TIA Daily • November 9, 2010
COMMENTARY
The big news of the past few days is that the world has finally begun to rebel against the inflationary, currency-destroying "quantitative easing" policy of the Federal Reserve—in effect, printing money out of thin air to buy up US government debt. The Fed's policy is a crucial part of the whole system of government bailouts and artificial "stimulus." The Treasury has been pumping cash into government spending programs with no regard for where the money is supposed to come from—and the Fed is answering that dilemma by saying, "we'll just print you some."
But when the government starts printing new money, it is not producing any more goods or services. The new money does not represent wealth; it represents new claims on existing wealth. Which means that the value of the newly printed dollars is siphoned off directly from the value of all existing dollars—including the ones in your bank account. The result is a reduced value of the dollar and, inevitably, uncontrollably rising prices, i.e., inflation.
More and more people are beginning to see the writing on the wall and speaking out against the Fed's policy.
It starts at the grassroots. In a recent speech, conservative populist Sarah Palin inveighed against the Fed's policy:
We shouldn't be playing around with inflation. It's not for nothing Reagan called it "as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man." The Fed's pump priming addiction has got our small businesses running scared, and our allies worried. The German finance minister called the Fed's proposals "clueless." When Germany, a country that knows a thing or two about the dangers of inflation, warns us to think again, maybe it's time for Chairman Bernanke to cease and desist. We don't want temporary, artificial economic growth bought at the expense of permanently higher inflation which will erode the value of our incomes and our savings. We want a stable dollar combined with real economic reform. It's the only way we can get our economy back on the right track.
Palin refers to international criticism, which has been coming thick and fast at the recent G-20 meeting of major economic powers. The Wall Street Journal has a good report on this. Make sure to scroll down to see the little map of global criticism.
But the real blockbuster was a statement on Monday by World Bank President Robert Zoellick, who advocated a return to the gold standard.
Zoellick was not talking about a full-fledged gold standard. He was advocating what Reuters calls a "modified gold standard."
Writing in the Financial Times, Zoellick called for a new system of floating currencies as a successor to the Bretton Woods fixed-exchange rate regime, which broke down in the early 1970s and involved measuring currency rates against gold.The former US trade representative, who served in several Republican administrations, said the new system "is likely to need to involve the dollar, the euro, the yen, the pound and (a Chinese yuan) that moves towards internationalisation and then an open capital account.
"The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values," he added.
Zoellick did not spell out in detail how this system might work, but said it would help to rebuild the confidence of financial markets and the general public in the global monetary system after the financial crisis.
Zoellick's suggestion isn't flying with top officials in the international monetary system, of course. European Central Bank President Jean-Claude Trichet dismissed the notion when asked about it, and according a Reuters, a German official "added that it would not be practical to use modern monetary policy tools in a system that was 'based on a commodity whose availability is dictated by natural conditions.'"
Well, that's kind of the point, isn't it? The whole point of a gold standard is that there is a natural, objective standard for monetary values that is not subject to the manipulations of central planners. No wonder they aren't happy about the idea: it puts them out of a job.
But the point is that the idea is now out there and up for discussion—and can serve as a rallying point for putting pressure on Congress to rein in the federal government's spending spree and the Federal Reserve's assault on the value of our money. It is good to get that campaign started now—to be ready to channel the public outrage that will come when inflation does inevitably hit.
John Maynard Keynes denounced gold as a "barbarous relic," inferior to the oh-so-sophisticated central planning of the central bankers. After a century of bouts of hyperinflation, artificial boom-and-bust cycles, and the pervasive uncertainty that afflicts an economy whenever the system strays too far from gold, it is Keynes and the central banking manipulators who now are beginning to look like barbarous relics.
The gold standard is now part of the international discussion on fixing the credit crisis and stabilizing global currencies and capital markets. That is a big opportunity—and we should start getting prepared to exploit it.—RWT
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