You shall not crucify mankind upon a cross of paper!!

“Be careful what you wish for”, they say, “as you might just get it.”  The quip is brutally common in the social science called economics.  The cardinal rule of economics -- you cannot interfere with the law of supply and demand.

In this case we direct the quip towards the Roosevelt economists who flat out reject the notion of returning to the gold standard.  Gold is economic relic and too restrictive as it does not guarantee that currency base will grow at the pace of the economy.  Gold bugs are equivalent to those crazy people who cling to guns and religion.

Dare we reconsider? 

The current deflationary cycle is suffocating our debt fueled economy.  In this election year, political gridlock and policy paralysis slowly tightens a noose around the nascent economic rebound of the last three quarters.  Capital flight out of Europe and Russia and into US Dollar denominated assets creates a needlessly stronger dollar combined with artificially low interest rates.  Artificial, as those rates are below the current inflationary figures and suppressed by the bond purchases of the Federal Reserve.  The credit spread between corporate bonds and US Treasuries is widening not because cash-flush corporations are a bad bet but for the reason that capital flight is seeking an immediate safe haven.

 The Fed in its infinite wisdom purchased over $1 trillion in these bonds the weary huddled masses Europeans so eagerly demand.  Paul Krugman the Nobel Prize NY Times columnist cries out that the Treasury Department should take advantage of this situation and supply the market more of these coveted bonds via Treasury auctions and use the proceeds to purchase labor (i.e. shovel-ready projects) so recently and long term out of favor.  He rightly suggests the Federal Reserve print more money to counter the rapid appreciation of the US Dollar and supply the public with the money to offset the deflationary debt trap.

And yet, both institutions cannot do the right thing.  Policy maker’s hands are effectively handcuffed.  First, the Fed, after two rounds of quantitative easing, must not act as a stooge to the current administration whose political fortunes are now directly tied to the health of the economy.  It must maintain the facade of independence.  Secondly, amid record deficits and the specter of yet another deficit spending ceiling debate, our Treasury Department husbands its political and financial resources until after the election.  Deficit reduction is the mind-set of those pesky populists seeking the stern policy of austerity.

There you have it…gridlock and paralysis from two powerful quasi-independent organizations. 

High gold prices signal producers that consumers demand more of the relic of monetary policy.  The old adage… ‘The solution to high prices…is high prices” comes into play. Producers willingly respond.  Old mining operations are refurbished and new discoveries exploited.  Billionaire executives from Silicon Valley invest part of their wealth to capture the super-nova detritus in space containing Atomic number 78 and 79.   No political discussion necessary. 

                                                                                                         

The law of supply and demand naturally creates the currency the nation so desperately seeks.  No government mandate or ceiling to interfere -- just raw greed to replace legions of stymied policy makers.  Economist Milton Friedman in his Nobel prize treatise “A Monetary History of the United States: 1867 to 1960” points out that all too often Federal Reserve policy makers know the right policy moves during a time of crisis but are handcuffed into making the wrong decision because of political expediency-- not making a decision is the wrong decision in financial markets. 

The Fed should print dollars to purchase bullion from any willing seller of gold.  The new inventory of gold is an asset the balance sheet of the Fed, currency the offsetting liability.  As the economy recovers the Fed would chose between two assets it could sell to drain cash from the system – bonds or gold.  There is strength in the diversity of policy choices.


Practically the policy is automatic. Ordinarily money supply growth should correspond to the target growth of the economy of say two percent of $13 trillion. If gold purchases comprised of 20 percent of monetary growth, the Fed could easily buy 1200 Gold Futures contracts (100oz) discretely throughout the day to create these monies. The Fed takes delivery of the gold and those monies are now permanent in the system. The physical gold exchanged with the Treasury and Gold certificates received in return as is the current practice. Simple. Think of this policy executed daily as a drip line to the private economy. A $2000 linux box is all that is required.

To paraphrase Walter Bagehot, history’s first central banker, ‘Lend freely but at an exacting price’.  The Fed lends freely but its coveted bonds are locked in a digital vault in New York.  Selling those bonds at a tidy profit to our desperate Europeans is a contraction of money to central bank watchers and would send the market into a tailspin. A simple solution is re-instating gold bullion as part of the repertoire of monetary tools.  Gold does not necessarily need to a standard but it can certainly be a diversified outlet of money to the economy.  Buying more bonds only distorts the current pricing mechanism of interest rates and enriches the fortunes of entrenched bankers.  Money creation through gold sales directly distributes money to the entrepreneurial class and is not trapped in the arcane world of excess reserves.  Banks would no longer have a monopoly on the issuance of new monies and might be force to compete for the cash available from the completive outlet of gold purchases.  The scarcity of gold would ensure that such purchasing power is not abused.

The tragic irony in this tale: the liberating fiat currency is now a conservative shackle and the ancient gold relic just might be a liberating stimulant.