Who will owe us?
Wednesday, 26 June 2013
Why I struggle with Freefiat™
The trouble with any fiat currency system is, by definition, the holders of credits in the system are owed something later by someone — which, unavoidably, implies somewhere in the system a corresponding debt must be owed. If all will primarily hoard currency credits as savings, someone or another must be in an awful lot of debt.
Who will owe us?
It just doesn't really sound much different to today?
Who will owe us?
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14 comments:
Hi DP,
you mean the germans must not retire on their surplus tokens and the PIGS will do not need to work of their Freefiat(tm) debts? Wait a minute,... how can that be, some retard dumbass told me that the Euro would be so great, has that changed in the meantime?
Greetz, AD
P.S. So what is the cleverest thing to do NOW? Forget about any king of tokens, get you your stuff NOW and stop working for the lazy dumb PIGS.
Hi DP,
The significance of that graph to me is twofold. It shoots a gigantic hole in two of the claims about the 'golden age' of the BOE during the gold standard period prior to WW1.
The first claim is that it was achieved despite the BOE having scant gold reserves most of the time. This could also be expressed as the theory that the pound sterling was the world's preferred reserve currency because it had the BOE's backing and therefore it was the most prestigious.
Despite having a currency zone which spanned 70 colonies encircling the globe, in secret, the BOE had to respond to fluctuations in pound sterling by buying substantial amounts of foreign specie at times in order to stabilize the currency.
In other words this is the 'brake and spur' at work which FOFOA described in his posts based on Jacques Reuff's writings not virtuosity in central banking as some economic historians claim.
The second claim about the BOE during the gold standard that I think this graph undermines is that it was a 'reserve currency'. One could make the argument that the IMFS has never had a reserve currency in its whole history apart from gold and (since 1968-1971) oil.
It's quite easy to debunk claims that there were several reserve currencies before the pound and the US dollar. If you look at the usual list of 'reserve currencies' nominated as former reserve currencies. I think there's a correlation versus causation issue with the conclusion that reserve currency status made a particular state "top dog" in its day.
If you look for other crowns that moved along with the title of 'reserve currency' the one that stands out is that each of the major city states that became the most important banking centre and capital market was then later accorded, in retrospect by historians, the title of 'reserve currency' issuer. In other words, as the role of being the world's number one financial centre migrated over time to London the currency issued from that country became the so-called 'reserve currency'. IMO a label not the cause of the ascendancy.
Despite the fact that the USA had clearly been the more dynamic and vibrant economy for decades compared to Great Britain it wasn't until the role of number one financial centre was split between the London and New York and NY became the "senior partner" that the US dollar began to leave the pound behind. This unseating of the pound was also supported by the USA accumulating large, enduring monetary gold reserves. IMO to these two trends converged and allowed the US dollar to become the principal trade currency.
Capital moved first and the reserve currency status followed. There's some good ammunition in this for the freegolders.
Cheers
(Chart referred to is linked in this tweet)
The historical record is clear: when it comes to currencies, perception is everything. Surprisingly often "the incredible" becomes "reality"… people can be fickle creatures at times.
One observation:
This unseating of the pound was also supported by the USA accumulating large, enduring monetary gold reserves
Didn't much of the accumulating gold reserves of the USA arrive at the expense of the BoE's reserves? This may have helped contribute to the downfall of ye ole pound, methinks.
Hi DP,
There was a huge flow of capital into the USA between the end of WW1 and the start of the Great Depression. I would have to delve into some reference works in order to discuss the specifics.
Suffice to say both France and the USA significantly increased the amount of gold backing their respective currencies. The flow of gold was sterilised rather than being allowed to provide the 'brake and spur' that could have helped to resolve some of the trade/currency imbalances. According to a paper by Irwin (2012) this may have triggered the deflationary episode in phase 1 of the Great Depression.
Clearly there were a lot of other factors involved but there was a common theme in the actions that brought the IMFS to its knees in that period - intervention by governments in markets. Plus ça change, plus c'est la même chose.
Hi DP,
You may recall a comment you made in response to a comment from me a while ago at FOFOA's blog about the possibility of depositors being sidelined in the European banking system as a primary source of lending to banks. In your typical fashion you cut to the heart of the matter in describing my scenario as the ECB becoming a "pawnbroker" or "pawnshop" to the banking system in the EMU. I think that description may prove to be accurate (see below).
Earlier today I was listening to an interview at FT Alphaville with Manmohan Singh of the IMF discussing his work on the role of pledged collateral in the IMFS which reminded me of that exchange. Singh mentions two looming problems for exiting QE concerning high-quality liquiding assets (HQLA) - which are mainly sovereign bonds.
