Author: Warren Coats

I specialize in advising central banks on monetary policy and the development of the capacity to formulate and implement monetary policy.  I joined the International Monetary Fund in 1975 from which I retired in 2003 as Assistant Director of the Monetary and Financial Systems Department. While at the IMF I led or participated in missions to the central banks of over twenty countries (including Afghanistan, Bosnia, Croatia, Egypt, Iraq, Israel, Kazakhstan, Kenya, Kosovo, Kyrgystan, Moldova, Serbia, Turkey, West Bank and Gaza Strip, and Zimbabwe) and was seconded as a visiting economist to the Board of Governors of the Federal Reserve System (1979-80), and to the World Bank's World Development Report team in 1989.  After retirement from the IMF I was a member of the Board of the Cayman Islands Monetary Authority from 2003-10 and of the editorial board of the Cayman Financial Review from 2010-2017.  Prior to joining the IMF I was Assistant Prof of Economics at UVa from 1970-75.  I am currently a fellow of Johns Hopkins Krieger School of Arts and Sciences, Institute for Applied Economics, Global Health, and the Study of Business Enterprise.  In March 2019 Central Banking Journal awarded me for my “Outstanding Contribution for Capacity Building.”  My recent books are One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina; My Travels in the Former Soviet Union; My Travels to Afghanistan; My Travels to Jerusalem; and My Travels to Baghdad. I have a BA in Economics from the UC Berkeley and a PhD in Economics from the University of Chicago. My dissertation committee was chaired by Milton Friedman and included Robert J. Gordon. I live in National Landing Va 22202

Edward Snowden

Edward Snowden continues to amaze me and to rise in my admiration (see his interview by the New York Times). “Snowden-says-he-took-no-secret-files-to-Russia” 

He most certainly violated his pledge and the law, but the thoughtfulness and care with which he has revealed very selective documents contrasts very sharply with the damaging data dump of Chelsea Manning (AKA Bradley). Manning, who never convincingly explained what he thought he was doing or why, impeded the flow of candid information and discussion within the U.S. government (e.g. in cables between our embassy’s and the State Department). This will make future diplomacy more difficult.

Snowden, on the other hand, who revealed information gathering programs and their assessments rather than the content of information collected, has thankfully forced more open discussion of what tools the government has and how they should be used. He has risked his own future in the heroic service of the higher interests of his (and my) country.  Richard Cohn expresses these views very well in a recent Washington Post oped: “Snowden is no Traitor/2013/10/21/”

Our government has been caught lying repeatedly in connection with its spying activity. https://wcoats.wordpress.com/2013/08/20/abuse-of-power/  In many respects this is an expected part of the game with regard to enemies we wish to protect ourselves from. But the law sets important limits and safeguards on the government when it comes to spying on its own at home or friends abroad (e.g. the President of Mexico, 70 million French phone records per month, etc). Records revealed by Snowden document that these are being violated as well.

Last week I attended a fascinating discussion at the Brookings Institute between Matt Apuzzo, Investigative Reporter for The Associated Press and author with Adam Goldman of Enemies Within: Inside NYPD’s Secret Spying Unit and Bin Ladin’s Final Plot Against America (Touchstone, 2013), and Bruce Riedel, Director, The Intelligence Project, Senior Fellow, Foreign Policy, Saban Center for Middle East Policy, Center for 21st Century Security and Intelligence. Apuzzo and Goldman’s book is a spy thriller account of the only specific case revealed by the government of the 50 potential attacks they claim their programs helped prevent. The government thwarted the September 2009 al Qaeda terrorist plot – led by Najibullah Zazi, an Afghan-American – to attack the New York City subway system. Without taking a position on whether NSA and related domestic spying activities helped with this case, Mr. Apuzzo reported that the link to the would be terrorist came as the result of an email he sent to a known British terrorist. This was enough to enabled the government to monitor Mr. Zazi’s communications on the basis of older and established intelligence authorities without resort to the more intrusive programs reveals by Snowden. So the government lied to us again.

The natural tendency of government is to grow and to expand their authority. Whenever our government seemed to go too far, American’s have pushed back. Edward Snowden has alerted us to the need to push back again and I am very grateful to him for that.

Can Washington Still Govern?

October 11, 2013

The popularity of the government is at an all time low. Different people want different things, thus none of us can have everything we want. What to do? Congress enacts laws and if they later decide that they enacted a bad one they can vote to amend or repeal it. The voting public can vote out representatives who don’t properly represent them and vote in new ones who will adopt the laws they want.  But at the end of the day compromise is required to satisfy the largest number of people.

Refusing to authorize government expenditures for existing laws and thus shutting down the government (sort of) is better described, according to Andrew Reinbach, as sedition:

“The definition of sedition says among other things that ‘If two or more persons in any State or Territory, or in any place subject to the jurisdiction of the United States, conspire… by force to prevent, hinder, or delay the execution of any law of the United States… they shall each be fined or imprisoned not more than 20 years, or both.’”

