Welcome to the new version of European Tribune. It's just a new layout, so everything should work as before - please report bugs here.

A video on the future of the dollar (and money)

by Luis de Sousa Mon Oct 5th, 2009 at 01:34:01 PM EST


Analysis below the fold.


This log entry was crossposted at TheOilDrum:Europe with the addition of my comments on the news that came out yesterday on the matter.

CNBC invited Jim Rickards, a senior managing director at a firm called Omnis to comment on the latest G-20 meeting and the future of the dollar. His testimony shows some rare lucidity about the present problems with our monetary system. Bearish on the dollar, bullish on gold, don't mistake him for a gold bug, for he is well aware of the consequences of a flight to the “barbarian's relic".

If gold goes to 1500$ […] it has to with the fact that the dollar is imploding [...]

Rickards links an oped article at the Wall Street Journal penned by Federal Reserve governor Kevin Warsh to the G-20 meeting in an interesting way: it is a camouflaged warning against a fast drop of the dollar against other currencies, especially gold.

The Fed needs the dollar to get down by about half in the next 14 years, we have 60 trillion dollars of liabilities [...] there's no feasible combination of growth and taxes than can fund those liabilities. […] They need to do that, but that's a dynamically instable process, they would like to do it gradually, and that's the plan, but if the market gets ahead of it, if the market sees this playing (which probably they will) you could have a very rapid collapse of the dollar [...]

The secular declining trend of the dollar has been resuming since early September, fueled by the carry trade proportionated by null interest rates in the US. This is leaving a lot of people uncomfortable, both those issuing the dollar as those pilling it up.

It is important to understand that pretty much all of the major player in the international market (read G-20) are looking at this perspective of their main unit of account and medium of exchange entering a downward spiral. This is where the SDR (Special Drawing Rights) comes about, a remnant of one of Keynes' bold ideas that may be materializing today.

The IMF is being sort of anointed as a Global Central Bank, they are now running a balance sheet, they've issued debt for the first time in History, they are issuing SDR, the last time they were issued was in 1980 or 1981 […] they are printing money, there's nothing behind these SDR.

An abstract version of the Bancor seems to be already in active duty, but is it the solution for the problem? It may be if the problem is simply one of having a regional entity (the Federal Reserve) managing the global monetary policy. But there is more to it.

In order to stimulate world trade and the world economy some hard currency country has to run persistent large deficits, but if you run persistent large deficits you eventually go broke. […] 50 years later the US is getting closer to going broke, we fueled the world economy the last 50 years.  

The US is not “going broke" only because it ran persistent large deficits. Fifty years ago the US was the largest world oil producer, one of the largest energy and food exporters and held considerable amounts of gold; today it is the largest world energy importer and its gold reserves have become of little relevance. The physical basis of the world's medium of exchange has been depreciated to a point where international trade players have lost faith on it.

So how do you get out of that? The US can get its own house in order but that would cause world trade to contract. What you need is to kick the problem upstairs, we gonna use SDR to fuel the global economy so that we can take the dollar off into a corner and depreciate the dollar to solve our won debt problems.

Rickards also makes some sharp points on US security, although taking into account its nuclear arsenal the US will still be a super-power if the SDR comes to be the new world reserve currency. The problem is: if the US can't print money as before, wars like the ones being fought in Iraq and Afghanistan may not be possible anymore.

Warsh is saying: “We are not going to let that happen […] we sort of have to trash the dollar, but if the market gets ahead of us and we see gold from 1500$ to 2000$ we are going to raise rates a lot, maybe 50 or 75 basis points to defend the dollar".

That was largely what happened in 1980, when panic drove gold prices over 800$, well beyond 2000$ at today's prices. That same year the Federal Reserve pushed interest rates to 20%; after that the deepest world recession since WWII unfolded.

The problem is, when you own gold you are fighting every Central Bank in the World. Central Banks hate gold because it limits their ability to print money. But the market is the market, the market will do what it wants, and even Central Banks aren't bigger than the market.

Quite true, all Central Banks in the world are today working with paper, not precious metals. Moreover, many Central Banks have been dumping their gold reserves during these past decades of growth.

