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Bernanke Sets Job Creation as the Fed's Top Priority

12:00 AM, Sep 15, 2012 • By IRWIN M. STELZER
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Two years ago Robert Zoellick, then president of the World Bank, suggested that we need a new international monetary system that “should consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values.” Not a gold standard, but the use of gold to get a clue to inflation expectations. Such fine distinctions escape most commentators, so  reaction varied between behind-the-hand snickers and outright derision.

Fast-forward almost two years to Tampa, Florida, and the Republican convention, where the delegates decided to call for a commission to study the possibility of a return to the gold standard. A fringe group, sniffed critics, who might have changed their mind about fiat money when Mario Draghi, head of the European Central Bank, announced that he would do what it takes to save the euro, and that what it takes includes printing euros with which to buy the sovereign bonds of peripheral eurozone countries. 

Nothing really new here. History teaches that countries weighed down by debts, but unwilling to raise taxes, cut social spending, or institute growth-enhancing reforms, will run the presses and repay what they owe with depreciated dollars, euros, pounds, pesos, reals, and whatever Zimbabwe decides to call its currency.

None of this means that America is about to go back onto some version of the gold standard. But it does mean that critics who want to dilute the Fed’s independence have the wind at their backs. The new Congress will almost (note: almost) certainly establish some sort of procedure to allow it to “audit” the Fed—and not only its books, but its monetary policy. This new procedure will go beyond the present system, which merely requires Senate approval of the president’s board appointments and the chairman to submit to periodic grilling by members of various congressional committees.

Given that politicians favor expansionary policies, and leave it to their successors to clean up the inflationary mess created by too-loose monetary policy, such audits bode ill for the future value of the dollar, and for the ability of America to continue to parlay the American currency’s “safe haven” status into record low interest rates. But doing nothing also has its risks, as it would demonstrate that a Fed chairman can strike a policy balance that subordinates control of inflation to his notion of what constitutes a properly functioning labor market.   

But cheer up. Bernanke or his successor might just prove able to bring us safely down from the sugar high that is QE3+.

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