The Differences Between the Eurozone and the Dollarzone

How the US succeeds as a monetary union while Europe doesn’t, and why Greece is in a debt crisis while California isn’t:

1. The California banking system’s creditworthiness is not linked to the state’s.
>California’s banks are not heavily exposed to the California government’s credit risk because they are not the government’s principal source of funding, due to the tax-exempt nature of California’s debt.
>California has no responsibility for the solvency of the California banking system; instead the federal government is responsible for the solvency of all banks in the dollar zone.
>Bank deposits in the dollar zone are guaranteed by the US government.
>Because of the excellence of US bank accounting and regulation, dollar zone bank financial statements are credible.
>The American states have no control over their banks, and can’t order them to buy state debt.
>The Federal Reserve does not condition the provision of  bank liquidity on the fiscal performance of the California government.
>The federal government does not condition state-level funding on state government fiscal performance.
>The Federal Reserve does not buy state government debt.
2. California’s market access is unrelated to its credit rating
>Because of the Constitutional accident of tax-exempt state debt, most of California’s debt is held by California residents and not by foreigners.
>Because California has a monopoly on the issuance of debt that is tax exempt in California, her access to the bond market is unimpaired despite her volatile credit risk.
>The California bond market is entirely domestic. It is neither national nor international.

3. The government of California is a small part of California’s economy
>Most government spending in California is federal, not state.
>The California economy would survive the bankruptcy of the state, because it would not bring down the banking system, and federal spending would continue.
>The US government does not condition its California spending on the state’s fiscal performance.
>Most California residents are not employees of the state, and the California public sector is small compared to that of Greece.

4. California bank deposits have no convertibility risk
>There is no risk of a California currency redenomination because, pursuant to the US Constitution and the outcome of the Civil War, California cannot exit the dollar zone, nor can she be expelled from it.
>California cannot impose currency or capital controls.

What the eurozone would have to do to separate bank and state solvency and to eliminate convertibility risk:

1. The ECB guarantees bank deposits.
2. The ECB is responsible for bank solvency and regulation.
3. The ECB imposes strict, uniform and transparent solvency and liquidity standards on all eurozone banks.
4. The ECB’s bank regulatory regime is comprehensive, intrusive, incorruptible and independent of government interference and political pressure.
5. National central banks are abolished and removed from the ECB governing council.
6. ECB does not condition the fulfillment of its statutory responsibilities on the fiscal behavior of member governments.

7. The EU does not condition its spending policies on the fiscal behavior of member governments.

8. Governments can default on their debt but cannot redenominate.
9. Interest on government debt is tax-deductible for households but not for banks.
10. Government debt is marked to market, forcing timely recapitalization.
11. Concentration limits are imposed on bank exposure to government risk.

The ECB May Yet Save Europe!

Hat’s off to Mario Draghi, who may actually be the smartest man in Europe.

As a result of today's ECB board meeting, I now assign a higher probability to eurozone survival than I have since the crisis began in early 2010. For the first time, the cup is half-full. Europe has finally abandoned its hopeless strategy of mutual eurobonds backed by fiscal union (piling debt upon debt), and is moving toward the only possible solution: full-scale monetary rescue by the ECB.

The entire governing council (minus one, Weidmann of the Bundesbank) voted for Draghi’s bond-buying program (“outright monetary transactions”). Under this program, the ECB will spend an “unlimited” amount of euros to buy medium term government bonds in the secondary market. To be eligible for the OMT, governments will have to apply to the EFSF/ESM and submit to a comprehensive reform plan including both micro reforms and a path to budgetary balance. (This is a big mistake.)

But before I discuss the plan’s drawbacks, let me explain its good parts. First of all, this action embodies my fondest hope, which was that the ECB would finally ignore Weidmann and get on with rescuing the eurozone. Poor Mr. Draghi was forced to cook up an elaborate rationale explaining why buying peripheral bonds is in keeping with the ECB’s charter, which explicitly forbids it. He knows that his rationale is completely bogus but he needs it to help the Northern governments sell it to their people. (Note that both the Finnish and Dutch central banks went along with the plan, which may not please their governments, especially Finland. We haven’t heard from any governments yet.)

