(This
originally appeared in the Daily
Reckoning on June 30, 2009.)
http://dailyreckoning.com/how-to-establish-and-international-currency/
Citizens
can be easily coerced into using the government’s currency. Usually it
is enough to demand that taxes be paid in that currency. Today, most
governments make it illegal to use a foreign currency within their borders.
People
in other countries are beyond such simple mechanisms of control. For an
international currency, there must be reasons to use the currency
voluntarily.
The
best currency is the one that is most stable in value. Historically, the
premier international currencies, whether the US dollar after World War II,
the Dutch guilder in the seventeenth century, or the Athenian owl in the
fourth century BC, were those reliably pegged to gold. Gold has been the
superlative monetary standard for thousands of years.
Even
after the US dollar left the gold standard in 1971, it remained the most
stable currency in the world, which allowed it to maintain its prominence up
to the present day. There was no better alternative.
During
the 19th century, the US was considered an emerging market. The premier
international currency was the British pound.
In
1914, the British pound had been pegged to gold (with brief lapses) for 233
years. However, the beginning of World War I tossed all the European powers
into turmoil, including Britain. The pound’s link with gold was broken.
People in Europe looked for a reliable store of their financial assets. They
observed that the United States was untroubled by war and had by then a long
history of gold-linked currencies and protection of property rights.
In the
1930s, all European governments devalued their currencies again. The United
States did as well, in 1933, but the dollar remained pegged to gold
afterwards while most European currencies (and the yen) floated. World War II
cemented the transfer of financial prominence to the US To put it quite
simply: the US Treasury bond – denominated in gold-linked dollars
– was the most reliable store of value in the world.
Financial
theorists divide the world of investments into two asset classes: the
risk-free asset, and all other risky assets. With currencies mismanaged
constantly by central banks, nothing today even approaches the ideal of a
“risk-free asset.” In marketing-speak, a vast demand goes
unsatisfied.
How
could China establish an international currency? I predict it will happen
when a person anywhere in the world is able to say: The Chinese government
bond is the most reliable store of value in the world – the closest
approximation to the “risk-free asset.”
Obviously, we are not there yet. How could the Chinese government promote
this process?
The
Chinese yuan would have to be reliably stable in value. In the past, this has
always meant a gold standard. Fiat floating currencies managed by bureaucrats
are never very reliable, and have a nasty tendency of disappearing
altogether. In the past, the international currency was always the one that
remained pegged to gold, while the alternatives sank into chaos and
devaluation.
Chinese
authorities may claim that their floating currency managers are better than
the US or European floating currency managers, but nobody would believe them.
The
yuan would have to be a reliably independent alternative to the dollar, euro
or yen. Since 1950, the yuan has had one form or another of a dollar peg. It
is completely pointless to use yuan instead of dollars, if the yuan is pegged
(tightly or loosely) to the dollar. The desire for stable exchange rates is
entirely reasonable. However, the Chinese government has not established any
record of being able to manage an independent currency.
Simply
having a floating currency is not enough. Both the euro and yen float, but
they are not really independent of the dollar. Monetary policies at all three
central banks are eerily similar. The Bank of Japan, in particular, seems to
be subject to political pressure from the United States. If the dollar were
to fall in value considerably, it is likely that the euro and yen would also
be guided lower to avoid disadvantages to trade. They would all decline
together, if not quite at the same speed.
To put
it a slightly different way: Even though people are getting nervous about the
reliability of the US Treasury bond, neither the German government bond nor
the Japanese government bond are clearly better.
If
China adopted a gold standard policy, this would establish true independence
from the dollar. However, if the dollar fell in value considerably, then the
yuan/dollar foreign exchange rates could change dramatically. Instead of
about 7:1 today, perhaps it could go to 1:1 in the future. This would be due
to a dollar fall, not a rise in the yuan.
Many
countries could not tolerate such a situation. Switzerland tried, in the
early 1970s, but the trade consequences were too great. It would be quite
unpleasant for China as well. However, China already has significant trade
advantages, so even large forex moves like this could be withstood.
The
Gulf States – and Russia to some degree – have an even larger advantage
in this regard. They have no real competition for their primary export, crude
oil.
A
credible military remains, unfortunately, an important component of political
independence, and consequently currency independence. The US is not likely to
hand over its mantle of world leadership without complaint. While hostilities
are unlikely, certain political pressures by the US can be imposed upon
governments who, in schoolyard terms, seem like they can be pushed around.
Japanese leaders remember the military exercises the US Navy conducted in
Tokyo Bay in 1989, a rather blatant reminder of the Black Ships of 1853.
Russia is well aware of political incursions in the former Soviet republics,
and even Germany still hosts enormous US military bases.
China is establishing itself as a military power. An alliance with Russia,
and acquiescence among the other Asian states, would help establish real
political independence.
There
remains a little problem of exactly how to manage a gold standard system.
This is not very difficult, but the Chinese monetary authorities apparently
have not yet mastered the basic concepts involved. Fortunately, there is now
a handbook on these subjects – Gold:
the Once and Future Money (2007), which is available in a Chinese
edition.
The US
dollar is, quite frankly, not a very good currency. It would not be difficult
to develop a better alternative – a currency pegged to gold. Once the
Chinese authorities had demonstrated that they can manage such a system,
people everywhere would flock to yuan-denominated assets. Lenders would
demand that their loans be denominated in reliable, gold-linked yuan.
Shanghai would become the financial capital of the world.
