I’d imagine there’s a growing number of vaxed people beginning to regret that choice 
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- #10,162
- Nov 11, 2021 3:14am Nov 11, 2021 3:14am
- | Commercial User | Joined Dec 2014 | 14,165 Posts
https://www.lawnow.org/the-colour-of-the-law/
The Colour of the Law
SEPTEMBER 5, 2018 BY PETER BOWAL AND DEVON SLAVIN
Reading Time: 6 minutes
https://www.lawnow.org/wp-content/up...r4-300x213.jpg
Colour is almost always contrasted with something else in law; where the ‘something else is right, and the ‘colour’ is blackened out as a legal non-being.
Gray, C.B., “The Colour of Law: Law is Constituted from the Colour of Right,” (2008) Les Cahiers De Droit, 49:3 at p. 393
Law is infused with colour. Indeed, the colour gives law its character. This article describes several ways colour appears in the law, namely concepts of colour and colourability, blackmail, legal blacklining, blue-pencil severance and red circling.
Colour and Colourability
Under the common law, the term colour of law refers to the mere semblance of a legal right. That is to say that one’s action taken under the colour of law adjusts, or colours, the law to the circumstance although the action may technically contravene the law. To ‘colour’ one’s actions are to characterize or bend them toward legality.
From legal defences and justifications in crimes to drafting, revising and enforcing contracts, the foundations of law are rooted in colour.
For example, for a legislature to act ‘colourably’ is to essentially act outside its legal jurisdiction but to seek to paint its actions as legal. Variations of the colour and colourability theme include the colour of the office, the colour of the title, and the colour of the right. Technical legal propriety is in question under each of these categories. Persons assert ‘colour’ as an explanation or defence when the legality of their action is in issue or is on the margins.
Where public official acts beyond her power, she may have honestly believed or was told that her actions were within her power. She acted under the pretence or colour of office. The merits of her official position and her belief that she was acting within her power colour her actions as legitimate within the scope of her office.
Colour of title occurs where someone with an informal or tenuous claim to legal title (ownership) to land asserts ownership rights in the land. For example, a squatter on land for a long, continuous period makes a claim to the property in adverse possession. One holding mere colour of the title holds the appearance or semblance of a legally enforceable right of possession or ownership. Documentation plays a critical role in land ownership. Defective or incomplete documentation usually means one enjoys the only the colour of title to the land.
The colour of the right is the most common colour category. It is a way of saying, “I honestly thought I had the right to . . ..” It can be used defensively as an explanation or excuse to avoid a legal penalty. One’s action, although wrongful, was due to an honest but mistaken belief that one had the right to act in that way.
The most common definition of the colour of right is “an honest belief in a state of facts which, if it existed, would be a legal justification or excuse”: R v Johnson (1904), 8 CCC 123 (Ont HCJ).
This criminal defence is based on the honest belief of the accused that, at the time the offence was committed, she had a colour of right. The test is a subjective one where the belief in the erroneous facts must be an honest belief but not necessarily a reasonable one. The accused must only prove there is an “air of reality” to her mistaken belief in facts. So it would be a valid colour of right defence if one took property from a location at the request of someone who she trusted and honestly believed to own that property.
In Canada’s Criminal Code, the colour of right is a defence where one forcibly enters a land that is in the actual and peaceable possession of another (section 72) or commits theft of property (sections 322 and 326) or fraudulently uses credit card data or a computer (sections 342 and 342.1).
Section 429(2) of the Criminal Code states that “no person shall be convicted of an offence under sections 430 to 446 where he proves that he acted with legal justification or excuse and with the colour of right.” The key to the colour of the right defence is that if the mistaken belief were true, the action would be legal. Note that one might be mistaken about critical facts, but “ignorance [or mistake] of the law by a person who commits an offence is not an excuse for committing that offence” (section 19).
Blacklining
In addition to transmuting what is illegal to render it legal, the colour spectrum extends to the process of revising formal legal documents. Blacklining is the process by which a document is revised between lawyers or parties in a negotiation. A blackline document or legal blackline uses word processing software to compare originals to revised copies of documents. All revised drafts are retained so the historical integrity of the changes, including who made them and why can be reviewed in the future. This is where it is important to preserve original documents.
Blackmail
Blacklining is the process by which a document is revised between lawyers or parties in a negotiation. Colour also comes into play in a more sinister context: blackmail. In Canada, the term ‘blackmail’ is actually not used. Rather the crime is called extortion and it is related to theft and robbery because the crime focuses on intimidation and interference with freedom of choice. Blackmail and extortion involve issuing a threat to compel someone to act against one’s will and to give up money or property. Typically blackmail involves a threat to reveal embarrassing or damaging facts about a person unless compensated in some way.
Section 346 (1) of the Criminal Code states:
Everyone commits extortion who, without reasonable justification or excuse and with intent to obtain anything, by threats, accusations, menaces or violence induces or attempts to induce any person, whether or not he is the person threatened, accused or menaced or to whom violence is shown, to do anything or cause anything to be done.
Blue Pencils
Colour is also invoked by judges who order blue-pencil severance. This is a common law doctrine where a court finds parts of a contract to be unenforceable, but the rest of the contract to be enforceable. The rule allows the legally-valid terms of the contract to operate despite the severance of the offending unenforceable provisions. The remaining version must represent the original meaning. For example, blue-pencil severance would never delete the word “not” to alter the contract meaning.
The doctrine was created by the English House of Lords in Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535. Described in the 1920 English case of Attwood v. Lamont, blue-pencil severance is “effected when the part severed can be removed by running a blue pencil through it.” Bastarache J. described this form of severance in the 2004 Supreme Court of Canada decision of Transport North American Express Inc. v New Solutions Financial Corp. at para. 57:
Under the blue-pencil test, severance is only possible if the judge can strike out, by drawing a line through, the portion of the contract they want to remove, leaving the portions that are not tainted by illegality, without affecting the meaning of the part remaining.
Blue-pencil severance is reserved for rare cases where the text removed is clearly severable, trivial, and not part of the main purpose of the contract. If the nature or core of the agreement is altered by the removal, then the illegal clause is not a candidate for severance and the entire contract is void.
To ‘colour’ one’s actions are to characterize or bend them toward legality.
The blue coloured test was applied in 2009 in Shafron v KRG Insurance Brokers where the question was whether the court should sever text in a restrictive covenant to resolve ambiguity around the precise meaning and boundaries of the “Metropolitan City of Vancouver.” The Court concluded that blue-pencil severance could not be applied to change the ambiguous wording because it was not a mere trivial part of the covenant agreed upon by the two parties. There also was doubt the parties would have agreed to change the wording without varying any other terms of the contract or otherwise “changing the bargain.”
The law has never explained the doctrine’s emphasis on the colour blue. And the test is blue-pencil, not necessarily blue line. Non-photo (non-repro) blue is a common tool used in the graphic design and print industry. It is a particular shade of blue that cannot be detected by cameras or copiers. Artists lay down sketch lines without the need to erase them after inking. Likewise, judges use the blue-pencil test to rectify or alter contracts without substantive detection.
Red Circles
In contrast, to blue-pencil severance, red circling is not a legal term. It refers to a human resource practice of pay conservation. Salaries of employees compensated more than a colleague doing equivalent work are circled and frozen until the colleague’s pay catches up.
Red circling can arise during mergers and acquisitions when employees are transferred into a new employer. The new employer cannot reduce the salaries of these recently acquired employees to bring them into line with their peers. Red circling can freeze status and promotion as well.
Conclusion
Colour and the law may seem to be completely unconnected paradigms. However, while it may not be the full palette, there is colour in the law. From legal defences and justifications in crimes to drafting, revising and enforcing contracts, the foundations of law are rooted in colour.
https://www.lawnow.org/wp-content/up...7978-70x70.jpg
About Peter Bowal
Peter Bowal, formerly of the University of Calgary, is Visiting Professor of Business Law at Mercer University in Macon, Georgia.
The Colour of the Law
SEPTEMBER 5, 2018 BY PETER BOWAL AND DEVON SLAVIN
Reading Time: 6 minutes
https://www.lawnow.org/wp-content/up...r4-300x213.jpg
Colour is almost always contrasted with something else in law; where the ‘something else is right, and the ‘colour’ is blackened out as a legal non-being.
Gray, C.B., “The Colour of Law: Law is Constituted from the Colour of Right,” (2008) Les Cahiers De Droit, 49:3 at p. 393
Law is infused with colour. Indeed, the colour gives law its character. This article describes several ways colour appears in the law, namely concepts of colour and colourability, blackmail, legal blacklining, blue-pencil severance and red circling.
Colour and Colourability
Under the common law, the term colour of law refers to the mere semblance of a legal right. That is to say that one’s action taken under the colour of law adjusts, or colours, the law to the circumstance although the action may technically contravene the law. To ‘colour’ one’s actions are to characterize or bend them toward legality.
From legal defences and justifications in crimes to drafting, revising and enforcing contracts, the foundations of law are rooted in colour.
For example, for a legislature to act ‘colourably’ is to essentially act outside its legal jurisdiction but to seek to paint its actions as legal. Variations of the colour and colourability theme include the colour of the office, the colour of the title, and the colour of the right. Technical legal propriety is in question under each of these categories. Persons assert ‘colour’ as an explanation or defence when the legality of their action is in issue or is on the margins.
Where public official acts beyond her power, she may have honestly believed or was told that her actions were within her power. She acted under the pretence or colour of office. The merits of her official position and her belief that she was acting within her power colour her actions as legitimate within the scope of her office.
Colour of title occurs where someone with an informal or tenuous claim to legal title (ownership) to land asserts ownership rights in the land. For example, a squatter on land for a long, continuous period makes a claim to the property in adverse possession. One holding mere colour of the title holds the appearance or semblance of a legally enforceable right of possession or ownership. Documentation plays a critical role in land ownership. Defective or incomplete documentation usually means one enjoys the only the colour of title to the land.
The colour of the right is the most common colour category. It is a way of saying, “I honestly thought I had the right to . . ..” It can be used defensively as an explanation or excuse to avoid a legal penalty. One’s action, although wrongful, was due to an honest but mistaken belief that one had the right to act in that way.
The most common definition of the colour of right is “an honest belief in a state of facts which, if it existed, would be a legal justification or excuse”: R v Johnson (1904), 8 CCC 123 (Ont HCJ).
This criminal defence is based on the honest belief of the accused that, at the time the offence was committed, she had a colour of right. The test is a subjective one where the belief in the erroneous facts must be an honest belief but not necessarily a reasonable one. The accused must only prove there is an “air of reality” to her mistaken belief in facts. So it would be a valid colour of right defence if one took property from a location at the request of someone who she trusted and honestly believed to own that property.
In Canada’s Criminal Code, the colour of right is a defence where one forcibly enters a land that is in the actual and peaceable possession of another (section 72) or commits theft of property (sections 322 and 326) or fraudulently uses credit card data or a computer (sections 342 and 342.1).
Section 429(2) of the Criminal Code states that “no person shall be convicted of an offence under sections 430 to 446 where he proves that he acted with legal justification or excuse and with the colour of right.” The key to the colour of the right defence is that if the mistaken belief were true, the action would be legal. Note that one might be mistaken about critical facts, but “ignorance [or mistake] of the law by a person who commits an offence is not an excuse for committing that offence” (section 19).
Blacklining
In addition to transmuting what is illegal to render it legal, the colour spectrum extends to the process of revising formal legal documents. Blacklining is the process by which a document is revised between lawyers or parties in a negotiation. A blackline document or legal blackline uses word processing software to compare originals to revised copies of documents. All revised drafts are retained so the historical integrity of the changes, including who made them and why can be reviewed in the future. This is where it is important to preserve original documents.
Blackmail
Blacklining is the process by which a document is revised between lawyers or parties in a negotiation. Colour also comes into play in a more sinister context: blackmail. In Canada, the term ‘blackmail’ is actually not used. Rather the crime is called extortion and it is related to theft and robbery because the crime focuses on intimidation and interference with freedom of choice. Blackmail and extortion involve issuing a threat to compel someone to act against one’s will and to give up money or property. Typically blackmail involves a threat to reveal embarrassing or damaging facts about a person unless compensated in some way.
Section 346 (1) of the Criminal Code states:
Everyone commits extortion who, without reasonable justification or excuse and with intent to obtain anything, by threats, accusations, menaces or violence induces or attempts to induce any person, whether or not he is the person threatened, accused or menaced or to whom violence is shown, to do anything or cause anything to be done.
Blue Pencils
Colour is also invoked by judges who order blue-pencil severance. This is a common law doctrine where a court finds parts of a contract to be unenforceable, but the rest of the contract to be enforceable. The rule allows the legally-valid terms of the contract to operate despite the severance of the offending unenforceable provisions. The remaining version must represent the original meaning. For example, blue-pencil severance would never delete the word “not” to alter the contract meaning.
The doctrine was created by the English House of Lords in Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535. Described in the 1920 English case of Attwood v. Lamont, blue-pencil severance is “effected when the part severed can be removed by running a blue pencil through it.” Bastarache J. described this form of severance in the 2004 Supreme Court of Canada decision of Transport North American Express Inc. v New Solutions Financial Corp. at para. 57:
Under the blue-pencil test, severance is only possible if the judge can strike out, by drawing a line through, the portion of the contract they want to remove, leaving the portions that are not tainted by illegality, without affecting the meaning of the part remaining.
Blue-pencil severance is reserved for rare cases where the text removed is clearly severable, trivial, and not part of the main purpose of the contract. If the nature or core of the agreement is altered by the removal, then the illegal clause is not a candidate for severance and the entire contract is void.
To ‘colour’ one’s actions are to characterize or bend them toward legality.
The blue coloured test was applied in 2009 in Shafron v KRG Insurance Brokers where the question was whether the court should sever text in a restrictive covenant to resolve ambiguity around the precise meaning and boundaries of the “Metropolitan City of Vancouver.” The Court concluded that blue-pencil severance could not be applied to change the ambiguous wording because it was not a mere trivial part of the covenant agreed upon by the two parties. There also was doubt the parties would have agreed to change the wording without varying any other terms of the contract or otherwise “changing the bargain.”
The law has never explained the doctrine’s emphasis on the colour blue. And the test is blue-pencil, not necessarily blue line. Non-photo (non-repro) blue is a common tool used in the graphic design and print industry. It is a particular shade of blue that cannot be detected by cameras or copiers. Artists lay down sketch lines without the need to erase them after inking. Likewise, judges use the blue-pencil test to rectify or alter contracts without substantive detection.
Red Circles
In contrast, to blue-pencil severance, red circling is not a legal term. It refers to a human resource practice of pay conservation. Salaries of employees compensated more than a colleague doing equivalent work are circled and frozen until the colleague’s pay catches up.
Red circling can arise during mergers and acquisitions when employees are transferred into a new employer. The new employer cannot reduce the salaries of these recently acquired employees to bring them into line with their peers. Red circling can freeze status and promotion as well.
Conclusion
Colour and the law may seem to be completely unconnected paradigms. However, while it may not be the full palette, there is colour in the law. From legal defences and justifications in crimes to drafting, revising and enforcing contracts, the foundations of law are rooted in colour.
https://www.lawnow.org/wp-content/up...7978-70x70.jpg
About Peter Bowal
Peter Bowal, formerly of the University of Calgary, is Visiting Professor of Business Law at Mercer University in Macon, Georgia.
- #10,163
- Nov 11, 2021 3:26am Nov 11, 2021 3:26am
- | Commercial User | Joined Dec 2014 | 14,165 Posts
DislikedI’d imagine there’s a growing number of vaxed people beginning to regret that choiceIgnored
Nice to have you post here. The bigger issue for citizens that live in North America is the fact that propaganda trumps truth and balance.
Read the post about the color of the laws and it becomes clear what the real problems are and what should or needs to be done to have real game-changing solutions.
Laws only work when they are followed not when they are ignored. What are your thoughts on that?
Colour and Colourability
Under the common law, the term colour of law refers to the mere semblance of a legal right. That is to say that one’s action taken under the colour of law adjusts, or colours, the law to the circumstance although the action may technically contravene the law. To ‘colour’ one’s actions are to characterize or bend them toward legality.
From legal defences and justifications in crimes to drafting, revising and enforcing contracts, the foundations of law are rooted in colour.
For example, for a legislature to act ‘colourably’ is to essentially act outside its legal jurisdiction but to seek to paint its actions as legal. Variations of the colour and colourability theme include the colour of the office, the colour of the title, and the colour of the right. Technical legal propriety is in question under each of these categories. Persons assert ‘colour’ as an explanation or defence when the legality of their action is in issue or is on the margins.
- #10,164
- Edited 12:11pm Nov 11, 2021 12:00pm | Edited 12:11pm
- | Commercial User | Joined Dec 2014 | 14,165 Posts
https://goldswitzerland.com/how-the-...n-signs-mount/
How the Fed Played Us—And Cornered Themselves as Recession Signs Mount
November 11, 2021
By Matthew Piepenburg
With the possible exceptions of Bill Martin and Paul Volker, history will one day confirm that the Fed is precisely what Thomas Jefferson warned: A parasitical banker’s bank that will do more damage within its host nation than a foreign army standing on its shores. Here’s the story of how the Fed played us.
The Fed’s more recent history of just plain dishonesty, manipulation, and market favoritism at the expense of economic realism and free-market price discovery opened with patient-zero Greenspan and then remained embarrassingly consistent via the identical policies of Bernanke, Yellen, and Powell.
For years, we have shown this with data rather than drama.
The latest and most obvious evidence of form over substance and words over truths from the Eccles Building is the Fed’s desperate inflation narrative as well as inflation conundrum, which boils down to this:
If the Fed doesn’t tackle the real rather than “transitory” inflation problem (i.e., by raising rates), the bond market tanks; however, if the Fed tries to raise rates to save bonds, it kills the stock market.
This, of course, is a conundrum, forcing the Fed, as one commentator observed, “to ride two horses with the same a$$.”
https://i0.wp.com/goldswitzerland.co...55%2C341&ssl=1
Ultimately, however, we all kind of know-how that can end…
https://i1.wp.com/goldswitzerland.co...04%2C440&ssl=1
Two Sides of the Same Mouth
But as we discover below, the Fed’s solution to this conundrum is to do what the Fed does best: Spin, obfuscate, and fib.
This means talking hawkish yet remaining dovish when it comes to keeping the liquidity spigot fully open to an otherwise fully-Fed-dependent equity and credit market.
Or in plain speak, this means publicly “tapering” the QE money printing with words while replacing that liquidity with hidden but otherwise consistent acts of alternative liquidity from, inter alia, the Standing Repo Facility (SRF) and FIMA swap lines.
Ackman’s Mistaken Battle Cry
Recently, hedge fund manager Bill Ackman made a presentation to the New York Fed recommending an immediate and meaningful taper along with equally meaningful rate hikes.
Needless to say, the equally recent and much-headlined (though hardly meaningful) Fed “tapering” from $120B/month to $105B/month was an open farce, just as a Fed balance sheet rocketing toward $9T hardly suggests that our securities markets can ride on their own without central bank training wheels.
After all, a bottle of whiskey a day is hardly less of an addiction than a bottle and glass a day of whiskey…
Such ongoing rather than “tapered” accommodation hardly suggests that our market is anything but a broken vehicle surviving exclusively on the artificial support of (and addiction to) a deadly monetary experiment in which trillions of currency-debasing and inflation-generating dollars are produced with a mouse-click with each passing (and compounding) month.
Clearly, Ackman, like so many Wall Street dragon-slayers, is worried about cancerous inflation, as it makes a mockery of bonds whose yields can’t outpace inflation’s cruel bite—hence his valiant call for a rate hike, the 85% chance of which has already been priced into the market.
But Mr. Ackman, like Mr. Market, is forgetting a few, well…risks and realities in his otherwise forceful presentation: Namely, the Fed can’t afford to raise interest rates above inflation rates.
Damned If They Do, Damned If They Don’t…
Yes, inflation is a major risk normally worthy of a rate reaction/hike, but unfortunately, there’s nothing normal at all about the current debt reality.
Central bankers have put us and themselves into a fatal corner regarding rate hikes that boils down to: “Damned if they do, damned if they don’t.”
Like so many spoiled hedge fund managers and retail investors who came of age in a world where money was effectively free for a select few, Ackman has gotten used to fiscal fantasy to the point where it’s part of his financial subconscious.
In this way, he’s forgotten one sad but simple fact: We can’t raise interest rates higher than inflation rates.
Why?
Because as a debt-soaked nation as well as a debt-driven market, we are too broke to pay the rate piper unless we do so with inflated (i.e., debased currencies).
Thus, the Fed can pretend to worry about inflation while it simultaneously and deliberately seeks more of it.
As I’ve said elsewhere, negative real rates are the only option going forward.
The shameful debt pyre/pile that has grown along with Ackman’s net worth in the preceding decades makes a rate hike less of an option than it is a bullet to the heart of an artificial market.
In other words, the reality of our debt pile makes inflation (and more rather than less liquidity) far more necessary than the experts would want us to otherwise believe.
I would remind Mr. Ackman, for example, that even Uncle Sam has to pay interest on his debt—and it’s at an embarrassing as well unprecedented (not to mention unsustainable) level.
https://i0.wp.com/goldswitzerland.co...24%2C284&ssl=1
Specifically, Ackman and others need to remember that even at the 5000-year, all-time low-rate fantasy environment in which the Fed has placed us, there was and is not enough tax revenues coming in to pay even the interest expense alone on the insane debt levels currently owed.
https://i2.wp.com/goldswitzerland.co...75%2C377&ssl=1
Forcing rates higher, as Ackman recommends, would only make those interest expenses even more comically unpayable than they already are.
Thus, any public taper (i.e., removal of printed/QE liquidity) and a rate hike would need to be (and will be) immediately offset with new liquidity in the form of FIMA swap lines, the SRF and new SLR exemptions allowing toxic banks to employ more rather than less deadly leverage.
In short, and notwithstanding “taper” tough-guy talk from the Eccles Building, the needed, as well as inflationary and currency-debasing liquidity, will come from somewhere.
If not, the VIX and USD will shoot to the moon and stocks will sell toward the basement.
But here’s the rub…
If the Fed won’t deal with inflation via a literal rather than figurative elimination of liquidity, stocks will continue to rise but bonds will spiral as liquidity-driven inflation eats away at their already negative yields.
See what I mean by damned if they do, damned if they don’t?
Doves and Hawks—Squawking in Tandem as the Fake-It Policies Continue
A dovish Fed is thus good for stocks but bad for bonds. A hawkish Fed is good for bonds but bad for stocks.
See the dilemma?
So, what can we expect?
Simple: More faking it and more QE-like liquidity under a different name, specifically, more repo support gone wild, more FIMA swaps, and more “permitted” leverage by those very dangerous banks under the Fed’s protection.
The Fed has so thoroughly, negligently, recklessly, and stupidly put us and the rest of the world into an insane quandary.
Not Your Ordinary Bond Market—In Fact, No Market at All
The grotesquely supported and openly artificial US sovereign bond market (i.e., Treasury market) is not just any bond market.
It’s the largest and most important bond market in the world.
Its published rate acts as the risk-free (yet return-free…) rate for all the additional assets under the Capital Asset Pricing Model (CAPM).
In short, the US Treasury market matters, and the Fed will use the back channels above to “prop” it.
Unfortunately, however, and apparently still unknown to most, is that this bond market is no market at all.
Instead, the Fed simply creates money out of thin air and acts as a permanent bidder on U.S. IOUs that no one wants to buy but the Fed itself.
Since February of last year, greater than 55% of Uncle Sam’s IOUs (i.e., Treasury bonds) were bought by the Fed itself.
More bluntly: The US Treasury “market” is like a lemonade stand in the Alaskan tundra where the only buyers of its unwanted beverage are its owners, who use counterfeit money printed in an igloo to maintain a robust “sales report.”
As a recent Bloomberg op-ed reminded us, the U.S. Treasury market is “a political construct where the Fed dominates trades and sets rates at whatever politically-expedient levels the U.S. government or Fed require.”
Or stated even more simply: The Fed played us, and the U.S. Treasury market is an open sham.
Greasy Tricks, Greasy Sleeves
The Fed can use other liquidity tricks up its greasy, tattered, and discredited sleeves to always keep U.S. Treasuries “bought” despite tanking demand for these unloved IOUs.
In addition to the repo pits, swap lines, and loosening bank rules, it can even impose yield caps and inevitable yield curve controls.
But in the end, the Fed will do what it always does: Lie, rig and false virtue signal its “war” on inflation.
“It’s Good to be the King”
And by that, I am simply saying the Fed will continue to pour more liquidity (i.e., more fiat/fake money) into the UST market via SRF and other means (i.e., increased short-term bond issuance for money markets) to keep stock markets “accommodated’ while publicly appearing to be hawkish by “signaling” a QE “taper” or rate hike to “fight” inflation, the actual levels of which it will intentionally misreport (and downplay).
Translated even more simply, the Fed will publicly “fight” inflation while privately promoting it and then openly misreport it.
As Mel Brooks might say: “It’s Good to the King—or Fed.”
Thus, as the Fed nominally “tapers,” liquidity will just keep coming in the form of QE by other names.
Un-recovered Addicts
For this reason, we feel liquidity (the kind that kills currencies) will keep on coming, as the banks and markets are now fully addicted to the same.
This, of course, will be good for gold, BTC, and stocks, all of which will fare much better than fixed-income assets, which, let’s be honest, are just negative income assets when adjusted for persistent rather than transitory inflation.
Meanwhile, the Fed pretends to tackle inflation but deep down seeks more of it in order to get the U.S. out of debt the old-fashioned way—by inflating their way out of it.
Loading Up the Money Markets, Ignoring the Middle Class
The fact that the US Treasury Dept is slashing long-term debt issuance in favor of shorter-term debt for the first time in 5 years just as they were announcing a “taper” was no coincidence.
Instead, it is evidence enough that they are loading up the money markets as an alternative form of QE by another name.
Such pro-inflationary reality hiding behind a tough-on-inflation stance/facade, by the way, is great for markets and just criminal for the real economy and the middle class.
But nothing new there. The Fed is a banker’s bank and a Wall Street backstop; it doesn’t give a hoot about the middle class.
What If…
If, however, and only if, the Fed actually and truly did cut liquidity (i.e., no back-end support via repo lines, swaps, and front-end curve/money market issuance to cover a “fake taper”), then just about every asset but the USD and VIX will suffer, including gold and silver.
That, however, is highly unlikely.
As we’ve written before: Addicts are predictable, and the Fed’s (as well market’s) addiction to liquidity won’t stop just because, as Ackman ironically believes, it ought to.
In short, prepare to see the liquidity run, the dollar loses even more of its inherent purchasing power, and real stores of value like gold shine.
The Real Economy Isn’t Smiling, It’s Warning Us of a Recession
As for the markets, they may and will receive more “accommodation” from a Fed who cares little for the real economy, but that real economy still matters—and it’s sending dangerous warning signs.
Recently, for example, I noted that the NFIB’s rating for small business conditions in the U.S. had its 3rd lowest levels in 50 years.
Well, that same NFIB has also just reported that the cost of labor for those businesses is hitting a 48-year high.
https://i1.wp.com/goldswitzerland.co...61%2C440&ssl=1
The foregoing data (12-Handed) is not only a screaming inflation indicator but a time-tested recession indicator.
At levels of 8 and above, this late-cycle barometer has always seen recessions follow within 19 months.
Gosh, facts are stubborn things, no?
In short, and regardless of what the Fed pretends, they can’t print away, hike away or repress away an economic recession, which will likely be the bottom-up straw that ultimately breaks this artificial market’s back.
Just saying…
How the Fed Played Us—And Cornered Themselves as Recession Signs Mount
November 11, 2021
By Matthew Piepenburg
With the possible exceptions of Bill Martin and Paul Volker, history will one day confirm that the Fed is precisely what Thomas Jefferson warned: A parasitical banker’s bank that will do more damage within its host nation than a foreign army standing on its shores. Here’s the story of how the Fed played us.
The Fed’s more recent history of just plain dishonesty, manipulation, and market favoritism at the expense of economic realism and free-market price discovery opened with patient-zero Greenspan and then remained embarrassingly consistent via the identical policies of Bernanke, Yellen, and Powell.
For years, we have shown this with data rather than drama.
The latest and most obvious evidence of form over substance and words over truths from the Eccles Building is the Fed’s desperate inflation narrative as well as inflation conundrum, which boils down to this:
If the Fed doesn’t tackle the real rather than “transitory” inflation problem (i.e., by raising rates), the bond market tanks; however, if the Fed tries to raise rates to save bonds, it kills the stock market.
This, of course, is a conundrum, forcing the Fed, as one commentator observed, “to ride two horses with the same a$$.”
https://i0.wp.com/goldswitzerland.co...55%2C341&ssl=1
Ultimately, however, we all kind of know-how that can end…
https://i1.wp.com/goldswitzerland.co...04%2C440&ssl=1
Two Sides of the Same Mouth
But as we discover below, the Fed’s solution to this conundrum is to do what the Fed does best: Spin, obfuscate, and fib.
This means talking hawkish yet remaining dovish when it comes to keeping the liquidity spigot fully open to an otherwise fully-Fed-dependent equity and credit market.
Or in plain speak, this means publicly “tapering” the QE money printing with words while replacing that liquidity with hidden but otherwise consistent acts of alternative liquidity from, inter alia, the Standing Repo Facility (SRF) and FIMA swap lines.
Ackman’s Mistaken Battle Cry
Recently, hedge fund manager Bill Ackman made a presentation to the New York Fed recommending an immediate and meaningful taper along with equally meaningful rate hikes.
Needless to say, the equally recent and much-headlined (though hardly meaningful) Fed “tapering” from $120B/month to $105B/month was an open farce, just as a Fed balance sheet rocketing toward $9T hardly suggests that our securities markets can ride on their own without central bank training wheels.
After all, a bottle of whiskey a day is hardly less of an addiction than a bottle and glass a day of whiskey…
Such ongoing rather than “tapered” accommodation hardly suggests that our market is anything but a broken vehicle surviving exclusively on the artificial support of (and addiction to) a deadly monetary experiment in which trillions of currency-debasing and inflation-generating dollars are produced with a mouse-click with each passing (and compounding) month.
Clearly, Ackman, like so many Wall Street dragon-slayers, is worried about cancerous inflation, as it makes a mockery of bonds whose yields can’t outpace inflation’s cruel bite—hence his valiant call for a rate hike, the 85% chance of which has already been priced into the market.
But Mr. Ackman, like Mr. Market, is forgetting a few, well…risks and realities in his otherwise forceful presentation: Namely, the Fed can’t afford to raise interest rates above inflation rates.
Damned If They Do, Damned If They Don’t…
Yes, inflation is a major risk normally worthy of a rate reaction/hike, but unfortunately, there’s nothing normal at all about the current debt reality.
Central bankers have put us and themselves into a fatal corner regarding rate hikes that boils down to: “Damned if they do, damned if they don’t.”
Like so many spoiled hedge fund managers and retail investors who came of age in a world where money was effectively free for a select few, Ackman has gotten used to fiscal fantasy to the point where it’s part of his financial subconscious.
In this way, he’s forgotten one sad but simple fact: We can’t raise interest rates higher than inflation rates.
Why?
Because as a debt-soaked nation as well as a debt-driven market, we are too broke to pay the rate piper unless we do so with inflated (i.e., debased currencies).
Thus, the Fed can pretend to worry about inflation while it simultaneously and deliberately seeks more of it.
As I’ve said elsewhere, negative real rates are the only option going forward.
The shameful debt pyre/pile that has grown along with Ackman’s net worth in the preceding decades makes a rate hike less of an option than it is a bullet to the heart of an artificial market.
In other words, the reality of our debt pile makes inflation (and more rather than less liquidity) far more necessary than the experts would want us to otherwise believe.
I would remind Mr. Ackman, for example, that even Uncle Sam has to pay interest on his debt—and it’s at an embarrassing as well unprecedented (not to mention unsustainable) level.
https://i0.wp.com/goldswitzerland.co...24%2C284&ssl=1
Specifically, Ackman and others need to remember that even at the 5000-year, all-time low-rate fantasy environment in which the Fed has placed us, there was and is not enough tax revenues coming in to pay even the interest expense alone on the insane debt levels currently owed.
https://i2.wp.com/goldswitzerland.co...75%2C377&ssl=1
Forcing rates higher, as Ackman recommends, would only make those interest expenses even more comically unpayable than they already are.
Thus, any public taper (i.e., removal of printed/QE liquidity) and a rate hike would need to be (and will be) immediately offset with new liquidity in the form of FIMA swap lines, the SRF and new SLR exemptions allowing toxic banks to employ more rather than less deadly leverage.
In short, and notwithstanding “taper” tough-guy talk from the Eccles Building, the needed, as well as inflationary and currency-debasing liquidity, will come from somewhere.
If not, the VIX and USD will shoot to the moon and stocks will sell toward the basement.
But here’s the rub…
If the Fed won’t deal with inflation via a literal rather than figurative elimination of liquidity, stocks will continue to rise but bonds will spiral as liquidity-driven inflation eats away at their already negative yields.
See what I mean by damned if they do, damned if they don’t?
Doves and Hawks—Squawking in Tandem as the Fake-It Policies Continue
A dovish Fed is thus good for stocks but bad for bonds. A hawkish Fed is good for bonds but bad for stocks.
See the dilemma?
So, what can we expect?
Simple: More faking it and more QE-like liquidity under a different name, specifically, more repo support gone wild, more FIMA swaps, and more “permitted” leverage by those very dangerous banks under the Fed’s protection.
The Fed has so thoroughly, negligently, recklessly, and stupidly put us and the rest of the world into an insane quandary.
Not Your Ordinary Bond Market—In Fact, No Market at All
The grotesquely supported and openly artificial US sovereign bond market (i.e., Treasury market) is not just any bond market.
It’s the largest and most important bond market in the world.
Its published rate acts as the risk-free (yet return-free…) rate for all the additional assets under the Capital Asset Pricing Model (CAPM).
In short, the US Treasury market matters, and the Fed will use the back channels above to “prop” it.
Unfortunately, however, and apparently still unknown to most, is that this bond market is no market at all.
Instead, the Fed simply creates money out of thin air and acts as a permanent bidder on U.S. IOUs that no one wants to buy but the Fed itself.
Since February of last year, greater than 55% of Uncle Sam’s IOUs (i.e., Treasury bonds) were bought by the Fed itself.
More bluntly: The US Treasury “market” is like a lemonade stand in the Alaskan tundra where the only buyers of its unwanted beverage are its owners, who use counterfeit money printed in an igloo to maintain a robust “sales report.”
As a recent Bloomberg op-ed reminded us, the U.S. Treasury market is “a political construct where the Fed dominates trades and sets rates at whatever politically-expedient levels the U.S. government or Fed require.”
Or stated even more simply: The Fed played us, and the U.S. Treasury market is an open sham.
Greasy Tricks, Greasy Sleeves
The Fed can use other liquidity tricks up its greasy, tattered, and discredited sleeves to always keep U.S. Treasuries “bought” despite tanking demand for these unloved IOUs.
In addition to the repo pits, swap lines, and loosening bank rules, it can even impose yield caps and inevitable yield curve controls.
But in the end, the Fed will do what it always does: Lie, rig and false virtue signal its “war” on inflation.
“It’s Good to be the King”
And by that, I am simply saying the Fed will continue to pour more liquidity (i.e., more fiat/fake money) into the UST market via SRF and other means (i.e., increased short-term bond issuance for money markets) to keep stock markets “accommodated’ while publicly appearing to be hawkish by “signaling” a QE “taper” or rate hike to “fight” inflation, the actual levels of which it will intentionally misreport (and downplay).
Translated even more simply, the Fed will publicly “fight” inflation while privately promoting it and then openly misreport it.
As Mel Brooks might say: “It’s Good to the King—or Fed.”
Thus, as the Fed nominally “tapers,” liquidity will just keep coming in the form of QE by other names.
Un-recovered Addicts
For this reason, we feel liquidity (the kind that kills currencies) will keep on coming, as the banks and markets are now fully addicted to the same.
This, of course, will be good for gold, BTC, and stocks, all of which will fare much better than fixed-income assets, which, let’s be honest, are just negative income assets when adjusted for persistent rather than transitory inflation.
Meanwhile, the Fed pretends to tackle inflation but deep down seeks more of it in order to get the U.S. out of debt the old-fashioned way—by inflating their way out of it.
Loading Up the Money Markets, Ignoring the Middle Class
The fact that the US Treasury Dept is slashing long-term debt issuance in favor of shorter-term debt for the first time in 5 years just as they were announcing a “taper” was no coincidence.
Instead, it is evidence enough that they are loading up the money markets as an alternative form of QE by another name.
Such pro-inflationary reality hiding behind a tough-on-inflation stance/facade, by the way, is great for markets and just criminal for the real economy and the middle class.
But nothing new there. The Fed is a banker’s bank and a Wall Street backstop; it doesn’t give a hoot about the middle class.
What If…
If, however, and only if, the Fed actually and truly did cut liquidity (i.e., no back-end support via repo lines, swaps, and front-end curve/money market issuance to cover a “fake taper”), then just about every asset but the USD and VIX will suffer, including gold and silver.
That, however, is highly unlikely.
As we’ve written before: Addicts are predictable, and the Fed’s (as well market’s) addiction to liquidity won’t stop just because, as Ackman ironically believes, it ought to.
In short, prepare to see the liquidity run, the dollar loses even more of its inherent purchasing power, and real stores of value like gold shine.
The Real Economy Isn’t Smiling, It’s Warning Us of a Recession
As for the markets, they may and will receive more “accommodation” from a Fed who cares little for the real economy, but that real economy still matters—and it’s sending dangerous warning signs.
Recently, for example, I noted that the NFIB’s rating for small business conditions in the U.S. had its 3rd lowest levels in 50 years.
