A gold standard would just make business cycles more extreme, according to co-founder and chairman of Roubini Global Economics, Nouriel Roubini.
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Nouriel Roubini
What's more, a gold standard would make central banks unable to fight inflation or deflation, much less do anything to combat persistent unemployment, Roubini said in an interview with NetNet yesterday.
"A fixed exchange regime, even if it is not a gold standard… that world just doesn't work. Because in that world, monetary policy by definition instead of being countercyclical becomes procyclical," Roubini told NetNet. "Suppose you have a fixed exchange rate regime...it just exacerbates the business cycle."
Roubini asks us to imagine two countries: One that's growing very quickly, and one that's growing very slowly.
The economy that is growing quickly would tend to "overheat"—an economic phenomenon characterized by accelerated growth, inflation and the potential for asset bubbles. In the economy that is growing more slowly, there would be a tendency toward deflationary pressure and recession. So, instead of having a central bank with the capacity to successfully counter-balance these tendencies, an economy with a fixed exchange rate regime would continue to reinforce the existing negative trends in the business cycle, Roubini argues.
Although he is best known as an economist who challenges conventional views, Roubini pretty well lines-up the consensus view of mainstream economics on the gold standard or fixed exchange rate regimes: "You have the opposite of what any optimal rule about monetary policy will tell you," Roubini said.
The ranks of the gold standard advocates, which have long included many Austrian economists and others worried about central bank manipulation of the money supply, were seemingly joined this week by World Bank President Robert Zoellick. Hardcore gold standard folks, however, are skeptical of Zoellick.
Nouriel Roubini agrees with the skeptics. "In fairness to him [Zoellick], he was speaking about a wide variety of issues in the global economy…so it was not a proposal centered around going back to some modified gold standard," Roubini said.
Roubini seems to think a gold standard is a pretty awful idea. "There are many fundamental problems with any variant of a gold standard," he said.
A general summary of Roubini's position on the issue would likely begin by saying that, generally speaking, a fixed exchange rate regime or gold standard limits the flexibility and range of actions that central banks can take to improve a nation's economy in fundamental ways. (For example, in a fixed exchange rate regime, central banks have less ability to maximize employment, stimulate growth and manage price stability.)
And, as Roubini specifically pointed out to me, fixed rate regimes inhibit the ability of banks to provide lender of last resort support to an economy when necessary.
According to Roubini, there are other major feasibility issues with the proposals for a transition to a global gold standard. One of the principal problems with such proposals is the current level of central banks' gold reserves.
Roubini raises the following question: If you are on a gold standard, or modified gold standard, what do you do in the event of a bank run—if you don't have enough gold to fully back the currency? Roubini explains that most central banks in today's economy have far greater financial liabilities than gold in reserve. In fact, according to Roubini, in the case of most central banks today that ratio is about 40 or 50 to 1.
Of course, many who support a gold standard would say that limiting the ability of central banks to increase their leverage would be a benefit of adopting the gold standard.
Aside from the issue of central banks' insufficient current gold reserves, there are the issues that historically plagued gold standard economies. One of the most intractable of those issues was the impact that the gold standard had on traditional business cycles.
Historically speaking, Roubini says, during the days of the gold standard economies were constantly imperiled by spasmodic cycles:
"When you had a traditional gold standard, boom and bust with severe swings in economic activity were the norm—really big ones. It was only once we moved to fiat money that central banks were able to smooth the business cycle, and make it less volatile, as we did during the financial economic crisis," Roubini said.
Of course, this directly contradicts Austrian business cycle theory, which argues that boom-bust cycles are caused by central banks departing from the gold standard.
In short, Roubini's views challenge the Austrian economists where they live: at the intersection of monetary policy and the business cycle.
We eagerly await the response. Over to you Ron Paul and the Mises Institute!
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