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Your daily guide to the Transitional Economy as the FIRE Economy recedes and the TECI Economy takes over

Tuesday, October 19, 2010

Central banks continue to buy gold to hedge currency risk

The entry of the world's major central banks into the gold market marks a new stage in the development of the gold market that confirms our original reasons for entering the market in 2001: central banks are holding or buying gold to hedge the potential breakdown of the global monetary system. We bought it in 2001 for the same reason. The risk is of a disorderly transition to a new system.

By Christian Oliver and Song Jung-a in Seoul and Jack Farchy in London
Published: October 18 2010 10:24

South Korea, holder of the world’s fifth-biggest foreign exchange reserves, is considering buying gold to diversify its dollar-heavy portfolio, the country’s central bank said, adding it would be cautious in making any final decision.

Even a small realignment of South Korea’s reserves would have a powerfully bullish effect on the gold market. With just 14 tonnes of gold – or 0.2 per cent of its $290bn reserves – Seoul is one of the smallest holders of gold among large economies. The world average is 10 per cent, according to the World Gold Council, while countries such as the US, Germany and France hold well over 50 per cent of their reserves in gold. read more...

Monday, October 18, 2010

THE GOLD STANDARD: Should the U.S. Go Back to It?

Comment: Today the phrase "currency wars" emblazons business media headlines. As fresh as today's news, the following Time Magazine article explores a solution to an earlier monetary and currency crisis. Can you guess when it appeared? Date clues as indicated have been hidden to improve the challenge. The paradox of the justifications for staying off the gold standard then, in light of developments decades later, are highlighted in red.

As they met last week in Washington, delegates to the meeting of the World Bank and International Monetary Fund studiously avoided discussion of one subject: a change in the world's gold policy. Reason for the reticence: their host, the U.S. Treasury, is

unequivocally opposed to any change. Since the U.S. is the world's largest gold holder, no adjustment can be made without U.S. initiative. Yet speculation about a change continues to be an irrepressible topic of conversation among financiers and statesmen around the world.

Talk about a change takes two forms. One is that the U.S. should junk its present managed-money system (in which gold is used only as a currency reserve and to settle international accounts) and return to the fully convertible gold standard, abandoned in 1933, under which dollars could be exchanged for gold coins. The other—usually joined with the first—is that the U.S. should double or triple the present gold price of $35 an ounce, thus devaluing the dollar and in effect automatically increasing the monetary value of the official gold holdings of the free world's nations.

Among the chief advocates of a return to the full gold standard for both the U.S. and European nations are French Economic Adviser Jacques Rueff, the architect of France's successful financial-austerity program, and Philip Cortney, president of Coty, Inc. and chairman of the U.S. Council of the International Chamber of Commerce. 

They, like the rest of a small but dedicated group of economists, believe that the gold standard is the only answer to the world's present monetary problems, such as inflation and a concentration of capital. They believe that a return to the rigid fiscal discipline of the gold standard would act as a brake on inflation by preventing governments from overspending, head off world recessions by doing away with the excesses that lead to them. A full gold standard, as they see it, would also put a damper on sudden expansions of credit not backed by gold, help stabilize prices, and step up the flow of capital—and thus international trade—by making all currencies freely convertible into gold. 

A return to the gold standard would probably have to be accompanied by a price hike in gold to provide more adequate backing for the vast expansion of money and credit in the last few decades. Some economists who do not advocate a return to the gold standard nonetheless want a price hike. They argue that the U.S. has artificially kept gold at a fixed price since 1934, while the prices of the world's goods and services have more than doubled, and that not enough gold has been produced to keep up with the world's economic strides. The freeing of gold, they feel, is a logical economic adjustment that would 1) step up production of gold, 2) increase the free world's purchasing power in dollars by some $20 billion (if the price were doubled), 3) bring most of the $10 billion to $12 billion in gold hoarded by wary Europeans back into productive use. 

But the great majority of the world's economists strongly oppose both the gold standard and a price hike. Says a top U.S. Treasury officer: "The full gold standard is oldfashioned, impracticable, a discipline enforced with the lash. The world has moved on without it." In place of that rigid discipline, nations have built up flexible disciplines better suited to control the ups and downs of the complex modern world, such as the International Monetary Fund. Opponents of return to the standard of a quarter of a century ago insist that the U.S. is already as near to a gold standard as necessary, since gold still backs up its currency, and its dollar can be converted into gold by foreign governments and central banks. 

Nor do most economists see any reason for making a price hike now. The British Radcliffe Report on monetary policy this year concluded that such an increase is not "immediately necessary or the most hopeful approach to the problem of international liquidity," and the International Monetary Fund has come out against it. Gold-short nations that need the most help would benefit least by the change; the major gains would be made by such big gold producers as Russia and South Africa. 

Economists still believe firmly in gold's prime importance as the ultimate financial standard. They consider it psychologically vital to fiscal confidence, useful as a long-term guarantee that countries can meet their bills. But they have long since ceased to regard it as the sole test of a currency's stability. More important in today's world is the health of a nation's economy, the real rise in its national income, the strength of its built-in fiscal controls. Most nations now have learned the heavy price of unsound financial and fiscal policies; they no longer need the lash of gold.

Read more:,9171,864070-1,00.html#ixzz12jOdf4Y3

Comment: So that's what went wrong!  If a gold standard is "psychologically vital to fiscal confidence," and "useful as a long-term guarantee that countries can meet their bills" then its absence eliminated the guarantee that countries pay their debts, leading to fiscal imbalances and a loss of fiscal confidence. If indeed economists have "long ceased to regard it as the sole test of a currency's stability"  and economic health and fiscal controls matter as much or more, then conversely, if a nation's economy is unhealthy and fiscal controls have failed, as is the case for the US today, a return to the gold standard may in fact be mandated by the international debt and currency markets.

The TIME Magazine article above was published in what year? Vote in the poll on the top right of this posting. 

EDIT Oct. 19, 2010: The answer to the question of when this was originally published in TIME is 1959. 

See: The Fourth Currency

Saturday, October 16, 2010

Welcome to The Postcatatrophe Economy blog

Thank you for reading The Postcatastrophe Economy and welcome to the book blog.

I wrote my book for everyone who is not an expert in economics and finance who wants to understand what went wrong with our economy, why it's not recovering, what needs to be done to get the economy back on track, and what each of us can do both to encourage positive change and to protect ourselves from the personal risks that our difficult economic environment presents.

The blog is for non-experts who want to understand the changes happening to our economy. Finance and economics experts can visit my other site,, started in October 1998. Here I will comment on economy related news -- in housing, employment, energy, inflation, the dollar -- as they happen and explain what they mean. 

Reader comments are always appreciated. Due to time constraints I will not be able to answer questions posted here by readers, although moderators who are familiar with my work will respond to questions.

It's going to be an eventful decade ahead. Thank you for reading and for your participation.