Wikinvest Wire

Another call for a gold standard in the WSJ

Monday, November 24, 2008

It does seem rather obvious, doesn't it?

The fallout from another burst asset bubble following years of virtually unlimited creation of money and credit aided by the complete failure of regulation of financial industry could have been avoided if only there were inherent limits on the creation of money and credit.

Without such restraint, greedy financiers aided by dimwitted economists and naive politicians, most of whom seek only short-term solutions to complex problems in order to ensure their re-election, will always produce the same result.

Is there any hope for a longer lasting solution to our current problems?

Well, the sharply increased volume of editorials in the Wall Street Journal calling for a new monetary order is a hopeful sign that the message is getting out.

Whether or not anyone is listening is another question, but you gotta start somewhere.

To wit, another WSJ editorial calling for a new gold standard, this one by Christoper Wood,
the author of "The Bubble Economy: Japan's Extraordinary Speculative Boom of the '80s and the Dramatic Bust of the '90s":

There are no easy policy answers to the current credit convulsion and intensifying financial panic -- not as long as politicians and central bankers are determined not to let financial institutions fail, and so prevent the market from correcting the excesses.
What happens next? With a fed-funds rate at 0.5% or lower in coming months, it is fast becoming time for investors to read again Mr. Bernanke's speeches in 2002 and 2003 on the subject of combating falling inflation. In these speeches, the Fed chairman outlined how policy could evolve once short-term interest rates get to near zero. A key focus in such an environment will be to bring down long-term interest rates, which help determine the rates of mortgages and other debt instruments. This would likely involve in practice the Fed buying longer-term Treasury bonds.

It would seem fair to conclude that a Bernanke-led Fed will follow through on such policies in coming months if, as is likely, the U.S. economy continues to suffer and if inflationary pressures continue to collapse. Such actions will not solve the problem but will merely compound it, by adding debt to debt.

In this respect the present crisis in the West will ultimately end up discrediting mechanical monetarism -- and with it the fiat paper-money system in general -- as the U.S. paper-dollar standard, in place since Richard Nixon broke the link with gold in 1971, finally disintegrates.

The catalyst will be foreign creditors fleeing the dollar for gold. That will in turn lead to global recognition of the need for a vastly more disciplined global financial system and one where gold, the "barbarous relic" scorned by most modern central bankers, may well play a part.
The flight to gold appears to already be underway with the some of the largest international dollar holders - the Saudis and the Chinese - either talking about buying lots more gold or already doing so.


Nostradamus, apparently said...

Someone posted a VERY naive comment here recently that gold is just another fiat and what we need is simply a 'rule' that US central bankers can't print more money unless Congress allows it.

You have to laugh at that kind of thinking. It's hard to believe someone posted that comment seriously.

Anyone who thinks a 'rule' like that will be followed is completely daft.

It's true that ANY standardized monetary system involves a fiat (substitute) for the value represented by the society's wealth.

That's the WHOLE POINT of money. Money is a substitute for value that makes it easier to engage in commerce. It's easier to exchange 5 coins for a chicken than 1/18th of a cow.

If you don't want any fiat, you are stuck with a barter system. Since that's not going to work in today's world, we need something to impose discipline on flawed, greedy, selfish, stupid, etc. humankind.

The reason many people call for a gold standard is it imposes SOME LIMIT on the supply of the fiat whereas relying on the good will, honesty and competence of central bankers to do so is, as we've seen throughout history and most recently here in the US, a JOKE!

Nothing is perfect but, as usual, some people want to let the perfect be the enemy of the good.

A gold standard (or something similar) is better than NO STANDARD as we have now.

With no standard, the fed will just keep 'printing' money and Congress and the President will go along until a major catastrophe occurs.

What we've seen so far is not the catastrophe. This is the run up TO the catastrophe in financial markets.

Since our world-wide fiat currency is based on the psychology of the entire human race (their faith in the US dollar), it's impossible to predict when or exactly what will happen. People are not predictable that way.

Also, there are just too many other variables at play to be able to make any exact predictions. The world is still a big place with a lot of different people who want many different things. Anything is possible.

But, history tells us that fiat money systems always end in failure. Again, the current system is a WORLD WIDE FIAT MONEY SYSTEM based on the US dollar.

Wow! Globalization through technology has really ramped up the size of the problems.

Anonymous said...

@Nostrodamus. I agree except that the present system is a standard based on the ability of the government to tax its citizens. No standard would mean repealing legal tender laws and allowing citizens to freely choose their form of money. Thereafter, a free monetary system (no standard by law) would arise spontaneously.

Tim said...

It's hard to believe that 'ol Greenie actually thought he did a good job of "mimicking" a gold standard. See The Maestro Changes His Tune

Nostradamus, apparently said...


That's a great point: the US dollar is backed by the government's ability to tax its citizens.

