The long — and dangerous — American path paved in gold – Simon Johnson

MIT Sloan Professor Simon Johnson

From The Washington Post 

What is gold? Is it the essential bedrock of fiscal prudence? Is it a political football, with fortunes and importance determined by far greater forces? Or is it a mere distraction at the margins of the global financial system — attracting a disproportionate number of scams and oddball political characters?

Gold in the American economic system has been all of these and in that order. James Ledbetter weaves a highly readable tale, literally from the origins of the republic to the dubious sponsors of Glenn Beck on Fox News (a brilliant concluding chapter). Too often, this kind of economic history becomes dry and even soporific. But Ledbetter — the editor of Inc. magazine — has a fine eye for personality and ideas; each of the 12 chapters puts you on the spot at a critical moment on the American journey with gold, with anecdotes nicely blended to create the broader historical context.

You can read it in chronological order or you can dip a toe in at any point, almost the ideal summer reading. Or — my favorite for this kind of tale — watch the story unfold backwards; start with the modern and familiar, and see how far you need to go back in time before it feels like you are watching something straight out of Marvel Comics, with big characters and motivations that now seem strange. The most compelling material explains how President Franklin D. Roosevelt reluctantly yet effectively — and with very good reason — ended the way gold had operated over the previous half century. But Operation Goldfinger is also highly entertaining — a 1960s public policy escapade, inspired by the James Bond movie.

The broader plot line is this. The American republic was initially bankrupt, a point that the hit musical Hamilton made more effectively than any middle school history lesson. A monetary system subsequently modeled on that of Britain included gold as an anchor of value for paper money and bank deposits. This system provided sufficient stability in good times — along with plenty of opportunity for financial speculation and shenanigans — and could also be suspended when circumstances dictated, most notably during the Civil War.

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Defaulting to big government—the unintended consequences of not raising the debt ceiling

MIT Sloan Prof. Simon Johnson

From CNN World

Leading United States congressmen are determined to provoke a showdown with the Obama administration over the federal government’s debt ceiling. Ordinarily, you might expect House Republicans to blink at this stage of the negotiations, but there is a hardline minority that actually appears to think that defaulting on government debt would not be a bad thing.

These representatives – with whom I’ve interacted at three congressional hearings recently – are convinced that the US federal government is too big relative to the economy, and that drastic measures are needed to bring it under control. Depending on your assessment of “Tea Party” strength on Capitol Hill, at least a partial debt default does not seem as implausible as it did in the past – and recent warnings from ratings agencies reflect this heightened risk.

But the consequences of any default would, ironically, actually increase the size of government relative to the US economy – the very outcome that Republican intransigents claim to be trying to avoid.

See the full post at Global Public Square

Simon Johnson, a professor of global economics and management at MIT Sloan, is the former chief economist at the International Monetary Fund and co-author of 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown