CNN) -- A foreign submarine recently trespassed in Swedish territory, officials there said Friday, but they couldn't say what country the vessel belonged to. The Swedish military began an intense sweep of the waters off the coast of Stockholm more than three weeks ago. On Friday, the Swedish Armed Forces announced that its investigation confirmed that a submarine was indeed in Swedish waters. Sweden hunts for mystery sub When the search started, the Swedish newspaper Svenska Dagbladet reported that the military became suspicious after Swedish intelligence picked up an emergency radio call in Russian. Russia denied that it had any vessel in Swedish waters. Russia flexes muscles with long-range bomber flights near U.S. shores While confirming that there was a territorial violation, the military said that "the analysis cannot determine the nationality of the intruder." Swedish Prime Minister Stefan Lofven gave a warning to whoever the intruder may have been.
Triffin's Dilemma: The 2014 Edition Submitted by Tyler Durden on 02/05/2014 20:09 -0500 Ben Bernanke Borrowing Costs Brazil Central Banks Federal Reserve fixed Foreign Central Banks Gross Domestic Product India Japan Moral Hazard Recession Reserve Currency Trade Balance Trade Deficit Turkey in Share 1 Submitted by Shane Obata-Marusic of Triggers ( pdf ) Triffin's Dilemma: The 2014 Edition What does it mean to be the world’s reserve currency? Everbank’s Chuck Butler sums it up nicely in the following quote : “Remember, the country with the reserve currency gets to receive loans at discounted borrowing costs. Also, commodities are priced in the reserve currency, meaning central banks around the world must hold the currency in their reserves to facilitate trade.” Furthermore , “Trading nations need dollars to lubricate trading and as foreign exchange reserves that bolster the value of their own currency and provide the asset base for the expansion of credit within their own nation” Many different currencies have held reserve status throughout history. This is important to note because it goes to show that, just like everything else, reserve currency status doesn’t last forever. At present, the US dollar is the world’s main reserve currency. That status has been a gift for the US: it has allowed it to run a deficit in perpetuity. But it has also been a curse : “The demand for safe assets feeds tha t exorbitant privilege enjoyed by the United States. This contributes to a weakening of US policy discipline as the country tends to excessively rely on easy credit in normal times and very expansionary macroeconomic policies in times of crisis. The outcome is excessive US indebtedness. The corporate sector was in debt prior to the burst of the dot-com bubble in 2001; so were the household and financial sectors before the eruption of the sub-prime crisis in 2007-08; and the official sector is in debt today.” Moving on. Let’s assume for a moment that the US recovers, the dollar appreciates in value relative to other currencies, the trade deficit shrinks, and QE comes to end. That all sounds good, right? Yes, but maybe not for other countries – specifically those with current account deficits. The end of easy money and artificially low interest rates will not bode well for the emerging markets. The “faulty five” – aka the “BI ITS” – Brazil, India, Indonesia, Turkey and South Africa are particularly vulnerable because they rely on external financing to operate. A stronger USD has multiple negative implications for their economies. Before we continue let’s introduce the idea of Triffin’s Dilemma. And now for a bit of history: “Prior to the 1944 Bretton Woods agreement, central banks used gold as the asset to back their currencies. By the end of World War I I , the United States had established itself as the world’s creditor and largest holders of gold. Under the 1 944 Bretton Woods agreement, the US Dollar was fully backed by gold at a fixed value of 1 /35th an ounce per dollar, and foreign Central Banks could use US Dollar assets as reserves backing their currency, in lieu of gold. This agreement avoided the inevitable deflationary pressure a return to pre-war gold/currency ratios would have forced just as Europe was beginning to rebuild, and allowed US debt held abroad to be used as an asset by central banks against their local currencies. (- Zero Hedge) After WW I I , America was the only industrialized country still intact. Through the Marshall Plan and rebuilding Japan and later South Korea, America was lending huge amounts of dollars to other countries, which in turn were used to collateralize their own currencies. America was able to run huge trade surpluses and our economy was booming. But, then Triffin’s Dilemma came into play. The demand for dollars around the world exceeded America’s ability to back it with gold. Those sneaky folks at the Federal Reserve printed more dollars anyway. And, when other countries figured out what was happening there was a run on America’s gold reserves and so President Richard Nixon had no choice but to stop backing the dollar with gold. However, the dollar remained the world’s reserve currency because of the size and strength of the US economy. ” ( Source ) Despite the fact the US dollar is still the world’s reserve currency, “The IMS is not in a better situation today. The quandary under the BW system – the lack of a credible anchor for international monetary and financial stability – continues to exist. Key issuers and holders of reserve currencies pursue domestic objectives independently of what would best serve the global system and even their longer-run interest. To the extent that these policies pay insufficient attention to negative externalities for other countries and longer-term macroeconomic and financial stability concerns, they tend to produce unsustainable imbalances and fuel vulnerability in the global financial system. In particular, a large body of literature supports the view that a worldwide glut of both liquidity and planned savings over investment – stemming from, respectively, reserve-issuing and reserve- accumulating economies – was a key driver of the hazardous environment at the root of the global financial and economic crisis which broke out in summer 2007” ( Source ) Will Triffin’s dilemma be relevant again in 2014 and going forward? Many people believe that it will. The US is now producing a lot more energy and importing a lot less - on a net basis. This is causing their trade deficit – which has been negative for the better part of 50 years – to shrink. If we think of the trade balance as part of the supply of US dollars then – as a result of the dollar’s world reserve currency status – a reduction in the trade deficit means fewer US dollars leaving the country. This has implications for other countries because they use USDs to buy US assets and for reserves. Triffin’s Dilemma is that the country that issues the world’s reserve currency will have to choose between: 1 ) running a trade deficit in perpetuity - risking of a loss of confidence in its currency and solvency while the rest of the world enjoys an adequate supply of USDs. or 2) running a trade surplus and enjoying an appreciation in the value of the dollar while the rest of the world suffers from a lack of liquidity and collateral. Either way, there are negative implications for world growth. In the first example – in which the US runs a trade deficit in perpetuity – the US continues to add to its debt and risks undermining its ability to pay off that debt. In the second example – in which the US runs a trade surplus – emerging market currencies are put under pressure by the USD potentially leading to capital outflows, a higher cost of debt, and global financial instability. When Bernanke first mentioned the possibility of a reduction in asset purchases in May of 2013, emerging market currencies – in particular the BIITS – sold off in a big way. At the same time, GDP forecasts for the emerging markets (started to get) (were) revised downwards. That was the tell. What I mean is that that’s when we first got a glimpse of what would happen if and when this giant monetary experiment came to an end. In other words, the end of easy money isn’t going to be easy. If emerging market currencies continue to depreciate then the relative value of the cash flows of companies that operate within those countries will fall. In that case, it’s likely that net capital outflows from those markets would continue. This flight of capital could force emerging market countries to increase their interest rates in an attempt to remain competitive for acquiring external financing. With more money going towards interest payments, growth will be limited even further. What’s more is that an increase in the relative value of the USD will cause the price of imports, financial assets, and external debt to rise in local currency terms. Lastly, and arguably most importantly, a smaller trade deficit or trade surplus will result in a reduction in foreign exchange reserves held at emerging market central banks. Source As those banks use their dollar reserves to buy back their domestic currencies in an effort to curb inflation they will 1 ) reduce their ability to “protect” their currency in the future and 2) reduce the asset base against which bank reserves are backed. In conclusion, the falling trade deficit in the US is likely to increase the relative value of the dollar. If, in addition to an improving balance of trade, the fed continues to taper its asset purchases, then it’s likely that emerging market currencies and ETFs will face increasingly negative pressures. Source Basically, there is no easy way out of this giant moral hazard driven debt bubble that the world’s central banks, and in particular the fed, have created. I am hoping for the best but I’m not sure how this will play out. The entire world is in way over its head in debt... Source And somehow, whether it’s deliberate or forced, we need to get rid of it all. Source What used to be known as the business cycle – i.e. a cycle wherein a period of expansion is followed by a recession which cleanses the system of malinvestment – doesn’t exist anymore. Currently, the entire economic system is centrally planned. Instead of letting the nature run its course, the world’s “best and brightest” minds in economics – the central bankers – have decided to try and outsmart it. I f the US continues to operate without regard to the effects on the rest of the world, then world growth will be negatively affected. Triffin’s dilemma: the 201 4 edition might turn out to be a prime example of the negative consequences of keeping money too easy for too long – i.e. suppressing interest rates and monetizing deficits. Unfortunately, policies that were intended to “smooth out” the economic cycle have only resulted in bigger booms and busts. Source Someone’s going to be left holding the bag. Try not to let it be you. Average: 4.8 Your rating: None Average: 4.8 ( 5 votes)
