Saturday, July 28, 2012

Gold Standard Debate on the Right

One of my favorite economists and bloggers, John H. Cochrane, argues against the gold standard in today's WSJ.
Let's start by clearing up some common misconceptions. Congressman Ron Paul's attraction to gold, and Federal Reserve Chairman Ben Bernanke's biggest criticism, is that a gold standard implies an end to monetary policy and the Federal Reserve. It does not.
. . .
A gold standard does not eliminate debt crises or debt-induced inflation. No monetary system can absolve a nation of its fiscal sins.
. . .
Why not the old version? Most of all because the value of gold is poorly linked to other prices in the economy, which is what we want to stabilize. Fixing the price of gold today would do little to control the general price level. There are two big reasons for the disconnection between gold and other prices.
I mostly agree with Cochrane's criticisms, but still a support a return to the gold standard. Cochrane proposes inflation indexed bonds that would be tied to the consumer price index. He states that the purpose of monetary policy is to ensure price stability. Since gold is not well tied to the prices of consumer goods in the economy, he argues that it is a bad choice as a standard vis-à-vis price stability.

My objection to the current regime is that the federal reserve can manipulate the currency to the benefit of the big banks, in a largely undetected way. A gold standard doesn't fully prevent manipulation, but limits the scope of debauchery. To use Cochrane's own example, if the Fed issues more currency than it has reserves to redeem, it will eventually provoke a run on convertibility which will require a public devaluation. Such devaluations would serve as a public shaming that the Federal Reserve had mismanaged the currency.

Further, gold is tied to significant commodities that make a up key portions of the CPI. For example, gold and gasoline prices have shown a much narrower range of ratios than either commodity has to the dollar. Under Cochrane's proposal there is no reason to believe that either the bonds or the CPI itself wouldn't be subject to manipulation. Since Cochrane's proposal is "rule" based, I have no faith in it. The federal government and Federal Reserve has shown a disdain for what we would regard as rules. For example, we know that the Federal Reserve has loaned money to non-bank businesses who quickly put together an "industrial bank" and who would have been otherwise ineligible. While technically not a violation of the Code of Federal Regulations, this also shows a Fed that is operating well beyond its founding parameters.

There should be no doubt that a gold standard isn't going to bring nirvana. We have had booms and busts with or without the gold standard. Since going off the gold standard hasn't brought price stability or the end of booms and busts, and has undermined our faith in fair play in the economy; a return seem in order.


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  2. Steve Forbes has predicted a return to the gold standard, as has top Wall Street strategist Stephanie Pomboy.

    A gold standard is necessary, but not sufficient, to restore economic stability. We also need to end taxpayer backstop of TBTF banks, put derivatives on exchanges and balance sheets, and enforce mark-to-market accounting.

    If, as seems likely, we do return to a gold standard because Zimbabwe Ben and the Euro clowns have destroyed faith in political fiat money, you'll want to buy gold now. The U.S. could only afford to go back on the gold standard at multiples of the current gold price. $5000 or $10,000 an ounce is not only likely but quite possibly conservative.

  3. I have to go with Cochrane on this. Although I think you are correct that a gold standard would be better than the current situation, it wouldn't go far enough. Some "financial engineer" would come up with a way around it. The central issue is long term contracts and the desire of our politicians to use inflation to solve their problem. Cochrane is right. Massive inflation, or gentle, yet protracted inflation would be a soft default. At some point I can foresee contracts, including labor, having a demand clause that will incorporate some measure of inflation protection, whether it be gold, oil,refined gasoline,or the payer's choice of currency.

  4. Johnny Cochrane is not really making a case against a gold standard. He's just saying it's not a panacea. Which is true.

    But look where fiat currency has gotten us: 8% GDP deficits, serial market bubbles, severe structural unemployment, 15% of the population on food stamps, government borrowing 40 cents of every dollar it spends, the Dirty Fed monetizing government deficits...

    The gold standard won't fix everything. But it's better than Bernanke Bucks by a mile.

  5. How about the fact that the Goldand SilverCoin is required by the Constitution? Every court and every government servant in America is breaking the law every minute ofevery day they work. Violation of the contractual oath has destroyed our prosperity and exhalted criminals toevery office of government and should be properly treated as treason. They are using fraudulent unlawful tender to wage war on all people of the world and they should be dealt with accordingly.

    I even use the tender issue in court for everything and win everytime, I have built a nice little library of audio video and case files that would blow your mind completely. You can just point out that the people claiming to be the court have actually overthrown our lawful government and are utilizing violent force to force the use and artificially create value of this unlawful tender which gives them the means and motive to commit further acts of violent warfare against the people for their own pecuniary advantage. This stops the courts in their tracks and soon it will be time to arrest the men and women who claim to be under oath but are obviously not and the tender issue opens the door to the perfectly clear cut case against them. When the jury finds out how the tender is mathematically guaranteed to fail and guarantees inherent transfer of all natural wealth to the private owners of the Federal Reserve even the lowest level bureaucrat will be toast. Ron Paul is the only one in congress who even has a clue about this. Ron Paul 2012. Come with us. We are the good guys...