The Elusive Quest For Gold

By Simon Johnson.  As prepared for the NYT’s Room for Debate – for the context and the whole discussion, see this link

In a world with so many instabilities, there is an understandable search for something that offers a stable value – preferably something that cannot be affected by the whim of government or the latest scheme of a central bank.  Unfortunately, this search proves just as illusory as the pursuits of alchemists in pre-modern times; there is no magic to gold.

For international economic transactions, proposing any kind of return to the gold standard is equivalent to wanting more fixed exchange rates, i.e., moving away from market-determined rates and returning to the system, at least in part, to how it operated before 1971.

But it is hard to imagine how this would help with regard to the major currencies, which are again the subject of controversy today. The main issues in the US are high unemployment, an unstable financial system, and longer-term issues around the budget.  How exactly would gold help on any dimension?  Advocates of a modified gold standard argue that this would serve as a form of anchor to the system – but in the 1930s it proved to be an anchor tied around the neck of some countries, including the United States.  Nobody needs the kind of “stability” associated with the Great Depression.

And China’s exchange rate today is controversial precisely because it is essentially fixed in nominal terms against the dollar.  Adding gold as a reference point for China’s exchange rate would do nothing to affect the problem – China keeps its currency undervalued in real terms, aiming for a large current account surplus.  This is unfair and violates both the rules of the exchange rate system and the reasonable expectations of its trading partners.

The world – and the G20 — needs to confront its main problems: global banks have become far too powerful, financial reform has failed, and we are setting ourselves for another dangerous credit cycle – which will again devastate jobs.  The G20, incredibly, has refused to take up the issue of how to handle the failure of megabanks when these operate across borders.  The failure of leadership and responsibility at the Seoul summit is profound.

Proposing a modified gold standard is at best a distraction.  At worst, it may be latched onto by people who wish to further divert us from the real problems.

49 thoughts on “The Elusive Quest For Gold

  1. Yup, it’s standard political misdirection in the short run. (The “honest money” scam used to sound intuitively plausible to me as well before I learned about this stuff.)

    In the longer run, it’s part of the neofeudal game plan.

    As deflation definitively sets in, a gold standard would be used by the banksters to accelerate deflation even beyond its “natural” process, in order to more effectively impose debt indenture and strangulation.

    That’s how the gold standard was previously used, even in times of real growth – to artificially constrict the money supply among participants in the real economy, to force them into debt.

    But whether it’s a time of real inflation or real deflation, the gold standard is used the same way, as a depressant and control over the non-finance sectors and especially the non-rich.

    The real solution, if we’re to continue using money like this at all:

    1. The government should directly issue greenbacks,

    2. for productive, real economic purposes.

    No “finance sector” necessary.

  2. “(W)e are setting ourselves for another dangerous credit cycle”

    I think gold is mostly an intellectual exercise; this is the part that is most interesting to me.

    Because there has been no real reform of the American financial system and the G20 can be relied upon for little, I think that there is at least a 40% chance that another dangerous cycle will occur within 5 years. In fact the chance of that happening will not be the same over time; it may hit its peak half way through that period. i.e. mid 2013, and actually decline afterward.

    I’m more interested in what it will look like. Will it involve meltdown in state and municipal finances in America, with defaults that will make Orange County look tiny by comparison and Harrisburg just a harbinger in the wings?

    Will we export disaster again? We did it once with Smoot-Hawley. Can we do it with QE2?

    Whatever it is, I’m looking for the next short. I sincerely believe it’s there. Zoloft notwithstanding.

    Any ideas?

  3. pairochucks wrote, November 10, 2010 at 8:00 pm:

    “Whatever it is, I’m looking for the next short. I sincerely believe it’s there. Zoloft notwithstanding.

    Any ideas?”

    Each financial circumstance is different, so each response must be unique.

    The amount of Zoloft required would be predicated on financial risk tolerance and personal circumstances. Personally I prefer a 5HT-1a sub-receptor agonist :-)

  4. In 1919 there were 3500 labor strikes in the US. Demand for labor had reached a high-point during WWI because Western Europe had become dependent on the US for many things, but especially for food. WWI was of course fought on Europe’s farmland, and this had an empowering effect on the labor movement in the US.