Guest Post: The Original Dollar Crisis And How It Led To Today's Crisis - Part 1 Submitted by Tyler Durden on 06/29/2010 16:40 -0400 Bank of England Bear Market Belgium Central Banks China Credit Suisse Creditors ETC Federal Reserve fixed Foreclosures Foreign Central Banks France Germany Gordon Gekko Guest Post Hyperinflation International Monetary Fund Italy Japan Market Bottom Monetary Policy Money Supply Portugal Recession Reserve Currency Swiss Banks Swiss Franc Switzerland Time Magazine Trade Balance Trade Deficit Tribune Unemployment Zurich in Share 0 The Original Dollar Crisis And How It Led To Today's Crisis - Part 1, Submitted By John Law To fully understand today's economic crisis and where we are heading,one must find the origin of this crisis -- the event or the culmination of events that put us down this path. The event leading us to the current crisis isn't the high unemployment -- currently 9.7% -- and avalanche of foreclosures or the bailout of all the major banks as a result of the housing boom and subsequent crash of the 2000s. It wasn't the preceeding tech bubble of the late 1990s and early 2000, or all the years of the Fed's easy monetary policy. Which lead to the high -- arguably understated -- inflation of the last three decades. No one of these events put us down this path. When one searches for the origins of the current crisis, they will find all of these events are rather the symptoms of the same illness -- the same illness that has steadily worsened and accelerated us down the path upon which we are now traveling. A path that leads us over a cliff into which we fall into the abyss. The origins of today's crisis can be traced all the way back to the 1944 Bretton Woods agreement. In 1944, world leaders and economists met to form a new world monetary system for the post war era. With the Bretton Woods agreement, America became the reserve currency of the world, promising other nations they could redeem any dollars they had for gold. While the dollar's value was set in gold, the other countries' currency valuations were fixed to the dollar. The value of the dollar was set at FDR's 1934 revaluation of $35 per ounce of gold. Before FDR's revaluation, the dollar was stronger and was valued at $20.67 per ounce of gold. However, this was not a true gold standard and it heavily favored the United States. In a true gold standard the currency is convertible by any one -- private citizen, foreign central bank etc. -- whereas under the Bretton Woods agreement, only foreign central banks could convert their dollars to gold. It favored the United States because the US could settle its foreign payments in dollars. Whereas other nations had to settle their foreign payments -- including any with the US -- in gold, so the US could simply print dollars and send them overseas and keep doing this until when/if foreign central banks started demanding gold for their dollars. Under a true gold standard, all foreign payments by any country would be settled in gold. Thus putting a limit on the number of dollars the Federal Reserve could print. Forcing balance of payments and trade responsibility, so as to the outflow of gold is not greater than the inflow of gold. After World War II, it didn't take the US long to find itself in war again, this time in Korea. War broke out on June 25, 1950. The Korean War escalated the Cold War between the US and the Soviet Union; and as what would have been a civil war, turned into a proxy war between the two powers, with the US vowing to defeat communism at all costs. The war ended on July 27, 1953 with an armistice, but the stage was set for the further escalation of the Cold War and the international currency crisis that would engulf the world in the late 60s and in 1971, bring the collapse of the Bretton Woods agreement and the ensuing run on the dollar that pushed it to the brink of collapse and hyperinflation. The three year Korean War set the stage for these events by the financial cost of the war and the actions -- which are still repeated this day -- taken to pay for the costs. Although the US had a trade surplus, it had a balance of payments deficit which was due mainly to government spending on overseas expenditures, including military and foreign aid to help rebuild Europe. The US Treasury issued new bonds which were then bought by The Federal Reserve with money printed out of thin air. By the year 1951, The Federal Reserve had more US Treasury bonds on its balance sheet than it had in gold reserves. By 1958 these dollars were being exchanged for gold by foreign central banks at an alarming rate. By the end of 1958 US gold reserves had fallen 9%. By October 1960, the outflow of gold from the United States was beginning to put upward pressure on the price of gold. Gold had just reached $40 per ounce in trading on The London Gold Exchange that October, while the official price was still at $35 per ounce. In an effort to suppress the price of gold, the US, Great Britain, Germany, France, and other western central banks, formed the London Gold Pool in 1961. If the price of gold neared $35.20, the group would dump gold onto the market in an effort to get gold back to the official $35 price and if the price fell below $35, the group would buy gold to bring the price of gold back to $35. By 1965 the outflow of gold was accelerating even more as the balance of payments deficit grew ever larger. Large tax cuts proposed by President Kennedy and passed after his death by President Johnson in 1964 had taken effect. A massive full escalation of the Vietnam War had started, the space race with the Soviet Union was in full swing, and huge, new entitlement spending on President Johnson's Great Society also had taken effect. As a result of the massive increase in government outlays, in 1967 total US foreign liabilities had soared to $36 billion, while the US only had $12 billion in gold reserves -- only one third of total obligations. With the acceleration in the outflow of gold, the US increasingly attempted to forcefully control the outflow. In 1959 President Eisenhower made it illegal for Americans to buy gold overseas. Before his death, President Kennedy proposed The Equalization Tax, which was passed after his death in 1964. The act was a new tax on foreign currency deposits to prevent Americans from investing overseas. President Lyndon Johnson went as far as to discourage Americans from traveling. He stated "We may need to forgo the pleasures of Europe for a while." And also, "I am asking the American people to defer, for the next two years, all non-essential travel outside the western hemisphere." And as a Time magazine article from February 12, 1965 noted: "Martin, Douglas Dillon and Budget Director Kermit Gordon are lobbying for measures that would drastically affect the nation's foreign and domestic policies. Among the proposals that one or all three of them have forwarded: an exit tag of $50 or $100 per person to discourage tourism abroad, direct controls on U.S. investments abroad..." Beginning in 1965, French President General Charles de Gaulle-- who by that time had made France an economic power house through austerity programs in which built up France's gold reserves after he returned to power in 1958-- started demanding a reform of the international monetary system, a move back to the gold standard. As this February 12, 1965 Time article explains: "Perhaps never before had a chief of state launched such an open assault on the monetary power of a friendly nation. Nor had anyone of such stature made so sweeping a criticism of the international monetary system since its founding in 1944. There was Charles de Gaulle last week proclaiming that the primacy of the dollar in international dealings was finished, calling for an eventual return to the gold standard —which the world's nations scrapped 50 years ago — and practically inviting other countries to follow France's lead and cash in their dollars for gold. It was a particularly nettling irritant just as the U.S. was deeply involved in making some hard decisions about its monetary policy." Time also wrote in the article that "past attempts to close the payments gap have been mere palliatives — and that the problem has begun to undermine U.S. influence around the globe." And: "Just before De Gaulle spoke, Treasury Secretary Douglas Dillon made the first public admission that the U.S. payments deficit in 1964 moved higher than anyone had expected. It totaled about $3billion, all of which the U.S. is legally committed to exchange for U.S. gold on demand. The Federal Reserve announced that the U.S. gold supply declined last week by $100 million, to a 26-year low of 15.1 billion. France converted $150 million into gold last month, plans another $150 million conversion soon. Following