How can you tell if Timothy Geithner is lying? His lips are moving. The treasury secretary has no credibility. He came to the office under two clouds: his income tax avoidance and the AIG bailout. Things have only gotten worse. In fact he may be the worse Treasury secretary since Hank Paulson. His utterances over the debt ceiling are embarrassing. He is asserting without challenge from the clueless news reporters that if the debt ceiling is not raised then the US will default on its obligations. Only a fool would say that and only a fool would believe it. Someone should ask him how a nation with a printing press could ever default on its obligations. The only consequence of not raising the debt ceiling is that the government cannot borrow to finance new spending. As I have noted before, the US takes in enough "revenues" to pay the interest on the existing debt and to actually run much of the government. Moreover, since the Fed is the largest debtholder, then just have the Fed practice forbearance and pay them later. Speaking of the Fed, there are those like Ron Paul who want to abolish the Fed and the gold bugs who want to go to a gold standard. While that is a truly bad idea that I will discuss fully later, the gold bugs say that on a gold standard you limit government spending and the Fed's ability to create money. Obviously they haven't heard of the Emperor Diocletian, whose Rome suffered hyperinflation under the gold standard by debasing the currency by adding lead to it. Nor do they realize that the Congress could just change the value of gold in terms of dollars which could be easily done. No, if you want to control the Fed's ability to create money, there is a far simpler solution, first you need to have 100 percent reserves. The way most money is created is through bank lending via fractional reserves. With 100 percent reserves the banks could not create money. Yes they could still lend but they would have to borrow the money just like nondepositories do today rather than lend from their excess reserves because there would be no excess reserves. Second, there has to be a law prohibiting the Fed from buying Treasuries directly from the US Treasury (re: Timothy Geithner). The fed could continue to buy treasuries that have already been issued and are in the portfolios of the public but they could no longer monetize the national debt. The buying directly form the Treasury as in QE and QE2 give money directly to the Treasury which immediately will spend it. The result is inflationary because the money is generated out of thin air. It you want to preserve the value of the dollar, if you want to combat the threat of inflation, if you want to slow down the unchecked rate of growth in government spending the answer is simple and clear. It is not the gold standard which will only enrich those friends of capitalism like George Soros, it is to constrain the Fed by enacting two rather simple changes in the law.
Harold A. Black is professor emeritus in the Department of Finance, University of Tennessee, Knoxville having retired after 24 years of service. He has served on the faculties of American University, Howard University, the University of North Carolina - Chapel Hill and the University of Florida. His government service includes the Office of the Comptroller of the Currency and as a Board Member of the National Credit Union Administration. He also has served on the boards of directors Home Savings of America and its parent company, H. F. Ahmanson & Co., Irwindale, California prior to its merger with Washington Mutual Savings Bank, on the board of New Century Financial Corporation, Irvine, California, then the nation’s largest real estate investment trust and as director and later chairman of the Nashville Branch of the Federal Reserve Bank of Atlanta. He writes an occasional article for the Knoxville News-Sentinel at http://www.knoxnews.com/staff/dr-harold-black/. His web page is haroldablackphd.com