Monday, November 24, 2008

FT says "Bring gold dollar link back"

This morning a thought provoking article in the FT. Author Richard Duncan argues that ever since 1971 when the gold exchange window was closed by the US, the world has been living the consequences of the monetary flows that have resulted from fiat money.

Basically once the US govt got free reign to print it's own money, it did and got the world economy clocking again. In a sense it was a crowning moment for Keynes. The cycle of boom bust ensued, starting with a big rash of inflation in the 70's and then world chaos in predictable order. The machine spun until it inflated the biggest asset bubble "housing" (or a bubble too far as the article calls it), until that one deflated.

The article concludes with a call to design a new monetary system. Gold seems to be an emotional favorite.



The events of September 2008 – the nationalisation of Fannie Mae, Freddie Mac and AIG; the disappearance of the investment banking industry in the US; and the Bush administration’s $700bn bailout to save what is left of Anglo-American capitalism – demonstrate that the 37-year experiment with fiat money and floating exchange rates has failed catastrophically.

When Richard Nixon destroyed the Bretton Woods International Monetary System in 1971 by closing the “gold window” at the Treasury, he severed the last link between dollars and gold. What followed was a spiralling proliferation of increasingly spurious credit instruments denominated in a debased currency. The most glaring and lethal example of this madness has been the growth of the unregulated derivatives market, which has ballooned in size to $600,000bn, the equivalent of almost $100,000 per person on Earth.

Under the post-Bretton Woods dollar standard, credit growth powered economic growth. In the US, the ratio of total credit to gross domestic product rose from 150 per cent in 1969 to 350 per cent in 2007. Credit financed consumption and sucked in imports with a devastating impact on America’s trade balance. By 2006, the US current account deficit had reached almost $800bn.

As the dollar standard flooded the world with funny money, economic instability spread around the globe. The reinvestment of “petrodollars” created the Latin American economic boom in the 1970s and then the third world debt crisis of the 1980s. Japan’s trade surplus with the US drove up Japanese property prices in the late 1980s until the imperial gardens in Tokyo were worth more than California; and then produced the lost decade in Japan when that bubble popped in 1990. Next came the rise and fall of the Asian miracle bubble. Each economic convulsion resulted from the excessive influx of dollars into those economies. No regulatory regime could cope when confronted with such an extraordinary incursion of exogenous money.

The Bretton Woods collapse severed the link between the world’s currencies and gold. Central banks were then free to create as much money as they wished. Between 2001 and today, central banks outside the US created the equivalent of about $6,000bn. This can be seen in the seven-fold increase in foreign exchange reserves in that period. The money created (which accounted for most, if not all, of Federal Reserve chairman Ben Bernanke’s so-called global savings glut) was used to buy dollars and suppress the value of the currencies of US trading partners to perpetuate their trade advantage.

When those dollars were reinvested in dollar-denominated assets, it was America’s turn to bubble. As central banks bought up US treasury bonds, they drove up their price and drove down their yields. However, there were not enough new Treasury bonds being issued to absorb the rest of the world’s trade surplus earnings, so central banks bought Fannie and Freddie debt as well. That allowed those government-sponsored enterprises to acquire or guarantee more than half of all the mortgages in the country before they failed. Between unnaturally depressed interest rates and the buying spree by Fannie and Freddie, US property prices surged. The US housing bubble followed the ill-fated Nasdaq bubble. However, the inflation of the US housing market was one bubble too far. When it imploded, the global financial system was hurled into crisis, leaving the 21st century version of Anglo-American financial capitalism discredited.

The lesson that must be learnt from this disaster is that “free market” capitalism under a fiat money regime does not produce the same blessings (sustainable prosperity) that are produced by true free market capitalism within a monetary system anchored by gold. When President Nixon severed the link between the dollar and gold, he changed the nature of the Anglo-American economic model and ultimately destroyed it.

The world cannot return to a gold standard overnight without provoking a brutal contraction of credit and a global depression. However, neither can we afford to pretend that nothing has changed and that the global economy can continue to function on the dollar standard. The time has come to convene a forum of the world’s leaders to hammer out and begin the transition to a new rule-based international monetary system predicated on sound money and balanced trade. Current Group of 20 efforts fall well short of what is required.

The writer is author of The Dollar Crisis: Causes, Consequences, Cures



I don't get all these calls for Gold to make a come-back as a monetary standard. I would have to read up on monetary policy under a gold standard. Governments, specifically in the US have expanded dramatically. Undoing this sounds difficult and a bit idealistic.

