Russian wants gold back in the monetary mix

From the UK Telegraph;

Arkady Dvorkevich, the Kremlin’s chief economic adviser, said Russia would favour the inclusion of gold bullion in the basket-weighting of a new world currency based on Special Drawing Rights issued by the International Monetary Fund.

Chinese and Russian leaders both plan to open debate on an SDR-based reserve currency as an alternative to the US dollar at the G20 summit in London this week, although the world may not yet be ready for such a radical proposal.

And from the same article;

China’s government has floated a variant of this idea, suggesting a currency based on 30 commodities along the lines of the “Bancor” proposed by John Maynard Keynes in 1944.

At least these people are thinking about ways to properly anchor the value of money.

The world does not need a single currency. However it does need a common currency. We used to use gold. At the moment we use the US dollar. Our current choice isn’t offering a lot of stability.

19 thoughts on “Russian wants gold back in the monetary mix

  1. I suspect it would be good for the US economy if the US dollar was not used as a reserve currency. At the moment its value does not reflect the state of the US. Instead it’s being used as a global safe haven, distorting its underlying value. With all the money Obama is printing it ought to be dropping like a stone.

  2. Terje

    They’re only suggesting that SDR’s also carry a gold component. That has as much chance of getting through the IMF as Bird becoming US prez.

    What these guys are talking about has no chance of ever happening. The reason is that no one really wants to take SDR’s. they could now if they wanted.

    How do you go into a shop with an SDR and buy something?

    the US will continue to remain the world reserve for a long time as there is no alternative on the horizon.

  3. At the moment its value does not reflect the state of the US.

    The objective of monetary policy should be to ensure that the currency remains stable in value. The objective should not be to ensure that the currency reflects the state of the domestic economy. If that was the objective then we would have to conclude that the monetary policy of Zimbabwe was a roaring success.

    Obama isn’t printing money. The Federal Reserve is printing money. And so long as demand for that currency remains strong then they can increase supply without decreasing value. Of course demand could do a reversal any time and they better be ready to start mopping up liquidity when that happens. Gold will be a good indicator to watch but not the only one.

    They’re only suggesting that SDR’s also carry a gold component. That has as much chance of getting through the IMF as Bird becoming US prez.

    An amusing comparison but hardly accurate.

    How do you go into a shop with an SDR and buy something?

    You wouldn’t. However during periods when the world was on a gold standard people didn’t generally go into shops and buy something with gold. And we don’t go into shops today and pay for things using CPI baskets. And yet CPI baskets is what is used as the standard of value for monetary policy.

    the US will continue to remain the world reserve for a long time as there is no alternative on the horizon.

    I suspect you are right on this point. Especially if everybody is as fatalistic about such things as you appear to be.

    http://en.wikipedia.org/wiki/Reserve_currency#Global_currency_reserves

    However I don’t see the point of SDRs or Bancors or Gold Bullion as being reserve currencies. I see them as being more like the ECU was for the Eurozone. A reference point on which policy may be built.

  4. The ECU was the worst of all worlds as it was essentially a fix.

    Theoretically it should have worked if the members were behaving themselves but they never really did.

    The rule was that the weaker member was required to buy it’s own currency to bring it back when it fell out of the band while the strongest member was required to do the opposite. However that required the stronger member usually Germany or Holland to intervene to bring the weaker member Italy or Spain etc back into line.

    It didn’t always happen like that and devaluations were actually quite frequent. The UK fell out primarily because Germany would intervene at the top of the band.

    Now these countries were pretty much integrated or rather as integrated as you could ever find. Imagine trying that stuff with the entire world.

    You also keep referring to the old days such as when we had Bretton Woods and before. You realize don’t you that you actually had to get permission for the central bank to purchase foreign currency if you went on a trip overseas. That’s how bad things were then as the system could only work with exchange controls.

    When there were periods of the gold standard people were well aware that currency (paper) was essentially an expression of a weight of gold and if they were on the exchange standard people watched carefully to see what was happening to the gold supply.

    I’m not sure why on earth you would be advocating a system like the ECU when for all intents and purposes a fixed exchange rate is destined to brake in the worst possible way.You need political union with a ECU based system and the last thing most of us would want is to see supra nationals starting to dictate political policy in the same way as the EU does.

    Furthermore we tried an sort of system like the ECU with wider bands in the late 80’s and it’s one reason why we had the 87 crash. Countries were imposing a band when there was little economic integration.

  5. Yes I know we had capital controls at the time of Bretton Woods. We also had tariffs and other things however these were not necessary to the gold exchange system. They were symptomatic of the usual “we must control everything” attitude. When all they really needed to do was keep the currency as good as gold via open market operations.

