Source: www.atlasnetwork.org
Dr. Judy Shelton is an economic advisor to President Donald Trump and the director of the Sound Money Project at the Atlas Network.
She is the author of Fixing the Dollar Now: Why US Money Lost Its Integrity and How We Can Restore It, The Coming Soviet Crash, Money Meltdown and A Guide to Sound Money. Her international economics articles have been published by the Wall Street Journal, the New York Times, Washington Post, Financial Times, Judy Shelton holds a Ph.D. in business administration from the University of Utah.
Mark Valek:
Good morning Dr. Shelton, thanks for taking the time to talk to us.
The current monetary system is sometimes referred to as US-Dollar Standard or Bretton Woods II. Some central bankers also call it a “Non-Standard“. In the past President Trump said some very interesting things about the gold standard. And what we didn’t know until recently is that Vice President Mike Pence delivered a fabulous speech where he mentioned the return to sound money, which we found extremely interesting.
How realistic is it in your opinion that there will be some serious considerations about the current global monetary system (the dollar standard) during this administration? Do you think it will be fundamentally questioned?
Dr. Judy Shelton:
I think Donald Trump brought to his candidacy a willingness to look at the relationship between currency movements and trade. And when I was serving on the transition team at the Treasury Department, which is responsible for the exchange rate policy of the US, there really was a great focus on the problem of not actually having any kind of rules.
There are a lot of references to the rules based global trading system and to Bretton Woods, but in fact when it comes to currencies and exchange rates there really are no rules. If you look at the IMF’s own website they explain that today it’s a “do your own thing” approach. Any country can have any kind of approach they want. They can intervene, like China does daily, they can have floating rates, they can peg or they can have a unified currency (like the Eurozone has).
Ironically, the only thing the IMF says they can’t do is to peg their currency to gold, which is almost perverse given its heritage and its raison d’être. I find that more than ironic. I published a piece in the Wall Street Journal called “Trump’s Contribution To Sound Money” last year, and the very next day I was asked to join the Trump council of economic advisors by Steven Mnuchin.
And then I was asked to be the international advisor at Treasury for the Trump transition, a member of what they called the landing team. When you ask “will there be reforms?” I can’t comment specifically, but in a recent interview where Steven Mnuchin was speaking with Christine Lagarde he said that the international monetary system is not working for everyone and I think that he has told the IMF that they need to speak candidly about the exchange rate arrangements of member countries.
We saw that China was not labeled a currency manipulator, nor was any other country, in the April report that just came out from the Treasury. I think that the criteria used in that report to define manipulation are inadequate. By those criteria, you would potentially label countries like China, Japan, Germany and Switzerland currency manipulators. So that tells you that we don’t have a good definition of manipulation. For example, does manipulation mean that a country is deliberately and persistently trying to distort free market outcomes by intervening in forex markets? In the case of China that is the case; they are intervening persistently. But it’s to hold their currency up. It could be that we have been too narrowly focused on using competitive depreciation as a way to gain an export advantage; we should also be focused on the problem of altered capital flows. In short, we should be concerned about the distorting effects of deliberate government intervention to move its currency in either direction.
Now we see the Fed is talking about raising interest rates. If the ECB potentially moves toward higher rates in the future, we might see competitive appreciation going forward. It’s the capital flows that are most important to an economy, not exports. So perhaps in the interest of trying to attract capital, we will see central banks trying to competitively raise interest rates. That is also a form of manipulation.
What we have seen with Trump is that he is showing a certain sophistication with regards to the dollar. A recent headline story in the Wall Street Journal read: “Trump warns about dangers of a strong dollar”. Normally a president wouldn’t even comment about the currency, but he actually said that the only good thing about a strong dollar is the way it sounds. And he is right; no leader wants to call for a “weak” currency.
There is an adjective I would far prefer, one that our treasury secretary has used – which is a “dependable dollar”. That is a much better way to describe our currency. It’s interesting: President Trump has said that moving to a gold standard would be difficult, but that it would be wonderful, because we would “have a standard on which to base our money”. Bravo! If the next Bretton Woods conference takes place at Mar-a-Lago, I am very happy.
Ronald Stoeferle:
I think that after the press conference with Shinzo Abe, Trump mentioned that the currencies of the U.S., China and Japan would soon be on “a level playing field”.[2] But what I am highly interested in is, if a sound dollar policy would be compatible with Trump’s plan to reduce the structural trade deficit? I think it was quite a sensation that he was so vocal about the dollar and he seems to want a weaker dollar to kickstart the re-industrialization. Do you think there will be another monetary conference like Bretton Woods if we have another financial crisis? And is it possible we get another monetary system that is linked to gold?
Dr. Judy Shelton:
I don’t want to suggest that there is anything concrete that will happen, but I think the chances now are better than they were with prior US presidents. The overriding theme in the remarks that President Trump made during his campaign having to do with currency manipulation or about the Federal Reserve creating a false economy relate back to monetary integrity. One thing that is very clear about Trump’s policies is that he would like to re-connect monetary policy to the real economy.
