The Buttonwood columnist for the Economist has come down on paper where the world’s central bankers seem to be coming down in practice – spreading inflation in Christmas stockings throughout the world.
Writing about the International Monetary Fund’s World Economic Outlook in October, Buttonwood wrote: “Back in 2010, when I wrote a debt survey in the Economist, I concluded that, in the absence of rapid growth, the options were "inflate, stagnate or default". The developed world has spent the last two years failing to confront this choice, and as a result has been heading down the stagnation route. In part, this is because there has been a reluctance to take the pain of default; in Greece, only the private sector was asked to take the strain. And as for QE, to the extent that it can work in the long run (rather than just propping up asset markets and confidence in the short run) this must surely be by inflating away the debt, or at the very least by the financial repression seen after the war. We may just be seeing, in the latest statements from Ben Bernanke and Mervyn King, a growing acceptance from central banks that inflation is the least worst way out of the mess.”
The man who will replace King as governor of the Bank of England seems to be trodding down the same dangerous path. The Guardian reported recently: “Speaking in Toronto on Tuesday night, Carney mused on the need for central banks to be creative in the post-crisis world. Growth has been so slow that the Bank of Canada governor said that in certain circumstances policymakers might need to ditch inflation targets and embrace nominal GDP targets instead.” As the Guardian’s economics editor, Larry Elliott, reported:
In the UK and in many other countries, the job of the central bank is to prevent prices from rising too quickly. The Bank of England is obliged by law to try to hit a 2% inflation target, although the annual increase in the cost of living has tended to be higher in recent years thanks to rising global commodity prices, higher VAT and the depreciation of the pound. The assumption is that if inflation is under control, the economy will expand at something like its long-term trend rate of growth, which is in the region of 2-2.5%. If you add real growth of 2.5% to 2% inflation then nominal GDP should rise by, say, 4.5% a year.
Since the slump of 2008-09, this relationship has broken down. The Office for Budget Responsibility is forecasting nominal GDP will rise by just 2.2% this year and, with inflation running at 2.3%, that means the economy is predicted to shrink by 0.1%. Inflation is under control but the economy is struggling.
So because these policies haven’t worked, the central banks are tempted to try other policies that won’t work.
There is a better, “least worst” way out of the present dilemma and it is not inflation. As Lewis Lehrman has written: “Through a process of long-term economic evolution in tribal, interregional, and national trading markets, gold’s natural properties account for the fact that gold became universally acceptable as the optimum, long-term store of value and a uniform standard of commercial measure. Universal acceptability is a hallmark of global money. Silver was the sub-optimal monetary metal of civilization, exhibiting as it does many but not all of the properties of gold.
Merchants, bankers, farmers, and laborers may not have self-consciously considered these facts, but over the long run they behaved as if they did. Desired by everyone, trading peoples observed that gold was the most marketable article of wealth in the market.
There it is folks, the gold standard – the real antidote to what ails us.
Today’s economic conditions reflect a fiat monetary system held together by many tricks and luck over the past 40 years. The world has been awash in paper money since removal of the last vestige of the gold standard by Richard Nixon when he buried the Bretton Woods agreement — the gold exchange standard — on August 15, 1971.
Since then we’ve been on a worldwide paper dollar standard. Quite possibly we are seeing the beginning of the end of that system. If so, tough times are ahead for the United States and the world economy.
The new Federal Reserve chairman, Janet Yellen, gave a policy speech today at Chicago, where, in a startling gesture, she mentioned three working individuals by name — Jermaine Brownlee, Vicki Lira, and Doreen Poole. They lost their jobs the Great Recession and have been struggling ever since. It was a refreshing, even affecting demarche by Mrs. Yellen, who has made a return to full employment a public priority. She underscored her sincerity by telephoning Mr. Brownlee and Ms. Lira and Ms. Poole before delivering her speech.
Publisher's Note: Originally released in June/July of 1991, this detailed report discusses Jacques Rueff's economic theories and applies them to modern economic events.
By John D. Mueller
Who Was Jacques Rueff?
... Trained in science and mathematics at the Ecole Polytechnique, Rueff devoted his first theoretical work to showing that the same scientific method applies to “moral” or “social” sciences like economics as to the physical sciences (Des Sciences Physiques aux Sciences Morales, 1922). In both cases, he pointed out, individual acts can be “indeterminate,” but the pattern of large numbers of individual acts can be predicted as a matter of probability. And so in economics no less than physics, as he later wrote, “A scientific theory is considered correct only if it makes forecasting possible.”
"Forerunners of man lived upon the planet several million years ago. But the unique, modern, social order of man – civilization – emerged only four to five thousand years ago. Historical and archaeological evidence suggests that the institution of money evolved coterminously with civilization. From the standpoint of the 100,000-year history of Homo sapiens, civilization and money are but young and fragile reeds. Today their very existence is threatened by financial disorder."
Hostility toward gold has a long pedigree.
19th century depiction of Pliny the Elder courtesy of the Library of Congress
Gaius Plinius Secundus, commonly known as Pliny the Elder, in his The Natural History, Book 33, section 3, writes:
Would that gold could have been banished for ever from the earth, accursed by...
The New York Times’ Jonathan Gilbert reported: “Argentines endured price rises of nearly 30 percent last year, according to an unofficial index published by opposition politicians; the government, which has been accused of manipulating economic data in the past, claims inflation reached only 10.9 percent in 2013. In 2014, inflation...