[A-List] Republican contrarians ruminate on the dollar

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PFV 10/23 MONEYCHANGER - DR. WALKER TODD ON THE AMAZING LEVITATING US  DOLLAR

  A MONEYCHANGER Interview:

 DR. WALKER TODD ON THE AMAZING LEVITATING US DOLLAR

 Dr. Walker Todd is no stranger to Moneychanger readers. He was born  in 
Murfreesboro, Tennessee and graduated from Vanderbilt University.  He holds 
a master's degree from the University of Wisconsin, a Ph.D.  in French from 
Columbia University, and a J.D. from Boston  University School of Law. For 
20 years he worked for Federal Reserve  banks as a lawyer and economist. In 
1981, he served on the U.S.  negotiating team that secured the release of 
52 US hostages from  Iran and established an international tribunal plan 
for adjudicating  claims against Iran. Today he is an independent economic 
and legal  consultant living in Chagrin Falls, Ohio Dr. Todd kindly made 
time  for this interview on June 8, 2001. Although that dates 
the  interview somewhat (because we know what happened 
immediately  afterward, like the dollar index topping) and 9-11 has changed 
the  scene tremendously, this interview is still very valuable today.  It 
offers us clues us about the troubles the US dollar faces, not to  mention 
those faced by the "Masters of the Universe, the dollar's  managers in the 
Fed and US treasury. Dr. Todd also offers us some  danger signs to watch 
for cracks in the dollar.

 MONEYCHANGER Frankly, I'm baffled. The US dollar obviously holds the  key 
to financial events in the near future, but how can you explain  its 
historically high valuation? Even in the face of the long bond  market 
falling, Greenspan dropping interest rates, and a record  balance of 
payments deficit, the dollar just keeps on riding high.  And this 
surrealistic script is played out against the background of  an obviously 
topping stock market.

 TODD We were in a similar period in the early 1980s. Everyone likes  to 
forget that. From roughly August '82 until September '86,  conditions were 
very much similar to today's, considering the US  dollar versus competing 
foreign currencies, the posture of US  interest rates versus major foreign 
interest rates, and the like.  Conditions at home were also similar. The 
dollar had become very  much too strong at that time.

 Manufacturing was in a world of hurt. If you'll recall that period  saw 
the first wave of wipe-outs in the auto industry, and some major  steel 
downsizing. LTV Steel in Cleveland filed for bankruptcy in '86  or '87. And 
the US was running what at the time looked like a record  trade deficit 
(current account deficit).

 These conditions are similar, and at the same time the stock market  was 
in the middle of a big boom. Stock prices rose steadily from  roughly 8/82 
to 9/86.

 A strong dollar is good for Wall Street. Since most people who 
make  their living on Wall Street live within a 50 - 100 mile radius 
of  New York city, they don't care much what happens to the rest of 
the  country -- as long as Wall Street prospers.

 The US Treasury Secretary, of course, always has to be concerned  with 
what Wall Street thinks of the Treasury. Nevertheless, he also  represents 
the US public's interests in maintaining their treasury.  Since 1934 the 
Treasury has been charged exclusively with managing  the dollar's foreign 
exchange value. At the end of the day,  responsibility for the dollar - 
strong, weak, or whatever you have  -- resides at the Treasury department. 
From roughly mid-`95 onward  Clinton's administration touted the virtues 
of a strong dollar  policy to cure foreign country's ills. The theory was 
that we would  sacrifice a little bit of US Gross Domestic Product (GDP) to 
help  bail out countries struggling to pay their debts. How do 
we  sacrifice? We expand US imports by keeping the dollar strong. But 
if  you're importing it, it doesn't add to GDP, does it? This theory 
was  triggered off Mexico's troubles at the end of 1994.

 Mexico, however, failed to recover before the next wave of 
defaults  began. That began in east Asia in summer 1997 with Thailand, 
and  eventually embraced Korea, Indonesia, and a bunch of others. As  those 
countries began going down the tubes, once again the foreign  policy 
Establishment advisors to the Treasury began touting the  virtues of the 
strong dollar and expanded US imports to help these  countries out of a 
jam. In a meeting once I heard a staff economist  of the Council on Foreign 
Relations say, "Well, it's going to cost  us half a point of GAP to get 
east Asia out of this slump -- but  that's not much."

