Supposedly seeking to placate Ron Paul’s supporters, the GOP strategists have included in the party’s 2012 platform’s first draft a call for a “gold commission,” which would investigate again linking the dollar to gold. Linking the dollar to gold would limit – if adhered to, which has proven to be a problem for politicians – the number of dollars that the government/Fed could create. The Establishment sees the idea as dead on arrival.
A Reuter’s analysis notes that a gold standard is “impractical” and “unrealistic” because “Gold prices would likely surge to $10,000 an ounce, the greenback’s credibility would vanish…” Reuter goes on to note that “To back the U.S. monetary based (sic) currently at around $2.56 trillion by the 262 million ounces of gold held by the United States government means bullion prices would soar as high as $10,000 an ounce…”
Actually, the $2.56 trillion “U.S. monetary base” reflects the Fed’s balance sheet (the monetary base) and not the number of dollars in circulation. M2 is somewhere is about $10 trillion, which means that gold “fairly priced” in dollars could be in the $36,000/oz range.
Would $10,000 gold be so bad if it came with a sound monetary policy? Besides, where do analysts think the price is going if controls are not put on how many dollars the Fed creates? Many critics see the official US debt rising to $20 trillion by 2016 at the current rate of spending. Do the people at Reuters think that gold is going to stay at $1,675/oz when the official debt hits $20 trillion?
In ridiculing the idea of returning to the gold standard, the Financial Times made an argument that only be described as a dysfunctional:
A return to a fixed money supply would also remove the central bank’s ability to offset demand shocks by varying interest rates. That could mean a more volatile economy and higher average unemployment over time.
A “…more volatile economy and higher average unemployment over time?” Clearly, the Times has not been paying attention to economic conditions. No one believe that unemployment rate in the US is at 8.8%. With 46 million Americans on food stamps, the rate is probably closer to 15%.
The Fed, in its efforts to shore up the world’s financial institutions, ballooned its holdings from $800 billion in 2008 to $2.56 trillion today (the monetary base). Still, the economy is suffering horribly, in either recession or depression, depending on whose analysis you accept. What happened to the Keynesian theory that increasing the money supply filliped the economy?
Further, with interest rates nearly at zero, the Fed cannot “vary” interest rates. It can only raise them from current levels. To take interest rates to zero would make a mockery of the concept of central banking.
Compounding the problem, analysts estimate that the federal government’s off-balance sheet liabilities to be north of $100 trillion. Those are liabilities that are promised but not yet funded. The official national debt encompasses acknowledged and “funded” liabilities. The money supply can only move higher as the government and the Fed, working in unison as designed, create more dollars to pay those liabilities.
$10,000 gold? That price may be low.