The 38 Year Cycle in US Monetary History

I am not a big believer in comprehensive cycle theory. The weakness of cycles is the same as all systems that seek to impose an external order on natural events and occurrences: one can always find something to fit in a less than rigorously defined methodology. This applies from biblical prophecy codes based on the placement of words and letters, to cycle and wave theories with a wide range of alternatives.

However, I also believe in what call 'generational memory.'  People as a group often forget the lessons of the past, and human nature being what it is, events based on bad judgement and reckless behaviour seem to recur at regular intervals.  Or as J.K.Galbraith observed, there are essentially no new financial frauds, just new variations on the established themes.

If there was any 'tell' for the current crisis, it was the general overturning of the safeguards for the financial system that had been put in place in the aftermath of the financial panic of 1929 and the Great Depression that followed, culminating in the eventual overturn of Glass-Steagall and the ascendancy of extreme leverage using exotic, unregulated instruments.

This is why we call this a generational change. This is no slump, and not even a common recession. And it is far from over.

We are experiencing some major changes that are easily lost when one only looks at the day to day moves, listens to the description of events on the mainstream media, and of course, have a lack of memory, a knowledge of history, of things that have happened to their grandfathers and great grandfathers. The arrogant ignorance of so many still in place is a sure sign of greater chastisement to come, until the lessons of history are learned again, and the system is brought back into a sustainable balance.

2009

The story is still being written, and history will have its say over time. But it will likely include the reckless expansion of credit by the Greenspan Fed, the lapses in financial regulation, the overturn of Glass-Steagall, and the financial scandals including LTCM, Enron, Worldcom, culminating in the failure of the US banking system which began in 2007 including the de facto nationalization of the banks.

The loss of confidence in the informal Bretton Woods II arrangement with the dollar as the world's reserve currence with the rise of alternatives, precipitated by the unprecedented expansion of the monetary base by the Bernanke Fed including the monetization of private debts, will be the hallmark of the crisis from a monetary perspective.

1971

Nixon Closes the Gold Window on Bretton Woods

"The Nixon Shock was a series of economic measures taken by U.S. President Richard Nixon in 1971 including unilaterally canceling the direct convertibility of the United States dollar to gold that essentially ended the existing Bretton Woods system of international financial exchange.

By the early 1970s, as the costs of the Vietnam War and increased domestic spending accelerated inflation, the U.S. was running a balance of payments deficit and a trade deficit, the first in the 20th century. The year 1970 was the crucial turning point, which, because of foreign arbitrage of the U.S. dollar, caused governmental gold coverage of the paper dollar to decline 33 percentage points, from 55% to 22%. That, in the view of Neoclassical Economists and the Austrian School, represented the point where holders of the U.S. dollar lost faith in the U.S. government’s ability to cut
its budget and trade deficits.

In 1971, the U.S. government again printed more dollars (a 10% increase) and then sent them overseas, to pay for the nation's military spending particularly in Vietnam and private investments. In May 1971, inflation-wary West Germany was the first member country to leave the Bretton Woods system — unwilling to deflate the deutsche mark to prop up the dollar.

Because of the excess printed dollars, and the negative U.S. trade balance, other nations began demanding fulfillment of America’s “promise to pay” - that is, the redemption of their dollars for gold. On 5 August 1971, Congress released a report recommending devaluation of the dollar, in an effort to protect the dollar against foreign speculators.

To stabilize the economy and combat runaway inflation, on August 15, 1971, President Nixon imposed a 90-day wage and price freeze, a 10 per cent import surcharge, and, most importantly, “closed the gold window”, ending convertibility between US dollars and gold. The President and fifteen advisors made that decision without consulting the members of the international monetary system, thus the
international community informally named it the Nixon shock.

