Re: RE: Re: Gold

["Christian Gregory" <christian11@xxxxxxxxxxxxxx>]

> Again, this is a misunderstanding.  Greenspan is attempting, through the
> manipulation of interest rates, to act counter-cyclically to his personal
> understanding of the strength/weakness of the economy.  Comparatively, 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.  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.  In response, the Fed should then buy bonds until the
> value of gold heads back to the targeted price, thereby increasing the
money
> supply.

You make it sound as if AG's "personal" understanding of the economy
entirely idiosyncratic. The Fed muses obsessively about economic data, and
its decisions, at least for the last 20+ years, have represented the
interests of bondholding classes. For the most part, he's been guided by
consensus assumptions of mainstream economists. Which doesn't mean he's
right: only that he's not totally autocratic, and certainly no less
capricious than the market itself.

More importantly, how could the gold standard be neutral with respect to the
business cycle, unless you think that credit demand and the business cycle
are completely unrelated? The whole point of a price-specie flow model is to
balance the payments system "automatically," such as to "correct"  over- and
under- production, excess and insufficient demand, by referring them all
back to the gold price. What good is a currency with a constant value if it
has no macro-economic effects? Surely, you don't want a currency with a
constant value for its own sake--right? (ie. You did complain in an earlier
post about price volatility since the 70's.)

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

Hmm. Gold standard =constant money value = less inflation = (cet par) lower
inflation expectations= lower nominal (and real) interest rates.  Constant
money value= less volatility = decreased costs of hedging, insurance, etc. =
lower real interest rates. No? Isn't that the argument?

One of the stranger things about this discussion is that, like lots of other
liberal economists, you point to the closing of the gold window as the
moment when the contemporary financial world began. Difference is that,
while John Eatwell and Lance Taylor want to use the BIS as the int'l lender
of last resort, you want a gold standard. Assuming that this is possible for
the US at present, do you think it would fly internationally? Wouldn't it
have to to work?


Christian