Pimco Economist Has A Stunning Proposal To Save The Economy: The Fed Should Buy Gold

Tyler Durden's picture

Back in December 2014, just before the ECB officially launched its initial phase of QE in which it would monetize government bonds, Mario Draghi was asked a very direct question: what types of assets could the ECB buy as part of its quantitative easing program. He responded, "we discussed all assets but gold."

The reason for his tongue in cheek response was because over the prior few weeks speculation had arisen that gold could be part of the central bank’s asset purchases after Yves Mersch, a member of the ECB executive board and former Governor of the Central Bank of Luxembourg, said on November 17 that "theoretically the ECB could purchase other assets such as gold, shares, ETFs to fulfill its promise of adopting further unconventional measures to counter a longer period of low inflation."

Mario Draghi promptly shot down that idea.

But according to a provocative paper released by none other than Pimco's strategist Harley Bassman, Yves Mersch's inadvertent peek into what central bankers are thinking, may have been on to something. 

In "Rumpelstiltskin at the Fed", Bassman goes down the well-trodden path of proposing Fed asset purchases as the last ditch panacea for the US economy, however instead of buying bonds, or stocks, or crude oil, Bassman has a truly original idea: "the Fed should unleash a massive Fed gold purchase program that could echo a Depression-era effort that effectively boosted the U.S. economy."

He is of course, referring to FDR's 1933 Executive Order 6102, which made it illegal for a citizen to own gold bullion or coins. Americans promptly sold their gold to the government at the official price of $20.67, with the resulting hoard of gold was then placed in Fort Knox.

The Gold Reserve Act of 1934 raised the official price of gold to $35.00, a near 70% increase. It also resulted in an implicit devaluation of the US dollar. As Bassman points out, over the three years from January 1934 to December 1936, GDP increased by 48%, the Dow Jones stock index rose by nearly 80%, and most salient to our topic, inflation averaged a positive 2% annually, despite a national unemployment rate hovering around 18%.

In short, a brief economic nirvana which was unleashed by the devaluation of the dollar confiscation of gold. In fact, we have frequently hinted in the past that another Executive Order 6102 is inevitable for precisely these reasons. However this is the first time when we see a "respected economist" openly recommend this idea as a matter of monetary policy.

Bassman says that the Fed should "emulate a past success by making a public offer to purchase a significantly large quantity of gold bullion at a substantially greater price than today’s free-market level, perhaps $5,000 an ounce? It would be operationally simple as holders could transact directly at regional Federal offices or via authorized precious metal assayers."

What would the outcome of such as "QE for the goldbugs" look like? His summary assessment:

A massive Fed gold purchase program would differ from past efforts at monetary expansion. Via QE, the transmission mechanism was wholly contained within the financial system; fiat currency was used to buy fiat assets which then settled on bank balance sheets. Since QE is arcane to most people outside of Wall Street, and NIRP seems just bizarre to most non-academics, these policies have had little impact on inflationary expectations. Global consumers are more familiar with gold than the banking system, thus this avenue of monetary expansion might finally lift the anchor on inflationary expectations and their associated spending habits.

 

The USD may initially weaken versus fiat currencies, but other central banks could soon buy gold as well, similar to the paths of QE and NIRP. The impactful twist of a gold purchase program is that it increases the price of a widely recognized “store of value,” a view little diminished despite the fact the U.S. relinquished the gold standard in 1971. This is a vivid contrast to the relatively invisible inflation of financial assets with its perverse side effect of widening the income gap.

And before Krugman accuses Bassman of secretly being on our payroll, this is how Pimco's economist defends his unorthodox idea:

Admittedly, this suggestion is almost too outrageous to post under the PIMCO logo, but NIRP surely would have elicited a similar reaction a decade ago. But upon reflection, it could be an elegant solution since it flips the boxes on a foreign currency “prisoner’s dilemma” (more on this below). Most critically, a massive gold purchase has the potential to significantly boost inflationary expectations, both domestic and foreign.

 

* * *

 

Many people will rightfully dismiss the gold idea as absurd, as just another fanciful strategy to print money; why not just buy oil, houses or some other hard asset? In fact, why fool around with gold; why not just execute helicopter money as originally advertised? I would answer the former by noting that only gold qualifies as money; and as for the latter, fiscal compromise on that order seems like a daydream in Washington today – don’t expect a helicopter liftoff anytime soon.

