Global Agenda: Debased and debauched

October 4, 2007 22:49

Debasement and debauchery have a lot in common. For a start, they're on the same page in dictionaries.

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Debasement and debauchery have a lot in common. For a start, they are on the same page in most dictionaries. My Chambers, for instance, defines the noun debasement as "degradation" and the verb it comes from, to debase, as "to lower; to make mean or of less value; to adulterate." Debauchery, in contradistinction, is "excessive intemperance" or, alternatively, "habitual lewdness" - and to debauch is "to lead away from duty or allegiance" as well as "to corrupt (with lewdness)" or "to seduce." The concepts are clearly close, although not identical. In the context of money, the term more commonly used is debasement - and we will be hearing it used a lot more in the coming months and, maybe, years. That's because the Federal Reserve Bank has deliberately and with due forethought decided to debase the currency it is in charge of, the former "almighty dollar," which is now in a steady decline against most other currencies in the world. Of course it may be argued - and many "right-wing" economists and commentators have been doing so for decades - that this policy of America's central bank is not new at all, but has been underway since the Fed's inception in 1913, and certainly since it absorbed the lessons of the Great Crash and Great Depression. Thus, this school of thought, in which gold bugs and other supposed weirdos are heavily represented, will calculate that the value of a 1913 dollar (or 1939, or 1971, or whichever date they choose to use) is today worth a tiny fraction of what is was worth then. This calculation is usually made in terms of gold, because this precious metal is regarded as the best and most reliable measure of value over time. Even so, the decision made by the Fed in September 2007 is qualitatively different. Technically, all the Fed did was to reduce interest rates by 0.5 or a percentage point. But for a central bank to reduce rates means that it is increasing the supply of money until the price of the stuff (measured by the short-term interest rate) goes down enough to meet the new target set. The Fed did so despite the certain knowledge that this would cause the dollar's value to decline against all other currencies and, more critically, the dollar's value as defined by its price in terms of many commodities, to fall as well. Gold is merely the most prominent example of a commodity the price of which jumped after the Fed move and is expected to rise further, in expectation of or response to further such moves. The same is true of soybeans, sugar, copper, and pretty much anything else whose price is commonly quoted in dollar terms. To the man in the street, a rise in the price of sugar, wheat and all the rest equals inflation. But to economists, or at least to monetary economists, the rise in the price of sugar is merely the symptom, not the cause, of inflation. In the late Milton Friedman's classic formulation, "inflation is, everywhere and always, a monetary phenomenon." That means it is caused by massive increases in the supply of money available (leave the issue of the velocity of money to the theoreticians). When the money supply goes up a lot, and for an extended period, prices rise - because there is "too much money chasing too few goods," as the simple definition puts it. More correctly, there is too much new money chasing too few new goods. Inflation occurs in those areas where the new money piles up. Thus, for the period 2001-2006, the money flowed primarily to real estate and that's where the price rises (a/k/a inflation) occurred. Now, however, the real estate bubble has burst - and the Fed is flooding the economy with a new wave of money. This time, the prices that are going up are all those everyday items (a/k/a commodities) denominated in dollars, starting with oil and other energy sources, through metals precious and metals basic, and on to coffee and sugar (a/k/a Starbucks). These prices will show up in a big way in what the general public calls "inflation," ie the Consumer Price Index - and then the wailing will start because house prices going up makes most people happy, but coffee and sugar prices going up makes no one happy (except the growers, and who cares about them?). The Fed hath deliberately wrought these things, because the alternative would be to let the problems in the subprime and other garbage-lending sectors cause a severe recession. In the choice between inflation and recession, the fear of recession has taken precedence on every occasion since 1979, when Paul Volcker sent interest rates to 20%. But that was after a decade of steadily worsening inflation - in other words, consistently heavy debasement of the currency. Volcker recognized that at some point, the threat from inflation would trump that of recession. Now, however, we are still in the denial stage of inflation, with all the official and Wall Street mavens claiming that it will not be. Few of them venture into a supermarket and, it appears, few even bother to buy their own lattes in Starbucks any more. But they do make fortunes from the markets and they want to continue raking in obscene salaries and bonuses - which a monetary clampdown will put a stop to. That's where the debauchment comes in. The debasement of the currency is predicated on debauched behavior, where the debauchment is "excessive intemperance" on the part of the central bankers, who are thereby "led away from their duty or allegiance" to the long-term health of the economy, and seduced by their cronies and mates in the financial sector, with their offers of jobs down the road and threats of imminent financial disaster and collapse - "it'll be recorded in history as having happened on your watch. Just think about it…"

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