The Goldwatcher

Chapter 4: The Rise and Fall of the Gold Standard associates with the question ‘Did gold cause the Great Depression?’  Ben Bernanke sides with the economists who accept Milton Friedman and Anna Jacobsen Schwartz’s conclusion that  flawed Fed policies at the time, including excessive concern with the nation’s commitments to the gold standard, caused the depression.   At Milton Friedman’s 90th birthday celebration, shortly after becoming a Governor,  Bernanke spoke for the Fed.  This was his message: ‘I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.’

Bernanke thought he had all the answers. He wrote at the time ’a smart central banker can protect the economy and the financial sector from the nastier side effects of a stock market collapse.’ (The Goldwatcher Page 61). We all know he was wrong on that one for a range of reasons.  Now,   92 year old  Anna Jacobson Schwatz has commented in a WSJ Interview , Bernanke knew history and should have responded differently when the present crisis erupted.  In her opinion ’ Today’s crisis isn’t a replay of the problem in the 1930s, but our central bankers have responded by using the tools they should have used then. They are fighting the last war…I don’t see that they’ve achieved what they should have been trying to achieve. So my verdict on this present Fed leadership is that they have not really done their job.”

Chapter 5: The Dollar Standard and the ‘Deficit without Tears’ associates with the question ‘Is the $ again America’s currency and everyone else’s problem?’ Opinions from several respected economists are discussed in this Chapter, including Nouriel Roubini’s criticism of the so called ‘Bretton Woods 2′  arrangements - the foundation for the convenient ‘America spends Asia lends’  pattern promoted by Alan Greenspan, George W. Bush and Ben Bernanke to give the illusion of prosperity.  Nouriel has been forecasting a breakdown of Bretton Woods 2 since the theory was first introduced. But  at an IMF Seminar he presented a year back he acknowledged that, in the event of a recesssion, once China  realised the extent to which it would be a loser following an economic collapse in the US,  it would be unlikely to ‘pull the plug’ on the US. (The Goldwatcher pages 86/87)  I had the opportunity to discuss this with him in June this year. That was still his view - and as far as I know still  is. It’s also consistent with the view of Frank Holmes in the post below.

# Note posted on 24.10.08 : In this Bloomberg Video of  Roubini mentioned above he argues that  if the US can’t import substantially from China it won’t have the benefit of vendor finance and will be unable to secure funding from China on favourable terms.

 Can We Save the World Economy? A Conversation with Geroge Soros, Nouriel Roubini, and Jeffrey Sachs 

This video of a discussion at Columbia Columbia University moderated by CNN’s John Roberts is essential listening for readers seeking a better understanding of the origins, potential results and possible ways out of the present crisis. Roubini (pictured above) is as usual straight talking,  pragmatic and he pulls no punches. George Soros,  who has been writing about the end of the era ‘of international expansion based on the dollar as the international currency’ explains the errors in policy and general perception that  led to the flawed belief that the market is always right. (The Goldwatcher Page 96.) Jeffrey Sachs reviews wrong  priorities over the the Bush YEARS..  A common thread they share is the need for a well directed fiscal stimulus - not only in the US, but globally. Again to an extent consistent  with the view expressed by Frank Holmes below.

For those concerned over the recent fall in the gold price it;s worth  listening carefully to George Soros’s commentary in the CNN video and not assuming the market is always right.

 Jacques Rueff & ‘The Deficit Without Tears,’ that could end in tears:

The French Economist Jacques Rueff, committed believer in a gold standard  and relentless critic of the dollar standard,  coined the phrase ‘deficit without tears.’ It describes the privileged status of the US under the Bretton Woods arrangements that made it possible for it to run a deficit that would never disappear while the dollar standard prevailed. (The Goldwatcher Page 87). Rueff’s conclusion was inevitably the dollar standard and associated deficit will lead to a global economic crisis that will end in tears and an event akin with the Great depression.  Rueff could, alas, still be proved to be right

Chapter 9: Gold price prospects and owning gold:

This Chapter on gold price prospects anticipates the Global Crisis of Confidence and ends with serious oncerns over both outcomes for the dollar and an economic crisis on the scale of the Great Depression. But it’s acknowledged  that strong leadership can still get the US and Word Economies back on track. That’s also very much the message I got from the interviews with Roubini, George Soros and Jeffrey Sachs. And it’s also what most of us, optimists a heart. expect.

But what if outcomes are not as benign as we hope they will be?  While no one can answer that question everyone can be better equipped to deal with the consequences of worst case scenarios by holding some gold as insurance against the unthinkable.(The Goldwatcher Pages 8-9)

.