Economists Dumbfounded Over German Gold Repatriation

It must be difficult to deal with the possibility that much of what you’ve been taught in many years of college might be wrong. It also must be challenging to consider that a good portion of the entire belief system that you’ve developed in your professional career might be ill-founded.

Such is the case for many economists in recent days who seem dumbfounded and befuddled by the German central bank’s announcement earlier in the week that they will soon start bringing home much of their gold that, for decades, has been stored in vaults at the New York Federal Reserve and the French central bank.

Of course, this wouldn’t be the first time that economists have had to rethink how they see the world and probably the best example of this was in former Fed Chairman Alan Greenspan’s famous “I found a flaw in my ideology about how markets work” moment back in 2008 as recounted in Greenspan finds a flaw.

Anyway, this Wall Street Journal report($) yesterday did a pretty good job of laying out what’s going on over at the Bundesbank and brought up a few important points about the Germans, their gold, and how economists see the whole situation.

First, it is clear that this is more of a political decision than one driven by German central bankers no longer trusting their counterparts in the U.S. or France as suggested by Pimco’s Bill Gross, though the question of trust could certainly have been a consideration:

The campaign highlighted and played to deep and intense popular fears that the euro crisis could ultimately lead to the loss of Germany’s gold reserves, the most tangible expression of national savings accumulated from nothing since World War II.

That’s an interesting choice of words - the most tangible expression of national savings - and I’m sure some economists may have lost their coffee yesterday morning when first reading it. Here’s why:

Economists had viewed the debate with bewilderment, seeing it as entirely divorced from reality, given that gold has played no official role in international monetary policy since the collapse of the Bretton Woods agreement in 1973.

“Last year’s debate was absolutely ludicrous…driven completely by irrational fears,” said Holger Schmieding, chief economist for Berenberg Bank in London. “I don’t see any economic or financial rationale for the Bundesbank to be doing this.”

For more, see Doomsday, gold and the Bundesbank and Gold, gold, GOLD!!! written by economists with blogs.