From: Allin Cottrell (cottrell@wfu.edu)
Date: Fri Nov 19 2004 - 21:25:32 EST
On Thu, 18 Nov 2004, Paul Cockshott wrote: > What would be the implications for the US governments budget > deficit of a re-adoption of the gold standard by the Federal > Reserve? > > Would the current level of deficit be sustainable? > > If it were not, would that not force the re-abandonment of the > gold standard in a few years. Interesting questions -- though I tend to regard them as hypothetical, since I do not believe that the Fed has any serious commitment to the re-adoption of a gold standard. Gold is peculiar, in that it is relatively imperishable and the existing stock very much dominates flow production, so therefore on Ricardian/Marxian grounds the price is relatively indeterminate, governed by speculative considerations. Among such considerations, over the last few decades, the expected rate of sales out of central banks' stocks has been very important, making the prospect of a neo-gold standard curiously self-referential. But just suppose for the sake of argument that we can abstract from such speculation -- that is, suppose that the relative price of gold were governed by cost of production at the margin. I suspect (though I don't have strong evidence for this, and it's hard to find evidence, since the market price of gold has long been a creature of central bank policy and speculation) that over the long run the rate of technical progress in gold production tends to lag that in the economy at large. If that is so, there would be a long-term tendency for the relative price of gold to rise, in which case stabilizing the price of gold would imply countenancing ongoing CPI deflation. In that case, the central bank would lose control over real interest rates (since the floor for the nominal interest rate is 0), and I suspect that this consideration would by itself force abandonment of the policy. To the extent that the central bank's support of ongoing fiscal deficits requires monetization of those deficits, this would also be ruled out, creating additional pressure to abandon the policy. Note that if there are diminishing returns in gold production (which seems likely in an extractive operation), the flow production cost at the margin is endogenous, depending on the rate of accumulation or decumulation on the part of central banks, which contributes another dimension to what I described above as the "self-referential" aspect of a new gold standard. Central banks would be attempting to stabilize the price of something whose price (even at "equilibrium") depends in an integral way on their own actions, and on the expectations of those actions on the part of market participants. Allin.
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