The resource cost of a gold standard

We are currently incurring costs akin to having a gold standard – in that we are using gold for monetary purposes, as an inflation hedge. But we don’t get any of the benefits. 

In my City AM column on September 4th 2012, I discussed the resource costs of a gold standard. This was triggered by reading Lawrence White's estimate that the benefits of a commodity standard outweigh the costs once inflation hits around 4%. Due to space constraints, the calculations were not included in that article. I thought I'd provide them here. The basic analysis is (White, 1999, p.42-50).

Following Friedman and White we first need to know the ratio of gold to money. This is equal to the typical reserve ratio (like White I used 2%) multiplied by the ratio of currency notes and demand deposits to M2 (52.7%), plus the ratio of coins to M2 (0.18%).

G/M = R + Cp/M = [(R/N)+D][N+(D/M)] + Cp/M

(Where R is bank reserves, Cp is gold coins held by the public, M is M2, (R/N)+D is the ratio between gold reserves and demand liabilities, (N+D)/M is the ratio of notes and deposits (but not coins) to M2).

Assuming the marginal reserve ratio is equal to the average reserve ratio, the resource cost is equal to this ratio (1.2%) multiplied by the change in money supply that would keep the price level unchanged, multiplied by the ratio of M2 to GDP.

ΔG/Y = (ΔG/ΔM) (ΔM/M) (M/Y)

I used 4% for the former (as a rule of thumb), and 176% for the latter (from the World Bank). All in this suggests that a gold standard would cost 0.085% of GDP, which amounts to around £31bn, or £512 per capita

Back of the envelope calculations, to be sure. I encourage others to give it a better stab.


Towards a NGDP futures market

Kaleidic Economics has been flirting with prediction markets since our launch. I have also been intruiged by Scott Sumner's proposal for an NGDP futures market (see this proposal for the Adam Smith Institute), and the impact this would have on the discretion of central bankers. As I said in my brief review for Money Marketing:

Targeting the level removes a large amount of discretion from the Bank of England. Monetary policy stops being an arbitrary policy lever and provides a macroeconomic foundation upon which economic activity can build. 

Some time ago I set up a prediction market for NGDP using Inkling Markets. Here are the details:

The main problem with this is the difficulty of finding NGDP figures for the UK. Britmouse provides this useful guide to UK GDP but my suggestion is to start off with Table A1 of the Quarterly National Accounts (published by the Office for National Statistics). It would be handy if there was a stable link for the most recent release, but the best I can find is going to "All releases of Quarterly National Accounts". You can then click on the most recent, and eventually "select series from this dataset". Table A1 has what you need.

I think that it's easiest to think of NGDP in terms of quarterly growth rates that are compared to the previous year. This was what I had in mind when I posed the question, and here are the components (the red and blue lines should sum to the orange one):

NGDP = Real GDP + GDP Deflator


The chart below shows the composition of NGDP over the last decade.

You can also do this for annual figures (YoY change)


Or quarterly figures (QoQ change)


As Lars Christensen rightly pointed out it is the level of NGDP rather than a particular growth rate that "market monetarists" care about. One of the downsides of NGDP targetting is that people tend to think in terms of growth rates rather than levels. But that can change. Therefore it would probably be better to focus on the level of NGDP:

The prediction market question should probably be in relation to this figure, therefore Kaleidic Economics will endeavour to update it on a quarterly basis as part of our data. The series code is YBEU. I'm open to suggestions for what that question should be - for example an annual figure on an annual basis? Or a quarterly figure on a quarterly basis? For now I've done the following trial:

Finally, for the absolute amount of NGDP: 

  • Table C1: Quarterly National Accounts - Gross domestic product: expenditure at current market prices = YBHA

 Other Kaleidic resources:


MA hovering at 6% growth

Our MA measure continued its year on year growth at 6% in May, similar to what it did in April. Furthermore, M4 and M4x also grew at similar rates to their April peers. Please see our data page for further information.


Thoughts on UK employment data

I've just received by email the following chart from Ewen Stewart, of Investec (source). It shows long terms changes in UK employment by sector.

As he points out, some of the striking features include:

  • The decline in Manufacturing 
  • The cyclicality of Retail, Construction, and IT & Comms
  • The structural increases in Health and Social Work, and Education

It certainly ties into the view that the UK economy has been shifting from a manufacturing to a strong dependency on public services. Finance and Insurance is minor compared to state funded industries.

The April 2012 Labour Market Statistics also provide some interesting insights. Table EMP13 shows employment by industry sector, and I wanted to see what's been going on during the "recovery". Unfortunately they only provide 3 years worth of data, so it doesn't help us compare the boom and the bust. This would be useful though, because Paul Krugman has argued that US employment fell in a balanced way across all sectors (I can't find the presentation online but it was very simlar to this(.pdf)). This would suggest that the recession is due to an aggregate demand shock.

For the UK, however, there are clear structural differences. Some industries are contracting, others are gorwing (and indeed quite strongly).

To see this in more detail I focused on the five biggest sectors (those that employ more than 2m people each) and what does it show? Massive falls in Construction, but clear differences between the different sectors. 

 I also wondered about Public vs. Private sector employment. Table EMP04 provides a breakdown, and I've just taken the absolute numbers (note that private sector employment is on the RHS, it is around 80% of total employment whilst public sector is around 20%).

It is likely that these numbers underestimate the scale of the public sector, because if a local council outsources cleaning to a private contractor, for example, this will be treated the same as people switching from public to private provision of goods. We see a large increase in public sector employment from 1999 - 2005, and this isn't simply because it's growing from a lower base. During this period public sector rises from 20.2% of total employment to 21.3%. But the ratio then inverts with (relatively) high private sector growth just prior to the financial crisis.

The fiscal stimulus of 2008 led to a spike in private sector jobs, but most of those have now been reduced. This is exactly what a "stimulus" is supposed to do in theory - provide a temporary boost. But it seems odd that people complain about falling public sector employment, now that we're 4 years after the stimulus. It's impossible to continue that temporary growth permanently. In reality what we see is the failure of that policy. At the very least, the unwinding should be treated as part of the costs.


Austerity and the passage of time

Following the fourth meeting of Kaleidic Economics, we have released a report on the UK's austerity plans. Three main arguments are made:

  1. Temporary changes in the tax code are inconsistent with both sides of the debate
  2. We cannot ignore the historic state of the UK economy when discussing fiscal policy
  3. Alternative forecasts for GDP can make a dramatic difference to austerity measures

This chart shows government spending as a proportion of GDP, using a GDP forecast lower than the official OBR figures. It reveals that government plans to reduce spending are based as much on over optimistic growth forecasts as they are on actual spending cuts.

You can read it in full here (.pdf).