Well, that same NFIB has also just reported that the cost of labor for those businesses is hitting a 48-year high.
https://i1.wp.com/goldswitzerland.co...61%2C440&ssl=1
The foregoing data (12-Handed) is not only a screaming inflation indicator but a time-tested recession indicator.
At levels of 8 and above, this late-cycle barometer has always seen recessions follow within 19 months.
Gosh, facts are stubborn things, no?
In short, and regardless of what the Fed pretends, they can’t print away, hike away or repress away an economic recession, which will likely be the bottom-up straw that ultimately breaks this artificial market’s back.
Just saying…
1
- #10,165
- Edited 12:25pm Nov 11, 2021 12:14pm | Edited 12:25pm
- | Commercial User | Joined Dec 2014 | 14,165 Posts
https://www.goldmoney.com/research/g...al-bank-policy
It is only now becoming clear to the investing public that the purchasing power of their currencies is declining at an accelerating rate. There is no doubt that yesterday’s announcement that the US CPI rose by 6.2%, compared with the longstanding 2% target, came as a wake-up call to markets.
Along with the other major central banks, the Fed’s reaction is likely to be to double down on interest rate suppression to keep bond yields low and stock valuations intact. The alternative will lead to a major financial, economic and currency shock sooner rather than later.
This article introduces the reader to some of the basic fallacies behind state currencies. It explains the misconceptions policy planners have over interest rates, and how central banks have become contra cyclical lenders, replacing commercial banking’s credit creation for non-financial activities.
In effect, narrow money is being used by the major central banks in a vain attempt to shore up government finances and economic activity. The consequences for currency debasement are likely to be more immediate and profound than cyclical bank credit expansion.
Introduction
It is becoming clear that there has been an unofficial agreement between the US Fed, Bank of England, the ECB and probably the Bank of Japan not to raise interest rates. It is confirmed by remarkably similar statements from the former three in recent days. When, as the cliché has it, they are all singing off the same hymn sheet, those of us not a party to agreements between our monetary policy planners are right to suspect they are doubling down on a market rigging exercise encompassing all financial markets.
That these policy planners are clueless about money and economics escapes nearly everyone affected. It is assumed the so-called experts know what they are doing. But for nearly a century, universities have promoted statist beliefs in their economics courses to the exclusion of reasoned theory leading to the current situation. In modern times it started with Georg Knapp’s Chartalist movement in Germany before the First World War. And it really took off with Keynes’s General Theory published in 1936. The essence of it has been state attempts to dehumanise economics; to turn economic actors, that is you and me, into predictable components in a mathematical economy.
The infamous failure of communism’s command economies in the Soviet Union and Maoist China bear testimony to the futility of these policies. But while Western capitalists felt vindicated by communism’s failure, they failed to understand its similarities with their own economic policies. The truth was that western economies were and remain highly socialistic, with the unfettered relationships between transacting individuals being increasingly interfered with by their relevant governments. The triumph of capitalism over communism was hubris, little more than a power play, an opportunity for the Western Alliance to move its missile bases into newly liberated eastern Europe.
The propaganda that the state’s primary function is to control human activity has been so pervasive and effective that it is no longer questioned. Capitalism, in the sense that corporations exist for profit, is unanimously declared to be a necessary evil and reluctantly tolerated. This is even believed by those who are cast by the media as the agents of capitalism themselves: leaders in big business, the bankers, and in fossil-burning oil megaliths. With their social consciousnesses they subscribe to a new form of Marxist philosophy. They attend gatherings to plan for a better world — their world. The COP26 conference in Glasgow is the latest manifestation of it with private participants seemingly unconscious that travelling in 118 private jets to do so is inconsistent with their professed green credentials.
The wellspring of this self-importance is ignorance of economics. Universities have turned out highly intelligent students who know nothing other than mathematics and statistics and think it makes them economists. They ignore their own life experiences in fields such as the division of labour, promoting instead macroeconomics — mainly a Keynesian invention. Its origin arose from Keynes’s denial of Say’s law, a cast-iron definition of the division of labour and the role of the medium of exchange:
“That Say’s law, that the aggregate demand price of output as a whole is equal to its aggregate supply price for all volumes of output, is equivalent to the proposition that there is no obstacle to full employment. If, however, this is not the true law relating the aggregate demand and supply functions, there is a vitally important chapter of economic theory which remains to be written and without which all discussions concerning the volume of aggregate employment are futile.”[i]
By dismissing in the first sentence a proposition without a proper explanation (the few paragraphs preceding it are irrelevant), in the second sentence Keynes proposes his new science of macroeconomics, which then becomes the subject of his General Theory. It marks the formal separation between classical free-market economics as social science and the new statist mathematical macroeconomics masquerading as natural science.
But Keynes’s proposition is preceded by conditional conjunction, a supposition for which there is no evidence. On the contrary, the evidence is clear: we specialise in our work to maximise our output which we exchange for all the other things that satisfy our needs and wants, and the role of money is to make the transactions involved as efficient as possible. And anyone not so employed and lacks savings to draw upon must be carried by someone else — fully employed is a red herring.
The few words that follow Keynes’s conditional “if” are the mainspring driving modern socialism and the belief held by statists and the super-rich alike that their contribution in the fields of economics and money is for the general good. It has seen the establishment ignore the similarities between the new economics and Karl Marx’s megalomania.
Given the motives and statist beliefs prevalent in the corridors of power, it is hardly surprising that monetary policy is badly flawed. And when, as it now appears, there is collusion between the major central banks to keep interest rates heavily suppressed, we should at least suspect that all is not well and that everything might be about to unravel.
Central bank interest rate errors
Statists have long held the belief that interest rates are usuary imposed on borrowers by wealthy savers. By casting savers as the greedy party and borrowers as the victims they constructed a moral case for suppressing interest rates.
In pursuing their moral case, statists have ignored the reality behind what they and borrowers perceive to be the cost of money. A lender parting with money’s utility is justified in expecting compensation for the loss of that possession. When a lender is promised instant access to his money, then compensation becomes a fitting reimbursement for risk, comprised of the sum of currency and counterparty risks. Nowadays, money has been replaced with a reserve currency, so a lender will often think of currency risk as being the difference between the dollar and that of his national currency.
When a lender parts possession with money for a defined period, an additional time-preference element is introduced, compensating him for loss of possession for the time agreed with the borrower. Therefore, the normal condition for yield curves plotted against a basis of time is positive, with longer maturities yielding greater interest than shorter ones.
A borrower is bound to view interest differently. For an entrepreneur, it is the cost of obtaining financial capital for investment in a project. He must perform an economic calculation that involves all his anticipated costs from the initial capital investment until final production output, which with his estimate of the value of final production allows him to calculate a margin for profits. He might refine his calculations as the project progresses, which could lead to it being abandoned, and he might have difficulty repaying the lender. A lender must also allow for these implied risks in his calculations of what interest compensation he requires. And when an agent, or a financial arranger, acts for the lender that agent will make these calculations on his behalf.
These are the basic factors that determine interest rates in free markets with sound money. There is further consideration behind setting them, and that is whether it is the lenders or the borrowers who take the lead in setting interest rates. Do lenders, as Keynes assumed, seek to obtain the maximum return on their capital, forcing borrowers to pay up needlessly, or do borrowers bid up interest rates in order to attract the capital necessary to proceed with a business project? Which party drives the rate?
The evidence from free markets before central banks managed or imposed interest rate policies upon them is provided to us by Gibson’s paradox. Figure 1 covers the time from Lord Liverpool’s introduction of the gold sovereign as circulating coinage up to the outbreak of the First World War when the gold coin standard was abandoned. It compares the wholesale price index with the yield on Consols stock, undated government bonds that provide a pure yield indication without the distortion of maturity factors.
An estimate of final values of production is necessary for a borrower to estimate in his calculations how much interest he can afford for an investment to be profitable. By ensuring a high degree of price stability, sound money backing the circulating currency allows the calculation to be made. This explains why free-market interest rates for borrowers tracked wholesale prices under the gold standard and the two correlated well.
https://www.forexfactory.com/images/media/Central1.png
There were times of moderate price volatility, but these were mainly due to the cycle of bank credit expansion which led to the extra currency being in circulation, followed by periodic banking crises and credit contractions roughly every ten years. But the overall price stability provided by the gold standard still allowed businesses to continue to make the relevant calculations.
In the early days of the gold standard, domestic considerations had a greater impact on wholesale prices than later. This can be seen in a relative price instability between 1820—1850 compared with later. In the second half of the nineteenth century the combined benefits of free trade (the Cobden—Chevalier Anglo-French free trade agreement was signed in 1860), the adoption of gold coin standards by Britain’s trading counterparties and the increasing ownership of gold coins by the general public all led to greater price stability.[ii]
The importance of the spread of gold coin standards is underlined by statistical evidence in Tables 5 and 6 in Timothy Green’s report (referenced in endnote 2) which showed that gold coins in public circulation increased substantially between 1873—1895. Total minted worldwide between these dates was 5,809 tonnes, of which the combined production of Australian and UK sovereigns was 1,395 tonnes, 24% of the world total. The British and Australian minted amounts were in addition to coin production from 1817 representing an additional 1,500 tonnes for a total of nearly 2,900 tonnes, the equivalent of 396 million sovereigns. Some of these coins would have been taken in for reminting and to that extent, there is double counting.
By way of contrast, leading central banks and government treasury departments for the UK, France, Germany Italy, Russia, and the US held only 2,013 tonnes in 1895, one-quarter of the quantity minted into circulating coins during the previous twenty-two years. These statistics show that gold coins in circulation made up a significant amount of the combined quantities of money and narrow measures of currency supply, which with free trade provided international price stability at a time of rapid global industrialisation and technological progress.
By way of contrast with the correlation between prices and wholesale borrowing costs, Figure 2 shows the relationship between the inflation rate of prices and wholesale borrowing costs. There is no correlation between the two. It tells us that the assumption held by central bank policymakers, that inflation, by which they mean changes in the general level of prices, can be managed by varying interest rates, is incorrect.
https://www.forexfactory.com/images/media/Central2.png
This was the essence of Gibson’s paradox, which plainly showed the opposite to be true of what was expected by statist economists, none of which were able to resolve the paradox. It was never, to my knowledge, addressed by the Austrian School, which was probably generally unaware of it, only being named after Gibson by Keynes who then proceeded to ignore it. A search of all Ludwig von Mises's writings tuns up nothing on Gibson, and the only two references to Thomas Tooke, who was credited with first seeing the unexplained relationships in the nineteenth century, refer only to his involvement with the banking school.
Monetary policy objectives
Having examined the role of interest rates in unfettered free markets we can now turn our attention to the consequences of central bank interest rate policies. By resolving Gibson’s paradox, we have a starting point; the knowledge that attempts to manage the rate of price inflation by interest rate policies are flawed at the outset. But the interest rate policies of central banks have another motivation for price management, which is to reduce the cost of borrowing at the expense of savers.
By suppressing interest rates, central banks have brought about several destructive changes to trade and the economy in respect of money and credit. By expanding their balance sheets from a customary minimum reflecting mostly circulating currency and required reserves for commercial banks as central bank liabilities before the Lehman crisis, the sum of the Fed’s, the ECB’s, the BoE’s, and the BoJ’s balance sheets have expanded over six times from $4 trillion equivalent to $25.4 trillion currently. The Fed’s expanded about ten times, the ECB’s nearly five times, the BoJ’s over six times, and the BoE’s by nearly seven times.[iii]
In effect, central banks have subsumed the role of commercial banks with respect to credit expansion, directed at their respective economies with an important difference. Central bank credit expansion is countercyclical to commercial bank credit and directed mainly at financing government spending instead of industrial production. The stated objective is to support growth in the wider economy. But being countercyclical a more accurate policy description is to prevent credit-cleansing recessions and to cover government deficits. Commercial banks have refocused their credit expansion towards a combination of acquiring government bonds, which are deemed the lowest lending risk, and financing purely financial activities. For example, the Fed’s H8 form recording assets and liabilities of commercial banks in the US shows Commercial and Industrial Loans (line 10) to have declined every quarter since 2020 Q3.
To a degree, the decline in commercial lending reflects the offshoring of production. An optimist would point to the improvement in cash flows replacing debt finance, and bank credit expansion doesn’t include changes in the level of bond finance. These structural factors must be admitted, but they cannot adequately explain why credit to manufacturers is contracting at a time when consumer demand outpaces product supply. The logical answer is that far from an improving economic outlook, the outlook has been deteriorating in terms of lending risk. Headline GDP figures are therefore an unreliable guide to economic conditions, GDP being indirectly inflated by the expansion of central bank balance sheets.
Clearly, the countercyclical financing of the whole economy in all major jurisdictions is a valid description of the current actions of central banks. It takes no leap of the imagination to deduce that without central bank credit expansion all these major economies would be sinking into deep slumps. This is particularly true of the US, UK and EU, while the BoJ’s balance sheet total unlike the others has admittedly declined over the last year. Therefore, while current economic conditions persist, we can expect a continuing expansion of central bank balance sheets for no real economic benefit.
But monetary policy can never be commercial in nature. It is not the function of a bureaucratic body answerable only to the government to make commercial lending judgements. Central banks acting as countercyclical lenders, a role that requires the judgement of profit-seeking company doctors, cannot deliver a positive economic outcome. While the cycle of commercial bank credit expansion had its own evils, at least it involved institutions capable of commercial judgement. That has now been marginalised.
Monetary policy is now trapped with an ultimate failure looming. Without a change in policy, the only outcome will be a further acceleration of inflation of the currency quantity led by its narrower measures. And as we saw in Figure 1, the consequences for prices of the cycle of bank credit expansion and contraction were broadly confined to consecutive periods of expansion and contraction. But there is no such limitation on the expansion of unbacked base currency, and the effect over recent times is shown in Figure 3.
https://www.forexfactory.com/images/media/Central3.png
This cannot be undone, and the debasement of currencies can only accelerate unless policymakers sum up the courage to face the consequences: a deliberate act to unwind all the distortions by stopping the printing presses, which will simply crash their respective economies.
This is as likely as the moon colliding with Mars, at least, that is, before the situation deteriorates to the point where central bankers are driven to consider backing their failing currencies with a gold coin standard. Meanwhile, by venturing into the business of contra cyclical currency expansion central banks have entered dangerous territory. The commitment to continue suppressing interest rates is now greater than ever. But the consequences for the purchasing power of their fiat currencies are likely to be manifest far sooner than might be generally expected.
The economic outlook will also rapidly deteriorate
Besides the inability of intervening central bank policymakers to make commercial judgements, their actions also take their respective economies even further away from commercial progress. The relationship between currencies, credit and private sector enterprises can be expected to deteriorate more rapidly from here as time preference factors re-emerge. The model relationship between prices and borrowing costs in a successful sound-money economy illustrated by Gibson’s paradox has been destroyed by depreciating fiat. For too long, malinvestments driven by a widespread expectation of profits arising from interest rate suppression more than from genuinely profitable production have dominated economic activity. That is now set to be displaced by malinvestments arising from expectations of rising prices. It can only be stopped by letting free markets set interest rates. But no businessmen in the major economies believe in free enterprise anymore with good reason, only in profits from speculation, the root of which is currency debasement. They are all addicted to interest rate suppression and rising prices as mechanisms to get rich.
While monetary policymakers persist in believing in monetary stimulation the consequences are in fact horribly destructive. The following bullet points are not exhaustive:
It is only now becoming clear to the investing public that the purchasing power of their currencies is declining at an accelerating rate. There is no doubt that yesterday’s announcement that the US CPI rose by 6.2%, compared with the longstanding 2% target, came as a wake-up call to markets.
Along with the other major central banks, the Fed’s reaction is likely to be to double down on interest rate suppression to keep bond yields low and stock valuations intact. The alternative will lead to a major financial, economic and currency shock sooner rather than later.
This article introduces the reader to some of the basic fallacies behind state currencies. It explains the misconceptions policy planners have over interest rates, and how central banks have become contra cyclical lenders, replacing commercial banking’s credit creation for non-financial activities.
In effect, narrow money is being used by the major central banks in a vain attempt to shore up government finances and economic activity. The consequences for currency debasement are likely to be more immediate and profound than cyclical bank credit expansion.
Introduction
It is becoming clear that there has been an unofficial agreement between the US Fed, Bank of England, the ECB and probably the Bank of Japan not to raise interest rates. It is confirmed by remarkably similar statements from the former three in recent days. When, as the cliché has it, they are all singing off the same hymn sheet, those of us not a party to agreements between our monetary policy planners are right to suspect they are doubling down on a market rigging exercise encompassing all financial markets.
That these policy planners are clueless about money and economics escapes nearly everyone affected. It is assumed the so-called experts know what they are doing. But for nearly a century, universities have promoted statist beliefs in their economics courses to the exclusion of reasoned theory leading to the current situation. In modern times it started with Georg Knapp’s Chartalist movement in Germany before the First World War. And it really took off with Keynes’s General Theory published in 1936. The essence of it has been state attempts to dehumanise economics; to turn economic actors, that is you and me, into predictable components in a mathematical economy.
The infamous failure of communism’s command economies in the Soviet Union and Maoist China bear testimony to the futility of these policies. But while Western capitalists felt vindicated by communism’s failure, they failed to understand its similarities with their own economic policies. The truth was that western economies were and remain highly socialistic, with the unfettered relationships between transacting individuals being increasingly interfered with by their relevant governments. The triumph of capitalism over communism was hubris, little more than a power play, an opportunity for the Western Alliance to move its missile bases into newly liberated eastern Europe.
The propaganda that the state’s primary function is to control human activity has been so pervasive and effective that it is no longer questioned. Capitalism, in the sense that corporations exist for profit, is unanimously declared to be a necessary evil and reluctantly tolerated. This is even believed by those who are cast by the media as the agents of capitalism themselves: leaders in big business, the bankers, and in fossil-burning oil megaliths. With their social consciousnesses they subscribe to a new form of Marxist philosophy. They attend gatherings to plan for a better world — their world. The COP26 conference in Glasgow is the latest manifestation of it with private participants seemingly unconscious that travelling in 118 private jets to do so is inconsistent with their professed green credentials.
The wellspring of this self-importance is ignorance of economics. Universities have turned out highly intelligent students who know nothing other than mathematics and statistics and think it makes them economists. They ignore their own life experiences in fields such as the division of labour, promoting instead macroeconomics — mainly a Keynesian invention. Its origin arose from Keynes’s denial of Say’s law, a cast-iron definition of the division of labour and the role of the medium of exchange:
“That Say’s law, that the aggregate demand price of output as a whole is equal to its aggregate supply price for all volumes of output, is equivalent to the proposition that there is no obstacle to full employment. If, however, this is not the true law relating the aggregate demand and supply functions, there is a vitally important chapter of economic theory which remains to be written and without which all discussions concerning the volume of aggregate employment are futile.”[i]
By dismissing in the first sentence a proposition without a proper explanation (the few paragraphs preceding it are irrelevant), in the second sentence Keynes proposes his new science of macroeconomics, which then becomes the subject of his General Theory. It marks the formal separation between classical free-market economics as social science and the new statist mathematical macroeconomics masquerading as natural science.
But Keynes’s proposition is preceded by conditional conjunction, a supposition for which there is no evidence. On the contrary, the evidence is clear: we specialise in our work to maximise our output which we exchange for all the other things that satisfy our needs and wants, and the role of money is to make the transactions involved as efficient as possible. And anyone not so employed and lacks savings to draw upon must be carried by someone else — fully employed is a red herring.
The few words that follow Keynes’s conditional “if” are the mainspring driving modern socialism and the belief held by statists and the super-rich alike that their contribution in the fields of economics and money is for the general good. It has seen the establishment ignore the similarities between the new economics and Karl Marx’s megalomania.
Given the motives and statist beliefs prevalent in the corridors of power, it is hardly surprising that monetary policy is badly flawed. And when, as it now appears, there is collusion between the major central banks to keep interest rates heavily suppressed, we should at least suspect that all is not well and that everything might be about to unravel.
Central bank interest rate errors
Statists have long held the belief that interest rates are usuary imposed on borrowers by wealthy savers. By casting savers as the greedy party and borrowers as the victims they constructed a moral case for suppressing interest rates.
In pursuing their moral case, statists have ignored the reality behind what they and borrowers perceive to be the cost of money. A lender parting with money’s utility is justified in expecting compensation for the loss of that possession. When a lender is promised instant access to his money, then compensation becomes a fitting reimbursement for risk, comprised of the sum of currency and counterparty risks. Nowadays, money has been replaced with a reserve currency, so a lender will often think of currency risk as being the difference between the dollar and that of his national currency.
When a lender parts possession with money for a defined period, an additional time-preference element is introduced, compensating him for loss of possession for the time agreed with the borrower. Therefore, the normal condition for yield curves plotted against a basis of time is positive, with longer maturities yielding greater interest than shorter ones.
A borrower is bound to view interest differently. For an entrepreneur, it is the cost of obtaining financial capital for investment in a project. He must perform an economic calculation that involves all his anticipated costs from the initial capital investment until final production output, which with his estimate of the value of final production allows him to calculate a margin for profits. He might refine his calculations as the project progresses, which could lead to it being abandoned, and he might have difficulty repaying the lender. A lender must also allow for these implied risks in his calculations of what interest compensation he requires. And when an agent, or a financial arranger, acts for the lender that agent will make these calculations on his behalf.
These are the basic factors that determine interest rates in free markets with sound money. There is further consideration behind setting them, and that is whether it is the lenders or the borrowers who take the lead in setting interest rates. Do lenders, as Keynes assumed, seek to obtain the maximum return on their capital, forcing borrowers to pay up needlessly, or do borrowers bid up interest rates in order to attract the capital necessary to proceed with a business project? Which party drives the rate?
The evidence from free markets before central banks managed or imposed interest rate policies upon them is provided to us by Gibson’s paradox. Figure 1 covers the time from Lord Liverpool’s introduction of the gold sovereign as circulating coinage up to the outbreak of the First World War when the gold coin standard was abandoned. It compares the wholesale price index with the yield on Consols stock, undated government bonds that provide a pure yield indication without the distortion of maturity factors.
An estimate of final values of production is necessary for a borrower to estimate in his calculations how much interest he can afford for an investment to be profitable. By ensuring a high degree of price stability, sound money backing the circulating currency allows the calculation to be made. This explains why free-market interest rates for borrowers tracked wholesale prices under the gold standard and the two correlated well.
https://www.forexfactory.com/images/media/Central1.png
There were times of moderate price volatility, but these were mainly due to the cycle of bank credit expansion which led to the extra currency being in circulation, followed by periodic banking crises and credit contractions roughly every ten years. But the overall price stability provided by the gold standard still allowed businesses to continue to make the relevant calculations.
In the early days of the gold standard, domestic considerations had a greater impact on wholesale prices than later. This can be seen in a relative price instability between 1820—1850 compared with later. In the second half of the nineteenth century the combined benefits of free trade (the Cobden—Chevalier Anglo-French free trade agreement was signed in 1860), the adoption of gold coin standards by Britain’s trading counterparties and the increasing ownership of gold coins by the general public all led to greater price stability.[ii]
The importance of the spread of gold coin standards is underlined by statistical evidence in Tables 5 and 6 in Timothy Green’s report (referenced in endnote 2) which showed that gold coins in public circulation increased substantially between 1873—1895. Total minted worldwide between these dates was 5,809 tonnes, of which the combined production of Australian and UK sovereigns was 1,395 tonnes, 24% of the world total. The British and Australian minted amounts were in addition to coin production from 1817 representing an additional 1,500 tonnes for a total of nearly 2,900 tonnes, the equivalent of 396 million sovereigns. Some of these coins would have been taken in for reminting and to that extent, there is double counting.
By way of contrast, leading central banks and government treasury departments for the UK, France, Germany Italy, Russia, and the US held only 2,013 tonnes in 1895, one-quarter of the quantity minted into circulating coins during the previous twenty-two years. These statistics show that gold coins in circulation made up a significant amount of the combined quantities of money and narrow measures of currency supply, which with free trade provided international price stability at a time of rapid global industrialisation and technological progress.
By way of contrast with the correlation between prices and wholesale borrowing costs, Figure 2 shows the relationship between the inflation rate of prices and wholesale borrowing costs. There is no correlation between the two. It tells us that the assumption held by central bank policymakers, that inflation, by which they mean changes in the general level of prices, can be managed by varying interest rates, is incorrect.
https://www.forexfactory.com/images/media/Central2.png
This was the essence of Gibson’s paradox, which plainly showed the opposite to be true of what was expected by statist economists, none of which were able to resolve the paradox. It was never, to my knowledge, addressed by the Austrian School, which was probably generally unaware of it, only being named after Gibson by Keynes who then proceeded to ignore it. A search of all Ludwig von Mises's writings tuns up nothing on Gibson, and the only two references to Thomas Tooke, who was credited with first seeing the unexplained relationships in the nineteenth century, refer only to his involvement with the banking school.
Monetary policy objectives
Having examined the role of interest rates in unfettered free markets we can now turn our attention to the consequences of central bank interest rate policies. By resolving Gibson’s paradox, we have a starting point; the knowledge that attempts to manage the rate of price inflation by interest rate policies are flawed at the outset. But the interest rate policies of central banks have another motivation for price management, which is to reduce the cost of borrowing at the expense of savers.
By suppressing interest rates, central banks have brought about several destructive changes to trade and the economy in respect of money and credit. By expanding their balance sheets from a customary minimum reflecting mostly circulating currency and required reserves for commercial banks as central bank liabilities before the Lehman crisis, the sum of the Fed’s, the ECB’s, the BoE’s, and the BoJ’s balance sheets have expanded over six times from $4 trillion equivalent to $25.4 trillion currently. The Fed’s expanded about ten times, the ECB’s nearly five times, the BoJ’s over six times, and the BoE’s by nearly seven times.[iii]
In effect, central banks have subsumed the role of commercial banks with respect to credit expansion, directed at their respective economies with an important difference. Central bank credit expansion is countercyclical to commercial bank credit and directed mainly at financing government spending instead of industrial production. The stated objective is to support growth in the wider economy. But being countercyclical a more accurate policy description is to prevent credit-cleansing recessions and to cover government deficits. Commercial banks have refocused their credit expansion towards a combination of acquiring government bonds, which are deemed the lowest lending risk, and financing purely financial activities. For example, the Fed’s H8 form recording assets and liabilities of commercial banks in the US shows Commercial and Industrial Loans (line 10) to have declined every quarter since 2020 Q3.
To a degree, the decline in commercial lending reflects the offshoring of production. An optimist would point to the improvement in cash flows replacing debt finance, and bank credit expansion doesn’t include changes in the level of bond finance. These structural factors must be admitted, but they cannot adequately explain why credit to manufacturers is contracting at a time when consumer demand outpaces product supply. The logical answer is that far from an improving economic outlook, the outlook has been deteriorating in terms of lending risk. Headline GDP figures are therefore an unreliable guide to economic conditions, GDP being indirectly inflated by the expansion of central bank balance sheets.
Clearly, the countercyclical financing of the whole economy in all major jurisdictions is a valid description of the current actions of central banks. It takes no leap of the imagination to deduce that without central bank credit expansion all these major economies would be sinking into deep slumps. This is particularly true of the US, UK and EU, while the BoJ’s balance sheet total unlike the others has admittedly declined over the last year. Therefore, while current economic conditions persist, we can expect a continuing expansion of central bank balance sheets for no real economic benefit.
But monetary policy can never be commercial in nature. It is not the function of a bureaucratic body answerable only to the government to make commercial lending judgements. Central banks acting as countercyclical lenders, a role that requires the judgement of profit-seeking company doctors, cannot deliver a positive economic outcome. While the cycle of commercial bank credit expansion had its own evils, at least it involved institutions capable of commercial judgement. That has now been marginalised.
Monetary policy is now trapped with an ultimate failure looming. Without a change in policy, the only outcome will be a further acceleration of inflation of the currency quantity led by its narrower measures. And as we saw in Figure 1, the consequences for prices of the cycle of bank credit expansion and contraction were broadly confined to consecutive periods of expansion and contraction. But there is no such limitation on the expansion of unbacked base currency, and the effect over recent times is shown in Figure 3.
https://www.forexfactory.com/images/media/Central3.png
This cannot be undone, and the debasement of currencies can only accelerate unless policymakers sum up the courage to face the consequences: a deliberate act to unwind all the distortions by stopping the printing presses, which will simply crash their respective economies.
This is as likely as the moon colliding with Mars, at least, that is, before the situation deteriorates to the point where central bankers are driven to consider backing their failing currencies with a gold coin standard. Meanwhile, by venturing into the business of contra cyclical currency expansion central banks have entered dangerous territory. The commitment to continue suppressing interest rates is now greater than ever. But the consequences for the purchasing power of their fiat currencies are likely to be manifest far sooner than might be generally expected.
The economic outlook will also rapidly deteriorate
Besides the inability of intervening central bank policymakers to make commercial judgements, their actions also take their respective economies even further away from commercial progress. The relationship between currencies, credit and private sector enterprises can be expected to deteriorate more rapidly from here as time preference factors re-emerge. The model relationship between prices and borrowing costs in a successful sound-money economy illustrated by Gibson’s paradox has been destroyed by depreciating fiat. For too long, malinvestments driven by a widespread expectation of profits arising from interest rate suppression more than from genuinely profitable production have dominated economic activity. That is now set to be displaced by malinvestments arising from expectations of rising prices. It can only be stopped by letting free markets set interest rates. But no businessmen in the major economies believe in free enterprise anymore with good reason, only in profits from speculation, the root of which is currency debasement. They are all addicted to interest rate suppression and rising prices as mechanisms to get rich.
While monetary policymakers persist in believing in monetary stimulation the consequences are in fact horribly destructive. The following bullet points are not exhaustive:
- Suppression of interest rates has encouraged businesses to borrow for projects which otherwise would have not been deemed profitable. When central banks have subsequently been forced to raise interest rates in response to rising prices these projects collapse or are rescued by the state. Every credit cycle, this burden on central bank policymaking accumulates.
- Interest rate suppression transfers wealth from savers for the benefit of borrowers. Consequently, savers reduce their savings in favour of immediate consumption, while borrowers take advantage of interest rate suppression to benefit from the wealth transfer effect. A low propensity to save is associated with a tendency towards consumer price inflation and greater interest rate instability.
- The increase of circulating currency is of most benefit to those who receive it first before it has driven prices higher due to the increase in its quantity. Those who benefit most are the issuer, the government, and licenced banks. As the extra currency is spent into circulation it drives prices higher, to the detriment of later receivers. The people who lose most are those who are distant from financial centres and those on fixed incomes, such as state pensioners and the low paid.
- Since tax thresholds are not adjusted for the effects of inflation, inflation increases the tax burden on the productive economy, reducing its ability to prosper.
- The Keynesian justification for inflationary financing was to stimulate the economy. It relies on economic actors being unaware of the increased quantity of currency and the effect on its purchasing power. Instead, the rise in prices for everyday goods and services is widely attributed to increased demand, giving the illusion of improved trading conditions. Inevitably, once the increased quantity of currency has been fully absorbed in general circulation, the effect passes and even reverses, and further stimulation is required to perpetuate the effect. But the more this trick is deployed, the more widely the consequences become understood and the less effective it becomes.
- The more a government uses monetary inflation to finance its spending, the more difficult it is to control. Political practicalities force politicians to continue with inflationary financing, increasing the burden on private sector production. The interests of a government and its electors diverge, with governments increasingly desperate for the benefit of wealth transfer through currency debasement at the expense of economic progress.
- Unless it is somehow stopped, the accelerating collapse of a currency whose decline yields progressively less value to its issuer destroys economic activity, leading to widespread destitution and political rebellion. These are the conditions that open the door to political instability, dictatorships, and extremism.
The first test as to whether any of the major central banks will see the light and tackle the inflation problem will take place in the coming few weeks as evidence of falling purchasing power for fiat currencies mount. The US Fed faced a shock yesterday with the consumer price index up 6.2% against expectations of 5.8%, and a mandated target of 2%. Its claims that inflation is “transient” is looking more preposterous by the day.
Investment managers have yet to challenge the Fed’s view, but with mounting evidence that it is incorrect, it is likely to be a matter of only weeks, possibly days, before yields on government bonds begin to reflect currency debasement. In assessing the situation, driven by macroeconomic theories investment managers in bond markets tend to think of inflation in terms of real yield, being the nominal redemption yield on a bond adjusted by the official rate of price inflation. The shock of a CPI rising at 6.2% adjusts the current yield on the 10-year US Treasury bond from the current 1.6% to a negative yield of 4.6%. The more fund managers make this calculation, the greater the threat to bond prices.
Usually with a lag, a rise in bond yields and the prospect of higher ones to come begin to undermine equity market valuations. This is important for the satisfaction of policy management objectives, which for some time, and certainly since the Lehman crisis thirteen years ago, has placed an emphasis on a healthy stock market to maintain economic confidence. For the Fed, the BoE and the BoJ this has been particularly important and is the rationale for quantitative easing.
This brings us to the Rubicon: in the face of a currency’s loss of purchasing power, evidenced in a higher and rising general level of prices, will one or more of the major central banks abandon what has become an untenable monetary policy, calling a halt to further currency expansion?
Alternatively, will they all continue to combine efforts to suppress interest rates and accelerate currency expansion through increased QE to support financial markets and contain the financing costs on further government borrowing?
The former choice by just one of them would end all central bankers’ efforts of contra cyclical expansion to support markets and the illusion that all is well in their underlying economies. It would end central bank control over markets and allow markets to reassert themselves with respect to currencies and the conditions for domestic and international trade. It would expose to the vote of the marketplace government finances for what they are. The abandonment of the marketplace of interest rate policies would bring about the crisis central banks have strived to prevent for decades.
The latter choice will involve central banks to overtly coordinate their attack on markets, an attempt to force them to accept continuing dominance of state currencies and the monetary policies that go with them. Further measures can be expected, such as a currency accord to ensure continuing stability against each other with increased swap arrangements. We can expect political policies in other spheres, such as capping energy prices and prices of other goods deemed politically sensitive.
These are all symptoms of an ultimate failure of the state. We have seen them repeated throughout history. The decision to choose to face the reality of the situation or to struggle on in accordance with the state’s self-sought mandate is a choice as to whether the looming crisis visits us sooner, or later.
[i] Keynes, General Theory, Book 1, Chapter 3.1.
[ii]See Central Bank Gold Reserves — a historical perspective by Timothy Green.
[iii] Yardeni Research, Nov 8 Monthly balance sheets. BoE figures additional from BoE.
The views and opinions expressed in this article are those of the author(s) and do not reflect those of Goldmoney unless expressly stated. The article is for general information purposes only and does not constitute either Goldmoney or the author(s) providing you with legal, financial, tax, investment, or accounting advice. You should not act or rely on any information contained in the article without first seeking independent professional advice. Care has been taken to ensure that the information in the article is reliable; however, Goldmoney does not represent that it is accurate, complete, up-to-date and/or to be taken as an indication of future results and it should not be relied upon as such. Goldmoney will not be held responsible for any claim, loss, damage, or inconvenience caused as a result of any information or opinion contained in this article and any action taken as a result of the opinions and information contained in this article is at your own risk.
- #10,166
- Nov 11, 2021 3:37pm Nov 11, 2021 3:37pm
- | Commercial User | Joined Dec 2014 | 14,165 Posts
https://www.zerohedge.com/geopolitic...nomic-collapse
They Have Lost Control" - Michael Snyder Warns "Our Destination Is Economic Collapse"
https://zh-prod-1cc738ca-7d3b-4a72-b.../picture-5.jpg
BY TYLER DURDEN
THURSDAY, NOV 11, 2021 - 04:20 PM
Authored by Michael Snyder via TheMostImportantNews.com,
I think that they actually believed that they could get away with it. I think that they were actually convinced that they could create, borrow and spend trillions upon trillions of dollars without any serious long-term consequences. But they should have known better. The people running things are very highly “educated”, and after spending decades getting to their current positions they are supposed to be “experts” that we can trust with very difficult decisions. Unfortunately, the “experts” have put us on a path that leads to a currency collapse and financial ruin.
https://assets.zerohedge.com/s3fs-pu...?itok=6nxX0CIu
So our leaders should have known better.
But it is just so tempting because pumping out money like crazy always seems to work out just great at first. For example, when the Weimar Republic first started wildly creating money it created an economic boom, but we all know how that experiment turned out in the end.
This week, the mainstream media is full of talk about inflation, and many of the talking heads seem mystified that things have gotten so bad. But anyone with half a brain should have been able to see that this was coming. Just look at what has been happening to M2 since the start of the pandemic.
https://assets.zerohedge.com/s3fs-pu...?itok=JIM4Oddk
What we have been doing to the money supply is complete and utter lunacy, and this is inevitably going to kill the U.S. dollar eventually.
Next, I would like for you to take a look at how rapidly the Fed balance sheet has been rising. This is the sort of thing that you would expect to see in a banana republic.
https://assets.zerohedge.com/s3fs-pu...?itok=_jrPBOvF
I think that our leaders deceived themselves into thinking that they could get away with creating money so recklessly, but they haven’t.
Very painful inflation is here, and on Wednesday we learned that prices have been rising at the fastest pace in more than 30 years…
The consumer price index, which is a basket of products ranging from gasoline and health care to groceries and rents, rose 6.2% from a year ago, the most since December 1990. That compared with the 5.9% Dow Jones estimate.
On a monthly basis, the CPI increased 0.9% against the 0.6% estimate.
If inflation continues to rise at about 1 percent a month, it won’t be too long before we are well into double digits on a yearly basis.
Of course, I don’t actually put too much faith in the inflation numbers that the government gives us, because the way inflation is calculated has been changed more than two dozen times since 1980.
And every time the definition of inflation has been changed, the goal has been to make inflation appear to be lower.
