War, US Hegemony, and Geopolitics

This article in Foreign Affairs by Robert Kagan addresses the current geopolitical crisis in historical context using the standard analysis of national security and international relations. However, I think Kagan misses the tail that wags the dog that will shape the near future of geopolitics. That would be the hegemonic role played by the US$, and by association with the C5 central banks in the West over the international monetary system.

Finance unleashes centripetal forces on the flows of capital, concentrating capital in the core of the market system, which, in the case of US$ policy, is the US financial system. All those dollars created over the past 30-40 years must flow back to the US in some way to be reinvested in US$ assets. What this does is suck capital from the periphery.

The capital-starved periphery has relied on the cheap cost of labor relative to the developed world, but about 35 years ago that began to be sucked up by China’s liberalized mercantilist trading policies. So the periphery has been starved of both capital and labor income. This leads to political strive and eventually to armed conflict along the borders of these periphery countries. In some cases, like Mexico, Afghanistan, and Columbia, it has led to failed democracies being transformed into narco-trafficking states run by criminal enterprises that control the governments of these countries.

Russia has been on the wrong side of this widening divide between rich and poor. So have countries like Iran, Iraq and North Korea. The continuation of US$ central bank easy credit policies and the CCP labor policies will only aggravate geopolitical conflict across the globe. And some will still wonder why. The global pandemic has merely thrown gasoline on the fire.

It’s also important to note that these two forces operate at the micro as well as national and international levels, causing a growing divide between the asset-rich and the asset-poor within nations as well as between nations. We’ve seen the imbalance grow in our own cities and communities between rich and poor. More billionaires, more poverty, and a hollowing out of the middle class. We can expect more conflict to come as the direct consequence of our misguided monetary, credit, and fiscal policies snd the Ukraine is just another canary in the coal mine.

The Price of Hegemony

Can America Learn to Use Its Power?

By Robert Kagan, May/June 2022

For years, analysts have debated whether the United States incited Russian President Vladimir Putin’s interventions in Ukraine and other neighboring countries or whether Moscow’s actions were simply unprovoked aggressions. That conversation has been temporarily muted by the horrors of Russia’s full-scale invasion of Ukraine. A wave of popular outrage has drowned out those who have long argued that the United States has no vital interests at stake in Ukraine, that it is in Russia’s sphere of interest, and that U.S. policies created the feelings of insecurity that have driven Putin to extreme measures. Just as the attack on Pearl Harbor silenced the anti-interventionists and shut down the debate over whether the United States should have entered World War II, Putin’s invasion has suspended the 2022 version of Americans’ endless argument over their purpose in the world.

Inflation? What Inflation?

Not that we haven’t been writing here for the past dozen years: central bank policy is the key to mismanaging public finance. MMT? Stupid is as stupid does.

We’re Paying for All of That ‘Free’ Money Now, Aren’t We?

Why is everything so darn expensive? A deep dive noting that economic minds on the right and the left are coming to an agreement — sure, the supply-chain issues and the labor shortage didn’t help, but the biggest factor in our runaway inflation was “vast amounts of government rescue aid, including three rounds of stimulus checks” — way more aid than the European Union, Canada, or the United Kingdom gave to their citizens — and lo and behold, we’ve got much worse inflation rates than they do. We’ve borrowed and spent ourselves into this inflation crisis. 

Fake Money?

This article published in Vox is not very insightful (as most articles in Vox are mostly partisan political parroting), but it does raise lots of questions for the layperson to contemplate. First off, all fiat currency money is fake until it’s made real, which means until you trade currency for real assets, it’s only worth the paper it’s printed on. Value is not in money, it’s in the positive returns that an asset delivers over time. That return can be in additional currency, time, or energy.

Money Has Never Felt More Fake

Some excerpts:

“Money feels cold and mathematical and outside the realm of fuzzy human relationships. It isn’t,” he wrote. “Money is a made-up thing, a shared fiction. Money is fundamentally, unalterably social.”

Yes. As stated above. Money is actually stored time. The more money you have the more time you’ve stored up. But it doesn’t extend your time on earth, it only allows you to trade it for more free time within that uncertain lifetime we all have.

