Mankiw has gotten a little bit ahead of himself
as capital will eventually move from digital illusions into physical FRN$
illusions because physical FRN$ tickets are safer and more liquid.
This
has not happened yet although the US government has been placing restrictions
to prevent it such as the filing of Special Activity Reports, etc.
Nevertheless, the attempt by Mankiw and Krugman is to force capital up the liquidity
pyramid while the natural economic law is bringing it down. They
may as well attempt to order the sun not to rise.
MORALITY
Since
individuals are “endowed by their Creator with certain unalienable
rights” and because individuals form governments to protect property,
life, and liberty, it follows that individuals are superior to their creation
of government. Individuals
can grant to their creation at most only those rights they possess.
No individual possesses the right to unjustifiably infringe on another individual’s
autonomy, and because individuals create governments, no government can
possibly be justified in the possession of such a right. Therefore,
legitimate government must act within the constraints of the Non-Aggression
Axiom. Otherwise those actors are merely criminal
gangs costumed in government regalia.
Government
represents one of the most powerful forces on earth. Therefore, an individual’s
political beliefs reveal with perfect clarity his or her moral character.
In
this case, Mr. Mankiw would use the brutal violence of government to
arbitrarily steal 10% of anyone’s savings and finds this repulsive
behavior to be the philosopher’s stone as ’some
economic problems require the same trick’. Can there be
worse psycho-sociopathic tendencies?
I
wonder if Mr. Mankiw would recommend torture, invasion and genocide as good
economic policies to get out of a looming recession because they would
increase aggregate demand, stimulate the economy and increase GDP. Even
Vladimir Putin revealed his understanding of these
basic laws when he stated, “The only problem: your results were
poor and this will always be the case because the work you do is unfair and
immoral. In
the long run immoral policies always lose.”
Mr.
Mankiw and Mr. Krugman are not engaged in the study or teaching of economics
but political dogma. And so we see evidence of the true motive of these
two influential court economists which is most likely: the sadistic desire to abuse the
power of the State to engage in looting and killing.
CONCLUSION
The trick to get out
of the current economic problems is really founded in morality. Decades
ago Ludwig von
Mises wrote in The Theory of Money and Credit, “It is
impossible to grasp the meaning of the idea of sound money if one does not
realize that it was devised
as an instrument for the protection of civil liberties against despotic
inroads on the part of governments. Ideologically it belongs in the
same class with political constitutions and bills of rights.”
The
solution to the current economic problems is to be found by picking up an
extremely short document, the United States Constitution,
and strictly applying its powers and disabilities in accordance
with the Non-Aggression Axiom. Of course, doing so would drastically
limit the ability of those who desire looting and killing.
If you
look at every single problem we are facing today almost all are the result of
a lack of respect for the rule of law and the Constitution. The
solution can only be applied if society changes its idea about what the role
of government ought to be. If society thinks that the role of
government is to take care of individuals from cradle to grave and police the
world by spending hundreds of billions of dollars on a foreign policy that
cannot be managed then the greater depression will only exacerbate. Thus the
true budget deficit and balance sheet deficiencies appear to be
moral and not economic.
National
currencies are like the common stock of nations. So long as the United
States and its people continue violating these basic laws of morality and
engaging in immoral policies the FRN$ will continue to decline. The
price of the monetary metals, gold and silver, will increase. But if you think
the United States is a rogue elephant on the world stage now just wait until
she is truly panicked.
Disclosures:
Long physical gold and silver with no position in GLD, SLV, US
Treasuries such as TLT, UDN or UUP.
Trace Mayer
RuntoGold.com
Trace Mayer,
J.D., holds a degree in Accounting from Brigham Young University, a law
degree from California Western School of Law and studies the Austrian school
of economics. He works as an entrepreneur, investor, journalist and monetary
scientist. He is a strong advocate of the freedom of speech, a member of the
Society of Professional Journalists and the San Diego County Bar Association.
He has appeared on ABC, NBC, BNN, many radio shows and presented at many
investment conferences throughout the world.
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