Mark W. Hendrickson
Mark W. Hendrickson is a faculty member, economist, and contributing scholar with the Center for Vision and Values at Grove City College, Grove City, Pennsylvania. These articles are republished from V & V, a website of the Center for Vision & Values.
Cap-and-Trade Update
On Sept. 30, Senators Barbara Boxer (D-CA) and John Kerry (D-MA) unveiled their proposal for cap-and-trade (C&T) legislation. The Senate bill calls for a 20 percent reduction of U.S. carbon dioxide (CO2) emissions by 2020, and an 80 percent reduction by 2050 -- targets similar to those in the C&T bill passed by the House of Representatives in June.
The timing of this proposal is ironic. Scientists in the global warming alarmist camp have begun to change their tune. They are now telling us that the earth is likely to cool for a few decades before entering a prolonged period of rapid warming. This is an astounding admission; they have essentially demolished the man-made global warming theory.
Here is why: For years alarmists have insisted that CO2 warms the planet. Now they assert that rising levels of CO2 won't warm the earth for 30 or 40 years, but then will do so later on. Come again? Does CO2 warm the earth or doesn't it? Alarmists are finally conceding the main argument of global warming skeptics: Other forces -- particularly solar variations -- overwhelm the greenhouse effect. It's time to focus on those other factors instead of obsessing over CO2.
It is also ironic that the Senate bill was unveiled just one week after the G-20 declined to prioritize an international climate agreement at the upcoming Copenhagen meeting. The foreign heads of state who visited Pittsburgh are unwilling to cripple their economies by limiting CO2 emissions, although they surely won't object if President Obama and his congressional allies torpedo the American economy with C&T. (C&T would slam the American economy to the tune of $1,700 annually per family, according to a study performed by the Environmental Protection Agency -- a study that Team Obama squashed, until its release was obtained via the Freedom of Information Act.)
The bad news is that, in spite of the strategic retreat of scientists unable to deny earth's present cooling trend and the dim prospects for a strong international agreement in December, Congress may still pass C&T legislation. The progressive/environmentalist power base of the Democratic Party will rally behind such a bill. It will be joined by some odd bedfellows, e.g., powerful corporations like Goldman Sachs eager to make fortunes by establishing a market for buying and selling CO2 permits (a role for which Enron had the inside track when this scheme first surfaced in the 1990s). Also, nuclear-power companies and other utilities with no or low CO2 emissions would reap immense windfall profits from a C&T scheme. To the chagrin of anti-capitalist greens on the left and free-market economists on the right, C&T could end up being the most expensive corporate welfare bill in history.
On Oct. 2, The Wall Street Journal's Kimberly Strassel reported that three CEOs of giant utilities expecting to profit from C&T legislation have withdrawn from the U.S. Chamber of Commerce in protest of the Chamber's reasonable position that the government be transparent about the "science" used to justify C&T. While it's no surprise that many CEOs have no compunctions about ambushing their competition, it is reprehensible that they are willing to sell out the freedom and prosperity of the American people.
As reported by the Financial Times on Sept. 14, some Britons are already being fined for having traveled "too far," thereby exceeding government-mandated personal CO2 emission limits. That's what Americans will eventually face if Uncle Sam gets the proverbial camel's nose under the tent by passing legislation -- however minimal at the outset -- that incorporates the principle that the government may regulate our energy consumption and thereby regiment our lives.
The really bad news for the American people is that, even if we rise up in sufficient numbers to block draconian C&T legislation from being enacted, we will STILL be saddled with costly caps on CO2 emissions. That's because the EPA is now required to regulate them, because CO2 was officially designated as a pollutant earlier this year.
The EPA recently announced that it intends to start by regulating only the 10,000 or so industrial companies (such as utilities and refineries) that emit over 25,000 tons of CO2. This would cost jobs and drive up the price of electricity and gasoline for the rest of us. The EPA's target is arbitrary and illegal at the moment, since existing legislation mandates a threshold of 250 tons of emissions (a discrepancy that the Senate bill would eliminate by stipulating the higher figure).
There is a simple way out of this nightmarish mess. Instead of the Senate's bloated 821-page proposal, Congress should enact a one-sentence bill: "For legal purposes in the United States, carbon dioxide shall not be regarded as a pollutant." Sadly, with this Congress, we're a million miles away from such enlightened policymaking.
Gold, Geopolitics, and the Carry Trade
The price of gold has recently spurted to a new all-time high in terms of U.S. dollars. I'm neither an expert nor a market timer, but let me offer a few perspectives on this event.
To most people, including gold bugs, gold is an inflation hedge, preserving purchasing power at a time of currency depreciation. Today, unlike the gold bull market in the 1970s, gold is rising while consumer and producer prices are falling. Nevertheless, many economically knowledgeable market participants are getting out of Dodge -- that is, they are reducing their holdings of dollars now -- some to avoid potential losses from future dollar depreciation and some for other reasons.
