Ron Paul has some predictions on the current economic downturn. Let’s hope that his predictions don’t come true. The Financial Times reports:
“People will start to abandon the dollar as current and past economic policies create a steep rise in interest rates,” Mr Paul says.
“If you are in Treasuries, you will need to be watchful and nimble to time your escape.”
Unfortunately, cashing out will not protect the value of investments, he insists, because “fiat” currencies will all decline over the coming years as measures to try to haul the world economy out of recession fail. “The current stimulus measures are making things a lot worse,” says Mr Paul.
“The US government just won’t allow the correction the economy needs.” He cites the mini-depression of 1921, which lasted just a year largely because insolvent companies were allowed to fail. “No one remembers that one. They’ll remember this one, because it will last 15 years.”
At some stage – Mr Paul estimates it will be between one and four years – the dollar will implode. “The dollar as a reserve standard is done,” he says. He sees little hope for other currencies where central banks have also created too much liquidity dating right back to the early 1970s.
“Europe and the US will both have to fundamentally change their money systems,” he adds.
And don’t even mention shares to Mr Paul: “The last place you want to be is in the stock market,” he says. “It may not bottom out for 10 years – just look at Japan.”
I don’t agree with most of Dr. Paul’s solutions, but he can sometimes be very accurate in putting his finger on problems. He is absolutely correct about the problem of over-liquidity in the US credit markets and that there is a very real potential for quite long term stock market recession, at least compared to the insane elevator ride up, up, up we have been having since the 1950s, broken only briefly my comparably mild recessions.
The problem is that Dr. Paul believes that one solves problems by ignoring them. We have had warnings of the unreliability of stock markets and dangers of over-burdening the credit system since 1929 and the 19th Century, respectively. It was a credit crisis (triggered by the Credit Mobilier scandal) that caused the infamous Black Friday market crash when Ulysses S. Grant was president. Instead of institutionally reforming our economic system, we have applied temporary fixes to individual economic events.
We need a significant rewrite of banking and trading laws. Lending regulations must be clear, straightforward, and must protect bank customers. It should be remembered that banks do not loan their own money, and the laws should be written with that in mind. Likewise, we need to return the stock market to its proper place in our economy: a system for capitalizing business operations. Currently it is an off track betting parlor… at best.
Once the laws are properly written, we need to properly enforce them. The SEC, FDIC, and Federal Reserve must all do their job rather than join in the orgy during economic good times.
I thought this was worth posting to give you and Fritz some new material to debate about.
Eclectic is into external regulation by government agencies while I would prefer to change rules of corporate governance so that internal regulation works (rather than our current pattern of corporate boards rubber stamping the actions of management). Other than that, we often are in a high level of agreement.
Sorry we aren’t generating rhetorical flames to drive trackbacks. 🙂
I find nothing much to disagree with in Dr. Paul’s prognostications. I hope it is more a Japanese-style “no economic growth” rather than full-scale depression. But 15 years seems likely — which brings us right up to the demographic tsunami of the baby boomer retirement. How many greeters does WalMart need?
Rhetorical flames, or even serious debate, doesn’t do anything to generate trackbacks. If it did bring in traffic I’d let all the off the wall comments from wingnuts (both wings, but most often right) through. That would make the comment section useless for any actual discussion.
If the economy stays bad Wal-Mart might need more greeters. After a decade it might be necessary to shop there instead of Nordstrom’s. (What an awful way to describe an economic downturn in real world terms.) Still, your point is valid that there won’t be enough jobs for all the retiring baby boomers. Personally I’m giving up on the idea of retirement. Retirement is for wimps.
If it becomes necessary to shop at Wal-Mart instead of Nordstrom’s, no one will even be able to afford Wal-Mart because the only people working to produce the products sold in the American economy will be working in China, Taiwan, Hong Kong, Japan, and Mexico. No one working means no one buying anything. Even Wal-Mart will be out of business then, however much the current situation benefits them in the short term.
In hopes of getting some of those rhetorical flames going, I will say that I don’t believe ‘internal regulation’ is regulation of any kind or that changes in corporate governance can be accomplished on an institutional level without the force of law behind them.
Asking corporations, or banks, or Wall Street firms to regulate themselves is like asking street gangs to perform the job of the police. The people whose conduct is questionable are not the people to trust to regulate questionable conduct in their neighborhood. It’s like the story about the fox and the hen house.
I did have one thought that I am extremely curious to know Fritz’s thoughts upon, considering his views of corporate governance:
Should we bring back company charters? In the 17th and 18th century a corporation had to be chartered by the royal crown to operate and strictly to adhere to its own rules and agreements or it would be dissolved. We could use similar laws to require a greater degree of self-regulation from corporations if they wish to stay in business. Their charter would be required to pass muster in order to be approved, and they would be required to adhere to their charter in order to stay in business. This would be required of public corporations only.
Board members of private corporations and individual entrepreneurs would be directly criminally responsible for criminal actions commited by their companies.
Maybe that will give you some fireworks, Ron. 🙂
From the Financial Times:
China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.