Regards,
Nathan Lewis
for The Daily Reckoning
* * *
It's
Goldman Sachs! Those guys really are scum. This article
gets at maybe 0.1% of their nefarious activities.
The
first thing you need to know about Goldman Sachs is that it's everywhere. The
world's most powerful investment bank is a great vampire squid wrapped around
the face of humanity, relentlessly jamming its blood funnel into anything
that smells like money. In fact, the history of the recent financial crisis,
which doubles as a history of the rapid decline and fall of the suddenly
swindled-dry American empire, reads like a Who's Who of Goldman Sachs
graduates.
http://www.correntewire.com/great_american_bubble_machine_0
More
fingers are pointing at Goldman regarding their recent market-propping
efforts.
This
is a nice post by Karl Denninger, translating some ZeroHedge-speak into
layman's terms:
Denninger on ZeroHedge on Goldman
Joe
Saluzzi of Themis Trading saying the same thing:
ZeroHedge: Joe
Saluzzi
I'm
sure you didn't miss the kerfuffle on CNBC, where Rick Santelli, Larry Levin
(trader), and guest host (???) Wilber Ross (???) discovered that they all
agreed that the U.S. stock market is being propped up by official
intervention.
Market intervention goes mainstream on CNBC
Some
people think this particular event was meaningful: that it signaled, to the
great masses of people who wait to be told what to think, that it was now OK
to recognize official intervention in asset markets. I mean, would you rather
side with Steve Liesman or Wilbur Ross?
Background info on High Frequency Trading from Themis Trading
* * *
Tax
hikes in 25 states: Paul Krugman wrote recently about fifty Herbert Hoovers. He says:
But
even as Washington tries to rescue the economy, the nation will be reeling
from the actions of 50 Herbert Hoovers — state governors who are
slashing spending in a time of recession, often at the expense both of their
most vulnerable constituents and of the nation’s economic future.
These
state-level cutbacks range from small acts of cruelty to giant acts of panic
— from cuts in South Carolina’s juvenile justice program, which
will force young offenders out of group homes and into prison, to the
decision by a committee that manages California state spending to halt all
construction outlays for six months.
Of
course this is baloney. Herbert Hoover was not a penny-pincher. He spent
money like mad! Then -- afterwards -- he tried to "balance the
budget" by increasing taxes. Roosevelt did the same thing, though not
quite so dramatically. It's the tax hiking that was Hoover's big mistake.
That tax-hiking was motivated by the deficits that appeared in large part due
to the big spending, so in some sense the spending was a mistake too.
CS Monitor: Tax Hikes in 25 states
Apparently,
the idea of a national VAT tax is getting more traction too. Hoowee that
would suck. State and local sales taxes alone are over 10% in numerous
places.
The
funny thing is, I'm sure Paul Krugman knows all this. That's why I say he's a
hack. A hack for the Keynesian Establishment, the Democratic Party, academic
economists in general, and any other influential group that is in need of
hacks.
* * *
The
Medical Scam: I think you have to live in another
country to understand that the U.S. medical system is a scam. Fred Reed, who
lives in Mexico -- and is a regular columnist for the American Conservative
-- calls a spade a spade:
Ah!
But in America, the means of production own the government. Inverted
socialism it is. Here is a far better thing. If you are a means of
production, anyway.
Example:
Bausch & Lomb makes ophthalmic salt water, useful in treating corneal
edema, under the trade name “Muro.” In the Yankee Capital, it
costs $23 for 1.8 ounces; in Wincherster, Va., $19; in Farmacias Guadalajara,
about $6. The identical product. The generic here, Hipoton, comes in at about
$3.
You
could call it price-fixing, but I prefer to think of it as governmental
regulation of prices. It is perfectly legal, because Big Pharma owns the
government.
I
believe that Econ textbooks say that price controls haven’t worked from
Diocletian on. Wrong. They work splendidly. Ask Bausch & Lomb. If you
could make over twenty-two bucks on a dime’s worth of salt water,
wouldn’t you be in favor of governmental interference in the economy?
Let me
explain medicine briefly. It’s an unholy scam. Here in Mexico my wife
occasionally gets ear infections. At any pharmacy, we pick up Amoxicillin,
250mg three times a day for ten days. Six bucks.
Recently
we were staying in Maryland with friends, and she got an ear ache.
Amoxicillin is by prescription only in the US, which means that doctors have
a monopoly on ear aches. It was Friday evening. It was either agony until
Monday or go to one of those mall-based walk-in clinics, which wanted $150
for the appointment and prescribed $78 in medicines.
It’s
a scam, pure and simple. Above the level of county government, the US is as
corrupt as Mexico could ever be, and it’s mostly legal. Yes, I know all
the who-struck-John from doctors about engendering resistant bugs. Funny. Any
pharmacist in Thailand will tell you the same thing a US doctor
will—Amoxicillin, take all ten days’ worth, etc. Scam.
http://www.fredoneverything.net/Damocles.shtml
Nathan
Lewis
Nathan
Lewis was formerly the chief international economist of a leading economic
forecasting firm. He now works in asset management. Lewis has written for the
Financial Times, the Wall Street Journal Asia, the Japan Times, Pravda, and
other publications. He has appeared on financial television in the United
States, Japan, and the Middle East. About the Book: Gold: The Once and Future
Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is available at
bookstores nationwide, from all major online booksellers, and direct from the
publisher at www.wileyfinance.com or 800-225-5945. In Canada, call
800-567-4797.
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