According to John Williams of shadowstats.com, if inflation was still calculated the way it was back in 1980, the official rate of inflation would be close to 15 percent right now.
This is a real national crisis, and it isn’t going away any time soon.
One of the factors that are driving up the overall rate of inflation is the price of gasoline. If you can believe it, the price of gas is almost 50 percent higher than it was last year at this time…
Gasoline prices last month shot up nearly 50% from the same month a year ago, putting them at levels last seen in 2014. Grocery prices climbed 5.4%, with pork prices up 14.1% from a year ago, the biggest increase since 1990.
Prices for new vehicles jumped 9.8% in October, the largest rise since 1975, while prices for furniture and bedding leaped by the most since 1951. Prices for tires and sports equipment rose by the most since the early 1980s.
Even Joe Biden is using the term “exceedingly high” to describe the current state of gasoline prices.
Other forms of energy are also becoming a lot more expensive…
The price of electricity in October increased 6.5% from the same month a year ago while consumer expenses paid to utilities for gas went up 28%, according to numbers released Wednesday by the U.S. Bureau of Labor Statistics. Fuel oil rose 59%, and costs for propane, kerosene, and firewood jumped by about 35%, the data show.
It is going to cost you a lot more money to heat your home this winter.
I hope that you are prepared for that.
Speaking of homes, they continued to shoot up in price during the third quarter…
The median price of single-family existing homes rose in nearly all — 99% — of the 183 markets tracked by the National Association of Realtors in the third quarter, with double-digit price increases seen in 78% of the markets.
If our paychecks were rising fast enough to keep up with inflation, then at least our standard of living would remain the same.
But that isn’t happening, is it?
In fact, the Labor Department’s own numbers show that real average hourly earnings are going down…
The Labor Department reported Friday that average hourly earnings increased 0.4% in October, about in line with estimates. That was the good news.
However, the department reported Wednesday that top-line inflation for the month increased 0.9%, far more than what had been expected. That was the bad news – very bad news, in fact.
That’s because it meant that all told, real average hourly earnings when accounting for inflation, actually decreased 0.5% for the month.
What this means is that our standard of living is going down.
And it is going to keep going down.
In a desperate attempt to maintain the status quo, many Americans are taking on more debt than ever before…
American households are carrying record amounts of debt as home and auto prices surge, Covid infections continue to fall and people get out their credit cards again.
Between July and September, US household debt climbed to a new record of $15.24 trillion, the Federal Reserve Bank of New York said Tuesday.
How in the world did we allow ourselves to get 15 trillion dollars in debt?
Of course many would point out that the federal government is an even worse offender. Very shortly, the U.S. national debt will cross the 29 trillion dollar mark.
As our leaders in Washington continue to engage in the greatest debt binge in world history, the U.S. dollar will steadily lose value.
This is going to deeply affect everyone and everything in our society. For instance, just check out the pain that inflation is causing for one food bank in the San Francisco area…
In the prohibitively expensive San Francisco Bay Area, the Alameda County Community Food Bank in Oakland is spending an extra $60,000 a month on food. Combined with increased demand, it is now shelling out $1 million a month to distribute 4.5 million pounds (2 million kilograms) of food, said Michael Altfest, the Oakland food bank’s director of community engagement.
Pre-pandemic, it was spending a quarter of the money for 2.5 million pounds (1.2 million kilograms) of food.
I warned you way ahead of time that this was coming, and what we have experienced so far is just the beginning.
The “experts” running the Fed and our politicians in Washington aren’t going to suddenly reverse direction.
In fact, Congress just passed another gigantic spending bill that Joe Biden desperately wanted.
Our course has been set and there is no turning back.
Our destination is economic collapse, and life in America will never, ever be the same again.
* * *
They Have Lost Control" - Michael Snyder Warns "Our Destination Is Economic Collapse"
https://zh-prod-1cc738ca-7d3b-4a72-b.../picture-5.jpg
BY TYLER DURDEN
THURSDAY, NOV 11, 2021 - 04:20 PM
Authored by Michael Snyder via TheMostImportantNews.com,
I think that they actually believed that they could get away with it. I think that they were actually convinced that they could create, borrow and spend trillions upon trillions of dollars without any serious long-term consequences. But they should have known better. The people running things are very highly “educated”, and after spending decades getting to their current positions they are supposed to be “experts” that we can trust with very difficult decisions. Unfortunately, the “experts” have put us on a path that leads to a currency collapse and financial ruin.
https://assets.zerohedge.com/s3fs-pu...?itok=6nxX0CIu
So our leaders should have known better.
But it is just so tempting because pumping out money like crazy always seems to work out just great at first. For example, when the Weimar Republic first started wildly creating money it created an economic boom, but we all know how that experiment turned out in the end.
This week, the mainstream media is full of talk about inflation, and many of the talking heads seem mystified that things have gotten so bad. But anyone with half a brain should have been able to see that this was coming. Just look at what has been happening to M2 since the start of the pandemic.
https://assets.zerohedge.com/s3fs-pu...?itok=JIM4Oddk
What we have been doing to the money supply is complete and utter lunacy, and this is inevitably going to kill the U.S. dollar eventually.
Next, I would like for you to take a look at how rapidly the Fed balance sheet has been rising. This is the sort of thing that you would expect to see in a banana republic.
https://assets.zerohedge.com/s3fs-pu...?itok=_jrPBOvF
I think that our leaders deceived themselves into thinking that they could get away with creating money so recklessly, but they haven’t.
Very painful inflation is here, and on Wednesday we learned that prices have been rising at the fastest pace in more than 30 years…
The consumer price index, which is a basket of products ranging from gasoline and health care to groceries and rents, rose 6.2% from a year ago, the most since December 1990. That compared with the 5.9% Dow Jones estimate.
On a monthly basis, the CPI increased 0.9% against the 0.6% estimate.
If inflation continues to rise at about 1 percent a month, it won’t be too long before we are well into double digits on a yearly basis.
Of course, I don’t actually put too much faith in the inflation numbers that the government gives us, because the way inflation is calculated has been changed more than two dozen times since 1980.
And every time the definition of inflation has been changed, the goal has been to make inflation appear to be lower.
According to John Williams of shadowstats.com, if inflation was still calculated the way it was back in 1980, the official rate of inflation would be close to 15 percent right now.
This is a real national crisis, and it isn’t going away any time soon.
One of the factors that are driving up the overall rate of inflation is the price of gasoline. If you can believe it, the price of gas is almost 50 percent higher than it was last year at this time…
Gasoline prices last month shot up nearly 50% from the same month a year ago, putting them at levels last seen in 2014. Grocery prices climbed 5.4%, with pork prices up 14.1% from a year ago, the biggest increase since 1990.
Prices for new vehicles jumped 9.8% in October, the largest rise since 1975, while prices for furniture and bedding leaped by the most since 1951. Prices for tires and sports equipment rose by the most since the early 1980s.
Even Joe Biden is using the term “exceedingly high” to describe the current state of gasoline prices.
Other forms of energy are also becoming a lot more expensive…
The price of electricity in October increased 6.5% from the same month a year ago while consumer expenses paid to utilities for gas went up 28%, according to numbers released Wednesday by the U.S. Bureau of Labor Statistics. Fuel oil rose 59%, and costs for propane, kerosene, and firewood jumped by about 35%, the data show.
It is going to cost you a lot more money to heat your home this winter.
I hope that you are prepared for that.
Speaking of homes, they continued to shoot up in price during the third quarter…
The median price of single-family existing homes rose in nearly all — 99% — of the 183 markets tracked by the National Association of Realtors in the third quarter, with double-digit price increases seen in 78% of the markets.
If our paychecks were rising fast enough to keep up with inflation, then at least our standard of living would remain the same.
But that isn’t happening, is it?
In fact, the Labor Department’s own numbers show that real average hourly earnings are going down…
The Labor Department reported Friday that average hourly earnings increased 0.4% in October, about in line with estimates. That was the good news.
However, the department reported Wednesday that top-line inflation for the month increased 0.9%, far more than what had been expected. That was the bad news – very bad news, in fact.
That’s because it meant that all told, real average hourly earnings when accounting for inflation, actually decreased 0.5% for the month.
What this means is that our standard of living is going down.
And it is going to keep going down.
In a desperate attempt to maintain the status quo, many Americans are taking on more debt than ever before…
American households are carrying record amounts of debt as home and auto prices surge, Covid infections continue to fall and people get out their credit cards again.
Between July and September, US household debt climbed to a new record of $15.24 trillion, the Federal Reserve Bank of New York said Tuesday.
How in the world did we allow ourselves to get 15 trillion dollars in debt?
Of course many would point out that the federal government is an even worse offender. Very shortly, the U.S. national debt will cross the 29 trillion dollar mark.
As our leaders in Washington continue to engage in the greatest debt binge in world history, the U.S. dollar will steadily lose value.
This is going to deeply affect everyone and everything in our society. For instance, just check out the pain that inflation is causing for one food bank in the San Francisco area…
In the prohibitively expensive San Francisco Bay Area, the Alameda County Community Food Bank in Oakland is spending an extra $60,000 a month on food. Combined with increased demand, it is now shelling out $1 million a month to distribute 4.5 million pounds (2 million kilograms) of food, said Michael Altfest, the Oakland food bank’s director of community engagement.
Pre-pandemic, it was spending a quarter of the money for 2.5 million pounds (1.2 million kilograms) of food.
I warned you way ahead of time that this was coming, and what we have experienced so far is just the beginning.
The “experts” running the Fed and our politicians in Washington aren’t going to suddenly reverse direction.
In fact, Congress just passed another gigantic spending bill that Joe Biden desperately wanted.
Our course has been set and there is no turning back.
Our destination is economic collapse, and life in America will never, ever be the same again.
* * *
1
- #10,167
- Edited 7:24pm Nov 11, 2021 7:13pm | Edited 7:24pm
- | Commercial User | Joined Dec 2014 | 14,165 Posts
https://www.zerohedge.com/crypto/why...itcoin-upgrade
Much has been written about Bitcoin’s Taproot upgrade, and plenty of resources exist to explain its technical concepts. However, in the author's opinion, a more comprehensive roundup of why Taproot is being implemented, what it will bring to the network, and what it might enable for the future, in plain English, is still lacking. Driven by the misconceptions that regular users have about Taproot and a certain lack of understanding, this essay leverages the technical resources that came before it to enlighten you to the broader implications of what is arguably the most significant upgrade to Bitcoin yet.
WHY TAPROOT MATTERS
In short and at the highest level of abstraction possible, the Bitcoin Taproot soft fork will optimize scalability, privacy, and smart contract functionality. It will bring about a new address type, allowing bitcoin spending to look similar regardless of whether the sender is making a simple payment, a complex multi-signature transaction, or using the Lightning Network. Moreover, Taproot addresses will allow users to save on transaction fees — the more complex the spending conditions, the more the user will save — compared to previous address types. By reducing the transaction size and making nearly any transaction appear like a simple, single-signature one, Taproot will also enable larger and more complex operations to be deployed on Bitcoin that were previously unfeasible or almost impossible.
If you only use Bitcoin to hold coins long-term and sparingly move them around between wallets, you might think Taproot will have little impact on you. But in fact, the possibilities that this soft fork will enable for Bitcoin's future are extensive, as Taproot lays the groundwork for more prominent and more significant developments to land on the network.
For one, Taproot ultimately empowers the Lightning Network to unleash its full potential as a proper scaling technology for Bitcoin. Currently, the second layer protocol can be spotted in action in the Bitcoin blockchain, reducing coins' fungibility. Fungibility is vital for a monetary good to actualize the medium of exchange role because it allows for coins to be seen as equal. If transaction outputs were seen differently, they could suffer from discrimination by the receiver, preventing users from using their BTC for payments in certain conditions.
In addition, the Lightning Network and other complex wallets and contracts will enjoy greater efficiency and lower transaction fees, further empowering the usage of Bitcoin as a medium of exchange. Enabled by Schnorr signatures, even the most complex transactions made between Taproot-supporting wallets will incur the same fees as simple ones. Furthermore, this reduction of costs and the increased flexibility and capabilities for smart contracts will ultimately enable very complex setups that were previously not feasible in Bitcoin.
But to comprehend why Taproot is being implemented in Bitcoin, one must first understand how Bitcoin transactions work and the many upgrades that have been made up to this point, naturally leading to Taproot.
A QUICK OVERVIEW OF HOW BITCOIN TRANSACTIONS WORK
Bitcoin transactions work based on inputs and outputs, which are also equal since coins are not destroyed. If you want to send me 5 BTC, for instance, you would need to select precisely 5 bitcoin, else the transaction would be either incomplete, or you'd have too many funds.
For the former, Bitcoin can't do much — you can't send funds you don't have — but for the latter, Bitcoin will give you the "rest" as change. Therefore, if you select 7.38 BTC to send me five, 2.38 will go back to you as a change. So you'd have 7.38 as input and 2.38 + 5 as outputs, although you'd receive a little less than 2.38 because the network needs to deduct the transaction fees.
When we talk about spending, we are referring to an output. Now that I have the 5 BTC you sent me, I can use it as I wish. I can send 3 BTC to Alice and 2 BTC to Bob, for instance, or I can send 5 BTC to Joe. Or I can keep the 5 BTC and HODL indefinitely. Unless I choose to hold it, I will be making a transaction regardless of the use I make of my new bitcoin. This latest transaction will get the 5 BTC output I have as input, and this transaction's output will be whatever I decide to send. Notice that since I received the 5 BTC in full, even if I want to send only 3 bitcoin, I will have to input all the 5 bitcoin into the transaction, and I'll get the rest back as change.
What's essential in this dynamic is to realize the interaction of coins as inputs and outputs. When we spend, we are transferring a transaction output to another person. But to do that, we need to input it into a new transaction, and the other person will get the BTC as another transaction output. For that reason, the concept of a wallet is an abstraction intended to make things easier to acknowledge and understand by summing up all the transaction outputs you own. Because after all, that's all there is — transaction outputs (UTXOs).
IMPROVING THE BITCOIN TRANSACTION MODEL
The history of paying in bitcoin has changed a lot since the early days of the network. Overall, the UTXO model described above relies on scripts or contracts created using the Bitcoin Script "programming" language. This author has put “programming” in quotation marks because Bitcoin's scripting language can more accurately be seen as a verification language than one that provides computation directives. In essence, Bitcoin scripting is a way to specify conditions for spending a UTXO.
There are three major constraints when considering Bitcoin Script and how its improvements are made: privacy, space efficiency, and computational efficiency — usually, improving one of these cascades into strengthening the other two. For instance, seeking to reveal less about a transaction and thereby improving privacy would entail submitting a smaller amount of data, reducing space needs for the transaction, and making it easier to be verified — it’s less computationally intensive.
The community has been improving how Bitcoin transactions work by gradually introducing new script, or address, types. Ultimately, these changes have sought to enhance transactional privacy, make the transfer of funds more lightweight, and speed up the process of validating transactions. As a result, users have greater flexibility for creating scripts that increase the resilience of their savings, move funds around more efficiently and privately, and help unleash financial sovereignty. Albeit complicated for the end-user, technical tools have emerged to adopt these practices and abstract low-level technicalities, ensuring greater adoption of current best practices.
One clear example of this is multisignature addresses, which once had to be done manually with Bitcoin Script but can now be effortlessly created with a smartphone or a laptop. The same is true for Lightning, Bitcoin's second-layer scaling solution for small and frequent payments. This Layer 2 is now available in mobile apps and allows for people to transact once-unfeasible amounts of BTC with each other instantly.
Taproot, the latest upgrade to the Bitcoin protocol and arguably the most important one to date is a natural evolution of the way Bitcoin transactions, and hence scripts, work. Enabled by Schnorr signatures, MAST, and Tapescript, Taproot seeks to increase flexibility and privacy without compromising security.
In the early days of Bitcoin, with legacy addresses, the sender of a transaction had to care about the receiver's wallet policy — its contract, or script — which was not only impractical but represented a significant privacy shortcoming. The contract had to be revealed when the transaction was sent for anyone to see; hence, the receiver's privacy was low.
With the advent of pay to script hash (P2SH), Bitcoin changed that dynamic, and transactions started to be sent to the hash of the contract instead of the contract itself. This meant the contract wouldn't be revealed until the output was spent, and outputs became identical — just a hash.
A hash is the output of a hashing function, which takes a variable-length input and returns an encrypted result of fixed length. Not only did this addition to Bitcoin transactions improve privacy by making all outputs look similar, but it also reduced the output size, thereby increasing efficiency.
However, the contract had to become visible when spending, and all of the spending conditions had to be revealed. The two downsides with this approach are privacy and efficiency, as any observer could learn about the different spending conditions — thus learning plenty of information about the spender — and the blockchain would be bloated with a large script with unnecessary logic — it only makes practical sense to verify the spending condition that was used to spend that output.
The Taproot upgrade improves this logic by introducing Merklelized Abstract Syntax Trees (MAST), a structure that ultimately allows Bitcoin to achieve the goal of only revealing the contract's specific spending condition that was used.
There are two main possibilities for complex Taproot spending: a consensual, mutually-agreed condition; or a fallback, specific condition. For instance, if a multisignature address owned by multiple people wants to spend some funds programmatically, they could set up one spending condition in which all of them agree to spend the funds or fallback states in case they can't reach a consensus.
If the condition everyone agrees on is used, Taproot allows it to be turned into a single signature. Therefore, the Bitcoin network wouldn't even know there was a contract being used in the first place, significantly increasing the privacy of all of the owners of the multisignature address.
However, if a mutual consensus isn't reached and one party spends the funds using any of the fallback methods, Taproot only reveals that specific method. As the introduction of P2SH increased the receiver's privacy by making all outputs look identical — just a hash — Taproot will increase the sender's privacy by restricting the amount of information broadcast to the network.
Even if you don't use complex wallet functionality like multisignature or Lightning, improving their privacy also improves yours, as it makes chain surveillance more difficult and increases the broader Bitcoin network anonymity set.
WHAT TAPROOT COULD ULTIMATELY ENABLE FOR AVERAGE BITCOIN USERS
By making transactions cheaper, more efficient, and more private, the adoption of Taproot will set the stage for extra functionality to land on the Bitcoin network. As nodes upgrade and people start using Taproot addresses primarily, it will become more difficult for blockchain observers to spot and discriminate between senders and receivers, UTXOs will be treated more equally, and the broader Bitcoin network will be a more robust settlement network that enables complex functionality to be built on top.
Layer 2 protocols and sidechains will be empowered to step up and leverage even more sophisticated smart contracts for coordinating funds on the base layer. The end-user might not construct these themselves, but they will benefit from more special offerings in the broader Bitcoin ecosystem with stronger assurances. Although some decentralized finance applications and use cases are already being implemented on Bitcoin, the greater smart contract flexibility and capabilities brought by the Taproot upgrade can ultimately allow even more use cases to be implemented and more complex functionality to be deployed while leveraging the strong security assurances of the Bitcoin network — which no other "cryptocurrency" can match.
As bitcoin is actual money, long-term applications of decentralized finance can naturally only be built on top of it. Novelty networks such as Ethereum lack the monetary properties of the Bitcoin base layer and its security and robustness — part of the reason why most applications built on them have fallen short of accomplishing their value proposition over the long run. By patiently building up the foundations for a distributed, uncensorable, antifragile, and sovereign monetary network throughout its lifetime, Bitcoin is set to enjoy actual long-term functionality and growth through a layered approach.
The Taproot upgrade, which also comprises Schnorr, MAST, and Tapscript, builds on that foundation by furthering the security and privacy of the base layer and enabling more complex applications to be built on top of it. Greater flexibility of the smart contract functionalities of Bitcoin brings about a new era of unthinkable possibilities, opening up the door for broader use cases to be implemented on the best monetary network humanity has ever known.
Over the long term, upgrades like Taproot and Lightning might effectively render altcoins redundant and unnecessary. If a given functionality can be implemented in Bitcoin, the most robust and secure network, it is only natural that it will. While altcoins foster innovation and eventually showcase some exciting use cases, they can be more accurately seen as experimentation playgrounds. Once real use cases are found, they will likely be ported to Bitcoin –– their best bet for continued, long-term development and usage.
* * *
To learn more about Taproot, Aaron van Wirdum's technical overview is a good place to start. For a more extensive explanation, reference Kraken Intelligence's detailed report published earlier this year. If you want to jump into the specific proposals, read BIP340, BIP341 and BIP342.
Much has been written about Bitcoin’s Taproot upgrade, and plenty of resources exist to explain its technical concepts. However, in the author's opinion, a more comprehensive roundup of why Taproot is being implemented, what it will bring to the network, and what it might enable for the future, in plain English, is still lacking. Driven by the misconceptions that regular users have about Taproot and a certain lack of understanding, this essay leverages the technical resources that came before it to enlighten you to the broader implications of what is arguably the most significant upgrade to Bitcoin yet.
WHY TAPROOT MATTERS
In short and at the highest level of abstraction possible, the Bitcoin Taproot soft fork will optimize scalability, privacy, and smart contract functionality. It will bring about a new address type, allowing bitcoin spending to look similar regardless of whether the sender is making a simple payment, a complex multi-signature transaction, or using the Lightning Network. Moreover, Taproot addresses will allow users to save on transaction fees — the more complex the spending conditions, the more the user will save — compared to previous address types. By reducing the transaction size and making nearly any transaction appear like a simple, single-signature one, Taproot will also enable larger and more complex operations to be deployed on Bitcoin that were previously unfeasible or almost impossible.
If you only use Bitcoin to hold coins long-term and sparingly move them around between wallets, you might think Taproot will have little impact on you. But in fact, the possibilities that this soft fork will enable for Bitcoin's future are extensive, as Taproot lays the groundwork for more prominent and more significant developments to land on the network.
For one, Taproot ultimately empowers the Lightning Network to unleash its full potential as a proper scaling technology for Bitcoin. Currently, the second layer protocol can be spotted in action in the Bitcoin blockchain, reducing coins' fungibility. Fungibility is vital for a monetary good to actualize the medium of exchange role because it allows for coins to be seen as equal. If transaction outputs were seen differently, they could suffer from discrimination by the receiver, preventing users from using their BTC for payments in certain conditions.
In addition, the Lightning Network and other complex wallets and contracts will enjoy greater efficiency and lower transaction fees, further empowering the usage of Bitcoin as a medium of exchange. Enabled by Schnorr signatures, even the most complex transactions made between Taproot-supporting wallets will incur the same fees as simple ones. Furthermore, this reduction of costs and the increased flexibility and capabilities for smart contracts will ultimately enable very complex setups that were previously not feasible in Bitcoin.
But to comprehend why Taproot is being implemented in Bitcoin, one must first understand how Bitcoin transactions work and the many upgrades that have been made up to this point, naturally leading to Taproot.
A QUICK OVERVIEW OF HOW BITCOIN TRANSACTIONS WORK
Bitcoin transactions work based on inputs and outputs, which are also equal since coins are not destroyed. If you want to send me 5 BTC, for instance, you would need to select precisely 5 bitcoin, else the transaction would be either incomplete, or you'd have too many funds.
For the former, Bitcoin can't do much — you can't send funds you don't have — but for the latter, Bitcoin will give you the "rest" as change. Therefore, if you select 7.38 BTC to send me five, 2.38 will go back to you as a change. So you'd have 7.38 as input and 2.38 + 5 as outputs, although you'd receive a little less than 2.38 because the network needs to deduct the transaction fees.
When we talk about spending, we are referring to an output. Now that I have the 5 BTC you sent me, I can use it as I wish. I can send 3 BTC to Alice and 2 BTC to Bob, for instance, or I can send 5 BTC to Joe. Or I can keep the 5 BTC and HODL indefinitely. Unless I choose to hold it, I will be making a transaction regardless of the use I make of my new bitcoin. This latest transaction will get the 5 BTC output I have as input, and this transaction's output will be whatever I decide to send. Notice that since I received the 5 BTC in full, even if I want to send only 3 bitcoin, I will have to input all the 5 bitcoin into the transaction, and I'll get the rest back as change.
What's essential in this dynamic is to realize the interaction of coins as inputs and outputs. When we spend, we are transferring a transaction output to another person. But to do that, we need to input it into a new transaction, and the other person will get the BTC as another transaction output. For that reason, the concept of a wallet is an abstraction intended to make things easier to acknowledge and understand by summing up all the transaction outputs you own. Because after all, that's all there is — transaction outputs (UTXOs).
IMPROVING THE BITCOIN TRANSACTION MODEL
The history of paying in bitcoin has changed a lot since the early days of the network. Overall, the UTXO model described above relies on scripts or contracts created using the Bitcoin Script "programming" language. This author has put “programming” in quotation marks because Bitcoin's scripting language can more accurately be seen as a verification language than one that provides computation directives. In essence, Bitcoin scripting is a way to specify conditions for spending a UTXO.
There are three major constraints when considering Bitcoin Script and how its improvements are made: privacy, space efficiency, and computational efficiency — usually, improving one of these cascades into strengthening the other two. For instance, seeking to reveal less about a transaction and thereby improving privacy would entail submitting a smaller amount of data, reducing space needs for the transaction, and making it easier to be verified — it’s less computationally intensive.
The community has been improving how Bitcoin transactions work by gradually introducing new script, or address, types. Ultimately, these changes have sought to enhance transactional privacy, make the transfer of funds more lightweight, and speed up the process of validating transactions. As a result, users have greater flexibility for creating scripts that increase the resilience of their savings, move funds around more efficiently and privately, and help unleash financial sovereignty. Albeit complicated for the end-user, technical tools have emerged to adopt these practices and abstract low-level technicalities, ensuring greater adoption of current best practices.
One clear example of this is multisignature addresses, which once had to be done manually with Bitcoin Script but can now be effortlessly created with a smartphone or a laptop. The same is true for Lightning, Bitcoin's second-layer scaling solution for small and frequent payments. This Layer 2 is now available in mobile apps and allows for people to transact once-unfeasible amounts of BTC with each other instantly.
Taproot, the latest upgrade to the Bitcoin protocol and arguably the most important one to date is a natural evolution of the way Bitcoin transactions, and hence scripts, work. Enabled by Schnorr signatures, MAST, and Tapescript, Taproot seeks to increase flexibility and privacy without compromising security.
In the early days of Bitcoin, with legacy addresses, the sender of a transaction had to care about the receiver's wallet policy — its contract, or script — which was not only impractical but represented a significant privacy shortcoming. The contract had to be revealed when the transaction was sent for anyone to see; hence, the receiver's privacy was low.
With the advent of pay to script hash (P2SH), Bitcoin changed that dynamic, and transactions started to be sent to the hash of the contract instead of the contract itself. This meant the contract wouldn't be revealed until the output was spent, and outputs became identical — just a hash.
A hash is the output of a hashing function, which takes a variable-length input and returns an encrypted result of fixed length. Not only did this addition to Bitcoin transactions improve privacy by making all outputs look similar, but it also reduced the output size, thereby increasing efficiency.
However, the contract had to become visible when spending, and all of the spending conditions had to be revealed. The two downsides with this approach are privacy and efficiency, as any observer could learn about the different spending conditions — thus learning plenty of information about the spender — and the blockchain would be bloated with a large script with unnecessary logic — it only makes practical sense to verify the spending condition that was used to spend that output.
The Taproot upgrade improves this logic by introducing Merklelized Abstract Syntax Trees (MAST), a structure that ultimately allows Bitcoin to achieve the goal of only revealing the contract's specific spending condition that was used.
There are two main possibilities for complex Taproot spending: a consensual, mutually-agreed condition; or a fallback, specific condition. For instance, if a multisignature address owned by multiple people wants to spend some funds programmatically, they could set up one spending condition in which all of them agree to spend the funds or fallback states in case they can't reach a consensus.
If the condition everyone agrees on is used, Taproot allows it to be turned into a single signature. Therefore, the Bitcoin network wouldn't even know there was a contract being used in the first place, significantly increasing the privacy of all of the owners of the multisignature address.
However, if a mutual consensus isn't reached and one party spends the funds using any of the fallback methods, Taproot only reveals that specific method. As the introduction of P2SH increased the receiver's privacy by making all outputs look identical — just a hash — Taproot will increase the sender's privacy by restricting the amount of information broadcast to the network.
Even if you don't use complex wallet functionality like multisignature or Lightning, improving their privacy also improves yours, as it makes chain surveillance more difficult and increases the broader Bitcoin network anonymity set.
WHAT TAPROOT COULD ULTIMATELY ENABLE FOR AVERAGE BITCOIN USERS
By making transactions cheaper, more efficient, and more private, the adoption of Taproot will set the stage for extra functionality to land on the Bitcoin network. As nodes upgrade and people start using Taproot addresses primarily, it will become more difficult for blockchain observers to spot and discriminate between senders and receivers, UTXOs will be treated more equally, and the broader Bitcoin network will be a more robust settlement network that enables complex functionality to be built on top.
Layer 2 protocols and sidechains will be empowered to step up and leverage even more sophisticated smart contracts for coordinating funds on the base layer. The end-user might not construct these themselves, but they will benefit from more special offerings in the broader Bitcoin ecosystem with stronger assurances. Although some decentralized finance applications and use cases are already being implemented on Bitcoin, the greater smart contract flexibility and capabilities brought by the Taproot upgrade can ultimately allow even more use cases to be implemented and more complex functionality to be deployed while leveraging the strong security assurances of the Bitcoin network — which no other "cryptocurrency" can match.
As bitcoin is actual money, long-term applications of decentralized finance can naturally only be built on top of it. Novelty networks such as Ethereum lack the monetary properties of the Bitcoin base layer and its security and robustness — part of the reason why most applications built on them have fallen short of accomplishing their value proposition over the long run. By patiently building up the foundations for a distributed, uncensorable, antifragile, and sovereign monetary network throughout its lifetime, Bitcoin is set to enjoy actual long-term functionality and growth through a layered approach.
The Taproot upgrade, which also comprises Schnorr, MAST, and Tapscript, builds on that foundation by furthering the security and privacy of the base layer and enabling more complex applications to be built on top of it. Greater flexibility of the smart contract functionalities of Bitcoin brings about a new era of unthinkable possibilities, opening up the door for broader use cases to be implemented on the best monetary network humanity has ever known.
Over the long term, upgrades like Taproot and Lightning might effectively render altcoins redundant and unnecessary. If a given functionality can be implemented in Bitcoin, the most robust and secure network, it is only natural that it will. While altcoins foster innovation and eventually showcase some exciting use cases, they can be more accurately seen as experimentation playgrounds. Once real use cases are found, they will likely be ported to Bitcoin –– their best bet for continued, long-term development and usage.
* * *
To learn more about Taproot, Aaron van Wirdum's technical overview is a good place to start. For a more extensive explanation, reference Kraken Intelligence's detailed report published earlier this year. If you want to jump into the specific proposals, read BIP340, BIP341 and BIP342.
- #10,168
- Nov 11, 2021 7:28pm Nov 11, 2021 7:28pm
- | Commercial User | Joined Dec 2014 | 14,165 Posts
http://traderfeed.blogspot.com/2021/...velopment.html
MONDAY, OCTOBER 04, 2021
Stages In A Trader's Development
https://1.bp.blogspot.com/-t8cSnUYK-...verTooLate.jpg
A beginning trader starts with eagerness and passion and focuses on winning. The beginner's great fear is to miss opportunity and so the beginner overtrades and eventually takes significant losses. Many traders never move beyond this stage.
With experience, the beginning trader recognizes that the goal is not simply making money, but making more money on winning trades than losing ones. Instead of focusing solely on winning, the more experienced trader also focuses on not losing and containing risk. The goal is thus consistency of trading and profitability and, above all, staying in the game. This is when the beginning trader becomes a good trader.
Now, however, the good trader faces a new stage of development: growing that consistency of trading. The good trader grows laterally, expanding their expertise and skills and finding a broader range of opportunity. The good trader also develops depth in their trading, finding superior ways to manage positions and their ever-evolving risk/reward. The good trader becomes a great trader by exercising skills and experience in different market environments and finding a balance between assertively seeking opportunity and mindfully managing risk.
Good traders become better and better at playing the game. Great traders find new and promising games to play.
I recently spent an intensive period of time studying the stock market on a daily basis from 2014 to present. I tracked cycles in a new way and explored ways of taking best advantage of phases of those cycles. Instead of regularity of time, I looked for regularity of structure in defining the cycles. That has led to new trade ideas. Early days, early days. But we always have the power to innovate and develop what is good into what is great.
Further Reading:
Trading Psychology 2.0 and the role of creativity in our development as traders
Reading Market Cycles
.
Posted by Brett Steenbarger, Ph.D.at 6:40 AM
MONDAY, OCTOBER 04, 2021
Stages In A Trader's Development
https://1.bp.blogspot.com/-t8cSnUYK-...verTooLate.jpg
A beginning trader starts with eagerness and passion and focuses on winning. The beginner's great fear is to miss opportunity and so the beginner overtrades and eventually takes significant losses. Many traders never move beyond this stage.
With experience, the beginning trader recognizes that the goal is not simply making money, but making more money on winning trades than losing ones. Instead of focusing solely on winning, the more experienced trader also focuses on not losing and containing risk. The goal is thus consistency of trading and profitability and, above all, staying in the game. This is when the beginning trader becomes a good trader.
Now, however, the good trader faces a new stage of development: growing that consistency of trading. The good trader grows laterally, expanding their expertise and skills and finding a broader range of opportunity. The good trader also develops depth in their trading, finding superior ways to manage positions and their ever-evolving risk/reward. The good trader becomes a great trader by exercising skills and experience in different market environments and finding a balance between assertively seeking opportunity and mindfully managing risk.
Good traders become better and better at playing the game. Great traders find new and promising games to play.
I recently spent an intensive period of time studying the stock market on a daily basis from 2014 to present. I tracked cycles in a new way and explored ways of taking best advantage of phases of those cycles. Instead of regularity of time, I looked for regularity of structure in defining the cycles. That has led to new trade ideas. Early days, early days. But we always have the power to innovate and develop what is good into what is great.
Further Reading:
Trading Psychology 2.0 and the role of creativity in our development as traders
Reading Market Cycles
.
Posted by Brett Steenbarger, Ph.D.at 6:40 AM
- #10,170
- Edited Nov 13, 2021 2:06am Nov 12, 2021 3:17am | Edited Nov 13, 2021 2:06am
- | Commercial User | Joined Dec 2014 | 14,165 Posts
Login
D161499760
Password
Regulatory Documents:
IIROC Brochure: How Can I Get My Money Back, How IIROC Protects Investors, IIROC Complaints Brochure, CIPF Brochure, CIPF Coverage Policy, IIROC Order Execution Only Bulletin, Conflict Disclosure Statement
The relationship between Friedberg Direct and FXCM was formed with the purpose to allow Canadian residents access to FXCM's suite of products, while maintaining their accounts with a regulated Canadian firm. All accounts are opened by and held with Friedberg Direct, a division of Friedberg Mercantile Group Ltd., a member of the Investment Industry Regulatory Organization of Canada (IIROC). Friedberg customer accounts are protected by the Canadian Investor Protection Fund within specified limits. A brochure describing the nature and limits of coverage is available upon request or at www.cipf.ca.
D161499760
Password
Regulatory Documents:
IIROC Brochure: How Can I Get My Money Back, How IIROC Protects Investors, IIROC Complaints Brochure, CIPF Brochure, CIPF Coverage Policy, IIROC Order Execution Only Bulletin, Conflict Disclosure Statement
The relationship between Friedberg Direct and FXCM was formed with the purpose to allow Canadian residents access to FXCM's suite of products, while maintaining their accounts with a regulated Canadian firm. All accounts are opened by and held with Friedberg Direct, a division of Friedberg Mercantile Group Ltd., a member of the Investment Industry Regulatory Organization of Canada (IIROC). Friedberg customer accounts are protected by the Canadian Investor Protection Fund within specified limits. A brochure describing the nature and limits of coverage is available upon request or at www.cipf.ca.
- #10,171
- Edited 2:15am Nov 13, 2021 2:01am | Edited 2:15am
- | Commercial User | Joined Dec 2014 | 14,165 Posts
https://www.zerohedge.com/markets/ru...ops+to+zero%29
ZEROHEDGE READS
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- ACTING MAN
- ALT-MARKET
- CAPITALIST EXPLOITS
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- DR. HOUSING BUBBLE
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- QUOTH THE RAVEN RSRCH
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- SPOTGAMMA
- TF METALS REPORT
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Russell Napier: Central Banks Have Become Irrelevant
https://zh-prod-1cc738ca-7d3b-4a72-b.../picture-5.jpg
BY TYLER DURDEN
SATURDAY, AUG 01, 2020 - 02:00 PM
Two weeks ago, we wrote that one by one the world's legendary deflationists are taking one look at the following chart of the global money supply (as shown most recently by DB's Jim Reid) and after seeing the clear determination of central banks to spark a global inflationary conflagration, are quietly (and not so quietly) capitulating.
https://assets.zerohedge.com/s3fs-pu...?itok=DvirxTF9
One month ago it was SocGen's Albert Edwards, who after calling for a deflationary Ice Age for over two decades, finally threw in the towel and conceded that "we are transitioning from The Ice Age to The Great Melt" as "massive monetary stimulus is combining with frenzied fiscal pump-priming in an attempt to paper over the current slump."
At roughly the same time, "the world's most bearish hedge fund manager", Horseman Global's Russell Clark reached a similar conclusion writing that "all the reasons that made me believe in deflation for nearly 10 years, do not really exist anymore. China looks okay to me, and potentially very good. Commodity supply is getting cut at a rate I have never seen before. The US dollar is strong but will likely weaken from here. And it is clear to me Western governments will only ever attempt fiscal austerity as a last resort, not a first. The conditions for both good and bad inflation are now in place."
Finally, it is the turn of another iconic deflationist, Russell Napier, who in the latest Solid Ground article on his Electronic Research Interchange (ERIC) writes that "we are living through another deflation shock but [he] believes that by 2021 inflation will be at or near 4%."
