by Ralph Benko

This article was published originally by on June 25, 2012

President Obama’s re-election strategy will be predicated on blaming the economic stagnation on George W. Bush, and, thus, the GOP, my colleagues Frank Cannon and Jeff Bell persuasively argued recently in The Weekly Standard.  Cannon and Bell are right.  And, that said, Bush’s fiscal policies were not the culprit.

Bush was mugged by the Fed. The Fed produced a Hurricane Katrina of louche money. The Fed produced the housing bubble, which, popping, caused the panic of ‘08.  The Meltdown developed on Bush’s watch.  More voters therefore still blame Bush than Obama for the lousy economy. Obama is exploiting that at the heart of his campaign strategy.  But Obama’s strategy of blaming Bush can be forced to backfire.

Flipping the Obama campaign on its back requires that the Romney campaign exploit this vulnerability:  Obama has embraced the same Fed whose policies caused the catastrophe. Romney can use this to turn Obama’s line of “Blame Bush” attack back on Obama.  But he can do so only if his political team shows the same degree of savvy as does his economic team.

Romney’s economic team is led by R. Glenn Hubbard.  Hubbard, although having done a stint as chairman of the council of economic advisers under Bush, gets it.  He unflinchingly attacks the Fed policies that torpedoed the economy.  If Romney’s political strategists will pivot and open fire on the real culprit, defective central planning by the central bank, Obama’s main campaign thrust is parried and can become fatal to the president’s reelection hopes.

Cannon and Bell observe that “Obama strategists would treat Romney’s selection as a vice presidential running mate of anyone who could be portrayed as a Bush-era economic policymaker (such as Ohio senator Rob Portman) as a gift from the political gods.”  This is emphatically true applied to “a Bush-era economic policymaker” who misunderestimates how critical monetary policy is in creating an economic climate of job growth and prosperity — or, as now, despair.

The GOP seems to have gotten it through its thick head that tax increases — like the preprogrammed “Taxmaggedon” threatening America — are terrible for the economy and job creation.  Most voters clearly understand this.  But good tax policy alone is not enough.  Good money — keeping the dollar healthy — was as much part of the foundation of  the Reaganomics magic as was cutting marginal tax rates.  Most voters understand this too.

Reagan worked his voodoo to achieve prosperity through two key variables: tax rate reduction and an end to the flood of cheap Carter regime dollars.  (Clinton held on to the essence of these and upped the ante with trade liberalization and, under pressure from Gingrich,  welfare reform.)  Lower tax rates andgood money unleashed a tsunami of worldwide economic growth.  The crucial “good money” piece of Reagan’s formula often seems to have been lost on much of Washington, even on the establishment GOP who should have internalized the core of Reaganomics by now.

There’s been a recent sighting of the Republican Memory Hole, emanating, alas, from that very Rob Portman against whom Cannon and Bell characterize as “a gift from the political gods” for Obama.  The Supply Side, the Tea Party, the Conservative, and the Libertarian bases of the GOP were stunned earlier this month by Portman’s public attaboy for  President Obama’s job-killing monetary policy.

Portman is widely considered the frontrunner pick for Vice President so this was not the usually inconsequential Senatorial blather.  If he is selected without having retracted this it will be much harder for Romney to credibly undercut the Obama strategy.  In a June 13 op-ed in Politico Portman wrote to contrast the feeble Obama recovery with the strong Reagan recovery in We Can Do Better on Economy.  Buried 12 paragraphs in Sen. Portman observes:

Remarkably, Reagan’s recovery took place even as the Federal Reserve was strongly contracting the money supply. Obama’s policies have failed despite the Federal Reserve loosening the money supply. Reagan’s recovery took place even as the Federal Reserve was strongly contracting the money supply?  Obama’s policies have failed despite the Federal Reserve loosening the money supply?

