Zoellick seeks gold standard debate

By Alan Beattie, FT.com
November 8, 2010 -- Updated 0107 GMT (0907 HKT)

Leading economies should consider readopting a modified global gold standard to guide currency movements, argues the president of the World Bank.

Writing in the Financial Times, Robert Zoellick, the bank's president since 2007, says a successor is needed to what he calls the "Bretton Woods II" system of floating currencies that has held since the Bretton Woods fixed exchange rate regime broke down in 1971.

Mr Zoellick, a former US Treasury official, calls for a system that "is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves towards internationalisation and then an open capital account". He adds: "The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values."

His views reflect disquiet with the international system, where persistent Chinese intervention to hold down the renminbi is blamed by the US and others for contributing to global current account imbalances and creating capital markets distortions.

This week's meeting of government heads in South Korea is likely to see yet more exchange rate conflict. A US plan for countries to sign up to current account targets has run into widespread opposition.

Wolfgang Schäuble, Germany's finance minister, has raised the temperature by describing the US economic model as being in "deep crisis" and criticising the US Federal Reserve's decision to pump an extra $600bn into financial markets. "It is not consistent when the Americans accuse the Chinese of exchange rate manipulation and then steer the dollar exchange rate artificially lower with the help of their [central bank's] printing press."

Although there are occasional calls for a return to using gold as an anchor for currency values, most policymakers and economists regard the idea as liable to lead to overly tight monetary policy with growth and unemployment taking the brunt of economic shocks.

The original Bretton Woods system, instituted in 1945 and administered by the International Monetary Fund, the World Bank's sister institution, comprised fixed but adjustable exchange rates linked to the value of gold. Controls to restrict destabilising shifts of capital from one economy to another buttressed it.

"The scope of the changes since 1971 certainly matches those between 1945 and 1971 that prompted the shift from Bretton Woods I to II," Mr Zoellick writes. "Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today."

http://edition.cnn.com/2010/BUSINESS/11/07/zoellick.world.bank.gold.ft/index.html

This is huge news!

Personally can't see it happening, at least not in the way that most gold bugs expect. Could be wrong of course

A gold standard is only ever going to be as good as the government standing behind it. Even during previous eras when there was a gold standard, war, severe recession, etc would see government's abandon it as circumstances change, damaging the supposed credibility of the standard.

Under this sort of a system, when it comes to the crunch, with people knowing that a country is in trouble, there will be a speculative attack, leaving governments in the position where they would have to either try and defend the currency and gold standard at the expense of the local economy, or step in and devalue. Which leads the world straight back to where it is now, times get tough and there are certain countries actively pursuing a cheap currency.

Personally, I think the world would be better off looking to try and regulate the banking system to try and remove future systemic risks, combined with more attention on the formation of speculative bubbles to try and kill them off before they can bring the entire system down when they burst

To add petrol to the fire:

Ron Paul, who after last week's elections is the heir apparent to take the chairmanship of the House sub-committee over-seeing the Fed this January. He staunchly believes the Fed is too independent, he wants an audit of the US gold deposits, and he wants a return to the gold standard.

To throw the fire blanket:

How would countries like Canada or Australia back their currencies? Three or four tons just don't go that far these days. Currency collapse, or if your ear's not by the gurgler you'll have missed the sound... So, no gold standard ever.

Another option:

How about the IMF's unit of account, the SDR? To learn:

http://en.wikipedia.org/wiki/Special_Drawing_Rights

I look forward to reasoned responses and debate. For the bugs salivaitating out there may I add: Invest in guns, bullets, canned food, water purification, and liquor. I do not want to live in a world where your doom is the norm. If offended, tough.

SX

I don't see the world going back to a gold standard any time soon, if at all. I think with the change in dynamics and ease of world commerce and trade since the advent of the internet, the key is in normalising management and accounting standards around the world.

I agree with Prof. The solution is in the regulaton of the banks... more particularly how they can treat debt (loans) as assets.

