Tuesday, March 31, 2009

A New World Currency?

Going into the G-20 international meeting in London, the Chinese and Russians appear to be coming together in a call for a new world currency backed by gold. Now, I don’t want to see the dollar go into the dustbin of history. But I really like the idea of reinserting gold into the world monetary system.

Nobel Prize winner Robert Mundell -- who is advising the Chinese central bank -- undoubtedly put China up to this. I don’t know if he wants a new world currency. The last time I talked to him he wanted the dollar stabilized with the Chinese yuan and the euro. But if the Bernanke Fed and the Greenspan Fed before it had paid attention to gold, their policies would not have been nearly as erratic with the housing and commodity boom and bust.

You don’t have to be for the old gold standard to nonetheless favor the use of gold as a key monetary indicator, or for that matter a broad commodity index that includes gold. Monetary policy has been so bad in recent years that a gold price rule or a commodity-price reference point could only make it better.

I was talking to Art Laffer about this today. Art remarked that if helicopter Ben Bernanke continues to print new dollars, we’re gonna need a new world currency. And he agreed with Mundell that putting gold back into the world currency calculus is a good idea.

Incidentally, Art believes the best thing the G-20 nations can do at the London conference is to not coordinate policies. He thinks policy coordination will probably produce bad policy. He’s in favor of tax competition among nations, including so-called tax havens that the Europeans and Americans want to abolish. I totally agree. In fact, we ought to make the U.S. a tax haven by slashing the corporate tax, declaring a two-year capital-gains tax holiday, and moving towards a low-tax-rate flat tax. Of course, it ain’t gonna happen, but that’s my thought.

Art also believes that Obama’s economic policy is starting to resemble Richard Nixon’s: easy money, heavy regulation, industrial policy, and rapid spending. Government’s influence on business keeps growing. Think GM.

But I will say this: The exchange value of the U.S. dollar is up about 20 percent over the past year and remains firm in current trading. So maybe it’s possible -- at least in the short run -- that 20 percent growth at an annual rate in real M2 (hat tip to Mike Darda) and the upward-slopping yield curve that signals economic recovery and bank profitability are more positive signs for stocks and the business outlook.

Even during the Nixon years, we did have periods of good growth and rising share prices, even though the 1970s were stagflationary and economically disastrous.

Sorry folks, that’s the best I can do right now.