Last Lap for Bretton Woods

Re: Last Lap for Bretton Woods

C1ue -

You are way smarter than I am on economics, so please cut me some slack here on my criticism. You wrote:

< Substitute overconsumption for war debts...voila! >

It's really important however that one recognize, one absolutely cannot substitute overconsumption for war debts. One is voluntary, with options for change open within it's future, the other involuntary, trapped by past events. And people in those two situations really can't finesse that difference too much at all.

This is part of the what now seems fashionable around here - to equate many aspects of Weimar to the US. There are one or two limited parallels, but that's about it. I think Metalman at one point tried to point that out too, elsewhere.

[c1ue]

Re: Last Lap for Bretton Woods

if this is a replay of the '30s we must ask which nation holds the place of germany - with its unbearable burden of war debts hindering its economic growth.

Pogo's wisdom as always applies:

we have met the enemy, and he is us.

Substitute overconsumption for war debts...voila!

I note that the consensus on iTulip seems to be that the rest of world will sit idly by while both their export market to the US is eroded and the accumulated work of the past 20 years is inflated away - I'm not sure I agree. As I noted previously, all the ROW must do is stop lending money. Present debts are such that even this action would have clear effects - and bombing offshore production centers still doesn't put the Tonka truck under the Xmas tree.

As for Russia - while there is always the probability of politicians exploiting native Russian xenophobia, this time around there is not a nearby danger.

China is far away and apparently not needing Siberian land.

Europe is dependent on energy.

Iraq is neutralized from a geopolitical perspective, while Iran is severely restricted by the US fomented economic and political sanctions.

Only Turkey of all of Russia's historical enemies is still available to cause trouble, and they in turn have their own internal secular vs. theological state, plus minority unrest issues.

More likely the US would pick a fight with Russia to 'free the world from XXXX'

[fogger]

Re: Last Lap for Bretton Woods

The Euro and all of today's currencies have the same problem: pure fiat. (Even the Swiss Franc decoupled from gold in 2001.) As faith in this trust-based system is destroyed, people will demand something solid: gold/silver.


Looking at this through purely national lines is a mistake. Bankers are not national. The danger is when the solution is presented to create a single global currency issued by a world central bank (backed by gold of course).


What better way to consolidate power? Destroy faith, offer solution, rule the planet. If I owned the BIS, that's what I'd do. Ridding myself of those pesky central bank satellites stealing my profits.

[GRG55]

Re: Last Lap for Bretton Woods

...We could be coming up on a kind of pre-World War I period, where powers draw battle lines and alliances for their strategic interests...

That's along the lines of Niall Ferguson's views in War of the World.

http://www.amazon.com/War-World-Twen...6223096&sr=1-2

[metalman]

Re: the euro

india has a single polity, fractious though it may be. the federal institutions of the eurozone are very weak.

paradox... federal institutions in the usa are very strong, thus able to inflate and depreciate. in the global mess... live in the usa but own german bonds! worst... live in germany and own usa bonds (in the winter while putin turns off the heat). worst of all possible worlds... live in france and be an immigrant.

spruced the old museum up recently but the tribes of europe will go at it again some day.

[jk]

Re: the euro

India is as widely varied as Europe - linguistically (from Tibetan to Tamil to Pushtun, from Burmese to Hindi, with Arabic and/or Persian influenced dialects of every one) and culturally (with cultures varying between languages, and sometimes completely different cultures[*] within the same language group)

than Europe, IMHO - but the rupee seems to do well enough, with many fewer resources than Europe has.


[*] (along with north/south, east/west, dark skin / light skin bigotries within and between groups)

india has a single polity, fractious though it may be. the federal institutions of the eurozone are very weak.

[Spartacus]

Re: the euro

India is as widely varied as Europe - linguistically (from Tibetan to Tamil to Pushtun, from Burmese to Hindi, with Arabic and/or Persian influenced dialects of every one) and culturally (with cultures varying between languages, and sometimes completely different cultures[*] within the same language group)

than Europe, IMHO - but the rupee seems to do well enough, with many fewer resources than Europe has.

2 more pieces on the euro:

1st a remark from bill fleckenstein:

"The euro is a flawed piece of paper, just not as over owned, nor as flawed as the dollar....someday it too will have problems, but that may be a while down the road."




2nd- here's ambrose evans-pritchard's latest

Are we primitive euro-haters?

Posted by Ambrose Evans-Pritchard on 27 Nov 2007 at 07:50


In answer to all those posts suggesting that we will use any piece of dirt to besmirch the euro, let me reply.

