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Saturday, July 21, 2012

Does Stephanie Pomboy read Zero Hedge?

Probably not - at least probably not a lot. However her interview in Barron's this week ($$), entitled "Coming: The End of Fiat Money" is rote ZH fair, if, mercifully, passed through an hirsuteness filter:
We checked in with [Pomboy] last week, as central banks around the globe weighed more easing and as Fed chief Ben Bernanke described to Congress the headwinds facing the U.S. economy, including the automatic tax increases and spending cuts set for year end, called the "fiscal cliff." With the Fed being the biggest buyer of Treasuries, Pomboy thinks the 40-year-old fiat system will crack within five years.

Barron's : What don't investors anticipate today?

Pomboy: That the Fed will be a presence in the Treasury market for a long, long, long time. Some believe that, with another round of quantitative easing, we move forward, emerge from the morass, and the need for further intervention will dissipate. But the Fed is really the only natural buyer of Treasuries anymore. It will have to continue to monetize Treasury issuance at the same time all the other major developed economies—from the Bank of Japan to the Bank of England to the European Central Bank—are doing the same. Pursue that to its natural conclusion, and you see the inevitable demise of fiat money. To look at our policies and not be concerned about the risks to our currency would be dangerously naive...  
The whole article is recommended.  Pomboy is a contender for the best comentatress out there. We at Vitus are great admirers, and followers (when we can get a snippet from her - the cost of her newsletter is so huge it shall not be named). In the above, we especially like the "Fed is really the only natural buyer of Treasuries anymore" observation.

The standard argument against the gold standard, which she of couse knows, was expressed simply in 2010 by Doug Irwin, a professor at Dartmouth (Pomboy's Alma Mater!):
Any proposal to resurrect the gold standard today overlooks the stark lessons of economic history. The malfunctioning gold standard was intimately related to the Great Depression of the 1930s. Countries that were not on the gold standard managed to avoid the Depression, while countries on the gold standard did not recover from the Depression until they left it (as the United States did in early 1933).

Furthermore, the gold standard intensified protectionist pressures in the 1930s. By making exchange rate adjustments more difficult, the gold standard hampered a monetary policy response to the slump. This forced countries to resort to protectionist measures, including higher tariffs, import quotas, and exchange controls. Such measures helped destroy world trade during that horrible decade.
Vitus, it should come as no surprise, agrees with the latter.

Pomboy, at least in the Barrons piece, does not address the extensive anti-gold standard literature. (An interesting observation on the similarity of the gold standard and the euro by Martin Wolf is here. The best and most fun discussion Vitus has seen of the gold standard itself is by DeLong. Etc.)

Perhaps Pomboy is right. The interview, however, reminds Vitus of Meredith Whitney's ill-fated call for muni defaults on December 19, 2010.

In the long run, again, they both may be right. About the long run, Keynes (supposedly) said...

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