Fasten Your Seatbelts: The Coming Global Monetary Reset

The big currency reset. It’s not a case of ‘if’ – it’s a case of when.
Don’t expect your provincial Secretary of Treasury or Chancellor Exchequer to warn you about what is coming around the corner, because they are either too stupid to know, or too busy covering their own backsides.

To understand where we are, it’s very important to understand how we got here (another point which bureaucrats and backers do not want the general populace to know).

A quick history lesson then…

The Opposite of Emerging is Submerging

Lulled and distracted by the antics of developed country central banks and emerging economy central banks, all controlled by the Jesuits Order Knights of the 4th Reich of the Holy Roman Empire, better known as the British Empire – to constantly “pump-up the jam” and flood the economy with paper casino chips from either Fort Knox or Mount Gox, the real tectonic shift of the global economy since 2008 has been more or less ignored by financial gurus and sages. It is taken as “normal” that deflation, or disinflation is operating in the developed economies, but now we can see that rip-roaring inflation operating in the emerging economies.

Supposedly, this is ‘Muddle Through’, but since 2008 the North-South paradigm has all but dissolved – the developed OECD economies are locked in a death embrace with the Emerging economies. The developed economies are now locked into chronic globalization – exporting monetary inflation while importing cheap industrial goods, services and resources.

Since 2008 the always-promised ‘world shift’ of the economy from west to east, and from north to south has happened, but the net result is a shock. Pretending “we didn’t know” is comforting, but ultimately stupid.

This is an unstable equilibrium, or an interregnum – even a sideshow, because the current global economic context and process is the exact opposite of sustainable. Harm to both North and South is now the main impact of the post-2008 process of overreach and intense fiat paper shuffling. Listing the consequences and causes of this overreach is not easy and always open to argument, but possibly the best summary is to suggest that since 2008, ‘Ricardo’s comparative advantage‘ paradigm has been inverted. Economic and above all monetary globalization is now the path to ruin and poverty. From win-win to lose-lose. The worse it gets, expect the architects of ruin – establishment politicians, central bankers and financial pundits, to retreat into even deeper denial.

The Production Bubble That Triggers the Collapse

Another simple way to argue the global economy has overreached is that industrial and economic production capacity in the Emerging economies (EMs), starting with the BRICs, is now massively over-sized. This means the EMs can and will saturate the post-industrial, deflating North with industrial supply at every stage and opportunity as technology, design and product development throw up a new market openings everywhere. Examples like the car and cellphone, fashion wear and off-shore call center industries are relatively “classic”. All of these are already saturated with capacity – but the EMs are still adding more. Previous historical “classic examples” of this process for example included the ship building industry, but the scale paradigm has been woefully ignored.


BRAZILIAN SKILLZ: Production of top-line automobiles in Brazil has surpassed many of its ‘developed’ counterparts.

Since 2008, the process has intensified, creating an increasingly certain outlook for a forced and fiat end to the willingness of the EMs to accept the fiat currency endlessly printed to finance the deflating, de-industrializing DMs (developed economies).

This will not necessarily be a politicized process, of the type hinted at by India’s central bank governor (see http://finance.fortune.cnn.com/tag/raghuram-rajan/), due to the rapidity and scale of the crisis, but instead trigger the collapse of the current global fiat monetary orderdictated by national economic self-defence and survival in the EMs.

The economic jump start of the Ricardo model, which has run riot for the last quarter-century, and went into over-drived from 2008 – will be abandoned.

Deflation/Inflation: Two Sides of the Same Bitcoin

Ricardo’s original model held sunny Portugual as a producer of cork and sherry, while rainy England could produce wine casks from its oak forests and wool from its sheep flocks. The money used in a basically resource-based exchange using then-rapidly growing maritime transport capabilities was held to be stable and gold-linked (or based). Later on, low-cost labor resources were built into Ricardo’s paradigm called “comparative advantage”. The EMs since the 1980s have played the role of resource providers while the DMs were the solvent market suppliers.

While there was a clear limit on cork, wine, oak casks and woolens supply and demand, this does not really apply to modern global fiat money and modern industrial technology. These are high gain positive feedback processes which only stop when they hit a brick wall.

