Policy Solutions, Part Three of Four

The printing of money used to replenish the financial system may cause inflation — whether or not this series of radical measures is adopted. It will monetize public and private debt, and the key to not letting the surge in inflation become embedded permanently will be the taking of a credible stance to redraw our system with reduced liability going forward. While we are printing money, our government should quietly (if possible) buy gold with which it would promise to redeem dollars beginning at some point when our economic recovery is certain. No doubt this would be at a price that might shock the world today: perhaps $5,000, $10,000, or higher. Let the market bracket the possibilities; perhaps gold ETFs or digital gold accounts such as those at goldmoney.com would be our new private currency, and we could get out of the money-printing business once and for all.

Taxes, like death, are inevitable. But they do not have to be destructive and pit one element of society against another. The current system of having Warren Buffett pay 17 percent and the upper-middle class owe 35 percent plus another 5 to 10 percent to state government is unacceptable. Some have proposed a flat tax on income or consumption. These suggestions are intriguing and should be considered. But for millennia mankind has instead existed with wealth taxes. One’s gross assets would be subject to tax, so the use of leverage, which today is used in a fiat currency environment to perpetually defer the payment of taxes by the über-wealthy, would become very unappealing. The result would be less leverage, ergo less systemic risk. With income taxed 0 percent at the margin, an incentive to produce would be unleashed unlike anything seen since the age of Augustus, when Roman prosperity reached its zenith. Fairness would also result, just as long as strong limits on progressivity or regressivity were codified, because no longer would the über-wealthy be able to minimize W-2 or ordinary income and extract cash through borrowing against constantly appreciating assets.

There would also need to be a plethora of other changes, mostly to dismantle the chokehold regulation has on much of the economy — such as the farcical cancerous growth rates of financial regulators who could neither anticipate nor control what may go down in history as the largest financial meltdown of our nation. Yes, there are some very appealing aspects of regulation: safe drugs, prevention or at least prosecution of outright financial fraud, and certain environmental protections. Keep them; jettison everything else. Moreover, craft a new apparatus that harnesses the creativity and millions of hours that independent research analysts might perform to reveal risk and gauge opportunity for investment in everything from stocks, bonds, commodities, credit ratings, off balance sheet conduits, investment advisors, broker-dealers, you name it. To do this, firms that engage in corporate finance and trading (banks and broker-dealers) would be strictly prohibited from being in the research business. Moreover, publicly traded companies and these banks and broker – dealers would not be allowed to pay independent firms for research. They would be paid either directly by investors, small and large, or through directed commission flow from mutual funds or other accounts managed for them. Those disbursements, in turn, should be disclosed and transparent. To aid their work, securities – issuing companies would be required to make much greater disclosure of the things these analysts need to look at, such as off balance sheet structured vehicles. The SEC could reexamine its mission thusly and get creative about what that might be. Such a system would cost almost nothing. It would provide gainful employment for many laid-off Wall Streeters (not that anyone cares!). And it would uncover more fraud than an army of technocrats looking for documentation of every move financial industry employees make.

I can say with 100 percent certainty that these solutions would not even come close to seeing the light of day in today’s fractious political environment. At the moment, we are in the midst of a civil war of ideas. Great concepts such as the abolition of slavery or the establishment of our democracy were born out of conflict — literally armed conflict. The one silver lining above this struggle is that like other transformative events, World War II for example, it will touch all of us together, which opens up the possibility of some unanimity of opinion. All that is needed is a two-thirds majority. Another is that it should not come to mortal blows as true war would. The greatness of America has been its ability to come together in adversity and to recall great ideals that were immortalized by our founders. We were not descended from kings, emperors, or pharaohs. Our strength is in each other. If we can reclaim our moral clarity, we may resume our path to the great destiny that inspired us over two centuries ago.

But casting these solutions as moral is sure to infuriate the humanists, secularists, and socialists among us. It begs another issue raised in the book, that those who would use government as an agent to rearrange society feel they are in sole possession of morality and that the capitalists are heartless. As this is being written today, the fix is nearly in. The Fed has begun to print money that is monetizing federal debt and mortgages. It may not be adequate to produce enough nominal income to make servicing debt that reached nearly four times GDP easy. Additional waves of printing might be politically necessary, although it is highly unlikely we would go to the extreme seen during the Civil War or under the French National Assembly of the 1790s. In the French experience, money transformed from hard to soft, sewing the seeds of temporary affluence that gave way to economic ruin. Consider what happened at the end of the 18th century in that country:

… there appeared another outgrowth of this disease . . . This outgrowth was a vast debtor class in the nation, directly interested in the depreciation of the currency in which they were to pay their debts. The nucleus of this class was formed by those who had purchased the church lands from the government. Only small payments down had been required and the remainder was to be paid in deferred installments: an indebtedness of a multitude of people had thus been created in the hundreds of millions. … these were speedily joined by a more influential class;—by that class whose speculative tendencies had been stimulated by the abundance of paper money, and who had gone largely into debt looking for a rise in nominal values. Soon demagogues of the viler sort in the political clubs began to pander to it; a little later important persons in this debtor class were to be found integrating in the Assembly—first in its seats and later in more conspicuous places of public trust. Before long, the debtor class became a powerful body extending through all ranks in society . . . . All were apparently able to demonstrate to the people that in new issues of paper lay the only chance for national prosperity. This great debtor class, relying on the multitude who could be approached by superficial arguments, soon gained control . . . while every issue of paper money really made matters worse, a superstition gained ground among the people at large that, if only enough paper money were issued and were cunningly handled the poor would be made rich. Henceforth all opposition was futile.

The Fed has encouraged banks to print in large quantities since its inception. After the Internet bubble burst, it stepped up the pace of the printing press, which bestowed an opulence across the country through the real estate boom in particular. Rather than admit M3 growth was out of control (over 8 percent since 1970, and surprisingly 10.6 percent year-over-year in December 2008), it chose to ignore it and eventually even stop reporting it.


Bill Baker,
for The Daily Reckoning

[Editor’s note: This passage is reprinted from William W. Baker’s book, Endless Money: The Moral Hazards of Socialism, with the permission of John Wiley & Sons, Inc (©2010). You can get your own copy of his book here.]