    The ECU targeting exercise in Europe did have some so called crisis occasions. However again this was only because of a “we must control everything” attitude. A monetary crisis is essentially nothing more than a set of unpalatable choices brought about by a previous failure to decide. Not only were they trying to target the ECU they were also trying to target the domestic interest rate. Ultimately these two objectives are going to come into conflict. You can’t shoot two targets with one arrow unless the two targets happen to be in alignment. OMO only gives you one arrow which is the quantity of base currency. You can use that arrow to hit an interest rate target or a gold target or an ECU target or a Bancor target but you can’t consistently hit multiple targets at the same time. You need to pick one and work with it.

    I have said repeatedly that I believe interest rates should float. I also think, although I may not have always articulated the point, that there should not be capital controls. If you do away with interest rate targets and capital controls then you can use OMO to achieve an effective currency fix to an ECU, Bancor, or to Gold. You can do this without crisis. And ironically if you fix to gold you get low interest rates anyway. Just as nations today that fix to the EURO or the US dollar essentially inherit the interest rate and core inflation rate of those currency zones.

    Britian could fix the Pound to the EURO today so long as they decided to abandon attempts to also fix the domestic interst rate. They would inherit their inflation rate and interest rate from the EURO. They would not need to adopt the EURO but would get all the same benefits (more integrate trade). Notionally this might be characterised as handing your destiny to a bunch of beauracrats at the ECB but in practice foreign beauracrats are generally no worse than domestic beauracrats. Although if instead they fixed the Pound to gold then they would not even need to worry about foreign beauracrats (although Nixon managed to worry about foreign speculators).

    The sea of floating exchange rates we have across the world today represents the biggest tariff on trade that we have going. And it does not even generate public revenue. Living with floating rates is like deliberately putting large rocks in our harbours. It is ultimately a disfunctional setup and not one that a global free market in currency would land us with.

  6. p.s. I could go on about how US bimetalism was also a crisis cooker built on an attempt to hit two targets at once but then I’d just be labouring the point.

  7. Okay dokey, so what you are suggesting is that instead of an economic shock being felt in the exchange rate, you would prefer to see shocks felt through internally. Would you mind explaining how the labor market would be allowed to adjust downward in nominal terms… that is, both a real and nominal wage cut. He would we do it when the ALP has just re-regulated the labor market to a centralized award system that wouldn’t even contemplate such a thing.

  8. “Would you mind explaining how the labor market would be allowed to adjust downward in nominal terms… that is, both a real and nominal wage cut”
    .
    That’s easy — you just need deregulate the labor market fully. Falling wages (and deflation) are exactly what HK had from about 1998-2004, without great problems. It seems to me that once people realize their wages can go both up and down, these things are far less of a problem. I believe even now in the UK, people are beginning to work for less again, so I don’t think it’s impossible.

  9. Isaac Newton was the first modern proponent of gold. We could call any standard of gold-backed currency a Newgold, in his honour. 1 Newgold could be 1 gram of gold in the new system. This could be shortened to Ng.

  10. JC – I would not have picked you as a proponent of the Phillips curve. The idea that inflation (a decline in the value of currency) will lead to a corresponding increase in employment. But there you go.

    For a country such as Australia where we have a lot of commodity exports it is hard to think of a shock that would damage us if commodity prices were stabilised by a commodity standard. And I don’t see the current monetary scheme as having isolated anybody from any shocks. If anything the current monetary scheme has been something of a prime mover in multiple economic shocks.

    How does California deal with an economic shock given that it’s currency is fixed to the currency used in all the other US states? Robert Mundell pioneered a whole field of inquiry regarding optimal currency areas based on such questions. He won a Nobel prize for it. And his conclusion is that the ideal currency zone is the entire planet.

    And if there are rare exceptions when a currency devaluation is an essential ingredient in avoiding economic problems then a fiat gold standard does not entirely preclude the possibility of devaluation. It just makes it a seriously offensive high stake political decision. So you could simply advocate a fiat gold standard and refuse to support the subsequent reforms that would denationalise currency entirely.

  11. Curious assertion you make, Terje. However wrong again.

    If we link to gold or another currency that maintains a “harder” tone than we do you had better ensure that the domestic price level…. with the price of labor being the most important….. is reasonably flexible. If it isn’t, there’s a problem.

    We’ve been through this before.

    Mundell won his Nobel on monetary economics however he didn’t win it for suggesting the world go to one currency.

    The US is an optimal currency area because the government also has the fiscal ability to make transfer payments from one region to another if required. Europe’s Euro will not survive in the current fashion unless some mechanism there too. You have already seen Germans walking away from that proposition. You’re also totally overlooking political union which the US has while the EU doesn’t.

    Why should we change our currency status? If people want to have one currency they could simply peg to ours.

