What is the “natural” rate?

Once again I am bereft of ideas, and thus forced to do a riff on a recent Nick Rowe post.  Today I’d like to consider the term “natural rate.”  Of course there are many definitions, but one of the more useful was Wicksell’s notion that interest rates were at their natural rate when monetary policy was set in a way that stabilized the price level.  As you know, I prefer that monetary policy stabilize the expected future level of NGDP, along a track that grows at a predetermined rate.  So here is how I would define various “natural” variables:

1.  The natural rate of interest in the market rate when 12-month forward NGDP expectations are on target.

2.  The natural rate of the dollar in the Forex market is the market exchange rate when 12-month forward NGDP expectations are on target.

3.  The natural price of commodities is their market price when 12-month forward NGDP expectations are on target.

By now you may be noticing a disturbing pattern.  Just to show I am not THAT autistic, let’s try a few more:

4.  The natural unemployment rate is the not the unemployment rate when 12-month NGDP is on target.  Rather, assume there was also a futures market for unemployment.  Then if a 12-month forward NGDP was on target, the natural rate of unemployment would be the 12-month forward unemployment rate in the futures market.

5.  What about the price of Ben and Jerry’s one pint containers of Chunky Monkey Ice Cream?  The same as unemployment; the natural rate would be the 12 month forward rate in an ice cream price prediction market, assuming NGDP expectations are on target.

6.  What about real estate prices?  I am not quite sure.  It depends on whether (and to what extent) real estate prices are sticky.

James Hamilton discussed the relationship between commodity prices and monetary policy in a recent post.  I agree with Hamilton that monetary policy can influence commodity prices without influencing the current unemployment rate.  In another post he expressed concern about the possibility of monetary ease blowing up a commodity bubble, and possibly destabilizing the real economy.  Although he did not favor a rise in interest rates right now, he argued that monetary policymakers should pay attention to commodity prices.

I believe that the information contained in commodity prices does have some value to monetary policymakers.  But not quite in the same way as Hamilton does.  In my view, commodity prices are only important for monetary policy to the extent that they provide information about future expected NGDP that is not available elsewhere.

The fast rising commodity prices of the 1970s did signal excessive NGDP growth.  The fast rising commodity prices of the first half of 2008 did not signal excessive NGDP growth.  The rapidly falling commodity prices of late 2008 did signal deficient NGDP growth.  I cannot be certain, but in reading a number of recent Hamilton posts I gained the impression that he thought a commodity bubble could be destabilizing even if NGDP growth was expected to be on target.  Indeed he seemed to argue that monetary ease was partly to blame for the commodity price spike of mid-2008, which in turn contributed to the subsequent recession.  I do not share that belief.  I do not think monetary policy was expansionary in early 2008, as NGDP growth expectations were probably under 5%.

Of course the term ‘natural’ does not necessarily mean good.  One of Wicksell’s definitions, however, was equivalent to “consistent with good monetary policy.”  That is also my definition.  I regard a good monetary policy as one that keeps expected future  NGDP moving along a roughly 3% to 5% NGDP growth track.

I differ from Nick Rowe in that my definition is not model contingent, rather it is contingent on one’s definition of the optimal monetary policy.  Is the natural rate a useful concept?  I think it is for unemployment and real GDP.  It is a way of thinking about the differences between changes in U and RGDP due to suboptimal monetary policy, and changes due to other factors.  I’m not sure that it is very useful for other variables.

PS.  I feel like I should say something about Paul Samuelson, who was one of the four most influential figures of 20th century macroeconomics.  (The others were Fisher, Keynes and Friedman.)  Unfortunately I know much less of Samuelson’s work than the other three.  This NYT obit summarized his life much more effectively than anything I could say.  I enjoyed the last six paragraphs on page four.


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25 Responses to “What is the “natural” rate?”

  1. Gravatar of marcus nunes marcus nunes
    14. December 2009 at 11:44

    Samuelson was certaily a great economist. But maybe he had his fingers “in too many pies”. He certainly, and rightly, was concerned with the “real world”, nevertheless his 1960 piece with Robert Solow “Analytical Aspects of Anti Inflation Policy” was the trigger for the policy actions proposed by the Kennedy CEA led by Walter Heller that gave rise to the periodo that became know as the “Great Inflation” that lasted from 1966 to 1980.

