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The Other Currency War

by John Rubino on March 29, 2013 · 27 comments

Most of the recent “currency war” talk refers to countries trying to lower the value of their currencies to gain a trade advantage and/or make their debts more manageable. But this war has another theater, where a weaker currency is not the main goal.

Start with the premise that when a country conducts most of its trade in another currency, it cedes power to the “reserve currency” issuer. Right now that’s the US. Because oil and most other things are traded in dollars, the world’s central banks have to hold a lot of dollars as reserves. The resulting nearly-infinite global demand for dollars allows Washington to borrow as much as it wants, and to govern without having to make hard spending and tax choices that other countries have to live with. It also allows the US to fund a military that dwarfs everyone else’s and to throw its weight around in ways far out of proportion to its population or moral authority. If you’re a would-be superpower like China, Russia, India or Brazil, “dollar hegemony” is in your way.

So there’s an advantage to be gained by cutting the dollar out of bi-lateral trade in favor of one’s own currency. Here’s how China and Brazil are playing it:

China, Brazil sign trade, currency deal ahead of BRICS summit

BRICS members China and Brazil agreed on Tuesday to trade in their own currencies the equivalent of up to $30 billion per year, moving to take almost half of their trade exchanges out of the U.S. dollar zone.

The agreement, due to last three years and signed hours before the start of a BRICS summit in Durban, South Africa, marked a step by the two largest economies of the emerging powers group to make real changes to global trade flows long dominated by the United States and Europe.

“Our interest is not to establish new relations with China, but to expand relations to be used in the case of turbulence in financial markets,” Brazilian Central Bank Governor Alexandre Tombini told reporters after the signing.

Trade between the two countries totaled around $75 billion in 2012. Brazilian officials have said they hope to have the trade and currency deal operating in the second half of 2013.

At the summit in Durban, the fifth held by the group since 2009, Brazil, Russia, India, China and South Africa are widely expected to endorse plans to create a joint foreign exchange reserves pool and an infrastructure bank. They are also due to discuss trade and investment relations with Africa.

 

According to the IMF, dollars make up about 62% of allocated central bank currency reserves, with the other 38% in mostly euros and pound sterling. The yen accounts for 4%, and the Chinese yuan virtually zero. But China is now the world’s biggest trading power, with Brazil and India not that far behind. So why does the dollar still get to dominate world trade, with all the advantages that confers? Because it’s been that way since World War II, and old habits die hard. But as bi-lateral trade deals like the above become common, countries trading with China and Brazil in local currencies instead of dollars will need large yuan and real reserves and correspondingly fewer dollars.

If central banks start selling dollars to buy other currencies, this will, other things being equal, force down the dollar’s value. Which, ironically, helps the US in the other currency war theater, where victory is defined as a cheaper currency. An orderly transition to a multi-reserve-currency world would make US export industries more profitable and our debts less onerous (at least according to conventional wisdom).

The problem is that markets don’t normally do orderly transitions. They get going in one direction and then, when a critical mass of players decides the trend will continue, they go parabolic. The asset in question soars or falls off the table. So the combination of US policy designed to weaken the dollar and other countries actively trying to supplant the dollar as a reserve currency makes a gradual, smooth decline in the dollar’s value the least likely scenario.

 

  • Bruce C.

    This is a really interesting subject because it’s so complex and underlies all kinds of seemingly unrelated things.

    First of all, there is nothing inherently wrong or disadvantageous about a reserve currency. In fact, it CAN actually have advantages for all parties, but only if that reserve currency is “strong” and stable. And that’s the problem these days: The US needs/wants a “weak” dollar (to devalue its debt burdens and bolster its domestic economy via increased exports) but it remains relatively strong – and also volatile – because of even greater economic problems elsewhere (e.g., Europe, Great Britain, and Japan). It is the weakening and volatility of the dollar that is motivating other countries to find a better “reserve” currency, or an alternative to that. The US has abused its “exorbitant privilege” and therefore will probably lose it.

