Tuesday, January 31, 2012

Return to the Gold Standard?

Small children are enticed by shiny objects.

On NPR this afternoon, I heard this discussion on the gold standard.  Newt is trying to suck up to Ron Paul supporters by saying he is for the gold standard.  The discussion on the program was informative, but like most media, they put up a crackpot against someone who knows what they are talking about, and then give both arguments equal weight and "let you decide."

Worse yet, they fail to research or challenge any of the "facts" cited by one of the "experts".  One particular boner jumped out at me and almost made me drive off the road.

Jim Grant, a "respected Wall Street Publisher" (interesting credential) noted that  the argument for gold begins with its role as the original money.  From NPR:
"People recognize it as such. You don't need a Ph.D. in economics to have it explained to you. Gold is sort of the Muhammad Ali of monetary substances; the world over, you look at it, you know what it is," Grant says. 
Pegging the dollar to gold would limit inflation, he says, and force greater fiscal constraints on governments because they couldn't simply print money to pay their debts or bail out bankers. 
And, he says, it would bring the kind of stability to the monetary system that it had a hundred years ago.
Read that last sentence again, and when after you fall out of your chair from laughing, you may understand why Ron Paul followers are total losers.

Financial stability in 1912?  First of all, look at the 1800s.  Taking aside for the moment the Civil War, there were panics and bubbles of all sorts, such as the great railroad bust and a few mineral bubbles as well.  And in the 1900s, there were a few as well.  Something happened in 1929, but I can't remember at the moment what it is.  Oh yea, the great depression.  And we were on the gold standard then - we were until 1973 when Nixon took us off it.

From Wikipedia a short history of those "good old days" when the economy was stable and we were on the gold standard:

19th century
  • Panic of 1819
  •  – pervasive USA economic recession w/ bank failures; culmination of U.S.'s 1st boom-to-bust economic cycle
  • Panic of 1837
  •  – pervasive USA economic recession w/ bank failures; a 5 yr depression ensued
  • Panic of 1857
  •  – pervasive USA economic recession w/ bank failures
  • Panic of 1873
  •  – pervasive USA economic recession w/ bank failures, known then as the 5 yr Great Depression & now as the Long Depression
  • Panic of 1893
  •  – a panic in the United States marked by the collapse of railroad overbuilding and shaky railroad financing which set off a series of bank failures

20th century

  • Panic of 1901
  •  – limited to crashing of the New York Stock Exchange
  • Panic of 1907
  •  – pervasive USA economic recession w/ bank failures

Ahhh! for the good old days of robber barons, monopolies, the trusts, and people manipulating railroad stocks!  Let's go back to that!  We can all wear tophats and waistcoats, too!  Maybe not.

Why did we go off the gold standard?  That is a question worth asking, and remember it was a Republican President - Nixon, he of wage and price controls - who did this.

Simply stated, the dollar was fixed to the price of gold at $32 an ounce.  Foreign countries sold gold for far higher prices.  So, naturally, when they cashed in their chits at New York banks, they insisted on being paid in gold, thank you.  And there was a run on gold as a result.  If Nixon hadn't let gold "float" we would have run out in short order.

And gold, far from being "stable" goes up and down in value as well - it is a commodity, not the rock of Gibraltar.   It moves all over the place, based on the good old laws of supply and demand.  It has no inherent value.  It is merely a talisman, a placeholder for the idea of money, not money itself.

And as I noted before, money is just an idea - and that freaks some people out.  When I hand you money - whether it is a dollar bill, a Euro or a gold coin, it is just a promise being handed back and forth.  Maybe you give me labor in return, or maybe goods.  And you take that promise and hand it off to someone else - who in turn provides you with labor or goods.  No one actually ends up using the gold, other than some industrial processes and electronics firms - and of course jewelers.

So, contrary to Mr. Grant's assertion (Oh, Mr. Grant!) the idea that we will return to a "stable" economy of 100 years ago is nonsense.  Why?  Because 100 years ago our economy wasn't stable - in fact one could argue it was more unstable than today.

And replacing dollar bills with gold coins just is replacing one placeholder for another - the underlying idea of money is not changed.  Nor is it fixed - as the "value" of a gold dollar would depend on how much gold there was in the world and who controlled it.

Think about it for a minute.  Suppose they find a huge gold reserve in, let's say, Uzbekistan?  Suddenly, they are the richest country in the world, and basically control our currency.  You want to cede our sovereignty to whoever has mineral rights?  Aren't we already doing this with petro-dollars and the Arabs?

And the value of gold is not constant, and as a result, huge inflation can take place, even on a gold standard.  The price of gold - its value - has shot up dramatically in the last few years, from less than $500 an ounce to more than $1500 an ounce.  Meanwhile, inflation in regular goods has remained relatively flat.  A $10,000 car in 2005 costs about $12,000 today.   In 2005, that car would cost 20 ounces of gold.  Today, it would cost 8 ounces of gold - a staggering amount of deflation - more than 50%!

So no, gold is not "stable" at all.

Going to a gold standard is not a panacea to all our problems.  In fact, there are no panaceas to all our problems - never were, never are.  When someone comes along and says, "Well, the world is a highly complex place, with all sorts of complex inter-relationships and things going on.  But, I tell you, if we change just one thing, it would solve all our problems!" - they are selling you snake oil, plain and simple.

The attractive "selling point" for gold bugs is that the gold standard would prevent governments from "printing more money" and thus causing inflation and devaluing the currency.  But as more gold is discovered, it deflates the value of the currency by an amount not controlled by the government - or anyone for that matter.  And when economies expand, the shortage of gold can throttle expansion - which was one argument behind the whole "free silver" deal.

Simple answers to complex problems are attractive.  But they are invariably not only wrong, but usually against your best interests.  There is no "one secret to the tiny belly"  there is no one "trick" to getting out of debt.   You cannot solve your tax problems by calling the 1-800 number touted by the animated robot on television.  Life just isn't that simple or easy.

And believing in easy answers is always what gets us in trouble - on a personal level or a national one, historically throughout time.  A leader or would-be leader comes along and tells us that if we just do one thing, we would be living in a paradise!

But rarely do these plans work out as promised - and usually, everyone ends up more miserable than before.

Walk away from charismatic leaders with simple answers.   They are very dangerous, and history has proven this so.