  2. Gravatar of Bill Woolsey Bill Woolsey
    14. December 2009 at 11:56

    I think your definition of the natural interest rate (consistent with optimal monetary policy) is right and very similar to the ones you are using for unemployment and real income. Interest rates changing due to disturbances from monetary policy vs. other factors.

  3. Gravatar of ssumner ssumner
    14. December 2009 at 12:04

    Marcus, It is interesting that you mention that. There is one glaring mistake in the obit. They imply that the 1964 Kennedy tax cuts were a good piece of demand management, and that they helped the economy recover. In fact, as demand management they could have hardly been more poorly timed. The economy was relatively stable in 1964, and was certainly not in recession. After the tax cuts the economy overheated badly.

    I actually think the 1964 tax cuts were justified, but only on supply-side grounds. The NYT picked one of the worst examples imaginable for “Keynesian demand management.”

    One reason why I found the last six paragraphs interesting is that it seemed that Samuelson himself eventually realized some of the limitations of Keynesian policies. He was far from the only economist who misinterpeted the situation in the 1960s, most of the profession made the same errors.

    Still, in the end I much prefer Friedman. Samuelson’s strength was his technical work, which was extremely important and laid the groundwork for further advances in many areas of economics.

  4. Gravatar of Scott Sumner Scott Sumner
    14. December 2009 at 12:10

    Thanks Bill, The reason why I singled out those two as important (U and RGDP) is that they relate directly to social welfare, whereas interest rates are merely a “means to an end,” not a goal variable. Once you target NGDP, you not longer care about i. But if U is still too high even after you have targeted NGDP, then maybe you try to deregulate the labor market, or apply some other non-monetary policy aimed at reducing the natural rate of unemployment.

  5. Gravatar of marcus nunes marcus nunes
    14. December 2009 at 12:15

    Three books give a complete and euphoric account of the “Golden Age” as the 1960´s became known economywise:
    New Dimensions of Political Economy, by Walter heller (an account of his years as CEA chief (1966), The New Economics one Decade Older by Tobin (1974) and The Political Economy of Prosperity (by Arthur Okun 1969), CEA chief under Johnson and the man most responsible for imprinting, in everyone´s mind, the longlasting concept of the output gap

  6. Gravatar of StatsGuy StatsGuy
    14. December 2009 at 14:14

    July 2008 was an extremely complicated period. I know you don’t think the Fed should be paying attention to the value of the dollar and commodity prices (which, I gather, are closely related). But they clearly were if you scan the minutes.

    But let’s say the Fed did the right thing in crushing the commodity bubble in July 08 (and “crush” is appropriately strong), they waited far too long to respond to the rapid fall. If the Fed was going to take a position on asset prices, then presumably it should take that position in both directions. Which underlines why this is dangerous – how does the Fed differentiate between “real” and “speculative” price? Even worse, how does it do this without drawing political fire? (Yet another advantage of a clear NGDP target, in addition to adding predictability and creating symmetric credibility.)

    Hamilton had an interesting piece a little while back on oil prices as a “tax” and growth (but the causation was quite unclear). Can’t find it.

    I would bet you the FOMC committee members felt pretty good about themselves in August when they saw oil prices starting to drop.

  7. Gravatar of StatsGuy StatsGuy
    14. December 2009 at 14:17

    BTW, Hamilton/Duy’s comment about rates being a “blunt” instrument with lots of side effects is quite accurate. It’s like nuking your next door neighbor.

  8. Gravatar of Doc Merlin Doc Merlin
    14. December 2009 at 15:39

    @ StatsGuy:
    Yes, rates are really dangerous, but so is any monetary policy. Any time the fed engages in open market activities it has potential to strongly distort the market.

  9. Gravatar of Doc Merlin Doc Merlin
    14. December 2009 at 15:44

    Scott: so by natural rate you really mean expected rate?

    If this is a good definition then the difference in a market between the expected rate and the actual rate 12 months later would be a good indicator of macroeconomic market inefficiency.

  10. Gravatar of Doc Merlin Doc Merlin
    14. December 2009 at 15:46

    hrm,… I spoke too soon, it wouldn’t just be market inefficiency but also inefficiency from non market sources.

  11. Gravatar of Nick Rowe Nick Rowe
    14. December 2009 at 16:19

    Scott: suppose you were having an argument with another economist who had a slightly different preference for optimal monetary policy. Maybe he wanted NGDP to grow at 4%, rather than your preferred 5%.

