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That the ratio has been swimming in the shallows since the demise of Bretton Woods suggests that our paper money has been on the wane for many years. Financial deregulation, that took off post the floating of currencies and the onset of the oil crisis, had been the catalyst for this trend. With the unfolding of the Great Moderation, that commenced in the early 80′s, the expansion of credit reached its apogee. Until the GFC that is. Since then its been left to governments to keep the credit balloon afloat.
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Can the Fed credibly argue that it is not monetising the Treasury’s debt when expectations are that the Fed will effectively buy
all of this year’s debt issuance? (The consensus budget deficit estimate for FY11 is $1.214 trillion versus 12 months of QE at $100bn per month.) They can try – as suggested by this exchange at the Treasury Borrowing Advisory Committee (
here):
It was pointed out by members of the Committee that the Fed and the Treasury are independent institutions, with two different mandates that might sometimes appear to be in conflict. Members agreed that Treasury should adhere to its mandate of assuring the lowest cost of borrowing over time, regardless of the Fed’s monetary policy. A couple members noted that the Fed was essentially a “large investor” in Treasuries and that the Fed’s behavior was probably transitory. As a result, Treasury should not modify its regular and predictable issuance paradigm to accommodate a single large investor.
This is like the lung arguing that the heart is an irrelevant patsy in its oxygen sequestering scheme.
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The Bank of England was established in 1694 with the single mandate to buy the sovereign’s debt. William of Orange was caught up in the Nine Year war with France and had cleared his coffers by this time. The Fed is simply returning to its roots.
That the birth of the BoE happened to occur in a period of currency debasement that was forestalled in 1696 by 25% inflation and the Great Recoinage (overseen by none other than Isaac Newton and John Locke) that lead to a default by the BoE followed ultimately by the introduction of the British Gold standard is just coincidence. Funny, too, that it was when credit was first beginning to blossom in the English economy.
As the Duke of Beaufort remarked 5 May, 1696 (from a paper by Charles Larkin
here):
…at this time all money is refused unless it be new money or very broad, of which there is but little stirring. I was forced to enter my name in a book to pay for my dinner, for they choose rather to trust than take even passable sixpences. The Exchequer had a double guard these two days, and the common people began to grow a little mutinous.
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The GFC was the defribullator – a quick shock to kick start the pulse. You can see it in the copper/gold ratio – a spike in demand for money. Since then the US has adopted its QE strategy, and the flight of capital out of the US$ and into commodities, junk bonds and emerging markets has begun in earnest. Even the US equity market has benefited at least in devalued US$ terms. But that of course was the objective.
All else being equal, the liklihood is that the Fed will continue down this road until it becomes untenable. The swinging pendulum will take us back to a capital controlled world – a reincarnation of the spirit of Bretton Woods.
Where credit is more tightly controlled and money is tight. Basel III is only the beginning. When that time comes, it might be time to short gold and buy copper.
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Bernard L. Madoff, on 04 November 2010 - 08:22 AM, said:
