Is there anyone out there suggesting a credible way to get back to some form of sound monetary policy in today's reality? One thing's for certain: it won't be the Federal Reserve. So what alternative ideas are out there?
In economist Edward C. Harwood's day (1900-1980), his suggestion would have been three-pronged:
First, reinstate the gold standard. Second, return the responsibility for credit creation to the commercial banks, basing it only on goods and services coming to market. Third, legislate the strict separation of commercial and savings banking from investment banking, a la Glass-Steagall. (For more about Harwood and his ideas, click here to access my newly published biographical sketch.)
But we seem far from these options today.
What about a market-evolved solution, like Bitcoins? In the abstract, it seems possible that the market would evolve towards some kind of sounder monetary system than what we have now if it were left to its own devices. But in reality, the political likelihood of our getting there is next to nil. Whether or not it's a viable alternative, Bitcoin producers and users are currently under attack from the government.
One of the reasons for this is that, now that the government has seized control of money creation through the Fed, even well organized citizens will find it hard to wrench that power from its hands to return it to the private sector. Very few governments in history, if any, have given up the right to control money without a fight to the death.
What about current economic research? Is there any hope there?
A few schools of economics are making a little headway in their specific line of thought, but they do not concern themselves directly with monetary policy. They study topics such as public choice theory, game theory, and behavioral economics.
On monetary policy per se, little progress has been made in the academic world of economics over the past 50 years, and today most of the research done is counterproductive or ineffective. I have noted three major groups studying the subject:
You have the group now called the Keynesians (even if what they advocate has little to do with what Keynes actually recommended). These people currently run the show. But they are the ones who got us where we are today. They believe a central authority can tame the business cycle, and they have now proven themselves wrong. Yet they continue to believe. Reminds me of the alchemists of old.
There are the Austrians and people such as Larry White, George Selgin, and others, with whom I agree on lots of things, including the basic description of the business cycle, the consequences of inflating the money supply, and the dangers of centrally controlled anything. However, with all due respect to this great group, this side has lost its gravitas for lack of a spokesperson with the charisma of a Von Hayek. (But I still see some hope here.)
Then you have the John Taylor people who criticize current Fed policy and who continue to work on the Friedman theory of a computerized mathematical tool to control money supply. But this theory even Friedman came to admit was utopian, given that politics is so enmeshed at the Fed and in our society. Their heart is in the right place, though.
Are there any other modern monetary schools of interest? Frankly, I can't think of any. And furthermore, the politics problem is quasi-insurmountable, putting an end to most of my personal hope for a solution.
Another disturbing factor that pokes its ugly head into our abstract fantasy of a new monetary policy is this: international geopolitics. Can you really trust the other bastards to stick to any rules you might agree upon on paper? For rules to work, they need international, ethical cooperation. Is the world in a state where such cooperation is possible? Not in these times of everyone for himself. Has such cooperation ever been achieved even in the best of times? Very rarely, and it didn't last.
In the end, perhaps politics and international geopolitics are what destroyed the gold standard in spite of it being a pretty darn good system. After all, we live in a very competitive world (and quite naturally so) where all is fair in love and war. Like the sexes, even cooperating individual nations seem always to be at war on one level or another, especially when their economy is going sour. Sometimes friendly competition can be a healthy thing; sometimes it becomes destructive. Occasionally, it can get so bad that the people actually begin to clamor for someone's head. Literally.
Where does gold stand today?
Amazingly, gold has maintained its monetary role behind the scenes, in spite of the penalizing taxes levied in almost all, if not all, countries around the world. Although they give lip service to gold's lack of utility in monetary matters, central banks have not sold all their gold reserves, quite the contrary. And people still buy the metal both for jewelry and as security against poor money management. If reports are true, the Chinese government actually encourages its people to buy gold (although I don't know about the fine print). The gold price, although it moves radically due to speculative activity, has kept pretty good pace with real worldwide monetary expansion.
So what to do? Follow the sequence of bubbles on the Monopoly board? The Dot Com? Stocks and bonds? Real estate? Commodities? And now back to the Dot Com, stocks and bonds, and real estate again? If you're a gambler and you've got money to lose, by my guest.
Personally, I would prefer to follow the lead of world central banks. Own gold in some form. This is the only way to protect oneself against the poor monetary managers who seem to be hell-bent on destroying the wellbeing of conscientious hardworking people all over the world, especially those who try to put some money away for their needy years, i.e. people like us. Not only will you probably protect your purchasing power, but you might even be sending your politicians a message that they cannot ignore.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I own some mining stocks including gold.