Keynesian Medicine losing its efficacy

[gnk]

Re: Keynesian Medicine losing its efficacy

Hmm... how about both, both gold and a continuance of the fiat charade?

Following up on FOFOA's latest column Reflection, how about:

• U.S. ships some gold to its largest creditors (e.g. China), in return for most of its Treasuries.
• A "Bretton Woods III" replaces the Dollar with some IMG/G20/SDR/BIS concoction for the world's "Reserve Currency."
• Suitable other major centralization of world banking regulation and resetting of major debts.

This way, gold plays a role, but not directly in ways that you or I can easily participate, rather indirectly via the Central Bank holdings of various nations participating in the G20, a basket of whose currencies comprise the defining base of the SDR concoction that each of those Central Banks hold in turn as reserves.

Note: I'm not saying I like this, nor am I saying that the U.S. will willingly participate in this, nor am I saying that we get to this right away, without some intervening Sturm and Dangst.

Is it a basket of currencies, or is it gold, or both? Does the dollar get gold backing, or does the SDR, and thus the dollar, being a part of the SDR, has some gold backing?

And if it is a basket of currencies, I would assume that there would be an agreement amongst the G20 that their representative share of the SDR would not be decimated, correct? Otherwise, the "exorbitant privilege" issue that was done away with by adding gold and other nations' currencies to the SDR rears its ugly head again.

Think of it this way. You're China, I'm the US. My currency is 20% of the SDR, yours is 8%. I like to allow my banks to create debt money and ponzi financing... which ultimately is inflationary. Now every country in the world that holds these SDRs as reserves for int'l trade watches that 20% of every SDR diminish in value. Basically, the US in this scenario would still be exercising its "exorbitant privilege" of exporting it's inflation. It's not as exorbitant as it used to be, because the US now only has 20% of the reserve currency unit, the SDR, but it's a privilege nonetheless, and an abused one at that.

Remember, the international currency must be neutral, and free from member countries' manipulations. Hence, a member country's currency would have to operate within a strict band - they could not inflate away like back in the fiat days. Both banks and governments would not like this. Fiscally responsible individuals, however, would smile more.

Also keep in mind, that a maintianed high gold valuation would be needed to rebalance the financial system - i.e. debtor nations would pay off creditor nations. Thereafter, the SDR would be used as an int'l currency unit with the requirement that member countries do not abuse their currency, which ultimately is a cost shifting exercise.

Does that make sense?

[ThePythonicCow]

Re: Keynesian Medicine losing its efficacy

Is it a basket of currencies, or is it gold, or both? Does the dollar get gold backing, or does the SDR, and thus the dollar, being a part of the SDR, has some gold backing?

What I suggesting might happen, after some serious tumult (depression and/or war) is the following.

A new IMF/BIS fiat currency is defined by a "Bretton Woods III" agreement. It resembles SDR's perhaps, though on a larger scale. This new world reserve currency becomes what is used for settlements between central banks and is held in reserve by the central banks of all nations. It replaces the Dollar in that role as the world's reserve currency. The Dollar remains the national currency of the U.S. This new IMF/BIS concoction is managed by some faceless (or at least unelected) bureaucrats, under the back room control of the G20 and other most powerful/wealthy families to roughly correspond to a basket of currencies of the major nations.

Each nation as well as the IMF also maintains some gold holdings. This national and IMF gold is infrequently traded, and seldom if ever openly traded with the public.

Stronger international bank regulations bring the wildcatters of Wall Street to heel. A new generation of politicians in Washington bow to these international financial bodies, rather than to Wall Street (this will first take some humiliation of the U.S. financial businesses on the world stage.) Major oil contracts may also be priced in this IMF/BIS construct. The Dollar loses its world reserve currency status. Americans taste austerity and severe price increases of anything imported, including oil.

The price of gold is jacked up high enough to suck back in much of the gold from smaller private investors. The gold hoard of the G20 and IMF is then used, as before, to help maintain some price control of the physical gold market, in terms of this new reserve currency.

Debt is issued in this new currency, with some global tax on banks and/or energy and/or "carbon" to provide the cash flow to fund payments on this debt. Major national debt is restructured in terms of this new debt.

First we will see more debt piled onto the Federal Reserves balance sheet, as larger banks, major pension funds, smaller nations, and major states within the U.S. require bailing out. Major war debt may be piled onto this load as well. Eventually (one to ten years from now, perhaps) the Fed's balance sheet collapses, ushering in this Bretton Woods III agreement.