This announcement effectively means that the South (or should I say Europe?) has hijacked the ECB and left the Bundesbank in the dust, which was absolutely necessary. Weidmann will now have to resign or shut up. Merkel certainly wants him to shut up. (Germany’s other board member voted for the plan, which further isolates Weidmann.)

The ECB staff was unable to come up with a transparent formula for deciding how to target bond yields for each country, which is perhaps understandable given the political sensitivity. However, without an announced target, the markets can only flounder around trying to figure out what the ECB’s secret target really is. This will cost the ECB a lot of money that it wouldn’t have had to spend defending an announced target.

There will be a lot of commotion in the bond market for a while. The key numbers to watch will be Spanish 3-year and 10-year yields. The 3-year maturity would fall within the OMT program, and the 10-year will signal the market’s unmanipulated opinion of the program.

This program could contain the seeds for a complete monetary rescue of the eurozone, maybe including even Greece (which Draghi never mentioned and which no reporter asked about). Greece is now chump change. Once the ECB starts in on this, it is literally in a fight for its life. It will have to spend whatever it takes, or it will lose. I don’t know if Merkel fully understands what has just happened, but it really does mean the Italianization of the ECB. It may still be located in Frankfurt, but it’s now the Banca Centrale Europea. Some Germans besides Weidmann may not like this.

Now, the problems. As I indicated yesterday, it takes two to play the conditionality game and, for now, Spain isn’t playing. Rajoy’s position is that Spain has already launched a reform program and doesn’t need a new one imposed by the Troika. Draghi (meaning Merkel) left no room for compromise on this, so Rajoy will have to blink. When and how will he do so? He has run out of money except for the round-trip through his central bank. The ECB abandoned all collateral standards today, so in theory the Spanish banks can now pledge their paper clips and furniture, but I expect that Draghi will start closing the spigot. Rajoy will be forced to lose face or default. (This is not your father’s central bank!)

As I said earlier, the austerity requirement is a big mistake, since it leads inexorably to depression. These economies need growth, not asphyxiation. I’m sure Draghi knows this, but is an incrementalist. An even bigger mistake is the ECB’s ongoing monetary nonfeasance.

Draghi today:
Turning to the monetary analysis, the underlying pace of monetary expansion remained subdued. The annual growth rate of M3 increased to 3.8 percent in July 2012, up from 3.2 percent in June. Economic growth in the euro area is expected to remain weak.
Euro area real GDP contracted by 0.2 percent, quarter on quarter, in the second quarter of 2012, following zero growth in the previous quarter. Economic indicators point to a continued weak economic activity in the remainder of 2012 in an environment of heightened uncertainty.
Looking beyond the short term, we expect the euro area economy to recover only very gradually. The growth momentum is expected to remain dampened by the necessary process of balance sheet adjustment in the financial and nonfinancial sectors, by the existence of high unemployment, and by an uneven global recovery.

In plain English: “We don’t know when we will arrive at our destination because we are driving as slowly as we can and are taking frequent rest stops. Also, the motor may be broken."

You might ask: won’t unlimited bond purchases stimulate monetary growth? Not for these scientists. Draghi made clear that all such purchases will be fully sterilized and that the notion of not sterilizing  wasn’t even discussed (!). 

The ECB is apparently quite happy with zero real growth and negligible nominal growth. And one of the excuses Draghi gives for low growth is high unemployment! Maybe he isn’t the smartest man in Europe, or maybe he is playing the long game. After all, if he plans to monetize the entire debt of Spain and Italy, that will ultimately require a bigger balance sheet. I hope that’s what he’s thinking: in for a penny, in for three trillion euros.

