Thread by @swshipman

@GeorgeSelgin @LouisWoodhill @norbertjmichel @B_Eichengreen @MaMoMVPY @david_glasner @vtg2 @greg_ip @rcwhalen 1) @judyshel Selgin makes an honest effort to ferret out the potential risks of a gold price peg or gold price rule system. He even exhibits sympathy for the economic advances under prior systems. Either on Twitter or elsewhere, I will dissect the shortcomings of his analysis.

@GeorgeSelgin @LouisWoodhill @norbertjmichel @B_Eichengreen @MaMoMVPY @david_glasner @vtg2 @greg_ip @rcwhalen @judyshel 2) The major flaw that is evident throughout his piece stems from what appears to be a complete misdiagnosis or understanding of what might be called the Ricardian (or Wanniskian) insight into the centrality of gold to a monetary system. His reference to Lucas and Sargent allow

@GeorgeSelgin @LouisWoodhill @norbertjmichel @B_Eichengreen @MaMoMVPY @david_glasner @vtg2 @greg_ip @rcwhalen @judyshel 3) for an alternative framework for positing the efficacy of a gold peg or gold price rule. One must begin with understanding the dynamics of the price of gold (POG) because without it, one devolves into thinking of gold as only a scarce commodity that has an irrational allure.

@GeorgeSelgin @LouisWoodhill @norbertjmichel @B_Eichengreen @MaMoMVPY @david_glasner @vtg2 @greg_ip @rcwhalen @judyshel 4) Before addressing Chinn and Lastrapes, it's critical to address how POG is determined. Contrary to the econometricians' assumption that the price is determined by the supply and demand of the metal, as with corn, POG is actually fashioned by the supply and demand for money.

@GeorgeSelgin @LouisWoodhill @norbertjmichel @B_Eichengreen @MaMoMVPY @david_glasner @vtg2 @greg_ip @rcwhalen @judyshel 5) The Ricardian perspective holds that POG is a ratio of two ratios: supply/demand for money over the supply/demand for gold. A succinct description can be found here and saves time for discussion within the limited confines of Twitter. Gold is unique: manonthemargin.com/more-thoughts-…

@GeorgeSelgin @LouisWoodhill @norbertjmichel @B_Eichengreen @MaMoMVPY @david_glasner @vtg2 @greg_ip @rcwhalen @judyshel 6) So all changes in POG occur because the Fed (or any CB) fails to match its precise level of base money supply with a wholly unknowable level of transactors' money demand. A gold standard is simply a mechanism that dynamically adjusts supply to dynamic demand at a given price.

@GeorgeSelgin @LouisWoodhill @norbertjmichel @B_Eichengreen @MaMoMVPY @david_glasner @vtg2 @greg_ip @rcwhalen @judyshel 7) When a CB avoids this 'price rule' or 'peg,' it adopts the conceit that it can manipulate FF to change the behavior of money demand to meet its supply. With a GS, POG is stable, and interest rates float. With IRT, FF is stable and the POG floats. A CB cannot use both tools.

@GeorgeSelgin @LouisWoodhill @norbertjmichel @B_Eichengreen @MaMoMVPY @david_glasner @vtg2 @greg_ip @rcwhalen @judyshel 8) Many (not Selgin) simply don't understand gold standard systems and mechanisms. Again, better to read these to save time: see Wanniski polyconomics.com/ssu/ssu-971212… and Lewis newworldeconomics.com/five-gold-stan… This applies to journalists, academics, Wall Street economists, and politicians.

@GeorgeSelgin @LouisWoodhill @norbertjmichel @B_Eichengreen @MaMoMVPY @david_glasner @vtg2 @greg_ip @rcwhalen @judyshel 9) (This humble scribe is a 'practioner,' who uses macro/micro understandings to invest. My mentor was the late Jude Wanniski, who has done more than most to advance the cause of the GS in the 20th/21st Century. You will find many references to him and @NLeconandpolicy).

@GeorgeSelgin @LouisWoodhill @norbertjmichel @B_Eichengreen @MaMoMVPY @david_glasner @vtg2 @greg_ip @rcwhalen @judyshel @NLeconandpolicy 10) The groundwork, now the commentary. The econometricians cannot do simple or elaborate regressions to try to describe how FF impact AU or vice versa. From a monetary policy perspective, one, but not the other, remains constant. Since I'm not a statistician, I'm at a loss to

@GeorgeSelgin @LouisWoodhill @norbertjmichel @B_Eichengreen @MaMoMVPY @david_glasner @vtg2 @greg_ip @rcwhalen @judyshel @NLeconandpolicy 11) describe the condition when one variable is absolutely independent of the other, but in the Ricardian system, this is true. Assuming that a CB chooses IRT, consider the array of variables (which it cannot control) that affect money demand. They include, but are not limited

@GeorgeSelgin @LouisWoodhill @norbertjmichel @B_Eichengreen @MaMoMVPY @david_glasner @vtg2 @greg_ip @rcwhalen @judyshel @NLeconandpolicy 12) to: a) changes in regulatory policy, b) changes in tax policy, c) changes in trade policy, d) geopolitical strife or peace, e) Presidential tweets (lol), f) natural disasters, g) technological change. Under IRT, the inability to 'know' demand results in a debasement of the

@GeorgeSelgin @LouisWoodhill @norbertjmichel @B_Eichengreen @MaMoMVPY @david_glasner @vtg2 @greg_ip @rcwhalen @judyshel @NLeconandpolicy 13) currency leading to inflations and deflations, but certainly volatility. Nowhere in Chinn or Lastrapes did I read even a mention of the factors that influence money demand. Why? Because they really don't understand POG. If they did, they'd model the listed demand factors.