Even as?  Despite?  This seems to mean that Mr. Portman considers the Reagan-era stabilization of the dollar by the Volcker Fed contractionary and the Obama-era flood of dollars by the Bernanke Fed … stimulative.  Let us hope this was merely an infelicitous choice of words.  But… Portman served as Bush’s Director of the Office of Management and Budget.  By training and disposition his proficiencies are … management — meaning regulations— and budget. Not money when money is crucial.

Portman shows he has assimilated half of the Reagan lesson by calling for “pro-growth tax reform by lowering marginal tax rates and pay for it by closing loopholes that only complicate the Tax Code and slow growth.”  And Portman calls, uncontroversially, for “regulatory relief to small businesses, open up more export markets … and encourage domestic energy production to create jobs and lower prices. … (and to) rein in runaway spending ….”

Good fiscal and regulatory policy are necessary for growth.  But by themselves they are insufficient. Portman concludes his claim that the GOP can do better by saying  “These pro-growth policies would unshackle the economy and encourage hiring. They would bring long-term sustainability to the budget and new revenues through growth.  There is no reason the economy cannot return to the higher growth that occurred in past recoveries. We have the blueprint; we just need the will.”

Yes, Senator, we have Reagan’s blueprint for economic growth:  good monetary, as well as good fiscal, policy.  In the party’s Congressional wing, Joint Economic Committee Vice Chairman Kevin Brady, joined by, now, 45 House co-sponsors and your colleague Sen. Mike Lee call for passage of the “Sound Dollar Act” as the first important step towards better monetary policy. Perhaps Sen. Portman’s implication that current Fed policy is stimulative was merely a rhetorical lapse. If so it is one from which he can quickly recoup by consulting with good money GOP champions.

At the party base, Libertarians, led by Ron Paul, enthusiastically call for recognizing gold as money.  Tea Partiers, led by Herman Cain, demand a 21st Century Gold Standard.  Supply Siders led by Steve Forbes, Lew Lehrman and Sean Fieler (institutes who the latter two chair this columnist professionally advises) also call for restoring the gold standard.   Conservatives, led by Reagan’s counselor and attorney general Edwin Meese, call for monetary reform in their 2012 consensus agenda.  In academe, elite economists such as Prof. Taylor call for, well, predominantly the Taylor Rule.

There’s a discussion under way within the GOP as to whether the “Taylor Rule” or the “Golden Rule” is the better choice.  But there is a firm consensus within the party — one shared, according to Rasmussen , by the voters — that good money is essential to job growth and prosperity.

Romney’s economic team understands the need for monetary reform. Led by Hubbard, Team Romney is on record demanding just that.  Romney’s prospects may well depend, now, upon whether Romney’s political team will grasp how Obama’s effort to attach blame to the GOP for the lousy economy can be turned back on Obama himself by an attack on Obama’s support for louche Fed policy.


by Charles Kadlec

This article was published on June 11 by

Monetary policy in the U.S. has tightened, inadvertently, but with potentially dire consequences for the economy, employment and the stock market.  The source of tight money is a failure of the Fed to act in the face of a surge in the demand for dollars as individuals and corporations shift money balances out of the euro and into the dollar.

This episode is but the latest example of the cost of a monetary system that relies on the “best judgments” of a dozen voting members of the Federal Open Market Committee (FOMC) to set monetary policy. Without concrete rules and procedures that would permit monetary policy to adjust to the inevitable fluctuations in the demand for dollars as they occur, those in charge must wait for evidence in the real economy of either too much for too little money before they can arrive at a judgment as to what action to take next.  By then, the Fed is relegated to damage control from its own inaction.  The consequence is a more cyclical economy prone to financial crises.

The preponderance of evidence now points to a sudden and harsh reversal of inflationary pressures evident just a year ago, whipsawing commodity producers and adding monetary uncertainty to the existing impediments to economic growth in the U.S. and around the world.

Last June, the Fed’s second round of “quantitative easing” (QE2) was coming to an end. Over the prior eight months, the Fed had purchased $600 billion in assets, increasing the monetary base or supply of money by 33% above its year earlier level.

