Currency Wars

[Cryptic_Snow]

James Rickards and Jim Grant discussing the prospects of a currency war and the gold standard. The mere talk about Russia and China using alternative currencies is a little scary, especially the Pentagon war game scenario he spoke about.


Link to video.

 

[Integral]

Here's something I don't understand.

Many gold standard advocates are also free-traders who want floating exchange rates. But if everyone's on a gold standard, an immediate consequence is that exchange rates are fixed.

Anyway.

Why do we not like a gold standard? The most fundamental reason is that the demand for gold is not stable, so swings in supply/demand in an arbitrary market (gold) will have immediate spillovers to the general price level and general level of economic activity.

Similarly, the demand for money is not stable, but at least in that case the central bank can adjust the money supply to offset swings in money demand. It's far more difficult to do that on a gold standard.

It's astonishing that he mentions "revaluing" as one way to "fix" the gold standard: if you revalue the gold standard, then it isn't a gold standard anymore! Further, if you don't know the right price of gold, you're going to guarantee a boom-bust cycle as you try to find the market-clearing price!

The gold standard has one benefit - price level (as opposed to inflation) stability, but comes with the costs of inefficient monetary policy, fixed exchange rates, holding the economy hostage to the vagaries of a single market, and letting Ron Paul win at anything.

On the recession: indeed, we are headed for a lost decade if we don't loosen up monetary policy and get incomes back on track.

 

[warpus]

Totally not an economist here; what would happen if we switched back to the gold standard? Would that mean that every single dollar out there would have to correspond to a physical presence of a certain amount of gold, stored somewhere?

 

[Integral]

Totally not an economist here; what would happen if we switched back to the gold standard? Would that mean that every single dollar out there would have to correspond to a physical presence of a certain amount of gold, stored somewhere?

More or less.

In a hard gold standard, "one dollar" is defined as "1/35 ounce of gold" (or whatever), and each little green slip of paper is in theory convertible to gold: you can walk up to your (central) bank and demand to swap your green bits of paper for shiny gold.

In practice there are "cover ratios", so that, say, 40% of the currency is actually backed by physical gold. That's one thing that led to the Depression: the US and France started hoarding physical gold above their cover ratios, without expanding the supply of little green bits of paper, causing a shortage of gold worldwide and hence a recession.

 

[warpus]

More or less.

In a hard gold standard, "one dollar" is defined as "1/35 ounce of gold" (or whatever), and each little green slip of paper is in theory convertible to gold: you can walk up to your (central) bank and demand to swap your green bits of paper for shiny gold.

In practice there are "cover ratios", so that, say, 40% of the currency is actually backed by physical gold. That's one thing that led to the Depression: the US and France started hoarding physical gold above their cover ratios, without expanding the supply of little green bits of paper, causing a shortage of gold worldwide and hence a recession.

Interesting, thanks for explaining.

Isn't one of the problems with today's economy that a lot of the "money" out there is sorta created out of thin air? in a manner of speaking? It seems like reverting back to some sort of a ____ standard might fix that problem, but I'm sure it's a bad idea for other reasons.

 

[Integral]

Depends on whether you want to call it a "problem" or not.

So the money supply has gotten bigger over time, and that tends to raise prices (too much money chasing too few goods). An X standard might fix that, if X is itself in limited supply.

But there are good reasons to let the money supply grow over time: larger populations and larger economies need more money, so a growing economy needs a growing money supply. If the money supply is fixed, as in a hard gold standard, what you get is deflation. Deflation can be good or bad, but tends to be bad empirically.

It's a tough line to walk. Fiat money is a great temptation for governments to inflate their debts away; commodity standards tie the health of the whole economy to the peculiarities of a single market.

 

[Core Imposter]

Here's something I don't understand.

Many gold standard advocates are also free-traders who want floating exchange rates. But if everyone's on a gold standard, an immediate consequence is that exchange rates are fixed.

Anyway.

Why do we not like a gold standard? The most fundamental reason is that the demand for gold is not stable, so swings in supply/demand in an arbitrary market (gold) will have immediate spillovers to the general price level and general level of economic activity.

Similarly, the demand for money is not stable, but at least in that case the central bank can adjust the money supply to offset swings in money demand. It's far more difficult to do that on a gold standard.

It's astonishing that he mentions "revaluing" as one way to "fix" the gold standard: if you revalue the gold standard, then it isn't a gold standard anymore! Further, if you don't know the right price of gold, you're going to guarantee a boom-bust cycle as you try to find the market-clearing price!