Politicians were told that the euro would lead to a crisis
It is true that a substantial army of British Eurosceptics kept insisting until the eve of E-day in January 1999 that the single currency would never get off the ground.
They then repeated their dire claims as the euro plummeted to 82 cents against the dollar, predicting a bond crisis.
Well, yes, but I was not among them, and nor were many of us diehard critics. The beauty of the internet (and often the curse, for journalists) is that you can check these things.
The article below was one that I wrote in late 1998, after a visit to Rome to talk to the Italian central bank and Treasury – since Italy was then viewed as the weakest link.
The euro will work - that's the problem
My point is – and always has been – that launching the euro was the easy part. The test would be 1) whether countries with vastly different structures, trade patterns, wage bargaining systems, debt structures, sensitivities to interest rates, productivity growth rates, and historic inflation rates would diverge so far over time that this would threaten the viability of the system.
2) Whether EMU could weather a bad storm without single treasury and debt union to back it up.
3) Whether the eurozone bloc had the “solidarity characteristic of a nation” (the Bundesbank’s term) required for it to endure through bad times.

[*] (along with north/south, east/west, dark skin / light skin bigotries within and between groups)

[metalman]

Re: Last Lap for Bretton Woods

Of course not. But that doesn't mean we can't speculate like we were sitting around a bar drinking and discussing it. ;)

another round, barkeep! things are sleepy tonight at the itulip bar and grill.

To me, this is going to be the most interesting part of the future United States and how it acts. What's the U.S. and its population going to do when it realizes it's no longer the superpower? How's it going to act when it has to treat China for example as an equal? China is clearly rising in power and I think most people realize it, but very few common Americans or politicians in public would ever think they'll become our equal in economy, military, geopolitics the way the Soviet Union once was.

Whether we treat it with grace and acceptance the way the British did after their failure at Suez in the 1950s or deny it all the way down and refuse to accept truth is going to have a large determination in my view of how the world will turn out after all this crisis is done. I personally expect us to deny it and we're going to have an even greater reckoning.

sure & 15 years later...

Britain Gaining Time; Massive I.M.F. Loan Allows Breather In Fight to Overcome Economic Woes
By CLYDE H. FARNSWORTH
May 13, 1965, Thursday

Section: BUSINESS FINANCIAL, Page 51, 910 words

LONDON, May 12 -- With a massive new loan from the International Monetary Fund, Britain has lost some of her economic sovereignty; but she has gained time in the attempt to solve her economic problems.

that's what happens when the colonies stop paying the bills.

So who's the weakest kid on the European bloc whose politics and citizenry can provide the earliest insight to what will happen there? Spain?

spain on the top of the itulip list. haven't seen any updates recently, tho.

Russia is a kind of oddball in this whole situation. I would call them a #4 power in the world right now, behind the U.S., China, and the EU. They have a strategic alliance with China that is mixed, and they supply resources to the EU and are using it to their strategic benefit. The EU is trying to limit their influence through a kind of buffer region of sympathetic states in Ukraine and Georgia for example, not to mention the EU want missile defense. However, I severely question the long-term potential of the EU when the member countries are required to take a bullet.

how about those riots in france? a strong euro and recession ain't going to help matters.

We could be coming up on a kind of pre-World War I period, where powers draw battle lines and alliances for their strategic interests and no one trusts anyone else.

that's why these guys are so friggin desperate to avoid a recession. they'll print & print & print until the cows come home. inflation sucks but war sucks more.

[jk]

Re: the euro

2 more pieces on the euro:

1st a remark from bill fleckenstein:

"The euro is a flawed piece of paper, just not as over owned, nor as flawed as the dollar....someday it too will have problems, but that may be a while down the road."




2nd- here's ambrose evans-pritchard's latest

Are we primitive euro-haters?

Posted by Ambrose Evans-Pritchard on 27 Nov 2007 at 07:50


In answer to all those posts suggesting that we will use any piece of dirt to besmirch the euro, let me reply.