President Trump believes in real productive economic growth. Not just giving cheap money to already rich investors who proceed to bid up financial markets. He has always said that as a developer he loves zero cost money, but at the same time he has acknowledged that it has been extremely unfair to working people who just have normal bank accounts or who rely on normal pensions. He said, “they are getting creamed”. It’s been unfair to normal people and it has worsened the income inequality. We have not seen productive growth or increases in wages or rising standards of living as a result of the zero cost money. I think that Trump wants to make things real. He favors people who produce real goods and services. He appreciates manufacturing and skilled labor. Those workers matter greatly to him, and their output makes sense to him. The economy needs to work for them.
I was recently at a conference in Washington and I presented a proposal for a gold-linked Treasury bond. That is strictly my own opinion, but I think a gold-linked bond would be a good thing to think about both domestically and internationally. There was recently a conference in Washington that included video appearances by Paul Volcker, James Baker and Robert Mundell[3] and somebody asked if we need a new Plaza Accord if the dollar continues to strengthen. A strengthening dollar poses a problem for US exporters and the question is if the government would intervene to try to affect the exchange rate. I would rather see an initiative that involves trying to establish a new monetary playing field and I think that would be a longer-term approach, but it could be initiated fairly quickly if they wanted to (not that they actually will, though). I think they could introduce something comparable to TIPS bonds, but you would compensate people over the life of the bond with a stable value in terms of gold. Again, I’m just speaking on my own behalf.
Ronald Stoeferle:
We did have gold linked bonds in the 1970s and it worked pretty well, especially for the French.
Dr. Judy Shelton:
I think in the US it was proposed by Alan Greenspan in 1981 and I think he still supports it. I’ve known him for a long time and we have spoken at some length about it. In the US in the 70s we did once issue a Deutsche Mark denominated bond and there was a currency risk with that; there could be a similar risk with a gold linked bond. But there are also important benefits. If you issue a gold linked bond with a convertibility option, you would have an instrument that linked the value of the dollar to gold. That would be a vitally important signal that the US intended to move towards a stable dollar. It would suggest an inclination to establish new currency arrangements – and would represent a first step toward building a new international monetary system. A stable monetary foundation is more consistent with genuine free trade, in my view. It doesn’t have to be linked to gold, but gold has certain advantages. It is a neutral reserve asset held by more than a hundred countries in their central banks. In that sense it’s nonpolitical. I personally think it would be an interesting initiative, but I am not suggesting it is something we should expect.
When Vice President Mike Pence spoke at the Detroit Economic Club in 2010, he laid out his own pro-growth economic plan which he called START. The S stands for sound money and he even goes so far as to mention an idea floated by Robert Zoellick that we should use gold as a reference point in proposing new international currency arrangements. Unfortunately, that didn’t go very far.
Zoellick was criticized for suggesting any role for gold in his Financial Times opinion essay and the idea largely went away. What I brought up at the Washington conference a few days ago was that James Baker as Treasury Secretary in 1987 during the IMF and World Bank meetings also suggested that the US would consider using a commodity basket that included the price of gold as a way to better coordinate international economic policy. The IMF dropped the ball on that; nothing was done. But we have another chance now.
If the dollar starts to get out of alignment with other currencies (and we know Trump is concerned about that) I think it will be an opening for new initiatives rather than just a bilateral side agreement on currencies and trade negotiations with individual countries. I think we need to develop a prototype for what we would consider as a way to disarm currency manipulation in a trade relationship. And one way might be for both countries to agree to use gold linked sovereign debt securities to track how their own currencies perform relative to a neutral reserve asset.
Mark Valek:
Just out of curiosity, would you accept a position at the Federal Reserve or the FOMC board if you were offered one?
Dr. Judy Shelton:
I would be honored, and I am happy even when my name is mentioned, but I think the next one will be Randal Quarles. I think the priority is on the vice chairman for bank supervision. Quarles is a rules-oriented person; he likes the Taylor rule. For me, the best monetary policy rule would involve some kind of reference to gold.
There is also talk about appointing a community banker to the Fed’s governing board. I am hoping it would be John Allison who is a gold standard proponent and headed the Cato Institute. From the administration’s point of view, Allison has the great advantage of really understanding the importance of giving small business more access to capital through community bank loans. We need to reduce the regulatory burden on community banks so that they can help support entrepreneurial aspirations. If we could get Allison, I think you would have a chance to make a real difference in the Fed’s outlook. So, I’m hoping for that.
Ronald Stoeferle:
Dr. Shelton, thank you so much for your time!
Dr. Judy Shelton:
Thank you very much, it was my pleasure.
[1] The Interview was held on April 24, 2017.
[2] https://www.bloomberg.com/politics/articles/2017-02-10/trump-vows-level-playing-field-for-u-s-japan-china-currency
[3] “A Kemp Forum on Exchange Rates and the Dollar. Should the international monetary system be more stable?”, www.jackkempfoundation.org
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