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Money Is the Key to Recovery
(Nov 14, 2008)
How the G-20 can rebuild the “capitalism of the future.”
DC – Tomorrow’s “Summit on Financial Markets and the World Economy” in
Washington will have a stellar cast. Leaders of the Group of 20
industrialized and emerging nations will be there, including Chinese
President Hu Jintao, Brazilian President Luiz Inacio Lula da Silva, King
Abdullah of Saudi Arabia and Russian President Dmitry Medvedev. French
President Nicolas Sarkozy, who initiated the whole affair, in order, as he
put it, “to build together the capitalism of
the future,” will be in attendance, along with the host, our own
President George W. Bush, and the chiefs of the World Bank, the
International Monetary Fund and the United Nations.
is guaranteed: Most attendees will take the view that Wall Street greed and
inadequate regulatory oversight by U.S. authorities caused the global
financial crisis – never mind that their own regulatory agencies missed the
boat and that their own governments eagerly bought up Fannie Mae and Freddie
Mac securities for the higher yield over Treasurys.
whatever they agree to pursue, whether new transnational regulatory
authority or globally mandated limits on executive remuneration, would only
stultify prospects for economic recovery –
and completely miss the point [emphasis added].
bottom of the world financial crisis is international monetary disorder.
Ever since the post-World War II Bretton Woods system – anchored by a
gold-convertible dollar – ended in August 1971, the cause of free trade has
been compromised by sovereign monetary-policy indulgence.
soupy mix of currencies sloshes investment capital around the world,
channeling it into stagnant pools while productive endeavor is left high and
dry. Entrepreneurs in countries with overvalued currencies are unable to
attract the foreign investment that should logically flow in their
direction, while scam artists in countries with undervalued currencies lure
global financial resources into brackish puddles.
of “overvalued” or “undervalued” currencies is to raise the question: Why
can’t we just have money that works – a
meaningful unit of account to provide accurate price signals to producers
and consumers across the globe? [emphasis added.]
this: The total outstanding notational amount of financial derivatives,
according to the Bank for International Settlements, is $684 trillion (as of
June 2008) – over 12 times the world’s nominal gross domestic product
[which, as FM Duck has pointed out over and over is one of the reasons why
it is ludicrous to claim that the definition of the dollar is defined as
“backing” by our GDP]. Derivatives make it possible to place bets on future
monetary policy or exchange-rate movements. More than 66% of those
financial derivatives are interest-rate contracts: swaps, options or
forward-rate agreements. Another 9% are foreign-exchange contracts.
words, some three-quarters of the massive derivatives market, which has
wreaked the most havoc across global financial markets, derives its
investment allure from the capricious
monetary policies of central banks [emphasis added] and the
chaotic movements of currencies.
absence of a rational monetary system
[emphasis added], investment responds to the perverse incentives of paper
profits. Meanwhile, price signals in the
global marketplace are hopelessly distorted [which is exactly
what Keynesian economists such as former Fed Reserve Chief Alan Greenspan,
current Fed Chief Ben Bernanke, and Treasury Secretary Hank Paulson don’t
understand, i.e., the subjective theory of price formation in classical free
market economics, emphasis added by FM Duck].
part, British Prime Minister Gordon Brown says his essential goal is
“to root out the irresponsible and often
undisclosed lending at the heart of our problems.” But if anyone
has demonstrated irresponsibility, it is not those who chased misleading
price signals in pursuit of false profits – but rather global authorities
who have failed to provide an appropriate international monetary system to
serve the needs of honest entrepreneurs in an open world economy.
President Richard Nixon closed the gold window some 37 years ago, it marked
the end of a golden age of robust trade and unprecedented global economic
growth. The Bretton Woods system derived its strength from a commitment by
the U.S. to redeem dollars for gold on demand.
right of convertibility at a pre-established rate was granted only to
foreign central banks, not to individual dollars holders; therein lies the
distinction between the Bretton Woods gold exchange system and a classical
gold standard. Under Bretton Woods, participating nations agreed to
maintain their own currencies at a fixed exchange rate relative to the
value of the dollar fixed to gold at $35 per ounce of gold – guaranteed by
the redemption privilege – it was as if all currencies were anchored to
gold. It also meant all currencies were convertible into each other at
Volcker, former Fed chairman, was at Camp David with Nixon on that fateful
day, Aug. 15, when the system was ended. Mr. Volcker, serving as Treasury
undersecretary for monetary affairs at the time, had misgivings; and he has
since noted that the inflationary pressures which caused us to go off the
gold standard in the first place have only worsened. Moreover, he suggests,
floating rates undermine the fundamental tenets of comparative advantage.
“What can an exchange rate really mean,”
he wrote in “Changing Fortunes” (1992), “in
terms of everything a textbook teaches about rational economic decision
making, when it changes by 30% or more in the space of 12 months only to
reverse itself? What kind of signals does that send about where a
businessman should intelligently invest his capital for long-term
profitability? In the grand scheme of economic life first described by Adam
Smith, in which nations like individuals should concentrate on the things
they do best, how can anyone decide which country produces what most
efficiently when the prices change so fast? The answer, to me, must be that
such large swings are a symptom in disarray.” [Suffice it to say
that there are many other economic and moral issues that could be included
in support of Volcker’s conclusions here but FM Duck does not want to stop
and pontificate on those issues at this point. Nor, apparently does the
author, Ms. Shelton.]
If we are
to “build together the capitalism of the
future,” as Mr. Sarkozy puts it, the world needs sound money.
Does that mean going back to a gold standard, or gold-based international
monetary system? [You’re damn right it does, says FM Duck, and for more
econ and moral issues than are discussed here.] Perhaps so; it’s hard to
imagine a more universally accepted standard of value.
occupied a primary place in the world’s monetary history and continues to be
widely held as a reserve asset. The central banks of the G-20 nations hold
two-thirds of official world gold reserves; include the gold reserves of the
International Monetary Fund, the European Central Bank and the Bank for
International Settlements, and the figure goes to nearly 80%, representing
about 15% of all the gold ever mined.
Ironically, it was French President Charles de Gaulle who best made the case
in the 1960s. Worried that the U.S. would be tempted to abuse its role as
key [or is that Keynesian? Added by FM Duck] currency issuer by exporting
domestic inflation, he called for the return to a classical international
gold standard. “Gold,” he observed,
“has no nationality.”
Sarkozy might build on that legacy if he can look beyond the immediacy of
the crisis and work toward a future global economy based on monetary
integrity. This would indeed help to restore the values of democratic
capitalism. And Mr. Volcker, an influential adviser to President-elect
Barack Obama, could turn out to be a powerful ally in the pursuit of a new
stable monetary order. Ms. Shelton, an
economist, is author of “Money Meltdown:
Restoring Order to the Global Currency System”
(Free Press, 1994) --
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