What lies behind the GOP dash to the past? Yes, Republican positions on every social issue embody nostalgia for a bygone era of women as second-class citizens, immigrants and people of color as despised “others,” and consenting adults monitored by Big Brother.

As significant, but far less well understood, is that party’s adherence to the belief that basing the economy on gold — bright, shiny, and substantial, like the Emerald City of Oz — would be a good thing.

According to the Ron Paul crowd and the GOP platform, the problem of inflation is so severe we have to tie the dollar to gold. We run grave risks if we don’t. But there’s no inflation now. And there’s not any somewhere over the rainbow either.

Increases in the consumer price level have been under 2 percent for the last couple of years. All the predictions see the core inflation rate at or below this level for the foreseeable future. The reason for this consensus view is straightforward: we have huge pools of unutilized resources. Mass unemployment — the nation’s number one problem, not inflation — means that our industrial, commercial and human potentials are going to waste. What we don’t produce when millions are unemployed is lost forever. In just the second quarter of 2012 we didn’t produce nearly $1 trillion that we could have produced. That’s a lot of real, actual stuff not to have.

Anti-inflation hysteria is Wall Street’s default position. Put simply, unanticipated inflation hurts creditors (bankers and financiers) and helps debtors (you and me).

More inflation would be good for most Americans since we’d be paying off our loans with cheaper money. Sure, “banksters” would take a hit. Boohoo. Billions in taxpayer funded bonuses later and we’ve not seen any financial institutions face criminal charges for their roles in the 2008 meltdown. And those “too big too fail” banks? They’re bigger than ever.

Since there’s no inflation now, and there’s not likely to be any until well past 2024 (when, at the current level of 163,000 jobs created per month, the unemployment rate will return to pre-crash levels), what explains the GOP’s lust for gold?

Sure you can touch, see, weigh, and taste gold. But that doesn’t mean that a currency backed by it is stable. Gold-based monetary systems are notoriously prone to boom-bust cycles far more severe than any experienced since Nixon took the U.S. off the gold standard (1971). That’s why there’s not a country in the world with a currency denominated in a precious metal. Consider too the national security implications: 30 percent of the world’s gold is produced by China, South Africa and Russia; less than 20 percent comes from the U.S. and Australia. Make the U.S. economy dependent on Moscow, Bejing and Pretoria? Brilliant.

Follow the GOP yellow brick road to nowhere.

In a gold system, the monetary authority (in the U.S. that’s the Federal Reserve) sets the gold-price of money (or the money-price of gold) and they have to buy or sell gold to maintain the legally established price. If the official price of gold is set “too high” then everyone and their cousin queues up to sell the stuff. Gold hoarders become gabillionaires overnight. But this releases gabillions of dollars (remember those clicks which, like runs in baseball, we can’t run out of?) into the system — just the opposite of why we’re supposed to want a gold system.

The pressure is to set the price of gold “too low,” setting off a rush to buy gold from the Fed and causing dollars (those pesky clicks) to drain out of the system as money is traded for gold.

When money flows out of the system, there’s way less available to borrow, lend or spend. The result? Sharp reductions in credit, surging interest rates and falling prices.

Here we are, right now, in the midst of a severe employment crisis with over 20 million Americans unable to find full time work. And we’re supposed to believe that the GOP is serious about growth and job creation when they endorse a policy that cuts credit and raises interest rates? Please.

What exactly are the disastrous effects of a massive credit contraction? More business bankruptcies. More home foreclosures. More unemployment. The economy gets sucked even deeper into the sinkhole of insufficient aggregate demand.

Without enough spending to absorb the output firms can potentially produce, firms reduce production. Layoffs increase. People spend less. Shops, factories, and offices close. Tax collections collapse. So localities shutter schools, fire departments and police stations. Income and employment fall some more. Sound familiar?

Ryan and Romney and Paul. Oh my.

An economic free fall would trigger a tidal wave of sell-offs as everyone rushes to cover existing debts and minimize losses (holding onto assets like inventories, cars, and homes means selling them for even less in the future). When goods and services flood markets, prices are forced down making the existing supply of money worth more-the opposite of inflation.

As prices fall, debt burdens rise. In a deflation, consumers and other debtors pay off loans incurred in the past with money that’s worth more now.

The level of U.S. household indebtedness is scary. Of homeowners with a mortgage, 31 percent are underwater. They “own” homes worth less in today’s markets than they owe on the loans created (often fraudulently) when they purchased or refinanced them.

An analysis of U.S. households by Credibility, a major consumer-counseling agency, places the nation’s consumers just barely out of the indebtedness danger zone.

On the Consumer Distress Index there are only 4 states where consumer finances are “good, stable.” In Maine, as in 30 other states, consumer finances are “weakening, at risk.” More than half of these “at risk” states are barely above the level of “distressed, unstable,” the unenviable condition of consumers in 15 states.

Flip that GOP gold coin. Heads, Wall Street wins. Tails, Main Street loses.

This policy, like OZ, is a complete fantasy. The fear of inflation that supposedly motivates it is without grounding in reality. From history we know that adherence to the gold standard depresses output, causes massively destructive deflationary cycles, and makes existing debt crises worse

Finally, no matter how much GOP goldbugs want to implement this policy, they can’t unless nations in the rest of the world make similar changes in their monetary systems. This is so not happening. Returning to a gold standard is impossible.

Ron Paul found his courage. Ryan never asked for a heart. Romney, “If I only had a Bain.”

Susan Feiner is a professor of economics and women and gender studies at the University of Southern Maine.

 

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