In the lengthy report , Napier wrote that similar to Albert Edwards' conclusion that MMT, i.e., Helicopter Money, is a gamechanger, "what has just happened is that the control of the supply of money has permanently left the hands of central bankers - the silent revolution." As a result, "the supply of money will now be set, for the foreseeable future, by democratically elected politicians seeking re-election." His conclusion: "it is time to embrace the silent revolution and the return of inflation long before such permanency is confirmed." (read our summary of his full report in the article we published on July 12 "Another Iconic Deflationist Capitulates: According To Russell Napier, "Control Of Money Supply Has Permanently Left The Hands Of Central Bankers.")
* * *
In a follow up published two days later to clarify his position, Russell sat down with Mark Dittli of the Swiss website TheMarket.ch in which he laid out his reasoning for why investors should prepare for inflation rates of 4% and more by next year. The main reason, as we expounded on previously: central banks have become irrelevant as governments have taken control of the money supply.
The full article is below, courtesy of TheMarket.ch:
Central Banks have Become Irrelevant
In the years following the financial crisis, numerous economists and market observers warned of rising inflation in the face of the unorthodox monetary p0licy by central banks. They were wrong time and again.
Russell Napier was never one of them. The Scottish market strategist has for two decades – correctly – seen disinflation as the dominant theme for financial markets. That is why investors should listen to him when he now warns of rising inflation.
"Politicians have gained control of money supply and they will not give up this instrument anymore", Napier says. In his view, we are at the beginning of a new era of financial repression, in which politicians will make sure that inflation rates remain consistently above government bond yields for years. This is the only way to reduce the crushing levels of debt, argues Napier.
In an in-depth conversation with The Market/NZZ he explains how investors can protect themselves and why central banks have lost their power.
Mr. Napier, for more than two decades, you have said that investors need to position themselves for disinflation and deflation. Now you warn that we are in a big shift towards inflation. Why, and why now?
It’s a shift in the way that money is created that has changed the game fundamentally. Most investors just look at the narrow money aggregates and central bank balance sheets. But if you look at broad money, you notice that it has been growing very slowly by historical standards for the past 30 or so years. There were many factors pushing down the rate of inflation over that time, China being the most important, but I do believe that the low level of broad money growth was one of the factors that led to low inflation.
And now this has changed?
Yes, fundamentally. We are currently in the worst recession since World War II, and yet we observe the fastest growth in broad money in at least three decades. In the US, M2, the broadest aggregate available, is growing at more than 23%. You’d have to go back to at least the Civil War to find levels like that. In the Eurozone, M3 is currently growing at 8,9%. It will only be a matter of months before the previous peak of 11.5% which was reached in 2007 will be reached. So I’m not making a forecast, I just observe the data.
https://assets.zerohedge.com/s3fs-pu...?itok=CA6Fu-Xq
Why is this relevant?
This is the big question: Does the growth of broad money matter? Investors don’t think so, as breakeven inflation rates on inflation-linked bonds are at rock bottom. So clearly the market does not believe that this broad money growth matters. The market probably thinks this is just a short-term aberration due to the Covid-19 shock. But I do believe it matters. The key point is the realization who is responsible for this money creation.
In what way?
This broad money growth is created by governments intervening in the commercial banking system. Governments tell commercial banks to grant loans to companies, and they guarantee these loans to the banks. This is money creation in a way that is completely circumventing central banks. So I make two key calls: One, with broad money growth that high, we will get inflation. And more importantly, the control of money supply has moved from central bankers to politicians. Politicians have different goals and incentives than central bankers. They need inflation to get rid of high debt levels. They now have the mechanism to create it, so they will create it.
In the aftermath of the Global Financial Crisis, central banks started their quantitative easing policies. They tried to create inflation, but did not succeed.
QE was a fiasco. All that central banks have achieved over the past ten years is creating a lot of non-bank debt. Their actions kept interest rates low, which inflated asset prices and allowed companies to borrow cheaply through the issuance of bonds. So not only did central banks fail to create money, but they created a lot of debt outside the banking system. This led to the worst of two worlds: No growth in broad money, low nominal GDP growth and high growth in debt. Most money in the world is not created by central banks, but by commercial banks. In the past ten years, central banks never succeeded in triggering commercial banks to create credit and therefore to create money.
If central banks did not succeed in pushing up nominal GDP growth, why will governments succeed?
Governments create broad money through the banking system. By exercising control over the commercial banking system, they can get money into the parts of the economy where central banks can’t get into. Banks are now under the control of the government. Politicians give credit guarantees, so of course the banks will freely give credit. They are now handing out the loans they did not give in the past ten years. This is the start.
What makes you think that this is not just a one-off extraordinary measure to fight the economic effects of the pandemic?
Politicians will realize that they have a very powerful tool in their hands. We saw a very nice example two weeks ago: The Spanish government increased their €100bn bank guarantee program to €150bn. Just like that. So there will be mission creep. There will be another one and another one, for example to finance all sorts of green projects. Also, these loans have a very long duration. The credit pulse is in the system, a pulse of money that doesn’t come back for years. And then there will be a new one, and another one. Companies won’t have any incentive to pay back these cheap loans prematurely.
So basically what you’re saying is that central banks in the past ten years never succeeded in getting commercial banks to lend. This is why governments are taking over, and they won’t let go of that tool anymore?
Exactly. Don’t forget: These are politicians. We know what mess most of the global economy is in today. Debt to GDP levels in most of the industrialized world are way too high, even before the effects of Covid-19. We know debt will have to go down. For a politician, inflation is the cheapest way out of this mess. They have found a way to gain control of the money supply and to create inflation. Remember, a credit guarantee is not fiscal spending, it’s not on the balance sheet of the state, as it’s only a contingent liability. So if you are an elected politician, you have found a cheap way of funding an economic recovery and then green projects. Politically, this is incredibly powerful.
A gift that will keep on giving?
Yes. Theresa May made a famous speech a few years ago where she said there is no magic money tree. Well, they just found it. As an economic historian and investor, I absolutely know that this is a long-term disaster. But for a politician, this is the magic money tree.
But part of that magic money tree is that governments keep control over their commercial banking system, correct?
Yes. I wrote a big report in 2016 titled «Capital management in the age of financial repression». It said the final move into financial repression will be triggered by the next crisis. So Covid-19 is just the trigger to start an aggressive financial repression.
Are you expecting a repeat of the financial repression that dominated the decades after World War Two?
Yes. Look at the tools that were used in Europe back then. They were all in place for an emergency called World War II. And most countries just didn’t lift them until the 1980s. So it’s often an emergency that gives governments these extreme powers. Total debt to GDP levels were already way too high even before Covid-19. Our governments just know these debt levels have to come down.
And the best way to do that is through financial repression, i.e. achieving a higher nominal GDP growth than the growth in debt?
That’s what we have learned in the decades after World War II: Achieve higher nominal GDP growth through higher rates of inflation. The problem is just that most active investors today have had their formative years after 1980, so they don’t know how financial repression works.
Which countries will choose that path in the coming years?
Basically the entire developed world. The US, the UK, the Eurozone, Japan. I see very few exceptions. Switzerland probably won’t have to financially repress, but only because its banking system is not in the kind of mess it was in in 2008. Government debt to GDP in Switzerland is very low. Private sector debt is high, but that is mainly because of your unique treatment of taxation for debt on residential property. So Switzerland won’t have to repress, neither will Singapore. If Germany and Austria weren’t part of the Eurozone, they wouldn’t have to repress either. Of course there is one catch: If the Swiss are not going to financially repress, you will have the same problem you had for a long time, namely far too much money trying to get into the Swiss Franc.
So we will see more upward pressure on the Franc?
Yes. But financial repression has to include capital controls at some stage. Switzerland will have to do more to avoid getting all these capital inflows. At the same time, other countries would have to introduce capital controls to stop money from getting out.
The cornerstones of the last period of financial repression after World War II were capital controls and the forcing of domestic savings institutions to buy domestic government bonds. Do you expect both of these measures to be introduced again?
Yes. Domestic savings institutions like pension funds can easily be forced to buy domestic government bonds at low interest rates.
Are capital controls really feasible in today’s open financial world?
Sure. There are two countries in the Eurozone that have had capital controls in recent history: Greece and Cyprus. They were both rather successful. Iceland had capital controls after the financial crisis, many emerging economies use them. If you can do it in Greece and Cyprus, which are members of the European Monetary Union, you can do it anywhere. Whenever a financial institution transfers money from one currency to another, it is heavily regulated.
What’s the timeline for your call on rising inflation?
I see 4% inflation in the US and most of the developed world by 2021. This is primarily based on my expectation of a normalization of the velocity of money. Velocity in the US is probably at around 0.8 right now. The lowest recorded number before that was 1.4 in December 2019, which was at the end of a multi-year downward trend. Quantitative easing was an important factor in that shrinking velocity, because central banks handed money to savings institutions in return for their Treasury securities. And all the savings institutions could do was buy financial assets. They couldn’t buy goods and services, so that money couldn’t really affect nominal GDP.
https://assets.zerohedge.com/s3fs-pu...?itok=ORyXigpL
What will cause velocity to rise?
The money banks are handing out today is going straight to businesses and consumers. They are not spending it right now, but as lockdowns lift, this will have an impact. My guess is that velocity will normalize back to around 1.4 some time next year. Given the money supply we have already seen, that would give you an inflation rate of 4%. Plus, there is no reason velocity should stop at 1.4, it could easily rise above 1.7 again. There is one additional issue, and that is China: For the last three decades, China was a major source of deflation. But I think we are at the beginning of a new Cold War with China, which will mean higher prices for many things.
Most economists say there is such a huge output gap, inflation won’t be an issue for the next three years or so.
I don’t get that at all. You can point to the 1970s, where we had high unemployment and high inflation. It’s a matter of historical record that you can create inflation with high unemployment. We have done it before.
The yield on ten year US Treasury Notes is currently at around 60 basis points. What will happen to bond yields once markets realize that we are heading into an inflationary world?
Bond yields will go up sharply. They will rise because markets start to realize who is controlling the supply of money now, i.e. not central banks, but politicians. That will be the big shock.
For a successful financial repression, governments and central banks will need to stop bond yields from rising, won’t they?
Yes, and they will. But let me be precise: It will be governments who will act to stop bond yields from going up. They will force their domestic savings institutions to buy government bonds to keep yields down. The bit of your statement I disagree with is that central banks will put a cap on bond yields. They won’t be able to.
Why not? Even the Fed is toying with the idea of Yield Curve Control, an instrument they successfully used between 1942 and 1951, when they capped yields at 2.5%.
I think this is a bad parallel, because from 1942 to 1951, we also had rationing, price controls and credit controls. With that in place, it was easy for the Fed to cap Treasury yields. Yield Curve Control is easy when everyone is expecting deflation, which the current policy of the Bank of Japan shows. But once market participants start to expect inflation, they will all want to sell their bonds. The balance sheet of the central banks will just balloon to the sky. They would be spreading fuel on the fire, given that their balance sheets would expand with rising inflation expectations. Yield Curve Control in an environment of rising inflation expectations is not going to happen.
You are saying that governments now control the supply of money, and it will be governments who will make sure policies of financial repression are successfully implemented. What will be the future role of central banks?
They will be sidelined. They will become more a regulatory than a monetary organization. The next few years will be fascinating. Imagine, you and I are running a central bank and we have a 2% inflation target. And we see our own government print money with a growth rate of 12%. What are we going to do to fulfill our mandate of price stability? We would have to threaten higher interest rates. We would have to ride a full-blown attack on our democratically elected government. Would we do that?
Paul Volcker did in the early 80s.
Yes. But Paul Volcker had courage. I don’t think any of today’s central bankers will have the guts to do that. After all, governments will argue that there is still an emergency given the shocks of Covid-19. There is a good parallel to the 1960s, when the Fed did nothing about rising inflation, because the US was fighting a war in Vietnam, and the administration of Lyndon B. Johnson had launched the Great Society Project to get America more equal. Against that background of massive fiscal spending, the Fed didn’t have the guts to run a tighter monetary policy. I can see that’s exactly where we are today.
So central banks will be mostly irrelevant?
Yes. It’s ironic: Most investors believe in the seemingly unlimited power of today’s central banks. But in fact, they are the least powerful they have ever been since 1977.
As an investor, how do I protect myself?
European inflation-linked bonds are pretty attractive now, because they are pricing in such low levels of inflation. Gold is obviously a go-to asset for the long term. In the next couple of years, equities will probably do well. A bit more inflation and more nominal growth is a good environment for equities. I particularly like Japanese equities. Obviously you wouldn’t buy government bonds under any condition.
How about commodities?
In a normal inflationary cycle, I’d recommend to buy commodities. There is just one complicating factor with China. If we really enter into a new Cold War with China, that will mean big disturbances in commodities markets.
You wrote in the past that there is a sweet spot for equities up to an inflation rate of 4%, before they tip over. Is this still valid?
Yes, this playbook is still in place. But once governments truly force their savings institutions to buy more government bonds, they will obviously have to sell something. And that something will be equities. Historically, inflation above 4% hasn’t been too good for equities.
How high do you see inflation going?
If we’re taking the next 10 years, I see inflation between 4 and 8%, somewhere around that. Compounded over ten years, combined with low interest rates, this will be hugely effective in bringing down debt to GDP levels.
In which country do you see it happening first? Who will lead?
The one I worry about the most is the UK. It has a significant current account deficit, it has to sell lots of government bonds to foreigners. I never really understood why foreigners buy them. I wouldn’t. Now we have Brexit coming up, which could still go badly. I don’t think it will, but it could. So we would see a spike in bond yields in the UK.
What will it take for an investor to successfully navigate the coming years?
First, we have to realize that this is a long term phenomenon. Everyone is so caught up in the current crisis, they miss the long term shift. This will be with us for decades, not just a couple of years. The financial system is a very different place now. And it’s a very dangerous place for savers. Most of the skills we have learned in the past 40 years are probably redundant, because we have lived through a 40 year disinflationary period. It was a period where markets became more important and governments less important. Now we are reversing that. That’s why I recommend to my clients that they promote the people from their emerging markets departments to run their developed world departments. Emerging markets investors know how to deal with higher levels of inflation, government interference and capital controls. This will be our future.
- #10,172
- Nov 13, 2021 2:16am Nov 13, 2021 2:16am
- | Commercial User | Joined Dec 2014 | 14,165 Posts
Russell Napier: Central Banks Have Become Irrelevant
https://zh-prod-1cc738ca-7d3b-4a72-b.../picture-5.jpg
BY TYLER DURDEN
SATURDAY, AUG 01, 2020 - 02:00 PM
Two weeks ago, we wrote that one by one the world's legendary deflationists are taking one look at the following chart of the global money supply (as shown most recently by DB's Jim Reid) and after seeing the clear determination of central banks to spark a global inflationary conflagration, are quietly (and not so quietly) capitulating.
https://assets.zerohedge.com/s3fs-pu...?itok=DvirxTF9
One month ago it was SocGen's Albert Edwards, who after calling for a deflationary Ice Age for over two decades, finally threw in the towel and conceded that "we are transitioning from The Ice Age to The Great Melt" as "massive monetary stimulus is combining with frenzied fiscal pump-priming in an attempt to paper over the current slump."
At roughly the same time, "the world's most bearish hedge fund manager", Horseman Global's Russell Clark reached a similar conclusion writing that "all the reasons that made me believe in deflation for nearly 10 years, do not really exist anymore. China looks okay to me, and potentially very good. The commodity supply is getting cut at a rate I have never seen before. The US dollar is strong but will likely weaken from here. And it is clear to me Western governments will only ever attempt fiscal austerity as a last resort, not a first. The conditions for both good and bad inflation are now in place."
Finally, it is the turn of another iconic deflationist, Russell Napier, who in the latest Solid Ground article on his Electronic Research Interchange (ERIC) writes that "we are living through another deflation shock but [he] believes that by 2021 inflation will be at or near 4%."
In the lengthy report, Napier wrote that similar to Albert Edwards' conclusion that MMT, i.e., Helicopter Money, is a gamechanger, "what has just happened is that the control of the supply of money has permanently left the hands of central bankers - the silent revolution." As a result, "the supply of money will now be set, for the foreseeable future, by democratically elected politicians seeking re-election." His conclusion: "it is time to embrace the silent revolution and the return of inflation long before such permanency is confirmed." (read our summary of his full report in the article we published on July 12 "Another Iconic Deflationist Capitulates: According To Russell Napier, "Control Of Money Supply Has Permanently Left The Hands Of Central Bankers.")
* * *
In a follow-up published two days later to clarify his position, Russell sat down with Mark Dittli of the Swiss website TheMarket.ch in which he laid out his reasoning for why investors should prepare for inflation rates of 4% and more by next year. The main reason, as we expounded on previously: central banks have become irrelevant as governments have taken control of the money supply.
The full article is below, courtesy of TheMarket.ch:
Central Banks Have Become Irrelevant
In the years following the financial crisis, numerous economists and market observers warned of rising inflation in the face of the unorthodox monetary p0licy by central banks. They were wrong time and again.
Russell Napier was never one of them. The Scottish market strategist has for two decades – correctly – seen disinflation as the dominant theme for financial markets. That is why investors should listen to him when he now warns of rising inflation.
"Politicians have gained control of money supply and they will not give up this instrument anymore", Napier says. In his view, we are at the beginning of a new era of financial repression, in which politicians will make sure that inflation rates remain consistently above government bond yields for years. This is the only way to reduce the crushing levels of debt, argues Napier.
In an in-depth conversation with The Market/NZZ, he explains how investors can protect themselves and why central banks have lost their power.
Mr. Napier, for more than two decades, you have said that investors need to position themselves for disinflation and deflation. Now you warn that we are in a big shift towards inflation. Why, and why now?
It’s a shift in the way that money is created that has changed the game fundamentally. Most investors just look at the narrow money aggregates and central bank balance sheets. But if you look at broad money, you notice that it has been growing very slowly by historical standards for the past 30 or so years. There were many factors pushing down the rate of inflation over that time, China being the most important, but I do believe that the low level of broad money growth was one of the factors that led to low inflation.
And now this has changed?
Yes, fundamentally. We are currently in the worst recession since World War II, and yet we observe the fastest growth in broad money in at least three decades. In the US, M2, the broadest aggregate available, is growing at more than 23%. You’d have to go back to at least the Civil War to find levels like that. In the Eurozone, M3 is currently growing at 8,9%. It will only be a matter of months before the previous peak of 11.5% which was reached in 2007 will be reached. So I’m not making a forecast, I just observe the data.
https://assets.zerohedge.com/s3fs-pu...?itok=CA6Fu-Xq
Why is this relevant?
This is the big question: Does the growth of broad money matter? Investors don’t think so, as breakeven inflation rates on inflation-linked bonds are at rock bottom. So clearly the market does not believe that this broad money growth matters. The market probably thinks this is just a short-term aberration due to the Covid-19 shock. But I do believe it matters. The key point is the realization of who is responsible for this money creation.
In what way?
This broad money growth is created by governments intervening in the commercial banking system. Governments tell commercial banks to grant loans to companies, and they guarantee these loans to the banks. This is money creation in a way that is completely circumventing central banks. So I make two key calls: One, with broad money growth that high, we will get inflation. And more importantly, the control of the money supply has moved from central bankers to politicians. Politicians have different goals and incentives than central bankers. They need inflation to get rid of high debt levels. They now have the mechanism to create it, so they will create it.
In the aftermath of the Global Financial Crisis, central banks started their quantitative easing policies. They tried to create inflation but did not succeed.
QE was a fiasco. All that central banks have achieved over the past ten years is creating a lot of non-bank debt. Their actions kept interest rates low, which inflated asset prices and allowed companies to borrow cheaply through the issuance of bonds. So not only did central banks fail to create money, but they created a lot of debt outside the banking system. This led to the worst of two worlds: No growth in broad money, low nominal GDP growth, and high growth in debt. Most money in the world is not created by central banks, but by commercial banks. In the past ten years, central banks never succeeded in triggering commercial banks to create credit and therefore to create money.
If central banks did not succeed in pushing up nominal GDP growth, why will governments succeed?
Governments create broad money through the banking system. By exercising control over the commercial banking system, they can get money into the parts of the economy where central banks can’t get into. Banks are now under the control of the government. Politicians give credit guarantees, so of course, the banks will freely give credit. They are now handing out the loans they did not give in the past ten years. This is the start.
What makes you think that this is not just a one-off extraordinary measure to fight the economic effects of the pandemic?
Politicians will realize that they have a very powerful tool in their hands. We saw a very nice example two weeks ago: The Spanish government increased their €100bn bank guarantee program to €150bn. Just like that. So there will be mission creep. There will be another one and another one, for example, to finance all sorts of green projects. Also, these loans have a very long duration. The credit pulse is in the system, a pulse of money that doesn’t come back for years. And then there will be a new one and another one. Companies won’t have any incentive to pay back these cheap loans prematurely.
So basically what you’re saying is that central banks in the past ten years never succeeded in getting commercial banks to lend. This is why governments are taking over, and they won’t let go of that tool anymore?
Exactly. Don’t forget: These are politicians. We know what mess most of the global economy is in today. Debt to GDP levels in most of the industrialized world are way too high, even before the effects of Covid-19. We know debt will have to go down. For a politician, inflation is the cheapest way out of this mess. They have found a way to gain control of the money supply and to create inflation. Remember, a credit guarantee is not fiscal spending, it’s not on the balance sheet of the state, as it’s only a contingent liability. So if you are an elected politician, you have found a cheap way of funding an economic recovery and then green projects. Politically, this is incredibly powerful.
A gift that will keep on giving?
Yes. Theresa May made a famous speech a few years ago where she said there is no magic money tree. Well, they just found it. As an economic historian and investor, I absolutely know that this is a long-term disaster. But for a politician, this is the magic money tree.
But part of that magic money tree is that governments keep control over their commercial banking system, correct?
Yes. I wrote a big report in 2016 titled «Capital management in the age of financial repression». It said the final move into financial repression will be triggered by the next crisis. So Covid-19 is just the trigger to start aggressive financial repression.
Are you expecting a repeat of the financial repression that dominated the decades after World War Two?
Yes. Look at the tools that were used in Europe back then. They were all in place for an emergency called World War II. And most countries just didn’t lift them until the 1980s. So it’s often an emergency that gives governments these extreme powers. Total debt to GDP levels was already way too high even before Covid-19. Our governments just know these debt levels have to come down.
And the best way to do that is through financial repression, i.e. achieving a higher nominal GDP growth than the growth in debt?
That’s what we have learned in the decades after World War II: Achieve higher nominal GDP growth through higher rates of inflation. The problem is just that most active investors today have had their formative years after 1980, so they don’t know how financial repression works.
Which countries will choose that path in the coming years?
Basically the entire developed world. The US, the UK, the Eurozone, Japan. I see very few exceptions. Switzerland probably won’t have to financially repress, but only because its banking system is not in the kind of mess it was in in 2008. Government debt to GDP in Switzerland is very low. Private sector debt is high, but that is mainly because of your unique treatment of taxation for debt on residential property. So Switzerland won’t have to repress, neither will Singapore. If Germany and Austria weren’t part of the Eurozone, they wouldn’t have to repress either. Of course, there is one catch: If the Swiss are not going to financially repress, you will have the same problem you had for a long time, namely, far too much money trying to get into the Swiss Franc.
So we will see more upward pressure on the Franc?
Yes. But financial repression has to include capital controls at some stage. Switzerland will have to do more to avoid getting all these capital inflows. At the same time, other countries would have to introduce capital controls to stop money from getting out.
The cornerstones of the last period of financial repression after World War II were capital controls and the forcing of domestic savings institutions to buy domestic government bonds. Do you expect both of these measures to be introduced again?
Yes. Domestic savings institutions like pension funds can easily be forced to buy domestic government bonds at low-interest rates.
Are capital controls really feasible in today’s open financial world?
Sure. There are two countries in the Eurozone that have had capital controls in recent history: Greece and Cyprus. They were both rather successful. Iceland had capital controls after the financial crisis, many emerging economies use them. If you can do it in Greece and Cyprus, which are members of the European Monetary Union, you can do it anywhere. Whenever a financial institution transfers money from one currency to another, it is heavily regulated.
What’s the timeline for your call on rising inflation?
I see 4% inflation in the US and most of the developed world by 2021. This is primarily based on my expectation of a normalization of the velocity of money. Velocity in the US is probably at around 0.8 right now. The lowest recorded number before that was 1.4 in December 2019, which was at the end of a multi-year downward trend. Quantitative easing was an important factor in that shrinking velocity because central banks handed money to savings institutions in return for their Treasury securities. And all the savings institutions could do was buy financial assets. They couldn’t buy goods and services, so that money couldn’t really affect nominal GDP.
https://assets.zerohedge.com/s3fs-pu...?itok=ORyXigpL
What will cause velocity to rise?
The money banks are handing out today is going straight to businesses and consumers. They are not spending it right now, but as lockdowns lift, this will have an impact. My guess is that velocity will normalize back to around 1.4 sometime next year. Given the money supply we have already seen, that would give you an inflation rate of 4%. Plus, there is no reason velocity should stop at 1.4, it could easily rise above 1.7 again. There is one additional issue, and that is China: For the last three decades, China was a major source of deflation. But I think we are at the beginning of a new Cold War with China, which will mean higher prices for many things.
Most economists say there is such a huge output gap, inflation won’t be an issue for the next three years or so.
I don’t get that at all. You can point to the 1970s, where we had high unemployment and high inflation. It’s a matter of historical record that you can create inflation with high unemployment. We have done it before.
The yield on ten-year US Treasury Notes is currently at around 60 basis points. What will happen to bond yields once markets realize that we are heading into an inflationary world?
Bond yields will go up sharply. They will rise because markets start to realize who is controlling the supply of money now, i.e. not central banks, but politicians. That will be a big shock.
For successful financial repression, governments and central banks will need to stop bond yields from rising, won’t they?
Yes, and they will. But let me be precise: It will be governments who will act to stop bond yields from going up. They will force their domestic savings institutions to buy government bonds to keep yields down. The bit of your statement I disagree with is that central banks will put a cap on bond yields. They won’t be able to.
Why not? Even the Fed is toying with the idea of Yield Curve Control, an instrument they successfully used between 1942 and 1951 when they capped yields at 2.5%.
I think this is a bad parallel because from 1942 to 1951, we also had rationing, price controls, and credit controls. With that in place, it was easy for the Fed to cap Treasury yields. Yield Curve Control is easy when everyone is expecting deflation, which the current policy of the Bank of Japan shows. But once market participants start to expect inflation, they will all want to sell their bonds. The balance sheet of the central banks will just balloon to the sky. They would be spreading fuel on the fire, given that their balance sheets would expand with rising inflation expectations. Yield Curve Control in an environment of rising inflation expectations is not going to happen.
You are saying that governments now control the supply of money, and it will be governments who will make sure policies of financial repression are successfully implemented. What will be the future role of central banks?
They will be sidelined. They will become more regulatory than a monetary organization. The next few years will be fascinating. Imagine, you and I are running a central bank and we have a 2% inflation target. And we see our own government print money with a growth rate of 12%. What are we going to do to fulfill our mandate of price stability? We would have to threaten higher interest rates. We would have to ride a full-blown attack on our democratically elected government. Would we do that?
Paul Volcker did in the early 80s.
Yes. But Paul Volcker had courage. I don’t think any of today’s central bankers will have the guts to do that. After all, governments will argue that there is still an emergency given the shocks of Covid-19. There is a good parallel to the 1960s, when the Fed did nothing about rising inflation, because the US was fighting a war in Vietnam, and the administration of Lyndon B. Johnson had launched the Great Society Project to get America more equal. Against that background of massive fiscal spending, the Fed didn’t have the guts to run a tighter monetary policy. I can see that’s exactly where we are today.
So central banks will be mostly irrelevant?
Yes. It’s ironic: Most investors believe in the seemingly unlimited power of today’s central banks. But in fact, they are the least powerful they have ever been since 1977.
As an investor, how do I protect myself?
European inflation-linked bonds are pretty attractive now because they are pricing in such low levels of inflation. Gold is obviously a go-to asset for the long term. In the next couple of years, equities will probably do well. A bit more inflation and more nominal growth is a good environment for equities. I particularly like Japanese equities. Obviously, you wouldn’t buy government bonds under any condition.
How about commodities?
In a normal inflationary cycle, I’d recommend buying commodities. There is just one complicating factor with China. If we really enter into a new Cold War with China, that will mean big disturbances in commodities markets.
You wrote in the past that there is a sweet spot for equities up to an inflation rate of 4% before they tip over. Is this still valid?
Yes, this playbook is still in place. But once governments truly force their savings institutions to buy more government bonds, they will obviously have to sell something. And that something will be equities. Historically, inflation above 4% hasn’t been too good for equities.
How high do you see inflation going?
If we’re taking the next 10 years, I see inflation between 4 and 8%, somewhere around that. Compounded over ten years, combined with low-interest rates, this will be hugely effective in bringing down debt to GDP levels.
In which country do you see it happening first? Who will lead?
The one I worry about the most is in the UK. It has a significant current account deficit, it has to sell lots of government bonds to foreigners. I never really understood why foreigners buy them. I wouldn’t. Now we have Brexit coming up, which could still go badly. I don’t think it will, but it could. So we would see a spike in bond yields in the UK.
What will it take for an investor to successfully navigate the coming years?
First, we have to realize that this is a long-term phenomenon. Everyone is so caught up in the current crisis, they miss the long-term shift. This will be with us for decades, not just a couple of years. The financial system is a very different place now. And it’s a very dangerous place for savers. Most of the skills we have learned in the past 40 years are probably redundant because we have lived through a 40-year disinflationary period. It was a period where markets became more important and governments less important. Now we are reversing that. That’s why I recommend to my clients that they promote the people from their emerging markets departments to run their developed world departments. Emerging markets investors know how to deal with higher levels of inflation, government interference and capital controls. This will be our future.
https://zh-prod-1cc738ca-7d3b-4a72-b.../picture-5.jpg
BY TYLER DURDEN
SATURDAY, AUG 01, 2020 - 02:00 PM
Two weeks ago, we wrote that one by one the world's legendary deflationists are taking one look at the following chart of the global money supply (as shown most recently by DB's Jim Reid) and after seeing the clear determination of central banks to spark a global inflationary conflagration, are quietly (and not so quietly) capitulating.
https://assets.zerohedge.com/s3fs-pu...?itok=DvirxTF9
One month ago it was SocGen's Albert Edwards, who after calling for a deflationary Ice Age for over two decades, finally threw in the towel and conceded that "we are transitioning from The Ice Age to The Great Melt" as "massive monetary stimulus is combining with frenzied fiscal pump-priming in an attempt to paper over the current slump."
At roughly the same time, "the world's most bearish hedge fund manager", Horseman Global's Russell Clark reached a similar conclusion writing that "all the reasons that made me believe in deflation for nearly 10 years, do not really exist anymore. China looks okay to me, and potentially very good. The commodity supply is getting cut at a rate I have never seen before. The US dollar is strong but will likely weaken from here. And it is clear to me Western governments will only ever attempt fiscal austerity as a last resort, not a first. The conditions for both good and bad inflation are now in place."
Finally, it is the turn of another iconic deflationist, Russell Napier, who in the latest Solid Ground article on his Electronic Research Interchange (ERIC) writes that "we are living through another deflation shock but [he] believes that by 2021 inflation will be at or near 4%."
In the lengthy report, Napier wrote that similar to Albert Edwards' conclusion that MMT, i.e., Helicopter Money, is a gamechanger, "what has just happened is that the control of the supply of money has permanently left the hands of central bankers - the silent revolution." As a result, "the supply of money will now be set, for the foreseeable future, by democratically elected politicians seeking re-election." His conclusion: "it is time to embrace the silent revolution and the return of inflation long before such permanency is confirmed." (read our summary of his full report in the article we published on July 12 "Another Iconic Deflationist Capitulates: According To Russell Napier, "Control Of Money Supply Has Permanently Left The Hands Of Central Bankers.")
* * *
In a follow-up published two days later to clarify his position, Russell sat down with Mark Dittli of the Swiss website TheMarket.ch in which he laid out his reasoning for why investors should prepare for inflation rates of 4% and more by next year. The main reason, as we expounded on previously: central banks have become irrelevant as governments have taken control of the money supply.
The full article is below, courtesy of TheMarket.ch:
Central Banks Have Become Irrelevant
In the years following the financial crisis, numerous economists and market observers warned of rising inflation in the face of the unorthodox monetary p0licy by central banks. They were wrong time and again.
Russell Napier was never one of them. The Scottish market strategist has for two decades – correctly – seen disinflation as the dominant theme for financial markets. That is why investors should listen to him when he now warns of rising inflation.
"Politicians have gained control of money supply and they will not give up this instrument anymore", Napier says. In his view, we are at the beginning of a new era of financial repression, in which politicians will make sure that inflation rates remain consistently above government bond yields for years. This is the only way to reduce the crushing levels of debt, argues Napier.
In an in-depth conversation with The Market/NZZ, he explains how investors can protect themselves and why central banks have lost their power.
Mr. Napier, for more than two decades, you have said that investors need to position themselves for disinflation and deflation. Now you warn that we are in a big shift towards inflation. Why, and why now?
It’s a shift in the way that money is created that has changed the game fundamentally. Most investors just look at the narrow money aggregates and central bank balance sheets. But if you look at broad money, you notice that it has been growing very slowly by historical standards for the past 30 or so years. There were many factors pushing down the rate of inflation over that time, China being the most important, but I do believe that the low level of broad money growth was one of the factors that led to low inflation.
And now this has changed?
Yes, fundamentally. We are currently in the worst recession since World War II, and yet we observe the fastest growth in broad money in at least three decades. In the US, M2, the broadest aggregate available, is growing at more than 23%. You’d have to go back to at least the Civil War to find levels like that. In the Eurozone, M3 is currently growing at 8,9%. It will only be a matter of months before the previous peak of 11.5% which was reached in 2007 will be reached. So I’m not making a forecast, I just observe the data.
https://assets.zerohedge.com/s3fs-pu...?itok=CA6Fu-Xq
Why is this relevant?
This is the big question: Does the growth of broad money matter? Investors don’t think so, as breakeven inflation rates on inflation-linked bonds are at rock bottom. So clearly the market does not believe that this broad money growth matters. The market probably thinks this is just a short-term aberration due to the Covid-19 shock. But I do believe it matters. The key point is the realization of who is responsible for this money creation.
In what way?
This broad money growth is created by governments intervening in the commercial banking system. Governments tell commercial banks to grant loans to companies, and they guarantee these loans to the banks. This is money creation in a way that is completely circumventing central banks. So I make two key calls: One, with broad money growth that high, we will get inflation. And more importantly, the control of the money supply has moved from central bankers to politicians. Politicians have different goals and incentives than central bankers. They need inflation to get rid of high debt levels. They now have the mechanism to create it, so they will create it.
In the aftermath of the Global Financial Crisis, central banks started their quantitative easing policies. They tried to create inflation but did not succeed.
QE was a fiasco. All that central banks have achieved over the past ten years is creating a lot of non-bank debt. Their actions kept interest rates low, which inflated asset prices and allowed companies to borrow cheaply through the issuance of bonds. So not only did central banks fail to create money, but they created a lot of debt outside the banking system. This led to the worst of two worlds: No growth in broad money, low nominal GDP growth, and high growth in debt. Most money in the world is not created by central banks, but by commercial banks. In the past ten years, central banks never succeeded in triggering commercial banks to create credit and therefore to create money.
If central banks did not succeed in pushing up nominal GDP growth, why will governments succeed?
Governments create broad money through the banking system. By exercising control over the commercial banking system, they can get money into the parts of the economy where central banks can’t get into. Banks are now under the control of the government. Politicians give credit guarantees, so of course, the banks will freely give credit. They are now handing out the loans they did not give in the past ten years. This is the start.
What makes you think that this is not just a one-off extraordinary measure to fight the economic effects of the pandemic?
Politicians will realize that they have a very powerful tool in their hands. We saw a very nice example two weeks ago: The Spanish government increased their €100bn bank guarantee program to €150bn. Just like that. So there will be mission creep. There will be another one and another one, for example, to finance all sorts of green projects. Also, these loans have a very long duration. The credit pulse is in the system, a pulse of money that doesn’t come back for years. And then there will be a new one and another one. Companies won’t have any incentive to pay back these cheap loans prematurely.
So basically what you’re saying is that central banks in the past ten years never succeeded in getting commercial banks to lend. This is why governments are taking over, and they won’t let go of that tool anymore?
Exactly. Don’t forget: These are politicians. We know what mess most of the global economy is in today. Debt to GDP levels in most of the industrialized world are way too high, even before the effects of Covid-19. We know debt will have to go down. For a politician, inflation is the cheapest way out of this mess. They have found a way to gain control of the money supply and to create inflation. Remember, a credit guarantee is not fiscal spending, it’s not on the balance sheet of the state, as it’s only a contingent liability. So if you are an elected politician, you have found a cheap way of funding an economic recovery and then green projects. Politically, this is incredibly powerful.
A gift that will keep on giving?
Yes. Theresa May made a famous speech a few years ago where she said there is no magic money tree. Well, they just found it. As an economic historian and investor, I absolutely know that this is a long-term disaster. But for a politician, this is the magic money tree.
But part of that magic money tree is that governments keep control over their commercial banking system, correct?
Yes. I wrote a big report in 2016 titled «Capital management in the age of financial repression». It said the final move into financial repression will be triggered by the next crisis. So Covid-19 is just the trigger to start aggressive financial repression.
Are you expecting a repeat of the financial repression that dominated the decades after World War Two?
Yes. Look at the tools that were used in Europe back then. They were all in place for an emergency called World War II. And most countries just didn’t lift them until the 1980s. So it’s often an emergency that gives governments these extreme powers. Total debt to GDP levels was already way too high even before Covid-19. Our governments just know these debt levels have to come down.
