Ron Paul's Economic Policy, Part Two: Alternative Currencies

I agree that the Treasury's crusade against the Liberty Dollar is stupid and should be halted. I don't agree that you have a right to hold commodities without paying capital gains taxes, nor that the US government should accept taxes in multiple currencies. The exigencies of the law mean that the government is always going to specify tax rates in one currency, which means that anyone who wants to use an alternative currency is going to accept currency risk. And given that taxes are 20% of GDP, most people are not going to be willing to accept that currency risk.

Which is why, while I agree that the government should leave the damn Liberty Dollar people alone, I don't agree that this matters. The gold standard is an idea whose time has gone.

Comments

"The exigencies of the law mean that the government is always going to specify tax rates in one currency"

for us young Grasshoppers, could you unpack that statement?

"I don't agree that you have a right to hold commodities without paying capital gains taxes"

Also, what is your underpinning for thinking that (non-indexed) 'capital gains' should be taxed?

Posted by MEH | December 28, 2007 6:06 PM

"And given that taxes are 20% of GDP, most people are not going to be willing to accept that currency risk."

Megan, why not let people make that choice? Why should Uncle Sam, or Megan McArdle make that choice for them?

Its a specious argument in any case, because people make risk-adjusted choices with their money all the time, everyday.

The government can continue to require taxes to be paid in dollars. But shouldn't citizens be allowed to do with their 'dollars' what they wish, provided they aren't harming anyone else?

You really don't find it even the slightest bit odd that the government so vehemently opposes voluntarily circulated asset-backed currencies? Have you thought about what the motivations of that institution might be in doing so?

Posted by Rahuk | December 28, 2007 7:40 PM

I think those who advocate competing currencies neglect one major problem - arbitrage.

For example, had I been omniscient I could have bought EURO 1,000,000 for $860,000 5 years ago. Today, I could have sold that EURO 1,000,000 for $1,471,399.67. Now, in a world of competing currencies my profit of 611,399.67 would have been tax free.

In a world of tax free currency trading there are innumerable ways to game the system and essentially pay no tax on hugely profitable transactions. How would the system survive when we would read repots in the Wall Street Journal about 25 yo billionaire currency traders who paid $0 in tax?

Seriously, I ask you? How would a competing currency system deal with those who were able to game that very system.

Posted by jmo | December 28, 2007 8:46 PM

Jmo,

The operative words in your post were "had I been omniscient."

If currency transactions were not taxed, would that make you omniscient?

So what if there were a few billionaires? Why would this threaten the system?

I simply don't believe currency arbitrage is sound investing. Currency arbitrage is one of the riskiest forms of speculation, and if it wasn't taxed, how would that materially change the incentives of the current system?

How exactly would allowing competing currencies suddenly allow people to game the system?

Are current capital gains taxes currently forcing everyone out of the lucrative currency arbitrage game?

The way people make money speculating on currency fluctuations right now is, for example, they see the government deficit spending and they bet this will cause a decline in the dollar.

This is the type of thing Dr. Paul is trying to remedy.

Posted by Andrew | December 28, 2007 9:08 PM

I would also wonder... let us say we allow the Liberty Dollar. I would imagine that there would be (at times) a difference between the Fed Funds Rate and the LIBOR(Liberty Interbank Offered Rate). Now, if I was a young George Soros, I might imagine ways of setting up ways to profit from that divergence: Perhapse a LIBOR/Fed Funds carry trade for example...

I could imagine in 20 years, a time when the newly affluent East African Nation of Liberia - one of the new African Tigers - decides to borrow the money it needs for the development in Liberty Dollars. Five years later, Liberia defaults on it's Liberty Dollar denominated debt - what happens then?

Do we have some 25 yo hedgie "breaking" the liberty dollar?

Posted by jmo | December 28, 2007 9:13 PM

and yes, I know it is its not it's.

Posted by jmo | December 28, 2007 9:39 PM

jmo,

So, what's your problem with 20-25 year olds?

