Volcker on a new Gold Standard

[don]

Former Chairman of the Federal Reserve Paul Volcker explains the impact of a new “old fashioned” gold standard on the price of gold and the effectiveness, or lack thereof of the Federal Reserve’s monetary policy in this new video.
Volcker at the 49 minute mark:

“If a gold standard is going to be effective, you’ve got to fix the price of gold and you’ve got to really stick to it.” Volcker continues, “To get on a gold standard technically now, an old fashioned gold standard, and you had to replace all the dollars out there in foreign hands with gold, God the price, you buy gold, because the price of gold would have to be enormous (atlas-sized touchdown hand signal).” Volcker goes on to say “Who thinks that would be maintained?” (scoff).

Volcker continuing from the 50 minute mark:

“The straightforward central banking measures have lost their effectiveness. They have gone as far as they could go.”

The full video from NYU:

http://tradewithdave.com/?p=14381

[Adeptus]

Re: Volcker on a new Gold Standard

Don, Thanks for sharing that and so many other interesting articles you share weekly, much appreciated.

I found it an interesting point, as you mentioned in your quote, when Volcker says that the problem with the [old] gold standard is that nobody seems willing to stick with it through thick and thin. Anytime the country run into problems, governments/central banks just go back off the gold standard to fiat and print, and I can't think of a resolution for that except unless there was a global world currency because no matter what laws get created within a single country to prevent getting out of the gold standard, well decades later, laws can be revoked or changed to get out of it. So a global currency, much like Europe is trying to do within their continent which requires a tonne of debate and agreement amongst nearly all nations before any discipline averse actions are taken, may in theory be the only way to a permanent currency standard like a gold standard.

Volcker's point strikes me as a plausible arguement, except it's akin to the following bad arguement: Well we know what's good for us, but since we also know we will get out of it eventually, let's not go there.

The other interesting meme from this video was the one repeated by the book author several times and which appears immediately important and that is that you cant have monetary policy without fiscal policy/discipline. Monetary policy can only take us so far, and even Volcker stated (paraphrase) that Bernanke is all out of bullets except for a couple of small tools that wouldn't have great impact. So this would seem to be a key point as to when the dollar finally loses the trust of its creditors as the reserve currency, although it is important to note that they too (like EJ) don't believe that's an overnight event. In other words, if they don't deal with this fiscal cliff in a convincing way, and more specifically if Congress doesn't get its present and future fiscal house in order, (and, and, and,... surely many of you can list a few other key items), they are estimating the problems will start becoming evident with the dollar within 18-24 months.

[don]

Re: Volcker on a new Gold Standard

Plenty of good points, Adeptus. The dollar's Reserve Currency status is where the rubber meets the road.

[Polish_Silver]

Gold, History and Banks

\Anytime the country run into problems, governments/central banks just go back off the gold standard to fiat and print, and I can't think of a resolution for that except unless there was a global world currency because no matter what laws get created within a single country to prevent getting out of the gold standard, well decades later, laws can be revoked or changed to get out of it. So a global currency, much like Europe is trying to do within their continent which requires a tonne of debate and agreement amongst nearly all nations before any discipline averse actions are taken, may in theory be the only way to a permanent currency standard like a gold standard.

In practice, nations have been able to maintain gold standards for extended periods. Britain roughly 1700-1913. USA roughly 1800-1913.

Perhaps socialist democracy perhaps makes it harder to achieve monetary discipline than a monarchy, but monarchies fought lots of useless wars and went bankrupt plenty of times.

A big reason it is hard to stay on a gold standard, and hard to avoid excess printing under a paper system, is leveraged finance (banks). The inflation/deflation cycle is caused primarily by lending with leverage and is a major reason for excess printing. If banks could only lend deposits, we would be living in a different economic world. The way to restrain the political power of creditors and debtors is to restrain the amount of borrowing to what has been previously saved.