that lead, Spain has quietly exchanged $60 million of its dollar reserves for U.S. gold—the biggest such transaction of the Franco era. To free more gold to meet rising demand, a congressional committee last week approved President Johnson's proposal to eliminate the 25% gold backing now legally required for deposits held in the Federal Reserve System. But concern is growing in Washington that nations that have so far refrained from converting dollars out of consideration for the U.S. may cash them in for gold once the extra bullion becomes available—and thus send still more gold-laden truckloads rolling out of Fort Knox." Unlike France, Great Britain’s economy was already a disaster and was getting worse. Britain’s external trade balance and general economic conditions were poor and was getting worse. With foreign obligations growing and a shrinking industrial base, fears began to fester the Bretton Woods agreement would be broken at the Pound Sterling link. With fears of a Sterling crisis and a breakdown of the Bretton Woods agreement possible, causing France's Charles de Gaulle to push for an overhaul of the international monetary system, de Gaulle was the target of several CIA-linked assassination attempts between 1965-1966. After these attempts failed, de Gaulle's government was then a target of destabilization which later succeeded in 1968. Economist and historian William Engdahl gives a more detailed account in his 1992 (republished 2004) book, "A Century of War: Anglo-American Oil Politics And The New World Order": "After the war , under Bretton Woods, Britain, through her Sterling Bloc ties with colonies and former colonies, had been able to make the Pound Sterling a strong currency, which in many parts of the world was regarded the equal of the dollar as a stable reserve currency. Member countries in the British Commonwealth were required, among other "courtesies," to deposit their national gold and foreign exchange reserves in London and to maintain Sterling balances in City of London British banks. Britain's quota share in the IMF was second only to that of the United States. Therefore, the Pound was disproportionately important to the stability of the Bretton Woods dollar order in the 1960's, despite the clearly depleted condition of her economy. During the 1960's England, like America, was a net exporter of financial funds to the rest of the world, despite the fact that her technologically stagnant industrial base created increasing trade deficits. Continental European economies, through growth of trade within the new Common Market and their productive advantages from strong investment in technology, grew vigorously. Thus Britain's deficiencies and lack of new technological investment grew ever larger by comparison. The powerful financial interests of the City of London again preferred to focus single- mindedly on drawing the world's financial flows into London banks by maintaining the highest interest rates of any major industrial nation throughout the mid-1960's. Industry went into a slump, unable to borrow for needed technological innovations. By 1967, the British position was alarming. Despite several large emergency borrowings from the IMF to help stabilize the Pound Sterling, British foreign debts continued to grow, rising another $2 billion, or some 20% in that year alone. In January, 1967, de Gaulle's principal economic adviser, Jacques Rueff, came to London to deliver a proposal for raising the official price of gold held by the leading industrial nations. The United States and Britain continuously refused to hear such arguments, which would have meant a de facto devaluation of their currencies. Throughout 1967, the Bank of England's gold reserves declined. Foreign creditors, sensing the obviously imminent devaluation of the weakening Pound, scrambled to redeem paper for gold, which they calculated must rise in value. By June 1967, de Gaulle's government announced that France had withdrawn from the American-instigated "Gold Pool." In 1961, under U.S. pressure, the central banks of ten leading industrial countries had created the Group of Ten as it became known. In addition to the U.S., Britain, France, Germany, and Italy were added Holland, Belgium, Sweden, Canada, and Japan. The Group of Ten had agreed in 1961 to pool reserves into a special fund, the Gold Pool, to be administered in London by the Bank of England. Under the arrangement, a temporary remedy at best, as events revealed, the U.S. "central bank contributed only half the costs of continuing to maintain the world price of gold at the artificially low $35/ounce of 1934. The other nine, plus Switzerland, agreed to pay the second half of such "emergency" interventions, on the argument the situation would be temporary. But the "emergency" had become chronic by 1967. Washington refused to bring its war spending deficits under control, and Sterling continued to weaken along with the collapsing British economy. De Gaulle withdrew from the Gold Pool, not wanting to lose additional French central bank gold reserves to the bottomless pit of interventions. The American and British financial press, led by the London Economist, began a heightened attack against French policy. But de Gaulle made one tactical blunder in the process. On January 31, 1967, a new law came into effect in France which allowed unlimited convertibility for the French Franc. At the time, with French industrial growth among the strongest in Europe, and the Franc, backed by strong gold reserves, one of the strongest currencies, convertibility was seen as a confirmation of France's successful economic policy since de Gaulle took office in 1958. It was soon to become the Achilles heel which finished de Gaulle's France at the hands of Anglo-American financial interests. French Prime Minister Georges Pompidou, in a public speech in February 1967, reaffirmed French adherence to a gold-backed monetary system as the only way to avoid international manipulations, adding that the "international monetary system is functioning poorly because it gives advantages to countries with a reserve currency (i.e., the United States): these countries can afford inflation without paying for it." In effect, the Johnson administration and the Federal Reserve simply printed dollars and sent them abroad in place of its gold. The lines were more sharply drawn over the course of 1967. France's central bank, determined to exchange its dollar and Sterling reserves for gold, left the voluntary 1961 "gold pool" arrangement. Other central banks followed. The situation assumed near panic dimensions; some 80 tons of gold were sold on the London market toward the end of the year in an unheard-of period of five days, in a failed effort to stop the speculative attack. Fear grew that the entire Bretton Woods edifice was about to crack at the weakest link, the Pound Sterling. By the second half of 1967, financial speculators were selling Pounds and buying dollars or other currencies which they then used to buy commercial gold in all possible markets from Frankfurt to Pretoria, sparking a steep rise in the market price of gold, in contrast to the$35/ounce official U.S. dollar price. The Sterling crisis indirectly focused attention on the growing vulnerability at the core of the international monetary system, the U.S. dollar itself. By November 18, 1967, the British Labour government of Harold Wilson bowed to the inevitable, despite strong pressure from Washington, and announced a 14% devaluation of Sterling from $2.80 down to $2.40 per Pound, the first devaluation since 1949. The Sterling crisis abated, but the dollar crisis was only beginning. Once Sterling was devalued, speculative pressures turned directly to the U.S. dollar at the end of 1967. International holders of dollars went to the New York Federal Reserve Gold Discount Window and demanded their rightful gold in exchange. The market price of gold began an even steeper rise as a result, despite efforts of the U.S. Federal Reserve to dump its gold reserves onto the market to stop the rise. Washington, under the sway of the powerful dollar-based New York banks, adamantly refused to budge from the $35/ounce official valuation of gold. But the withdrawal of France, one of the largest holders of gold, from the Group of Ten Gold Pool, had intensified Washington's problem. By the end of the year, Washington's official gold stock declined another $1 billion, to only $12 billion. De Gaulle is toppled The crisis gathered momentum into 1968, and between March 8 and March 15 of that year the Gold Pool in London had to provide nearly 1,000 tons to hold the gold price. The weighing-room floor, loaded with gold at the Bank of England, almost collapsed under the weight. U.S. Air Force planes had been commandeered to rush gold in from the U.S. reserve at Fort Knox. On March 15, the U.S. requested a two-week closing of the London gold market. By April, 1968, a special meeting of the Group of Ten was convened, in Stockholm, at Washington's request. U.S. officials planned to unveil yet another scheme, the creation of a new "paper gold" substitute through the IMF, so-called Special Drawing Rights (SDRs), in an effort to postpone the day of reckoning still further. At the Stockholm gathering, designed to set the stage for official I MF adoption of the Washington SDR scheme at the upcoming IMF meeting the following month, France defiantly blocked unanimous agreement, with France's Minister Michel Debre reasserting traditional French policy on a return to the original rules of Bretton Woods. De Gaulle's adviser Rueff had repeatedly proposed a "shock" devaluation of the U.S. dollar of 100% against gold, which would have been elegantly simple, would have doubled official U.S. gold reserves in dollar terms and would have been sufficient to allow the U.S. to convert the approximate $10 billion of foreign held dollars, while