On the other hand, getting back to a gold like fixed exchange rate stability, would minimize the occasions for economic war. That would be a good thing. But could this could be achieved through negotiation rounds, but this is not something that will happen overnight. Getting all this crowd to agree is going to take some time.

11 comments:

Barry Kelly said...

The emotions behind gold are indeed irrational. All money is based on trust, whether it's belief that the gold behind the currency will be worth what one thinks it will, or whether one believes that the government won't debase the currency or renege on its debt. But gold is also subject to speculation and debasement in the form of e.g. gold discoveries, and manipulation by e.g. gold hoarding.

But the fact that people use banknotes and not actual gold pieces means that in practice, all money is fiat money. Even if it is notionally backed by a currency, you're still trusting the banking system / government not to renege and break the link.

The theory behind commodity-backed currency is that it automatically regulates exchange rates according to trade flows. If there are too many imports, there will be less gold to go around the nation, and thus things will get more expensive (i.e. deflation). That will reduce competitiveness in trade, and thus the balance of trade payments should swing the other way. It should work out the other way too.

A key advantage of fiat currency, AFAICT, though, is that the government can forcibly prevent deflation through the printing press. Deflation is the big monster, more feared than inflation.

Marcf said...

Hey barry,

Is stable money supply a product of the gold standard? Is it just a way to make sure governments do not spend but what they raise in taxes?

Yes, the way I understand the advantage of fiat is that with public spending you can stabilize prices. Debt is good as it stimulates an economy, too much of it can kill however.

With fiat a government doesn't need taxes, which is why Obama is saying he won't raise taxes after all?

Army No Va said...

Obama does not want to repeat Hoover's and Roosevelt's mistakes of raising taxes. Hoover raised them to something like 65% and helped turn a deep recession into a depression. Roosevelt later raised them to 85% and killed the 1934-35 recovery and rekindled the depression. He later raised them to 94% in WWII.

I give Obama credit for listening to history and today's advisers and for being smart.

Governments hate things like gold standards as they lose a lot of flexibility to run deficits and such. Also, it does make it hard to stop deflation. Of course, in a debt ridden society like we are now (far worse than in 1929), deflation means massive default. Becomes a vicious cycle.

The US Govt is desparate to stop housing deflation...however, they can't because there is too much supply, not enough income and too much debt. All their market manipulations will do is postpone the inevitable and essentially freeze the housing market. Right now, the 2nd round of knife catchers, investors are jumping in thinking houses are a good buy compared to 2005. When they tire of running negative cash flows waiting for 2005 to come back, they will walk in 2010-11. And so it goes, like a ball bouncing down the steps till it reaches a stable point.

Now, with the mantra that "real estate only goes up" destroyed, there isn't a good reason to buy a house until it is cheaper to buy than to rent. We will see breath-taking deflation in real estate, especially houses and the new suburban commercial developments that support them, in 2009. Right now, we are only halfway or less to the bottom.

The government CAN'T go to a gold or other standard in this type of environment, otherwise we get the 1870s, 1890s or 1930s. The 1870s are instructive as the government shrunk the money supply generated by the Civil War to get back to a "sound", gold backed currency.

Looking past the immediate delfation problem, as government inject trillions of dollars into the system...

I expect, when foreigners (especially most Asian countries and oil producers) abandon the $, is massive inflation in things we need (energy, food, water, imported goods) and deflation in luxuries (houses, new cars, etc...), is a move for the US $ to be replaced with a North American Union money, call it the Amero. At this point, some Asian currency will likely become the new international standard for oil and other transactions. The American standard of living will fall to something like a more modern version of the late 19th century and we will become an export driven economy again.

Marcf said...

Pierre,

Ojala, as the spaniards say, we may become an export driven economy on ideas, because manufacturing is gone. Maybe Agriculture?

Good point on the difficulty for modern governments to achieve this.

I hadn't thought about it, but in a world of gold standard, our taxes are at 80%? 95 in times of war?

Small wonder we would prefer a stable fiat system.

Army No Va said...

In the 1920s Fed income taxes were more like they are today (really less). In 1913 it all started at 1% for the "rich"! :-) ... Before that, we had a MUCH smaller Fed govt that was funded primarily with import/export duties.

Anonymous said...