This is crux of the matter, Central Banks have very limited options regarding gold; being it a resource in very limited supply, the sort of expansionary monetary policies run especially since the early 1980s are impossible with it. With paper monies Central Banks can cast a floor on Velocity with Inflation (this means monetary mass expansion) guaranteeing that paper's function as wealth storage is limited in time. While with paper investors are compelled to feed their money into the economy, so to avoid its continuous loss of value, with gold such isn't the case – its limited supply and resilience to forgery makes it a wealth storage medium for the very long term. With gold investors simply do not have the same incentive to feed the economy and can opt for simply sit on it, killing Money Velocity and imparing economic activity. From a Keynesian perspective the Great Depression can be explained as a consequence of the post-WWI re-introduction of gold as de facto currency in Europe. Investors lost the incentive to invest, portfolios moved towards liquidity (gold is the most liquid of all assets, even without legal tender it is more liquid than paper) and Velocity collapsed.

Going back to the SDR, kicking the problem upstairs can indeed deal with the dollar's expiration as world reserve currency. A new reserve currency system seems to be well on the way of development, in similar terms to the old Ecu, opening perspectives for an orderly shift away from the dollar. But as I wrote last time on this issue, there's more to this problem than simply finding a new reserve currency system. What Rickards seems not be yet aware of is that the problems being faced today by the US may well become common to all other international players, even those adopting the SDR as reserve currency. What if there's no more growth, in physical terms?

If the flows of energy and matter to the economy fail to grow during an extended period of time, Central Banks will get locked between a rock and a hard place, they can either continue with present expansionist policies and assist powerless to the degradation of their currencies (and rise of precious metals) or limit the abstract currency supply and treat it essentially as a commodity currency. Whatever the option, in the long run, Central Banks will be dealing with limited supply currencies.

In the case of gold, Central Banks still have some options, like opening the Mints and mobilizing the dozens of tons of monetary jewelry worldwide into the bullion pool, thus effectively expanding supply (and even increasing velocity). But for the other precious metals this is not the case. Silver, for instance, can become a serious problem; industrial usage depleted the world stock to the point that in weight terms it is now down to less than a sixth of the world gold stock[1]; compounding to that is the traditional lack of silver reserves at Central Banks. Silver is easy to falsify, having a density similar to that of lead, but in small bullion pieces it is still safe. With newer precious metals such as palladium or platinum the situation is similar. Platinum especially, is even denser than gold and also impossible to falsify in practical terms.

The End of Growth foreclosures a monetary system that existed during a brief period of time from an historical perspective, officially during the last four decades, in practice since WWII. It was feed by growth and in its turn feed growth itself, in a feedback loop that brought about the world of today. A world that tomorrow will be the past.

[1] World gold stocks are around 160 000 tones. World silver stocks are calculated to be circa 25 000 tones.

Display:
Ellen Brown: The IMF Catapults From Shunned Agency to Global Central Bank

"A year ago," said law professor Ross Buckley on Australia's ABC News last week, "nobody wanted to know the International Monetary Fund. Now it's the organiser for the international stimulus package which has been sold as a stimulus package for poor countries."

The IMF may have catapulted to a more exalted status than that. According to Jim Rickards, director of market intelligence for scientific consulting firm Omnis, the unannounced purpose of last week's G20 Summit in Pittsburgh was that "the IMF is being anointed as the global central bank." Rickards said in a CNBC interview on September 25 that the plan is for the IMF to issue a global reserve currency that can replace the dollar.

"They've issued debt for the first time in history," said Rickards. "They're issuing SDRs. The last SDRs came out around 1980 or '81, $30 billion. Now they're issuing $300 billion. When I say issuing, it's printing money; there's nothing behind these SDRs."

SDRs, or Special Drawing Rights, are a synthetic currency originally created by the IMF to replace gold and silver in large international transactions. But they have been little used until now. Why does the world suddenly need a new global fiat currency and global central bank? Rickards says it because of "Triffin's Dilemma," a problem first noted by economist Robert Triffin in the 1960s. When the world went off the gold standard, a reserve currency had to be provided by some large-currency country to service global trade. But leaving its currency out there for international purposes meant that the country would have to continually buy more than it sold, running large deficits; and that meant it would eventually go broke. The U.S. has fueled the world economy for the last 50 years, but now it is going broke. The U.S. can settle its debts and get its own house in order, but that would cause world trade to contract. A substitute global reserve currency is needed to fuel the global economy while the U.S. solves its debt problems, and that new currency is to be the IMF's SDRs.



"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Mon Oct 5th, 2009 at 02:42:30 PM EST
very interesting... thanks luis!

ChrisCook:

But leaving its currency out there for international purposes meant that the country would have to continually buy more than it sold

that's the hinge i don't understand yet. would there be a way to avoid this? it sounds so inevitable, put that way, but is it totally necessary, or just so historically probable as to seem that way?

