Pimco Economist Has A Stunning Proposal To Save The Economy: The Fed Should Monetize Gold

"Back in December 2014, just before the ECB officially launched its initial phase of QE in which it would monetize government bonds, Mario Draghi was asked a very direct question: what types of assets could the ECB buy as part of its quantitative easing program. He responded, "we discussed all assets but gold."

The reason for his tongue in cheek response was because over the past few weeks speculation had arisen that gold could be part of the central bank’s asset purchases after Yves Mersch, a member of the ECB executive board and former Governor of the Central Bank of Luxembourg, said on November 17 that "theoretically the ECB could purchase other assets such as gold, shares, ETFs to fulfill its promise of adopting further unconventional measures to counter a longer period of low inflation."

Mario Draghi promptly shot down that idea.

But according to a provocative paper released by none other than Pimco's strategist Harley Bassman, Yves Mersch's inadvertent peek into what central bankers are thinking, may have been on to something. 

In "Rumpelstiltskin at the Fed", Bassman goes down the well-trodden path of proposing Fed asset purchases as the last ditch panacea for the US economy, however instead of buying bonds, or stocks, or crude oil, Bassman has a truly original idea: "the Fed should unleash a massive Fed gold purchase program that could echo a Depression-era effort that effectively boosted the U.S. economy."

He is of course, referring to FDR's 1933 Executive Order 6102, which made it illegal for a citizen to own gold bullion or coins or risk prison time. Americans promptly sold their gold to the government at the official price of $20.67, with the resulting hoard of gold was then placed in Fort Knox.

The Gold Reserve Act of 1934 raised the official price of gold to $35.00, a near 70% increase. It also resulted in an implicit devaluation of the US dollar. As Bassman points out, over the three years from January 1934 to December 1936, GDP increased by 48%, the Dow Jones stock index rose by nearly 80%, and most salient to our topic, inflation averaged a positive 2% annually, despite a national unemployment rate hovering around 18%.

In short, a brief economic nirvana which was unleashed by thedevaluation of the dollar confiscation of gold. In fact, we have frequently hinted in the past that another Executive Order 6102 is inevitable for precisely these reasons. However this is the first time when we see a "respected economist" openly recommend this idea as a matter of monetary policy.

Bassman says that the Fed should "emulate a past success by making a public offer to purchase a significantly large quantity of gold bullion at a substantially greater price than today’s free-market level, perhaps $5,000 an ounce? It would be operationally simple as holders could transact directly at regional Federal offices or via authorized precious metal assayers."

What would the outcome of such as "QE for the goldbugs" look like? His summary assessment:

A massive Fed gold purchase program would differ from past efforts at monetary expansion. Via QE, the transmission mechanism was wholly contained within the financial system; fiat currency was used to buy fiat assets which then settled on bank balance sheets. Since QE is arcane to most people outside of Wall Street, and NIRP seems just bizarre to most non-academics, these policies have had little impact on inflationary expectations. Global consumers are more familiar with gold than the banking system, thus this avenue of monetary expansion might finally lift the anchor on inflationary expectations and their associated spending habits..."

at  http://www.zerohedge.com/news/2016-04-21/pimco-economist-has-stunning-proposal-save-economy-fed-should-monetize-gold