And the best way to do that is through financial repression, i.e. achieving a higher nominal GDP growth than the growth in debt?
That’s what we have learned in the decades after World War II: Achieve higher nominal GDP growth through higher rates of inflation. The problem is just that most active investors today have had their formative years after 1980, so they don’t know how financial repression works.
Which countries will choose that path in the coming years?
Basically the entire developed world. The US, the UK, the Eurozone, Japan. I see very few exceptions. Switzerland probably won’t have to financially repress, but only because its banking system is not in the kind of mess it was in in 2008. Government debt to GDP in Switzerland is very low. Private sector debt is high, but that is mainly because of your unique treatment of taxation for debt on residential property. So Switzerland won’t have to repress, neither will Singapore. If Germany and Austria weren’t part of the Eurozone, they wouldn’t have to repress either. Of course, there is one catch: If the Swiss are not going to financially repress, you will have the same problem you had for a long time, namely, far too much money trying to get into the Swiss Franc.
So we will see more upward pressure on the Franc?
Yes. But financial repression has to include capital controls at some stage. Switzerland will have to do more to avoid getting all these capital inflows. At the same time, other countries would have to introduce capital controls to stop money from getting out.
The cornerstones of the last period of financial repression after World War II were capital controls and the forcing of domestic savings institutions to buy domestic government bonds. Do you expect both of these measures to be introduced again?
Yes. Domestic savings institutions like pension funds can easily be forced to buy domestic government bonds at low-interest rates.
Are capital controls really feasible in today’s open financial world?
Sure. There are two countries in the Eurozone that have had capital controls in recent history: Greece and Cyprus. They were both rather successful. Iceland had capital controls after the financial crisis, many emerging economies use them. If you can do it in Greece and Cyprus, which are members of the European Monetary Union, you can do it anywhere. Whenever a financial institution transfers money from one currency to another, it is heavily regulated.
What’s the timeline for your call on rising inflation?
I see 4% inflation in the US and most of the developed world by 2021. This is primarily based on my expectation of a normalization of the velocity of money. Velocity in the US is probably at around 0.8 right now. The lowest recorded number before that was 1.4 in December 2019, which was at the end of a multi-year downward trend. Quantitative easing was an important factor in that shrinking velocity because central banks handed money to savings institutions in return for their Treasury securities. And all the savings institutions could do was buy financial assets. They couldn’t buy goods and services, so that money couldn’t really affect nominal GDP.
https://assets.zerohedge.com/s3fs-pu...?itok=ORyXigpL
What will cause velocity to rise?
The money banks are handing out today is going straight to businesses and consumers. They are not spending it right now, but as lockdowns lift, this will have an impact. My guess is that velocity will normalize back to around 1.4 sometime next year. Given the money supply we have already seen, that would give you an inflation rate of 4%. Plus, there is no reason velocity should stop at 1.4, it could easily rise above 1.7 again. There is one additional issue, and that is China: For the last three decades, China was a major source of deflation. But I think we are at the beginning of a new Cold War with China, which will mean higher prices for many things.
Most economists say there is such a huge output gap, inflation won’t be an issue for the next three years or so.
I don’t get that at all. You can point to the 1970s, where we had high unemployment and high inflation. It’s a matter of historical record that you can create inflation with high unemployment. We have done it before.
The yield on ten-year US Treasury Notes is currently at around 60 basis points. What will happen to bond yields once markets realize that we are heading into an inflationary world?
Bond yields will go up sharply. They will rise because markets start to realize who is controlling the supply of money now, i.e. not central banks, but politicians. That will be a big shock.
For successful financial repression, governments and central banks will need to stop bond yields from rising, won’t they?
Yes, and they will. But let me be precise: It will be governments who will act to stop bond yields from going up. They will force their domestic savings institutions to buy government bonds to keep yields down. The bit of your statement I disagree with is that central banks will put a cap on bond yields. They won’t be able to.
Why not? Even the Fed is toying with the idea of Yield Curve Control, an instrument they successfully used between 1942 and 1951 when they capped yields at 2.5%.
I think this is a bad parallel because from 1942 to 1951, we also had rationing, price controls, and credit controls. With that in place, it was easy for the Fed to cap Treasury yields. Yield Curve Control is easy when everyone is expecting deflation, which the current policy of the Bank of Japan shows. But once market participants start to expect inflation, they will all want to sell their bonds. The balance sheet of the central banks will just balloon to the sky. They would be spreading fuel on the fire, given that their balance sheets would expand with rising inflation expectations. Yield Curve Control in an environment of rising inflation expectations is not going to happen.
You are saying that governments now control the supply of money, and it will be governments who will make sure policies of financial repression are successfully implemented. What will be the future role of central banks?
They will be sidelined. They will become more regulatory than a monetary organization. The next few years will be fascinating. Imagine, you and I are running a central bank and we have a 2% inflation target. And we see our own government print money with a growth rate of 12%. What are we going to do to fulfill our mandate of price stability? We would have to threaten higher interest rates. We would have to ride a full-blown attack on our democratically elected government. Would we do that?
Paul Volcker did in the early 80s.
Yes. But Paul Volcker had courage. I don’t think any of today’s central bankers will have the guts to do that. After all, governments will argue that there is still an emergency given the shocks of Covid-19. There is a good parallel to the 1960s, when the Fed did nothing about rising inflation, because the US was fighting a war in Vietnam, and the administration of Lyndon B. Johnson had launched the Great Society Project to get America more equal. Against that background of massive fiscal spending, the Fed didn’t have the guts to run a tighter monetary policy. I can see that’s exactly where we are today.
So central banks will be mostly irrelevant?
Yes. It’s ironic: Most investors believe in the seemingly unlimited power of today’s central banks. But in fact, they are the least powerful they have ever been since 1977.
As an investor, how do I protect myself?
European inflation-linked bonds are pretty attractive now because they are pricing in such low levels of inflation. Gold is obviously a go-to asset for the long term. In the next couple of years, equities will probably do well. A bit more inflation and more nominal growth is a good environment for equities. I particularly like Japanese equities. Obviously, you wouldn’t buy government bonds under any condition.
How about commodities?
In a normal inflationary cycle, I’d recommend buying commodities. There is just one complicating factor with China. If we really enter into a new Cold War with China, that will mean big disturbances in commodities markets.
You wrote in the past that there is a sweet spot for equities up to an inflation rate of 4% before they tip over. Is this still valid?
Yes, this playbook is still in place. But once governments truly force their savings institutions to buy more government bonds, they will obviously have to sell something. And that something will be equities. Historically, inflation above 4% hasn’t been too good for equities.
How high do you see inflation going?
If we’re taking the next 10 years, I see inflation between 4 and 8%, somewhere around that. Compounded over ten years, combined with low-interest rates, this will be hugely effective in bringing down debt to GDP levels.
In which country do you see it happening first? Who will lead?
The one I worry about the most is in the UK. It has a significant current account deficit, it has to sell lots of government bonds to foreigners. I never really understood why foreigners buy them. I wouldn’t. Now we have Brexit coming up, which could still go badly. I don’t think it will, but it could. So we would see a spike in bond yields in the UK.
What will it take for an investor to successfully navigate the coming years?
First, we have to realize that this is a long-term phenomenon. Everyone is so caught up in the current crisis, they miss the long-term shift. This will be with us for decades, not just a couple of years. The financial system is a very different place now. And it’s a very dangerous place for savers. Most of the skills we have learned in the past 40 years are probably redundant because we have lived through a 40-year disinflationary period. It was a period where markets became more important and governments less important. Now we are reversing that. That’s why I recommend to my clients that they promote the people from their emerging markets departments to run their developed world departments. Emerging markets investors know how to deal with higher levels of inflation, government interference and capital controls. This will be our future.
- #10,173
- Edited 4:59am Nov 14, 2021 2:31am | Edited 4:59am
- | Commercial User | Joined Dec 2014 | 14,165 Posts
- #10,174
- Edited 4:59am Nov 14, 2021 2:48am | Edited 4:59am
- | Commercial User | Joined Dec 2014 | 14,165 Posts
https://www.armstrongeconomics.com/i...m_campaign=RSS
Blog/Corruption
Posted Nov 14, 2021, by Martin Armstrong
Spread the love https://www.armstrongeconomics.com/w...tain_Soros.png
There is a book about to be published that exposes that Soros has had his fingers in Ukraine to protect Hillary and Biden while undermining Trump. As everyone knows, I had direct contacts in Ukraine which were providing the backdrop to events. I was advising on how to win the revolution by convincing the police to switch sides to the people because the president was using Russian thugs to defend him not Ukrainian.
Moreover, despite the people who just spin conspiracies from nothing, the revolution was by and for the people – not the CIA. When they actually won, that is when both the EU and the US interfered and warned if they overthrew the people they were installed, there would get no support from the West. Hence, the very corrupt politicians were retained.
Video Player
00:00
07:08
Soros has been using his billions made from the trading club to alter the world and to force it into his insane idea that if there is only one government, then you will eliminate war. This was adopted by Europe and the former head of France explained was the purpose behind creating the Eurozone also allegedly funded secretly by Soros.
There is nobody else who has been funding the overthrow of governments to devolve into a single world government than Soros. He has bought access to the world and has set up his son to carry the torch.
Soros has been controlled the media and is in league with both Bill Gates and Klaus Schwab.
Soros is the dark lord behind the curtain and it has been his money that is funding even the attempt to overthrow the United States and shred our Constitution.
This new book provides extensive documentation of his influence in usurping powers through Ukraine which has propelled Biden to the White House and protested both Hillary and Hunter Biden.
Categories: Corruption, Politics, Tyranny
« All Fingers Point to Hillary & McCain
Biden Raises Cost for Senior & Medicare While Planning to Hand $450k to Illegal Aliens »
Blog/Corruption
Posted Nov 14, 2021, by Martin Armstrong
Spread the love https://www.armstrongeconomics.com/w...tain_Soros.png
There is a book about to be published that exposes that Soros has had his fingers in Ukraine to protect Hillary and Biden while undermining Trump. As everyone knows, I had direct contacts in Ukraine which were providing the backdrop to events. I was advising on how to win the revolution by convincing the police to switch sides to the people because the president was using Russian thugs to defend him not Ukrainian.
Moreover, despite the people who just spin conspiracies from nothing, the revolution was by and for the people – not the CIA. When they actually won, that is when both the EU and the US interfered and warned if they overthrew the people they were installed, there would get no support from the West. Hence, the very corrupt politicians were retained.
Video Player
00:00
07:08
Soros has been using his billions made from the trading club to alter the world and to force it into his insane idea that if there is only one government, then you will eliminate war. This was adopted by Europe and the former head of France explained was the purpose behind creating the Eurozone also allegedly funded secretly by Soros.
There is nobody else who has been funding the overthrow of governments to devolve into a single world government than Soros. He has bought access to the world and has set up his son to carry the torch.
Soros has been controlled the media and is in league with both Bill Gates and Klaus Schwab.
Soros is the dark lord behind the curtain and it has been his money that is funding even the attempt to overthrow the United States and shred our Constitution.
This new book provides extensive documentation of his influence in usurping powers through Ukraine which has propelled Biden to the White House and protested both Hillary and Hunter Biden.
Categories: Corruption, Politics, Tyranny
« All Fingers Point to Hillary & McCain
Biden Raises Cost for Senior & Medicare While Planning to Hand $450k to Illegal Aliens »
- #10,175
- Edited 5:00am Nov 14, 2021 3:09am | Edited 5:00am
- | Commercial User | Joined Dec 2014 | 14,165 Posts
https://www.theepochtimes.com/more-f...JGA2W6oMVN%2Fx
CANADA
‘Something Has Gone Wrong With Our Economy’: Economist on Canada’s Growth and Competitiveness
By Andrew Chen
November 12, 2021, Updated: November 13, 2021
Canada’s competitiveness and economic growth are being hampered by restrictive policies and the government’s disinterest in fostering the wealth-producing business sector, an economist says.
“There’s an increasing feeling in this country that something has gone wrong with our economy, and in particular our business sector, that we’re just not as competitive on the world stage as we used to be,” Philip Cross, a senior fellow at the Fraser Institute and former chief economic analyst at Statistics Canada, told The Epoch Times.
In a recent paper, Cross looked at factors that have reduced Canada’s competitiveness and productivity, which further lowered its share of global GDP. He found that Canada’s annual real GDP growth over the past decade has been the slowest since the 1930s.
“Canada’s sluggish economic growth in the years before the pandemic reflects a lack of innovation and weak productivity growth that has persisted for decades,” he wrote.
“The prolonged slump cannot be fully addressed with the current approach of policies targeting specific sectors such as high technology or green energy, or spurring research and development in the hope of boosting one or more of these variables. Worse would be acceding to the endless requests from specific groups, industries, or firms for favors in the name of job creation or higher incomes.”
A more productive approach, Cross advises, would be for Canada to undertake “a root-and-branch re-examination of its public policy mix and its commitment to markets, competition, and capitalism,” the goal being to create an environment more conducive to stronger business development and investment.
Back in the late 1990s, Canada still had several “world-class” corporations, such as Nortel Networks and JDS Uniphase, which were the “leading light” in the technological revolution in the 2000s, says Cross. During that time, Canadian corporations were regarded as extremely attractive to investors.
But beginning with the 2007-2009 recession, Canadian corporations started to lose their global appeal, which Cross said seemed to accelerate after 2014 with the downturn in oil prices—mainly caused by global supply growth—and the Liberal Party took power the following year.
“With a drop in global commodity prices, and especially oil prices, our firms simply became less attractive. But at the same time, we shot ourselves in the foot. We would not allow our largest corporations to be competitive by, for example, giving them access to pipelines, giving them access to overseas markets where they could get a better price for whether it was crude oil or whether it was liquefied natural gas,” he said.
“A lot of the damage we’ve done is self-inflicted, and has been self-inflicted by government policies that were implemented without fully understanding how negatively this was going to impact the competitiveness [of Canada].”
Cross said he is “quite worried” about the mindset of the Trudeau government, which “does not seem to attach any importance” to nurturing and promoting the Canadian business sector, giving the example of the Liberals’ small-business tax reform in 2017, which lacked consultation with the private sector.
He said Canada’s political leaders tend to think that it is “pro-business” to help established firms maintain their place, and many companies have therefore used business models that are based on “governments using a thicket of regulations, patents, tariffs, occupational licensing rules, restrictions on foreign investment, and price-fixing to shelter firms from competition.”
But this approach is “very anti-business,” he notes.
“That’s sending the message to all the other firms and all the other people who are thinking about entering into the business to compete with these established interests that ‘no, you don’t have a chance, we’re not going to help you at all, we’re going to tilt the playing field,’” Cross said.
“If I was a senior executive, particularly if I had global interests, I would not be looking to be expanding my operations in Canada.”
The lack of government support, in addition to regulatory roadblocks that make it difficult for firms to develop or expand, have stalled the long-term growth of the economy, Cross said, including in the auto and energy industries. One example is Ontario’s auto sector; although manufacturers have kept their plants in the province running, they are expanding in the United States and Mexico, not in Canada.
“Our share of the auto industry has declined,” he said. “It happened because we neglected it. We didn’t cultivate it, and it needs cultivation.”
The China Factor
Communist China’s economic boom over the past 40 years took a considerable chunk out of the global GDP share. Cross says in his paper that while European countries suffered the greatest loss as a result of China’s rise, Canada has been the “second biggest loser,” as its share of global GDP also shrank steadily from 2.5 percent in 1978 to 1.9 percent in 2020.
Meanwhile, the United States was able to retain most of its global GDP share through policies that supported technological innovation.
“If I had a choice of economic models to pick and one was Europe and the other was the U.S., I am going to pick the U.S. every time … because the U.S. has values that support entrepreneurship, innovation, and dynamism,” Cross said.
Many of the same symptoms of “business malaise” in European countries today are also evident in Canada, he says.
“Increasingly [in Canada] we’re becoming like Europeans—we just sit around and we expect the government to do everything for us, and that’s not going to work as a model for high economic growth rates over time. That’s a defensive policy that will produce stagnation.”
Cross believes Canada should focus on working more with its democratically south of the border, rather than courting authoritarian states like China.
“I don’t know why we look to China for growth. We’ve got the most innovative, dynamic economy in the world right next door. We should be concentrating on that,” he said.
“Instead, we seem to be putting all our eggs into cultivating China as if they’re going to be the next global superpower in economics”—something he said he is “far from convinced” will come to pass.
“China has gone through a period of rapid growth. So did the Soviet Union in the ’20s and ’30s. At some point, the Soviet Union did not master innovation and their economy collapsed,” Cross said.
“I don’t think a centralized dictatorial government like that, in the long run, is going to produce an economic superpower. The long-term economic growth is supported by the type of a [democratic] society that the United States has.”
https://img.theepochtimes.com/assets...ndrewChen1.jpg
Andrew Chen
Andrew Chen is an Epoch Times reporter based in Toronto.
CANADA
‘Something Has Gone Wrong With Our Economy’: Economist on Canada’s Growth and Competitiveness
By Andrew Chen
November 12, 2021, Updated: November 13, 2021
Canada’s competitiveness and economic growth are being hampered by restrictive policies and the government’s disinterest in fostering the wealth-producing business sector, an economist says.
“There’s an increasing feeling in this country that something has gone wrong with our economy, and in particular our business sector, that we’re just not as competitive on the world stage as we used to be,” Philip Cross, a senior fellow at the Fraser Institute and former chief economic analyst at Statistics Canada, told The Epoch Times.
In a recent paper, Cross looked at factors that have reduced Canada’s competitiveness and productivity, which further lowered its share of global GDP. He found that Canada’s annual real GDP growth over the past decade has been the slowest since the 1930s.
“Canada’s sluggish economic growth in the years before the pandemic reflects a lack of innovation and weak productivity growth that has persisted for decades,” he wrote.
“The prolonged slump cannot be fully addressed with the current approach of policies targeting specific sectors such as high technology or green energy, or spurring research and development in the hope of boosting one or more of these variables. Worse would be acceding to the endless requests from specific groups, industries, or firms for favors in the name of job creation or higher incomes.”
A more productive approach, Cross advises, would be for Canada to undertake “a root-and-branch re-examination of its public policy mix and its commitment to markets, competition, and capitalism,” the goal being to create an environment more conducive to stronger business development and investment.
Back in the late 1990s, Canada still had several “world-class” corporations, such as Nortel Networks and JDS Uniphase, which were the “leading light” in the technological revolution in the 2000s, says Cross. During that time, Canadian corporations were regarded as extremely attractive to investors.
But beginning with the 2007-2009 recession, Canadian corporations started to lose their global appeal, which Cross said seemed to accelerate after 2014 with the downturn in oil prices—mainly caused by global supply growth—and the Liberal Party took power the following year.
“With a drop in global commodity prices, and especially oil prices, our firms simply became less attractive. But at the same time, we shot ourselves in the foot. We would not allow our largest corporations to be competitive by, for example, giving them access to pipelines, giving them access to overseas markets where they could get a better price for whether it was crude oil or whether it was liquefied natural gas,” he said.
“A lot of the damage we’ve done is self-inflicted, and has been self-inflicted by government policies that were implemented without fully understanding how negatively this was going to impact the competitiveness [of Canada].”
Cross said he is “quite worried” about the mindset of the Trudeau government, which “does not seem to attach any importance” to nurturing and promoting the Canadian business sector, giving the example of the Liberals’ small-business tax reform in 2017, which lacked consultation with the private sector.
He said Canada’s political leaders tend to think that it is “pro-business” to help established firms maintain their place, and many companies have therefore used business models that are based on “governments using a thicket of regulations, patents, tariffs, occupational licensing rules, restrictions on foreign investment, and price-fixing to shelter firms from competition.”
But this approach is “very anti-business,” he notes.
“That’s sending the message to all the other firms and all the other people who are thinking about entering into the business to compete with these established interests that ‘no, you don’t have a chance, we’re not going to help you at all, we’re going to tilt the playing field,’” Cross said.
“If I was a senior executive, particularly if I had global interests, I would not be looking to be expanding my operations in Canada.”
The lack of government support, in addition to regulatory roadblocks that make it difficult for firms to develop or expand, have stalled the long-term growth of the economy, Cross said, including in the auto and energy industries. One example is Ontario’s auto sector; although manufacturers have kept their plants in the province running, they are expanding in the United States and Mexico, not in Canada.
“Our share of the auto industry has declined,” he said. “It happened because we neglected it. We didn’t cultivate it, and it needs cultivation.”
The China Factor
Communist China’s economic boom over the past 40 years took a considerable chunk out of the global GDP share. Cross says in his paper that while European countries suffered the greatest loss as a result of China’s rise, Canada has been the “second biggest loser,” as its share of global GDP also shrank steadily from 2.5 percent in 1978 to 1.9 percent in 2020.
Meanwhile, the United States was able to retain most of its global GDP share through policies that supported technological innovation.
“If I had a choice of economic models to pick and one was Europe and the other was the U.S., I am going to pick the U.S. every time … because the U.S. has values that support entrepreneurship, innovation, and dynamism,” Cross said.
Many of the same symptoms of “business malaise” in European countries today are also evident in Canada, he says.
“Increasingly [in Canada] we’re becoming like Europeans—we just sit around and we expect the government to do everything for us, and that’s not going to work as a model for high economic growth rates over time. That’s a defensive policy that will produce stagnation.”
Cross believes Canada should focus on working more with its democratically south of the border, rather than courting authoritarian states like China.
“I don’t know why we look to China for growth. We’ve got the most innovative, dynamic economy in the world right next door. We should be concentrating on that,” he said.
“Instead, we seem to be putting all our eggs into cultivating China as if they’re going to be the next global superpower in economics”—something he said he is “far from convinced” will come to pass.
“China has gone through a period of rapid growth. So did the Soviet Union in the ’20s and ’30s. At some point, the Soviet Union did not master innovation and their economy collapsed,” Cross said.
“I don’t think a centralized dictatorial government like that, in the long run, is going to produce an economic superpower. The long-term economic growth is supported by the type of a [democratic] society that the United States has.”
https://img.theepochtimes.com/assets...ndrewChen1.jpg
Andrew Chen
Andrew Chen is an Epoch Times reporter based in Toronto.
- #10,176
- Nov 14, 2021 9:51pm Nov 14, 2021 9:51pm
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- #10,177
- Edited 3:16am Nov 15, 2021 2:47am | Edited 3:16am
- | Commercial User | Joined Dec 2014 | 14,165 Posts
https://www.zerohedge.com/geopolitic...er-imperialism
Bitcoin & The End Of US 'Super Imperialism'
https://zh-prod-1cc738ca-7d3b-4a72-b.../picture-5.jpg
BY TYLER DURDEN
MONDAY, NOV 15, 2021 - 12:00 AM
Authored by Alex Gladstein via BitcoinMagazine.com,
In 1972, one year after President Richard Nixon defaulted on the dollar and formally took the United States off of the gold standard for good, the financial historian and analyst Michael Hudson published “Super Imperialism,” a radical critique of the dollar-dominated world economy.
The book is overlooked by today’s economic mainstream and puts forward a variety of provocative arguments that place it outside of orthodoxy. However, for those seeking to understand how the dollar won the money wars of the past century, the book makes for essential reading.
Hudson’s thesis comes from the left-leaning perspective — the title inspired by the German Marxist phrase “überimperialismus” — and yet thinkers of all political stripes, from progressives to libertarians, should find value in its approach and lessons.
In “Super Imperialism,” Hudson — who has updated the book twice over the past 50 years, with a third edition published just last month — traces the evolution of the world financial system, where U.S. debt displaced gold as the ultimate world reserve currency and premium collateral for financial markets.
https://assets.zerohedge.com/s3fs-pu...?itok=Te04VWd4
How did the world shift from using asset money in the form of gold to balance international payments to using debt money in the form of American treasuries?
How did, as Hudson puts it, “America’s ideal of implementing laissez-faire economic institutions, political democracy, and a dismantling of formal empires and colonial systems” turn into a system where the U.S. forced other nations to pay for its wars, defaulted on its debt, and exploited developing economies?
For those seeking to answer the question of how the dollar became so dominant — even as it was intentionally devalued over and over again in the decades after World War I — then “Super Imperialism” has a fascinating, and at times, deeply troubling answer.
Drawing on extensive historical source material, Hudson argues that the change from the gold standard to what he calls the “Treasury Bill Standard” happened over several decades, straddling the post-World War I era up through the 1970s.
In short, the U.S. was able to convince other nations to save in dollars instead of in gold by guaranteeing that the dollars could be redeemed for gold. But eventually, U.S. officials rug-pulled the world, refusing to redeem billions of dollars that had been spent into the hands of foreign governments under the promise that they were as good as gold through fixed-rate redemption.
This deceit allowed the U.S. government to finance an ever-expanding military-industrial complex and inefficient welfare state without having to make the traditional trade-offs a country or empire would make if its deficit grew too large. Instead, since U.S. policymakers figured out a way to bake American debt into the global monetary base, it never had to pay off its debt. Counterintuitively, Hudson says, America turned its Cold War debtor status into an “unprecedented element of strength rather than weakness.”
As a result, the U.S. has been able to, in Hudson’s words, pursue domestic expansion and foreign diplomacy with no balance of payment concerns: “Imposing austerity on debtor countries, America as the world’s largest debtor economy acts uniquely without financial constraint.”
A key narrative in Hudson’s 380-page book is the story of how the U.S. government systematically demonetized gold out of the international economic system. Curiously, he does not mention Executive Order 6102 — passed by President Roosevelt in 1933 to seize gold from the hands of the American public — but weaves a compelling narrative of how the U.S. government pulled the world away from the gold standard, culminating in the Nixon Shock of 1971.
In Hudson’s view, leaving the gold standard was all about America’s desire to finance war abroad, particularly in Southeast Asia. He says the Vietnam War was “single-handedly” responsible for pushing the U.S. balance-of-payments negative and drastically drawing down America’s once staggering gold reserves.
Ultimately, Hudson’s thesis argues that unlike classic European imperialism — driven by private sector profit motives — American super imperialism was driven by nation-state power motives. It was not steered by Wall Street, but by Washington. Bretton Woods institutions like the World Bank and International Monetary Fund (IMF) did not primarily help the developing world, but rather harnessed its minerals and raw goods for America and forced its leaders to buy U.S. agricultural exports, preventing them from developing economic independence.
There are, of course, several criticisms of Hudson’s narrative. It can be argued that dollar hegemony helped defeat the Soviet Union, pressuring its economy and paving the way for a more free world; ushering in the age of technology, science, and information; pushing growth globally with surplus dollars, and isolating rogue regimes. Perhaps most compellingly, history seems to suggest the world “wanted” dollar hegemony, if one considers the rise of the eurodollar system, where even America’s enemies tried to accumulate dollars outside of the control of the Federal Reserve.
Hudson was not without contemporary critics, either. A 1972 review in The Journal Of Economic History argued that “it would require an exceptionally naive understanding of politics to accept the underlying assertion that the United States government has been clever, efficient, totally unscrupulous, and consistently successful in exploiting developed and developing nations.”
The reader can be the judge of that. But even with these criticisms in mind, Hudson’s work is important to consider. The undeniable bottom line is that by shifting the world economy from relying on gold to relying on American debt, the U.S. government implemented a system where it could spend in a way no other country could, in a way where it never had to pay back its promises, and where other countries financed its warfare and welfare state.
“Never before,” Hudson writes, “has a bankrupt nation dared insist that its bankruptcy become the foundation of world economic policy.”
In 1972, the physicist and futurist Herman Kahn said that Hudson’s work revealed how “the United States has run rings around Britain and every other empire-building nation in history. We’ve pulled off the greatest rip-off ever achieved.”
Governments always dreamed of transforming their debt into the most valuable asset on earth. This essay explains how the U.S. succeeded in turning this dream into a reality, what the implications for the wider world were, how this era might be coming to a close, and why a Bitcoin standard might be next.
I. THE RISE AND FALL OF AMERICA AS A CREDITOR NATION
European powers, tempted by the ability to print paper money to finance war operations, broke off the gold standard entirely during World War I. The metal’s restraint would have resulted in a much shorter conflict but the warring factions decided instead to prolong the violence by debasing their currencies.
Between 1914 and 1918, German authorities suspended the convertibility of marks to gold and increased the money supply from 17.2 billion marks to 66.3 billion marks, while their British rivals increased their money supply from 1.1 billion pounds to 2.4 billion pounds. They expanded the German monetary base by six-fold and the British monetary base by nearly four-fold.
While European powers went deeper and deeper into debt, America enriched itself by selling arms and other goods to the allies, all while avoiding conflict in its homeland. As Europe tore itself to shreds, American farms and industrial operations ran full steam. The world at large began to buy more from the U.S. than it sold back, creating a large American current account surplus.
Post-war, U.S. officials broke with historical precedent and insisted that their European allies repay their war debts. Traditionally, this kind of support was considered a cost of war. At the same time, U.S. officials put up tariff barriers that prevented the allies from earning dollars through more exports to America.
Hudson argues that the U.S. essentially starved Germany through protectionist policy as it was also unable to export goods to the U.S. market to pay back its loans. Britain and France had to use whatever German reparations they did receive to pay back America.
The Federal Reserve, Hudson says, held down interest rates so as not to draw investment away from Britain, hoping in this way the English could pay back their war debt. But these low rates, in turn, helped spark a stock market bubble, discouraging capital outflows to Europe. Hudson argues this dynamic, especially after the Great Crash, created a global economic breakdown that helped trigger nationalism, isolationism, autarky, and depression, paving the way for World War II.
Hudson summarizes America’s post-World War I global legacy as follows: the devastation of Germany, the collapse of the British Empire, and a stockpiling of gold. At home, President Roosevelt ended domestic convertibility of dollars for gold, made holding gold a felony, and devalued the dollar by 40%. At the same time, the U.S. received most of Europe’s “refugee gold” during the 1930s as the threat of renewed war with Germany led to capital flight from wealthy Europeans. Washington was accumulating gold in its own coffers, just as it was stripping the precious metal from the public.
As World War II neared, Germany halted reparations payments, drying up the allied cash flow. Britain was unable to pay its debts, something it wouldn’t be able to fully do for another 80 years. Capital flight to the “safe” U.S. accelerated, combining with Roosevelt’s tariffs and export-boosting dollar devaluation to further enlarge America’s balance-of-payments position and gold stock. America became the world’s largest creditor nation.
This advantage grew even more dramatic when the allies spent the rest of their gold to fight the Nazis. By the end of the 1940s, the U.S. held more than 70% of non-Soviet-central-bank-held gold, around 700 million ounces.
In 1922, European powers had gathered in Genoa to discuss the reconstruction of Central and Eastern Europe. One of the outcomes was an agreement to partially go back to the gold standard through a “gold exchange” system where central banks would hold currencies that could be exchanged for gold, instead of the metal itself, which was to be increasingly centralized in financial hubs like New York and London.
In the later stages of World War II in 1944, the U.S. advanced this concept even further at the Bretton Woods conference in New Hampshire. There, a proposal put forth by British delegate John Maynard Keynes to use an internationally-managed currency called the “bancor” was rejected. Instead, American diplomats — holding leverage over their British counterparts as a result of their gold advantage and the bailouts they had extended through Lend-Lease Act policies — created a new global trade system underpinned by dollars, which were promised to be backed by gold at the rate of $35 per ounce. The World Bank, International Monetary Fund, and General Agreement on Tariffs and Trade were created as U.S.-dominated institutions which would enforce the worldwide dollar system.
Moving forward, U.S. foreign economic policy was very different from what it was after World War I, when Congress gave priority to domestic programs and America adopted a protectionist stance. U.S. policymakers theorized that America would need to remain a “major exporter to maintain full employment during the transition back to peacetime life” after World War II.
“Foreign markets,” Hudson writes, “would have to replace the War Department as a source of demand for the products of American industry and agriculture.”
This realization led the U.S. to determine it could not impose war debt on its allies as it did after World War I. A Cold War perspective began to take over: if the U.S. invested abroad, it could build up the allies and defeat the Soviets. The Treasury and the World Bank lent funds to Europe as part of the Marshall Plan so that it could rebuild and buy American goods.
Hudson distinguishes the new U.S. imperial system from the old European imperial systems. He quotes Treasury Secretary Morgenthau, who said Bretton Woods institutions “tried to get away from the concept of control of international finance by private financiers who were not accountable to the people,” pulling power away from Wall Street to Washington. In dramatic contrast to “classic” imperialism, which was driven by corporate interests and straightforward military action, in the new “super imperialism” the U.S. government would “exploit the world via the international monetary system itself.” Hence why Hudson’s original title for his book was “Monetary Imperialism.”
The other defining feature of super imperialism versus classic imperialism was that the former is based on a debtor position, while the latter was based on a creditor position. The American approach was to force foreign central banks to finance U.S. growth, whereas the British or French approach was to extract raw materials from colonies, sell them back finished goods, and exploit low wages or even slave labor.
Classic imperialists, if they ran into enough debt, would have to impose domestic austerity or sell off their assets. Military adventurism had restraints. But Hudson argues that with super imperialism, America figured out not just how to avoid these limits but how to derive positive benefits from a massive balance-of-payments deficit. It forced foreign central banks to absorb the cost of U.S. military spending and domestic social programs which defended Americans and boosted their standards of living.
Hudson points to the Korean War as the major event that shifted America’s considerable post-World War II balance-of-payments surplus into a deficit. He writes that the fight on the Korean peninsula was “financed essentially by the Federal Reserve’s monetizing the federal deficit, an effort that transferred the war’s cost onto some future generation, or more accurately from future taxpayers to future bondholders.”
II. THE FAILURE OF BRETTON WOODS
In the classic gold standard system of international trade, Hudson describes how things worked:
“If trade and payments among countries were fairly evenly balanced, no gold actually changed hands: the currency claims going in one direction offset those going in the opposite direction. But when trade and payments were not exactly in balance, countries that bought or paid more than they sold or received found themselves with a balance-of-payments deficit, while nations that sold more than they bought enjoyed a surplus which they settled in gold... If a country lost gold its monetary base would be contracted, interest rates would rise, and foreign short-term funds would be attracted to balance international trade movements. If gold outflows persisted, the higher interest rates would deter new domestic investment and incomes would fall, thereby reducing the demand for imports until the balance was restored in the country’s international payments.”
Gold helped nations account with each other in a neutral and straightforward way. However, just as European powers discarded the restraining element of gold during World War I, Hudson says America did not like the restraint of gold either, and instead “worked to ‘demonetize’ the metal, driving it out of the world financial system — a geopolitical version of Gresham’s Law,” where bad money drives out the good. By pushing a transformation of a world where the premium reserve was gold to a world where the premium reserve was American debt, the U.S. hacked the system to drive out the good money.
By 1957, U.S. gold reserves still outnumbered dollar reserves of foreign central banks three to one. But in 1958, the system saw its first cracks, as the Fed had to sell off more than $2 billion of gold to keep the Bretton Woods system afloat. The ability of the U.S. to hold the dollar at $35 per ounce of gold was being called into question. In one of his last acts in office, President Eisenhower banned Americans from owning gold anywhere in the world. But following the presidential victory of John F. Kennedy — who was predicted to pursue inflationist monetary policies — gold surged anyway, breaking $40 per ounce. It was not easy to demonetize gold in a world of increasing paper currency.
American and European powers tried to band-aid the system by creating the London Gold Pool. Formed in 1961, the pool’s mission was to fix the gold price. Whenever market demand pushed up the price, central banks coordinated to sell part of their reserves. The pool came under relentless pressure in the 1960s, both from the dollar depreciating against the rising currencies of Japan and Europe and from the enormous expenditures of Great Society programs and the U.S. war in Vietnam.
Some economists saw the failure of the Bretton Woods system as inevitable. Robert Triffin predicted that the dollar could not act as the international reserve currency with a current account surplus. In what is known as the “Triffin dilemma,” he theorized that countries worldwide would have a growing need for that “key currency,” and liabilities would necessarily expand beyond what the key country could hold in reserves, creating a larger and larger debt position. Eventually, the debt position would grow so large so as to cause the currency to collapse, destroying the system.
By 1964, this dynamic began to visibly kick in, as American foreign debt finally exceeded the Treasury’s gold stock. Hudson says that American overseas military spending was “the entire balance-of-payments deficit as the private sector and non-military government transactions remained in balance.”
The London Gold Pool was held in place (buoyed by gold sales from the Soviet Union and South Africa) until 1968 when the arrangement collapsed and a new two-tiered system with a “government” price and a “market” price emerged.
That same year, President Lyndon B. Johnson shocked the American public when he announced he would not run for another term, possibly in part because of the stress of the unraveling monetary system. Richard Nixon won the presidency in 1968, and his administration did its part to convince other nations to stop converting dollars to gold.
By the end of that year, the U.S. had drawn down its gold from 700 million to 300 million ounces. A few months later, Congress removed the 25% gold backing requirement for federal reserve notes, cutting one more link between the U.S. money supply and gold. Fifty economists had signed a letter warning against such an action, saying it would “open the way to a practically unlimited expansion of Federal Reserve notes… and a decline and even collapse in the value of our currency.”
In 1969, with the end of Bretton Woods palpably close, the IMF introduced Special Drawing Rights (SDRs) or “paper gold.” These currency units were supposed to be equal to gold, but not redeemable for the metal. The move was celebrated in newspapers worldwide as creating a new currency that would “fill monetary needs but exist only on books.” In Hudson’s view, the IMF violated its founding charter by bailing out the U.S. with billions of SDRs.
He says the SDR strategy was “akin to a tax levied upon payments surplus nations by the United States… it represented a transfer of goods and resources from civilian and government sectors of payments-surplus nations to payments deficit countries, a transfer for which no tangible quid pro quo was to be received by the nations who had refrained from embarking on the extravagance of war.”