I don't think George Soros or Warren Buffett stole money from me just because they helped cleared markets through arbitrage. In fact, the only problem I have with these ultra-rich folks is when they try to lobby the government.

Megan,

"I will, in the run-up to Iowa, be digging into the economic policies of all of the major candidates"

Your productivity is impressive, but to give anything close to equal time, the other candidates have some catching up to do.

Posted by Andrew | December 28, 2007 9:46 PM

The best criticism of the gold standard I've seen is that because the government more or less behaves, it acts almost as if we had a gold standard, more or less.

That certainly isn't a resounding pounding of the amarillo dollar billos.

Posted by Andrew | December 28, 2007 9:52 PM

Maybe capital gains taxes are an idea whose time has gone.

Posted by Doc W | December 28, 2007 9:55 PM

Andrew, I love 20-25 year olds. I even married one.

I think people who propose a system, need to keep in mind, that any system they set up, people are going to "game".

The fact that I can think of numerous ways to "game" the multiple currency systems indicates that those who advocate it, haven't thought it through.

Posted by jmo | December 28, 2007 10:04 PM

jmo,

Well, I do believe that any way that you could "game" the system has to be available now, minus the taxes.

So, as it stands today, does a 15% capital gain rate make such a ludicrously lucrative proposition unappealing?

Explain this to me. Just give me a hint. You don't have to completely divulge your secret arbitrage strategy to all these other folks.

Posted by Andrew | December 28, 2007 10:25 PM

Andrew,

I'm sure you could imagine a scenario in which - driven by greed - the value of the Federal Reserve Note soars. The public - being fools - poors all their money into Federal Reserve Notes. All the while, the smart money - seeing the "irrational exuberance" in the Fed Note market, begins to sell short the Fed Note.

All at once, as so often happens, the public's greed for Fed Notes changes to fear. They dump Fed Notes in their mad rush into the safety of the Liberty Dollar. This leads to "irration exuberace" in the Liberty Dollar market - and the whole process begins again.

Now, the public - being composed of jealous fools - is going to demand that the greedy speculators that "exploited" their irrational fear be made to pay. Perhapse, some ambitions politician suggests banning the Libterty Dollar to prevent speculation.

I just wonder how all this would play out in the real world.

Posted by Jmo | December 28, 2007 10:54 PM

I thought currency trading was currently tax free?

Now, for most retail purchasers, I think you have to buy some sort of fund, which would be an asset subject to capital gains. But if I just converted 100 dollars (or 1 thousand/million/billion dollars) to euros, and did the reverse a few weeks, months, or years later, any difference is not subject to income tax, right? Could someone clear this up?

Posted by Kolohe | December 29, 2007 2:16 AM

Jmo,

I'm not exactly sure what your point is, though, we already have cross-asset class arb plays today.

Your U$D/Euro example is just one type.

I think the issue at hand is "Legal Tender" laws. The FedRes Note has the major advantage of being the only currency accepted for payments of Taxes (in the US sphere).

As we've already seen, many various Commodities/Currencies have a ready market price. I'm not sure it is necessary, in the obvious sense, why the "Legal Tender" laws need to remain. To try to be clearer, a 'non-obvious' case would be to continue the subsidy to the FedRes Note.

To your point about Soros & the British Pound, if their Gov't wasn't pouring Billions of their subjects Pounds into the Forex market to try to retain an arbitrary valuation, that trade wouldn't have been nearly so profitable..

This: "The public - being fools - poors all their money into Federal Reserve Notes." btw, is a great/funny Freudian slip..

Posted by MEH | December 29, 2007 2:21 AM

"The gold standard is an idea whose time has gone."

You conclude this of course based on the incredible success fiat currency has shown. Incredible isn't it that with the wise manipulation of our currency by the Fed we've seen no inflation, no boom bust cycle, no devaluation.

Why would we ever consider dropping a system that has clearly worked so well, for the public good, and never used to enrich the few at the expense of the many?

