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bernanke_13495505At the famous Federal Reserve confab at Jackson Hole, Wyoming, Chairman Ben Bernanke laid the groundwork for Quantitative Easing III. He couldn’t contain himself about how well the first two versions of the big Fed asset-purchase program had turned out over the last few years—unemployment is down from the peak and all that. Bernanke even suggested that had we tried QE in the 1930s, it might have solved the Great Depression.

Then the Fed Chair echoed the President (even using Obama’s rhetorical security blanket—“headwinds”) in saying that the lack of further expansion in the governmental sector is holding us back. No kidding:

“Rather than attributing the slow recovery to longer-term structural factors, I see growth being held back currently by a number of headwinds….[F]iscal policy, at both the federal and state and local levels, has become an important headwind for the pace of economic growth. Notwithstanding some recent improvement in tax revenues, state and local governments still face tight budget situations and continue to cut real spending and employment. Real purchases are also declining at the federal level…. [P]olicymakers should take care to avoid a sharp near-term fiscal contraction that could endanger the recovery.”

Read that closely: taxes and spending can bear us along to recovery. This from the Fed Chairman. We sure all are Keynesians now.

If the President’s most notorious utterance has come to be you didn’t build that, Bernanke’s has got to be the line he gave Rep. Paul Ryan back in June 2010 at a House Budget Committee hearing. To wit: “I don’t fully understand the movements in the gold price.”

The gold price. This is the thing that was parked within a 25% band of $350 for the Reagan-Clinton boom and was hovering at $275 for the first two years of the 2000s. Then it began its steady march, crossing $400 in 2004…$500 in 2005…$700 in 2006…$800 in 2007…$1000 in 2008…$1200 in 2009…$1400 in 2010…and onward and upward since, to circa $1700 today. There would seem to be a simple correlation: boom years, low steady gold price; lost decade, steadily increasing price. If the Fed Chair (and Princeton professor) doesn’t fully understand the gold price, it probably should be all hands on deck at the central bank to start to figure it out. As Rep. Ryan was at pains to point out at that hearing two years ago, the decade-long surge in gold has closely followed the various Fed attempts to spur the economy by means of loose monetary policy. There was the period of too low, too long interest rates that stoked the housing bubble, and then the quantitative easings of the recession period.

A permanent run-up in gold, as long history has shown, means that the agents in the economy at large are suspicious of the way the predominant currency-issuer is conducting itself. There can be no doubt that if QE 3 happens, gold will power beyond its current near-record.

The economic results will not be satisfactory. However much stocks, mortgages, or what have you might be poked along by another round of quantitative easing, yet more capital, along with the mountain already there, will park itself on the sidelines—in gold—in the wait for sound-money policy from the Fed. QE after QE, coupled by persistent proud ignorance from the Fed about gold, is one way this nation can enter long-term decline.

Books on the topic discussed in this essay may be found in The Imaginative Conservative BookstoreOriginally published at Forbes.com the essay is reprinted here with gracious permission of Brian Domitrovic.

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  1. “Read that closely: taxes and spending can bear us along to recovery. This from the Fed Chairman. We sure all are Keynesians now.”

    Of course. Why wouldn’t we be? New Keynesian economics co-opted all the portions of monetarism that were not invalidated by the experiences of the 1980s. The only other mainstream alternative – Real Business Cycle theory – more or less held that monetary policy is irrelevant, which probably isn’t the attitude you want in a Fed chief. What’s more, it has been quite thoroughly invalidated by experience.

    That is because there are no fundamentals that make sense, given its movements. The low real interest rates should allow for higher gold prices, other things equal, just as the low to negative real interest rates of the late 1970s made for high gold prices. But it went quite a bit beyond that now.

    “There was the period of too low, too long interest rates that stoked the housing bubble, and then the quantitative easings of the recession period.”

    Yes, low interest rates increase the price of assets, other things equal. In keeping with Vernon Smith’s research, this can propel irrational price bubbles due to the possibility of continuing capital gains.

    “A permanent run-up in gold, as long history has shown, means that the agents in the economy at large are suspicious of the way the predominant currency-issuer is conducting itself. There can be no doubt that if QE 3 happens, gold will power beyond its current near-record.”

    Asset prices in general, but the effect will be more psychological than actual. The tiny movements in long term interest rates are quite a bit out of sync with the fluctuations in asset prices that accompany QE. It would seem to be the effect that QE has on the attitudes of actors in particular financial areas.

    “The economic results will not be satisfactory. However much stocks, mortgages, or what have you might be poked along by another round of quantitative easing, yet more capital, along with the mountain already there, will park itself on the sidelines—in gold—in the wait for sound-money policy from the Fed. QE after QE, coupled by persistent proud ignorance from the Fed about gold, is one way this nation can enter long-term decline.”

    I think you’re mistaking the creation of reserves holdings of assets like gold on the part of private actors. And you haven’t made the case that this somehow contributes to national decline.

    Prolonged recession – that contributes to decline. One can be a conservative and embrace the realities of Keynesian economics.

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