Silly Season Is Upon Us

Fresh from my rant about Ireland and its debt, I find myself confronted with another dumb idea. The World Bank chief, Bob Zoellick has made a speech arguing that we should consider a return to a gold standard or something like one.

No.

That’s dumb. Really, really dumb.

The US is in the midst of a steady slide in its price structure. Disinflation is slowly eliminating all semblance of inflation. We are perilously close to outright deflation and a Japanese lost decade. The only impact of a return to a gold standard like structure for the global economy would be to make this slide worse, faster, and more certain.

So that’s bad, worse, and awful.

We need the maximum wiggle room at the moment in order to get our monetary policy to have any impact. I have my doubts about QE2 not on any theoretical grounds, but on its size. Plus, I am skeptical because I think we need fiscal policy as well. Indeed from my perspective the current malaise pretty much shouts out loud that monetary policy will be ineffective without another big increase in government spending.

And before you all shrug and argue that the first stimulus didn’t seem to do the job, let me remind you – yet again – that it was weak and has been offset by state level austerity. People forget that the US is actually a group of small economies cobbled together. Budget cuts at the state level offset any burst of spending at the federal level. That’s just another reason why the luminaries who foisted the tepid stimulus got it wrong. They forgot where they live.

But back to Zoellick: his idea is ridiculous.

We should all pretend he didn’t say anything and thus save his embarrassment.