Monday, 8 November 2010

The gold bug bites hard...

There I was, innocently trying to explain why my students should learn about the gold standard... and trotted out the "usual suspects" in terms of explanations. It's a bit like EMU, folks! It tells us about what social and political factors matter for running a monetary system! etc. And only two weeks after that problem set on the gold standard, out comes Bob Zoellick, head of the World Bank, arguing for a new gold standard. I have to say, I almost swallowed my gum when I read the headline. It's not Ron Paul, but Zoellick, who made a pretty decent trade negotiator under George W. Bush. We know that a) gold is very good if you want to kill inflationary expectations b) works disastrously if your problem is deflation c) is the worst thing you can do if your labor markets are rigid. Now, let's see what we know about the current crisis. Inflation is NOT the problem -- if anything, Bernanke and friends worry themselves sick over the fact that inflation is too low, and monetary policy doesn't have enough oooomph as a result. Labor markets are pretty rigid everywhere in the developed world. Even after a few decades of "structural reforms", we still have long-term labor contracts, unemployment insurance, etc. (and a good thing, too). The 19C labor market where workers traded their time for cash the way we trade tomatoes is long gone, and nobody except some freaks on the luny fringes of economics wants them back. So why would anyone want a new gold standard? Apparently, Zoellick feels that it would anchor inflationary expectations, etc., but he doesn't have much to say about why this should be a problem when financial markets predict less than 2% on average over the next 10 years. For my money, Keynes' verdict on gold stands - it's a "barbarous relic".

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