As the fall semester concluded, Hamilton students on the New York Program toured the Federal Reserve Bank of New York to hear about the global macroeconomic trends and visit the Reserve gold vault. They met with Paolo Pesenti, vice president in the research department and former Princeton, NYU and Columbia Professor. Pesenti presented on the dynamics of the current international economy, paying special attention to the Euro area crisis.
The main part of the presentation analyzed the relationship between “U.S. and THEM” – the latter an acronym for the “Truly Heterogeneous Eurozone Members.” Despite the fact that the recession in the Euro area is modestly easing (at least judging from the latest confidence surveys), Pesenti noted that perceived risk of default varied widely across countries, represented by the sovereign bond yield spreads of the different nations. Although he noted that liquidity is fine across the area, uncertainty about the future is making it difficult for some ailing states to borrow. This uncertainty is, in turn, affecting the U.S. economy, where businesses are hoarding cash as a safety net.
Pesenti also commented on the effects of the third round of U.S. Federal Reserve Quantitative Easing, although he stopped short of quantifying them definitely. The important issue, he noted, was whether the extra money the Fed pumped into the economy would help lower mortgage rates. Speaking more broadly about the economy, he argued that the U.S. will return to higher levels of growth given time but that austerity programs in the European Union may have severe headwind effects if pushed too far.
A trip to the vault, the world’s largest known depository of monetary gold, followed. Our tour guide said that the NY Fed is home to roughly 540,000 gold bars belonging to 48 different nations and central banks. At around $670,000 per bar, the sum value comes close to $362 billion. Little of that sum belongs to the United States. The U.S. holds the majority of the gold in the vault for foreign governments as a token of goodwill.
When we went down to the vault floor, our guide informed us that we were 30-feet underground, and surrounded by several feet of concrete on every side. The water- and fireproof vault door, constructed during the 1920s, still operates via a system of gears, and rotates 90 degrees when opened to unveil a hallway between the elevators and storage. Getting into the gold cage requires two keys held by different individuals.
Once inside, our guide led us to a massive two-pan balance scale, also constructed in the 1920s. Although the scale was made for measuring 20-some pound bars of gold bullion, our guide demonstrated that the scale was accurate within a gram, showing how a dollar bill showed precisely three grams.