Wednesday, March 21, 2012

About that Au Standard...

...Bernanke recently spoke about the shortcomings of the Gold Standard, with points captured by Joe Weisenthal of Bloomberg. Note the first point he makes is the truly preposterous notion that the U.S. should out-source foreign policy (and economic policy) to gold producing countries. Note also the #1 producing country at the moment is China. It is ironic that some of the most virulent supporters of the gold standard share similar ideologies as Mr. Paul of Texas, as any gold producing country in the world would immediately become a key U.S. interest.

  • To have a gold standard, you have to go dig up gold in South Africa and put it in a basement in New York. It's nonsensical.

  • The gold standard ends up linking everyone's currencies, causing policy in one country to transmit to another country (sort of how U.S. policy now transmits to China, because they've fixed the yuan price to the dollar). So for example, if the U.K. fixes the number of pounds to an ounce of gold, and the U.S. fixes the number of dollars to an ounce of gold, then the pound and the U.S. dollar inadvertently become linked.

  • It creates deflation, as William Jennings Bryan noted. The meaning of the "cross of gold" speech: Because farmers had debts fixed in gold, loss of pricing power in commodities killed them.

  • The gold standard tends to cause interest rates to rise during downturns and interest rates to fall during good times, the exact opposite of what monetary policy should be doing.

  • The economy was far more volatile under the gold standard (all the depressions and recessions back in the pre-Fed days).

  • The only way the gold standard works is if people are convinced that the central bank ONLY cares about maintaining the gold standard. The moment there's a hint of another priority (like falling unemployment) it all falls apart.
  • Gold standards leave central banks open to speculative runs, since they usually don't hold all the gold.

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