SUPER POWERS CAN HANDLE SUPER DEBT?
World renowned Harvard economist Niall Ferguson says the USA is now unlikely to default on its debt (actually only partially) and that the reason they won’t “run out” of money has nothing to do with their status as a currency issuer, but has everything to do with being a super power which gives them the ability to handle “super debts” (via Business Insider):
“I think we are going to get some defaults one way or the other. The U.S. is a different story. First of all I think the debt to GDP ratio can go quite a lot higher before there’s any upward pressure on interest rates. I think the more I’ve thought about it the more I’ve realized that there are good analogies for super powers having super debts. You’re in a special position as a super power. You get, especially, you know, as the issuer of the international reserve currency, you get a lot of leeway. The U.S. could conceivably grow its way out of the debt. It could do a mixture of growth and inflation. It’s not going to default. It may default on liabilities in Social Security and Medicare, in fact it almost certainly will. But I think holders of Treasuries can feel a lot more comfortable than anyone who’s holding European bonds right now.”
I don’t know what that means really. Japan isn’t really a super power, but they have handled a far larger debt load for far longer than the USA has. He doesn’t seem to recognize that being sovereign in your currency is the key factor here. But this position is a big change from the position he’s maintained for quite some time now. Interestingly, he concedes that Paul Krugman was somehow “right” about the USA’s position even though Professor Krugman only just recently that being a currency issuer is the key differentiating factor between Europe and the USA….
“I don’t know what that means really.”
Hah. Ditto.
This is everyone going through the stages of realizing they’re wrong, first making minor adjustments to their position and in the final stages having to commit to the entire paradigm shift. Ferguson is at step 1. Krugman is midstage. I just hope MMT/MR is getting credit, if not tacitly.
I mean seriously, that’s one of the most pathetic excuses for economic rationale or theory I’ve ever read, and HE’S the famous economist???????
Super America! That’s it! We’re super!
Sorry for the caps but HE IS A HISTORIAN NOT AN ECONOMIST.
When I saw him on stage “debating” a Nobel laureate in economics on macroeconomics,
I knew he was a raging narcissist and not worthy of attention.
He who knows not and knows not he knows not is a fool…..
We’re not just super — we’re super duper.
USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA! USA!
I think it’s silly how people pay attention to Niall Ferguson’s forecasts. Sure, he’s a great author and a Harvard professor, but remember that he is an economic historian (note ‘economic’ is the adjective, not the noun). In reality, he is a historian, and as Warren Buffett says, “If past history is all there was to the game, the richest people would be librarians.” I think the same can be said of historians.
He’s not a economist, he’s a historian. He wrote an outstanding history of WWI in the late 90s (The Pity of War) and he’s been coasting ever since.
Speaking of WWI, I found something that was too cool a few weeks ago. I’d always wondered where the trenches ended. Magic 8 balls says:
1. The North Sea (British side, called “the barrel post”)
http://pudgyblogt.files.wordpress.com/2011/03/2011-03-08-nieuwpoort-014-1917.jpg
2. The Swiss border (German side)
http://www.firstworldwar.com/photos/graphics/gws_gertrenchswiss_01.jpg
Thank you for those links. I had never even wondered about the southern end. Those images were enlightening. I’d love to read some stories from the men who served there.
Great stuff! I’ve always wondered where the last guy in line stood. . .
Thanks, here are aerial shots of the two locations today. First photo above was taken just north of Zeedijk and the second one (so far as I can tell) was taken just south of Le Largin.
http://binged.it/AcAHYt
http://binged.it/ywPypr
The absurdity of this situation had struck me (the North Sea OK, but the Swiss border?)- but it spurs a serious association:
The decline of Powers is generally marked by polarization. The Brits might seem an exception (- that over the Boer War came closest. A personal hero, Henry Campbell-Bannerman, in spite of a courageous public stand against atrocity, later became Prime Minister, but was powerless to forestall the holocaust). But they were part of a larger, dominant but polarized civilization.
If the British Century began with Waterloo and ended abruptly with the Guns of August, and the American began then, that century bookend is right around the corner.
The discourse at this site has been distinguished by a diversity of experience and expertise (and a broad political spectrum, largely a reflection of the former, more important differences), shared with generosity and civility.
The touches of liberal daffiness in a Randy Wray, rather than seized as ammunition for indiscriminate broadsides, might be forgiven, as can the occasional knee-jerks of serious contributors here.
Janet Tavakoli calls him a “carnival economist”. Seems pretty apropos.
http://www.businessinsider.com/chanos-crash-timing-chinas-financial-meltdown-2012-1
Carnival is good, his value as an entertaining writer, but subject to other informed interpretations.
His latest books about the 6 killer apps of western civilization was also good until he summed up the last chapter with his misinterpretation of modern money.
LOL!
So why then form a Supercommittee to reduce the superpowers superdebt? Sounds superfluous to me.
“You’re in a special position as a super power. You get, especially, you know, as the issuer of the international reserve currency, you get a lot of leeway.”
I guess that’s what Iran found out, just as Iraq and Libya did before them when they asked to be paid in something else than dollars for their oil.
There is also a spreading in bilateral currency swaps between many countries, without going through the dollar. Iran-China, Iran-India, China-Japan, China-Pakistan, China-United Arab Emirates, etc…
Add some relentless gold purchasing from central banks around the world, especially in Asia and you find the dollar loosing ground by the day.
Better enjoy this super status while it lasts folks!
Let’s hope the greed of a few is not more important than the welfare of Americans people as a whole.
Here’s a nice paper from NY Fed on the dollar’s international role.
“Approximately $580 billion in physical U.S. currency outstanding was circulating overseas at the end of March 2009.”
“According to the Reinhart and Rogoff categorizations (Table 1), seven countries currently are dollarized or have currency boards using the dollar and eighty-nine have a pegged exchange rate against the dollar. The share of countries linking their currency to the dollar in some manner has been stable since 1995, and this group represents more than a third of world GDP (excluding the United States).”
“In 2009, dollar assets accounted for about two-thirds of the reserve assets of industrialized and developing countries (Chart 3)”
“The dollar is a leading transaction currency in the foreign exchange markets and a key invoicing currency in international trade. With an 86 percent share of FX transaction volume—more than twice the share of the euro—the dollar continues to dominate these markets”
“This narrower measure—termed “international debt securities” in the chart—suggests that the dollar also continues to be a significant currency for debt when borrowers turn to external markets and foreign currency financing. In 2009, the dollar accounted for almost half of these debt securities.”
“Data on crossborder-liability denominations show that by June 2008, non-U.S. banks had accumulated approximately $27 trillion in cross-border liabilities denominated in currencies other than that of their home country. More than $18 trillion of this amount was denominated in dollars.”
http://www.newyorkfed.org/research/current_issues/ci16-1.pdf
In short.. It ain’t happening.
Those numbers are from 2009 and depict a pre-Lehmann world.
I’m talking about recent agreements between countries like between China and Japan last year. Although it wasn’t covered much in the news, this has huge implications and we will only see the result of those agreements in a few years from now.
But I agree, it is a long way to go and we are not quite there yet. But they are chipping on it little by little and some day they will reach a tipping point if nothing is done to prevent it.
Surely the euro must be blitzing ahead towards the USD as its chief competitor..
In any event, it’s important to note that Japan, while not a ‘superpower’, still was the world’s 2nd largest economy for a few decades, which Fergy would probably allude to. Still, I wouldn’t listen to anything Fergy has to say, as he’s been pretty wrong about everything thus far concerning debt, inflation, etc. and is basically a neo-classical parrot from a historical perspective.. and a soothing British accent
yeah
superpower to the superprinter in supermassive quantities to the superinfinity
(ah, superinflation btw)
The greatest takeaway here might be a reminder of how far MR and the descriptive side of MMT have to go.
