10-16-2012 07:17 PM
“it’s our currency but it’s your problem”
Secretary of the treasury under Richard Nixon, John Connally said this to Ministers of Finance from major European countries shortly after he was appointed to the office in 1971.
More than 40 years later it is now our problem.
When John Maynard Keynes felt one of the major factors that lead to WW2 was a lack of liquidity in the world financial mkts. He had the Brain child that lead to The Breton woods conference, the heart of the plan rested upon the formulation of a super currency called the Bancor, the Bancor was to be the currency that would allow all foreign exchanges to be settled in. The problem was that The US had become the dominant world super power both militarily and financially. We would not give up this might. In 1944 we held 20,000 tons of gold in our reserves in Fort Knox, West Point, and the Federal Reserve building in New York City. This gave us the gold to back our currency that no other country could even begin to compete with.
Thus the World finally conceded to the Demands of the American Government and Keynes idea of a separate world currency was placed on the cutting floor at the Breton Woods Conference. This worked very well till 59, when due to the Marshall Plans need for dollars to settle debt and the US Citizenries desire for foreign goods, demanded an increase in the money supply. World Governments saw what was happening and while the value of gold was fixed in America, the rest of the world was able to openly trade gold, and by 1960 the world gold price had risen to 40 dollars an ounce. In so doing the dollar had become devalued. The French protested loudly. Many Governments began to exchange dollars for Gold. The American Gold window was open and we began to sell our reserves. LBJ’s decision to have a guns and butter policy only continued to push the money supply. And sometime about the Early 60’s a little known Belgian-American economist named Robert Triffen was able to identify what is now commonly called the triffen dilemma.
The Triffen Dilemma at it’s most base and fundamental position states that A sovereign country whose Currency has also become the World’s Reserve currency will at some point have to make the choice between what is best for it’s own country and what is best for the world’s economy. By Becoming the WRC the country must have enough currency (cash) to settle all the debts of it’s own citizenry all Government debt as well and have enough cash to settle the worlds transactions between foreign entities. The dilemma that is faced is that as the world economy grows so does the need for an increasing money supply. Without a solid backing of Gold or silver the money is only as good as the full faith and credit of the issuing country. Therefore the world Governments must believe that for the sake of international trade the issuing WRC country will be wiling to run trade deficits endlessly.
America has now for 38 years.
When Nixon took us off the Gold Standard in 1971 He basically signaled the end of the Breton woods era. Now instead of having a Currency backed by Gold as many had expected we now had a currency backed by good will. There were no more brakes to be put on money supply by natural forces or economic law, we were now in a race to see who could purchase and develop hard assets fast enough to mitigate the effects of an inflationary spending policy. The 70’s saw an effective loss of half of the dollars purchasing power. Gold started at 35 an oz. and ended at over 800. In 10 short years gas went from 25 cents to over 90 cents and even higher in some cases in that time frame. Corn went from 90 cents to over 3 dollars soybeans went from 2 dollars to over 12 in that same period. Milk and meats all shot up also. Land values tripled or even more. The dollar had begun to go the way of all major currencies. The out of control inflation was wreaking havoc on our citizenry. We had to strengthen the dollar. And so we did. Carter Appointed Paul Voelcker as Fed chair and he began a process of increasing interest rates so as to attract money away from investment that lead to growth and contracted the money supply by bringing dollars out of circulation. It worked. Commodities came down across the board. And so did land values.
Ag slogged through a time of asset depreciation as the dollar strengthened we saw prices collapse as well. Oil was cheap along with gold and everything else. But we hadn’t learned our lesson. WE began spending wildly again, Military, entitlements you name it. We spent. Finally the world said enough!