GameStop has come to epitomize an era of meme investing, where ordinary investors are piling into stocks and cryptocurrencies and digital assets not necessarily because they believe in the underlying value of the thing they’re buying (though some do) but instead because it just seems like a thing to do. Dogecoin or NFTs or stock in theater chain AMC get popular online or in their social circles, and they turn around and think, why not?

Yes, the psychological nature of fiat money means that psychology can drive the prices of goods and services. This is especially true with speculation based on the greater fool theory of value.

Value is ultimately a story, one we tell to ourselves and to others. In the United States, we’ve convinced ourselves of the story of the dollar, which is backed by the full force of the US government. But it’s ultimately just a piece of paper. Cryptocurrencies and NFTs and AMC all come with their own stories, which, admittedly, can be on the kooky side.

Well, yes, it’s a story, but whether that story is truth or fiction is borne out by subsequent experience. Value is a function of a positive stream of desired “goods,” much like a bond delivers coupon payments (i.e, interest) every quarter. If the bond fails, well then, the story was fiction.

There’s more to the current money landscape than dogecoin and meme stocks that makes the whole thing seem a little fake. The stock market soared during much of 2020 and 2021, even during the depths of the pandemic, making it hard not to wonder what the whole thing is for. The federal government was able to deliver a lot of money through monetary and fiscal relief to keep the markets — and regular people — afloat.

Yes, money printed by the Fed to monetize excess government borrowing is fake unless it is converted to real value through the conversion of time and energy into real goods and services. Paying people not to work is converting money into fake value that will evaporate in time.

“If it’s just a dot-com bubble, it sucks for the people who invested,” says Hilary Allen, a law professor at American University who specializes in financial regulation. “But if it’s 2008, then we’re all screwed, even those of us who aren’t investing, and that’s not fair. It really depends on who’s getting into this and how integrated it’s getting with the rest of the financial system.”

Well, Prof. Allen doesn’t quite get it. In the early 20th century, market meltdowns bankrupted speculators and financiers and the rich who saw their assets devalued. That is no longer the case as just about everyone has a stake in financial assets through their pensions, real estate, and income flows. We’re all “invested” and it is true today that those most hurt today are those without asset portfolios. The Fed protects the asset rich today. It’s why when Mr. Market eventually ends this game, there will be nowhere to hide except far off the grid. Maybe that’s why the tech billionaires want to colonize outer space? Good luck.

Crony Crapitalism at its Worst

A brief look at the Citicorp case and court rulings from Matt Taibbi’s TK News on Substack:

Meet Jed Rakoff, the Judge Who Exposed the “Rigged Game”

“We have mass incarceration for the poor, and it’s totally hands-off for the rich, and that’s pretty hard to stomach.” Justice Jed Rakoff on his new book, and his famous challenge to the system

“Heads we win, tails you lose,” is not capitalism!

QE4Ever

A bit like love, eh?

This article offers some good insights into monetary manipulation. The one thing I see missing is the recapitalization of assets based on depressed long-term interest rates, which is a result of Quantitative Easing and Zero Interest Rate Policy (ZIRP). So we have massive asset bubbles across many real asset classes as a result. No one seems to have any idea how this unwinds, but unwind it must.

‘Quantitative Easing’ Isn’t Stimulus, and Never Has Been

By Ken Fisher, RealClearMarkets

(AP Photo/Jose Luis Magana)

Upside down and backwards! Nearly 13 years since the Fed launched “quantitative easing” (aka “QE”), it is still misunderstood, both upside down and backwards. One major camp believes it is inflation rocket fuel. The other deems it essential for economic growth—how could the Fed even consider tapering its asset purchases amid Delta variant surges and slowing employment growth, they shriek! But both groups’ fears hinge on a fatal fallacy: presuming QE is stimulus. It isn’t, never has been and, in reality, is anti-stimulus. Don’t fear tapering—welcome it.

Banking’s core business is sooooooo simple: taking in short-term deposits to finance long-term loans. The spread between short- and long-term interest rates approximates new loans’ gross profit margins (effectively cost versus revenue). Bigger spreads mean bigger loan profits—so banks more eagerly lend more.