Before one can sell someone toothpaste, the potential customer has to know she has teeth.
Being a currency issuer is a major barrier to government debt problems in my view, but not a guarantee.Debt problems being either significant currency movements(most likely risk for the US) or sustainability problems like Greece(unlikely in the US). Nial Ferguson’s claim that the US is different because its a super power is wrong, even if the reality is that the barriers to the US experiencing debt induced problems are considerably higher than for other sovereigns.
The key reasons why the US might expect a higher barrier to debt induced problems in my opinion are :
1. The reserve currency status means there are high volumes of trade going through the currency so any speculative currency movments are likely to be rather swamped by trade volumes. Its not an insummountable barrier as the UK knows especially if your reserve currency status is begining to wane.
2. Japan has a barrier to debt problems in that a large proportion of buyers of the debt are the Japanese public who are unlikely to rock the boat. Similarly the US buyers of debt are a mixture of local buyers and sovereign currency manipulators who both want the market to remain stable.
Nobody knows where the tipping points are for individual sovereigns, but my guess for the US would be somwhere between where it is now and where Japan is. In essence the most powerful factor is the local savings rate and local investment in the sovereign debt.So there are some very positive points which raise the barrier for the US and a couple of negative ones which bring it down a little. The important point to consider is that the tipping point will change with time as conditions change, especially as other sovereigns adjust (china) and set up bilateral trade agreements.
The question you should ask is whether the conditions that mean the US is unlikely to experience debt induced problems are a real postive to the US economy in the long run. Essentially the US may be able to print more and spend more, because other sovereigns currencies are not free floating. The cost to the US of having this benefit may be monetary policy which will always tend to leak abroad, suppressed wage growth and employment and increasing inequality. All of these can be addressed at a cost, but as the world economy changes and develops there are risks, that your debt adjustments cannot match the rate at which your barriers to problems change.
Hey Brick.
You make some good points.
However, one fact you have wrong re FX.
FX swamps the size of global GDP:
‘According to the Bank for International Settlements,[3] as of April 2010, average daily turnover in global foreign exchange markets is estimated at $3.98 trillion’
Global GDP is estimated at $62trillion, and much of that will be within borders, rather than cross-border.
Mr Ferguson is wrong, the US can QE all it likes, to keep yields low, but ultimately the world will ditch the dollar as the reserve, as the Fed cannot create confidence, and as confidence drains, so will the demand for dollars.
I give it a few years til it dies a hyperinflated death, so maybe he’ll get to QE6 or 7.
One point Mr Ferguson fails to make, and it’s an argument that is never made by socialist/MMt types, is that in Europe they are taking their medicine, eating their losses on bad loans to broke governments, and will start to rebuild again. And their currency remains intact.
I wonder how long the US/UK/Japan would actually last if they didn’t monetize their own debts? 2 to 3 weeks maybe?
It’s called a ponzi, and most will get burned, as well as innocent savers who didn’t see the writing on the wall and buy some gold.
Gary: I’d like to hear your “contenders” for the world’s next reserve currency.
@ Gary_UK
“Europe they are taking their medicine, eating their losses on bad loans to broke governments”
Really? is that the what there doing? eating their medicine. The medicine there eating is 10,000 milligrams of denial. They’ve prescriped chemotherapy for herpes. They havn’t done anything to resolve the structural issues of a currency user in a union that has a balance of payment problem. There has been no rebalancing from surplus nations deficit nations. Slowly moving in a direction because they have been wrong from the very moment they signed the teaty. They are doing everything they can to not take losses.
And…if you think there is a loss of confidence and hyperfinflation is around the corner than prove it. 1. it’s not here(i heard this at the end of 2008 and there are no signs) 2. Post your investments. Put your money where your mouth is and let’s what you own to profit from your analysis.
Lastly, Nialls is the reason why I am happy I turned down Harvard to be home schooled. Granted many of you must suffer in the form of reading poorly written grammatical posts. But at least I was taught the difference between a deflationary balance sheet deleverging cycle and inflation. Which one do you think we’ve been in since 2008 Gary?
Hello JSwede.
Nothing is certain, but the Euro is best positioned to take on the reserve status, however it’ll be without the exorbitant privilege that the US has enjoyed and abused for the last 80 years. If you wonder why that would be the case, it’s because the Eurosystem markes their gold to market, and physical gold is being positioned as the reserve asset that will settle trade imbalances. Check out freegold at Fofoa’s site for more details.
And VII, your answer just displays a horrible entrenched bias against the Euro currency and the Euro area. Socialists ALWAYS try to blame the Euro currency for the problems in Greece/Irelend et al, but if countries had managed their affairs better, they would be just fine now. You cannot blame a currency for bad decisions by banks and governments, as well as lazy households. The ECB is forcing bondholders to take actual capital losses, rather than QEing to try to devalue the currency and inflate away the problem. That is a great thing, I rejoice at bondholders eating losses. Savers in the Euro should rejoice too, as their buying power is being preserved.
As for currency collapse/hyperinflation, it is already guaranteed, the dollar was hyperinflated decades ago, and the problem is hidden in the pyramid of ‘investments’ that are now proving to be worthless (Mortgage-back securities is just one example).
Every time the Fed buys that shit, it changes imaginary ‘credi money’ into real base money, which devalues all other dollars. Eventually as confidence withers away (as is already happening) the Fed will print to buy it all, every last piece of debt/crap will be covered with newly created base money, and eventually the world will realise the dollar is worthless. Any number of individual events could start the collapse, and my estimate is that we will see currency crises within the next 3-5 years. Once the markets realise QEs are ineffective and the econmies of the world continue to contract, it won’t take long.
Time will prove all, and don’t fret, I will be here to help you find your way along this trail, maybe some here will remove their MMT blinkers and get some gold, I hope so. Do visit Fofoa’s blog, with an open mind, as 18 months ago I was a die-hard deflationist, but now I realise currency collapse/HI is just a politically driven route to the inevitable deflation.
@ Gary_UK
“Socialists ALWAYS try to blame the Euro currency for the problems in Greece/Irelend et al,”
NO where can you infer I’m a socialist in any decision or action I’ve made in my life. Nothing I’ve written or posted on this site could support your comment.
You remind me of the guy from a one of our countries less developed areas who approached my wife and said….”what are you?” ..(wife)”execuse me?” …”what are you?” (wife)”I don’t follow”….”ya know yuuu Chiiineeeease” …(wife)”uh..NO I’m Korean”..”Yup..Chiiiineeeaasse…Ii knuuu iiit”
Yep…that about somes up the inflationists, debasing currency, end of Days for the United States and it’s reckless ways. To them we are all the same. Were all MMT socialists. Even when were clearly not. No matter what the truth is.
Let me help. Here is one(there are many more) problem with your alacrity to claim the ECB has it all figured out. .
“The ECB is forcing bondholders to take actual capital losses, rather than QEing to try to devalue the currency and inflate away the problem. That is a great thing, I rejoice at bondholders eating losses. Savers in the Euro should rejoice too, as their buying power is being preserved.”….SO WHAT? Think about this Gary. Define first what is the problem in Europe as it exists currently? Does forcing bondholders to take losses fix any of the structural problems of the current EU? I don’t disagree with you that when someone invests and stands to profit..the only way to ensure the proper functioning of capitalism is for capitalsim to work as it was intended. When you loan money out to someone who can not repay it..guess what? they don’t and you get the right to incur losses. I will never stand in the way of your right to make money or lose money. It is not the States responsibility to bail out reckless stewards of capital.