The best overview of the outrageous behavior by both the Republicans and the Democrats remains, in my judgment, the article by Charles Krauthammer that I posted earlier. “Who Shut Down Yellowstone? /2013/10/03/”.  This all came back to my mind as I drove down Clara Barton Parkway toward the District yesterday morning for an 8:30 am meeting with the Afghan delegation here for the IMF/World Bank Annual Meetings. There are a number of parking areas along the parkway. People park there to take their canoes down to the Potomac or to walk along the river. You might have thought that closing the government would have no consequences for such pullovers. At most it might leave the trash deposited in the trash cans there uncollected. Instead, the government spent the money to place concrete barriers beside the road preventing anyone from pulling off and parking there.  I am told that the same was done across the river on the Virginia side along the George Washington Memorial Parkway and no doubt in many other places as well employing the well-known government trick of making the cuts as painful as possible to the public.  This is the government we have now. The moron who made those decisions should be fired (the gentlest penalty that passed through my mind).

I have always believed that one of the things that makes America great is that it has managed to create a system in which people of different cultures and faiths, but common core values, live peaceably together. This gives our country the enriching benefits of the creative power of diverse ideas from diverse cultures without the costs of social strife. A major source of this success comes from a constitution and system of government that has limited the power of the government and does not overly interfere in the private activities of its citizens. No ones religious beliefs are imposed on anyone else, etc.

These days our political class seems to have lost the capacity of compromise, an essential aspect of living together peaceably. Many of our politicians no longer see compromise as a virtue (the fools). The problem is not a new one, of course. When farmers from the Near East moved into Central Europe 7,500 years ago they were not assimilated by the hunters-gatherers who lived there. Rather they coexisted in parallel cultures, forced by necessity to get alone.  “Stone-age Farmers-Hunters Kept Their Distance /2013/10/10/”

Fortunately, the dysfunction of our government is not reflective of our broader society, though I know there are many ugly exceptions. I was happy to read in today’s Washington Post that a heart wrenching dispute between the natural father of a four year old girl and her adopted parents who actually loved and cared for and raised her has been resolved and a mutually sensible way, keeping hope for civilization alive: “Cherokee Nation and Father of adopted 4 year old girl drop court battle for custody /2013/10/11” Veronica’s adopted parents will retain custody of her but will cooperate in making ways for her natural, Cherokee father to be involved in her life.

Using an increase in the debt ceiling as leverage to reduce the government’s deficit to sustainable rates is quite a different matter.  It has been recognized for many years by both political parties that government spending commitments in the future, given the aging of the population (i.e., the fall in the working age population relative to the retired population), could not be met. The Congressional Budget Office’s current long-term, baseline forecasts, which assume current tax and spending laws (including the reduced spending growth required by the sequester) are for the debt to grow more rapidly than income, i.e., to rise as a percent of GDP without end. One bipartisan effort after another (Bowles-Simpson commission, the Senate Gang of Six, Bipartisan Policy Center’s Debt Reduction Task Force, the Super Committee, etc.) tried to reach tax and spending compromises and failed. Yes, even with the sequester (across the board cuts in planned spending increases) the growth in debt is not sustainable. Something must change. A compromise must be agreed. Using approval of an increase in the debt ceiling as leverage to achieve such a compromise is a reasonable tactic. If not now the market will force it later (significant increases in the interest rates demanded by the market to lend to an increasingly over indebted government). Better and cheaper sooner than later. “The-sequester”  “Thinking About the Public Debt”

An Afghan view

Burhanuddin Rabbani was the President of Afghanistan from 1992 – 96.  After the fall of the Taliban regime, he served temporarily as President from Nov to Dec 20, 2011, until the International Conference on Afghanistan in Bonn chose Hamid Karzai for that position. He was assassinated in his home in Kabul on September 20, 2011 by a suicide bomber. One of his sons, Shuja, a former Deputy Director General of the Financial Supervision Department of Da Afghanistan Bank (the central bank of Afghanistan), was in his father’s house at the time of the assassination. He posted the following on his FACEBOOK page today (September 29):

Afghan elections buzz is on full swing. Twitter wars have begun, social media propaganda is on full scale, ethnic cards are being thrown at your face, and I couldn’t be bothered to get involved. I never voted, I don’t intend to vote, but if you believe in democracy, then go ahead and rock your vote and I wish you all the very best!

All I can say to the youth is that if you’re not happy with the choice of the future President of #Afghanistan, remember that not enough of you voted. If the votes are rigged like last time, maybe you should join Anonymous and start a revolution. Or maybe not. Maybe you should just leave the country for dreams of a better life and never return. Some say the next President has to be someone who is given the “stamp of approval” by President Karzai. Remember that President Karzai is not some Godfather. Power was given to him and power can be just as easily taken back from him. Pashtun or Tajik, it doesn’t matter because as a nation, we’ve never really had respect for any of the Presidents or Heads of State so why play the ethnic game?