Posted by Todd S | December 29, 2007 2:25 AM

As someone whose knowledge comes only from selected economists, does Megan have more articles out there that justify her position? Specifically on the gold standard, it seems that is her underpinning for her halfhearted endorsement of the gold standard, and also her treatment of commodities.

Posted by jeff | December 29, 2007 3:31 AM

Finally, it is good to see a libertarian opposed to returning to the gold standard. I have never seen any libertarian argument on behalf of returning to the gold standard give any realistic appraisal of how many millions of Americans would be thrown out of work within the first year of such a draconian deflationary policy. As ever, by arguing for a 'hard' currency deflation, we libertarians only reveal how much we belong on the fringe.

Posted by a Duoist | December 29, 2007 5:14 AM

MEH,

I'll give you another example. Let us say we have competing currencies. I'd assume that, for ease of tax paying, most companies would continue to pay their employees in dollars. However, I could imagine that Libterty Dollar interest rates would be lower. So, imagine, millions of people, who are paid in USD, take out their mortgages demoninated in Liberty Dollars.

I could imagine a 20% drop in the dollar treatening millions with forclosure. Congress then passes a law that Liberty Dollar loans can be paid back with USD at a 1:1 ratio. What makes you think this wouldn't happen?

Also, MEH, do you have any idea how much of a pain in the ass competing currencies are? If you ever talk with a Swiss businessman you will find that most of them will have each corporate account split in to three parts: CHF, USD and EUR. You may be selling your product in the Middle East or Asia being paid in dollars. You owe Swiss taxes and some of your employees work in the Munich office. So you need to manage your USD, EUR, and CHF accounts to make sure you don't get screwed by changing currency rates.

Living in such a large country, most American business (which are mostly small businesses) have no idea how to deal with multiple currencies. The time they spend today on building their businesses would instead be wasted worrying about making sure their check to the IRS didn't bounce because they forgot to convert Libterty Dollars to USD.

Now, you might argue that many companies deal with moving money between accounts and with FOREX today. That is true. But, you must admit that competing domestic currencies would make everyones life and business that much more complicated. I would think it a substantial drag on the economy.

Posted by Jmo | December 29, 2007 8:14 AM

I'm confused. If alternate currencies are opened and are exempt from capital gains, won't essentially every asset be converted into a "currency" to avoid capital gains?

"I'm not buying IBM stock, I'm buying IBM dollars!"

Posted by Tom West | December 29, 2007 8:54 AM

Jmo,

That's why I was asking about "Legal Tender" laws, seriously, why do we need them?

I hear you about the CHF/U$D/EUR conundrums, though those risks can be, and are, mitigated by those that choose to(as you know).

"Living in such a large country, most American business (which are mostly small businesses) have no idea how to deal with multiple currencies."

This is not, literally, true, think: current forms of non-cash compensation. Remember, one of the reasons we think of 'benefits' was that Corps/Execs found it to be a fruitful tax-arbitrage, to begin with.

Personally, I thik peep of all walks are way mre comfortable trading goods/services, then they are with dealing with tax code minutiae. Point being, if we are really looking for Economic efficiencies, we'd radically simplify the Tax Code.

Also, I'd still like to know why 'capital gains' (esp. non-indexed) are even taxed, at all.

"But, you must admit that competing domestic currencies would make everyones life and business that much more complicated."

I think the changeover could happen fairly smoothly; I mean, I can, already, cross borders and receive the local 'coin of the realm' from the nearest JiffyTeller24. Also, the majority of US transactions are already electronic. Those, imagined, hurdles are not that tall. We'd probably help stamp out innumeracy in the process ;)
http://finance.google.com/finance?q=NYSE%3AMA

http://finance.google.com/finance?q=NYSE:AXP

services like AMEX Open would be right there to aid their customers, for sure.

see also: http://www.paymentsnews.com/peppercoin/

The Market could such 'problems', no problem..

