It seems that the primary focus of this blog, watching for major changes in the present monetary system, is no longer just a non mainsream media activity. The very mainstream Economist runs this article wondering how much longer the present system can hold together and what is going to eventually replace it. Below are a couple of excerpts and then some added comments.
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"A minimally disruptive end to Bretton Woods II remains within the realms of possibility. Its fate might resemble that of Bretton Woods I, especially if Mr Trump loses office in 2020. Democrats are more economically nationalistic than they used to be, but still mindful of the value of global co-operation. President Bernie Sanders or Elizabeth Warren might seek a one-off depreciation of the dollar while recommitting America to a rules-based system of global trade. A recession in China could scare its leadership into offering concessions on trade that America would accept.
But the experience of the 1930s may prove a more apt guide. In the absence of a co-ordinated adjustment to exchange rates and a peaceful end to trade hostilities, the world could stumble into a cycle of competitive devaluations and tariff rises. As trading relationships unravel, countries may organise themselves into rival economic blocs. It is hard to imagine the world repeating such an ugly era of history. But not as hard as it used to be."
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My added comments: I am struck by how much the last paragraph quoted above sounds like something Jim Rickards would say. If you have followed these issues for a long time, you realize that the world is simply moving in an unpredictable fashion in ways that what we might call "the establishment" never likely imagined possible not too long ago.
The political landscape has been significantly altered in the last 3-4 years such that it now seems more likely that the world is moving in this direction stated in the article above:
"In the absence of a co-ordinated adjustment to exchange rates and a peaceful end to trade hostilities, the world could stumble into a cycle of competitive devaluations and tariff rises. As trading relationships unravel, countries may organise themselves into rival economic blocs."
A few years back we talked about this being one of the very real potential outcomes back in a time when many were expecting some kind of a new one world global currency issued by some kind of global central bank to be the future. Now, that seems like a very remote possibility any time soon as achieving any kind of political consensus nationally or globally has disappeared.
As hard as we try to stay out of any political discussions here, we have to admit that political agendas are clearly driving the world forward. Using the US as a major example, it seems clear that US voters are going to be offered a choice to continue on with President Trump or move hard left to a very different kind of more socialistic economic agenda that is now controlling the Democratic Party. The idea that somehow these opposing forces will join together in some kind of middle of the road compromise seems completely unrealistic. No matter who wins the next election, the US is badly divided politically and that is not going to change.
So, in attempting to provide an analysis for readers here, what should we watch for heading into the 2020 elections which are obviously going to suck all the oxygen out of the room from now until they are over. Here are some thoughts:
1- The most important factor to watch closely is the health of the economy, period. This is most likely going to be the biggest factor in determining the outcome of this election which will then determine what happens going forward in the economy and eventually our monetary system.
2- If there is an economic downturn, how severe will it be? This is the huge question in my mind. Continued growth (even mild growth) will most likely favor President Trump because most people are not anxious to roll the dice on major change so long as things seem reasonably stable. Even a mild recession may not have much impact. But if we get another big crisis (like the 2008-2009 GFC), the door opens wide for all kinds of unpredictable election outcomes. To me, it's a fairly simple analysis. Who will the majority of the voting public trust if we get "the big one" between now and November 2020?
a) President Trump? - We know his loyal base will stick with him and will simply ignore any effort to blame him for any crisis as a "deep state" project to get rid of him. Trump will clearly blame the Federal Reserve and probably even call for major reform of it if we get a huge crisis (see this article - Former Fed Pres fires back). His followers will accept that as most of them already distrust central banks. They will believe him over his opponents without any doubt. But how big will that loyal base be and will it include enough independents to insure his re election? Maybe. I don't know. We'll see.
b) The Democratic Opposition to President Trump? - We know the loyal base of voters on this side will blame President Trump for any economic crisis period. They will say that the global economic order which they will say has built global prosperity for decades was ruined by President Trump's sanctions, tariffs, and trade wars. The more progressive wing of the party will probably say the major crisis proves capitalism has failed and now socialist style policies are required to solve the problem. Can they convince enough of the people "in the middle" that Trump is to blame to get him out of office? Maybe. I don't know. We'll see.
In my mind, the above is pretty easy to predict if you are paying any attention at all to what is going on politically in the US and around the world for that matter.
In my view, what is missing from this shallow "debate" (that actually is just an effort on each side to divert blame to the other side to gain political advantage from any crisis that arises) is the transparent telling of the truth to the general public. Really, until that happens, it seems very unlikely that any kind of reasonable consensus to fix the problems in the present system can ever happen.