It just seems immoral and wrong in the spirit of Common Law and Contract Law, that your lender can effectively sell your loan (debt) obligations to another without your consent or even knowledge, or more importantly that your lender does not have the 'hard' assets to back the loan and still book it as an asset.

There has to be a clearer line of distinction between encumbered and unencumbered assets in the accounting standards. I believe the International Accounting Standards Board (IASB) is currently looking at new rules on things like Hedge Accounting for their International Financial Reporting Standards (IFRS).

But the bigger problem is the lack of uniformity of laws between countries. There has to be a bigger effort to regulate, audit and enforce compliance to the highest common or international standard in this era where corporations are international in their operations.

In summary, I don't have a big problem with there being no 'Gold Standard'... the point is what was lost in the change was not so much the 'Gold', but the willingness to comply to a 'Standard' per se.

There has been an over use of 'Insurance' being an avenue to pass the parcel and escape personal responsibility and liability.

Governments need to allow the free market to return. Government involvement, particularly on the scale being exercised now appears IMV to be socialist/communism back on the march, and this time in our back yard.

Gold is merely a means of holding and for exchange in the overall free barta system. In a sense coloured beads have been money.

Gold is rare, cannot be counterfieted or printed out of existence and will be a backing for money again in some form in my view. However other metals may also become involved. And in the readjustment they will remove six or maybe even up to nine zeros.

For example, one thousand dollars or an ounce of gold will be the value of a house. And all paper money on issue will be backed by metal or be metal, copper coin could be a dollar.

Anyway a bit of thinking outside the square is starting to happen at the World Bank level, which at least is an improvement on the money printers at the US Federal Reserve.

Anyway, interesting thread guys.

explod said:

Gold is rare, cannot be counterfieted

Click to expand...

Adjustment - Gold is much harder to counterfeit since it requires physical labor to do such things unlike fiat which can be created at a push of a button.


Problem is like PF said it will only happen unless governments want to play ball, but if your in the governments shoes would you really want a gold backed system? that means your available capital will be crushed to nothing since most countries dont have much gold or the gold price would need to shoot up to $20,000 p/o to cover the current cash each country spends but then if thats happens it will cripple the jewellery industry and most industries that use gold which will only mean investment and government backing is the only thing driving it.

Possible but unlikely, nevertheless im just curious to see what they do next to get out of this mess?

Surely the main point is that the idea is even being talked about at this level. That alone speaks volumes as to the state of the present system.

For those who have followed the whole money printing / gold debate for years, this is a classic case of another "as expected" development unfolding. Drip, drip, drip - eventually the glass will be full.

The sub-prime mortgage mess was not unexpected, only the timing and surrounding events were in any doubt some years before it actually happened.

The bankruptcy of General Motors was not unexpected, only the timing and surrounding events were in any real doubt.

And the demise of the US Dollar as global reserve currency is also not unexpected, with only the timing and surrounding events in doubt.

Next? The peaking of oil production is not unexpected, with only the timing and surrounding events in doubt.

That a return to some sort of gold standard is being talked about by the World Bank suggest that the "timing" aspect of the demise of the US Dollar standard may not be too far away, leaving the broader consequences as the next unanswered question.

Ageo said:

Adjustment - Gold is much harder to counterfeit since it requires physical labor to do such things unlike fiat which can be created at a push of a button.

Click to expand...

Problem 1 identified! We are now seeing the aftermath of unrestrained fiat creation and associated problems ie currency misalignment ie the global financial system is not free & fair, each are looking out for their own, and will eventually lead to a break down of 'the system'? Some people have identified this and are trying to create discussion before it totally breaks down.

Smurf1976 said:

Surely the main point is that the idea is even being talked about at this level. That alone speaks volumes as to the state of the present system.

For those who have followed the whole money printing / gold debate for years, this is a classic case of another "as expected" development unfolding. Drip, drip, drip - eventually the glass will be full.

Click to expand...

Spot on again Smurf. It's a bit like going to the final One.Tel Christmas party knowing that the company is insolvent - everyone out to get as much as they can before it goes under.