still maintaining the value of its gold reserves as before. This would have been far more rational and painless, in human terms, than what ensued from Washington's side. But tragically, it was not to result. Within days of the French refusal to back Washington's SDR dollar bailout scheme, France itself was the target of the most serious political destabilization of the postwar period. Beginning with leftist students at the University of Strasbourg, soon all of France was brought to a chaotic halt as students rioted and struck across France. Coordinated with the political unrest (which, interestingly the French Communist Party attempted to calm down), U.S. and British investment houses started a panic run on the French Franc which gained momentum as it was touted loudly in Anglo-American financial media. The May 1968 student riots in France were the result of the vested London and New York financial interests in the one G-10 nation which continued to defy their mandate. Taking advantage of the new French law allowing full currency convertibility, these financial houses began to cash in Francs for gold, draining French gold reserves by almost 30% by the end of 1968, and bringing a full- blown crisis in the Franc. Sadly, the counterattack of the Anglo-Americans succeeded. Within a year, de Gaulle was out of office and France's voice severely weakened. One of his last meetings while still President in 1969, was with British Ambassador to France, Christopher Soames. Once again, the General told Soames, in a broad review of French postwar policy, that Europe must be independent and that her independent stance had been profoundly compromised by the "pro-American" sentiments of many European countries, most especially Britain. One other country openly daring to defy the powerful financial interests of London and New York at this time was the largest gold-producer in the west, the Republic of South Africa. During the early part of 1968, South Africa refused to sell its newly-mined gold for Pounds or dollars at the official price of $35/ounce. France and South Africa had been holding talks to form a new gold basis for reforming the Bretton Woods monetary order. This provoked a U.S.-led central bank boycott of South Africa, a move again repeated by the same interests almost exactly 20 years later, in the mid-1980's. Despite the apparent decline of the French "threat," Washington and London's success was to prove a Pyrrhic victory." The US Federal Reserve requested the London Gold Market be closed for two weeks on March 15, 1968. While the London Gold Market was closed, the Gold Pool was dismantled. Upon the London Gold Market's reopening, gold rose to $39 per ounce. On the same day, western central banks, led by the US Treasury Secretary Robert Fowler, in what is known as the Washington Accord, announced the world's monetary reserves to be "sufficient" and no additional purchases or sales of gold by any central bank in any market was needed. Letters were sent to some 95 central banks asking them not to buy gold. Fowler hoped that by boycotting South Africa, monetary demand for gold would drop, thus forcing South Africa, producer of 77% of the non-Communist world's output of gold at the time , to dump its gold on markets in London and Switzerland and thus drive the price down to the official $35-per-ounce level. The boycott had no effect at first. As the price of gold by July 1968 was over $40 per ounce and by mid-1969 was approaching $44 . South Africa was able to pay for its imports in several ways: In the three years prior to 1968, South Africa had run capital account surpluses; also, after the bear market bottom in 1966, South Africa saw huge foreign currency inflows from bullish investors. South Africa was even able to sell some of its gold to western central banks despite the US led boycott. The Bank of Portugal broke the central bank boycott and bought $145 million worth of gold in 1968 and another $120 million by mid 1969. South Africa also sold gold to three Swiss banks, Credit Suisse, Union Bank and Swiss Bank Corp.(apparently these three wanted Zurich to challenge London's status as the leading gold market in the world) South Africa even offered to sell gold to the IMF--which IMF rules stated the fund must buy all gold offered to it, by its members. South Africa offered the IMF 1 million ounces of gold in May 1968, but the IMF deferred decision on the legality of gold purchases, with the US having 25% of the board votes. However, by mid 1969, South Africa was in desperate need of exporting its gold to pay for its imports. The Bull market in stocks that had started in 1966 had ended and investors were increasingly shunning South Africa, who in the 2Q of 1969 had its first capital account deficit since 1965. As a result, South Africa began dumping gold on the market in London. South Africa's reserves fell from $1.4 billion in May 1969 to $1.1 billion the following August. An estimated 20 tonnes of South African gold was hitting the market. This dumping of gold on the markets was a disaster for gold prices. Gold prices would fall from $43.50 to $35 by the end of that October and all the way down to $34.80 on January 16, 1970. This decline was short lived however. By the end of 1970 gold was back to $37.50 per ounce, as the economic situation in the US deteriorated. For the first time in the 20th century, the US had a trade deficit in 1970. This flood of new dollars to foreign countries would soon find their way back home in the form of gold demands; demand for gold the US could not cover. By 1971, total US gold reserves had fallen to just $10 billion, while foreign central banks held some $80 billion -- eight times the total of US gold reserves. With the Vietnam War still raging and now not only a balance of payments deficit, but now also a trade deficit and a major economic recession looming, the Federal Reserve, in the face of rising inflation and commodity prices in 1971, increased the money supply by 10%. Fearing massive inflation and no longer willing to prop up the dollar, inflation-leery West Germany -- Wiemar Germany hyperinflated in the early 1920s -- pulled its Deutsche Mark from the Bretton woods agreement. This move actually strengthened the German economy and also the Deutsche Marked as it appreciated some 7.5% vs. the dollar by August 1971. The German withdrawal from the Bretton Woods agreement sparked panic and a currency crisis. By the end of June 1971, $22 billion in assets had left the US. Later, in July 1971, Switzerland redeemed $50 million for gold and one month later in August, pulled its Swiss Franc from the Bretton Woods agreement. At the same time, France redeemed $191 million for gold by sending a French battleship to New York to take delivery of the gold from the Federal Reserve and to bring back to France. Then, in a shocking move on August 11, 1971, the British ambassador requested to redeem an astonishing $3 billion for gold -roughly one third of the total gold reserves of the US, at the time. The same day, Congress released a report recommending a devaluation of the dollar in an effort to protect the dollar from "foreign price-gougers." It was too little, too late. The dollar was in a full blown crisis and was on the brink of collapse and hyperinflation as faith had been lost. So, on August 15, 1971 President Richard Nixon, in an event that would come to known as the Nixon shock, unilaterally closed the US gold window and imposed a 90 day price and wage freeze along with a 10% surcharge tax on imports. For the first time ever, America was on a full fiat paper system. This concludes part one. The Bretton Woods agreement put us on this path and infected us wth an illness, an illness in which today has grown to monstrous proportions and has us gasping for our last breaths. What is this illness and how did it contribute to America's first bankruptcy in 1971? How will it lead to the second and final currency crisis and bankruptcy of the US? I am currently working on part two and hope to have it finished and published in the coming weeks. Part two will take us through the post Bretton Woods era, from the high inflation of the 70s and early 80s, to the Gordon Gekko era of greed in the mid-late 80s till today. The asset mania that engulfed the nation in the 90s and continues till this day and the dot com bubble in the late 90s. And all the other events, manias, wars etc. over the last 10 years. --------------------------------------------------------------------------------- References: Mises Daily Tuesday March 31, 2009 "The Losing Battle to Fix Gold at $35, Part II" http://mises.org/daily/3402 William Engdahl "A Century Of War: Anglo-American Oil Politics and The New World Order" published 2004 p.120 Time Magazine February 12, 1965 "Money: De Gaulle v. the Dollar" http://www.time.com/time/magazine/article/0,9171,840572-1,00.html Time Magazine Jul. 25, 1969 "Money: Where the Gold Has Gone" http://www.time.com/time/magazine/article/0,9171,901146,00.html Asia Times October 2, 2008 "Gold, manipulation and domination" http://www.atimes.com/atimes/China_Business/JJ02Cb03.html Chicago Tribune June 15, 1975 featured a front-page story which read in part: “Congressional leaders have been told of CIA involvement in a plot by French dissidents to assassinate... De Gaulle... Sometime in the mid-1960s – probably in 1965 or 1966 – dissidents in the De Gaulle government are said to have made contact with the CIA to seek help in a plot to murder the French leader.... According to the CIA briefing officer, discussions were held on how best to eliminate De Gaulle, who by then had become a thorn in the side of the Johnson administration because of his ouster of American military bases from French soil and his demands that U.S. forces be withdrawn from the Indochina War" 25407 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Warning: Do Not Taunt Happy Fun Schweizerische Nationalbank Swiss National Bank Accelerates Downside Currency Intervention, Raises To Bernanke The Biggest EURUSD Bull, Goldman's Thomas Stolper, Throws In The Towel, Cuts His Forecast Across The Board Frontrunning: November 30 Guest Post: Swiss Finish Sets New Standard for Global Bank Regulation