Given the importance of the announcement — and its impact upon foreign currencies — presidential advisors recalled that they spent more time deciding when to publicly announce the controversial plan, than they spent creating the plan. He was advised that the practical decision was to make an announcement before the stock markets opened on Monday (and just when Asian markets also were opening trading for the day). On August 15, 1971, that speech and the price-control plans proved very popular and raised the public's spirit. The President was credited with finally rescuing the American public from price-gougers, and from a foreign-caused exchange crisis." Wikipedia

1933 - 1934

Suspension of the Gold Standard and Dollar Devaluation

"In early 1933, in order to fight severe deflation Congress and President Roosevelt implemented a series of Acts of Congress and Executive Orders which suspended the gold standard except for foreign exchange, revoked gold as universal legal tender for debts, and banned private ownership of significant amounts of gold coin. These acts included Executive Order 6073, the Emergency Banking Act, Executive Order 6102, Executive Order 6111, the Agricultural Adjustment Act, 1933 Banking Act, House Joint Resolution 192, and later the Gold Reserve Act. This set up the devaluation of the dollar. In early 1934 F.D.R. increased the price of gold by 69%($20.67 to $35/oz). This represented a 41% devaluation of the US dollar." Dollar Devaluation in 1934, I. M. Vronsky

1895

Gold Panic: U.S. Gold Supply Running Dry

"The early 1890s were not kind to America's gold reserves...Coupled with declining revenues triggered by various protective tariffs, the reserves plummeted, taking a severe toll on the economy. In 1893, the falling gold supply helped spark a debilitating financial crisis known as the Panic of 1893...By February 8, 1895, the gold supplies had thinned out to a paltry $41 million.

With the U.S. Treasury teetering on the brink of bankruptcy, Cleveland intervened, and using a syndicate led by J.P. Morgan as an intermediary and U.S. bonds as bait, attempted to buy back gold from foreign investors. Cleveland sold roughly sixty-two million dollars worth of bonds, valued at 3.75 percent, to Morgan's syndicate. Morgan and company in turn shopped the issues to foreign parties for a handsome profit. Although clearly borne of desperation, the deal nonetheless provided some badly needed relief: it briefly spelled the gold crunch and saved the Treasury from disaster. " This Day in History

1857

The Panic of 1857

"The Panic of 1857 abruptly ended the boom times that followed the Mexican War. The immediate event that touched off the panic was the failure of the New York branch of the Ohio Life Insurance and Trust Co., a major financial force that collapsed following massive embezzlement. Hard on the heels of this event arrived other setbacks that shook the public's confidence...

Widespread railroad failures occurred, an indication of how badly over-built the American system had become. Land speculation programs collapsed with the railroads, ruining thousands of investors.

Confidence was further shaken in September when 30,000 pounds of gold were lost at sea in a shipment from the San Francisco Mint to eastern banks. More than 400 lives were lost as well as a loss of public confidence in the government's ability to back its paper currency with specie.

In October, a bank holiday was declared in New England and New York in a vain effort to avert runs on those institutions. Eventually the panic and depression spread to Europe, South America and the Far East. No recovery was evident in the United States for a year and a half and the full impact did not dissipate until the Civil War."

1819

The Panic of 1819

"The causes of the Panic of 1819 were the first to largely originate within the U.S. economy. The resulting crisis caused widespread foreclosures, bank failures, unemployment, and a slump in agriculture and manufacturing. It marked the end of the economic expansion that had followed the War of 1812. However, things would change for the US economy after the Second Bank of the United States was founded in 1816, in response to the spread of bank notes across United States from private banks, due to inflation brought on by the debt following the war.

In the event, President Monroe, interpreting the economic crisis in the narrow monetary terms then current, limited governmental action to economizing and ensuring fiscal stability. He acquiesced in suspension of specie (gold) payments to bank depositors, setting a precedent for the Panics of 1837 and 1857."

Mark Pittman, Investigative Journalist

Bloomberg
Mark Pittman, Reporter Who Foresaw Subprime Crisis, Dies at 52
By Bob Ivry

Nov. 28 (Bloomberg) -- Mark Pittman, the award-winning investigative reporter whose fight to open the Federal Reserve to more scrutiny led Bloomberg News to sue the central bank and win, died Nov. 25 in Yonkers, New York. He was 52.

Pittman suffered from heart-related illnesses. The precise cause of his death wasn’t known, said his friend William Karesh, vice president of the Global Health Program at the Bronx, New York-based Wildlife Conservation Society.

A former police-beat reporter who joined Bloomberg News in 1997, Pittman wrote stories in 2007 predicting the collapse of the banking system. That year, he won the Gerald Loeb Award from the UCLA Anderson School of Management, the highest accolade in financial journalism, for “Wall Street’s Faustian Bargain,” a series of articles on the breakdown of the U.S. mortgage industry.

