Gold bug variations

Last week I worried that a modern version of the gold standard mentality might lead to premature monetary tightening. The signs of such a mentality continue, alas, to multiply.

Exhibit A: The cover story this week in Barron’s:

IT’S TIME FOR THE FEDERAL RESERVE TO STOP talking about an “exit strategy” and to start implementing one.There’s no need for short-term rates to remain near zero now that the economy is recovering. The call to action is clear: Gold, oil and other commodities are rising, the dollar is falling and the stock market is surging.

And what about mass unemployment? Oh well.

Also, Willem Buiter has an excellent piece about the ECB, which somehow always finds a reason for tighter policy: if core inflation is low, it stresses headline inflation, if headline inflation is negative, it stresses core inflation. Let’s not forget that the ECB took the single dumbest monetary action so far in the crisis, actually raising rates in July 2008. But the hawks apparently still rule in Frankfurt.

All in all, there seems to be a growing number of players determined to party like it’s 1937.

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Hal Horvath (findingourdream.blogspot.com) October 19, 2009 · 2:15 pm

The worst mistakes Keynesian advocates made was to use the illustration that even paying people to dig and fill in holes would be effective.

This illustration was a terrible mistake, since it invited natural skepticism and helped to politically discredit the Keynesian stimulus among many in the middle.

Word matter. And just as your common sense tells you, the precise types of public investment we make affect our future economy.

The error of using the dig and fill hose illustration reminds me of using the word “nationalization” to refer to the needed restructuring of major banks.

Words matter, and using the wrong word matters greatly.

Louis October 19, 2009 · 2:20 pm

Those who haven’t learned from history as well as those who have learned from history are doomed to repeat it. As Lisa Douglas so eloquently put it a generation ago:

‘Behind every good man is a good woman standing in front of him.’

Robert October 19, 2009 · 2:22 pm

Well, I have some sympathy for your views. But I think, also, that a lot of the problems we have encountered recently have been due to excessive demand management – every time there is a flucttuation downwards in GDP, in steps the government with more spending and the monetary authorities with lower rates. And debt climbs. The ‘natural rhythms’ of the economy are tamed at the expense of building up huge latent risks. Your new-found love of Minsky should have made you aware of this.

However, it is not at all apparent to me that the solution to the Minsky problem is more Government intervention. (Unless you want them to be in charge of everything.) It is not at all apparent to me that the taming of Keynesian “bearishness” or uncertainty is an unalloyed good thing.

So, yes, we can save ourselves now with ultra loose money and more Government debt. BUT WHAT ABOUT NEXT TIME?

An economy that carries a healthy amount of skepticism, a healthy respect for uncertainty, should help to put the brakes on such excesses. Right now, almost every piece of borrowing is underwritten by the Government – and ultimately me. I am being taxed to subsidise irresponsible (but given the tax code, not irrational!) behaviour.

As a saver, I am the stupid one.

Hal Horvath (findingourdream.blogspot.com) October 19, 2009 · 2:29 pm

The worst mistake Keynesian advocates made was to use the illustration that even paying people to dig and fill in holes would be effective stimulus.

This illustration was a terrible mistake, since it invited natural skepticism and helped to politically discredit the Keynesian stimulus among many in the middle.

Words matter. And the precise types of public investment we make affect our future economy.

The error of using the dig and fill hose illustration reminds me of using the word “nationalization” to refer to the needed restructuring of major banks.

Words matter, and using the wrong word matters greatly.

Now that we’ve made Keynesian stimulus seem like digging holes and filling them, it’s no wonder many now doubt this form of economic support.

Dillon October 19, 2009 · 2:30 pm

Professor,

Should we worry about the surging stocks? I’ve heard some cry “asset bubble.”

Breuckelen October 19, 2009 · 2:31 pm

You ask: “And what about mass unemployment?”

Apparently today’s powerful have found their response in history: “Let them eat cake.”

skeptonomist October 19, 2009 · 2:36 pm

I’m not sure Buiter understands the simple mathematical implications of using year-over year inflation rates – anyway this does not come across in his piece. When there is a positive blip of less than two years duration, this guarantees a subsequent negative blip in year-over-year inflation. This is what happened in both U.S. and Euro inflation numbers – because headline CPI numbers in early 2009 were being compared to the oil-grain inflated numbers in 2008, headline inflation was distinctly negative. But month-over-month headline numbers are actually similar to what they were before the oil-grain-blip, that is roughly 2% yearly rate. Core inflation numbers have been reasonably constant – in no way are they in dangerous deflation territory yet, though there is reason to fear that they might be if there is not real improvement in the economy.

