#BTColumn – Decline, denarius and the dollar (Part 2)

Disclaimer: The views and opinions expressed by the author(s) do not represent the official position of Barbados TODAY.

by Adrian Sobers

“Bring me a denarius and let me see it.” – Mark 12:15

Nicholas Rowe’s reminder in A Global Liquidity Crisis is worth repeating: the US dollar “is meta-money.” This meta-money status goes back to the collapse of Bretton Woods and the establishment of the International Monetary Fund. A discussion in and of itself, but for now Alan Meltzer’s observation in Volume 1 of his history of the Federal Reserve will suffice.

“A related problem was that fund rules did not make it clear what should happen when the principal reserve currency country—the United States—ran persistent trade or current account deficits.” Meltzer continues, “the system was based mainly on the dollar, and there proved to be no binding restrictions on the supply of dollars under the Bretton Woods system.” But, as I said, a discussion in and of itself.

Arkadiusz Sieroń won the Polish Prime Minister’s prize for his doctoral dissertation on which his book Money, Inflation and Business Cycles is based. You do not have to read too far to see why. His voice needs to be amplified in the Monetary Matrix: “an increase in global money supply – in contrast to the transfer of purchasing power – will lead to global price inflation.” It is truly award-winning material.

“Contrary to many opinions, national fiat currencies do not provide isolation from global inflation processes and international cycles. In a modern global economy, a given country – especially if it is a small and open economy – can experience inflationary processes and the business cycle, even when it conducts a relatively restrictive monetary policy.”

Eshon Burgundy gave a brief history lesson on the hook of Cotton that is instructive here. He linked government’s centralized control of fiat currency to centralized control of our lives since money touches everything. Devin Singh (Divine Currency) likens it to tendrils of control. We are still picking cotton, especially in the context of the dollar as the world’s reserve currency.

“Money not made outta paper / It’s made of cotton / Slaves would pick it after it blossom / Master would trade it for gold profits / But history has faded, this has been forgotten / … But don’t forget about the 1933 lock-in / They kept the gold and gave us dollars / We still counting cotton.” Careful readers will note the implications for any cash payments/transfers and reparations. (Lord come for your world.)

Damian Marley was sad to see the old slave mill grinding slow but still. Don’t look now Mr. Marley, the cotton mill is also in operation. The entire world is still picking and counting cotton in the form of US dollars. Due to the dollar’s reserve status, they are the only country that can finance ridiculous debt levels by issuing debt instruments denominated in its own currency.

The authors of The Great Liquidity Boom and the Monetary Superpower Hypothesis made the point that “dollar-pegged economies are losing their export competitiveness” because “these countries are getting higher-than-desired inflation with QE2. … This is making their exports more expensive and defeating the very purpose of linking cheaply to the dollar.” China is the obvious example.

The Chinese Communist Party is many things; stupid isn’t one of them. If we track the relationship between the cumulative US current account deficit and the total foreign exchange reserves from 1950 to 2007 we see that they move in lockstep because countries that have a trade surplus with the US bought said dollars entering their country.

Converting US dollars in a free market means appreciating their currency making their products more expensive. The People’s Bank of China (PBOC) creates renminbi to buy US dollars earned by Chinese exporters. This keeps down the value of the renminbi and the PBOC can then invest these in US government bonds and other US dollar denominated assets.

Ownership of US government bonds by the rest of the world went from less than 5 percent in 1970 to around 40 percent in 2007. When the Fed raised the Federal Funds Rate between mid-2004 and mid-2006, the yield on the 10-Year US government bond did not go up as expected. When asked about this, then governor Alan Greenspan said, he didn’t know it’s a conundrum.

It was not a conundrum. It was because foreign central banks (like the PBOC) were buying US government bonds, holding down their yield. (They who have his bonds and all that.) Also important is the relationship between the US current account deficit and budget deficit, especially in a world where QE has created so much liquidity.

From what one reads and hears, what follows next is not well understood by some economists, and more importantly, policymakers.  Quantitative easing created excess liquidity (especially when you annualise the billions the Fed was printing monthly during multiple rounds of QE). The plot in the Monetary Matrix thickens when the US current account deficit is recycled back into the US as a capital account surplus providing even more liquidity which pushes up asset prices. B is for bubbles that burst, and the bull (let’s go with crap) the powers that be feed us.

Richard Duncan’s warning in The Dollar Crisis, is worth repeating: “The current account deficits are destabilizing the global economy by creating runaway global money supply growth. They must be put to a stop.” Mr. Duncan wasn’t advocating stopping the growth but reducing it to a pace that is “supportive of economic expansion but not so excessive that it is destabilising.” (Do not confuse this with talk of quantitative tightening.)

Duncan correctly pointed out (as have countless others), that Ben Bernanke’s global savings glut hypothesis is actually a global fiat money creation glut. The global economy will eventually get an answer to the question Mr. Greenspan posed in 2004 (only God knows when). Small open, dollar-pegged economies won’t like the answer.

The decline starts with the money, it invariably must. Matters of money double as matters of sovereignty and there is only one Sovereign, the sovereign One: “Those who worship vain idols forsake their true loyalty” (Jonah 2:8).

Adrian Sobers is a prolific letter writer and commentator on social issues.