Fixing Our Broken Finance

It's forty years since President Nixon took the US off the gold exchange standard. Since then the dollar has declined from $35 per ounce of gold to the present $1,800 per ounce. Not good. With the dollar as paper, our ruling class has expanded credit, government debt, and near government debt recklessly, and ordinary savers, people who save money in banks and bonds, have been screwed. The question is: what do we do?

Actually, I think there are two questions. What does each of us do individually, and what should we do collectively.

Let's get me, individually, out of the way first. I reckoned, back in the early days of the current recovery, that the government was going to print money big time. So I determined not to hold more than a minimum in dollars. Thus I converted my cash into gold ETFs and resolved not to hold dollar-denominated bonds. The stock market may go up and down, I reckoned, but it represents the wealth-generating power of the US economy. The dollar may go to zero, but the US economy won't. Nor will gold.

But what about the nation as a whole? What should we do to stop the damage? The easy solution is to say: get back to gold; set a new gold price for the dollar and stick to it. The problem is that this doesn't solve the other problems, the moral hazard of the central bank as the lender of last resort, the resort to inflation to gun the economy in a recession, and the dense net of credit subsidies embedded in the economy. It will be difficult to fix any of those things because the current ruling class gets so much of its power from their continuance.

I'm going to go out on a limb. I think that a new credit and monetary system is going to grow up alongside the current government-dominated system. The Dutch finance system of central bank, funded government debt, discounted short-term debt, and money-denominated bonds is going to wither away. Because the government abuses it so badly.

The modern financial system began, they say, with people depositing their gold with goldsmiths, who then started to lend money on the credit of the deposited gold. In our present world we have gold ETFs that are supposedly storing gold in vaults in return for electronic depositary receipts. How long can it be before someone figures out a way to turn the gold ETFs into a kind of bank? Don't ask me how. That is for those financial wizards and their lawyers to figure out. But right now a ton of people are sterilizing their cash by storing it in gold in the vaults of the ETFs. Not good. Nature abhors a vacuum and finance abhors one too. Finance is all about getting money from where it is to where it is wanted. Something has got to give, and sooner or later it will.

What will happen then is anyone's guess.

Fixing the Economy

You could call it the Summer of Reality. Liberal opinion leaders are confronting the reality that their response to the Crash of 2008 has failed. But, of course that doesn't mean that they are ready to ditch their Keynesian-Entitlement-Regulation policy brew. That will come later, and not before the end of the annus horribilis of 2012. Take James K. Galbraith, economist and son of famed liberal-socialist John Kenneth Galbraith. He's ready to admit that the Obamis shot the wrong arrow:

In fact, stimulus alone was never going to bring recovery. This crisis was caused by financial collapse, rooted in massive banking fraud. The financial system is our economic motor and when it fails it cannot be revived simply by pouring money on it, any more than a wrecked reactor can be restarted just by adding fuel. Team Obama faced a situation not seen since the 1930s — a worldwide banking meltdown. The financial system needed to be rebuilt — and it still does. But Team Obama chose to overlook this.

But he's not ready to admit the reason for the "massive banking fraud." It was government sponsored enterprises like Fannie and Freddie fire-hosing dodgy sub-prime assets into the credit system. The role of the bankers was in dressing up as much of the dreck as possible to look like investment-grade debt so that the banks and the insurance companies and the pension plans could buy it. The investment banks are middle men; their business is selling bonds to institutions. One way or another, they will sell it. The government's No. 1 job is to make sure that its own debt is investment grade. That's because, ever since modern finance was invented by the Dutch and adopted by the Brits, the foundation of a healthy credit system has been rock-solid government funded debt. The worst bubbles have occurred when government-sponsored enterprises have floated dreck, as in the Mississippi Bubble, the South Sea Bubble, and the Fannie Freddie Bubble.

Here's an article by Alex J. Pollock on the real story of the 2000s financial meltdown. The problem is "agency debt."

The huge debt of Fannie Mae, Freddie Mac, other government-sponsored enterprises, and other off-budget government agencies (“agency debt”) fully relies on the credit of the United States. This means it by definition exposes the taxpayers to losses, but it is not accounted for as government debt.

How much is it? Well, in 1998 agency debt was $4 trillion, the same as the Treasury debt held by the public. In 2009, it was again the same as the Treasury debt--at $8 trillion. Between those dates, during the credit binge of the 2000s, the agency debt was larger than the Treasury debt. In 2002 agency debt was $6 trillion, 50 percent more than Treasury debt held by the public. So the real debt that the full faith and credit of the United States was committed to honoring was about twice the published amount.