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Tue Oct 6th, 2009 at 12:59:22 AM EST
[ Parent ]
And all this time I thought it was just because we were gluttonous fools.  Does this mean we've been virtuous gluttonous fools?

Now where are we going and what's with the handbasket?
by budr on Tue Oct 6th, 2009 at 07:07:47 AM EST
[ Parent ]
didn't you get the memo?

give us each day our ten tons of wonderbread...

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Tue Oct 6th, 2009 at 09:58:15 AM EST
[ Parent ]
The demise of the dollar

In the most profound financial change in recent Middle East history, Gulf Arabs are planning - along with China, Russia, Japan and France - to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars ....

The Americans, who are aware the meetings have taken place - although they have not discovered the details - are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China's former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. "Bilateral quarrels and clashes are unavoidable," he told the Asia and Africa Review. "We cannot lower vigilance against hostility in the Middle East over energy interests and security."


How scary is that?
by das monde on Tue Oct 6th, 2009 at 06:47:13 AM EST
I'm with Jérôme on this one: it doesn't matter what currency oil prices are denominated in.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Tue Oct 6th, 2009 at 07:27:45 AM EST
[ Parent ]
Which is what I've always said.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Tue Oct 6th, 2009 at 09:53:59 AM EST
[ Parent ]
The currency in which oil prices are denominate is not important per see. But it becomes important once nations start hoarding that currency as gaurantee of future purchasing power.

Vencit omnia veritas.
by Luis de Sousa (luis[dot]a[dot]de[dot]sousa[at]gmail[dot]com) on Tue Oct 6th, 2009 at 12:23:27 PM EST
[ Parent ]
Mish says pretty much the same:

Mish's Global Economic Trend Analysis: Ridiculous Hype Over Secret Oil Meetings

[...]
5) It takes less than a second for Forex trades to take place. 24 hours a day, 7 days a week, one can sell any currency they want and buy any other currency.
6) The above logic applies to any currency and any commodity.
7) Nothing is stopping anyone at any time anywhere from selling dollars for whatever currency they want to hold. Nor is anything stopping anyone anywhere at any time from selling any major currency for U.S. Dollars.
8) Because currency conversion is instantaneous no one has to hold U.S. dollars to buy oil, copper, gold, iron, lead, wheat, soybeans, or anything else.
[...]
by Bernard on Tue Oct 6th, 2009 at 04:29:38 PM EST
[ Parent ]
I thought the purpose of "hoarding" dollars was to keep the dollar at a high value vs. certain other currencies for the purpose of promoting exports into the US/other countries.  That's been the effect of China keeping the Yuan low vs. the dollar for years and years.  Here in Mexico just about everything we buy is now made in China.  I just looked at some popular Mexican brand ceramic dishes we bought here about five years ago.  That same brand (Santa Anita)is now produced in China.  A popular joke in the Yucatan is that the Chinese now produce a smaller, cheaper version of the famed Habanero chile pepper that competes with the locally grown version.

I can swear there ain't no heaven but I pray there ain't no hell. _ Blood Sweat & Tears
by Gringo (stargazing camel at aoldotcom) on Tue Oct 6th, 2009 at 10:52:35 PM EST
[ Parent ]
Except being the oil currency means that you're the global reserve currency (or rather the other way around) which means you can finance your deficits by issuing bonds in your own currency, and at a lower interest rate than would be otherwise possible.

If this is a blessing or curse is another thing...

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Oct 7th, 2009 at 12:15:02 AM EST
[ Parent ]
You're the global reserve currency if you have 50% of world GDP and are the exporter of last resort. As for issuing bonds internationally, this has to do with the expectation that sovereign default won't happen, not only because you're a net exporter but also because the principle of free contract is deeply ingrained in your country's laws and mores.

The US stopped exporting oil in the 70's and much of anything else since then. But old habits die hard.

The question is whether people believe BRIC will remain the world's exporter of last resort, as well as be unlikely to default on their sovereign debt. Brazil and Russia have a history of that, not so India or China, but they also don't have a long history of issuing bonds in their own currency. China just issued Yuan bonds internatinally for the first time.

Now people are talking about making the IMF the world's central bank, possibly using SDR as a global reserve currency. Maybe that will give us another 30 years or 5 before it goes bankrupt in its turn, and then what?

