Michael Green is an economist and writer who has worked as a senior official in the British government specializing in global finance. Green teamed up with Matthew Bishop, New York bureau chief of The Economist, to write the book In Gold We Trust? The Future of Money in an Age of Uncertainty. Green talked to JLN editor/producer Nicole V. Rohr about prospects for gold in 2012, and inflation worries leading to the creation of alternative forms of currency.

Q: What were your goals in writing this book?

A: Over the last few years, I’ve been writing books with my old friend Matthew Bishop, who is the New York bureau chief for The Economist. And I think it was about 18 months ago when we were chatting, and we were just intrigued by the fact that you have such divergent views about investing in gold, from some of the most respected investors in the market. You’ve got people like Warren Buffett, who is always really critical about gold and always has been, and I think always will be. Then you have Ray Dalio, the most successful hedge fund manager in history, George Soros for a while, and John Paulson – all investing money in gold. So, there was this question there: Why is this commodity dividing opinions so strongly with some of the smartest investors in the world? So, we thought it was an interesting story to tell and an issue to investigate.

Q: What do you mean when you say that 2012 will be a “make or break” year for gold?

A: The reason we said that is because if you look at John Paulson’s rationale for investing in gold, he was big on gold in 2009 when quantitative easing started. His feeling was that we were going to have that expansion of the monetary base which was going to feed into inflation. And Alan Greenspan, who advised him, talked about a 12- to 13-quarter lag between increases in the monetary supply and increases in inflation. So, really on that calculation, if QE is going to lead to inflation, it’s going to be coming through in 2012. And if and when that inflation does come through, it’s really going to drive the price of gold upward.

Q: If inflation is the concern, what should the federal government do to restore confidence in the dollar?

A: I think federal government, and governments everywhere, are in this catch-22 situation. I think they did the right thing with things like quantitative easing and all the other measures to stop the depression. There’s a probability that it’s now bringing value into question. And I think even if Paulson’s bet is wrong on QE leading to inflation, even further down the line, no one is really battling their debt problems. In the UK, we have austerity measures, but we’re not growing. So, in a sense, we’re not really making much progress in climbing out of our debt problem. The U.S. is at least showing some sense of a recovery, but the U.S. is doing nothing about the debt problem, and it’s been kicked down the road to the next round of elections, so there may not be anyone besides Obama doing anything about the debt afterwards. So, I think about QE having already led to inflation, but I think there’s almost a more powerful reason to be worried about inflation: Politically, it may be the only way that politicians think that they can get out of this problem. Inflation, in some sense, is the necessary chemotherapy to deal with the cancer of debt that’s affecting our economies. So, I think there are political reasons why we’re going to be seeing inflation rates going upward over the next two to five years.

I think you’re seeing some different views. If you think of money as a technology, it’s a technology that tries to do different things. One of its functions is as a tool to help the economy as a whole along. It’s a macroeconomic tool. I think that’s what Ben Bernanke has been doing with the QE and the printing of money and the low interest rates. He’s been trying to help the economy along. But that function of money is running into conflict with another function of money, which is a stored value. So, you’re almost caught between those two different roles of money. Are we going to let the stored value function of money collapse in order to protect the economy as a whole? And that’s why investors are expecting inflation and shifting into other assets, to try to get away from that risk in government-backed paper money.

Q: Would you tell someone to buy gold now?

A: Gold is always going to be volatile, especially with the way it’s going up and down at the moment. So, there’s a volatility in there where you have to be invested in a diversified portfolio in order to tolerate risk. I don’t think it’s a widows-and-orphans investment. Secondly, if you think politicians are going to get ahold of the debt issue, if you think they’re going to protect the value of money, then it’s probably best for you not [to invest] in gold. But if you think as we do, that we’re going to see further attempts to reduce the value of money in the future, then gold is going to be one of the safe havens to protect you. There are other safe havens. You know, Warren Buffett is seen as being a big critic of gold, but in some ways he’s backing stocks, real assets, in alternative ways to hedge against those risks. We say a bit in the book, maybe there are other assets that have started to emerge as money alongside gold. Gold, in a sense, is the first mover if investors look for alternatives to government-regulated money. But we may be seeing others, and that could influence some of these digital currencies like bitcoin.

Q: Can you explain why a return to the gold standard would be a “catastrophic error”?

A: The problem with a gold standard in the classical, government-backed gold standard sense is that it makes the supply of money very rigid. It’s based on the supply of metal. So, what you’ve seen through history is there’s no real correlation to what the economy needs and the supply of metal. Now sometime in the 16th century, you had a big influx of metal and that caused inflation. And another time, at the end of the 19th century, you had a huge shortage of gold, and that created a deflationary problem. And I think looking at the state of the global economy, if you [moved] back to a classical gold standard, you’d have a massive monetary squeeze on the macroeconomy as a whole.

If you look at someone like Ron Paul, he’s actually not advocating that kind of gold standard. What he’s talking about is a system whereby government doesn’t create any money at all, gold-backed or not. He wants free money where different currencies can compete, and so he and his followers would say, what they’re advocating, is that gold doesn’t have that risk. Frederich von Hayek actually talks about the problems with the gold standard, and calls gold a “wobbly anchor” because there’s not enough of it around. So, Ron Paul and others who follow the Austrian School of Economics think that if gold is too deflationary, then you’ll see more forms of money emerging. What we argue in the book is that whether or not Hayek is right about this as a prescription, it may actually be a description of the way the world is changing. Investors, because they’re looking for these alternatives, are creating the alternative monies, and it’s actually much easier to do that in a globalized world with sophisticated financial markets.

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