I would envisage a Euro style currency system globally with strict rules & regs but also with gold backing, although only like the current bank capital requirement ie 5-10% backed by physical gold. The problem is that in order to get to that place we will have to endure the bankruptcies of both the USA & China? It's not going to be pretty or orderly getting to the new world order of restraint & sustainability? And living within our means.....can the world afford India & China becoming 1st world countries?

Gold surges above $1,400 on Zoellick calls

By Javier Blas and Jack Farchy in London

Published: November 8 2010 20:09 | Last updated: November 8 2010 20:09

Gold prices surged above $1,400 a troy ounce on Monday, setting a fresh nominal all-time high after Robert Zoellick, World Bank president, said leading economies should look at a modified global gold standard to guide currency movements.

Gold traders said Mr Zoellick’s comments were supportive to the metal’s price, but added that heightened worries about Ireland’s debt were also behind the surge. In euros, bullion broke above €1,000 an ounce for the first time since July as European investors piled in.

Mr Zoellick’s call for gold to form part of a new “co-operative monetary system” comes amid growing concerns ahead of the G20 meeting in South Korea that leading governments might pursue competitive devaluations among their currencies.

Gold’s sharp rise is delivering hefty profits to some of the world’s largest hedge fund managers, including David Einhorn of Greenlight Capital and John Paulson of Paulson and Co, who have invested heavily in bullion as a way of betting that central banks would fail to preserve the value of paper currencies.

Edel Tully, precious metals strategist at UBS, said Monday’s rally had been driven by “considerable private client buying”.

In London, spot gold surged to an intraday high of $1,407 an ounce, up 1 per cent on the day and more than 28 per cent since January. Gold is trading at a nominal record high, but adjusted for inflation it remains far off the levels hit in 1980.

Matthew Turner, precious metals strategist at Mitsubishi in London, said Mr Zoellick’s comments were bullish. “They indicate that gold is discussed at the highest levels – in sharp contrast to the past 30 years when it was seen as a relic.”

Writing in Monday’s FT, Mr Zoellick said: “Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.”

But analysts were sceptical about the return to a fully fledged gold standard, in which each dollar has to be backed by gold.

Due to the rapid expansion of the world’s monetary base since the collapse of the gold standard in the early 1970s – when an ounce of gold was worth $35 – analysts believe that if gold were to play the same role today, its price would need to rise to $6,000-$10,000 an ounce.

Source - http://www.ft.com/cms/s/0/6f7c917c-eb70-11df-b482-00144feab49a.html

Due to the rapid expansion of the world’s monetary base since the collapse of the gold standard in the early 1970s – when an ounce of gold was worth $35 – analysts believe that if gold were to play the same role today, its price would need to rise to $6,000-$10,000 an ounce.

Click to expand...

One wonders what would be wrong with that level. On 1980 prices gold inflation adjusted should in any case be now around US$4000 an ounce. If one looks back at the four stimulus periods since the mid 1990's and the artificial propping of the markets it is not hard to see that in its abscence gold would also be at around that level. And it only dropped to US$260 because Gordon Brown et al., dumped it on the market and encouraged its manipulation since.

Jeeez, $10,000 would be a bit embarrassing, could'en have that now could we.

If thats what is needed to back currencies and provide stability then I would be only too pleased. He he he he.

FWIW, A gold standard would just make business cycles more extreme, according economist Nouriel Roubini.

http://www.cnbc.com/id/40088925

thought this might be of interest....

http://bilbo.economicoutlook.net/blog/?p=12262

The World Bank boss Robert Zoellick claims that we should all return to the Gold Standard to restore economic stability in the World economy. He is crazy. Sorry! The G-20 meeting in Seoul this week will obviously be concentrating on side issues such as the impact of the latest US quantitative easing plans on world inflation and the international currency system which many commentators are now claiming is in turmoil. Zoellick’s proposal will be added to the agenda which will reinforce what a waste of time these meetings are turning out to be. Zoellick’s call for a gold standard is just another one of these conservative smokescreens that attempt to solve the problem by denying it. They are all just expressions of obsessive and moribund fear of fiscal policy and the erroneous allegation that budget deficits cause inflation. So we will get a G-20 communiqué in a few days calling for more international cooperation in trade and currency settings and more fiscal consolidation and the need for on-going discussions about the creation of a new international reserve currency (perhaps a gold standard). But all these words will be in spite of the real policy agenda that is required – more public spending. What will they come up with next?......