Overwhelmingly, people think central banks “print money” under QE. Wrong. Very wrong. Super wrong! Under QE, central banks create non-circulating “reserves” they use to buy bonds banks own. This extra demand boosts bond prices relative to what they would be otherwise. Prices and yields move inversely, so long-term interest rates fall.

Fed Chair Jerome Powell and the two preceding him wrongheadedly label QE stimulus, thinking lower rates spur borrowing—pure demand-side thinking. Few pundits question it, amazingly. But economics hinges on demand … and supply. Central bankers almost completely forget the latter—which is much more powerful in monetary matters. These “bankers” ignore banking’s core business! When short-term rates are pinned near zero, lowering long rates shrinks spreads (“flattening” the infamous yield curve). Lending grows less profitable. So guess what banks do? They lend less! Increase demand all you want—if banks lack incentive to actually dish out new loans, it means zilch.  Stimulus? In any developed world, central bank-based system, so-called “money creation” stems from the total banking system increasing net outstanding loans. QE motivates exactly the opposite.

Doubt it? Consider recent history. The Fed deployed three huge QE rounds after 2008’s financial crisis. Lending and official money supply growth shriveled. In the five pre-2008 US expansions, loan growth averaged 8.2% y/y. But from the Fed’s first long-term Treasury purchases in March 2009 to December 2013’s initial taper, loan growth averaged just 0.8% y/y. After tapering nixed the nonsense, it accelerated, averaging 5.8% until COVID lockdowns truncated the expansion. While broad money supply measures are flawed, it is telling that US official quantity of money grew at the slowest clip of any expansion in history during QE.

Now? After a brief pop tied to COVID aid, US lending has declined in 12 of the last 14 months. In July it was 4.7% above February 2020’s pre-pandemic level—far from gangbusters growth over a 17-month span.

Inflation? As I noted in June, it comes from too much money chasing too few goods and services worldwide. By discouraging lending, QE creates less money and decreases inflation pressure. You read that right: QE is disinflationary. Always has been. Wherever it has been tried and applied inflation has been fried. Like Japan for close to …ah…ah…ah….forever. Demand-side-obsessed “experts” can’t see that. But you can! Witness US prices’ measly 1.6% y/y average growth last expansion. Weak lending equals weak real money growth and low inflation—simple! The higher rates we have seen in recent months are all about distortions from lockdowns and reopenings—temporary.

The 2008 – 2009 recession was credit-related, so it was at least conceivable some kind of central bank action might—maybe kinda sorta—actually help. Maybe! But 2020? There was zero logic behind the Fed and other central banks using QE to combat COVID. How would lowering long rates stoke demand when lockdowns halted commerce?

It didn’t. So fearing QE’s wind-down makes absolutely no sense. Tapering, other things equal, would lift long-term rates relative to short rates—juicing loans’ profitability. Banks would lend more. Growth would accelerate. Stocks would zoom! Almost always when central banks try to get clever they wield a cleaver relative to what they desire.  A lack of FED action is what would otherwis be called normalcy.

Fine, but might a QE cutback still trigger a psychological freak-out, roiling markets? Maybe—briefly. Short-term volatility is always possible, for any or no reason. But it wouldn’t last. Tapering is among the most watched financial stories—has been for months. Pundits over-worry about it for you. Their fretting largely pre-prices QE’s end, so you need not sweat it. This is why Powell’s late-August Jackson Hole commentary—as clear a statement that tapering is near as Fed heads can make—didn’t stoke market swings. The ECB’s September 9 “don’t call it a taper” taper similarly did little. Remember: Surprises move markets materially. Neither fundamentals nor sentiment suggest tapering is bear market fuel.

