Mr. Norris:

It so happens our friend, Thane Rosenbaum, interviewed Larry Summers last night at the 92nd Street Y in New York. When asked about a gold standard, Summers recoiled and shrieked “a gold standard is the creationism of economics!” The crowd got a big chuckle out of that. So you seem to be in popular company with your February 3rd piece, “In a Focus on Gold, History Repeats Itself” (http://www.nytimes.com/2012/02/03/business/in-rise-of-gold-bugs-history-repeats-itself.html?_r=1&ref=business).
But please consider the following:

The stock of money does not need to be managed higher by policy makers to accommodate a growing economy, as Keynesian and Monetarist economists argue and as you seem to agree. Were the money stock (global money stock, not just US dollars) to grow at 1.5% per year (annual growth of the gold stock), all that would mean is that the price level of all aggregate global goods and services could rise only 1.5% per year (more or less). Of course, price levels within the bucket containing all-things-not-money would still shift based on preference. The point is economies could and would grow as much as they should, not as much as they were willing to leverage themselves.

All things equal, the price of gold in paper currency terms rises with paper money growth and falls with unreserved credit growth. Its “exchange rate” to US dollars is simply a function of its relative scarcity, like any other currency exchange rate. It’s not as complicated or as emotional as you and most economists suggest.

All the unreserved credit in the world today (unreserved because there is not enough base money with which to repay it, by a factor of about 7 times for US bank assets only), suggests strongly that global central banks will have to manufacture more of their currencies. Thus, the strong bid for gold today.

In fact, some would argue the current price of gold in USD terms is way too low in the current environment given the enormous leverage already in the system and the amount of money that has to be manufactured in the future to de-lever it. Based on this metric we believe gold is undervalued by as much as five times presently, even without any further Fed printing. It might interest you to know that, using this metric, gold in 1980 became extremely overvalued and so it should have fallen, and obviously it did. Sadly for your readers you did not consider relative value vis-à-vis gold’s proper benchmark – the gap between unreserved credit and base money.

So, there are some secular reasons to like gold at current prices and even to believe in a disciplined monetary system. If the fervency of gold bugs annoys you so much, why not just suggest that your fellow world improvers abolish capital gains taxes on physical bullion and let us crazy gold bugs save in a currency we think will maintain its purchasing power better? We will go away quietly and let you and Mr. Summers amass debt-based “savings”. Maybe a little balance is in order?