 What's the problem with that line of reasoning? The half a point of  GDP 
never comes out of hide of Wall Street or the New York financial  community.

 When they're talking about giving up half a point of GDP, 
they're  talking about shutting down steel mills, automobile plants, 
and  turning off farmers' exports. That's exactly what's been 
happening  ever since. We're just now living at the crest of the wave.

MONEYCHANGER This was Rubin's and Clinton's idea?

 TODD It was. To give Rubin some credit, though, he was not a 
wildly  cheerleading, enthusiastic supporter of this policy.  Instead, 
Larry Summers was.

 MONEYCHANGER So this was Summers' policy.

 TODD Yes, and remember he started out as an assistant secretary 
for  international affairs, became under-secretary for international,  then 
deputy secretary, and finally Treasury secretary at the end of  the Clinton 
years.

 It was Larry who tended to run international policy at the Treasury.

 MONEYCHANGER Was he not a Kissinger protégé?

 TODD No, his guru was a Harvard economics professor named Martin  Feldstein.

 MONEYCHANGER Who used to belong to the president's council of  economic 
advisors.

 TODD Yes, under Reagan.

 MONEYCHANGER How long can a currency maintain a low interest rate  policy 
and run high current account deficits? Both force down a  currency's value. 
It's obvious that the bond market already smells a  rat, because in spite 
of Greenspan's interest rate drops, the long  bond market refuses to rise.

 TODD Exactly. It's a telling point that about two months back 
the  crossover point was reached where the Fed cut rates but the long  bond 
no longer fell.

 MONEYCHANGER Which implies the steely-eyed bond traders said, "Nope,  we 
aren't going to play this hand."

 TODD Exactly. 1986 was only 15 years ago and there are probably  enough 
old boys around Wall Street who remember that and are saying,  "No, if you 
want me to take 10-year risks with the dollar and US  Treasury bonds, I 
want to be paid a higher rate for it."

 The interesting thing is, why doesn't a similar concern pop up in  the 
gold price?

 MONEYCHANGER You tell me. The gold price has just made me throw my  hands 
up in the air. There are only three possible explanations for  its deadness.

 First, the derivatives revolution of the last 70 years has given  people 
alternative to gold in disaster protection or inflation.

 TODD Right. At a minimum call it "inflation protection." The 
market  offers other vehicles besides gold.

 MONEYCHANGER Vehicles that they didn't have 20 years ago. The 
second  explanation is that the market has become so indifferent to 
gold  because for 70 years the American people has been propagandised 
on  this imaginary, fiat system so that finally we have a generation  that 
has forgot gold.

 The third explanation is that they're just outright rigging the  price. I 
think there's a lot of evidence for that. You can't view  Greenspan's 
history and conclude you have a man indifferent to the  gold price. In 
fact, back in 1994 he stated before Congress that any  central bank that 
ignores the gold price does so at its own peril. Still, gold doesn't 
respond to these inflationary pressures. So  maybe it's one of those three 
explanations, or a combination. TODD I think it's a combination. Around the 
margins there may be a  little manipulation of the gold price. I haven't 
yet seen enough  hard evidence of the manipulation to buy the GATA theory 
totally,  but I think they've got their arms around at least a little bit 
of  the truth.

 The circumstances are such that it would only take a little bit 
of  manipulation to make a major change in the outcome. So I think 
that  there's a little bit of manipulation and still just enough 
central  bank gold sales under the Washington Agreement so that demand 
is  soft.

 MONEYCHANGER From the beginning of 1999 to the end of 1999,  Greenspan 
pumped $100 billion of currency into a system that began  with $450 billion 
in circulation. The rate of monetary growth since  then, depending on which 
monetary aggregate you use, has been  clipping along well above 15%, and in 
some indicators above 20%.