The market price of things reflects how much people value them. For people to value a currency highly, they must have confidence both in the integrity of the currency and, in the case of a fiat currency, the political and financial viability of the government issuing the currency. Confidence in the buck is currently low because Washington's fiscal policy is profligate and out of control, and because Federal Reserve Chairman Ben Bernanke has stated that the Fed will create as many dollars as deemed necessary to prevent a depression. (For the record, there is no guarantee that monetary policy, inflationary or otherwise, can prevent a depression. It is possible to have a hyperinflationary depression.)
Market prices decline when sellers outweigh buyers. The dollar currently has lots of sellers. China, for example, is hedging its exposure to dollars by exchanging paper assets for hard assets, buying massive quantities of raw materials around the globe, while also encouraging its own citizens to diversify into gold and silver. There are recurring rumors that some Arab Gulf states, China, Russia, France, and maybe even Japan would like to replace the buck with a basket of currencies and gold for oil transactions. The Federal Reserve Note may become "the old maid" of the global currency markets.
Another important, but generally under-appreciated, factor affecting the price of gold is geopolitics. Eight-hundred dollars an ounce gold in January 1980 was, among other things, an emphatic no-confidence vote for the United States as a world power. Under Jimmy Carter, the United States appeared impotent and incompetent on the world stage. Soviet tanks rolled into Afghanistan, Iran held over 50 Americans hostage for 444 days, and everyone remembered how Carter had kissed Leonid Brezhnev. The dollar tanked and gold soared. When Ronald Reagan reasserted America's resolve and effectively stood up to Soviet expansionism, the dollar entered a prolonged bull market and gold a prolonged bear market.
Today, President Obama seems paralyzed in Afghanistan, clueless about Iran, makes unilateral concessions to the likes of Vladimir Putin and Hugo Chavez, and gold is at record highs despite overall price deflation. Nobody wants to hold the currency of a declining power; hence, until our president starts projecting strength, the dollar is likely to remain under pressure. Many foreigners love to gripe about American power, but when push comes to shove, they generally prefer the relative stability provided by a strong United States and a strong dollar.
Another major factor affecting the gold-dollar exchange market today is "the carry trade." This is a currency-trading technique whereby speculators (everyone from financial institutions to hedge funds to individual investors) borrow money at low interest rates in one currency, then sell that currency to buy another currency where they can earn higher interest rates, thereby profiting from interest rate spreads.
In recent years, the Japanese yen had the lowest interest rates, and therefore was sold to finance the carry trade. Incidentally, this policy was designed to prop up politically connected too-big-to-fail bankrupt banks, resulting in years of economic stagnation in Japan.
Uncle Sam and the Fed have adopted a similar program today. The Federal Reserve is keeping interest rates near zero, so currency traders are selling dollars (accentuating the already bearish trend in the buck) to buy other currencies in the search for yield. Since the Fed has insisted that it will hold interest rates at these amazingly low levels at least through 2011, many currency traders are selling dollars to buy euros, yuan, the Brazilian real, Canadian, Australian and New Zealand dollars, etc. (Note to amateur speculators: The carry trade isn't as risk-free as it seems. If there is a financial panic similar to last fall's, panic buying of the dollar might crush those who are "short" the buck.)
Incidentally, since one of the traditional arguments against buying gold is the fact that it pays no interest, today's super-low interest rates on dollar-denominated savings practically eliminate the opportunity costs of converting dollars to gold, further incentivizing a shift from dollars to gold.
This economist doesn't know the future, and this article isn't giving investment advice. Gold prices may continue to soar or they may get caught in a deflationary downdraft. I will, however, make one categorical assertion: Gold is warning us that our country is on the wrong track.
Monetary Madness
China, Russia, et al. are talking about shifting their monetary reserves out of U.S. dollars. Gold has hit $1000 per ounce, even though wholesale and retail prices exhibit a deflationary bias. The United Nations has called for a new world currency to replace the dollar. What's going on?
All of these phenomena are early death throes of Federal Reserve Notes. I balk at saying "the U.S. dollar," because a "dollar" is still defined in law as a certain quantity of silver or gold, whereas the U.S. currency that now circulates here and around the globe consists of nothing more than scraps of paper (actually, a linen-cotton compound) -- a "fiat currency." (Technically, Federal Reserve Notes aren't even money. Historically, "money" denoted coinage of metals prized in the commercial marketplace; therefore, only a currency redeemable in those metals is a genuine money substitute. Federal Reserve Notes s are fakes, nothing more than legalized counterfeits of true money substitutes.)
Whether Federal Reserve Notes survive -- that is, whether they continue to retain purchasing power and function as money -- for a few more years or a few more decades is unknowable. In fact, the Federal Reserve Note could strengthen against other currencies if the powers-that-be would trigger another financial crisis like last year's. (Isn't that a wretched option?) Inevitably, though, Federal Reserve Notes will become worthless, just as every other fiat currency in world history eventually ends up worth nothing more than what they are -- little scraps of material.
