Sep 10 2008
Peg the Dollar to Gold?
A senator from Texas is proposing that the Fed would be required to maintain a $500/oz gold value. This would be accomplished through open market operations where the Fed drains reserves (sells Treasury securities) until the target is reached. This is the same thing the Fed does to manage the Fed Funds rate. Here’s his plan.
The concept is interesting, but there are some issues with his arguments.
My first one is the part where he suggests that since the monetary base has risen $45 bln since the last time gold was at $500/oz (12/09) that should be all the Fed needs to sell in securities to bring the metal back to the target price. That rise in the base is about 5%, but gold is up more like 60%. I’m not seeing the math working out there.
Also, the Senator does realize that selling Treasury paper like that would push rates higher, right?
He also makes the following statement:
Unlike capital, the amount of money in the economy should not be limited by anything physical. It should be determined by the demand for money, which depends upon the transactions people want to do and how much money they want to hold.
Ummm…That’s exactly what’s going on now. When we borrow from the bank money is created. It’s demand pull. The more we borrow, the greater the increase in money supply. This doesn’t solve the basic problem of over spending and overconsumption based on debt.
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