How to pay for fiscal stimulus

Congress is dithering over a second fiscal stimulus bill that would among other things extend unemployment benefits and give money to states to avoid layoffs of teachers and other employees. A small number of misguided Senators and Congressmen are holding up progress on the bill because of concerns over its effect on the budget deficit. Here's a suggestion: the Treasury owns 261 million ounces of gold that it holds at the Federal Reserve and that appears on the asset side of the Fed's balance sheet (it is quaintly valued at $42 per ounce, the par value when the US officially abandoned the gold standard in 1973). Gold sells for $1250 per ounce today, meaning the US holdings are worth about $327 billion. I think you can see where I'm going with this...

The idea of selling off US gold reserves has been raised before, but dismissed for reasons I have a hard time understanding. This article, for example, gives a number of nonsensical reasons we haven't done it yet:

"If we started selling gold from our official reserves, it would be recognized as a sign of weakness for the dollar," said Jeffrey Nichols, managing director of American Precious Metals Advisors and senior economic advisor to Rosland Capital. "America's relatively large gold holdings provide some psychological benefit to our currency."

That's an awfully high price to pay for an imagined "psychological benefit." There is no reason that a sale of gold to fund spending on teachers would call the dollar's stability into question.

"Geithner doesn't want to be the Treasury secretary that sells gold at $1,100 an ounce and next year it's at $2,000," said Shelton.

So is there a magic number at which the Treasury will sell? I'm guessing not. I'd rather have $1100 an ounce (now $1250) than $0.

Furthermore, a sale of all the country's gold wouldn't make much of an impact. With the nation's annual deficit at $1.7 trillion, a $787 billion stimulus package and a $700 billion bank bailout, $300 billion is kind of puny in comparison.

"The Fed has plenty of tools to pump money into the economy; it doesn't need to sell gold to do it," said Lyle Gramley, a former Fed governor. "The government has its gold by historic accident, but there's no reason why they'd sell it -- there's no motivation."

But now there is a motivation. Apparently your kid won't have a teacher next fall unless Congress can be persuaded that her salary won't increase the budget deficit.

But most of all, a sale of the government's gold would be especially poorly timed now, since foreign central banks are lining up to add gold to their reserves. As a result, experts say a mass-sale of gold would mostly end up in other nation's coffers.

That could spell disaster for the U.S. government, which is trying to finance its economic rescue packages by selling record amounts of debt to foreign countries in the form of Treasury securities. As gold holdings take up a larger percentage of foreign reserves, Treasury holdings could be reduced.

Crazy. Private investors and central banks crave a safe, liquid asset. They are willing to pay a premium for such assets. The Federal Reserve is sitting on hundreds of billions of them. There is no reason not to provide the market what it wants. Especially if doing so helps fund the jobs programs that we need to recover from the recession.