Tag: news

Submitted by Michael Lebowitz via 720Global.com (h/t Lance Roberts at RealInvestmentAdvice.com),

Pondering the state of the global economy can elicit manic?depressive?obsessive?compulsive emotions. The volatility of global markets – equities, bonds, commodities, currencies, etc. – are challenging enough without consideration of Brexit, the U.S. Presidential election, radical Islamic terrorism and so on. Yet no discussion of economic and market environments is complete without giving hefty consideration to what may be a major shift in the way economic policy is conducted in Japan.

The Japanese economy has been the poster child for economic malaise and bad fortune for so long that even the most radical policy responses no longer garner much attention. In fact, recent policy actions intended to weaken the Yen have resulted in significant appreciation of the yen against the currencies of Japan’s major trade partners, further crippling economic activity. The frustration of an appreciating currency coupled with deflation and zero economic growth has produced signs that what Japan has in store for the world falls squarely in to the category of “you ain’t seen nothin’ yet.” Assuming new fiscal and monetary policies will be similar to those enacted in the past is a big risk that should be contemplated by investors.

 

The Last 25 Years

The Japanese economy has been fighting weak growth and deflationary forces for over 25 years. Japan’s equity market and real estate bubbles burst in the first week of 1990, presaging deflation and stagnant economic growth ever since. Despite countless monetary and fiscal efforts to combat these economic ailments, nothing seems to work.

Any economist worth his salt has multiple reasons for the depth and breadth of these issues but very few get to the heart of the problem. The typical analysis suggests that weak growth in Japan is primarily being caused by weak demand. Over the last 25 years, insufficient demand, or a lack of consumption, has been addressed by increasingly incentivizing the population and the government to consume more by taking on additional debt. That incentive is produced via lower interest rates. If demand really is the problem, however, then some version of these policies should have worked, but to date they have not.

If the real problem, however, is too much debt, which at 255% of Japan’s GDP seems a reasonable assumption to us, then the misdiagnoses and resulting ill?designed policy response leads to even slower growth, more persistent deflationary pressures and exacerbates the original problem. The graphs below shows that economic activity is currently at levels last seen in 1993, yet the level of debt has risen 360% since 1996. The charts provide evidence that
Japan’s crippling level of debt is not helping the economy recover and in fact is creating massive headwinds.

What is so confounding about this situation is that after 25 years, one would expect Japanese leadership to eventually recognize that they are following Einstein’s definition of insanity – doing the same thing over and over again and expecting different results. Equally insane, leaders in the rest of the developed world are following Japan over the same economic cliff. 

Throughout this period of economic stagnation and deflation, Japan has increasingly emphasized its desire to generate inflation. The ulterior motive behind such a strategy is hidden in plain sight. If the value of a currency, in this case the Yen, is eroded by rising inflation debtors are able to pay back that debt with Yen that is worth less than it used to be. For example, if Japan were somehow able to generate 4% inflation for 5 years, the compounded effect of that inflation would serve to devalue the currency by roughly 22%. Therefore, debtors (the Japanese government) could repay outstanding debt in five years at what is a 22% discount to its current value. Said more bluntly, they can essentially default on 22% of their debt. 

What we know about Japan is that their debt load has long since surpassed the country’s ability to repay it in conventional terms. Given that it would allow them to erase some percentage of the value of the debt outstanding, their desperation to generate inflation should not be underestimated. One way or another, this is the reality Japan hopes to achieve.

 

QE

Quantitative easing (QE) is one of the primary monetary policy approaches central banks have
taken since the 2008 financial crisis. With short term interest rates pegged at zero, and thus the traditional level of monetary policy at its effective limit, the U.S. Federal Reserve and many other central banks conjured new money from the printing presses and began buying sovereign debt and, in some cases mortgages, corporate bonds and even equities. This approach to increasing the money supply achieved central bank objectives of levitating stocks and other asset markets, in the hope that newly created “wealth” would trickle down. The mission has yet to produce the promised “escape velocity” for economic growth or higher inflation. The wealthy, who own most of the world’s financial assets, have seen their wealth expand rapidly. However, for most of the working population, the outcome has been economic struggle, further widening of the wealth gap and a deepening sense of discontentment. 