Politicians were told that the euro would lead to a crisis
It is true that a substantial army of British Eurosceptics kept insisting until the eve of E-day in January 1999 that the single currency would never get off the ground.
They then repeated their dire claims as the euro plummeted to 82 cents against the dollar, predicting a bond crisis.
Well, yes, but I was not among them, and nor were many of us diehard critics. The beauty of the internet (and often the curse, for journalists) is that you can check these things.
The article below was one that I wrote in late 1998, after a visit to Rome to talk to the Italian central bank and Treasury – since Italy was then viewed as the weakest link.
The euro will work - that's the problem
My point is – and always has been – that launching the euro was the easy part. The test would be 1) whether countries with vastly different structures, trade patterns, wage bargaining systems, debt structures, sensitivities to interest rates, productivity growth rates, and historic inflation rates would diverge so far over time that this would threaten the viability of the system.
2) Whether EMU could weather a bad storm without single treasury and debt union to back it up.
3) Whether the eurozone bloc had the “solidarity characteristic of a nation” (the Bundesbank’s term) required for it to endure through bad times.
As Jon Livesey and others have pointed out on my last blog, the euro-zone is not an “optimal currency area” – OCA in the jargon.
Since it has no central treasury, it cannot spread money from vibrant regions to depressed regions to cushion the blow.
These “fiscal transfers” happen automatically in the US through social security payments, federal assistance, etc (DC takes 20pc of GDP. Brussels takes just over 1pc, and it is banned from using it to smooth ups and downs) .
And since the euro-zone is a linguistic Babel, it lacks the migrant flows that act as a social safety valve. Yes, we all know that unemployed French youths come to London, and 500,000 Poles are in Britain, and that certainly helps.
But will a 38-year old German car worker pick up sticks and migrate to Spain to start a new working life in Valladolid. Not likely.
In fact, we know that there is less migration between regions within the borders of Germany, or France, or Spain, or Italy, that there is across the entire US.
There is a school of thought that the US is not an optimal currency area either, and that Americans would be richer if they had a New England dollar, a Southern dollar, a Prairie dollar, etc. Possibly.
But the US is so obviously a unified nation and democracy that the political benefits of a single Greenback vastly outweigh any quibbling points over efficiency.
Can this apply to Europe? Well, the original architects of EMU saw it as a means of forcing the pace towards a European proto-state – disregarding the advice of their own economists that a currency straddling the Latin and Germanic blocs could not work until they had brought their economic, commercial, and legal cultures into alignment – a task that takes decades.
The politicians were told that the euro would ultimately lead to a crisis. They did not care.
Indeed, they saw the uses of pushing events to a head – as Romano Prodi candidly admitted as Commission president -- hoping for a “beneficial crisis” that would then enable Brussels to push its agenda, taking over parts of fiscal policy and establishing the beginnings of a debt union.
The euro was to be the midwife of the federal state.
We will see about that. I suspect that it will be the midwife of disorder, leading to an existential crisis for the European system.
I don’t know when this will occur, but I suggest that Club Med’s loss of unit labour competitiveness against Germany since 1995 – 20pc for France, 30pc for Spain, and 40pc for Italy (Eurostat data) – has gone beyond the point of no return. We simply await a slow motion train-wreck.
It feels to me like the period from early 1991 to September 1992, when sterling and the lira were at last blown out of the ERM.
You could see that the structure was unsustainable.
You could see that Germany was overheating, while Britain was heading into a housing slump, and that Britain’s M3 money supply growth was slowing faster than it had between 1929 and 1931 – and that if had we not been rescued in time by George Soros, the British economy would have spiralled into depression. (Sweden hung on for another two months or so – with overnight interest rates at 500pc – and did in fact go into depression, with two major bank failures).
Yet the consensus kept pretending that nothing was wrong. You learn to distrust consensus.
Yes, I know: EMU is not the ERM. The political investment is much greater, the stakes much higher. But that means the fever will rise even higher before the bubonic boil is lanced.
So yes, I have been repeating – like a stuck record, perhaps – that this will all end badly. But only once the divergences have been stretched to snapping point. We are not there yet.
How it all unfolds will depend on countless different decisions by different players, above all Berlin and the Bundesbank.
If the German people are willing to tolerate a life of inflation at 4pc, 5pc, 6pc, and perhaps even threatening to rise beyond that – then the day of reckoning can be put off for a while.
But will they tolerate any such thing?

http://blogs.telegraph.co.uk/busines...nov07/euro.htm

[metalman]

Re: Last Lap for Bretton Woods

In such a scenario, wouldn't there be serious deflation as opposed to inflation?

recall he's said elsewhere that if the dollar falls by 1/2 while demand falls by 1/3 still inflationary, and grg55 said somewhere that production can fall even faster than demand as projects get pulled.

[rj1]

Re: Last Lap for Bretton Woods

To answer your question, no one can know exactly what we'll wind up with. So much depends on how acrimonious the negotiations become, and that depends on increased nationalism, and that depends on the depth of a future U.S.-centric global recession.

Of course not. But that doesn't mean we can't speculate like we were sitting around a bar drinking and discussing it. ;)

One thing is certain, that the current multi-polar global military power structure is inherently less balanced and stable than the bi-polar structure that emerged after WWII that allowed the U.S. to shape the international monetary system. It wasn't much of a negotiation at Bretton Woods; terms were more or less dictated. That will not be the case this time.