Kind regards,

Paul Brodsky & Lee Quaintance
QB Asset Management Company, LLC

Paul Brodsky
QB Asset Management Company, LLC

~~~

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Category: Federal Reserve, Gold & Precious Metals, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

7 Responses to “In response to Floyd Norris’ defense of the virtues of unitary executives managing capitalism”

  1. MayorQuimby says:

    Hahaha…come on – the average person makes $45K a year or something. After taxes that is about $3K a month. So one gold coin is worth 2 – 3 MONTHS of labor output?!

    Get real.

    During bubbles – articles are always out there justifying insane prices.

    Gold is a commodity and has nothing to do with money. It was money in the past and could be again but it currently is not. It is an asset – an overvalued one.

    You have to use some basic common sense – anything that rises during an easing cycle is going to fall during a tightening one.

    This crap has been going on for decades now. If you don’t get it by now…

  2. sf0bserver says:

    MayorQuimby – if gold is a commodity that has nothing to do with money – than why do central banks hold gold reserves?

  3. constantnormal says:

    Sadly, gold-based economies are every bit as susceptible to blowing themselves up on debt as any other.

    So a gold standard does exactly nothing to protect against fiscally irresponsible governments.

    Repeat, NOTHING. ZERO, NADA , ZILCH.

    All that a gold standard does is reduce the corrective mechanisms from a choice between inflation and deflation (or some insane dance between them) to one based purely on deflation.

    And sfobserver, aside from the obvious reason of historical momentum, gold is an easier commodity to store in nationally significant amounts. Assume that we backed our foreign exchange transactions with some other form of commodity — like the oil in the SPR — how would we manage to provide transfers of collateral?

    Because at some level, we are still engaging in barter, or at least are offering that possibility as the ultimate backstop, whenever we put our assets on the line as collateral in any sort of financial transaction, whether it be our house our car, or our brokerage assets. Collateral is the barter that backstops all our trust-based monetary exchanges.

    All that money — any money — represents is an expression of fungible trust. Nothing more. That trust has less to do with the medium of the money than the honor and reputation of the people/organizations/nations who are parties to the transaction.

    There is no magic in money. The magic is in the trust.

    There are good and sound reasons why central banksters aim at low rates of inflation, and specifically *not* zero, when conducting monetary policy. Deflation tends to be a self-reinforcing syndrome that is exceedingly difficult to break out of, once entered — just ask Ben Bernanke.

    Gold is simply a commodity that has a high assumed price (and has very little physical utility, unlike platinum or some even more expensive metals) and occupies very little space. It’s an ideal mechanism for collateral, but it suffers from being unable to be inflated when used as a national currency.

    And gold, unlike electronic money, suffers from a certain lack of traceability, which is important in modern times. No government likes that, nor should any holder of untraceable currencies … but thieves adore it.

    And when a ship or plane delivering a ton of bullion collateral goes down in the middle of the ocean, what happens to the “perfect money” it was carrying? When one deals with hard currencies, eventually the backing collateral must be delivered, or else it loses its charisma as the “real” currency to the promissory notes it backs. Electronic monetary transactions can be handled in a much more forgiving manner.

    But one does not have to indulge in theoretical discussion or engage in logic and reason regarding gold, one can simply resort to the examples of history … when the wheels come off the civilization cart, things like sugar and gasoline — commodities with utility — have a lot more value than gold. In such circumstances, not enough people have currency to make it worthwhile, and they always fall back to barter. Never to gold. There’s simply not enough gold to go around.

    Which was a rather long-winded way to make the Mayor’s point, I believe.

  4. Greg0658 says:

    did ya hear about this one:
    http://www.petoskeynews.com/news/breaking/pnr-sunken-platinum-treasure-pegged-at-3-billion-20120201,0,4404286.story

    and now the word is out on TBP whats the new pegs for Monday :-)

  5. cn-

    toward your Point(s)..

    Multa fidem promissa levant. ~Many prommses lessen confidence.
    Fides servanda est. ~Good faith must be observed.

    http://legal-dictionary.thefreedictionary.com/confidence

    See: allegiance, confidence, credibility, duty, faith, fidelity, guarantee, honesty, loyalty, obligation, promise, reliance, trust, vow

    http://legal-dictionary.thefreedictionary.com/Fides

    Etymology of fidelity, faith, confidence, fiance.

    Posted by Johannes on 5 December 2010

    Origin of fidelity, faith, confidence, fiance.
    Fidelity comes form the French fidelite from the Latin fidelis (faithful), from fides (faith, loyalty), from the verb fido (to trust), which derives from the Greek verb pitho (to persuade, to trust; Gr: πείθ-ω/πείθ-ομαι).
    .

    From the same root:
    English: fiducial, faith, confidense, fiance, fiancee.
    French: fidele, fiducie, fidelite, fier, fiancer, confiance, defier
    Italian: fido, fidducia, fidarsi, diffidare, fidanzare, condidenza
    Spanish: fiel, Fidel, fidelidad, fiar, fe, fianza, confianza
    http://ewonago.wordpress.com/2010/12/05/etymology-of-fidelity-faith-confidence-fiance/

    as an aside, note: why ol’ “Fido” was, indeed, Named such..

  6. O, about the Post..

    to be Clear..

    with..

    “…All things equal, the price of gold in paper currency terms rises with paper money growth and falls with unreserved credit growth. Its “exchange rate” to US dollars is simply a function of its relative scarcity, like any other currency exchange rate. It’s not as complicated or as emotional as you and most economists suggest…”
    +
    “…So, there are some secular reasons to like gold at current prices and even to believe in a disciplined monetary system. If the fervency of gold bugs annoys you so much, why not just suggest that your fellow world improvers abolish capital gains taxes on physical bullion and let us crazy gold bugs save in a currency we think will maintain its purchasing power better? We will go away quietly and let you and Mr. Summers amass debt-based “savings”. Maybe a little balance is in order?…”

    at the minimum..

    Q & B are ‘spot-on’..~

  7. boveri says:

    Perhaps a humorous hacker inserted this preposterous phrase, “we believe gold is undervalued by as much as five times presently [sic].”

    Why would anyone pay $8,000 per ounce for a metal that costs $500 pre ounce to mine?