Not buying it? Look, again, at history. The entrenched mythological mindset paints 2013’s “Taper Tantrum” as a game-changer for markets. Untrue! After then-Fed Chairman Ben Bernanke first hinted at tapering back in May 2013, long-term Treasury bond prices did sink—10-year yields jumped from 1.94% to 3.04% by that yearend. But for US stocks, the “tantrum” amounted to a -5.6% decline from May 21 through late June—insignificant volatility. After that, stocks shined. By yearend, the S&P 500 was up 12.2% from pre-taper-talk levels. Stocks kept rising in 2014 after tapering began. 10-year yields slid back to 2.17%. My sense is even tapering’s teensy impact then is smaller this time because, whether people consciously acknowledge it or not, we all saw this movie before.

Taper terror may well worsen ahead of each coming Fed meeting until tapering actually arrives. Any disappointing economic data will spark cries of “too soon!” Tune them down. History and simple logic show QE fears lack the power to sway stocks for long.

Ken Fisher, the founder, Executive Chairman and co-CIO of Fisher Investments, authored 11 books and is a widely published global investment columnist.

Modern Monetary Fantasies 2

The Myth of Big Government Deficits – A TED Talk

This is quite the tale. I’m sure Ms. Kelton studied her economics but here with MMT she takes a few basic truths and spins an elaborate fantasy. Essentially her argument is that debt is no obstacle to economic policy and economic outcomes. You want a Ferrari? No problem, the Fed can write a check and it’s yours, no taxes, no worries. Advocates will hate this simplification but that’s essentially what Ms. Kelton is selling. (You can substitute free healthcare, free college, whatever you want, but I’d go with the Ferrari 365GT.)

MMT is utopian economics. Yes, in theory it can make sense, just don’t go too far down that rabbit hole. Govt debt is not like private debt because it never has to be paid back, only serviced and rolled over. So the debt in $ terms doesn’t matter, but the productivity of that debt matters a lot (the debt to GDP ratio is a good indicator – it looks worse every day).

She lauds the pandemic stimulus because that essentially was an MMT experiment. Look, no recession! But recessions are measured in monetary terms (not value), and if the Fed keeps pumping out money, voila! No recession. But value creation matters and in value terms, we are suffering an extreme recession and stagflation. How many small businesses have closed in the past 2 years? How much price inflation are we experiencing? 5-9%? Have you tried to buy a house lately? 20% price increases. Tried to get a plumber or electrician?

Yes, when the government spends $28 trillion, that money goes somewhere in the private sector. And yes, we’ve seen it skimmed off by the banking industry, the asset-rich who have merely leveraged 3% debt, and the securities markets that have bubbled up even as production has declined. This is what is driving inequality to new heights as the global elites suck up this cheap credit courtesy of the central banks. Check out the number of mega yachts plying the oceans.

Yes, we’ve seen the fantasy of MMT in action and that’s why we’re having a political revolution. Kelton and the handful of economists selling MMT are assuming a utopian political world where everybody always does the right thing. Ultimately, intellectual dishonesty like this is extremely damaging.

Read her book, there’s nothing there that will address these false assumptions. Credit and debt are tools that the market uses to restrain profligacy. Without those restraints, the party will eventually implode.

Modern Monetary Fantasies

I read this comment to an article on cultural conflict and politics (the article was a UK perspective and not that insightful – see link below). I was struck by this reader’s comment because it hits the nail on the head, despite its rudimentary tone and language. I could write an empirical and theoretical analysis that would bore readers to tears but it would all support this view.

It’s US$ monetary policy that is driving the distributional consequences of deficit spending along with globalization and technology into the cul-de-sac we find ourselves in. Think about it: when the government borrows and spends $28 trillion, where do we think it goes? Into private pockets controlled by those at the top. (All those real estate assets we own are merely keeping pace – it’s still the same four walls and roof.)

There’s probably not more than a handful of politicians in Washington DC that could explain this well or understand it, but they’re all setting the policies in ignorance.

Money Printing, the ability to spend more than is taken in has had a vast set of consequences – and almost all the problems can be laid at its feet. Really Nixon in 1971 taking US off the ‘Gold Standard’ to fund Johnson’s ‘Great Society’ and the Vietnam War. Both these make the rich richer. The Military-Industrial Complex goes directly to the wealthy, and the increased Social Spending $ always trickle-up while paying the poor to be poor traps them in poverty.