Such an increase in the supply of dollars in the face of steady demand led to a fall in the value of the dollar.  Over those same twelve months, commodity prices as measured by the CRB spot commodities index were up 34%. Metals prices were up 37%, oil up 28% and foodstuffs up an incredible 45%.

But, when QE2 stopped, the Fed virtually stopped growing the monetary base. As a consequence, the year-over-year increases began to fall, hitting 29% at the end of December.  By March, the 12-month change had dropped to 16%. By the end of May, the monetary base was virtually unchanged from its June 2011 level.

A zero increase in the supply of money may have been fine had not the European financial crisis intensified over the same period.  As confidence in the sovereign debt of spread from Greece to Spain, Portugal and Italy fell, so did trust in the stability of banks stuffed with government bonds and the stability of the euro itself.   The latest concerns over Greece and now Spanish banks has intensified the flight to the dollar.

If you hold the quantity of a good constant in the face of rising demand, the price of that good goes up.  The same is true for the value of a currency.  In the past year, the value of the dollar has gone up – 16% against the euro. The year/year change in the CRB spot commodity index is now minus 14%.  The dollar price of metals and foodstuffs have fallen 17% and oil prices have dropped 15% to under $85 a barrel.

Apologists for the Fed will blame the decline in prices on a weak economy.  But, that is exactly backwards.  A swing from a 34% increase in prices to a 14% decline in prices is the epitome of price instability. That kind of instability increases uncertainty, and therefore makes it a lot harder to do business.  When monetary instability makes it harder to do business, no surprise, the economy slows and job creation comes dangerously close to a halt.

The root problem is the Fed has no operating procedure to enable a timely response to rapidly changing demand for dollars.  Instead, a dozen men and women on the FOMC meet every six weeks, review a hodgepodge of data on inflation and economic output, almost all of which is at least a month old and subject to revision, and then use their best judgment to set monetary policy. Such an approach provides no reliable answer to the fundamental operational question the Committee is charged with answering:  Should the Fed expand, contract, or leave unchanged the monetary base through the sale and purchase of securities?

The consequence is an earnest debate among the members of the FOMC as each attempts to divine what to do next.  Last week, for example, Fed Chairman Ben Bernanke necessarily was guarded in his testimony before Congress’s Joint Economic Committee.  Speaking in double negatives about next week’s FOMC meeting he said: “At this point, I really can’t say anything is off the table.”

Really?  Everything is on the table from interest rate hikes to another round of quantitative easing?

If the Fed were to announce another bout of “quantitative easing” as a response to economic weakness, it has no assurance that it would not undermine confidence in the future value of the dollar.  If that were the case, dollar holders could begin to dump dollars as well as euros in favor of gold, precious metals and other foreign currencies.  Such a drop in the demand for dollars would, in fact, be inflationary.

On the other hand, failure to act could lead to yet another financial crisis, as the downward pressure on prices reduces cash flow to businesses large and small, dims the prospects for corporate profits, and forces banks to pull back on loans to all but the most credit worthy borrowers.  Faced with increased monetary uncertainty, individuals would hoard cash and insured bank deposits, further increasing the demand for money.  The financial system would thus amplify deflationary pressures, leading to increased unemployment and triggering another recession.

Such a quandary is the result of a trial and error monetary system that ostensibly manages the economy, hopes to avoid financial crises, and strives to devalue the dollar no more than 20% over the next 10 years.

What is needed is a clear set of operating procedures that will empower the Fed to adjust the quantity of money to shifts in the demand for money in real time.  By matching the supply of dollars to the demand for dollars, the Fed can restore price stability.  Because price stability that can be trusted makes it easier to do business, implementing such a procedure is the only way for the Fed to meet its other legal obligation of encouraging full employment.