    Now, JR’s claim that the dollar is still the reserve currency because of “old habits” since WW II is an understatement. The main reason now is still because of the “petrodollar agreement” that was made between the US and “OPEC” (the Organization of Petroleum Exporting Countries) in the early 70’s. That was an agreement to ensure US dollar hegemony in spite of the dollar’s new purely fiat status (Pres. Nixon stopped physical gold-to-dollar convertibility in ’71) and the ever increasing US deficit spending required to fund the Vietnam War and Pres. Johnson’s “Great Society” social welfare programs. That agreement was for OPEC (and Saudi Arabia in particular, the “Saudi” family being the one placed in power by guess who) to purchase US Treasury bonds by selling their oil only in US dollars in exchange for US military protection from Israel. (Gold is also (still) traded in dollars because of the standards used by the bullion banks (the London Gold Exchange) to repress the price of gold

    in the late sixties, in an ultimately futile attempt to maintain the dollar’s value.)

    The US has tried to maintain the dollar’s hegemony since WW II, initially because it was an ambitious and self-righteous but innocent country, but increasingly because of economic and political necessity, having created structural liabilities for itself that are untenable. Consequently, the US has embroiled itself ever deeper in global geo-political quagmires to protect its interests by force such as innumerable subversive activities by the CIA, the wars in Iraq and Afghanistan, sanctions against Iran, and the recent build up of forces in the Red Sea, Mediterranean, China Sea and South Korea. It’s a mess.

    In the meantime, many new agreements are being formulated that will probably replace today’s status quo, the one between China and Brazil merely scratching the surface. See, for example,

    http://goldsilver.com/news/11-international-agreements-that-are-nails-in-the-coffin-of-the-petrodollar/

    Ironically, the demise of the dollar may actually be a brutally drawn out process despite every reason for it to literally collapse quickly. Being a fiat currency relative to other fiat currencies it’s still the least ugly beauty contestant. If Europeans send their money to the US because of the Cyprus deal then that would strengthen and stabilize the dollar, and weaken any agreements to use the euro. The yen has been permanently checked in to the wood shed so don’t expect to see price inflation in the US for Japanese products. The US will not allow Israel to attack Iran (gotta maintain that petrodollar agreement), if anything Iran will attack Israel, and that will give the US a reason to attack Iran – to keep Israel intact to maintain the balance of powers in the Middle East (If Israel is eliminated then why would OPEC maintain the petrodollar agreement?)

    • stopthesocialism

      I think it’s pretty obvious that the Chinese Yuan is already in the process of replacing the dollar. China will take over as the worlds largest economy, and eventually, the worlds only superpower.
      China not only has a much larger labor resource, but also have developed a system that encourages hard work, and innovation. The US system has turned against free enterprise, and now promotes laziness, and incompetence.

      • Robert

        I don’t know where to begin. First of all Obama, Junior, Slick Willie, Daddy and Reagan have created an economy of Crony- Capitalism. That is NOT real capitalism because it eschews competition and tries to rig the market place in its favor, using government cronies to fix the system. It is NOT socialism either because it eschews public ownership.

        It is actually the economic analogue of fascism. That is where Big Bus (and banks) work hand and hand with Big gov to guarantee each others perks, power and privilege, at the expense of the people including small businesses.

        The media hysteria about China is as foolish now as it was when the Japanese bought Rockefeller center in the ’80s. China is still a developing nation. It’s leaders are even more corrupt (if that is possible) than those of the United States.

        While the Chinese work very hard and are easily focused to move together in one direction, they have a culture in which people are taught that the blade of grass that stands up will be cut down. That is not a culture that leads to innovation. It is a culture that can only copy.

        For all that is wrong with the United States it is still the most innovative place in the world. The cancer of crony- capitalism has still not completely infected the nation at its roots.

        And while central banks may save more and more renminbi as a part of their reserves, China is going to have to become a massive IMPORTING nation like the US to export enough renminbi to the world so that people can use them as a currency for trading. That is a Looooonnnngggg way away.

        I would if I were you avoid listening to the propaganda on CNBC, Fox News or Rush Limbaugh (or CNN or the New York Times or MSNBC for that matter) as most of these people know nothing at all.

