Mission Creep and Monetary Policy

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Published on Thursday, 08 September 2011 19:29

Written by Brian Domitrovic

When Richard Nixon took the dollar off gold in 1971, the hope was that this move would free up monetary policy to focus all its energy on combatting unemployment. In lieu of price stability, the nation would get jobs, the argument ran.

With the gold link gone, however, further objectives aside from unemployment-fighting soon came up for consideration. As environmental regulations exploded in the 1970s, the Fed released extra money so that corporations could finance their compliance. In the 1990s, as business executives worried about the “Y2K” glitch in the computer system, the Fed lowered rates to lessen budget pressures on companies as they outfitted their machines with “patches.”

Who would have ever supposed that it falls to the currency issuer to make ad hoc decisions on how to pay for reducing pollution or upgrading computer ware? When the currency is not officially collateralized – such as in gold – all sorts of larks may present themselves to the issuer as worthy of its attention and be taken seriously as such. Under the convertibility discipline of gold, however, these requests are passed on to other places – where they belong.

Now Bernanke's Place is "Dog Hill"

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Published on Tuesday, 10 May 2011 10:54

Written by Brian Domitrovic

"Mexico's Central Bank Buys 100 Tons of Gold," ran the headlines last week. Isn't that interesting. For years in the United States, the go-to term for a currency that's next to worthless has been "peso." Now here are the masters of that very currency passing on the dollar and accumulating its most formidable substitute, gold. Touché.

Back in the 1980s, one of the Mexican presidents kept saying he would defend the peso "like a dog." When that didn't work out, as Robert L. Bartley of Wall Street Journal fame liked to point out, people started calling the outcropping of villas the man retired to "Dog Hill."

Why on earth Mexico has never fixed to the dollar – up to now – is anyone's guess. Canada has pursued the same policy too, of a floating currency, rather unsuccessfully until the last few years. But now it looks like the game is up. Forget about NAFTA: any advantage to the decline of trade barriers among North America’s finest nations will be cancelled by currency fluctuations. The chance that either Mexico’s or Canada’s currency tries to mimic Ben Bernanke's dollar has trended to zip.

The world is a funny place when the US abjures currency leadership. People do things like trade in big for fairly non-fungible assets like gold. The last time this happened in a major way, the 1930s, the next step was for lots of places to make a bid for complete national economic self-sufficiency. Germany and Japan weren't quite satisfied with their own natural resource endowments, however, and you know what happened.

Not only is it a justified insult of the US for Mexico to procure the gold, in tonnage no less, it is a sign that other countries are finally despairing that there will be a stable major currency in the world. This portends autarky and probably poverty – at best. Mexico on its own! The way to arrest the process: make the dollar freely convertible to gold at $2000 an ounce. Bernanke will calm down with the QE larks, everyone's investments in gold will be fully justified, and people globally will once again get down to the business of prosperity on the basis of a reliable means of exchange.

Flexible currencies are killing US manufacturing

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Published on Thursday, 24 March 2011 13:08

Written by Brian Domitrovic

Trade wars are coming back from the dead. Donald Trump is talking about scuttling free trade arrangements as he contemplates a presidential run. It’s fair to ask why so much manufacturing in the US has been abstracted to places like East Asia. The decline of trade barriers is not the reason; the failure to return to fixed exchange rates and gold convertibility are at fault.

There is no reason why major countries with similar low inflation rates should not have their currencies trade at fixed rates of exchange. After all, if the real purchasing power of currencies is not changing, why should the exchange rates of the currencies themselves be anything but stable? And yet over the last 30 years, as inflation rates in the first world converged, wild swings in the exchange rates of the major currencies were the norm. The result was that worldwide, people hoarded dollars, because in an era of flexible rates, the greenback was most likely among all competitors to maintain its value and prestige.

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Recessions Under the Gold Standard? How about GDP Growth Under a Gold Standard?

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Published on Tuesday, 01 February 2011 01:27

Written by Brian Domitrovic

There’s another fact-defying entry from Paul Krugman. His blog post from January 30 is titled, “Recessions Under the Gold Standard,” and the text manages to undermine both terms in that title. A total of one recession is adduced, that surrounding the panic of 1893, which as they used to teach in school, came about specifically because the US had recently balked at the gold standard and permitted the mass monetization of silver. No “recessions” plural and no gold standard.

You’ve got to look under a lot of rocks to find recessions in the era before the silver purchase act of 1890. For the 1880s, when the US was closest to being on a full gold standard, were the greatest decade of real economic growth in the nation’s history, and the only competition is the 1870s, when the US made the decision to commit to gold. We’re talking 5-6% growth per annum for the long haul.

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