Crisis currency: does gold damage the world economy?

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WWhen looking at what the International Monetary Fund (IMF) scientists are working on, it could easily have the impression that the Washington institution is secretly preparing for the next big financial crisis. Recently, the fund, founded in 1945 shortly after the Second World War, made headlines with the idea of ​​punishing the attitude of money.

Now, the IMF scientific department is working on history, drawing conclusions that have the power to directly influence politics, with potentially far-reaching consequences for both savers and investors.

In an innocuous "discussion paper" overwrites the current publication, IWF economist Johannes Wiegand deals with the introduction of the gold standard in nineteenth-century Europe. It makes the unilateral transition of Germany to the gold standard after the foundation of the Reich in 1871, responsible for the great economic crisis of the seventies.

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Setting a monetary policy on a precious metal has led Europe to deflation and has brought with it a downward spiral. The IMF's thesis can be read as saying that too much money is still a problem in Europe today, especially when governments do not coordinate their policies.

In this reading, Germany will continue to represent the representative of an excessively hard currency with its "regulatory policy", while at the same time it will be blocked by the general coordination necessary to support the monetary union. As a result, much of the European economy slips into deflation with no prospects of recovery.

Brisant recommendations for action

Indeed, since the financial crisis, the European Central Bank (ECB) has failed to keep inflation well below the zero line, where deflation begins. In most countries, the price increase remains behind the two-percent ECB target, although interest rates remain at record levels.

Here, the historical investigation Wiegand, including their implicit recommendations for action, becomes explosive: if the European economy slid into recession, the monetary guard would have little to counter with the collapse of the current constellation. The same scientist at the IMF sees clear parallels between the political situation at the end of the nineteenth century and today's debate on the architecture of the euro. "Solid common institutions are needed," he says, otherwise the currency area could not be stabilized.

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In this way, the IMF seems to support proposals that strengthen the coordination of fiscal policy: "The conclusion of the document is that a monetary system is stable only if it is connected to a robust political superstructure," emphasizes Gunther Schnabl, professor of economic policy at the 39; University of Leipzig, out. Summing up the thoughts, the IMF document of a European fiscal union is one in which one country promotes for all the others.

"Results-oriented analysis" of the IMF?

The valid contracts of Maastricht do not explicitly provide for this total responsibility. "The French demands for a common eurozone budget should probably be motivated by historical-economic evidence", Schnabl criticizes and points out that the IMF is led by the French Christine Lagarde.

The economist sees it critically: the necessary centralization of fiscal, economic and political power at the European level threatens the principle of subsidiarity, that every state is the first responsible for its decisions and errors, weakens. "Economic resources are increasingly being used for supranational political objectives that do not match citizens' preferences in EU regions," says Schnabl.

Market participants also suspect behind the publication of documents for further reasons: "There is an impression that the IMF has a lot of result-oriented analysis," says Astdell Capital Partners' Bernd Ondruch.

Wiegand has chosen a historically significant crisis in its relations with monetary policy. After the start-up boom, fired from French reparations after the war of 1870/71, he arrived in Germany at the so-called incident of the founder, which lasted until 1879. However, the pre-crisis level of the economy was reached new in 1890. Other countries also fell into the downward spiral. Wiegand claims that the crisis has been so strong and protracted for two reasons.

Firstly, the countries did not implement coordinated policies and, secondly, the unique gold standard introduced by Germany seemed an imprisoned foot. The economic weight of the new German Reich created facts and forced other countries to switch to purely gold currency, including countries that had previously operated fairly well with two currency metals.

This was the case, for example, of France: after Germany's turn to gold, the former war adversary also threw his silver stocks on the market. This not only meant that the price of white metal fell into the bottomless and all the states that rejected their previous second-currency metal, only a residual value, but had another effect.

Source: Infographic WORLD

From that moment on, economists hung up on the ups and downs of gold mining globally. In the beginning, it was not a problem because in the middle of the century large gold deposits had been discovered in California and in Australia, which provided abundant stocks, but already in the nineteenth & seventies , the new gold was not reinstated because it was in the IMF's interest that liquidity was needed to combat the crisis, the amount of money actually depended on the amount of gold.

The most eager buyers are China and Russia

Therefore, the IMF study can also be read as a clear commitment against the gold hedging of currencies. The question has practical relevance. The same study comes at a time when central banks have the biggest appetite for gold for half a century. According to data from the watchdog, the institutions have increased their holdings as much as they did in 1971, when the United States surrendered gold as the last big economy. The most eager buyers are China and Russia, who are suspected of wanting to break with the US financial hegemony.

Source: Infographic WORLD

But even among investors, the precious metal is growing in popularity: private buyers have recently saved much on gold funds as well as since 2013 no more. Gold rose to more than $ 1,300 an ounce on commodity markets, after it was under $ 1,200 in 2018. However, it is still far from its $ 1920 record. But if the IMF apparently feared a crisis, this should change very soon.

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