Gold Standard and the U.S. Deficit

A few days ago, CNN was showing on the LCD TV in the gym I was working out in and I read a headline saying the republican GOP wants to consider reverting back to the Gold Standard. This follows in tandem with recent debates to abolish the Federal Reserve, which presents the classical-based, supply-side, thought that discretionary monetary policy is the true destabilizing element of the economy. Arguments have been made that, “If we abolish the Fed and revert back to the Gold Standard, the government can no longer deficit spend,” and that stable market forces will gravitate the economy back to equilibrium (full employment). This revisits the contrasting views of Classical-based and Keynesian economics, the supply or demand-driven economy debate, or that the market is inherently stable or unstable. But I will save this discussion of different schools of thought for another entry.

Granted, the federal deficit is definitely an important issue that must addressed, but this debt overhang it merely just a dynamic of the current crisis. Quite honestly, this notion to go back to a Gold Standard is just ludicrous, and in my opinion, this idea of Gold Standard reversion is something that really appeals to the wealthy and big business, because now there will be no entity that can influence inflation and inflate away their assets. The inflexibility of the Gold Standard would actually be much more detrimental to the economy than anything else. Any type of shocks to the economy could no longer be buffered, since monetary policy, like stimulus injection, could not be used. Plus, a Gold Standard would further implicate an obliteration of any kind of policy adjustment that could end mass unemployment through minor inflation.

The main issue with the current crisis is that there is a lack of aggregate demand. Businesses are lacking in sales because consumers cannot afford to buy goods, due from the high level of unemployment and the private debt overhang. Typically, in times where private spending is low, conventionally the government increases spending to offset the decrease in private consumption.

I know some may not agree with me here, but efforts to reduce the deficit, namely austerity measures, should really be done when the economy is not struggling, especially right now when the U.S. hasn’t experienced a downturn this bad since the 1930s. For instance, the GOP’s impulse of austerity during a time where the economy really needs more stimulus is only drawing out the recovery process and suffering for those that are unemployed. Paul Krugman, a Nobel prize winner for Economics in 2008, illustrated in the media a few months ago that U.S.’s real government spending (state and federal) per capita over the past few decades, and current 2012 levels are at all time lows. And the GOP wants to cut more public services? Krugman describes it well: “Your spending is my income, and my spending is your income. Both the public and private sectors cannot be saving at the same time because this is only dragging down any potential of economic growth, which growth is something that our country really needs right now.” Back to those who took ECON 101 in their college days, two-thirds of Gross Domestic Product in the U.S. is made up from the consumption of goods and services. So we can see implications of stopping the cycle of economic activity. A perpetual downward spiral.

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~ by Roger Sutton on August 26, 2012.

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