As we can see from jtabeb's reports on the Alternate-Energy work being done by the U.S. Air Force, the U.S. military understands that energy independence is key to it's continued dominance and that U.S. military dominance is key to this continued global dominance. U.S. financial dominance becomes subordinated to IMF/BIS/G20/... world bodies, but the U.S. military continues to provide the world's dominant military force.

[Mn_Mark]

Re: Keynesian Medicine losing its efficacy

Excellent post and anyone who had read the 1936 work that Keynes is most known
would understand that Keynes never advocated perpetual deficits and build up of higher
national debt...only a government captured by financial banking interests and other capitalist enterprises would be immune to reducing big time public subsidies on the private sector. Remember the recent Wall St disaster shifted its debts onto Washington (socialism)
so they would avoid the bankruptcy that should have occurred. Volcker was correct that there is need for a mechanism to have an orderly bankruptcy process for the TBTF banks.

The theory of Keynes' seems fine but as we all know the problem is that the politicians never get around to the belt-tightening during the good times that is supposed to offset and balance the government spending during the bad times. Whose fault is that, exactly? ECON seems to blame "capitalist enterprises" for capturing government and preventing a reduction of public subsidies for the private sector. I don't think it's sensible to blame businessmen for trying to get benefits from government; rather, it's the general mentality of society which believes that the federal government should fix all problems that is to blame. That's the place to fix the blame for government taking on too much: the political philosophy that says society can be perfected through government control and that government - through regulation, subsidies, and even bailouts - is the right and proper manager/fixer/parent-figure who should step in anytime there is a problem in society.

Rather than blame "capitalist enterprises", I blame the politicians who use the tax bounty of good economic times as an excuse to grow government programs bigger. That's the time when the excess tax revenues should be used to pay off the debt accumulated by the government spending during bad times. Instead, those who see government as the solution to social problems implement big new spending programs using the surplus revenues. Then when times get bad and tax revenues drop, they want to raise taxes again to keep the revenue flowing rather than cut back the spending to match what the government is actually taking in. For these types of people, greater government revenues are an excuse to grow government programs and lesser government revenues are to be remedied by tax increases. That's how we went from a "temporary" 1% federal income tax on "the rich" in 1913 to the much higher federal payroll and income taxes we have now.

So if you want to blame someone for the failure of Keynes, I'd say its the people who see big government as the solution to problems and inculcated that mentality in the general public who deserve the blame, not "capitalist enterprises".

[gnk]

Re: Keynesian Medicine losing its efficacy

The theory of Keynes' seems fine but as we all know the problem is that the politicians never get around to the belt-tightening during the good times that is supposed to offset and balance the government spending during the bad times. Whose fault is that, exactly? ECON seems to blame "capitalist enterprises" for capturing government and preventing a reduction of public subsidies for the private sector. I don't think it's sensible to blame businessmen for trying to get benefits from government; rather, it's the general mentality of society believes the federal government should fix all problems that is to blame. That's the place to fix the blame for government taking on too much: the political philosophy that says society can be perfected through government control and that government - through regulation, subsidies, and even bailouts - is the right and proper manager/fixer/parent-figure who should step in anytime there is a problem in society.

Rather than blame "capitalist enterprises", I blame the politicians who use the unexpected tax bounty of good economic times as an excuse to grow government programs bigger. That's the time when the excess tax revenues should be used to pay off the debt accumulated by the government spending during bad times. Instead, those who see government as the solution to social problems implement big new spending programs using the new money. Then when times get bad and tax revenues drop, they want to raise taxes again to keep the revenue flowing rather than cut back the spending to match what the government is actually taking in. For these types of people, greater government revenues are an excuse to grow government programs and lesser government revenues are to be remedied by tax increases. That's how we ended up going from a "temporary" 1% federal income tax only on "the rich" in 1913 to the much higher federal payroll and income taxes we have now.

So if you want to blame someone for the failure of Keynes, I'd say its the people who see big government as the solution to problems and inculcated that mentality in the general public who deserve the blame, not "capitalist enterprises".

There is another, greater factor at play here that Keynes addressed in the past - but it does not deal with stimulus, but the choice of world reserve currency at Bretton Woods. It's called the Triffin Dilemma.

From Wiki:

The Triffin dilemma (less commonly the Triffin paradox) is the observation that when a national currency also serves as an international reserve currency (as the US dollar does today), there are fundamental conflicts of interest between domestic and international economic objectives. This dilemma was first identified by Belgian-American economist Robert Triffin in the 1960s, who pointed out that the country issuing the global reserve currency must be willing to run large trade deficits in order to supply the world with enough of its currency, to fulfill world demand for foreign exchange reserves.