And so it has progressed till the National debt is 28$ Trillion! About equal to 8 years of all USA’s tax revenues. At the current ZERO percent interest rate it takes 1.5$ Trillion to service the debt! About half of all the Fed Tax revenues! Biden wants to add 4.5$ Trillion on human infrastructure (waste, pork, corruption, and free money to minorities, to trickle to the super-rich (and China, via Amazon and Walmart)). This on top of the monthly 120$ BILLION purchases of Treasuries and mortgage-backed securities the Fed buys – and the 1-3$ Trillion budget deficit! (If, when, interest rises to 5% it will take all the gov tax revenue just to service the national debt – )

Anyway, the printed $ all rise to the super wealthy, they get all of it. The poor just get addicted to the drug of the Welfare Trap, and become multi-generational poor. The working class and middle class have all their savings and pensions harvested by the stealth Tax called Inflation (now officially 5%, but really 9) because interest must be kept at Zero for the debt to be serviced. So all workers’ savings get eaten up by inflation Tax of 5% – (minus the bank and bond interest of 1% = MINUS 4% savings growth). Their pensions and savings melting like snow as the printing inflates the money supply….

But the above just scratches the surface of the harm. USA will eventually lose ‘Reserve Currency Status’ over this. The foreign trade deficit is a Trillion – how can that continue – the hard assets and Equities so inflated – and the wealthy own them. The rich have hard assets which appreciate, they carry HUGE debt at 3% interest while inflation eats the debt basis away – and Dividends, so make money while everyone goes broke.

This is what Lefty/Liberal MMT is doing – the death of America. The Left economics is always same – all the money to the elites, and the rest go broke.

Why Does America Hate Itself?

Afghanistan and the Politics of National Security

To Stop War, American Needs a Third Party

by Matt Taibbi, Substack

For the past few years I haven’t read much from Matt Taibbi to disagree with, as he has done a masterful job exposing the degeneracy of our political and cultural elites. I would agree here with the gist of his criticisms of bipartisan foreign policy and national security policy that has resulted in a long series of futile small war engagements.

However, I do fail to see the connection between war and political party systems he draws out in his title. Perhaps he is a bit unclear himself of the connection as he doesn’t really present the case as a solution, only that our two-party system is part of the problem. Basically he argues our two parties have failed and are corrupt (agreed), but then unconvincingly suggests maybe a third party is the solution. But I can’t find either internal logic or empirical history supporting the case for multiparty systems solving the national security dilemma, even while conceding Eisenhower’s warning concerning the Military Industrial Complex as a real danger. The solution to corrupt politics is to clean out the corruption through the voting process and, if necessary, through the checks of the judicial branch.

To review recent history, no multiparty democracy in the post-war world has satisfactorily solved the security dilemma without becoming dependent on the bipolar great power conflict between the USA and the former USSR. Even after the 1989 demise of the Soviet Bloc, the hegemonic dominance of US continued to provide a convenient security umbrella for European democracies, as well as many developing countries around the world. One must merely offer tacit submission to US global interests to have the US military do all the heavy lifting while the US taxpayer picks up the bill.

This convenient arrangement started to unravel as the global system became unipolar while the rest of the world began to catch up economically during Pax Americana. The cost of hegemony has continued to rise as the US$-centered global monetary system has undermined global trade flows and fundamental prices in asset markets. The liberalization of India and China has also contributed heavily to this transformation of global trade by shifting the global mix of capital and labor. What we have seen in the frequent mismanagement of global conflict by US hegemony has been, as Taibbi notes, an exercise in managing peace rather than decisively ending conflict. As Taibbi notes, one does not wage war for any other reason than to win by vanquishing one’s enemy. There is no polite, dignified way to do this and better not to start a war than to try to manage it over time.

Taibbi’s forlorn hope seems to be like that of Immanuel Kant, who believed democracies do not wage war against each other, so a world characterized by free democracies would ensure everlasting peace. History has proven otherwise as democracies are just less likely to initiate wars, but they are always drawn into them. We have not seen the End of History.