To repeat, the negative year-over-year headline inflation numbers for early 2009 are an artifact of the 2007-2008 oil-grain inflation, not themselves a result of economy-wide deflation.

Clifford Nelson October 19, 2009 · 2:37 pm

but is employment being stimulated by high commodities prices? What will happen to interest rates if the dollar continues to fall? How successful have the Fed’s policy been at keeping long term rates low? Will whatever success the Fed has had continue, and if so, for how long? To what extent has the policy stimulated investment and job growth?

Why not raise rates and have an effective fiscal stimulus? The gov’t should be concerned about the dollar and long term interest rates because of all the debt. To me it is not clear that its policy will be effective in keeping long term rates low or in stimulating investment and demand.

bex October 19, 2009 · 2:40 pm

I’m unsure…

Since banks aren’t lending money anyway, why not tighten up the money supply? Why not force banks to pay a higher interest rate, and take cash stimulus directly to those in need?

If the government did some low-interest loans (or grants) to small businesses, I’d wager it would do a heck of a lot more good than giving it to large lenders and HOPING that the lenders would do their job…

DavidRF October 19, 2009 · 2:44 pm

Gosh, I was just listening to the Goldberg Variations this morning.

Michael A. Cohen October 19, 2009 · 2:47 pm

This is far behind where we used to be in terms of analysis and possible policies. We are living in an era reminiscent of Teddy Roosevelt. Its too bad the US government cannot get into business like public options. For example the Federal Reserve should run a private bank which competes without taxpayer support. If necessary for initial capital it can simply sell some treasuries. After the initial investment the Government can run a large money center bank without government support.

If the bank merely earns a prudent profit, and invests in worthwhile but unconventional investments like alternative energy and electric cars, they might force the rest of the economy to engage in innovative and productive long term investments rather than the latest noise trades.

The fear of state ownership and investment in the US is neither involves freedom nor control of wealthy investments. Its the legitimate fear that the state can marshal potentially stronger intellectual resources and do a better job thus limiting private profits or putting them out of business. The Government would do an infinitely better job of regulating business if they were part time in the business of running them.

Publius October 19, 2009 · 2:51 pm

Normally, I disagree with you. But here, I agree that premature action is dangerous. But, “having a plan” for an orderly exit is not bad policy.

Olof October 19, 2009 · 2:58 pm

Well, Sweden’s Riksbank managed to raise its rate in September 2008, so they should provide some serious competition here…

Chris Maj October 19, 2009 · 3:04 pm

And what about mass counterfeiting? Oh well. I guess it’s perfectly fine to print money out of thin air if you back it with the force of legal tender laws. (Just try to keep your actions hidden from anybody living on a fixed income, lest they figure out how much the dollars they saved for retirement have lost in value over, say, the last 50-100 years.)

Wafa October 19, 2009 · 3:05 pm

Buiter has also been arguing for a while that monetary policy is much tighter than it needs to be, given zero-to-negative inflation.

Also, there was that 6 month-ish period where the Fed kept paying 0.75% interest on reserves while keeping the Fed Funds rate at zero. Pardon me, but huh what?

Even now, they are paying 0.25%, which is the upper bound of their target. Am I the only one who finds this factoid, combined with an M1 multiplier that’s been hovering around 1 for months now to be, shall we say, puzzling?

Or is there something I am failing to understand on account of only having taken one graduate macro class, & no graduate classes in monetary theory/policy?

jonathan October 19, 2009 · 3:28 pm

It’s really odd because China ties the RMB to the dollar and the dollar has dropped – and will likely drop more – so the Euro is becoming too expensive for the Germans, the world’s largest exporter, etc.

felipe October 19, 2009 · 3:36 pm

its well known unemplyment is high and will be there for a while but something has to be done with this liquidity. Look all risk assets arond th world…Stocks, currencys, comodities… It seems liquidity have been inflating assets too quickly again. Banks got the extra money but they have not been punished.So investor are doing it again. Inflating assets.

anthony October 19, 2009 · 3:36 pm

Wouldn’t a rise in rates pull much of the money currently inflating the stock market into interest-bearing vehicles and cause another crash? Don’t the dollar hawks understand this?