We can holler all we like about "massive banking fraud" and "greedy bankers." But until liberals acknowledge that the central player in the late great 2000s credit bubble was government, we really can't start healing the economy.

And to suggest, as the president and Professor Galbraith do, that an "infrastructure bank" is just the ticket is to demonstrate nothing more than an alcoholic's morning-after craving for a pick-me-up.

Riots and Civil Society

Peggy Noonan, as usual, asks the critical question in the aftermath of the London riots and the Philadelphia flash mobs.

When the riot begins or the flash mob arrives, the best the government can do is control the streets, enforce the law, maintain the peace.

After that, what? Britain is about to face that question. We'll likely have to face it, too.

The usual answer, she writes, is "The government has to do something. We must start a program, create an agency to address juvenile delinquency." Only that seems to be a joke these days. After all, the youths of London have been programmed, agencied, and delinquencied to death in the last half century. And still we get riots?

The conservative answer to the failure of the authoritarian welfare state with its programs, its agencies, and its flexible responses is "civil society." That goes back to Edmund Burke and his "little platoons." Berger and Neuhaus addressed it in To Empower People where they argued for "mediating structures," of family, church, association between the individual and the state.

But recently I have been reading the work of Lawrence Cahoone. His Civil Society: The Conservative Meaning of Liberal Politics is a profound critique of the failure of "neutralist liberalism" and an argument for civil society. Of course, his book is not a font of policy prescriptions, ammo for politicians eager to "do something" in the present crisis. It does little more than describe civil society: What it is, what it means, and what it does.

Even in the chaos of the London riots we can see civil society at work. From the Daily Mail.

In Dalston and Hackney, north-east London, Turkish shopkeepers and their families fought back against looting youths, before spending the night standing shoulder-to-shoulder in an attempt to deter further attacks.

One man said: 'This is Turkish Kurdish area. They come to our shops and we fight them with sticks.'

Well, that is getting close to tribalism, but you get my point. When the chips are down, civil society means that the men get together to defend their neighborhood. You can also see that where families have degraded into single mothers and children, the defense option has suddenly become problematic. The neighborhood women defending their homes, assisted by their feral children?

Cahoone describes civil society in two major chapters of his book. The first, "Civil Society," describes civil society institutionally; the second, "Civility, Neighborhood, and Culture," describes it from a cultural perspective.

The key point is that civil society is informal, a "quasi-independent association of households." It is not government, but it is an association that relates to government. In detail, Cahoone describes five characteristics of civil society:

• The autonomy of the social "Society gets its norms from the inside rather than from institutions outside it."
• Expansion of civitas to society There are no subjects, only citizens. Aristocrat and commoner are united in their "Frenchness" or "Englishness."
• Spontaneous order Social order emerges out of "social interactions not coordinated by command" or political will.
• Institutional pluralism No "single agency dominates social life." There are different types of institutions competing and many competing within each type.
• Market economy Civil "societies must have market economies," but civil society is not the same as the market; it abuts the market economy and "the rules of civility are not the rules of the market."

You can see that anyone taking these notions seriously must be a foe of what Juergen Habermas called the "authoritarian" welfare state.

At the cultural level, writes Cahoone, it is important to keep front and center the idea that civil society is not politics. It is primarily "living-with, not talking-with." It has these qualities: "membership, freedom, civility, and dignity" that must not be violated. It is a loose form of association, with moral rules, obligation, and civility that falls short of a binding social contract. It requires above all a recognition of dignity, "recognizable worthiness," a rough equality so that banker and laborer take care to relate as equals, treating each other with civility and dignity.

The culture of the neighborhood and of localism is threatened in the modern era, partly by the growth of the modern economy and state, and partly by "liberal anti-localism." When liberals want to do something, they do it at the national level. Yet it is clear from the London riots that the marginalization of civil society at the neighborhood level leaves the local community naked to the power of the thugs.

The essential core of the civil society is its "dialectic of civility and culture." There cannot be a "pure civility." It "must be informed by some cultural tradition." But not just one tradition. Thus civil society implies a diversity, a competition of cultural narratives, with some inside the cultural consensus and some left outside. The point is to minimize coercion, so that competing narratives can try to change the consensus. "Civil society and culture engage in a kind of dance" in which "the point is to keep dancing."