The euro shows the problems of a multi-national currency not grounded in gold. It's politically expedient to spend, borrow, and print, but not to discipline the borrowers. Triffin never really addresses that, but he wanted the ECU to be primarily for international transactions, where it would not face political pressure to devalue.

I'd say the real solution is to allow parallel government and private sector currencies. Abolish or reform legal tender laws. At this point government issued money would be in competition with foreign currencies, as well as private sector currencies and physical bullion. If market participants felt any one of them was going south, they would sell off and go to the others.

Private sector currencies have been used quite successfully. There's an interesting video on Von Mises, where the guy explains how privately minted copper coins were preferred to british government coins. The government coins had the correct amount of copper, but they couldn't be distinguished from counterfeits, which had cheap metal in them. The private sector coins had such elaborate engraving that they couldn't be counterfeited.

Leveraged finance is incompatible with a stable currency value, as discussed in "The Chicago plan revisited"

Critical to a stable currency is a strong political constituency which depends on the stability, and will resist devaluation. For example, a large middle class with savings or bond debt in thier own currency. This is necessary, but not sufficient. Japan is in this category, but there was nothing to restrain the government from issuing too much debt. The citizens willingness to use thier savings to aquire government debt only made the problem bigger. If they had instead bought gold or oil, the government would have had to balance the budget years ago, when the problem was more tractible. Japan is now facing cataclysmic change.

[don]

Re: Gold, History and Banks

For Britain, in those years cited, having a trade surplus was a big incentive to keeping a gold standard.

[Polish_Silver]

Lecture high points: Fed,

About 5 min in, the lecturer says the FED makes the CIA look like a publicity hound.

Volcker wrote the introduction for Peter Bernstein's book about the history of the gold standard. Bernstein emphasizes that GS implies fixing the price of gold, and that this requires credibility. Credibility has been damaged twice in the last 80 years, once in 1933, once in 1971.

11:30: Volcker dislikes inflation because it undermines trust of government.
(it also sucks if you are trying to retire on a bond portfolio)

Paradoxically, his 1971 idea to abandon gold convertibility definitely violated the trust of foreign dollar holders.

He claims he refused to monetize the deficit. I think this means that the FED did not print money to buy the t-bonds issued by the treasury. So the rates went up until the market would buy the t-bonds. So the Volcker fed did not directly "raise rates", they just refused to print money and bring them down.

The problem with proprietary trading was that it changes the culture within the bank. It was the mortgages, not the trading, that caused the financial crisis. But the proprietary trading caused a "speculation culture" to grow throughout the institution, which caused the sub-prime lending.

Raising capital requirements doesn't work. The banks just finnagle around it.

Underlying cause is 20 years of excess leverage. (Couldn't agree more.)

Too big to fail is not solved by Dodd Frank. The institutions are international, and the laws we have could not be applied straightforwardly to international banks, such as Deutsche bank. (The real solution is to separate the savings and payment systems from the lending institutions. It is the lending institutions that can go bust and drag everything else down. Payments and savings accounts should be handled by separate institutions that take no lending risk)

Euro: the low rates caused a borrowing binge by governments (greece) and the housing sector (spain).

USD in danger of losing reserve status.

Congress usually won't restrain spending when interest rates are low.

"Huge supply of natural gas will save the world". Volcker didn't buy this one!

The author bought gold.

[c1ue]

Re: Lecture high points: Fed,

Frankly, there are a lot of ways to parse what Volcker said.

1) He's assuming we have to replace all the dollars held by everyone outside the US with gold.

Do we really?

I can see the big stakeholders being 'bailed out' - central banks and what not. I can also see everyone else getting the shaft.

2) Price of gold must be fixed.

Well, that's what things like Bretton Woods are for.

3) The price of gold would have to be enormous.

Yes, and that's how zeros get chopped off a currency. Plenty of precedent for that.

Ultimately all of his 'points' against gold are operational ones, while his point at the end of the speech is what matters: since the traditional central banking methods have failed, is there no alternative (but gold)?

