Debtor's Prison

Greetings fellow inmates,

As we contemplated whether our last post of the year should be the standard “Predictions for 2010”, we can across a post on the great Jesse’s Café Américain.  In an article entitled What Will the New World Reserve Currency Regime Be?, Jesse discusses the apparent imperative of ushering in a new monetary system in the form of a single world currency.   One Single World Currency (SWC) is a topic that we have discussed many times from the very early days of this blog.    For months, our discussions have focused on the causes behind the eventual collapse of the current USD-backed financial system, the apparent INEVITABILITY of this collapse and the very high LIKELIHOOD that the proposed solution to this will be a global monetary system backed by a single currency unit – perhaps a modified version of an IMF SDR as Jesse suggests, or something new altogether.    While most of our energy has been spent demonstrating the high likelihood (in our opinion, inevitability) of a SWC, we have been cowards when it comes to taking a stance on a SWC either way.  Our apparent neutrality thus far has been largely motivated by a desire to remain unbiased while we explored some of the Numbers/definitions first.   Having set these foundations and thought about the matter for some time, the gloves finally come off and we declare ourselves to be VEHEMENTLY OPPOSED to a SWC, both technically and in principle and spirit.   Naturally, building our case against SWC will be a task that will span several posts, but this post will aim to give you a broad overview of our thinking.    Perhaps some might consider it a futile exercise to refute something that seems inevitable.   However, it is an Obligation to speak up against a new system that aims to imprison us even deeper than we already are.  Besides, the “inevitability” of the system around us should never be a reason for complacency since, after all, we will never be able to break our shackles unless we understand their weakness.   Ultimately, unlike many of you fellow inmates who despair at the prospect that we have all been sentenced for life with no possibility of parole, we remain optimistic that we will one day escape this debt prison and emerge into a world built on solid, better foundations.   Our discussion of a SWC will naturally touch on very abstract and foundational topics such as “value”, “money”, “debt”, “production”, “the future”, “density”, “cyclical and dynamical theory”, amongst others.   We will also provide Numbers and calculations for all these premises in the next few posts, but for now, we aim to give you an overview of the battle ahead.  Let us start at the beginning.

Despite our silence, we have intuitively been averse to the idea of a SWC for a long time.  Mostly because we know that a SWC will be administered by the Ancient Clan of Wizards of the Black Arts, who boast of a millenary record of imprisoning every man, woman and child they can get their hands on and then bleeding them dry.   The staunch severity with which several prominent people have endorsed the idea of a SWC as the only solution to our current problem also makes us sceptical, since it smacks of the traditional modus operandi of The Powers That Be (TPTB) when they aim to justify the implementation of heavier control following a crisis.  Our initial bias notwithstanding, let’s begin by thinking about potential benefits of a SWC.

At first rational glance, there seem to be several advantages to having a SWC.   For starters, proponents argue that it would be more efficient than the current system of mostly sovereign currencies.  Having multitudes of national currencies means that every time one currency is exchanged for another, some value is lost since the bank usually keeps the bid-ask spread (the difference in the rates they use when they buy or sell a given currency).  In aggregate, a SWC would not really cause a significant change in the value of these “erosion” losses, but simply transfer wealth from banks to the productive element in the economy.  In other words, the institution of a SWC would create an effective tax cut in transactions across the board, of varying magnitudes depending on your position in the local supply chain.   We do not have estimates at the moment on what would be a likely distribution of the “beneficiaries” of that tax-cut, but for the moment let’s assume it’s just the global economy as a whole.  Bear in mind that if we consider the economy as a whole, of which banks is a subgroup, the benefits of this tax cut would be decreased, if not totally cancelled, by all the profits the banks would be unable to make anymore off FX. We will explore this in more detail and give more precise estimates on it in a future post.

Another alleged benefit of a SWC is that it could foreseeably cause a substantial reduction in capital flow volatilities across borders.   A SWC would cause individual sovereign currency risk to disappear, or in other words, there would no longer be the risk that a country will become too trigger-happy with its printing press and devalue its currency to the point it isn’t able to pay its foreign-currency debts.   This is the traditional problem/catalyst for massive outflows of foreign capital, especially for emerging countries. The elimination of currency risk would thus greatly reduce cross-border capital flow volatility, permitting much more stable growth, especially in emerging countries.   Clearly, this is a great potential development in and of itself.   We can even take it one step further and claim that a SWC could even potentially bring down economic volatility; no, not like Judy Greenscam’s imaginary “Great Moderation”, but a real reduction.   Since countries would not be able to manipulate their own currencies, allegedly less trade imbalances could be built up, therefore reducing the prevalence of extremely unstable situations (like excessive dependence on exports for example).   In juxtaposition, many people believe that a big cause of today’s broken financial universe was China’s manipulation of the Yuan, keeping it cheaper than it should be in order to subsidize exports and as a result allowing the US to run up huge deficits and a mountain of debt.   This sort of thing could foreseeably not happen any more, which is ultimately a good thing right?  Well, yes and no.   Remember that we are talking about a reduction of imbalances, in general.   Therefore, though a SWC eliminates the possibility of cross-border imbalances, it simultaneously creates the problem of potential global imbalance.  This, we argue, is much more dangerous, since it does not have the self-cancelling effects of individual sovereigns allegedly acting in their own self-interest and partially off-setting each other.  

