WILL CURRENCY WARS END WITH A RETURN TO THE GOLD STANDARD ? / ZERO HEDGE

Will Currency Wars End With A Return To The Gold Standard?
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Submitted by Tyler Durden
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on 02/12/2013 10:57 -0500
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Gold continues to flow from the west to east. Reuters reports that U.S. Commerce Department data showed U.S. exports of nonmonetary gold, which excludes central bank transactions, climbed by 43% to $4 billion in December from the prior month.

 

That's the highest total and the largest month-on-month jump in U.S. private gold exports since September 2011, when gold rallied to a record nominal high over $1,920/oz. Hong Kong accounted for nearly half of the $4 billion.

The Group of Seven nations have reiterated their commitment to market-determined exchange rates and said fiscal and monetary policies must not be directed at devaluing currencies.


Actions speak louder than the words of the communiqué and the reality is that the fiscal and monetary policies of many members of the G7, and especially the U.S., are directed at devaluing currencies through competitive currency devaluations.


Concerns about the devaluations and the growing risk of a severe bout of inflation have led to calls for a return to fixed exchange rates and a gold standard.


Bloomberg’s Trish Regan and Adam Johnson interviewed TCW Group’s Komal Sri-Kumar and Bank of New York Mellon's Michael Woolfolk about the risks from currency wars on Bloomberg Television's "Street Smart."


Trish Regan asks whether there is a danger that “we have massive inflation worldwide for years to come?”


The answer is yes and both agree that inflation is a real risk as is a loss of credibility by central banks.


Komal Sri-Kumar is asked what the solution is and is asked about his Op-Ed in The Financial Times in which he calls for a return to a gold standard.


He replies that a gold standard today would be no different to “how good it was from 1945 to 1971.”


“It worked, the world was in prosperity, there was economic growth and there was clearly certainty in terms of what exchange rates were.”


He warns that “even in the short term there is nothing to be gained by devaluing. We have tried that in the United States. We have been devaluing through QE1, QE2 and QE Infinity, the most recent one ... we don’t have sustained economic growth.”


In his Op-Ed in The Financial Times, Sri-Kumar called for gold to be fixed just above today’s levels at $1,675/oz:


“A first step would be to fix the price of gold in dollar terms at near its current level of $1,675, with assured convertibility. To ensure that currencies are neither over- nor undervalued, the consumption basket (or the hypothetical loaf of bread) should be valued at roughly similar levels in different currencies at fixed rates against the dollar.”


Bank of New York Mellon's Michael Woolfolk says that you could back the dollar with gold as “the value of gold would have to be astronomically high to back the money supply”.


“At the time of the 1960’s a dollar was a unit of currency and $35 bought an ounce of gold, but the velocity of money is so much greater now the price would need to be higher”, Columbia University educated Kumar said.


The benefit of the gold standard was that there was a fixed exchange rate.


“If we went back to the gold standard you would be looking at a global recession,” says Michael Woolfolk. “We don’t have enough gold and it’s not growing fast enough”.


Kumar disagrees that by using a gold standard and that having it fixed exchange rates, the certainty would increase global trade and overall global production.


“The price of gold would have to be astronomically high, plus you couldn’t guarantee that all countries have different interest rates set”?


“Michael, I don’t think the inflation would be much higher if the country submits itself to a fixed exchange rate” said Kumar.


Sri-Kumar concluded the following:


“During the Bretton Woods period the The Vietnam War pushed the inflation up as the U.S. had to print dollars to finance a war. Then Nixon abolished the gold link in August of 1971 was death net. After that, money supply increased by 10% in one year and this was not consistent with the fixed exchange rate. If you had not done that we would have avoided the push up in inflation in 1973-1975 and the subsequent increase in oil prices in 1979.”



This debate shows how gold is being seen as money and as a safe haven asset again, and shows the silly nature of the ongoing suggestions that gold is a ‘bubble’.