The use of a national currency as global reserve currency leads to a tension between national monetary policy and global monetary policy. This is reflected in fundamental imbalances in the balance of payments, specifically the current account: to maintain all desired goals, dollars must both overall flow out of the United States, but dollars must at the same time flow in to the United States. Currency inflows and outflows of equal magnitudes cannot both happen at once.

The Triffin dilemma is usually used to articulate the problems with the US dollar's role as the reserve currency under the Bretton Woods system, or more generally of using a national currency as an international reserve currency...

In the wake of the Financial crisis of 2007-2008, the governor of the People's Bank of China explicitly named the Triffin Dilemma as the root cause of the economic disorder, in a speech titled Reform the International Monetary System. Zhou Xiaochuan's speech of 29 March 2009 proposed strengthening existing global currency controls, through the IMF. ^{[1] [2]}

This would involve a gradual move away from the US dollar as a reserve currency, and towards the use of SDRs (IMF Special Drawing Rights) as a global reserve currency.
Dr Zhou argued that part of the reason for the original Bretton Woods system breaking down was the refusal to adopt Keynes's Bancor which would have been a special international currency to be used instead of the dollar.

American economists such as Brad Delong have agreed that on almost every point where Keynes was overruled by the Americans during the Bretton Woods negotiations, he was later proved correct by events.^[3]

Dr Zhou's proposal attracted much international attention; ^[4] in a November 2009 article published in Foreign Affairs magazine, economist C. Fred Bergsten argued that Dr Zhou's suggestion or a similar change to the International Monetary System would be in the United States' best interests as well as the rest of the world's.^[5] While Dr Zhou's proposal has not yet been adopted, leaders meeting in April at the 2009 G-20 London summit did agree to allow $250 Billion of SDRs to be created by the IMF, to be distributed to all IMF members according to each country's voting rights.

Source: http://en.wikipedia.org/wiki/Triffin_dilemma

Conclusion: if you have the reserve currency, you will always need to run a deficit. But there will come a day that you cannot service this deficit. This was recently addressed by Philipp Hildebrand, Chairman of the Swiss National Bank at a recent IMF Meeting he cohosted with the IMF:

"A first perspective was the so-called “Triffin dilemma”, discussed in the context of the
Bretton Woods fixed exchange rate regime. This discussion highlighted that increasing indebtedness of the reserve-issuing country would in time undermine the very confidence that forms the basis for the reserve asset status."

source: http://www.snb.ch/en/mmr/speeches/id...1_pmh_1.en.pdf

[gnk]

Re: Keynesian Medicine losing its efficacy

PC - you bring up a lot of points, some I agree, some I don't. It's a lot to address. But let's boil it down a bit to the two most pressing issues:

1) International reserve currency. As I wrote below in another post in this thread, there is an issue with the dollar's role as reserve currency. You are right, it will be addressed, and int'l bankers will have a great role. In fact, I would say it's already in the workings. But that does not address the enormous debts the western world is burdened by. It only addresses the need for a viable, independent reserve currency to continue international trade.

2) Western debt. The West can default, the West can go on austerity for a couple of decades, or the west can revalue gold and use much of it to pay down (no need to pay off) debts to a manageable level. Defaults, in my view would be catastrophic and would impact the sovereign debt markets tremendously. Bond vigilantes would become a swarm of locusts destroying one country's finances at a time - more so than they are now. Austerity? That could take decades, and the threat of collapse will always hang like the sword of Damacles. And I just don't see a combination of taxation and growth that could knock off a debt that needs to grow for the economy to avoid collapse.

Gold revaluation is the only quick solution for the Western nations, IMHO. And if gold is revalued, it would also be needed to back the currencies (and SDR?) to an extent to prohibit future imbalances from occurring ever again.

The global fiat experiment is dead.

We can learn this the easy way, or the hard way.

(BTW, here's an EXCELLENT King World News interview with Felix Zulauf: http://www.kingworldnews.com/kingwor...ix_Zulauf.html warning! not for the faint at heart!)

[bill]

Re: Keynesian Medicine losing its efficacy

(BTW, here's an EXCELLENT King World News interview with Felix Zulauf: http://www.kingworldnews.com/kingwor...ix_Zulauf.html warning! not for the faint at heart!)

Great interview. thankyou gnk
As Felix said CB will fight deflation until currencies are destroyed.