 TODD Normally you'd say that's way too much, and the US has just  gotten 
away with it because enough foreigners are willing to hold  dollars, so we 
haven't yet had to pay the price.

 But I want to remind everybody about some earlier episodes, 1971   1979. 
A lot of official US policy is built on assuming that there  will never 
come a time when foreigners will get tired of holding US  dollars. In the 
two years I mentioned, 1971  1979, that's exactly  what happened. They 
called the Fed's bluff and said, "We're not  going to finance your current 
account deficit any more, at least,  not at the current exchange rate." 
Willy-nilly, the US was forced to  devalue. In 1979 they combined it with a 
major hammer-hit on  interest rates.

 MONEYCHANGER A few months ago a professor from McGill University  floated 
a theory that demand for cash dollars in Europe was keeping  the dollar's 
exchange rate up. At the end of this year the old  national paper 
currencies - Deutsche marks, pesetas, francs, lira -  will be withdrawn and 
replaced by the paper Euro. At that point the  folks with untaxed, black 
market profits held in national currencies  will lose them. If they try to 
swap them for Euro currency, they'll  get caught.

 TODD Right, if you've been holding Deutsche marks underground,  you've 
got a problem.

 MONEYCHANGER So the professor's theorises that, anticipating 
that  changeover, Europeans are cashing in black market marks and 
franks  and lira for US dollars and holding their untaxed profits that 
way.  Add another fact to that. 70% of new $100 bills are sent 
overseas,  and Treasury estimates that two-thirds to three-quarters of 
US  currency circulates outside the borders of the US already. We  already 
know there's a big foreign demand for US cash. To what  extent is the Euro 
conversion affecting that?

 TODD It's just a small fraction of the whole, but at the margin 
it  accounts for a lot of the demand, like the official manipulation 
of  the gold price. It's not much as a fraction of the whole, but at 
the  margin it makes a big difference in the marginal price. That's 
what  is happening with foreign demand for the dollar. While it might 
not  amount to much as a fraction of the whole, it's still enough at 
the  margin to sop up as much as one-third to one-half of the 
current  foreign demand for dollars.

 MONEYCHANGER Which is significant at the margin. TODD Yes.

 MONEYCHANGER And the margin is what the people at the Fed are 
always  trying to control, just like herding cattle. If one breaks out, 
you  have to get him back in, or the rest of them will follow him.

 TODD Exactly. Good analogy.

 MONEYCHANGER What signs should we look for that the dollar is 
coming  unglued? One thing we haven't mentioned yet is the huge chunk of 
US  government debt that foreigners own. Two years ago that stood 
at  40%.

TODD It's still in that neighbourhood, a little over $2 trillion. 
Ironically, the proportion of foreign ownership may keep rising as  the 
Treasury redeems debt. The denominator is the total publicly  held debt and 
the numerator is the foreign held part. That  foreign-held percentage will 
keep rising in the near future, even if  they don't buy another dollar of 
debt. Any significant liquidation  of the foreign position in US government 
debt would be a major  danger signal.

MONEYCHANGER Where would we find that?

 TODD The only way you see it regularly is in the Fed's Board 
of  Governors H.4.1 Release, the weekly statement of condition of 
the  Federal Reserve banks. They also publish a monthly summary of that  in 
the Federal Reserve bulletin. A line item entry there shows "US  government 
securities held in custody by the Federal Reserve Banks  for foreign 
official and international accounts." You can always  look at that total to 
see whether it's rising or falling. The  benchmark number is $600 - 700 
billion, where it has been in recent  years.

 [Go to < http://www.federalreserve.gov/releases/H41/>, where you  will 
find a list of dates to choose from. Choose the latest report.  After the 
body of numbered items, you will find the first remark.  "On June 6, 2001, 
the face amount of marketable U.S. government and  federal agency 
securities held in custody by the Federal Reserve  Banks for foreign 
official and international accounts was $709,699  million, a change of 
$   2,692 million for the week." -- FS]

 MONEYCHANGER A liquidation of any significant portion of that debt  would 
signal trouble.