But this brings us to the suggested salve of multiparty systems, which are somewhat analogous to a multipolar international security system. Multipolar systems rely on configurations of alliances and these alliances must be trustworthy. Allies must be willing to commit to the alliance and absorb their share of the costs. This is a radically different dynamic than hegemony, where the big dog takes care of everything in return for obeisance. It is also radically different than bipolarity, which is what a two-party system is.

The USA is no longer the global hegemon because its leaders have not promoted the necessary commitments from the voting populace, and so the American public has moved away from supporting such a role. Remember, President George W. Bush maintained that we could fight the Afghan and Iraq wars without distracting ourselves from shopping at the mall. In other words, zero commitment from anyone, save those who volunteered to be on the front lines. This lack of commitment to assume the costs of global stability permeates US society today, from national politics to the financial sector to our cultural and educational institutions. It was reflected in President Trump’s desire to disengage from the Middle East. What should concern us, and Taibbi, is how global monetary hegemony of the US$ is destabilizing the global economic system, leading to more conflict at the periphery. US monetary policy, in coordination with the 4 other C5 central banks is creating massive inequalities between US$ holders and everyone else. The elite oligarchs of the world benefit from US$ portfolios, but their citizens do not and they will become increasingly restless and combative. There is no global policeman, so the world will become a more dangerous place in the absence of US hegemony.

A third-party in US politics can do nothing to reverse this trend toward irresponsible national policies in a multipolar world. And a multiparty electoral system is just as unstable as a multipolar global security system. It relies on fragile coalitions that give disproportionate power to minority parties that can tip the balance. On the other hand, a two-party system is quite effective in stabilizing a diverse, multi-ethnic, multi-racial pluralistic democratic society, albeit with certain trade-offs. Those trade-offs for stability include resistance to change and political sclerosis. But this is a crucial and deliberate element inherent to the overall design of our constitution to prevent passing populist fads from changing our form of self-government. I would be loathe to throw out national stability for the unwarranted hope of convergence on international comity. Instead, in a multiparty system we would expect the instability of comparable historical cases like post-war Italy, India, Indonesia or Brazil. A global superpower can hardly afford those kinds of risks.

I find Taibbi’s criticisms of our political leaders, our foreign policy bureaucracies, and our military-industrial complex to be on the mark. I sincerely doubt a third party solves any of these problems, but we will never find out because the logic of the two-party electoral system supersedes any argument against it for myriad reasons. Paramount is that national stability is a necessary precondition for good government, continuity, and preservation of the union. We’ve had dozens of third party movements in US history and the only ones that have been successful have been those rare moments when a new party replaces one of the two that has been rejected by the voters. The US electoral system favors reform from within the major parties by holding elected politicians to a higher standard and by removing them from office when necessary. The Republican party accomplished much of this house-cleaning in 2016, but the Democratic party is still conflicted over its future path.

It should be added that to reduce the risks of national politics we should devolve as much power away from the central government back to the states, counties, municipalities and individuals where it belongs. The central government was designed to coordinate democratic self-rule, not overrule.

But what we really need is a much broader understanding of our loss of political and financial integrity. What we need is another Greatest Generation on the horizon that recognizes good and evil and is willing to take a stand.

Bretton Woods – #2 of Series

Second of a Series of articles on the international monetary regime reprinted from the NY Sun.

Not sure I would agree with all of this. Net exports is different than manufacturing exports and manufacturing employment, especially in the global information economy. I believe the problem here is that the reserve currency allows the US central bank to issue too much US$ credit liabilities without paying the direct consequence. Our trading partners are not exactly happy about this either since they surrender control of their currencies to the dominance of the US Federal Reserve and US politics. I think we need to rein in political discretion over the value of money.

Time To Reverse the Curse Over the Dollar

nysun.com/national/beyond-bretton-woods-the-road-from-genoa/91606/

By JOHN MUELLER

Journalism thrives on simple narratives and round numbers. So I must note that what President Nixon ended 50 years ago was not the international gold standard, which persisted despite interruptions for more than two millennia to 1914, but its complicated parody: the gold-exchange standard, established 99, not 50, years ago by a 1922 agreement at Genoa.

