"The only resource against political disorders that had been known till then was the concentration of power. Solon undertook to effect the same object by the distribution of power. He gave to the common people as much influence as he thought them able to employ, that the State might be exempt from arbitrary government. It is the essence of Democracy, he said, to obey no master but the law. Solon recognised the principle that political forms are not final or inviolable, and must adapt themselves to facts; and he provided so well for the revision of his constitution, without breach of continuity or loss of stability..."
John Dalberg Lord Acton, History of Freedom in Antiquity
My long time friend Hugo Salinas-Price has shared some uniquely interesting observations on the growth of international paper reserves, which have been largely constituted of claims on debt, often pinned to the US dollar because of its international reach. And with all such fertile and insightful thinking it provokes more thought in others.
In this article he observes that the appetite for sovereign Treasury debt, and other forms of private debt such as mortgages and consumer credit, may not be keeping pace with the issuance of these forms of debt.
I think that with respect to price that this is a foregone conclusion in light of the Fed's QE III. The whole point of this exercise is to ensure that the current pricing is not sustainable without a non-market priced subsidy from the Fed, hopefully until some point that the markets reach some sort of self-sustaining equilibrium.
One of my key theses has long been that this equilibrium cannot occur without major systemic reforms. The factors that created the problem were not incidental, but fundamental to changes that occurred during the 1990's in particular, with deeper roots back to 1980. There was a decade long effort to overturn the New Deal Reforms that had allowed for the long stability that the financial world largely enjoyed in the post-WW II era. These reforms were overturned by greed and corruption of power, and so here we are today. We cannot go forward without returning to more transparent, honest markets that operate with a bias towards justice, and not bowing to
right as defined and sanctified by
might.
Modern monetary theorists would postulate that none of this is a problem, because the issuance of money based on debt is not necessary in the first place. All the debt can be repurchased through the direct issuance of money by a sovereign at any time. The proposal of the 'trillion dollar platinum coin' illustrates that principle in action.
But while technically true, there are two important facts that impinge on the wonders of such a brave new monetary world, besides the obvious problem of the ability of concentrated power to corrupt such Utopian arrangements, almost from their inception. I keep asking, 'where is the flywheel' meaning where is the check and balance on the monetary issuance?
Quis custodes custodiet?
The first obstacle is that such money issuance system of almost unrestrained fiat works best where all the market participants are forced to operate according to the centralized rules. They will accept the money at stated value because they simply have no other choice, no other options. Given Gresham's Law, if you think about this for a while, it becomes very apparent that this is the case. Fiat of this level of discretion must have the absolute force of law, without viable competition or substitute.
Money is what we say it is, and is worth our stated official price.
I think we have enough historical examples of how well this works in practice. I saw it up close in both Russia and Czechoslovakia before and during the final collapse of the Soviet System.
In the world as it is, there is really no one world currency, issued by a centralized all-powerful entity, that essentially creates money from nothing, distributes it as it pleases, and dictates its value to all. At least there is no such system yet, although it is certainly the objective of more groups than you might care to imagine.
In the case of a non-self-sufficient economy, there is the inescapable issue of trade and travel with other economies, that are not under the control of the central authority.
So the second great problem is that in the world as we have it today, oil and natural gas and certain essential commodities are significant factors when considering the international currency regime. In quite a literal sense, the US dollar is the petro-dollar, and control of the world's currency regime requires a strong influence over the world's oil and gas supply first and foremost.
If the US was truly energy self-sufficient, then the issue of trade and tariffs and money would be much simpler. This would not be the case for some other entities without its geographic reach and the rich variety of its resources.
The other imported products are much more discretionary, and the domestic economy would most likely even prosper under a greater emphasis on self-sufficient production. Although the issue of reform would still remain because of the broken system of wealth distribution along lines of unequal power and undue influence over law to the detriment of justice.
It would have repercussions on international relations no doubt, but that is economic power by other means and would be dealt with through the usual alliances and cooperative ventures that could be denominated in other than a domestic currency. This arrangement calls for the growth of large areas of common interest, or spheres of interest if you will, that are able to achieve resource self-sufficiency.
The sophists will seek to dismiss what I am saying here as a
paean to the gold standard. I wish to state again, categorically, that it is not. I am not proposing any solution at all, but merely attempting to draw up some outlines around the problem, what might be termed a systems analysis and requirements.
Gold does have some remarkable qualities that make it quite suitable for use as money. No one can create it, it is enduring, and relatively stable in terms of growth. As an external standard it is almost ideal. There is little wonder that diverse societies have gravitated towards gold and things like it down the long corridor of time. And yet it does have one drawback: gold alone cannot enforce honesty on a corrupted system. The recent growth on paper of the rehypothecated gold supply is one case in point.
There is no secret to creating a workable system. I know I could do it, and many other people could so as well and perhaps much better. The problem is that people of power do not wish to have a good system.
There will be no good and sustainable monetary system easily reached for the same reasons that this generation of leaders can no longer create and put forward fair and workable laws for their own country. They are overcome by ego and greed. They wish for a system riddled with loopholes and personal advantage for them and their friends. So this is what is produced. And until this changes, progress and change will be spattered with misery and blood, as it has so often been in the past.
If there is any key point I wish you to take and hold in your minds and hearts it is that there is no such thing as a perfect, self-regulating monetary system. There could only be such an ideal model if men and women were angels, perfectly rational and reliably virtuous.
And like wealth the distribution of reason and virtue is very uneven, and so all systems must rely on a continuing effort and bias towards equal justice for all. And this has inescapable requirements for the design of the system. Among these are transparency and the rule of law. And the assumption that there will always be those who will be actively attempting to subvert the system, some bluntly, and some quite cleverly.
Money is power, and power corrupts. So no system can succeed by its own design if its reins are held in the hands of mortal people, with all their weaknesses and failings. So the system must account for this, and accommodate change and judgement as well as the balance of justice.
This was the great innovation of the US Constitution, the balance of power and its ability to change and evolve through law, with its commitment to justice and equality as an ideal, integrated into its construction, even though imperfectly by imperfect men of their time. This is what made it such a bright star on the darkened horizon of human endeavour, a hymn to human freedom. And look what they've done to our song.
It will be fascinating to see how this evolves. Will we see the creation of an SDR like monetary instrument based on a basket of items and currencies not under the control of a single power bloc?
Will the world evolve into three or four powerful trading blocs, each with their own currency arrangements? Will the current dollar hegemony continue on until the collapses, and the what could have been an evolution will be a more sudden monetary revolution in which great wealth is destroyed, transferred and created anew?
We do live in interesting times. And inescapably, these questions are now being addressed in the ongoing struggle for monetary power in what some have called
