THE AMERICA FIRST NEWS
Phelin M'Quirk

The Topic

By Phelin M'Quirk
31 Oct 2018

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f course Trump hasn't figured out how to end the business cycle. Neither has any other politician of either party - so of course there will be a correction of some sort, at some time. The only questions are how severe? and when?

Does anyone remember when Keynesians used to dismiss expressions of concern about the national debt with "but we owe it to ourselves"? This may have been true at one time, but today, thanks to massive overall trade deficits, we owe it increasingly to foreigners. Defenders of the current managed trade policies argue that trade deficits do not matter because the creditor countries invest the monies owed in the U.S. economy. However, they do so only as long as there is no better alternative.

In the days of gold convertibility, when a country ran a trade deficit with its trading partners, the latter might invest some of it in the debtor country, but could - and frequently did - demand settlement in gold. This resulted in a draw-down of the debtor country's gold reserves, which in turn withdrew liquidity from its entire economy. The periodic "panics" that characterized the nineteenth and early twentieth centuries (e.g., in 1893 and 1907) were the results of such gold withdrawals.

Does anyone remember when Keynesians used to dismiss expressions of concern about the national debt with but we owe it to ourselves? This may have been true at one time, but today, thanks to massive overall trade deficits, we owe it increasingly to foreigners.

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he political response to these events split along partisan lines. William Jennings Bryan cried out against the "cross of gold." His "silver Democrats" argued for continued free trade and advocated a massive inflation of the dollar through the monetization of silver at an artificially high price. McKinley and the Republicans defended sound money and the gold standard, preferring to discourage trade deficits and the accompanying gold withdrawals by protective tariffs that encouraged the consumption of domestic goods in preference to imports.

When Nixon abandoned even the limited gold convertibility provided under the Bretton Woods agreement, he abandoned the economic discipline that went with it. The result seems to me to have been that the frequency of the business cycle has been lengthened at the expense of increasing its amplitude. We are navigating in uncharted water with these large trade deficits. While the national debt is itself appallingly worrisome, it would be less so if indeed, as the Keynesians used to claim, we owed it to ourselves. We'd be better off if we owed less of it to foreigners.

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hether tariffs are the best way to reduce our trade deficits is debatable, but that those deficits are unhealthy is hard to contest. What they indicate is that not only the United States government, but also the American public, are producing less than they consume, and are spending too much while saving too little. This reflects a Keynesian bias against saving which has been implemented in policy ever since the New Deal, and which even the GOP establishment has accepted for the past fifty years.

The peculiarity of the moment is that Trump is truer to the economic thinking of William McKinley, Calvin Coolidge, and Andrew Mellon than the so-called free-traders of NTO, who are (whether they recognize if or not) closer to Bryan and Keynes than to the historic positions of the Republican Party.

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