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In case you missed it, Bob Zoellick, the head of the World Bank, was pontificating in the FT this week about the merits of returning to some sort of gold peg for currencies. DeLong, in his typically understated fashion, shoots him down hard.

Without passing any particular judgement on Zoellick's mental faculties, I think it's fair to say that suggesting a return to the gold standard in any format is a bad idea no matter who is suggesting it. But like some form macroeconomic acne, the idea of the gold standard keeps popping back up in periods of stress. For example, see my comments on Gillian Tett's misguided op-ed in the FT last year.

At the time I argued that, using the same logic, an economy run by squirrels would use an acorn standard. Why? Because they like nuts, silly. This analogy is even more apt that I had initially realized: much like humans and gold, squirrels spend a lot of time and energy scurrying around gathering up acorns - only to promptly bury them back underground.

Where the analogy breaks down is that acorns actually have an intrinsic value (nutrition), whereas gold does not have much intrinsic value at all. Its skyrocketing price is the result of investors (and here I'm quoting DeLong again) "using gold as a speculative asset and a hedge. They are not using it [as] a medium of exchange, a unit of account, or a safe store of nominal value."

As if this weren't damning enough, a return to a gold peg wouldn't even address the global imbalances problem. It would merely shift it around: US and European central banks own some 50% of the world's gold reserves. Hmmmmm. One suspects that if Saudi Arabia was the dominant world economy, we might be hearing ideas about an oil standard. This at least would have the added benefit of being a highly liquid asset. (HA!)

Seriously folks: this is gauling. All the more so because the gold standard is one of those rare phenomena in economics where it's not a theoretical debate. We've tested it out. It doesn't bloody work.

With so many potentially bad ideas floating around about how to fix the world economy, there's absolutely no reason why we need keep discussing the one we know for sure will be a disaster. 

UPDATE: Zoellick clarifies his comments: "Gold is now being viewed as an alternative monetary asset. This is not the same as a gold standard,” said Mr Zoellick. “Gold has become a reference point because holders of money see weak or uncertain growth prospects in all currencies other than the renminbi, and the renminbi is not free for exchange. So, in relative terms, gold is appealing to people who ask where should I put my money. It is a hedge against uncertainty.”

Well alright. Nevermind then, Bob: I forgive you. But just so we're clear: "a hedge against uncertainty" is not the same thing as an alternative monetary asset, mmk?

Germany is not China, or so Heleen Mees is eager to point out.

And quite right to do so, I might add. Aside from shared membership in the United Nations and their local Tuesday night 10-pin bowling league, the list of similarities between the two industrious nations is rather short. But on the surface, the two countries share a particularly poignant economic indicator: massive current account surpluses.

In fact, it is precisely by exporting far more goods and services than they import that both Germany and China have vaulted to the front page of the financial news in recent days. Germany, for its whopping 2.2% quarterly economic growth; and China, for (more or less) overtaking Japan as the world's 2nd largest economy.

It is now increasingly clear that the problem of global macroimbalances has returned with a vengeance. At first glance, both Germany and China's export-fueled growth appears to be making these imbalances worse, not better. But this is where Ms. Mees takes over, insisting that there are important differences between the two countries, not least in their capital accounts:

"... Germany did not accumulate foreign reserves the way that China did. On the contrary, German foreign reserves actually declined between 2000 and 2008. Whereas China is a large net recipient of foreign direct investment (FDI), Germany is a large net exporter of FDI. China’s net FDI inflow totaled $94 billion in 2008, compared to Germany’s net FDI outflow of $110 billion.

... German’s surplus is thus less damaging than China’s, as it is used for investments that foster productivity gains, economic growth, and job creation – and that often include technology transfers that help to develop human capital.

The Chinese surplus, on the other hand, being heavily skewed towards US government bonds, primarily boosts personal consumption – a process whose apotheosis came in the early 2000’s, as the Bush administration’s tax cuts, together with cash-out home refinancing and home-equity loans, turned US sovereign debt into consumer credit."

This is well-trodden ground: the Chinese proclivity towards saving resulted in having their hard-earned yuan recycled as a US consumer credit boom. According to Mees, the earnings from German GDP were largely recycled into foreign direct investment into neighbouring countries, which is productive. So: China surplus bad; German surplus good. Got it?

But then I keep reading:

"Of course, the demand generated by Chinese credit also fosters economic growth, but mostly in China, owing to booming exports to the US."

Erm, what? This is starting to smell like bullshit. Mees appears to be arguing that the Chinese current account surplus is "damaging" because the economic benefits were only seen in China. Why on earth would that matter?