 

The Nuclear Option

In 2014, as the verdict on the efficacy of QE became increasingly clear, European and Japanese central bankers went back to the drawing board. They decided that if the wealth effect of boosting financial markets would not deliver the desired consumption to drive economic growth then surely negative interest rates would do the trick. Unfortunately, the central bankers appear to have forgotten that there are both borrowers and lenders who are affected by the level of interest rates. Not only have negative interest rates failed to advance economic growth, the strategy appears to have eroded public confidence in the institution of central banking and financially damaging the balance sheets of many banks.

In recent weeks, former Federal Reserve (Fed) chairman Ben Bernanke paid a visit to Tokyo and met with a variety of Japanese leaders including Bank of Japan chairman Haruhiko Kuroda. In those meetings, Bernanke supposedly offered counsel to the Japanese about how they might, once and for all, break the deflationary shackles that enslave their economy using “helicopter money” (the termed was coined by Milton Freidman and made popular in 2002 by Ben Bernanke). What Bernanke proposes, is for Japan to effectively take one of the few remaining steps toward “all?in” or the economic policy equivalent of a “nuclear option”.

The Japanese government appears to be leading the charge in the next chapter of stranger than fiction economic policy through some form of “helicopter money”. As opposed to the prior methods of QE, this new approach marries monetary policy with fiscal policy by putting printed currency into the hands of the Ministry of Finance (MOF or Japan’s Treasury department) for direct distribution through a fiscal policy program. Such a program may be infrastructure spending or it may simply be a direct deposit into the bank accounts of public citizens. Regardless of its use, the public debt would rise further.

According to the meeting notes shared with the media Bernanke recommended that the MoF issue “perpetual bonds”, or bonds which have no maturity date. The Bank of Japan (BOJ or Japan’s Central Bank) would essentially print Yen to buy the perpetual bonds and further expand their already bloated balance sheet. The new money for those bonds would go to the MoF for distribution in some form through a fiscal policy measure. The BoJ receives the bonds, the MoF gets the newly printed money and the citizens of Japan would receive a stimulus package that will deliver inflation and a real economic recovery. Sounds like a win?win, huh?

Temporarily, yes. Economic activity will increase and inflation may rise. Let us suppose that the decision is to distribute the newly printed currency from the sale of the perpetual bonds directly into the hands of the Japanese people. Further let us suppose every dollar of that money is spent. In such a circumstance, economic activity will pick up sharply. However, eventually the money will run out, spending falters and economic stagnation and decline will resume.

At this point, Japan has the original accumulated debt plus the new debt created through perpetual bonds and an economy that did not respond organically to this new policy measure. Naturally the familiar response from policymakers is likely to be “we just didn’t do enough”. It is then highly probable another round of helicopter money will be issued producing another short lived spurt of economic activity. As with previous policy efforts, this pattern likely repeats over and over again. Each time, however, the amount of money printed and perpetual bonds issued must be greater than the prior attempts. Otherwise, economic growth will not occur, it will, at best, only match that of the prior experience.

Eventually, due to the mountain of money going directly in to the economy, inflation will emerge. However, the greater likelihood is not that inflation emerges, but that it actually explodes resulting in a complete annihilation of the currency and the Japanese economy. In hypothetical terms as described here, the outcome would be devastating. Unlike prior methods of QE which can be halted and even reversed, helicopter money demands ever
increasing amounts to achieve the desired growth and inflation. Once started, it will be very
difficult to stop as economic activity would stumble.

The following paragraph came from “Part Deux – Shorting the Federal Reserve”. In the article we described how the French resorted to a helicopter money to help jump start a stagnant economy.

“With each new issue came increased trade and a stronger economy. The problem was the activity wasn’t based on anything but new money. As such, it had very little staying power and the positive benefits quickly eroded. Businesses were handcuffed. They found it hard to make any decisions in fear the currency would continue to drop in value. Prices continued to rise. Speculation and hoarding were becoming the primary drivers of the economy. ‘Commerce was dead; betting took its place.’ With higher prices, employees were laid off as merchants struggled to cover increasing costs”.

 

The French money printing exercise ultimately led to economic ruin and was a leading factor fueling the French revolution.