As long as the ECB continues to deliver zero growth, nothing can save the periphery because only growth can grow government revenue and shrink relative debt. The ideal policy would be unlimited spending in support of across-the-board yield ceilings, no austerity, and massive monetary stimulus in order to achieve 5-6% nominal growth. We are nowhere near that plan, which is why I am not yet converted to the bull case for Europe.

Going forward, we will have to see what Rajoy says, what Monti says, what Merkel says, what happens to Spanish yields and--yes--what happens with Greece. But Spain is the crisis du jour.

Expect Little From The ECB on Thursday

Thursday is the next ECB board meeting. Will Draghi be able to do “whatever it takes” to save Spain?

In order for the ECB to start buying Spanish bonds, there are three conditions precedent: (1) the ESM must be inaugurated, which requires the OK of the German constitutional court; (2) Spain must apply for aid from the ESM; and (3) Spain must sign onto a fiscal plan approved by the Troika, including the IMF.

I presume that the German court will OK the ESM. But Spain is not willing to even discuss making an application to the ESM.  PM Rajoy says that he doesn’t need to agree to an austerity plan, and that in any case he won’t apply until the ECB agrees to unlimited bond purchases.

Draghi is left with no room for manoeuvre. He can’t agree to unlimited bond purchases, and he can’t do anything at all for Spain until the government applies for aid. Draghi stands ready to buy Spanish bonds, but he can’t do it yet.

Rajoy knows that Spain is TBTF, and he is prepared to play chicken with Europe to get what he wants. He has no desire for the “men in black” to take over his country.

If I were Mariano Rajoy, I would be doing exactly what he is doing. He does not want Spain to walk the path of starvation in exchange for minimal life-support. He wants the ECB to bring Spanish bond yields down to an affordable level without having to impose austerity. If he gets his way, it will be better for Spain; the strategy of spending cuts chasing revenue shortfalls is disastrous.

This is a battle between the North (Germany, Finland, Netherlands) and the South (France, Italy and Spain), and the cockpit is the ECB governing council. On Thursday, I expect neither side to win. I have no idea who will win in the end, but I’m rooting for the South.

Next Week's FOMC: Another Bowl Of Peanuts

Last week, Chairman Bernanke spoke at the annual Jackson Hole monetary conference, where he laid the groundwork for additional QE, which is good news. However, he did not even mention the idea of a higher inflation target, or an NGDP target. Rather than defend the Fed against the patent failure of its policies, he chose instead to defend it against the counterfactual claim that QE is inflationary.

Thus, Bernanke’s Fed continues its policy of periodically tapping its toe on the accelerator, rather than targeting a desired speed and opening the throttle until it is achieved. Not only that, but by playing around with QE without a target, he is discrediting QE because "it hasn’t worked”. That is analogous to giving a starving patient a bowl of peanuts and then concluding that the peanuts didn’t help because the patient is still starving.

Let’s take a look at the current economic telemetry and see what kind of a job the Fed is doing.

In terms of its 2% inflation target, the CPI has fallen 25% below target and remains at a suboptimal 1.5%.

In terms of its “maximum employment” mandate, the Fed continues to be creative in its excuses for four years of nonfeasance. Civilian unemployment at 8.2% is now 50% above the Fed’s informal target of 5.5%. Bernanke is full of reasons why this is the best that he can do. At Jackson Hole he said that, when interest rates are at the zero bound, we must tolerate higher levels of unemployment than normally. This argument was demolished ten years ago by an economist with the same name as the current Fed chairman. Then, Bernanke argued that monetary policy remained fully effective below the zero bound; now he says it doesn’t. The old Ben was right, and the new Ben is disingenuous.

Currently the Fed tolerates having 24 million people out of work or underemployed because there are “unquantifiable downside risks” to aggressive monetary expansion. The US economy is growing at an anemic 4% nominal rate, versus 6-7% before the recession, an output gap of 2.5%. With federal debt growing by 9% while NGDP grows at 4%, we have a fiscal trajectory that is modeled on Japan's.

