In a witty session today entitled “Bonfire of the Currencies” at the 64th CFA Institute Annual Conference in Edinburgh, James Grant, founder and editor of Grant’s Interest Rate Observer, called for the return to a “true gold standard (that) favors no one nation, but synchronizes the balance of payments between all.”
Grant says that central bank policies such as the Fed’s quantitative easing are deliberately thwarting supply and demand. “Central bankers prefer the brute methods of command and control to the delicate simplicity of the price mechanism,” he said, and these policies have undermined confidence in paper currencies. He strongly criticized the Fed’s implied third mandate of buoying asset prices, and while he noted that central banks are experiencing “mission creep” on both sides of the Atlantic, “on my side it positively gallops.”
Asked what alternative policies he might prescribe to remedy the financial crisis, Grant said emphatically that reinstating individual responsibility for downside investment risk was essential. The credit crisis, he said, “was a scandal of mismanagement, the result of the so-called Greenspan put that socialized risk,” and this needs to change.
Grant suggested that the dollar might experience upside movement if faith in the euro continues to deteriorate due to Europe’s sovereign debt problems, but that in his opinion neither currency is a reliable long-term store of value — and that a return to a gold standard would “restore the price mechanism to its proper place.”
While acknowledging that a new gold standard may not be a realistic or popular proposition at this point in time — “if a tomato was thrown, it missed me completely,” he quipped — Grant suggested that a gold standard might indeed be seriously considered “when the full cost of the paper dollar standard is tallied.”