Thursday, January 24, 2013

All the Wrong Reasons

Simon Johnson has written an article entitled “Germany’s Gold Delusion.”  In this article, he examines the various possible reasons why Germany might want to move it gold from New York and Paris to Germany. 

Who is Simon Johnson?

Simon Johnson, a former chief economist of the IMF, is a professor at MIT Sloan, a senior fellow at the Peterson Institute for International Economics….

Additionally, he was Chief Economist at the IMF during 2007-2008.

Back to Germany and moving its gold.  Johnson asks all the wrong questions, and not the only (likely) correct one:

One possibility is that German policymakers believe that we are approaching an every-country-for-itself scenario – and only gold guarded by one’s own police is worth anything.

He concludes this cannot be the reason: if the world moves to raising large walls, the location of gold might be the least concern.

Does Germany think that its gold will be subject to sanctions or some form of confiscation – as sometimes happens to rogue nations?

He concludes no.  Germany isn’t Iran or Venezuela, he suggests.  There is no reason such sanctions would be applied to Germany.

Perhaps German central bankers sense a longer-term shift in international preferences away from the dollar and want to be ready in some fashion.

He concludes this also cannot be the reason – moving the gold will have no impact on the mix of Germany’s holdings.  Germany owns the gold, regardless of the location.

It is as if German political elites think that they are back in the era of the gold standard.

This can’t be it either.  In a gold standard, what matters is that you own the gold, not where it is held.

The broader and more worrying trend is the politicization of central banking.

This is true, but I don’t believe this has anything to do with the underlying reason.  Johnson raises it in the context of Germany not trusting the ECB.  Again, he concludes that the physical location is not important; the ownership is.

He concludes that the Germans must be delusional:

German politicians would thus seem to be suffering from some serious delusions about the importance of gold and the effects of shifting its location.

Isn’t it reasonable to keep looking for reasons instead of attributing delusion as the cause?  Why would Johnson stop here?  He examines every possible reason except the likely correct reason – the elephant in the room that Simon Johnson either doesn’t see himself or doesn’t want his readers to see. 

I have no idea why Germany decided to take this action.  However, there is one possibility Johnson did not suggest to his readers.  What if Germany wants to see its gold, to be sure it exists, to have complete control over its use and disposition?  In other words, what if Germany doesn’t trust the Fed as a depository institution?

Why didn’t Simon Johnson ask that question?

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