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Since my last post we have had the announcement that $600 billion new
dollars will be printed over the next six months. A day later we heard from
the ROW (the rest of the world):
China, Brazil and Germany on Thursday criticised
the Fed’s action…
the Brazilian finance minister who was the first to warn of a “currency
war”, said: “Everybody wants the US economy to recover, but it
does no good at all to just throw dollars from a helicopter.”
… the Chinese central bank called unbridled
printing of dollars the biggest risk to the global economy…
Backlash against Fed’s
$600bn easing
FT.com
11/4/10
So in keeping with the theme of Monday's post, "the network
effect," I thought it would be interesting to explore what might happen
to all those "homeless dollars" if "the effect's"
feedback loop were to turn sharply negative. In looking at this I will let
others do the writing for me, posting excerpts of my choosing with the credit
and date at the bottom of each excerpt. This should keep the lively
discussion going. Beginning here, it is no longer me writing...
The "Chartalists"
(and their useful idiots everywhere) claim that the Federal Government simply
spends money into existence, and thus they can do this all they want. Well,
technically true - you can print all the money you want. However, you cannot
control its value except through relative scarcity!
The Bond Market, rather than being a monetary tool as these people claim, is
in fact a fiscal discipline enforcement device.
This is what The Fed with its QE and now QE2 has destroyed.
When Ben Bernanke said "we will not monetize the debt" what he was
saying is that he would not permit that fiscal discipline device to be
removed from the scales of financial balance. He lied - he not only removed
it with QE1, he has now ratified that this discipline function will remain
removed via QE2.
QE is effectively naked emission of currency into the economy by government
spending.
Eventually The Fed ends up being, for all intents and purposes, the entire
government bond market.
At that point the issuance of credit money is no longer backed by anything at
all - it is simply emitted raw, and for every dollar emitted in this fashion
you have both a 100% transmission into prices and a premium applied on your
threat to do more of it.
That's Weimar Germany folks - it is exactly what happened there, and exactly
what will happen here unless Bernanke stops this crap. Since he won't stop on
his own volition it is up to Congress and the people to stop him.
Karl Denninger
11/4/10
* *
How does the Fed print money? It’s easy; they
simply buy bonds from the market and credit the seller’s bank account
with electronic cash that comes out of thin air.
How risky is the Fed’s program of bond purchases? Very.
If inflation takes off, the Fed will have to choose between holding bonds and
letting inflation get worse or selling bonds and going bankrupt in the
process. Since no entity goes down without a fight, the Fed will naturally
hold the bonds and let inflation take off.
Jim Rickards on King World News
11/5/10
* *
His point being, only
Americans and those in contracts governed by American law have to use
dollars. The real deal is international trade and the settlement and clearing
of trade flows among central banks. Right now most of that is done via the
dollar.
Jim Rickards is suggesting that current policy
(creating base reserves to pay over market price for crap and then burying
said crap on the balance sheet at mark-to-fantasy valuation till term, or
playing a game of hide the ball) may lead to that no longer being the case. Which isn't good for the FED, because they really just have
dollars. If nobody wants what you have, you're broke.
JR
11/5/10
* *
People who worry about the dollar's international
primacy are confused about how exactly currencies are used, as well as
exaggerating by how much the US economy benefits from oil sales between, say,
Kazakhstan and South Korea being denominated in dollars.
Yes, international oil trade is generally conducted in US dollars, as is much
other trade in commodities and goods, and the dollar's use in international
transactions is larger than the US economy's share of world trade. But, then,
so is the Swiss franc's share. All that tells you is that most companies and
countries prefer to do business in some currencies (dollars, Swiss francs, euros) than others.
Open any reputable economics textbook and you will find a chapter on the role
of money. They pretty much all say the same thing: money is a unit of
account, a store of value and a medium of exchange. The US dollar is regarded
a reliable store of value - in the same way that gold, sterling or Swiss
francs are - because of the strength of the US economy and the stability of
its institutional support.
But the "medium of exchange" and "unit of account"
elements are just functions of liquidity and convenience. If South Korea buys
oil from Kazakhstan by converting Korean won into US dollars, then Kazakhstan
can either keep the payment in dollars or convert it into Kazakh tenge for domestic use. In any case, all that happens is
a transfer from one bank account outside the US to another one.
For all three reasons of value, exchange and account, the world's central
banks tend to hold large proportions of their foreign exchange reserves in US
dollars - in part because, as in the Kazakhstan example, that's what they
receive a lot of in the first place.
