August 13, 2011

From ‘AAA’ To ‘LOL’

Readers suggested a topic on the debt fallout. “I’m now seeing more and more economists say that we should try to inflate our way out of some our federal/state/local/corporate/financial/personal debt overhang. Usually, 4.0% to 6.0% inflation for several years is mentioned, as if it could be fined tuned this way. That would also allow real cuts in wages without nominal cuts and the associated drama.”

“Comparing deleveraging through inflating away debt or a spiral of bankruptcies as part of Great Depression II, who wins and who loses, and which makes sense? If it has the choice, should the U.S. choose the Andrew Mellon route — liquidate, liquidate, liquidate — or the modern equivalent of dumping the gold standard?”

A reply, “If interest rates can be held at 0% while doing this it would be a real neat trick. Problem is people would adapt to this and who knows what werid side effects would show up? underground economy? people trading in Gold, Government officials accepting bribes, all the good third world stuff.”

Another said, “Because real cuts in wages are a good way to decrease debt levels…..Right.”

One asked, “When is the dollar going to lose its reserve status in the world? At the rate the FED is going to prop up bubbles it can’t be too far off.”

“And what effect will it have on Americans? Might be hard to pay off all this debt if creditors won’t accept dollars and the treasury has to convert to another form of currency.”

A reply, “In my opinion the first thing you need to do is identify what currency will become the dollar’s successor once greenback loses its status as the world’s reserve currency.”

“And the nominees are: Uhhhh…. let me get back to you on that.”

One said, “‘I don’t have to outrun the bear, I just have to outrun YOU.’ Says Bucky to the Euro.”

And finally, “Once again, the slogan of the United States should be: ‘We Suck Less!’”

The New Zealand Herald. “When Standard & Poor’s downgraded the debt of the United States last week, the US joined just two other countries with an AA+ rating: Belgium and New Zealand. The rating agency’s move put US creditworthiness below 18 AAA ranked countries and territories from Australia to Liechtenstein.”

“For the United States to be ranked alongside two minnows in world affairs whose combined population is less than Florida’s, prompted considerable derision. The country had gone from ‘AAA’ to ‘LOL,’ one talkshow host quipped.”

The New York Times. “It will take more than a debt downgrade and two years of ultra-low interest rates to knock the dollar from its perch as the world’s reserve currency. Despite multiple setbacks, the dollar remains the lingua franca of global commerce and the currency of choice for foreign central banks. The Federal Reserve’s commitment to keep interest rates exceptionally low until mid-2013 is bound to start another storm of international protest, and with good reason. Low rates make dollars much less appealing to hold and drives investors to alternatives like the Swiss franc and the Japanese yen.”

“Even though it has lost more than a third of its value in the last decade, global savers have filled their central bank mattresses with the stuff. According to the International Monetary Fund, 61 percent of the world’s $5.3 trillion allocated currency reserves are in dollars, little changed from the previous two years.”

“Reserve currency reigns do not end overnight. The previous champ, sterling, ceded its title over a period of decades. This time around, there is still no other currency that could take the dollar’s place. The euro, once the leading contender, is under siege, while the Chinese renminbi is still pegged to the dollar. Plans to create a reserve currency basket have not gained much traction.”

“Still, recent actions have clearly hurt the dollar more. And it is the bleeding from a thousand cuts, both inevitable and self-inflicted, that will eventually cost the dollar its dominance.”

The Voice of Russia. “According to Chairman of Kazakhstan’s National Bank Grigory Marchenko, the current crisis has revealed huge imbalance in the global economy. ‘The global economy is affected by the instability of the US market but there’s no getting away from that because it’s only the American market that can offer something for the global economy. Even though many countries are not happy about the dollar as reserve currency, trillions of assets are in dollars and the US is the only liquidity market for them. Standard & Poor’s downgrade triggered panic. People began to invest huge resources in US stocks thereby moving back to what preceded the downgrade. There are, in fact, no other reserve currencies to rely on.’”

“As economists are struggling to define the current trend, Polish analyst and politician Leszek Balcerowicz blames the crisis on the faulty policies of governments and central banks in recent years. ‘A number of governments pursued wrong economic strategies, which resulted in excessive spending and credit boom. But the boom was followed by recession. Anti-crisis strategies are to blame too, causing huge budget deficits in the US, Britain and a number of other countries. There can be no quick way out, such as boosting expenditures amid budget deficit or introducing low interest rates. Judging by the past three years, a short-term stimulation of economic growth is inefficient.’”

The Hindustan Times. “As gold prices touched record levels as a safe investment tool after the US credit-rating downgrade, a quiet debate is gaining currency: With the dollar losing its sheen, is the world moving back to a ‘gold standard’ system — 40 years after it was abolished? A number of countries have increased the proportion of gold in their reserves during the last few years, triggering the debate among central bankers and policy makers whether a return to ‘gold standard’ is realistically possible.”

“Even in the US, the state of Utah has made gold the legal tender, which may be adopted by 13 other states in that country. World Bank chief Robert Zoellick also feels that perhaps time has come to ‘consider employing gold as an international reference point.’”

The Globe & Mail. “It was mid-August of 1971 when U.S. President Richard Nixon took to the airwaves in a televised address to drop a bombshell on the international financial system: He was severing the final link of the U.S. dollar to gold.”

“Monday, August 15 will mark the 40th anniversary of Mr. Nixon’s historic announcement that the U.S. would no longer honour a pledge to foreign governments to redeem U.S. dollars for gold, which was then trading on the open market for what now seems like the ridiculously low price of about $40 (U.S.) a troy ounce.”

“His decision ushered in the modern era of floating exchange rates and paper-money currencies that today dominate the global marketplace. The decision to cut the bond between the dollar and gold marked the end of the road for the global monetary system that had been set up in the closing days of the Second World War. The system worked well until the mid-1960s, when it started to fray after the U.S. flooded the world with too many dollars to help finance its domestic social programs, the Vietnam War, and its global military spending.”

“The U.S. was facing a chronic trade deficit. Investors and other governments began to worry that the United States wasn’t as good as its word to redeem dollars for gold at $35, causing a run on the U.S. gold reserve, a flight out of dollars and the eventual collapse of the arrangement. But his actions have prompted intense debate ever since. Some economists of a conservative bent lament that the formal end of the gold standard placed the world in uncharted territory with paper currencies that have no intrinsic value. Governments are now free to print up these so-called fiat currencies at will.”

“The critics contend that the lack of a gold standard, with its tighter control on the amount of new money in circulation, has led to greater financial instability, more inflation and persistent imbalances in trade accounts. ‘It is the lack of any credible monetary rule, the loss of a gold anchor, and the growing discretion of central banks issuing pure fiat monies that have wreaked havoc on the global monetary order,’ said James Dorn, monetary analyst at the Cato Institute.”




Bits Bucket for August 13, 2011

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