Re: RE: Re: Gold

[Jim Devine <jdevine@xxxxxxxxxxxxxxx>]

David wrote:
>  a gold standard policy is entirely neutral as to the strength/weakness
> of the economy.  The sole goal is to maintain the constant value of the
> currency as a unit of account.

Right: under the gold standard, the _only_ purpose of monetary policy is to
avoid inflation -- in the very specific and idiosyncratic sense that the
number of dollars needed to buy an ounce of gold stays constant. (I guess
that a rising price of gold in terms of dollars is David's meaning of the
phrase "monetary inflation.") The GS also avoids deflation -- in the
idiosyncratic sense of a falling number of dollars needed to buy an ounce
of gold.

However, there could still be inflation as most people see it (if the
supply of gold increases relative to demand, as after 1500 or 1849) or
deflation as most people see it (if the supply of gold decreases relative
to demand). The latter was the problem I pointed to before. Falling prices
imply real problems unless anticipated at the time of the loan by those who
loan and those who borrow.

> It is entirely possible that if the economy is booming, the aggregate
> demand for money will increase, in which case the price of gold will go down.

Are you referring to a demand for the paper money that's tied to the gold?
If so, you're correct: the number of dollars needed to buy an ounce of gold
("the price of gold") would fall.

> In response, the Fed should then buy bonds until the value of gold heads
> back to the targeted price, thereby increasing the money supply.

All else constant, this would encourage inflation, as most people use that
term.

> Furthermore, a gold standard is not an effort to restrain (or encourage)
> credit.  It is entirely neutral to real or nominal interest rates.

what is meant by "neutral" with respect to interest rates?

> This is a Keynesian confusion (as I understand it) that believes interest
> rates are simply derived from the money supply, and you can decrease
> interest rates simply by pumping money into the system.

In the usual Keynesian system, nominal interest rates are affect not only
by the money supply but also from the demand for money. Nominal interest
rates can't be lowered if there's a "liquidity trap" (if scared speculators
are willing to hold large amounts of money to avoid the capital losses that
are feared on other paper assets) or if the nominal rate approximates zero
(i.e., zero plus the premium because non-money paper assets aren't as
liquid as money). I don't see any "confusion" there with respect to the GS.

Eventually, if the economy is hitting supply constraints, pumping up the
money supply will encourage inflation (assuming that the Fed actually
controls the money supply), which would raise nominal rates again. That's
why Greenspan _et al_ restrain the money supply (or keep nominal rates from
falling). Modern Keynesianism (1) admits that lower interest rates can
stimulate the economy, as with the housing boom these days but (2) avoid
such polices when perceived "full employment" has been attained. I have my
criticisms of this view. What are yours?

> If there is anything we have learned over the past 30 years, it is that
> maybe you can fool lenders once or twice, but you cannot do it as a
> sustained policy over time.

The Fed is currently lowering interest rates. What role are the allegedly
now-wise lenders playing?

Jim Devine jdevine@xxxxxxx &  http://bellarmine.lmu.edu/~jdevine