Did somebody say "gold standard"?

Might sanity be creeping back into our global financial system?

From Moneynews.com:
"World Bank Chief Calls for Return to Gold Standard"
http://www.moneynews.com/Headline/World-Bank-Chief-Return/2010/11/08/id/376286?s=al&promo_code=B10E-1

"Leading economies should consider adopting a modified global gold standard to guide currency rates, World Bank President Robert Zoellick said on Monday in a surprise proposal before a potentially acrimonious G-20 summit."

"'The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values,' he added."


The United States has benefited by having the dollar used as the reserve currency for the world. We have been able to export our debt, so to speak. This is unlikely to last forever, and it simply cannot last forever if the U.S. keeps printing money.

Why can't it last if we keep printing money? Let's say that we issue notes with 3% interest. We get dollars now and the purchaser of the notes get dollars (plus 3%) some time later. But if we inflate our currency by, say, 4% in that time then our hypothetical investor has lost 1%! He is paying us for the privilege of supporting our economy. When the notes come due the original purchaser won't be able to buy as much real stuff as he did when he started--which defeats the whole purpose of investing.

Maybe other countries would have been more likely to put up with this stuff in the past, when there was no alternative. The dollar, even if it inflated a bit over time, was still the most solid way to make sure that you didn't lose real value. That may not be as true as it once was. Given our deficits and debt, and the low likelihood that we'll cut government spending, we'll have no choice but to inflate. Other countries (potential investors) see this. They'll invest elsewhere. We won't be able to continue to float more debt and the whole house of cards will come tumbling down.


So why is the dollar the de facto reserve currency of the world? Good question. From Bloomberg:
"PBOC Academic Adviser Questions Dollar’s Global Role"
http://www.businessweek.com/news/2010-11-09/pboc-academic-adviser-questions-dollar-s-global-role.html

"Nov. 9 (Bloomberg) -- Li Daokui, an academic adviser to China’s central bank, said it could be seen as 'absurd' that the dollar remains a reserve currency after the financial crisis.

"'To a visitor from outer space, it would seem “absurd” that the dollar holds that role, given problems in U.S. financial regulation and the country’s economic difficulties,' Li said at a forum in Beijing. 'The same assessment could be made of the nation’s ability to keep issuing currency according to its own needs,' he said."

Remember, China is the largest holder of U.S. debt. Our high standard of living is propped up by the fact that China sends us low cost goods while we send them worthless pieces of paper. What would happen if they stopped playing the game?


Here's an article for you Sarah Palin haters out there. Amazing how she's always on the correct side of the issues for someone who is supposedly so stupid.

From the Wall Street Journal:
"Review & Outlook: Palin's Dollar, Zoellick's Gold"
http://online.wsj.com/article/SB10001424052748703514904575602231815453378.html?mod=djemEditorialPage_t

"Stressing the risks of Fed 'pump priming,' Mrs. Palin zeroed in on the connection between a 'weak dollar—a direct result of the Fed's decision to dump more dollars onto the market'—and rising oil and food prices. She also noted the rising world alarm about the Fed's actions, which by now includes blunt comments by Germany, Brazil, China and most of Asia, among many others."

"'We don't want temporary, artificial economic growth brought at the expense of permanently higher inflation which will erode the value of our incomes and our savings,' the former GOP Vice Presidential nominee said. 'We want a stable dollar combined with real economic reform. It's the only way we can get our economy back on the right track.'

"Mrs. Palin's remarks may have the beneficial effect of bringing the dollar back to the center of the American political debate, not to mention of the GOP economic platform. Republican economic reformers of the 1970s and 1980s—especially Ronald Reagan and Jack Kemp—understood the importance of stable money to U.S. prosperity.

"On the other hand, the Bush Administration was clueless. Its succession of Treasury Secretaries promoted dollar devaluation little different from that of the current Administration, while the White House ignored or applauded an over-easy Fed policy that created the credit boom and housing bubble that led to financial panic.

"Misguided monetary policy can ruin an Administration as thoroughly as higher taxes and destructive regulation, and the new GOP majority in the House and especially the next GOP President need to be alert to the dangers. Mrs. Palin is way ahead of her potential Presidential competitors on this policy point, and she shows a talent for putting a technical subject in language that average Americans can understand.

"Which brings us to Mr. Zoellick, who exceeded even Mrs. Palin's daring yesterday by mentioning the word 'gold' in the orthodox Keynesian company of the Financial Times. This is like mentioning the name 'Palin' in the Princeton faculty lounge."

"And here's Mr. Zoellick's sound-money kicker: 'The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.' Mr. Zoellick's last observation will not be news to investors, who have traded gold up to $1,400 an ounce, its highest level in real terms since the 1970s, as a hedge against the risk of future inflation."

Palin's prepared remarks are here, courtesy of National Review Online:
"Palin to Bernanke: ‘Cease and Desist’"
http://www.nationalreview.com/corner/252715/palin-bernanke-cease-and-desist-robert-costa


In related news, this post from Politico put a smile on my face. Even if this doesn't come to pass (it should!) I smiled when I read it:
"Ron Paul in charge of Federal Reserve oversight?"
http://www.politico.com/blogs/glennthrush/1110/Ron_Paul_in_charge_of_Federal_Reserve_oversight.html