^^ nice blog!! ^@^

徵信, 徵信網, 徵信社, 徵信社, 徵信社, 徵信社, 感情挽回, 婚姻挽回, 挽回婚姻, 挽回感情, 徵信, 徵信社, 徵信, 徵信, 捉姦, 徵信公司, 通姦, 通姦罪, 抓姦, 抓猴, 捉猴, 捉姦, 監聽, 調查跟蹤, 反跟蹤, 外遇問題, 徵信, 捉姦, 女人徵信, 女子徵信, 外遇問題, 女子徵信, 徵信社, 外遇, 徵信公司, 徵信網, 外遇蒐證, 抓姦, 抓猴, 捉猴, 調查跟蹤, 反跟蹤, 感情挽回, 挽回感情, 婚姻挽回, 挽回婚姻, 外遇沖開, 抓姦, 女子徵信, 外遇蒐證, 外遇, 通姦, 通姦罪, 贍養費, 徵信, 徵信社, 抓姦, 徵信, 徵信公司, 徵信社, 徵信, 徵信公司, 徵信社, 徵信公司, 女人徵信, 外遇

徵信, 徵信網, 徵信社, 徵信網, 外遇, 徵信, 徵信社, 抓姦, 徵信, 女人徵信, 徵信社, 女人徵信社, 外遇, 抓姦, 徵信公司, 徵信社, 徵信社, 徵信社, 徵信社, 徵信社, 女人徵信社, 徵信社, 徵信, 徵信社, 徵信, 女子徵信社, 女子徵信社, 女子徵信社, 女子徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信,

徵信, 徵信社,徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 徵信, 徵信社, 外遇, 抓姦, 離婚, 外遇,離婚,

徵信, 外遇, 離婚, 徵信社, 徵信, 外遇, 抓姦, 徵信社, 徵信, 徵信社, 徵信, 外遇, 徵信社, 徵信, 外遇, 抓姦, 徵信社, 征信, 征信, 徵信, 徵信社, 徵信, 徵信社, 征信, 徵信, 徵信社, 徵信, 徵信, 徵信社, 徵信, 徵信社, 徵信社, 徵信社, 徵信, 外遇, 抓姦, 徵信, 徵信社, 徵信, 徵信社, 徵信,

Anonymous said...

2008真情寫真aa片免費看捷克論壇微風論壇大眾論壇plus論壇080視訊聊天室情色視訊交友90739美女交友-成人聊天室色情小說做愛成人圖片區豆豆色情聊天室080豆豆聊天室 小辣妹影音交友網台中情人聊天室桃園星願聊天室高雄網友聊天室新中台灣聊天室中部網友聊天室嘉義之光聊天室基隆海岸聊天室中壢網友聊天室南台灣聊天室南部聊坊聊天室台南不夜城聊天室南部網友聊天室屏東網友聊天室台南網友聊天室屏東聊坊聊天室雲林網友聊天室大學生BBS聊天室網路學院聊天室屏東夜語聊天室孤男寡女聊天室一網情深聊天室心靈饗宴聊天室流星花園聊天室食色男女色情聊天室真愛宣言交友聊天室情人皇朝聊天室上班族成人聊天室上班族f1影音視訊聊天室哈雷視訊聊天室080影音視訊聊天室38不夜城聊天室援交聊天室080080哈啦聊天室台北已婚聊天室已婚廣場聊天室 夢幻家族聊天室摸摸扣扣同學會聊天室520情色聊天室QQ成人交友聊天室免費視訊網愛聊天室愛情公寓免費聊天室拉子性愛聊天室柔情網友聊天室哈啦影音交友網哈啦影音視訊聊天室櫻井莉亞三點全露寫真集123上班族聊天室尋夢園上班族聊天室成人聊天室上班族080上班族聊天室6k聊天室粉紅豆豆聊天室080豆豆聊天網新豆豆聊天室080聊天室免費音樂試聽流行音樂試聽免費aa片試看免費a長片線上看色情貼影片免費a長片

Anonymous said...

