Edwin Truman, a senior fellow in the Peterson Institute, who is of course a former Fed member, and of course a Yale Ph.D., writes in the FT, suggesting the brilliant idea that it is high time for the US to sell its gold. In other words do precisely what Gordon Brown did a few thousand percent ago, and now has to defend against allegations he did so merely to protect the LBMA cartel which was on the verge of being margin called into oblivion. And even if one ignores the fact for a minute that there has not "really" been an audit of the US gold holdings in who knows how long, who is to say that Goldman, of all people, may not be right and gold will be at $1,700 in a year? Or Dylan Grice for that matter, and it will be about 10 times higher. One thing is certain: converting real hard asset value into paper to patch up 2.25% of government debt as a % of GDP is easily the dumbest idea we have ever heard. Especially, since as we disclosed yesterday, the Fed will have to force Congress to increase its deficit, and thus debt funding needs, simply so that there are enough Treasuries for the Fed to monetize. We hope Mr. Truman is in the contention for next year's economic and peace Nobel prizes, because with articles such as this he has certainly proven he belongs to that unique category of brilliant economists that only Princeton, Yale and Harvard can produce.
From the article:
Gold is back in the news. Its price is soaring in what some analysts say is a reflection of a weak economy and a lack of confidence in government policies. Naturally, investors are looking at a new sure thing in the expectation that prices will continue upward. My advice to the US government, however, is that this may be the best time – to sell. Doing so would help President Barack Obama and Congress reduce indebtedness, at little cost.
It is an article of faith in bullion markets that the US will be the last country to dispose of its gold stock. For 30 years it has had a no-net-sales policy for reasons ranging from resistance by US gold-producing interests to concerns about the international monetary system. That assumption may remain plausible. Yet the administration has an obligation to re-examine its policy.
And now for kicker #1: gold is up due to "fraud and misinformation" - oddly there is no mention of the fraud accompanying the Keynesian ponzinomics that the world is fighting tooth and nail to preserve:
The market price of gold has risen for more than a decade propelled by low interest rates, the hype of the bullion dealers (holding large inventories) and no doubt the normal amount of fraud and misinformation accompanying asset price bubbles. The Financial Times has reported that the precious metals industry expects the price to increase by a further 11 per cent over the next year.
So here is Truman's modest proposal: take the gold, convert it to linen, and use it to patch up just over 2% of US debt. Brilliant
Meanwhile, the US Treasury holds 621.5m fine troy ounces of gold. The government has been sitting on that gold since the Great Depression, receiving no return. At the current market price of $1,300 per ounce, the US gold stock is worth $340bn. The Treasury secretary, with the approval of the president, has the power to sell (and buy) gold on terms that the secretary considers most beneficial to the public interest. Revenues from sales must be used to reduce the national debt.
If the US were to sell its entire gold stock at the current market price, it would reduce the gross government debt by 2¼ per cent of gross domestic product. Based on the average interest cost from 2005 to 2008, this reduction in debt would trim the budget deficit by $15bn annually. Thus, the Obama administration would be doing something about the US fiscal debt and deficit without reducing near-term support for the ailing economy.
Kicker #2: Truman had graduated from economist to financier, recognizing the importance of buying (or confiscating as the case may be) low and selling high:
This proposal has several other benefits. First, the US would be obeying the maxim to buy low and sell high. Second, it would be performing a socially useful function. Demand for gold exceeds normal production, driving up the price. To the extent that the gold craze is being fed by concern (rational or irrational) about government policies, public welfare would be enhanced by giving citizens something tangible to hang around their necks or place in safe deposit boxes. Third, if the price is a bubble, as seems likely, the sooner it is burst the better for the average investor.
Lest Truman be accused of being a biased idiot, he himself provides some counter arguments to his Darwin award worthy suggestio:
Some people point to possible costs. Aside from political pressures from those who want to protect the value of their holdings, above or below ground, two principal arguments are made against US gold sales. The first is that such sales would disrupt the market. But the US government can be cautious in its sales, avoiding disruption of gold sales programmes of other countries, as it has in the past. There is little risk. In recent years, sales under the Central Bank Gold Agreement have dwindled, and some other central banks are buying gold. (The US is not a party to the agreement.) Also the International Monetyary Fund has completed more than three-quarters of its own planned sales of 403.3 metric tons.
Another counter argument is that the US should hold on to its stock in anticipation of the return to a monetary system based on gold by itself or with other nations. Returning to the gold standard would reinstate a system that has not existed for a century, however. It is not going to happen. The gold standard was associated with unstable prices, wages, output and employment. The current official discussions of the reform of the international monetary system do not include any advocates of a return to gold, and the IMF articles of agreement prohibit doing so. The sooner thoughts of a return to the gold standard are laid to rest, the better. A related argument for retention of the US gold stock is as a “rainy day” precaution. But after the recent economic and financial crisis and with the prospect of further misery for several more years, how much more rain must pour before the US acts?
So now you know - the gold standard "is not going to happen." What else is there to say - arguing with such brilliant logic which sees the benefits in 100 years of dollar devaluation, coupled with the greatest credit bubble ever, which has led the world to the precipice of all out currency, trade and soon, actual, war and assumes that the barbarous relic is actually worse than this is, well, pretty much pointless.