    If you and he agreed on everything else, your estimate of the natural rate would be about (would be exactly, under super-neutrality) 1 percentage point higher than his.

    This leads me to conclude:

    1. You and he would get into useless semantic arguments when trying to argue over whether the current interest rate was above or below the natural rate.

    2. The nominal interest rate is a useless indicator of the stance of monetary policy (though that’s not news to you, of course).

    I have some sympathy for your approach. There have been times when I have found it useful to define the (nominal) natural rate as “That (path of) interest rate which would bring about 2% inflation at a 2-year horizon”. (A very Canadian definition of the natural rate, of course).

  12. Gravatar of saifedean saifedean
    15. December 2009 at 04:27

    Scott,

    Here’s an alternative definition:

    The natural interest rate is the rate at which the market for capital clears. Savers “sell” their savings and borrowers “buy” them at the interest rate. When the supply of savings goes up, the “price” goes down, and so the interest rate goes down. When demand for loans goes up, the “price” of savings goes up, and so the interest rate goes up.

    The crux of Hayek’s business cycle theory is that without government intervention, the market for capital would clear, and the interest rate clears the market. This is identical to any other market. When the government intervenes, in whichever way, it can only do so by distorting the interest rate from where it would otherwise have been if it were determined purely by market forces.

    So, when the government artificially lowers the price of capital, this leads to the granting of loans that wouldn’t have happened otherwise (because there was no capital to finance them), and to the reduction in savings since the lower interest rate offers lower incentive for savers.

    This intervention is no different whatsoever from any other intervention in any other good. If the government intervenes in the potato market, for instance, by lowering the price, then you will have people consuming too much potato, and producers producing too little. The end result is a shortage! In capital, the end result is a flurry of bad businesses being undertaken (malinvestments) when they would not have been undertaken otherwise, and when there is not enough capital to fund them; as well as a reduction in savings, as we see today.

    What is so wrong with this view?

  13. Gravatar of Scott Sumner Scott Sumner
    15. December 2009 at 06:46

    Thanks Marcus.

    Statsguy. I agree with your reading of the Fed, but I think what this shows is that it is dangerous to focus too much on a price set in world markets. Yes, the fall in the dollar explains some of it, but consider that oil prices must have tripled between 2006 and mid-2008, and yet the fall in the trade weighted dollar was probably much smaller (around 20%?) My point is that focusing on oil inadvertently caused a tight money policy at exactly the wrong time.

    Let’s step back and look at this from a more basic level. We have various factors such as a housing/banking crisis and a oil crisis. Our models give us zero guidance as to what sort of relative weights to put on these conflicting factors. If we don’t have a single lodestar like expected NGDP (or the core inflation rate) we are flying blind. In practice the Fed just hops around, worried about banking one month and oil the next. That is just asking for trouble.

    None of this conflicts with what you said, I am merely trying to get the entire picture into focus.

    Statsguy#2, I entirely agree. And just to show that none of this is new, in the 1920s Gov Strong said trying to stop the stock boom with high rates was like spanking all the children when one misbehaved.

    Doc Merlin, I’d say expected rates, but only (and this is important) if monetary policy is on track in terms of expected NGDP growth. If monetary policy is bad, expected rates aren’t natural rates.

    Nick, You said;

    This leads me to conclude:

    “1. You and he would get into useless semantic arguments when trying to argue over whether the current interest rate was above or below the natural rate.

    2. The nominal interest rate is a useless indicator of the stance of monetary policy (though that’s not news to you, of course).
    I have some sympathy for your approach. There have been times when I have found it useful to define the (nominal) natural rate as “That (path of) interest rate which would bring about 2% inflation at a 2-year horizon”. (A very Canadian definition of the natural rate, of course).”

    I entirely agree. I don’t think the natural rate of interest is a very useful concept. My post was more a “if were are going to define the natural rate, what makes sense” exercise. But notice that the two natural rates I singled out as being useful (U and RGDP) are both natural rates that are invariant to the decision over whether to target NGDP at 4% or 5%

    saifedean, In my view the problem doesn’t arrive with the advent of government, it arrives with the advent of money. As long as you have loans made in money terms, not barter, you have a money rate of interest. And any shocks to the money market will cause mischief in the capital markets, and may move rates away from the natural rate. Example:

    Consider a totally free market gold standard system. Private banks hold gold and issue fully backed banknotes for currency. No government. I still say a major gold discovery causes inflation and also many of the side effects that Hayek correctly worries about.