 

Let’s be honest; most people thought NIRP was just as nonsensical a few years ago, yet it has now been implemented by six central banks with little evidence it is effective. And while a gold purchase program should qualify as a fairy tale, what is unique here is that it actually occurred with a confirmed positive effect on the U.S. economy.

We agree, if for no other reason than everything central banks have done and tried in history has been a disastrous mistake, leading to either huge asset bubbles or massive busts, which in turn have needed even more spectacular bubbles to be reflated and so on. As such, the one thing that central banks should do is that which they are "genetically" against - purchasing the one asset class which is their inherent nemesis, the one Ben Bernanke said had value only because of "tradition": Gold.

Of course, all of the above assumes Americans would be willing to sell their gold to the Fed at any prices, but as Bassman finally lays it out, it is worth finding out. Janet, are you listening?

* * *

From PIMCO, by Harley Bassman


Rumpelstiltskin at the Fed

Though it seems incredibly farfetched, a massive Fed gold purchase program could echo a Depression-era effort that effectively boosted the U.S. economy.

As our title alludes, I am about to spin a monetary policy fairy tale, a fantasy that could certainly never occur … except for the small detail that it’s happened before.

First I must remind you there are only two avenues out of a debt crisis – default or inflate – and inflation is just a slow-motion default. Thus in the darker days of the global financial crisis, the U.S. Federal Reserve set sail on a monetary experiment tangentially suggested by late Nobel laureate Milton Friedman, the original coiner of the phrase “helicopter money.” (Ben Bernanke borrowed this clever construct in his famous November 2002 speech, “Deflation: Making Sure ‘It’ Doesn’t Happen Here.”)

The notion was simple: Increase monetary velocity via financial repression to create inflation, depreciate nominal debt and deleverage both the public and private economies of the U.S. The toolkit of financial repression would include, but not be limited to, near-zero overnight interbank borrowing rates, massive asset purchase programs (also known as quantitative easing or QE), term surface restructuring (known as Operation Twist) and good old-fashioned jawboning, in this case taking the form of distant forward guidance.

Notwithstanding various political exhortations, there can be little doubt the Fed’s aggressive monetary policies after the collapse of Lehman Brothers were quite effective in cushioning the macro economy from the financial turmoil. Would the economy have cured itself without the Fed? We can’t prove a negative, but up until China allowed the devaluation of the yuan last August and Japan implemented negative interest rates in January, the Fed’s “Plan A” was working reasonably well.

But we do not operate in a vacuum, and various monetary machinations from the eurozone, Japan and China are now working in concert to export deflation to the U.S. This is quite worrisome as it may well hinder the U.S. economy from reaching the Fed’s target inflation level (2%) and escape-velocity economic growth.

Thus did Fed Chair Janet Yellen, in her most recent visit to Congress, tentatively start to explore a “Plan B” (which looks like Plan A on steroids) that includes, if only in theory, the barest remote possibility of a negative interest rate policy (NIRP).

There are a host of reasons PIMCO believes NIRP would be not only ineffective, but also possibly harmful to the U.S. economy, and these have been detailed by CIOs Scott Mather and Mihir Worah. But this does raise the question as to whether the Fed has indeed reached the bottom of its toolkit. Many things are possible, at least in theory, including the famous helicopter drop. Another option is to resurrect a plan that was actually implemented (with great success) 83 years ago.

The real fairy tale

From shortly after the October 1929 stock market crash to just before Franklin Delano Roosevelt became president in 1933, U.S. gross domestic product (GDP) declined by nearly 43%; during a similar timeframe, consumer prices declined by nearly 24%.

Employing what can only be described as force majeure politics, in April 1933 the U.S. government issued Executive Order 6102, which made it illegal for a citizen to own gold bullion or coins. Lest they risk a five-year vacation in prison, citizens sold their gold to the government at the official price of $20.67. This hoard of gold was then placed in a specially built storage facility – Fort Knox.

The Gold Reserve Act of 1934 raised the official price of gold to $35.00, a near 70% increase; positive results were almost immediate. Over the three years from January 1934 to December 1936, GDP increased by 48%, the Dow Jones stock index rose by nearly 80%, and most salient to our topic, inflation averaged a positive 2% annually, despite a national unemployment rate hovering around 18%.