The failures are structural; they can not stand forever as a barrier to gold standard operational concerns.

[Polish_Silver]

Re: Lecture high points: Fed,

Frankly, there are a lot of ways to parse what Volcker said.

1) He's assuming we have to replace all the dollars held by everyone outside the US with gold.

Do we really?

I can see the big stakeholders being 'bailed out' - central banks and what not. I can also see everyone else getting the shaft.

2) Price of gold must be fixed.

Well, that's what things like Bretton Woods are for.

3) The price of gold would have to be enormous.

Yes, and that's how zeros get chopped off a currency. Plenty of precedent for that.

Ultimately all of his 'points' against gold are operational ones, while his point at the end of the speech is what matters: since the traditional central banking methods have failed, is there no alternative (but gold)?

The failures are structural; they can not stand forever as a barrier to gold standard operational concerns.

His main argument against implementation was that it would be hard to establish credibility.
Well, a balanced budget is the only thing that would make it credible.

You are right--you would not need 100% backing of dollars with gold. He must know that, because he referred to GS as "fixing the price" which is quite a different animal. The british gold standard did not rely on significant backing of the pound. They only had a very thin reserve, enough to cover the redemptions. But as he said, they were bound and determined to fix the price ratio between paper pounds and gold ounces. So very few people actually turned in the paper.

EJ has mentioned that one of the ingredients would be a real positive interest rate. People would hold cash and bonds if they got a decent interest rate. High enough to compensate for the risk of future devaluation. As in 1980, a high rate would crash gold prices in favor of bonds.

[raja]

Re: Lecture high points: Fed,

His

EJ has mentioned that one of the ingredients would be a real positive interest rate. People would hold cash and bonds if they got a decent interest rate. High enough to compensate for the risk of future devaluation. As in 1980, a high rate would crash gold prices in favor of bonds.

I high interest rate would also crash the US gov't . . . not a bad idea.

[lektrode]

Re: Lecture high points: Fed,

methinks the best parts of this are Here at 12:00
where silber talks about the dollar being the reserve currency is because of
TRUST THE US GOV WONT MONETIZE THE DEBT??
funny tho, thats just whats happening...

and how it was the passage of the Gramm-Rudman-Hollings Balanced Budget and Emergency Deficit Control Act of 1985 - which considering the sitch today - sounds downright hilariously orwellian vs say the 'affordable care act' or even more hilarious: the 'Dodd–Frank Wall Street Reform and Consumer Protection Act'
since at least GRH actually accomplished something (even if they did end up gutting it before it actually fixed things)

which rudman - (who checked out back in november - without, somewhat oddly, ANY of the fanfare we saw this past week in DC) - who "called at the time, a bad idea whose time has come" quoting silber - and how volcker had a 'hidden agenda' of keeping interest rates high until congress fixed the budget/deficit problems - funny how the more things change, the more they stay the same - yet here we are today suffering now from the effects of below-zero interest rates, that have basically 'pushed the string into the corner' while doing zip, zilch, NADA for the '2nd mandate' of full employment?

and Here at 19:30
where the question is "should int rates be higher" - but he and silber think it still isnt 'the time to act' - and how 'the fed is independent, but not independent of congress' - and then compares the present to the 30's

altho eye dont have time to go thru any more of this, couldnt help but notice a couple of other items -
and as much as i hesitate to give the subject of this one any more attention/credence than necessary, do find the questions it raises quite interesting:



esp considering what PCR had to say the other day (never mind that the lamestream media sez NOTHING about it):

The Derivatives Tsunami is the result of the handful of fools and corrupt public officials who deregulated the US financial system. Today merely four US banks have derivative exposure equal to 3.3 times world Gross Domestic Product. When I was a US Treasury official, such a possibility would have been considered beyond science fiction.

