The following is in response to our article, Jeremy Grantham Guarantees Gold will Crash, which appeared on May 18, 2010.
Dear Editor,
Well, it's been over a year and near $700 an ounce since Grantham made his foolish tirade about gold crashing. He's now a marked shill for the corporate bankers, if not worse.
Here’s to reminding him of his ignorant ways in spades!
John Ickes
Editor’s note: In fairness to Mr. Grantham, our article noted that his comment about gold was tongue-in-cheek.
The following is in response to Michael O. Kokesh’s Letter to the Editor, published last week, which was in response to Paul Kasriel’s July 26 commentary, Washington Had a Spending Problem.
Dear Editor,
Michael O. Kokesh’s prescription to put the U.S. government on “a real weight-loss program” would be fine if federal budget deficits had any real-world analogue in bariatric medicine, as he and many others assume. But let’s think about the roles that federal budget deficits and U.S. government debt have played in the economy and financial system since at least 1973, when the Bretton Woods system, the last vestige of a global gold standard, was abandoned by President Nixon. Prior to that point, new, “unencumbered” money — that is, additions to the money stock that were not offset by a corresponding liability — came primarily from gold mines by way of a public or private mint. As Frank Knight and other economists noted long ago, the periodic output of gold mines had to roughly correspond to the periodic accumulation of real capital in the economy in order for the gold standard to work effectively. (It rarely ever did, as gold supplies were characterized by long periods of shortfall punctuated occasionally by massive new discoveries.)
There are two relevant facts to note. First, gold mines had to run perpetual “deficits” of gold — producing gold without ever taking any of it back — in order to provide a growing world with the net financial assets required to support its real economy. Second, no one ever supposed that there was an intertemporal budget constraint on that output. The children and grandchildren of mine owners did not face the prospect of having to someday rebury as much gold in a year as they took out, or worse, rebury all of the gold the mine had ever produced. If enough mines did so, it would have demolished the foundations of the financial economy.
Now that sovereign governments have assumed the same role that gold mines once played in the global economy, those facts apply equally to federal budget deficits and debt. First, as monopoly suppliers of money, governments must, under almost all conditions imaginable, run ongoing deficits that are sufficient to meet the financial demands of their national economies (and for the U.S., the global economy), in much the same way that we used to rely on gold mines for additions to the world’s financial assets. And it’s important to recognize that those deficits aren’t technically financed. Indeed, they can’t be if the government is the monopoly supplier of the money it is “borrowing.” Second, there is neither an actual intertemporal government budget constraint nor any good reason to believe in “paying off” the government’s debt, which would equate to taking back all of the financial assets that have been created by prior deficit spending. If inflation is too high, an appropriate amount of assets can be destroyed via taxation. But inflation is the only true constraint on federal budget deficits.
