Fool's gold

By R.A. | LONDON

I HAVE to say, I feel a little bad for Robert Zoellick. He has written a piece for the Financial Times that mostly consists of laying out the weaknesses of the global monetary system and proposing sensible reforms for it: things like an agenda of structural reforms to reduce imbalances, a general swearing off of currency market interventions, and an effort to move emerging markets toward floating exchange rates (with limited capital controls to avert destabilising surges of hot money). But no one is paying any attention to that. Instead, the FT has put Mr Zoellick's story on the front page with the banner headline, "Zoellick seeks gold standard debate". All because of this little bit, fifth in his plank of proposals:

Fifth, the G20 should complement this growth recovery programme with a plan to build a co-operative monetary system that reflects emerging economic conditions. This new system is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves towards internationalisation and then an open capital account.

The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.

That's the extent of the gold talk. And honestly, I'm not even sure what's he calling for here. Not only is this point vague, it's also the least necessary of all the things he recommends; obviously markets are very good at revealing expectations of inflation and future currency values already.

It seems like he's trying to work toward a solution to the problem of the dollar's international reserve status. As nearly everyone agrees, other currencies need to play a larger role in international reserves, but it's not necessarily easy to understand how this might take place. There are advantages to being the issuer of a reserve currency—interest rates are kept lower than normal, for instance. But such status also tends to mean a relatively dear currency, not to mention international anger at attempts to allow the currency to weaken (which, in addition to generating a trade advantage reduces the value of foreign reserve holdings). And so countries' are a bit wary about achieving reserve status.

This has led to calls for expansion of the SDR ("special drawing right"), a quasi-currency doled out by the IMF. But an effective global currency requires an effective global central bank, and there isn't one backing the SDR.

So maybe that's the gap in the international monetary system that Mr Zoellick is seeking to fill with gold. But gold just isn't a magic bullet. A real gold standard would likely be deflationary and would bring with it all the problems of any system of fixed exchange rates—stresses on reserves and loss of monetary independence among them. Broad fixed exchange rate regimes don't look that hot right now, given the significant struggles within the euro zone and the imbalances that have been generated within the dollar zone thanks to China's peg. Gold makes for a lousy medium of exchange, and as I mentioned above, its expectation signalling properties aren't perfect or unique.

The world will simply have to fumble its way forward on the reserve currency issue, perhaps focusing first on the development of regional reserve currencies. The healthiest resolution to the monetary trilemma looks, for the moment, to be a regime of floating exchange rates coupled with limited "circuit-breaker" capital controls. And Mr Zoellick must know now if he didn't already; mentioning gold is a good way to get attention, albeit at the cost of having most of your substantive points ignored.