Summary

Is it possible that Bernanke’s helicopter money approach could work and finally help Japan escape deflation in conjunction with a healthy, organically growing economy? It has a probability that is certainly greater than zero, but given the continual misdiagnoses of the core problem, namely too much debt, that probability is not much above zero. There is a far greater likelihood of a multitude of other undesirable unintended consequences.

Of all the developed countries, Japan is in the worst condition economically. Most others, including the United States, are following the same path to insanity though. Unlike Japan, other countries may have time to implement policy changes that will allow them to avoid Japan’s desperate circumstances.

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Julian Assange sat down with Democracy Now to discuss Wikileaks’ recent release of the DNC leak emails and his perspective on the looming election.

For WikiLeaks founder Julian Assange, choosing between Hillary Clinton and Donald Trump is like choosing between two ugly diseases:

"Well, you’re asking me, do I prefer cholera or gonorrhea?"

 

"Personally, I would prefer neither."

Assange notes that the prospect of a Trump presidency is "completely unpredictable" but the Wikileaks' founder believes one thing is inevitable…

"Look, I think – you know, we know how politics works in the United States."

"Whoever, whatever political party gets into government is going to merge with the bureaucracy pretty damn fast. It will be in a position where it has some levers in its hand. And so, as a result, corporate lobbyists will move in to help control those levers. So it doesn't make much difference in the end."

Here is the full 15 minute interview…

h/t Liberty Blitzkrieg's Mike Krieger

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Submitted by Nick Giambruno via InternationalMan.com,

Will Hillary Clinton win in November and ensure the Deep State stays in control?

 

I recently sat down with Casey Research founder Doug Casey to discuss this. Doug is a former classmate of Bill Clinton and has met him several times, including once at the White House.

 

Doug shared his insights on why a Clinton win could accelerate the onset of World War III.

 

We also touched on how Donald Trump will destroy the Republican Party… and why it’s a good thing.

 

I think you’ll find our discussion insightful.

Nick Giambruno: There is a popular conception that only the “best and brightest” go into government. I think this is a sacred cow that needs to be slaughtered. What’s your take, Doug?

Doug Casey: It’s a real problem when a pernicious myth subverts reality. Everybody believes that the institution of government is like Camelot—a wise ruler assisted by noble paladins. Maybe that meme gained traction in recent times with John Kennedy and his good-looking wife, Jackie. They looked like an ideal couple. They weren’t. But they were a lot better than what followed for the next 50 years…

The fact is that the high levels of government do get people with high IQs. They can pass tests. They’re skilled at manipulating both laws and people. But they tend to be of low moral character, number one. Number two, despite their high IQs, they’re actually quite stupid. Let me explain these things.

From a moral point of view, there are two types of people in the world. People who believe in coercion when dealing with their fellow humans. And people who believe in dealing voluntarily with their fellow humans.

Government is force. The essence of government is coercion. So, people attracted to it are necessarily the wrong kind of people, coercion-oriented people. Government draws much more than its share of criminal personalities.

And they’re not the most intelligent people—completely contrary to common belief. It’s because one sign of intelligence is not just seeing the immediate and direct consequences of an action—any intelligent six-year-old can usually do that. It’s seeing the indirect and delayed consequences of actions. They’re very bad at that.

Almost everything government does, certainly relative to the economy, creates distortions and misallocations of capital. Their inflation of the currency discourages saving and creates the business cycle. Their taxes and regulations destroy capital. Their actions are almost purely destructive of society. This reminds me of one definition of stupidity—it’s an unwitting tendency to self-destruction. So, people in government are not “the best and the brightest.”

Everybody should purge these false memes about the state and its employees from their mind and look at reality as opposed to what they’ve been told is reality.

The problem is compounded by the fact that television and movies generally portray government officials as noble, thoughtful and virtuous. But this is a completely false impression. Almost an alternate reality. They’re generally not that way. Prosecuting attorneys, for instance, tend to be much more interested in collecting scalps for their self-advancement than they are in justice. Cops have been transformed from peace officers into law enforcement officers.