Such a pity that these halcyon days were soon sullied as the government tightened financial conditions (both fiscal and monetary) from late 1936 to early 1937, which many point to as the precipitant of the Dow’s 33% decline. Additionally, the 1938 calendar reported a 6.3% decline in GDP and a 2.8% deflation in consumer prices. (Many suspect it is the fear of a 1937 redux that motivates the Fed to contemplate additional extraordinary actions, including NIRP.)

So in the context of today’s paralyzed political-fiscal landscape and a hyperventilated election process, how silly is it to suggest the Fed emulate a past success by making a public offer to purchase a significantly large quantity of gold bullion at a substantially greater price than today’s free-market level, perhaps $5,000 an ounce? It would be operationally simple as holders could transact directly at regional Federal offices or via authorized precious metal assayers.

Admittedly, this suggestion is almost too outrageous to post under the PIMCO logo, but NIRP surely would have elicited a similar reaction a decade ago. But upon reflection, it could be an elegant solution since it flips the boxes on a foreign currency “prisoner’s dilemma” (more on this below). Most critically, a massive gold purchase has the potential to significantly boost inflationary expectations, both domestic and foreign.

Asset or currency?

While never an officially stated policy, there has been a slow-moving, low-intensity currency war taking place over the past decade. The U.S. was the first mover, implementing QE in 2009, which had the effect of depreciating the trade-weighted U.S. dollar (USD) by 16%. Japan was next, implementing “Abenomics” in 2012; this helped depreciate the yen (JPY) versus the USD by over 30% in eight months. Europe went last when Mario Draghi followed through on “whatever it takes” in 2014; the euro devalued versus the USD from peak to trough by 24%. China had pegged the yuan to the USD to help maintain a stable trading environment, however, the increasing value of their currency against their other trading partners was hindering growth, and thus the motivation for a slight realignment last August.

The problem the world’s major economies now face is that any attempt to depreciate their currencies to improve the terms of trade must effectively come out of the pockets of their partners; this creates a classic prisoner’s dilemma. Thus the interesting twist of a Fed gold purchase program.

Warren Buffett famously railed against the shiny yellow metal in 2012 when he noted all the gold in the world could be swapped for the totality of U.S. cropland and seven ExxonMobils with $1 trillion left over for “walking-around money.” His point was that these assets can generate significant returns while owning gold produces no discernable cash flow.

While this observation is certainly true, the rub is that this is not a fair comparison since gold is not an asset; rather, it should be considered an alternate currency. Pundits often describe the five factors that define “money”:

  1. Its supply is controlled or limited,
  2. It is fungible/uniform – this is why diamonds cannot qualify,
  3. It is portable – this is why land cannot qualify,
  4. It is divisible – thus art cannot be money, and
  5. It is liquid – this means people will readily accept it in exchange.

By this definition, gold is certainly a form of money, and to Mr. Buffett’s point, one also earns no cash flow on paper dollars, euros, yen or yuan.

Raising expectations

A massive Fed gold purchase program would differ from past efforts at monetary expansion. Via QE, the transmission mechanism was wholly contained within the financial system; fiat currency was used to buy fiat assets which then settled on bank balance sheets. Since QE is arcane to most people outside of Wall Street, and NIRP seems just bizarre to most non-academics, these policies have had little impact on inflationary expectations. Global consumers are more familiar with gold than the banking system, thus this avenue of monetary expansion might finally lift the anchor on inflationary expectations and their associated spending habits.

The USD may initially weaken versus fiat currencies, but other central banks could soon buy gold as well, similar to the paths of QE and NIRP. The impactful twist of a gold purchase program is that it increases the price of a widely recognized “store of value,” a view little diminished despite the fact the U.S. relinquished the gold standard in 1971. This is a vivid contrast to the relatively invisible inflation of financial assets with its perverse side effect of widening the income gap.

In coda I would respond to the argument that a central bank cannot willfully create inflation – I disagree; it just depends upon how hard one tries. There are plenty of examples ranging from Weimar Germany to Zimbabwe where central banks have unleashed uncontrolled hyperinflations.

The more interesting question is not whether the Fed can create a 15% to 20% price spiral, but rather can they implement policies that will result in a somewhat gentle and controlled 2% to 3% inflation rate that will slowly deleverage the U.S. debt load while simultaneously increasing middle class nominal wages.