 TODD Say the Japanese, with problems of their own, decide to cash 
in  their dollars, you might see $300 billion walk out the door. 
You'd  notice that in the Fed total. You might also see it in the long 
bond  rate.

 MONEYCHANGER Driving the value of long bonds down by 
drastically  increasing their supply.

 TODD Another signal would be a sudden, unexplained rise in the Euro.  If 
the Europeans hold their interest rates more or less steady (and  currently 
they are signalling that's exactly what they will do) and  still the Euro 
started rising rapidly against the dollar, that would  be a signal that 
people are bailing out of the dollar.

 MONEYCHANGER Recently the European Central Bank (ECB) dropped  interest 
rates. That certainly looked like collusion with the Fed.  I think people 
get confused when they listen to central bankers  because they all loudly 
proclaim their own independence. Yet once a  month they meet in Basel at 
the BIS.

 TODD The cynic would say they are independent of their governments  but 
they all collude with each other. [laughing]

 MONEYCHANGER When you were talking about the early '80s I was  thinking 
about the Plaza Accords.

 TODD The Plaza and Louvre Accords were the two things that kept  turning 
the dollar around on a dime in '85 and '87.

 MONEYCHANGER The chart made it very obvious that some big policy  change 
had been made.

 TODD But anyway I don't think we've got that sort of agreement yet.  You 
might argue, we may need one to stem the rise of the dollar.  [laughing] 
Another signal to watch is the US Dollar Index, the  trade-weighted value 
of the dollar against major foreign currencies.  The base year, by the way, 
is 1973, the first year of the official  float of the dollar. A "100" on 
the dollar index equals the 1973  value.

 At 95 or below, US manufacturers and exporters do okay. Between 95  and 
100, we are losing export competitiveness. At 100, it becomes very hard for 
US exporters to sell anything  abroad. The current dollar index is around 
120. The last time it was  that high was 1986.

 [For current quotes on the US Dollar Index, go to , in the 
"Please  select the FUTURE Commodity below" window, select "US Dollar 
Index."  You can get a daily or weekly chart of the US Dollar Index at -- FS]

 MONEYCHANGER Right before the stock market came down so hard.

 TODD Exactly.

 MONEYCHANGER The dollar index has stayed over 100 (with a few 
short  exceptions) since the beginning of 1998. So US 
export  competitiveness has been dropping for a long time.

 TODD Do you know about the four farmers' lawsuit in Colorado?

 MONEYCHANGER No.

 TODD Early in 2000 Gene Schroeder and three other plaintiffs filed 
a  federal suit against the Treasury and other departments. 
They  challenged the foreign exchange management of the dollar. On 
what  grounds? Because as it was being carried out, it subverts 
the  interests of farmers. This was wrong statutorily and  constitutionally 
because it constituted an indirect "taking" of  farmer's production and 
property rights. When you look at the  statutes that give the Treasury the 
power to regulate foreign  exchange, or the executive branch power to 
negotiate foreign  bilateral trade agreements, all of those statutes are 
conditioned on  taking the agriculture's interests into account. Clearly, 
they are  not using these powers that way, so we're saying either you begin 
to  do that or you pay us parity prices.

 Where has the lawsuit gone? Initially the federal district court 
in  Denver dismissed our complaint in July 2000. The farmers appealed 
to  the 10th circuit federal court of appeals. We asked for oral  argument. 
The government opposed it, but we got oral argument anyway  on March 13, 2001.

 It was the biggest event in the history of the 10th circuit, except  for 
the Timothy McVeigh stuff. We had over 120 farmers standing  around a room 
designed to hold ninety.

 MONEYCHANGER They must have nearly croaked. They must have called  out 
every US marshal for a hundred miles. [laughing]

 TODD To give the court full credit, I thought they were great. As 
a  lawyer I was proud and pleased with the way the 10th circuit  conducted 
itself that day. It was probably the finest hour in the  history of the 
American judicial system. The judges were informed,  they had read all the 
briefs, they understood the arguments, they  asked appropriate and 
pertinent questions. It was a great day to be  in the courtroom.

