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Yet another call for a new gold standard

Tuesday, November 18, 2008

Not to be overshadowed by the recent blitz of calls for a new gold standard, Walker Todd, an economic consultant at the Federal Reserve Banks of New York and Cleveland writes in the Christian Science Monitor that, without one, we might be headed straight toward hyperinflation.

If anyone can think of a suitable metaphor that would help to describe the recent rush of economists to once again embrace the yellow metal, please feel free to scribble it out in the comments section below.

At the moment, all I can think of is a clean and sober version of professional golfer John Daly who, for years, claimed he could handle his drinking, but then keeps winding up with a new 3 AM mug shot after a drunken bar brawl, passing out, or a combination of the two.

Forget Bretton Woods II – we need a gold standard
Too much credit and easy money. Those were the biggest culprits behind this financial crisis. Yet, apallingly, the government's rescue attempt is built on more credit and even easier money. That's like giving a procrastinator a deadline extension. By choosing this course, Washington has steered us on to the "road to Weimar" – the road to runaway inflation.

It didn't have to come to this. And it still doesn't. But the proper remedy will take tremendous political courage: Bring back the gold standard. That, more than any byzantine regulations that emerge from the Bretton Woods II conference this weekend, would provide stability and safety for nations and individuals around the world.
Anna J. Schwartz, who co-wrote with Milton Friedman the highly influential book, "A Monetary History of the United States: 1867-1960," suggested at a 2004 gold conference at the American Institute for Economic Research that only a crisis of sufficient depth and magnitude would provoke the public to demand the stability of gold or a gold-linked currency. Such a crisis, which appeared remote at the time, may soon be upon us.
Some critics worry that a return to gold would make credit harder to come by. It's true that the kind of ultra-loose credit that fuels housing bubbles would be marginalized, but normal credit in a gold system would tend to be cheaper because concerns about the future value of repayments are diminished.

America faces a stark choice. The path back to a gold standard is rocky and uphill. The current inflationary path is slippery and downhill. One leads to integrity and stability. The other could lead to financial ruin. Which will we choose?
A new gold standard is becoming a crowded trade, that is, everywhere except in the gold futures market.


Nostradamus, apparently said...

This isn't a metaphor but it comes to my mind as I think about how long Ron Paul has been screaming for a gold standard and I read all these recent articles about how we need a gold standard.

"All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident." ~ Arthur Schopenhauer

At the moment, some people are finally starting to see the truth. In the end, all of us who have long accepted the reality that fiat currency is a joke and a sham will be disappointed because, by then, all the so-called 'experts' will claim that it was obivous!

fironzelle said...

Yes, but if it does come to that we will also have access to archives of ridiculous anti-gold standard commentaries by, oh say for example Megan McArdle and David Frum to name just two, lest the world forget the truth.

Nostradamus, apparently said...


Good point!

Tim recently posted a YouTube video of older clips where various morons argued with Peter Schiff about his recession predictions.

Sadly, though, I don't see any real accountability or consequences for these people who publicly deny the truth. They either slink away, never to be heard from again (Art Laffer, hopefully), or they steadfastly deny their prior statements (Alan Greenspan and Barney Frank, e.g.).

With elected officials, the truth doesn't seem to matter much to the electorate who don't follow "tough" topics like finance and just vote based on charisma and empty promises. "Of course I'll respect you in the morning" comes to mind.

With the so-called 'news' media, the truth doesn't matter at all; all that matters is ratings. So, we'll see Ben Stein on Fox finance shows until he passes away because we all loved him in Ferris Bueller's Day Off!

Democracy is doomed to fail as it devolves to the level of its lowest common denominator, the masses (math, another 'tough' topic that no one wants to hear about).

Anonymous said...

Returning to the gold standard would be an admission of guilt for our leadership and not an admission of error in judgement. See, it was criminal to run the American economy and debt burdens on anything based on credit. The credit has been the "full faith and backing of the United States Government". That full faith has been compromised by our political system since 1971 and we have been floating along a top of credit borrowed and promised to virtually every other industralized nation on the planet. I for one, will not be suprised when the G-20 collectively votes to reject the dollar as a universal monetary standard. A new era is upon us and it is not the America your forefathers founded, nor the one your family fought world wars to protect and further. Americans believe in each other but not their leaders.

Anonymous said...

Jim Cramer made himself famous touting tech stocks during the 90s. I thought back then that at least he would disappear in shame after his predictions turned out to be garbage.

Unfortunately, it doesnt work that way in the real world. Just because someone gives bad advice and is an idiot, doesnt mean there won't be a market for their new brand of bad advice later on.