    Looking at Europe, the problem as I see it is that it is wrongly matched. You have the hard currency advocates in the north and the soft bloc in the south. The ECB is clearly the bastard child of the Bundesbank and follows a harder currency regime than the soft countries. Normally the soft countries would be devaluing in this environment. Yet they can’t However their labor and goods markets are extremely inflexible to take the hit in nominal wages and prices that would invariably lead to a cut in real terms. Hence the big possibility of a major default in Europe.

    Why don’t you ask Quiggler about all this as I’m sure he carries a great deal of expertise seeing he is a 2020 summit veteran. You get on with him don’t you?

  12. Are you claiming John Quiggin as some sort of an economic authority on such matters? He would not be my first choice by a long shot.

    If I’m reading you right you think that:-

    1. Currency devaluations (or inflation by another name) is a necessary or at least highly desirable economic tool for fighting recessions.

    2. Fiscal transfers, or corporate and individual welfare or what me might call regional stimulus packages or basically just tax and spend are necessary for a common currency area to work.

    3. Accordingly you think the Eurozone is doomed.

    On all those points I’m strongly inclined to disagree. Zimbabwe has tested the limits of the devaluation trick and it doesn’t work. Tax and spend is means to economic stimulous is a menace even if you call it transfer payments. And the markets seem to like the EURO and based on it’s status as a reserve currency it is certainly popular with other central banks.

    The one thing that I would point to that makes the Eurozone and the USA more suitable as currency zones is the free movement of labour. However I don’t think even this is entirely essential.

  13. Terje:

    No, you are not reading me right. Perhaps you need to try to avoid the intellectual dishonesty and the word games.

    1.I’ll repeat one more time. If you’re going to have a regional currency bloc or a gold backed currency you need to ensure that the domestic market is as flexible as possible or as flexible as the most open economy.

    That seems to always come as a surprise to you so you may wish to ask anyone with economic training if that’s so seeing you have a great difficulty believing me.

    2. If you don’t change the current tax/economic structure you’d had better ensure there is a transfer mechanism in place otherwise the currency would be as potentially dysfunctional as the euro may turn out to be. You don’t seem to be suggesting that so I would take it that point 2 is a strawman.

    3. Yes. The Euro zone isn’t just doomed; it will be a dead zone. Don’t take my word for it though; Friedman made that very comment before he died. He said the Euro would not make it past the first major recession. I think he’s right.
    However that process could be slowed down somewhat seeing the Europeans were able to load up the IMF with about $700 of cash and extra commitments which they basically stole from the rest of the world under the pretense of altruism when in fact they are trying to get at the loot themselves to help the former eastern bloc countries and soon the southern EU region.

    You can disagree as much as you like, however if the domestic market is rigid the only choice is devaluation or the market will do it for you.

    Southern Europe has almost always gone for devaluation for the reasons I enumerated. The Zimbabwe example is taking the argument to absurdity. The Italian Lira was not denominated in the ‘ 000’s because Italians like big numbers. The same goes for the French Franc to the lesser degree and Spain and Greece.

    The markets will become more uncertain with the Euro especially if the ECB continues to refrain from monetary expansion, as the internal market still doesn’t seem to be able to adjust due to its enmormous inflexibility.

    Well actually the Euro’s reserve status has barely budged over the past two years. It increased by about 2%. The Euro is not going to be the world’s reserve currency.

    Free movement of labor is not only essential, it’s also make or brake for a unified currency zone which is the reason regional differences in the US aren’t a big problem whereas they are in Europe as people barely want to move from one village to another in finding a job.

    Yes, I thought Quiggin is the foremost expert on the financial crisis. His postings so far have been what I would expect from someone that will eventually win the Nobel peace prize.

  14. “His postings so far have been what I would expect from someone that will eventually win the Nobel peace prize.”

    Harsh. But funny. 🙂

  15. As a minarchist, I think that local governments should be able to set standards for trading with their citizens on their roads and parks and utilities. This would leave private citizens free to barter or trade in whatever medium they agreed. The local standard would become the de facto standard, so long as it didn’t become de jure.

  16. if the domestic market is rigid the only choice is devaluation or the market will do it for you.

    If currency revaluations are such a potent tool for dealing with shocks then surely you would want authorities to actively revalue the currency and not just let it drift about in the hope that it may move the right way.

    Anyway you have not detailed the sorts of shocks you are concerned about. However lets consider a few.

    1. Monetary shock due to shift in currency value.

    This is what we are trying to avoid. If you build a system that avoids sharp shifts in currency values then you mitigate this type of shock up front.

    2. Demand shock.

    Lets say the bottom falls out of the commodities market. Australia might want to devalue. However if we are using commodites as the anchor for our currency then we will anyway. Alternatively if demand for Australian manufactured cars suffers a sudden downward demand shock then the key shock absorber should be the profit margins of those firms involved. And if they reach breaking point then that is a necessary signal also.