    If you want to argue that a big inflation is more likely with government involvement, of course I’ll agree. But I think that as soon as you bring money in, you create at least some distortions.

  14. Gravatar of Bill Woolsey Bill Woolsey
    15. December 2009 at 07:07

    Saefedian:

    Saving isn’t the same thing as capital.

    The usual way to describe this is that the natural interest rate is where saving equals investment.

    But saving is income less consumption and investment is purchases of capital goods.

    Since income equals output, and consumption is both a use of income and an expenditure on output, then in a simple all private economy, saving equals investment is the same thing as expenditure equals output.

    income equals consumption plus saving

    expenditure equals consumption plus investment.

    Saving equals investmnet is the same as income equals expenditures.

    If you count unplanned inventory investment as part of expenditure, then this holds true always.

    If you are just concerned with planned investment, then it is an equilibrium condition.

    However, it appears to hold true at many levels or output and income. And so, the usual assumption is to define the natural interest rate as the real interest rate that makes planned investment equal to saving with real income equal to potential income.

    And that makes the natural interest rate the interest rate that makes real expenditure equal to potential income.

    In other words, the market interest rate that clears what you call the “capital market” is the same market interest rate that generates aggregate demand equal to the productive capacity of the economy.

    If the government “intervenes” and somehow distorts the capital market by making interest rates “too low,” it is, at the same time, creating excessive aggregate demand.

    However, monetary disequiibrium can result in a market interest rate differrent from the natural interest rate without there being any change in the quantity of money.

    Further, changes in saving or investment can lead to changes in the natural interest rate, and a lower market interest rate can result in monetary disquilibirum, blocking a proper adjustment.

    I think (though I am not sure,) that your entire approach to macreconomics fails because it is all baed upon certeris paribus analysis–given the demand for money. Given the demand for money, an increase in the quantity of money creates an imbalance between saving and investment…

    And, while we are at it, lets just ignore that saving and investment may shift for any number of reasons, so that the the natural interest rate is changing.

    Given an increase in the demand to hold money, unless the interest rate on money falls or the quantity rises, there will be an imbalance between saving and investment and an imbalance between total expenditures and the productive capacity of the economy.

    The market process that corrects this is a change in the prices of all goods and services, which adjusts the real quantity of money to the demand to hold it. At the same time, that adjusts the market interst rate to the natural interest rate and the real volume of expenditures to the productive capacity of the econmy.

    If you assume this works instantly and perfectly, then the market interest rate never deviates from the natural interset rate and real expenditure never deviates from the productive capacity of the economy.

    Again, perhaps I don’t understand your view, but it is not the case that the natural interest rate is the interest rate that exists if the nominal quantity of money is held constant.

  15. Gravatar of 123 123
    15. December 2009 at 14:43

    More people are talking that instead of one natural interest rate that keeps long term inflation expectations on target there should be two natural variables – short term risk free interest rate and the extent of QE operations. ECB has started communicating in this way, and there is growing speculation that Fed might make this switch too.

    What do you think?

  16. Gravatar of Doc Merlin Doc Merlin
    15. December 2009 at 15:21

    @123
    I don’t think there is a single natural rate, as I argued on Nick Rowe’s blog.
    I think there are a multitude of natural rates all dependent on the risk of the borrowing and the length of time borrowed.

    In my view, saying there is a single natural rate is a lot like saying there is a single price for toasters. In reality there are lots of natural prices for toasters dependent on features reliability, etc. While money may be differentiate-able (in physics speak we would say “money has no hair”) promises for future money (what you buy when you issue a loan) are differentiate-able by risk, etc.

  17. Gravatar of Doc Merlin Doc Merlin
    15. December 2009 at 15:27

    Typo, I mean money isn’t differentiate-able.

  18. Gravatar of 123 123
    15. December 2009 at 15:52

    Doc Merlin, I completely agree, as you can even imagine a wicksellian framework without any central banking. But my question was about those prices that are pegged by central banks.

  19. Gravatar of Doc Merlin Doc Merlin
    15. December 2009 at 16:21

    @123
    Oh, then I agree with you, every class of t-bill and overnight rate would have a different “natural rate”.