By 1971, short-term dollar liabilities to foreigners exceeded $50 billion, but gold holdings dipped below $10 billion. Mirroring the World War I behavior of Germany and Britain, the U.S. inflated its money supply to 18-times its gold reserves while it waged the Vietnam War.
III. THE DEATH OF THE GOLD STANDARD AND THE RISE OF THE TREASURY BILL STANDARD
As it became clear that the U.S. government could not possibly redeem extant dollars for gold, foreign countries found themselves in a trap. They could not sell off their U.S. treasuries or refuse to accept dollars, as this would collapse the dollar’s value in currency markets, advantaging U.S. exports and harming their own industries. This is the key mechanism that made the Treasury bill system work.
As foreign central banks received dollars from their exporters and commercial banks, Hudson says they had “little choice but to lend these dollars to the U.S. government.” They also gave seigniorage privilege to the U.S. as foreign nations “earned” a negative interest rate on American paper promises most years between the end of World War II and the fall of the Berlin Wall, in effect paying Washington to hold their money on a real basis.
“Instead of U.S. citizens and companies being taxed or U.S. capital markets being obliged to finance the rising federal deficit,” Hudson writes, “foreign economies were obliged to buy the new Treasury bonds… America’s Cold War spending thus became a tax on foreigners. It was their central banks who financed the costs of the war in Southeast Asia.”
American officials annoyed that the allies never paid them back for World War I, could now get their pound of flesh in another way.
French diplomat Jacques Rueff gave his take on the mechanism behind the Treasury bill standard in his book, “The Monetary Sin Of The West”:
“Having learned the secret of having a ‘deficit without tears,’ it was only human for the US to use that knowledge, thereby putting its balance of payments in a permanent state of deficit. Inflation would develop in the surplus countries as they increased their own currencies on the basis of the increased dollar reserves held by their central banks. The convertibility of the reserve currency, the dollar, would eventually be abolished owing to the gradual but unlimited accumulation of sight loans redeemable in US gold.”
The French government was vividly aware of this and persistently redeemed its dollars for gold during the Vietnam era, even sending a warship to Manhattan in August 1971 to collect what they were owed. A few days later, on August 15, 1971, President Nixon went on national television and formally announced the end of the dollar’s international convertibility to gold. The U.S. had defaulted on its debt, leaving tens of billions of dollars abroad, all of a sudden unbacked. By extension, every currency that was backed by dollars became pure fiat. Rueff was right, and the French were left with paper instead of precious metal.
Nixon could have simply raised the price of gold, instead of defaulting entirely, but governments do not like admitting to their citizenry that they have been debasing the public’s money. It was much easier for his administration to break a promise to people thousands of miles away.
As Hudson writes, “more than $50 billion of short-term liabilities to foreigners owed by the U.S. on the public and private account could not be used as claims on America’s gold stock.” They could, of course, “be used to buy U.S. exports, to pay obligations to U.S. public and private creditors, or to invest in government corporate securities.”
These liabilities were no longer liabilities of the U.S. Treasury. American debt had been baked into the global monetary base.
“IOUs,” Hudson says, became “IOU-nothings.” The final piece of the strategy was to “roll the debt over” on an ongoing basis, ideally with interest rates below the rate of monetary inflation.
Americans could now obtain foreign goods, services, companies, and other assets in exchange for mere pieces of paper: “It became possible for a single nation to export its inflation by settling its payment deficit with paper instead of gold… a rising world price level thus became in effect a derivative function of U.S. monetary policy,” Hudson writes.
If you owe $5,000 to the bank, it’s your problem. If you owe $5 million, it’s theirs. President Nixon’s Treasury Secretary John Connolly riffed on that old adage, quipping at the time: “The dollar may be our currency, but now it’s your problem.”
IV. SUPER IMPERIALISM IN ACTION: HOW THE U.S. MADE THE WORLD PAY FOR THE VIETNAM WAR
As the U.S. deficit increased, government spending accelerated, and Americans — in a phenomenon hidden from the average citizen — watched as other nations paid “the cost of this spending spree” as foreign central banks, not taxes, financed the debt.
The game which the Nixon administration was playing, Hudson writes, “was one of the most ambitious in the economic history of mankind ... and was beyond the comprehension of the liberal senators of the United States… The simple device of not hindering the outflow of dollar assets had the effect of wiping out America’s foreign debt while seeming to increase it. At the same time, the simple utilization of the printing press — that is, new credit creation — widened the opportunities for penetrating foreign markets by taking over foreign companies.”
He continues:
“American consumers might choose to spend their incomes on foreign goods rather than to save. American businesses might choose to buy foreign companies or undertake new direct investment at home rather than buy government bonds, and the American government might finance a growing world military program, but this overseas consumption and spending would nonetheless be translated into savings and channeled back to the United States. Higher consumer expenditures on Volkswagens or on oil thus had the same effect as an increase in excise taxes on these products: they accrued to the U.S. Treasury in a kind of forced saving.”
By repudiating gold convertibility of the dollar, Hudson argues “America transformed a position of seeming weakness into one of unanticipated strength, that of a debtor over its creditors.”
“What was so remarkable about dollar devaluation,” he writes, “is that far from signaling the end of American domination of its allies, it became the deliberate object of U.S. financial strategy, a means to enmesh foreign central banks further in the dollar-debt standard.”
One vivid story about the power of the Treasury bill standard — and how it could force big geopolitical actors to do things against their will — is worth sharing. As Hudson tells it:
“German industry had hired millions of immigrants from Turkey, Greece, Italy, Yugoslavia and other Mediterranean countries. By 1971 some 3 percent of the entire Greek population was living in Germany producing cars and export goods… when Volkswagens and other goods were shipped to the United States… companies could exchange their dollar receipts for Deutsche marks with the German central bank... but Germany’s central bank could only hold these dollar claims in the form of U.S. Treasury bills and bonds... It lost the equivalent of one-third the value of its dollar holdings during 1970-74 when the dollar fell by some 52 percent against the Deutsche mark, largely because the domestic US inflation eroded 34 percent of the dollar’s domestic purchasing power.”
In this way, Germany was forced to finance America’s wars in Southeast Asia and military support for Israel: two things it strongly opposed.
Put another way by Hudson: “In the past, nations sought to run payments surpluses in order to build up their gold reserves. But now all they were building up was a line of credit to the U.S. Government to finance its programs at home and abroad, programs which these central banks had no voice in formulating, and which were in some cases designed to secure foreign policy ends not desired by their governments.”
Hudson’s thesis was that America had forced other countries to pay for its wars regardless of whether they wanted to or not. Like a tribute system, but enforced without military occupation. “This was,” he writes, “something never before accomplished by any nation in history.”
V. OPEC TO THE RESCUE
Hudson wrote “Super Imperialism” in 1972, the year after the Nixon Shock. The world wondered at the time: What will happen next? Who will continue to buy all of this American debt? In his sequel, “Global Fracture,” published five years later, Hudson got to answer the question.
The Treasury bill standard was a brilliant strategy for the U.S. government, but it came under heavy pressure in the early 1970s.
Just two years after the Nixon Shock, in response to dollar devaluation and rising American grain prices, the Organization of the Petroleum Exporting Countries (OPEC) nations led by Saudi Arabia quadrupled the dollar price of oil past $10 per barrel. Before the creation of OPEC, “the problem of the terms of trade shifting in favor of raw-materials exporters had been avoided by foreign control over their economies, both by the international minerals cartel and by the colonial domination,” Hudson writes.
But now that the oil states were sovereign, they controlled the massive inflow of savings accrued through the skyrocketing price of petroleum.
This resulted in a “redistribution of global wealth on a scale that hadn’t been seen in living memory,” as economist David Lubin puts it.
In 1974, the oil exporters had an account surplus of $70 billion, up from $7 billion the year before: an amount of nearly 5% of US GDP. That year, the Saudi current account surplus was 51% of its GDP.
The wealth of OPEC nations grew so fast that they could not spend it all on foreign goods and services.
“What are the Arabs going to do with it all?” asked The Economist in early 1974.
In “Global Fracture,” Hudson argues that it became essential for the U.S. “to convince OPEC governments to maintain petrodollars [meaning, a dollar earned by selling oil] in Treasury bills so as to absorb those which Europe and Japan were selling out of their international monetary reserves.”
As detailed in the precursor to this essay — “Uncovering The Hidden Costs Of The Petrodollar” — Nixon’s new Treasury Secretary William Simon traveled to Saudi Arabia as part of an effort to convince the House of Saud to price oil in dollars and “recycle” them into U.S. government securities with their newfound wealth.
On June 8, 1974, the U.S. and Saudi governments signed a military and economic pact. Secretary Simon asked the Saudis to buy up to $10 billion in treasuries. In return, the U.S. would guarantee security for the Gulf regimes and sell them massive amounts of weapons. The OPEC bond bonanza began.
“As long as OPEC could be persuaded to hold its petrodollars in Treasury bills rather than investing them in capital goods to modernize its economies or in ownership of foreign industry,” Hudson says, “the level of world oil prices would not adversely affect the United States.”
At the time, there was a public and much-discussed fear in America of Arab governments “taking over” U.S. companies. As part of the new U.S.-Saudi special relationship, American officials convinced the Saudis to reduce investments in the U.S. private sector and simply buy more debt.
The Federal Reserve continued to inflate the money supply in 1974, contributing to the fastest domestic inflation since the Civil War. But the growing deficit was eaten up by the Saudis and other oil-exporters, who would recycle tens of billions of dollars of petrodollar earnings into U.S. treasuries over the following decade.
“Foreign governments,” Hudson says, “financed the entire increase in publicly-held U.S. federal debt” between the end of WWII and the 1990s, and continued with the help of the petrodollar system to majorly support the debt all the way to the present day.
At the same time, the U.S. government used the IMF to help “end the central role of gold that existed in the former world monetary system.” Amid double-digit inflation the institution sold off gold reserves in late 1974, to try and keep any possible upswing in gold down as a result of a new law in the United States that finally made it legal again for Americans to own gold.
By 1975, other OPEC nations had followed Saudi Arabia’s lead in supporting the Treasury bill standard. The British pound sterling was finally phased out as a key currency, leaving, as Hudson writes, “no single national currency to compete with the dollar.”
The legacy of the petrodollar system would live on for decades, forcing other countries to procure dollars when they needed oil, causing America to defend its Saudi partners when threatened with aggression from Saddam Hussein or Iran, discouraging U.S. officials from investigating Saudi Arabia’s role in the 9/11 attacks, supporting the devastating Saudi war in Yemen, selling billions of dollars of weapons to the Saudis, and making Aramco the second-most valuable company in the world today.
VI. EXPLOITATION OF THE DEVELOPING WORLD
The Treasury bill standard carried massive costs. It was not free. But these costs were not paid for by Washington but were often borne by citizens in Middle Eastern countries and in poorer nations across the developing world.
Even pre-Bretton Woods, gold reserves from regions like Latin America were sucked up by the U.S. As Hudson describes, European nations would first export goods to Latin America. Europe would take the gold — settled as the balance-of-payments adjusted — and use it to buy goods from the U.S. In this way, gold was “stripped” from the developing world, helping the U.S. gold stock reach its peak of nearly $24.8 billion (or 700 million ounces) in 1949.
Originally designed to help rebuild Europe and Japan, the World Bank and International Monetary Fund became in the 1960s an “international welfare agency” for the world’s poorest nations, per The Heritage Foundation. But, according to Hudson, that was a cover for its true purpose: a tool through which the U.S. government would enforce economic dependency from non-Communist nations worldwide.
The U.S. joined the World Bank and IMF only “on the condition that it was granted unique veto power… this meant that no economic rules could be imposed that U.S. diplomats judged did not serve American interests.”
America began with 33% of the votes at the IMF and World Bank which — in a system that required an 80% majority vote for rulings — indeed gave it veto power. Britain initially had 25% of the votes, but given its subordinate role to the U.S. after the war, and its dependent position as a result of Lend-Lease policies, it would not object to Washington’s desires.
A major goal of the U.S. post-WWII was to achieve full employment, and international economic policy was harnessed to help achieve that goal. The idea was to create foreign markets for American exports: raw materials would be imported cheaply from the developing world, and farm goods and manufactured goods would be exported back to those same nations, bringing the dollars back.
Hudson says that U.S. congressional hearings regarding Bretton Woods agreements revealed “a fear of Latin American and other countries underselling U.S. farmers or displacing U.S. agricultural exports, instead of the hope that these countries might indeed evolve towards agricultural self-sufficiency.”
The Bretton Woods institutions were designed with these fears in mind: “The United States proved unwilling to lower its tariffs on commodities that foreigners could produce less expensively than American farmers and manufacturers,” writes Hudson. “The International Trade Organization, which in principle was supposed to subject the U.S. economy to the same free-trade principles that it demanded from foreign governments, was scuttled.”
In a meta-version of how the French exploit Communauté Financière Africaine (CFA) nations in Africa today, the U.S. employed many double standards, did not comply with the most-favored-nation rule, and set up a system that forced developing countries to “sell their raw materials to U.S.-owned firms at prices substantially below those received by American producers for similar commodities.”
Hudson spends a significant percentage of “Super Imperialism” making the case that this policy helped destroy economic potential and capital stock of many developing countries. The U.S., as he tells it, forced developing nations to export fruit, minerals, oil, sugar, and other raw goods instead of investing in domestic infrastructure and education — and forced them to buy American foodstuffs instead of grow their own.
Post-1971, why did the Bretton Woods institutions continue to exist? They were created to enforce a system that had expired. The answer, from Hudson’s perspective, is that they were folded into this broader strategy, to get the (often dictatorial) leaders of developing economies to spend their earnings on food and weapons imports. This prevented internal development and internal revolution.
In this way, “super imperial” financial and agricultural policy could, in effect, accomplish what classic imperial military policy used to accomplish. Hudson even claims that “Super Imperialism” the book was used as a “training manual” in Washington in the 1970s by diplomats seeking to learn how to “exploit other countries via their central banks.”
In Hudson’s telling, U.S.-directed aid was not used for altruism, but for self interest. From 1948 to 1969, American receipts from foreign aid approximated 2.1 times its investments.
“Not exactly an instrument of altruistic American generosity,” he writes. From 1966 to 1970, the World Bank “took in more funds from 20 of its less developed countries than it disbursed.”
In 1971, Hudson says, the U.S. government stopped publishing data showing that foreign aid was generating a transfer of dollars from foreign countries to the U.S. He says he got a response from the government at the time, saying “we used to publish that data, but some joker published a report showing that the U.S. actually made money off the countries we were aiding.”
Former grain-exporting regions of Latin America and Southeast Asia deteriorated to food-deficit status under “guidance” from the World Bank and IMF. Instead of developing, Hudson argues that these countries were retrogressing.
Normally, developing countries would want to keep their mineral resources. They act as savings accounts, but these countries couldn’t build up capacity to use them, because they were focused on servicing debt to the U.S. and other advanced economies. The World Bank, Hudson argues, pushed them to “draw down” their natural resource savings to feed themselves, mirroring subsistence farming and leaving them in poverty. The final “logic” that World Bank leaders had in mind was that, in order to conform with the Treasury bill standard, “populations in these countries must decline in symmetry with the approaching exhaustion of their mineral deposits.”
Hudson describes the full arc as such: Under super imperialism, world commerce has been directed not by the free market but by an “unprecedented intrusion of government planning, coordinated by the World Bank, IMF, and what has come to be called the Washington Consensus. Its objective is to supply the U.S. with enough oil, copper, and other raw materials to produce a chronic over-supply sufficient to hold down their world price. The exception of this rule is for grain and other agricultural products exported by the United States, in which case relatively high world prices are desired. If foreign countries still are able to run payments surpluses under these conditions, as have the oil-exporting countries, their governments are to use the process to buy U.S. arms or invest in long-term illiquid, preferably non-marketable U.S. treasury obligations.”
This, as Allen Farrington would say, is not capitalism. Rather, it’s a story of global central planning and central bank imperialism.
Most shockingly, the World Bank in the 1970s under Robert McNamara argued that population growth slowed down development, and advocated for growth to be “curtailed to match the modest rate of gain in food output which existing institutional and political constraints would permit.”
Nations would need to “follow Malthusians policies” to get more aid. McNamara argued that “the population be fitted to existing food resources, not that food resources be expanded to the needs of existing or growing populations.”
To stay in line with World Bank loans, the Indian government forcibly sterilized millions of people.
As Hudson concludes: the World Bank focused the developing world “on service requirements rather than on the domestic needs and aspirations of their peoples. The result was a series of warped patterns of growth in country after country. Economic expansion was encouraged only in areas that generated the means of foreign debt service, so as to be in a position to borrow enough to finance more growth in areas that might generate yet further means of foreign debt service, and so on ad infinitum.
"On an international scale, Joe Hill’s 'We go to work to get the cash to buy the food to get the strength to go to work to get the cash to buy the food to get the strength to go to work to get the cash to buy the food…' became reality. The World Bank was pauperizing the countries that it had been designed in theory to assist."
VII. FINANCIAL IMPLICATIONS OF THE TREASURY BILL STANDARD
By the 1980s, the U.S. had achieved, as Hudson writes, “what no earlier imperial system had put in place: a flexible form of global exploitation that controlled debtor countries by imposing the Washington Consensus via the IMF and World Bank, while the Treasury Bill standard obliged the payments-surplus nations of Europe and East Asia to extend forced loans to the U.S. government.”
But threats still remained, including Japan. Hudson explains how in 1985 at the Louvre Accords, the U.S. government and IMF convinced the Japanese to increase their purchasing of American debt and revalue the yen upwards so that their cars and electronics became more expensive. This is how, he says, they disarmed the Japanese economic threat. The country “essentially went broke.”
On the geopolitical level, super imperialism not only helped the U.S. defeat its Soviet rival — which could only exploit the economically-weak COMECON countries — but also kept any potential allies from getting too strong. On the financial level, the shift from the restraint of gold to the continuous expansion of American debt as the global monetary base had a staggering impact on the world.
Despite the fact that today the U.S. has a much larger labor force and much higher productivity than it did in the 1970s, prices have not fallen and real wages have not increased. The “FIRE” sector (finance, insurance, and real estate) has, Hudson says, “appropriated almost all of the economic gains.” Industrial capitalism, he says, has evolved into finance capitalism.
For decades, Japan, Germany, the U.K., and others were “powerless to use their economic strength for anything more than to become the major buyers of Treasury bonds to finance the U.S. federal budget deficit… [these] foreign central banks enabled America to cut its own tax rates (at least for the wealthy), freeing savings to be invested in the stock market and property boom,” according to Hudson.
The past 50 years witnessed an explosion of financialization. Floating currency markets sparked a proliferation of derivatives used to hedge risk. Corporations all of a sudden had to invest resources in foreign exchange futures. In the oil and gold markets, there are hundreds or thousands of paper claims for each unit of raw material. It is not clear if this is a direct result of leaving the gold standard, but is certainly a prominent feature of the post-gold era.
Hudson argues that U.S. policy pushes foreign economies to “supply the consumer goods and investment goods that the domestic U.S. economy no longer is supplying as it post-industrializes and becomes a bubble economy, while buying American farm surpluses and other surplus output. In the financial sphere, the role of foreign economies is to sustain America’s stock market and real estate bubble, producing capital gains and asset-price inflation even as the U.S. industrial economy is being hollowed out.”
Over time, equities and real estate boomed as “American banks and other investors moved out of government bonds and into higher-yielding corporate bonds and mortgage loans.” Even though wages remained stagnant, prices of investments kept going up, and up, and up, in a velocity previously unseen in history.
As financial analyst Lyn Alden has pointed out, the post-1971 fiat-based financial system has contributed to structural trade deficits for the U.S. Instead of drawing down gold reserves to maintain the system like it did during the Bretton Woods framework, America has drawn down and “sold off” its industrial base, where more and more of its stuff is made elsewhere, and more and more of its equity markets and real estate markets are owned by foreigners. The U.S., she argues, has extended its global power by sacrificing some of its domestic economic health. This sacrifice has mainly benefitted U.S. elites at the cost of blue-collar and middle-income workers. Dollar hegemony, then, might be good for American elites and diplomats and the wider empire, but not for the everyday citizen.
Data from the work of political economists Shimson Bichler and Jonathan Nitzan highlights this transformation and shines a light on how wealth is moving to the haves from the have-nots: In the early 1950s, a typical dominant capital firm commanded a profit stream 5,000 times the income of an average worker; in the late 1990s, it was 25,000 times greater. In the early 1950s, the net profit of a Fortune 500 firm was 500 times the average; in the late 1990s, it was 7,000 times greater. Trends have accelerated since then: Over the past 15 years, the eight largest companies in the world grew from an average market capitalization of $263 billion to $1.68 trillion.
Inflation, Bichler and Nitzan argue, became a “permanent feature” of the 20th century. Prices rose 50-times from 1900 to 2000 in the U.K. and U.S., and much more aggressively in developing countries. They use a staggering chart that shows consumer prices in the U.K. from 1271 to 2007 to make the point. The visual is depicted in log-scale, and shows steady prices all the way through the middle of the 16th century, when Europeans began exploring the Americas and expanding their gold supply. Then prices remain relatively steady again though the beginning of the 20th century. But then, at the time of World War I, they shoot up dramatically, cooling off a bit during the depression, only to go hyperbolic since the 1960s and 1970s as the gold standard fell apart and as the world shifted onto the Treasury bill standard.
Bitchler and Nitzan disagree with those who say inflation has a “neutral” effect on society, arguing that inflation, especially stagflation, redistributes income from workers to capitalists, and from small businesses to large businesses. When inflation rises significantly, they argue that capitalists tend to gain, and workers tend to lose. This is typified by the staggering increase in net worth of America’s richest people during the otherwise very difficult last 18 months. The economy continues to expand, but for most people, growth has ended.
Bichler and Nitzan’s meta point is that economic power tends to centralize, and when it cannot anymore through amalgamation (merger and acquisition activity), it turns to currency debasement. As Rueff said in 1972, “Given the option, money managers in a democracy will always choose inflation; only a gold standard deprives them of the option.”
As the Federal Reserve continues to push interest rates down, Hudson notes that prices rise for real estate, bonds, and stocks, which are “worth whatever a bank will lend.” Writing more recently in the wake of the Global Financial Crisis, he said “for the first time in history people were persuaded that the way to get rich was by running into debt, not by staying out of it. New borrowing against one’s home became almost the only way to maintain living standards in the face of this economic squeeze.”
This analysis of individual actors neatly mirrors the global transformation of the world reserve currency over the past century: from a mechanism of saving and capital accumulation to a mechanism of one country taking over the world through its growing deficit.
Hudson pauses to reflect on the grotesque irony of pension funds trying to make money by speculating. “The end game of finance capitalism,” he says, “will not be a pretty sight.”
VIII. COUNTER-THEORIES AND CRITICISMS
There is surely a case to be made for how the world benefited from the dollar system. This is, after all, the orthodox reading of history. With the dollar as the world reserve currency, everything as we know it grew from the rubble of World War II.
One of the strongest counter-theories relates to the USSR, where it seems clear that the Treasury bill standard — and the unique ability for the U.S. to print money that could purchase oil — helped America defeat the Soviet Union in the Cold War.
To get an idea of what the implications are for liberal democracy’s victory over totalitarian communism, take a look at a satellite image of the Korean peninsula at night. Compare the vibrant light of industry in the south with the total darkness of the north.
So perhaps the Treasury bill standard deserves credit for this global victory. After the fall of the Berlin Wall, however, the U.S. did not hold another Bretton Woods to decentralize the power of holding the world’s reserve currency. If the argument is that we needed the Treasury bill standard to defeat the Soviets, then the failure to reform after their downfall is puzzling.
A second powerful counter-theory is that the world shifted from gold to U.S. debt simply because gold could not do the job. Analysts like Jeff Snider assert that demand for U.S. debt is not necessarily part of some scheme but rather as a result of the world’s thirst for pristine collateral.
In the late 1950s, as the U.S. enjoyed its last years with a current account surplus, something else major happened: the creation of the eurodollar. Originally borne out of an interest from the Soviets and their proxies to have dollar accounts that the American government could not confiscate, the idea was that banks in London and elsewhere would open dollar-denominated accounts to store earned U.S. dollars beyond the purview of the Federal Reserve.
Sitting in banks like Moscow Narodny in London or Banque Commerciale pour L’Europe du Nord in Paris, these new “eurodollars” became a global market for collateralized borrowing, and the best collateral one could have in the system was a U.S. treasury.
Eventually, and largely due to the changes in the monetary system post-1971, the eurodollar system exploded in size. It was unburdened by Regulation Q, which set a limit on interest rates on bank deposits in the U.S. Eurodollar banks, free from this restriction, could charge higher rates. The market grew from $160 billion in 1973 to $600 billion in 1980 — a time when the inflation-adjusted federal funds rate was negative. Today, there are many more eurodollars than there are actual dollars.
To revisit the Triffin dilemma, the demand for “reserve” dollars worldwide would inevitably lead to a draining of U.S. domestic reserves and, subsequently, confidence in the system breaking down.
How can a stockpile of gold back an ever-growing global reserve currency? Snider argues that the Bretton Woods system could never fulfill the role of a global reserve currency. But a dollar unbacked by gold could. And, the argument goes, we see the market’s desire for this most strongly in the growth of the eurodollar.
If even America’s enemies wanted dollars, then how can we say that the system only came into dominance through U.S. design? Perhaps the design was simply so brilliant that it co-opted even America’s most hated rivals. And finally, in a world where gold had not been demonetized, would it have remained the pristine collateral for this system? We’ll never know.
A final major challenge to Hudson’s work is found in the discourse arguing that the World Bank has helped increase living standards in the developing world. It is hard not to argue that most are better off in 2021 than in 1945. And cases like South Korea are provided to show how World Bank funding in the 1970s and 1980s were crucial for the country’s success.
But how much of this relates to technology deflation and a general rise in productivity, as opposed to American aid and support? And how does this rise compare differentially to the rise in the West over the same period? Data suggests that, under World Bank guidance between 1970 and 2000, poorer countries grew more slowly than rich ones.
One thing is clear: Bretton Woods institutions have not helped everyone equally. A 1996 report covering the World Bank’s first 50 years of operations found that “of the 66 less developed countries receiving money from the World Bank for more than 25 years, 37 are no better off today than they were before they received such loans.” And of these 37, most “are poorer today than they were before receiving aid from the Bank.”
In the end, one can argue that the Treasury bill standard helped defeat Communism; that it’s what the global market wanted; and that it helped the developing world. But what cannot be argued is that the world left the era of asset money for debt money, and that as the ruler of this new system, the U.S. government gained special advantages over every other country, including the ability to dominate the world by forcing other countries to finance its operations.
IX. THE END OF AN ERA?
In Enlightenment philosopher Immanuel Kant’s landmark 1795 essay “Toward Perpetual Peace,” he argues for six primary principles, one of which is that “no national debt shall be contracted in connection with the external affairs of the state”:
“A credit system, if used by the powers as an instrument of aggression against one another, shows the power of money in its most dangerous form. For while the debts thereby incurred are always secure against present demands (because not all the creditors will demand payment at the same time), these debts go on growing indefinitely. This ingenious system, invented by a commercial people in the present century, provides a military fund which may exceed the resources of all the other states put together. It can only be exhausted by an eventual tax-deficit, which may be postponed for a considerable time by the commercial stimulus which industry and trade receive through the credit system. This ease in making war, coupled with the warlike inclination of those in power (which seems to be an integral feature of human nature), is thus a great obstacle in the way of perpetual peace.”
Kant seemingly predicted dollar hegemony. With his thesis in mind, would a true gold standard have deterred the war in Vietnam? If anything, it seems certain that such a standard would have made the war at least much shorter. The same, obviously, can be said for World War I, the Napoleonic Wars, and other conflicts where the belligerents left the gold standard to fight.
“The unique ability of the U.S. government,” Hudson says, “to borrow from foreign central banks rather than from its own citizens is one of the economic miracles of modern times.”
But “miracle” is in the eye of the beholder. Was it a miracle for the Vietnamese, the Iraqis, or the Afghans?
Nearly 50 years ago, Hudson writes that “the only way for America to remain a democracy is to forgo its foreign policy. Either its world strategy must become inward-looking or its political structure must become more centralized. Indeed since the start of the Vietnam War, the growth of foreign policy considerations has visibly worked to disenfranchise the American electorate by reducing the role of congress in national decision making.”
This trend obviously has become much more magnified in recent history. In the past few years America has been at war in arguably as many as seven countries (Afghanistan, Iraq, Syria, Yemen, Somalia, Libya and Niger), yet the average American knows little to nothing about these wars. In 2021, the U.S. spends more on its military than do the next 10 countries combined. Citizens have more or less been removed from the decision-making process, and one of the key reasons — perhaps the key reason — why these wars are able to be financed is through the Treasury bill standard.
How much longer can this system last?
In 1977, Hudson revisits the question on everyone’s mind in the early 1970s: “Will OPEC supplant Europe and Japan as America’s major creditors, using oil earnings to buy U.S. Treasury securities and thereby fund U.S. federal budget deficits? Or will Eastern Hemisphere countries subject the U.S. to a gold-based system of international finance in which renewed U.S. payment deficits will connote a loss of its international financial leverage?”
We of course know the answer: OPEC did indeed fund the U.S. budget for the next decade. Eastern hemisphere countries then failed to subject the U.S. to a gold-based system, in which payments deficits marked loss of leverage. In fact, the Japanese and Chinese in turn kept buying American debt once the oil countries ran out of money in the 1980s.
The system, however, is once again showing cracks.
As of 2013, foreign central banks have been dishoarding their U.S. treasuries. As of today, the Federal Reserve is the majority purchaser of American debt. The world is witnessing a slow decline of the dollar as the dominant reserve currency, both in terms of percentage of foreign exchange reserves and in terms of percentage of trade. These still significantly outpace America’s actual contribution to global GDP — a legacy of the Treasury bill standard, for sure — but they are declining over time.
De-dollarization toward a multi-polar world is gradually occurring. As Hudson says, “Today we are winding down the whole free lunch system of issuing dollars that will not be repaid.”
X. BITCOIN VS. SUPER IMPERIALISM
Writing in the late 1970s, Hudson predicts that “without a Eurocurrency, there is no alternative to the dollar, and without gold (or some other form of asset money yet to be accepted), there is no alternative to national currencies and debt-money serving international functions for which they have shown themselves to be ill-suited.”
Thirty years later, in 2002, he writes that “today it would be necessary for Europe and Asia to design an artificial, politically created alternative to the dollar as an international store of value. This promises to be the crux of international political tensions for the next generation.”
It’s a prescient comment, though it wasn’t Europe or Asia that designed an alternative to the dollar, but Satoshi Nakamoto. A new kind of asset money, bitcoin has a chance to unseat the super-imperial dollar structure to become the next world reserve currency.
As Hudson writes, “One way to discourage governments from running payments deficits is to oblige them to finance these deficits with some kind of asset they would prefer to keep, yet can afford to part with when necessary. To date, no one has come up with a better solution than that which history has institutionalized over a period of about two thousand years: gold.”
In January 2009, Satoshi Nakamoto came up with a better solution. There are many differences between gold and bitcoin. Most importantly, for the purposes of this discussion, is the fact that bitcoin is easily self-custodied and thus confiscation-resistant.
Gold was looted by colonial powers worldwide for hundreds of years, and, as discussed in this essay, was centralized mainly into the coffers of the U.S. government after World War I. Then, through shifting global monetary policy of the ’30s, ’40s, ’50s, ’60s, and ’70s, gold was demonetized, first domestically in the U.S. and then internationally. By the 1980s, the U.S. government had “killed” gold as a money through centralization and through control of the derivatives markets. It was able to prevent self-custody, and manipulate the price down.
Bitcoin, however, is notably easy to self-custody. Any of the billions of people on earth with a smartphone can, in minutes, download a free and open-source Bitcoin wallet, receive any amount of bitcoin, and back up the passphrase offline. This makes it much more likely that users will actually control their bitcoin, as opposed to gold investors, who often entered through a paper market or a claim, and not actual bars of gold. Verifying an inbound gold payment is impossible to do without melting the delivery bar down and assaying it. Rather than go through the trouble, people deferred to third parties. In Bitcoin, verifying payments is trivial.
In addition, gold historically failed as a daily medium of exchange. Over time, markets preferred paper promises to pay gold — it was just easier, and so gold fell out of circulation, where it was more easily centralized and confiscated. Bitcoin is built differently, and could very well be a daily medium of exchange.
In fact, as we see more and more people demand to be paid in bitcoin, we get a glimpse of a future where Thier’s law (found in dollarizing countries, where good money drives out the bad) is in full effect, where merchants would prefer bitcoin to fiat money. In that world, confiscation of bitcoin would be impossible. It may also prove hard to manipulate the spot price of bitcoin through derivatives. As BitMEX founder Arthur Hayes writes:
“Bitcoin is not owned or stored by central, commercial, or bullion banks. It exists purely as electronic data, and, as such, naked shorts in the spot market will do nothing but ensure a messy destruction of the shorts’ capital as the price rises. The vast majority of people who own commodity forms of money are central banks who it is believed would rather not have a public scorecard of their profligacy. They can distort these markets because they control the supply. Because bitcoin grew from the grassroots, those who believe in Lord Satoshi are the largest holders outside of centralised exchanges. The path of bitcoin distribution is completely different to how all other monetary assets grew. Derivatives, like ETFs and futures, do not alter the ownership structure of the market to such a degree that it suppresses the price. You cannot create more bitcoin by digging deeper in the ground, by the stroke of a central banker’s keyboard, or by disingenuous accounting tricks. Therefore, even if the only ETF issued was a short bitcoin futures ETF, it would not be able to assert any real downward pressure for a long period of time because the institutions guaranteeing the soundness of the ETF would not be able to procure or obscure the supply at any price thanks to the diamond hands of the faithful.”
If governments cannot kill bitcoin, and it continues its rise, then it stands a good chance to eventually be the next reserve currency. Will we have a world with bitcoin-backed fiat currencies, similar to the gold standard? Or will people actually use native Bitcoin itself — through the Lightning Network and smart contracts — to do all commerce and finance? Neither future is clear.
But the possibility inspires. A world where governments are constrained from undemocratic forever wars because restraint has once again been imposed on them through a neutral global balance-of-payments system is a world worth looking forward to. Kant’s writings inspired democratic peace theory, and they may also inspire a future Bitcoin peace theory.
Under a Bitcoin standard, citizens of democratic countries would more likely choose investing in domestic infrastructure as opposed to military adventurism. Foreigners would no longer be as easily forced to pay for any empire’s wars. There would be consequences even for the most powerful nation if it defaults on its debt.
Developing countries could harness their natural resources and borrow money from markets to finance Bitcoin mining operations and become energy sovereign, instead of borrowing money from the World Bank to fall deeper into servitude and the geopolitical equivalent of subsistence farming.
Finally, the massive inequalities of the past 50 years might also be slowed, as the ability of dominant capital to enrich itself in downturns through rent-seeking and easy monetary policy could be checked.
In the end, if such a course for humanity is set, and Bitcoin does eventually win, it may not be clear what happened:
Bitcoin & The End Of US 'Super Imperialism'
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BY TYLER DURDEN
MONDAY, NOV 15, 2021 - 12:00 AM
Authored by Alex Gladstein via BitcoinMagazine.com,
In 1972, one year after President Richard Nixon defaulted on the dollar and formally took the United States off of the gold standard for good, the financial historian and analyst Michael Hudson published “Super Imperialism,” a radical critique of the dollar-dominated world economy.
The book is overlooked by today’s economic mainstream and puts forward a variety of provocative arguments that place it outside of orthodoxy. However, for those seeking to understand how the dollar won the money wars of the past century, the book makes for essential reading.
Hudson’s thesis comes from the left-leaning perspective — the title inspired by the German Marxist phrase “überimperialismus” — and yet thinkers of all political stripes, from progressives to libertarians, should find value in its approach and lessons.
In “Super Imperialism,” Hudson — who has updated the book twice over the past 50 years, with a third edition published just last month — traces the evolution of the world financial system, where U.S. debt displaced gold as the ultimate world reserve currency and premium collateral for financial markets.
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How did the world shift from using asset money in the form of gold to balance international payments to using debt money in the form of American treasuries?
How did, as Hudson puts it, “America’s ideal of implementing laissez-faire economic institutions, political democracy, and a dismantling of formal empires and colonial systems” turn into a system where the U.S. forced other nations to pay for its wars, defaulted on its debt, and exploited developing economies?
For those seeking to answer the question of how the dollar became so dominant — even as it was intentionally devalued over and over again in the decades after World War I — then “Super Imperialism” has a fascinating, and at times, deeply troubling answer.
Drawing on extensive historical source material, Hudson argues that the change from the gold standard to what he calls the “Treasury Bill Standard” happened over several decades, straddling the post-World War I era up through the 1970s.
In short, the U.S. was able to convince other nations to save in dollars instead of in gold by guaranteeing that the dollars could be redeemed for gold. But eventually, U.S. officials rug-pulled the world, refusing to redeem billions of dollars that had been spent into the hands of foreign governments under the promise that they were as good as gold through fixed-rate redemption.
This deceit allowed the U.S. government to finance an ever-expanding military-industrial complex and inefficient welfare state without having to make the traditional trade-offs a country or empire would make if its deficit grew too large. Instead, since U.S. policymakers figured out a way to bake American debt into the global monetary base, it never had to pay off its debt. Counterintuitively, Hudson says, America turned its Cold War debtor status into an “unprecedented element of strength rather than weakness.”
As a result, the U.S. has been able to, in Hudson’s words, pursue domestic expansion and foreign diplomacy with no balance of payment concerns: “Imposing austerity on debtor countries, America as the world’s largest debtor economy acts uniquely without financial constraint.”
