Presidential candidate Ron Paul has more than a few people talking about boring monetary policy at the Federal Reserve these days. And its not just on conspiracy talk radio, either. The Wall Street Journal ran an op-ed by David Malpass on Thursday with Pauls name in the headline, praising the Texas congressman for making Fed monetary policy a topic in the political campaign. Apparently, Malpass has not been watching much of the debates because the only person really talking about monetary policy is Ron Paul.
Nevertheless, contrary to what some Paul supporters have been saying all along, the good doctor does get covered in the mainstream press. He even gets kudos at times from the WSJ, which of course is no small accomplishment. On the matter of the Fed, Paul is seen as the expert.
Malpass piece ultimately highlighted the perils of further quantitative easing. But his logic suggests that the Fed should continue using interest rates as its operating lever to control the dollar, says Paul Hoffmeister, an economist at independent research firm Bretton Woods Research.
To be clear, interest-rate targeting does not control the money supply. The purpose of targeting interest rates is to accelerate or decelerate economic growth to control the price level, which is entirely a demand-side supposition. Should Republicans win the House, Senate and White House, then this distinction will be critical should they pursue substantive monetary reform. Its best that Congress eliminate any discretion at the Fed and mandate that it follows a gold price rule.
Wow, thats another market watcher giving accolades to Ron Paul and his take on the Federal Reserve.
The Fed is going to keep interest rates low for at least another two years in an effort to keep this economy sputtering along. More quant easing is likely in the form of bond buybacks and other non-security instruments that blew a big hole in the market in 2008. Further inflationary pressures from are stagflating the global economy, Hoffmeister says.
In turn, this is creating a terrible growth outlook and creating a better than 50% probability that the Fed and/or European Central Bank will monetize debt and inflate even more this year. The Fed will blame the weak growth environment, and the European Central Bank will blame southern Europe.
Hoffmeister, a student of Jude Wanniski, an 80s supply-side champion and former economic adviser to Ronald Reagan, agrees that the dollar should be somehow pegged to something more tangible, like gold. But thats not in the Feds interest at all. Ron Pauls made headlines in the summer when he asked Ben Bernanke about his thoughts on gold, and whether it could be used to back the dollar, and Bernanke told him that gold is not a currency, never will be a currency, it is just a precious metal. It is the Fed that makes monetary policy, so that is the last word on the matter.
Then I asked Hoffmeister about this and he said that Article 1, Section 8 of the Constitution states that Congress has the power to coin money and regulate the value of it. As a result, the President can work with Congress to rescind the Federal Reserves current dual mandate to maintain stable prices and low unemployment, and to create a mandate that the Federal Reserve target a stable dollar value in relation to gold. This new mandate would achieve stable prices and low unemployment far more efficiently and effectively than the current mandate and it would eliminate the discretion of monetary policymakers to tinker with the economy.
So whats the tradeable takeaway from all this? Gold is on the rise. Bretton Woods told clients to get into gold last week when it was at $1,650 an ounce. The Feds zero rate policy and this weeks news that Chairman Bernanke is seriously considering another round of quantitative easing, coupled with the potential instability in the Middle East, means that gold could easily reach $2000 in 2012.
Lastly, note to the WSJ. Your firewall does not work.