Gold

["David Shemano" <dshemano@xxxxxxxxxx>]

Doug Henwood wrote:

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How about Jude Wanniski? He'd almost be as much fun.

Jude's now complaining that the Fed has imposed a monetary deflation
on the world, though the money supply is growing faster than the 2%
growth a gold standard would allow. So how'd we go from an
inflationary fiat currency regime in the 1970s to a deflationary one
in the 2000s?

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This a misunderstanding of what a gold standard (or any commodity standard)
is, as I understand it.  Your notion is that if the gold supply increases 2%
a year, the money supply could only increase 2% a year, so that the money
supply is directly correlated the amount of gold.  Wanniski's argument is
not that the Fed should make decisions based upon the amount of gold in the
world, but that the Fed should publicly commit that it will buy and sell
bonds to maintain a fixed dollar price relative to gold.  In other words, if
the Fed commits to $350 an ounce, and the Fed sees that the market price for
gold is $340, the Fed should take that as a signal that the economy demands
more monetary liquidity, and the Fed should buy back bonds until the price
goes back to $350.  If the price of gold goes up to $360, the Fed should
take that as a signal that the economy demands less monetary liquidity, and
the Fed should sell bonds until the price goes back to $350.

Under this view, the Fed should not make policy decisions based upon the
money supply (the monetarist view), or try to manipulate interest rates (the
Keynesian view), but simply look at the market price of gold in order to
satisfy the aggregate demand for monetary liquidity.  By doing so, the Fed
will be stabilizing the dollar as a unit of account, which is the most
important thing it can do.

Because the Fed is not committed to a publicy announced gold price, the
decisions of the Fed are unpredictable and subject to the personal
idiosyncracies of the governors.  For instance, if a majority of the
governors believe that growth causes inflation, which apparently they do,
you get the amusing spectacle of the Fed trying manipulate interest rate
counter-cyclically to the strength/weakness of the economy.  In other words,
the present Fed believes it should destroy the village in order to save it.

David Shemano