At times, I really do think we’re in denial about living in two-countries-in-one like the Iraqi Kurdistan and the rest of Iraq. But dare I mention anything on officially separating Afghanistan’s North from the South and drawing official borders and pay whatever price it takes to get ourselves the peace we’re looking for, I’m bound to be labelled a racist, a fascist, a slave of Pakistan, a slave of Iran, a slave of USA, this, that, and everything in-between.

If you want to call me names, go for it. Go ahead and label me. It’s just another label. I’ve lived my whole life hearing all kinds of criticisms thrown at us. From freedom-fighting Mujahidin heroes to warlords and war criminals, I’ve heard it all before. In the end, when you’re done wasting your time and energy, I’ll still be here – just like all the others before me. Afghanistan is a strange country: from the weakest to the strongest of leaders, we’ve never given our leaders the respect they deserve.

If the youth of Afghanistan is waiting for an Afghani Nelson Mandela, guess what? It will never happen. Learn from what you’ve had before, make best use of what you have today, and create your own tomorrow. And when Afghanistan becomes a civilized country, that’s when I’ll decide to return. If not, I’m pretty sure I’m not missing anything and I make no apologies for it.

More on Syria

My high school and college friend, Bill Hulsy, now living in Southern California, offers his analysis of Obama’s justification for attaching Syria:

Dear Friends:

This e-mail will discuss the various flaws in the arguments provided by the Obama Administration for an attack on Syria.  There are seven major flaws in the argument, to wit:  1) the predicate proof is unsatisfactory and unpersuasive, 2) the action is illegal under our law and international law, 3) the Chemical Weapons Convention does not provide a legal basis for this action, 4) the ostensible beneficiaries and cheerleaders of this action are bad actors, 5) this action is a pretext for War with Iran, 6) the United States has no moral standing since we have both used and aided and abetted the use of chemical weapons, and 7) U.S. loss of face is the problem of Obama himself, and a lesser alternative to bad policy.

This proposed action is predicated on alleged use of chemical gas by the government of Syria.  This contention is illogical as the Syrian government was winning the civil war, and the use of chemical agents is an act of desperation.  Much of Syria has been overrun by the rebels and they have captured many munitions and that includes chemical agents.  The Internet is full of pictures and stories showing that the Syrian rebels have chemical agents.  Logic suggests their use of the gas as a “false flag” operation.

The whole post-WWII peace process has been based on the use of the United Nations.  The United Nations Charter was adopted and ratified by the United States in 1945.  It is a treaty and is United States law.  Article 42 provides that force may be used individually or collectively by signators only if approved by the Security Council.  The only exception is the right of “self defense.” which is permitted under Article 51.  There is no special exception for chemical warfare.

The Chemical Weapons Convention was adopted in 1993.  Syria is not a signatory.  That convention has no enforcement mechanism.  Hence, there is no right to wage war or commit acts of war (such as proposed) pursuant to some “norm” of the Chemical Weapons Convention.

The rebels in Syria are Sunni jihadis.  These are the same people who attacked the United States on 9/11.  Syria is a secular, not a religious state.  The Christians (numbering 2 million souls) make up 10% of the population.  The government protects the interests of the minorities in Syria of which the Christians are one.  The Sunni jihadis want to commit a sectarian cleansing, driving the Syrian Christians into Lebanon.  For a look at what a Sunni jihadi victory would look like, from a religious point of view, see what happened to the Christian community in Iraq after the Iraq War.

This attack is nothing but a pretext for a War with Iran.  This attack will provoke counter-measures by Syria’s allies.  Either an agent of Iran (or one of our agents operating in Iran) will fire a missile at a U.S. ship or tanker and, then, immediately we will attack Iran’s nuclear facilities and the war will be on.  Israel will attack Hezbolla in Lebanon, reactively or pre-emptively,  Russia will cut off oil supplies to Europe.  United States assets all over Arabia and the Moslem world will be at risk.  I believe that is the real reason for the attack on Syria–to promote war with Iran.  It is the American Way.

Not only does the United States have no legal standing for this attack, but, also it has no moral standing to attack Syria.  We used Agent Orange in Vietnam, which was a chemical agent.  We used phosphorus in Fallouja, and we aided and abetted Iraq in its use of gas in warfare in its war with Iran.  We provided the intelligence for where the gas was to be placed to devastate the Iranians where they were massing troops.

It is said that America will lose face if Congress does not approve an attack.  Well, even if that is true, the fault will be Obama’s since lacked any legal or moral power to draw “red lines” regarding the conduct and internal affairs of independent states.  The alternative to the “loss of face” is much worse.  Mr. Obama styles himself a Constitutional Scholar.  He should have known better.

William S. Hulsy
Attorney at Law

Syria and the Red Line

On August 21, 2013, a chemical weapons attack killed 1,429 men, women and children on the outskirts of Damascus. President Obama and Secretary of State John Kerry attribute the horrifying attack to the Assad government. The Geneva Protocol of 1925, the Biological Weapons Convention of 1972, and the Chemical Weapons Convention of 1993 forbid the use of chemical weapons. The use of force to punish violators of the ban may be authorized by the UN Security Council. The United States is not unilaterally authorized under international law to do so.

