Richard Nixon talked a good populist game about "international speculators", but the reality was this: central banks of foreign nations had the privilege of exchanging dollars for gold under the post WWII Bretton Woods monetary system. The Federal Reserve created more dollars than could plausibly be backed by gold, and foreign countries began calling our bluf. In the early sixties the "street price" of gold began to rise (outside of the US, where people were allowed to actually own the stuff) and measures were taken to restrain that "street price" - but these eventually collapsed.
So the rest of the world was holding our paper dollars, and we asserted the right to print said dollars to create claims on the goods of the rest of the world - first oil from the Middle East, then cars from Japan, then goods from China. And those countries promptly exchanged those paper dollars for paper debts - US Treasury securities. Securities which promised to pay ever more paper dollars...
Spare a small bit of sympathy for Barack Obama. He is culpable for accelerating the process - arguably even culpable for failing to reverse it while it that was still possible. But the seeds of the process which led to the downgrade of the credit of the United States were sown some time ago.
It is the arrest of that debt spiral which is the existential test of the nation now.
(I meant to get to this "today" but my "today" has a way of turning into everyone else's "tomorrow"...)
ReplyDeleteThere's a good post a the usual financial d00mpr00n hangout. As ever, just ignore the comments.
Hmmmm. I, for one perhaps misguided person, do NOT see "Gold" as money. To me, attaching exchange (money) to gold is arbitrary and does not reflect the economy of a given nation. In essence gold is "found wealth" that produces no spawn, no growth in other words. Oil has more economic fecundity. Gold's sole virtue is its relative safety from counterfeiting and chemical stability. It has technical applications to be sure, but no amount of gold has ever grown from within itself ... as economies do with innovation and productivity.
ReplyDeleteGold and silver were nothing more than stable common denominators between mediums of exchange ... an over simplified lazy & limited means to measure wealth. Neither reflected the productive wealth of a nation. The Aztec's had plenty of gold and how'd that work out for them?
In short, IMO, Nixon was right. No default occurred except in terms of rocks found in or on the ground.
Okay, I shall no go hide behind a big rock.
From behind my rock I will acknowledge that "gold" (Bretton Woods) did theoretically prevent us from printing money and incurring debt beyond our productive means to fulfill ... until it didn't. I'm also quite sorry I didn't buy as much as I could ship home when the street price in Korea was $33/ounce Troy in June 1971. That price was below the US standard of $35 because the dollar was worth more per se, at that point in time and in that place. (So was a Zentih television) Today with gold pushing $1800 all it tells me is that the dollar is worth much less.
ReplyDeleteHah! It just dawned on me that the Jug Eared Messiah can derive a new slogan from this (since the Bush did it bit is wearing out): NIXON DID IT!!
ReplyDeleteThe errors of compounding debt with more debt, debt gaining on productivity, is one of executive and legislative folly. IMO, un-anchoring dollars to essentially some rocks is not the cause of inflation and dollar devaluation. It is over spending and borrowing. It can be reversed, but as with all addictions, there is pain in withdrawal.
I'm not sure we can stand that pain at this point...nor does our government have a clue how. Small example: Aside from Boeing being an integral part of the "Military Industrial Complex" (Eisenhower's term for it), the plain simple fact is that this administration, via the NLRB, is determined to prosecute Boeing and eliminate 1000 jobs, never mind the post facto nature of it all, since the billion $ plant was nearly finished and ready to start up. Nice political timing, eh?
Given this administration's core values, I'll not be shocked if we see Electric Boat, McDonnell-Douglas, and Lockheed-Martin pilloried in favor of buying crappy MIG 29 Fulcrum knock-offs from the Chinese and some shitty submarines from the Russians. That'll retain jobs and capacity won't it? I'm sure we cold all sleep better at night, too. Not.
Okay, I'll go away now and wish Matt Happy Birthday on Fay's thread..
Now that, Ari, is a development I hadn't thought of... buying our military hardware from the Chinese and Russkies. And you know what, I wouldn't be at all surprised if someone in the JEM's administration was seriously contemplating the idea.
ReplyDeleteAnd of course, agree with you re the over spending and borrowing. What is depressing to me is that the only ones who seem, at least in theory, to at least be aware of the significant issues to be addressed are the ones who don't stand a snowball's chance in hell of being elected. Then again I haven't looked carefully at Perry yet so I'm not sure of his positions on much of anything.
Yeah... the shoulda, coulda, woulda's of our youth, my list is quite long.
Lewy, that Zero Hedge site is good at the doom, unfortunately their vision of gloom appears more and more likely with each passing day. And truth be told I'm not prepared for any of this. Well, perhaps better prepared than some but still, if the bottom falls out I'll be out selling pencils in a crowded market. Hell, if its been a charade for the last forty years why couldn't it wait another twenty... then I'd be dead and buried and wouldn't have to worry about it.