Thanks To QE Bernanke Has Injected Foreign Banks With Over $1 Trillion In Cash For First Time Ever Submitted by Tyler Durden on 05/21/2013 11:54 -0400 Ben Bernanke Two years ago, Zero Hedge first made the observation that the bulk of Fed reserves (also known simply as " cash created out of thin air " because money is first and foremost fungible no matter what textbook theoreticians may claim, and the only cash allocation preference is the capital allocation IRR analysis) had been parked not with US banks, but with foreign banks with US-based operations. We followed that with more analyses , showing explicitly how the Fed was providing a constant cash injection to foreign banks courtesy of the rate on overnight reserves which is the amount Fed pays to banks that hold reserves with it, as the bulk of reserves continued to end up with foreign banks - a situation set to become a huge political storm some time in 2014-2015 when the IOER has to rise and the Fed is "found" to have injected tens of billions of "interest" not into US banks but in foreign banks operating in the US, and which then can upstream the "profits" to insolvent offshore domiciled holding companies. So it was our expectation that while if not slowing down its rate of money-creation (i.e., reserve-production) - something that won't happen for a long time as it would crash the stock market - the Fed's reserves would at least revert to being accumulated at US-based banks. No such luck. In fact as the latest H.8 report demonstrates, as of the most recently weekly data, the Fed's policies have led to foreign banks operating in the US holding an all time high amount of reserves, surpassing $1 trillion for the first time, or $1,033 billion to be precise. This means that, as we expected several months ago, the only recipient of ongoing Fed money printing are not US banks, but foreign banks operating in the US. For those confused about the big picture, here is a chart showing the breakdown of cash held by big and small US banks as well as foreign banks, superimposed to total reserves created by the Fed since the start of the Great Financial Crisis. The correlation is 100%. And just to prove that ALL the unsterilized cash from both QE2 and QEternity has essentially gone to support offshore banks, here is the conclusive chart showing the change in Fed reserves and cash held by foreign banks: Finally, tying it all together, here is chart showing cash at US banks vs cash at foreign banks operating in the US. At $1.03 trillion in foreign cash, the Fed's policies have once again led to more cash being held by foreign banks than all cash held by domestic banks. We are confident that we speak for all when we say: " Thank you Ben - insolvent foreign banks appreciate your ongoing QE2 and QEternity-funded generosity " Average: 5 Your rating: None Average: 5 ( 26 votes) Tweet - advertisements - VectorVest Stock Analysis. Find out Whether a Stock is a Buy, Sell or Hold. Get your Free Stock Analysis simply by clicking here! Login or register to post comments 23981 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Fed May Inject Over $1 Trillion To Bail Out Europe Japanese Bond Curve Inverts For First Time Ever As 3Y Cash Is Now King Over $1 Trillion In Excess Reserves? Not A Problem According To Goldman Sachs NY Gov. Paterson: "For The First Time Ever, At The End Of December New York State Will Have A Negative Cash Balance" Grayson Grilling Bernanke On Half A Trillion In Foreign Liquidity Swaps And The Constitutional Basis For Such
A Short History Of Currency Swaps (And Why Asset Confiscation Is Inevitable) Submitted by Tyler Durden on 05/05/2013 14:55 -0400 Belgium Ben Bernanke Central Banks Creditors default EuroDollar European Central Bank Eurozone Federal Reserve Foreign Central Banks France Germany Guest Post Hungary Investment Grade Italy Lehman Mark To Market Monetary Base national security Purchasing Power Reserve Currency Sovereign Debt Sovereign Risk Sovereign Risk Sovereigns Trade Deficit World Trade Submitted by Martin Sibileau of A View From The Trenches blog , I want to offer today an historical perspective on the favorite liquidity injection tool: Currency swaps. These coordinated interventions are not a solution to the crashes, but their cause, within a game of chicken and egg. But I’ve just given you the conclusion. I need to back it now… To read this article in pdf format, click here: May 5 2013 With equity valuations no longer levitating but in a different, 4th dimension altogether, and credit spreads compressing... Which fiduciary portfolio manager can still afford to hedge? Any price to hedge seems expensive and with no demand, the price of protection falls almost daily. The CDX NA IG20 index (i.e. the investment grade credit default swap index series 20, tracking the credit risk of 125 North American investment grade companies in the credit default swap market) closed the week at 70-71bps. The index was at this level back in the spring of 2005. By the summer of 2007, any credit portfolio manager that would have wanted to cautiously hedge with this index would have seen a further compression of 75% in spreads, completely wiping him/her out. It is in situations like these, when the crash comes, that the proverbial run for liquidity forces central banks to coordinate liquidity injections. However, something tells me that this time, the trick won’t work. In anticipation to the next and perhaps final attempt, I want to offer today an historical perspective on the favorite liquidity injection tool: Currency swaps. These coordinated interventions are not a solution to the crashes, but their cause, within a game of chicken and egg. But I’ve just given you the conclusion. I need to back it now… How it all began Let me clarify: By currency swaps, I refer to a transaction carried out between two central banks. This means that currency swaps cannot be older than the central banks that extend them. On the other hand, foreign exchange swaps between corporations may date back to the late Middle Ages, when trade began to resurface in the Italian cities and the Hansastdte . Having said this, I believe that currency swaps were born in 1922, during the International Monetary Conference that took place in Geneva. This conference marked the beginning of the Gold Exchange Standard, with the goal of stabilizing exchange rates (in terms of gold) back to the pre-World War I. According to Prof. Giovanni B. Pittaluga (Univ. di Genova), there were two key resolutions from the conference, which opened the door to currency swaps. Resolution No. 9 proposed that central banks “… centralise and coordinate the demand for gold, and so avoid those wide fluctuations in the purchasing power of gold which might otherwise result from the simultaneous and competitive efforts of a number of countries to secure metallic reserves… ” Resolution No. 9 also spelled how the cooperation among central banks would work, which “…should embody some means of economizing the use of gold maintaining reserves in the form of foreign balance, such, for example, as the gold exchange standard or an international clearing system… ” In Resolution No. 11, we learn that: “…The convention will thus be based on a gold exchange standard.” (…) “ …A participating country, in addition to any gold reserve held at home, may maintain in any other participating country reserves of approved assets in the form of bank balances, bills, short-term Securities, or other suitable liquid assets …. when progress permits, certain of the participating countries will establish a free market in gold and thus become gold centers ”. Lastly, gold or foreign exchange would back no less than 40% of the monetary base of central banks. With this agreement, the stage was set to manipulate liquidity in a coordinated way to a degree the world had never witnessed before. The reserve multiplier, composed by gold and foreign exchange could be “managed” and through an international clearing system, it could be managed globally. How adjustments worked under the Gold Standard Before 1922, adjustments within the Gold Standard involved the free movement of gold. In the figure below, I show what an adjustment would have looked like, as the United States underwent a balance of trade deficit, for instance: Gold would have left the United States, reducing the asset side of the balance sheet of the Federal Reserve. Matching this movement, the monetary base (i.e. US dollars) would have fallen too. The gold would have eventually entered the balance sheet of the Banque of France, which would have issue a corresponding marginal amount of French Francs. It is worth noting that the interest rate, in gold, would have increased in the United States, providing a stabilizing/balancing mechanism, to repatriate the gold that originally left, thanks to arbitraging opportunities. As Brendan Brown (Head of Economic Research at Mitsubishi UFJ Securities International) explained ( here ), with free determination of interest rates and even considerable price fluctuations, agents in this system had the legitimate expectation that key relative prices would return to a “perpetual” level. This expectation provided “…the negative real interest rate which Bernanke so desperately tries to create today with hyped inflation expectations…” There is an excellent work on the mechanics of this adjustment published by Mary Tone Rodgers and Berry K. Wilson, with regards to the Panic of 1907 (see here ). The authors sustain that the gold flows that ensued from Europe into the United States provided the