To me, this is going to be the most interesting part of the future United States and how it acts. What's the U.S. and its population going to do when it realizes it's no longer the superpower? How's it going to act when it has to treat China for example as an equal? China is clearly rising in power and I think most people realize it, but very few common Americans or politicians in public would ever think they'll become our equal in economy, military, geopolitics the way the Soviet Union once was.

Whether we treat it with grace and acceptance the way the British did after their failure at Suez in the 1950s or deny it all the way down and refuse to accept truth is going to have a large determination in my view of how the world will turn out after all this crisis is done. I personally expect us to deny it and we're going to have an even greater reckoning.

Back in 1990 I read the first piece I recall seeing that attempted to forecast the outcome of the post-Soviet multi-polar world in the article Why We Will Soon Miss The Cold War by John J. Mearsheimer (The Atlantic Monthly; August 1990).

There is something elementary about the geometry of power in international relations, and so its importance is easy to overlook. "Bipolarity" and "multipolarity" are ungainly but necessary coinages. The Cold War, with two superpowers serving to anchor rival alliances of clearly inferior powers, is our model of bipolarity. Europe in 1914, with France, Germany, Great Britain, Austria-Hungary, and Russia positioned as great powers, is our model of multipolarity.

Mearsheimer's gloomy forecast was that without Soviet power to balance U.S. power, European nations would soon be at each other's throats. Seventeen years later there's not much sign of that, in fact, the opposite; Mearsheimer didn't imagine the level of economic integration necessary to produce the euro, for example. But then again, except for minor recessions we've seen nothing but economic prosperity throughout the period, so European economic integration has never been tested. This is an inherent strength of the U.S., that Michigan can go into recession but their is no President of Michigan who has to defend the state's continued participation in the union that is throttling the state's economic prosperity with too high interest rates and insufficient fiscal and monetary stimulus.

So who's the weakest kid on the European bloc whose politics and citizenry can provide the earliest insight to what will happen there? Spain?

Russia remains the wild card in the European union's future in the next period of economic and political stress.

Then, too, the Soviet withdrawal from Eastern Europe hardly guarantees a permanent exit. Indeed, the Russian presence in Eastern Europe has surged and ebbed repeatedly over the past few centuries. In a grave warning, a member of President Mikhail Gorbachev's negotiating team at the recent Washington summit said, "You have the same explosive mixture you had in Germany in the 1930s. The humiliation of a great power. Economic troubles. The rise of nationalism. You should not underestimate the danger."

Were a global recession to cause oil demand to fall dramatically, the impact on the Russian economy will be more profound than on China's. In the context of rising nationalism in Putin's Russia, President Mikhail Gorbachev's negotiating team member's warning may prove prophetic.

Russia is a kind of oddball in this whole situation. I would call them a #4 power in the world right now, behind the U.S., China, and the EU. They have a strategic alliance with China that is mixed, and they supply resources to the EU and are using it to their strategic benefit. The EU is trying to limit their influence through a kind of buffer region of sympathetic states in Ukraine and Georgia for example, not to mention the EU want missile defense. However, I severely question the long-term potential of the EU when the member countries are required to take a bullet.

We could be coming up on a kind of pre-World War I period, where powers draw battle lines and alliances for their strategic interests and no one trusts anyone else.

[bart]

Re: Last Lap for Bretton Woods

Or do you mean a global recognized new born currency and if so who would set policy B.I.S.?
http://www.bis.org/cgfs/index.htm

Globalization and the NWO are alive and well.
The B.I.S. I.M.F. and World Bank were there at Bretton Woods, when the gold window was closed in 1971, and are very much still around. In the '70s, many folk characterized the I.M.F. as the engine of inflation.


"For more than a century, ideological extremists at either end of the political spectrum have seized upon well-publicized incidents to attack the Rockefeller family for the inordinate influence they claim we wield over American political and economic institutions. Some even believe we are part of a secret cabal working against the best interests of the United States, characterizing my family and me as 'internationalists' and of conspiring with others around the world to build a more integrated global political and economic structure - one world, if you will. If that's the charge, I stand guilty, and I am proud of it."
-- David Rockefeller, Memoirs, 2002

[touchring]

Re: Last Lap for Bretton Woods

Were a global recession to cause oil demand to fall dramatically, the impact on the Russian economy will be more profound than on China's. In the context of rising nationalism in Putin's Russia, President Mikhail Gorbachev's negotiating team member's warning may prove prophetic.