A key narrative in Hudson’s 380-page book is the story of how the U.S. government systematically demonetized gold out of the international economic system. Curiously, he does not mention Executive Order 6102 — passed by President Roosevelt in 1933 to seize gold from the hands of the American public — but weaves a compelling narrative of how the U.S. government pulled the world away from the gold standard, culminating in the Nixon Shock of 1971.
In Hudson’s view, leaving the gold standard was all about America’s desire to finance war abroad, particularly in Southeast Asia. He says the Vietnam War was “single-handedly” responsible for pushing the U.S. balance-of-payments negative and drastically drawing down America’s once staggering gold reserves.
Ultimately, Hudson’s thesis argues that unlike classic European imperialism — driven by private sector profit motives — American super imperialism was driven by nation-state power motives. It was not steered by Wall Street, but by Washington. Bretton Woods institutions like the World Bank and International Monetary Fund (IMF) did not primarily help the developing world, but rather harnessed its minerals and raw goods for America and forced its leaders to buy U.S. agricultural exports, preventing them from developing economic independence.
There are, of course, several criticisms of Hudson’s narrative. It can be argued that dollar hegemony helped defeat the Soviet Union, pressuring its economy and paving the way for a more free world; ushering in the age of technology, science, and information; pushing growth globally with surplus dollars, and isolating rogue regimes. Perhaps most compellingly, history seems to suggest the world “wanted” dollar hegemony, if one considers the rise of the eurodollar system, where even America’s enemies tried to accumulate dollars outside of the control of the Federal Reserve.
Hudson was not without contemporary critics, either. A 1972 review in The Journal Of Economic History argued that “it would require an exceptionally naive understanding of politics to accept the underlying assertion that the United States government has been clever, efficient, totally unscrupulous, and consistently successful in exploiting developed and developing nations.”
The reader can be the judge of that. But even with these criticisms in mind, Hudson’s work is important to consider. The undeniable bottom line is that by shifting the world economy from relying on gold to relying on American debt, the U.S. government implemented a system where it could spend in a way no other country could, in a way where it never had to pay back its promises, and where other countries financed its warfare and welfare state.
“Never before,” Hudson writes, “has a bankrupt nation dared insist that its bankruptcy become the foundation of world economic policy.”
In 1972, the physicist and futurist Herman Kahn said that Hudson’s work revealed how “the United States has run rings around Britain and every other empire-building nation in history. We’ve pulled off the greatest rip-off ever achieved.”
Governments always dreamed of transforming their debt into the most valuable asset on earth. This essay explains how the U.S. succeeded in turning this dream into a reality, what the implications for the wider world were, how this era might be coming to a close, and why a Bitcoin standard might be next.
I. THE RISE AND FALL OF AMERICA AS A CREDITOR NATION
European powers, tempted by the ability to print paper money to finance war operations, broke off the gold standard entirely during World War I. The metal’s restraint would have resulted in a much shorter conflict but the warring factions decided instead to prolong the violence by debasing their currencies.
Between 1914 and 1918, German authorities suspended the convertibility of marks to gold and increased the money supply from 17.2 billion marks to 66.3 billion marks, while their British rivals increased their money supply from 1.1 billion pounds to 2.4 billion pounds. They expanded the German monetary base by six-fold and the British monetary base by nearly four-fold.
While European powers went deeper and deeper into debt, America enriched itself by selling arms and other goods to the allies, all while avoiding conflict in its homeland. As Europe tore itself to shreds, American farms and industrial operations ran full steam. The world at large began to buy more from the U.S. than it sold back, creating a large American current account surplus.
Post-war, U.S. officials broke with historical precedent and insisted that their European allies repay their war debts. Traditionally, this kind of support was considered a cost of war. At the same time, U.S. officials put up tariff barriers that prevented the allies from earning dollars through more exports to America.
Hudson argues that the U.S. essentially starved Germany through protectionist policy as it was also unable to export goods to the U.S. market to pay back its loans. Britain and France had to use whatever German reparations they did receive to pay back America.
The Federal Reserve, Hudson says, held down interest rates so as not to draw investment away from Britain, hoping in this way the English could pay back their war debt. But these low rates, in turn, helped spark a stock market bubble, discouraging capital outflows to Europe. Hudson argues this dynamic, especially after the Great Crash, created a global economic breakdown that helped trigger nationalism, isolationism, autarky, and depression, paving the way for World War II.
Hudson summarizes America’s post-World War I global legacy as follows: the devastation of Germany, the collapse of the British Empire, and a stockpiling of gold. At home, President Roosevelt ended domestic convertibility of dollars for gold, made holding gold a felony, and devalued the dollar by 40%. At the same time, the U.S. received most of Europe’s “refugee gold” during the 1930s as the threat of renewed war with Germany led to capital flight from wealthy Europeans. Washington was accumulating gold in its own coffers, just as it was stripping the precious metal from the public.
As World War II neared, Germany halted reparations payments, drying up the allied cash flow. Britain was unable to pay its debts, something it wouldn’t be able to fully do for another 80 years. Capital flight to the “safe” U.S. accelerated, combining with Roosevelt’s tariffs and export-boosting dollar devaluation to further enlarge America’s balance-of-payments position and gold stock. America became the world’s largest creditor nation.
This advantage grew even more dramatic when the allies spent the rest of their gold to fight the Nazis. By the end of the 1940s, the U.S. held more than 70% of non-Soviet-central-bank-held gold, around 700 million ounces.
In 1922, European powers had gathered in Genoa to discuss the reconstruction of Central and Eastern Europe. One of the outcomes was an agreement to partially go back to the gold standard through a “gold exchange” system where central banks would hold currencies that could be exchanged for gold, instead of the metal itself, which was to be increasingly centralized in financial hubs like New York and London.
In the later stages of World War II in 1944, the U.S. advanced this concept even further at the Bretton Woods conference in New Hampshire. There, a proposal put forth by British delegate John Maynard Keynes to use an internationally-managed currency called the “bancor” was rejected. Instead, American diplomats — holding leverage over their British counterparts as a result of their gold advantage and the bailouts they had extended through Lend-Lease Act policies — created a new global trade system underpinned by dollars, which were promised to be backed by gold at the rate of $35 per ounce. The World Bank, International Monetary Fund, and General Agreement on Tariffs and Trade were created as U.S.-dominated institutions which would enforce the worldwide dollar system.
Moving forward, U.S. foreign economic policy was very different from what it was after World War I, when Congress gave priority to domestic programs and America adopted a protectionist stance. U.S. policymakers theorized that America would need to remain a “major exporter to maintain full employment during the transition back to peacetime life” after World War II.
“Foreign markets,” Hudson writes, “would have to replace the War Department as a source of demand for the products of American industry and agriculture.”
This realization led the U.S. to determine it could not impose war debt on its allies as it did after World War I. A Cold War perspective began to take over: if the U.S. invested abroad, it could build up the allies and defeat the Soviets. The Treasury and the World Bank lent funds to Europe as part of the Marshall Plan so that it could rebuild and buy American goods.
Hudson distinguishes the new U.S. imperial system from the old European imperial systems. He quotes Treasury Secretary Morgenthau, who said Bretton Woods institutions “tried to get away from the concept of control of international finance by private financiers who were not accountable to the people,” pulling power away from Wall Street to Washington. In dramatic contrast to “classic” imperialism, which was driven by corporate interests and straightforward military action, in the new “super imperialism” the U.S. government would “exploit the world via the international monetary system itself.” Hence why Hudson’s original title for his book was “Monetary Imperialism.”
The other defining feature of super imperialism versus classic imperialism was that the former is based on a debtor position, while the latter was based on a creditor position. The American approach was to force foreign central banks to finance U.S. growth, whereas the British or French approach was to extract raw materials from colonies, sell them back finished goods, and exploit low wages or even slave labor.
Classic imperialists, if they ran into enough debt, would have to impose domestic austerity or sell off their assets. Military adventurism had restraints. But Hudson argues that with super imperialism, America figured out not just how to avoid these limits but how to derive positive benefits from a massive balance-of-payments deficit. It forced foreign central banks to absorb the cost of U.S. military spending and domestic social programs which defended Americans and boosted their standards of living.
Hudson points to the Korean War as the major event that shifted America’s considerable post-World War II balance-of-payments surplus into a deficit. He writes that the fight on the Korean peninsula was “financed essentially by the Federal Reserve’s monetizing the federal deficit, an effort that transferred the war’s cost onto some future generation, or more accurately from future taxpayers to future bondholders.”
II. THE FAILURE OF BRETTON WOODS
In the classic gold standard system of international trade, Hudson describes how things worked:
“If trade and payments among countries were fairly evenly balanced, no gold actually changed hands: the currency claims going in one direction offset those going in the opposite direction. But when trade and payments were not exactly in balance, countries that bought or paid more than they sold or received found themselves with a balance-of-payments deficit, while nations that sold more than they bought enjoyed a surplus which they settled in gold... If a country lost gold its monetary base would be contracted, interest rates would rise, and foreign short-term funds would be attracted to balance international trade movements. If gold outflows persisted, the higher interest rates would deter new domestic investment and incomes would fall, thereby reducing the demand for imports until the balance was restored in the country’s international payments.”
Gold helped nations account with each other in a neutral and straightforward way. However, just as European powers discarded the restraining element of gold during World War I, Hudson says America did not like the restraint of gold either, and instead “worked to ‘demonetize’ the metal, driving it out of the world financial system — a geopolitical version of Gresham’s Law,” where bad money drives out the good. By pushing a transformation of a world where the premium reserve was gold to a world where the premium reserve was American debt, the U.S. hacked the system to drive out the good money.
By 1957, U.S. gold reserves still outnumbered dollar reserves of foreign central banks three to one. But in 1958, the system saw its first cracks, as the Fed had to sell off more than $2 billion of gold to keep the Bretton Woods system afloat. The ability of the U.S. to hold the dollar at $35 per ounce of gold was being called into question. In one of his last acts in office, President Eisenhower banned Americans from owning gold anywhere in the world. But following the presidential victory of John F. Kennedy — who was predicted to pursue inflationist monetary policies — gold surged anyway, breaking $40 per ounce. It was not easy to demonetize gold in a world of increasing paper currency.
American and European powers tried to band-aid the system by creating the London Gold Pool. Formed in 1961, the pool’s mission was to fix the gold price. Whenever market demand pushed up the price, central banks coordinated to sell part of their reserves. The pool came under relentless pressure in the 1960s, both from the dollar depreciating against the rising currencies of Japan and Europe and from the enormous expenditures of Great Society programs and the U.S. war in Vietnam.
Some economists saw the failure of the Bretton Woods system as inevitable. Robert Triffin predicted that the dollar could not act as the international reserve currency with a current account surplus. In what is known as the “Triffin dilemma,” he theorized that countries worldwide would have a growing need for that “key currency,” and liabilities would necessarily expand beyond what the key country could hold in reserves, creating a larger and larger debt position. Eventually, the debt position would grow so large so as to cause the currency to collapse, destroying the system.
By 1964, this dynamic began to visibly kick in, as American foreign debt finally exceeded the Treasury’s gold stock. Hudson says that American overseas military spending was “the entire balance-of-payments deficit as the private sector and non-military government transactions remained in balance.”
The London Gold Pool was held in place (buoyed by gold sales from the Soviet Union and South Africa) until 1968 when the arrangement collapsed and a new two-tiered system with a “government” price and a “market” price emerged.
That same year, President Lyndon B. Johnson shocked the American public when he announced he would not run for another term, possibly in part because of the stress of the unraveling monetary system. Richard Nixon won the presidency in 1968, and his administration did its part to convince other nations to stop converting dollars to gold.
By the end of that year, the U.S. had drawn down its gold from 700 million to 300 million ounces. A few months later, Congress removed the 25% gold backing requirement for federal reserve notes, cutting one more link between the U.S. money supply and gold. Fifty economists had signed a letter warning against such an action, saying it would “open the way to a practically unlimited expansion of Federal Reserve notes… and a decline and even collapse in the value of our currency.”
In 1969, with the end of Bretton Woods palpably close, the IMF introduced Special Drawing Rights (SDRs) or “paper gold.” These currency units were supposed to be equal to gold, but not redeemable for the metal. The move was celebrated in newspapers worldwide as creating a new currency that would “fill monetary needs but exist only on books.” In Hudson’s view, the IMF violated its founding charter by bailing out the U.S. with billions of SDRs.
He says the SDR strategy was “akin to a tax levied upon payments surplus nations by the United States… it represented a transfer of goods and resources from civilian and government sectors of payments-surplus nations to payments deficit countries, a transfer for which no tangible quid pro quo was to be received by the nations who had refrained from embarking on the extravagance of war.”
By 1971, short-term dollar liabilities to foreigners exceeded $50 billion, but gold holdings dipped below $10 billion. Mirroring the World War I behavior of Germany and Britain, the U.S. inflated its money supply to 18-times its gold reserves while it waged the Vietnam War.
III. THE DEATH OF THE GOLD STANDARD AND THE RISE OF THE TREASURY BILL STANDARD
As it became clear that the U.S. government could not possibly redeem extant dollars for gold, foreign countries found themselves in a trap. They could not sell off their U.S. treasuries or refuse to accept dollars, as this would collapse the dollar’s value in currency markets, advantaging U.S. exports and harming their own industries. This is the key mechanism that made the Treasury bill system work.
As foreign central banks received dollars from their exporters and commercial banks, Hudson says they had “little choice but to lend these dollars to the U.S. government.” They also gave seigniorage privilege to the U.S. as foreign nations “earned” a negative interest rate on American paper promises most years between the end of World War II and the fall of the Berlin Wall, in effect paying Washington to hold their money on a real basis.
“Instead of U.S. citizens and companies being taxed or U.S. capital markets being obliged to finance the rising federal deficit,” Hudson writes, “foreign economies were obliged to buy the new Treasury bonds… America’s Cold War spending thus became a tax on foreigners. It was their central banks who financed the costs of the war in Southeast Asia.”
American officials annoyed that the allies never paid them back for World War I, could now get their pound of flesh in another way.
French diplomat Jacques Rueff gave his take on the mechanism behind the Treasury bill standard in his book, “The Monetary Sin Of The West”:
“Having learned the secret of having a ‘deficit without tears,’ it was only human for the US to use that knowledge, thereby putting its balance of payments in a permanent state of deficit. Inflation would develop in the surplus countries as they increased their own currencies on the basis of the increased dollar reserves held by their central banks. The convertibility of the reserve currency, the dollar, would eventually be abolished owing to the gradual but unlimited accumulation of sight loans redeemable in US gold.”
The French government was vividly aware of this and persistently redeemed its dollars for gold during the Vietnam era, even sending a warship to Manhattan in August 1971 to collect what they were owed. A few days later, on August 15, 1971, President Nixon went on national television and formally announced the end of the dollar’s international convertibility to gold. The U.S. had defaulted on its debt, leaving tens of billions of dollars abroad, all of a sudden unbacked. By extension, every currency that was backed by dollars became pure fiat. Rueff was right, and the French were left with paper instead of precious metal.
Nixon could have simply raised the price of gold, instead of defaulting entirely, but governments do not like admitting to their citizenry that they have been debasing the public’s money. It was much easier for his administration to break a promise to people thousands of miles away.
As Hudson writes, “more than $50 billion of short-term liabilities to foreigners owed by the U.S. on the public and private account could not be used as claims on America’s gold stock.” They could, of course, “be used to buy U.S. exports, to pay obligations to U.S. public and private creditors, or to invest in government corporate securities.”
These liabilities were no longer liabilities of the U.S. Treasury. American debt had been baked into the global monetary base.
“IOUs,” Hudson says, became “IOU-nothings.” The final piece of the strategy was to “roll the debt over” on an ongoing basis, ideally with interest rates below the rate of monetary inflation.
Americans could now obtain foreign goods, services, companies, and other assets in exchange for mere pieces of paper: “It became possible for a single nation to export its inflation by settling its payment deficit with paper instead of gold… a rising world price level thus became in effect a derivative function of U.S. monetary policy,” Hudson writes.
If you owe $5,000 to the bank, it’s your problem. If you owe $5 million, it’s theirs. President Nixon’s Treasury Secretary John Connolly riffed on that old adage, quipping at the time: “The dollar may be our currency, but now it’s your problem.”
IV. SUPER IMPERIALISM IN ACTION: HOW THE U.S. MADE THE WORLD PAY FOR THE VIETNAM WAR
As the U.S. deficit increased, government spending accelerated, and Americans — in a phenomenon hidden from the average citizen — watched as other nations paid “the cost of this spending spree” as foreign central banks, not taxes, financed the debt.
The game which the Nixon administration was playing, Hudson writes, “was one of the most ambitious in the economic history of mankind ... and was beyond the comprehension of the liberal senators of the United States… The simple device of not hindering the outflow of dollar assets had the effect of wiping out America’s foreign debt while seeming to increase it. At the same time, the simple utilization of the printing press — that is, new credit creation — widened the opportunities for penetrating foreign markets by taking over foreign companies.”
He continues:
“American consumers might choose to spend their incomes on foreign goods rather than to save. American businesses might choose to buy foreign companies or undertake new direct investment at home rather than buy government bonds, and the American government might finance a growing world military program, but this overseas consumption and spending would nonetheless be translated into savings and channeled back to the United States. Higher consumer expenditures on Volkswagens or on oil thus had the same effect as an increase in excise taxes on these products: they accrued to the U.S. Treasury in a kind of forced saving.”
By repudiating gold convertibility of the dollar, Hudson argues “America transformed a position of seeming weakness into one of unanticipated strength, that of a debtor over its creditors.”
“What was so remarkable about dollar devaluation,” he writes, “is that far from signaling the end of American domination of its allies, it became the deliberate object of U.S. financial strategy, a means to enmesh foreign central banks further in the dollar-debt standard.”
One vivid story about the power of the Treasury bill standard — and how it could force big geopolitical actors to do things against their will — is worth sharing. As Hudson tells it:
“German industry had hired millions of immigrants from Turkey, Greece, Italy, Yugoslavia and other Mediterranean countries. By 1971 some 3 percent of the entire Greek population was living in Germany producing cars and export goods… when Volkswagens and other goods were shipped to the United States… companies could exchange their dollar receipts for Deutsche marks with the German central bank... but Germany’s central bank could only hold these dollar claims in the form of U.S. Treasury bills and bonds... It lost the equivalent of one-third the value of its dollar holdings during 1970-74 when the dollar fell by some 52 percent against the Deutsche mark, largely because the domestic US inflation eroded 34 percent of the dollar’s domestic purchasing power.”
In this way, Germany was forced to finance America’s wars in Southeast Asia and military support for Israel: two things it strongly opposed.
Put another way by Hudson: “In the past, nations sought to run payments surpluses in order to build up their gold reserves. But now all they were building up was a line of credit to the U.S. Government to finance its programs at home and abroad, programs which these central banks had no voice in formulating, and which were in some cases designed to secure foreign policy ends not desired by their governments.”
Hudson’s thesis was that America had forced other countries to pay for its wars regardless of whether they wanted to or not. Like a tribute system, but enforced without military occupation. “This was,” he writes, “something never before accomplished by any nation in history.”
V. OPEC TO THE RESCUE
Hudson wrote “Super Imperialism” in 1972, the year after the Nixon Shock. The world wondered at the time: What will happen next? Who will continue to buy all of this American debt? In his sequel, “Global Fracture,” published five years later, Hudson got to answer the question.
The Treasury bill standard was a brilliant strategy for the U.S. government, but it came under heavy pressure in the early 1970s.
Just two years after the Nixon Shock, in response to dollar devaluation and rising American grain prices, the Organization of the Petroleum Exporting Countries (OPEC) nations led by Saudi Arabia quadrupled the dollar price of oil past $10 per barrel. Before the creation of OPEC, “the problem of the terms of trade shifting in favor of raw-materials exporters had been avoided by foreign control over their economies, both by the international minerals cartel and by the colonial domination,” Hudson writes.
But now that the oil states were sovereign, they controlled the massive inflow of savings accrued through the skyrocketing price of petroleum.
This resulted in a “redistribution of global wealth on a scale that hadn’t been seen in living memory,” as economist David Lubin puts it.
In 1974, the oil exporters had an account surplus of $70 billion, up from $7 billion the year before: an amount of nearly 5% of US GDP. That year, the Saudi current account surplus was 51% of its GDP.
The wealth of OPEC nations grew so fast that they could not spend it all on foreign goods and services.
“What are the Arabs going to do with it all?” asked The Economist in early 1974.
In “Global Fracture,” Hudson argues that it became essential for the U.S. “to convince OPEC governments to maintain petrodollars [meaning, a dollar earned by selling oil] in Treasury bills so as to absorb those which Europe and Japan were selling out of their international monetary reserves.”
As detailed in the precursor to this essay — “Uncovering The Hidden Costs Of The Petrodollar” — Nixon’s new Treasury Secretary William Simon traveled to Saudi Arabia as part of an effort to convince the House of Saud to price oil in dollars and “recycle” them into U.S. government securities with their newfound wealth.
On June 8, 1974, the U.S. and Saudi governments signed a military and economic pact. Secretary Simon asked the Saudis to buy up to $10 billion in treasuries. In return, the U.S. would guarantee security for the Gulf regimes and sell them massive amounts of weapons. The OPEC bond bonanza began.
“As long as OPEC could be persuaded to hold its petrodollars in Treasury bills rather than investing them in capital goods to modernize its economies or in ownership of foreign industry,” Hudson says, “the level of world oil prices would not adversely affect the United States.”
At the time, there was a public and much-discussed fear in America of Arab governments “taking over” U.S. companies. As part of the new U.S.-Saudi special relationship, American officials convinced the Saudis to reduce investments in the U.S. private sector and simply buy more debt.
The Federal Reserve continued to inflate the money supply in 1974, contributing to the fastest domestic inflation since the Civil War. But the growing deficit was eaten up by the Saudis and other oil-exporters, who would recycle tens of billions of dollars of petrodollar earnings into U.S. treasuries over the following decade.
“Foreign governments,” Hudson says, “financed the entire increase in publicly-held U.S. federal debt” between the end of WWII and the 1990s, and continued with the help of the petrodollar system to majorly support the debt all the way to the present day.
At the same time, the U.S. government used the IMF to help “end the central role of gold that existed in the former world monetary system.” Amid double-digit inflation the institution sold off gold reserves in late 1974, to try and keep any possible upswing in gold down as a result of a new law in the United States that finally made it legal again for Americans to own gold.
By 1975, other OPEC nations had followed Saudi Arabia’s lead in supporting the Treasury bill standard. The British pound sterling was finally phased out as a key currency, leaving, as Hudson writes, “no single national currency to compete with the dollar.”
The legacy of the petrodollar system would live on for decades, forcing other countries to procure dollars when they needed oil, causing America to defend its Saudi partners when threatened with aggression from Saddam Hussein or Iran, discouraging U.S. officials from investigating Saudi Arabia’s role in the 9/11 attacks, supporting the devastating Saudi war in Yemen, selling billions of dollars of weapons to the Saudis, and making Aramco the second-most valuable company in the world today.
VI. EXPLOITATION OF THE DEVELOPING WORLD
The Treasury bill standard carried massive costs. It was not free. But these costs were not paid for by Washington but were often borne by citizens in Middle Eastern countries and in poorer nations across the developing world.
Even pre-Bretton Woods, gold reserves from regions like Latin America were sucked up by the U.S. As Hudson describes, European nations would first export goods to Latin America. Europe would take the gold — settled as the balance-of-payments adjusted — and use it to buy goods from the U.S. In this way, gold was “stripped” from the developing world, helping the U.S. gold stock reach its peak of nearly $24.8 billion (or 700 million ounces) in 1949.
Originally designed to help rebuild Europe and Japan, the World Bank and International Monetary Fund became in the 1960s an “international welfare agency” for the world’s poorest nations, per The Heritage Foundation. But, according to Hudson, that was a cover for its true purpose: a tool through which the U.S. government would enforce economic dependency from non-Communist nations worldwide.
The U.S. joined the World Bank and IMF only “on the condition that it was granted unique veto power… this meant that no economic rules could be imposed that U.S. diplomats judged did not serve American interests.”
America began with 33% of the votes at the IMF and World Bank which — in a system that required an 80% majority vote for rulings — indeed gave it veto power. Britain initially had 25% of the votes, but given its subordinate role to the U.S. after the war, and its dependent position as a result of Lend-Lease policies, it would not object to Washington’s desires.
A major goal of the U.S. post-WWII was to achieve full employment, and international economic policy was harnessed to help achieve that goal. The idea was to create foreign markets for American exports: raw materials would be imported cheaply from the developing world, and farm goods and manufactured goods would be exported back to those same nations, bringing the dollars back.
Hudson says that U.S. congressional hearings regarding Bretton Woods agreements revealed “a fear of Latin American and other countries underselling U.S. farmers or displacing U.S. agricultural exports, instead of the hope that these countries might indeed evolve towards agricultural self-sufficiency.”
The Bretton Woods institutions were designed with these fears in mind: “The United States proved unwilling to lower its tariffs on commodities that foreigners could produce less expensively than American farmers and manufacturers,” writes Hudson. “The International Trade Organization, which in principle was supposed to subject the U.S. economy to the same free-trade principles that it demanded from foreign governments, was scuttled.”
In a meta-version of how the French exploit Communauté Financière Africaine (CFA) nations in Africa today, the U.S. employed many double standards, did not comply with the most-favored-nation rule, and set up a system that forced developing countries to “sell their raw materials to U.S.-owned firms at prices substantially below those received by American producers for similar commodities.”
Hudson spends a significant percentage of “Super Imperialism” making the case that this policy helped destroy economic potential and capital stock of many developing countries. The U.S., as he tells it, forced developing nations to export fruit, minerals, oil, sugar, and other raw goods instead of investing in domestic infrastructure and education — and forced them to buy American foodstuffs instead of grow their own.
Post-1971, why did the Bretton Woods institutions continue to exist? They were created to enforce a system that had expired. The answer, from Hudson’s perspective, is that they were folded into this broader strategy, to get the (often dictatorial) leaders of developing economies to spend their earnings on food and weapons imports. This prevented internal development and internal revolution.
In this way, “super imperial” financial and agricultural policy could, in effect, accomplish what classic imperial military policy used to accomplish. Hudson even claims that “Super Imperialism” the book was used as a “training manual” in Washington in the 1970s by diplomats seeking to learn how to “exploit other countries via their central banks.”
In Hudson’s telling, U.S.-directed aid was not used for altruism, but for self interest. From 1948 to 1969, American receipts from foreign aid approximated 2.1 times its investments.
“Not exactly an instrument of altruistic American generosity,” he writes. From 1966 to 1970, the World Bank “took in more funds from 20 of its less developed countries than it disbursed.”
In 1971, Hudson says, the U.S. government stopped publishing data showing that foreign aid was generating a transfer of dollars from foreign countries to the U.S. He says he got a response from the government at the time, saying “we used to publish that data, but some joker published a report showing that the U.S. actually made money off the countries we were aiding.”
Former grain-exporting regions of Latin America and Southeast Asia deteriorated to food-deficit status under “guidance” from the World Bank and IMF. Instead of developing, Hudson argues that these countries were retrogressing.
Normally, developing countries would want to keep their mineral resources. They act as savings accounts, but these countries couldn’t build up capacity to use them, because they were focused on servicing debt to the U.S. and other advanced economies. The World Bank, Hudson argues, pushed them to “draw down” their natural resource savings to feed themselves, mirroring subsistence farming and leaving them in poverty. The final “logic” that World Bank leaders had in mind was that, in order to conform with the Treasury bill standard, “populations in these countries must decline in symmetry with the approaching exhaustion of their mineral deposits.”
Hudson describes the full arc as such: Under super imperialism, world commerce has been directed not by the free market but by an “unprecedented intrusion of government planning, coordinated by the World Bank, IMF, and what has come to be called the Washington Consensus. Its objective is to supply the U.S. with enough oil, copper, and other raw materials to produce a chronic over-supply sufficient to hold down their world price. The exception of this rule is for grain and other agricultural products exported by the United States, in which case relatively high world prices are desired. If foreign countries still are able to run payments surpluses under these conditions, as have the oil-exporting countries, their governments are to use the process to buy U.S. arms or invest in long-term illiquid, preferably non-marketable U.S. treasury obligations.”
This, as Allen Farrington would say, is not capitalism. Rather, it’s a story of global central planning and central bank imperialism.
Most shockingly, the World Bank in the 1970s under Robert McNamara argued that population growth slowed down development, and advocated for growth to be “curtailed to match the modest rate of gain in food output which existing institutional and political constraints would permit.”
Nations would need to “follow Malthusians policies” to get more aid. McNamara argued that “the population be fitted to existing food resources, not that food resources be expanded to the needs of existing or growing populations.”
To stay in line with World Bank loans, the Indian government forcibly sterilized millions of people.
As Hudson concludes: the World Bank focused the developing world “on service requirements rather than on the domestic needs and aspirations of their peoples. The result was a series of warped patterns of growth in country after country. Economic expansion was encouraged only in areas that generated the means of foreign debt service, so as to be in a position to borrow enough to finance more growth in areas that might generate yet further means of foreign debt service, and so on ad infinitum.
"On an international scale, Joe Hill’s 'We go to work to get the cash to buy the food to get the strength to go to work to get the cash to buy the food to get the strength to go to work to get the cash to buy the food…' became reality. The World Bank was pauperizing the countries that it had been designed in theory to assist."
VII. FINANCIAL IMPLICATIONS OF THE TREASURY BILL STANDARD
By the 1980s, the U.S. had achieved, as Hudson writes, “what no earlier imperial system had put in place: a flexible form of global exploitation that controlled debtor countries by imposing the Washington Consensus via the IMF and World Bank, while the Treasury Bill standard obliged the payments-surplus nations of Europe and East Asia to extend forced loans to the U.S. government.”
But threats still remained, including Japan. Hudson explains how in 1985 at the Louvre Accords, the U.S. government and IMF convinced the Japanese to increase their purchasing of American debt and revalue the yen upwards so that their cars and electronics became more expensive. This is how, he says, they disarmed the Japanese economic threat. The country “essentially went broke.”
On the geopolitical level, super imperialism not only helped the U.S. defeat its Soviet rival — which could only exploit the economically-weak COMECON countries — but also kept any potential allies from getting too strong. On the financial level, the shift from the restraint of gold to the continuous expansion of American debt as the global monetary base had a staggering impact on the world.
Despite the fact that today the U.S. has a much larger labor force and much higher productivity than it did in the 1970s, prices have not fallen and real wages have not increased. The “FIRE” sector (finance, insurance, and real estate) has, Hudson says, “appropriated almost all of the economic gains.” Industrial capitalism, he says, has evolved into finance capitalism.
For decades, Japan, Germany, the U.K., and others were “powerless to use their economic strength for anything more than to become the major buyers of Treasury bonds to finance the U.S. federal budget deficit… [these] foreign central banks enabled America to cut its own tax rates (at least for the wealthy), freeing savings to be invested in the stock market and property boom,” according to Hudson.
The past 50 years witnessed an explosion of financialization. Floating currency markets sparked a proliferation of derivatives used to hedge risk. Corporations all of a sudden had to invest resources in foreign exchange futures. In the oil and gold markets, there are hundreds or thousands of paper claims for each unit of raw material. It is not clear if this is a direct result of leaving the gold standard, but is certainly a prominent feature of the post-gold era.
Hudson argues that U.S. policy pushes foreign economies to “supply the consumer goods and investment goods that the domestic U.S. economy no longer is supplying as it post-industrializes and becomes a bubble economy, while buying American farm surpluses and other surplus output. In the financial sphere, the role of foreign economies is to sustain America’s stock market and real estate bubble, producing capital gains and asset-price inflation even as the U.S. industrial economy is being hollowed out.”
Over time, equities and real estate boomed as “American banks and other investors moved out of government bonds and into higher-yielding corporate bonds and mortgage loans.” Even though wages remained stagnant, prices of investments kept going up, and up, and up, in a velocity previously unseen in history.
As financial analyst Lyn Alden has pointed out, the post-1971 fiat-based financial system has contributed to structural trade deficits for the U.S. Instead of drawing down gold reserves to maintain the system like it did during the Bretton Woods framework, America has drawn down and “sold off” its industrial base, where more and more of its stuff is made elsewhere, and more and more of its equity markets and real estate markets are owned by foreigners. The U.S., she argues, has extended its global power by sacrificing some of its domestic economic health. This sacrifice has mainly benefitted U.S. elites at the cost of blue-collar and middle-income workers. Dollar hegemony, then, might be good for American elites and diplomats and the wider empire, but not for the everyday citizen.
Data from the work of political economists Shimson Bichler and Jonathan Nitzan highlights this transformation and shines a light on how wealth is moving to the haves from the have-nots: In the early 1950s, a typical dominant capital firm commanded a profit stream 5,000 times the income of an average worker; in the late 1990s, it was 25,000 times greater. In the early 1950s, the net profit of a Fortune 500 firm was 500 times the average; in the late 1990s, it was 7,000 times greater. Trends have accelerated since then: Over the past 15 years, the eight largest companies in the world grew from an average market capitalization of $263 billion to $1.68 trillion.
Inflation, Bichler and Nitzan argue, became a “permanent feature” of the 20th century. Prices rose 50-times from 1900 to 2000 in the U.K. and U.S., and much more aggressively in developing countries. They use a staggering chart that shows consumer prices in the U.K. from 1271 to 2007 to make the point. The visual is depicted in log-scale, and shows steady prices all the way through the middle of the 16th century, when Europeans began exploring the Americas and expanding their gold supply. Then prices remain relatively steady again though the beginning of the 20th century. But then, at the time of World War I, they shoot up dramatically, cooling off a bit during the depression, only to go hyperbolic since the 1960s and 1970s as the gold standard fell apart and as the world shifted onto the Treasury bill standard.
Bitchler and Nitzan disagree with those who say inflation has a “neutral” effect on society, arguing that inflation, especially stagflation, redistributes income from workers to capitalists, and from small businesses to large businesses. When inflation rises significantly, they argue that capitalists tend to gain, and workers tend to lose. This is typified by the staggering increase in net worth of America’s richest people during the otherwise very difficult last 18 months. The economy continues to expand, but for most people, growth has ended.
Bichler and Nitzan’s meta point is that economic power tends to centralize, and when it cannot anymore through amalgamation (merger and acquisition activity), it turns to currency debasement. As Rueff said in 1972, “Given the option, money managers in a democracy will always choose inflation; only a gold standard deprives them of the option.”
As the Federal Reserve continues to push interest rates down, Hudson notes that prices rise for real estate, bonds, and stocks, which are “worth whatever a bank will lend.” Writing more recently in the wake of the Global Financial Crisis, he said “for the first time in history people were persuaded that the way to get rich was by running into debt, not by staying out of it. New borrowing against one’s home became almost the only way to maintain living standards in the face of this economic squeeze.”
This analysis of individual actors neatly mirrors the global transformation of the world reserve currency over the past century: from a mechanism of saving and capital accumulation to a mechanism of one country taking over the world through its growing deficit.
Hudson pauses to reflect on the grotesque irony of pension funds trying to make money by speculating. “The end game of finance capitalism,” he says, “will not be a pretty sight.”
VIII. COUNTER-THEORIES AND CRITICISMS
There is surely a case to be made for how the world benefited from the dollar system. This is, after all, the orthodox reading of history. With the dollar as the world reserve currency, everything as we know it grew from the rubble of World War II.
One of the strongest counter-theories relates to the USSR, where it seems clear that the Treasury bill standard — and the unique ability for the U.S. to print money that could purchase oil — helped America defeat the Soviet Union in the Cold War.
To get an idea of what the implications are for liberal democracy’s victory over totalitarian communism, take a look at a satellite image of the Korean peninsula at night. Compare the vibrant light of industry in the south with the total darkness of the north.
So perhaps the Treasury bill standard deserves credit for this global victory. After the fall of the Berlin Wall, however, the U.S. did not hold another Bretton Woods to decentralize the power of holding the world’s reserve currency. If the argument is that we needed the Treasury bill standard to defeat the Soviets, then the failure to reform after their downfall is puzzling.
A second powerful counter-theory is that the world shifted from gold to U.S. debt simply because gold could not do the job. Analysts like Jeff Snider assert that demand for U.S. debt is not necessarily part of some scheme but rather as a result of the world’s thirst for pristine collateral.
In the late 1950s, as the U.S. enjoyed its last years with a current account surplus, something else major happened: the creation of the eurodollar. Originally borne out of an interest from the Soviets and their proxies to have dollar accounts that the American government could not confiscate, the idea was that banks in London and elsewhere would open dollar-denominated accounts to store earned U.S. dollars beyond the purview of the Federal Reserve.
Sitting in banks like Moscow Narodny in London or Banque Commerciale pour L’Europe du Nord in Paris, these new “eurodollars” became a global market for collateralized borrowing, and the best collateral one could have in the system was a U.S. treasury.
Eventually, and largely due to the changes in the monetary system post-1971, the eurodollar system exploded in size. It was unburdened by Regulation Q, which set a limit on interest rates on bank deposits in the U.S. Eurodollar banks, free from this restriction, could charge higher rates. The market grew from $160 billion in 1973 to $600 billion in 1980 — a time when the inflation-adjusted federal funds rate was negative. Today, there are many more eurodollars than there are actual dollars.
To revisit the Triffin dilemma, the demand for “reserve” dollars worldwide would inevitably lead to a draining of U.S. domestic reserves and, subsequently, confidence in the system breaking down.
How can a stockpile of gold back an ever-growing global reserve currency? Snider argues that the Bretton Woods system could never fulfill the role of a global reserve currency. But a dollar unbacked by gold could. And, the argument goes, we see the market’s desire for this most strongly in the growth of the eurodollar.
If even America’s enemies wanted dollars, then how can we say that the system only came into dominance through U.S. design? Perhaps the design was simply so brilliant that it co-opted even America’s most hated rivals. And finally, in a world where gold had not been demonetized, would it have remained the pristine collateral for this system? We’ll never know.