Hopefully, much of the derivative exposure somehow nets out so that the net exposure, while still larger than many countries’ GDPs, is not in the hundreds of trillions of dollars. Still, the situation is so worrying to the Federal Reserve that after announcing a third round of quantitative easing, that is, printing money to buy bonds–both US Treasuries and the banks’ bad assets–the Fed has just announced that it is doubling its QE 3 purchases.

In other words, the entire economic policy of the United States is dedicated to saving four banks that are too large to fail.

The banks are too large to fail only because deregulation permitted financial concentration, as if the Anti-Trust Act did not exist.

The purpose of QE is to keep the prices of debt, which supports the banks’ bets, high. The Federal Reserve claims that the purpose of its massive monetization of debt is to help the economy with low interest rates and increased home sales. But the Fed’s policy is hurting the economy by depriving savers, especially the retired, of interest income, forcing them to draw down their savings. Real interest rates paid on CDs, money market funds, and bonds are lower than the rate of inflation.

Moreover, the money that the Fed is creating in order to bail out the four banks is making holders of dollars, both at home and abroad, nervous. If investors desert the dollar and its exchange value falls, the price of the financial instruments that the Fed’s purchases are supporting will also fall, and interest rates will rise. The only way the Fed could support the dollar would be to raise interest rates. In that event, bond holders would be wiped out, and the interest charges on the government’s debt would explode

could someone explain how this 2300page+ nightmare - aka "fixing the banking system" -
is somehow better or any kind of an improvement over
the "32 pages of Glass-Steagall"

or why this isnt just another political cover for the TBTF.inc and merely just a(nother) 'stimulous' program for the legal brigage??? (as will be 'the affordable care' act)

and yet - aside from something from matt taibbi every now and then - THE LAMESTREAM MEDIA HAS LITTLE TO ZILCH TO SAY ABOUT IT??? and worse, decides that gun control is now pert near the only story....

[don]

Re: Lecture high points: Fed,

could someone explain how this 2300page+ nightmare - aka "fixing the banking system" -

the portion that's being activated is 'fixing' the smaller banks, Lek




true TBTF reform:

[Polish_Silver]

How to "fix" banks--and dogs!

could someone explain how this 2300page+ nightmare - aka "fixing the banking system" -
is somehow better or any kind of an improvement over
the "32 pages of Glass-Steagall"

From what I know, Glass-steagall was more effective than dodd-frank. MMR has mentioned that DF and Basil regulations have knocked some wind out of the big banks, as have the low rates.

However, a real solution is something like Kotlikoff's limited purpose banking, or the similiar Chicago Plan. Completely restructure banking, take out the leverage, bank risk, and TBTF problem. FDIC and FED, completely not needed at that point!

Many people I talk to think that leverage is to the economy like oxygen is to the eco-system. That's how deep the brain washing is.

[fengguo1]

Re: How to "fix" banks--and dogs!

Specifically addressing Volker's fallacies, I find it surprising that he cannot distinguish between bank credit (broad money) and base money(fed credit?). Even amongst the false monetary theories that Fed economists believe in, surely it is clear that Gold backing would only be necessary for narrow money, not broad money.

Aside from mark-to-fantasy accounting of some assets and duration-mismatch, Bank balance sheets generally have sufficient assets in their banking books to cover deposit and market liabilities. Bank capital accounts however are loaded to the gills with 'assets' such as treasury debt instruments - i.e. liabilities of governments that are denominated in liabilities of the Federal Reserve. The best asset to use as bank capital in a sovereign debt crisis are real assets such as Gold. The promotion of Gold to a first-class (zero-risk-haircut) asset is already underway.

As Prof. Antal Fekete's New Austrian School of Economics has explained, the key benefit of the Gold standard is stable long-term interest rates. In an endogenous-credit-based money system based on an irredeemable monetary-standard, falling interest rates destroy capital and labour. Fekete's student Keith Wiener has proposed an path to transition back to a Gold backed monetary system by the auction of Gold-bonds to retire existing government debt. This will inject Gold Bonds directly into the monetary system and stabilise the interest rate structure of the economy.