“He was one of the great financial journalists of our time,” said Joseph Stiglitz, a professor at Columbia University in New York and the winner of the 2001 Nobel Prize for economics. “His death is shocking.”

Pittman’s fight to make the Fed more accountable resulted in an Aug. 24 victory in Manhattan Federal Court affirming the public’s right to know about the central bank’s more than $2 trillion in loans to financial firms. He drew the attention of filmmakers Andrew and Leslie Cockburn, who gave him a prominent role in their documentary about subprime mortgages, “American Casino,” which was shown at New York City’s Tribeca Film Festival in May.

‘One Reporter’

“Who sues the Fed? One reporter on the planet,” said Emma Moody, a Wall Street Journal editor who worked with Pittman at Bloomberg. “The more complex the issue, the more he wanted to dig into it. Years ago, he forced us to learn what a credit- default swap was. He dragged us kicking and screaming.”

James Mark Pittman was born Oct. 25, 1957, in Kansas City, Kansas, where he played linebacker on the high school football team. He took engineering classes at the University of Kansas in Lawrence before graduating with a degree in journalism in 1981. He was married soon after and had a daughter, Maggie, in 1983. The marriage ended in divorce.

Pittman’s first reporting job, covering the police department for the Coffeyville Journal in southern Kansas, paid so little he took a part-time job as a ranch hand across the Oklahoma border in Lenapah, according to an interview he gave to Ryan Chittum for the Columbia Journalism Review’s The Audit, a watchdog for the business press.

‘Huge Personality’

“What a funny guy -- huge personality,” Chittum said in an e-mail message. “Mark was my favorite reporter working. In a time when too much journalism is timid or co-opted, Mark personified the whole ‘afflict the comfortable’ tenet of the business. Mark’s passing is a huge loss for journalism at a time when we can least afford it.”

Pittman spent a year in Rochester, New York, with the Democrat & Chronicle newspaper and 12 years at the Times Herald- Record in Middletown, New York, where he met his second wife, Laura Fahrenthold-Pittman in 1995.

“All I know is we fell in love the moment we met,” Fahrenthold-Pittman said in an interview Friday. “We moved in together a week later. He was as serious about his family life as he was about work. Mark did nothing in a small way.”

Pittman joined Bloomberg News in 1997. In 2007, he was writing about the securitization of home loans when subprime borrowers, who have bad or limited credit histories, began missing payments on their mortgages at a faster pace.

S&P, Moody’s

His June 29, 2007, article, headlined “S&P, Moody’s Hide Rising Risk on $200 Billion of Mortgage Bonds,” was excoriated at the time by Portfolio.com for “trying to play ‘gotcha’ with the ratings agencies.”

“And that really isn’t helpful,” said the unsigned posting.

Pittman’s story proved prescient. So did his reports on U.S. banks exporting toxic mortgages overseas, on Treasury Secretary Henry M. Paulson’s role in creating those troubled assets while he was chief executive officer of Goldman Sachs Group Inc. and on the U.S. bailout of American International Group Inc.

“He’s been on this crisis since before the crisis,” said Gretchen Morgenson, the Pulitzer Prize-winning financial columnist for the New York Times. “He was the best at burrowing into the most complex securities Wall Street could come up with and explaining the implications of them to readers of all levels of sophistication. His investigative work during the crisis set the standard for other reporters everywhere. He was a giant.”

‘Fearless, Trusted’

In the “Faustian Bargain” series, Pittman explained how 5 percent of U.S. mortgage borrowers missing monthly payments could lead to a freeze in lending throughout the world.

“Mark Pittman proved to be the most fearless, most trusted reporter on the most important beat during the 12 years he wrote about credit markets, corporate finance and the Federal Reserve at Bloomberg News,” said Bloomberg Editor-in-Chief Matthew Winkler. “His colleagues will miss his laughter and generous sense of mission. Bloomberg readers were rewarded by his many achievements culminating with a federal court ruling validating his search for records of taxpayer-financed policies withheld from the public and the Gerald Loeb Award.”

Public policy would be more effective if reporters, lawmakers and citizens understood how the financial system worked and why the crisis happened, Pittman said in the Feb. 27, 2009, interview with Chittum.

