Shelton Says Yes to Zero
Return to Gold Standard
In addition to wanting 0% rates, Shelton seeks a return to the gold standard and has written that central banks ‘are the world’s biggest currency manipulators’
Her Own Words
Please consider Judy Shelton in Her Own Words.
Ms. Shelton argues that central banks’ interest-rate moves cause economic disruptions by manipulating currencies in ways that affect global trade.
Curiously, she must think that 0% rates do not cause economic disruptions.
When asked in a recent interview with the Journal’s opinion page whether the Fed should cut interest rates now, she said, “The answer is yes,” a view that aligns with Mr. Trump’s recent public comments. She said, “When you have an economy primed to grow because of reduced taxes, less regulation, dynamic energy and trade reforms, you want to ensure maximum access to capital.
Ms. Shelton opposed the Fed’s efforts to stimulate the economy in the aftermath of the recession, arguing that the central bank’s low interest rates and asset purchases enriched the wealthy while putting everybody else at risk of a sharp increase in inflation or a new asset bubble. “It is ironic that concern for wage earners serves to justify money pumping by the Fed that ends up largely benefiting people who have hefty stock-market portfolios, especially at a time when “income inequality” is a major White House theme,” she wrote in a 2014 Journal opinion article published after then-Fed Chairwoman Janet Yellen had addressed Congress. “Perhaps one of our elected representatives on Capitol Hill can explain to Ms. Yellen that when the low-grade fever of perpetual inflation becomes a full-blown economic malady—when the next financial bubble bursts with horrible consequences for the real economy—average Americans will pay the biggest price.”
Once again this is peculiar because 0% interest rates also cause bubbles.
The Gold Standard
Ms. Shelton has repeatedly called for a return to the gold standard, a monetary regime that pegged the value of the dollar to the value of gold. That would make it impossible for the Fed to affect the strength of the dollar through monetary policy, she writes. “For all the talk of a “rules-based” system for international trade, there are no rules when it comes to ensuring a level monetary playing field. The classical gold standard established an international benchmark for currency values, consistent with free-trade principles.
Sorry Judy. You cannot peg the dollar to the price of gold. It does not work.
You can however, make the dollar redeemable in a fixed amount of gold as long as these conditions hold.
- The dollar is 100% gold back.Banks cannot lend money into existence.
- There is no fractional reserve lending nor MMT madness.
- Banks cannot lend money for terms that exceed deposit rights (e.g. Issuing a 2-Year CD and making a loan for 10 years)
Ms. Shelton favors a hard dollar, by which she means one whose value doesn’t fluctuate depending on monetary policy.
Sorry Judy, this is also impossible as stated. The three conditions above again apply.
Think Back to Nixon
For those who do not understand why you cannot peg the dollar to the price of gold, think back to Nixon.
He ended convertibility of dollars to gold because the Bretton Woods agreement pegging an ounce of gold at $35 blew sky high in a mass flight of gold to France.
You cannot have a fixed price of gold with budget deficits and monetary printing out the wazoo.
You can, under strict conditions noted above, allow a dollar to represent a fixed amount of gold. That’s the correct way.
The dollar will then buy what it does. Yes, it will be very stable.
Shelton has clearly convoluted thinking, but arguably she is no worse than anyone else on the Fed.
I welcome the choice if for no other reason than to get gold back into discussion.
Mike “Mish” Shedlock