Posted by MEH | December 29, 2007 12:06 PM

The Market could such 'problems', no problem..

solve

Posted by MEH | December 29, 2007 12:08 PM

MEH - capital gains are taxed because otherwise, some employers would find a way to make their employees' salaries look like capital gains instead of taxable wages.

So long as we have an income tax, capital gains (and losses) should be taxed at the same rate as income from labor or ordinary interest, subject to indexing the purchase price of the asset against inflation. That we are currently stupid about how we tax capital gains is not an argument that we should not tax them at all.

Posted by Anthony | December 29, 2007 12:53 PM

Anthony: great "John Edwards" "2 Americas" talking points.

Now back to reality: there are economies out there WITHOUT capital gains taxes (who knew?). Hong Kong, for example, has no capital gains tax, and has the most rolls royces per capita of any economy in the world. Its per capita GDP is higher than Japan/ UK/ Italy/ France/ Germany.

Starting with Megan, this blog is getting to be an incredible 'swapping of ignorance'.

Posted by Rahul | December 29, 2007 1:33 PM

"I don't agree that you have a right to hold commodities without paying capital gains taxes, nor that the US government should accept taxes in multiple currencies."

You only need the first to legalize a competing currency. You've already stated that you're against a domestic, competing currency (even though you did not provide a legitimate reason) so I don't get the point of this post. Is it only because you were ignorant of the Liberty Dollar case when you made the last post stating - incorrectly - that competing currencies were already legal?

Megan, going back to the quote above, where do you think rights come from?

Posted by Sergei | December 29, 2007 6:10 PM

"I agree that the government should leave the damn Liberty Dollar people alone, I don't agree that this matters"

So you kind of want the government to stop stealing privately owned assets, but not really, because it doesn't matter?

Posted by independent | December 29, 2007 6:48 PM

You guys need to remember that money didn't come from from government, it arose in the marketplace. Governments (even as far back as Rome) nationalized it in order to engage in inflationary spending. The United States' federal government did the same thing during all of its major wars, and it still does it to a much lesser degree every time the Fed buys a T-bill with newly-printed dollars (which is to say every time it expands the money supply using open-market operations).

There are certainly arguments to be made that multiple currencies are a pain in the ass. They are. So we are faced with the question: "How many currencies should we have?". I don't think you'll find the answer to be "as many as the government says we can have", but instead "as many as the market selects".

Most people wouldn't trust the government to supply people with computers or pizzas, so why should we trust it with the most important element in the economy? Money is one half of every transaction, and as any economists knows, price signals are what coordinate actions in any market economy. Prices convey information which is impossible for governments to collect or respond to, and are precisely why market economies are superior to command economies.

Not that I'm complaining too much, we could have it much worse. We should be grateful that the Fed is semi-insulated from politics. They haven't screwed up too terribly since the Great Depression (and if anyone says the GD was caused by the gold standard, they've got some reading to do).

Not that any of this matters. Paul wouldn't be able to implement any of his policies with the exception of foreign policy and SCOTUS appointments even if he could win.

Posted by G | December 29, 2007 8:55 PM

Perhaps this is "conspiratorial", but why did JFK end up shot in the head 5 months after he signed his name to Executive Order 11110 which introduced silver backed certificates into the economy? Oh I know I know...coicendence :)

Posted by Nick | January 8, 2008 3:43 AM

....Other than superficially and with real intent we must examine the root. What is money?
Perhaps it has something to do with energy?

Posted by Nick | January 8, 2008 3:47 AM

Wake up America! Educate yourself! If you want to know why Ron Paul wants to get rid of the Federal Reserve and the IRS, visit http://www.freedomtofascism.com and check out Aaron Russo's documentary, "America, From Freedom To Fascism" Bulk order it for $1.25 each and send it to your non-computer literate baby boomer friends, heck, all of your friends and relatives!
WE THE PEOPLE need to take back our Republic!
(BTW, I'm 62 years old)

Posted by One Tuza | January 12, 2008 10:55 AM