Wikinvest Wire

Niall Ferguson is not making sense

Tuesday, September 15, 2009

It's always interesting when a German reporter interviews anyone on the subject of money, particularly when it comes to fiat money, financial crises, inflation, and gold. But, this Spiegel interview with historian Niall Ferguson is even more fascinating than usual because it exposes the irrational disdain that most contemporary economists have for sound money.

SPIEGEL: The purely paper-based system is not all that old. The dollar was pegged to gold until 1971. Aren't precious metals a far better form of payment?

Ferguson: It does indeed appear attractive to have gold in your portfolio these days, and gold does have a special allure. I recently saw the death mask of Agamemnon in Athens. Although it was made in the 16th century before Christ, it's lost none of its splendor. Nevertheless, I don't think gold will ever have a monetary role again. For example, think how impractical it would have been if you'd had to pay for your flight to Boston using gold. How much was it?

SPIEGEL: Just under 400 euros.

Ferguson: At current prices, that's the equivalent of almost half an ounce of gold, that is, about 15 grams. Now just imagine you had to pay for a single apple.
Now just imagine that somehow, someway, a monetary system could be developed where computers would keep track of gold-based money and you could just swipe a card to pay for goods and services just like you swipe a debit card.

No, apparently, that's too much to imagine.

And, you guessed it. Here comes the standard knock on any sort of a gold-backed money - it impedes economic growth, it's too inflexible, and it fosters deflation.
SPIEGEL: And yet there was a close relationship between money and precious metals for centuries -- millenia even. Why was the link broken?

Ferguson: Because it proved to be an extremely inflexible system. If the overall volume of money depends on the availability of precious metals, it can't simply be increased. So a shortage of gold or silver can limit economic growth. The link to gold brings with it a danger of deflation, in other words a constant drop in prices which would hobble the economy. The gold standard was one of the causes of the deflation Germany suffered in the early 1930s, for example.
What Mr. Ferguson fails to point out is that "simply increasing" the supply of money is not necessarily a good thing - especially when it happens all the time.

This used to be called "temporarily abandoning the gold standard" back in the 19th century and it would occur during times of war and during other crises.

Now, nations routinely expand the money supply at at 10 or 20 percent a year while the population grows at a fraction of that rate and credit creation is virtually limitless.

Or, at least it was.

So what about the current crisis then...
SPIEGEL: What aspects of the current financial crisis are similar to earlier ones?

Ferguson: The source of the crisis is typical: It began with a glut of cheap money, loans were easy to get, and a bubble developed -- in this case in the US housing market -- that eventually burst.
It's hard to square these two views - a gold standard is bad because you can't "simply increase" the money supply, yet it was cheap money that has caused the world so much pain over the last couple years.

What about the future of the global monetary system?
Ferguson: The fates of many of the world's economies are pegged to the development of the dollar at the present time. If the dollar loses value, which is highly likely, it will be particularly painful for countries like Japan and Germany, whose exports will become more expensive. So it should be in Germany's interest in particular that the monetary system is changed.

SPIEGEL: What might such a new system look like?

Ferguson: Perhaps a little like the situation in the 19th century, when there were several reserve currencies: sterling, the US dollar, the German mark, and the French franc. As such, the dollar's dominance could well diminish in favor of the euro, the Japanese yen, or the Chinese currency; the yuan.
The 19th century is also notable because most of the world was on a gold standard, a point that, somehow, in Mr. Ferguson's view, was not germane to this part of the discussion.

It's amazing how so many economists, journalists, finance-types, etc. just dismiss the notion of sound money out of hand and pretend as though, since the beginning of time, we've always had fiat money when, in fact, fiat money is the exception and not the rule.

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staghounds said...

Die, strawman, die!

That's why the nineteenth century was one of limited economic growth.

And what the ff is wrong with falling prices? I don't hear anyone complaining about paying $40 for a dvd player rather than $1500 1987 dollars for a betamax.

CS said...

Someday, maybe in the next few years, people will realize that conventional wisdom like that espoused by Ferguson is just plain wrong. Maybe Niall will eventually "find a flaw" in his theory.

Anonymous said...

a gold debit card, through Master Card, is now available from a New Zealand company:

Jones said...

poor fella is off his rocker.

Consistent, shallow deflation is great! I don't know anyone who wouldn't mind a gradual increase in purchasing power.

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