Bob Dobbs October 19, 2009 · 3:36 pm

Bach to the ’30s! “Goldbug Variations” indeed! What next, the Bernanke Concerto No. 3?

I feel your pain, Prof. Krugman; but is it any surprise?

robob18 October 19, 2009 · 3:44 pm

So disheartening to see the cover – expected it to be some sort of Alan Abelson play on words; he of the very driest of wits.

More disheartening was to see Princeton alum Bernanke telling a bidness group that the U.S. needs to control the deficit (?)

The problem is perceived realities by the group you so verrrrrrry well set out in the superfreakingmeta post and Louis Uchitelle detailed for us in his NYTimes piece of 6/12/1994.

Until we start taking apart the too-big-to-fails, the myopia of this cadre will plague us all.

JV October 19, 2009 · 4:14 pm

Well, it’s quite difficult to see when a recession ends (we can only describe completely a recession some months after it has started and some other months after it has actually finished). We have to do economic policy now with past information.

Of course, we have some predictions from models. Obviously, models cannot show all future information (economists are not magicians, they are just poor economists) and nobody really knows what is going to happen three, six or nine months onwards (too many endogonous variables, too many uncertain perturbations; we know what we know and we are not completely sure).

So, we must bet. If we stop now and we were wrong, we can create more unemployment with less GDP. If we wait and we were wrong, we can create more inflation and a GDP above potencial GDP and a recession (another type of recession) some years later (hence, more unemployment, less GDP, and more inflation). We live dangerous times, don’t we?

Paul October 19, 2009 · 4:37 pm

Have faith in Ben to do the right thing. He’s made the right moves so far and he understands the situation better than anyone else. Also, Obama is backing him completely.

dennisS October 19, 2009 · 4:56 pm

Is it as simple as they want the rents on wealth to be higher? Do they put one form of earning income ahead of all others? Presumably these barons will also make money on surging commodity prices, and increased exports, but maybe they get a bigger thrill out of charging more for loaning out their wealth.

I say we introduce these guys to drugs and sex, so they don’t have to get their jollies screwing us.

Joseph O’Shaughnessy October 19, 2009 · 4:59 pm

There will be continual pressue to tighten. We are now an economy with instant transmission of information and ideas and a society with many theories of economics and monetary policy to transmit.

So there undoubtedly will be some tightening. I don’t know if it is a good idea or a bad idea, but it is understandable that some would think it is.

Therefore, we need to expand in the private sector with everything already avaliable. All the assets can’t be bad. We hear of some investment, but I don’t see it. And it won’t happen soon enough.

We need to levy very modest duties on all imports by American corporations of the products they make abroad. We need to recover some of the excess profits from this kind of operation, without seriously impeding free trade. (“Free trade” is an oxymoron anyway.)

It could raise a staggering amount of money that could go immediately into investment in green energy jobs and other traditional kinds of manufacture that are now borderline for being done here but still done in Asia.

It will work. Even one or two percent would raise enormous amounts, enough to jump start tens of thousands of businesses. Why should we borrow more from ourselves when we have this tool available? Price increases could occur but with current downward pressure on prices, this is much better than borrowing more outright.

This is bottom-up rather than trickle-down. It will work because the value goes directly to the consumer, not in lower prices but in greater buying power.

Someone needs to get on this. The thing we need most, after healthcare (and even then only because it is now right on the cusp) are jobs. Jobs are the simple solution to everything.

St. Kitt October 19, 2009 · 5:27 pm

“Gold Bug” is simply another way of describing those who would count themselves as invitees to St. Thomas Aquinas’s hallowed picnic, where:

“In order that the happiness of the saints may be more delightful to them and that they may render more copious thanks to God [Gold?] for it, they are allowed to see perfectly the sufferings of the damned. . . so that they may be urged the more to praise God [Gold?].”

A gold bug is merely a fundamentalist of the greatest religion in human history: Exchange Value-ism.