The True Gold Standard (Second Edition)
Ezra Klein (2012) comments:
It is of course true that the urgency of adopting a gold standard to fight inflation is lower when the inflation rate is lower. If inflation were our exclusive concern, and we could trust the central bank to keep inflation as low under a fiat standard as it was under the classical gold standard, then it would be foolish to bear any cost to reinstitute a gold standard. Inflation today is certainly lower than it was in the 1970s and 1980s, but it is not true that inflation is as low today as it was under the classical gold standard. As noted above, the inflation rate was only 0.1 percent over Britain’s 93 years on the classical gold standard. Over the most recent ten years (August 2002 to August 2012) in the United States, the CPI-U price index rose 27.5 percent, for an annualized inflation rate of 2.5 percent. Over the last forty years (since August 1972, shortly after President Nixon closed the gold window), the rise has been 449.2 percent, and the annualized rate 4.4 percent. There remains a case for the gold standard based on inflation alone.
How low are market expectations of the inflation rate to come? According to the Financial Times (17 September 2012), the announcement of the Fed’s QE3 program pushed the market’s expectation of the US inflation rate over the next 10 years (derived from prices on the inflation-indexed bond market) to 2.73 percent per annum. Inflation expectations are not as low today as they were under the classical gold standard, and they are more volatile. There is no tangible institutional assurance that the US inflation rate will not return north of 4 percent or even 10 percent.
Of course, consumer price inflation is not our exclusive concern. The past decade has reminded us that, even with consumer inflation rates around 2.5 percent or lower, asset price bubbles and unsustainable credit booms are a serious danger under a central bank policy of artificially low interest rates. The ultralow Fed Funds rate policy of 1.25 percent or less from November 2002 through June 2004 helped fuel the housing bubble (White 2012b). Today’s rate policy has been holding the Fed Funds rate at 0.25 percent or less for more than 3.8 years (since December 2008), with the announced prospect of another three years of ultralow rates. Time will tell where a new bubble is now forming. More generally, the Fed’s track record for real economic stability under fiat money does not weigh in favor of fiat money (Selgin, Lastrapes, and White 2012).