Get ready for a new crisis — the transatlantic monetary avalanche. This will be the result of President Barack Hussein Obama’s policy of pouring some 4.5 Trillion dollars into the US system. The aim is to buy out toxic assets created by toxic financiers and decades of toxic government policy.
The problem is that it is likely to have major unintended consequences for Europe. It is not clear whether the US administration has fully considered the non-US consequences … or even cares.
That may sound harsh. But much of the origin of the crisis dates from this persistent Beggar my neighbour attitude. In fact the origin of the Euro derives from wishing to avoid being taken for a ride by careless and self-serving US administrations.
In 1971, USA took the dollar off the gold standard. This was the last of a series of events where major currencies had done the same thing. Forty years earlier Britain had taken Sterling off the gold standard. It put the pound on the dollar standard which was on the gold standard. Then in the 1960s the politicians tried an official bank gold price and a separate free market gold price. This didn’t work. So when Nixon realized that the Federal Reserve had been printing too much money, he simply took it off the standard that reminded him he was doing something naughty. A standard is unwanted if you have a bad conscience. Whether gold is the best standard is one question. Not having any standard at all but the judgement of bank officials and politicians is quite another one. The USA had become the virtual world Central Bank without any control of most of the people on the planet who used it.
Nixon’s decision meant that USA could print as much money as it wanted. But as the USA had the world reserve currency and gold became just a metal, there was no real restraint. The Europeans complained. With good reason: international trade demanded proper standards. The US was behaving like the grocer that kept his thumb on the scales or used false weights. The US was paying Europeans for their real goods and services; they were getting paper dollars of declining worth, they said. The Europeans worked hard to provide real goods and services: the Americans had the monopoly on the dollar printing press. They could use it at will.
The Americans’ answer? Nixon’s Treasury Secretary John Connally responded famously: ‘It is our currency, but your problem.’ In other words, you have found out we are tricking you, but we are the only people with a scale or money in town.
The peculiar thing about currencies is that they normally exist in two forms. Internal and external. Pounds Sterling are used in the United Kingdom. They are issued by the Bank of England. However some people used to hold a lot of pounds abroad, especially gold sovereigns. British ex-patriots may use them between themselves. Countries of the Commonwealth may also use pounds for trading because the local currency is so weak and deteriorates so much.
This works the other way as tourists may have experienced. If Europeans bring back a wallet of weak, tourist-country currency from abroad, it will shrink in value. It may even be devalued several times by the currency’s central bank without their knowing it.
If you are a native of the tourist country, you may not notice this. After a currency devaluation, a box of local biscuits still costs the same the day after devaluation. If you are living outside the country, you may say: ‘Ouch! I wish I had changed that into my own currency instead of bringing it with me.’ The devaluation has immediate effect as a loss of value.
The Nixon-Connally attitude tried to divorce morality from money supply. The attitude caught on fast. Generations of Americans worked out a number of ways to fiddle the books. This involved not only speculation on commodities like oil and stocks. Is there a simple indicator that shows that oil spikes are not due to a free market but manipulators and speculators? Well how do you explain that the prices of oil always went up on a Monday and came down a bit before the weekend, except of course on public holidays! Other scams like Enron involved fiddling the books. Some created specious mathematical models for plutocratic investments like Long-Term Capital Management. They nearly wrecked the economy. Politicians wanted to get more votes so they manipulated the mortgage market. They put place-men into mortgage firms to provide unrealistic, non-commercial (sub-prime) home-loans to the poorest people who were also voters. Junk bonds and derivatives became a new growth scam. Some of these paper loans became too obviously worthless. No problem! Wrap up a package of many practically worthless derivatives and give them AAA ratings. So four or five decades after Nixon/Connally these governmental attitudes, magnified by many others beggaring their unnamed neighbours have become a world crisis.
Conclusion: All the population, from poorest to the richest, have been trying to defraud each other. Worse, too often this is government policy.
