Quote of the Day

That we are witnessing strange and dangerous deformations of the capitalist system, if we can still even call it capitalist, and that new bubbles are being blown everywhere, is not only evident by the increasingly grotesque dichotomy between a woefully underperforming real economy perennially teetering on the brink of renewed recession and a financial system, in which almost every sector is trading at record levels, but also by the fact that the high correlation among asset classes on the way up to new records is beginning to strain the minds of the economists to come up with at least marginally plausible fundamental justifications for such uniform asset inflation. ‘Safe haven’ government bonds that would usually prosper at times of economic pain are equally ‘bid only’ as are risky equities and the grottiest of high yield bonds. The common denominator is, of course, cheap money. And if cheap money for the foreseeable future is not enough, then how about cheaper money – forever?

Detlev Schlichter

The Monarchs of Money

An interesting look at the role of central bankers from the CBC, Canada’s public broadcaster:

George Osborne warning us about the Bank of England?

In 1997, the Bank supposedly went independent. Of course, a central bank by its very nature is anything but independent. Ask Goldman Sachs.

However the Chancellor of the Exchequer is still required by law to give advice to the Bank – so what is it? Give  “due weight to the impact of its actions on the near-term economic recovery”, and “sustain growth”. Not really the warning I was hoping for.

The implications are simple enough: stop asking banks to shore up capital (and by proxy, lend less he says) and get on with building the economy. By saying this Osborne flies in the face of Basel III, public opinion, and common sense. It is time for politicians to grow some spine and stop thinking of the near-term, as Osborne calls it (most would call it short term), and focus on the real problems that banks face – in particular one on Threadneedle Street.

Quote of the Day

The Fed is the elephant in the living room that everyone pretends not to notice. Even many of those who blame government for the current mess leave the Fed out of the picture altogether. The free market, meanwhile, takes the blame for the destructive consequences of what it does. This charade has gone on long enough. It’s time to consider the possibility that maybe the elephant, and not little Johnny, is the one breaking all the furniture.

Thomas Woods, Meltdown

The Head of the ECB has “No plan B”

The head of the ECB, Mario Draghi, was asked if there was a plan if countries such as Cyprus decided to leave the Euro:

Well you really are asking questions that are so hypothetical that I don’t have an answer to them. Well, I may have a partial answer. These questions are formulated by people who vastly underestimate what the Euro means for the Europeans, for the Euro area. They vastly underestimate the amount of political capital that has been invested in the Euro. And so they keep on asking questions like: “If the Euro breaks down, and if a country leaves the Euro, it’s not like a sliding door. It’s a very important thing. It’s a project in the European Union. That’s why you have a very hard time asking people like me “what would happened if.” No Plan B.

To mangle a phrase from Instapundit, the Euro’s in the very best of hands. It’s not like this wasn’t predicted by numerous economists prior to the creation of the eurozone or anything…

 

Dangerous experimentation

“Since we decided a few weeks ago to adopt the leaf as legal tender, we have, of course, all become immensely rich.”

The Restaurant At The End of The Universe, Douglas Adams

Post World War II, there was a system known as Bretton Woods, which was the last remains of the pre-war gold standard. Under this system, US dollars were convertible into gold, and the dollar acted as the worlds reserve currency. Bretton Woods had many flaws, not least the greater inflation it allowed compared to the pre-war standard, but it could be argued that at least it was planned before being implemented. The current system we have has no such defence.

Over time, the US gold reserves dwindled, and selling them at the agreed fixed price of $35 an ounce was no longer possible.  The date 15th August 1971 isn’t one that is terribly well known, but it’s a key date in the economic history of the world. On this date, Richard Nixon effectively ended the Bretton Woods system by declaring that the US would no longer honour the agreements and stopped selling the gold. Despite all the focus on the Watergate scandal,  this act of Nixon’s administration has had far wider and longer-lasting consequences.

Fiat currency is now global – there is nothing backing up the money supply, and central banks can inflate to their hearts content. Individual countries had experimented with fiat currencies in the past but this has never happened before on a global scale. Economists now love to talk about how we can’t go back to the gold standard – but our current system wasn’t planned or debated, it wasn’t voted on by politicians nor by the people in a referendum. The fundamental basis of our economy, money, was decided by an executive decision.

As Detlev Schlichter explains in Paper Money Collapse, no fiat (or “paper” money) system has ever been successful long term. They have either collapsed in chaos, or a decision was taken to revert to some form of commodity based money before things got out of hand. Throughout nearly all of human history, gold or silver has been used as money. Are we arrogant enough to think that our worldwide experiment with fiat money will last? In the 42 years it has so far lasted, we have had many financial crises, an ever growing pile of debt (both private and government), and the highest sustained inflation ever seen.

The pound sterling has lost 90% of its value since 1971. And this is the system economists tell us is the best one?

Quote of the Day

The central banking branch of the state remains hostage to Wall Street speculators who threaten a hissy fit sell-off unless they are juiced again and again. Monetary policy has thus become an engine of reverse Robin Hood redistribution; it flails about implementing quasi-Keynesian demand–pumping theories that punish Main Street savers, workers, and businessmen while creating endless opportunities for speculative gain in the Wall Street casino.

David Stockman