President Obama continues to surprise me. Despite over a 100,000 casualties in Syria’s two-year plus civil war, he has wisely resisted direct involvement in a conflict that the U.S. has no obvious self-interest in. We have no real control over the unfolding events and outcome of the struggle underway there. Unfortunately, there is no plausible outcome that serves our interest in peace and democracy in the region much less in having a friendly regime. There is no obvious successor to Assad’s regime, though radical Islamism (al Qaeda) forces seem to currently dominate the anti-government forces. Edward Luttwak argues in a NY Times op-ed that a stalemate is the least bad of bad options. “In-Syria America Loses if Either Side Wins”

Obama then foolishly drew a red line against the Assad regime’s use of chemical weapons. It now seems very likely that Assad has crossed it in a big way. If the U.S. does not act decisively it will lose credibility and its red lines will become meaningless. If it acts, as Obama has suggested, in a limited, “surgical” manner that does not tip the balance of Syria’s civil war, will it have “taught” Assad a lesson that will detour him from using chemical weapons in the future? More likely it will affirm U.S. powerlessness in the area. And what about the inevitable collateral damage even if our rockets hit their intended targets and Syria’s unpredictable countermeasures? In a statement released September 1, the International Crisis Group stated that: “To precisely gauge in advance the impact of a U.S. military attack, regardless of its scope and of efforts to carefully calibrate it, by definition is a fool’s errand…. Consequences almost certainly will be unpredictable.” “Syria Statement”

In a letter to the Senate Armed Services Committee last month, Gen. Martin Dempsey, chairman of the Joint Chiefs of Staff, stated that: “As we weigh our options, we should be able to conclude with some confidence that use of force will move us toward the intended outcome. Once we take action, we should be prepared for what comes next. Deeper involvement is hard to avoid.” More recently he added that: “Simply the application of force rarely produces and, in fact, maybe never produce the outcome we seek.” According to Daniel Byman of Brookings Institute “A limited bombing campaign against Syria’s chemical weapons infrastructure is likely to produce the worst of all worlds: raising expectations and further involving the United States in the Syrian civil war without significantly altering the balance of forces on the ground.” “Syria Crisis-Military Action”

Syria’s use of chemical weapons without consequences could render their prohibition toothless. However, not only is the US not legally authorized to police world agreements, it can’t afford to go into another war and still remain economically and militarily strong. Given Russian and Chinese opposition, the UN Security Council will not authorize the use of force. A U.S. attack on Syria would violate international law every bit as much as Syria’s apparent use of chemical weapons has. That does not mean that nothing can be done within the framework of the law in reaction to the use of chemical weapons. If we continue to disregard international law, why would we expect others to abide by it? Globalization, which has dramatically reduced poverty around the world, would suffer. We would be left to police the world by military force (and how has that been working for us?) until we burned ourselves out.

In his rose garden address to the nation Saturday the President said that: “I have decided that the United States should take military action against Syrian regime targets….  And I’m prepared to give that order.” His surprise, however, was his promise to seek Congress’s authorization, something he had not considered necessary for Libya. “But having made my decision as Commander-in-Chief based on what I am convinced is our national security interests,… I will seek authorization for the use of force from the American people’s representatives in Congress.” Regrettably he did not seem to seek this authorization as a legal requirement of the constitution but rather as a pragmatic way to build public support. What ever his reason the step is welcomed.

Harvard Law Professor Jack Goldsmith reviewed the legal arguments over the President’s war powers in a recent New York Times article: “What Happened to the Rule of Law?”  The Obama administration has pushed Presidential authority further than any previous administration. A return to the rule of law, domestically and internationally, is America’s best chance of survival in a dramatically changing world.

Congress should say no to Obama’s request for an illegal and unpromising attack on Syria. But we can thank him for asking.

Liberty and the Overly Prescriptive State

Few things reveal a person’s views on liberty more than their attitude toward the right of others to say or do things they disagree with. The First Amendment to the Constitution of the United States protects our right of free speech and assembly, later interpreted to include the right of association. “The NSA Unravels a Civil Rights Era Win”/2013/08/29/ None of these rights is absolute (yelling fire in a theater, etc), but where we as a society draw the line has a great deal to do with how successfully our diverse citizens will live together in harmony and freedom.

The latest example of the imposition of the state into what should be private issues of belief is California’s ban on health practitioners “offering psychotherapy aimed a making gay youth straight.” The U.S. Court of Appeals for the 9th Circuit in San Francisco ruled that the law does not violate the free speech rights of licensed counselors and patients seeking treatment.” “US Court Upholds First in Nation Law Banning Gay to Straight Therapy for Minors”/2013/08/29/

Conversion therapy is a scientifically documented scam, but if its practitioners believe in it, it is not a deliberate fraud (maybe they do and many they don’t). We are freer, and live in greater harmony the more we allow people to pursue and experiment with their own beliefs. This includes things the rest of us might think are silly. Such freedom, when exercised within a strong set of moral values, also tends to move society more quickly to a more virtuous level. The caveat is that in allowing people to live according to their own creed, they must do no real harm to others.  Even the “doing no harm to others” standard is subject to discussion and can moved a bit this way or that – toward more freedom or less. In the case of the California law against conversion therapy, the law was aimed at protecting minors from harm inflicted by such therapy and we have rightly been quicker to protect minors than others. In short, drawing an appropriate line between private rights and state intervention is a serious and not particularly easy undertaking.