To achieve such a price rule, the Fed should consider announcing that it will arrest any further decline in a specified basket of spot commodity prices.  Once the year-over-year change in such an index returns to zero, the Fed would then commit itself to expanding or contracting the monetary base in order to keep the year/year change of the commodity index to within a band of plus or minus 10%.

The stability provided by such a “price rule” would provide an important step toward restoring the ultimate guarantee of the quality of the dollar – once again making the dollar as good as gold.  With the dollar’s purchasing power stabilized, restoring a dollar convertible into a fixed weight of gold would formalize and operationalize a robust, Constitutionally based price rule for U.S. monetary policy.  The result would be a new era of price stability, economic growth, high paying jobs and rising standards of living associated with the gold standard throughout history.



We Need A Dollar As Good As Gold — Herman Cain, Wall Street Journal

A Gold Standard is to the moochers and looters in government what sunlight and garlic are to vampires

My 9-9-9 tax code replacement plan provoked enormous enthusiasm during my presidential campaign because it represents the largest transfer of power in the history of the republic. By instituting a 9% income tax, a 9% business tax, and a 9% national retail sales tax—and eliminating most of the remaining tax code (including the many hidden taxes built into the process of doing business)—we would simplify the system for everyone and rob politicians of their ability to use the code to manipulate economic activity.But why stop there? Washington thwarts prosperity through more than the tax code.

The present monetary system is an abysmal failure by any objective measure. As the former chairman of the Federal Reserve Bank of Kansas City, I can say with firsthand experience that it is not the people of the Fed, but the actual structure, that needs reform. Our liberty and prosperity depend on it.

Think of economic growth as the result of two gears operating together—low tax rates and sound money. When both gears are fully engaged, the economy moves forward. When the gears become disengaged, the middle class suffers. That’s why, as convinced as I am of the power of the 9-9-9 concept, we need sound money to go with it. Read entire article



Ben Talks Down The Gold Standard, In Favor of Bernanke — John Tamny, RealClearMarkets

“Facing increasing pressure from an electorate understandably skeptical about the ability of his central bank to manage the dollar, Fed Chairman Ben Bernanke used a speech at George Washington University this week to talk down the gold standard. Walter Bagehot long ago wrote that central banks attract “vain” and “grasping” men, so it’s no surprise that Bernanke would decry a currency system that would happily render him and his Fed irrelevant.

“The good news is that if Bernanke’s speech is seen as the “gold standard” for objections against same, the path to stable money values anchored in gold free of hubristic central bankers like Bernanke is far more certain. Indeed, his objections don’t stand up to the most basic of scrutiny, and in Bernanke’s case, were often contradicted by Bernanke himself. Though he did so unwittingly, with his every utterance Bernanke made a wildly strong case for gold…

“Never lacking in unwarranted self-assurance, Ben Bernanke set out this week to discredit the gold standard, and in doing so, perpetuate the employment of meddling central bankers. The problem for the Chairman is that a speech meant to discredit the gold standard made the case for it in ways that true gold standard advocates have never done on their own. Thank you, Mr. Chairman.”  Read entire article


By Charles Kadlec

This article was published by on March 19, 2012

Do you know why oil and prices are moving sharply higher? Some blame the oil companies, charging they are manipulating prices. Others cite U.S. sanctions on Iran and the threat of a military encounter that would disrupt the flow of oil from the Middle East.

Speculators, too are blamed for ostensibly bidding up the price of oil. In the political arena, President Obama is taking credit for increased domestic oil production even as his critics point out the slow pace of drilling permits issued by his Administration soon will hamper additional increases in the U.S. oil production.

Yet, the basic reason for higher energy prices is being overlooked, even though it is right before our eyes: Oil prices are up because the value of the dollar is down. Our common sense hides this source of higher prices because we view the dollar as fixed, and prices as moving. News reports explain the sharp rise in consumer prices in February were caused by higher energy and food prices, implying that higher prices cause inflation. Of course, higher prices do not cause inflation. Higher prices are inflation.

