Sunday, November 16, 2008

Gold Standard Talk Again

gold
[Thanks to www.australianminesatlas.gov.au for the image.]

Here's another mention of the gold standard. Doug Noland over at Prudent Bear points out this article by Judy Shelton appearing in the Wall Street Journal Saturday.

The pertinent paragraph:

"... [I]f anyone has demonstrated irresponsibility, it is not those who chased misleading price signals in pursuit of false profits -- but rather global authorities who have failed to provide an appropriate international monetary system to serve the needs of honest entrepreneurs in an open world economy.... [T]he inflationary pressures which caused us to go off the gold standard in the first place have only worsened. Moreover, [Paul Volcker] suggests, floating rates undermine the fundamental tenets of comparative advantage.

"[quoting Volcker:] 'What can an exchange rate really mean,' he wrote in 'Changing Fortunes' (1992), 'in terms of everything a textbook teaches about rational economic decision making, when it changes by 30% or more in the space of 12 months only to reverse itself? What kind of signals does that send about where a businessman should intelligently invest his capital for long-term profitability? In the grand scheme of economic life first described by Adam Smith, in which nations like individuals should concentrate on the things they do best, how can anyone decide which country produces what most efficiently when the prices change so fast? The answer, to me, must be that such large swings are a symptom of a system in disarray.'"

Now, if the G20 read this on Saturday morning, they had some food for thought.

Don't get your hopes up, however. Politicians get too much bang for their fiat-currency buck to give it up. A standard somehow set to gold would tie their hands behind their back.

Even if they want to get back to some kind of standard, the present will not be the time to instigate it. Monetary authorities are now pumping as much liquidity and capital as they can into the system, and a standard would put a gold wrench into the works.

We are now on a path where there can be only one of two outcomes:

- Either we inflate out way out of this crisis and we manage to get back to a semblance of calm, at which time the authorities will have to mop up all that excess liquidity or watch it turn into another global bubble that will last who-knows-how-long until another crisis occurs;

- Or there will be a general flight from all fiat currencies to gold, because either panic or renewed inflation settles in. Gold will explode in exchange value in all currencies, eventually to settle at some amount that will represent the market's evaluation of each currency's real gold-exchange worth.

In other words and in my opinion, if we want to stabilize economies in the future, we will have to get back to gold either by the door or by the window, as the French say.

Mr. Volcker will probably be Obama's adviser. What will he suggest? Wouldn't it be ironic if the resolution of our monetary madness came from the big-government left.

Shelton wrote "Money Meltdown: Restoring Order to the Global Currency System." See more on this book at Amazon.

See also this article at the American Institute for Economic Research, and this AIER book on the prospects for a resumption of the gold standard and what it would take; plus this book on gold's role in history.

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