liquidity necessary to mitigate the panic, without the need of intervention. This success in reducing systemic risk was due to the existence of US corporate bonds (mainly from railroads) with coupon and principal payable in gold, in bearer or registered form (at the option of the holder) that facilitated transferability, tradable jointly in the US and European exchanges, and within a payment system operating largely out of reach from banksters outside of the bank clearinghouse systems. The official story is that the system was saved by a $25MM JPM-led pool of liquidity injected to the call loan market. How adjustments worked under the Gold Exchange Standard During the 1920s and particularly with the stock imbalances resulting from World War I, the search for sustainable financing of reparation payments began. Complicating things, the beginning of this decade saw thehyper inflationaryprocesses in Germany and Hungary. By 1924, England and the United States rolled out the Dawes Plan and between 1926 and 1928, the so called Poincaré Stabilization Plan in France. The former got Charles G. Dawes the Nobel Prize Peace, in 1925. As the figure below shows, against a stable stock of gold, fiat currency would be loaned between central banks. In the case of a swap for the Banque de France, US dollars would be available/loaned, which were supposedly backed by gold. The reserve multiplier vs. gold expanded, of course: With these transactions central banks would now be able to influence monetary (i.e. paper) interest rates. The balancing mechanism provided by gold interest rate differentials had been lost. As we saw under the Gold Standard before, an outflow of US dollars would have caused US dollar rates to rise, impacting on the purchasing power of Americans. Now, the reserve multiplier versus gold expanded and the purchasing power of the nation that provided the financing was left untouched. The US dollar would depreciate ( on the margin and ceteris paribus ) against the countriesbenefitingfrom these swaps. Inflation was exported therefore from the issuing nation (USA) to the receiving nations (Europe). The party lasted until 1931, when the collapse of the KreditAnstalt triggered a unanimous wave of deflation. How the perspective changed as the US became a debtor nation Fast forward to 1965, two decades after World War II, and currency swaps are no longer seen as a tool to temporarily “stabilize” the financing of flows, like balance of trade deficits or war reparation payments, but stocks of debt. By 1965, central bankers are already worried with the creation of reserve assets, just like they are today; with the creation of collate ral (see this great post by Zerohedge on the latter). Indeed, 48 years ago, the Group of Ten presented what was called the Ossola Report , after Rinaldo Ossola , chairman of the study group involved in its preparation and also vice-chairman of the Bank of Italy. This report was specifically concerned with the creation of reserve assets. At least back then, gold was still considered to be one of them. In an amazing confession (although the document was initially restricted), the Ossola Group explicitly declared that the problem “… arises from the considered expectation that the future flow of gold into reserves cannot be prudently relied upon to meet all needs for an expansion of reserves associated with a growing volume of world trade and payments and that the contribution of dollar holdings to the growth of reserves seems unlikely to continue as in the past…” Currency swaps were once again considered part of the solution. Under the so called “currency assets”, the swaps were included by the Ossola Group, as a useful tool for the creation of alternative reserves. Three months, during a Hearing before the Subcommittee on National Security and International Operations, William McChesney Martin, Jr., at that time Chairman of the Board of Governors of the Federal Reserve System, acknowledged a much greater role to currency swaps, in maintaining the role of the US dollar as the global reserve currency. In McChesney Martin’s words: “…Under the swap agreements, both the System (i.e. Federal Reserve System) and its partners make drawings only for the purpose of counteracting the effects on exchange markets and reserve positions of temporary or transitional fluctuations in payments flows. About half of the drawings ever made by the System, and most of the drawings made by foreign central banks, have been repaid within three months; nearly 90 per cent of the recent drawings made by the System and 100 per cent of the drawings made by foreign central banks have been repaid within six months. In any event, no drawing is permitted to remain outstanding for more than twelve months. This policy ensures that drawings will be made, either by the System or by a foreign central, bank, only for temporary purposes and not for the purpose of financing a persistent payments deficit. In all swap arrangements both parties are fully protected from the danger of exchange-rate fluctuations. If a foreign central bank draws dollars, its obligation to repay dollars would not be altered if in the meantime its currency were devalued. Moreover, the drawings are exchanges of currencies rather than credits. For instance, if, say, the National Bank of Belgium draws dollars, the System receives the equivalent in Belgian francs; and since the National Bank of Belgium has to make repayment in dollars, the System is at all times protected from any possibility of loss. Obviously, the same protection is given to foreign central banks whenever the System draws a foreign currency. The interest rates for drawings are identical for both parties. Hence, until one party disburses the currency drawn, there is no net interest burden for either party. Amounts drawn and actually disbursed incur an interest cost, needless to say; the interest charge is generally close to the U.S. Treasury bill rate…” My graph below should help visualize the mechanism: Essentially, with these currency swaps, foreign central banks that during the war had shifted their gold to the USA, became middlemen of a product that was a first-degree derivative of the US dollar, and a second-degree derivative of gold. On September 24th 1965, someone called this Ponzi scheme out. In an article published by Le Monde, Jacques Rueff publicly responded to this nonsense, under the hilarious title “ Des plans d’irrigation pendant le déluge ” (i.e. Irrigation plans during the flood). He minced no words and wrote: “… C’est un euphénisme inacceptable et une scandaleuse hyprocrisie que de qualifier de création de “liquidités internationales” les multiples operations, tells que (currency) swaps…” “C’est commetre une fraude de meme nature que de présenter comme la consequence d’une insuffiscance générale de liquidités l’insufficance des moyens dont disposent les Etats-Unis et l’Anglaterre pour le réglement de leur déficit exterieur” My translation: “…It is an unacceptable euphemism and an outrageous hypocrisy to qualify as creation of “international liquidity” multiple transactions, like (currency) swaps…”…“…In the same fashion, it is a fraud to present as the consequence of a general lack of liquidity, the lack of means available to the USA and England to settle their external deficits …” Comparing the USA and England to underdeveloped countries, Rueff added that these also lack external resources, but those that are needed cannot be provided to them but by credit operations, rather than the superstition of a monetary invention disguised as necessary and in the general interest of the public (i.e. rest of the world). With impressive prediction, Rueff warned that the problem would present itself in all its greatness, the day these two countries decide to recover their financial independence by reimbursing with their dangerous liabilities (i.e. currencies). That day, said Rueff, international coordination would be necessary and legitimate. But such coordination would not revolve around the creation of alternative instruments of reserve, demanded by a starving-for-liquidity world. That day would be a day of liquidation, where debtors and creditors would be equally interested and would share the common responsibility of the lightness with which they jointly accepted the monetary difficulties that are present ….Sadly, Rueff’s call could not sound more familiar to the observer in 2013… How adjustments work today, without currency swaps Until the end of the Gold Exchange Standard, even if the reserve multiplier suppressed the value of gold (like today), gold was still the ultimate reserve and had in itself no counterparty risk. After August 15th, 1971, when Nixon issued the Executive Order 11615 (watch announcement here ), the ultimate reserve was simply cash (i.e. US dollars) or its counterpart, US Treasuries. And unlike gold, these reserve assets could be created or destroyed ex-nihilo. When they are re-hypothecated, leverage grows unlimited and when their value falls, valuations dive unstoppable. Because (and unlike in 1907) the transmission channel for these reserves today is the banking system, when they become scarce, counterparty risk morphs into systemic risk. When Rueff discussed currency swaps, he had imbalances in mind. In the 21st century, we no longer have time to worry about these superfluous things. Balance of trade deficits? Current account deficits? Fiscal deficits? In the 21st century, we cannot afford to see the big picture. We can only see the “here and now”. Therefore, when we talk about currency swaps, the only thing we have in mind is counterparty risk within the financial system. The thermometer that measures such risk is the Eurodollar swap basis, shown below (source: Bloomberg). As the US dollar became the carry currency, the cost of accessing to it became the cornerstone of value for the rest of the asset spectrum, widely