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Currencies: Re-evaluating the ghost of gold

Imagine if, over time, as our solar system swings around the Sun, the planet Jupiter suddenly put on a tremendous amount of weight. Over time the gravitational pull of the planets — and the Sun — would begin spinning around Jupiter, causing great celestial upheavals in the process.

Nobel laureate Robert Mundell likens that scenario to what has happened with currencies in the modern economic era. For most of human existence, the sunny center of our buying and selling solar system was gold and other precious metals. In the 20th century, however, economies in Europe began going off the gold standard during the Great Depression, a conversion completed when the U.S. went fully off the gold standard in 1971.

One platform of the recent U.S. Republican National Convention that, ultimately, could reverberate around the world is a plan to study a possible return of the U.S. to the gold standard. While it was perceived as a move to appease the party's extreme right wing, economists like Mundell think the world needs a limited return to the gold standard.

“Currencies are the ghost of gold,” Mundell said in a speech to the Asia Society in Hong Kong last year. And while few believe the U.S. will move back to the gold standard, Mundell noted that 40 years is a relatively short period of time to judge the experimental success of a global currency system that circles the U.S. dollar versus gold.

You can see this U.S. dollar universe at play in the way global investors awaited word last month whether the Fed would introduce QE3, printing cash to help bring down the value of the dollar and make U.S. goods more competitive in the global markets. But central banks in Asia and elsewhere cringe at these moves — the extra U.S. cash sloshes around the global economy, seeking the best places for return, which these days are developing markets like Indonesia, Mongolia and Brazil.

But that influx of U.S. dollars — as we saw in the early rounds of “currency wars” in 2010 and 2011 — both can spur inflation and raise the value of local currencies, hurting their competitiveness abroad.

Erratic currency value slides in 2008 were an under-reported catalyst of the recent financial crisis, Mundell said.

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