In modern terms — which few would have understood in 1896 — the question was what level of monetary growth was necessary for the rapidly growing American economy. Bankers wanted deflation, which increased the real value of their assets (loans). Debtors, esp farmers, wanted inflation. The bankers won, and we got a series of brutal depressions until WWI — an example of “be careful what you ask for.”

My guess is that Bryan would not support measures designed to stiff our creditors. He wanted a fair monetary system that was not tilted toward creditors. We already have that, borrowing at low rates on easy terms to a degree probably never seen in the history of the world. The current debate, as seen above, is about how we can avoid paying back what we fecklessly borrowed. I think Bryan would greatly resent comparing our borrowing to support lavish consumption with that of 19th C farmers trying to support families in the harsh conditions of the American mid-west.

Update: My apologies. It was, of course the Populist and not the Progressive Movement that Bryan co-opted in 1896. A late night typo.

“A typical recession is a 1.5% drop, so going cold-turkey on borrowing would mean a very severe downturn. I suspect this is far more likely to result from foreigners taking away America’s national VISA card than us deciding to stop spending like drunks.”
We may be closer to this than most think: Fighting Inflation, China Freezes Energy Prices

On an operational note, we borrow the stupendous sum of roughly 5% of our national income from foreigners. A typical recession is a 1.5% drop, so going cold-turkey on borrowing would mean a very severe downturn. I suspect this is far more likely to result from foreigners taking away America’s national VISA card than us deciding to stop spending like drunks.

The point of making such a radical thought is not, in itself, to provide a solution. Rather it is to stimulate creative new approaches. So how do we ( and by “we” I do not necessarily mean the federal government but rather each of us, all of us, or any subset thereof in any possible arrangement ) adjust our affairs so our credit rating no longer matters so much?

Yeah, our leading export these days is the dollar. China sends us stuff, we send back dollars (and bonds, etc.) As long as those dollar-things are kept as reserves the big ball keeps rolling. While I don’t believe the world is dumping the dollar as a reserve currency, I’ve seen many stories that nations are going to the Dollar/EU mix. I’m thinking what’s changing is that in the past we benefited from a monopoly of the dollar as a reserve currency and now there’s competition. Nations can smoosh the percentage slider either way from Dollar or EU, and in the new environment the USA needs to take care to make sure the dollar is competitive as a reserve currency — as usual, we won’t start paying attention to this until it becomes a disaster.

“We cannot do the same thing for America, mailing the keys to our foreign creditors - making it their problem. But we can default, or inflate the debts away to oblivion. Our creditors trusted enough in America to lend to us without collateral and in our own currency. Were they wise to do so?”

The dollar is now falling relative to other currencies, so even if it doesn’t look like inflation here, we are already effectively inflating the debts away from the perspective of guys overseas who own US bonds. The Ottoman story explained the consequences of this pretty well. Owning bonds in a falling currency doesn’t look like such a great bet. To preserve value, those guys are going to want buy income producing properties, American companies, land and buildings — the Citibank deal, for example.

As long as there’s something to buy here with the dollars the party can continue a little longer, but eventually what happens is they simply own everything. We become serfs to foreign powers. We rent homes owned by them; we work at companies owned by them. Our taxes are used to pay interest that goes to fund projects in their countries.

“Quietly developing in the background, the global economy is undergoing a no less dramatic transformation. While we expect oil prices to retreat somewhat in 2008 after years of surges, their sustained strength continues to shove a great deal of cash into the hands of the world’s oil exporters — cash that these countries cannot process internally and that therefore will either be stored in dollars or invested in the only country with deep enough capital pools to handle it: the United States. Add in the torrent of exports from the Asian states, which generates nearly identical cash-management problems, and the result is a deep dollarization of the global system even as the U.S. dollar gives ground. The talk on the financial pages will be of dollar (implying American) weakness, even as the currency steadily shifts from the one of first resort to the true foundation of the entire system.”

Thoughts?

I see China and the US as two drunks leaning on each another. Can either stand alone? If one falls, does the other also? Both systems are deeply flawed, albeit in different — perhaps opposite - ways.