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Strategies & Market Trends : The coming US dollar crisis -- Ignore unavailable to you. Want to Upgrade?

To: Real Man who wrote (18803)	3/18/2009 6:57:45 PM
From: Elroy Jetson	1 Recommendation Read Replies (2) \| Respond to of 71428

The Fed's action is fascinating in terms of game theory. The Fed's $1.5 trillion money printing announcement, with the Orwellian "Newspeak" name of "Quantitative Easing" is backfiring in substantial ways within hours of it's announcement. In the run-up to the upcoming G-20 meeting UK Chancellor of the Exchequer Alistair Darling has been promoting this as a coordinated move by all central banks. Japan and Europe, especially Germany, has been reluctant to go along with this plan. Not surprisingly the Dollar is down sharply today on this action against the Euro and Yen. If Europe, Japan and other major central banks do not follow the lead of the UK and US, these two nations will need to halt their money printing scheme since the results will be the opposite of what they hope for. The alternative the UK and US have proposed to a deleveraging with economic depression, is the IMF's proposal to greatly increase the number of Special Drawing Rights. SDRs, created in 1944 as part of the Bretton Woods agreement, are of course the current monetary system's equivalent/replacement for gold. Economist Charles Rist, the former Governor of the Bank of France, was dubious of the long term survival of this system, arguing that this discipline would inevitably break-down, with a call for an arbitrary increase in SDRs to match increased debt - the situation we now face. His observations of what would happen in this scenario are now instructive, since the proposal in now on the table. Being related, I grew up partial to his views. Charles Rist published his contribution these policy discussions as a book "Defense de l'or", published in English in 1953 under the title "The Triumph of Gold". openlibrary.org The global increase in debt, as measured to relative to income or capital has reached an unsustainable level. The world's nations with central banks in 2006 agreed to correct this following with the Basel II Accord, which would have required a return to prudent banking standards requiring roughly 10% capital, or more depending upon the risks the bank takes on. Having made modest moves in this direction, we are now effectively making a bee-line in the opposite direction by removing prudent banking standards by the central banks and delaying these standards for commercial banks. The reason being we are too late in the excess leverage process to accomplish a return to prudent standards without a substantial collapse in many institutions. Obama's stimulus plan would have been a fine policy to accompany this painful deleveraging. But now we appear to be attempting to avoid a deleveraging with a global devaluation through an increase in SDRs. It's little surprise that the most vocal proponent of this move is the UK, as the UK and Ireland are arguably the most heavily indebted nations in the world, relative to the size of their economy, with the most excessive asset bubble to unwind. This is an echo of the past, as the UK was in a similar position in 1927. With the Pound over-valued, UK gold reserves were nearly depleted. Benjamin Strong of the Federal Reserve, and Monague Norman of the Bank of England, proposed that Strong and Rist should lend gold from the US and French central banks to Montague Norman at the Bank of England and Hjalmar Schacht at the Reichsbank in Germany in return for UK and German currency to prevent a global economic depression. Charles Rist, on behalf of the Bank of France, rejected this proposal pointing out that the obvious solution was for England to devalue the Pound and for the Allied nations to in some fashion suspend the reparations agreement imposed on Germany for WW-I. Rist said the proposal from the US and France to lend gold to England and Germany would merely postpone the inevitable day of reckoning and make the necessary adjustments more severe. Rist had refused to permit the creation of a credit bubble during the post-WW-I period of the 1920s in France. As a result this period in France, often referred to as "the hollow years" was very difficult economically. Meanwhile the US and UK created a credit bubble in their nations during this same period, and accordingly experienced the "Roaring 20s". Having taken the austere road, France was not leveraged, had built up large gold reserves and Rist saw no benefit in participating in a scheme which essentially prolonged the party in the US and UK. Hjalmar Schacht, the central banker in Germany, rejected this proposal, even though it would mean a substantial transfer of gold to Germany, primarily because he distrusted Strong and Norman. He wrote Rist that while he did not understand whey the US and the UK should want to provide gold to Germany, he assumed it was not for the reasons they said, and were unlikely to be in the long run interest of Germany or international stability. So now we face a similar situation, with the UK and US once again playing the same roles as a result of the same financial irresponsibility. .