Germany’s Gold Delusion

Germany’s gold is on the move. For the first time since official gold transactions became more transparent, the Bundesbank has given notice that a significant portion of its holdings will be transferred home from France and the United States. Ostensibly, this is just a matter of monetary housekeeping. But why now?

One possibility is that German policymakers believe that we are approaching an every-country-for-itself scenario – and only gold guarded by one’s own police is worth anything.

But this is more than far-fetched. The world in which financial trust breaks down completely between Germany and France or Germany and the US is one in which we have much bigger problems than where a country’s gold is located. International trade would collapse, and major global companies would struggle to sell their products. Having more gold at home, rather than in the vaults of the New York Fed, would be neither here nor there in such a situation…

Perhaps German central bankers sense a longer-term shift in international preferences away from the dollar and want to be ready in some fashion. This is plausible in terms of a future decline in the dollar’s importance as a reserve asset and safe haven. Reserve holdings of dollar assets (primarily by central banks) were worth around 2% of US GDP in 1948 and about the same in 1968. Today, such holdings are at least 15% of US GDP – with some estimates as high as 30%…

But moving Germany’s gold is hardly helpful in this regard. What would help is to turn the euro around – in the sense of convincing investors that the common currency has a bright future, because it is underpinned by a stronger monetary, fiscal, financial, and political union. When seen in this light, the physical location of gold is purely a distraction…

…Moving gold does nothing to keep inflation under control or change the behavior of central banks. The link between currencies and gold was irrevocably broken in 1971, when US President Richard Nixon decided to suspend the convertibility of dollars into gold for central banks. We have lived in a purely fiat money system ever since – meaning that our money’s value is not backed by gold or any other physical item…

German politicians would thus seem to be suffering from some serious delusions about the importance of gold and the effects of shifting its location. But they are right to worry about the ECB’s policies: Providing unconditional credit to eurozone governments is unlikely to make these governments more careful…

The German fascination with gold is a red herring. Its fear of wayward monetary policy is not.

Regular readers of this blog are aware of my dedication to Project Syndicate. I owe no loyalty to any unifying credo at the site. I’m not certain you could describe one – other than a predilection for modern and up-to-date economic analysis and thought.

I’m drawn back most often by the quality of writing and understanding of economics. Many of these Doctors of the science of economics [whatever that might mean] are individuals whose opinions frankly serve as fodder for discussion around a portion of our extended family. Whether the provocation be political, philosophical or directly concerned with economics – these functions served by a nation’s commerce within and without borders illuminate the bedrock foundations of how our society progresses.

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