@GeorgeSelgin @LouisWoodhill @norbertjmichel @B_Eichengreen @MaMoMVPY @david_glasner @vtg2 @greg_ip @rcwhalen @judyshel @NLeconandpolicy 14) Selgin addresses three questions about a gold based price rule or gold peg. The first relates to a 'revival' of gold standard in this form. Others have address this and I defer to them, with a couple of links and this quote from David Ricardo, who engineered a return to gold.

@GeorgeSelgin @LouisWoodhill @norbertjmichel @B_Eichengreen @MaMoMVPY @david_glasner @vtg2 @greg_ip @rcwhalen @judyshel @NLeconandpolicy 15) A gold standard system has many mechanisms. The Ricardo quote underscores the importance of the system, while others argue about mechanisms. All systems are discussed in excruciating detail in Nathan Lewis' definitive "Gold: The Final Standard." It describes gold's efficacy.

@GeorgeSelgin @LouisWoodhill @norbertjmichel @B_Eichengreen @MaMoMVPY @david_glasner @vtg2 @greg_ip @rcwhalen @judyshel @NLeconandpolicy 16) For quick references without reading the book, I attach these links that provide an understanding with out the data. One from Jude Wanniski: polyconomics.com/ssu/ssu-971212… One from Lewis: newworldeconomics.com/three-things-a… So, short answer: the mechanism is doable and replicates the system.

@GeorgeSelgin @LouisWoodhill @norbertjmichel @B_Eichengreen @MaMoMVPY @david_glasner @vtg2 @greg_ip @rcwhalen @judyshel @NLeconandpolicy 17) Question two involves evaluating what type of mechanism nominee Shelton prefers in executing a gold standard system if any. Selgin has valid quotes and Shelton has ample writings. She's familiar and friendly with Bob Mundell, a system advocate. It's best she answer herself.

@GeorgeSelgin @LouisWoodhill @norbertjmichel @B_Eichengreen @MaMoMVPY @david_glasner @vtg2 @greg_ip @rcwhalen @judyshel @NLeconandpolicy 18) Selgin's third question involves Powell's suggestion that a gold peg would be 'disastrous.' For this he relies on two statistical evaluations, one by Chinn and the other by an associate, Lastrapes. Though not a statistician or econometrician, I will attempt to evaluate both.

@GeorgeSelgin @LouisWoodhill @norbertjmichel @B_Eichengreen @MaMoMVPY @david_glasner @vtg2 @greg_ip @rcwhalen @judyshel @NLeconandpolicy 19) My immediate observations of the Chinn's work: first, as implied above, assuming that FF rates alone influence or can explain the POG is erroneous. Even in an IRT environment, many other exogenous variables influence price. A most difficult one to evaluate statistically is

@GeorgeSelgin @LouisWoodhill @norbertjmichel @B_Eichengreen @MaMoMVPY @david_glasner @vtg2 @greg_ip @rcwhalen @judyshel @NLeconandpolicy 20) geopolitical turbulence, say US/Iran tensions. Classic economists know that such geopolitical events will dampen dollar demand, creating a temporary surplus of dollar liquidity, leading to an increase in the POG. Another is a change in fiscal policy, especially tax cuts.

@GeorgeSelgin @LouisWoodhill @norbertjmichel @B_Eichengreen @MaMoMVPY @david_glasner @vtg2 @greg_ip @rcwhalen @judyshel @NLeconandpolicy 21) Reagan's tax cuts led to increased dollar demand, lowering the price of gold; Clinton's tax increases in '93 did the opposite, reducing dollar demand. Neither really had anything to do with the FF rate. Third, one should question the time period she chooses to make her study

@GeorgeSelgin @LouisWoodhill @norbertjmichel @B_Eichengreen @MaMoMVPY @david_glasner @vtg2 @greg_ip @rcwhalen @judyshel @NLeconandpolicy 22) Chinn chooses to conflate multiple operating standards at the Fed under her single umbrella of evaluation. From the starting period of Q3 1968 to at least Q3 1971, the Fed still operated under the BW Agreement. One could argue it extended until Q3 1973 when George Schultz

@GeorgeSelgin @LouisWoodhill @norbertjmichel @B_Eichengreen @MaMoMVPY @david_glasner @vtg2 @greg_ip @rcwhalen @judyshel @NLeconandpolicy 23) persuaded Nixon to float the dollar. Even after BW was abandoned, the Fed operated under different standards. The changes in the Fed attributable to Reagan were profound, especially with the inclusion of Angell which extended until early '94. A quasi price rule ensued.

@GeorgeSelgin @LouisWoodhill @norbertjmichel @B_Eichengreen @MaMoMVPY @david_glasner @vtg2 @greg_ip @rcwhalen @judyshel @NLeconandpolicy 24) Greenspan, as Selgin alludes, followed Angell's lead throughout the '90's and early 'oughts. The point is Chinn might have advanced her arguments better if she measured these discreet time periods with different Fed objectives, even if FF was the only variable to measure.

@GeorgeSelgin @LouisWoodhill @norbertjmichel @B_Eichengreen @MaMoMVPY @david_glasner @vtg2 @greg_ip @rcwhalen @judyshel @NLeconandpolicy 25) Finally, even if one accepts her evaluation, the (alt) R squared is only .17, meaning that FF rates explain less than 20% of the movement in the POG. I do not think one needs training in statistics to recognize that this is a weak correlation, at best.