        And the ones that do are knowingly spreading disinformation because they have a serious stake in Crony Capitalism. All of this media is owned by very rich, powerful and well connected people. Everyone they put on the air and everything they say is intended to help them not you.

        • stopthesocialism

          You have some studying to do. China has already setup trading agreements with Russia, Iran, Brazil, South Korea, South Africa, etc. These countries will be trading their own currencies WITHOUT USING DOLLARS!
          And with regards to the brain trust, China has more honor students, than the US has students.
          Also, you can’t innovate without a manufacturing base. The US manufacturing base has moved to China.
          I find it quite ironic that Russia and China have moved away from Socialism, because they found out that it didn’t work. Whereas the US and EU are moving away from Capitalism. Greece and Stockton are perfect examples of why Socialism doesn’t work.
          The worst situation you can have is a Democracy, Fiat money, and a population willing to vote themselves more benefits, and less taxes to pay for them. And that is exactly what we have now in the US. Like Greece, this is going to end very badly.

          • spiritsoul

            Yeah but some of the best well to do countries like Norway, Switzerland, Denmark, Germany, Japan e.t.c are socialist countries where they have a very high standard of living and the government cares for the people rather than trying to exploit them. Also taxes are high no doubt which in turn pay for these services but the pay that an average individual gets is very high as well. That’s why the standard of living is so good and people are happy. Oprah had gone to Denmark recently and she made a proper tv show on it where she exclaimed that the Danes were one of the happiest people on earth. As there is free healthcare, free university education and good benefits for the common man. Its the same in Norway as well and Norway is still better off than Denmark and more well to do. If you went there someday you will realize how good it is for people there. And Denmark and Norway are socialist countries by the way. Its just that if the leaders of the world started serving the public rather than exploiting them for their own selfish interests, things would be a lot better and the cycle of life would run quite smoothly and perfectly.

          • stopthesocialism

            Those are the exceptions. Probably because the people in those countries have a strong work ethic, and personal responsibility. That is certainly not the case in the US, and many other places. Most socialist countries are failures.

          • csm

            this is a one century+ planned takedown of the lamb of liberty, america has been carefully fractionated… this is an evil agenda very ancient and banks are suicidal by evil design, turning back liberty to make the rest of the world mind the master.. evil hands behind the puppets.. any concept of how to name and stop the beast? peace

  • http://twitter.com/kooblet Bill Johns

    What will loss of US$ reserve currency status do to US bond rates?

    • Bruce C.

      Newly issued bonds would be at higher interest rates and existing bond prices would fall.

  • Robert

    The pertrodollar agreement will continue because the US is taking complete hegemony in the region. Way beyond Israel, The Gulf sheiks are terrified of Iran and beyond that what happened in Egypt, Libya, Iraq and Syria they know can happen VERY easily to them.

    Almost everyone believes in the demise of the dollar. That may happen in the long term. But in the medium term I believe the Dollar is going to have a huge run as it did in the mid ’80s and for similar reasons.

    The US recovery is for real. But more importantly Europe and China are restructuring. Europe is not ready for growth and China will be in slow growth mode until they have completed their makeover to a consumer economy driven by local demand. India is floundering. All of this means weak commodity demands which will limit growth in Brazil, Russian, Canada and even Australia.

    That will mean relatively low commodity prices for US manufacturers being brought home by Chinese industrial espionage and near access to local developing energy sources.

    I believe many people on these pages are going to be surprised by what will soon be a big fall in US unemployment rates. But the biggest surprise is going to be when Bernanke takes away or limits what’s in the punch bowl and interest rates rise, AND stocks will rise as well.

    That is because higher US interest rates (relative to Europe and Japan) will attract global wealth. People coming to the US for yield will also see currency gains as well. Some of that wealth will find its way into common stocks driving up stock prices and unleashing a period of isolated US prosperity.

    With a $65 trillion global GDP mostly traded in dollars, if the world’s economy is to grow they must have an increasing flow of those dollars. A $30 billion side deal between Brazil and China is a drop in the bucket, even if multiplied by a number of these side deals.

