Gold nearing overbought after GOP ignites gold standard debate
In The Lead: “Standard Fare”
The Washington Post’s Ezra Klein reminds us that former President Reagan created a Gold Commission back in 1981 — one with similar purposes as the one being proposed in the GOP convention platform. The conclusion of that Commission? “That’s a clown idea, bro.” The Reagan exploratory team concluded that “restoring a gold standard does not appear to be a fruitful method for dealing with the continuing problem of inflation.” Mr. Klein believes that the GOP picked the wrong time to “rediscover” gold. Rep. Ron Paul admitted himself to CNBC that the propositions were part of the GOP platform in an effort to appease him ahead of the convention.
Noted economist and UC Berkeley Prof. Barry Eichengreen (we have mentioned his seminal “A Critique of Pure Gold” here many times) cautions that under a gold standard “the Fed would have little ability to act as a lender of last resort to the banking and financial system. The kind of liquidity injections it made to prevent the financial system from collapsing in the autumn of 2008 would become impossible because it could provide additional credit only if it somehow came into possession of additional gold. Given the fragility of banks and financial markets, this would seem a recipe for disaster.” Unlike 1981, in other words, when the gold standard made a kind of superficial sense as a response to our problems, 2012 is a moment when a gold standard would clearly have worsened our problems. Dramatically, the idea’s “proponents paint the gold standard as a guarantee of financial stability; in practice, it would be precisely the opposite.”
The Financial Times posted a reader’s letter to the editors in which the sender argues that the GOP’s move to try to re-adopt the gold standard shows their “increasingly tenuous relationship with reality.” One Mr. David Beffert of Portland, Ore., remarks that the euro is in fact a kind of a gold standard under which members are being robbed of independent monetary policy and he asks the Republican gold bugs if they have ever heard of the euro crisis.
Speaking on CNBC, Ralph Silva, Director at Silva Research and Moorad Choudhry, Head of Treasury at Royal Bank of Scotland described the GOP idea as “nonsensical and ludicrous.” The analysts said that the key goal for the US should be fiscal discipline and that the answer is not the gold standard but perhaps not fighting certain wars and spending trillions on them.
Project Syndicate’s Christopher Mahoney points out in great detail why the gold standard would not be workable today (just as it became unworkable several decades ago) and that implementing it would require either a dictatorship or a “Finnish-like national cohesion” – something that America completely lacks. In addition, in order to build the [gold] “standard’s credibility, the country must be able to demonstrate that it won’t cut and run at the first sign of distress.” The peg to gold must in fact be done within the scope of a constitutional amendment. There would be no Fed chairman, no employment level mandate, and the required flexible nominal wages and incomes are the stuff of “fantasyland.” Mr. Mahoney dubs gold “the Republican Death Wish.”
Edelman Financial Group’s Ric Edelman says that “certain fiscal hawks like the idea because it's rigid and would help prevent runaway government spending. But it's a radical solution whose time has come and gone. Maybe we should move to a sand standard. There's plenty of sand. How about this for a solution: Tell Congress to stop authorizing spending bills.”
Stanford University Prof. John Taylor, a supporter of GOP candidate Romney, notes that the return to the gold standard is not the best way for the US to try to increase economic stability. Prof. Taylor also advises that the Fed should hold off on a third round of QE as the benefits from such a move would be “minimal.” Mr. Taylor would prefer that the US dollar be pegged to a “broad price index” as it is more robust.
The normally very much pro-gold Daily Reckoning admits that “you can’t link anything to anything and expect it to remain that way in the long-run. It points to the 1700s and the gold and silver 15:1 ratio as the cause for periodic shortages and oversupply of the metals as arbitrage took its toll. Much later, Winston Churchill’s decision to return the British pound to the pre-WWI gold standard proved to be the worst decision of his career as it unleashed disastrous deflation and joblessness.