known as “risk”. In the chat below, we can see two big gaps in the Eurodollar swap basis. The one in 2008 corresponds to the Lehman event. The one in 2011 corresponds to the banking crisis in the Eurozone that was contained with a reduction in the cost of USDEUR swaps and with the Long-Term Refinancing Operations done by the European Central Bank. In both events, the financial system was in danger and banks were forced to delever. How would the adjustment process have worked, had there not been currency swaps to extend? In the figure below, I explain the adjustment process, in the absence of a currency swap. As we see in step 1, given the default risk of sovereign debt held by Eurozone banks, capital leaves the Eurozone, appreciating the US dollar. We see loan loss reserves increase (bringing the aggregate value of assets and equity down). As these banks have liabilities in US dollars and take deposits in Euros, this mismatch and the devaluation of the Euro deteriorates their risk profile Eurozone banks are forced to sell US dollar loans, shown on step 2. As they sell them below par, the banks have to book losses. The non-Eurozone banks that purchase these loans cannot book immediate gains. We live in a fiat currency world, and banks simply let their loans amortize; there’s no mark to market. With these purchases, capital re-enters the Eurozone, depreciating the US dollar. In the end, there is no credit crunch. As long as this process is left to the market to work itself out smoothly, borrowers don’t suffer, because ownership of the loans is simply transferred. This is neutral to sovereign risk, but going forward, if the sovereigns don’t improve their risk profile, lending capacity will be constrained. In the end, an adjustment takes place in (a) the foreign exchange market, (b) the value of the bank capital of Eurozone banks, and (c) the amount of capital being transferred from outside the Eurozone into the Eurozone. How adjustments work today, with currency swaps Let’s now proceed to examine the adjustment –or better said, lack thereof- in the presence of currency swaps. The adjustment is delayed. In the figure below, we can see that the Fed intervenes indirectly, lending to Eurozone banks through the ECB. Capital does not leave the US. Dollars are printed instead and the US dollar depreciates. On November 30th, of 2011, upon the Fed’s announcement at 8am, the Euro gained two cents vs. the US dollar. As no capital is transferred, no further savings are required to sustain the Eurozone and the misallocation of resources continues, because no loans are sold. This is bullish of sovereign risk. The Fed becomes a creditor of the Eurozone. If systemic risk deteriorates in the Eurozone, the Fed is forced to first keep reducing the cost of the swaps and later to roll them indefinitely, as long as there is a European Central Bank as a counterparty for the Fed , to avoid an increase in interest rates in the US dollar funding market. But if the Euro zone broke up, there would not be any “safe” counterparty –at least in the short term- for the Fed to lend US dollars to. In the presence of a European central bank, the swaps would be bullish for gold. In the absence of one, the difficulty in establishing swap lines would temporarily be very bearish for gold (and the rest of the asset spectrum). Final words Over almost a century, we have witnessed the slow and progressive destruction of the best global mechanism available to cooperate in the creation and allocation of resources. This process began with the loss of the ability to address flow imbalances (i.e. savings, trade). After the World Wars, it became clear that we had also lost the ability to address stock imbalances, and by 1971 we ensured that any price flexibility left to reset the system in the face of an adjustment would be wiped out too. This occurred in two steps: First at a global level, with the irredeemability of gold: The world could no longer devalue. Second, at a local and inter-temporal level, with zero interest rates: Countries can no longer produce consumption adjustments. From this moment, adjustments can only make way through a growing series of global systemic risk events with increasingly relevant consequences. Swaps, as a tool, will no longer be able to face the upcoming challenges. When this fact finally sets in, governments will be forced to resort directly to basic asset confiscation. Average: 4.78261 Your rating: None Average: 4.8 ( 23 votes)
Spot The Foreign Demand For US Treasurys Under Obama Submitted by Tyler Durden on 11/06/2012 11:01 -0500 Obama Administration POMO POMO Few charts capture as effectively the shift in foreign demand for US Treasurys over the past 4 years, or under the Obama administration, as the following two, courtesy of the latest TBAC Q4 refunding presentation . They are quite self-explanatory. Total foreign demand: Bills and Coupons. And foreign demand for just Coupon paper. So who is picking up the slack? And what is another name for Primary Dealers?...think POMO.... Why, the Fed of course. Average: 4.846155 Your rating: None Average: 4.8 ( 13 votes) Tweet Login or register to post comments 10871 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Guess Who Was The Biggest Beneficiary From The Fed's POMO Bonanza Fed Forces Primary Dealers To Buy Ever More Short-Dated Paper As Corporate Bond Holdings Drop To Decade Low As US Closes June With $15,856,367,214,324.44 In Federal Debt, US Debt/GDP Hits Post WWII High Of 101.5% 2 Forces Battling In The Treasury Market - Friday's Large Buyer vs This Week's Auction Setup Sellers Fed's "Other Assets" Hit All Time High Of $205 Billion
Guggenheim On Gold And The 'Unsustainable' Return To Bretton Woods Submitted by Tyler Durden on 10/10/2012 18:18 -0400 Central Banks Federal Reserve Foreign Central Banks France Great Depression Gross Domestic Product Monetary Base Monetary Policy Money Supply None OPEC Precious Metals Purchasing Power Quantitative Easing Reserve Currency Trade Deficit Via Scott Minerd of Guggenheim Partners , Bretton Woods is a resort in the mountains of New Hampshire that was made famous by a series of meetings of world leaders and economists in 1944. Nine months before the last of Hitler’s V-2 rockets struck Britain, 730 delegates from the 44 Allied Nations congregated in Bretton Woods to create a new world order, including a monetary system that could resolve the festering economic consequences of the First World War and the Great Depression. Under the Bretton Woods Agreement, the world’s currencies would be pegged to the U.S. dollar and central banks would be able to exchange dollars for gold at a set price of $35 per ounce. It was this arrangement that firmly established the U.S. dollar as the global reserve currency. The system worked relatively well for almost three decades (1944-1971). During that time, Bretton Woods’ member states achieved increasing levels of trade, economic cooperation, and initially, a period of relative price stability. The trouble with the system was that global central banks had pegged their currencies at low levels to support exports to the U.S. This led to the accumulation of massive dollar reserves in the hands of foreign central banks. These dollars were used to buy interest-bearing U.S. Treasuries. The structural imbalance, which resulted in ever growing dollars reserves, created problems that would ultimately compromise the very existence of Bretton Woods. Today, global central banks are once again managing the exchange values of their currencies relative to the dollar to ensure export competitiveness. Just as pressure mounted as a result of the accumulation of large Treasury reserves by foreign central banks under Bretton Woods, today, ever-expanding dollar-denominated reserves on central bank balance sheets around the world threaten global price stability and even dollar hegemony. Though a reversal of this unsustainable pattern is not imminent, the ultimate consequences could be even more severe than the precedent set 41 years ago. By understanding the demise of Bretton Woods, we gain a better handle on how today’s global monetary arrangement may result in a period of relative price stability in the short-run followed by a rapid depreciation in the purchasing power of currencies on a global scale . An historical perspective provides the framework to better understand the current monetary system and the impact these policies have on investment portfolios. The Golden Years of Bretton Woods At the outset of Bretton Woods, the value of the United States’ gold reserves relative to the monetary base, known as the gold coverage ratio, was approximately 75%. This helped to support the dollar as a stable global reserve currency. By 1971, the issuance of new dollars and dollar-for-gold redemptions had reduced the U.S. dollar’s gold coverage ratio to 18%. The consensus view during the early years of Bretton Woods was that the dollar was as good as gold . Gold has no yield so central banks held interest-bearing Treasuries on the assumption that they could always be converted to gold at a later time. By the early 1960s, there was widespread recognition that the U.S. could never fulfill its commitment to redeem all outstanding dollars for gold. Despite this disturbing fact, central banks did not call the Fed’s bluff by selling their dollar reserves. They had become hostage to the system. By the end of the decade, the problem had intensified to the point that if any central bank attempted to convert its dollars to gold, its domestic currency would rapidly appreciate above the levels that were pegged under Bretton Woods . This would lead to severe economic slowdowns for any country who challenged the U.S. Throughout the 1960s, foreign central banks implicitly imported inflation as a result of maintaining the exchange value of their currencies at the artificially low rates