Other potential benefits of a SWC are the apparent reduction in commodity-price volatility, which has been so correlated to currency fluctuations in the past.   One must be careful to realize however, that commodity price volatility is responsive to exchange rate movements in the currency in which they are denominated, or rather the prevalent reserve currency (ie; the price of oil being very affected by movements in the USD).   If a SWC came to pass, then presumably all commodities would then be denominated in the SWC, and hence would now be subject to monetary volatility on this NEW fiat paper currency.    This brings us to the crux of our opposition to a SWC: it would be a larger, hence potentially more destructive, version of the same faulty system we have now.   Though there are more potential benefits we have not discussed, the nature of our claims is such that we believe that any potential benefits, in aggregate, are overwhelmed by the negatives and all the reasons why we should NOT implement a SWC.   We intend to develop quite a strong case against an SWC, and for what it’s worth, we intend to disseminate it far and wide, so that in spite of the seeming inevitability of a SWC we will not remain silent in the face of this oppression and hopefully build foundations with those individuals that will construct the new world once the SWC collapses, A-G-A-I-N.   Let’s begin with a very vividly understood notion.    Below is the renown chart of the purchasing power of the USD since the creation of the Fed in 1913:

Look at it, it is truly pathetic.   $1 in 1913 is now worth only 4 cents, really, pathetic.   This is the pure and sole legacy of the Ancient Clan of Wizards.   This is the price WE paid to participate in an allegedly more stable banking/financial system that would do away with the “panics of yesterday”.  (Sound familiar?)    Please pay close attention to the following narrative of what happened since the creation of the Fed in 1913.   Below is a chart of US inflation, as measured by the CPI, since 1666.   This chart is an equivalent alternative way to see the lower purchasing power.  

Notice that from 1666 to the early 1900s, an inflation-deflation cycle was inherent.   It seems natural of course, as we would argue that in principle, an oscillation between growth and contraction in prices around a baseline level is the only way to ever achieve price stability.  This is part of the Great Swindle, which is the belief that low, “moderate” inflation should be the perpetual state of any economy.   Uncle Benny and Co’s idiotic 2% inflation targets “seem” reasonable only because they are an annual figures.   Sure, perhaps most of us wouldn’t be seriously hurt by losing 2% of purchasing power in a year, but guess what happens if we have 2% inflation for 35 straight years? Well, prices double, and your wealth is now worth half (forget for now the fact that inflation will be much higher than this). And to would-be nay-sayers that would propose the trite and tired argument of rising wages, we respond that that is absolutely irrelevant when considering the value of “savings”.  In order words, suppose you save $100k now; over the course of 35 years the value of your savings will erode, by half, regardless of whether or not your future wages keep up with inflation or not.    The point is that generating inflation ALWAYS and never allowing deflation leads to the INEVITABLE erosion of wealth and savings.    All the “blue”(inflation) at the end of the above chart, with none of the corresponding “green” (deflation) is what has created the great erosion in the value of the USD since 1913.   Remember, we are talking about THE SYSTEM here, so we care about all time magnitudes as we should seek long-term sustainability.   Why would we want a system that discourages long-term saving?   One of our strongest objections to a SWC would be that it would simply be a continuation of this same system.     There is absolutely NO indication whatsoever that these policy views expressed by the public face of TPTB, mostly maintaining a consistent and pernicious inflation rate, are even being considered for revision.   What is overwhelmingly likely to happen in the institution of a SWC would be a simple re-juggling of some definitions, sleight of hand by skilful magicians (as CM01 suggested a while ago) and a resetting of price.   In other words, all the physical assets in the world would get re-valued, reappraised, and assigned a characteristic value in terms of SWC units, at which time then prices would begin to float.   Over the course of a few decades following that, we are likely to see the same erosion and destruction of wealth as each SWC will lose value and eventually collapse, in the same way that the current fiat, centrally-controlled reserve currency, the USD, has done.