So far, this move is merely a shot across the bow, but the fact that China is raising doubts about the dollar is not trivial.
For more, see the Naked Capitialism Blog post: http://www.nakedcapitalism.com/2009/03/china-calls-for-new-reserve-currency.html
Eclectic Radical: I’m not sure about Ron, but IMO considering incorporation itself is a creation of government, there’s argument that the only boundary to what can be done with — or to — the corporate form is purely political.
Of course, since in practice its entire point to existence is as a conduit for dumping the costs of business on the general public via favorable government policy, I’d personally rather it cease in the long run.
I like the notion that board members would be responsible for the actions of their corporations — that makes sense to me. You would wind up with very cautious corporations.
I would not agree that the entire point of the existence of a corporate structure is to manipulate government policy — although if governments are there and maleable they will, of course, do so. As will labor unions and any other group. Government is a powerful tool to use — all those pointy sticks.
With proper rules for corporate governance, you should not need external regulations to keep WaMu from giving a mariachi player a mortgage for an expensive house based only on a photo of him in his getup. That should be a no-brainer because the board should have their collective cojones on the line if they are careless with the stockholders’ assets. And, yes, there should be law to mandate that kind of corporate governance.
Well Fritz, here is the thing. Laws mandating proper corporate governance are external regulations, because the mandate is coming from the government and not the corporation. There may be a cosmetic difference between laws setting standards of governance and liability and their proper enforcement and laws dictating what the corporations and and cannot do and their proper enforcement, but either is external regulation of corporations by the government. I can understand the preference for one form of external regulation over the other, for cosmetic reasons, but it is important to remember it is a cosmetic difference.
b-psycho, you are incorrect. The original purpose of corporations was to raise capital for business operations by selling shares of the business enterprise to be launched on the public market. In return for a share in that business’s profits (i.e., dividends) the stockholder provided capital. The government was not involved. The government’s first involvement with corporate affairs was during the Gilded Age, when Teddy Roosevelt and William H. Taft began breaking up monopolies that artificially drove prices up and labor costs down by suppressing competition. Not at all a friendly relationship between the two.
The modern idea of a corporate-government relationship, what we call supply side economics, is based on business practices of the Fascist Party in Italy and the Nazi Party in Germany in the Depression Era and WWII. On the theory that businesspeople knew business better than the government, corporate leaders were brought into the government to handle economic affairs. This led to a form of reverse socialism in which the corporations served government interests in return for government financing. This practice started in the US on a large scale for the first time during the Reagan administration, though it has not yet reached truly ‘fascist’ levels. This relationship is not the reason corporations exist, they predated it. It is simply the natural result of a political belief in the ‘virtue’ of making money divorced from a similar belief in the necessity of ethical behavior in business or government.
You’re actually arguing that the corporate form spontaneously emerged from market forces?
Whether or not it was ‘spontaneous’ is a different story. It is best to say that the joint-stock company, the ancestor of the modern corporation, emerged from the desire for merchants to raise more capital than the middle class was generally able to raise during the 16th, 17th, and 18th centuries. As a result, merchants pooled their resources into larger companies and sold partnerships to wealthier aristocrats in need of liquidity. This is more ‘premeditated’ than ‘spontaneous’, but it certainly a natural outgrowth of the theory of business and economics outlined in ‘The Wealth of Nations.’ Adam Smith’s writing was rather specifically in defense of this activity: the raising of capital through the selling of shares in the profits of business activity. It is better to say that the theory of capitalism emerged from ‘corporations’.
That said, genuine capitalism (as opposed to quasi-fascism in the form of supply side reverse socialism, or actual fascism in the form of actually bringing corporate leaders into the economic mechanisms of government) argues that corporations should be as removed from government as possible but accountable to government. In a genuinely capitalist system, those who invest capitalism in business assume a share of that business’s success or failure. It is traditionally the share-holders and not the government who hold the bag for the corporate officers when business fails.
Eclectic — I would not call it a cosmetic difference. When you regulate externally you have to do so with cumbersome rules and the entities under regulation are working hard to evade the restrictions — so the result is more regulations. Many years ago I did some work for the Air Force Logistical Command. Their pile of regulations for procurement was absolutely frightening — and yet still scams occured. When you set up a system so that entities self-regulate, there is far less friction.
And, yes, I want to move what we have back to something like the traditional form of corporate capitalism.
Rules do not have to be cumbersome. They are frequently made so by bureaucrats, but this is not necessary. If one rights direct, intelligent laws then the regulations can be clear and straightforward. I still can’t calla system ‘self-regulation’ if it is backed by force of law. Still, I think that what you actually mean by self-regulation, from the way you explain it, is something I could certainly accept. Especially if the system is set up for maximum accountability for executives who abuse the system.
Yeah — but I figure if the board members are required to be personally liable to actually perform the duty they take on as representatives of the owners then they will make sure the corporate executives are accountable — because it would be their nuts on the line.
This would mean that being a board member would become something like a full-time high-paying job. Which it should be.