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Because it’s such an unusual way of thinking about monetary policy, it might help to compare it to the gold standard. The U.S. successfully pegged the price of gold at $20.67/oz. from 1879-1933, and at $35/oz, from 1934 to 1968. So in a technical sense a gold standard is very doable, even the devaluation of 1933-34 was not done because we ran out of gold, but rather to further FDR’s macro objectives. But that is also exactly what is wrong with a gold standard, pegging the nominal price of gold does not stabilize the relative price of gold (in terms of other goods.)
So why doesn’t the Fed peg the price of a composite good, where the weights are the same as in the CPI? Because there are no highly liquid commodity markets for most components of the CPI. This problem, however, suggests an obvious answer–peg the price of a CPI futures contract. Of course Barney Frank might complain to Bernanke that inflation targeting doesn’t meet the Fed’s legal obligation to worry about both inflation and employment, the so-called “dual mandate.” If so, then switch to a 4% or 5% nominal GDP target, which is a hybrid inflation/real growth target (and in my view is a better target anyway.)
Under that sort of regime we never would have experienced the dramatic economic crash that occurred last fall...
Originally posted by projectvxn
You cannot diversify th value of a dollar in the broad commodities market. Because you have to deal with futures. You can bet inflation would come with that quickly, especially in high demand times. Your currency would inflate out of control in a few years. There are two successful pegs and that is gold and silver. If you're going to diversify in commodities you should use metals like gold and silver and maybe even palladium as it holds value as consistently as gold.
As I explained in my last post, it would be like tying it to CPI. Where the futures market in commodities is concerned, a speculative bubble or data manipulation could potentially destroy your currency in a relatively short while. You want to peg currencies to commodities that HOLD their value, not ones that shift.