    As soldiers were returning from WWI and putting downward pressure on this empowering demand for labor, these dynamics changed very quickly. The demand for food produced in the US was falling because Europe’s farmland was being put back in use. The USDA though, ironically, encouraged farmers to continue producing at WWI levels for 2 additional growing seasons. The resulting glut caused the Agricultural Depression of 1921.

    Labor markets shifted rapidly from an empowered position for workers in 1919, to a state of oversupply by 1921. This shift in the demand for labor though was not simply an historical accident, opportunities and options in agriculture were eliminated by design as other labor demand factors, (returning soldiers and massive immigration), were used as a matter of convenience to bring an end to labor strikes. And this machination worked, labor values remained stagnant throughout the 1920s as inflation drove down the real cost of labor,(sound familiar?).

    The percentage of the population being directly supported by agriculture had fallen from 40% in 1921, to 25% in 1929. Urban labor markets were therefore being flooded with potential workers from rural areas at the same time that soldiers were being released back into the job markets. Vast numbers of immigrants had also been allowed into the country leading up to, and during the war.

    Before the crash of ’29, 71% of the population was living below poverty(BLS), the labor strike problem though had been solved. But it was this manipulative effort to devalue labor… that caused The Great Depression. This machination simply left too little purchasing-power in the hands of too many consumers, and, traders did not panic due to ‘animal spirits’, but instead because it was so obvious that consumers were tapped out. Much the same as in 2007 when it became so obvious that housing costs were not sustainable.

    Theories about ‘animal spirits’, or inadequate gold supplies, or in this case, currency value constraints or imbalances, are merely efforts by technocrats to alleviate the blame on themselves and their masters(plutocrats). Richard Zoellick would do well to consider that $1.25 per day equates to about 16 cents per hour based on a 40 hour work week, and then, he should try to see the global economy today as a macrocosm of the US economy in 1929. Today, as was the case in 1929 and in 2007, there is too much global liquidity and the resulting speculation, and relatively too little global purchasing-power.

    Gold as an investment tool is nothing more than an expression of human folly, and a folly based in fear of what is not fully understood. If for no other reason than concern for the environmental damage being done by gold extraction, gold should be allowed to find its price equilibrium based on its utility. This could also help to improve capital allocation factors by removing investment in gold as an unproductive option. Perhaps if economists would put as much effort into defining the value of productive labor, as they do the subject of gold as an investment opportunity, with specific emphasis on the importance of workers as consumers, then gold might become cheap enough to allow its use in applications where it could in fact be useful.

    Mankind’s problems are caused by greed, exploitation, stupidity in a wide variety of forms, and the resulting conflicts, not fiat currencies.


  5. Mr. Johnson wrote:

    “Proposing a modified gold standard is at best a distraction.”

    “All that glisters is not gold;
    Often have you heard that told:
    Many a man his life hath sold…

    “There’s a lady who’s sure all that glitters is gold
    And she’s buying a stairway to heaven

    There’s a sign on the wall but she wants to be sure
    Because you know sometimes words have two meanings…”

  6. All that glitters is not gold is a well-known saying, meaning that not everything that looks precious is precious. The expression, in various forms, dates from at least as far as the 12th century.[1]. It might even go back as far as Aesop. ~ Wiki

    We learn s l o w l y.

  7. “Warren explained that one of her objectives was to help consumers with debt. “It doesn’t take tax money to do that. What it takes is leveling the playing field, it’s saying, ‘look, we just want some basic fairness here.’

    The pricing has to be clear up front, the risk has to be clear up front, and it has to be easy — up front — to make comparisons among products. That means getting rid of fine print.

    That means no more tricks and traps in the game. When that happens, more money stays in the pockets of American families and less of it drains out to the financial institutions that have become so powerful.”

  8. Agreed, reverting to a standard of gold, platinum, oil or any other commodity would do little to enhance global economic activity at this point. But as Big Ben prepares to fire the first shot of a mult-nationaly currency war, it’s not hard to imagine how a world reserve currency might help. The G20 should seriously consider the idea.