So what does the US gain from the dollar's international role? In theory it
means the US can borrow money more cheaply, receiving a lower interest rate
for dollar-denominated loans or bonds than would otherwise be the case,
because those dollars have to go somewhere. Unfortunately, there is no
evidence that US interest rates would be higher if the dollar were not a
widely held reserve currency - for many years Germany paid lower interest
rates on its bonds than the US, despite the German mark not being
internationally as popular.
The only tangible benefit comes from forgone interest that would have been
paid on US currency - actual notes - held outside the US. According to the
Federal Reserve, about $300bn in hard cash circulates outside the boundaries
of the US, with much of it held by criminals and black-economy participants.
The US economy does gain a benefit from this, but it is only a tiny benefit.
If this hoard were kept in interest-bearing assets, the US economy would be
paying out about $10bn a year in one way or another. Instead, the US economy
is subsidised to that extent. In an economy the
size of the US, that is chicken-feed - the equivalent of £25 a year to
an average full-time wage earner in Britain.
Let's be clear what this does not mean. Just because Kazakhstan has a US
dollar-denominated bank account in London or Basle does not mean that it is
in hock to the US, or that it is forced to buy American assets or exports.
Nor is Kazakhstan subsidising the US economy, at
least not to any appreciable extent.
It certainly does not mean the US somehow gets to import oil for
"free" because it pays for it in dollars - it can't simply print
money to pay for barrels of black stuff. Or, to be theoretically correct,
it could do so but not for long - the value of the US dollar would sink on
foreign exchange markets as a result, and cost the US economy far more.
A little dollars and
sense
Richard Adams
The Guardian (UK)
5/5/03
* *
Why does this article by Richard Adams worry me? Has
he got it right or wrong?
I thought that if oil was paid for in Euros, say, instead of dollars, then
that would encourage most countries to divest themselves of an appropriate
number of "dollar asset reserves" in favour
of "Euro asset reserves", thereby reducing the demand for dollars
and lowering its "value", and increasing the demand for the Euro
and raising its value.
...and in his last paragraph, I thought that the US HAS been "simply
printing money" - maybe not to "get oil for nothing" directly,
but to support US asset prices…
Any other opinions out there?
Sundeck (5/5/03; 03:56:35MT - usagold.com msg#: 102354)
Dollars for oil - how important is it?
* *
Like Sundeck, I was surprised at the Guardian
author's blunt dismissal of the importance of the dollar's being a reserve
currency. Don't get me wrong: I am not for a moment suggesting that
preserving reserve status is the ONLY factor in deciding US foreign policy;
but I do believe that losing reserve status would knock the US quantity of
money wildly out of balance and that the US Treasury knows this.
His argument about the unimportance of oil's being priced in dollars is then
expressed as: '... the "medium of exchange" and "unit of
account" elements are just functions of liquidity and convenience. If
South Korea buys oil from Kazakhstan by converting Korean won into US
dollars, then Kazakhstan can either keep the payment in dollars or convert it
into Kazakh tenge for domestic use.'
It's an argument I've seen before: if I have dollars, and oil is priced in euros, then this makes no difference -- I can
"convert" my dollars to euros before I
buy the oil. And to me, his use of the word "convert" seems to
confuse the "medium of exchange" and "unit of account"
uses of money.
Let me explain what I mean. There are some transactions which are much the
same whether they are carried out by me or by the United States ... give or
take an extra eight zeros on the numbers involved. But there are others where
the large transaction is different in kind from the small.
If I want to buy an ounce of gold, I can go into any coin dealer in the High
Street and buy a Krugerrand for a few per cent over
the intrinsic metal value.
If I want to buy 200 times as much, 200 Krugerrands,
I can telephone Centennial, where I'll pay a smaller percentage premium
because of the quantity I am buying.
If I want to buy 200 times as much again, 40,000 ounces, then everything
changes. "Economies of scale" become less important than
"supply and demand." I am probably buying most of the available
physical gold in the market and need to compete against other major buyers of
physical gold. My purchase will take time and cost more.
If I want to buy 200 times as much again, 8,000,000 ounces, then probably
nobody anywhere has that much on sale. This is 10% of the gold mined
worldwide in a year.
Much the same holds for "converting" from one currency to another
for the purposes of exchange. As a unit of account, I can just use
multiplication: "Your account at present stands at 1,000 pounds
sterling, John, which is the equivalent of 1,500 US dollars." But if I
want to use those dollars as a medium of exchange -- to buy something with
them -- I first have to use my pounds to buy the dollars.
If I want to buy 1,000 pounds-worth of dollars, then first I must come out of
the coin dealer in the High Street -- or I shall wind up with 1,500 Sacagawea
golden dollar coins -- and go into any bank, which will give me Federal
Reserve notes in exchange for Bank of England notes, at the tourist rate. I
can "convert" the currency easily.
