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Global Inflation

Mises Daily: Sunday, September 20, 1998 by

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Speaking to the Council on Foreign Relations, President Clinton proposed more spending, regulating, and monetary manipulation as the keys to fixing up the world economy. More ominously, he called for the creation of a new international financial "architecture," which, he implied, would be a permanent bailout fund for deadbeat governments the world over.

Since Clinton has had other things on his mind, one can suppose that he was acting as a spokesman for larger financial and banking interests. Indeed, the day after the speech, a manifesto by George Soros appeared in the Wall Street Journal that underscored Clinton's main points, but with greater attention to detail. Soros wants a global FDIC, possibly with the power to create money.

And writing in the New York Times, Jeffrey Garten of Yale is alarmingly blunt. "The world needs an institution that has a hand on the economic rudder when the seas become stormy. It needs a global central bank."

This is supposed to cure what ails the world financial system? Don't bet on it. These "solutions" will actually perpetuate the very source of the problem The drastic devaluations, the stock market crashes, and the burst bubbles of the last five years are not due to the inherent instability of markets, but to destabilizing effects of government intervention and manipulation. Further centralizing this intervention will only make matters worse.

Clinton began his speech by drawing attention to inflation, which he considers long gone and utterly unrelated to global financial instability. In fact, inflation and financial instability flow from the same source. Thirty years ago, at a critical turning point, Bretton Woods began to unravel. Fearing the loss of its entire gold stock to foreign redemption, the Nixon administration eventually suspended gold redemption at the same time it imposed wage and price controls and told Fed chairman Arthur Burns to step on the monetary gas.

Thus was born one of the most disastrous experiments in monetary planning of all time. Currencies were decoupled from their historic linkage to a physical anchor. And for the first time in history, central bankers and governments the world over were unshackled from the outside monetary discipline that the gold standard, even the unstable one created in the post-war period, had imposed on them.

The dollar would be backed by only the promise of politicians and central bankers to make good in the long run. Of course, the promise didn't pan out. Inflation taxed away the purchasing power of the 1969 dollar, reducing it to 22.6 cents today. This has resulted in incalculable losses, encouraged fiscal profligacy and debt accumulation, and dramatically redistributed wealth from savers to debtors.

The price has been a shrinkage in savings, a reduced incentive for capital accumulation, and thus lower incomes and less economic growth. Inflation also changed the psychology of personal, government, and corporate finance. Excessive speculation was encouraged.

Chronic price inflation began to abate in the early eighties, but not Fed manipulation, so the problem of loose credit began to show up in other ways. Starting with the domestic rescue and restructuring of the S&L industry, officials came to believe in the magical power of the financial bailout. Bad investments and overbuilt capital sectors would be propped up by fiscal intervention, debt conversion, and credit guarantees.

The troubles with the S&L industry came to be duplicated on an international level, first in Mexico and then in Asia, and now, increasingly, in South America. The details are different, but the overall structure is the same. A certain sector of the economy becomes overvalued and bloated relative to the underlying savings and consumer demand available to support it over the long run. At the root is always excessive and unchecked bank lending, subsidized by political design.

The experiment in free-floating, global fiat currencies has nearly unraveled many times in the past. It has also resisted every attempt to try to bring it under control (remember the pitiful efforts of Treasury Secretary James Baker to fix exchange rates in the 1980s?). What we are witnessing now is the definitive judgement that such unsound currencies, propped up by sporadic interventions, are no basis for consistent and stable international economic development.

Clinton shows no awareness of these roots of the current global crisis. He referred to the problems of "financial turmoil," but equally to the problem of "declining economic growth." His solution (to "spur growth") confuses the condition with the cause. It amounts to a vain hope that problems can be literally papered over rather than fundamentally solved.

It's hard to believe that anyone would deny, at this late stage, that making the IMF the world's lender of last resort, much less creating a new and flexible world currency (the "Soros"?), doesn't generate a moral hazard for governments. It also wastes tax money, rewards looters, and invites political corruption. Further, a world central bank promises merely to further globalize the destabilizing effects of currency manipulation, and eventually lead to global inflation and currency collapse.

Yes, the riding out a market-based transition from recession to recovery can be painful. But the option of more debt, more bailouts, more inflation, and more putting off the inevitable, is frankly unthinkable, except for an administration that seems to have a knack for denying reality in the hope that it will go away.

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Llewellyn H. Rockwell, Jr. is president of the Ludwig von Mises Institute in Auburn, Alabama.