  9. The “main issues in the US” are consequences of the series of bubbles created by an unconstrained Federal Reserve, which for good measure has just put the final nail in the coffin of the idea that markets drive currency fluctuations in practice. The power of the banks derives from the massive profits they extract during the booms and busts the Fed causes in its misguided attempts to conquer the business cycle; the corrupt politicians at the center of Professor Johnson’s idee fixe are mere pawns in the larger game. Gold has been money for millenia, and will remain so long after the current US dollar ceases to exist. We would do well to devise a monetary system with actual money as a reference point.

  10. Oh come on, in a world where so many want to fight asset bubbles, like in houses, which would mean in fact to pursue a house standard, why get so upset if someone then wants a gold standard? At least gold is movable and houses are not… at least gold prices fluctuate up and down while decreasing house prices are fought against as if lower house prices would be the end of the world.

    If I have to choose I much prefer gold-bugs to house-bugs.

    And by the way, talking about houses… have a house song.

  11. Maybe a finite amount of assets is necessary, such as gold, to keep the central bankers from blowing asset bubbles with fiat money.

  12. The mega banks are wards of the state. NIM has collapsed. No one wants new creditt, just refi. Banks are already done.

    The “problem” has now morphed into a store of value issue. Dollars won’t cut it anymore for the Asian CBs. They are choking on dollars earning zero, and the problem gets worse daily. What are they supposed to do, revalue by 50%?

    Come on. The dollars have to go somewhere. They will not stay in negative real rate Treasuries. The Asian CBs are shifting to gold, so velocity is going to pick up big time. Those dollars the CBs dump, quietly, are going to start roaring into every little thing.

    Inflation is coming…..

  13. Hard to pay off $4 trillion in debt with gold bars. Just think of the cost of transporting hither and yonder from one investment bank to another. I think the secret goal is to default on the federal debt, social security commitments, and some surviving form of Medicare. That is why the radical right loves gold and gold standard. As the bible belter WJ Bryant stated, “do not crucify us on a cross of gold”. At that time the farming sector was facing years of deflation and as mentioned in the other comments deflation kills off debtors and rewards lenders. Inflation, in contrast,rewards borrowers and punishes savers and Big Bill wants to penalize the savers. China is the biggest saver of them all, 2.5 trillion US dollars and dollar denominated debt. If they won’t float the exchange rate then let them eat inflated dollars. Sooner or later they will have raise the cost of their exports to reflect the currency debauchery of the US government. Until then, I am all for sticking to China. Unfortunately no one will be left in the US who can remember how to make anything.

  14. We are living in truly interesting times. Years from now we will be reading about the “big one” that started in 2008. Forget about Gold and currencies, budgets and deficits. What we need is to start stressing the importance of economics according to Von Mises. We have gone way off track and instead of finding our way back to the fundamental truth, we are engaging the distractions being tossed in front of us by the banksters etc.

  15. But which is the better financial risk tolerance approach, before or after Zoloft? (Thank God it’s Sertraline i.e. off patent now.) Are we in an area where psychological economics becomes psychiatric economics???

    You actually caught me with the “5HT-1a sub-receptor agonist”. I admit I don’t know what that is. But, as soon as my wife wakes up from her sleep after a 24 hour duty as a hospital doctor, I’ll ask her. She’s not a psychiatrist but she’s my health care insurance for my old age… with or without Obamacare.

  16. It isn’t all that complicated. Wages/incomes simply need to keep pace with investment/leverage/liquidity.

    The two most extreme instances of inequitable wealth distribution occurred in 1929, and in 2007.

    The plutocracy/technocracy/bureaucracy must accept that investment gains are constrained by incomes/wages. Too many people are swayed by the illusory allure of wealth via investment and usury.

    The current conditions though offer a perfect opportunity to show that sustainable economic progress is not difficult. Once an economy reaches optimum rates of employment, inflation, capital formation, etc., wages/incomes simply must rise in step with productivity gains. This is not complicated although economists trying to sell such ideas are marginalized by those in power. But we are doing the very thing that can change all of that.

    The “distractions” though, as Simon pointed out in this post, do get in the way.

  17. The problem with gold is that you are tying your base money supply (and thus you nation’s economic performance) to a whole host of variable factors to which no sane person would ever tie a nation’s money supply.