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Wed Oct 7th, 2009 at 04:07:42 AM EST
[ Parent ]
The US is the world's #3 exporter. As has been discussed before, though, the employment profile behind the products being exported no longer supports the middle class of the 60's. Gov't policy makes the situation worse rather than better as it arguably does in France and Germany.

you are the media you consume.

by MillMan (millguy at gmail) on Wed Oct 7th, 2009 at 05:17:28 AM EST
[ Parent ]
MillMan:
The US is the world's #3 exporter.
Are you considering the EU as a unit or as 27 separate countries in that statistic?

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Wed Oct 7th, 2009 at 05:23:54 AM EST
[ Parent ]
List of countries by exports - Wikipedia, the free encyclopedia
--  World (sum of all countries) $ 16,280,000,000,000 2008 est.
--  European Union (minus internal trade) $ 1,690,000,000,000 2007
1  Germany $ 1,530,000,000,000 2008 est.
2  People's Republic of China $ 1,465,000,000,000 2008 est.
3  United States $ 1,377,000,000,000 2008 est.
4  Japan $ 776,800,000,000 2008 est.


En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Wed Oct 7th, 2009 at 05:28:43 AM EST
[ Parent ]
But experts is not what matters, but the balance of trade (or net exports)

List of countries by current account balance - Wikipedia, the free encyclopedia

Rank   Country   CAB USD, bn  
1  People's Republic of China 371.833
2  Germany 252.501
3  Japan 210.967
4  Saudi Arabia 95.762
5  Russia 76.163
...
177  Italy -52.725
178  Australia -56.342
179  United Kingdom -105.224
180  Spain -145.141
181  United States -731.214 [2]


En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Wed Oct 7th, 2009 at 05:32:23 AM EST
[ Parent ]
That's not what we were discussing - you threw out the "American doesn't make stuff anymore" piece of "common knowledge."

But as far as balance of trade - all I'm concerned with is the level of imports required to give the US a North/Western European style quality of life (and yes, I know, economic measures are no a good measure of quality of life, but they're a really good place to start). Consumer culture in the US needs to be replaced with something more likely to result in human happiness.

you are the media you consume.

by MillMan (millguy at gmail) on Wed Oct 7th, 2009 at 05:56:51 AM EST
[ Parent ]
This is what I was citing, yes.

you are the media you consume.

by MillMan (millguy at gmail) on Wed Oct 7th, 2009 at 05:57:19 AM EST
[ Parent ]
So in trade-weighted terms, the world's reserve currency should be 10% EUR, 8% EUR, 9% CYN, 5% JPY ?

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Wed Oct 7th, 2009 at 06:13:44 AM EST
[ Parent ]
The world's reserve currency should be an unitised measure of global ecological health.
by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Oct 7th, 2009 at 06:50:41 AM EST
[ Parent ]
that's an interesting comment, TBG.

can you illustrate what you mean a little more, please?

you mean a new currency, or any currency, but with a different value?

right now a banknote is a promissory statement, and as fungible a symbol as can exist.

is there any other kind of symbol that could supplant it, that took into consideration the 'externalities'  blithely dismissed with the 'deemed' value currencies presently enjoy?

i guess it will be 1's and 0's whatever form it takes in meatspace, and i guess money will not be a simple reward for creating wealth short term, but will also include an appreciation of its (symbolic) value to future generations.

my grandpa always said 'you have to learn the value of money', then when i heard how much one unit of british sterling has devalued since his time, i was really puzzled as to what he really meant.

conversations like this somewhat assuage this bewilderment. though i fumble to language exactly what i think, listening to you all is a great learning...

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Wed Oct 7th, 2009 at 10:52:48 AM EST
[ Parent ]
I think someone - probably me, when I finish this damn book - needs to write something about what value really is, and how people perceive prosperity.

Everyone knows it's not about rational actors, or even - particularly - about credit and useful things happening because of credit.

We have an interesting situation now where stock market value seems to exist even though economic activity doesn't, much.

This makes no sense - supposedly.

I think in fact it makes perfect sense - but only if you understand what's really being traded, what the motivation for trade is, and why what happens to people who don't trade on the markets doesn't actually matter a damn.

(Except in the limit, when they start starving, rioting and burning things down.)

From there it's possible - eventually - to create new theories of value that are less subjective than the ones we have now.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Oct 8th, 2009 at 12:39:29 PM EST
[ Parent ]
thanks, i look forward to it.

