The Economy: Bill Bonner, "Honohan, Meet Havenstain"
By Bill Bonner
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Now we see both how our modern monetary system began…and how it will end. In the sunny days of August, 1971, Richard Nixon was merely solving another problem caused by another solution. The solution to the world’s problems in the ’60s was to spend money on the war in Vietnam and the War on Poverty. The spending of the ’60s created the debts that Nixon had to reckon with – particularly to the French. Rather than pay the foreigners in gold, as had been customary for hundreds of years, the Nixon team defaulted. They changed the world’s monetary system, beginning the monetary equivalent of Napoleon’s march on Moscow.
They thought they were doing the world a favor. A more ‘flexible’ currency system would give financial authorities another powerful weapon with which to fight downturns. Instead of holding gold as their main monetary reserve, nations switched to holding each other’s paper. Henceforth, one’s reserve assets were another’s liabilities – all netting out to zero. With this new weapon in their hands the feds won every battle – from the Latin American debt crisis of the ’80s to the mini recession of 2001. But the trouble with money that grows on trees is that you are soon raking it off your lawn. The pile of international reserves, other than gold, grew from under $300 billion in 1971 to more than $8.5 trillion today. Prices rose too. As measured in Britain, consumer prices rose as much in the last 40 years as in the entire preceding 700.
The private sector is now solving the problem of too much debt by cutting back. Consumer credit is falling. Commercial and industrial loans are falling. The money supply, as measured by M3, is deflating at the fastest rate since the Great Depression – more than 9% annually. And prices – as measured by the US core CPI – are going up at the slowest paces since 1966.
This correction is natural and normal. But the feds want to stop it anyway. What can they do? ECB council member Patrick Honohan, from Ireland, has the answer. He applauds an “important new weapon,” referring to the very same hot cannon that blew up in Rudolf von Havenstain’s face 9 decades ago. The ECB has begun its own program of quantitative easing. It bought 35 billion euros of bonds in the first 3 weeks of the program. “Restoring market confidence in the solidity of governments’ finances is absolutely crucial,” Honohan said. Mr. Honohan is neither evil nor stupid. He is merely putting one foot in front of the other. He judges the need for confidence greater than the risk of inflation. Reasonable…as far as it goes. But where does it lead? The Rhine, the Niemen, and the Volga have all been breached. Sooner or later, he will be on the banks of the Berezina."
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