Hey, Ari. And everyone else as well of course. In light of your past experiences with malware you may find this of interest, or not. I've been using IE9 since Beta and except for a few minor things I've been very pleased with it.
ReplyDeleteWhen it comes to blocking malware, Microsoft's Internet Explorer 9 seems to come out on top, by leaps and bounds, over other browsers.
Ari, good points - I would argue them, but not dismiss them.
ReplyDeleteInstead, let me give you my view by way of analogy.
Very, very crude analogy. (Ladies, you might not want to read this).
srsly.
OK?
The errors of compounding debt with more debt, debt gaining on productivity, is one of executive and legislative folly. IMO, un-anchoring dollars to essentially some rocks is not the cause of inflation and dollar devaluation. It is over spending and borrowing.
Hmmm... I could just as well say
The errors of fathering one bastard child after another, and then more bastard sons with bastard daughters, is one of restraint and character. IMO, banging all the loose women within reach is not the cause of the bastard breeding. It's ejaculating inside these loose women's what's done it.
Think of gold as a condom. Yeah, it breaks every few hundred years, but that's better than the few decades MTBF of un-anchored paper money.
Lewy -
ReplyDelete=))
;))
ReplyDeleteThank you, lewy, for explaining that in, uh, laymen's terms.
ReplyDeleteLewy ... heh heh. Now if gold is a condom then there is a limited supply, with no potential for growth, and some will hoard, thus more bastids will git borned by those who have none.
ReplyDeleteIMO, the analogy makes my point.
Now if you shoot the fornicators in the skull, then there'll be no bastids, ejaculation being difficult when dead. The point of ejaculation or screwing then being moot.
:D
Why are we even having this discussion? At the debt levels we are at there's zero chance of re-visiting Bretton-Woods. Period. Simply because ... we can't, and I doubt many others could either. ~x(
ReplyDeleteLuther ...
ReplyDeleteFirst, I use XP Pro+ as an operating system, and IE 9 is incompatible with it. IE 8 is it.
Next, I suspect IE9 requires you add MS Security Essentials (freeware) as anti-malware. MS Security Essentials is incompatible with numerous malware repair programs ... e.g., you cannot turn it off if you need to do so. It does NOT stop everything, trust me. Same for AVG.
I am back to using the 2002 Symantec Corporate Edition, which is still updated and current in 2011. It is a plain anti-virus program that is easily programed....down to 10+ levels if desired. Unfortunately not everyone can acquire it unless they work for an outfit that provides it to employees. I also use the paid version of Malwarebytes ($24 one time fee).
Ari, I think you've stretched the analogy a little thin... ;)
ReplyDeleteI'm sure you get my point. Keynesian economics is like Tantric sex. Sustainable and pleasurable for truly enlightened practitioners, but the average person (politician) will find it impossible to resist the urge to splu(r)ge...
The danger of this level of debt is that default will come one way or another: through inflation or otherwise.
lewy14 said...
ReplyDeleteAri, I think you've stretched the analogy a little thin...
Yep. That's an issue with condoms, no?
The danger of this level of debt is that default will come one way or another: ...
No argument here. The bastids will be born. Unless we stop screwing (spending) and begin restoration (abstinence), it is inevitable.
Ari, I think it's even worse than that. The problem is that, in a sense, Krugman et al are correct.
ReplyDeleteSpending cuts will reduce aggregate demand. Growth will suffer, and more people will be out of work. Depression may result.
This will make our debts even harder to pay off.
If we follow Krugman's prescriptions, we will end up debasing the dollar. Eventually other countries will stop accepting dollars for things like oil. Inside the US we'll see this as hyperinflation.
We're screwed either way.
Thing is, if we take Krugman's path, the government is in total control of the rump economy. Take the Tea Party path, the people retain control of what's left of the economy (and are potentially able to stave off default through privatization).
This is why the game is so vicious now. It's about the end-game.
(On the other hand, maybe everything will work out OK).
I don't see how spending cuts will necessarily reduce demand. Just because the government is no longer lighting cigars with $100 bills does not mean that useful buying will not occur on other fronts.
ReplyDeleteI get dibs on the government owned Darth Vader-mobile when it's auctioned off. :D
ReplyDeleteMatt, the $100 bill lights the cigar - the cigar gets smoked (consumed).
ReplyDeleteFewer cigars lit -> less consumption.
In the short run, it's not an economic opinion, it's an accounting identity - consumption and GDP will decline.
Longer term, private enterprise will pick up the slack given a sufficiently optimistic outlook - but that will take some time.
Yes, but how many more cigars would be purchased if the government was not using $100 bills to light theirs? And how much more consumption would there be if people would light the non-govenrment cigars with $20 Zippos?