Those of you who are lucky enough to be Facebook friends of Jonathan Rauch, author of “Denial” and currently a contributing editor of the National Journal and The Atlantic, and a guest scholar at the Brookings Institute, have access to a very thoughtful discussion of the freedom of conscience, association and speech and equal protection of the law. In comments to one of Jonathan’s postings, Charlotte Allen, Tom Palmer, and Walter Olson, Walt Becker (a pseudonym), David Dalton and others explore the interface between the freedom of association and equal protection of the law in the context of same sex marriage. In such discussions it is critical for those of us who defend the importance and morality of liberty to clearly distinguish what we individually believe is right and good from what is or should be allowed under the law. The law should allow people to make their own stupid mistakes.

In reaction to slavery and Jim Crow laws, which legally discriminated against blacks, America has gone well beyond repealing such legislation and has adopted a range of anti-discrimination laws limiting the ability of “public” businesses to choose their employees and customers. These anti-discrimination laws are now increasingly being extended to GLBTs (Gays, Lesbians, Bisexuals and Transgenders). Personal beliefs and preferences, whether we agree with or respect them or not, thus confront state interference in our personal choices and behavior. Doctors, who do not believe in abortion, are required to perform them. Companies whose owners do not believe in contraception are forced to provide health insurance and condoms to employees wanting them. A New Mexico photographer and baker are sued for refusing to provide their services to a same-sex wedding ceremony.

Equal treatment in the law was put aside for Affirmative Action giving preference to blacks in some cases on what was meant to be a temporary basis until the damage of earlier negative discrimination could be reversed. The Supreme Court has now started to roll back such preferences. In the above Facebook debate, Charlotte, who has trouble accepting marriage equality for same-sex couples, takes a more libertarian position on other areas of state imposed morality when she says “Why can’t we give people the freedom to set the parameters of their own commercial transactions?” The optimal balance shifts over time and I doubt that we have it anyway.

The government, which is often a lagging reflection of public sentiment, has been one of the last to extend equal treatment to same sex couples. Pure profit motive led corporate American to move ahead several decades ago to extend “marriage” benefits to employee partners of whatever sex. They did so in order to attract the best employees without regard to their color, religious beliefs, or sexual orientation. Discrimination has an economic cost.

No church should be required to marry anyone they don’t want to or don’t believe would be consistent with their beliefs. Allowing same-sex couples to receive a marriage license and the legal benefits that come with it from the State, which is surely required by the principle of equal protection of the law, does not and should not obligate any church to do so. I think that the treatment of the Boy Scouts of American set the right example.  As a private club the law allowed them to exclude gay boys from membership if they wanted to. However, evolving social understanding and attitudes and deeper reflection by Boy Scout leaders are slowly leading the Boy Scouts to change this policy. Getting the balance right will never be easy, but I prefer to error on the side of personal freedom rather than government dictated morality.

Turning a corner on the invasion of privacy?

In a small step to improve transparency, the U.S. government has released a two-year-old opinion by its secret Foreign Intelligence Surveillance Court revealing that “the National Security Agency unlawfully gathered tens of thousands of e-mails and other electronic communications between Americans” The Washington Post, Aug 22, 2013. Perhaps it was pushed to preempt Edward Snowden from doing so before it did. But it was also in response to a year old Freedom of Information lawsuit by the Electronic Frontier Foundation.

“It’s unfortunate it took a year of litigation and the most significant leak in American history to finally get them to release this opinion,” said foundation staff attorney Mark Rumold, “but I’m happy that the administration is beginning to take this debate seriously.”

In the October 3, 2011, opinion, John D. Bates, then the surveillance court’s chief judge, wrote: “The court is troubled that the government’s revelations regarding NSA’s acquisition of Internet transactions mark the third instance in less than three years in which the government has disclosed a substantial misrepresentation regarding the scope of a major collection program…. NSA’s knowing acquisition of tens of thousands of wholly domestic communications through its upstream collection is a cause of concern for the court.” Bates also noted that the court’s authorization of the NSA’s bulk collection of Americans’ phone-call records was “premised on a flawed depiction of how the NSA” uses the data. “This misperception by the FISC existed from the inception of its authorized collection in May 2006, buttressed by repeated inaccurate statements made in the government’s submissions, and despite a government-devised and court-mandated oversight regime.”

That is a mouth full and it is encouraging that the government has finally shared the court’s opinion with the public. It is in sharp contrast with the disclaimers of any wrong doing it was issuing a few weeks ago.