set in 1944. The overvalued dollar led to trade deficits versus a sizable trade surplus for the United States. Because of the undervaluation of non-U.S. currencies, Bretton Woods member states were forced to expand their money supplies at rates that compromised price stability. As foreign exporters converted dollars back to their local currencies, the dollar reserves on central bank balance sheets continued to grow. This surplus of dollars held by central banks, and subsequently invested in Treasury securities, reduced the United States’ cost of borrowing and allowed the country to consume beyond its means. Valéry Giscard d’Estaing, then finance minister of France referred to the situation as “America’s exorbitant privilege,” but he was only half right. As Yale economist Robert Triffin noted in 1959, by taking on the responsibility of supplying money to the rest of the world, the U.S. forfeited a significant amount of control over its domestic monetary policy. The End of the Golden Years When Triffin introduced his theory to the world, he accurately predicted the collapse of Bretton Woods and the end of an era of U.S. trade surpluses. Triffin told Congress that, at some point, foreign central banks would become saturated with Treasury securities and seek to redeem them for gold. However, because this would appreciate their currencies and slow growth, it was difficult to envision a set of circumstances that would lead foreign central banks to stop accumulating more dollars. By the middle of the 1960s, the U.S. was escalating the war in Southeast Asia while expanding social welfare programs under Lyndon Johnson’s Great Society. As the U.S. pursued a policy of both ‘guns and butter,’ its trading partners questioned the country’s willingness to restore fiscal balance. Over time, the U.S. trade surplus deteriorated as America imported more than it exported. Further, the increasing trade deficit in the U.S. accelerated the accumulation of dollar reserves around the world. As a result of the massive growth in reserves, the Bretton Woods nations saw domestic inflation rise by an average of 5.2% during the 1960s, relative to U.S. inflation, which was 2.9%. European countries began to consider that the price of dollar-denominated inputs such as oil would fall dramatically if their currencies were revalued upward. By abandoning Bretton Woods, they could reduce their domestic inflation by reasserting control over their domestic money supply. However, the possibility of an exit from Bretton Woods had not been contemplated in the original 1944 plan. How would member states leave Bretton Woods? The answer could be found in Trffin’s prediction. Forced to swap dollars for gold, the U.S. would have to admit that it could no longer keep its pledge to exchange gold for $35 per ounce. Between Bretton Woods’ establishment in 1944 and its demise in August 1971, the U.S. exported almost half of its gold reserves. In the 12 months leading up to the end of Bretton Woods, the Fed lost nearly 15% of its total gold reserves; a rate at which the U.S. would have depleted all of its reserves in a short time. This led then-President Richard Nixon to abruptly end the dollar’s gold convertibility by ‘closing the gold window.’ While the United States’ trading partners immediately reaped the benefits of reduced inflation and cheaper imports, the end of gold convertibility for the dollar would set in motion a decade of subpar growth and high inflation. In the early 1970s, members of the Organization of the Petroleum Exporting Countries (OPEC) saw the purchasing power of their dollar-denominated oil receipts rapidly erode. They seized the opportunity to raise prices. Between 1973 and 1980, oil prices would rise by more than 1,000%. As a result, during the 1970s, countries that had pursued relatively weaker currencies under Bretton Woods began to seek relatively stronger exchange values to constrain their energy costs. The resulting fall in demand for the dollar led to a drastic reduction in its purchasing power. Bretton Woods II: The Sequel The early success of Bretton Woods, which relied upon weak currencies to successfully promote exports looks surprisingly similar to the policies being practiced by central banks around the world today. Some have referred to the current policies in foreign exchange markets as Bretton Woods II. Although not officially acknowledged, central banks are once again tacitly pegging their currencies to the dollar. As the U.S. is expanding its monetary base through quantitative easing (QE), other countries have few options but to join this race to the bottom. This situation is as unsustainable today as it was in the 1960s. (For a more in-depth discussion, read one of my previous commentaries, The Return of Beggar-Thy-Neighbor .) Once global growth begins to accelerate and capacity utilization increases, economic bottlenecks will cause the price of inputs, such as energy, to rise. There will then be another inflection point when countries will realize that by allowing their currencies to appreciate, reduced import prices will spur productivity and domestic growth. This will happen when it becomes apparent that the savings resulting from lower input prices exceeds the export losses associated with a stronger currency. Though the timing of this event is difficult to forecast, its occurrence will likely cause Bretton Woods II to collapse. Investment Implications: A Green Light for Gold Gold was an important component of the Bretton Woods system. As a monetary anchor, it provided stability for the dollar as a global reserve currency. With the demise of gold convertibility under Bretton Woods, global price stability began to unravel. After being depegged from its official price of $35 per ounce in 1971, gold rose by more than 2,000% over the next 10 years. Investors migrate to gold when currencies no longer function as good stores of value. The U.S. gold coverage ratio, which measures the amount of gold on deposit at the Federal Reserve against the total money supply, is currently at an all-time low of 17%. This ratio tends to move dramatically and falls during periods of disinflation or relative price stability. The historical average for the gold coverage ratio is roughly 40%, meaning that the current price of gold would have to more than double to reach the average. The gold coverage ratio has risen above 100% twice during the twentieth century. Were this to happen today, the value of an ounce of gold would exceed $12,000. The possibility of an upward revaluation of the official price of gold should not be minimized. Although I do not anticipate or advocate a return to the gold standard, an upward revaluation of gold by one of more central banks is possible. If the Federal Reserve, for instance, announced that it stood ready to purchase gold at $10,000 per ounce, the gold-coverage ratio of the dollar would return to 75%, roughly where it stood at the beginning of Bretton Woods. This could restore confidence in the value of the dollar if its ultimate role as a reserve currency were to be challenged. Gold’s industrial use only represents .03% of global GDP. Therefore, its upward revaluation would not cause a significant economic shock associated with rising input prices. Likewise, a higher price would probably not affect the behavior of the world’s largest holders, which are central banks and sovereign wealth funds. Prescient investors should consider making allocations to gold and other precious metals as a hedge against the erosion of purchasing power of the dollar as well as for the potential upside from positive market price appreciation or a possible intervention at the policy level. Despite the sizable appreciation in gold prices in the last decade, gold is far from overvalued. This makes gold a low-risk investment and leads me to believe that gold will never again trade below $1,600 an ounce. The Precarious Balance Continues Almost 70 years later, the global monetary system is still living in the long shadow of Bretton Woods. Triffin’s views are as relevant today as they were when they were first published more than half a century ago. The current paradox in the global monetary system is as unsustainable as it was under the original Bretton Woods Agreement. The exact timing of an inflection point for Bretton Woods II remains unclear, and although it is not imminent, its eventual occurrence is virtually certain. As was the case in the 1960s, a reversal of the acquisition of Treasuries by foreign central banks will cause a major shift in global capital flows and insecurity about the value of dollar-based assets, particularly Treasuries. The most likely outcome will be renewed support for precious metal, which functions as a store of value and a hedge against currency depreciation. In contrast to the 1960s, bullion is free to float at market prices and gold markets have already begun discounting a future set of circumstances which is much different from today. The time to buy insurance on the end of Bretton Woods II is before the inevitable occurs. None of this should come as a surprise given the unorthodox growth of central bank balance sheets around the world. The collapse of Bretton Woods in 1971 caused a decade of economic malaise and negative real returns for financial assets. Can anyone afford to wait to find out whether this time will be different? Full pdf here Average: 4.578945 Your rating: None Average: 4.6 ( 19 votes) Tweet Login or register to post comments 8268 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Guest Post: The Gold Standard Debate Revisited On Gold As A Hyperinflation Put Gold Report 2012: Erste's Comprehensive Summary Of The Gold Space And Where The Yellow Metal Is Going Guest Post: Gold And Triffin's Dilemma The Seeds For An Even Bigger Crisis Have Been Sown
标签: Foreign经管大学堂：名校名师名课
京公网安备 11010802022788号
论坛法律顾问：王进律师
知识产权保护声明
免责及隐私声明
