Macroecono-Moose, Part 2

Nouriel Roubini explains why all this "Sarah Palin's right, we need to go back on the gold standard" crap is just that:  crap.

"A fixed exchange regime, even if it is not a gold standard… That world just doesn't work. Because in that world, monetary policy by definition instead of being countercyclical becomes procyclical," Roubini told NetNet. "Suppose you have a fixed exchange rate regime...It just exacerbates the business cycle."

Roubini asks us to imagine two countries: One that's growing very quickly, and one that's growing very slowly. 

The economy that is growing quickly would tend to "overheat"—an economic phenomenon characterized by accelerated growth, inflation, and the potential for asset bubbles. In the economy that is growing more slowly, there would be a tendency toward deflationary pressure and recession. So, instead of having a central bank with the capacity to successfully counter-balance these tendencies, an economy fixed exchange rate regime is to continue to reinforce the existing negative trends in the business cycle, Roubini argues. 

Although he is best known as an economist who challenges conventional views, Roubini pretty well lines-up the consensus view of mainstream economics on the gold standard or fixed exchange rate regimes: "You have the opposite of what any optimal rule about monetary policy will tell you." 

In other words, going back on the gold standard would tie our hands on being able to do anything to adjust policy at a macro level.  There's a reason the world left it in 1971.  It wasn't working.

Aside from the issue of central banks insufficient current gold reserves, there are the issues that historically plagued gold standard economies. One of the most intractable of those issues was the impact that the gold standard had on traditional business cycles. 

Historically speaking, Roubini says, during the days of the gold standard economies were constantly imperiled by spasmodic cycles: "When you had a traditional gold standard, boom and bust with severe swings in economic activity were the norm—really big ones. It was only once we moved to fiat money that central banks were able to smooth the business cycle, and make it less volatile, as we did during the financial economic crisis." 

So we'd have far larger bubbles and far worse crashes when they popped, because we wouldn't be able to shrink or grow the money supply in order to compensate.  It's literally like driving a speedboat with no throttle, you'd be at the mercy of the currents and all you could do is steer and hope instead of being able to go faster or slower to keep you on course and safe.  You'd be at the mercy of the currency currents, literally.

This is basic stuff, and yet all of a sudden people are acting like going back on the gold standard would be easy, let alone feasible, and now Sarah Palin is getting in on the action.  It's a joke.

The best part? Wingers are lining up to say how Sarah Palin sticking her nose into something she clearly doesn't understand actually justifies their own clueless position on this, like she's a genuine polymath of a Renaissance policy wonk or something, you betcha.

The absurdity of this alone could power suns.