This CNBC article is titled “Fed’s Powell explains why a return to the gold standard would be so damaging to the economy”. Parts of the article quoting Powell could have been written by the satire website The Onion.
The Fed chair was in front of Congress on Wednesday where he said that many FOMC members see the case to be more accommodative. The S&P 500 hit an intra-day high above 3,000.
In questioning, when asked about going back to a gold standard, Powell said, “There have been plenty of times in fairly recent history where the price of gold has sent signals that would be quite negative for either of those goals.” Here, he is talking about the Fed’s supposed dual mandate of maximum employment and stable prices.
On the question of stable prices, it is true that a gold standard would hamper the Fed’s ability to control prices. But if anything, gold would give us more stable prices. The dollar has depreciated by about 95% since 1933 according to the government’s own statistics. Under a true gold standard, prices would most likely go down as productivity increases. Imagine all consumer products being like electronics, where the price gets cheaper every year and the quality goes up.
Powell is correct that his job would become far less meaningful under a gold standard. That is the point. A small group of central bankers shouldn’t be controlling the interest rates and money supply for 325 million people, or more if you consider the dollar’s status as the world’s reserve currency.
The true libertarian position is not even to have a gold standard. It is to let the market determine the money to be used. Of course, the market chose gold as a form of money for thousands of years.
As Alan Greenspan wrote in 1966, “This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”
This is why any form of a gold standard is anathema to most politicians and bureaucrats. It is a limitation of their spending, which is a limitation on their power.
The topic of the gold standard is getting a little bit of attention now because Trump nominated Judy Shelton for the Fed. She has been somewhat sympathetic to the idea of a gold standard, at least with her rhetoric.
It is rather odd that Trump has been criticizing Powell for keeping interest rates too high, while he nominates Shelton for a position at the Fed. If Trump thinks interest rates are too restrictive now, imagine what a gold standard would do.
The Insanity Continues
We are in this world again where bad news is good news. Stock investors actually cheer bad economic news because it means that the Fed is more likely to lower its target interest rate. So when we hear bad economic news, stocks go higher.
Stocks are at or near all-time highs. Interest rates are still historically low. Official unemployment is near all-time lows. Looking at these key pieces of data, the economy is booming. Unfortunately, talking to middle class Americans paints a different picture. They have jobs (sometimes plural), but the wages can barely keep up with the rising expenses.
The yield curve also paints a different picture from this idea of a booming economy. The 10-year yield is lower than short-term yields such as the 3-month. The mostly inverted yield curve is signaling trouble ahead, but stock investors keep enjoying the boom.
I believe that Powell and company are going to lower the federal funds rate because of the inverted yield curve. It doesn’t have much to do with what Trump is saying. The Fed is not going to come right out and say that they are lowering rates because the yield curve is telling them that a recession is imminent.
Rates are already low. I don’t know what will happen when the recession finally hits. Will the Fed copy Europe and Japan and go negative? Or will they just count on quantitative easing (digital money printing) to save the day?
The Fed is still reducing its balance sheet, but I expect this to end very soon. Once stocks start to crash and it is evident that we are in a recession, I expect the Fed to announce QE4.
Gold has finally turned bullish after many years of being mostly flat. It is over $1,400 per ounce as I write this. It may drop with all other commodities during the initial phase of the recession. But with the Fed’s only answer being more monetary inflation, I expect gold to roar ahead rather quickly. I don’t necessarily expect the same for Bitcoin, but you never know.