    I once heard someone describe a US return to the gold standard as, “allowing the GDP growth of the US economy to be reduced by a bumper crop in India which increases the number of women who get married which in turn increases demand for gold”.

    Returning to the gold standard means an economy that wildly fluctuates based on the amount of gold mined each year, the trade balance, varying industry and dental demand for gold, etc.

    There’s something approaching an intellectual loop here. People start with the idea of “hey wouldn’t it be great if we could take the money supply out of discretionary hands and just tie it to something like gold”. Then the problems stated above become apparent. The next step is, “how about just a fixed quantity of money?” Further analysis leads one to see that this leads to a deflation dynamic in the presence of output growth. Finally, we end up with “how about fiat money that grows at the same rate as GDP” which leads to the classical Friedmanite monetarist problem. The problems with this is that 1) it’s impossible to get money to grow at exactly this rate and 2) it’s impossible to know which monetary aggregate matters most at any given time (and ignores financial innovation) and most importantly 3) relies on the false assumption that monetary velocity is constant. Since very few in the academic mainstream are willing to just accept the obvious fact of endogenous money and its implications, we then repeat the loop.

  18. I agree with you. Unfortunately we have a toxic system in the US where (what passes for) democracy and capitalism result in plutocracy. Until that can be modified, the US will continue to export its devious financial “products” until the rest of the world stops us. Gold is a distraction. The system is broken.

  19. If everyone alive personally had 10 ounces of gold to call their own, there would be a lot fewer people alive.

  20. I agree that exchange standards is a distinct issue than banking reforms, and should not be read as a cure for that issue.

    But it would be a mistake to dismiss calls for a gold standard as a mere distraction. The fact of the matter is that the U.S. (and other countries) are racing to devalue their currencies, playing “begger thy neighbor.”

  21. The perennial allure of gold to critics of whatever the prevailing monetary-banking system happens to be is based on nostalgia for an imaginary time when gold could solve many/all of the toughest problems in simple liquidity systems, including:

    –Eligibility: What are the qualifications for bank establishment, i.e., who has the right to multiplex/expand the base liquidity mechanism by extending credit?

    –Discretion: How to calculate the actual local level liquidity instrument multiplexing, and the max. safe level? How to structure bankers incentives so that they never allow their private interests to trump their technical know-how and contractual commitments to depositors, e.g., by intentionally multiplexing their monetary assets beyond sustainable levels?

    –Transparency: How to minimize the dynamic monitoring costs for all interested parties, so that any deviations from eligibility and/or discretion expectations are detected immediately?

    Of course, history provides many reasons to doubt that gold actually satisfied all of these expectations at any time/place in world history. Today the appeal to gold is nothing more than a convenient shorthand means of simultaneously signaling one’s tough-minded commitment to the idealized benefits described above (as well as the implied second-order benefits like fairness, stability, individual accountability, etc.), together with one’s tender-minded expectation that these benefits can be achieved and sustained by gold alone; no other costs, restrictions, or behavioral changes are required. In other words, it’s the purest manifestation of magical thinking in the domain of monetary and financial affairs.

  22. Roubini has come out forcefully against the gold standard too. Primary argument – it’s procyclical.

    As some have noted, this hits the Austrians right where it hurts – “the intersection of monetary policy and the business cycle”

    The fight between the Monetarists, Keynesians, and Austrians reminds me of the finale in the Good, the Bad, and the Ugly.

    Honestly, I don’t think anyone really understands what money _really_ is. Certainly not the Austrians, who mistake money for something you dig out of the ground.

  23. Yes, money is a concept not a thing. That’s very hard to understand for most people. Gold isn’t money any more than cowry shells, paper dollars or giant stones were money. Money is simply and exchange vehicle for goods, representing a particular amount of those goods at a particular point. We use money because it’s easier to cart around than chickens, and whether it’s backed by gold, or silver, or nothing – the same boom and bust cycles can occur – and have.