Prime Minister David Lloyd George convened the Genoa Conference in an effort to restore the economies of Central and Eastern Europe, modify the schedule of German reparations owed to France, and begin the re-integration of Soviet Russia into the European economy. Lacking any American support, the conference was a failure on all those counts.

The gold-exchange standard, John Maynard Keynes’ idea, was Genoa’s one tangible result. Keynes had proposed in 1913 that the monetary system of British colonial India be adopted world-wide. The British pound would remain convertible into gold, but India’s and other countries’ domestic payments would be backed by ostensibly gold-convertible claims on London. Following Genoa, the pound could be exchanged for gold, and other national currencies could be exchanged for pounds.

But there was a complication: unlike most currencies, the Indian rupee actually was based on silver, not gold, and British officials, including Keynes, overvalued the silver rupee, hoping to reduce heavy demands for British gold. British monetary experts inserted this scheme (without the silver wrinkle) in the 1922 Genoa accord, incidentally forestalling impecunious Britain’s repayment of its World War I debts in gold.

While working 35 years ago for Congressman Jack Kemp, I first coined the term the “reserve currency curse.” I was tutored in the subject by Lewis E, Lehrman, who in turn was influenced by the French economist Jacques Rueff (1896-1978). Keynes had claimed that what matters is only the value, not kind, of monetary reserves. It was Rueff who countered in 1932 that foreign exchange is qualitatively different from an equal value of precious metal.

With the creation of, say, dollar reserves, purchasing power “has simply been duplicated, and thus the American market is in a position to buy in Europe, and in the United States, at the same time.” This credit duplication causes prices to rise faster in the reserve-currency country than its trading partners, precipitating the reserve-currency country’s deindustrialization. That fate soon befell Great Britain, then the United States after the dollar replaced the pound under the 1944 Bretton Woods agreement.

Other countries backing their currencies with dollar-denominated securities led to a dilemma for America. The United States is the only major country with negative net monetary reserves (foreign official assets minus liabilities). All others — even those whose currencies are used by foreign central banks — have positive net reserves (i.e., those countries’ foreign official assets exceed their foreign official liabilities).

There is a correlation of more than 90% between America’s net reserves and its manufacturing employment. American net reserves had been positive before but turned negative by 1960, and manufacturing jobs have since disappeared in direct proportion to the decline in our net reserves. Focusing on one bilateral trade balance or other — say, the US and China — is a mug’s game. What matters is the total balance, not bilateral subsets.

How could an American president reverse the reserve-currency curse? By making honesty the best policy: negotiating and starting repayment of all outstanding dollar reserves over several decades. Since international payments must be settled in real goods — not IOUs — the necessary production of American goods for export is the surest way to revive America’s manufacturing employment.

To increase our manufacturing jobs back to the peak of 17 million from today’s 12 million, it would be necessary to repay most outstanding official dollar reserves. If President Biden is as ineffectual as most of his recent predecessors in responding to the “reserve-currency curse,” he, too, will have to get used to the title “ex-President.”

________

Mr. Mueller is the Lehrman Institute Fellow in Economics at the Ethics and Public Policy Center in Washington DC and author of “Redeeming Economics.” Image: Conferees at the Genoa Conference, with Prime Minister Lloyd George of Britain front and center. Detail of a British Government photo, via Wikipedia Commons.

What is Money?

This looks to be an excellent series of articles concerning the most important policy issue of the past 50 years. The global monetary regime that uses the US$ as the reserve currency and gives the world’s central banks discretion and control over the supply of fiat currency drives current global events, for better and worse. The effects range from economic crises and financial meltdowns to inequality, political conflict, and environmental degradation. Given the importance of money, I print the following article from the NY Sun in full…

God and Money: ‘A Perfect and Just Measure Shalt Thou Have’

nysun.com/national/god-and-money-a-perfect-and-just-measure-shalt/91597/

By JUDY SHELTON

Following begins a new series of columns marking the 50th anniversary of the collapse of the Bretton Woods gold exchange standard established in the closing months of World War II. A related editorial appears nearby.