Liquidation goes on for next 2 years, Fed saves us from financial disaster. Inflationary pressure builds and 2013 (EJ call), Fed is forced to liquidate assets along with a currency collapse.

http://www.itulip.com/forums/showthr...739#post153739

bill 03-21-10 12:33 PM
If Fed is granted powers we get an orderly asset transfer to the Fed. Fed expands balance sheet assets are transferred, crisis contained and controlled liquidation takes place. Inflationary as Fed expands Balance sheet to accommodate asset liquidation. Non performing debt, toxic assets are dumped onto Fed ‘s balance sheet in return for capital liquidity, paper received is replaced with “REAL ASSETS” hedged against inflation.

[Mn_Mark]

Re: Keynesian Medicine losing its efficacy

That is interesting, but why should Special Drawing Rights work any better as an international currency among independent nations than the euro is turning out to work as a european currency among independent european nations?

These folks who are enamoured of world government sure do seem to have a problem with just using gold as the international currency (which is what it is, whether they like it or not).

If they start relying on SDRs instead of dollars, I think it's guaranteed that it simply shifts the problems to another level that will quickly be revealed to be no better than the problems we have now. The real solution is fiscally responsible governments. If you don't have that it doesn't make any difference what you use for currency. And the beauty of gold is that it is better at forcing that responsibility than any other alternative.

[ThePythonicCow]

Re: Keynesian Medicine losing its efficacy

So if you want to blame someone for the failure of Keynes, I'd say its the people who see big government as the solution to problems and inculcated that mentality in the general public who deserve the blame, not "capitalist enterprises".

Looking for whom or what to blame is a bit tricky, because we have to work at two levels at once.

We have to look at both the people and the system.

We have a system that would likely fail sooner or later no matter how hard we try to only put good and competent people in place.

However, usually when that "blame the system" argument is made, it implicitly goes along with "exonerate the individuals." No. Some of the individuals have no doubt performed illegal, immoral or incompetent acts, worthy of prosecution, censure, blame, demotion, firing or reprimand.

In short, there's plenty of "blame" to go around, including blaming some bankers, some politicians, some regulators, and no doubt a few others, and blaming systemic flaws in all those arenas as well.

It seems to me that these discussions of whom to blame run afoul of a presumption of singular or at least primary blame.

• Blame him.
• No, blame her.
• No, this other guy screwed up worse - blame him.
• No, that whole bunch of guys screwed up worse - blame them.
• No, it's the system - fix that.

I say consider "all of the above."

Keep in mind that the purpose (in my view) of affixing blame is to guide our remedial actions. We would like to know what to change and what to keep as is, as we would like to know who to punish and who to praise.

[ThePythonicCow]

Re: Keynesian Medicine losing its efficacy

The price of gold is jacked up high enough to suck back in much of the gold from smaller private investors.

Recall when it is that many of us plan on selling a substantial portion of our gold -- that being when and if we think it's value has just, or is just about, to peak. The strong hands have considerable means at their control to simulate such a peak. I am confident they will use those means.

[gnk]

Re: Keynesian Medicine losing its efficacy

That is interesting, but why should Special Drawing Rights work any better as an international currency among independent nations than the euro is turning out to work as a european currency among independent european nations?

These folks who are enamoured of world government sure do seem to have a problem with just using gold as the international currency (which is what it is, whether they like it or not).

If they start relying on SDRs instead of dollars, I think it's guaranteed that it simply shifts the problems to another level that will quickly be revealed to be no better than the problems we have now. The real solution is fiscally responsible governments. If you don't have that it doesn't make any difference what you use for currency. And the beauty of gold is that it is better at forcing that responsibility than any other alternative.

I think you're confusing SDRs with an individual nation's currency and fiscal situation.

SDRs are merely a reserve currency for international trade - not a method of inflating or paying debt. The reason SDRs are being touted is to have something safer for international trade, as opposed to the US dollar. Think of it this way - If you're Saudi Arabia, would you prefer, in these times, to export your precious, diminishing oil for dollars, euros, or SDRs?

The SDR solves the issues of 1) exorbitant privilege - one nation exporting it's inflation because it has the world's reserve currency and 2) the deficit spending requirement of having the world's reserve currency is not fair to the system.

The EURO is not a proper analogy to have with SDRs. With the SDR system, nations keep their currencies and control their own fiscal situation... but no one nation benefits (exorbitant privilege) or suffers (needs to run trade and fiscal deficits) - the SDR is something you and I will not have in our wallets. It is for the central banks of the world to keep in reserve as opposed to the current scenario which is the fear of the current reserve currencies (dollar, euro, yen) imploding on their balance sheets.

