All you need to do is change the Fed’s mandate from targeting interest rates to targeting Gold. The Fed can easily keep the price of Gold within a tight trading range by increasing liquidity when the Price of gold dips below the prescribed range (indicating deflationary pressures) and conversely selling bonds to mop up excess liquidity when the price of gold goes above a set trading range. This would create a “De Facto” gold standard and uses gold as a barometer for how much liquidity the economy needs at any given point in time. Because of it’s nature, Gold is the best monetary barometer available, much more accurate than the human guessing game which believes that growth causes inflation and that liquidity stimulus can somehow create growth. Both of which have the unintended consequences of creating inflation during downturns and starving the the economy during growth spurts.
With the technological advances of the last 50 years, we should be living in a “Golden Age” of living standards, but instead we seem to be living through unending economic disaster.
The cause of this is not the economy itself, but instead the unit of account.
Imagine trying to have a sporting match, conducting mathematics or science without a unit of account. It couldn’t be done. And the same goes with economics. Without a standard unit of account, a stable economy is not possible. And that’s what we are living through.
Maybe the only thing I disagree with Ron Paul about, is that there is a time when the Fed should create liquidity, and that time is when, like in the 90’s due to the Internet and Communications revolution, there is a period of incredible growth. A growing economy needs liquidity like a growing body needs food.
The problem is, that it’s exactly during periods of growth that the Fed turns the spicket off and starves a growing economy of the liquidity it needs. This is one of the major reasons that Web 1.0 crashed.
And then during times of recession like the past few years the Fed does the opposite. It adds liquidity, which causes inflation and “stag-flation.”
This is why we don’t need so much a “Gold Standard” in as much as we need a “De-Facto” Gold standard, meaning Gold should be used as the barometer for when liquidity should be injected and or “mopped up.”
Using the price of Gold as a barometer, the Fed, or whoever directs monetary policy, should keep the price of Gold in a tight trading range by adding liquidity when the price of gold dips below a certain target, and mopping up liquidity when the price of gold rises above the target.
This does two virtuous things: It gives a growing economy the right amount of liquidity it needs to sustain, and it also permanently ends inflation and deflation.
Other than that I totally agree with Dr. Paul that the Fed, as it acts now, should be ended, or given the tight mandate of using a Gold barometer for monetary policy.
Ron Paul is correct that gold is important. It’s very important. The only part of the equation that Ron Paul is missing is the demand for money. Inflation is caused by two factors: how much money is printed and how much demand there is for money (growth increases the demand) If you had enough growth it would soak up the excess liquidity and there wouldn’t be inflation.
The reason Gold is so important to this picture is because it’s intrinsic value (for a variety of factors) is the most resistant or stable to economic or political factors. So what we need is not necessarily a “Gold Standard” but rather a de facto gold standard that uses the price of gold to indicate how much cash to print. In another words, the Fed’s policy should be to keep gold in a very tight trading range. When the price of gold goes above that range, that indicates that there is more cash in the system than the system can handle or demands (like now!) and the fed should sell bonds to soak it up. If and when the price of Gold goes below the target, that’s when they should print, because that indicates the economy is demanding more liquidity.
When the fed does the opposite, which it usually does, because it ignores the gold signal, then you get the worst of both worlds: too much liquidity and no demand for it, which equals “stagflation”
Growth is stimulated through fiscal policy (lower taxes, regulation) and inflation could be controlled through a correct monetary policy, which would be to target gold. So there is no reason at all for inflation, even during tough economic times. You can’t print your way to prosperity. You have to increase productivity and add real value.
A “De Facto” gold standard would not deprive the economy of the liquidity it needs to grow, as the the opponents of such a policy argue as a scare tactic against it. Instead, it would give the economy exactly the amount of liquidity it needs to grow without any inflation. So, in a sense we could get rid of the Fed, or at least downsize it. (No more billion dollar Fed buildings needed!) Because basically it would only take one guy and a computer to effectively execute and maintain such a monetary policy.