Abuse of Power

If I had more energy, I would gather together all of the recent ways in which the Obama administration has abused presidential authority and lied to us. That would make reading this blog worthwhile. I apologize. I just returned from a very enjoyable week with my two children and six of my grand children. The seventh grandchild, Bryce Davidson, left for college the day before I arrived. The week included all four opera’s of Wagner’s Ring der Nibelungen. So, as all dialogs seem to begin these days, I will just let loose my diatribe at the latest two disturbing atrocities of Big Brother.

We have enemies who wish us harm. We need the best information possible on their plans to harm us. But the technical ability of our government (of any government) to spy on our enemies and thus potentially on each of us (especially those the administration doesn’t like) is also dangerous. Checks and balances and clear limits are needed on the government’s use of these powers. President Obama increasingly demonstrates a lack of interest in limiting his actions to the law. For one of many examples, read my blog on his refusal to call the military coup in Egypt by its obvious real name because he doesn’t like the legal consequences of doing so: https://wcoats.wordpress.com/2013/07/30/the-egyptian-coup/

When Edward Snowden first leaked a number of NSA documents reveling that the National Security Agency (NSA) was illegally collecting massive amounts of data on American citizens, the government fought back by claiming that 50 some odd potential attacks on America had been prevented by such information, thus justifying “stretching” the law. Deeper scrutiny revealed that at most one instance of such data might have materially helped (along with other information) prevent such an attack. Many would say that one instance is enough to justify any risk of government abuse of its access to private information on Americans. But many of us are not comfortable with Big Brothers potential use of such powers.

For starters it is difficult to know the truth of the potential benefits and risks of NSA and other government agencies’ spying activities. The Director of National Intelligence, James Clapper, later admitted that he had lied to Congress when he testified that the NSA doesn’t collect data on “millions or hundreds of millions of Americans.”

When asked what it would take for Congress to hold James Clapper accountable for lying to Congress, Congressman Dennis Kucinich told Cullen Hoback, the director of the documentary on data privacy “Terms and Conditions May Apply:”

Well, you know it’s illegal to lie to Congress, but everyone lies to Congress. As soon as they raise their right hand, watch out! Clapper should be held responsible, but he won’t be, because that’s the condition we’re in right now. In a just world, Snowden, we’d be having ticker tape parades for him. But that’s not what’s going to happen.

President Obama and security officials then attempted to reassure us that they only overstepped the limits of the law a few times. Then last week Snowden released another round of damning documents. As reported in The Washington Post an NSA internal audit and other secret documents provided by Snowden showed the agency “has broken privacy rules or overstepped its legal authority thousands of times each year since Congress granted the agency broad new powers in 2008.”

A few true believers in Leviathan have suggested that no one—no innocent person—has been harmed or abused by these NSA violations of the law. Step forward David Maranda, the Brazilian partner of Glenn Greenwald, the journalist through whom Snowden has been providing leaked documents to the British news paper, The Guardian. Changing planes in London’s Heathrow airport on his way from Berlin (on assignment for The Guardian with regard to Edward Snowden) to his home in Rio de Janeiro, Mr. Maranda was detained for nine hours of interrogation under the British Terrorism Act of 2000. According to Neil Wallis, former executive editor, News of the World: “This is an appalling, blatant breach of press freedom.” U.S. officials acknowledged that they were aware of Mr. Maranda’s detention but claimed that they had not requested it. Right! We believe every thing our government tells us. Right?

How far do the abuses of power by the Obama administration have to go before we become concerned enough to put a stop to them?

Are We Becoming A Nation of Cowards?

“No nation can preserve its freedom in the midst of continual warfare.”

James Madison, April 20, 1795

Osama Bin Laden’s vendetta against the United States grew out of his anger over our stationing American troops in his home country of Saudi Arabia. Imagine for a moment what might be his most cost efficient weapons for hurting the U.S.  What might give him the biggest bang for the buck? Shutting 19 American Embassies and related diplomatic facilities in the Middle East for at least a week on the basis of intercepted communications between al-Qaeda leader Ayman al Zawahiri in Pakistan and Nasser al-Wuhayshi, who heads the al-Qaeda franchise in the Arabian peninsula, would be high on the list. Such reactions to intel, which could well be a deliberate planted by clever Arabs, must have the ghost of Bin Laden laughing hysterically (if it is possible to imagine Bin Laden laughing at all).

I still carry in my travel bag a nail clipper missing the little nail file that a Miami airport guard broke off as a potentially dangerous carry on weapon not too long after 9/11. It has taken 12 years for our government (the Orwellian named Department of Homeland Security) to figure out a way for me to board planes without taking out my computer and taking off my belt and shoes. At least the perpetual alert status of code Orange has been dropped.

These are minor inconveniences compared to the cost and danger of the billions and billions of dollars spent by NSA and others to invade our privacy (for our own good, of course) in order to better search for needles in hay stacks that might detect plots to harm us (such as the Boston marathon bombings—Upps). We are assured that these data will never be searched by a rogue bureaucrat looking for dirt on political enemies. We are reassured because our political leaders never lie to us.  For example, when National Intelligence director James Clapper informed a Senate Intelligence Committee last March that the government was not “wittingly” collecting information on millions of Americans, he later justified the lie by saying that it was the least dishonest statement he was comfortable making.