We’ve already mentioned that sovereign imbalances would be eliminated by an SWC, however, potential new global imbalances could emerge.   This is quite simple to illustrate and see.   Take the one-size-fits-all approach of the Euro and the problems it causes for certain European nations.   It is quite evident than even in a relatively homogenous Europe, economic conditions vary so widely across countries that many find themselves dangerously restricted and hampered to undertake necessary monetary actions their economies demand.     For example, there have been countries that really needed to stimulate their crumbling economies with lower interest rates, but instead were bound to what Jean-Claude decided.   This argument could easily be extended to a global scale of course, where economic differences are MUCH more pronounced.   Can anyone realistically explain to us how it is possible that ONE monetary policy could EVER possibly prescribe ideal, or even appropriate, conditions for ALL local and regional economies?   No, because it’s impossible.   The potential dangers of this are gargantuan.   Imagine some broad global monetary aggregate that would be used to some degree to calibrate monetary policy at the Single World Bank (SWB); it would necessarily have to be aggregate and average.  As such, coordinating monetary policy based on this would clearly create inflationary/deflationary extremes at different localities in the world where the inflationary conditions varied significantly from the mean (as they will, since inflation conditions would not be homogenized by a SWC).   In general though, and this is an idea that we will develop further, individual sovereign systems might create imbalances, but at least there are some checks and balances where some imbalances might offset each other.  In a global system such as a SWC, there are NO checks-and-balances; the overshooting of monetary policy (as has NEVER failed to happen) would then result in GLOBAL economic destruction, as opposed to today’s regional kind.    Moreover, local imbalances would actually still arise, but they would simply be “masked” underneath the rigidity of the monetary union, and if they were to get bad enough, could threaten the entire union with what would have been an otherwise regional problem.   This issue of locality brings us to our last point of the night, and perhaps the most important and we believe the check-mate for the SWC, that of trade granularity.  

            Trade granularity is a complex and highly technical concept that we will develop over the course of the next few posts.   For now, imagine granularity as simply the amount of different important “trading” hubs on a map, represented by a dot, each hub connected to other hubs trough lines, or “trade routes”.   The size of each dot/”hub” is determined by the volume of its trade, and all the lines on the map represent all the possible trade routes.  The “thickness” of each line connecting hubs is also proportional to the volume of trade between those two hubs.   In case there are no direct trade routes between points A and B on the map, then you can find alternate routes.    If we were to take a time-evolved "movie" of what this “trade-density” (or “granularity”) map would look like in the past 100 years, it would certainly get more and more populated, more and bigger dots, more and bigger lines, until it began to seem like lines and points covered the whole map.   We will attempt to model this, and maybe provide numerical and visual simulations, though it is truly a gargantuan task and we have to teach ourselves how to use our new abacus.   This effect is otherwise known as globalization.   While 50 years ago they never would have known each other existed, Johnny in Bumblefuck USA can now purchase some nice gold bars from Baruti in Edenville, South Africa on eBay.  This has not only created a direct line between those two points on the map, it has made the line connecting them thicker.   So, we think you get the picture, this visual “trade map” has become much denser and more “filled in”, as globalization has increased trade capacity across the world, removing large “super-clusters” of trade that then fed into their local systems and replacing it with a more diffuse, interconnected and dynamic trade network.   And what comes of this?  Well, remember, the whole PURPOSE of foreign exchange, the whole purpose of CURRENCY is TRADE!  Get back to the basics.   Having established this a priori, we argue that the significantly increased trade granularity of the past few decades diminishes the need for a SWC, and in fact, creates ideal situations for the establishment of more localized currencies, which would be infinitely more stable than a SWC.  As trade between any given two regions increases, so does the amount of transactions and exchanges of one currency for the other, reducing bid-ask spreads.   It seems to us that this would provide a much more stable system since local conditions would adjust themselves accordingly.  What exactly do we mean by local? Well, anything is possible, anywhere from regions to states to cities to individual banks could issue their own currencies; we believe market forces would largely decide the appropriate size of each marketplace.   In other words, what we are suggesting is that increased trade granularity (which is a fact) increases the pheasibility and stability of local, floating currencies, to the point that they might be a preferable alternative to a SWC.   Over the next few weeks we hope to demonstrate this convincingly.  

Finally, we come to the end this initial Battle Cry against a Single World Currency (SWC).   Our opposition to a SWC runs very, very deep; to the very depth of our shivering spirit in this cold and damp concrete floor in prison.  It will likely shape much of our own thought, discourse and activism in the coming future.   However, before we even touch on the higher and spiritual depths of this problem, we will aim to deconstruct the notion of a SWC, economically and rationally.    Go ahead Judy, we challenge you. Assemble your disparate, rag-tag, assembly of court jesters, pundits and cowards with your shape-shifting economic platitudes and greenscamspeak; we shall meet you in the field of battle, armed with nothing by Numbers and Reason!   A SWC will not prevail, So Mote it Be!

May your capital be safe and your investments prosperous,

MAAA