    3. Credit shock.

    We are seeing a collapse in credit just lately. This is a potentially deflationary process. Deflation means prices fall including commodity prices. However if the value of your currencies are fixed to commodities then the quantity of base currency increases automatically to take up any slack (and to dent the price decline).

    In any case for most nations the import and export sectors are smaller than the domestic economy. If collective price reductions via currency manipulation are so viable then domestic inflation must be a real panacia. In practice however it proves to be the exact opposite.

    Yes, I thought Quiggin is the foremost expert on the financial crisis.

    If we follow his remedies then we’re doomed;

    http://johnquiggin.com/index.php/archives/2009/04/06/an-agenda-for-social-democracy/

  17. http://www.thenewamerican.com/economy/commentary-mainmenu-43/932

    U.S. Treasury Secretary Timothy Geithner has given a nod of approval to China’s call for a global currency to replace the dollar, joining a chorus of international voices that include Russia, a United Nations panel, billionaire investor George Soros, and Kazakhstan — among others. Geithner’s remarks favoring the China proposal, delivered at a meeting of the Council on Foreign Relations (CFR) on March 25, surprised many, as the previous day both he and President Obama gave statements disapproving of any move away from the U.S. dollar as the world’s reserve currency.

  18. It really doesn’t seem to sink in does it, Terje? How many times have I explained to that if you construct a currency regime that is inflexible you need to ensure the external market is flexible enough to absorb any shocks?

    How may times have I mentioned Argentina as example of what can go wrong when a currency is tied to an economy that’s far more flexible while Argentina was as stiff as a solid wood plank?

    You seem to think that fixing currencies to gold or to each other will somehow be a panacea for all our ills, when we have seen from past evidence this is far from the truth.

    Almost every currency fix has been broken long term with the exception of Hong Kong and the reason Hong Kong is able to hold on is because the internal market is actually far more flexible then the US.

    A few months back you were suggesting Australia should fix its rate to gold. Great idea. NOT! If we had fixed our currency to gold we would be eating grass by now as our labor market would be able to adjust seeing we have recently re-regulated to a system that seems to only allow upwards nominal adjustment. Try and bring a case to the Gillard Higher Wages Tribunal demanding you be allowed impose a nominal wage cut because the price of gold has appreciated.

    A floating rate regime serves our interests these days. In fact it serves the world’s interest unless we’re able to go back to the 19th century and allow nominal changes to the domestic price level. I keep mentioning this to you and you play these stupid freaking games accusing me of supporting the Philips curve.

    The Euro is a horrendous idea, which at some stage it will fray at the edges unless they are able to impose political union that allows money transfers in a regional setting. Germany has already put the kibosh to that and who can blame them. You also need a mobile labor market, which they don’t have and don’t look like obtaining one any time soon. You need regional money transfers in this sort of economic setting especially when domestic prices in the EU are so sticky and downward adjustments can’t take place in nominal terms. Do you understand why?

    The idea of a global currency without ALL the nations having the same flexibility in the labor and goods markets is a silly idea. It will end up self-destructing and it would allow the weaker members to arbitrage the credit rating of the stronger members. No thanks as it would be the biggest socialist boondoggle ever created.

    Here’s what you need to have first before to tie a currency to gold or to each other.

    Ensure the world is operating in a complete free trade environment without any lies and bullshitting going one. Ensure the world has uniform labor laws that look identical in each country. Ensure that the goods and service market in each is left unhindered and taxation is broadly identical. Yes, I know about Ireland. It was able to get away with a much lower tax regime because it’s really a tiny country otherwise the howls of “ harmonization” would have been stronger from the social demolitionists.

    Once you have done that you can then agitate for one world currency.

    PS I gave you an example before of what could have happen if the Aussie tied to gold. Do you wish I repeat it?

    Yes, I saw Mike Steketee’s summary of the quiggles “ideas. He’s very consistent at least.

    And here I was thinking dinosaurs couldn’t be brought back to life. 100 years of socialist experiment in its various forms and you still end up with deadenders pushing for it.

    Here’s hoping he gets a nomination for the peace Nobel peace prize.

    ————

    By the way, the idiot, Geithner retracted that comment 12 hours or so later. He realized what a stupid comment it was. The tax cheat has no idea what he was saying.

    Here’s the thing about the US dollar and why it won’t be much of a problem for them in terms of funding their position going forward.

    The US NET debt position with the rest of the world is only about 17% of total debt outstanding. 86% of that is financed in US dollars which i guess is the magic of having a reserve currency. They’ll fight tooth and nail before they give that up. The other issue is that it takes oceans of time before a reserve currency loses it’s status. The Sterling proved that to be the case. The other issue is that reserve status is usually eventually handed to the nation that has the biggest guns and i can’t see anyone really taking away that mantle form the US anytime soon.

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