Gregory Johnsen, an expert on Yemen at Princeton, recently noted the unrealistic and dangerous expectations of the American public (at least as our government sees or would like to see them):“Unfortunately the way we in the US have talked about the terror threat as a society AQAP [Al-Qaeda in the Arabian Peninsula] doesn’t have to be particularly good or even successful to constitute a serious threat.  As a society we in the US seem to have a zero-tolerance approach to terrorism instead of weighing its risks against other potential threats.  In such an environment any threat from AQAP could be considered serious.” (reported by Foreign Policy Magazine)

I am not one to see conspiracies everywhere, but this latest scare is a nice distraction for recent revelations of potentially dangerous and at a minimum wastefully expensive government over reaches in the name of keeping us safe (Snowden’s NSA and other revelations). This mornings Washington Post has two op-ed pieces on this subject that you should read. The first by Eugene Robinson, “The New Al-Qaeda Menace” /2013/08/05/, is correct in my view. The second (just below it) by Juan Zarate and Thomas Sanderson,  “Adapting to Terrorism 2.0”,  is down right scary. George Orwell’s big brother could not have made the case better for bigger and more intrusive government for our own good. Are they deliberately trying to destroy our liberties or are they over zealot fools. Probably the latter.

Over the centuries our young men and ladies have risked and often lost their lives to keep us free. How ironic that in the name of keeping us secure our liberties are being increasingly eroded and threatened. It is worth reading a more extensive excerpt from James Madison’s prescient April 20, 1795 “Political Observations” quoted above:

“Of all the enemies of true liberty, war is, perhaps, the most to be dreaded, because it comprises and develops the germ of every other.

“War is the parent of armies; from these proceed debts and taxes; and armies, and debts, and taxes are the known instruments for bringing the many under the domination of the few.

“In war, too, the discretionary power of the Executive is extended; its influence in dealing out offices, honors and emoluments is multiplied; and all the means of seducing the minds, are added to those of subduing the force, of the people.

“The same malignant aspect in republicanism may be traced in the inequality of fortunes, and the opportunities of fraud, growing out of a state of war, and in the degeneracy of manner and of morals, engendered in both.

“No nation can preserve its freedom in the midst of continual warfare.

“War is in fact the true nurse of executive aggrandizement. In war, a physical force is to be created; and it is the executive will, which is to direct it.

“In war, the public treasuries are to be unlocked; and it is the executive hand which is to dispense them.

“In war, the honors and emoluments of office are to be multiplied; and it is the executive patronage under which they are to be enjoyed; and it is the executive brow they are to encircle.

“The strongest passions and most dangerous weaknesses of the human breast; ambition, avarice, vanity, the honorable or venal love of fame, are all in conspiracy against the desire and duty of peace.”

–James Madison, from “Political Observations,” April 20, 1795 in Letters and Other Writings of James Madison, Volume IV, page 491.

A Hard Anchor for the Dollar

For the last three years with zero interest rates and “quantitative easing” the Federal Reserve has been pushing on a string. It has been trying to stimulate an economy that suffers from problems that are not basically monetary. In the process it is distorting the limping economic recovery and potentially reflating housing and other asset bubbles. The Federal Reserve has jeopardized its revered independence by undertaking quasi-fiscal operations (buying long-term government debt and MBS to push down longer term interest rates in those markets while paying banks interest on their deposits at the Fed to keep them from lending the proceeds). The result has been an explosion of the Fed’s balance sheet (base money—the Fed’s monetary liabilities—jumped from around $800 billion in mid 2008 to over $3,200 billion in July 2013) while the money supply only grew modestly (over the same period M2 increased from about $8,000 billion to about $10,700 billion- about the same increase as over the five year earlier period from mid 2003 to mid 2008).

There is growing sentiment that our fiat currency system should be replaced with a hard anchor, such as the gold or silver standards in place in much of the world over the two centuries preceding gold’s abandonment by the United States in 1971. In order to avoid the weaknesses of the earlier gold standard, which contributed to its ultimate abandonment, three key elements of its operation should be modified. These are: a) the conditions under which currency fixed to a hard anchor is issued and redeemed; b) what the currency is sold or redeemed for; and c) what the anchor is.

Monetary Policy

During the earlier gold standard, the value of one U.S. dollar was fixed at $19.39 per ounce of fine gold from 1792 to 1934 and $35.00 per ounce from 1934 to 1971 when Nixon ended the U.S. commitment to buy and sell gold at its official price because the U.S. no longer had enough gold to honor its commitment.  None-the-less, the official price was raised to $38.00 per ounce in 1971 and to $42.22 in 1972 before President Ford abolished controls on and freed the price of gold in 1974.