The gold standard has one benefit - price level (as opposed to inflation) stability, but comes with the costs of inefficient monetary policy, fixed exchange rates, holding the economy hostage to the vagaries of a single market, and letting Ron Paul win at anything.

On the recession: indeed, we are headed for a lost decade if we don't loosen up monetary policy and get incomes back on track.

Could you explain how exactly monetary policy could be loosened?

 

[Core Imposter]

More or less.

In a hard gold standard, "one dollar" is defined as "1/35 ounce of gold" (or whatever), and each little green slip of paper is in theory convertible to gold: you can walk up to your (central) bank and demand to swap your green bits of paper for shiny gold.

In practice there are "cover ratios", so that, say, 40% of the currency is actually backed by physical gold. That's one thing that led to the Depression: the US and France started hoarding physical gold above their cover ratios, without expanding the supply of little green bits of paper, causing a shortage of gold worldwide and hence a recession.

That causitive theory of the great depression is total myth.

 

[Core Imposter]

Using gold as a standard is not the objective or at least should not be. The problem is the absence of a standard. The problem is the idea that central bankers can manipulate the economy as if were a yo-yo on a string. The idea is that you can loosen things up when things slow down and tighten them up as needed to keep the economy from overheating.

This has never worked and it never will. Human beings lack restraint. The bias will always be to overloosen. More, more, more.

We need a standard to prevent central bankers from doing what they will always otherwise do. Which is to flood the economy with too much money, which will always lead to misallocation which will always exacerbate the business cycle which in turn only makes busts more destructive.

But I am beating a dead horse. We are into the age of free ponies now, which we will ride over the cliff come hell or high water and later, after the general destruction, we will blame them for having the money suppy too tight! Because we can't never learn nothing because its our nature to want everything and more right here and now and damn if we won't just start the destructive cycle again just as we always have in the past.

The Fed should raise rates now. End the dual mandate now. Pass a balanced budget amendment now.

Beat the dead horse Cooper. Beat it Cooper.

 

[BrownCan]

This would mean "real money" with "real value". Not like paper currency in gazillions with no gold backed.

 

[Integral]

You amuse me and therefore I shall reply.

1. "How could monetary policy be loosened?"
- Quantitative easing
- credible promises to keep short interest rates low
- coordinated devaluation against a commodity price index
- reducing the interest rate on reserves
- announcing a price level target
- etc

2. "That causative story is a myth."
The single most popularly and academically accepted "cause" of the GD still has at its core the Friedmanite story of the money supply plummeting in 1929-31. I am merely going one step back and explaining that the reason the money supply fell, was the Fed's gold hoarding.

3. I like rules too, but rules based on commodities are demonstrably bad.

We've seen that nominal targets work extraordinarily well. Pick a nominal target and stick to it, and we get the Great Moderation. Deviate, and we get the 70s and the Great Recession.

I do not disagree that monetary mistakes cause many, if not most, recessions. I also do not disagree that monetary discipline is needed. We differ in our solution mechanisms.

 

[AL_DA_GREAT]

I have bought both gold and silver. The more they print the richer I get.

 

[Core Imposter]

You amuse me and therefore I shall reply.

1. "How could monetary policy be loosened?"
- Quantitative easing
- credible promises to keep short interest rates low
- coordinated devaluation against a commodity price index
- reducing the interest rate on reserves
- announcing a price level target
- etc

2. "That causative story is a myth."
The single most popularly and academically accepted "cause" of the GD still has at its core the Friedmanite story of the money supply plummeting in 1929-31. I am merely going one step back and explaining that the reason the money supply fell, was the Fed's gold hoarding.

3. I like rules too, but rules based on commodities are demonstrably bad.

We've seen that nominal targets work extraordinarily well. Pick a nominal target and stick to it, and we get the Great Moderation. Deviate, and we get the 70s and the Great Recession.

I do not disagree that monetary mistakes cause many, if not most, recessions. I also do not disagree that monetary discipline is needed. We differ in our solution mechanisms.

1. You could also just send every citizen a debit card with one quarter million on it. That wouldn't be a good idea either.
2. Coincidence that this popularly and academically accepted theory is also one that a populace addicted to easy money can readily embrace. Print more!
3. If you see any monetary discipline break out let me know..

 

[Tahuti]

More or less.

Not persée, since most gold standard advocates such as Ron Paul would advocate abolishing legal tender laws, in the expection that people will adopt gold and silver in the proces, thus ensuring a fluid transition to gold and silver.

 

[Leoreth]

I have bought both gold and silver. The more they print the richer I get.