With regard to the Fed’s policy stance, its balance sheet has gone sideways for over a year; there has been no expansion since last spring, despite high unemployment and weak nominal growth. I can think of no reason why the Fed should not have been growing its balance sheet at some pace over this period, even 10% p.a., in order to increase employment. This is disgraceful, and it has been unfair to the incumbent president, who should be able to expect that the Fed will fulfill its legislated mandates. (I wonder if Obama is even aware of how badly he has been screwed by the hawks on the FOMC.) Obama’s policy mix been bad for growth, but not half as bad as Bernanke’s. They've made a great team.

What will the FOMC do next week? I expect the Fed to announce a third round of QE without any kind of employment or growth target. The first QE (post-Lehman) was $1 trillion. The second QE, in the first half of 2011, was $700 billion. I would imagine that this round, QE 3, will be in the neighborhood of $500 billion, enough to palliate but not to cure. 

The failure to announce any targets undercuts the potential growth benefits of the exercise. Instead of announcing that it will feed the starving patient until he recovers, the Fed is handing him another bowl of peanuts, and pledging “close monitoring” of his vital signs going forward. “In the event that the patient continues to starve, there are further steps we can take, including additional peanuts.”

Will Greece Blow Up Before Election Day?

Samaras now has two to three weeks left to put together an austerity package worth about €14 billion ($17.5 billion) for the next two years. But politicians in Berlin and Brussels doubt whether his new course will produce results quickly enough.
The troika will spend the entire month of September auditing the books in Athens. Meanwhile, staff at the European Council in Brussels are assuming that the summit of European Union leaders on Oct. 18-19 will be a showdown over Greece.
The IMF is taking a particularly hard line in the negotiations. The fund's envoys feel that Greece's debts are not sustainable and are threatening to withdraw from the aid program altogether. The only alternative is for the public creditors, in particular the European Central Bank (ECB), to write off a portion of Greece's debt.
The German government faces a dilemma. Chancellor Angela Merkel had made IMF participation a condition of any Greek bailout, but if public-sector creditors agreed to a debt haircut, it would cost Germany many billions of euros.
For Merkel, that is out of the question, as is a third aid package or extending the current program by two years, as Samaras has requested. Both of the latter two options would cost additional money, and that, the chancellor fears, is something members of her own party and its coalition partners would refuse to support in the Bundestag. The scenario of a Greek withdrawal from the euro is looming.
--Der Spiegel, Aug. 27th, 2012


Once again, we are invited to witness another Greek cliff-hanger: Will Athens be bailed out (again), or will she default? The financial media are filled with speculation that, this time, Greece will be cut off. This is understandable, given that Greece has failed to implement any of the austerity or reform measures that she has repeatedly agreed to.

Germany's economy minister has rejected calls for Greece to get more time to implement economic reforms, saying that Athens needs to respect the bailout deal reached with its international creditors. "What the Greeks have asked for, half a year or two years, that's not doable," said Roesler, who is also the vice chancellor in Angela Merkel's coalition government. He added that "time is always money" and all parties had agreed that additional funds for Greece weren't up for debate. (AP, 8/27/12)


There is a lot of pressure on Merkel to toss the Greeks out. The Dutch and Finns are angry and making dire noises. Elements of Merkel’s coalition are hostile to rewarding Greek defiance. Merkel’s own finance minister said last week:
"More time generally means more money, and that very soon means a new bailout programme. That would not be the right way to solve the fundamental problems of the euro zone." 

The Finns, Dutch and Germans are all saying no more money for Greece. They appear to be trying to psych themselves up for giving Greece the old sayonara.

But I will make a bold prediction: Greece will be bailed out and won’t get thrown out of the eurozone in October. This is because I can’t imagine that Europe will want to have to deal with a Greek crisis in the middle of the Spanish crisis. And also, as I have said before, because the potential ramifications of a Greek default are unknown, Grexit is still a potential catastrophe. To let Greece go now would be very risky. The cost of keeping Greece on life support would be cheaper and safer.

