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Nick Godt's Market Medics
Nov. 12, 2010, 12:01 a.m. EST
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By Nick Godt, MarketWatch
NEW YORK (MarketWatch) "” World Bank president Robert Zoellick's suggestion of a return to the gold standard serves as a reminder that many in the policy-making world often confuse markets with policy-making and economic realities.
"Mercury poisoning," is the answer from Barry Ritholtz, the very outspoken CEO and director of equity research at Fusion IQ, when asked where Zoellick's idea might have come from.
G-20 fever in South Korea has inspired everything from pop songs to fashion shows. Watch a clip from the Let's Go G-20 Concert.
Zoellick, also a former Treasury official in the Reagan administration and managing director at Goldman Sachs, made his suggestion in an op-ed in the Financial Times last Sunday, just days ahead of the Group of 20 major countries meeting in Seoul.
The suggestion was made to world leaders in order to address "global imbalances," the diplomatic expression being used to refer to the impact of China's vastly undervalued renminbi on other countries' competitiveness.
And in the run-up to the G-20, China, soon joined by Germany and others, has countered with accusations that new easing measures from the Federal Reserve are a way of pressuring the dollar and fueling asset bubbles and inflation outside of U.S. borders.
But markets, Zoellick said, "are using gold as an alternative monetary asset today," and the precious metal could be used as "an international reference point of market expectations about inflation, deflation and future currency values."
His suggestion might have served as the perfect idea to, if nothing else, short-circuit the saber-rattling from all sides with a nonsensical idea.
The Fed's easing measures were taken in order to stave off a grave threat of deflation in the U.S., in an economy which is still licking its wounds from the Great Recession.
"The last thing that the world economy needs right now is another source of deflation in a financial crisis," said Brad DeLong, chair of the political economy department at Berkeley and a former Treasury official in the Clinton administration.
"Attaching the world economy's price level to an anchor that central banks cannot augment at need is another source of deflation "” we learned that in the 15 years after World War I," DeLong wrote on his blog.
Gold, meanwhile, is not being used by markets as an alternative to currencies or an indication of inflation. It's used by investors as either just another speculative bet or as a hedge against currency fluctuations.
And it's rallied along with stocks and everything else lately. On the one hand, earnings are growing with big corporations running lean, while a huge chunk of the world, led by China, is growing at a fast pace.
On the other hand, the Fed is providing markets with lots and lots of easy money.
Should asset bubbles or inflation in some emerging markets eventually cause trouble down the line, it's hard to imagine gold not falling along with other risk assets and a rising dollar.
The good news for markets, if not for the real economy and employment in many industrialized countries, is that little is really expected to come out from either Zoellick's suggestion or from the G-20.
"It's a lot of blah-blah, and usually nothing happens," says Ritholtz. "It's about raising tensions and defusing tensions," for policy makers. He expects markets to continue gaining ground at least through the end of the year.
Nick Godt is MarketWatch's markets editor, based in New York.
Consumers have a new ally in a most unusual place: the Federal Reserve, where new Fed Gov. Sarah Bloom Raskin showed she won't roll over for the loan-servicing industry, writes Rex Nutting.
5:02 p.m. Nov. 12, 2010
- COREY377 | 8:21 a.m. Nov. 12, 2010
"$INTC approves 15% dividend hike http://bit.ly/dp3Vsq" 6:01 p.m. EST, Nov. 12, 2010 from MarketWatch
"U.S. stocks slide on China inflation fears http://bit.ly/cHvItZ" 5:13 p.m. EST, Nov. 12, 2010 from MarketWatch
"Major U.S. stock indexes close week down more than 2% http://on.mktw.net/abNNnF" 4:12 p.m. EST, Nov. 12, 2010 from MarketWatch
"RT @mktwcrum: GM, Wal-Mart earnings among U.S. highlights next week. http://bit.ly/bVMCkp" 4:11 p.m. EST, Nov. 12, 2010 from MarketWatch
"U.S. stocks finish lower Friday on China rate fears; gold slides 2.7%; crude declines 3.3% http://on.mktw.net/cSSJP3" 4:02 p.m. EST, Nov. 12, 2010 from MarketWatch
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