Frontline cops on the beat used to use common sense in keeping the peace; that was their job. But that’s becoming less and less the case; they’re now, instead, mostly charged with enforcing a myriad of arbitrary laws. More than in the past, the wrong kind of people are going into policing now. They’re guys who have an extra Y chromosome. Most are now ex-military, who have picked up a lot of bad habits in the government’s numerous foreign adventures.

Nick Giambruno: This kind of thinking—that government employees are naturally good, virtuous people—appears to have even infected Gary Johnson, the Libertarian Party candidate for president, who, unfortunately, is no Ron Paul. He recently called Hillary Clinton “a wonderful public servant.”

You were talking about how there are two types of people, those who favor voluntarism and those who favor coercion. For me, at least, Johnson has muddied the waters on where he is exactly.

Doug Casey: Regarding Johnson, I don’t know what his philosophical beliefs, if any, are. The only thing that I think I know about him is that he wants to see pot legalized on a national scale. Well, bravo. I’m all for that, even though I’m not a toker. It’s a step in the right direction toward dismantling the insane War on Some Drugs. But does he have any other libertarian tendencies? He doesn’t seem to have a grasp of the basic principles… although he seems better than the average politician. But that’s not saying much.

I’m especially concerned about his running mate, William Weld, who’s an actual neocon. He’s an overt statist, an active promoter of warfare, welfare, taxes and regulations. He has no libertarian tendencies at all that I’m aware of. I mean, he’s a pure Deep State guy.

It appears that the Libertarian Party has been captured by the Republicans, which is surprisingly clever on the Republicans’ part. Now they have two parties that are registered in all 50 states. It’s kind of a backup system to the regular Republican Party. They’ll need a backup, since the old GOP is a dead duck.

One thing you’ve got to say about the Democratic Party is that, while their ideas are destructive and evil, at least they’re more honest about them than the Republicans are about their own. Democrats make no bones about being the party of socialism, and they naturally attract the envy driven, the class warriors, the politically correct, the cultural Marxists, the gender Nazis and the like. The Democratic Party is beyond redemption.

The Republicans attract a different group. Religious people. Cultural traditionalists. People who generally favor what they think is the free market. They tend to be much more nationalistic and pro-military than the Democrats. But, unlike the Dems, the Reps have no real philosophical foundation.

The Democrats can be viewed as the evil party and the Republicans as the stupid party. But they’re really just two sides of the same coin, at least when it comes to their leadership—they’re all Deep State members. The Libertarians once had a claim to being the party of principle, back in the days when people like John Hospers, Harry Browne and Ron Paul were their candidates. But now, the Libertarians can be viewed, at best, as the smart wing of the stupid party. It’s a sad testimony to the nature of politics…

With a little bit of luck, Trump will end up destroying the Republican Party, which is held together by chewing gum and bailing wire. Its disparate elements have very little in common with each other. The neocons, the evangelical Christians, the social conservatives and people who think they support the free market are there only for lack of a better alternative. They really have nothing in common except a dislike of the Democratic Party.

Although I suspect Trump will win, I expect the Republican Party itself will blow up. The situation is not unlike that before the War Between the States. Very unstable.

Nick Giambruno: Speaking of all this, I have to ask you about the Clintons. Bill Clinton was your former classmate in college. What was your impression?

Doug Casey: He’s one of the most charming people you could ever meet. When you talk to him, even if the room is full of people trying to get his attention, when he looks at you and talks to you, he makes you feel like you’re the only person in existence. He’s that good. He’s got a lot of interpersonal skills.

I met him when he was campaigning for president of the class at Georgetown. I never ran with the same group he did, but he was knocking at everybody’s door and that’s how I first met him. And then I met him again at our 25th class reunion, which he held at the White House.

I was shocked that when I walked up to him—and there must have been 400 people at the reunion—and I don’t know how, or even if, he saw my name tag—but when I said, “Hey, Bill, how are you?” he responded with, “Hey, Doug, it’s good to see you.” He’s a superpro.

Despite Bill’s charm, the Clintons are essentially criminal personalities. I’m not just talking about the $100,000 bribe Hillary got for supposedly trading cattle in the old days; now, she wouldn’t even walk across the street for that little. From the earliest days, starting with the strange death of Vince Foster, and then the strange death of Ron Brown, there are a lot of strange deaths that have surrounded the Clintons. They may well have gotten away with murder, quite frankly.