[gnk]

Re: Keynesian Medicine losing its efficacy

Recall when it is that many of us plan on selling a substantial portion of our gold -- that being when and if we think it's value has just, or is just about, to peak. The strong hands have considerable means at their control to simulate such a peak. I am confident they will use those means.

If/When gold becomes money - de jure, not de facto as it is now, then its price will not crash down as it did in the early 1980s.

[gnk]

Re: Keynesian Medicine losing its efficacy

Great interview. thankyou gnk
As Felix said CB will fight deflation until currencies are destroyed.

Liquidation goes on for next 2 years, Fed saves us from financial disaster. Inflationary pressure builds and 2013 (EJ call), Fed is forced to liquidate assets along with a currency collapse.

http://www.itulip.com/forums/showthr...739#post153739

One thing that I've noticed in my continued research is that EJ, James Rickards, and Felix Zulauf have all recently noticed the acceleration of the deterioration of the current global financial order and subsequent potential IMF response. I agree with EJ's recent timeframe re-adjustment. Of course, anything can happen to slow things down, or even accelerate them at a faster pace... does a white or black swan lie ahead of us? That's the known unknown, IMHO.

BTW, I did notice your use of "REAL ASSETS" in capital letters and in quotes... you have done that before in another thread as well. Gotta love bankerspeak.

[ThePythonicCow]

Re: Keynesian Medicine losing its efficacy

That is interesting, but why should Special Drawing Rights work any better as an international currency among independent nations than the euro is turning out to work as a european currency among independent european nations?

The Euro is "working" -- the money masters still have more power over the affairs of European nations than they had before the Euro. Sure, there are dramatic episodes, and sure it's not working so well for the man on the street in Athens.

Besides, the IMF/BIS construct I speculated about would have more means at its disposal than the Euro. It would have (by my story) taxing authority (say on bank transactions and some energy or carbon base) and it would be able to issue debt in large quantities. It would also likely have stronger regulatory control, bringing the Wall Street wildcatters and debt dealers to heel ... for a while.

Finally, I'm making no claim that this actually "works" for a long time. I view my speculative future as "kicking the can upstairs". If X (U.S. Dollar hegemony) doesn't work, then let's try 10*X.

The folks in charge aren't looking to establish a healthy, sustainable monetary system. They are looking to use and abuse our monetary, political, military, economic, research, media and intelligence systems in order to ensure that they remain the folks in charge. Driving nations through periods of great debt, followed by "privatizing" anything of value in that nation (its resources, it tax revenue streams, it private and public debt repayment streams, it's rent, fee and income streams, whatever, ...) seems to be a part of this. This show will be coming soon to an American town near me.

These folks who are enamoured of world government sure do seem to have a problem with just using gold as the international currency (which is what it is, whether they like it or not).

As I say, they aren't looking for what you or I would consider a healthy monetary system. They are looking for sustained and expanded control.

If they start relying on SDRs instead of dollars, I think it's guaranteed that it simply shifts the problems to another level that will quickly be revealed to be no better than the problems we have now. The real solution is fiscally responsible governments. If you don't have that it doesn't make any difference what you use for currency. And the beauty of gold is that it is better at forcing that responsibility than any other alternative.

That's exactly why we won't have an honest gold backed currency in my lifetime.

[ThePythonicCow]

Re: Keynesian Medicine losing its efficacy

If/When gold becomes money - de jure, not de facto as it is now, then its price will not crash down as it did in the early 1980s.

I can't be certain that won't happen in the next decade or three, but I have to hedge other possibilities as well.

The four major possibilities that I plan for over the next few decades are, in descending order of probability:

1. The scenario I described above, replacing the Dollar with some IMF/BIS construct as the world's reserve currency.
2. The Dollar lives to fight another day, another decade at least, as the world's reserve currency.
3. Honest gold backed currencies for the major nations of the world.
4. Mad Max Armageddon.

Possibilities 3 and 4 are much less likely, according to my crystal ball (got it for $1.49 at a garage sale ;).)

[ThePythonicCow]

Re: Keynesian Medicine losing its efficacy

P
The global fiat experiment is dead.

We can learn this the easy way, or the hard way.

(BTW, here's an EXCELLENT King World News interview with Felix Zulauf: http://www.kingworldnews.com/kingwor...ix_Zulauf.html warning! not for the faint at heart!)

That Felix Zulauf interview is good - thanks for linking it.

I'll agree that the current fiat money system (using the Dollar as the world's reserve currency) is due for a major reset.

However the forces behind that currency are far from dead. Therefore I think it is more likely we will get another, bigger, fiat currency than that we will return to an "honest" monetary system.