    On the side of the dollar is gong to be that the US is going to send less dollars abroad as it becomes energy independent and as China restructures its economy away from global exports.

    Where is the world going to get the dollars it needs for growth? People are going to have to bid up the price of the dollars that they need for trade. So until Europe and China have finished restructuring and there is again global demand for commodities sufficient to drive oil to $150 and higher then the US will be the only game in town.

    Incidentally none of this is good for gold. Westerners buy very little gold and have little commitment to it. They are paper hoarders. The rise in gold prices since 2000 correlates very closely to the rise in China. With new faith in the dollar, higher interest rates, dollar based investment momentum in US markets, flat commodity prices and restructuring in China there will be little reason to hold gold. The big US bank shorts will have a field day.

    OK I just thought you ought to see another view

    • stopthesocialism

      The trend in US manufacturing is outsourcing. That trend will likely continue. Also, new technology reduces labor requirements. Real unemployment is likely to remain high, and go higher. With a shrinking income base, more and more money will have to be printed. This is the death spiral we are in now.
      Government stats are being manipulated. A better measure of the economy is the number of people on government assistance. A quick look at those numbers proves that the economy has been getting worse every year since 2007.
      Oil imports have been reduced mainly by people driving less. This is the result of high unemployment, and high gas prices. Prices are likely to keep going higher because of world demand.

    • Bruce C.

      The point of view you present is compelling on the surface but it depends upon almost lottery-level “luck” for the US.

      “The US recovery is for real” ? Do you mean even more credit-based investment and consumption is a good thing? So those who didn’t over-extend themselves pre-’08 are the basis for a new leg higher? That higher taxes and regulations in the US won’t matter? That it’s worse everywhere else? That China and Europe are “restructuring”?

      Maybe it is on a relative basis, but there is a point where most people choose not to feed “the beast” any longer, despite the seeming self-destruction of that decision. The conventional belief that individuals and businesses will find the will and the way to overcome yet more hurdles of restriction and extortion are waning, regardless of how much worse it could be.

      Furthermore, any such arguments like you present that ignores or relies upon the unprecedented monetary stimulation by central banks worldwide is grounds for dismissal alone. You may “prove” right for the time being, but only because “free” money is very greasy, if you know what I mean.

      If for some quirky/lucky combination of circumstances the US “gets away” with their profligacy then God help us all. Given its history it’s one thing for Europe to be – once again – in a complicated political and economic mess, but for the US to be on the path toward a similar situation – given its myriad advantages – is depressing.

      Just because everywhere else is worse doesn’t mean it’s good here. There ARE absolutes, and every animal displays that by sensing the “sense of life” of their offspring and act accordingly.

      • Robert

        You wrote; “Do you mean even more credit-based investment and consumption is a good thing?”. I am not a moralist. I agree with Jim Rogers that all of this is going to end badly. But when will that happen?

        The US banking system has been strengthened at the expense of the American people and for the moment the Fed is the bad bank still holding junk no bank can sell. But like underwater Florida real estate in the ’50s that was hawked to unknowing Northerners as their place in the sun, the land got filled in and air conditioning turned bad investments into good ones.

        The banking system is going to start lending again and Americans are chomping at the bit to do what they do best which is innovate. I personally don’t believe that a recovery will last all that long. As soon as China and Europe have finished restructuring then the demand for commodities will reappear and energy prices will act as a global growth ceiling.

        Then interest rates will rise globally and the hot money that came into the US to fund its deficits (due to rising interest rates) can and will leave as quickly as it came, leaving the same old problems behind. I expect when that happens the markets may have a 1987 style fall.

        In recoveries however as with recessions you never know how deep they will be nor how long they will last. Maybe the US recovery (which you will note from falling real unemployment rates) will go far enough to bring back real estate values so that the junk the Fed is holding like Florida swampland will be marketable.

        And a recovery should lower government deficits. Neither bad times nor good times go in a straight line. Every dog has its day and it is going to be the time of the Americans again, maybe for the last time. Who knows?

        So all of the people on these pages are probably going to be proven right. But being right and being wrong about your timing is the same as being wrong.