本土成人貼圖站大台灣情色網台灣男人幫論壇A圖網嘟嘟成人電影網火辣春夢貼圖網情色貼圖俱樂部台灣成人電影絲襪美腿樂園18美女貼圖區柔情聊天網707網愛聊天室聯盟台北69色情貼圖區38女孩情色網台灣映像館波波成人情色網站美女成人貼圖區無碼貼圖力量色妹妹性愛貼圖區日本女優貼圖網日本美少女貼圖區亞洲風暴情色貼圖網哈啦聊天室美少女自拍貼圖辣妹成人情色網台北女孩情色網辣手貼圖情色網AV無碼女優影片男女情色寫真貼圖a片天使俱樂部萍水相逢遊戲區平水相逢遊戲區免費視訊交友90739免費視訊聊天辣妹視訊 - 影音聊天網080視訊聊天室日本美女肛交美女工廠貼圖區百分百貼圖區亞洲成人電影情色網台灣本土自拍貼圖網麻辣貼圖情色網好色客成人圖片貼圖區711成人AV貼圖區台灣美女貼圖區筱萱成人論壇咪咪情色貼圖區momokoko同學會視訊kk272視訊情色文學小站成人情色貼圖區嘟嘟成人網嘟嘟情人色網 - 貼圖區免費色情a片下載台灣情色論壇成人影片分享免費視訊聊天區微風 成人 論壇kiss文學區taiwankiss文學區

Anonymous said...

福~
「朵
語‧,最一件事,就。好,你西.............................................................................................................
..................

Anonymous said...

85cc免費影城 愛情公寓正妹牆川藏第一美女 成人影片 情色交友網 美女視訊 美女視訊 視訊情人高雄網 JP成人影城 383成人影城 aa片免費a片下載 a片線上看aa片免費看 ※a片線上試看※sex520免費影片※ aa片免費看 BT成人論壇 金瓶影片交流區 自拍美女聊天室 aa片免費a片下載 SEX520免費影片 免費a片 日本美女寫真集 sex520aa免費影片 sex520aa免費影片 BT成人網 Hotsee免費視訊交友 百分百貼影片區 SEX520免費影片 免費視訊聊天室 情人視訊高雄網 星光情色討論版 正妹牆 383成人影城 線上85cc免費影城 85cc免費影城 85cc免費影城 85cc免費影城 ※免費視訊聊天室※ ※免費視訊聊天室※ 免費視訊聊天室 85cc免費影片 85cc免費影片 080苗栗人聊天室 080苗栗人聊天室 080中部人聊天室 080中部人聊天室 免費a片下載 免費a片 AA片免費看 aa片免費看 aa片免費看 aa片免費看 aa片免費看 日本av女優影片 av女優 av女優無碼影城 av女優 av女優 百分百成人圖片 百分百成人圖片 視訊情人高雄網 電話交友 影音電話交友 絕色影城 絕色影城 夜未眠成人影城 夜未眠成人影城 色咪咪影片網 色咪咪影片網 色咪咪影片網 色咪咪影片網 色咪咪影片網 免費色咪咪貼影片 免費色咪咪貼影片 色情遊戲 色情遊戲 色情遊戲 色情遊戲 影音視訊交友網

Anonymous said...

視訊交友網 080視訊聊天室 ※免費視訊聊天室※ ※免費視訊聊天室※ 視訊聊天室 成人影音視訊聊天室 ut影音視訊聊天室 ※免費視訊聊天室※ 視訊ukiss聊天室視訊ukiss聊天室 視訊交友90739 視訊交友90739 情人視訊網 168視訊美女 168視訊美女 168視訊美女 視訊美女館 視訊美女館 免費視訊美女網 小高聊天室 小高聊天室 aio交友聊天室 aio交友聊天室 交友聊天室 交友聊天室 線上a片 線上a片 線上a片 線上a片 線上a片 免費線上a片 免費線上a片 嘟嘟成人網站 成人漫畫 情色文學 嘟嘟成人網 成人貼圖區 情色文學成人小說 微風成人區 情色貼圖區 免費視訊聊天 免費成人圖片區 愛情公寓 愛情公寓聊天室 寄情築園小遊戲 免費aa片線上看 aa片免費看 情色SXE聊天室 SEX情色遊戲 色情A片 免費下載 av女優 俱樂部 情色論壇 辣妹視訊 情色貼圖網 免費色情 聊天室 情人視訊聊天室 免費a片成人影城 免費a片-aa片免費看 0204貼圖區 SEX情色 交友聊天-線上免費 女優天堂 成人交友網 成人情色貼圖區 18禁 -女優王國 080視訊美女聊天室 080視訊聊天室 視訊交友90739 免費a片 aio 視訊交友網 成人影城-免費a片※免費視訊聊天※85cc免費影片日本線上免費a片 免費色咪咪影片免費色咪咪影片aaa片免費看影片aaa片免費看成人影城情人視訊高雄網sex520免費影片080聊天室080聊天室aa的滿18歲影片免費av18禁影片免費av18禁影片免費av18禁影片aa的滿18歲影片聊天室ut愛情公寓尋夢園聊天室