 They made it very clear that they took the issue very seriously and  that 
they will issue a deliberate opinion. We're still waiting for  that.

 If we win, that certainly throws a monkey wrench into the 
Treasury's  foreign exchange works. They suddenly have to consider new 
factors  in deciding whether to prop up the strong dollar and keep all 
the  things going that we were talking about.

 MONEYCHANGER Do you think Greenspan is riding a tiger?

 Does the new administration know they can't just climb off 
the  tiger?              TODD Yes, and they also are well aware that if 
Greenspan intends to  induce a recession for them, they want get it over 
with now, as  opposed to two years from now. The longer he keeps delaying, 
the  more likely that latter prospect is.              MONEYCHANGER Why is 
he willing to take the gamble of keeping the  stock market bubble alive?

 TODD Generally speaking I think he's concerned about the 
financial  condition of not only some banks but also some large 
financial  market players. As you sit there and see all these other 
companies  filing Chapter 11 it's clear he doesn't care if most companies 
go  bankrupt. What he cares about is banks and securities firms, 
hedge  funds, and so on.

 MONEYCHANGER So you're saying (and it shouldn't come as a surprise  to 
anyone) is that the country is run for the benefit of Wall  Street, and the 
rest of us be damned.

 TODD Yes, but I want to give Treasury Secretary O'Neill some 
credit.  He's the first treasury secretary we've had from west of 
the  Alleghenies in at least 20 years.

 MONEYCHANGER But he also hails from Andrew Mellon's old firm, 
Alcoa.  [laughing]

 TODD Franklin, Franklin, Franklin, listen up. What was Andrew  Mellon's 
policy on gold in the 1920s? He liked it, didn't he?

 MONEYCHANGER Yes.

 TODD He's our kind of guy. Don't badmouth Andrew Mellon.

 MONEYCHANGER Okay, but O'Neill is part of the same old Wall Street   Big 
Business Establishment.

 TODD Yes, but if you must choose between Andrew Mellon on the one  hand 
and Goldman Sachs on the other hand, which would you choose?

 MONEYCHANGER No choice. I'll go with Mellon every time.

 TODD Don't stand there waiting for the second coming. You're not  going 
to get it. O'Neill is such a refreshing change compared to  what we've had 
to deal with in the last 20 years, especially the  last 5 or 6 years, that 
I'll shout hosannas at the very mention of  his name.

 MONEYCHANGER I was suspicious of Rubin and Summers. I think they  would 
do anything to make money for their crowd in New York. I could  be wrong, 
but I don't think they'd gag a minute at using the power  of government to 
make money for their friends. Of course, they  wouldn't do it in a direct way.

 They wouldn't hand out $100 bills, but they would create 
conditions  whereby they can profit.

 In another direction, do you think it's possible that the dollar  could 
come unglued altogether?

 TODD Well, yes, but you have to define "unglued." Let's phrase 
it  another way. If the dollar index is at 120 and the powers that be 
in  Basel ordered us to get the dollar to a level so that the 
current  account deficit corrects itself and at least approach balance 
again,  how low do you have to take that index? Let's put a tag on that.

 The answer is, based on recent experience we have to get it at 
least  below 95, and to give it some running room you might want to take 
it  all the way down to 90. The last time they did a major adjustment 
of  that sort in the late '80s they took it all the way down to 87 or  88. 
Let's assume 90 on the dollar index is the target figure 
for  re-establishing a balanced current account. Well, 120 less 90 
equals  30, and 30 divided by 120 equals 25%.

 You have to wipe out 25% of the US dollar's foreign exchange value.

 MONEYCHANGER My goodness!

 TODD That's the price of restoring a sustainable balance. That 
great  loss is the main complaint. People have been pointing this out 
to  the treasury for well over a year, back when the dollar index was  only 
110. They warned the treasury, the longer you let this go on,  the bigger 
the adjustment you must take to return to a sustainable  balance.