BUT….what is the point of keeping the EU as it exists currently and thinking that taking losses will change the problems of the structure? You’ve done nothing to fix why more losses will follow over and over again. In fact in as currency users..you’ve made it worse. Each country has to access the private markets. You’ve just frozen them.(now it get’s tricky) Cause here’s where side deals and guarantees now must come in to play in order to get private investors the assurance that the loans to the soverigns will in the future not take losses. If you don’t give this to them they will offfer financing at market rates. Do you know what rate your anti socialist Private Bankers will offer? Guess? This is where I scratch my head as to why I’m even debating with someone who thinks the U.S is socialist and Europe is some free market enterprise. You do understand the MMT is not being implemented in the U.S. So your blaming the QEs on MMT. It’s absurd. Further WHERE has CULLEN or anyone on THIS site said QE is something good? Know one here thinks QE is worth a crap.
I’m all over the place…now.
I never blamed the currency on the problem of the EU?
But let’s get to the facts..I’m glad you here and I can help.
Let’s end this MYTH of a religion you’ve found over at Fofa.
We can help each other right now get to the facts. Ready? Let’s start slow and work our way through the differences.
Q: What is ailing Europe as you see it?
Firstly VII, please calm down.
I’ll take your word that you’re not a socialist, and mention that I didn’t actually say that you were (you seem to have inferred that, which I can understand when I re-read my comment).
You wrote:
‘They are doing everything they can to not take losses.’
I say it is obvious to anyone with eyes in their head that Greece is currently forcing bondholders to take losses. They won’t be the last.
I am wary of wasting my time debating online with someone that cannot even see that.
You also wrote:
‘They havn’t done anything to resolve the structural issues of a currency user in a union that has a balance of payment problem.’
and then you said:
‘I never blamed the currency on the problem of the EU?’
Well, sorry, but one of those statements will have to retracted, because they are contradictory.
At some point in the future the Eurozone WILL settle its imbalances, and it’ll be the same around the world. Gold will be used. You may think that a ‘myth of a religion’, but that just demonstrates to me that you are not prepared to read/think deeply enough as to where the world is heading. The evidence is all there.
As I said, 18 months ago I was like you. I even bought and read Richard Koo’s book on Japan’s experience (Holy Grail), and agreed with his research. I couldn’t see anything but a balance-sheet worldwide deflationary depression. And I still don’t. That is where we are at.
But once you understand the history of the current international monetary system, and the moves of the major players over the past 80 years, it is obvious where we are headed. And also obvious that a dollar collapse is baked in too (along with maybe a Yen/Sterling collapse).
As for Europe’s problems: same as the world over, too much debt. You may have heard Kyle Bass say recently, total credit market debt has grown from $80tr to $210tr over the past 10 years (approx 12% pa), whilst global GDP has grown by 4% pa.
How much of that debt will be ‘papered over’ by the US to keep their system going? Every bit of it, but it will just collapse the dollar, and then the system.
I’m sorry I haven’t got time to repeat what I have learned over the past year or so here, and I just suggest you read Fofoa/Another/Foa with an open mind.
@ Gary_UK
I wrote an epistle and got bumped off BUT..I will re-write it again. I will waste both of our time again.
Let me say this again. NO ONE WANTS TO TAKE LOSSES ON Greek DEBT! What I said is 100% acccurate. WTF? That is the why discussions are going on and on and on. Everyone is doing everything they can to not take losses and you reply first that the “ECB” is forcing losses and then that “Greece” is forcing losses. Then you say I can’t see it? You think your ECB is trying to protect savers? NO the ECB is trying to not create inflation vis a vi forcing private investors to take the losses on Greek debt rather than back stop more greek debt that no one no longer wants. And why do they not want it…BECAUSE they are no longer being protected agains losses.
In your free market capitalist European bond market why are they being forced to take losses? BECAUSE NO ONE WANTS TO TAKE LOSSES! THEY ARE DOING EVERYTHING THEY CAN TO NOT TAKE LOSSES! WHICH IS WHY THEY ARE BEING FORCED TO DO SO! OH..voluntarily so as not to trigger a credit event. AND WHY IS THAT? because this would be considered an “event” An actuall default. Which YOUR ECB promissed private investors would never occur when they told them(invited them) to buy this junk in the first place. Now they are haggling over who is going to take the losses and how much. Is this not what is occuring. Do you think everyone is lining up to take losses on this junk? So who is going to fund the PIIGS now? You think Germany will allow it’s banks to take the losses? No one wants to pay this bill. How can you not see this?
And Yes…the idea that the FED will provide swap lines to the ECB and allow California to go bankrupt is hilarious.
Gary_UK we are no longer on the Gold Standard. I’m sorry..we no longer have to keep Gold reserves.
Ok, I can see you’re having trouble.
Of course no one wants to take losses. Who ever does.
But the Eurosystem is forcing those losses, right now. It’s the opposite to what is happening elsewhere.
Those are facts. Your statement:
‘You think your ECB is trying to protect savers? NO the ECB is trying to not create inflation vis a vi forcing private investors to take the losses on Greek debt rather than back stop more greek debt that no one no longer wants. And why do they not want it…BECAUSE they are no longer being protected agains losses.’
That is spot on, I agree, we agree. Lol, but by trying to avoid inflation (currency debasement) of course they are also protecting the savers! Inflation only benefits debtors.
Ok, we agree, good stuff.
@ Gary_UK
“That is spot on, I agree, we agree. Lol, but by trying to avoid inflation (currency debasement) of course they are also protecting the savers! Inflation only benefits debtors.”
The ECB is playing a dangerous game.
“The ECB has “limited” its direct purchases of distressed European debt. More broadly, the ECB now has a larger balance shee-relative to European GDP- Than the federal Reserve has relative to US GDP.” Hussman-
How can you say the ECB being directed by Germany now less so is protecting Savers. Unless Savers are European Banks. If you claim that Europe is protecting Savers I don’t think the Irish, Greeks, Italians, Spanish and Portuguese would agree. Further..I would encourage Europe to do it. “just do it” already. Give you exactly what your FUBU websites call for.
Take all the debt and take the losses. Protect the savers. Then allow the PIIGS to access the private markets which no longer will exist. As money flows from the south to the north. Then as the currency becomes stronger in the north…let’s see how well that German Export machine operates with the strongest currency in the world. Yes you can buy everything you want in the north with that currency. We will be happy to sell to you. But who will buy your goods? China? The southern countries who you forced austerity on and losses which you encouraged them to take but then backed away from protecting.
Please I hope you get exactly what your FUBU website recommends. I don’t see how the savers will be better off if you connect the dots to what Germany has recommended as the course to solve this issues in the EU
Yes I know it says Gary_UK not DK/DM. And if Europe is so great why has the UK not embraced it? Hmmm maybe the currency thing has some legs to it?
BTW- I own gold- I’ve owned it at 5%, 7% and took it to 10%. I’m at 10% today and I’m taking it back down to 5% soon.
I’m out of here…my clients are all going to fire me if I continue with you Gary.
If we still end up with U.S dollars in 5 years and nothing has changed can you do me a favor. Can you send Fofa a letter asking them to reimburse me for wasting my time today. I’ll take payment in…U.S dollars. And can you then apologize to me and yourself for today.
Hi VII.
I like you, you are very passionate about this!
You wrote:
‘If you claim that Europe is protecting Savers I don’t think the Irish, Greeks, Italians, Spanish and Portuguese would agree.’
Are you thinking about the savers within those countries, or the countries themselves? Big difference between the two!
As for Germany, it has coped with a strong currency for decades, no sweat. Countries that make good products will get buyers. Countries that use the ‘strong curency’ excuse are just pulling the wool over their citizens eyes!
best of luck with your clients, thanks for your comments, a lot more thought went into them than those of some others in this thread.;)
I just read this:
http://latimesblogs.latimes.com/california-politics/2012/01/california-budget-crisis-cash.html
Looks like California is going to run out of cash. I will watch to see what happens with this situation. Will it be like Greece? Will fools that have lent to California be forced to take their losses?