The Europeans had their own very similar problems. A longer history in fact and often worse. France, Germany and Britain and the other countries had had the same toxic experience of ‘beggar my neighbour’ policies. But then the European Community fixed this with one central idea. We are all interdependent on each other. Beggar my neighbour policies have the effect of coming back and hitting you in the head. Schuman said in creating the Community his aim was to ‘detoxify‘ relations between European States and peoples. That is a moral stance. Thus in the 1970s they started seriously to envisage a common currency. The Werner plan for a common currency by 1980 was derailed by the two periods of the Arab oil weapon, each with the quadrupling of oil prices. Europe’s massive reserves were wiped out.
It was not until this millennium that the Euro saw the light of day. While not based totally on community principles, they put in place most of the rules that Schuman formulated when Minister of Finance from 1946 onwards. Schuman initiated the period of French recovery known as the thirty glorious years. Under the most adverse conditions, he balanced the budget (for the first time in a generation), reduced debt, arrested the inflationary spiral and put gold on the free market. Thus France had common indicators, standards, for everyone to see who was cheating. It was an old-fashioned idea called Honest Money. Trust, trade and prosperity can take place once people have confidence in the money. Later less scrupulous politicians rued the fact that their cheating, devaluations and inflation, became so publicly known.
Consider what is happening now. The USA has exported its paper dollars across the entire world to pay for its lack of savings and the selfish profligacy of the population in general. Of all the dollars emitted by the Federal Reserve only 30 per cent circulate in the US. Some 70 per cent of all dollars are export dollars. In other words, the rest of the world has a wallet full of tourist currency: There is no control for the wallet owner about its lasting value. Worse everyone knows it will drop like a pancake. The Federal Reserve has now declared that it will pump out paper dollars on a scale unknown in history.
In September 2008, the total number of dollars on the Fed’s books was just under 850 billion. But 70 per cent of this circulated abroad and only about 250 billion circulated inside the USA. President Obama will now increase the monetary mass by and enormous amount reaching 4500 billion dollars (4.5 trillion) by the autumn.
However, who wants these tourist dollars outside the USA? Major dollar reserve holders like Russia and India are already selling their dollar reserves, others are expected to have to do the same. Some Arab oil-producing countries like Saudi Arabia are going into current account deficit. That would make it unlikely that they will become big dollar buyers later on.
So what will happen to the sudden Niagara flow of dollars unleashed on the world? Most will go to the USA domestic market. This will see a huge increase from the 250 billion to something between three and nearly four trillion. That is anything between a twelve and seventeen-fold increase in money supply. In this confetti economy this torrent of liquidity is supposed to wash out the toxic assets. Unfortunately the US authorities only have ordinary mops for the task of reducing the supply afterwards. The toxic assets, the product of speculation upon leveraged speculation, are hardly likely to be great treasures.
This tsunami of dollars mainly in the US will have major consequences for the European Community system. First it devalues the dollar of our principal trading partner. In the short term, we should remember the adage: Buyer beware! But also that we are in the same boat together during the tsunami. Do we need more liquid or another plan? Is America ready to learn the lesson that Europeans learned with the European Community that united sovereign democratic states? If the US will take note of European history at least we have a chance to solve this dilemma.
Schuman wrote: ‘For all the countries that fought the last war, the big problems that grip us today have an international character and now escape the economic and political control of even the most powerful countries.
‘Supply of raw materials, questions of manpower and unemployment, the agonizing problem of refugees, displaced persons and overpopulation, the modernisation of our industrial and agricultural equipment, international exchange and currency stability, cyclical problems of shortages and overproduction are just some examples. In all these areas nothing lasting or worthwhile can be done in isolation as when a State is reduced to its own resources. National self-sufficiency which allowed Hitler to prepare war is impracticable today.’
The question is: How? We are all guilty of trying to rip off or beggar our neighbour. Politicians need to look again at the ORIGINAL Community system. They should apply its founding principle of reconciliation and honesty in public affairs.Author : David Heilbron Price
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