Thursday, 15 Dec 2011 03:26 PM

By Forrest Jones and Kathleen Walter

The United States must return to the gold standard if it wants the dollar to retain its worth, says author and Republican political consultant Jeffrey L. Bell.

Since the recession, the Federal Reserve has kept interest rates low — they're near zero now — and has bought assets from banks with what critics charge is money printed out of thin air to spur the economy, a policy known as quantitative easing.

Calls are increasing for a return to the gold standard, which ties the value of the dollar to gold and was abandoned in the 1970s.

The gold standard would limit what the U.S. could borrow, but as Bell pointed out, such a currency regime would do away with excessive spending and inflationary threats that today's loose monetary policies are unleashing on the economy and eating into personal savings.
"I think it's disastrous. For one thing, Ben Bernanke and the Federal Reserve don't seem to know how to get away from having a zero interest rate regime that makes elderly and middle-class people unable to save at their local bank," Bell told Newsmax.TV in an exclusive interview.

"It is true that the gold standard restricts the amount you can borrow, or at least borrow without having a good reason. But that's been precisely the problem," said Bell, author of “The Case for Polarized Politics: Why America Needs Social Conservatism.”
"Really the dangers are much greater than remaining with the present, debt-driven system than returning to a dollar that has independent value," said Bell, a two-time campaign adviser to Ronald Reagan.

The Federal Reserve recently wrapped up it last monetary policy meeting for the year and did not announce any changes.

Some market watchers interpreted the Fed's language to mean it was leaving the door open to even more easing in 2012.

"It's an absolute disaster, and we are already seeing the results of their earlier policies in terms of the commodity inflation, the sharp increases in energy costs and food that we are getting right now," said Bell.

Loose monetary policies often result in a surge of liquidity that finds its way to commodities markets, thus pumping up oil and food prices, which the Federal Reserve often takes out of its equations for setting rates on the grounds that such price hikes are cyclical and not the product of more fundamental demand.

Furthermore, Fed officials have said spikes in energy and food prices have been temporary and are even on their way down, but as Bell points out, they'll go back up once a lag between decisions to cut rates and the time it takes for the excess liquidity to find its way to commodities markets become apparent.

In other words, don't blame heftier prices at the pump and in the grocery store on rising Asian demand for raw materials.

"I think virtually all inflation of any level is monetary in nature. It does have a long lead time. In other words if the Fed was printing money in late 2008, which of course it was — because that was when Bernanke started the zero interest rate policy and quantitative easing — that means that it is just now coming into the energy market, " Bells says.

"The price of petroleum is affected by things that the Fed was doing two years ago. By the same token as the Fed continues to do these things, it ensures that petroleum and other energy prices are going to be even higher two years from now."

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