A final major challenge to Hudson’s work is found in the discourse arguing that the World Bank has helped increase living standards in the developing world. It is hard not to argue that most are better off in 2021 than in 1945. And cases like South Korea are provided to show how World Bank funding in the 1970s and 1980s were crucial for the country’s success.
But how much of this relates to technology deflation and a general rise in productivity, as opposed to American aid and support? And how does this rise compare differentially to the rise in the West over the same period? Data suggests that, under World Bank guidance between 1970 and 2000, poorer countries grew more slowly than rich ones.
One thing is clear: Bretton Woods institutions have not helped everyone equally. A 1996 report covering the World Bank’s first 50 years of operations found that “of the 66 less developed countries receiving money from the World Bank for more than 25 years, 37 are no better off today than they were before they received such loans.” And of these 37, most “are poorer today than they were before receiving aid from the Bank.”
In the end, one can argue that the Treasury bill standard helped defeat Communism; that it’s what the global market wanted; and that it helped the developing world. But what cannot be argued is that the world left the era of asset money for debt money, and that as the ruler of this new system, the U.S. government gained special advantages over every other country, including the ability to dominate the world by forcing other countries to finance its operations.
IX. THE END OF AN ERA?
In Enlightenment philosopher Immanuel Kant’s landmark 1795 essay “Toward Perpetual Peace,” he argues for six primary principles, one of which is that “no national debt shall be contracted in connection with the external affairs of the state”:
“A credit system, if used by the powers as an instrument of aggression against one another, shows the power of money in its most dangerous form. For while the debts thereby incurred are always secure against present demands (because not all the creditors will demand payment at the same time), these debts go on growing indefinitely. This ingenious system, invented by a commercial people in the present century, provides a military fund which may exceed the resources of all the other states put together. It can only be exhausted by an eventual tax-deficit, which may be postponed for a considerable time by the commercial stimulus which industry and trade receive through the credit system. This ease in making war, coupled with the warlike inclination of those in power (which seems to be an integral feature of human nature), is thus a great obstacle in the way of perpetual peace.”
Kant seemingly predicted dollar hegemony. With his thesis in mind, would a true gold standard have deterred the war in Vietnam? If anything, it seems certain that such a standard would have made the war at least much shorter. The same, obviously, can be said for World War I, the Napoleonic Wars, and other conflicts where the belligerents left the gold standard to fight.
“The unique ability of the U.S. government,” Hudson says, “to borrow from foreign central banks rather than from its own citizens is one of the economic miracles of modern times.”
But “miracle” is in the eye of the beholder. Was it a miracle for the Vietnamese, the Iraqis, or the Afghans?
Nearly 50 years ago, Hudson writes that “the only way for America to remain a democracy is to forgo its foreign policy. Either its world strategy must become inward-looking or its political structure must become more centralized. Indeed since the start of the Vietnam War, the growth of foreign policy considerations has visibly worked to disenfranchise the American electorate by reducing the role of congress in national decision making.”
This trend obviously has become much more magnified in recent history. In the past few years America has been at war in arguably as many as seven countries (Afghanistan, Iraq, Syria, Yemen, Somalia, Libya and Niger), yet the average American knows little to nothing about these wars. In 2021, the U.S. spends more on its military than do the next 10 countries combined. Citizens have more or less been removed from the decision-making process, and one of the key reasons — perhaps the key reason — why these wars are able to be financed is through the Treasury bill standard.
How much longer can this system last?
In 1977, Hudson revisits the question on everyone’s mind in the early 1970s: “Will OPEC supplant Europe and Japan as America’s major creditors, using oil earnings to buy U.S. Treasury securities and thereby fund U.S. federal budget deficits? Or will Eastern Hemisphere countries subject the U.S. to a gold-based system of international finance in which renewed U.S. payment deficits will connote a loss of its international financial leverage?”
We of course know the answer: OPEC did indeed fund the U.S. budget for the next decade. Eastern hemisphere countries then failed to subject the U.S. to a gold-based system, in which payments deficits marked loss of leverage. In fact, the Japanese and Chinese in turn kept buying American debt once the oil countries ran out of money in the 1980s.
The system, however, is once again showing cracks.
As of 2013, foreign central banks have been dishoarding their U.S. treasuries. As of today, the Federal Reserve is the majority purchaser of American debt. The world is witnessing a slow decline of the dollar as the dominant reserve currency, both in terms of percentage of foreign exchange reserves and in terms of percentage of trade. These still significantly outpace America’s actual contribution to global GDP — a legacy of the Treasury bill standard, for sure — but they are declining over time.
De-dollarization toward a multi-polar world is gradually occurring. As Hudson says, “Today we are winding down the whole free lunch system of issuing dollars that will not be repaid.”
X. BITCOIN VS. SUPER IMPERIALISM
Writing in the late 1970s, Hudson predicts that “without a Eurocurrency, there is no alternative to the dollar, and without gold (or some other form of asset money yet to be accepted), there is no alternative to national currencies and debt-money serving international functions for which they have shown themselves to be ill-suited.”
Thirty years later, in 2002, he writes that “today it would be necessary for Europe and Asia to design an artificial, politically created alternative to the dollar as an international store of value. This promises to be the crux of international political tensions for the next generation.”
It’s a prescient comment, though it wasn’t Europe or Asia that designed an alternative to the dollar, but Satoshi Nakamoto. A new kind of asset money, bitcoin has a chance to unseat the super-imperial dollar structure to become the next world reserve currency.
As Hudson writes, “One way to discourage governments from running payments deficits is to oblige them to finance these deficits with some kind of asset they would prefer to keep, yet can afford to part with when necessary. To date, no one has come up with a better solution than that which history has institutionalized over a period of about two thousand years: gold.”
In January 2009, Satoshi Nakamoto came up with a better solution. There are many differences between gold and bitcoin. Most importantly, for the purposes of this discussion, is the fact that bitcoin is easily self-custodied and thus confiscation-resistant.
Gold was looted by colonial powers worldwide for hundreds of years, and, as discussed in this essay, was centralized mainly into the coffers of the U.S. government after World War I. Then, through shifting global monetary policy of the ’30s, ’40s, ’50s, ’60s, and ’70s, gold was demonetized, first domestically in the U.S. and then internationally. By the 1980s, the U.S. government had “killed” gold as a money through centralization and through control of the derivatives markets. It was able to prevent self-custody, and manipulate the price down.
Bitcoin, however, is notably easy to self-custody. Any of the billions of people on earth with a smartphone can, in minutes, download a free and open-source Bitcoin wallet, receive any amount of bitcoin, and back up the passphrase offline. This makes it much more likely that users will actually control their bitcoin, as opposed to gold investors, who often entered through a paper market or a claim, and not actual bars of gold. Verifying an inbound gold payment is impossible to do without melting the delivery bar down and assaying it. Rather than go through the trouble, people deferred to third parties. In Bitcoin, verifying payments is trivial.
In addition, gold historically failed as a daily medium of exchange. Over time, markets preferred paper promises to pay gold — it was just easier, and so gold fell out of circulation, where it was more easily centralized and confiscated. Bitcoin is built differently, and could very well be a daily medium of exchange.
In fact, as we see more and more people demand to be paid in bitcoin, we get a glimpse of a future where Thier’s law (found in dollarizing countries, where good money drives out the bad) is in full effect, where merchants would prefer bitcoin to fiat money. In that world, confiscation of bitcoin would be impossible. It may also prove hard to manipulate the spot price of bitcoin through derivatives. As BitMEX founder Arthur Hayes writes:
“Bitcoin is not owned or stored by central, commercial, or bullion banks. It exists purely as electronic data, and, as such, naked shorts in the spot market will do nothing but ensure a messy destruction of the shorts’ capital as the price rises. The vast majority of people who own commodity forms of money are central banks who it is believed would rather not have a public scorecard of their profligacy. They can distort these markets because they control the supply. Because bitcoin grew from the grassroots, those who believe in Lord Satoshi are the largest holders outside of centralised exchanges. The path of bitcoin distribution is completely different to how all other monetary assets grew. Derivatives, like ETFs and futures, do not alter the ownership structure of the market to such a degree that it suppresses the price. You cannot create more bitcoin by digging deeper in the ground, by the stroke of a central banker’s keyboard, or by disingenuous accounting tricks. Therefore, even if the only ETF issued was a short bitcoin futures ETF, it would not be able to assert any real downward pressure for a long period of time because the institutions guaranteeing the soundness of the ETF would not be able to procure or obscure the supply at any price thanks to the diamond hands of the faithful.”
If governments cannot kill bitcoin, and it continues its rise, then it stands a good chance to eventually be the next reserve currency. Will we have a world with bitcoin-backed fiat currencies, similar to the gold standard? Or will people actually use native Bitcoin itself — through the Lightning Network and smart contracts — to do all commerce and finance? Neither future is clear.
But the possibility inspires. A world where governments are constrained from undemocratic forever wars because restraint has once again been imposed on them through a neutral global balance-of-payments system is a world worth looking forward to. Kant’s writings inspired democratic peace theory, and they may also inspire a future Bitcoin peace theory.
Under a Bitcoin standard, citizens of democratic countries would more likely choose investing in domestic infrastructure as opposed to military adventurism. Foreigners would no longer be as easily forced to pay for any empire’s wars. There would be consequences even for the most powerful nation if it defaults on its debt.
Developing countries could harness their natural resources and borrow money from markets to finance Bitcoin mining operations and become energy sovereign, instead of borrowing money from the World Bank to fall deeper into servitude and the geopolitical equivalent of subsistence farming.
Finally, the massive inequalities of the past 50 years might also be slowed, as the ability of dominant capital to enrich itself in downturns through rent-seeking and easy monetary policy could be checked.
In the end, if such a course for humanity is set, and Bitcoin does eventually win, it may not be clear what happened:
- #10,178
- Nov 16, 2021 3:08am Nov 16, 2021 3:08am
- | Commercial User | Joined Dec 2014 | 14,165 Posts
https://www.oftwominds.com/blog.html
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Paging Isaac Newton: Time to Buy the Top of This Bubble
November 15, 2021
Despite Newton's tremendous intelligence and experience, he fell victim to the bubble along with the vast herd of credulous greedy punters.
One of the most famous examples of smart people being sucked into a bubble and losing a packet, as a result, is Isaac Newton's forays in and out of the 1720 South Seas Bubble that is estimated to have sucked in between 80% and 90% of the entire pool of investors in England.
Some have claimed that Newton did not buy early in 1711, sell in April 1720 for a nice profit, then sink the majority of his substantial fortune in the bubble as it peaked in summer, and then suffering heavy losses as the bubble popped in September, but evidence supports this chain of events: Isaac Newton and the perils of the financial South Sea (Physics Today).
The chart below indicates the dates of Newton's purchases in his own account and the Hall estate of which he was a trustee.
I have added a "we are here" indicating where we are in the current bubble expansion and collapse: this secondary peak after a bout of initial selling is the classic "last chance to exit." Note that Newton "bought the dip" on the way up and then added to his position as the mania rolled over, making his final fatal purchase as a "buy the dip" just before the "last chance to exit" spike--which is precisely the point the current bubble has finally reached when everyone is all in and "buying the dip" to increase the profits which everyone agrees are essentially guaranteed because of the Fed.
The problem is, alas, smart people are still humans, and humans run with the herd when the herd is minting money. Absurdly farfetched claims are gussied up with "mathiness" and narratives that are powerfully simplistic, with just enough common-sense credibility to enliven the excessive greed that lies dormant but ready in every human heart.
Newton was not just smart and wealthy, he was financially sophisticated and a very successful investor who favored financial instruments such as bonds over land. He was the ultimate experienced, savvy investor who would not be bamboozled by specious math. Despite Newton's tremendous intelligence and experience, he fell victim to the bubble along with the vast herd of credulous greedy punters.
Newton died a wealthy man in 1727, so his bubble misadventure did not ruin him, though it did lop a huge chunk off his net worth. Many in the herd, then and now, won't be as fortunate.
https://www.oftwominds.com/photos202...bble11-21a.jpg
https://www.oftwominds.com/photos2019/wile-coyote1.jpg
If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.
https://www.oftwominds.com/25-25.gifhttps://www.oftwominds.com/CHSbanner2d.png
Paging Isaac Newton: Time to Buy the Top of This Bubble
November 15, 2021
Despite Newton's tremendous intelligence and experience, he fell victim to the bubble along with the vast herd of credulous greedy punters.
One of the most famous examples of smart people being sucked into a bubble and losing a packet, as a result, is Isaac Newton's forays in and out of the 1720 South Seas Bubble that is estimated to have sucked in between 80% and 90% of the entire pool of investors in England.
Some have claimed that Newton did not buy early in 1711, sell in April 1720 for a nice profit, then sink the majority of his substantial fortune in the bubble as it peaked in summer, and then suffering heavy losses as the bubble popped in September, but evidence supports this chain of events: Isaac Newton and the perils of the financial South Sea (Physics Today).
The chart below indicates the dates of Newton's purchases in his own account and the Hall estate of which he was a trustee.
I have added a "we are here" indicating where we are in the current bubble expansion and collapse: this secondary peak after a bout of initial selling is the classic "last chance to exit." Note that Newton "bought the dip" on the way up and then added to his position as the mania rolled over, making his final fatal purchase as a "buy the dip" just before the "last chance to exit" spike--which is precisely the point the current bubble has finally reached when everyone is all in and "buying the dip" to increase the profits which everyone agrees are essentially guaranteed because of the Fed.
The problem is, alas, smart people are still humans, and humans run with the herd when the herd is minting money. Absurdly farfetched claims are gussied up with "mathiness" and narratives that are powerfully simplistic, with just enough common-sense credibility to enliven the excessive greed that lies dormant but ready in every human heart.
Newton was not just smart and wealthy, he was financially sophisticated and a very successful investor who favored financial instruments such as bonds over land. He was the ultimate experienced, savvy investor who would not be bamboozled by specious math. Despite Newton's tremendous intelligence and experience, he fell victim to the bubble along with the vast herd of credulous greedy punters.
Newton died a wealthy man in 1727, so his bubble misadventure did not ruin him, though it did lop a huge chunk off his net worth. Many in the herd, then and now, won't be as fortunate.
https://www.oftwominds.com/photos202...bble11-21a.jpg
https://www.oftwominds.com/photos2019/wile-coyote1.jpg
If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.
- #10,179
- Nov 16, 2021 5:17pm Nov 16, 2021 5:17pm
- | Commercial User | Joined Dec 2014 | 14,165 Posts
https://www.zerohedge.com/crypto/chi...l-event-decade
The political and economic sun has been rising in the East over the past century with China playing an increasingly important role in global geopolitics. Despite this trend, I have long been skeptical of China’s centralized and autocratic governance structure, and 2021 could be a monumental year, exposing the frailties of excessive control. If Bitcoin proves to be as important a technology as I think it is, then the CCP’s decision to ban bitcoin mining could prove to be the biggest geopolitical faux pas of the next decade. In summary, while decentralized Bitcoin has displayed its resilience to regulation, bans and decreased the probability of a 51% attack, centralized China may have handed a critical technology of the future to its peers.
U.S.–China Conflict Is Not Just A Donald Trump Phenomenon
The U.S. and China have been at loggerheads in recent years with flashpoints over-controlling companies, tariffs and trade, Xinjiang, the Olympics, coronavirus origins, Hong Kong, spying, Huawei, Taiwan, the South China Sea, TikTok and WeChat, Tibet, and so on. Hopefully, the world’s two largest nations do not end in a hot war, but they will likely remain in a cold war for many years to come as the U.S. withdraws from its position as global hegemon, China rises in the East and we jostle for new world order. Despite all this conflict, the geopolitics of bitcoin mining has fallen under the U.S.-China radar.
Bitcoin Geopolitics — Who Cares?
Most people do not properly comprehend Bitcoin — let alone politicians and mainstream media outlets — so ignorance of Bitcoin geopolitics is unsurprising. But just like Bitcoin is growing in financial and economic importance, so will its geopolitical significance.
There is a fascinating geopolitical shift underway in Bitcoin where power is shifting from the East to the West.
China and the U.S. are both trying to exert control over their populations. The Chinese centralized apparatus is far swifter and more effective than the U.S. Some would argue there are benefits to the Chinese approach — like fighting the COVID-19 pandemic — but there are certainly consequences too. While China is turning away bitcoin miners, Western entrepreneurs are capitalizing and entrenching this industry in the West.
“Strategic China” Has Ignored Innovation Because Of Centralized Governance
We have established over recent quarters that Bitcoin is a powerful technology with immense potential for the world. The future is uncertain, but a digital, decentralized, secure, and scarce asset has the potential to be a cornerstone of a new digital financial infrastructure. With each passing cycle, the probability that Bitcoin has a role to play in global financial infrastructure increases, and smart individuals, institutions, and funds are securing their exposure to the network.
Miners are a critical component of the Bitcoin network; they secure the network and process transactions. At the start of the year, China sat in the kingmaker seat in this industry with approximately 75% of global bitcoin mining resources. This dominance was potentially a powerful tool for the Chinese economy. Yet in Q3 2021, China decided to ban bitcoin mining. Rather than tax, coerce or confiscate the equipment, miners were allowed to leave China en masse in Q3 2021.
The reasoning for China’s decision is uncertain but what we do know is that it would be very difficult to execute this type of blanket ban in a moderately free country. Imagine your country wiping out the industry on a whim. The U.S. is struggling to pass an infrastructure bill; how are they going to pass a ban on an asset they do not even understand? I wrote more about this in“Worried About A Ban? Then You Need Bitcoin More Than You Think.”
The Western world is far too swayed by tax revenue, fear of making mistakes, and immediate political pressures to implement a blanket ban on bitcoin mining. By contrast, China is only able to implement a ban because it is centralized and autocratic. I expect this rash centralized decision could be the biggest geopolitical faux pas of the next decade, ceding technological power and resources to global peers.
Bitcoin Miners Could Have A Profound Impact On The Energy Industry
Not only do miners secure the network, but they also convert energy into a digital monetary network, which has potentially profound implications for the broader energy industry. I recommend reading Nick Carter’s recent article“Bitcoin Mining Is Reshaping The Energy Industry And No One Is Talking About It” for more information. I also covered much of this ground in “The ESG Solution.”
The political and economic sun has been rising in the East over the past century with China playing an increasingly important role in global geopolitics. Despite this trend, I have long been skeptical of China’s centralized and autocratic governance structure, and 2021 could be a monumental year, exposing the frailties of excessive control. If Bitcoin proves to be as important a technology as I think it is, then the CCP’s decision to ban bitcoin mining could prove to be the biggest geopolitical faux pas of the next decade. In summary, while decentralized Bitcoin has displayed its resilience to regulation, bans and decreased the probability of a 51% attack, centralized China may have handed a critical technology of the future to its peers.
U.S.–China Conflict Is Not Just A Donald Trump Phenomenon
The U.S. and China have been at loggerheads in recent years with flashpoints over-controlling companies, tariffs and trade, Xinjiang, the Olympics, coronavirus origins, Hong Kong, spying, Huawei, Taiwan, the South China Sea, TikTok and WeChat, Tibet, and so on. Hopefully, the world’s two largest nations do not end in a hot war, but they will likely remain in a cold war for many years to come as the U.S. withdraws from its position as global hegemon, China rises in the East and we jostle for new world order. Despite all this conflict, the geopolitics of bitcoin mining has fallen under the U.S.-China radar.
Bitcoin Geopolitics — Who Cares?
Most people do not properly comprehend Bitcoin — let alone politicians and mainstream media outlets — so ignorance of Bitcoin geopolitics is unsurprising. But just like Bitcoin is growing in financial and economic importance, so will its geopolitical significance.
There is a fascinating geopolitical shift underway in Bitcoin where power is shifting from the East to the West.
China and the U.S. are both trying to exert control over their populations. The Chinese centralized apparatus is far swifter and more effective than the U.S. Some would argue there are benefits to the Chinese approach — like fighting the COVID-19 pandemic — but there are certainly consequences too. While China is turning away bitcoin miners, Western entrepreneurs are capitalizing and entrenching this industry in the West.
“Strategic China” Has Ignored Innovation Because Of Centralized Governance
We have established over recent quarters that Bitcoin is a powerful technology with immense potential for the world. The future is uncertain, but a digital, decentralized, secure, and scarce asset has the potential to be a cornerstone of a new digital financial infrastructure. With each passing cycle, the probability that Bitcoin has a role to play in global financial infrastructure increases, and smart individuals, institutions, and funds are securing their exposure to the network.
Miners are a critical component of the Bitcoin network; they secure the network and process transactions. At the start of the year, China sat in the kingmaker seat in this industry with approximately 75% of global bitcoin mining resources. This dominance was potentially a powerful tool for the Chinese economy. Yet in Q3 2021, China decided to ban bitcoin mining. Rather than tax, coerce or confiscate the equipment, miners were allowed to leave China en masse in Q3 2021.
The reasoning for China’s decision is uncertain but what we do know is that it would be very difficult to execute this type of blanket ban in a moderately free country. Imagine your country wiping out the industry on a whim. The U.S. is struggling to pass an infrastructure bill; how are they going to pass a ban on an asset they do not even understand? I wrote more about this in“Worried About A Ban? Then You Need Bitcoin More Than You Think.”
The Western world is far too swayed by tax revenue, fear of making mistakes, and immediate political pressures to implement a blanket ban on bitcoin mining. By contrast, China is only able to implement a ban because it is centralized and autocratic. I expect this rash centralized decision could be the biggest geopolitical faux pas of the next decade, ceding technological power and resources to global peers.
Bitcoin Miners Could Have A Profound Impact On The Energy Industry
Not only do miners secure the network, but they also convert energy into a digital monetary network, which has potentially profound implications for the broader energy industry. I recommend reading Nick Carter’s recent article“Bitcoin Mining Is Reshaping The Energy Industry And No One Is Talking About It” for more information. I also covered much of this ground in “The ESG Solution.”
- Miners can utilize energy at times when normal consumers have low demand. Often this energy is wasted because we do not have a cost-effective means of large-scale energy storage or long-distance transportation.
- Miners can provide baseload for intermittent electricity producers. Renewable energy producers are often the most intermittent, so miners can support renewables investment and ESG goals.
- Miners can make an energy grid more robust because it can also be turned off if energy is required elsewhere.
https://assets.zerohedge.com/s3fs-pu...?itok=6d8vAqlS
China has just handed over one of the most exciting new industries to the rest of the world. Miners have relocated across the globe, and the U.S. has been the biggest beneficiary. Most U.S. politicians probably have no idea what is going on, but some do. I know Ted Cruz is not everyone’s cup of tea but listen to this interview he gave on bitcoin mining. I think he understands a thing or two about the potential positive impact mining could have in America.
Key Implications
- Prior to this shift, a 51% attack on the Bitcoin network was already an unlikely event. But with China holding 75% of global hashing power, a nation-state coordinated 51% attack was a possibility.
- Bitcoin mining is far more decentralized and the likelihood of a 51% attack has reduced, enhancing Bitcoin security.
- Bitcoin displayed resilience to a massive reduction in hash rate (a measure of bitcoin mining power), processing transactions as normal through Q3 2021.
- After falling more than 50%, the hash rate has recovered to within 10% of its previous peak, further solidifying the resilience of Bitcoin.
- #10,180
- Edited 7:51pm Nov 16, 2021 5:24pm | Edited 7:51pm
- | Commercial User | Joined Dec 2014 | 14,165 Posts
https://www.zerohedge.com/news/2021-...hy-name-dollar
Perversity: Thy Name is Dollar
https://assets.zerohedge.com/s3fs-pu...?itok=sEWJFe5E
BY MONETARY METALS
TUESDAY, NOV 16, 2021 - 10:56
By Keith Weiner
Listen to the audio version of this article here
Breaking Down the Dollar Monetary System
If you ask most people, “what is money?” they will answer that money is the generally accepted medium of exchange. If you ask Google Images, it will show you many pictures of green pieces of paper. Virtually everyone agrees that money means the dollar.
What does it mean to have a dollar? If you hold a piece of paper with green ink on it, which says “ONE DOLLAR”, you may notice that it also says, at the top, “FEDERAL RESERVE NOTE”. The note is a word for credit. The dollar bill (the bill is also a word for a credit instrument) is a credit of some kind, the credit of the Federal Reserve.
The paper itself has no value, apart from that it is the obligation of a party whose full faith and credit is beyond question. It would be something like the fallacy of reification, to confuse the green piece of paper with the monetary value it represents.
Banking, Lending, and the Fed
Most holders of dollars do not hold them in the form of actual pieces of paper. For reasons of convenience, and safety, and security, people deposit them in a bank.
That is, they may think of it as having dollars in a bank (just as they think of the paper as the money). But let’s drill down into that.
Most people know that the bank does not just put all the green pieces of paper into a vault. The bank holds a small amount of paper cash, based on what it expects to pay during the business day. The rest, well, the bank does something-or-other with them. This something-or-other must earn some sort of interest for the bank (or it did, in the before times), else how could the bank pay interest to depositors?
That thing is lending. The depositor lends his dollar to the bank, which on-lends it to a third party. This party pays the bank something, the bank keeps some as its fee, and the bank pays some of it to the depositor.
Thus, the bank deposit is also a credit.
The Ins and Outs of Dollar Lending
Drilling further, into the bank itself, we see that the bank holds dollars in the form of credits to third parties. Those parties can be broken down into two categories: the government, and private borrowers. In the former case, the bank buys Treasurys. That is, it pays this credit money to the government. The government spends it on consumption goods. So, it is gone. However, the government has the power of taxation. It can tax everyone’s earnings to raise the cash to service its debts. It is clear, in this case, that these dollars do not actually exist anywhere. They are a promise to pay, which is what credit really means.
Alternatively, the bank can deposit these dollars in its account at the Fed. This makes sense if you think of the Fed as a bank for banks. Banks deposit dollars in their accounts at the Fed. And then banks can pay one another using this special kind of deposit (which is not available to the public).
However, this kind of dollar is not the end of the chain. The Fed does not store money, any more than the commercial banks do. The Fed uses bank deposits to fund its own purchases of Treasurys. This has many profound implications, but today we just want to focus on the fact that there is no monetary object to be found here, either.
The Nature and Function of Dollar Reserves
The dollars held on account at the Fed are called the bank’s “reserves”. The bank does not merely take in dollars, and then lend out those very dollars. Those dollars are generally the credit obligations of third parties, often of other banks (paper currency deposits being relatively small nowadays). However, banks generally do not want to be creditors of other banks, as this incurs credit risk (without any return). So they typically trade those dollars for either Treasurys or else dollars in their Fed accounts, i.e. reserves.
As noted above, banks can also lend to private borrowers. Banking regulation decrees how much a bank can lend to private borrowers, based on the number of its reserves. This leads to another important discovery.
Banks create both dollars and loans in the very same act of lending.
That is, a bank creates the dollars—which are its own obligation—to lend to the borrower. At the same time, it creates the loan—which is the borrower’s obligation to the bank.
The Implications of the Credit Relationship
Many people think of this as money printing. However, they should look at both sides of the ledger. At the same time that the bank creates and gives new credit dollars (which people think of as money) to the borrower, it also creates a new loan obligation. The borrower owes the bank the repayment of the dollars (plus interest). In other words, the bank cannot create free capital for itself. It adds to both its assets and its liabilities. What it can create is cash flow, i.e. the interest it is paid on the loan.
There are two limits on bank lending. One, as noted above, is a regulation that limits the ratio of loans to the bank’s balance held at the Fed. Two is the pool of creditworthy borrowers (and the concept of creditworthy is less and less about how a bank would assess the risk, and increasingly about categories and formulas dictated by regulation, which may or may not be an accurate measure of the risk of loss).
Got that? If the bank has X dollars of reserves held at the Fed, then it is permitted to create $Y of loans to private borrowers.
It should be noted that in the wake of Covid-19, the reserve requirement was eliminated. Bank lending today is not limited by regulation based on its reserves. It is limited entirely by banks’ ability to find people and businesses who want to borrow, and who are deemed creditworthy.
The problem illustrated by this is not the printing of money. It is much more pernicious than that. The root of the problem is that the dollar is not an object. It is not an entity, an existent. It is not a thing. One cannot actually hold a dollar in one’s hand. Or hold it at all (except in the abstract sense).
A dollar is a relationship. A credit relationship. The relationship of being owed.
If one goes all the way up and down the dollar-credit chain, one will not find an actual object which is a dollar. One finds only relationships, wherein one party owes the other. You might even say that it’s credit relationships all the way down.
So, of course, the Fed and the banks can create new dollars! We should not focus unduly on the fact that the dollar is created “out of thin air” (at the same time that the obligation to pay is also created). We should focus, instead, on the fact that, somewhere in history, someone pulled a massive switcheroo. A heist. All the actual dollars (i.e. grains of gold) were removed from the system.
It’s like in that old commercial, “we’ve secretly replaced [the] freshly ground coffee with Folger’s crystals [let’s see if they notice].” The difference is what they replaced was: the money. And it wasn’t a secret. It was done in full view of the public eye. And no one seemed to notice, until decades later. And even now, many deny that they notice it.
https://assets.zerohedge.com/s3fs-pu...?itok=QNjNVMsP
The Layers of Dollar Perversity
There are three layers of perversity to this.
One, when you get a loan, you are borrowing dollars. Those dollars are themselves, the liability of a bank. Which the bank backs with its own holding of dollars. Which are either government bonds, or else Fed credit-dollars which are backed by government bonds.
In the act of borrowing, you are committing to repaying the lender in units of credit owed by the government.
Two, when you are in debt, you must obtain enough dollars to service your debt. You must pay at least the interest, if not amortize the principal. If you fail to do so, then the bank will seize your business, house, or other assets. Therefore, every debtor must work hard. Every debtor must produce as much of the goods or services that he is in business to produce, in order to generate sufficient revenue. From this revenue, he subtracts his costs. Net of costs, the revenue must be at least the interest expense.
Most people, once they see the nature of the dollar scheme, wonder why the dollar still holds such robust value. And we see the answer in this perversity of the system. Every debtor—which is nearly every producer—is working as hard as possible to produce and sell its products for dollars.
Three, the producers depend on the availability of dollars for them to obtain, to service their debts. These dollars, let’s recall, are not objects that can move freely.
They are the credit obligations of third parties, and ultimately the government. And they do not move freely, they are pulled in tension by every debtor.
The debtors rely on the ultimate borrower, the government, to borrow more. And on the Fed to monetize that greater debt. The deeper the debtors go into debt, the more this unhealthy reliance. And, the lower the interest rate falls, the deeper into debt they are all lured.
If this is not perverse, then what is?
2021 Monetary Metals
Perversity: Thy Name is Dollar
https://assets.zerohedge.com/s3fs-pu...?itok=sEWJFe5E
BY MONETARY METALS
TUESDAY, NOV 16, 2021 - 10:56
By Keith Weiner
Listen to the audio version of this article here
Breaking Down the Dollar Monetary System
If you ask most people, “what is money?” they will answer that money is the generally accepted medium of exchange. If you ask Google Images, it will show you many pictures of green pieces of paper. Virtually everyone agrees that money means the dollar.
What does it mean to have a dollar? If you hold a piece of paper with green ink on it, which says “ONE DOLLAR”, you may notice that it also says, at the top, “FEDERAL RESERVE NOTE”. The note is a word for credit. The dollar bill (the bill is also a word for a credit instrument) is a credit of some kind, the credit of the Federal Reserve.
The paper itself has no value, apart from that it is the obligation of a party whose full faith and credit is beyond question. It would be something like the fallacy of reification, to confuse the green piece of paper with the monetary value it represents.
Banking, Lending, and the Fed
Most holders of dollars do not hold them in the form of actual pieces of paper. For reasons of convenience, and safety, and security, people deposit them in a bank.
That is, they may think of it as having dollars in a bank (just as they think of the paper as the money). But let’s drill down into that.
Most people know that the bank does not just put all the green pieces of paper into a vault. The bank holds a small amount of paper cash, based on what it expects to pay during the business day. The rest, well, the bank does something-or-other with them. This something-or-other must earn some sort of interest for the bank (or it did, in the before times), else how could the bank pay interest to depositors?
That thing is lending. The depositor lends his dollar to the bank, which on-lends it to a third party. This party pays the bank something, the bank keeps some as its fee, and the bank pays some of it to the depositor.
Thus, the bank deposit is also a credit.
The Ins and Outs of Dollar Lending
Drilling further, into the bank itself, we see that the bank holds dollars in the form of credits to third parties. Those parties can be broken down into two categories: the government, and private borrowers. In the former case, the bank buys Treasurys. That is, it pays this credit money to the government. The government spends it on consumption goods. So, it is gone. However, the government has the power of taxation. It can tax everyone’s earnings to raise the cash to service its debts. It is clear, in this case, that these dollars do not actually exist anywhere. They are a promise to pay, which is what credit really means.
Alternatively, the bank can deposit these dollars in its account at the Fed. This makes sense if you think of the Fed as a bank for banks. Banks deposit dollars in their accounts at the Fed. And then banks can pay one another using this special kind of deposit (which is not available to the public).
However, this kind of dollar is not the end of the chain. The Fed does not store money, any more than the commercial banks do. The Fed uses bank deposits to fund its own purchases of Treasurys. This has many profound implications, but today we just want to focus on the fact that there is no monetary object to be found here, either.
The Nature and Function of Dollar Reserves
The dollars held on account at the Fed are called the bank’s “reserves”. The bank does not merely take in dollars, and then lend out those very dollars. Those dollars are generally the credit obligations of third parties, often of other banks (paper currency deposits being relatively small nowadays). However, banks generally do not want to be creditors of other banks, as this incurs credit risk (without any return). So they typically trade those dollars for either Treasurys or else dollars in their Fed accounts, i.e. reserves.
As noted above, banks can also lend to private borrowers. Banking regulation decrees how much a bank can lend to private borrowers, based on the number of its reserves. This leads to another important discovery.
Banks create both dollars and loans in the very same act of lending.
That is, a bank creates the dollars—which are its own obligation—to lend to the borrower. At the same time, it creates the loan—which is the borrower’s obligation to the bank.
The Implications of the Credit Relationship
Many people think of this as money printing. However, they should look at both sides of the ledger. At the same time that the bank creates and gives new credit dollars (which people think of as money) to the borrower, it also creates a new loan obligation. The borrower owes the bank the repayment of the dollars (plus interest). In other words, the bank cannot create free capital for itself. It adds to both its assets and its liabilities. What it can create is cash flow, i.e. the interest it is paid on the loan.
There are two limits on bank lending. One, as noted above, is a regulation that limits the ratio of loans to the bank’s balance held at the Fed. Two is the pool of creditworthy borrowers (and the concept of creditworthy is less and less about how a bank would assess the risk, and increasingly about categories and formulas dictated by regulation, which may or may not be an accurate measure of the risk of loss).
Got that? If the bank has X dollars of reserves held at the Fed, then it is permitted to create $Y of loans to private borrowers.
It should be noted that in the wake of Covid-19, the reserve requirement was eliminated. Bank lending today is not limited by regulation based on its reserves. It is limited entirely by banks’ ability to find people and businesses who want to borrow, and who are deemed creditworthy.
The problem illustrated by this is not the printing of money. It is much more pernicious than that. The root of the problem is that the dollar is not an object. It is not an entity, an existent. It is not a thing. One cannot actually hold a dollar in one’s hand. Or hold it at all (except in the abstract sense).
A dollar is a relationship. A credit relationship. The relationship of being owed.
If one goes all the way up and down the dollar-credit chain, one will not find an actual object which is a dollar. One finds only relationships, wherein one party owes the other. You might even say that it’s credit relationships all the way down.
So, of course, the Fed and the banks can create new dollars! We should not focus unduly on the fact that the dollar is created “out of thin air” (at the same time that the obligation to pay is also created). We should focus, instead, on the fact that, somewhere in history, someone pulled a massive switcheroo. A heist. All the actual dollars (i.e. grains of gold) were removed from the system.
It’s like in that old commercial, “we’ve secretly replaced [the] freshly ground coffee with Folger’s crystals [let’s see if they notice].” The difference is what they replaced was: the money. And it wasn’t a secret. It was done in full view of the public eye. And no one seemed to notice, until decades later. And even now, many deny that they notice it.
https://assets.zerohedge.com/s3fs-pu...?itok=QNjNVMsP
The Layers of Dollar Perversity
There are three layers of perversity to this.
One, when you get a loan, you are borrowing dollars. Those dollars are themselves, the liability of a bank. Which the bank backs with its own holding of dollars. Which are either government bonds, or else Fed credit-dollars which are backed by government bonds.
In the act of borrowing, you are committing to repaying the lender in units of credit owed by the government.
Two, when you are in debt, you must obtain enough dollars to service your debt. You must pay at least the interest, if not amortize the principal. If you fail to do so, then the bank will seize your business, house, or other assets. Therefore, every debtor must work hard. Every debtor must produce as much of the goods or services that he is in business to produce, in order to generate sufficient revenue. From this revenue, he subtracts his costs. Net of costs, the revenue must be at least the interest expense.
Most people, once they see the nature of the dollar scheme, wonder why the dollar still holds such robust value. And we see the answer in this perversity of the system. Every debtor—which is nearly every producer—is working as hard as possible to produce and sell its products for dollars.
Three, the producers depend on the availability of dollars for them to obtain, to service their debts. These dollars, let’s recall, are not objects that can move freely.
They are the credit obligations of third parties, and ultimately the government. And they do not move freely, they are pulled in tension by every debtor.
The debtors rely on the ultimate borrower, the government, to borrow more. And on the Fed to monetize that greater debt. The deeper the debtors go into debt, the more this unhealthy reliance. And, the lower the interest rate falls, the deeper into debt they are all lured.
If this is not perverse, then what is?
2021 Monetary Metals