Tuesday, October 12, 2010

on money

Lots of interesting reading if you have any interest in money. The Fed's accomplished in a couple years what many of America's foes have tried for decades: a global questioning on the value of the pax dollar. The Fed's flooding the planet with dollars is certainly creating exciting results. The stock market is up, the bond market is up, commodity markets are up, and emerging markets are exploding higher. In fact, everything seems to be churning up except for American real estate and the American economy, but that just gets Wall Street more excited because it means the Fed's going to keep pumping.

Remember, the Fed put itself in this situation over the past three decades using loose money policies, combined with the financialization of the economy, which required ever looser money policies, especially after the biggest bubble pop two years ago. The Fed's policies have for the banks and Wall Street become one of perpetual profit, there are no losses, except those that can be shifted to the public. The real solutions are simple, but politically nonviable for a government controlled by Wall Street and the banks. Losses must be taken and the financial sector must be shrunk by at least half. As Chris Whalen says in his latest piece,
...the horrible damage that the Bernanke Fed is inflicting upon real American in order to bail out the large Wall Street banks. And the irony is that all of this damage and sacrifice by Dianna and tens of millions of American individuals and businesses who depend upon interest income to survive will be for naught. The Big Banks will have to be restructured...
But the Fed will continue, and this will continue cracking the foundations of global finance. The FT has a nice piece about the last few decades process of globalizing finance. And Michael Hudson has a real good piece on the war launched by the Fed in a failed attempt to save Wall Street and the big banks. Hudson writes,
“Quantitative easing” is a euphemism for flooding economies with credit, that is, debt on the other side of the balance sheet. The Fed is pumping liquidity and reserves into the domestic financial system to reduce interest rates, ostensibly to enable banks to “earn their way” out of negative equity resulting from the bad loans made during the real estate bubble.
The problem is that U.S. quantitative easing is driving the dollar downward and other currencies up, much to the applause of currency speculators enjoying a quick and easy free lunch. Yet it is to defend this system that U.S. diplomats are threatening to plunge the world economy into financial anarchy if other countries do not agree to a replay of the 1985 Plaza Accord “as a possible framework for engineering an orderly decline in the dollar and avoiding potentially destabilizing trade fights.” The run-up to this weekend’s IMF meetings saw the United States threaten to derail the international financial system, bringing monetary chaos if it does not get its way. This threat has succeeded for the past few generations.
Nations are fighting back, the Thais just announced a tax on foreign capital flows, and the Brazilians did the same. But this is all a losing game, for the entire corporate globalization endeavor has been an American game, with our financial system and political class selling-out the American people for a little more lucre.If the Fed and Wall Street want to blow the whole thing up in the name of saving it, nothing or no one can stop them. And this business can go on for a lot longer than anyone believes at this point

There's a breath of hope about ending the lunacy from none other than the Irish. The FT writes(tx yves) the Irish are "opening the door to renegotiation with senior bondholders." Time to get the bad money off the books folks. And then the question, what's good money? The Pax Americana is over, whether its next year or in thirty, so the dollar's reign is at an end too, and that will be better for no one more than America.
We need to rethink currencies, local currencies in conjunction with some sort of global money standard, based on the real physical economy such as energy, grains, industrial outputs, Keynes had over fifty things in his monetary "tabular standards." Frankly, that's the easy part, the question is how do you institutionalize it, under what entities? The Fed, or IMF, or World bank, no thanks! We need a rethink on the whole idea of global "order". If we weren't all so caught up trying to save the failed past, it'd be some pretty exciting times for opportunities on creating the future.

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