Comment

The Mainstreaming of Ron Paul

263
Bill Dalasio5/07/2009 6:47:23 pm PDT

As a practical matter, a return to the gold standard, or even a commodity basket standard like that proposed by Ron Paul, would produce some very bad results. Money works best when its rate of growth matches that of the productive capacity of the economy. Really, there’s no reason to suppose a particularly high correlation between the availability of gold or any other commodity and the growth of human productive capacity. If anything, technology has only further reduced the correlation. Thus we could find the money supply wreaking havoc with normal economic functions as the availability of commodities fluctuates in patterns unrelated to real economic growth. That said, the weakness of the gold bugs’ alternative does not necessarily invalidate all of their critiques. Over the last year, the pace of monetary growth can only be characterized as genuinely disturbing. Moreover, the Fed’s relatively recent introduction of quantitative easing into its policy mix suggests that things might well get worse. Yes, it probably has bought us some temporary, modest, relief from the consequences of the bursting of the real estate bubble. However, its far from clear that this inflation of the currency will kick off a period of real, self-perpetuating, economic growth. If that doesn’t happen, we will see a return to the economy’s downward path with the addition of price inflation. At that point, the central bank’s credibility severely eroded, the cost of relief in terms of growth will be higher, meaning still more severe inflation. That puts us in a spiral of inflation and contraction that gets very, very ugly very, very, quickly.