The deeper you immerse yourself in this kind of thinking the more you understand just how it challenges and threatens the current hegemony of the liberal elite and their authoritarian welfare state. Liberals cannot bear the idea of a spontaneous order where they cannot direct the national conversation. They cannot bear the idea of giving up control of the local neighborhood; they cannot bear the idea of toleration and co-existence with conservative culture.

Modernity is a mix of "market, civil society, and nationalism," writes Cahoone, and when you think about it, our liberal friends are at war with all three. They want to control the market, marginalize civil society, and neuter nationalism. And for what?

Right now, we see the whole liberal project teetering, and some prophesy that it is about to collapse in ruins. Given the weakness of President Obama, there is no telling what may happen. But the cultural and political opening created by the liberal crack-up creates an opportunity. With the right ideas and a new appreciation for civil society modern conservatives can work with the American people to conceive and birth a new order, in which the war on modernity will be defeated, and the three sectors of modernity can grow and flourish in freedom, trust, and dignity.

But first we must dash aside the poisoned chalice of the authoritarian welfare state.

When Gold Hits $2,067 an Ounce

In the last couple of days, the gold price breached $1,800 an ounce. Oh well, ho hum. So the gold bugs are making some money.

But let us think about something. One day soon, perhaps this year, perhaps next year, gold will breach the magic number of $2,067 an ounce. Why is that a magic number? Because, 100 years ago, before the modern wonder of the Federal Reserve System, you could buy an ounce of gold with 2,067 pennies.

Yes. The value of today's dollar in gold is getting perilously close to one percent of its value 100 years ago, when the government would exchange an ounce of gold for $20.67.

Now some people don't like to evaluate the value of the dollar in gold terms; for those, I suggest measuringworth.com's GDP deflator. It shows a price index of 6.23 for 1911, with 2005 prices as 100. Today the index is 111, so the value of the dollar is 5.61 percent of the 1911 dollar. On that measure the dollar buys about one twentieth what it could buy a century ago, rather than one hundredth.

Yeah, I know; many things we can buy today you couldn't buy then for love or money.

How did the dollar get to be worth 1 percent, or 5.6 percent of its value a century ago? It happened every time that the government got in a jam. In the Depression, after the Fed had gunned the economy in the 1920s, FDR devalued the dollar to $35 per ounce. Then in the 1970s Richard Nixon got in a jam and they floated the dollar. By 1980 the dollar had declined to less than $600 per ounce, but then Ronald Reagan became president and over the next twenty years gold declined to $270 an ounce in 2001. But since then, to get out of a jam in 2001, the Tech crash, and in 2008, the housing crash, the government has been devaluing the dollar with gusto. Now it's around $1,700 to $1,800 per ounce.

You might wonder why this keeps happening. It's not all that hard. Lots of people want easy money, cheap credit. So the government uses its credit to shovel money at deserving recipients. It might be farmers and farm credit, or it might be exporters and the Ex-Im Bank. Or it might be minorities that need affordable housing. No problem. We'll just shovel Fannie and Freddie at them, and when the whole thing comes tumbling down, why, we can refloat the nation's mortgages by taking the dollar down another 50 percent.

Let's call the 20th century the Century of Inflation. But let's make the 21st century something better. Because devaluing the dollar every generation to get out of a financial panic is no way to run a railroad. For one thing, as with most things, minorities and women and orphans and the poor get hardest hit.

Riots and Progressive Politics

Our liberal friends live in a curious world. On the one hand, they are convinced of the sophistication of their politics, and that the average person really isn't qualified to judge political matters. On the other hand, they often reduce politics to us-versus-them slogans such as Republicans "ending Medicare as we know it" without mentioning the sophisticated concept that Medicare is going to end as we know it with or without Republicans because otherwise it will eat the budget and then the economy.

So it is with public safety. Liberals talk a line to us about poverty causing violence. But they also work to make it a reality by sending community organizers into poverty-stricken areas to remind the people there how the Man is ruining their lives and that police brutality is a form of institutional racism.

Actually, the interesting question is why young underclass males don't riot more. The whole point of modern urban police forces, ever since Robert Peel invented urban policing for the Anglosphere in the 19th century, is to control young underclass urban males. The city is an agent of concentration, for merchants, for workers, for intellectuals, and also for young single males.

Whenever young single males gather together their thoughts, if you want to call them thoughts, turn to mayhem. It is the job of police to look them in the eye and tell them "just you try it." But left-wing politics since the French Revolution has been fueled by the idea of the oppressed rising up against their oppressors. So the left has always worked against the forces of order and encouraged the forces of disorder--young single males--as the potential gunpowder for their hoped-for revolution. Thus the left is always articulating ways in which the police are brutalizing the poor. Of course they are. The police are at war with the natural propensity of young single males to create mayhem.