    Everyone who wants to look at the Great Depression and the current crisis as evidence that the Central bank economic system is inferior to a gold standard. (although they existed together longer than they have apart) but the 19th century was no bastion of economic stability. In fact there were “panics” with alarming frequency. The reason they had less impact on the average american is that most still lived in small communities and the majority of goods and services performed and consumed came from that local source. If the currency value fluctuated too much they would just shift back to the barter system until things straighted out.

    Ask the French Revolutionaries if a gold based economy can be manipulated by the rich and powerful.

  24. Adam and Eve at the Fed’s Money Tree wanting their apple back…?

    I’ll trade you a gallon of milk for a quart of gasoline so I can drive down the street to buy a dozen eggs…?

    Sea shells for gold should buy you the Roman Armies…?

    A couple rolls of toilet paper cost what…!

    Ref: @ Google…”Bill Murphy/ Le Metropole Caf`e – They just don’t get it!”

  25. FWIW I think Kiyotaki-Moore and similar former practitioner-turned-researchers in the “search theoretic” school are on the right track in their strong focus on liquidity-related functions and mechanisms. I suspect that this may become clearer to more people as the already extreme mismatch between our exponentially growing productive capacity and our increasingly pinched earnings/consumption capacity becomes even more acute. Unfortunately, the vast gulf that separates their views from the quasi-moralistic (and conveniently self-serving) value/payment fixations of the Austrian School will probably guarantee their continued obscurity as long as the Esoteric Order of Hayek continues to dictate so much policy from the shadows.

  26. The liquidity work is promising – along with other work on collateral and leverage requirements.

    I’m still waiting for monetarists to explain margin calls in their model. In an equillibrium model, when the price of something goes up, fewer people buy it. Unless there’s a margin call. Then a LOT of people buy it, until they stop buying it, at which point it crashes.

    These things aren’t “irrational”; they’re just NOT IN THE MODELS.

  27. Simon, you finished with this:

    “Proposing a modified gold standard is at best a distraction. At worst, it may be latched onto by people who wish to further divert us from the real problems.”

    There is no question that this is a quintessential red herring. Meaningless blather in a country and a world that is far closer to social collapse than anyone is willing to admit. Of course you are right about calling out the world financial industry, which, as we all recognize is one of the leading global destructive oligarchic forces. Sadly, it is unlikely to be curbed. A gold standard, as proposed, would do nothing to change that part of the imbalance milieu which stands in the way of any kind of actual progress.

    Now, we have the infamous debt commission, which, as radical as some of its proposed considerations seem to be, is actually doing, in its recommendations (which are not final and the final ones will probably be far less bold) is completely underestimating the size of the problem we confront, not just in this country, but around the world. Just look at what is going on in Ireland, Greece, France, and Great Britain, and those measures are of questionable viability. What we have brewing on the world stage, and certainly in America, is a recipe for both meltdown and massive violent revolution. The world could well end up looking like France in the 1770’s, or Russia following WWI. It is a very scary prospect. Gold? Who gives a damn!!

  28. @MK Re: “Ask the French Revolutionaries” — so glad you mentioned that. I often wonder if the titans of Wall Street and Washington ever heard of Marie Antoinette.

    Of course, money is just an idea. But it’s an idea that could–and I think should–be put to use as a public utility.

  29. Yes but… then how would the bankers assert control over all of us and collect interest from all of us, regardless of if we use credit? No, we can’t have that. Bankers must be allowed to serve their boundless greed, or the world might end!

  30. That sums up all defenses of the Bailout I’ve ever heard.

    Even most who claim to deplore the banks still believe implicitly that the world will end without them. Ask them how that is? They can’t say, but they just know it.

  31. Better still are the friends I have that tell me people simply couldn’t buy things like houses or cars or home entertainment centers without credit from banks. The world simply wouldn’t function without credit in their minds. They never consider how much cheaper those things might be if the prices weren’t distorted by credit.

