Friday, November 12, 2010

Gold standard? Roubini is right

Since that early week left-field comment from World Bank head, Robert Kraftwerk Zoellick, about maybe slipping a bit of gold into the mix of world monetary policy (featured here) it's been hailed and jeered in turn by reactionaries. So far at least, the best and most reasoned argument heard by this humble scribe has come from Nouriel Roubini (and before we go on, yes I know his call on gold price not breaking $1200 was crap but let's leave the market fluctuation soothsayings aside because macro policy is where he's a smarter cat).

Jon Nadler of Kitco did a good job in summing up the Roubini call in his daily market musing yesterday. Here's the link (go read it all, well worth it) and here's the relevant excerpt:

"Much ado followed World Bank President Zoellick’s so-called ‘proposal’ to perhaps include gold into a revamped form of global monetary peg, given current turmoil and uncertainty. Camps are forming, battle lines are being drawn, forum chatter is ablaze with flamers (on both sides), and…economists, well, they bring logic to the table with “on the other hand” types of analyses. One such academic is Nouriel Roubini. According to whom, the re-adoption of a gold standard is unworkable.
"Speaking on CNBC the other day, Professor Roubini flat-out stated that "A fixed exchange regime, even if it is not a gold standard… that world just doesn't work, because in that world, monetary policy by definition instead of being countercyclical becomes pro-cyclical. Suppose you have a fixed exchange rate just exacerbates the business cycle." "
"NetNet reporter Ash Bennington details that “although he is best known as an economist who challenges conventional views, Roubini pretty well lines-up the consensus view of mainstream economics on the gold standard or fixed exchange rate regimes: "You have the opposite of what any optimal rule about monetary policy will tell you." Basically, fixed rate regimes inhibit the ability of banks to provide their “lender of last resort” support role to an economy when most needed. In so many words, the “good old days” were anything but “good.”
"This is borne out by the more than 22 recessions (some harsher than what took place in 1929-1941) the US experienced before WWII. See, for example, the “original” Great Depression (aka “The Long Depression”) that plagued the European and US economies from 1873 to 1896. The gold standard is generally thought to have its origins in the early 1700’s.
"UC Berkeley Prof. Barry Eichengreen has blamed the “dragging out” of the Great Depression 2.0 on the fact that the gold standard was then in force. Economic theorists would concur that –under such a rigid standard- monetary policy would essentially be determined by the rate of gold production. Variations in the amount of gold that can be mined at any particular time (where are the ‘peak gold’ adherents when you need them?) could cause inflation if there is an output increase, or deflation if there is a decrease in same.
""When you had a traditional gold standard, boom and bust with severe swings in economic activity were the norm—really big ones. It was only once we moved to fiat money that central banks were able to smooth the business cycle, and make it less volatile, as we did during the financial economic crisis," Prof. Roubini said. 
"We say, hold that personal “gold standard” of your own, and remain on it. Let central banks do what they might (while not forgetting that they, too, have their own ‘reserve’ stash of the stuff) –chances are they will steer a course away from rocky shores. Hoping for a crash upon said rocks is not in anyone’s best interest. Never has been."

Indeed. IKN agrees with Roubini and also agrees with Nadler and his "hold that personal gold standard" call. World finances need flexibility, something that stodgy old gold cannot provide. Meanwhile, the personal saver (sidebar note, somebody with net asset credit, unlike the total world financial economy which is, by definition, net asset neutral) should be holding gold as their insurance policy. Holding physical gold isn't a way of getting rich (despite the glittering numbers we're seeing recently), but a way of not becoming poor....far more important in this author's humble opinion. The world doesn't need to attach itself to gold, but smart individuals make the right choice when they hold gold. DYODD, dudettes and dudes.