海角大神

Federal Reserve Chairman Ben Bernanke went back to the classroom to educate young minds at George Washington University about the history and role of central banks and the Federal Reserve in particular.

On the topic of financial panics, Bernanke asks the students if they鈥檝e seen the movie 鈥淎 Wonderful Life.鈥� 聽Not as many students had seen the movie as he had hoped. 聽Bank panics are a serious problem Bernanke explains. 聽Banks borrow short and make long-term loans that are illiquid.

This would have been a perfect time to talk about unviability of fractional-reserve banking. 聽However, Professor Ben avoided that and instead waxed eloquent about a perfect world where Jimmy Stewart would be able to borrow from a lender of last resort鈥搕he central bank鈥� 聽and FDIC deposit insurance would quell unsettled depositors.

Bernanke cites Walter Bagehot鈥檚 axiom that central banks must lend freely in a panic, against good collateral, at penalty interest rates. 聽After all, the central bank doesn鈥檛 want borrowers taking advantage of cheap rates to get through the crisis.

No student hands shot up to question the Fed Chair as to how a Fed Funds rate of zero to 25 basis points could be defined as a 鈥減enalty rate.鈥�

鈥淕old standards are far from perfect,鈥� 聽Bernanke said. 聽鈥� They waste of resources,.鈥� 聽citing Milton Friedman鈥檚 quip about taking gold from one hole in the ground just to transfer it to other hole.

Gold standards are far from perfect because government bureaucrats have always been in charge of managing them. 聽聽The mere fact that heavy costs and resources are involved to mine the yellow metal is one of the 聽factors making gold a perfect money.

A gold-shackled currency takes away central bank flexibility, which bothers Bernanke. 聽But the question is, how much Bernanke flexibility can the dollar stand before it falls apart completely?

The Fed Chair admitted that the gold standard provides price stability鈥揵ut only in the long run. 聽He stressed that there have been short-term periods of price inflation and deflation under gold. 聽Well sure, prices increase and then correct, that鈥檚 what a gold standard does. 聽Under central bank management prices just increase; either slowly, quickly, or catastrophically.

Exchange rates are fixed under gold thus, Bernanke told the students, shocks in the money supply in one country will affect other countries. 聽聽He used the example that an accommodative monetary policy by his employer would cause inflationary pressures in China, because the yuan is tied to the dollar.

Bernanke cited speculative attacks on gold-backed currencies as a problem, saying that if it鈥檚 believed there isn鈥檛 enough gold backing the currency there can be a run on that currency. 聽This is a human problem, not a gold problem. 聽The same thing occurs more often under fiat currency systems. This is the way the market should work.

Amazingly, the Fed Chair rolled out the tired old 鈥渢here isn鈥檛 enough gold to maintain a gold standard鈥� argument. 聽Showing a slide of William Jennings Bryant, Bernanke told of farmers struggling with debt that was fixed, while the price of their crops was dropping. 聽Bryan called for a monetization of silver to increase crop prices.

Nigam Arora picks up on this theme in a piece for 鈥淭he Trading Deck鈥� on MarketWatch. 聽聽Mr. Arora writes that Bernanke did a great job and thinks his 鈥渃omments today on the gold standard may help those who are genuinely trying to make money from their investments.鈥�
聽Arora writes that there just isn鈥檛 enough gold for the modern economy and the production of gold can鈥檛 keep up. 聽He cites the Conference Board鈥檚 prediction that the world economy will grow by 3.6% this year, and gold production only grows 2-4% a year.

鈥淭he point is that the production of gold does not increase enough to accommodate growth in world economy,鈥� Arora writes. 聽鈥淭hen there is a peak gold theory which states that gold production has either peaked or will peak sometime in the near future. In contrast, the world economy will continue to grow.鈥�

But growing the money supply doesn鈥檛 grow an economy: only real savings does. 鈥淣either the Fed nor the government can grow the economy,鈥� explains Frank Shostak. 鈥淎ll that stimulatory policies can do is to redistribute real savings from wealth producers to nonproductive activities. And these policies encourage consumption that is not supported by useful production.鈥�

The redistribution created by the Fed鈥檚 monetary pumping actually weakens the economy over time as real savings is squandered on malinvestments. With gold as money, real production and savings is stimulated. 聽Capital and savings flow to the most efficient and best producers.

Mr. Arora writes that South Africa is number one in gold mining followed by the US. 聽Actually both of these countries are behind China and Australia, with Russia on the verge of pushing South Africa into the number five spot.

His bigger point is that countries without significant gold production would not be interested in a gold standard. 聽No political class anywhere is interested in the gold standard because it limits government expenditures.

Arora鈥檚 hedge fund is short gold and owns inflation hedges 鈥渢hat have lower risk and higher rewards compared to gold.鈥� 聽He writes, 鈥減laying gold as a speculation based on momentum and confusing it with the gold standard and monetary policy without deep understanding of these subjects is a losing proposition.鈥�

Arora鈥檚 arguments give us an idea how deep his understanding is: about the same as Chairman Bernanke鈥檚.