Under a strict gold standard, operated under currency board rules, the central bank would issue its currency whenever anyone bought it for gold at the official price of gold and would redeem it at the same price. In fact, however, the Fed engaged in active monetary policy, buying and selling (or lending) its currency for U.S. treasury bills and other assets when it thought appropriate. Thus rather than being fully backed by gold, the Fed’s monetary liabilities (base money) were partially backed by other assets. Moreover the fractional reserve banking system allowed banks to create deposit money, which was also not backed by gold. The market’s ability to redeem dollars for gold kept the market value of gold and hence the dollar close to the official value. Because the Fed could offset the monetary contraction resulting from redeeming dollars, this link was broken and in 1971 President Nixon closed the “gold window” altogether for lack of gold.

A reformed monetary system should be required to adhere strictly to currency board rules. The Federal Reserve should oversee the interbank payment and settlement systems and provide the amount of dollars demanded by the market by passively buying and selling them at the dollar’s officially fixed price for its anchor (gold, in a gold standard system) in response to market demand. Banks should be denied their current privilege to create deposit money by replacing the fractional reserve system with a 100% reserve requirement (a subject for another time).

Indirect redeemability

Historically, gold and silver standards required that the monetary authority buy and sell its currency for actual gold or silver. These precious metals had to be stored and guarded at considerable cost. More importantly, taking large amounts of gold and/or silver off the market distorted their price by creating an artificial demand for them. Under a restored gold standard the relative price of gold would rise over time due to its limited supply, and the increasing cost of discovery and extraction. The fix dollar price of gold would mean that the dollar prices of everything else would have to fall (perpetual deflation). While the predictability of the value of money is one of its most important qualities, stability of its value (approximately zero inflation) is also desirable.

This shortcoming of the traditional gold standard can be easily overcome via indirect redeemability. The market’s regulation of the money supply in line with the official price of money in terms of its anchor does not require transacting in the actual anchor goods or commodities. As long as an asset of equal market value is exchanged by the monetary authority when issuing or redeeming its currency, the market will have an arbitrage profit incentive to keep the supply of money appropriate for its official value. In a future, hard anchor monetary system, the Federal Reserve could issue and redeem its currency for U.S. treasury bills rather than gold or other anchor goods and services. The difference between that and current open market operations by the Fed is that such transactions would be fully at the initiative of the market rather than of the central bank. The storage cost of such assets would be negligible and in fact would generate interest income for the Fed.

The Anchor

The final weakness of the gold standard was that the relative price of the anchor, based on a single commodity, varied relative to the goods and services (and wages) purchase by the public. In short, though the purchasing power of the gold dollar was highly stable historically over long periods of time, gold did not provide a stable anchor over shorter periods relevant to most business decisions.

Expanding the anchor from one commodity to 10 to 30 goods and services carefully chosen for their collective stability relative to the goods and services people actually buy (e.g. the CPI index) would be an important improvement over anchoring the dollar to just one commodity (gold). There have been many such proposals in the past, but the high transaction and storage costs of dealing with all of the goods in the valuation basket doomed them. Replacing such transactions with the indirect convertibility described above eliminates this objection.

A Proposal

The United States could easily amend its monetary policy to incorporate the above features – a government defined value of the dollar as called for in Article 1 Section 8 of the U.S. Constitution and a market determined supply of dollars. First Congress would adopt a valuation basket of 10 to 30 goods and services chosen to give the dollar the most stable value possible in terms of an average family’s consumption (i.e. the Consumer Price Index). The basket would consist of fixed amounts of each of these goods and would define the value of one dollar. As with the gold standard, if the value of the goods in the basket were more in the market than one dollar, anyone could buy them more cheaply by redeeming dollars at the fed for an equivalent value of U.S. treasury bills (indirect redeemability). The resulting contraction of the money supply would reduce prices in the market until a dollar’s value in the market was the same as its official valuation basket value. The money supply would grow with its demand (as the economy grows) in the same way (selling t-bills to the fed for additional dollars). The Federal Reserve would be restricted to passive currency board rules. All active purchases and sales of t-bills by the fed (traditional open market operations) or lending to banks would be forbidden. During a two year transition period the fed would be allowed to lend to banks against good collateral in order to allow banks time to adjust their operations and balance sheets to the new rules.

A global anchor

The gold standard was an international system for regulating the supply of money in each country and between countries and provided a single world currency (fixed exchange rates). This led to a flourishing of trade between countries. This was a highly desirable feature for liberal market economies.

The United States could adopt the hard anchor currency board system described above on its own and others might follow by fixing their currencies to the dollar as in the past. The amendments to the historic gold standard system proposed above would significantly tighten the rules under which it would operate and strengthen the prospects of its survival.

However, there would be significant benefits to developing such a standard internationally as outlined in my Real SDR Currency Board proposal (http://works.bepress.com/warren_coats/25/). One way or the other, replacing the widely fluctuating exchange rates between the dollar and other currencies would be a significant boon to world trade and world prosperity.  Replacing the U.S. dollar as the world’s reserve currency with an international unit would have additional benefits for the smooth functioning of the global trading and payments system.