But, assuming I am right,  how can Europe manage to reposition Greece’s total failure as a success story? That is what Merkel and Hollande must have on their minds right now.

The party line right now is that Europe will decide nothing until the Troika makes its report in October and the ruling circles have a chance to look at what the Troika says.

So, if Europe wants to prevent (postpone) a Greek explosion, at what point in the process should it intervene in order to ensure the right outcome?  The obvious thing to do would be to fix the Troika and ensure that its report will say that Greece is making progress and will succeed if given more time and money (don’t laugh). That might solve the problem, but can they fix the Troika?

The Troika consists of the European Commission, the ECB and the IMF. The fix will be in at EC and the ECB and they will happily go along. But the IMF is harder to influence and is by no means a European stooge. The French head of the IMF will want to play ball, but can she control her team? She can certainly send signals, but it would be risky to leave any fingerprints.

In March, Lagarde said:
“The combination of ambitious and broad policy efforts by Greece, and substantial and long-term financial contributions by the official and private sectors, will create the space needed to secure improvements in debt sustainability and competitiveness. These actions, together with a significant strengthening of the financial sector, will pave the way for a gradual resumption of economic growth.”
So I think we know where she stands, but we don’t know if she can control her team.

The Troika’s most recent statement on Greece (Aug. 5th) was somewhat noncommittal, but not negative:

Staff teams from the European Commission (EC), European Central Bank (ECB) and International Monetary Fund (IMF) concluded today a visit to Greece to discuss with the new authorities the economic policies needed to restore growth and competitiveness, secure a sustainable fiscal position, and underpin confidence in the financial system in line with the objectives of the economic adjustment program that is being supported by the three institutions. The discussions on the implementation of the program were productive and there was overall agreement on the need to strengthen policy efforts to achieve its objectives. The Greek authorities are committed to proceeding with determination in their work over the next month, and the EC/ECB/IMF staff teams expect to return to Athens in early September to continue the discussions.

I predict that we will see similar meaningless mush from the Troika in October. It will issue a “balanced” statement, expressing dissatisfaction with Greece’s progress, but leaving open the option of providing Greece with more time, which is what Europe wants to hear.*

If the Troika report is negative and can’t be persuaded otherwise, then its report would have to be buried or misread, but that would be awkward and undesirable. Remember also that the IMF has to look over its shoulder at its largest shareholder, the U.S. Congress, which loathes the IMF and seeks to prevent more European bailouts.

Since October is the American campaign season, and because Obama certainly doesn’t want a Greek crisis before the election, I think that the fudge will go through. Greece will be given more time, along with more faux-serious “benchmarks” which will also have to be fudged in due course. The objective is not to fix Greece, but to postpone it.

If my prediction turns out to be wrong, then I would reiterate that a Greek exit is a Black Swan, and not to be taken lightly. If Greece exits before election day, bad news for Obama. But I just don’t see it happening.

Wash. Post, 10 Sept.:

By some estimates, Greece needs another €20 to €30 billion to stay afloat (at least for now). So how could the troika rationalize giving Greece even more aid? By massaging a few key numbers:

The troika could thus certify that the Greeks have made progress. According to this scenario, the inevitable financing gaps would be downplayed as a regrettable but merely temporary departure from the plan — and one that must be coped with as part of the current second rescue program. After all, the shortfalls cannot be too great, or a third rescue program might be necessary.

Christine Lagarde, head of the IMF, has already signaled some willingness to be flexible. “The IMF never leaves the negotiating table,” she said last month, adding that Greek efforts to curb deficits since 2009 were “impressive.” Now it sounds like Merkel, too, is ready to be a bit more accommodating. The tricky part, for Merkel, is selling this to German voters.

Gold: The Republican Death Wish

The libertarian (Ron Paul) wing of the Republican party desires a complete rethink of US monetary policy, and has succeeded in having a monetary commission added to the GOP platform. It is worthwhile examining their policy proposals on the remote chance that they could get some traction.