I don’t think so. Money will ‘magically appear’ from kindly Uncle Sam I suspect.
Oh dear, it is so obvious where this is all heading. And yet so few can see it!
FOFOA leaves out one important fact. Where does most of EU gold reside – especially Germany’s gold?
Don’t underestimate the US.
I agree that we’re going the gold route. Since 2000, gold has been slowly rising – the biggest factor is central bank purchases, especially in the emerging markets. There’s a reason for that. Though most on this website have no clue.
But I believe you are overestimating the EU and underestimating the US by reading FOFOA. At the end of the day, possession is 9/10ths of the law. Where’s your gold?
Also, many countries are entering into non-dollar denominated trade agreements. These are often the same countries that are accumulating gold. That’s not a coincidence.
In the 1980s, the US economy was over 50% of global gdp. Today? Less than a 25%. not exactly King of the Hill, especially if the reserve asset you offer is an IOU.
People don’t understand how history unfolds. They think fast and arrive at conclusions, but they don’t realize that global changes are slow in the making. So when they see the changes don’t match their conclusions, they change their minds – or if they believe the opposite, and nothing happens in a short time frame, they feel vindicated. It’s not the pace of change, it’s the direction of the change that matters.
The world’s leaving the US debt as reserve and moving towards gold as reserve, which isn’t unusual during an era of systemic breakdown.
The MMT’ers are celebrating prematurely. MMT’ers should only celebrate if/when the gold bull market is dead… Until then,
Watch the trend.
Misthos:
‘FOFOA leaves out one important fact. Where does most of EU gold reside – especially Germany’s gold?’
No, he doesn’t, plenty of stuff written on confiscation at his blog. Go read it.
Also, if you think America solves her problems by locking up the gold vaults at the NY Fed to its rightful owners, you are mistaken.
Think for a few minutes where that would leave the US in the world. Dead as a dodo, that’s where!
Misthos, the rest of your post is spot on though in my opinion.
@ Gary-
I killed my day today…
Funny really…..we are on totally different sides of this. Oh well. I’m sure it will all work itself out.(I wish I would have said that 4 hours ago)
I hope our leaders and yours do a better job of protecting good stewards of capital and allowing markets to take care of those who don’t.
Best to you…yes..I did get my panties in a tizzy today..didn’t I.
Don’t underestimate what the US, or any other country, for that matter, would do in a time of crisis.
I don’t think you fully understand how bad things are going to get. We’re talking economic survival here in a world of full blown resource wars.
It’s funny how people on this site make economic forecasts based on certain metrics and totally ignore the fact that the Middle East is about to blow up. Not exactly a black swan is it? Talk about wearing blinders! Gold and Oil is where it’s at. Let them debate their paper money – or electronic digits. They don’t realize that oil is what makes that paper flow. They don’t realize that gold is the insurance policy Central Banks hold against that paper. And that insurance premium has been rising over a decade for a reason.
There’s a reason the US has held onto much of European gold, and has also preferred to “defend” Europe from the USSR rather than have, say Germany able to defend itself. The US maintained its gold edge and its military edge over Europe for a reason. Think about it.
The US technically wouldn’t confiscate EU gold. It would “buy” it from the EU.
The Japanese people have a lot of savings BECAUSE the Japanese Gov has a lot of debt. The Japanese Gov can get out of debt anytime they want – tax the savings right out. Viola. No more debt, no more savings, no more Yen in circulation.
Not that anyone who refuses to understand will understand, but I like to tell people that since “Gov debt = Private Sector savings” all we need are some savers to volunteer their savings to help pay down the debt. Maybe Brick and Gary will volunteer first????
“Gov debt = Private Sector savings”
Ah, the classic MMT equation. It of course completely ignores that savers choose to save in many ways, such as shares, gold, property. Also, it ignores the fact that governments are now creating currency from thin air to buy their own debt (as no other fools want it). Ignores it.
‘all we need are some savers to volunteer their savings to help pay down the debt. Maybe Brick and Gary will volunteer first????’
I save in gold, and you ain’t getting any of that sorry. As for Japan, well, let’s see how bullish you are in a year or two, as your demographics are already leading to savers dis-saving, and you have rising unemployment too.
Sadly, Japan will be the first example of the ponzi-ness of the current system, and it will be truly horrible to live through. I wish you good luck people of Japan.
Yes, you save in gold and in exchange someone else decides to save in the dollars you gave them. That doesn’t change the fact that govt debt = non govt savings. The funny thing about you gold bugs is that you all seem to know this because all of these big gold websites always charge their customers in what, USDs!!!! For instance, look at John Williams, king hyperinflationist. The man hasn’t raised his subscription cost in a decade. And he charges people in USDs. Why do you think that is? Because he loves to collect USDs. He needs them. He cannot get enough of them….The hypocrisies in there are so extraordinary that I can’t help but laugh out loud every time I think about it.
My God Cullen, you are so close to grasping the truth.
Yes, some gold holder has to be prepared to sell his gold to enable me to get some. What would happen do you think if every gold holder in the world said ‘enough’? We don’t want your stinking dollars! Game over that’s what.
Well, just have a little look at a dollar chart, and a gold chart over the past ten years. That point is getting nearer every day.
The US need to allow gold to keep rising in price these days, because they need those weaker gold holders to bid for dollars. But it’s catch 22, because the higher the gold price, the more strong hands, and also the weaker the dollar. We physical gold advocates still need to transact is dollars of course (a weak point you make there to be honest), but you can bet we don’t hold much of our wealth in valueless currency.
Say, you must know a few wealthy banker types. Why not give one of them a ring, see if they can go snap up $2billion in physical? Make my predictions come true today!
I know you don’t live in the USA so maybe that’s why you’re not connecting the dots, but I will tell you that the primary reason why I collect US dollars is because there is a hell of a lot of stuff denominated in USDs that I want to buy. The eggs I just had for lunch. The gasoline for my car. The dinner I will eat tonight. The phone bill I will pay for today’s usage. The internet bill I will pay for this month’s usage. On and on and on. The point where I will reject that currency is the point where it no longer benefits me to transact in that currency. That could be very high inflation or it could be a massive decline in our output. It could also come as a result of any other series of events like a destabilizing regime change, loss of a war, etc etc. None of those events are occurring in the USA currently so your whole story keeps falling flat on its face. The hyperinflationists were wrong in 2008 because they thought our production would utterly collapse and our spending would far outstrip it. It was the Zimbabwe scenario all over again. Except that didn’t even come close to happening.
Please provide us with the precise cause of the USD’s collapse because thus far you don’t seem to have been able to connect the dots.
Before I start, I note you have deployed your usual debating tactic of moving the debate. You raised the issue of gold sales for dollars, I present my argument, which you then choose to ignore. Alway I suspect this tactic is because to debate the actual point leads you to lose the debate. You should consider a career in politics!!
‘I know you don’t live in the USA so maybe that’s why you’re not connecting the dots’
I remember you had a go at me for pointless and somewhat derogatory/rude comments, well, take a look in the mirror Cullen!
‘but I will tell you that the primary reason why I collect US dollars is because there is a hell of a lot of stuff denominated in USDs that I want to buy. The eggs I just had for lunch. The gasoline for my car. The dinner I will eat tonight. The phone bill I will pay for today’s usage. The internet bill I will pay for this month’s usage. On and on and on. The point where I will reject that currency is the point where it no longer benefits me to transact in that currency.’