In 2000 we only had about 8700 tons of Gold left in our reserves. Since Breton woods many countries had begun to exchange our dollars for Gold. Also in 2000 France and Germany made a deal with Saddam Hussein to trade for oil using a barter system that included food and other necessities, as well as the Euro. This was the first significant challenge ever to the US dollars World Reserve currency Status. The dollar was very strong and oil was extremely cheap at under 20 dollars a barrel. In 2001 we had the Attack on the twin towers and we started to ramp up our spending to fund a new war. Dollars were printed at an alarming rate. But they were used on internal spending. In Sept. 2006 we began to really blow off the lid of our exchanges by ramping up the printing presses. By 2007 with a democratically controlled house and senate we had ever increasing spending.
In the summer of 2008 we found the limit. Lots of things and policies could be blamed yet the fundamental thing was the lack of Liquidity to settle debts in the world. When Lehman went broke, Paulson and Bernanke tried to quickly get Lehman sold. When word leaked that Lehman was going to be bankrupt and sold stake holders in the company wanted to quickly get their money. The problem was there wasn’t enough money available to fund claims put against the World Reserve Currency. Credit markets were frozen. This Started on Sept. 15. It took a month but finally the US government was able to get the money out into circulation, by keeping 9 banks in a room until they were willing to accept the Government bailout funds. This was on Oct. 13. Several other things happened but the reality of it was that Tarp was invented to put the World Reserve Currency back into circulation.
The Triffen dilemma was now in Full force. The futures mkt. had recognized this by driving corn prices higher. Land was getting higher priced as investors tried to find a safe investment. And many consumers who had benefited from the good things that being a WRC had brought to them were now broke as the world contracted.
The impact on Ag markets is basically that now with the increase of the dollar money supply we have inflation. More dollars chasing the same goods. The dollars do not buy more nor do they increase wealth. And this is the reason for the higher Grain prices that we are experiencing today. But it is also the reason that we are in the doldrums of today’s market. The markets are very sensitive to monetary policy. At the Meeting in Clear Lake I asked Al Kluis to identify the risk in his risk mgt. plan. He said the usual things in the supply demand relationship. But I felt he answered that the greatest risk was when we go over the financial cliff. The reality is that we are now in a race to keep our dominance in the world currency mkts. The minute we lose this dominance is the minute we have had gravity pull us down from the buffalo jump that we are currently on the precipice of. As we approach a level of 90% of debt to GDP we may have gotten to the level of growth expectancy of 1% for the foreseeable future. This will make livestock mkts. weak, and add to the money flows into hard commodities. This will cause those countries who are holding our debt to exchange it for hard assets. One of the reasons for China’s insatiable desire for soybeans is the fact that for the first time China is able to purchase soybeans using treasury certificates. I think that may be the reason for such large purchases of soybeans in the past few weeks.
The currency is now our problem.
10-17-2012 01:00 AM
Thank God! Now I don't have to worry about commodity prices going down because we produced an insane surplus.
Metals backing currency no longer works for a credit based economy (that is, electronic exchanges where commercial paper provides liquidity for daily settlements). It's gone, and we're not going back. However, in a parallel universe where we could go back I'd guess India would have one of the strongest currencies on the planet. Their precious metals are worn at all times, both for show and security. Other Asian countries would do fairly well also I'd guess. Wouldn't you know, most of those places have poor financial regulation. I guess they're a step ahead.
I say buy gold and instantly have your assets on the gold standard. Don't have to wait on the government.
10-17-2012 04:01 AM
I think you have put the story in the light Palouser - """ electronic exchanges "" churning out vast amounts of volume with accountability being the forgotten trait --- this past year seems to have had headline debacles tarnishing the financial stability for many ---
10-17-2012 04:56 AM
Trade deficits – this isn’t Lake Woebegone, if some country runs a deficit , some other hAS to run a deficit. We run capital account surpluses, capital prefers to come here to invest vs stay at home on avg. Trade capital offset- THEY HAVE TO. How bad is it? I think it is great borrowing at 1.5% for 10 yrs to build roads, bridges. Who really wins, China of the US? Contrary to thee media which feeds doom/gloom (because of demand for such), WE DO.
