Wednesday, August 3, 2011

Gold Standard Hangs On

Yesterday morning I heard Secretary Geithner on Good Morning America while I was waking up a bit late. What he said made me stop and groan. He was explaining how reduction of the deficit was good, because it would provide room for private business to grow. 
That is an old, outdated gold standard concept. Maybe his new employer (He will soon be leaving the Administration.) made him say it. In any event, it is weird to hear the Secretary of the Treasury make such a statement in these times.
Under the gold standard government and the private sector competed for a limited quantity of money. Government spending drove up interest rates and crowded out business investment. It is difficult for an economy to grow under a gold standard or other fiscally constrained paradigm, e.g., the eurozone.
Good grief, with 25 million underemployed and production capacity at 76%, this country has plenty of room for the private sector to grow. The reason it is not growing is because there is a lack of aggregate demand rather than crowding out.
When there is full employment and full utilization of productive capacity, government acquisition of available resources may interfere with the private sector. Right now, with the capitulation to the Tea Party, we can only pray that we might someday reach a competitive situation between government and private sectors.
At that point we might be looking at possible inflation. That is when aggregate demand is greater than our productive capacity can supply. That would look pretty good at present. Either too much deficit spending by the government or to much debt in the private sector can bring financial trouble. Given the explosion of the housing bubble, the private sector has had enough borrowing until people reduce their debt. Consequently, spending by the government is all we have for increasing aggregate demand. That isn’t going to happen for about a decade according to the dastardly debt deal just done.
Austerity works for households not for government. Households must live within their means; governments must live up to the nation’s means.
We are five years into our lost decade just like Japan suffered through after its big real estate crash. And, we will be fortunate to recover in a decade. Explain that to your grandkids when they notice that their lives are less abundant than yours.
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