As the US government shutdown continues, the risk of default grows. Below are some thoughts on why this has played out as it has and what the outcome may be.
Tag: currency revulsion
If you look at the last two posts on this site from Marc Chandler and from Sober Look the connection between Fed tapering and money flows is clear. Hot money is flowing out of emerging markets and into Europe.
This is a good interview with Kyle Bass because it cuts to the heart of the matter. If you are a partisan in the Bass debate on Japan, you can see him as being either correct or incorrect. Now, I have covered this before and I have stressed that he is looking to make an asymmetric bet on outlier events to hedge his market-long portfolio. He is not taking a flyer via outsized risk exposure to short JGB trades. And Bass does make this clear in his commentary. Nonetheless, his macro view of the way interest-rate targeting central banks operate in a fiat currency system is completely wrong.
Long-term interest rates are a series of future short-term rates. That necessarily means that an interest-rate targetting central bank exerts the dominant influence not just on the short end in its currency area, but across the yield curve. Nevertheless, a lot of people act like this isn’t true. The bond vigilante paradigm, for example, is a clear violation of this principal. Ben Bernanke sets the record straight.
After the Great Depression broke out, American economist Irving Fischer championed a view of the financial system now called “endogenous money“, which sees each person in the economy as a creator of credit. Viewing the economy through this lens leads to a number of conclusions that are at odds with economic orthodoxy, particularly regarding the ability to generate a credit […]
The last post by Randall Wray below is an interesting one because it points out how the world has changed since the end of the gold standard and why the sovereign debt crisis is centered in the euro zone.
While I have an Austrian bias overall, for me, MMT is the best way to think about nonconvertible floating exchange rate systems as distinct from fixed exchange rate, currency board, pegged and convertible systems. The difference is policy space and what I would call the bond vigilante relief valve.
Harvard Economist Kenneth Rogoff has a post up at Project Syndicate which does a good job in laying out the conundrum that Europe faces in the sovereign debt crisis. He theme is exchange rates and currency revulsion. But the underlying framework Rogoff presents is anchored in a presentation of debt and monetary policy issues that is similar to what you read at Credit Writedowns.
As I see it, we cannot continue with the existing currency arrangement. Countries like Spain (I am reverting to my habit of calling all the deficit countries “Spain” and all the surplus countries “Germany”) simply will not adjust quickly enough as long as they maintain the euro, and we are going to watch their economies contract and their debts grow until finally the electorate has had enough and forces a radical change in strategy.
We’re not taking a victory lap here but think gold is now in the midst of a massive repricing as a legit global currency/store of value. Central banks are buying even at prices north of $1,500 per ounce. These are strong hands and not the flippers that can take it down $200 in a nanosecond. The main risk we see to gold in the short term is that its gains could be tapped for margin calls to cover bad positions by, say, the levered set or other stressed institutional investors. A spike in real short term interest rates due to sovereign credit concerns in the major countries, for example, is another major risk, but we don’t this as an issue for sometime.
We repeat: the “debt problem” is a currency problem and the currency must and will collapse. The global monetary system exists at the pleasure of the Fed, which legally exists at the pleasure of Congress, which as we have learned only has the political will to control the Fed at the pleasure of the Fed’s shareholder banks. It is the Fed and nothing else that determines the solvency of Treasury. Analogously, it is the Fed that ensures the ultimate solvency of the fractionally-reserved banking system – the system that shorts dollars via perceived “lending” today and covers those dollars once devalued as the Fed creates them tomorrow. Ultimately, Congress, the Fed and Wall Street will have to answer to the masses that buy milk and pay and staff its military.
At the weekend, I saw three articles asking essentially the same question about sovereign debt crisis contagion: why Italy and why not Japan (the US or Germany)? Here’s my answer.
In my view, fiat currency is a confidence trick. The key to confidence in a fiat currency is the belief of citizens that the government issuing the currency will manage its finances in a way that promotes general “life, liberty and prosperity”. If confidence erodes, tax evasion will rise, citizens will begin surreptitiously using other media of exchange to transact and inflation and currency depreciation will spiral out of control.