"We can all be prosperous but we can't all be rich." Ian Welsh
by melo (melometa4(at)gmail.com) on Thu Oct 8th, 2009 at 12:44:05 PM EST
[ Parent ]
ThatBritGuy:

We have an interesting situation now where stock market value seems to exist even though economic activity doesn't, much.

This makes no sense - supposedly.

I think in fact it makes perfect sense - but only if you understand what's really being traded, what the motivation for trade is, and why what happens to people who don't trade on the markets doesn't actually matter a damn.

I am re-reading Veblen's Theory of Business Enterprise. In it he claims that the capitalised value of the tangible assets of firms are covered by ordinary debt and maybe preferred (non-voting) stock, whereas common (voting) shares cover the capitalization of intangible assets, that is goodwill. That this mimics the separation of ownership (debt) from management (equity) and that the goodwill of "captains of industry" can be capitalised many times over because having lend their reputation to a venture, a "captain of industry" (such as, say, Warren Buffet) doesn't have his goodwill exhausted but even increased.

Having read the book for a second time I think it is very relevant to out current predicament (it also contains an explanation of the business cycle as speculative bubbles, of recession as a psychological phenomenon of the business class, etc).

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Thu Oct 8th, 2009 at 12:45:06 PM EST
[ Parent ]
Probably incompatible with floating exchange rates...

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Wed Oct 7th, 2009 at 11:14:03 AM EST
[ Parent ]
Or vice versa.
by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Oct 7th, 2009 at 03:53:21 PM EST
[ Parent ]
You're the global reserve currency if you have 50% of world GDP and are the exporter of last resort.

This doesn't seem to be the case, given that the dollar is the global resver currency.

As for issuing bonds internationally, this has to do with the expectation that sovereign default won't happen, not only because you're a net exporter but also because the principle of free contract is deeply ingrained in your country's laws and mores.

More like being so important that if you default, nothing else is secure and anything might happen. Which is why the price of gold (=hedge against systemic financial breakdown) surges when the US weaken.


Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Oct 7th, 2009 at 07:08:06 AM EST
[ Parent ]
You can't really default in your own currency, can you?

Because you can always print more.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Oct 7th, 2009 at 07:24:51 AM EST
[ Parent ]
Well, massive inflation and default are more or less the the same for foreign creditors, in the long run. Or if the inflation is really high, in the short run as well.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Oct 7th, 2009 at 07:29:28 AM EST
[ Parent ]
The privilege of being the issuer of a global reserve currency is that you are writing cheques you don't have to redeem.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Wed Oct 7th, 2009 at 07:40:25 AM EST
[ Parent ]
I'm not sure what we are disagreeing on here?

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Oct 7th, 2009 at 07:43:59 AM EST
[ Parent ]
 "Maybe that will give us another 30 years or 5 before it goes bankrupt in its turn, and then what?"

  either "more of the same-old same old" or something that consists of genuine reform taking account of hard-"learned" (?)-lessons.

   For further reading,

  Nicolas Bouleau:

  Mathématiques et risques financiers

  "Has the application of mathematics to finance contributed to the financial crisis?"

   http://www.odilejacob.fr/0207/2647/Mathématiques-et-risques-financiers.html

   and Paul De Grauwe:

  Economics is in crisis: it is time for a profound revamp

   By Paul De Grauwe

Published: July 21 2009 22:27
 | Last updated: July 21 2009 22:27

  link: http://www.ft.com/cms/s/0/478de136-762b-11de-9e59-00144feabdc0.html?nclick_check=1


"In such an environment it is not surprising that the ills of technology should seem curable only through the application of more technology..." John W Aldridge

by proximity1 on Wed Oct 7th, 2009 at 11:44:46 AM EST
[ Parent ]
Jerome:

The currency actually used to make the payment makes very little difference as long as the underlying currency to value the trade is the dollar.

"To value" here must mean to price such that USD is a unit of measurement to express transaction value of any commodity Q ("trade") which is not the use-value or production cost of or demand for the commodity Q. USD is the price of the currency of settlement. USD still dominates currencies of settlement in part because of FRB glut policies. However, if USD is not the currency of settlement, the transaction event yields ForEx profit (loss).

Elsewhere Chris is promoting a unit of measurement other than currency to express transaction value as well as demand for commodity Q, e.g. work, kWh.

Where did Jerome comment, "it doesn't matter what currency oil prices are denominated in"?

