Econ Saturday

The Rally

The stock market is rallying. Is it the end of the recession? Or just a bear market rally? Consumer confidence is rising, but so is government spending. After immersing myself for seven months in investment and economic articles, books, and podcasts, I’ve currently concluded that the words of Allan Meltzer are the best I’ve heard: economists are the best at forecasting the financial future, and they’re not very good at it it.

I realize, incidentally, that I’ve used that quote twice now, and I’ve cited Meltzer at least three times this year, but of the dozens of economists I’ve read and listened to, he seems to offer a good middle-of-the road voice. Example: Many economists I read say we need to get back to the gold standard, many economists scoff at the notion. Meltzer said, “The gold standard is better, but we won’t go to it, and we can’t go to it unless the rest of the world does, too, so there’s not much use talking about it.” I disagree that there’s not much use talking about it (quixotic currently, I think, but things could change), but it was refreshing to see a mainstream economist recognize the gold standard’s virtues.

Return of the Gold Standard?

I think it’s especially relevant in light of news eight days ago that China is stockpiling gold. Why is the dragon building a lair? There are all sorts of potential reasons, many of which fall outside my economic comprehension, but I’m going to throw out a guess: It wants to establish the Chinese Renminbi (RMB) (a/k/a Yuan) as the new world reserve currency, displacing the U.S. Dollar.

A little history: The U.S. Dollar became the world’s currency in 1944 at Bretton Woods. Why? Because the U.S. was the only nation still on the gold standard. The other nations had abandoned it in order to finance WWI with their printing presses (the gold standard hinders–does not prevent–a government from inflating the money supply). Because the U.S. was still on the gold standard,

the international currency naturally became the U.S. dollar and other nations pegged their currencies to the dollar rather than to the value of gold. The actual outcome of the Bretton Woods Agreement was to replace the gold standard with the dollar standard. Once the United States linked the dollar to gold at a value of $35 per ounce, the whole system fell into place, at least for a while. Since the dollar was convertible to gold and other nations pegged their currencies to the dollar, it created a pseudo-gold standard.

Well, LBJ stopped that with his guns and butter programs in the 1960s. In order to finance The Great Society–and in order to stop the flight of gold out of Fort Knox into foreign vaults–Nixon took us off the gold standard. Since then, no country has a currency pegged to gold. The world has continued to rely on the U.S. Dollar (out of inertia and perceived U.S. economic strength, I guess).

Commies Ask Tough Questions

That may be at an end. China and Russia have been questioning why the U.S. Dollar has such lofty status since (i) the original primary reason it achieved its status–its use the gold standard–disappeared nearly 40 years ago, and (ii) the U.S. is undertaking a reckless monetary policy (i.e., “cranking the printing presses 24/7″).

China and Russia are asking a fair question, and I’m just wondering whether China has decided to take matters into its own hands: It’ll establish its own gold-based currency, then the rest of the world will flock to the RMB. Gold has been the ultimate monetary source for 3,000 years. Warren Buffett can say gold is stupid, but he ain’t an historian, he ain’t a sociologist, and he ain’t no Jungian psychologist that can grapple with the development of a gold archetype in the collective unconscious of mankind over the course of millennia (alright, I don’t buy into Jung either, but you get my point).

I really don’t know what’s going to happen, but I’m going to throw loaded dice . . . dice loaded with history. I’ll keep buying gold (and its little brother, silver) when their prices dip, and I’ll hold onto my smattering of RMB. The problem with such an historical approach: It might take a century for the bet to pay off. In the meantime, I will have lost a fair amount of wealth through neglected equity opportunities.

But what the heck. If things go well for the U.S. economy, I should be fine. Barring a major disruption (the three Ds: death, disability, disbarment), I will be self-sufficient, paying for my necessities and reasonable comforts, with an occasional small luxury thrown in. When I die, I’ll leave my children the house and some gold/silver exchange traded funds.

And if history pans out sooner than later, I’m looking real good.

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This entry was posted on Saturday, May 2nd, 2009 at 6:07 am . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

3 Responses to “Econ Saturday”

1. The Economy and The Gold Standard « Scholium Says:
   May 2nd, 2009 at 6:05 pm

   [...] Gold The Daily Eudamon has been reading several different econimists the last few months and here are some of his conclusions. Also take a look at his B is for Beer [...]

2. Ivo Cerckel Says:
   May 2nd, 2009 at 6:47 pm

   TWO SNIPS
   Because the U.S. was still on the gold standard,
   the international currency naturally became the U.S. dollar
   +
   China and Russia are asking a fair question, and I’m just wondering whether China has decided to take matters into its own hands:
   UNSNIP

   No, China does not take matters into its own hands.
   It follows the example of the European Central Bank.

   This will result in gold having a role to play in the upcoming, NATURALLY EVOLVING, i.e., not imposed by bureaukrats, monetary system.

   Yes, I know, this violates many people’s blind belief in demokracy.
   It’s about demokracy versus the market.

   The POLITICIANS, who are maintained alive with taxation, whereas the thief does not come back periodically, nor does the thief pretend to be stealing in the public interest,
   VERSUS
   the MARKET.

   Yes, this frightens many people …

3. Mark Says:
   May 7th, 2009 at 4:08 pm

   I don’t see a way for the US out of the growing mess without a huge devaluation or default, which will have catastrophic consequences. Gold’s a pretty good bet (although small denominations of silver seem more practical as a medium of exchange).

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