* * *

The 50th anniversary of the collapse, on August 15, 1971, of the Bretton Woods monetary system is a momentous moment in the history of money. It should provide an occasion for thoughtful discussion focused on the road to reform, our priceless constitutional foundation, and the restoration of honest money.

Let us avoid an academic food fight among economists over prior international monetary systems. We should not be arguing about the classical gold standard versus the Bretton Woods pegged exchange-rate system, as these are just variations on the more significant theme of gold convertibility and the role of government in regulating money.

We can’t even usefully revert to debating the old fixed-versus-flexible arguments that were part of Milton Friedman’s justification for freely floating rates in the 1960s; the theoretical models for both positions have been mugged by reality.

Instead, we should be talking about money itself — what is its basic purpose, its relationship with productive economic growth — and whether today’s dysfunctional international monetary regime deserves to be designated any kind of system at all.

As the former chief of the International Monetary Fund, Jacques de Larosiere, noted at a conference in February 2014 at Vienna, today’s central bank-dominated monetary arrangements foster “volatility, persistent imbalances, disorderly capital movements, currency misalignments.”

These, he warned, were all major factors in the explosion of credit and leverage that precipitated the 2008 global financial crisis. Such an unanchored approach, he said, does not amount to a “non-system” but something considerably worse: an “anti-system.”

It is time to think creatively about money. We need to remind ourselves what it means as a measure, how it facilitates voluntary commerce and opportunity — how it can lead to greater shared prosperity while remaining compatible with liberty, individualism, and free enterprise. We’re at a moment when everything is on the table. For the wisdom of central bank mechanisms for conducting monetary policy is being called into question just as private alternative monies are making ever more credible bids for legitimacy.

Looking back and looking ahead, we can see that the most relevant and stimulating views emphasize the importance of productive economic activity and an open global marketplace. Money’s crucial role is to provide clear price signals to optimize the rewards of entrepreneurial endeavor and increased human knowledge.

Adam Smith wrote his treatise “The Wealth of Nations” during an age when nations forged a global monetary system by defining their currencies in terms of precise weights of gold and silver. A level monetary playing field arising from a system inherently disciplined by forces outside the control of government — wherein the economic decisions of private individuals are not held hostage to the ambitions of politicians—served profoundly liberal goals such as rule of law, private property, and the equal protection of human rights.

Modern-day visionaries likewise focus on the integrity of market signals conveyed through money. When Elon Musk says, “I think about money as an information system,” he goes to the heart of money’s unit-of-account function and underscores the importance of price signal clarity. When he tweets that “goods and services are the real economy, any form of money is simply the accounting thereof,” he illuminates the same reasoning that caused our constitutional Framers to include the power to coin money and regulate the value of American money, and of foreign coin, in the same sentence of our Constitution that grants Congress the power to fix our standard of weights and measures.

Money is meant to be a reliable measure, a meaningful unit of account, and a dependable store of value. When those qualities are undermined — especially by government — for purposes of redirecting economic outcomes at the risk of global financial instability, the dynamism and productive potential of free-market forces is diminished.

Political arguments in favor of maintaining government control over the issuance of money tend to invoke short-term objectives couched in words such as “stimulus” and the need for central bank “support” for an economy. Such calls are met with somber warnings about long-term “unsustainability” from the monetary authorities who nevertheless indulge them.

“But thou shalt have a perfect and just weight, a perfect and just measure shalt thou have,” goes the passage from the Book of Deuteronomy (25:15), “that thy days may be lengthened in the land which the LORD thy God giveth thee.” The biblical injunction against dishonest measures can be interpreted as alluding to sustainability not only in economic terms but also in the moral realm.

As noted by Robert Bartley, editor of the editorial page of The Wall Street Journal for more than 30 years, economist Robert Mundell was correct in his assessment that the only closed economy is the world economy. It’s time to start building an ethical international monetary system.

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Judy Shelton, an economist, is a senior fellow at the Independent Institute and author of “Money Meltdown.” Image: The conference room at the Mount Washington Hotel, Bretton Woods, New Hampshire, where, in 1944, the Bretton Woods Treaty was crafted. Via Wikipedia Commons.SupportAboutTerms