Recently Matthew O'Brien at The Atlantic explained why the gold standard was the worst idea in the world by using two charts.

Well in a new note out today, UBS' Paul Donovan debunks the gold standard in ONE chart.

One huge problem, is that the supply of gold isn't growing fast enough, meaning we'd be in a permanent state of deflation.

He explains:

Let us use global transactions as an example (though the case applies just as well for national transactions). We assume that globalisation holds steady, with global trade averaging around 20% of the world’s GDP. Under these circumstances, the value of global trade will rise in step with the rise in the value of global GDP. If the world economy has a trend nominal rate of growth of around 6% to 6.5% (perfectly realistic in the current climate), then the supply of currency to the world economy needs in order to conduct international trade has to rise by around 6% to 6.5%.



The problem that the world faces is that the supply of gold rose less than 3% last year. Thus there is too little growth in gold supply to facilitate the growth in the trade of international goods and services. There are only two possible outcomes that can be generated by this situation. The first is that globalisation goes into reverse (so that trade becomes a declining share of the world economy, and nominal trade grows at around 3.5% while the economy grows at around 6.5%). Reducing the role of international trade in the world economy would make the world economy less efficient. That means that people would have a lower standard of living than they could otherwise achieve.



Alternatively, the world could experience deflationary pressures. If the world economy is experiencing deflation, with prices falling at 0.5% every year, global GDP would grow at around 3.0% per year in nominal terms. That could give a nominal trend rate of growth for exports of around 3.0% per year, in line with the growth in gold supply. However, a world economy with repeated bouts of deflation is hardly healthy – as Japan in recent years or the US in the 1930s demonstrated. Deflation imposes a heavy burden on borrowers. That can serve as a disincentive to investment and entrepreneurship.

And he notes that the stability is bunk.

He compares the price of an everyday item (milk) when priced in gold and when priced in dollars.

The price of milk is way more stable over the last 18 years when priced in dollars. In gold, we'd have gone from major inflation in the 90s, to deflation throughout the 2000s.

So gold doesn't work for global purposes, and it doesn't even make the economy more stable.