If I want to buy a thousand times as much -- 1,000,000 pounds-worth of
dollars -- then I can still convert the currency easily. In foreign exchange
terms, a million pounds is a very modest amount, though large enough for me
to get the forex (rather than the tourist) exchange
rate. My own bank will have an account with USD 1,500,000 in it, which it can
withdraw and pay into a dollar account in my name; at the same time deducting
GBP 1,000,000 from my sterling account. (I should perhaps point out that I
have never actually done this!)
If I want to buy a thousand times as much again -- 1,000,000,000 pounds-worth
of dollars -- then it becomes clear that I am buying dollars, rather than
converting pounds to dollars. The extra demand for dollars that I have
created will increase the price of a dollar. My bank, however, will have no
great difficulty finding that many dollars. The reason for this is that there
is a huge quantity of dollars in the London foreign exchange market ...
because the US dollar is the principal reserve currency. These are the
dollars that European oil users buy so that they can buy oil, and which the
oil producers later use to buy euros so that they
can buy the things they need from the Eurozone.
These dollars are, in practice, never taken back to the US and spent there.
It is this need to find dollars -- in practice, to find banks which have
large dollar deposits which they are willing to sell to me -- that makes the
big difference between a "medium of exchange" and a "unit of
account". And it affects the monetary policy of the owner of the reserve
currency. If there was no longer a demand in London for US dollars to buy
oil, then the banks in London would no longer need large dollar deposits.
Where can these dollars be spent if they cannot be
spent on oil? In the United States.
This is what I meant when I wrote that losing reserve status would knock the
US quantity of money wildly out of balance. The repatriation of the
petrodollars would considerably increase the quantity of money available for
spending in the US ... with an immediate inflationary effect.
How much of an effect, I don't know. Does any of the Folk of the Forum know?
John the
Jute (05/05/03; 16:04:12MT - usagold.com msg#: 102381)
*
*
Enjoyed your post John the Jute - thanks for
painting the circumstances surrounding "medium of exchange" so
clearly. You've got me thinking about repatriation of dollars now.
From first principles, I suspect that the net global "float" of
petrodollars is related to the cumulative total-dollar-expenditure on oil by
all countries per unit time, and to the time-rate at which the dollars are
recycled. On top of this will be the "oil-portion" of
dollar-reserves set aside by all countries to buffer their balance of
payments at any give time. Do away with the
dollar-oil symbiosis and both the "whirlpool" of circulating
dollars and the oil-portion of reserves will look for another home...back in
the U.S of A.
Probably heaps been written about this here and elsewhere in the past, but
how to find a definitive and succinct treatise???
Sundeck (5/6/03; 03:46:21MT - usagold.com msg#: 102414)
*
*
Good post, John the Jute! Very nice way of
explaining the relativeness of scale.
Regarding your musings re: dollar repatriation, it can be a tough one to
answer. The obvious take is of course as you express, that without use for
dollars, they would simply find their way back to US shores, and help drive
(hyper-)inflationary pressure. Yet, if you will permit me also to think out
loud for a moment ;->, perhaps we can take a look at this currency as the
derivative instrument it effectively is, and then try to figure out its
ultimate fate. Let's view it specifically as a kind of call option; one that
commands a premium as a price paid for its exercise-ability at any time for
any of the goods or investment media that exchange in the currency's universe
(or the settlement of debts). This amounts effectively to a liquidity
premium.
This premium gives it a trade value in its own
right, and as such, as long as there is a market that believes in the
currency's stability, the currency itself trades on its own merits. Not
unlike futures and options. And just as many of these contract instruments
get exercised for whatever underlying asset they represent, most are simply
exchanged among speculators and hedgers trying to benefit from movements in
the contract price, never actually intending to exercise or take delivery.
The paper remains viable so long as the holder is confident that the next guy
believes the contract is generally good.
While many holders of a currency intend to "exercise" the currency
for real things, especially those in the currency's principal use domain,
most of these currency units are likewise exchanged among speculators and
hedgers (including all those private individuals, who own dollar denominated
savings and investment accounts overseas), who are only trying to profit
(speculate) from the currency's movement, or preserve (hedge) their own
currency's seemingly endless trek of depreciation vis-a-vis this US dollar. Most of these have no intention
whatsoever of "taking delivery" of things with these currency
instruments.
