This is the week when the presidential campaign is, the press is telling us, going to start focusing on the economy, particularly because the war, it seems, is being won. The dollar is down, gold is up, and the economy is on the edge of recession. But what is one to make of the bond market? Inexplicably, the dollar is being eviscerated to the accompaniment of cheers from the creditor class. One would suppose creditors would be weeping, given that a bond, being an IOU, is evidence of indebtedness, a promise to pay dollars.
But what is a dollar? There is the rub. The dollar, these days, is what the market believes it to be. The currency market may be having its doubts about the American scrip. But the bond market is expressing its confidence in the same green paper; Treasury securities are in a terrific bull market, with the 10-year note yielding a mere 3.78%. Back before President Nixon, the dollar was a defined term, 1/35th of an ounce of gold. And at that rate, America's foreign creditors had the right to exchange their paper for Fort Knox's bullion.
The Great Inflation of the 1970s followed the abrogation of that right of convertibility in 1971. Unanchored by gold, the dollar didn't so much float as sink. It was Paul Volcker who raised it up. The towering Federal Reserve chairman lifted interest rates even higher than the grotesquely high inflation rates of the day. On September 30, 1981, 30-year Treasurys yielded nearly 15%. As late as the spring of 1984, they paid nearly 14%. When they yielded almost 14%, America's consumer prices were rising at a rate of only little more than 4%. Savers never had it so good.
The bond market was slow to perceive the mortal peril of the Great Inflation — and slow to comprehend that Mr. Volcker had laid it low. When the creditors did, finally, see that the danger had passed, they began to imagine that paper currencies were no less stable than the gold-backed kind. The Federal Reserve suddenly could do no wrong. Now dawned the era of the celebrity central banker. As interest rates and the inflation rate declined, Alan Greenspan's reputation soared. The Maestro's gain was gold's loss; who needed the barbarous relic when geniuses were printing the money?
By late in the 1990s, gold scraped bottom and central bankers made, collectively, their top. "The new breed of central banker is not dazzled by gold and sees little point in having an asset that just takes up storage space," readers of the Financial Times of London were informed on December 13, 1997. Indeed, the paper noted, these masters of the universe had been selling the useless stuff. The Netherlands, Australia, and Argentina (now, there was a nation to emulate in a monetary way) had been dumping their gold at prices below $300 an ounce.
"Whereas gold used to be seen as a good asset," Eddie George, governor of the Bank of England, had recently told a European parliamentary committee, "it is now seen as the bottom of the pile." Now Mr. George's successor, Mervyn King, is being castigated for the collapse of Northern Rock, the U.K. mortgage lender; and Ben S. Bernanke, the Maestro's successor, is flailing about trying to explain why the Fed was so slow to comprehend the dimensions of the worldwide credit crisis, although the price of gold, which was at $283 when the Financial Times read the metal its last rites, is today on the cusp of $900 an ounce.
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Reagan would already have gone on television to talk about what all this meant. He'd majored, after all, in economics. We keep waiting for a presidential candidate besides Ron Paul to notice that commodity prices are soaring, the gold price is in orbit, and the dollar exchange rate is making new lows. But the candidates are beguiled by the willingness of lenders to advance dollars to the American Treasury at interest rates not much different than the year-over-year rise in the cost of living. It's a free country, and a free market. On the other hand, we recall as if it were yesterday the considered misjudgment of the 1984 bond market when inflation-adjusted yields of nearly 10% were judged to be only slightly palatable. That inflation-adjusted yields of nearly zero percent should, today, be deemed a fair rate of pay for loans to the Treasury in the teeth of a dollar crisis strikes us a neglected topic of debate, political no less than financial. At the end of World War II, world leaders gathered at Bretton Woods and wrote themselves into history. We're looking for the politician who promises to summon a new monetary conference to plot a course to soundness before our slumbering creditors awaken.