“Hopefully, we will be able to inform the people enough to know how badly we’re getting screwed,” he said with a laugh. “We need to know how to prevent it from happening again, and we need to know who did it.”

Booming Laugh, Bourbon

Standing 6 feet 4 inches (1.93 meters) with a booming laugh, a loud telephone voice and a taste for bourbon, Pittman made lifelong friends on Wall Street, in Congress, in journalism circles and in the artistic community after he and his wife opened an art gallery in Yonkers in 2005.

“I always learned something new when I spoke with Mark,” said Representative Scott Garrett, a New Jersey Republican on the House Financial Services Committee. “He was dogged in pursuit of the truth. This is a great loss for journalism and for those who relied on Mark for his insight.”

In “American Casino,” the title of which comes from an expression Pittman uses in the documentary, the filmmakers profile subprime borrowers who are losing their homes, mortgage brokers who made loans they knew their customers could never repay and bankers and ratings analysts whose companies profited from the housing boom...

Weekend Viewing: Fall of the Republic

A bit overstated and at times over the top, at least to my tastes.

However, it is important to hear the issues raised here, and to be aware of them. The documentary settles down after the first ten minutes and presents several thought-provoking ideas and observations.

Obviously one may likely not agree with them all, but again, listening to different perspectives helps us to calibrate where we are in troubled and confusing times.

Well of Emptiness: Family Day at the New York Stock Exchange

Today was 'Family Day' at the New York Stock Exchange. No it is not the day in which the boys celebrate the families which they have made homeless, the retirements they have ruined, and the faces they have ripped with their lugubrious bump and grind.

It is a day on which the junior people, semi-professional greeters, and B class spokesmodels who are stuck working on a long holiday weekend bring their kids to play on the big empty floor, growing emptier by the day as volume migrates to the Matrix, and the dark pools of the vampire squids. The better to eat you with, my dear.

And befitting a day of low volumes and maximum cynicism, the futures did almost exactly what we thought they might do and, after a well managed performance, absolutely nothing has been decided. We were thankful for a low open and an opportunity cover short positions, and then a nice long drift higher to let the long sides of our hedged positions go. And of course, shorts back on into the close, with moderation we hasten to add. No underestimating Tim and Ben here.

Another Sunday night is in the cards. Remember those? The long nights in which the players hold their collective breath while Asia opens, and then Europe, to see if the rest of the world is buying it, or continuing to sell it. When press releases from corporate giants and their government functionaries begin to leak the true estimates of the damage, shortly after they announce 'the fix' for the problem that they most recently swore great oaths did not exist.

The story of a potential sovereign default such as that of Dubai is not so much which banks are holding the actual loans, but rather, which counterparties are holding the Credit Default Swaps, and to what degree. This is still a derivatively challenged system, oversexed, overlevered, and unfortunately over here.

If it turns out that AIG is a counterparty on the wrong side of the banks again, it really would be a bit much, and Timmy should be fired the following day if he dares to utter the "B word."

There is a lot of theater in the markets and the media, all designed to shape perception, which is the last resort of the financial engineers and their corrupt politicians.

That is not a segway necessarily to the Jobs Summit wherein The One will sequester with the nation's leaders of a sort, and puzzle out what can be done to 'get more jobs.' So far the Obama Administration has resembled that of Herbert Hoover, rather than that of Franklin Roosevelt.

"Hoover quickly developed a reputation as uncaring. He cut unemployment figures that reached his desk, eliminating those he thought were only temporarily jobless and not seriously looking for work. In June 1930 a delegation came to see him to request a federal public works program. Hoover responded to them by saying: "Gentlemen, you have come sixty days too late. The Depression is over." He insisted that "nobody is actually starving" and that "the hoboes...are better fed than they have ever been." He claimed that the vendors selling apples on street corners had "left their jobs for the more profitable one of selling apples." Digital History Herbert Hoover and the 1930s

Have a pleasant weekend, and for our American readers, a tumultuous 'black Friday.' The results of the annual consumer binge will be portrayed and flayed to beat the band in the days to come. Remember that "you get what you pay for" but you also "pay for what you get," unless you are one of the bureaucractically blessed few who receive beyond all bounds of effort and any conceivable personal labour.

Here is the updated scorecard for the markets.