A King Dollar GOP?

Posted: Feb 11, 2012 12:01 AM

Out on the campaign trail, Fed head Ben Bernanke is an unpopular guy.

Mitt Romney and Newt Gingrich have both said they would replace Bernanke, not reappoint him. Congressman Ron Paul would swap the whole Federal Reserve monetary system for a gold-linked dollar, making the yellow metal legal tender. And it was Gov. Rick Perry of Texas, before he dropped out of the race, who said more quantitative easing by the Fed would be “almost treasonous.”

Republicans in Washington are equally unimpressed by Bernanke. Rep. Paul Ryan recently criticized the Fed for bankrolling our huge budget deficits and thereby accommodating a profligate fiscal policy. And former Federal Reserve Board governor Kevin Warsh, a Bernanke intimate before he left last April, just leveled criticism at the Fed’s extensive zero-interest-rate policy and its “operation twist.” (Warsh, by the way, was an economic official in the Bush White House.)

Finally, former Bush Treasury undersecretary John Taylor, author of the Taylor rule that is monitored inside the Fed, recently told me that the central bank target rate should be 2 percent, not zero.

There are two key takeaways from this onslaught of Fed criticism: First, the critics worry that the ultra-easy money pumped out by the Bernanke Fed will in the future create periodic inflationary bubbles (housing and energy), such as we had in the 2000s, which contributed mightily to the ultimate financial meltdown.

Second, and very much related to the inflation worry, the Republican party is gradually becoming the King Dollar party. After watching the greenback collapse almost 40 percent during the Bush years, Republican leaders are moving back to a Reaganesque dollar approach whereby a great nation with the world’s leading economy should have a strong and reliable currency.

The dollar soared and gold plunged during Ronald Reagan’s first term, just as it did during Bill Clinton’s second term. In both these eras, stocks rallied mightily and the economy grew rapidly. Supply-siders note that a good-as-gold dollar and low marginal tax rates were the ultimate prosperity tonics during these two periods.

But today we’re witnessing the opposite of supply-side prosperity. The current economic malaise seems borne of a weak-dollar/high-gold monetary policy coupled with a huge tax-hike threat looming in 2013.

To be fair, Bernanke has his supporters. They’re mostly from the canyons of Wall Street where money-market economists are loathe to criticize him. Then there’s NYU professor Mark Gertler, who has coauthored research with Bernanke. A recent Bloomberg story cites Gertler as saying, “Criticism about the Fed being inflationary is not fact-based. In terms of an inflation record, the facts are the Fed has been as close to impeccable as you can possibly get.”

Gertler notes that during Bernanke’s six-year tenure the consumer price index rose an average of 2.4 percent, lower than the 3.1 percent average for Alan Greenspan and the 6.3 percent for Paul Volcker. (Or course, that’s unfair to Volcker, who inherited 15 percent inflation and by targeting gold and the money supply brought it down to 3 percent.)

But the trouble is, after three years of zero interest rates (with more coming) and an outsized Fed balance sheet of more than $2 trillion, there’s still an inflation threat out there, despite the subpar economy. Bernanke has been a massive pump primer long after the financial emergency has passed. 

Over the past year the CPI has increased 3 percent. Energy prices have grown 6.6 percent, while food is up 4.7 percent. This is a big pinch on consumer pocket books and a drag on the economy. Inflation expectations are steadily running at 2.5 to 3 percent.

In Milton Friedman terms of too much money chasing too few goods, the 10 percent M2 increase of the past year is way above the 2.5 percent economy. In classical dollar-value terms, the $1,700 gold price is an ominous portent for future inflation. The tradable DXY dollar index is hovering under 80, which is massively below its 2001 peak of 120.

At the very least one can say there’s a dollar-confidence problem in the marketplace. Over time, even though lags are long and variable, a falling greenback and a rising gold price are bound to spell higher future inflation.

So the Republican party is absolutely right to shift toward a strong-dollar policy. (Newt Gingrich has gone so far as to propose a new gold commission, such as Reagan had, with investor Lew Lehrman and journalist James Grant as the co-chairmen.) While Mr. Bernanke was a good crisis manager, he seems to lack any conviction for a predictable rules-based policy that would create a reliable King Dollar.

Stable money is a growth incentive. And history tells us that a golden anchor for money is a key ingredient of long-term prosperity.