 MONEYCHANGER Walker, you're talking about returning the dollar to 
a  sustainable current account balance, but when I say "come unglued,"  I 
mean the possibility of a collapse.

 TODD Don't think that the dollar can drop to 25% of present 
value,  because the world doesn't work that way anymore. Maybe in a 
fair  minded world it should, but in a manipulated, collusive, 
central  bank-run world, the greatest decline you're likely to see is in 
the  neighbourhood of 25 - 30%.

 What would that do to the stock market? You might trigger a larger  than 
25% decline in the Dow Jones Industrial Average, just because  once the 
dollar goes to the weak side, foreign investors lose the  incentive to buy 
US rather than European stocks. That would drain an  awful lot of money out 
of Wall Street. A 25% correction in the  dollar might trigger a 40% or 50% 
correction on Wall Street.

 MONEYCHANGER We've watched Greenspan push the limit on what we  thought 
was possible for central banks to do -- certainly major  central banks -- 
in terms of inflation. Imagine 20% annualised  monetary growth rates for a 
couple of years. He has kept air in the  Wall Street Bubble, and kept on 
blowing it up! In spite of all this,  I believe I just heard you say that 
fundamentally it is no longer  possible for the dollar to collapse.

 TODD I think you'd see a 25% decline. That is entirely feasible now. 
MONEYCHANGER But not an evaporation.

 TODD Right, not an evaporation. You won't see 1933 again.

 MONEYCHANGER Well, I suppose that's comforting.

 TODD You may get a generation long decline to 1933, but as an  overnight 
phenomenon, no. [laughing]

 MONEYCHANGER I know that a "generation-long" decline is kind of a  joke, 
but then again, it's not a joke.

 TODD We certainly went through that from 1966 forward. Over 
the  following generation the dollar lost a great deal of its value. 
But  the way the world is, assuming semi-rational men continue to run 
it,  I wouldn't expect the dollar to decline more than 25-30% at the  most. 
Europeans will always have to be dragged in kicking and  screaming. The 
bidding would start with the treasury asking for 20%,  and the Europeans 
asking for 10%. The likely initial compromise is a  15% decline in the 
dollar. That still does nothing. All you do at a  dollar index value of 100 
is to lock in the trade deficit at the  current level with no improvement. 
Then you have to ask, How do you  like $400 billion trade deficits and $500 
billion current account  deficits as far forward as the eye can see?

 MONEYCHANGER Doesn't that at some point decapitalise the United  States?

 Doesn't that at some point destroy the value of the dollar?

 TODD Yes, but it has consequences that are more pernicious than  that. It 
transfers US assets into foreign hands, inviting the  re-creation of 19th 
century finance, especially the first half of  the 19th century. You are no 
longer the master of your own fate. You  wind up having to do whatever 
foreign creditors demand.

 MONEYCHANGER You become Argentina.

 TODD Yes. So it's pernicious from the standpoint of 
constitutional  governance in the long run. You don't want this trend to 
continue,  versus the views of the globalisers, who are all saying, "Well, 
we  just ought to be one more happy trading station on the great plain  of 
global trade."

 MONEYCHANGER Isn't there a fundamental issue of independence 
and  sovereignty here? So you're saying that it doesn't really matter  much 
whether Republicans or Democrats are in charge . . .

 TODD Oh, I think it does matter, but it matters more which set 
of  Republicans. As long as you've got Republicans from west of 
the  Alleghenies running things, I'd argue you're better off than if 
you  have any set of eastern Democrats or eastern Republicans 
running  things. At the moment, we have the best set.

 MONEYCHANGER Is this like telling the man with diabetes that only  his 
toes are gangrenous?

 TODD Yes, it's not a nice position but you have to live with it. We  can 
live with heartland Republicans. Where the problem always  arises, as you 
saw with Vermont senator Jeffors, is that eastern  Republicans are a 
different breed and you may not necessarily want  them representing you.

 MONEYCHANGER Well, those of us from the South have felt that way for  a 
long time.