The cost of this deception goes well beyond the vilification of the oil industry and free markets. The real price of the on-going debauchery of the dollar is measured by the loss of our prosperity and the debasement of our liberty. Continue reading »


By Ralph Benko

NEW YORK (TheStreet) — In the aftermath of former House Speaker Newt Gingrich’s call for a new Gold Commission, columnist Gary Weiss launched into a witty attack on proponents of the gold standard:

Gold bugs, the lunatic fringe of investing and economics, have crept into national politics. What’s next? Flat-earth advocates? Area 51 conspiracy theorists?

Weiss is in excellent elite company. According to a letter to the New York Times, “When asked about a gold standard [at a February interview at the 92nd Street Y in New York City former Treasury Secretary Larry] Summers recoiled and shrieked, ‘A gold standard is the creationism of economics!’”

That great bastion of reaction, the University of Chicago, and specifically its Booth School, recently polled 40 economists to discover exactly none supporting the gold standard. Austan Goolsby, former chairman of the Council of Economic Advisers, also of Booth, tweeted, as part of #fedvalentines, “Roses are red. Violets are pink. Don’t listen to goldbugs. No one cares what they think.”

All very merry. The only problem? Two, really.

Violets aren’t pink.

And lots of people are beginning to care what goldbugs think. Continue reading »


by Charles Kadlec

This article was published on February 28, 2012 by 

Once again we are faced with the pain of higher oil and gasoline prices, and the spectacle of politicians and pundits blaming all the usual suspects: trouble in the Middle East, greedy oil companies, OPEC, China, gas guzzling cars, and America’s penchant to consume too much energy.

No doubt, the immediate cause for the sudden rise in the price of oil and gasoline is fear of disruptions in the supply of oil due to unrest in the Middle East and the growing risk of war with Iran. The scramble to secure oil supplies now and into the future has contributed to the sharp increase in the price of oil on both the spot market and for future delivery.

But the fundamental culprit all choose to overlook is the weak dollar policy of the Obama Administration and Federal Reserve. And, because the Fed is given a pass, oil and gasoline prices are likely to be headed higher still.

In fact, the recent surge in gasoline prices above $4.00 a gallon was fully predictable. I can say that without reservation because last November I wrote: “… it is the fall in the value of the dollar to less than 1/1700 of an ounce of gold that will drive oil prices back above $100 a barrel, sending gasoline prices north of $4.00 a gallon.” Continue reading »


by Charles Kadlec

February 6, 2012

The Federal Reserve Open Market Committee (FOMC) has made it official:  After its latest two day meeting, it announced its goal to devalue the dollar by 33% over the next 20 years.  The debauch of the dollar will be even greater if the Fed exceeds its goal of a 2 percent per year increase in the price level.

An increase in the price level of 2% in any one year is barely noticeable.  Under a gold standard, such an increase was uncommon, but not unknown.  The difference is that when the dollar was as good as gold, the years of modest inflation would be followed, in time, by declining prices. As a consequence, over longer periods of time, the price level was unchanged.  A dollar 20 years hence was still worth a dollar.

But, an increase of 2% a year over a period of 20 years will lead to a 50% increase in the price level.  It will take 150 (2032) dollars to purchase the same basket of goods 100 (2012) dollars can buy today.  What will be called the “dollar” in 2032 will be worth one-third less (100/150) than what we call a dollar today.

The Fed’s zero interest rate policy accentuates the negative consequences of this steady erosion in the dollar’s buying power by imposing a negative return on short-term bonds and bank deposits.  In effect, the Fed has announced a course of action that will steal — there is no better word for it — nearly 10 percent of the value of American’s hard earned savings over the next 4 years.