Yes, you just need to change one partof that section to make it read correctly: you need to replace ‘when it no longer benefits me to transact in that currency’ to something like this ‘when it no longer benefits me to store my wealth over a period of time in that currency’ Without perhaps realising it you seem to implicitly realise that the dollar is great for transactions, but you don’t adress its wealth preserving suitability (maybe because its lost 90% of its buying power over 80 years eh?).
‘That could be very high inflation or it could be a massive decline in our output. It could also come as a result of any other series of events like a destabilizing regime change, loss of a war, etc etc. None of those events are occurring in the USA currently so your whole story keeps falling flat on its face. The hyperinflationists were wrong in 2008 because they thought our production would utterly collapse and our spending would far outstrip it. It was the Zimbabwe scenario all over again. Except that didn’t even come close to happening.’
Hmm, I seem to recall there was an electronic run on the system, which Mr Paulson had to act to halt. You forget that? Here’s a link:
http://www.youtube.com/watch?v=oCcRT-y2_rg
Watch it all. Then reflect. Zimbabwe? Not even close? Please man, wake up and smell the coffee.
The system was virtually at collapse point. It will get there again, for any number of reasons, and as the only response is to QE/print, eventually markets will run a mile.
‘Please provide us with the precise cause of the USD’s collapse because thus far you don’t seem to have been able to connect the dots.’
No, if you can’t see it that’s your problem.
Well Gary, you’ve been repeating this comment here for 2 years now. So it seems that the person with a hole in their macro thinking is you. Like John Williams, you seem to be riding this hyperinflation idea right into the ground….I’ve been refuting people like you for years so as long as it fails to happen we have to continue to give me the benefit of the doubt. Being right matters. So until you are in fact right, you’re wrong….And you’re wrong.
Cullen, truly, you ought to be ashamed.
I am. Ashamed to have been dead right about hyperinflation for 5 years running.
I’ll finish my sentence shall I?
You ought to be ashamed to post comments that ignore points that you cannot refute. Ashamed to be so entrenched in your view that facts get ignored. Ashamed to end a debate with ‘You’re wrong, I’m right’:). Ashamed to show to all of your blog visitors the lack of depth in your knowledge of the evolution of money, and where it is taking us.
When I was 9 through 12, and if I was in an argument I was losing, I used to stick my fingers in my ears, close my eyes, and shout la la la at the top of my voice. It worked a treat, but you already know that of course!
Gary, state your question in very clear terms. I’d love to answer it.
I already did, but here are a few again:
1. Yes, some gold holder has to be prepared to sell his gold to enable me to get some. What would happen do you think if every gold holder in the world said ‘enough’? We don’t want your stinking dollars!’
2.Here’s a link:
http://www.youtube.com/watch?v=oCcRT-y2_rg
Watch it all. Then explain how the US was ‘not even close to Zimbabwe’?
3. ‘The point where I will reject that currency is the point where it no longer benefits me to transact in that currency. That could be very high inflation’.
You say you could reject the currency if there was very high inflation. You will not be able to reject the currency, as you have stated you have no choice but to transact in it. Explain yourself.
4.Usage demand for the dollar is falling worldwide, with bilateral trade agreements. What effect do you think this will have on dollar values, and on its position as reserve currency?
5. Why does the US Treasury still carry gold on its books at $42 per ounce?
Tough questions, I expect you will struggle somewhat to actually answer them directly. Good luck, I am off to bed.
1. People don’t just reject a currency for no reason. The reasons are always very specific. I’ve done pretty vast research on this. http://pragcap.com/resources/understanding-hyperinflation
I’ve explained what generally causes hyperinflation and why it’s unlikely in the USA. You have yet to explain what will cause our hyperinflation.
2. Our banking system froze up which caused a temporary credit freeze and a decline in output. It wasn’t a permanent decline in output. McDonalds didn’t stop making hamburgers. WalMart didn’t stop selling stuff. The banks froze up because the consumer was deeply indebted and they’d made some bad bets. This was a temporary decline in output after a debt bubble. Not a permanent crippling of the system. That’s nothing like Zimbabwe where a socialist regime reallocated resources inefficiently and drove their primary industry into permanent decline.
3. I’ve always disagreed with the MMT point that taxes drive money. Read my primer. I am very specific on the fact that currency users can always reject the currency.
4. Reserve status is a function of output and stability. You can’t use the reserve currency argument and at the same time argue that demand for USD’s is collapsing. That makes no sense. The only reason the USD is the reserve currency is because there’s high demand for it. Why do you think the Fed needs to extend swap lines? It’s not because demand for USD’s has collapsed….You seem to have the whole story backwards.
5. Why do we carry gold? Well, we have gold amounting to roughly 3% of our GDP. So, that’s like asking me why I have those 20 cans of old tuna fish sitting in my cupboard or why 3% of my underwear has holes in it and still isn’t in the garbage. I don’t know. People hoard a lot of stupid things. And who knows. If a meteorite hits the earth and fear mongers ending up running this joint it might be good to have some shiny rocks sitting around so we can all talk about how pretty they are and how we should trade them for real goods and services. Pretty unlikely and stupid if you ask me, but you never know. People have worshipped dumber things than rocks in this world.
Gary you asked “What would happen do you think if every gold holder in the world said ‘enough’? We don’t want your stinking dollars!’”
But why answer a silly question like that when you can’t come up with a reason that people would refuse to sell all at once? I mean are we talking a meteor hitting the earth? Or WWIII with nuclear holocaust? Or some major flu pandemic or major worldwide crop failure? Because that’s the only way I see your question even becoming relevant. And if any of those were to happen – well, your gold might be worth a kazillion dollars, but my gun, bullets and oil will be worth a LOT more. Personally I choose not to believe that Mad Max is around the corner.
Cullen, your answers display your deep lack of knowledge about the history of global monetary workings, and therefore you are unable to see where we are headed.
I think you are a genuine guy, and I think you would benefit enormously if your knowledge of this area was expanded. You are currently trying to answer questions with one-hand tied behind your back.
When you answer that ‘you don’t know’ why the US Govt still holds 8,000 tonnes of gold, does that not make you feel curious to find out?
I suggest spending some time reading the annals of Another/FOA/FOFOA, or do your own research elsewhere. Feel free to ignore or disagree with all of the hyperinflation predictions by all means, but at least make yourself a better person by learning about the monetary history of gold and your own currency.
For my part, I shall continue to frequent this excellent blog to spread my small amount of knowledge, and will ignre any barbed comments that you or others may fling my way. My aim is only to educate.
Ok Gary.
‘If money is wealth then Zimbabweans must be rich!’
Well, not sure how you jumped to that, not from anything I said.
‘If gold is wealth then all we need to do is dig more rocks out of the ground.’
Yeah, it it were that easy, that might be happening. However, there is so much gold above ground (aprox 180,000 tonnes) and only 2,700 tonnes dug up each year, so a nice stable supply from below ground, just as well, as hardly any with physical are selling. Feel free to go start your own mining operation though.
‘Obviously, those ideas are horribly wrong. Unless you think money is wealth.’
Wealth is many things: gold, oil, land, fine art. All are wealth. Money, well, we get into a whole different debate then. is it a store of value, a method of exchange, a unit of account?
Should it be all of these? Can it be? There are some interesting and very sound analyses of these issues at a certain blog, go take a look, you can search the archive easily. Please, start with this one’ ignoring any mention of HI, just focus on the ‘money side of it. (no one will know you read it!). feel free to email me seperately too.
http://fofoa.blogspot.com/2009/10/gold-is-money.html
I sense you are not taking this overly seriously at the moment, so will leave you to consider whether you want to dig into the recent past (last 60 years or so). If you do, you will I am sure think very differently about gold, even if you don’t think hyperinflation is headed this way.