Unfortunately, it seems that a transparent telling of the truth is viewed as political suicide by the leaders on all sides of the debate so it just is not going to happen. We have wanted to create the impression for a long time that we can go on forever by expanding an economy based on explosive ongoing debt creation with no long term consequences. We have somehow convinced ourselves that if a major problem does arise, we can just print our way out of it and keep stumbling forward. If trillions won't cover up the problem, I guess the thinking is that we just move on to quadrillions. It never matters how big the debts get so long as we can pay the interest, right? So long as the US can create unlimited amounts of "the global reserve currency", all is good, right?
So far, that has been right so no one wants to rock the boat and suggest this might not be sustainable forever. That's political suicide, right?
I honestly hope it somehow could be right. So long as everyone just keeps pretending no amount of additional creation of money and debt will ever matter, I guess the game can just keep rolling along. Right?
But, we are beyond foolish if we don't ask ourselves these honest questions:
What if some day people don't keep believing? What if markets don't keep believing? What if we finally do cross the threshold where all confidence and trust in the system is lost? What if central banks lose all credibility with the public as they create trillions in new money and push for negative interest rates around the world? Nothing to worry about and everything is great, right?
We have to ask these questions because it is clear that our leaders on both sides of the political aisle will not ask them, because it is political suicide to ask them. They are trapped into perpetuating a system that everyone instinctively knows is NOT sustainable, but we we just cannot afford to acknowledge that fact because the ramifications are so serious and troubling. We all have to hope they can just keep kicking the can down the road forever and it is now pretty clear that is the only plan of operation left for the present system. Even The Economist runs an article saying the present monetary system is breaking down.
So, our job here is to monitor what really does happen with no political spin if possible. We must ask people to raise these kinds of honest questions and also to think about what they should do to try and prepare if some day this current system just cannot continue to function for any reason. There are two levels to this to think about:
1- The Macro Level - what will the US and the world do to fix things if the present system does go under at some point? We have devoted literally years here trying to research that and provide some ideas and concepts that many very bright people have suggested. You can look over those ideas on this page of the blog. New ideas are always welcome and I appreciate it when readers point me to them. The more you study various ideas, the better you can voice an informed opinion on what should happen if the present system does indeed fully "break down".
2- The Personal Level - what can I do for myself and my family to try and weather the storm if we do get "the big one" some day? - We have tried to offer suggestions here realizing that every situation is unique and there is no one size fits all answer to this problem. But simple common sense says that everyone should try to the extent they can to have some kind of emergency savings that is diverse as they can make it. Some kind of emergency cash reserve. If possible, a portion of that held in physical precious metals that might be usable if the local national currency fails completely where you happen to live. Don't tell me it can't happen because it already has in some places in the world and everyone who talks about money in any way always lists trust in it as the most critical aspect money must have going for it.
Beyond this, all we can do is try to stay as informed as we can and monitor what actually happens. At the end of the day, what actually happens is what matters, not what someone believes is going to happen (or thinks cannot possibly happen). This blog has been devoted to trying to research these issues honestly, look for creative ideas and proposals that have been put forward to try and improve things, and to offer the best analysis we can based on the information we have. That will continue to be the goal here so long as I am able to produce articles for this blog.
Added notes: Here is an interesting article that is somewhat along the same lines as this blog post which may be of interest.
Added 3pm (CST): And now Mark Carney (BOE) joins the chorus saying that the current US dollar based system "won't hold". Here is an excerpt from a Reuters article quoting him at Jackson Hole Wyoming:
“Even a passing acquaintance with monetary history suggests that this centre won’t hold,” Carney said. “We need to recognise the short, medium and long-term challenges this system creates for the institutional frameworks and conduct of monetary policy across the world.”
Added notes: Here is an interesting article that is somewhat along the same lines as this blog post which may be of interest.
Added 3pm (CST): And now Mark Carney (BOE) joins the chorus saying that the current US dollar based system "won't hold". Here is an excerpt from a Reuters article quoting him at Jackson Hole Wyoming:
“Even a passing acquaintance with monetary history suggests that this centre won’t hold,” Carney said. “We need to recognise the short, medium and long-term challenges this system creates for the institutional frameworks and conduct of monetary policy across the world.”
Here is the full text of the speech by Mark Carney at Jackson Hole calling for major changes in the present monetary system.
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