The Austrian Way’s latest article has inspired me to think more about the “end-game” as far the current state of international finance is concerned. In particular, about one possibility I’d like to get reader feedback on.
None of us doubt that we’re heading for some kind of economic denouement. For all the happy talk in the media about recovery, inconvenient facts keep peeping above the parapet. SDRs; increased IMF supervision of economies; a greater role for emerging market currencies; and a new gold exchange standard are some of the ideas being kicked around.
Debt needs to be purged from the system. Ideally this would be done via defaults. In practice though, the financial/political elite has its heart set on inflation as the remedy for our ills: meaning copious amounts of QE combined with rock-bottom interest rates for as far as the eye can see.
Alas for them, inflation – particularly in America – remains subdued. Certainly below the levels that would need to be sustained over a number of years to make a meaningful dent in the country’s massive debt burden.
The Fed can print all it likes, but the velocity of money remains very low. Credit creation by private banks leads inflation. The former remains well below the levels seen in the early to-mid part of the last decade.
However, as I see it, the US government does have a nuclear option as far as achieving an inflationary reset is concerned: re-pricing its gold reserves.
Every gold bug knows that arcane bit of trivia about the US Treasury pricing its gold at $42.22/oz – set in 1973 in a last-ditch attempt by the Nixon administration to retain some kind of official dollar-gold link.
So why not reset this official price at well above the market price, and agree to deal with all private parties that wish to sell to the US Treasury? Then sit back and watch as arbitrage takes the price of other commodities due north – followed by consumer prices.
Is this a credible reset scenario, or is there something I’m missing here (aside from the risk it would present in terms of generating serious inflation)? What do you Bogpaperites think?