So, what happens to the dollars they sell? For these average citizen types,
the banks that held their accounts buy them. They then either sell them to
another institution or may enter the foreign exchange markets themselves
(depending on how they are regulated). They also may hold some back,
depending on how they wish to balance their own portfolio. So, now these
dollars that have not ended up remaining in reserves at these banks have
entered the foreign exchange markets putting upward pressure on the currency
of the seller, and downward pressure on the dollar.
Historically, the paradigm was to do as little of this as was necessary in
order to keep the seller's currency "competitively" weak (among
other reasons). As the influence of export to the US wanes (tapped out US
consumer + growing size and sophistication of other markets), the need to
keep one's currency weak vs. the USD, so as to compete for this market also
wanes. Instead the stabilizing and strengthening of one's currency becomes
more important (thereby encouraging borrowing in the local capital markets),
and allowing local workers to enjoy a bit more the fruit of their labors,
instead of always helplessly watching the value of their labors get sucked
into the vortex of a dollar-dominant currency paradigm.
So, do these orphaned dollars eventually come home to roost in the US
domestic markets? We will be told that. The media will wring their hands over
anecdotal wake-up stories like Arabs buying up vast tracts of property, and
how "they" will soon "own" the country... (This has been
going on for ages in the U.K., as you're aware... every other lovely English
manor is seemingly owned by some Saudi mogul...) We experienced the same with
the Japanese in the 80's (Rockefeller Center...). Hence part of the political
response will be to enact capital flow restrictions. But anecdote amounts to
chump change, in a purely financial evaluation.
The really big holders of dollars are the central banks. What they do with
their reserves will make or break. Their influence over other banks and
financial institutions will also largely dictate the destiny of these
dollars. In the gold standard, the currency acted as something of a title
deed for a specific good at a specific price. Central Banks could and did
take these "receipts" and claim gold from each other. In this day,
there is nothing for CBs to "claim," as these dollars are no longer
"title deeds." Rather, they are like non-expiring calls for things
on demand, at the variable and going price. CBs are likely to neither a) dump
them on the forex markets, as this would simply
devastate the currency, and risk dreaded instability globally -- something
banks are NOT prone to do; or b) race to our markets to try and buy things
(like gold), as this would also be fruitless, since a market revaluation for
this action would instantly make gold unpriceable,
and it would not even be offered. Again, why engender the instability?
Without a certain weapon in the arsenal of the euro's design, the foreign CBs
would indeed be over a barrel. Previously they were forced to evermore be on
a dollar standard, since they would realistically only opt for this as the
lesser of two evils. The alternative of saying no to the dollar at that time, would only have meant a return to a gold standard,
and the politically unacceptable bone-crushing depression that would follow
(as well as instability). In 1979, the European CBs began marking their gold
reserves to market. This one act demonstrated immense foresight, and would
provide the escape valve from the rock-and-hard-place no-win choices between
eternal dollar support, or global depression.
Quietly, the euro-system banks have been divesting themselves of dollars.
Collectively they retain something like 211 bn. currently. (This is not a large amount relatively speaking, but consider
fractional reserve lending, and quickly we perceive the immesity
of euro-dollar infestation.) This decline in dollar holdings is desired to
take place concurrently with a rise in the price of gold to offset this. Spoonfeeding dollars into the system won't crash it, as
well a slow commensurate rise in gold. The discipline that they have thus far
maintained is indicative of the tectonic movement of the geopolitical strata.
Ideally there will be no rash or even discernible activity. The perfect
result is to simply keep shifting these plates until we wake up one day and
the world has been remapped. Reality of course is that there are points of
friction that cause tremors of unpredictable frequency and proportion all
along the way. At some point critical mass will be reached, and the dollar
contract markets for gold will no longer be able to contain its price as
market perception on a large enough scale discounts paper parity with the
real metal accordingly. It is at this juncture that the gold reserves of the
CBs will provide immense expansionary leeway, as they are for a season
revalued constantly upward. This bona fide liabilityless
reserve base will make the ECB member banks the premier lending institutions
to fuel the economic growth of the euro zone, and those align themselves with
it.
In this respect it is important to curry the cooperation of the more maverick
dollar holders, like China and Russia, as their track record of unpredictablility, may lead them to use their dollars as
weapons... (And don't think that their dollar debt is of much concern to
them, as they know all too well that those totals can be reduced in real
terms to pocket change, if such a hyper-inflation were to manifest.) Indeed
as far as the books are concerned, this one use for these dollars overseas --
the repayment of dollar debts -- would actually provide a contractionary
effect as these receivables are cleared from the balance sheet... One reason
why Goldendome's sought after interest rate hikes
can't happen... (gotta
keep expanding..., and making it more expensive to borrow, isn't gonna help matters...) [Goldendome,
there is much to this discussion, and I would like to provide my opinion in
response to you -- as I used to think exactly the same... I likely won't have
time, but the Trail provides some excellent discussion along these lines...]
