SHI 7.22.20 – The Earth is Flat Once Again

As it turns out, if you’re a member of the ‘International Flat Earth Research Society’ the Earth has always been flat. 

Or so its members believe, in spite of all scientific proof to the contrary.  Why?   Well, it turns out to be more of a ‘religious thing’ … the flat-earthers would tell you … because modern members would argue that the “Bible, alongside our senses, supported the idea that the earth was flat and immovable, and this essential truth should not be set aside for a system based solely on human conjecture.”   Sorry, folks, I’m not buying it.   Everyone knows the earth is a cube.  🙂

Right.  That’s crazy talk.   And here’s a bit more:  The “gold standard,” an archaic economic system abandoned decades ago because it no longer worked in modern economic conditions, is supported by yet another cult group.  Even though just about every intelligent economist on our ‘cubical earth’ vehemently believes returning to the gold standard would be sheer lunacy, the concept has its supporters, too.

And one of those “gold standard” flag-bearers and fervent supporters, Judy Shelton, nominated by President Trump, was just cleared by a Senate panel to join the Federal Reserve’s ‘Board of Governors.’   If confirmed, once there, I have no doubt she will suggest the US …

Which is a downright insane idea.    Sure, it’s romantic…and reminds us better days gone bye.  But it is nuts.   Absolutely nuts.  So how does a “gold bug” economist get nominated to join the FED?

Welcome to this week’s Steak House Index update.

If you are new to my blog, or you need a refresher on the SHI10, or its objective and methodology, I suggest you open and read the original BLOG: https://www.steakhouseindex.com/move-over-big-mac-index-here-comes-the-steak-house-index/

Why You Should Care:   The US economy and US dollar are the bedrock of the world’s economy.  

But is the US economy expanding or contracting?

Before COVID-19, the world’s annual GDP was about $85 trillion today.  No longer.  It will shrink thanks to ‘The Great Lockdown.’   I did not coin this phrase — the IMF did.  The same folks who track global GDP.   Until recently, annual US GDP exceeded $21.7 trillion.  Again, no longer.   But what has not changed is the fact that together, the U.S., the EU and China still generate about 70% of the global economic output.

The objective of this blog is singular.

It attempts to predict the direction of our GDP ahead of official economic releases. Historically, ‘personal consumption expenditures,’ or PCE, has been the largest component of US GDP growth — typically about 2/3 of all GDP growth.  In fact, the majority of all GDP increases (or declines) usually results from (increases or decreases in) consumer spending.  Consumer spending is clearly a critical financial metric.  In all likelihood, the most important financial metric. The Steak House Index focuses right here … on the “consumer spending” metric.  I intend the SHI10 is to be predictive, anticipating where the economy is going – not where it’s been.

Taking action:  Keep up with this weekly BLOG update.  Not only will we cover the SHI and SHI10, but we’ll explore related items of economic importance.

If the SHI10 index moves appreciably -– either showing massive improvement or significant declines –- indicating growing economic strength or a potential recession, we’ll discuss possible actions at that time.

The BLOG:

It’s a mystery to me.   This seems to be just one more seemingly impossible events in a sea of black-swan tails.  I mean, the FED Board of Governors is an important group.   Here is a brief description from the St Louis FED website comments,

“At the core of the Federal Reserve System is the Board of Governors, or Federal Reserve Board. The Board of Governors, located in Washington, D.C., is a federal government agency that is the Fed’s centralized component. The Board consists of 7 members who are appointed by the president of the United States and confirmed by the Senate. These Governors guide the Federal Reserve’s policy actions.”

So Judy will be ‘right at the core,’ helping guide FED policy.   Hmmm….I’m not sure I love that idea.   Neither does David Wilcox, a top FED economist who served on the FED board from 2011 to 2018, helping guide the country thru the last crisis.  His comments:

“This is no spot for on-the-job training. The heat of a crisis is no time to rehash ideas that were abandoned half a century ago and are studied today only in the context of learning lessons about what not to do.”

What is the gold standard?  It is a monetary system that requires every dollar of “paper money” be backed by $1 worth of gold.   Thus, a country’s currency or paper money has a value directly linked to gold.  Post WWII, as Japan and Europe wanted US dollars to buy American goods — yes, back then, we were a manufacturing powerhouse — so the US agreed to “back” the US dollar with $1 worth of gold.   At that time, the US government owned more than half the world’s gold reserves.   By that agreement, any country holding a US dollar could exchange it for an equivalent amount of gold, at the exchange rate of $35 per ounce.   Which they did.  Often.  Over the next 20 or so years, almost 2/3 of all US gold reserves left Fort Knox to take up residency in a foreign central bank.  The US was running out of gold, and in 1971 Richard Nixon said “no more.”   The US would no longer exchange gold for paper.   Do you remember what happened just a year or two later? 

And that’s the ‘gold bug’ argument.   Exiting the gold standard, they would say, pushed the US into an inflationary cycle that took decades to overcome.   A point, frankly, that I completely disagree with.  No, the US inflation problem began in the 1960s, accelerated in the 1970s and was quashed in the 1980s.   It took some serious effort, but it was quashed. 

Gold bugs believe the failure to anchor paper money to gold in inherently inflationary.  They would point to the economies in Venezuela and Zimbabwe as examples of paper money printing run amok … triggering hyperinflation.   And they would be right:  The bankers in those countries are equally insane.  And while there is a cause/effect of printing too much paper money, the opposite may be true as well:   Print too little money, and deflation may take root.   As we all know, the level-heads at the FED have battled the deflation problem for the past decade or more:  Inflation far below their 2% annual target/objective.   Inflation has been too low.  And it remains too low today, by FED standards.   Finding that perfect balance, it appears, is the magic trick. 

A currency pegged to gold would be unable grow in size.   In a gold standard monetary system, only if gold reserves expanded could the currency in circulation expand.   If the US were on the gold standard at present, we would have been unable to issue any fiscal stimulus.    Under a gold standard, the 25 million unemployed Americans now receiving supplemental benefits would have received nothing. 

Which is a serious problem when the state of our economy looks like this:

The latest ‘Nowcast” from the Federal Reserve Bank of NY suggests US GDP is shrinking at the annual rate of 14.31%.   Ironically, this is an improvement from the end of May when the annualized decline was over 35%.    The Atlanta FED is not as optimistic.   From their GDPNow website is another forecast from the same date:

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2020 is negative 34.7% on July 17, down from negative 34.5% on July 16. 

Ouch.   I can’t even imagine how a country on the gold standard would deal with this.  

Which is not to suggest that our leaders are making the “best bad choice” possible at this moment.   I believe future generations of Americans will pay a large price tag for today’s choices.   Stimulus programs are very costly in so many ways.  But the alternative may be even more costly.  Without the stimulus during this pandemic, I fear Americans would have a lot more to worry about than the Coronavirus.  Judy, let’s leave the ‘gold standard’ in the rear view mirror, right where it is at present ….

– Terry Liebman