2011-01-06

Gold debate heating up

Major players are signaling that gold is no longer on the kooky fringe.

Jim Rickards - Gold Standard Coming, Fed’s Hoenig Correct
Jim, you said that battle lines would be drawn on this debate and this is the second major figure who has joined with World Bank President Zoellick openly discussing the use of gold in the monetary system. What is your take on this development?

“What Hoenig has done, as Robert Zoellick did before him, is to legitimize the debate. This is not the last word on gold and there is a long way to go both intellectually and mechanically before we get to a gold standard. What is important is that the discussion is now out of the shadows and in the main arena and it will take on a life of its own from here with participation from many sides. Hoening may have lost his vote on FOMC but he has not lost his voice.”

With regards to the battle lines, how do you think Fed Chairman Bernanke will feel about this?

“Hoenig and Zoellick are not stalking horses for Bernanke and the Board of Governors. An honest debate about a gold standard is the last thing Bernanke wants. However, because of speeches like Hoenig's and the new prominence of Ron Paul in the Congress, this debate is now taking off whether Bernanke likes it or not and he will not be able to contain it.

The battle lines are being drawn between honest gold backed money and fiat money. The G20, IMF, central banks and most academic economists are on the side of fiat money and the citizens, certain honest intellectuals and a few economists are on the side of gold. Let the games begin.

Hoenig is right that even with a gold standard there will continue to be business cycles with occasional periods of higher unemployment and bank failures. But it's not as if fiat money has avoided those calamities. From the severe recessions in the 1970's and 1980's, the sovereign debt crisis of the early 1980's, the stock market crash of 1987, the recession of 1989-1990, the bond market crash of 1994, the LTCM collapse of 1998, the tech bubble crash of 2000 and the Panic of 2008 it's not as if it's all been smooth sailing under fiat money.

It's hard to see how gold could do worse and history says it will do much better. One need only look at inflation, unemployment and economic growth in the period 1870-1914 versus 1971-2010 to see the clear beneifts of gold which seems to produce both consistent growth and low inflation notwithstanding occasional business cycle volatility.”

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