Change is hard. In the physics nowadays, they’re debating Einstein’s theory of relativity. Many physicists are clinging to Einstein’s 1907 theory that nothing can travel faster than the speed of light. Others are embracing recent experiments that found neutrinos making the trip from Switzerland to Italy 60 nanoseconds faster than it takes a photon of light to make the trip. If the experiments are right, it is a bold new world out there – like when the Copernican Revolution overthrew the Ptolemaic model of the solar system.
The economic world seems slower to embrace systemic change – while the financial markets hope for the best and fear the worst. On Tuesday, the Financial Times featured two similar articles. One on the European money crisis by Gavyn Davies was headlined “Time to prepare for the worst-case scenario?” and concluded: “Once investors start to look over this precipice [of the disappearance of the euro], the resulting stampede out of euro-denominated assets could become self-fulfilling.”
A second by Gideon Rachman recalled the Great Depression with its headline “The long shadow of the 1930s” and was slightly more optimistic but observed: “The risk of a grave economic crisis in Europe is severe. The threats of sovereign-debt defaults and the break-up of the European single currency are rising – and with it, the attendant threats of collapsing banks, popular panic, deep recessions and mass unemployment. That would indeed feel like a modern version of the Great Depression.”
What ever the degree of panic anticipated in Europe, policy makers are surely moving slightly less fast than those neutrinos traveling between Switzerland and Italy. Economic events are outpacing central bank decisions.
Writing recently in the Financial Times, National Bank of Poland Governor Marek Belka wrote: “Led by Germany, the eurozone is now moving towards a model where nations must fend for themselves. Since Europe’s financial markets are highly integrated, rising expectations of default in some eurozone states have led to capital flight into ‘safe countries’ – creating further instability and divergence, with a damaging split between the faster-growing, more solvent north and the indebted south.”
There is an alternative to the arteriosclerosis affecting world financial decisions makers and the every-nation-for-itself solution Contrary to the Financial Times’s Jack Farchy, it does not involve using gold as collateral for a “eurozone bail-out.” Writing recently, Farchy did make an important point, however: “Between the, the central banks of the eurozone hold 10,792 tonnes of gold – 6.5 per cent of all the yellow metal that has ever been mined – worth some $590bn.”
Writing in the Washington Times, economist Richard W. Rahn has used a similar factoid to come to a far better conclusion: “The United States has more than 8,000 tons of gold, with a current market value of almost a half?trillion dollars, which would be enough to move to some form of a gold standard. A gold standard for money is not a panacea, but it is far better than an undisciplined fiat standard.”