An Exclusive Interview with John Mueller, part 2

It is a delight to interview John D. Mueller, one of the most important aides to Rep. Jack Kemp and an intimate participant in the formulation and implementation of what became known as "Supply Side Economics," whose implementation was a critical factor in propelling the world GDP from $11T to >$61T (not adjusted for inflation yet nonetheless a dramatic age of prosperity).


Photo of John Mueller courtesy of EPPC

Mueller is described at the Ethics and Public Policy Center as:

the Lehrman Institute Fellow in Economics and Director of the Economics and Ethics Program at the Ethics and Public Policy Center. Mr. Mueller specializes in the relation of modern economic theory to its Judeo-Christian and Greco-Roman origins, its practical application to personal, family, and political economy, and the interaction of economics, philosophical worldviews, and religious faith.

Mr. Mueller is also president of LBMC LLC, a firm in Washington, D.C. specializing in economic and financial-market forecasting and economic policy analysis. He has more than 30 years’ experience in those fields. Besides investment managers, Mr. Mueller has advised many American and foreign economic policymakers on monetary policy and exchange rates, policies for reducing unemployment, and income-tax, welfare and Social Security reform. He is author of Redeeming Economics: Rediscovering the Missing Element (ISI Books, 2010). From 1979 through 1988, Mr. Mueller was economist and speechwriter to then-Congressman Jack Kemp, mostly as Economic Counsel to the House Republican Conference (caucus) of which Kemp was chairman. In that capacity he drafted bills originating some key features of President Ronald Reagan’s tax cuts of 1981 and Tax Reform Act of 1986 and of Kemp’s 1988 presidential campaign. Mr. Mueller graduated in 1974 from Haverford College.

Herewith the second part of this interview:

Q:  You, along with Lewis E. Lehrman, have been among the most articulate contemporary critics of the dollar's reserve currency role, using a metaphor of someone who writes checks that are held, rather than deposited, thus providing an enormous "float" -- masking the fundamental NSF -- against which the utterer of the checks continues to spend, until people begin to notice that he has a lot of checks outstanding.  Would you reiterate this metaphor and apply it to our current situation?

A: I think I first came up with the analogy when I worked for then-Congressman Jack Kemp before and during both Reagan administrations, to help him explain the peculiarities and consequences of the dollar's role as chief official reserve currency. Imagine that everyone you met not only accepted your personal check, but also started carrying your uncashed checks around in their wallets or purses along with or in place of Federal Reserve notes. You'd find two results: first, you wouldn't need to carry much if any cash yourself, just your checkbook.

Second, when you got your bank statement you'd find a lot more money in your account than you had actually saved; the difference would be due to all the uncashed checks floating around. This is pretty much what it's like for the United States: first, U.S. monetary authorities hold relatively little in foreign official reserves to back the U.S. currency; and second, foreign monetary authorities now hold several trillion dollars worth of U.S. dollar securities, mostly U.S. public debt. Over time, members of the U.S. Congress have figured out that automatic financing by U.S. and foreign official monetary authorities means they don't have to balance the budget.

Q:  You have made the point that the inherent problem with the current fiduciary management system is not so much its creation of, but its inability to extinguish, excess liquidity balances.  Would you describe that here?

A: Jacques Rueff spent a lot of time in describing how a monetary system works. Any bank has to redeem its liabilities in some "final asset." That requirement exerts a discipline since the banks must keep sufficient reserves for redemption.  If banks could literally "create" money, they would never get into trouble, as so many did during the crisis that led to the Great Recession. Only the Federal Reserve can ignore the discipline for which it was designed, when it too had to redeem Federal Reserve notes and deposits in gold. But as I said, foreign dollar reserves have the same ultimate impact on the price level as the currency and bank reserves the Fed issues. So to eliminate overissue we'll need to restore the gold standard for the U.S. dollar, while refunding outstanding official dollar reserves at a sustainable parity.

Q:  What is your prognosis for the likely outcome, sooner or later, of this predicament.

A: I am reluctant to join the barking throng regularly predicting the dollar's imminent collapse or replacement. The paper dollar standard has continued this long because there are huge advantages to settling international accounts in a single "final asset." The pound collapsed in 1931 partly because gold and the dollar were available as alternatives. I think the system can still stumble along for awhile. But the only stable solution is to restore the international gold standard, and there are growing political incentives, on the one hand, for prospective U.S. presidential candidates to end the dollar's "reserve currency curse" -- the consequences of which are (rightly) blamed by voters on the current president -- and on the other hand for foreign governments like Russia and China to co-operate in ending the dollar's reserve currency role by replacing it with a "final asset" which no national government can control.

Q:  The dollar recently has been on its longest rally, both against foreign exchange and commodities, such as gold, for almost a generation.  What is your view of the cause of this phenomenon?

A: Well, the rally has come after a pretty long and steep decline against those same assets, including gold. Betting against the dollar has been a pretty good long-term strategy. Part of what I have done as a for-profit living for more than 25 years has been to know and say when it's safe to go in the water of U.S. equities. That has worked pretty well. But my non-profit work has aimed at using this knowledge to promote sound, even-handed, economic policies, including restoring the gold standard for the U.S. dollar.

Q:  Why has the Fed's (and the ECB's among others) QE program, not produced a stronger recovery?

A: Monetary policy can have only a temporary effect on the real economy because its ultimate effect is on the price level. As the great French economist Jacques Rueff, among others, pointed out in debate with John Maynard Keynes, Keynes's General Theory assumed that wages are fixed in nominal but not real or price-adjusted terms; in fact Keynes explicitly says that when wages are fixed in real terms, no amount of demand "stimulus" will work to reduce unemployment or expand the real economy. That's the case since social benefits have been indexed for the level of prices and (as with unemployment benefits) wages. Keynesians who nowadays talk about "stimulating" the economy with monetary policy are much like Talleyrand's description of the 18th and 19th century French Bourbon dynasty: they have remembered nothing and forgotten nothing.

Q:  What do you view the likely outcome of the Tapering?

A: Well, the Federal Open Market Committee announced at its October meeting that its "tapering" from more than a $1 trillion annual rate of increase was finished. And though it anticipated keeping the Federal Funds target at 0-1/4% "for some time," financial futures markets are already predicting that the Fed will raise its Federal Funds rate target to more than 3% over the next five years, and they are probably right.

Click here to read Part 1.

To be continued....



Kathleen M. Packard, Publisher
Ralph J. Benko, Editor

In Memoriam
Professor Jacques Rueff

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