January 19, 2012
Golden Stump Speeches
Is Newt Gingrich now running on a hard money platform? During campaigning in South Carolina earlier this week for the state's Republican primary on Saturday, January 21, the candidate recommended a "commission on gold to look at the whole concept of how do we get back to hard money," CNNMoney reports. "We need to say to the Federal Reserve: Your only job is to maintain the stability of the dollar because we want a dollar to be worth thirty years from now what it is worth now," he asserted. "Hard money is a discipline. It means you can't inflate away your difficulties."
Gingrich would model his "gold commission" after one put in place after Ronald Reagan was elected, when the nation was battling double-digit inflation. But even then, the commission overwhelmingly rejected the idea of a return to the gold standard.
One of only two members of the 17-member commission to endorse a return to the gold standard was Ron Paul, one of Gingrich's rivals for the GOP nomination.
Reasonable minds might wonder: Why gold now? Inflation has been quite low in recent years. In fact, given what we know about deep recessions, there's a strong empirical case for worrying that inflation is too low and will remain low for some time. Give the large output gap in the nation's economy and the still-high unemployment rate, worrying about inflation as the priority in macro continues to look premature.
The latest reading of U.S. consumer inflation, for example, pegs prices rising at a 3.4% annual rate. Historically speaking, that's near the low end of the range for the past several decades, and compared with the inflationary 1970s the recent levels look, well, almost deflationary.
Skeptics of the government's inflation estimates cry foul and warn that price pressures are actually much higher than the official numbers reveal. Perhaps, but alternative measures of inflation suggest otherwise. For example, MIT's Billion Prices Project generally tracks the government's CPI numbers. Meanwhile, the yield on the 30-year Treasury, currently at 2.9% or so, betrays minimal worries over future inflation. Indeed, the 30-year yield, which is highly sensitive to expected inflation, is near all-time lows. If the crowd expects inflation, there's a surprisingly cavalier reaction to the threat when it comes to deploying capital.
What about seeing gold as a general solution for calming economic turmoil and promoting macro stability? History reminds that we should be cautious in thinking that tying the money supply to gold is a magical elixir. For example, it's a myth that in the absence of a central bank while hugging the gold standard frees us from financial panics. For the ugly details, take a look at The Panic of 1907: Lessons Learned from the Market's Perfect Storm.
Meantime, economist David Beckworth advises "there is no need for a new commission on the gold standard. It has been extensively studied and there is a huge literature on it." He recommends starting with Barry Eichengreen's Golden Fetters: The Gold Standard and the Great Depression, 1919-1939.
Sure, the Fed is at risk of letting the inflationary cat out of the bag at some point. But there are other challenges as well, and it's not exclusively about inflation. It's all about discipline and making the right policy decisions. That's never easy, although it's certainly possible. In fact, it's reasonable to argue that the drop in inflation over the last generation (even before 2008) was at least partly due to progress in central banking. In any case, history strongly suggests caution in expecting that the adoption of a gold standard will provide a quick and easily solution to all our monetary and macro challenges. Nonetheless, the allure of fairy tales is powerful, particularly in an election year. In truth, there's only hard work and tough decisions. There's no substitute for leadership for managing the money supply.
Update: The December report on consumer prices suggests that inflation remains tame with a flat performance last month. On an annual basis as of last month, CPI rose 3.0%, or down from the 3.4% year-over-year rate through November.
Posted by jp at January 19, 2012 6:32 AM