On his blog for the Brookings Institution, former Federal Reserve chief Ben Bernanke has written a series titled “What tools does the Fed have left?”
The entries that Bernanke has penned so far discuss three weapons — negative interest rates, targeting longer-term interest rates, and helicopter money — that the central bank can still wield to hit the 2% inflation target it needs to declare final victory over the deflationary forces still lingering from the Great Recession.
But one word is missing from the three-part series: gold. That’s no surprise given Bernanke’s infamous dismissal of the yellow metal in verbal sparring sessions with then-Congressman Ron Paul during appearances on Capitol Hill. Even after Paul retired from Congress, Bernanke admitted to lawmakers that “no one really understands gold prices,” including Ben himself.
Exec cites FDR’s 1933 order: And European Central Bank chief Mario Draghi also got tongues wagging in December 2014 when he said he and his fellow policymakers had discussed buying “all assets but gold” in planning how to implement a quantitative-easing program for the eurozone.
But leave it to a vice president and fund manager at one of the world’s largest asset managers, Pimco, to invoke gold as an antidote to the economy’s current lethargy. In ahypothetical piece, Pimco’s Harley Bassman proposes that the Fed offer to buy citizens’ gold at above-market-value prices to stimulate the economy and generate inflation while offsetting the deflation being exported by other nations to the U.S.
Bassman uses as his model the gold-confiscation order issued by President Franklin D. Roosevelt in 1933 to lift the U.S. out from the Great Depression. Under penalty of possible prison time, citizens back then were told to turn in their gold for the price of $20.67, which the Fed later revalued to $35.
Ignoring for the moment the outrageous nature by which the gold was acquired, the plan worked, Bassman wrote. “Positive results were almost immediate,” Bassman notes. “Over the three years from January 1934 to December 1936, GDP increased by 48%, the Dow Jones stock index rose by nearly 80%, and most salient to our topic, inflation averaged a positive 2% annually, despite a national unemployment rate hovering around 18%.” (Subsequent Fed policy blunders plunged the nation back into Depression, but that’s another story.)
Fed would pay beyond spot value: Bassman’s modest proposal for the 21st century is this: “In the context of today’s paralyzed political-fiscal landscape and a hyperventilated election process, how silly is it to suggest the Fed emulate a past success by making a public offer to purchase a significantly large quantity of gold bullion at a substantially greater price than today’s free-market level, perhaps $5,000 an ounce? It would be operationally simple as holders could transact directly at regional Federal offices or via authorized precious metal assayers.”
Bassman argues that a Fed-sponsored gold-buying program would be more effective than QE, which “was wholly contained within the financial system” and didn’t boost the real Main Street economy. He also dismissed negative interest rates as “just bizarre to most non-academics.” In contrast, gold purchases used as an “avenue of monetary expansion might finally lift the anchor on inflationary expectations and their associated spending habits.”
Gold is uniquely qualified for such a Fed program because of its unique, time-tested functionality as money — attributes that other rival assets such as oil or houses lack, Bassman concludes.
Gold could be king after global reset: Of course, Bassman’s plan is not new. Besides its roots in 1933, West Shore Funds strategist and gold author Jim Rickards has long suggested that the Fed buy bullion. “I discussed #Fed buying #gold in #CurrencyWars p 244 (2011),” Rickards tweeted, referring to one of his bestselling books.
Right now, though, the Fed is doing all it can to downplay gold as a potential solution to a world now dominated by fiat currencies, overwhelming debt, and slowing growth. The Fed wants you to think that its bag of monetary-manipulation tricks is all the world needs to navigate through economic turmoil.
But other central banks are not on the same page as the Fed: The People’s Bank of China has been gobbling up bullion for years in preparation for the day when the U.S. dollar is now longer the pre-eminent reserve currency and its own yuan rises in stature. The potential great reset to the global financial system could catapult gold back into a central role — with a much greater value priced in fiat currencies — no matter how much the Fed currently chooses to ignore that possibility.
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