If I haven’t mentioned before, just 18 months ago, in April 2011, I was a hardcore deflationist, could not see any way gold was not in a bubble, or that inflation, or hyperinflation could be an issue. I was hardcore.
But now I think I am a pragmatist. I was open to think things through. Bloody glad I did,as I now have peace of mind.
Anyway, one can lead a horse to water, etc……. I think you are bright enough to delve in simply to better your understanding, if your position does not change, at least you will have more knowledge, which is only a good thing.
Yes, that’s right. You were once a deflationist calling for doom and gloom 24 months ago. You said the USA was screwed:
http://pragcap.com/why-are-rates-surging/comment-page-1#comment-13717
Now you’re a hyperinflatinoist calling for doom and gloom. You were wrong about the deflation in 2010 and you’re wrong about the hyperinflation now (which you’ve been calling for for a year). 13 months ago you wrote this:
http://pragcap.com/deficit-hysteria-the-debt-ceiling/comment-page-1#comment-39778
The one consistency is a sort of Zero Hedge like end of world mentality. That might be right eventually, but it’s by no means pragmatic, and it certainly hasn’t been right….
Cullen, it is sad to see that in your mind you have a view that a deflationary collapse is somehow different to a hyperinflationary collapse.
Really? You think the outcomes are any different? The only difference between the two is what happens to the currency.
I have now come to the conclusion that you are a one-trick pony, very clued up on the MMT stuff, but on broader monetary/economic issues, you have serious gaps in your knowledge. And sadly it seems with no desire to fill in those gaps.
I will therefore no longer waste my time engaging with you personally.
Okay Gary. Come back in a year when there’s no hyperinflation. We’ll have the same exact discussion.
No, sorry, I won’t waste my time with you anymore.
bit.ly/p4qXw2
Well, I’m pretty confident that once you’re proven wrong you won’t show your face around here anyhow. No hard feelings though. It’s all about understanding our reality. And hyperinflation isn’t in the cards.
I’m very patient.
Gary, riddle me this. Who is the larger holder of gold in the world (over 8000 tons)? I’ll give you a hint, its the same organization that first produced synthetic gold in the 1940s.
http://two.modernmechanix.com/2007/06/16/us-alchemists-make-gold/#more
If Uncle Sam genuinely cared about the price of gold, it could clobber the gold market in a split second with a simple sell at market order for every gold brick in Fort Knox (the Secretary of the Treasury, of course, has the legal authority to buy and sell gold whenever the spirit moves him). Curiously enough– and it would horrify them to realize this truth– Gold investors are bigger believers in America than even T-bond investors. Both are placing bets on the US Government’s record of good faith and fair dealing but only bondholders expect to be paid interest along the way. Naive faith is kind of touching, really.
Honestly, that’s the most ridiculous comment I’ve ever read here, or indeed anywhere. Congratulations on that!
If the US decided to sell all of its gold, it would be cleaned out, The Chinese would no doubt grab most of it, but there are plenty of countries with trade surpluses that would ditch their Treasuries to buy that gold. The US would then be literally broke.
Do you guys ever (ever) read history. This is why the US had to sever the gold backing for gold in 1971, and also why it confiscated its citizens gold before devaluing, because it was in the process of getting cleaned out, and it didn’t want to lose all of its only real wealth.
So, now its just a question of how long the world will put up with your ‘everything for nothing’ policy of $50bln a month trade deficits. The rocky road has been long, but the end is in sight.
Go read some monetary history, you might learn something.
There it is: you think gold is real wealth!! Now that, sir, is the most absurd thing I’ve ever heard.
Gary: 1 – Cullen: 1 (barely)
Ball in the center.
That was a great discussion. A Gold bug and a MMT’r. Both imprisoned in their own pre-constructed believes. I guess both of them learned something in this discussion (but off course they will never admit it).
Too bad you didn’t continue to discussion Cullen. You keep saying that your aim is to enlighten people but you constantly avoid or deflect any debate that doesn’t go your way.
I gladly admitt that both of you gave me some food for thoughs and refreshed some theories I long had forgot about.
I don’t have much time this morning so sorry to be short. If by “deflecting”, you mean I keep referring to my mountain of research on the subject, then yes, this is deflection. http://pragcap.com/resources/understanding-hyperinflation
The thing is, I’ve had these discussions 100 times with Gary over the years. He keeps making vague comments about currency users losing faith in the currency and I keep pointing him to my research which shows, historically, how none of the preconditions for hyperinflation currently exist in the USA. So I keep asking him for a catalyst and he keeps making vague statements about gold and faith. I’d love to see Gary explain his position and back it up with evidence as I have so thoroughly done in my research. But he can’t do it. He’s just falling back on FOFOA’s research which has literally been calling for hyperinflation for a decade now. How long do you have to be wrong before people begin to see flaws in your methodology?
Hi Cullen.
Surely not 100, only maybe a few dozen I think?
Anyway, in my opinion we rarely have a proper discussion, as I find it hard to pin you down. And you similarly find it hard to pin me down on ‘what will cause it’.
Ironically, you have commented yourself (perhaps when drunk) that hyperinflation could happen anywhere in the US, whilst on other occasions you rule it out altogether. Hedging your bets maybe?
As for me, as I just mentioned to Beowulf below, I fully grasp the MMT arguments, and have moved past criticising its proponents.
Something that is irrefutable is that every fiat currency that has ever existed in the world has eventually collapsed on itself. Many many different reasons.
I honestly can’t sit here and tell you which specific thing is going to cause the collapse in the US, but what I can see happening (already) is money moving down Exter’s pyramid (google it if you don’t know what it is), as confidence is lost in the higher levels.
Who here has confidence today to go and buy some MBS-bonds? Or some CDS on Greece? Or some AIG-bonds? Or some Californian bonds? As matters take their course, all of these layers of crap will be ditched.
Now, if the Fed and the Treasury stood back, and allowed the holders of that junk to eat their losses, HI would be avoided. But they can;t stand back can they? If they had stood back in 2008/09, the system would have collapsed. It is a house of cards.
So, they feel they have no choice but to buy that junk with newly created base money (not credit money), and all of that base money has just one thing backing it: a paper dollar.
We will see, indeed we already are, the price of real-world goods rising at 10% + a year against the dollar. Confidence will erode in the dollar. We will have further crises, bank failures, it will all be covered by the Fed.
The world, the American people, everyone (well, maybe apart from those that lurk here!) will see that the dollar is being trashed, and will move away from it. And it will accelerate, all the while gold is moving higher and higher, more people wanting it as a store of value.
At some point, trust in the Fed & the government will vanish, and people will then demand real cash, and again the Fed will print it.
So, in summary, it is a political currency collapse this time. Perhaps no external pressures, just the need for government to keep its own gravy train and the system going, refusing to admit the game is up. That will destroy the dollar. I am sure the rest of the world will stand by and watch, or even make little moves (bilateral trade agreements without the dollar for example) to hasten the collapse, as sadly America has few friends in the world these days.
So, there we are, that is how it will happen, and my expectation is the world goes down hard later this year, they manage to QE it back up again, but not for long, and the next time down it will be the end, maybe 2015 I think.
Sorry its not sooner, so we can wrap up this debate!
But I will perhaps post some links from time to time to help the curious-minded to dig into the global evolution that has beeen happening (wait for it) for the past 60 years!!
No hard feelings though, you’re very hospitable, and I think it reflects your deeply hidden doubts? Just guessing.
Regards.
Gary,
Thanks for the kind response. I would only add that there seems to be a huge gaping hole in your theory. You say:
If that’s true then why have Treasuries rallied so enormously? Why did the Fed have to extend swap lines for USD loans to foreign banks? If the demand for US paper is on the decline due to the govt gravy train then why is the demand for US paper so high? If demand for US paper were on the verge of collapse then we wouldn’t see 35% rallies in Tsy bonds or hundreds of billions in swap lines. The facts clearly refute your rather vague ideas.