Many people will rightfully dismiss the gold idea as absurd, as just another fanciful strategy to print money; why not just buy oil, houses or some other hard asset? In fact, why fool around with gold; why not just execute helicopter money as originally advertised? I would answer the former by noting that only gold qualifies as money; and as for the latter, fiscal compromise on that order seems like a daydream in Washington today – don’t expect a helicopter liftoff anytime soon.

Let’s be honest; most people thought NIRP was just as nonsensical a few years ago, yet it has now been implemented by six central banks with little evidence it is effective. And while a gold purchase program should qualify as a fairy tale, what is unique here is that it actually occurred with a confirmed positive effect on the U.S. economy.

So when the next seat for a Fed governor becomes available, I would nominate Rumpelstiltskin … just a thought.

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The Duke of New York A No.1's picture

But that would make the 3rd world countries rich in Gold/Silver very wealthly ... which is one of the big reasons they try keeping a lid AU/AG prices in check - to keep them poor.

zeropain's picture

bill gross will get the last laugh.  Pimco is toast.

Pinto Currency's picture

 

 

 

Swapping buckets of ice cream for buckets of shite.

New theory from Pimco shite barons.

US citizens clearly need to own more shite.

zeropain's picture

the us sold all the gold to china on the run up to $1900.  you know how many gold for cash stores were in compton in 2012?  they are all closed now.

Supernova Born's picture

Squishy, fleeting, little biological oddities trying to hijack and/or deny the power of creation.

Ivanka2032's picture
Ivanka2032 (not verified) Supernova Born Apr 21, 2016 1:40 PM

What gold?

Dicey's picture
Dicey (not verified) Ivanka2032 Apr 21, 2016 1:43 PM

Gold has already been monetized with BitGold.

Ivanka2032's picture
Ivanka2032 (not verified) Dicey Apr 21, 2016 1:51 PM

I have a better idea... Why doesn't THE FED 'monetize' counterfeit leveraged paper contracts on empty vaults that have a rotting gefilte fish twang that tickles people with abnormally large nostrils!

Supernova Born's picture

Economics has proven a resistance to actual science that long ago left alchemy in the dustbin of history.

MillionDollarBonus_'s picture

This is patently ridiculous. All the gold in the entire world fits into a swimming pool! There simply isn't enough gold to support a gold standard! PERIOD. It's simply ludicrous to think that we could divide up this gold and denominate our currency in millionths of an ounce. Is it me or are goldbugs missing something in the head?

https://accredited-times.com/2016/04/21/in-defense-of-hillary/

BaBaBouy's picture

Repeat, Repeat ... GOLD Heavy Resistance Between $2250. and $2300...

Eventually However 45K ...

Supernova Born's picture

As a kid we use to think the maximum speed of a car was based on its speedometer.

BaBaBouy's picture

WAITING ...... For TRUMP To Get In And Order The AUDITS Of FED and Ft. Knox ...

They may find lots of Roaches in the empty spaces...

stant's picture

Ft Knox = first the gold left , then the tanks left

Taylor's picture
Taylor (not verified) stant Apr 21, 2016 2:49 PM

This is Donald Trump's most shocking statement yet,

However the mainstream media isn't saying a word about it!

What are they really trying to cover up?

http://legitorscamreview.com/the-final-bubble

WordSmith2013's picture
Why Gold Always Goes Up In The Wake Of Quantitative Easing

 

The FED knows that gold price manipulation MUST be maintained ... at all costs!

 

 

thesonandheir's picture

PIMCO economists been reading Jim Rickards then?

 

He said ages ago if CB's are really desperate to get to the inflation target they need they could buy gold over and above market and create inflation at a stroke. 

 

Why don't they do it? 

 

Because they don't want you to think of gold as money.

Slomotrainwreck's picture

Jim Rickards is full of himself. There is only one way to measure gold. Not dollars, not yuan, not yen but in grams.

How much is that loaf of bread? .023gram. Period! Let the market decide.

If those Financialites want to give me sound money, make it convertable to gold in my pocket whenever i want it.

That said, what will my gold ounce be worth in 20 years? 28.3495grams. nothing more, nothing less. How much will a loaf of bread cost? Your guess is as good as mine but likely .023 grams. It's market value will have a lot to do with how much gold is in circulation.

 

Pinto Currency's picture

 

 

Bloomberg says if China remonetizes gold and assuming the PBOC have 10,000 tonnes (6x what they admit they have) then gold will be remonetized to $64,000 /oz

Gold is being remonetized by the BRICS and citizens holding gold worries the Feds as they do not want citizens with monetary options.