I think there are about 75 separate reasons why there should have been a full-scale investigation by the FBI in the strange death of Vince Foster. I wish there were some agency that was not part of the government that could investigate crimes, which is part of the problem, of course. The FBI is really just an overrated, bloated, politically driven bureaucracy. I sincerely doubt, for instance, that they'll ever go after The Clinton Foundation, which is clearly nothing but a gigantic slush fund.

The other thing I noticed at the reunion—and several of us noticed this—is that Hillary was sitting there with five or six really good-looking, young female velociraptors arrayed around her. Some classmates and I looked at each other and remarked that it was unusual for her to have all these good-looking young chicks around her. And, of course, since then, there have been rumors that she’s an aggressive lesbian. I have no other facts to back that up except for this one instance.

I’ve got to say, I couldn’t care less about Bill’s or Hillary’s, or anybody else’s personal sexual habits. As far as I’m concerned, that’s nobody’s business but theirs, and it’s got nothing to do with anything. But it’s interesting, for what it’s worth.

Nick Giambruno: I agree. I think focusing on their personal lives is a distraction from their real malfeasance. So, let’s talk about that.

Probably the most objectionable thing I find about Hillary is her reckless promotion of war.

I think she advocated for just about every conflict the U.S. has gotten involved with in the past 30 years, most of which have been unmitigated disasters.

She’s an ardent supporter of arming the so-called moderate Syrian rebels and toppling Bashar Al-Assad.

She’s supported the regime change in Ukraine.

She backed the surge in Afghanistan, which, predictably, accomplished exactly nothing.

She was the deciding factor in pushing Bill to bomb Serbia in the 1990s.

She infamously voted for the 2003 Iraq invasion.

And, of course, she was one of the main pushers of the NATO intervention in Libya that toppled Muammar Gaddafi. After rebels gruesomely executed Gaddafi—they reportedly sodomized him with a bayonet—Hillary said on national TV, “We came, we saw, he died.” It’s sort of a sociopathic spin on “Veni, vidi, vici,” a famous saying from Julius Caesar, the Roman leader, which means “I came, I saw, I conquered.”

These are just some examples off the top of my head. She has apparently learned nothing—or the completely wrong lessons—from this trail of disasters. She’s an unrepentant warmonger. And I think the odds of WWIII breaking out will be much higher under a Hillary presidency.

One nugget from Hillary’s email scandal, known as the Blumenthal Memo, basically disclosed that the real reason NATO wanted to go after Gaddafi was not a desire to bring freedom, democracy and unicorns to the Libyan people, but because NATO feared that Gaddafi would use his vast gold reserves to back a currency that would displace a version of the French franc that is used in Central and Western Africa.

After NATO-backed rebels toppled Gaddafi, plans for the gold-backed currency, along with the gold itself, vanished like a double cheeseburger placed in front of Chris Christie.

Strangely, this damning piece of information from her emails barely gets a peep in the mass media narrative.

Doug Casey: You’re absolutely right, because the media itself is part of the Deep State. They all are educated in the same universities by professors with horrible values, and taught the same things. They go to the same clubs. They socialize with each other. They have the same basic psychological, political, economic and philosophical underpinnings. So, of course, they look at the world through the same lens. And avoid mention of things that might be inconvenient, or conflict with their worldview.

And as far as Gaddafi, sure, he was a criminal. Can you name a head of state, certainly in the third world, who’s not? He was not a nice guy, but, as these people go, he was better than most. Assad in Syria is much the same. It’s hard not to be brutal when your job description is to hold together an artificial non-country with dozens of different religions, ethnic groups and fanatical political factions—all of them anxious to take over the government so they can steal and massacre rivals, including yourself. Mother Teresa would have started acting like a thug if you put her in charge of one of these places. Of course, these people are all demonized—unless they’re stooges of Washington. But even that is dangerous—as Saddam Hussein, once a BFF of the U.S.—discovered. Vladimir Putin is another example of somebody who’s been made into the devil incarnate.

Nick Giambruno: Well, Hillary has basically said Putin is the new Hitler.

