The Trump presidency arrives at a time coincident with a unique monetary opportunity. The dollar price of gold (POG) at $1200 is at or near the equilibrium point where creditors and debtors are in balance. What this means is that the Trump presidency has the opportunity to return the dollar link to gold that Nixon ended in 1971, with minimum disruption. Alexander Hamilton, who would have a greater affinity with Mike Pence and his understanding of stable money than the acclaimed Broadway stars who rehabilitated his name in rap, established the fledgling U.S. on a gold standard in 1792 by linking the dollar to gold at the fixed weight price of $19.39/oz. (The dollar was re-pegged at $20.67/oz in 1834 and $35.00/oz in 1934.) Hamilton would understand that his act that established the stable monetary foundation for America’s rise to the top of the global economic pyramid is ripe for renewal after 45 years of currency chaos fluctuation. How and why is this possible?
Gold’s value has remained stable for centuries. When a currency’s price is linked to gold at a fixed weight, its value becomes as stable as gold. A stable value for a currency balances creditors and debtors. A central bank is unable to give advantage to a creditor over a debtor, or vice versa, by manipulating change in a currency’s value through error or intention. This removes risk premiums from the terms of trade, and monetary commerce operates at peak efficiency. The market determines the price of interest upon which economic actors agree to terms of trade. A gold standard removes central authority commanded money illusion and replaces elitist Ph.D whim with gold’s democratic stability. A stable currency linked to gold eliminates currency hedges, derivatives, and carry trade churning. Capital flows to its most productive allocation. Labor benefits when capital increases, and the capital/labor ratio skews in labor’s favor. The standard of living rises proportionally and the middle class thrives.
There is always a dollar gold price where debtors and creditors are in balance. In our floating, fiat experiment world this value is constantly changing. Prior to Nixon ending Bretton Woods in 1971, the equilibrium value was $35/oz of gold. After the great inflation of the 70s, the equilibrium value re-stabilized near $350/oz. This is now known as the great moderation that lasted from 1982-2003. Even during this moderation, which was stable by today’s standard, there was constant error, including a destructive deflation from 1997-2001.
Since 2003 the only constant in the POG is that it will soon change again. The POG rose to $1000, fell to $700, rose to $1900, and fell back to $1050. It began a rise again to $1300 and today is below $1200. Along with these changes, the equilibrium point that balances creditors and debtors also changes. It is no wonder that an economic recovery cannot gain a foothold. There is no monetary stability upon which to base future economic decisions and production.
Gold’s fall from $1900 to $1050 upended models of economic thought. Supply-siders expected runaway inflation from Bernanke’s QE. The fall in the POG did not square with economic models and appeared to tarnish gold’s predictive signal. The Fed can create near unlimited liquidity with limited inflation. It’s a new economic world and Krugman is ecstatic.
But gold’s signal remained as pure as its unchanging value. Interest on reserves (IOR) and new financial regulation that punished business creation and lending locked up a large portion of the Fed’s liquidity in excess reserves. Gold’s fall from $1900 to $1050 reflected this excess liquidity being locked out of the economy.
Fed monetary policy no longer targets any specific indicator. Previously, the Fed targeted gold, the funds rate, or monetary aggregates. Today the Fed targets the size of its balance sheet to maintain it at $4.4 trillion. The supply of base money relative to demand determines the POG. There are $2.0 trillion of excess reserves today. This has resulted in a sort of de facto, yet very unstable floor to the POG. The equilibrium price that balances creditors and debtors under current Fed policy is determining the floor. Any excess supply of base money flows to excess reserves, while demand for base money is similarly met by excess reserves. We can interpolate based on multi-year gold price averages that the equilibrium price is near $1200.
There are many factors that will upset the precarious equilibrium that the Fed has inadvertently achieved. Almost all are biased to the upside in the POG. The longer the POG remains around the $1100-$1200 level, the more monetary stability that will result. A return to a gold standard at this level will make the stability permanent.
Trump’s unique opportunity exists because he has brought in economic advisors who understand monetary stability and gold. Returning to a gold standard at a dollar/gold link well below the equilibrium point is deflationary. Creditors benefit at the expense of debtors. A dollar/gold link at a price well above the equilibrium point is inflationary. Debtors benefit at the expense of creditors. In either case, the economic disruption caused by a faulty dollar/gold link will overwhelm the benefits of a return to a gold standard. There are many examples of this. The U.S. returned to gold at $20.67/oz after gold rose to near $50/oz during the civil war. This caused a harmful deflation, commodity producer uprising, and William Jennings Bryan’s cross of gold. Similarly, the deflation and subsequent economic hardship from Great Britain’s attempt to return to gold in 1925 at its pre-WWI price resulted in Great Britain abandoning their gold standard.
All the Trump administration need do for a successful return to a gold standard is to link the dollar to gold close to the equilibrium price, which is now near $1200. The benefits of a return to stable money will vastly overwhelm any small error in linking at exactly the correct equilibrium price, which is unknown.
A return to stable money, combined with tax and regulatory relief, will unleash the economy relegated to secular stagnation by the confused proponents of currency chaos. Capital creation will restore the capital/labor ratio in labor’s favor. The middle class will once again thrive. Economic growth is the only solution for the enormous debt and entitlement promises accumulated during the chaos years.
Trump has embossed his eponymous buildings with his name in gold. Trump and gold are already synonymous. Trump has the opportunity and moral obligation to restore gold and stability to our monetary system. Hamilton well understood the issue at our founding 224 years ago. He wrote:
“To emit an unfunded paper as the sign of value ought not to continue a formal part of the Constitution, nor ever hereafter to be employed; being, in its nature, pregnant with abuses, and liable to be made the engine of imposition and fraud; holding out temptations equally pernicious to the integrity of government and to the morals of the people.”
Try and rap that to wild applause.
Pingback: Today’s Brew 11-25-16 – Supply-Side Coffeehouse