Anonymous said...

Shakespeare recognized it some 400 yrs. ago... "Neither a borrower, nor a lender be; for loan oft loses both itself and friend, and borrowing dulls the edge of husbandry."

I'm afraid our husbandry has not just been dulled, it's void.

Although a devout gold holder for many years and a proponent of anything that would provide discipline to the economic system, I fail to see how a gold standard would save us from the scope of this problem. If there is a number large enough that if surpassed "returning would be as tedious as going o'er" then we may have passed it already.

The size of derivatives outstanding said to be over $500 Tn last year are now spoken of as over $600 Tn. Show me how there are $600 Tn worth of recorded assets in the world. Okay, so 70% of them are interest rate swaps and should net out. This leaves $180 Tn of "other" derivatives that no one seems to be able to define. And, if $420 Tn are related to interest rates and interest represents only a fraction of any associated asset, this would require assets valued at six or seven times this amount (say $2.5 QTn). Given this is an impossibility, the implication is parties involved in these transactions must be participating or wagering a multiple of their risk exposure. Who are these parties? What are their covenants? What happens if even some renege? If bets are involved, are there any assets involved at all?

Not to mention FNM, FRE, C, WB, BAC, AIG, MBI, ABK, AXP and GE, we've seen what happened to BSC and LEH and what's happening to MS, MER and GS. And these are only the front runners. What about the second and third tier players, hedge funds, etc.? I don't see a gold standard mitigating this aspect of the problem.

The ten page G20 "Summit Declaration" did not mention the word "debt" once. I have little faith the G20 would invoke a gold standard any time soon.

In a strange twist of inequity, as large positions seek liquidity, the U.S. is receiving seignorage dividends in spades thanks to its profligate issuance of greenbacks over the years and increased scope of involvement globally by what seems like every significant financial entity in existence. If, as and when currency repositioning is fulfilled, the U$ is doomed, gold is destined to soar beyond $3,000 (a realistic current value), the U.S. will experience hyperinflation as greenbacks are repatriated despite negative short term rates.

Like promoters with an overissued penny stock, we'll rollback the stock one for a thousand and change the name to "newbuck" hopefully with some type of discipline standard in effect.

Andreas said...

The gold standard simply will not work in a global economy of our size.

First, moving to a gold standard would effect a massive valuation change in gold. There would be winners and losers, but it would a massive wealth transfer none the less. A possible way to avoid this is for the government to confiscate all the gold in advance to turn it into the currency, as FDR did (though in his case it was for moving off the gold standard), thereby making the central bank the holder of all gold (which of course is quite distressing if that bank is one of the privately-owned Federal Reserve Banks of the US).

Second, the gold standard is subject to "counterfeiting". If the entire world's goods and services are tradeable in gold, whose supply hasn't increased nearly as quickly as the world's economy has grown, gold will become very expensive. If gold is $10,000 per ounce, then if someone can pay $8,000 to mine one ounce of gold, he is becoming a rich man. Of course one consequence of this is malinvestment in mining, where far too much of the world's energy will be directed toward finding gold simply to put it in a vault, which itself is not a productive exercise. But the much more dire consequence is some company - or some country or group - to find a way to convert, say, lead to gold. While it is claimed not to be possible now, technology is rapidly advancing and given a massive profit opportunity, it is inevitable that this will happen.

There is nothing inherently wrong with fiat money. Making gold a monetary standard is also by "fiat" - while gold may have real value, that doesn't distinguish it from any other asset or commodity. The distinction lies in the government proclamation that this particular asset is to be used for payment. That is the fiat.

A fiat money system can work if it is not subject to expansion or contraction at the whim of bankers. The bankers need to lose control over monetary policy, and it needs to be kept very safe and guarded.

My proposal would be something along these lines. First, there will be a fixed supply of this fiat currency. There will be no increases, or decreases, except under extraordinary circumstances that require widespread support (say Congress needs to pass a bill and the President signs it). Second, interest rates will be set by the markets, not any central bank (as is the case with the gold standard).

This solution has the same advantage as the gold standard: no arbitrary increase or decrease in the money supply. But it does not have the disadvantages of gold: malinvestment in production (the fiat currency is electronic), and the possibility of counterfeiting. (Of course the electronic money may be counterfeited when it is represented by Notes or similar, but these Notes can be continually updated to prevent updated counterfeiting techniques - Notes may even have an expiration date after which they can only be exchanged for new Notes at locations which have the capacity to detect counterfeit notes.

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