I’m thinking you haven’t had a look at Exter’s pyramid because of your time constraints.
Here is a link:
http://atyantcapital.com/precious-metals/moving-down-exter%E2%80%99s-pyramid-of-liquidity/
Treasuries are quite a way down the list. My point is exactly made by the ‘herd’ moving towards treasuries, they are moving down the risk scale.
Also, I don’t think anyone would dispute that yields are being kept down by QE programmes. Another factor in the confidence game, as people realise the government is monetizing the debt.
So, we just need to keep an eye on the movement of money down that pyramid. What happens when 3-month bills go negative? Will savers/investors park their cash for a negative nominal return, when inflation is at 2-7%? How long will that last?
Please read Bill Gross’s newsletter out this week, even he, the bond king, is starting to grasp where this is headed.
Not long, as people will swictch to other assets (real cash in note form), plus gold, maybe silver. One day, suddenly, Fed money will no longer be seen as safe.
As for the Fed swap lines, again, the dollars they are sending are to make good banks that simply should be failing. The Fed is increasing base money to cover dollars debts being extinguished in Europe, only a negative thing for the value of each dollar in existence.
Ironically, as the dollar dies, you will see DXY rise quite rapidly, and gold fall, but at that point the ‘markets’ will no longer be reflecting the physical plane.
Please, when you have time, do some reading, let yourself think about opposing views, as there are more and more people doing so, and that in itself is part of the road to collapse, once a tipping point of no-confidence is reached, it is game over. You can be on the right side of the transition with some physical gold though, so please get some.
Come on Gary. That pyramid is ridiculous. You really think gold is the most liquid asset in the world? I can’t even use gold at my local corner store. How could anyone think it’s more liquid than USDs?
Why do rates rise every time QE starts? And why do they fall every time QE ends? This seems to contradict your QE theory. Bill Gross has misunderstood QE worse than anyone on the planet. Even he admitted his mea culpa last year.
I am trying to be very open minded about all of this. I am just not convinced that you’re right….
Fair point, and I wouldn’t use the word liquidity at all. Maybe risk.
I can’t explain it any better than this post (just grit your teeth and open your mind and dive in, honest it won’t hurt!!):
http://fofoa.blogspot.com/2009/11/gold-is-wealth.html
Gold is money. It is definitely not wealth. Real wealth is time, happiness, freedom, good friends, good family, health, knowledge, productivity, real output, etc. Gold is just a means to these ends. No different really than paper money. Except, to the IRS, gold is not even money.
Confusing money with wealth is a horrible mistake that will lead many man astray in his life….
Yes, you could consider gold as money, but it most certinly is also wealth!
Real wealth is time, happiness, freedom, good friends, good family, health, knowledge, productivity, real output, etc. Gold is just a means to these ends.
I’d prefer not to get into philisophical debates around this sort of thing, as I’m only to help others get the monetary change that is-a-coming. I agree that it is pointless being a friendless billionaire, that’s as far as I’ll go down that road though.
If you consider gold is money, start to research why the US still has 8,000 tonnes of the stuff, and maybe read some of these links at this blog, as to the US government’s and other global entities views. It is a few years ago, but it will whet your appetite to know more I hope:
http://anotherfreegoldblog.blogspot.com/2012/01/us-gov-one-memo-99-memorandum-from.html
If money is wealth then Zimbabweans must be rich! If gold is wealth then all we need to do is dig more rocks out of the ground. Obviously, those ideas are horribly wrong. Unless you think money is wealth.
Yeah, just me, the central bankers, the Arab world, and a few billion folk in Asia who spotted the US default in 1971.
We’re a mad bunch for sure.
If the US decided to sell all of its gold, it would be cleaned out
OK, the Dept of the Treasury owns the equivalent of more than 3 years global production of gold. If 8000 tons were dropped on the market one quiet Friday afternoon, you think the gold market would keep chugging along? Interesting.
Like I said the truth is pretty horrifying. Speaking of which… Gary, this song is for you.
http://youtu.be/2R1jiVcIGcg
As with our host here , you simply don’t understand what is happening in the wider world.
Honestly, I think MMT perfectly descibes the monetary system as it is, but you guys ignore (and maybe don’t even know of) such things as ‘exorbitant privilege’, and the way the world’s superpowers are moving away from the dollar and towards a fairer system for the whole world.
And yes, if the US placed its gold on the market, all in one go, perhaps the price would temporarily fall, but it would be totally cleaned out. Please do some research around the events of Nixon closing the gold window, you will understand why.
Actually, we acknowledge that the CAD is a bigger problem than MMTers admit. That’s part of why we branched off to form MMR. Maybe you missed that controversy?
I don’t follow the internal MMT debates sorry.
But if you recognice that the trade deficit is an issue, then I think that is a good thing.
I think we have an inflation and devaluation in Harvard degrees and Nobel prizes.
As TPC has often stated, the currency is a creature of the users first, the state second. In that case, what does debt/GDP really mean?
Cullen,
Having just read your two 1/30/12 posts, I have a question. Do you have any posts on why politicians/government/renowned economists continue practicing and preaching bad economics?
I understand that the gold standard and history dictate here, but why no evolution in the thinking and acting?
I think the answer to this question is important in forecasting. As you point out, Krugman and Ferguson have come around to some degree. If MMT continues to gain in acceptance, the policy implications are significant.
Do you agree with this?
And do you have any thoughts on why “important” people hang on to a bygone era?
EF
I touch on it in my primer. Have you read it?
BTW Michael Pettis’ thoughts on reserve currency … it’s not an “exhorbitant privilege” to be able to build up massive debts as countries push their trade surpluses on to you. It’s only good for a small segment at the top.
And that’s the point, again an other power-hungry elites game. But people will still go vote lol.
REALLY glad I didn’t get into Harvard right about now.
You and I both know that’s not true
That said, Harvard is the bastion of the old guard. Has been for centuries. One cannot expect economic thought that might overturn the status quo to come forth from it. So, Niall fits right in.
U. of Chicago is worse – I’ve labeled it a ‘bastion of orthodoxy’; and Left Coast/Silicon Valley or no, Stanford doesn’t sound much better.
Still, the Academe has a vital role to play. One reason, differences aside, the UMKC folks need and deserve moral support.
Are you guys sure he’s a historian?
He doesn’t seem to remember what happened to that other “superpower” of the last century and its super debts. Nor the ones before that ….
Yeah, I do. The UK defaulted on its gold obligations, and in stepped the US, with all the gold.
But you forget, the US has already defaulted on its gold obligations, and therefore has nowhere to go.
Go do some reading.
Cullen-
Is this really suprising to you after all of these years?
All of these guys who have been wrong will come around to it eventually.
Ferguson is one pompous fwllow. I’ve seen quite a bit of him and his analysis is basically of the Ken Rogoff type. He says once a country reaches a certain level of debt it is inevitable that decline will set in. He says the US is going to be like the UK and retreat from its imperial aims and contract into profile more fitting of its size.
The apparent turnaround of the economy may have him hedging his bets at this point as he was expecting rampant inflation. He is probably coming to his sense on that one.
“it may default on liabilities in Social Security and Medicare, in fact it almost certainly will.
But I think holders of Treasuries can feel a lot more comfortable than anyone who’s holding European bonds right now.”
A couple of corrections.
First, future Social Security and Medicare payments are not considered liabilities by the FASAB, the accounting advisor for the federal government.
Treasury bonds are backing those future payments, although all Treasury bonds are not created equal.
There are 4 levels of obligations the federal government has, ranging from strongest to weakest to fulfill.
