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Jim Cook



Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

Best of Bill Buckler
November 18, 2010
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The last time that the world’s central bank – the U.S. Fed – actually did “take the punch bowl away’ was three decades ago.  This happened at the end of the 1970s under a threat from U.S “trading partners” that they would dump the U.S. dollar unless the Fed stopped creating more of them out of thin air.  In late 1979, Fed Chairman Paul Volcker returned from “an emergency” meeting in Belgrade to announce that the Fed would stop targeting U.S. interest rates and start targeting the quantity of U.S. dollars.

The shock on Wall Street was profound.  U.S. intere4st rates soared, as did the price of U.S. gold.  U.S. world paper markets slumped dramatically.  The result was a deep and protracted U.S. recession which lasted until mid 1982.  That short period between late 1979 and mid 1982 is the only time since the short-lived post WWI recession in 1920 – 21 when the Fed has not manipulated interest rates.

This manipulation of interest rates is not confined to the U.S. Fed of course.  All central banks do it as a matter of course.  It is an essential feature of what is called “monetary policy.”  But what the Fed does matters most because the U.S. dollar has been the world’s most important currency since the mid 1920s and the world’s sole “reserve” currency since the mid 1940s.  Up until 1971, however, there were limits beyond which no central bank (including the Fed) could go because the global financial system still preserved a direct link to Gold through the U.S. dollar’s “convertability” at U.S. $35 per troy ounce.

The Balances – And Imbalances – of Trade:

When currencies are directly or indirectly convertible into gold, a “chronic” trade or current account deficit cannot be maintained.  As the imbalance grows, the debtor nation will find that its real “money supply” – its gold – dwindles as creditor nations demand payment in money instead of money substitutes.  At some point in this process, the debtor nation cannot support this drain.  If left alone, the market rebalances the situation as interest rates rise.  This rewards savers, discourages investments which are revealed to be unviable and encourages capital (including gold itself) to flow back into the debtor nation.  In time, the imbalances decline and disappear.

When there is no link between currencies and any means of “final payment,” trade and current account imbalances are inevitable and always become chronic.  This is true for all nations, but its impact is greatest on the nation which provides the currency which is globally used as a “reserve.”  This currency is of course, the U.S. dollar.  In his inaugural address in January 1961, President Kennedy pointed out that over the previous decade (since January 31, 1951), the U.S. “foreign payments deficit” was U.S. $18.1 billion.  What he did not point out was that by 1956, foreign holdings of short-term U.S. debt paper exceeded U.S. holdings of gold at U.S. $35.  By 1964, these foreign holdings were double U.S. gold holdings.  By the end of the 1960s, the U.S. (and the world) was faced with a stark choice.  The U.S. dollar could be massively devalued against gold.  French economist Jacques Rueff suggested a tripling of the redemption rate to U.S. $105 per ounce along with an immediate cessation of U.S. budget deficits.  The other alternative was for the U.S. to renege on payment altogether by ceasing the convertibility of the U.S. dollar3e into gold completely.   On August 15, 1971, President Nixon chose this course.

The rest is history, a history which includes chronic increases in the total stock of money (inflation), chronic U.S. trade and current account balances, incessant government intervention into all facets of all economies and chronic U.S. budget, trade and current account deficits.  Because the world’s monetary system has worked on the basis of there being no final means of payment for almost 40 years, the payments owed have now ballooned to appoint which no economist or politician of the 1950s or 1960s (or 1970s) could ever have imagined.  What they could imagine (and some foresaw with penetrating accuracy), is the simple fact that system of global fiat money cannot be maintained.  What is now slowly dawning on the world is that they were right.  The G-20 shambles is proof positive of that.

The Successful Rescue – 1979 – 1982:

When the U.S. Fed under Paul Volcker stopped targeting interest rates in late 1979, they stopped trying to hold U.S, interest rates below levels set by the markets.  The result, of course, was that U.S. interest rates soared.  They soared because there was now no impediment which prevented them from reflecting both the risk of a depreciating currency and the risk of the debtor reneging in part or in whole on the debt.  Until late in 1980, these risks were also reflected in the U.S. dollar price of gold which soared to U.S. $850 in January of that year and had a secondary rally to U.S. $720 in September.  But while all this was happening, the U.S. dollar had stopped falling in the international currency markets simply because high U.S. interest rates were compensating U.S. dollar and U.S. dollar-denominated debt paper holders for their risk.

At the time when this was happening, U.S. Treasury funded debts were hovering just below U.S. $1 trillion level.  Interest payments could still be met, albeit with some difficulty.  But as these high interest rates persisted, the global, attitude towards the U.S. dollar changed profoundly.  All of a sudden, it was possible to earn a very good rate of return on U.S. dollar investments.  Even better. U.S. Treasury debt paper was selling at rock bottom prices on the secondary markets and had been falling for a decade.  With the dollar now stabilized and indeed starting to go up on the currency markets, everyone knew that U.S. rates would start heading down at some point and when they did, the prices of Treasury paper on the secondary markets would soar.  The world was enticed back into U.S. paper with a rush, starting in 1982.

On the surface, this looks like the “classic” means by which a chronic balance of payments deficit is resolved.  But it was not.  There was still no “final means of payment.”  The entire financial world still relied totally on the “full faith and credit” of the U.S. Government.

The Failing Rescue – The GFC – 2007 To Date:

In 1980 – 81, the U.S. Treasury was in hock (on the funded debt side) to the tune of just under U.S. R 1 trillion.  Today, the U.S. Treasury is in hock (on the funded side) to the tune of just under U.S. $14 trillion.  In 1980 – 81, the U.S. was still an international net creditor nation.  It became an international net debtor nation in early 1985 and has long since become the biggest international debtor the world has ever seen. In 1980 – 81, the U.S. central bank let the market reflect the true financial status of the U.S. by ceasing to interfere (for a short time) with interest rates.  In December 2008, the U.S. Fed under Ben Bernanke got rid of interest rates altogether by lowering their controlling rate to 0.00 – 0.25 percent.  In 1980 – 81, Fed Chairman Volcker faced the stark choice of letting interest rates free or throwing in the towel and directly monetizing the “reserve” behind the dollar – the debt issued by the U.S. Treasury.  He chose the former course.  In early 2009, Fed Chairman Bernanke faced the same choice.  The intervening three decades had seen U.S. debts increase to a point where the system could literally not afford any interest rate at all.  He chose the latter course with “QE1.”  On November 3, 2010, he compounded this by ushering in “QE2.”  The introduction of QE2 is an acknowledgement that QE1 failed.

In the lead up to the announcement of QE2, Mr. Bernanke stated publicly that he hoped to increase “inflationary expectations: amongst the American public to induce them to borrow and spend now before prices increased further.  He has since reversed his field, too late to make any difference.  U.S. cost of living increases already bear no resemblance to the official figures so beloved of the Fed.  To give just one example, the prices of ingredients in many staple packaged foodstuffs sold in the U.S. have jumped 20 – 30% since August.  U.S. retailers are at the point where they can no longer keep prices down without suffering actual losses.  The inflation is rampant.  The pressure under prices is a pent-up volcano.

The only incentive for the rest of the world to hold U.S. dollar debt paper is that they already hold so much of it.  The only rationale for the U.S. dollar to remain as the world’s reserve currency is that the global financial system is set up on that basis.  The only think holding the system together is fear of the consequences of dismantling it.  But the world can now seek at least in outline, that three years of U.S. stimulus has just made things worse.  There has got to be a better way, but what is it?


Ó 2009 – The Privateer

(reproduced with permission)


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