Diversity is the key to economic and political evolution.

by Cat on Wed Oct 7th, 2009 at 08:19:21 AM EST
[ Parent ]
Cat:
Where did Jerome comment, "it doesn't matter what currency oil prices are denominated in"?
Oh, we've been rehashing this argument for many years now...

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Wed Oct 7th, 2009 at 09:14:53 AM EST
[ Parent ]
But if I'm misrepresenting his position he can always say so...

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Wed Oct 7th, 2009 at 09:20:46 AM EST
[ Parent ]
Cat:
Chris is promoting a unit of measurement other than currency to express transaction value as well as demand for commodity Q, e.g. work, kWh.

Indeed, and I'm pointing out that this distinction already occurs in any barter system which involves credit.

So in the Swiss WIR system no Swiss Franc credit objects (ie fiat currency Units) change hands. Instead, goods and services change hands on trade credit terms (time to pay) by reference to Swiss Francs as a purely abstract "Value Standard" or unit of measure.

The framework of trust needed (to police debit balances) comes from property backing - ie WIR members have to give a charge over their property. The WIR accounting/monetary system works, and has worked since 1934.

I advocate extending such credit clearing more widely (ie to individuals as well as businesses) within new frameworks of trust, backed by provisions into default pools.

This requires currency units which are generally acceptable in exchange, (ie fungible) and in my view, Units redeemable in the use value of location, and of energy, are natural candidates. It also requires Credit-Service-Providers-Formerly-Known-As-Banks.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Oct 7th, 2009 at 09:23:17 AM EST
[ Parent ]
See this thread in today's Salon

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Tue Oct 6th, 2009 at 07:33:42 AM EST
[ Parent ]
This sounds a lot like a conspiracy theory. The only reason for these nations to work on their own is in case the US is not willing to cooperate, but it doesn't make much sense. Cooperating with the lender nations is the best way to avoid a collapse. The lender nations will first de-peg their currencies from the dollar and peg them to the SDR. This leaves still a lot of control in the US, given that the dollar makes up for more than 40% of the SDR. Afterwards the lender nations could slowly enter the SDR with small weights and then evolving from there (the Khaleji, the Real, the Ruble and the Yuan should be the first to enter the SDR).

By not cooperating, the US can obliterate the IMF and see a bunch of regional currencies popping up, over which it has no control.

I also do not see any Central Bank moving openly to a commodity currency at this stage (even if solely as reserve).

Vencit omnia veritas.

by Luis de Sousa (luis[dot]a[dot]de[dot]sousa[at]gmail[dot]com) on Tue Oct 6th, 2009 at 12:18:52 PM EST
[ Parent ]
... rejected so completely as this:
In order to stimulate world trade and the world economy some hard currency country has to run persistent large deficits, but if you run persistent large deficits you eventually go broke.

In the mainstream theory, trade is efficiency creating and therefore with "free trade" there is more to go around for all, which is the stimulus to trade and the world economy that is required.

The argument here is that, just as during the rise of the Atlantic trading economy when mountains of silver in Mexico and Peru were used to permit Spain to run trade deficits with all of the rest of Europe, to finance the European nations buying their way into the East Asian carrying trade, the Atlantic trading economy still relies on some big trade-deficit "source of demand".

Oddly enough he picked the same decline as "needed over 14 years" (50%) that featured in my little mini-utopia on the fall of the American Empire.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Oct 6th, 2009 at 06:42:00 PM EST
UN calls for new reserve currency


The United Nations called on Tuesday for a new global reserve currency to end dollar supremacy which has allowed the United States the "privilege" of building a huge trade deficit.

"Important progress in managing imbalances can be made by reducing the reserve currency country?s 'privilege' to run external deficits in order to provide international liquidity," UN undersecretary-general for economic and social affairs, Sha Zukang, said.

Speaking at the annual meetings of the International Monetary Fund and World Bank in Istanbul, he said: "It is timely to emphasise that such a system also creates a more equitable method of sharing the seigniorage derived from providing global liquidity."

He said: "Greater use of a truly global reserve currency, such as the IMF?s special drawing rights (SDRs), enables the seigniorage gained to be deployed for development purposes," he said.



Vencit omnia veritas.
by Luis de Sousa (luis[dot]a[dot]de[dot]sousa[at]gmail[dot]com) on Wed Oct 7th, 2009 at 04:26:07 AM EST
Can we implement Keynes' Clearing Union as originally configured, charging interest on both positive and negative trade balances?

