End the Depression, Buy Gold

Back in 2012 I wrote:
Gold is already becoming the safe haven of choice because if the dollar fails, the entire global financial system will collapse, meaning no currency is safe. Any country with a favored currency would see their economy collapse if they allowed it to appreciate (see the Swiss reaction to the decline in the euro), so they would all depreciate their currencies in response. In contrast, many central banks still hold literally tons of gold and no one would need to stop “hot money” from flowing into gold because it wouldn't be as disruptive to the economy.

Think of it this way: if Chinese yuan is 6 to $1, and a pen costs 6 yuan, it also costs $1 for an American.

Now, what happens if China's currency collapses to 600 to $1? Suddenly that pen is very cheap and everyone in America would buy as many as they could. So when we see a single currency depreciate against others, it's goods and services become very cheap, and other economies exports become very expensive, causing massive economic disruption.

What happens if everyone devalues against gold? The price of gold rises in dollars, euros, yen and yuan, the relationship between the currencies will not change as dramatically. Gold can act as a pressure valve because it can absorb capital inflows without as much economic disruption.

Revaluing against gold also takes away the desire for a safe haven by folding it back into the U.S. dollar and the global financial system. Instead of thinking of how to protect their assets, investors would invest their money, with many gold holders selling their gold to collect their profit.

Today at ZH: Pimco Economist Has A Stunning Proposal To Save The Economy: The Fed Should Monetize Gold
Harley Bassman of PIMCO writes:
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.
I don't advocate a policy of inflation, but if you want a policy of inflation, and one that doesn't destroy the global trading and financial system, and one that will actually work, then buy physical gold in size until inflation expectations rise.

Buying financial assets is screwing up the economy because it distorts price signals, most importantly the interest rate. People do not know what's going to happen down the road, so they don't act. Buying gold will send a clear and unambiguous signal: the currency has devalued. Which is the signal the Fed and other central banks want to send, but can't because they are trying to revive credit money systems that have reached peak credit and need to deleverage. Raising the price of gold results in an instant deleveraging of the global financial system because it is an unencumbered asset with no counterparty. Raise the price of gold and it can be used to extinguish debt or restart bank lending. The only distortion will be some misallocation into gold mining assets, but as a small fraction of the total economy, even a speculative bubble wouldn't be a major issue.

If the U.S. revalues gold, it could also afford a massive spending spree. The United States holds about 260 million ounces of gold, currently valued at $42 an ounce, or $11 billion. A revaluation of gold to $5,000 (the Fed would simply announce that it will pay $5,000 an ounce for gold and since it can offer FRNs for each ounce, it can immediately push the market to $5,000) would raise the value of the U.S. gold reserves to $1.3 trillion, which the Treasury could immediately demand from the Fed. Spread over 4 years, it would be equivalent to about 2% of GDP. The economy is growing at 2% now, and core inflation is 2%, so 6% nominal GDP growth would be the most conservative baseline. It would not be hard to hit 8-10% annualized nominal GDP growth.

The Fed could achieve this all without printing a single FRN. Tomorrow at 8 AM, the Fed announces it will pay $5,000 an ounce for any physical gold and the market will instantly adjust.

The Great Depression ended when countries devalued against gold, including the U.S. in 1934. Even though the gold standard no longer exists, gold is still money and this will work. In fact, the problem with "monetizing" gold is it would work so well, implementing this solution would risk hyperinflation. As Bassman writes:
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.
Steve Forbes proposed a virtual gold standard years ago, arguing the Fed should buy or sell gold to target the inflation rate. Start with a low price and start moving it higher until inflation reaches a desired range.

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