Monday, October 01, 2007

Gold Bugs

Although Ambrose Evans-Pritchard is an avowed Europhobe, and will tag on to almost anything he writes a message of doom for the Euro, I found his article in today's Telegraph very interesting.

I am not an economist that argues that the only real store of value is in precious metal, indeed I don't believe it and have often found those who advocate a return to the gold standard to be rather swivel eyed and fanatical.

The root of the disagreement depends on a view on inflation. "Hard fiat money" advocates believe that inflation is always and everywhere a destroyer of wealth. Yet, a certain low level of inflation is a lubricant for economic growth. zero inflation or deflation is almost always a sign of profound economic problems.

Nevertheless the idea that Evans-Pritchard puts forward- that the Dollar collapse could trigger what he calls "competitive devaluations" is a real threat. Essentially his view is the US Fed is seems to be trying to head off recession by exporting the problem overseas, and especially to the Euro zone.

My view is that Ben Bernanke can not pull off the difficult tightrope walk that will avoid a US recession, and by trying to reflate, he will simply inflate, thus leading to a further Dollar fall. I share Evans-Pritchard's view that the risk is ultimately more from uncontrolled inflation, if the the Fed actually adopts the policies that he suggests they will.

Better for the US to take the short run pain of even a deep recession than to destroy the Dollar as the reserve currency. Yet the market for gold suggests that no one believes that this will happen. The rocketing of the price of golds is a measure of the global fear in financial markets- a fear that may persist for some time. However I do not believe that this represents a victory for the hard fiat money advocates and were we to follow their prescriptions then any recession would risk becoming a global depression, with incalculable consequences.


Peter W. said...

A passionate article from AEP, He is anti-EU as you say, but on the few occasions I dealt with him I found him pretty reasonable in terms of the stories he decided to run. If it was rubbish he spiked it.

Munchau in the FT is quite interesting on this topic.

Tristan said...

I am very skeptical of the need for central banks. It seems to me to be another case of people cannot have enough knowledge to make the decisions and a market would be far more efficient.

Having a commodity based currency (be it gold, or something else of (relatively) fixed quantity) is certainly very attractive, I'm not sure how well it would work...

mel said...

Bernanke is doomed either way. Continue to lower the rate and cause disaster for the dollar (create more inflation, artificial commodity price rises, deceasing debt interest from foreign entities, etc), increase the rate and cause a separate but as bad disaster for the economy (spread sub-prime defaults into prime, crashed the market, etc), or hold -- and be called indecisive (which may hurt him and his ego the most).

We've gone too far to go back to a gold standard. The fear now is what you said, Cicero, that the dollar will lose its place as a reserve currency. When such a large amount of the money supply being held in foreign central banks and under mattresses in Quito, Chelyabinsk and Taipei alike, if those re-enter circulation (for simply the purpose of exchanging them for commodities or EUR), it would be a further disater for the US.

US economic and market commentators fail to realise that the bulk of the rise in commodity prices (that includes oil) is chiefly due to the declining dollar. If they gripe about how much the Kuwaitis are earning over a barrel, they need to learn.

Bernanke cannot export this recession out. And frankly, the greatest fear is the collapse of the stock market. Most of the US is already in a recession, if not worse (look at Cleveland and most of what's between California and the East Coast). If the market crashes further, that will dry up capital gains taxation -- and the 5-year carry-over will damage tax coffers for similar years.

For one, New York City will be hurting very badly budget-wise. And that will easily be exported to the City, Frankfurt, and so forth.

No matter what, the Bush-Bernanke recession will spread and it will hurt the UK very badly -- worse than it will hit the Continent.

Perhaps, Cicero, if this is timed well with Gordo calling a vote for next year, everyone not Labour will benefit. I guess I will see you up north next time then!

Anonymous said...


Have you observed the disquieting events in Georgia. Seems Saakshvili is following the well worn path from Democratic opposition Leader to strong man


mel said...

Dear Lepidus, you have sadly read the situation in Georgia incorrectly. The "protests" put on is for an individual that would be deemed "ultra-right" and "extreme hawk" by any standards. Any statements from him and his supporters must be taken with a brick of salt.

Nutty parties all have persecution complexes. Look at the bloody BNP...