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Wed Oct 7th, 2009 at 04:27:13 AM EST
[ Parent ]
The last thing we need IMHO is a centrally issued fiat currency - which Keynes was proposing with his Bancor - and all the institutionalised baggage and politics that goes with it. But the Gesellian approach of payments by those with both credit and debit balances is on the right lines.

I see the requirement as for a global "Value Standard" - and a fixed unit of energy seems logical - by reference to which fungible Units of currency (eg a Unit redeemable for land rental value, or a Unit redeemable for energy value) change hands on credit terms against goods and services etc.

This credit would be guaranteed within a globally valid framework of trust - ie an agreement I call a Guarantee Society.

In such a decentralised "Peer to Peer" credit clearing model, the payments made in respect of the credit and debit balances would be for the use of the globally valid guarantee.

After all, the true economic value provided by a bank apart from service provision is that of its guarantee of the borrowers' credit. In a P2P credit clearing model, the banks become pure service providers, and their only capital requirement is in respect of their operating costs.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Oct 7th, 2009 at 07:19:27 AM EST
[ Parent ]
Chris,

Why would I accept an energy unit or land unit issued in Japan? Or why would them accept those issued by me?

The fungibility of these things is something hard for me to cope with. If there's no physical way of linking our energy networks I can't figure how would this work. With a global fungible standard energy vector (such as methanol) this can be done, but if the energy unit is issued on the electric grid this is not simple.

Vencit omnia veritas.

by Luis de Sousa (luis[dot]a[dot]de[dot]sousa[at]gmail[dot]com) on Wed Oct 7th, 2009 at 09:20:15 AM EST
[ Parent ]
A Unit redeemable in Japanese land rental value is redeemable only in Japan, so its fungibility in Japan is pretty straightforward. Its fungibility elsewhere depends on how much that Japan produces that the relevant country imports, because they could pay for these imports with Japanese land-based currency.

An element of exchange control is built in to land-based currency, or maybe a better way of looking at it is that seigniorage (the benefit received by an issuer of currency) stays local. John Law proposed a land-backed currency 300 years ago, and most value in circulation is deficit-based (issued ex nihilo by a credit intermediary) but land-backed, through mortgages.

Electricity is regional/continental rather than global, but wherever Units redeemable in electricity are issued and accepted they would be priced against a constant energy Value Standard. eg 10 Kilo Watt Hours, or equivalent in BTUs

The point is that a currency Unit redeemable in electricity would not BE a Petro or Electro or Energy Dollar (unit of measure or value standard), but it should have a fixed price by reference to the Energy Standard. The redeemability of the Unit would require both acceptor and issuer to be a subscriber to the same Electricity Pool agreement and clearing /accounting system.

The obvious candidate for a global energy vector is gas (bio-methane in the long term), and any producer could issue Units redeemable in gas. The unit guarantees/secures price, and acts as a means of payment for supply actually received. But it does not guarantee supply.

Carbon energy Units would be priced against the Petro, and the price in Petros would depend upon the mode of fuel use, I guess. eg power generation, transport, or residential.

The way that profligate energy producers may reduce energy use is to ramp up carbon fuel prices to global
levels, and then to issue Units to the citizens. They could either continue their profligate ways, by redeeming Units against energy consumed, or exchange the Unit for something else of value to them.


"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Oct 7th, 2009 at 06:22:26 PM EST
[ Parent ]
ChrisCook:
The last thing we need IMHO is a centrally issued fiat currency - which Keynes was proposing with his Bancor - and all the institutionalised baggage and politics that goes with it.
There are good reasons why a central authority with the ability to tell people no, thou shalt not issue any more units at this time is a Good Thing™.

From a comment in The Agonist: The Morality of Deliberate Defaults

The answer lay in the terrible depression in the early 1890s when so many banks failed. Second, a national currency did not fully exist, and banks issued their own currency that traded on something similar to an exchange market. The First National City Bank of New York was well known and highly trusted, so its notes traded in the major cities at 100 cents/dollar. Smaller banks traded at discounts. Third, there was no Federal Reserve or government intervention to help banks. If your bank made too many bad loans, it was wiped out. One of the features of 19th century novels in Britain and the U.S. was the periodic impoverishment of the hero or heroine when all their assets held in a "trusted" bank were brought to zero because the bank failed. This was a very common occurrence and made it incumbent on the individual to research very thoroughly the creditworthiness of a bank which held their deposits.
(h/t melo)

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Wed Oct 7th, 2009 at 09:36:32 AM EST
[ Parent ]
You don't need a global authority/institution.

