The Financialist: ‘Currencies in a drought’ + Gold Standard roundup

29th August 2012

Quote of the day

Mike McCudden, "On sparse volumes the message is loud and clear that investors would rather sit this week out than get involved in the run up to Bernanke's speech at Jackson Hole. All the signs are there that he will announce additional policy easing but investors are not taking any chances."

Chart of the day

nom

Currencies in a drought: The top 10 countries with the largest and smallest agricultural weights in Nomura's commodity indices. (FT Alphaville)

Economics

Why George Osborne's economic policies are dividing Britain. (Guardian)

"If Tory policies threaten to depress profits, how can we say that the Tories are the party of capitalism?" (Stumbling and Mumbling)

Q&A: Why the appropriate response to the current crisis is more investment, not cuts. (Socialist Economic Bulletin)

MPs argue that restricting the capacity of Heathrow is harming the UK's economic potential. (BBC)

Investing

Opportunity comes knocking: Three cheap defense stocks. (Motley Fool)

5 ways investors can mentally weather, and even profit from market volatility. (Morningstar

UK Stocks-Factors to watch on Weds August 29. (qfinance)

Technology

How Samsung's loss is Microsoft's opportunity. (WSJ)

Look out: the once vital office landline will soon be a thing of the past. (Telegraph)

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+ Why is returning to the Gold Standard a bad idea?

Financial Times report last week that the Republican Party is set to call for the creation of a commission to look at restoring a link between the U.S. dollar and gold has created such headlines like: "Why the Gold Standard Is the World's Worst Economic Idea," "The Gold Standard Is Nuts," and "Going back to gold standard would be dangerous." In view of this, what makes a return to the gold standard an idea non grata?  

Well, according to the Atlantic's Matt O'Brien, it prevents the central bank from fighting recessions by outsourcing monetary policy decisions to how much gold a country has. "This policy inflexibility," he writes, "was the major cause of the Great Depression, as governments were forced to tighten policy at the worst possible moment. It's no coincidence that the sooner a country abandoned the gold standard, the sooner it began to recover."

Golden Instability

New York Times columnist Paul Krugman, meanwhile, offers a different take. In a blog post entitled "Golden Instability," the Nobel Prize-winning Princeton economics professor declares that returning to gold is "an almost comically (and cosmically) bad idea," because the widespread view that "at least gold has had stable purchasing power" couldn't be further from the truth: Since 1968, the real price of gold – the price deflated by the consumer price index -shows a huge range of variation.

Krugman says, "Anyone who believes that the gold standard era was marked by price stability, or for that matter any kind of stability, just hasn't looked at the evidence."

Government is too big; our banking system too entrenched, to ever permit a reversion to gold."

John Carney, CNBC's senior editor, points out, however, that "price stability" is not a central claim of real-life advocates of the gold standard. "The so-called Austrian school of economics, the most prominent economics school advocating the gold standard, is actually quite notable for its criticism of the very idea of ‘price stability.'" Nevertheless, Carney is not convinced that a return to sound money is even possible. "Our government is too big; our banking system too entrenched, to ever permit a reversion to gold."

Would Gold then become a good investment?

Ok, so with all talk about going back to gold, what would gold be priced at if it reclaimed its role at the center of the monetary system? Matthew Lynn, the Wall Street Journal's MarketWatch columnist says no one really knows but, "The London-based research firm Capital Economics estimated in a study last week that it would be around $10,000 an ounce, or more than five times its current price."

"But no one can say for certain. It would depend on the rate at which it was set in dollars, or in any other currency that decided to switch to gold…..And once a gold standard was re-established, of course, it might not be a very good investment at all."

Previously on The Financialist:

Sinodependency

Jobs, affordable housing and the recessions unlikely winner

This Chart Sums Up 80 Years of US Energy Policy

Bond Investors Beware

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