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Strategies & Market Trends : Gold - soon to be the new "in" play -- Ignore unavailable to you. Want to Upgrade?

To: d:oug who wrote (14)	8/20/1999 1:58:00 AM
From: d:oug	Read Replies (1) \| Respond to of 40

4 tube pages of text from Le Metropole Cafe - For a Gold Standard. The Toulouse-Lautrec Table David Tice The Prudent Bear Fund "The Anatomy of an International Monetary Regime" ticed@prodigy.net August 18, 1999 ..... from the vulnerable US credit system, we today see a global financial system that again appears to be coming apart at the seams..... ..... accumulation of fiat currencies from countries with unsound fiscal and monetary policies, out of control or impaired credit systems, and ..... ..... a predictable outcome after years of a "credit free-for all" with endemic and unprecedented excesses..... ..... a "hot money" crisis for the dollar and US financial markets. And with the dollar the world's de facto reserve currency, we expect the developing crises to be particularly precarious..... ..... an international monetary system of fiat currencies and unfettered money and credit growth is proceeding steadily towards failure..... ..... In this respect, the adjustment process under the gold standard was very much determined by market processes rather than public intervention. For such an adjustment process to work depended on the confidence of private and public actors in the regime itself. Under the gold standard such confidence was very high." During the gold standard, the management of the money supply and credit growth was decentralized and banking systems relatively unsupervised. The key was that individual lenders practiced sound banking practices, a necessity to ensure solvency. In aggregate, the entire credit system lacked a proclivity towards excess due to convertibility management and the norms of the time. If an individual bank lent in excess and/or irresponsibly, it would risk losing its gold reserves and face almost immediate failure. If an individual country's credit system created too much credit, hence stimulating excessive demand and resulting trade deficits and economic distortions, the entire economy would lose its gold reserves to foreign outflows, interest rates would rise, and a painful adjustment period would follow. Importantly, excesses were self-correcting and adjustments would rectify imbalances before they grew to pose major problems. As such, there was nothing magical about gold or the international monetary regime, for that matter. Instead, it was just a broad framework that functioned well as individual market participants, particularly within the financial sector, operated with prudence and discipline. Money stood for something vitally important. Sound money was both nurtured and protected with an almost religious fervor. It certainly wasn't just paper, and, back then, there was a general commitment to ensure the stability of money and credit systems generally for the good of society. Today we see nothing remotely of this kind. ..... if imbalances and the occasional crisis did develop during the gold standard period, the resolution was certainly not today's medicine of simply creating more money and credit and trying to "paper over" the problem. And we are to accept that today we have some type of miracle "new era" economy? Come on! ..... the gold standard was self-sustaining: In no other factors affecting the maintenance of convertibility was this more evident than in the effects of investors' perceptions ... were at the very center of the short-term adjustment process during the gold standard. Equilibrium in external positions in the developed world was maintained by short-term capital flows. ..... around perceptions that the international financial system was relatively free of exchange and convertibility risk ..... "Threats to convertibility generated sufficient and quick negative feedback processes to the extent that investors perceived the commitment to the rules of metallism to be credible..... ..... In nations where the commitment was perceived as less compelling, convertibility was difficult to defend even under milder crises. Hence, rules generated the means of their own preservation wherever commitments were credible and generated the means of their own undoing where commitments were not credible..... Two words stick out from Gallarotti's most cogent analysis as being the keys to the enduring success of the gold standard regime: "credibility" and "confidence." And if one looks back to the failure of John Law's paper money scheme in 1720 France, the loss of credibility and collapse of confidence were at the heart of this historic collapse..... lepatron@lemetropolecafe.com with questions or comments lemetropolecafe.com Bill Murphy Copyright 1999 Le Metropole Cafe