You may hear some politicians and commentators complain about the Chinese and others as they rebel against the dollar's status as the world reserve currency. You may say that the Chinese have no business stating that our government needs to stop its spendthrift, debt-bingeing ways. The fact of the matter, though, is that the Chinese have a right to speak out on these issues. After all, the Chinese are joined to us at the financial hip. They hold reserves of over two trillion Federal Reserve Notes, and close to one trillion of Treasury debt.
Put yourself in their shoes: If we held that much of a foreign currency, and we could see that the government of that country was in the process of debauching that currency by having its central bank flood the financial system with newly created reserves while the government's debt was exploding as a result of reckless, runaway spending, wouldn't you worry? Wouldn't you be tempted to feel resentful and indignant?
It is vital to realize that neither the Chinese nor the Russians nor any other foreign nation has put us in this predicament.
No Laughing Matter
Who won the Cold War? That's a no-brainer. The United States prevailed while the Soviet Union collapsed, and the People's Republic of China dumped Marxism; capitalism (free markets and private property) triumphed over socialism (centrally planned markets and state-owned property); an ethos of individual rights proved to be more resilient and healthy than collectivist ideology; relatively small, democratic government clearly was demonstrated to help a society prosper far more effectively than elitist Big Government.
How ironic, then, that voices in Russia and China are mocking our current Big Government policies. Those whose countries took the tragic, impoverishing detour through Big Government hell, now react with scorn and derision as we Americans charge headlong down that same path. What an amazing spectacle it must be for them to see the victor of the Cold War borrow many pages from the losers' playbook.
To read a startling indictment of the American predicament, Google the words "American Capitalism Gone with a Whimper," the title of an article by Stanislav Mishin. The author writes, "the American descent into Marxism is happening with breath-taking speed."
This decline has happened because, according to Mishin, "the population was dumbed down through a politicized and substandard education" that produced millions of Americans who "know more about their favorite TV dramas than the drama in D.C. that directly affects their lives." Mishin also faults the widespread abandonment of Christ's religion in America, our loss of faith. This is the cultural backdrop for a political system that has culminated in Barack Obama's unprecedented "spending and money printing." Mishin believes that, under Obamanomics, "America at best will resemble the Weimar Republic and at worst Zimbabwe."
Earlier this year, reports Mishin, "Prime Minister Putin . . . warned Obama and UK's Blair, not to follow the path to Marxism, it only leads to disaster." Mishin has concluded that we are ignoring Putin's warning -- based on 70 years of suffering during the nightmarish Soviet experiment in central planning -- and he concludes:
The proud American will go down into his slavery without a fight, beating his chest and proclaiming to the world how free he really is. The world will only snicker.
When I first read this astounding diatribe, I thought perhaps it had been written as a satire, almost as a spoof of what some libertarian writers in the United States have written. After consulting with a Russian friend, I have concluded that Mishin wrote in complete earnestness. Either way -- satire or grim analysis -- what Mishin wrote is no laughing matter. Mishin's is one of many voices, foreign and domestic, warning us of the dangers of the faith that government can be omnicompetent and can meet all our economic needs.
Adding to the irony of a Russian warning the United States about the dangers of Marxism is the fact that this article appeared in the online publication Pravda.ru -- the contemporary version of the Soviet-era newspaper Pravda that served as the official Communist Party channel for pro-Communist, anti-American propaganda.
Another harsh indictment of our ill-advised embrace of Big Government occurred on June 1, during Treasury Secretary Tim Geithner's official visit to China. Speaking at the University of Beijing, Geithner assured a large audience of students that China's large holdings of U.S. Treasury securities were "very safe." The students laughed out loud. This reaction might have been unusually rude, but it was brutally honest. They didn't believe Geithner for one second.
When the ability of the United States government to repay its debts (or at least, without doing so in significantly depreciated dollars) is perceived as a joke, it is anything but a laughing matter for our country. The Chinese gave us a wakeup call, although we appear not to have heeded it.
The Chinese students see what is plain for anyone with eyes to see. For years, fiscal discipline has been eroding in Washington, but President Obama has increased government spending with reckless abandon as the leviathan government absorbs more and more of the private sector. With Uncle Sam's total financial obligations totaling approximately five times our GDP, there is no way those debts and promises can be honored. The most likely outcome will be Uncle Sam -- the largest debtor in human history -- paying off those debts in greatly depreciated dollars. Indeed, our one-trick Federal Reserve (Motto: When there's a bump in the economic road, inflate) already has begun to create vast sums of new dollars through the mechanism of "quantitative easing" -- the direct purchase of the bonds that the government issues to finance its massive spending agenda.
The Chinese students laughing at Geithner told us implicitly what Stanislav Mishin told us explicitly: It is runaway government spending, stemming from the socialistic error that the government can be all things to all people, which threatens us all with financial cataclysm, national bankruptcy, and the loss of our prosperity and our freedoms. From the perspective of the Russians and the Chinese, the joke is on us. But for all of us, America's plunge into the Big Government trap is no laughing matter. *
"[G]overnment, even in its best state, is but a necessary evil; in its worst state an intolerable one." --Thomas Paine