The Ricardo comparative advantage model does not apply to post-1980′s globalization and super economies – like those of China and India, where industrial technology has raced ahead of infrastructure development. This is simply a bomb waiting to explode, alongside the industrial capacity growth, the EMs engaged massive growth of credit, mushroom growth urbanization, neglect of the agriculture and food sector, and turning a blind eye to rampant or even “structural” corruption. Inflation was the sure and certain result.

The results do not stop there. While inflation took off inside the EMs, with their economies producing more than they can consume, and exporting to the DMs which consume more than they produce, the EMs are also exported deflation to the developed market economies. At the same time, the emerging market economies mined out their capital bases to maintain their breakneck growth of industrial capacity.

On an almost daily basis now, the EMs are all shifting to current account deficit with the inevitable consequences of national currency devaluation, further inflation, and of course – higher interest rates.

Win-Win to Lose-Lose: Global Fiat Currency Crisis

The post-1980′s economic globalization paradigm can be called an initial ‘Win-Win’ model which eventually morphed to Lose-Lose.

The industrial nations of the DMs, which formerly benefited from the resource nations of the EMs under the previous ‘Ricardo-type’ model, are now mired in debt and de-industrialization, making it impossible for them to “grow their way out of crisis”. The EMs on their present industrial expansion path can only grow themselves into rapidly-deepening crisis.

The “money-in-the-middle” especially concerns the US dollar and its subsidiary partner, theeuro, both of which are vastly overvalued fiat currencies – but against what? Almost inevitably, this will feature a big rebound for gold, playing the starring role of in this latest episode of “Canary in the Monetary Coal Mine”. From a personal standpoint, or national (for those who have any), physical gold and silver could end up providing solid protection against the exposure of a monetary reset.

Conversely, commodities are unlikely to profit on an enduring sustained basis, due to economic restructuring, re-centering and contraction being almost certain.

Commenting on the IMF’s latest report on global capital flows since 1980, Reuters on 30 January said that while the IMF estimates net capital inflows to emerging economies as $7 trillion or more only since 2005, this was a “legacy trend” hinged on the EMs running a much higher GDP growth differential above the DMs than present. The IMF report noted that for 2014, economic growth in the BRICs will go on declining, and for Russia and Brazil, they will be less even than the GDP growth of the US and Britain. While the IMF’s economists do not allow themselves to project break-of-series change to the global economy, the process of what Gordon T. Long calls “Global collateral impairment” can easily default as the net result of apparently ‘unrelated and complex’ runaway processes.

This collateral impairment will inevitably trigger multi-national currency protection measures, a situation already clear in countries like Turkey, India, Argentina and other EMs.

For DMs in the North, plans are likely already underway. Will the reset feature a brand new reserve currency, or the introduction a fledgling single global, or virtual currency? If so, what will it be backed by (or maybe it won’t). It’s hard to know right now, but a shift of that magnitude could provide for the introduction of something new in the mix.

It’s a case of problem, reaction, solution, and one can assume that this Hegelian equation has already been mapped out on the back of a napkin in an executive dining floor of the one of the world leading central banks, possibly written using Christine Lagarde’s lip stick.

As a result, sacrificing GDP growth to protect the national money in the EMs will be inevitable. In turn, this will send a severe shock wave North to the DMs ,which have surfed on the latter-day version of the Ricardo paradigm for the last 30 years, and are now left unable to adapt.

The basic conclusion is that a global monetary reset is now overdue.

There will be shock waves, and haircuts too.

Brace yourself for impact, because it’s coming.

The truth is out: money is just an IOU, and the banks are rolling in it

'The central bank can print as much money as it wishes.' Photograph: Alamy

Back in the 1930s, Henry Ford is supposed to have remarked that it was a good thing that most Americans didn't know how banking really works, because if they did, "there'd be a revolution before tomorrow morning".

Last week, something remarkable happened. The Bank of England let the cat out of the bag. In a paper called "Money Creation in the Modern Economy", co-authored by three economists from the Bank's Monetary Analysis Directorate, they stated outright that most common assumptions of how banking works are simply wrong, and that the kind of populist, heterodox positions more ordinarily associated with groups such asOccupy Wall Street are correct. In doing so, they have effectively thrown the entire theoretical basis for austerity out of the window.