        As for personal balance sheets, when jobs pick up as well as housing prices debt levels won’t feel quite so scary. I don’t see Americans borrowing as much as they did in the past. It will be the foreign money that props the system up this time.

        • Bruce C.

          You may be right that the US “recovery” will continue perhaps longer than I at least think it will (China’s and especially Europe’s “restructuring” could take years), and as you said yourself, “Neither bad times nor good times go in a straight line,” and this central bank funded reflationary effort is already over 4 years old without any setbacks.

          Your analysis is certainly what the main stream media is claiming.

          One question though: What do you mean by the “real” unemployment rate?

          • Robert

            real unemployment rate = the unemployment rate plus discouraged workers.

          • Bruce C.

            Do part time jobs count? Would not income level versus the “real” unemployment rate be more relevant? Lots of people earning low wages and no “benefits” would lower the “real” unemployment rate but not increase consumption or help the economic recovery.

          • Robert

            Unfortunately the US is a society moving towards feudalism. While those at the bottom (on government money or minimum wage) spend a higher percentage of their income, they don’t move the needle much as a percent of national consumption.

            It is the middle and upper middle class that do that. I expect some skilled labor jobs will return to the US as they are created in the new energy sector (and those that serve it) and some jobs that will be brought back from China as well.

            Also if when interest rates rise, Euro dollars are temporarily repatriated the cash will be available for start ups and small business. There is a lot of pent up brain power and innovation out there that hasn’t had access to capital in a long time.

            None of this will save the middle class long term, or stop the long term debt problem as a rising percentage of GDP.

            But it should be a good hiatus, one that will have the media talking about America’s new glorious future (new poster boys of success) and never to sell the USA short.

            The politicians who will be lucky enough to be present while it happens will tell you that it was all because of them.

          • Bruce C.

            We shall see how the energy situation plays out. Right now the media makes it seem like only the US suddenly has all of this extra oil and natural gas that it can use to gain independence and even become a net exporter, hence all the jobs you refer to. However, that’s not the whole story. The rest of the world is beginning to incorporate fracking technologies too which is increasing global supplies and thus pressuring the price down and diminishing the potential energy export markets for the US. Fracking is not a new technology, it has just recently become economically feasible to deploy. Oil has to be about $75/brl (I think) for fracking to be feasible, so if demand keeps falling then energy production everywhere in the world is going to be just a massively expensive yet relatively unprofitable business commodity that will suffer the same global wage pressures (including for American workers) as everything else. On the other hand, if demand does increase then oil prices will be at least $80/brl (and higher also because of “beggar thy neighbor” exchange rates) which may prove to be a drag on economic growth in general. Wall Street likes to talk about the “developing countries” being like the West was in the early 50’s, but we may all soon learn if relatively (very) cheap energy is necessary for that rate of economic growth to continue. It may not be. Other kinds of technological innovations may overcome it. We shall see.

            Also, some manufacturing may return to the US from China but mostly because of technological innovations that replace human labor, thus removing the biggest arbitrage advantage that China’s cheap labor provided. If automation continues then the physical location of factories will be where business is treated best, or at least better than in China. The return of manufacturing to the US has not resulted in significant employment, never mind well-paying jobs.

            Finally, why are you so confident that interest rates are going to rise soon? Because you think employment will increase so Ben will stop QE? Automation, global wage arbitrage, and efforts to avoid “ObamaCare” requirements suggest otherwise. Even Ben thinks the unemployment rate won’t improve enough until 2015. Furthermore, the global wealth you foresee coming to the US tends to lower US interest rates, not raise them. I don’t think Ben will stop QE until the headline inflation rate is over 2.5%, regardless of employment, because deflation is his main concern.

            In the end we seem to agree that things are going to end badly, you just think there is going to be one last blow-off top for the US before imploding. Maybe so, but I think there is already too much debt clogging up the works for that to happen.

            Banks are going to start lending? To whom? Who has the assets or income or credit to do that to any significant degree? Or do you think that banks will just lower their lending standards again for one last blast? Maybe the Fed should be lending to all those people with “pent up brain power and desires to innovate” instead of the US Treasury.

          • Robert

            I don’t think that the US needs to be an energy exporter. If it is independent then it will help greatly with balance of payments and put upward pressure on the value of the dollar as less of them will be shipped abroad.

            Also it will save money on shipping of oil. US companies will be able to put plants close to energy sources again saving the cost and risks of shipping. You know that the world has not recovered from the crash of 2008 because oil prices are still way off their highs. That is in line with most commodities as per the CRB Index.

            When Europe and China are back to relatively normal growth, as measured over the past say 15 years, then we should be back to a synchronized global boom that will again pressure commodity prices higher.

            Until that happens US manufacturers are going to be benefiting from relatively low commodity prices. If world energy production increases then a global boom may last a bit longer until demand finally out-paces production and oil prices rise to the $150 + area which should signal that the party is over.

            But as you said we are years away from China and Europe completely their restructuring. So it will be years before the next (last) leg of the synchronized boom begins.

            Because of what you said about automation I don’t believe that much high skilled employment will return to the US. But I look at pools of money like water levels. As money is brought back to the US through energy independence and the return of factories some Americans are going to get even richer than they are today.

            Some of that money will trickle down even to the bottom of the pile creating low paying jobs for the ever growing class of American surfs.

            With the American labor movement long since dead and the wage base of unskilled and semiskilled labor having been decimated, and now with commodity demand and pricing in check, there is no real inflationary pressure that the Fed will pick up on its radar.

            When unemployment levels drop to 6% and below (even if the jobs are low paying) the Fed will phase out the punchbowl. Then interest rates will rise. And if America is still the only game in town Euro Dollars will flock here.

            The Fed always starts recoveries with easy money and chokes off boom cycles by choking off the money supply. Even if recoveries all start with easy money eventually a virtuous cycle develops of greater investment, more jobs and more spending. And with this comes greater loan demand from the banks.

            Two examples of how this cycle is working right now is that Wall Street in its quest for return has decided that Americans are now too afraid of owning real estate creating opportunities for them for rental yields. So the hedgies and private equity are pushing up real estate prices.

            While the American people may not be participating yet, when people know that their home prices have risen then many are emboldened to use their homes as piggy banks again so they can buy purchases that they have put off for years.

            And thanks to Uncle Ben corporations can now borrow for nearly nothing. Many are doing just that, and with their money buying back shares, lowering the shares outstanding and raising stock prices.

            And this whole process is being driven by the corporate big guys whose stock options are now worth, wow we can feed a small city on that. In fact I heard that as of now the whole rally in stocks is ONLY due to these Uncle Ben leveraged buy backs.

            But high stock prices, like rising real estate prices make people feel rich and they become more likely to spend on whatever it is they think they should spend it on. One reason that the economy and jobs have not recovered well so far is that the money supply has been sclerotic.

            Now some of the massive amounts of money Ben has printed will finally flush through the system. This is what begins real recoveries.

            But long term your view is still correct. All of this is based on creating ever more debt. The middle class was created by access to affordable education and heath care. Thanks to crony- capitalism the cancer of inflation in these two areas is growing without limit and will continue to destroy piece by piece what is left of the middle class.

            Money printed by Uncle Ben is welfare for the rich creating profits for crony bankers and businesses. So the rich will continue to grow richer while the poor will continue to grow poorer.

            The banks will lower standards again when this last American boom is over, as they try and keep the party going past closing. That is when you hear people say that recessions are dead and the good times will go on forever.

            As for the Fed lending directly to people, well that would really be about socialism and is another story.

            Still if Bernanke wanted to print his way out of the credit collapse of 2008 he would have done it in a more efficient and humane way by just dropping it out of his damn helicopter to real people than giving it to the banksters.

            But then Ben is a working man and the real issue is who pays him? I don’t believe many Americans think that they do. And if they do they are getting very bad value for money:-)

          • Bruce C.

            Again, our discourse really seems to come down to whether or not the US economy and the global central-banking/fiat-money/fractional-reserve banking systems (and the US dollar hegemony, which is what this piece was originally about) has one last gasp left in it before collapsing. It’s a tough call because so much (or all of it?) depends upon human psychology and decision making at myriad levels which seems to be fundamentally unpredictable and inconsistent.

