“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” — Henry Ford
Basically what the world central banks are doing is increasing their money by devaluing it (printing more than it’s worth) and giving it to banks so that they can lend it. Then, when things pick up, simply take the money back and destroy it.
The $100 bill in your pocket really becomes worth $50 when they double the amount of currency out there without anything to back it (e.g. investors with resources), and the surplus is given to the already rich, since money travels down a pyramid from the government or resource maker to the consumer who consumes as a result of his/her labour (or profit maker to the consumer through secondary falls).
The net effect of Quantitative Easing is giving cash to the rich. When the amount of currency dwindles as the government calls in purchased bonds, credit will be crunched again and we will look to investors to provide credit like they did before.
Of course, they will not be so inclined to invest in a country in which this method was employed, and so with no money to flow down the pyramid, the average Joe is left with nothing. House prices fall, people will sell for whatever they can get, and eventually the value of the currency becomes next to nil. Having many major currencies debased will provide ample opportunity for the IMF to step in with their Special Drawing Rights or a North American currency solution for the masses. Don’t beleive in the NAU? Well, the government of Canada does!
Sovereign debts will bring crises
The sovereign debt crisis is still unfolding and a currency crisis is now upon us. When Europe chose to go all-in by pledging backstops for the downward spiraling weak countries within the euro zone, they made a conscious decision to devalue the euro and to inflate away the debt.
For those like the euro zone, which are backed into a corner, a currency and debt devaluation become the only option. Also, with economies around the globe burdened with debt, addressing problems through currency devaluation becomes highly competitive. You see, currencies are only valued on a relative basis, that means someone’s currency has to win the least ugly contest, and as a result appreciate against world currencies; in this case, it’s the U.S. dollar.
Meanwhile, three out of four of the most liquid currencies in the world — the euro, the pound and the yen — will likely be dramatically devalued before it’s all said and done. As for the euro, many have been throwing around the possibility of the euro going to parity against the dollar. Source: Jutia Group, May 25, 2010.
The only thing the recent euro crisis re-enforced is the role big Hedge Funds play as economic hitman, targeting under-performing or volatile markets knowing that they can hedge against their ability to borrow, creating an artificial spike in rates coupled with a phantom monetary crisis which ultimately allows them to rip billions with impunity.
There is nothing emotional about the market other then an artificial media frenzy aimed at selling news and small time investors caught in the middle. At the executive level where the decisions are drawn it is all carefully conceived planned and executed. While there is nothing wrong with profiting or investing there is something fundamentally unethical about intentionally creating a crisis for profit. It would be the equivalent of a hospital causing a disaster to strengthen its cash flow.
What Europe really needs is a return to sound monetary policy by re-establishing a commodity (silver, gold, or oil?) backed currency as was the case for the majority of history throughout all civilizations. That is, until corrupt politicians realize the benefit of abolishing commodity-based currencies (gold standards) in favor of a fiat, purely speculative base of currency management that is the absolute most disasterous thing a country could do and has always ended in disaster. Doing the above would enable governments to virtually stop such speculative activities that Hedge funds, foreign governments, and money changers engage in. Money laundering used to be a legal practice serviced by bankers and lawyers until the US government decided to outlaw it and put and end to it. Why should massive speculative hedging against a market be any different?
The official numbers tell a very different story. It is the story of
debt, inherited from the past, that was perhaps manageable until—through no fault of the debtor—interest rates on the country’s borrowing increased. Higher interest payments, not increased spending, led to higher deficits. Growing deficits in turn created doubts about the overvalued exchange rate, which pushed interest rates still higher, creating larger deficits, in a hopeless spiral that ended in default and devaluation.
The most important mistake for South America was the fixed exchange rate, which tied the Argentine peso to the US dollar, but the immediate cause of Argentina’s crisis was a series of external shocks that were beyond its control, beginning with the US Federal Reserve Board’s decision to raise interest rates in February of 1994. The effect of each of these shocks was much worse than it otherwise would have been, because of the fixed exchange rate.
The commonly believed story (endorsed by many) is that the government could not accept a sufficient dose of the painful medicine of austerity, or spent its way into a hole, but this is not supported by the data. It was increasing interest payments on the debt that drove the government’s budget from surplus to deficit. Interest payments rose from $2.5 billion in 1991 to $9.5 billion in 2000, or from 1.2 to 3.4 percent of GDP. This by itself is a significant drain on the economy. The government’s attempts to eliminate the deficit, by cutting primary spending during a recession, worsened the economic situation.
Short selling has its legitimate uses. Even more so credit default swaps, but, when they are done naked, things get a bit spicier.