Not until you sell it. When will you do so (genuinely curious)?

 

[Arwon]

This has never worked and it never will. Human beings lack restraint. The bias will always be to overloosen. More, more, more.

[Citation needed]

[And not just from the United States either]

[I mean seriously this is the entire point of independent reserve banks with an inflation target]

 

[Dachs]

In practice there are "cover ratios", so that, say, 40% of the currency is actually backed by physical gold. That's one thing that led to the Depression: the US and France started hoarding physical gold above their cover ratios, without expanding the supply of little green bits of paper, causing a shortage of gold worldwide and hence a recession.

Interestingly, a similar crisis was brewing in the years immediately before the First World War. The French were the ones who started the hoarding pattern; by 1903 a third of the world gold supply was either in domestic circulation or in the reserves of the Banque de France. Four years later, when the Panic of 1907 hit Wall Street and the City, the Bank of England was caught below its cover ratio and the Banque de France and the Reichsbank had to support it from their reserves. The Panic brought more gold to the United States - where the Treasury promptly began to hoard it (by 1910 31% of the world's gold was in American hands) - and terrified the French and Germans into acquiring more for themselves, too. At the beginning of 1914, over 60% of the global gold supply was in the reserves of national banks.

For the longest time, the Bank of England didn't subscribe to this sort of "monetary nationalism", focusing instead on the ability to manipulate the City markets with the prototype of modern monetary policy and claiming that gold was "a commodity to be used". Even after the Panic of 1907, the Bank did not increase its gold reserves to meet its cover ratio. This made the country's clearing banks uneasy, because by the early 1910s they possessed more gold than the Bank did, but the Bank was their lender of last resort; in any financial crisis, the Bank would have to increase its gold reserves, preventing it from lending any gold to its needy client banks. Efforts by the clearing banks to induce the Bank of England to change its cover policy in early 1914 were ignored, and a run on gold had already begun to start - albeit in somewhat slow motion - in May, aggravated by concern over the Irish crisis. It's not clear how this would've turned out if the onset of war hadn't caused a massive discontinuous crisis in European financial markets.

 

[Monsterzuma]

We've seen that nominal targets work extraordinarily well. Pick a nominal target and stick to it, and we get the Great Moderation. Deviate, and we get the 70s and the Great Recession.

Does the steeply rising private-deb-to-GDP ratio during the Great Moderation not worry you in the slightest?

If NGDP level targeting was applied in 2007-2008, would you have expected a business-as-usual continuation of the Great Moderation to occur with private-debt-to-GDP rising to even further extremes?

 

[History_Buff]

Interestingly, a similar crisis was brewing in the years immediately before the First World War. The French were the ones who started the hoarding pattern; by 1903 a third of the world gold supply was either in domestic circulation or in the reserves of the Banque de France. Four years later, when the Panic of 1907 hit Wall Street and the City, the Bank of England was caught below its cover ratio and the Banque de France and the Reichsbank had to support it from their reserves. The Panic brought more gold to the United States - where the Treasury promptly began to hoard it (by 1910 31% of the world's gold was in American hands) - and terrified the French and Germans into acquiring more for themselves, too. At the beginning of 1914, over 60% of the global gold supply was in the reserves of national banks.

For the longest time, the Bank of England didn't subscribe to this sort of "monetary nationalism", focusing instead on the ability to manipulate the City markets with the prototype of modern monetary policy and claiming that gold was "a commodity to be used". Even after the Panic of 1907, the Bank did not increase its gold reserves to meet its cover ratio. This made the country's clearing banks uneasy, because by the early 1910s they possessed more gold than the Bank did, but the Bank was their lender of last resort; in any financial crisis, the Bank would have to increase its gold reserves, preventing it from lending any gold to its needy client banks. Efforts by the clearing banks to induce the Bank of England to change its cover policy in early 1914 were ignored, and a run on gold had already begun to start - albeit in somewhat slow motion - in May, aggravated by concern over the Irish crisis. It's not clear how this would've turned out if the onset of war hadn't caused a massive discontinuous crisis in European financial markets.

So given this and the whole potential civil war thing, is the general conclusion simply that without WWI, Great Britain would have taken a far greater beating domestically than they did in the war?

 

[Dachs]

So given this and the whole potential civil war thing, is the general conclusion simply that without WWI, Great Britain would have taken a far greater beating domestically than they did in the war?

Yeah. Ireland and "the whole potential civil war thing" was in fact a causative factor in British intervention in the First World War. The Asquith Cabinet was smarter and more devious than people gave it credit for.