Basically with $2 trillion in excess reserves held at the Fed by banks while the Fed is still soaking up $85 billion a month of (supposedly) HQLA governments and governments are approaching or exceeding limits on the amount of bonds they can issue it may not be possible for governments create HQLA during the next banking system crisis in order to rescue their banks. At the same time it appears that the political will to expose taxpayers to bailout risk is waning while bond markets are also perhaps now beginning to recognise that bank solvency and sovereign bond risk are conjoined.
IMO these problems are likely to figure prominently in the next stage of the ongoing GFC. Meaning the shortage of HQLA for collateral purposes and 'risk-free' sovereign bonds for use as bank capital is likely to crash the IMFS again. Under the more stringent rules on bank capital adequacy in the pipeline from Basel and other regulatory bodies "wrong way" risks abound that amplify the problems they seek to address when the SHTF.
It appears that we are inching toward a "pawnshop" solution among the central banks.
In the text accompanying the audio of the Singh interview there was a link to a speech by Governor Stein of the Federal Reserve. Stein mentions an innovation by Australia's Reserve Bank that has been accepted by the Basel Committee dealing with liquidity risk. The link to a transcript of that speech is here:
http://www.federalreserve.gov/newsevents/speech/stein20130419a.pdf
And here's a description of the RBA plan from Stein:
"At the same time, it is important to draw a distinction between priced and unpriced access to the LOLR (lender of last resort). For example, take the case of Australia, where prudent fiscal policy has led to a relatively small stock of government debt outstanding and hence to a potential shortage of HQLA.
The Basel Committee has agreed to the use by Australia of a Committed Liquidity Facility (CLF), whereby an Australian bank can pay the Reserve Bank of Australia an up-front fee for what is effectively a loan commitment,
and this loan commitment can then be counted toward its HQLA.
In contrast to free access to the LOLR, this approach is not at odds with the goals of liquidity regulation because the up-front fee is effectively a tax that serves to deter reliance on the LOLR-- which, again, is precisely the ultimate goal. I will return to the idea of a CLF shortly."
I think the RBA approach is a good fit with the ECB's structure and mandate. Since the ECB cannot issue government bonds (like the RBA) the "pawnshop" approach solves the HQLA problem without involving direct taxpayer bailouts.
IMO the parallel development of "bail-ins" involving depositors, repo etc, Freegold-RPG and becoming the top banking regulator would complete the ECB's money management toolkit. They would be able to create and destroy money regardless of whether it was originally created by the ECB or the banking system. If governments also deal with the gold miners as I anticipate we should then have a new IMFS that functions better than the current crock of shit $IMFS.
Cheers
G'day, mate.
Yes, the ECB are lately definitely (IMO) making the right noises about private sector assets as collateral. Treasuries as "the only asset in town" are running out of road fast.
"pay the Reserve Bank of Australia an up-front fee for what is effectively a loan commitment"
Insurance!
Pre-pay seigniorage!
RBA (et al) = AIG-on-steroids?
Keynes is dead! Long live Rocky Horror.
RBA (et al) = AIG-on-steroids?
Actually I think it could work well. It breaks the link between sovereign bonds and bank capital.
Incidentally this is more or less the original design of the Federal Reserve system - a liquidity provider based on commercial paper collateral. The concept for the system before it was hi-jacked by the USG.
As Stein observed in the speech transcript I linked the only way to deal with an insolvent bank that cannot obtain additional capital from the private sector is "resolution" (bankruptcy or re-organisation). So these are moves to differentiate liquidity measures from the approach to insolvency. It's a positive step forward IMHO.
Cheers mate!
Yes.
Cheers! ;-)
Actually…
It's a positive step backwards IMHO.
Rolling back the Keynesian bullshit.
I'm intrigued, why
do you think it's Keynesian and a step backwards?
As you said, the Fed wasn't originally setup as a way to fund government deficits. Someone took Keynes' ball onto the pitch one day and everyone ran with it.
It will be good to blow the whistle and put a knife through that ball now, go back to playing with the one originally intended.
Back To The Future.
Okay DP I understand the point you are making now. It was the reference to Keynes that confused me. He was a great borrower from earlier economic thinkers and economic historians.
The theories that justified the 'hi-jack' go back a long way but I agree he helped to legitimize government actions and make these theories part of mainstream political economics.
Don't underestimate the role of the supporters of the central bank model in these events. The belief that Gt Britain's success was due to the existence of the BOE was also widespread and according to my reading on the subject copying this model was thought to be a progressive initiative. In part a sensible response to the earlier chaos in the USA during the "wildcat" banking period in the 1800s.
Cheers
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