Doug Casey: It’s an amazingly stupid statement, in addition to being inaccurate. I mean, it’s almost like these people want to start some version of World War III. And they may succeed. It’s really very scary.

It could happen with China in the East or the South China Seas. It could happen accidentally with Syria. It could happen with the breakaway provinces in Ukraine. There are a lot of trip wires. I’m pleased to be spending a lot of time in Cafayate, among the horses and grapevines of Argentina, where I can watch this stuff on my widescreen, at least somewhat insulated from what might happen…

*  *  *

Editor’s note: Highly decorated General Dwight D. Eisenhower first warned the American public about the Deep State. He did it during the farewell address for his second term as President in January of 1961.

Ike’s farewell address also served as a warning to JFK, who would succeed him as President. And JFK tried to take the Deep State head on…

A short while later, JFK was assassinated. We don’t know exactly who did it or why, but we do know that he was the last President to challenge the Deep State directly.

Recently, Doug’s longtime friend and colleague Bill Bonner issued an alarming video on this topic, including some footage from Eisenhower’s farewell address. You can watch this new video right here:

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While the Democratic Convention is warming up ahead of tonight’s headline speakers, including Tim Kaine, Joe Biden and president Obama, Donald Trump is set to host an “Ask Me Anything” question-and-answer session on a Reddit board run by and for his supporters. The “Ask Me Anything,” or AMA, will be held Wednesday evening, starting at 7:00pm.

As the Trump campaign blasted on Monday:

Reddit: Ask Me Anything With Donald J. Trump

 

Who:
Donald J. Trump

 

What:
Mr. Trump will be participating in an “Ask Me Anything” event during which he will field questions from the Reddit community.

 

When:
Wednesday, July 27th, 2016

 

The official post will go out at approximately 6:30 PM (EST) where users will be able to ask Mr. Trump anything.
Mr. Trump will begin answering questions at 7:00 PM (EST)

To participate, visit http://ift.tt/1GeYNx2

Known for its humor and political incorrectness, /r/The_Donald is among the most popular boards on Reddit, with as many as 13,000 people reading at any given time. Some recent prominent AMA participants have included Madonna, Stephen Hawking and even Barack Obama where they have answered (mostly acceptable) questions on social networking website.

Readers can follow the AMA session at the following link.

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The Obama administration’s Office of Personnel Management is encouraging federal workers to work from home if they simply can’t bear the excessive heat this summer.  Beth Cobert, Acting Director of the OPM, warned federal employees in a recent blog post, as well as in a memo distributed to all federal HR Directors, of the excessive risks associated with “dangerous heat waves” and the precautions that should be taken to “protect ourselves and our family’s health and well-being.” 

The Office of Personnel Management (OPM) and the Department of Health and Human Services (HHS) have teamed up to remind all of us, including agencies and employees across government about what they can do to protect all Federal workers during potentially dangerous heat waves.

 

…severe heat and humidity – like we’ve seen during this summer season – make it necessary for us all to take precautions to protect ourselves and our family’s health and well-being.

 

It’s also important to remember that for Federal employees, OPM’s workplace flexibility that may be used to reduce health risks during such extreme heat periods. If your supervisor approves, telework-ready employees may telework from home on a day when air quality conditions are poor.

The detailed memo points to roughly 20 online resources that federal employees may reference that provide “advice on the best ways to cope with severe heat.”   

All of this inter-agency collaboration and highlighting of available resources makes us feel a bit negligent in our internal communications to employees regarding the heat wave which was simply to use some common sense.

The Washington Examiner also provided this helpful video:

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Authored by The Mises Institute's Frank Shostak (annotated by Acting-Man's Pater Tenebrarum),

Once Upon a Time…

Prior to 1933, the name “dollar” was used to refer to a unit of gold that had a weight of 23.22 grains. Since there are 480 grains in one ounce, this means that the name dollar also stood for 0.048 ounce of gold. This in turn, means that one ounce of gold referred to $20.67.

 

A 1922 20 dollar gold certificate – this note was actually redeemable for gold on demand, i.e., it was a money substitute. Today irredeemable banknotes are “standard money”.