  32. This is from an article by Bill Murphy (GATA_”Gold Anti-Trust Action” Commission) titled appropriately…the “Manipulation of the Gold Market” (6/5/09) having an interview with Lara Crigger:
    Crigger: What evidence is there suggesting price manipulation?
    Murphy: Well, we have nothing but evidence that we’ve collected for ten years. We haven’t found anything in 10 years that shows us we were wrong, and we’re always looking.
    A lot of it is on public record, such as Alan Greenspan saying “Central bank’s stand ready to lease gold in increasing quantities should the price go up. “Well, that’s what they did.
    Crigger: Right, but rather than what officials have said or not said, is there any evidence in the market itself that you could point to and say, “That means manipulation?”
    Murphy: Look at the concentrated position of JP Morgan Chase in the gold and silver markets. Their percentage of the shorts – theirs and HSBC’s – are almost the entire short position in the silver market. That’s far more of a concentrated position than you see in oil, corn or any other commodity. Nothing else shows anything like it. In fact, J.P. Morgan is short more silver than Nelson Bunker Hunt was long. But they allow that to occur. It’s just ridiculous. They’re not supposed to be having such concentrated positions. That’s one of the mandates of the CFTC (Commodities Futures Trading Commission), to make sure these things don’t occur, because that’s how manipulations can happen.

    futher down___Crigger: But what about manipulation? Won’t that keep the price down?
    Murphy: They’ll lose control. That doesn’t mean they won’t do whatever thaey can to calm things down again, with whatever gold they have left. But that’s the problem: They keep letting lose the gold they have left. Nobody knows how much U.S. gold is left in the U.S. Gold Reserve. We’re trying to find out through the Freedom of Information Act (FOIA), and the Fed and Treasury won’t tell us. They keep redacting or holding back information. Now if gold’s just sitting there, and they’ve never done anything with it as they say, then what’s there to hold back?

    final argument___Crigger: If it is true that the Fed is instrumental in this price manipulation, then how do you reconcile quantitative easing? One of the side effects of that is that gold prices are just going to shoot up, right?
    Murphy: That’s a very good question. Because that’s where they’re in trouble. They’re doing everything they can to keep the price of gold from going sky-high, and they’re desparately trying to keep interest rates and Treasury bonds down, and with all the money they’re printing, they’re petrified. So it’s actually making them more aggressive in trying to keep the prices of gold and silver down. But it’s such an obvious thing for people to see that demand is exploding all over the world. Whether it’s with ETF’s, the Chinese, or big hedge fund managers, the big money is pouring in, buying up the physical gold and silver. So they, I think, are on their last legs to try and hold the prices down, because if they don’t keep interest rates down, the troubled real estate market’s going to go right back in the tank. The quantitative easing will be the final straw that breaks the camel’s back. “But they shouldn’t have done this in the first place. That’s what caused the problem. Had they not rigged the gold prices for the past 10 or 12 years, interest rates would’ve gone way up, and it would’ve had self-correcting mechanisms. This is hurting alot of people, and yet they keep doing the same thing. But they’re going to get beat.”

  33. First of all, you cannot use a commodity subject to volatile supply as a monetary standard. Manipulations are lost in the production/consumption noise.

    But regardless, unless we have some kind of global democracy (which I do not see anytime soon), I do not want a world reserve currency, thank you.

  34. If everyone had 10 oz of gold, you would have increased the global supply of gold by over 10 times current estimates.

    Another way to look at it – the world would require about 2 billion less people in order to give everyone 10 oz. of gold.

    That’s a gold standard for you.

  35. Money is a symbol, a representation of value.

    As a symbol, it is subject to human manipulation. There are powerful incentives to do so.

    The gold standard is an attempt to restrain the dark side of human nature. It has been tried and failed.

    You can’t use physical gold as exchange medium – unless everyone wants to carry a microscope with them – there isn’t enough gold to represent the value of all goods and services out there – so you need “certificates” as a symbol to represent a symbol. Certificates are subject to manipulation.

    All of the mechanisms proposed by the gold-standard advocates to prevent manipulation and fraud can just as easily be applied to fiat currencies.

    The gold standard is a fool’s errand.

  36. Right on Russ.
    Who controls the gold supply? That would be the same bankers that control the fiat money supply, so that’s no net benefit to the rest of us.

    What needs to be recognized is that the debt saturation problem will not be cured by using a commodity backed money system. It can only be cured by clearing out the excess debt. I fear that we are approaching a hyperbolic asymptotic tipping point, where if it’s reached the debt will be cleared by violence.

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