10 January, 2014


I was interested to read an article online that seems to suggest Paul Krugman, prophet of the New York Times, didn’t understand the process of money creation. The writer Robert Bonomo then goes on to explain why gold is still valuable as a mode of currency-more so than printed cash, which devalues over time.  Check out the interesting illustration of how gold and printed currency have fared  from 1938 to 2013. 

I don’t really pretend to understand economics, but the idea of “Where does money come from?” has always intrigued me. Who gets to print it, and why? In case you are, like me, wondering about this, you should definitely check out Bonomo’s article, because it deals with how gold is still a weightier unit of currency than printed $$$.

And then you should read this article. According to L.Randall Wray  (if I understand it all correctly), paper money is, despite Krugman’s earnest exhortations, undoubtedly printed “out of thin air.”

Now lets think about this. Apparently the world’s currency is pegged to the dollar. And who prints the dollar? The United States. So each time there’s a subprime crisis and people can’t pay their mortgages, the banks simply print more cash. It’s a rather elegant solution, if you think about it.

Now the US has a GDP of 15 trillion or so per year. Wow, impressive. This is one fifth of the world’s total GDP—so even more impressive, considering it only has 330 million of the population (out of 7 billion.) But wait a minute—apparently it also has a lot of debt, 50.2 trillion of public and private debt in 2010, and this was 3.5 times the GDP. For people like you and me, we should understand that the USA has gotten into a lot of debt to generate its 15 trillion per year.  And more and more of it simply benefits the 1%.

According to Wikipedia, which cites a FederalReserve report:
Domestic financial assets totaled $131 trillion and domestic financial liabilities totaled $106 trillion.[45]

Do the math and conclude the USA has about 25 trillion in financial assets. That’s significantly less than the 131 trillions before the subtraction.

Despite all the big companies of the world being headquartered in the USA, Wall Street, the New York Stock Exchange, Silicon Valley, Hollywood, et cetera, et cetera, it also has the highest poverty rate of developed countries.

In 2013, child poverty reached record high levels, with 16.7 million children living in food insecure households, about 35% more than 2007 levels.[163]

So this is starting to look less like the “richest country in the world,” and more like a punch-drunk, indebted nation with some of the highest rates of poverty in the developed world.

 Of course, if you can print money whenever you want, you may end up with a lot of it. This is apparently known as “inflation” and eventually leads to something called “depression” because the money starts to buy less than it used to do before. Check out About.com’s

According to some Americans showing great concern about the “Jack and the beanstalk phenomena” of American stocks, it’s not good to overvalue your stocks, because eventually at some point, the overgrown plant crashes. In other words, the smoke and mirror clears and recession sets in.  I got that bit of economic wisdom from an American TV channel.

Then there’ s China, getting restive.  This interesting article looks at how the “intermediary of the dollar” has been cut out of Australia-China trade, because the volume of trade has just become too large:

Over the weekend, Australia appears to have come to the same conclusion, with the Australian reporting that the land down under is set to say goodbye to the world's "reserve currency" in its trade dealings with the world's biggest marginal economic power, China, and will enable the direct convertibility of the Australian dollar into Chinese yuan, without US Dollar intermediation, in the process "slashing costs for thousands of business" and also confirming speculation that China is fully intent on, little by little, chipping away at the dollar's reserve currency status until one day it no longer is.

Also from the same article from www.zerohedge.com, these links:

And then there’s the euro, doing stronger in 2013 than the dollar. And the United States of America may soon have a new competitor—The United States of Europe.  According to the Telegraph, on January 8th 2013 this new development appeared:

Viviane Reding, vice president of the European Commission and the longest serving Brussels commissioner, has called for "a true political union" to be put on the agenda for EU elections this spring.

Back to the article by Tyler Durden titled “Thanks, World Reserve Currency, But No Thanks: Australia And China To Enable Direct Currency Convertibility”:

Why is this so very critical? For the simple reason that the free lunch the US has enjoyed ever since the advent of the US dollar as world reserve currency, may be coming to an end as other, more aggressive alternatives - both fiat, and hard-asset based - to the USD appear. And since there is no such thing as a free lunch, all the deferred pain the US Treasury Department has been able to offset thanks to its global currency monopoly status will come crashing down the second the world starts getting doubts about the true nature of just who the real reserve currency will be in the future. 

And in no less than the WallStreet Journal, Dr. Eichengreen of Berkeley University predicted the end of the dollar’s reign in “Why the Dollar's Reign Is Near an End”:

Now, however, nearly everyone carries hand-held devices that can be used to compare prices in different currencies in real time. Just as we have learned that in a world of open networks there is room for more than one operating system for personal computers, there is room in the global economic and financial system for more than one international currency.
Second, the dollar is about to have real rivals in the international sphere for the first time in 50 years. There will soon be two viable alternatives, in the form of the euro and China's yuan.

But now, mainly as a result of the financial crisis, federal debt is approaching 75% of U.S. gross domestic product. Trillion-dollar deficits stretch as far as the eye can see. And as the burden of debt service grows heavier, questions will be asked about whether the U.S. intends to maintain the value of its debts or might resort to inflating them away. Foreign investors will be reluctant to put all their eggs in the dollar basket. At a minimum, the dollar will have to share its safe-haven status with other currencies.

Then there’s the crisis of trust, which may be the fundamental problem in how the dollar gets viewed acrossthe world.

As of Q1 2013 (most recent report), there was a record $3.764 trillion in foreign government reserves held in dollars. However, governments are diversifying, as this represents only 62% of the total measurable reserves, down from 67% in Q3 2008. Since the percentage of dollars is slowly declining, this means that foreign governments are slowly moving their currency reserves out of dollars.

 According to the website an article “The Beginning of the End for the U.S. Dollar as the World Reserve Currency“  by Michael Payne (April 20, 2012) in the website economyincrisis.org:

Many of these countries who are moving away from the dollar no longer view America as a stable and reliable force on the world economic stage and they are seeking alternatives as a hedge against a severe future decline in the dollar’s value.

And from the same article:

*The nations comprising the BRICS group (Brazil, Russia, India, China and South Africa) recently agreed at their summit meeting in Sanya, China, to establish mutual lines of credit in local currencies. This, again, is a very significant development since this group of nations represents a very powerful economic bloc going into the future.

Apparently even an entity as powerful as the IMF has its doubts about the dollar, suggesting this rather sensible alternative (below quote from same Michael Payne article):

*The International Monetary Fund (IMF) recently issued a statement about replacing the dollar as the world’s reserve currency with a system of Special Drawing Rights called SDR’s, an international type of currency created in 1969 which is, in effect, a “basket of national currencies” backed by the full faith and credit of the member countries’ governments.

And the article ends with these wise words of warning:

Time and time again this nation’s dysfunctional government has been warned that it is going in the wrong direction and must change course. It has been warned that it must stop pouring hundreds of billions and trillions of dollars into its war machine and downscale it vast worldwide military empire; it has not heeded those warnings.

For the richest country in the world with the greatest banking and financial institutions, and the greatest business schools, it seems strange the USA is not following its own MBA advice.

Namely, the greatest foundation in business relationships is not profit. It is trust. And unfortunately the USA’s security apparatus is going around systematically destroying the generous amount of trust people have placed in the richest country in the world.

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