 

Now, $20.67 is not the price of one ounce of gold in terms of dollars as popular thinking has it, for there is no such entity as a dollar. Dollar is just a name for 0.048 ounce of gold. On this Rothbard wrote:

No one prints dollars on the purely free market because there are, in fact, no dollars; there are only commodities, such as wheat, cars, and gold.

Likewise, the names of other currencies stood for a fixed amount of gold. The habit of regarding these names as a separate entity from gold emerged with the enforcement of the paper standard.

Over time, as paper money assumed a life of its own, it became acceptable to set the price of gold in terms of dollars, francs, pounds, etc. (the absurdity of all this reached new heights with the introduction of the floating currency system). In a free market, currencies do not float against each other. They are exchanged in accordance with a fixed definition.

If the British pound stands for 0.25 of an ounce of gold and the dollar stands for 0.05 ounce of gold, then one British pound will be exchanged for five dollars. This exchange stems from the fact that 0.25 of an ounce is five times larger than 0.05 of an ounce, and this is what the exchange of 5-to-1 means.

In other words, the exchange rate between the two is fixed at their proportionate gold weight, i.e., one British pound = five US dollars.

 

An Absurd System

The absurdity of a floating currency system is no different from the idea of having a fluctuating market price for dollars in terms of cents. How many cents equal one dollar is not something that is subject to fluctuations. It is fixed forever by definition.

The present floating exchange rate system is a by-product of the previously discredited Bretton Woods system of fixed currency rates of exchange, which was in operation between 1944 to 1971.

Within the Bretton Woods system the US$ served as the international reserve currency upon which all other currencies could pyramid their money and credit. The dollar in turn was linked to gold at $35 per ounce. Despite this supposed link to gold, only foreign governments and central banks could redeem their dollars for gold.

A major catalyst behind the collapse of the Bretton Woods system was the loose monetary policy  of the US central bank which pushed the price of gold in the gold market above the official $35 per ounce. The price, which stood at $35/oz in January 1970 jumped to $43/oz by August 1971 — an increase of almost 23 percent.

The growing margin between the market price of gold and the official $35 per ounce created an enormous profit opportunity, which some European central banks decided to exercise by demanding from the US central bank to redeem dollars for gold.

Since Americans didn’t have enough gold to back up all the printed dollars they had to announce effective bankruptcy and cut off any link between dollar and gold as of August 1971. In order to save the bankrupt system policymakers have adopted the prescription of Milton Friedman to allow a freely floating standard.

 

Milton Friedman, Richard Nixon and then Fed chairman Arthur Burns. We’re not sure if they were fully aware what the adoption of a completely unanchored fiat money system implied. Today Friedman is famous for being a supporter of the free market, but he was actually a central planner when it came to monetary policy.

 

No More Limits

While in the framework of the Bretton Woods system the dollar had some link to the gold and all the other currencies were based on the dollar, all that has now gone. In the floating framework there are no more limitations on money printing. According to Murray Rothbard:

One virtue of fixed rates, especially under gold, but even to some extent under paper, is that they keep a check on national inflation by central banks. The virtue of fluctuating rates — that they prevent sudden monetary crises due to arbitrarily valued currencies — is a mixed blessing, because at least those crises provided a much-needed restraint on domestic inflation.

Through policies of coordination central banks maintain synchronized monetary pumping so as to keep the fluctuations in the rate of exchanges as stable as possible.

Obviously in the process such policies set in motion a persistent process of impoverishment through consumption that is not backed up by the production of real wealth.

Furthermore, within this framework if a country tries to take advantage and depreciate its currency by means of a relatively looser monetary stance this runs the risk that other countries will do the same.

 

Printing money with gay abandon… US broad true money supply TMS-1 since 1986 – click to enlarge.

 

Euro area M1 (currency and overnight deposits) since 1980 (national currencies used prior to euro introduction) – more of the same. The main question seems to be which currency is going to be printed to oblivion first – click to enlarge.

 

Consequently, the emergence of competitive devaluations is a sure way of destroying the market economy and plunging the world into a period of crisis. On this Mises wrote in Human Action:

A general acceptance of the principles of the flexible standard must therefore result in a race between the nations to outbid one another. At the end of this competition is the complete destruction of all nations’ monetary systems.

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