You do need global agreement on standards, with which Service-Providers-Formerly-Known-As-Banks, ensure compliance - ie "thou shalt not".

Also agreement on other standards, such as transparency, in particular, so everyone can see what Units are in issue, and who by.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Oct 7th, 2009 at 09:48:07 AM EST
[ Parent ]
ChrisCook:
You do need global agreement on standards, with which Service-Providers-Formerly-Known-As-Banks, ensure compliance - ie "thou shalt not".
Which is why bank credit never leads to credit bubbles. Well-known fact.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Wed Oct 7th, 2009 at 09:55:26 AM EST
[ Parent ]
If the service provider/managing partner has a stake in the outcome from the decisions they make - ie they eat a share of any calls on the guarantee pool - then that concentrates the mind.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Wed Oct 7th, 2009 at 05:42:29 PM EST
[ Parent ]
Which is why no bank dabbling in Credit Default Swaps has gone bust over the past 2 years. Well-known fact, too.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Thu Oct 8th, 2009 at 02:41:31 AM EST
[ Parent ]
If you don't take the risk, how can you go bust?

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Thu Oct 8th, 2009 at 03:44:16 AM EST
[ Parent ]
For-profit service providers have a conflict of interest.

Public authorities can also go bust, and central banks occasionally do, but at least there are some procedures in place to detect and punish conflicts of interest, and an expectation of transparency which cannot be deflected by appeals to trade secrets or business practices.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Thu Oct 8th, 2009 at 05:25:35 AM EST
[ Parent ]
Migeru:
For-profit service providers have a conflict of interest.

You're telling me!

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Oct 8th, 2009 at 05:44:57 AM EST
[ Parent ]
China calls time on dollar hegemony


You can date the end of dollar hegemony from China's decision last month to sell its first batch of sovereign bonds in Chinese yuan to foreigners.

Beijing does not need to raise money abroad since it has $2 trillion (£1.26 trillion) in reserves. The sole purpose is to prepare the way for the emergence of the yuan as a full-fledged global currency.

"It's the tolling of the bell," said Michael Power from Investec Asset Management. "We are only beginning to grasp the enormity and historical significance of what has happened."

It is this shift in China and other parts of rising Asia and Latin America that threatens dollar domination, not the pricing of oil contracts. The markets were rattled yesterday by reports – since denied – that China, France, Japan, Russia, and Gulf states were plotting to replace the Greenback as the currency for commodity sales, but it makes little difference whether crude is sold in dollars, euros, or Venetian Ducats.

What matters is where OPEC oil producers and rising export powers choose to invest their surpluses. If they cease to rotate this wealth into US Treasuries, mortgage bonds, and other US assets, the dollar must weaken over time.

"Everybody in the world is massively overweight the US dollar," said David Bloom, currency chief at HSBC. "As they invest a little here and little there in other currencies, or gold, it slowly erodes the dollar. It is like sterling after World War One. Everybody can see it's happening."

"In the US they have near zero rates, external deficits, and public debt sky-rocketing to 100pc of GDP, and on top of that they are printing money. It is the perfect storm for the dollar," he said.

[...]

For the time being, Europe is bearing the full brunt of Asia's currency policy. The dollar peg has caused the yuan to slide against the euro, even as China's trade surplus with the EU grows. It reached €169bn (£156bn) last year. This is starting to provoke protectionist rumblings in Europe, where unemployment is nearing double digits.

ECB governor Guy Quaden said patience is running thin. "The problem is not the exchange rate of the dollar against the euro, but rather the relationship between the dollar and certain Asian currencies, to mention one, the Chinese Yuan. I say no more."

France's finance minister Christine Lagarde said at the G7 meeting that the euro had been pushed too high. "We need a rebalancing so that one currency doesn't take the flak for the others."

Clearly this is more than a dollar problem. It is a mismatch between the old guard – US, Europe, Japan – and the new powers that require stronger currencies to reflect their dynamism and growing wealth. The longer this goes on, the more havoc it will cause to the global economy.

The new order may look like the 1920s, with four or five global currencies as regional anchors – the yuan, rupee, euro, real – and the dollar first among equals but not hegemon. The US will be better for it.



Vencit omnia veritas.
by Luis de Sousa (luis[dot]a[dot]de[dot]sousa[at]gmail[dot]com) on Wed Oct 7th, 2009 at 09:34:17 AM EST


Display:
Go to: [ European Tribune Homepage : Top of page : Top of comments ]