Click to expand...

et al

The primary reason for government resistance to a true gold standard, viz gold coins circulating, as opposed to the Bretton Woods accord by which US dollars only were backed by gold, to the fiat money of today...is that it removes the government monopoly on money.

Fiat money for the government removes the requirement to produce: under a gold standard, production purchases money, which purchases consumer goods. This would require then taxation being required to fund any expenditures that the government wish to make. Taxation being the purchase of money for producing government services.

If taxation increases without any increase in government production, generally it starts a bit of a hue & cry. Government must either produce and sell [taxation] or borrow as debt if they wish to run a deficit. As debt levels rise, so then generally does the level of interest, which places government in direct competition with the private sector for savings.

Thus, should government borrow, they must invest [spend] the money productively to pay the interest, or, raise taxes to pay the interest should the investment be unproductive, which again places government under scrutiny.

Essentially the money monopoly is one of the fundamental underpinnings of government power. By removing the money monopoly, you significantly curb government power and thus gain greater individual freedom.

jog on
duc

Uncle Festivus said:

FWIW, A gold standard would just make business cycles more extreme, according economist Nouriel Roubini.

http://www.cnbc.com/id/40088925

Click to expand...

Roubini is simply incorrect.

jog on
duc

The argument against Roubini:
http://leduc998.wordpress.com/2010/11/13/roubini/#respond

jog on
duc

You have to ask yourself "why did the US even abandon the gold standard in 1971"?

War, recession? or undervalued currencies such as Japan.

Are there now any unfair undervalued currencies? say China! Print away USA at least other trading partners will appear.

Will "gold" control unfair currency manipulation? No.

MR. said:

You have to ask yourself "why did the US even abandon the gold standard in 1971"?

War, recession? or undervalued currencies such as Japan.

Are there now any unfair undervalued currencies? say China! Print away USA at least other trading partners will appear.

Will "gold" control unfair currency manipulation? No.

Click to expand...

The US under Nixon was forced from the pseudo-gold standard of Bretton Woods in August "71 simply because the US had been inflating the money supply, and the foreign Central banks that held these surplus dollars, started to redeem them for gold.

The US was then forced to default, via going off [defaulting on an $35/1oz gold exchange rate] gold.

As to will gold prevent currency manipulation? Yes, it most certainly will. Gold is a world currency, not a sovereign state currency. Outflows/Inflows via trade are self-correcting.

jog on
duc

The question still has to be asked why the US did this?

My understanding is when the US inflated the money supply it ended up holding foreign currencies which were believed undervalued. Were there undervalued currencies?

Currencies were undervalued such as the Yen and German Mark against the USD and therefore gold. There had been a bit of a run on US gold years before the end of the standard. Countries could exchange their USD’s which they acquired with their undervalued currencies and turn it into gold.
For example the German Mark was appreciated against the USD near two years before the end of the gold standard by near 10% and still the Mark was believed to have been well undervalued.

In the last year of the gold standard the US exchanged USD’s for foreign currency from that inflated money supply. That’s when the real run on US gold took place, as you speak, which forced the US to exit the gold standard because there simply was not enough gold.

IMO the undervalued currencies was the root of the problem and therefore I see no return.

Here is a gold standard question i have been pondering for a while:

If we do go back to some form of commodity backed currencies, wont that mean that those countries holding larger reserves will suddenly be more wealthy, or have a stronger currency?

I just dont see a way of adopting a commodity backed currency without causing major upheavel and skewed wealth distribution.

Discuss?

No thoughts?