The strategy of the level-headed is to slowly remap the globe financially.
This involves as much as possible a SLOW transformation from one currency
paradigm to Another. These dollars en masse will not return home. They were
born in exile and will die in exile. We will hyperinflate
ourselves, and won't need help from overseas...
Take care John the Jute,
miner
"Homeless Dollars"
miner49er
USAGold Hall of Fame
5/6/03
*
*
Gosh, what a thorough response, miner! You've
clearly thought about this matter in considerable detail. Thank you for
sharing the results of your thoughts with me.
John
John the Jute (05/06/03; 11:25:50MT - usagold.com msg#: 102432)
miner49er @ 102429 -- Homeless Dollars
*
*
Miner-man,
As I read your post I was held in rapt admiration. So many folks stubbornly
live in the past, but when a few guys like you (y'all know who you are) can
lay it out so clearly for general consumption, surely the future for everyone
is brought forward by *at least* a few days.
:-D
Thanks for your contribution toward making the world, in aggregate, a more
rational place one post at a time.
Gold. You know the drill. --- Ari
Aristotle (05/06/03; 13:54:06MT - usagold.com msg#: 102444)
*
*
Aristotle (05/07/03; 18:17:02MT - usagold.com msg#:
102497)
TRUTH!
"*Money* in its purest form is a mental association of values in
trade...a concept IN MEMORY...NOT A REAL ITEM!!! Understand money and you
understand Gold!" --- Belgian
Amen. And further:
"The exhorbitant growing confetti-creation,
policies... NEED TO BECOME DETERMINED BY WEALTH *OUTSIDE* THIS OFFICIAL MONEY
REALM!" --- Belgian
Amen. Hence the primary universal function of global physical Gold comes into
view -- an asset for savings that lets its owner know the true size and shape
of his wealth.
True Wealth. Get
you some. --- Ari
*
*
Aristotle (05/07/03; 20:44:46MT - usagold.com msg#:
102502)
omegaman -- money is also known as a time value
judgment
Sure!
The key point to recognize is that it's the multitude of goods prices that
we're exposed to along with our various wage-level associations that we hold
in our minds which gives money a functional *unit valueness*
even though it's not a standard weight or measure of any single physical
thing. Physicality be damned. As a *nominal* (mental
value) measuring unit it serves perfectly as the lubricating *unit of
account* in the ever-adjusting network of purchase orders, loan contracts and
labor agreements which all form the backbone of our economy and monetary
system.
To deny ourselves that pure nominal form for our monetary system is to deny
that we are human with warts and all. Although Gold has no right place *IN*
the monetary system, it is by natural selection the nearest neighbor living
in the real *OUTSIDE* world that can act as a universal translator to judge
and announce *without bias(!!)* the
temporal values of the many monetary pricing units being wiggled and jiggled
around *inside* the "gamey" system.
Only if and when *observed* by Gold like this can we begin to call it a
*perfect* monetary System for our admittedly imperfect world. Don't worry,
we'll get there from here on that vehicle -- even if only by default as every
other sort of vehicle will break down during the journey.
Gold. Rolling rolling rolling along like a song. --- Ari
*
*
Aristotle (05/07/03; 21:10:04MT - usagold.com msg#:
102506)
steady -- it's VERY good
to know the true size and shape of your wealth
I was deep in your vest pocket up until you offered this extreme:
"gold [...] is constant . [...] its value doesnt ever change all that is changing is the amount of
fiat one gets for it."
Wellllllll,,,, I suppooooose we *could* accept Gold as the fixed-value
center of the relative value universe. But what's wrong with accepting that
its value in human affairs could in fact climb even higher than it is
relative to other real things like butter and bread and eggs as we put it to
this special modern (ancient!!) usage we're describing?
You went onward to ask and bemoan:
"isnt it unfair that
some group of bankers can meet and make your life worthless by devaluing your
capital? That simply is not fair, not honest, most
importantly not cool."
Take heart! If we can finally rid ourselves of the paperGold games that are played in parallel with money
games, they can then only make your life worthless if you let them. That is,
if you hold your primary savings in the form of money instead of Gold.
It doesn't take much training to fall into the excellent rhythm of Gold
savings as the harmony to accompany your monetary melody of earnings and spendings. Billions of little easterlings
and southrons are in graceful step even as we
westerners only begin to hearken to the distant hum.
Gold. Get you some.
--- Aristotle
*
*
Sincerely,
FOFOA
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