The use of naked selling seems much more difficult to justify and it raises the serious question of what the difference really is between investing and gambling. Two distinguishing characteristics come to mind. First, like naked selling, but in contrast to traditional investing, gambling does not involve ownership of property, other than a contract right. Second, traditional investing generally involves a continuous activity rather than one that is fleeting and sporadic. Another example is life insurance. You cannot purchase a life insurance contract on someone that you don’t have a financial or familial interest in. That’s considered an unseemly form of gambling, and it is illegal. However, in most states you can now purchase an existing life insurance policy from a person who is terminally ill in a so-called viatical arrangement. Given these characteristics, much of what is done naked in the financial markets strikes me as rather an obscene form of gambling rather than the sober act of investing.
For much the same reasons, we can question whether someone not having a financial interest in Greek bonds should be able to gamble on their demise. As such, there should probably be greater limits on this sort of activity, but where to draw the on naked selling is like trying to draw the line on pornography—Supreme Court Justice Potter Stuart wrote: “I don’t know how to define it, but I know it when I see it”.
This is not to say that Mr. Geithner and Mr. Summers and others should be discouraged from giving advice to Europeans, or vice versa, so long as the advice is made without strutting. Like all advice, one can always ignore it or accept from it what is useful even if offered by a hypocrite. After all, isn’t that sort of advice dispensed every day here and in the various other opinion columns of the New York Times? Or, is this sort of opinion giving suddenly disallowed when one holds a position that entails actual responsibility for the consequences of those opinions?
In decrying the gold standard someone in this thread wrote:
“The problem is not the value of our currency but the extent of our debt, national and personal, and the public persona of our politicians that allows it.”
Under a gold standard dangerous amounts of debt, such as those carried by Canada and most of all the United States would not only not be allowed, it would not be possible.
Gold standard does not mean there would be no printing of paper money, but rather that every piece of paper money printed would be backed by something relatively scarce and which holds value (gold, obviously). Therefore, there would be a finite amount of paper that could be printed in the first place, greatly limiting the amount that could be borrowed.
Fiat currency, like that of most nations in the world, are just asking to be devalued through the carrying of debt. It is easy for politicians to borrow with money that isn’t “real” money. We need a gold standard so that politicians cannot have the power to bankrupt our children’s futures to finance our immediate, short term, greedy needs (i.e. cheap Chinese crap from Wal Mart, unnecessary SUVs, unions that make obscene demands, etc.) and wasteful and illegal wars (Afghanistan, Iraq).
Anyway, even without a gold standard (which we’ll probably never see again) you can own a piece of “global currency” by buying physical gold. That’s the only currency that can never be “talked down”, and will always rise against currencies that are.
The Federal Reserve Does NOT Control the Market
The design of the dollar is not at issue, people. Don’t get distracted.
The issue is devaluation, revaluation. That is, the Federal Reserve calling in all of its notes that bear the words “Legal tender for all debts, public and private”.
The U.S. Treasury then cancels all U.S. paper money from 1861 to the present, and orders the Fed to exchange old dollars for new ones at an unfavourable rate.
What is the rate? 2:1? 3:1? Come on! No country had ever called in its currency at that small rate.
Hate to rely on Wikipedia, but its article on the French Franc is a good example:
“In January 1960 the French franc was revalued at 100 existing francs. Inflation continued to erode the currency’s value but at a greatly reduced rate compared to other countries. Only one further major devaluation occurred (in August 1969) before the Bretton Woods system was replaced by free floating exchange rates.”
Telegraph.go.uk, May 26: “US money supply plunges at 1930s pace… The M3 money supply in the U.S. is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history.”
Deflation is suddenly in the news again. It’s a good moment to catch up on a few definitions, as well as strategies on how to beat this rare economic condition.
And who better to ask than EWI’s president Robert Prechter? He predicted the first wave of deflation in the 2007-2009 “credit crunch” and has written on this topic extensively.
We’ve put together a great free resource for our Club EWI members: a 63-page “Deflation Survival Guide eBook,” Prechter’s most important deflation essays. Enjoy this excerpt — and for details on how to read the eBook in full free, look no further than here.
If the dollar’s reserve status ends next year, and the Federal Reserve note is dumped by its holders for some other medium of exchange (or just credit), what becomes of the dollars?
Is the U.S. suddenly flooded with greenbacks? Will the revaluation be 100:1 in 2011 as it was with the Franc in 1960?
One thing’s for sure: the middle class will be utterly ruined. Every 401(k) posting $40,000 in savings will be revalued to $400 new dollars. Only problem is, all the prices will be the same. A new Chevy will still cost $22,000 and a new house will cost $200,000. Only, our savings will be scrapped just as the bills come due.