            I understand one of your earlier points that if one’s timing is off by too much then one’s prediction is wrong for all practical purposes, and I assume you’re referring to investment decisions such as buying tangible assets (e.g., PMs, commodities, agricultural land, etc.) at this time versus stocks or real estate or going long the dollar or shorting Treasuries, etc. , but that timing issue can work both ways. As you know, this global reflationary effort is 4 years in the making and it has barely – or not even -gained any consistent traction. Historically, economies with these debt levels take decades to work through, if they do at all (e.g, Japan) and interest rates tend to remain extremely low the whole time (e.g., Japan, pre Abe). But let’s say you’re right, that this time it’s different, that all the Pavlovian tricks will work their charm one last time and people dutifully respond in the ideal ways that you describe and world events cooperate according to script, and “you” invest accordingly. What then? What’s your exit strategy as an investor, especially when you know that this alleged growth spurt is serendipitous? What if your timing is wrong? If you agree that the system is inherently unsustainable does it not make better sense to invest now in that which will benefit from collapse, and not risk the historically unlikely from happening, and – if it does – the risk of misjudging the timing of when it all falls apart again? How did you do in 2000 and 2008? Were you following the Fed’s lead then too?

            Anyway, I find it interesting that you think that if the Fed loaned money to US citizens directly that would be socialism. At least the Fed is a private corporation. When the US Treasury loans money to citizens (e.g., the backing of student loans and mortgages) then ALL US citizens become responsible for those loans. To me THAT is a lot more socialistic. In theory the Fed could be stiffed and only its “stock holders” would suffer the loss. (Maybe the US Treasury will stiff the Fed!)

            Also, an article at the Daily Bell addresses the helicopter approach to monetary injection. See:

            http://www.thedailybell.com/28921/Slate-Wants-to-Drop-Money-From-Helicopters-Not-so-Fast-

          • Robert

            I really wasn’t trying to define what investment strategies people should have. That is something that is based on each persons perceived needs and their time horizons.

            With a developing world and populations still growing obviously commodities are an important core holding if you are looking for long term wealth preservation.

            The same is true for gold and silver relative to maximally leveraged fiat currencies.

            All I am saying is that everyone should look at other forces going on in the global economy as well, keep an open mind and stay flexible. There are endless forces out there that none of us can see. And no matter how dark the clouds may seem, the future is never wholly knowable. You know the flap of the butterfly’s wing.

            I sort of liked the Daily Bell Article. It is at its core a discussion of the value of the Central Bank.

            I was only saying in my message that given the central bank and its seeming need to print money, (to put a finger in the dike that would prevent the great debt flood from wiping out the global economy,) that that money would have been better distributed directly to the people who would use it, than to the banks who up until now only used it to shore up their balance sheets.

            Of course in suggesting this I was only kidding. I know who runs America. And while life may be infinitely complex, politicians are mostly and sadly quite predictable.

          • Bruce C.

            I want to thank you for exchanging so many ideas with me at this forum.

            I like your optimistic sentiment. You’re absolutely right that there are many forces at work, especially unseen ones, that form various probable realities. Some of those forces are not so good ones, and are potentially much bigger and stronger than any of us really know. But maybe there are even stronger positive ones too.

            And don’t misunderstand: I definitely believe that if there was to be any “bailing out” of the economy in ’08 it should have been directed to households directly, either via 0% loans or outright transfers. Screw the intermediaries; they were they ones who already profited by enabling the bubble. So stop “kidding”. Just as British rule backed by the Bank of England was shed by the American Revolution, and its step-child enabled by Alexander Hamilton was disabled, and the Second Bank of the United States was broken by the leadership of Pres. Andrew Jackson, the Federal Reserve Bank of the United States can be bankrupted too.

            You might be intrigued with another piece that documents the progression of US monetary policy and politics concerning gold and protection of the US dollar since the 50’s via actual randomly selected news reports. They’re very interesting in many ways. See:

            http://fofoa.blogspot.com/2013/03/checkmate-2-slow-history.html

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