Ah, but I forgot the part about Chinese savings helping to create a credit boom in the debt-laden United States. The credit boom, in turn, inflated asset bubbles that eventually had to burst. That's what makes the Chinese surplus so damaging and the German one so constructive.

Isn't that right? Ms. Mees? Oh, you're not finished:

"It is, of course, unfortunate that German banks and pension funds lent money to debt-laden countries such as Spain, Greece, and Portugal on overly favorable terms, inflating asset bubbles that eventually had to burst."

Yea, you're right: Germany is definitely not China.

Chris Giles thinks that we should feel sorry for the International Monetary Fund. When countries can't agree about a contentious macroeconomic issue (like a bank tax), the IMF is asked to study the problem and report back with its findings. As Giles explains, the IMF then "takes it in the neck" for writing a report that (surprise!) some countries don't agree with.

If that weren't bad enough, the IMF is also taking criticism for things that are entirely imaginary. For example, this morning's FT features a comment piece by Kevin Gallagher, entitled "Would the real IMF please stand up?," in which the author takes the IMF to task for endorsing capital controls in a February report, and then changing its mind in an April report. I am toying with the idea of writing Gallagar a letter later today that will read thusly:

"Dearest Mr. Gallagher,

Prior to criticizing the IMF in an internationally-respected newspaper, it would assist your cause if you actually read the $#%*ing reports.

Yours,
IPE Journal"

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Let us break down Gallagher's argument into its component pieces. He begins with the following statement:

"In a landmark report in February the IMF broke its longstanding fixation on capital account liberalisation. In a staff position note the IMF found that temporary controls on capital inflows have been effective and should be an essential part of a nation’s macroeconomic toolkit."

Two problems. First, the position note states explicitly - on the title page - that the views expressed are those of the authors of the note, and not of the IMF or its Executive Board. Surely, Gallagher at least read the title page. Second, the note does not come even close to stating that capital controls are an essential part of the toolkit. The Feb report:

"A key conclusion is that, if the economy is operating near potential, if the level of reserves is adequate, if the exchange rate is not undervalued, and if the flows are likely to be transitory, then use of capital controls—in addition to both prudential and macroeconomic policy—is justified as part of the policy toolkit to manage inflows."

So yea, controls are a justified option so long as you meet a laundry list of other criteria first. Despite what Gallagher suggests, this is a qualified endorsement:

"A significant caveat, however, to the use of capital controls by individual countries, relates to the potential for adverse multilateral consequences. In the present circumstances, global recovery is dependent on macroeconomic policy adjustment in EMEs, which could be undercut by capital controls, notably in cases where currencies are undervalued. Widespread adoption of controls by EMEs could exacerbate global imbalances and slow other needed reforms"

By contrast, Gallagher argues that the April IMF report is "driven more by ideology than rigorous research. The GSFR says capital controls are inefficient, but fails to acknowledge that controls, when designed properly, are seen as second-best instruments to make markets more efficient by correcting distortions." This is, in a word, poppycock. An excerpt from the April report:

"When the available policy options and prudential measures do not appear to be sufficient or cannot provide a timely response to an abrupt or large increase in capital inflows, capital controls may be a useful element in the policy toolkit. However, if the inflows are not temporary, but are driven by more fundamental factors, policymakers should adjust their macroeconomic policies to address the root causes, instead of mitigating the effects of inflows or attempting to limit them through various measures."

There's plenty more in there. Indeed, a careful reading of both reports suggests no difference in the IMF's view of capital controls, which is approving but qualified.

In sum, Gallagher has managed to get himself all worked up over something which is entirely the figment of his own imagination. He provides links, in his own article, to reports that he clearly has not read. And he got published in the FT, to boot.

It really pulls at my heart strings to think of the poor IMF staffers who are subject to such constant abuse. I mean, what good is all that tax-free income if you have to spend it on anti-depressants and alcoholic escapism?

The US Treasury is reportedly considering direct intervention in the mortgage market to stimulate the US housing sector.

Finally!!! Paulson has come to his senses, recognized that our economy is doomed without direct support to subprime mortgage holders, and will stem foreclosures through federal action.

Wait...what? You mean, he wants to respond to the housing crash by re-inflating a housing bubble? He doesn't want to prevent millions of foreclosures? Rather, encourage artificially low rate mortgages and securitization? We don't need to keep people in their homes, but need to get more people to buy more homes they can't afford, in the midst of a recession?

What!?!?!