ReplyDeletePlenty, of course - but with some delay.
ReplyDeleteIn the meantime, the government is going to be sending out many fewer paychecks, and ordering much less stuff - and the providers of that stuff are going to cut back in turn.
The problem is that there is a bunch of demand out there which is phony, coming from government budgets.
There was a bunch of demand (and employment) coming from the real estate segment in the last decade which was also phony - driven by artificially cheap money and fraudulent mortgage practices.
Replacing that phony demand with "real" (private, sustainable) demand will happen - but it will not happen over night.
It was a different environment in the late '70's / early '80s - but you could have asked the question how much better would the economy be if we didn't have this crazy inflation and wage price spiral? How much more would business invest if it could count on some measure of price stability? The answers, of course, were a lot better, and a lot more investment - as the mid/late 80's demonstrated.
But first we had to live though a miserable recession in the early '80s while Volker broke the back of inflation with crazy high interest rates.
Budget cuts will be similarly painful - more like heroin withdrawal than toxic medication, but painful still.
My bottom line point is that at the point fiscal austerity is agreed and baked in to market and business expectations - when S&P says "we believe the debt problem is under control and we restore the US AAA rating" - I don't expect the economy to instantly improve. It will take some time, and it may be the case that there is an entire segment of the population which will not find gainful employment - because their skills were geared to a real-estate driven economy which was always fake and which will not come back.
What Alphie said.
ReplyDeleteLewy # 21...
ReplyDeleteAgain, no argument from me on your analysis here. It is pretty much what I foresee. (And "Gold" has zero to do with it :D ) I'm reminded of the WWII rationing system and the necessary sacrifices there-in. I have serious doubts whether the adolescent mentality of today's liberals (and some radical conservatives of the cut nose to spite face variety) can withstand the pressure without going anarchist. Seriously.
For the record, the worst recession I had to live through prior to now was during the Geo H W Bush Presidency ... unemployment here was 13+% and businesses were tanking all over town. I tended bar in a ghetto saloon periodically during '90 and '91 just to get by ... not my favorite time period. I got a lot of responses to resumes saying "not a precise fit" even when my background was literally a template of the job descriptions ...e.g., at 50, "too f*cking old." So when I hear grand plans to raise the retirement age to get people to work longer I know it is bullsh*t and outright robbery of the middle and lower "classes."
As for phoney demand from government budgets, vis a vis "employment" ... that's true enough. Regretably I don't see how anyone is going to cut that "employment" back as the institutionalized senior executives in government will resist by gerrymandered reorganizations.
Just the Department of State is literally a stand alone entity, no matter who is President or who owns Congress. The military is no different ... there is a administrative (Pentagon Rangers)layer that is nearly immovable. When the cuts come, they'll cut grunts and new weapons & equipment, and retain themselves as the boss eunuchs. We're not much further than 40+ years ago when the overall admin & support to infantry ratio was 9:1 ... it is just hidden now by "privatization" to NGO contractors.
Our Armies can't move far without bivouac & food service and that is almost all an NGO operation today. I'm amused that today we have Hillary and Leon objecting to what they know is coming. They needn't worry, politically, the cake eaters will still be there. If they're truly concerned about our force projection, they'd be right. Rare in the big Zero administration.
All I can do is do my dinky part to vote sensibly.
Well, like I said Ari, you might not be interested.
ReplyDeleteLuther ... oh, I was interested. Thanks.
ReplyDeleteI tried all the new IE & security Microsoft stuff, but they didn't work out on my system. Changing to MS Office Pro 2010 and all new various Adobe 2011 software was challenging enough to this stubborn old timer ... Windows 7 OS might have tipped the balance and put me in the home with rubber walled rooms. As it is I'll likely age a decade just learning Adobe Light Room. At least Opera still works for XP Pro+ ... I use IE mostly for banking and federal stuff that seems to require it. I still get the pop ups from MS telling me about how they've just invented sliced bread & I should try it and be up to date. x(
Luther and others ... actually Symantec (Norton's daddy) should package and offer the very well designed, intuitive, and functional "Corporate Edition" as an optional package, for everyone who might like it, say for a one time fee of $25 to $100 (not as a "sub-f'ing-scription." I guarantee it would be worth it to anyone wanting an intuitive and non-resource hogging A/V program ... that works and updates nearly daily. What a concept.
ReplyDeleteI realize I'd never make it in "marketing" or as a car salesman.
Try This little dramatization for a scare. It's long, and there are a few functional errors, but it gives pause...
ReplyDeleteAridog, it's definitely long. I watched all of the "speech" and part of the commentary.
ReplyDeleteThe "speech" made my blood run cold. Scary stuff. Very.