Why target an annual 2 percent decline in the dollar’s value instead of price stability?  Here is the Fed’s answer:

“The Federal Open Market Committee (FOMC) judges that inflation at the rate of 2 percent (as measured by the annual change in the price index for personal consumption expenditures, or PCE) is most consistent over the longer run with the Federal Reserve’s mandate for price stability and maximum employment. Over time, a higher inflation rate would reduce the public’s ability to make accurate longer-term economic and financial decisions. On the other hand, a lower inflation rate would be associated with an elevated probability of falling into deflation, which means prices and perhaps wages, on average, are falling–a phenomenon associated with very weak economic conditions. Having at least a small level of inflation makes it less likely that the economy will experience harmful deflation if economic conditions weaken. The FOMC implements monetary policy to help maintain an inflation rate of 2 percent over the medium term.”

In other words, a gradual destruction of the dollar’s value is the best the FOMC can do.

Here’s why:

First, the Fed believes that manipulation of interest rates and the value of the dollar can reduce unemployment rates.

The results of the past 40 years say the opposite.

The Fed’s finger prints in the form of monetary manipulation are all over the dozen financial crises and spikes in unemployment we have experienced since abandoning the gold standard in 1971.  The financial crisis of 2008, caused in no small part by the Fed’s efforts to stimulate the economy by keeping interest rates too low for, as it turned out, way too long is but the latest example of the Fed failing to fulfill its mandate to achieve either price stability or full employment.

The Fed’s most recent experience with Quantitative Easing also belies the entire notion that monetary manipulation can spur the economy.  Between November 2010 and June 2011, the Fed tried to spur economic growth by purchasing $600 billion in Treasury securities, flooding the banking system with reserves and keeping interest rates low.  In response the economy, which had been growing at a 3.4% annual rate, slowed to a 1% annual rate in the first half of 2011.  Once, the Fed stopped supplying all of that liquidity, economic growth in the second half of the year accelerated to a 2.3% annual rate.

Second, the Fed does not use real time indicators of the price level.  Instead, it views inflation through the rear view mirror of the trailing increases in the PCE.  And, even when it had evidence of rising inflation — as it did in the first quarter of last year — it chose to temporize, betting that the spike in inflation would prove temporary.

This spike in inflation did prove temporary, as Fed Chairman Bernanke predicted at the time, but not for the reasons — a slack economy — that he cited.  Instead, the growing debt crisis in Europe led to a massive shift in deposits out of the euro and into the dollar — an event totally out of the Fed’s control.  Yet, this increase in the demand for dollars was far more important than any action taken by the Fed because it increased the value of the dollar and produced a slowdown in the inflation rate.

What we are left with is a trial and error monetary system that depends on the best judgment of 19 men and women who meet every six weeks around a big table at the Federal Reserve in Washington.  At the end of a day and a half of discussions, 11 of them vote on what to do next.  The error the members of the FOMC fear most when they vote is deflation.  So, they have built in a 2% margin of error.

Given the crudeness of the tools the FOMC uses to set monetary policy, allowing for such a margin of error is no doubt prudent.  For example,  when the economy slowed in the first half of last year, inflation picked up, accelerating to a 6.1% annual rate during the second quarter.  And, when the economic growth accelerated in the second half, inflation slowed.  These results are the precise opposite of what the Fed’s playbook says are supposed to happen.

The best the Fed can do — an average debauch in the dollar’s value of 2% a year while producing recurring financial crises and a more cyclical economy — is demonstrably inferior to the results produced by the classical gold standard.  Here’s just one example.   The largest gold discovery of modern times set off the 1849 California gold rush and increased the supply of gold in the world faster than the increase in the output of goods and services.  The price level in the U.S. did increase by12.4 percent over the next 8 years.  That translates into an average of just 1.5% a year.  The gold standard at its worst was better than the best the Fed now promises to do with the paper dollar.

The Fed’s best is hardly good enough.  The time has arrived for the American people to demand something far better — a dollar as good as gold.

Copyright 2012 by Ralph Benko and Charles Kadlec, Washington, DC and Laguna Woods, CA.
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