$5,000 per oz is laughable.

http://www.goldcore.com/us/gold-blog/gold-at-64000-bloombergs-china-gold-price/

Slomotrainwreck's picture

Furthermore, Whatever revaluation they come up with will be wrong, if not sooner then later. If it is proiced too high, it will cause market deflation; Too low and it's market inflation. These are things only the markets can control. It's never in the hands of the Financialites.

Squid-puppets a-go-go's picture

what is pimco smoking saying "will result in a somewhat gentle and controlled 2% to 3% inflation rate that will slowly deleverage the U.S. debt load"

3% was inufficient to deal ith the debtload pre 2008. How th f~ is 3% supposed to resolve it post QE balance sheets?

BaBaBouy's picture

PS... Gruenshpahn was/is a Goldbug of sorts, and admitted to owning the Physical...

Antifaschistische's picture

My only footnote to the "monetize gold" is that it should include the following language...

"gold sales to the FED or it's member banks can be done annonymously in exchange for cash for up to 2 ounces".

 

This way, gold of all flavors (jewelery, old coin, bullion, etc) would surface without fear of IRS backlash.  Yes, I know, why not make it 100 ounces...answer, because I'm trying to think of something they would actually consider.  They are not going to open the door for Drug Lords and Chinese Oligarchs to launder gold/money.

mary mary's picture

Whereas, there will soon be enough Tubmans to fill every ocean in the world, top to bottom.  :-)

TruthHunter's picture

There's plenty of gold to support a gold standard. 

There's not enough honesty, though.

Antifaschistische's picture

that's why God also gave us Copper, Nickel and Silver....and Platinum for the $100k coins.  (I'm dreaming now, a 10 oz, platinum $100k coin....sweet)

wise_owl_says...'s picture

MDB cant calculate in millionths but he sure can calculate in trillions. what a clown! this rainbow flake, has never heard of gold flakes. btw, silver is (10 to 1 ratio - natural in ground mineral silver / gold) 'mythical' fraction you are looking for.

GoldenDonuts's picture

Slow down on the cool aid.  Leave some for the other morons.  Price fixes everything.

zeronetwork's picture

How about $10,000 to start with?

JohnG's picture

 

 

How exactly soes the Fed monetize money?  And why?  Who (that understands gold) would trade it for paper???  Hell, I'm still amazed I can trade paper for gold. 

This is upside down bizarro world nonsense.

 

Winston Churchill's picture

They turned gold into shite didn't they ?

Scuba Steve's picture

Hey, Hey, Hey ...

Sir Janet can only do 1 job at a time ...

HowdyDoody's picture

Sorry it was gold ETFs that monetized gold. The banksters can manipulate those to their heart's content.

Dicey's picture
Dicey (not verified) Ivanka2032 Apr 21, 2016 1:44 PM

Gold has already been monetized with BitGold.

Dicey's picture
Dicey (not verified) Ivanka2032 Apr 21, 2016 1:45 PM

Gold has already been monetized with BitGold.

Dicey's picture
Dicey (not verified) Ivanka2032 Apr 21, 2016 1:45 PM

Gold has already been monetized with BitGold.

Ivanka2032's picture
Ivanka2032 (not verified) Dicey Apr 21, 2016 1:53 PM

Dude... So far your column looks like the BOX SCORE of the Phillies lineup!

pFXTim's picture

what, no big, bright, red, flashing letters and pokemon music to go with your link?

83_vf_1100_c's picture

  Getting a bit despearate shilling your lame ass product?

zeropain's picture

the og rappers were smart.  they bought gold in the mid 80's for $200 and sold in 2012 at $1900.

Pinto Currency's picture

 

 

And in 2018 they starved to death.

Buzz Fuzzel's picture

Isn't this what the Chinese and perhaps Russians are doing now?  The concept of gold as a store of value is "arcane" to our political leadership.  Perhaps unlike our overlords the Chinese know that the first one in the game is very likely to be the winner.

zeropain's picture

without selling the gold they would not have made it to 2018.  and if they are near starving to death they will head to the white neighborhoods to look for food and let out some frustration.

Scuba Steve's picture

... they'd better pick the right neighborhood because stupid, penniless and starving is no

way to die son.

zeropain's picture

when you got nothing to lose.  they risk it all