Wednesday, September 12, 2007

The Gold Standard

I would like to draw your attention to this article by Megan McArdle. Megan does a great job of outlining a lot of the reasons that I too oppose the gold standard. I know that among the Austrians, the gold standard is rather popular, and is supported by Paulities (Ron Paul for President supporters). Megan points out some of the absurdities in their position, but I also especially appreciate that she points out that allowing the currency to fluctuate eases the adjustment process. For the record, I am in favor of a monetarist approach to issue of the money supply, because I believe that the discretionary monetary policy of the Fed does us no favors, and imposes a fixed-rate of interest, that is far removed from the market rate. If you are interested, check out the divergence in LIBOR, and short-term treasuries. Or the spread between three-month treasuries and the Fed Funds rate... Take your pick, but also the Fed will have to bow to reality and make their adjustment, 5% Fed Funds. I don't think it will be lower than that because of the need to keep inflation in check.

Back to the Gold Standard, another important point that Megan makes is that because of the suddenness of adjustments required by a gold standard, recessions were deeper and much more severe, which reminded me of a graph I had put together for a paper I wrote about interest rates and how GDP growth had significantly lower standard deviation over time. I would also posit that the relative predictability of GDP has reduced the overall discount rate, which has foster a higher rate of growth. Risk, you have to remember is tied to volatility, and interest rates are tied to risk, lower volatility (ie. greater predictability) and lower rates will come with it.

That's my two cents for what's it worth. More to come on the 'R' word in the next post

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