Next, gold backing is archaic. Sending men 1 mile into the ground to find ORE to bring to the surface is NOT a good idea. 2) Gold had disastrous historic returns going back hundreds of yrs. 3 Contrary to miser GC bugs who missed the whole of US progress, returns on assets and standards of living in the fiat money era have been tremendous.
Nesxt Europe is NOT our problem- if she goes down because of foolish adolescent behavior, so be it. The US gets hurt some as it knocks back our GDP 3 or 4%. SO what, who owes us +3-6+ GDP forever? Why would there be some negative periods, expect them and situate yourself. IE don’t buy more farmland after it is up 300% sell some. Don’t use high leverage. Last enjoy high grain prices whilst they are here.
10-17-2012 04:59 AM
How about accept we don't know what comes next so be in position to harvest if presented.
Crazed commodity speculation, INDEX funds, have given frmers to chance to collect from rich
surbaban Coon and Ny and NJ investors - SO TAKE IT.
10-17-2012 06:56 AM
Progress, far from consisting in change, depends on retentiveness. When change is absolute there remains no being to improve and no direction is set for possible improvement: and when experience is not retained, as among savages, infancy is perpetual. Those who cannot remember the past are condemned to repeat it.
- This famous statement has produced many paraphrases and variants:
Those who cannot learn from history are doomed to repeat it.
Those who do not remember their past are condemned to repeat their mistakes.
Those who do not read history are doomed to repeat it.
Those who fail to learn from the mistakes of their predecessors are destined to repeat them.
Those who do not know history's mistakes are doomed to repeat them.
PRitch and Palouser You gotta be kidding me! You really believe that a currency backed by a really good computer program and a Leader that is well respected in the world is enough of a backing for the world?
In all of time Currency has been backed by the real value of a hard asset. As to why India isn't the main holder of Gold in the world? They have about 2,000 tons of gold.
When we look at countries we must differentiate between privately held Gold and Gold that is held by citizens.
But I would like you guys to go back and show me the country that survived a devaluing of their currency.
10-17-2012 09:48 AM - edited 10-17-2012 09:49 AM
Jr, gold is as arbitrary in its own way as paper. Where it's found, who gets control of it, etc. Rome had hard currency. Think about it. Some countries that have large quantities odf natural resources are poor as paupers. Gold doesn't solve any real problems.
In any case, we are NEVER going back unless civilization collapses. And gold doesn't prevent that from happening either, speaking of knowing history.
We DO need accountability. That was the issue with Wall ST. No accountability. Gold would NOT have prevented that situation. Greedy people who discovered a money machine based on fraud. Moody's and others were complicit - and I AM one who thinks there needs to be criminal investigations on a huge scale. One party is hesitant, one won't do it at all. So, little accountability - and GOLD would have made NO difference.
Finance IS a zero sum game. Gold doesn't really change or improve on this idea. Like I said, if you're stuck on gold then buy it. Meanwhile I want accountability and we're not getting it. The idea one party is interested in it and the other isn't is PURE BS. All we have is a struggle for power for power's sake and little thought for the masses. When people use democratic means to correct this then it would be better than gold by far! The heart of the game is to get you to indentify with a brand at a tribal level. As long as we do leadership will speak for us, not to us.
10-17-2012 11:08 AM
Gold is only valuableas long as people want it. And the only reason to want it is because you think the asset may gain value. It doesn't throw off income like farmland or interest like a cd. It's a metal for goodness sake. A commodity with few uses and $1700 gold can become $500 gold.
So that doesn't sound like a stable base for our currency. What is the matter with the capitalistic approach. The dollar is worth what people will pay for it. What they will exchange in product or assets to determine it's value. The same standard we apply to every thing else.
In fact maybe we ought to print money to settle our national financial obligations. A devalued dollar and inflationary gains but every one would pay more for what they buy. BUt at least no one would be able to avoid that tax. We need not borrow from the fed. The treasury could print our own money and leave the banksters out of the equation.