To get a sense of how radical the Bank's new position is, consider the conventional view, which continues to be the basis of all respectable debate on public policy. People put their money in banks. Banks then lend that money out at interest – either to consumers, or to entrepreneurs willing to invest it in some profitable enterprise. True, the fractional reserve system does allow banks to lend out considerably more than they hold in reserve, and true, if savings don't suffice, private banks can seek to borrow more from the central bank.

The central bank can print as much money as it wishes. But it is also careful not to print too much. In fact, we are often told this is why independent central banks exist in the first place. If governments could print money themselves, they would surely put out too much of it, and the resulting inflation would throw the economy into chaos. Institutions such as the Bank of England or US Federal Reserve were created to carefully regulate the money supply to prevent inflation. This is why they are forbidden to directly fund the government, say, by buying treasury bonds, but instead fund private economic activity that the government merely taxes.

It's this understanding that allows us to continue to talk about money as if it were a limited resource like bauxite or petroleum, to say "there's just not enough money" to fund social programmes, to speak of the immorality of government debt or of public spending "crowding out" the private sector. What the Bank of England admitted this week is that none of this is really true. To quote from its own initial summary: "Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits" … "In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money 'multiplied up' into more loans and deposits."

In other words, everything we know is not just wrong – it's backwards. When banks make loans, they create money. This is because money is really just an IOU. The role of the central bank is to preside over a legal order that effectively grants banks the exclusive right to create IOUs of a certain kind, ones that the government will recognise as legal tender by its willingness to accept them in payment of taxes. There's really no limit on how much banks could create, provided they can find someone willing to borrow it. They will never get caught short, for the simple reason that borrowers do not, generally speaking, take the cash and put it under their mattresses; ultimately, any money a bank loans out will just end up back in some bank again. So for the banking system as a whole, every loan just becomes another deposit. What's more, insofar as banks do need to acquire funds from the central bank, they can borrow as much as they like; all the latter really does is set the rate of interest, the cost of money, not its quantity. Since the beginning of the recession, the US and British central banks have reduced that cost to almost nothing. In fact, with "quantitative easing" they've been effectively pumping as much money as they can into the banks, without producing any inflationary effects.

What this means is that the real limit on the amount of money in circulation is not how much the central bank is willing to lend, but how much government, firms, and ordinary citizens, are willing to borrow. Government spending is the main driver in all this (and the paper does admit, if you read it carefully, that the central bank does fund the government after all). So there's no question of public spending "crowding out" private investment. It's exactly the opposite.

Why did the Bank of England suddenly admit all this? Well, one reason is because it's obviously true. The Bank's job is to actually run the system, and of late, the system has not been running especially well. It's possible that it decided that maintaining the fantasy-land version of economics that has proved so convenient to the rich is simply a luxury it can no longer afford.

But politically, this is taking an enormous risk. Just consider what might happen if mortgage holders realised the money the bank lent them is not, really, the life savings of some thrifty pensioner, but something the bank just whisked into existence through its possession of a magic wand which we, the public, handed over to it.

Historically, the Bank of England has tended to be a bellwether, staking out seeming radical positions that ultimately become new orthodoxies. If that's what's happening here, we might soon be in a position to learn if Henry Ford was right.

The Ever-Shrinking U.S. Economy

The Ever-Shrinking U.S. Economy

The Commerce Department reported May 29, that the U.S. economy shrank at an annual rate of 1% in the first quarter of this year, which doesn't begin to reflect the actual wreckage of the real economy, the result of decades of insane anti-growth, anti-human policies.

But the figure rattled a few people, nonetheless, as this was the first quarter in three years in which output of goods and services has contracted. Also, as the New York Times put it, pathetically, for those Democrats running for Congress in the November midterm elections, this is not good news. "There's still time for growth to rebound before then," but "little room remains on the runway for an economic takeoff this year."

Divorced from all reality, numerous economists and other "experts" offer multiple explanations for the drop--weather, slower stockpiling of business inventories, etc., etc.--but insist, stupidly, that everything is looking up, and that recession, let alone anything worse, is simply not in the cards. The Wall Street Journal points out that few Americans believe that, as only 27% think the U.S. is headed in the right direction, according to a Wall Street Journal/ABC News poll conducted in April.

http://larouchepac.com/node/30934