Friday, March 10, 2017

A Return to Gold Based Monetary System Under Trump?

This is a question you now see being raised more often since President Trump has made favorable comments about a gold standard in the past. A recent article in Forbes which we covered here directly called on Trump to move towards a gold based monetary system and to pack the Federal Reserve Board with pro gold advocates. But is it realistic to think Trump would go this direction?

This recent twitter comment by Dr. Judy Shelton leads me to believe that the reality is that moving to a gold based monetary system is probably not in the cards under President Trump. Dr. Shelton is frequently mentioned as a potential nominee for the Fed Board. At the very least she was an adviser to the Trump transition team. So we can assume she has a good feel for what Trump might actually consider. This is the article Dr. Shelton links to in her tweet. Here are some excerpts and then a few comments.


. . . . .  

"As readers of this column will be aware, there is a lively debate within international macroeconomics and finance on how serious are the distorting effects on the global economy of our current non-system of inflation-targeting national central banks tied together through flexible exchange rates. There is a related debate on whether classical inflation targeting, and, even more so, UMPs (unconventional monetary policies), represent sound policy. As I have argued myself in these pages, UMPs, which have brought interest rates down to zero and have hugely increased the balance sheets of advanced economy central banks, may well be a cure worse than the disease they intended to cure, and, what is more, a policy stance from which there is no credible exit.

All that is likely to change under President Trump. With a unique opportunity to appoint five or more members of the Fed board, including replacing the chair, Janet Yellen, and vice-chair for monetary policy, Stanley Fischer, when their terms expire, the new president has an historic opportunity to set his stamp on American monetary policy.
Some libertarian and conservative supporters and advisers of Trump have previously advocated a return to a commodity-backed currency, such as the gold standard which prevailed before the World War I and which, in modified form, was the basis for the global monetary order under Bretton Woods.
This may be a bridge too far from the current regime of a fiat currency whose quantity is determined endogenously by setting the policy rate to achieve a predetermined inflation target.
What may be within reach, instead, is the abandonment of discretion and the tying of monetary policy to a fixed rule: some version of a Taylor rule, for instance, which, in its simplest form, sets the policy rate as a linear function of the gap between the inflation rate and its target and also the gap between the actual level of output and its potential level, controlling for the real interest rate and, possibly, other variables."
. . . . .
"Economist Judy Shelton, who worked on Trump’s transition, has recently advocated, writing in The Wall Street Journal, the inclusion in trade agreements of provisions to prevent members from using currency manipulation to distort the pattern of comparative advantage. As Shelton writes, “The distortions induced by government intervention in the foreign-exchange market affect both trade and capital flows.”
Now, if he tackles this issue, President Trump may be right on the money."
My added comments: I encourage readers to read the full article. The excerpts above suggest that Dr. Shelton and others like the author of this article are not likely to push for Trump to adopt a gold based monetary system. Please note this article says "that may be a bridge too far from the current regime of a fiat currency." The article then goes on to suggest what "may be within reach, instead."
This gives us the clues we need. It is pretty clear that even gold friendly advisers to Trump think that moving to a gold based monetary system is unlikely and are probably going to push for a rule based system that uses something like the Taylor rule to set monetary policy. The article cites comments by Dr. Shelton where she calls for trade agreements to include provisions to "prevent members from using currency manipulation." Again, this suggests the present US dollar fiat currency system would still be in place.
Therefore, my conclusion is that the available evidence right now suggests that President Trump is unlikely to push for a return to a gold based monetary system. But we will follow events and see what actually does happen.

Added notes: It appears that new Treasury Secretary Steve Mnuchin is getting in touch with all the regular key players in the existing monetary system. Nothing here suggests a radical departure from the past in terms of the new Administration and the existing institutions. Of course these are probably just courtesy meetings to introduce himself. Nothing much to see here.

Meets with Lagarde/IMF

Meets with Mark Carney (BOE)

Meets with Incoming General Manager for the BIS - Agustin Carstens

Also, looks like the new Treasury Secretary will have his own Twitter account as well

Debt Ceiling Drama Begins - Treasury formally asks Congress to Raise It - No response so far. David Stockman repeats on Fox News that he believes a major crisis over the debt ceiling will arrive by early summer. He says there is "no path for a majority to raise the debt ceiling in Congress." I guess we will see. So far, no one seems concerned about it.

3-13-17: Still no hint of any concern over the debt ceiling. CBO says it won't create problem until fall which contradicts the David Stockman prediction that a crisis will arrive by early summer. Someone has to be wrong. It is clear that most everyone views this as a non event for now.

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