In such a scenario, wouldn't there be serious deflation as opposed to inflation?

[jk]

Re: Last Lap for Bretton Woods

The euro is becoming a reserve currency by virtue of the dollar becoming less worthy of that status. Europeans worry that a single nation splitting from the euro zone will have an out-sized impact on the euro. The dollar doesn't face that risk but others. It's striking to me that Europeans I speak with are as critical of the euro as Americans are of the dollar. Perhaps the expression "familiarity breeds contempt" applies to currencies as well.

all the risks to the euro are domestic/european, while foreign support is overwhelming.

[EJ]

Re: Last Lap for Bretton Woods

anti-anti-spin-
1. the euro has already become a reserve currency by default. nations of all political stripes all around the globe have chosen to move assets into that currency in spite of its lack of a politically cohesive home, its lack of a treasury, its lack of a centralized and standardized bond market, its overvaluation on purchasing power parity, and its inherently fractured and flawed economic basis in the eurozone. some currencies are born with reserve status, some attain reserve status, and some have reserve status thrust upon them. like it or not, the euro is already a reserve currency.

The euro is becoming a reserve currency by virtue of the dollar becoming less worthy of that status. Europeans worry that a single nation splitting from the euro zone will have an out-sized impact on the euro. The dollar doesn't face that risk but others. It's striking to me that Europeans I speak with are as critical of the euro as Americans are of the dollar. Perhaps the expression "familiarity breeds contempt" applies to currencies as well.

2. gave's argument, at least as stated above, makes no sense. the fact that u.s. bonds can be monetized means that indeed there will always be cash to pay them off, but also means that their value can be diminished in unlimited fashion. a deflationary threat overhanging the eurozone should makes its bonds more valuable than ever.

You misunderstand either Louis or my description of his position, I'm not sure which.

He speaks of deflation not inflation risk. Clearly, the self-consistent points about the dollar and inflation discussed here for going on ten years is that there is zero monetary deflation risk in the U.S. economy owing to the ability and clearly stated and demonstrated willingness of the Fed to monetize debt. Louis' point is that without a central euro treasury institution, the ability to fight monetary deflation may be insufficient to produce monetary inflation when needed to prevent deflation. Your point is well taken that this institutional limitation may make euro denominated bonds themselves more interesting to own than U.S. treasury bills, that's is not the point that Louis is making.

3. the dispersion of power, of "cards in the hands" of the various players around the world, the lack of a central overarching power or authority to provide a natural and clearly acceptable alternative to the dollar centrality as a reserve means there will be no acceptable alternative. or at least there will be no alternative for several playings and reshufflings of the cards. the dollar will decline in both value and esteem, and nations as well as individuals will scramble for assets with which to replace it. when the ecb finally bends to the political will of southern eurozone leaders, and finds an excuse to cut rates and thus cheapen the euro, we will know we are in full beggar-thy-neighbor mode. protectionist legislation in the u.s. will be another step towards geopolitical turmoil.

This comment is consistent with our theories here.

4. we need not worry about the power of dollar bond holders. this will not be a replay of newfoundland. as long as the u.s. functions as a market for their goods, the dollar holders dare not precipitate a crisis. by the time the u.s. no longer functions as a market for their goods, the dollar holders will not be capable of precipitating a crisis, for the value of their dollars will have evaporated into an inflationary miasma.

The Newfoundland example is about the political impact of debt burdens under economic duress, both on the debtor and the creditor. Great Britain defaulted on its debt to the U.S., increasing U.S. economic hardship. Some historians connect the political repercussions of that default with the decision by the U.S. to delay entry into WWII. If we accept Dr. Hudson's statement that no nation in history has ever repaid its foreign debts, and I have no reason to question that assertion coming from an economic historian, the question we've been asking here since 1998 is what form the U.S. default on its foreign debts will take. We have long assumed currency depreciation and inflation, ala 1999 Ka-Poom Theory. But it is useful to consider other forms and their impact. Of course, no player in the system wants to cause a crisis, and that is also part of the thesis; no party can undertake change so only a crisis that develops for other reasons will be the forcing function for the dissolution of the current order. That crisis may already be in play, starting from the housing led U.S.-centric credit crisis and recession and spreading outward. Just reported by S&P is a 4.5% national decline in housing prices in Q3. That is a stunning rate of decline.

5. if this is a replay of the '30s we must ask which nation holds the place of germany - with its unbearable burden of war debts hindering its economic growth.

Russia. This time around, the risk is not war debts but dependency on oil demand for economic and political power, and international prestige. Let's hope Peak Cheap Oil holds up.