The strongest is explicit liabilities, such as debt held by the public, so these Treasuries should be relatively safe.
The fourth level of obligation is implied benefits which include future Social Security and Medicare benefits.
These benefits pose more risk to the bondholders than the tier in level 1, debt held by the public.
Don Levit
Repeating a comment/questions from another post on the role of Fed swap lines in supporting the USD as GRC without increasing the CAD:
If the Fed swaps dollars, for say Euros, this would make dollars available (while if the Fed charged a premium over the exchange rate, actually decreasing the US CAD).
Does this then make the Eurosystem effectively an issuer of dollars? (Since it can issue Euros, which the ECB can swap for dollars. This also raises the question of how/by whom Euros are issued, about which I am still unclear.)
More generally, could this ultimately lead to a situation where it would make sense to view the Fed and the other central bank participants as a single entity managing a supranational currency system?
I had read the primer, but just reviewed it again. I think “How Could It be Possible that Our Leaders Don’t Understand This” is incomplete.
First, at its core, this is not complicated stuff. I’ve explained this concept to clients. There is a printing press. Therefore, we will never run out of money. The only risk is money can run out of its value. And that is likely not an issue for the forseeable future.
Second, the relic of a gold standard era makes sense, and I’m sure is true to some degree, but it was 40 years ago. Even if they still teach it.
Your third point, quite frankly, is a little over my head. But I think that’s the point. What change should I demand? I understand the issue and the problem, but I don’t understand the “solution.”
And I think that is, perhaps, the biggest problem with our leaders. MMT is a (somewhat complicated) problem without a solution. Maybe I’m missing it, but there does not seem to be a sufficient model for MMT.
To use your analogy of the faucet: How long can you turn the faucet on without the bathtub overflowing? If someone were able to model that and give the public some level of security based on past experience, the public might be willing to accept the new “problem” because it comes with a “solution.”
These ignorant politicians keep talking about the wrong problem. But they talk about that problem because it has a solution.
Maybe I’m missing the point. Maybe there is a somewhat clear model, and that’s part of the “complicated” that you talk about. I’m no economist.
Thanks for your time and continued education.
Generation X is starting to wake up to the reality of what Ferguson believes — the ‘default’ will take the form of reduced Social Security and Medicare benefits.
That is one way that today’s debt will create lower standards of living in the future.
Why should it? Because the politicians think we can’t “afford” them? That’s the only hurdle here.
“”a mixture of growth and inflation”" ? Yes, that’s what every government would like. But governments aren’t in control (anymore).
“The more I’ve thought about it, the more I’ve realized…” What the heck does that mean? Shouldn’t he be constructing models or looking at data and drawing solid conclusions based on real-world conditions? He makes it sound like he’s sitting in a yoga position pondering this stuff.
@ Gary-
I killed my day today…
Funny really…..we are on totally different sides of this. Oh well. I’m sure it will all work itself out.(I wish I would have said that 4 hours ago)
I hope our leaders and yours do a better job of protecting good stewards of capital and allowing markets to take care of those who don’t.
Best to you…yes..I did get my panties in a tizzy today..didn’t I.
No, I don’t think we are on different sides. I also think maybe we have the same job!
My email is on blogger, find my comments on Fofoa if you wanted to drop me a line!
Cullen,
Please read up on the Triffin Dilemma. Write an article on it. You’ll be surprised what you’ll learn.
China is now entering into more and more bilateral non-dollar denominated trade agreements. They did this with Russia, India, I believe Turkey, and now the UAE:
http://www.commodityonline.com/news/china-and-uae-ditch-us-dollar-will-use-yuan-for-oil-trade-45444-3-1.html
Brazil also wanted non dollar trade with India. It’s a real trend that’s growing.
Let me give you a hint. It will become increasingly more difficult for the US to export its inflation. Also, I am not an extreme hyperinflation gold bug. I believe in nuance, I believe in long term trends, and I also analyze using a multidisciplinary approach – I don’t ignore resource constraints, geopolitics, etc… which many economists do. We can’t analyze things in a sterile environment. The world doesn’t work that way.
You’re overly focusing on the insolvency of the US issue – which I agree with you – I understand MMT. But there’s something else going on. We live in a world of limited resources. We live in a world where those resources are purchased with various currencies. If the make up of those currencies changes, and it is changing – there are real consequences to that.
Not sure that we disagree. MMR disagrees with MMT on the balance of payments constraint. We don’t say that a persistent current account deficit doesn’t matter. I think it does matter.
Mosler is wrong, his “exports are a cost” like if it were an issolated issue is now starting to show it’s the wrong approach.
Why? Because all the paper the rest of he world accepted from USA, now its realizing that products & services won’t be able to be consumed from USA. A large ammount of paper which has no real backup in future production.
I’m not talking hyperinflation scenarios (yet), but I see a long stagflationary future in the USA when people starts to sell their accumulated dollars and world trade in dollars is increasingly diminished. In fact there has been real stagflation since 2009 for the majority of the population (disguissed as growth for the 1% and by economists and their clueless statistics), it already has started.
BTW this is the way you ‘default’ being a monoply currency issuer in a fiat system. Effects (all that matters) are the same: increasing poverty and inequality and diminishing standards of living.
Both USA & Europe are suffering through this.
What I was trying to get at in my questions above is, would it be possible for a group of currencies to function as a floating reserve (as a logical extension of a truly free-floating exchange system)?
This would entail a group of powerful central banks to operate in concert (acting in a sense as a single entity, with at some point currency ‘swaps’ operating in any direction needed to balance the system).
Could this evolve smoothly (ie without serious deterioration in the US – rather as a reflection of increasing strength in other parts of the global economy? My bet is that if the US goes down, the other major players do too – and probably vice versa.)
(Establishing a conceptual framework for addressing such issues seems a serious need at this point – which ‘Monetary Realism’ could help to fill.)
‘What I was trying to get at in my questions above is, would it be possible for a group of currencies to function as a floating reserve (as a logical extension of a truly free-floating exchange system)?’
Colin, no it wouldn’t. But gold, priced purely on a physical basis (no Comex, LBMA, GLD etc) would fit that bill perfectly.
Just head over to Fofoa’s blog, and get reading.
@ Gary_UK
Europe hasnt taken any medicine, the ECB balance sheet is larger than that of the FED, plus marked-to-market situation of assets is way worse.
We europeans have been creating a bigger & bigger mess by pretending to take medicine but not doing it either doing the contrary and steep with real bazookas.
But it’s all a political game between european elites and we are just pawns.
No, it’s a monetary game between the central banks.
The Eurosystem is forcing countries into austerity (reality), whilst forcing gradually bondholders to take their losses.
All the ECB is doing with its balance sheet is keeping the banks liquid, and that is what central banks are supposed to do (not sovereign balance sheets).
It’s a deep subject, you need to go read elsewhere to get it.
There is nothing deep about it, what you call ‘liquidity’ is recapitalization by the means of the sovereigns for basically broken banks with fresh euros & reserves.
And it’s all rigged, bonds with liquidity and liquidity with manufactured solvency. Apparently is right to manufacture solvency for banks but not for states, talk about bias.
I realise you don’t like it, I can’t say I do either, but a central bank can’t sit by and watch the banking system collapse can it? I suppose it could, but how would that help anyone?
Personally I’d allow the banks to go bust, but that’s just me!
So, yes, call it recapitisation by all means. But don’t forget, even with a huge balance sheet, just look at line 1 on the asset side, for all to see, revalued every month.
If all of the shitty ‘assets’ crash and burn, including overseas debt, that item on line 1 will fly to the moon (not if, when), and the Euro will end up nearly 100% reserved with that one asset. Have a look, see what you see.