Senator Warren Demands an Explanation

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The New York Sun

Best headline of the week is the one about how Senator Elizabeth Warren is demanding that Treasury Secretary Mnuchin “explain” the “turmoil” in the financial markets. The headline is on the Drudge Report. What kind of American president — or presidential wannabe — would ask for such an explanation from a treasury secretary? She might as well ask the blasted fox to explain the missing chickens.

It’s not that we’re here to belittle the problem about which Mrs. Warren inquires. Nor do we look down our proboscis at Mrs. Warren as an interlocutor. On the contrary, for some years we’ve been encouraging her — a law professor, after all, even if she’s well to our left — to get into the question of monetary reform. This started in 2011, with a Sun editorial about the senator’s book “A Fighting Chance.”

Senator Warren’s book looks at our economic crisis through the prism of her legal specialty, bankruptcy law. She was alarmed that the personal bankruptcy rate started soaring in the early to mid-1970s and is now way higher than it used to be. That’s a serious issue in our view. Our editorial included a chart from the St. Louis Fed showing how dramatic that upturn in the bankruptcy rate was in the 1970s.

It happens, though, that the personal bankruptcy rate wasn’t the only thing that started going off the rails in the mid-1970s. Unemployment, too, started soaring. Between the end of World War II and 1970, it averaged 4.6%. Between then and the date of our editorial, it averaged above 6%. Plus, too, there’s the so-called inequality rate. It preoccupies the economist Thos. Piketty. It also began soaring in the early 1970s.

So what was it that happened in the early 1970s that might have caused joblessness, personal bankruptcy, and inequality to start soaring? We haven’t done a double-blind study. Our guess, though, is that it had something to do with the end of the Bretton Woods era, during which we had agreed by treaty to redeem in gold dollars presented to our treasury by foreign governments.

That is, we ended the last remnant of the gold standard, rather than live within its requirements of monetary and fiscal integrity. Instead, we legislated a new monetary system, in which the dollar was not backed with gold or any other specie. It became a fiat currency. Inflation soared. Then interest rates soared. Some of them exceeded 20%. And we’ve been living in a, to use Mr. Trump’s phrase, “false economy.”

We’ve worn our typing fingers to the nub writing about this in the past 15 years. Our concern has always been bipartisan (the first warning we published on this head, in 2005, was called “The Bush Dollar”). President Trump’s statements on the dollar and gold during the 2016 campaign were one reason we endorsed him for president. It’s one of the issues on which he’s fallen short.

That strikes us as an opportunity for Senator Warren (or anyone else). Particularly because Mr. Trump made such an issue of how the Fed’s easy money policy was creating what he called a “false economy.” Since acceding to the White House, Mr. Trump has himself been beating the drums for lower interest rates, while the market has hit new highs. Now Mrs. Warren is alarmed at the recent spike in the “repo” rate.

The repo rate is the cost of borrowing against the collateral of Mr. Mnuchin’s bonds. The rate spiked, perhaps, because the supply of bonds is greater than the demand for bonds at today’s teensy interest rates. They are the very rates that present a standing temptation to borrow, which temptation a generation of congressmen and -women and treasury secretaries have been unable to resist.

This is a moment to watch the value of the dollar as measured in gold. In the 1980s and 1990s it had been soaring. It rose 38.8% under President Reagan, 23.1% under President George H.W. Bush, and 24.2% under President Clinton. The gains, though, have been lost, as the value of the dollar slid 68.9% under President George W. Bush, 28.9% under President Obama, and more than 20% just so far under Mr. Trump.

That is, our money is being debased under Mr. Trump as it was under Messrs. Obama and Bush. It’s one reason that so many Americans don’t sense the kind of improvement Mr. Trump has been talking about when he boasts of the best economy in history. The candidate to watch is the one who stops asking Mr. Mnuchin for an explanation and starts offering one him- or herself.

The New York Sun

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