Study their behaviors. Observe their territorial boundaries. Leave their habitat as you found it. Report any signs of intelligence.

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Tuesday, November 27, 2007

Liberty Dollars and Inflation Sense

If the Federal currency police were looking to give the Ron Paul campaign a boost, their abhorrent raid on the offices of the Liberty Dollar was pretty much the wisest move they could make. Most Americans don't remember that from 1933 through 1974 it was illegal in this country to own gold bullion without a license. The end of gold ownership regulations, along with the ends of the draft (1973), wage and price controls (1974), and the U.S. war in Vietnam (1975), must have contributed to the optimism of the early days of the Libertarian Party. Unfortunately, those four decades of gold regulation contributed to a paranoia about currency that still lingers in libertarians like Ron Paul. They claim that the government statistics showing low inflation since 1982 are a lie, and aren't persuadable by technical information about the CPI or systematic rebuttals to their fevered and ever-shifting arguments.

Two delicious ironies arise here. The first is that, if the gold bugs are right, then they should at some point be getting rich from their contrarian insights. That point always seems to be slipping into the foggy future. The second is that, if gold bugs had sufficient faith in -- or at least understanding of -- how markets work, they would realize that the modest 2%-4% inflation they decry is a scourge that any semi-intelligent person can hedge against using the right market instruments. What's economically most poisonous about inflation is that it historically has come in spiky and hard-to-anticipate amounts. A steady pace of low single-digit inflation is really only a problem for people who stuff currency into mattresses. (Indeed, if inflation gets to close too zero, it might draw the economy into a liquidity trap -- for details, see this Bernanke speech, and Tyler Cowan's dissenting view). A year ago, I had the pleasure of watching Prof. David Friedman sit in a living room and systematically dismantle an overmatched gold bug's arguments against fractional reserve banking. The closest approximation I can easily find on the web is this wonderful little paper he wrote in 1982 for the Cato Institute: Gold, Paper, or...: Is There A Better Money?

A somewhat dated overview of the the details of how the Fed influences inflation is this 1990 entry in the indispensable Concise Encyclopedia of Economics, part of the invaluable Library of Economics and Liberty. Some newer information is in this 2002 blog posting by Brad DeLong, and this 2004 paper about a "new monetary consensus". When liberal economists like DeLong can agree with libertarian economists like Tyler Cowan on the uninterestingness of the gold standard as a policy position, it's clear to me that gold buggery and Federal Reserve conspiracy theories are just a movement burden that we sane libertarians will have to grin and bear. The only interesting question I see on the inflation front is that regarding asset inflation: equities and real estate, and the extent to which their premiums are being driven (respectively) by the post-1995 productivity resurgence and by allegedly loose monetary policy. The conventional wisdom seems to say yes, but at least one mainstream economist says no (to the second thesis). The wild card for me here is the geolibertarian analysis of real estate valuation. I need to search the writings of Prof. Fred Foldvary and find out what geolibertarians think about inflation and asset prices.


Anonymous said...

Do you not follow Austrian economics, Brian?

Brian Holtz said...

I think academic Austrians are interesting, but not entirely persuasive (from what I've read so far). I try not to hold against Austrian Economics the antics of non-academic Internet/LP Austrian fan-boys (including Ron Paul a lot of the time), but it's not easy. I remember bookmarking a rejoinder to Bryan Caplan's persuasive "Why I Am Not an Austrian Economist", but I haven't read it yet. For now, I remain sympathetic to Milton Friedman's saying "there is no Austrian economics - only good economics, and bad economic".