 What does all this say for the stock market?

 TODD I tend to agree with you that it feels like it's at the crest  of 
the wave, along with these other factors I've been discussing.  You watch 
that dollar index keep going up and start asking yourself,  "Where's the top?

 125? 130?" The bubble will blow as high as Greenspan and the  Treasury 
allow that dollar index to go.

 MONEYCHANGER So our discussion has come full circle. The 
really  important indicator to watch right now is the US dollar index.

 TODD I think so. At 100, I think Wall Street just stays wherever it  sits 
at the moment. It will just sit there a while. At 95 you have a  prospect 
for the DJIA to rise smartly, because US manufacturers'  profits return.

 MONEYCHANGER But is the converse true? If the dollar stays high, is  the 
stock market doomed?

 TODD No, suppose the dollar index went to 130. One way it would 
get  there is Greenspan  the Treasury allowing long bond rates to  continue 
to rise to sustain foreign investors' purchases of dollars  in order to buy 
those Treasury securities at the higher rate. As  long as you see a 
corresponding rise in long term interest rates,  that dollar index is 
likely to keep going up and suck Wall Street up  along with it.

 Where Wall Street would decline, I think, would be in that range  from 
120 falling to 100, because with the dollar index in that  range, there's 
no upside for the Dow. They still can't export  anything, and nobody wants 
to buy your paper.

 MONEYCHANGER So on the one hand we export goods at the lower end of  the 
dollar index range, and at the upper end of the range we export  paper.

 TODD That's right.

 MONEYCHANGER What a world! [laughing] That's insane. TODD I agree  with 
you, it's an insane world. In the view of classical economists,  and 
Austrian economists especially, money ought to be a neutral  factor. That's 
the virtue of forcing a central bank to adhere to  some price that it 
cannot control, a gold price, for example.

 MONEYCHANGER But I think I have understood that you are saying that  we 
can't go back to a gold standard or convertibility.

 TODD I think Anna Schwartz made the wisest comment I ever heard on  this 
issue. She was asked that question at a CMRE meeting once, "Why  don't we 
go back to a gold standard?"

 She answered, "Because of the way central banks handle things." 
This  immediately followed her talk about what a botch central banks 
had  made of things.

 She added that at the Gold Commission in 1981 we decided that there  are 
many virtues in the gold standard, but the problem is that  government has 
grown far larger in our lives than it was in 1933,  the last time we were 
on a gold standard. At the time, if you looked  at total government 
expenditure was in the neighbourhood of 5 - 10%  of GDP versus today where 
government at all levels is maybe 40% of  GDP. That means in the old days 
the necessary adjustments to  maintain a gold price could be absorbed by a 
private sector that was  90% of GDP. Today that absorption would have to be 
taken by a  private sector that's only 60% of GDP, so that the consequences 
for  the living standards of the average American would be at least 
50%  more severe than in the old gold standard days of panics 
or  recessions. They would automatically be 50% worse to get you where  you 
had to go. So the task in the near term is shrink government to  the extent 
that you could then safely adopt and live with a gold  standard.

 MONEYCHANGER So you must shrink government before you can ever get  rid 
of the central bank incubus?

 TODD And the bad news is, of course, that the Establishment  controlling 
that central bank will fight like rabid dogs to keep you  from shrinking 
their government so as to take away their indirect  control of everything 
through their control of the central bank.

 MONEYCHANGER That implies also that without a central bank, 
no  government can metastasise to waste away 40% of the 
commonwealth's  production.

 TODD That's why the standard Democratic Party formulas are a  disaster, 
because they contemplate ever bigger government.

 MONEYCHANGER This has really been a cheerful conversation, Walker,  but I 
really appreciate your insight on the dollar, and that's what  we're going 
to keep our eyes on. Thanks very much.

 TODD You're quite welcome. [end]

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$95/year from P.O. Box 178, Westpoint, Tennessee  38486; (888) 218-9226).

 E-mail us at moneychanger@xxxxxxxxxxxxxx or visit our 
website  www.the-moneychanger.com .

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