Among their monetary wish list are:
1. Abolition of the central bank.
2. An end to fiat money and a return to a metallic monetary standard.
3. Liberalization and privatization of currency issuance.

It should be noted that these are not wild and crazy ideas from outer space. The US functioned under similar systems at various times in history:
1. The US was on the gold standard, in various forms and with occasional interruptions, from 1789 until 1971.
2. The US abolished its central bank in 1836 and did not revive it until 1914.
3. Any licensed bank was able to print paper currency (redeemable in specie) from 1789 until 1862.

This shows that these “wild-eyed” ideas have been tried before with reasonable success. The US did exceedingly well under these pre-modern monetary arrangements, experiencing rapid growth with no inflation (that’s right: the price level did not rise from 1789 until 1933). On the other hand, the US experienced wild swings in the business cycle with depressions occurring in every decade. Some of these depressions were as bad as the Great Depression, which was itself caused by the gold standard.

Maybe these periodic depressions of the 19th and 20th centuries were a healthy form of creative destruction. Maybe foreclosed farms and mass unemployment are more efficient than modern socialism and “full employment” policies. That could be. But such periodic depressions were politically unpopular then, and are likely to be now. Americans today think that 10% unemployment is intolerable; they may lack the fortitude to accept 25% unemployment for a few years.

The libertarian philosophy is at heart anti-statist, and does not accept the idea that the monetary system should be or needs to be controlled by the state. Libertarians believe that central banks manipulate prices, cause swings in the business cycle and manufacture inflation, all of which they believe could be resolved by a return to a metallic standard. Also, if the currency is understood in terms of its value in gold, there is no reason why private enterprises could not issue gold coins or paper money backed by bullion. The government would get out of the money business entirely.

As I have observed previously, all the world’s problems can be attributed to hard money policies, and gold is the hardest policy of them all. The libertarian monetary proposals are a prescription for disaster on a scale that we can’t even imagine. I also believe that such policies would do to the GOP what they did to the GOP eighty years ago, and as a God-fearing Republican, I don’t want another twenty years in the wilderness.

History shows that Man learns from experience. The American people have paid a heavy price to learn the following:
1. Soft money is more conducive to economic stability than hard money.
2. The gold standard is inherently unstable and is constantly tested by speculators and foreign central banks.
3. Hard money requires periodic depressions to remain “credible”.
4. The money supply should be controlled by a wise and independent central bank with the dual mandates of low inflation and maximum employment.
5. Wildcat currency printing leads to currency chaos. (Do we really have to relearn that particular chestnut?)
6. Hard money requires flexible nominal wages and incomes, which only exist in Fantasyland and Hong Kong.

However, instead of a lengthy examination of each of the libertarian proposals, let’s examine their central desire: the gold standard.

An ounce of gold is currently worth roughly $1700. To go on gold, Congress would have to pass a law which fixes that price in perpetuity, and provides that no other objectives are to be considered by the monetary authority.

To maintain that fixed price, the Fed/Treasury would have to:
1. Acquire enough gold to credibly “back” the currency (at least 40% of notes in circulation, but probably a lot more). This would be expensive and would add to the national debt.
2. Stand ready at the gold window to exchange gold for money and money for gold at the fixed price in unlimited quantities at any time.
3. Be prepared to stem a run on the dollar (a “gold drain”) by raising dollar interest rates and reducing the dollar money supply until market actors are induced to buy dollars with gold at the fixed price, even if that requires a major and prolonged deflation/depression.
4. In emergencies, be prepared to borrow in foreign currency in order to buy gold to meet the market’s demands for redemption in gold. (With fiat money, the US never has to borrow in foreign currency.)
5. Subordinate (i.e., completely ignore) all other monetary objectives except the gold price; no more employment mandate.