  20. Gravatar of Scott Sumner Scott Sumner
    15. December 2009 at 18:18

    123, I don’t see how any of that helps. We need to start targeting expectations. Or at the very least we need to do what Woodford (and Bernanke in 2003!!) suggests and adopt level targeting. Anything short of that is basically moving deck chairs around on the Titanic.

    Doc Merlin, I agree. My blog is of course called “The Money Illusion” and the biggest money illusion people have is that they can simply look at an interest rate and draw some conclusions about what is going on. But both low and high rates can have any number of meanings.

    123, Here is another worry about the proposal you mention. Michael Belongia has mentioned the problem of lack of transparency, and I entirely agree. If you have two policy tools the Fed can always point to one or the other when making excuses. So if the interest rate seems wrong they can point to the QE level. But with interest on reserves it is very hard to evaluate QE. So the central bank could sort of hide its true policy behind a cloud of smoke and mirrors.

  21. Gravatar of saifedean saifedean
    17. December 2009 at 07:27

    Scott,

    You make an excellent point, and you are absolutely correct. Yes, a major discovery of gold in a gold-based monetary system would have a large distortionary impact, akin to a massive monetary infusion. But this misses the whole point of why gold historically emerged as money. One of the main reasons is that it cannot be destroyed: it cannot evaporate, rust, spoil or be transformed into something else. So, virtually all the gold ever mined in human history is present today somewhere. This isn’t true for other commodities, which are perishable and can ruin. With gold, you have a 6,000 year stockpile, and a sudden discovery is just not going to be that large. This is why at its highest, gold production does not exceed 2 or 3% of global gold stock.

    Now, no one can print or manufacture gold; it needs to be mined, and that’s a very expensive activity. It is only carried out when the expected returns exceed the costs. So, as economic growth leads to deflation, it leads to an increase in the value of gold, making more mining profitable, causing an increase in the mining of gold. Here’s the eye-opening part: the market for the production and manufacture of gold would be like any other. People mine it and sell it according to supply and demand. This would be expected and would not be subject to shocks.

    So, in the excellent and totally pertinent free market example you mention, we’d get a virtually stable very tiny growth in the money supply. This is nothing like what we get today, where every year M3 increases by anywhere from 5 to 20% causing all sorts of economic miscalculations and depressions. But perhaps more relevant for you, there can be no massive deflation! Since money cannot be destroyed, and since there are no monetary expansions of fake credit, you will not get Fisher’s deflationary debt spiral, and there is no need for the central bank to continue to worry about maintaining NGDP growth! (So it’s not just Bernanke and Krugman who seem to be agreeing with Sumnerism, the free market would go Sumnerian too!)

    The major difference with today is that the growth in money does not come from one source; it can come from the government, the central bank, the banks, the shadow banking system and any financial institution that can produce money or money substitutes. So this distortion doesn’t arrive with the advent of money. Neither does it arrive with the advent of government. It arrives with the introduction of what Hayek calls ‘elastic money’: a currency/money/banking system that allows for increasing money supply by central banks, banks or financial institutions.

    To go back to our question, a free market would produce a natural rate of interest. The natural rate of interest would regulate the market for savings and investment, and there would be no business cycles, recessions or depressions. But monetary manipulation is like central planning of any price or market: it always causes economic disasters. That’s the whole point of Hayek’s writings on money and banking and business cycles.

    Please note here that the gold standard does NOT equal this free market system, for two main reasons:

    1- The gold standard does not stop the creation of money by financial institutions backstopped by the government. Government money is backed by gold, but the banks can issue checking accounts that are not. This would always lead to business cycles and require liquidity injection by the central banks. This is the key to understanding Hayek’s writings in the 1930’s. The prevalent (and very wrong) opinion then was that the solution to this problem is to go off the gold standard and allow the government to print as much money as needed to meet the needs of the banks. This only exacerbated the problem and allowed the central banks and the financial institutions to engage in ever-increasing inflation like we see today, and so the “modern economy” was born: with perpetual business cycles and liquidity injection, along with continuous inflation.

    2- The government will always find a way to abuse the gold standard by creating money above the quantity of gold present (Any increase of the money supply by any quantity above the quantity of gold is an abuse of the system. That’s why the rise in the price of gold is NEVER, as you have suggested a proxy for a shortage of gold, but an indicator of monetary expansion.)