But there is an additional factor to be considered. And that is the welfare state. In the old days, before the welfare state, the poor had an authentic culture and neighborhood society. They had to, because otherwise they would have perished. But the welfare state has demolished the culture of the poor and substituted middle-class supervision and pensions. The consequence in countries like Britain is that something like 15 percent of the adult population subsists on welfare or "incapacity" benefits. For young adults, the proportion is higher. NEETs, they are called: young people Not in Education, Employment, or Training.

According to figures from the Department for Education, 927,000 people aged 16 to 24 - 15.3 per cent - were classed as Neets between the start of January and end of March [2010].

All in all, you can figure that in cities where the police are restrained from harassing young single males, and the family and the neighborhood culture has been utterly demolished by the welfare state, the wonder is that they don't have riots every night of the year.

If you want to understand the nature of policing the underclass in Britain, the place to start is "Inspector Gadget's" Police Inspector Blog.

The End of an Era

It always ends like this. Whether it's a dynasty, a corporation, or even a marriage, it ends in a collapse of confidence, with the guardians of the old order spitting with rage as their facile shibboleths vaporize into thin air.

The authoritarian welfare state was never going to reform itself into something "sustainable" or organized according to the "precautionary principle" on its own. It was always pure politics, with political raiders plundering the wealth of the nation to hand off to their supporters. It was always going to keep going until it ran out of money.

So now the century-long fantasy of the progressives has come up against the cold hard reality of a credit downgrade. Now the American people are waking up and wondering if its political elite knows what it is doing. They are wondering if all those facile promises of benefits will ever be redeemed. They are wondering if they will even have jobs.

We are not yet to the point where people will start to sneer at politicians offering free lunches. Not yet. But the day will come when people will laugh at the idea that anyone imagined that government could deliver social services effectively and prudently. They will laugh at the idea that government could run a pension scheme. They will sneer at the idea that government could run a health system. They will joke about the bad old days when government ran a system of stunningly ineffective schools. But that day is not yet, for there are before us many years of failure and default that will be necessary to drive the lesson home.

The central fact about these Downgrade Days is the utter cluelessness of the ruling class. President Obama is, in these times, not a disappointment, but the very poster boy of the ruling class that he heads. He is a scion of the progressive dynasty, raised to continue and extend the power of his class. Unfortunately, they never taught him how to deal with retreat and defeat. So now the president is sitting in the White House wondering how to save his presidency.

You can almost see Scarlett O'Hara whining to Rhett Butler after three hours of simpering and manipulation: "Where shall I go, What shall I do?

Frankly, my dear liberals, I don't give a damn.

And Now Black Race Riots

In the aftermath of the civil rights revolution in the 1960s America had a choice. It could abandon race politics forever, or it could reformulate it along new lines. It turned out that our liberal friends couldn't resist the temptation of making race work for them, aping the way that Southern whites had made race work for them in the century of Jim Crow.

But just as Jim Crow politics turned the South into a mean and nasty place, a brutal white hegemony, so liberal race politics has turned liberals into monsters.

And it has created a monster too, the widespread black racism that has now metastasized into flash mobs of black youth, organized on Facebook and Twitter, that are disturbingly preying on peaceful whites.

It's easy for conservatives to say "I told you so." It is obvious that, in a modern, commercial, multiracial society no group can be allowed special license to act out its racist fantasies. But liberals have been condoning, and even whipping up, frank racism in the black community for half a century.

Now here we are, in the middle of a nasty great recession, in which young people, as usual, are hardest hit, and young undereducated, undersocialized, underemployed blacks are rioting. This is not like the urban riots of the 1960s in which blacks mostly burned down their own neighborhoods. This is frank race rioting, with black gangs seeking out whites to brutalize.

So now what do we do? We have a large underclass, harvest of 50 years of government subsidies for idleness; we have a catastrophic decline in black wealth, courtesy of the sub-prime mortgage lending of the last 20 years. We have an undereducated youth, courtesy of a century of government education. And we have a sluggish recovery, courtesy of the exploded Keynesian notion that more government spending and cheap money is the way to jump-start an economy. And don't mention the black cloud of ObamaCare, Dodd-Frank, and the S&P downgrade.

Yeah, Mr. President. Why don't you Do Something about all this?