Sunday, February 26, 2012

Gold and central banks

Robert Zoellick, Jr., outgoing World Bank chief,
" I've noticed that the price of gold has started to reflect some lack of confidence n national policies and central bankers."

That's very perspicacious of Mr. Zoellick. In terms of the path ahead,
"I do not mean to suggest a gold standard - in reality, I'm talking about flexible exchange rates. Therefore, I believe that gold should be used as an indicator, and information tool. It shouldn't be considered a formal anchor, but as a way of being a check on the checkers."

In the current situation, the degree of looseness of central banks is very relative, so the movement in exchange rates not very helpful. In this context, the moment you concede that gold should be used as an indicator, you are underlining how low the signalling value of the other currencies is.

At the 29th Annual Monetary Conference, held in Washington D.C. on November 16, 2011, Zoellick went on to say, " scholars have long pointed to the problems with the gold standard during the Great Depression. But sometimes, they then overreact against the idea that gold could ever play a role...sometimes scholars become captive to their own past analysis. They get so wedded to the beauty of their ideas that they ignore markets. I believe that is a mistake."

Here Zoellick is absolutely right, and I wish to expand on the issue of the gold standard. If one accepts that no monetary system is perfect, then the fact that the gold standard created problems in the past is a statement with little information content. The relevant questions are:
- whether the current fiat currency system works well
- whether a gold standard, which puts a brake on monetary expansion, better protects the interests of the economy at large - investors, households, and businesses, rather than just borrowers.

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