  22. Gravatar of saifedean saifedean
    17. December 2009 at 07:29

    Bill,

    I’m with you on everything until you say: “If you count unplanned inventory investment as part of expenditure, then this holds true always.”

    This is where the Keynesian obfuscation starts and I can’t follow any logical argument. I see absolutely no reason to view “unplanned inventory” as being in any way relevant here. I teach this stuff to hapless undergrads and understand it well, but I am utterly convinced it has absolutely nothing to do with the world. Wall-Mart has an instantaneous inventory, and the majority of US economic activity takes place in services, a sector where inventories don’t even exist.

    There really is no argument or reason to even think about inventories except for “Keynes said so.” Since I do not believe Keynes is God, I do not believe I should take his word for this utterly meaningless concept affecting the capital markets. I don’t believe in “Aggregate Demand” “Sticky Prices” or “Animal Spirits” either. If you want to make an intelligent argument, you’ll need to make it without these, or by explaining how these mythical concepts actually work, and why you’re assuming them. You can’t continue to use them as thought-substitutes.

    I find that putting away these Keynesian obfuscations allows me to understand things better. Economics makes sense as soon as you put these aside.

    So, there is no such a thing as “monetary disequilibrium” in a free market. The market for savings and investment works like any other market. In reality, money functions as a store of value and medium of exchange. When I store it under my mattress, I’m just storing that bit of value under my mattress for whatever reason. When I sell it for a bank to give to an entrepreneur to invest in a project, I’m transferring value to him to invest the value. The market for this store of value is the money market. And, like every market it works through supply and demand and prices. And, like every market, it is utterly ruined by central planning. The problems start when the government, prodded by Keynesians who believe in “monetary disequilibrium”, starts printing money and granting capital that isn’t there. This creates new money from nowhere and transfers value that does not exist to the entrepreneur. The business cycle is the result of this creation of money.

    You said: “I think (though I am not sure,) that your entire approach to macreconomics fails because it is all baed upon certeris paribus analysis-given the demand for money. Given the demand for money, an increase in the quantity of money creates an imbalance between saving and investment…”

    Treating the demand for money in the Keynesian fashion is where your misunderstanding arises. There’s no reason to treat it any differently from any other good. People use money as a store of value. If their demand for it as a store of value rises, then they store more of it, and prices drop. That’s not a bad thing. When they stop storing value and start spending it, prices rise. There is no reason to view this as some scary phenomenon necessitating government supervision and control.

    You said: “If you assume this works instantly and perfectly, then the market interest rate never deviates from the natural interset rate and real expenditure never deviates from the productive capacity of the economy.”

    It would deviate all the time, in an equilibrating manner: more savings drop the interest rate, more lending raises it. It’s called “supply and demand.” When you start centrally planning this is when it all backfires. Keynesian obscurantism makes you view the governmental central planning of this as the way to fix it. In fact, it’s how it’s ruined.

  23. Gravatar of Doc Merlin Doc Merlin
    17. December 2009 at 09:57

    @Nick Rowe:

    Honestly, I don’t see a problem. So, long as:
    1. its small, so its still vaguely in the linear regime)
    2. Its Per Capita NGDP, not just NGDP, so it accounts for demographic changes.
    3. It is fixed, so that fed response is predictable.

  24. Gravatar of Doc Merlin Doc Merlin
    17. December 2009 at 10:59

    To continue what I said, I think its more important that the first derivative of the magnitude of per capita NGDP is small and the second derivative of per capita GDP magnitude is much smaller (preferably 0).

  25. Gravatar of ssumner ssumner
    18. December 2009 at 07:33

    saifedean, You said;

    “But perhaps more relevant for you, there can be no massive deflation! Since money cannot be destroyed, and since there are no monetary expansions of fake credit, you will not get Fisher’s deflationary debt spiral, and there is no need for the central bank to continue to worry about maintaining NGDP growth!”

    I don’t think we get massive deflation under fiat money either. The only massive deflations we have had in the US were under gold, albeit not the free market gold you prefer. In my view the risks under a gold standard are produced by shifts in the demand for gold, not the supply. If Switzerland had been on the gold standard over the past three years, they would have experienced massive deflation, as the value of gold has soared relative to other goods. So at a minimum most of the world would need to join the gold standard, one little country could not go it alone.

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