Wednesday, January 5, 2011

Jim Rickards - Gold Standard Coming, Fed’s Hoenig Correct,_Feds_Hoenig_Correct.html

Fed Governor Hoenig shocked many observers yesterday when he stated, “The gold standard is a very legitimate monetary system...We're not going to have fewer crises necessarily. You will have a longer period of price stability or price level stability, but I don't know that you'll have lower unemployment, I don't know that you'll have fewer bank failures.” King World News immediately interviewed Jim Rickards who has worked with both the Fed & US Treasury, and who also has a background in national defense as well as consulting with government directorates around the world.

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.”

You can still have variations due to tightness in supplies, but it is proven that there is tremendous stability in pricing when you are on a gold standard. We had food riots in 2008 from Haiti to Bangladesh to Egypt over the soaring costs of basic foods. Food costs have now eclipsed 2008. It seems it is not only morally the right thing to do, being on a gold standard, but also the humane thing to do as far as providing price stability?

“Good question. Commodities are not just the playthings of speculators or mere industrial inputs. In many cases, commodities are actually food and their price volatility represents the difference between a steady diet or starvation for billions of people. If a gold standard contributes to lower volatility in food prices and fewer price related supply disruptions that's a social good over and above any economic good that is created.”

How do we get there Jim?

“Well, as I've said before, there's more to a gold standard than just snapping your fingers and wishing it to be so. It will require a lot of study, a lot of planning and a lot of technical work to execute. One clear implication is that given the amount of money printing in recent years, a much higher price of gold is required to create an equilibrium between the current money supply and the amount of official gold available to support it.

Estimates of that higher price can vary over a wide range depending on what definition of "money" you use and what gold to paper ratios you require. My own analysis indicates a range of between $5,000 to $11,000 per ounce of gold; of course, some estimates are much higher.”

There is the easy way and there is the other path which could very well involve social disorder, violence and failure of the current monetary system. A gold standard is coming to the United States, and the US can do this willingly, or “kicking and screaming” as Jim Rickards has said in the past. Let’s hope we choose the easy path.

Eric King

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