I hadn't thought it through that far and it makes the important point that money represents wealth and wealth is based on production.

Production is based on work by humans. So, if we work hard, we can produce valuable 'things' that enrich lives. We can then trade that value for other 'things' we might want. Money facilitates the trading.

But, I don't see the government's ability to tax its citizens as a "standard" because that ability is not measurable as far as I can see.

I'd love to hear other people's thoughts on these concepts of what is money, what is wealth, what is a monetary standard and, especially, is there some other way to handle money?

And, as for Greenspan mimicking a gold standard.... what can you say?

It appears that his stupidity is only exceeded by his hubris.

It's hard to believe how truly lame America's leaders have become as they continue to degrade to the level of the masses that elect them.

I recently saw the results of a civics literary test given to Americans, including elected officials.

Overall, Americans flunked with a 49% score. No surprise. Interestingly, though, elected officials did even WORSE with a 44% score.

You get what you pay for!

marku said...

Except that a gold standard would have done nothing to stop the current mess from being created. The US had plenty of "panics" and bank runs while we were on a metal standard; they occurred for the same reason this one did--greedy bankers chasing profit while ignoring risk lent too freely. And a gold standard has nothing to do with that piece of irresponsibility. Only regulation of reserves and leverage can stop that.

One very good thing a gold standard would have done is prevent the collapse of US manufacturing b/c of 30 years of trade deficits. The automatic corrective action of gold (gold flows out from the deficit country, leading to higher interest rates, reducing imports) would have prevented it.

Anonymous said...

@marku. Outright regulation of reserves and leverage is not necessary. A bank that engages in fractional reserve lending is committing fraud and puts itself at risk of a run on its reserves. No one would trust it without government backing via the currency. Remove government from the business of issuing currency and you cannot have sustained fractional reserve lending.

marku said...

Anon--how do you prevent fractional reserve banking without regulation? As I pointed out, the US had plenty of banking panics before the fiat currency, only reserves regulation (and requiring banks to hold reserves = deposits is a regulation) would control this.

Being on a metal based currency has nothing to do with it.

Frederick Dean said...

A gold standard would not affect the primary source
of money, which is not the treasury printing dollar
bills, but instead the monetization of promissory
notes by individuals and corporations to pay
in the future. Surely "gold standard" didn't prevent
that before, and doesn't propose to prevent that
now as it would kill our economy. Therefore
a gold standard would do little to address our
real banking problems which are bad
loans -- non-performing with insufficient
collateral -- and the lying about thereof.

The bad loan problem has many facets. Over-
leveraged financial institutions are a form
of bad debt, as is the negative USA savings rate
which is causing the national debt to drop in

We need to stop this notion of "too big to fail"
because it causes debts to be over-valued thus
encouraging them and harming competition. Instead
we must always seek to expose bad debt so it can be
defaulted and cleared out of the system. Ideally
regulation needs to be aggressively and consistently
applied to minimize bad debt creation in the
first place. I only wish we knew how to do that
without the corrupting influence of capitalism-for-sale
that caused all this.

Anonymous said...

@Marku. If I were a bank, unbacked by any government guarantee, with $100 on deposit and issued a note for $1000. Who would take it? A sucker. Those choosing to conduct business with this bank would eventually discover that they had been defrauded. No trust in such banks, no sustainable fractional reserve lending, no need for regulation.

Mark Herpel said...

ring a Distinguished Lecture Series hosted by Fordham’s Center for International Policy Studies. John Forbes Nash Jr., Ph.D., advocated for an international monetary standard.

More than 200 members of the Fordham community converged upon the Flom Auditorium on Oct. 14 to hear John Forbes Nash Jr., Ph.D., winner of the 1994 Nobel Memorial Prize in Economic Sciences, talk about solutions to the downturn in the national and global economy.

Nash told the audience that such financial crises would be less likely to occur if there was some international monetary standard, such as the gold standard or competition among worldwide currencies, to curb inflation and prevent the rise of mortgage abuses. He expressed some skepticism about a government bailout as a solution.

Anonymous said...

Those calling for more regulation and a new standard are missing an important point. History demonstrates that any monetary standard is eventually violated. Rick Rule has this saying that the primary function of government is to steal from you. Faith in a government money standard is placing trust where it is least deserved. If you concentrate power in Washington, that is where the special interests will go to operate. If you disperse the power back to tax payers directly, then they have to come to you. If you want to be an idealist, no standard is required, just dismantle the printing press and the Federal Reserve apparatus. It provides no net economic benefit. Without tax payer backing of deposits and credit notes, there is not sufficient trust in to support fractional reserve lending. Otherwise, what consenting adults do with their own money is none of my business. If people want to hold deposits with banks levered 30 to 1, who am I to say they can't? However, there must be a standard, then a metallic currency standard will at least enforce some discipline until is it overturned.

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