By adopting the gold standard, the US would surrender monetary sovereignty and would lose all control over monetary policy. It wouldn’t matter who was the Fed chairman, or who sat on the FOMC, since they would have no discretion. The only monetary matters to be discussed would be the techniques to be used to maintain the $1700 price. The foreign exchange value of the dollar would be almost completely outside of the government’s control; only the price of gold would be stable. Politicians would no longer be able to criticize the Fed or its policies, because they would be set by law. The president would have little reason to talk to the Fed chairman since there would be nothing to talk about, even if there were 25% unemployment, because the US was on the gold standard by law.

The gold standard cannot operate if it is not 100% credible. Imagine that Zimbabwe declared tomorrow that henceforth the value of the Z$ would be fixed at one ounce of gold, and that the Reserve Bank of Zimbabwe stood ready to exchange gold at that price for unlimited quantities of Z$. If I gave you a suitcase with Z$10 million, would you keep it in your safe, or jump onto the next flight to Harare to exchange it for 10 million ounces of gold before they run out?

If a country’s gold price is believed to be immovable, markets will know better than to speculate against it, because the speculator will always lose. To build the standard’s credibility, the country must be able to demonstrate that it won’t cut and run at the first sign of distress. An example of this is the HKMA which has pegged the HK$ to the US$ for the past thirty years. No one has ever made a penny speculating against the peg, even when the HK economy was under considerable stress. The HKMA can impose periodic deflations because HK is not a democracy.

The less credible the gold peg, the more the nation must be prepared to suffer to demonstrate the peg’s credibility. When the UK pegged sterling to the DM in 1992, all it took was for George Soros to appear on the horizon for the government to panic and devalue. When the UK was forced off gold in 1931, the betrayal of a sacred compact with millions of people, many people felt that it was the end of civilization. That’s how hard a peg has to be; almost if not literally a constitutional amendment.

So, it’s 2018, Romney is still president, and the US is irrevocably on gold at $1700 by law and by constitutional amendment. The Balanced Budget Amendment is in force, and unemployment has risen to 14%. The US has asked for a “gentlemen’s agreement” that foreign central banks won’t present dollars for gold, but the ECB insists on redeeming $100B in gold because it is “rebalancing its international reserves”. By surrendering $100B worth of bullion, the dollar’s gold cover falls below its statutory minimum and the US experiences a “gold crisis”.

Despite the high unemployment rate, the Fed raises the funds rate to 17%, hoping to attract gold. However, at that moment, Vice President Ryan off-handedly questions the gold standard in a TV interview, causing a global dollar run. The Fed must now act decisively to stem the run and to prove its credibility and fortitude. The funds rate is raised to 21% with guidance indicating that it is expected to remain at that level for one year. GM and Ford go bankrupt and liquidate; GE requires an emergency loan from the Federal Recovery Board; and unemployment hits 19%. President Romney declares a Temporary National Emergency, and announces a “Voluntary Wage Reduction Plan”,  calling on employers to reduce wages in lieu of layoffs. Federal salaries are cut by 15%.

I don’t need to go on, because we’ve been there before, under President Hoover. The above scenario ends with the next (Democratic) president raising the price of gold by executive order and “suspending” convertibility for an indefinite period.

My point is that a successful gold standard requires either a dictatorship or Finnish-like national cohesion, both of which America lacks. The American people have never taken kindly to a depression, and depression has always caused political and social turmoil (and a big lurch to the left).

The gold standard is not an experiment we need to try because we’ve already tried it. And it’s always been the Republicans who have tried it, and the Democrats who have fought against it (e.g., W.J. Bryan, FDR, Krugman). Just for the sake of the preservation of capitalism and free enterprise in one country, let’s not drive the bus over that cliff again!
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Addendum:
An advantage of the gold standard is that, by removing the risk of inflation, it lowers the Treasury's borrowing cost to a level analogous to TIPS. However, to make such a promise credible, contractual gold clauses would have to be added to Treasuries such that they would be payable in gold. This means that overnight our $15 trillion of debt would be redenominated into gold. It could never be inflated away unless the gold clauses was broken (as they were in 1933). This would suggest that highly indebted countries should stick to fiat money unless they are prepared to repay their debts in blood (see: Greece).