Wholesale price increases are rising at double-digit rates. I was one of the few columnists to predict, well in advance, our current inflation, in "Will Inflation be Sweet Meteor of Political Death for Biden Administration?"
Quoting from the excellent economist Professor Steve Hanke: "[I]t is obvious that April's year‐over‐year consumer price index inflation rate of 4.2% is simply a harbinger of more to come. This haunting spectre could spell the end of President Joe Biden's triumphal march."
So, now what? Bloomberg lays out the horns of the dilemma on which Joe Biden, his political future, and his place in history, are impaled: "Inflation or Recession?"
This is conventional wisdom. And wrong.
There's a third option. The Goldilocks Solution.
In "Goldilocks and the Three Bears" our heroine (really, darling trespasser) rejected the extremes of Papa Bear's "too hot," Mama Bear's "too cold," turning to Baby Bear's "just right" ... porridge.
The experts now present our president with two bad options: the "too hot" of inflation and the "too cold" of recession. There's a third option. "Just right."
The Fed calls this a "soft landing," tightening that does not produce a recession.
Alas, Fed-engineered "soft landings" are almost as rare as magical unicorns. Per Fox Business: "Recent research from Alan Blinder, a former Federal Reserve board vice-chairman and a Princeton economist, identified 11 tightening cycles since 1965, of which eight were followed by recessions. Still, that doesn't mean a severe recession is guaranteed: There were five instances of either very mild recessions in which GDP fell less than 1% or there was no economic decline at all."
Does this mean that our, and President Biden's, economic goose is cooked? Probably.
Yet not necessarily. Fed Chair Jerome Powell could get lucky.
Or he could get smart ... and go for the gold.
America long enjoyed consistent, inflation-free equitable prosperity under the classical gold standard. The Bank of England (no bed of goldbugs) observed in a 2011 Financial Stability Report that the gold standard generally proved an effective practical way of conducting a monetary policy that prevented both inflation and deflation (except in times of war and recovery therefrom, or political meddling) while fomenting a consistent climate of equitable prosperity.
Empirically the gold standard consistently produced better outcomes than the Fed's discretion. Yes, gold standard prosperity was punctuated by intermittent disruptions from war and monetary ignoramuses like President Andrew Jackson. The Great Depression itself was caused by a grotesque caricature of the gold standard, not the real deal, meanwhile getting the innocent gold standard wrongly blamed.
The gold standard, in its heyday, was considered sacrosanct by economists, financiers and officials. It is now almost uniformly ridiculed. But ... why?
Recently I enjoyed an extended conversation about federal policy making with the CEO of an important new advanced materials emerging technology company. He observed how it was hard for Washington to solve complicated problems.
Not unsympathetically, I took the contrarian position. Solving complicated problems is comparatively easy, politically (if you know what you are doing, as Herbert Hoover and Gerald Ford did not, and Ronald Reagan and Bill Clinton did).
There's glory there.
Solving, even averting, simple problems is politically more complicated. Voters elect candidates to solve big, complex, problems. Not to avert them.
We voters are fickle that way.
The real difficulty with restoring the classical gold standard is its simplicity. It ran like a top.
No glory there.
The Fed's economists now employ dynamic stochastic equilibrium modeling (which the Fed, sotto voce, admitted does not work well. And yet ... how sophisticated ...).
Professor Robert Mundell, in his 1999 Nobel Prize in Economics acceptance speech, mostly devoted to how well the gold standard worked in practice, stated (around minute 9:30) that it "did not require a great theoretical genius to run gold standards ... It was automatic. All that mattered is that countries would export or import gold, they'd fix their currencies to gold, and their exports or imports automatically changed the money supply, and the changes in the money supply brought about changes in expenditure which brought balance of payments into equilibrium."
Mundell departed from his prepared text to observe, at 9:45", "A monkey could run the gold standard because ... it was automatic."
No glory in running something "a monkey could run." Ph.D. economists are smart.
Yet smart does not always equate to wise. Human nature intervenes.
A false consciousness rooted in the rewards of expert overcomplication leaves President Biden impaled on the horns of a false dilemma.
Inflation? Or Recession?
Either (or in combination, "stagflation") constitutes the "sweet meteor of political death." No, Mr. Biden!
Follow the Goldilocks way. The gold standard.
Not too hot. Not too cold.
Thus, quell inflation, without recession, propelling yourself to reelection ... and a fine place in history.
Ralph Benko, co-author of "The Capitalist Manifesto" and chairman and co-founder of "The Capitalist League," is the founder of The Prosperity Caucus and is an original Kemp-era member of the Supply-Side revolution that propelled the Dow from 814 to its current heights and world GDP from $11T to $94T. Read Ralph Benko's reports — More Here.
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