Monetary Regime Transition – a Hypothesis – Concluding Post
This post is the seventh in a series that is preceded by the following:
Part I – Message 20281952
Part II – Message 20282026
Part III – Message 20282088
Part IV – Message 20282112
Part V – Message 20285041
Part VI – Message 20285132
And the original hypothesis:
Message 20277691
So FINALLY, I think I’ve collected my thoughts sufficiently to reply to KT’s question:
“Care to elaborate on this statement, "I think the answer lies in the creation of an entire new incentive system outside the existing monetary regime."?
… from his post:
Message 20280598
Boy I certainly never intended to take such a roundabout route to replying to KT’s question. But think I just needed to review relevant material before replying.
Anyway, here are the key conclusions, towards answering your questions:
A Price System provides incentive to allocate real goods in an Economy
A Price system is a relationship between money and the real goods money purchases, and provides macro and micro incentives for the flow of goods and money in an economy.
A Monetary Regime supports a Price System
That is to say, a Monetary Regime can coordinate (in a system near equilibrium) the five things which Quigley identifies as constituting a price system – i.e. (i) the supply and demand for goods, (ii) the supply and demand for money, and (iii) the speed and exchange between money and goods.
Thus, a Monetary Regime wields significant power in its ability to control/influence macroeconomic pricing mechanisms.
A Monetary Regime has a Geopolitical Foundation
Ultimately, the pricing mechanism is significantly an expression of the geopolitical power of the dominant players establishing the pricing mechanism.
Monetary Regimes and Geopolitical Powers don’t like to lose Power
… and consequently, are prone to lever, twist, distort, and manipulate the pricing mechanism to retain power, particularly when their power base is significantly threatened as during times of transition between distinct geopolitical eras (i.e. the demise of the British Empire, or the decline of the American Empire).
Sterilization of Money Flows – a sure sign that a Monetary Regime is foundering
A sure sign that a Monetary Regime is foundering is when it has to sterilize money flows because they no longer reciprocate to corresponding flows of real goods. We see this in the sterilization of gold in the 1920’s, Nixon closing the gold window to prevent outflows of bullion in the U.S. in the early 1970’s, and the current accumulation of US$ in Asian central banks.
This is a sign that something has to give … and will give.
Negative Real Interest Rates – a second sign a Monetary Regime is foundering
Negative real interest rates result in efficient use and misallocation of capital. They “denormalize” the time value of money and the credit structure, and inevitably produce asset bubbles.
K-wave Busts – when Pricing Mechanisms break …
As is well described in both Quigley’s and Polanyi’s writings, when pricing mechanisms break during K-wave busts, it is almost universally a very difficult period. To quote Quigley:
“the transition of each stage [of Capitalism] to the next was associated with a period of depression or low economic activity
In a sense, if human beings were able to instantly adjust their psychologies and behavior to an emergent forum of economic organization, there would be no need for such a disruption of economic activity. For example, in the Great Depression, available material resources did not suffer a sudden rupture overnight. Rather, it was the pricing mechanism, the allocation of goods throughout the global economy as guided by the invisible hand of Adam Smith’s pricing mechanism, that ruptured. And this “rupture” was levered by a “foundering” monetary regime, and its associated characteristics.
When the pricing mechanism fundamentally breaks, at least in the Great Depression, Capitalism itself fundamentally breaks. In the 1930’s, the New Deal in the U.S., National Socialism in Germany, and Communism in Russia were all policy responses to a economic world where the gold-standard based pricing mechanism (which remember was significantly geared to maintaining British and French purchasing power, and global aggregate demand on the basis of existing economic organization) ceased to function.
Transitioning toward a new Monetary Regime – and the transition to a new Pricing mechanism paradigm
So finally, FINALLY, I am finally in a position to reply to KT’s original comment:
“Care to elaborate on this statement, "I think the answer lies in the creation of an entire new incentive system outside the existing monetary regime."?
Yes, the “new incentive system outside the existing monetary regime” is really a foundation for a new pricing mechanism. What shapes this new monetary regime and associate pricing mechanism is likely extremely multi-faceted and difficult to predict at present. But here’s a shot at some potential emergent realities of the next K-cycle monetary regime:
1 – The U.S. and Western nations will no longer be able to consume the percentage of global resources that they do presently. A more fair distribution of global resources must be effected.
2 – Productive capabilities and efficiency of developing world nations will continue to close the gap with developed world nations, and in some cases will surpass or even leapfrog developed nations.
3 – The “wealth” of developed nations will shrink relative to key developing nations, most notably in Asia, and their most notably China.
4 - The U.S. was the epicenter of the current K-wave monetary regime. China will be the epicenter of the new K-wave monetary regime.
5 - As the US$ loses its role as the world's reserve currency, subsidization of flows of real goods to U.S. consumers and businesses will be curtailed. The developing world rejoices.
6 – As “the majority world” (as the developing world is sometimes called) continues to develop to “developed world” standards of living, it is possible that the demand on global resources will not support aspects of our current lifestyle in the West. If this is the case, portions of the capital and social base of the West may have to be written off as there will simply not be the supply of raw material and energy to support consumption at current rates.
As a corollary, much like the loss of revenues suffered by a tech company when caught between two product generations, the aggregate demand from the consumer base of the “old regime” and that of the “new regime” may take some time, and there may well be a period where aggregated demand “seizes” until a new economic and monetary order (and pricing foundation) is established.
New technologies and new forms of social and economic organization will in time undoubtedly ease resource constraints, but this may take time.
7 – The transition period between monetary regimes may involve an increased role for a “managed” economy, which facilitates resource allocation in society in the absence of a well-functioning pricing mechanism. I think there are a number of different ways to achieve this, with different social structures, but all involve some sort of “managed” allocation of scarce resources. Tariff structures, price rationing, government work programs, bartering schemes, are but a few possibilities.
8 - As is typical with K-wave troughs, the transition between monetary regimes will see heightened geopolitical conflict and wars. War economies also subvert normal market pricing mechanisms and are a way of achieving a "managed" economy that does not respond to free-market pricing mechanisms.
9 - Interestingly, "haute finance" or the money elites may ultimately provide a moderating influence as they restrain tendencies towards power grabs by national elites to maintain power. I personally feel we are seeing this with George Soros and his ilk pressing for the removal of Bush from Office.
Utlimately, "haute finance" (which certainly is not without its own excesses) failed in this challenge in WWI and WWII. It remains to be seen if things fair better this time 'round.
10 - And then there is always the possibility of increased social unrest, and its consequences on political and social structures. God forbid if the Chinese economy went to hell in a handbag.
Well, these are just a few thoughts on the matter, and probably not particularly comprehensive, but I’m just too darned exhausted from writing all these essays to think through the matter much further. LOL!
Hope these series of essays was at least moderately thought-provoking.
Regards,
Glenn |
