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A return to the Bretton Woods international gold standard is inevitable - Eric Janszen

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  • #31
    Re: A return to the Bretton Woods international gold standard is inevitable

    From the New Republic

    Debt Man Walking: Economists know the fatal flaw in our system--but they can't agree how to fix it. by John B. Judis

    For those Americans who are not daily readers of the Financial Times, the past few months have been a crash course in the abstract and obscure instruments and arrangements that have derailed the nation's economy. From mortgage-backed securities to credit default swaps, the financial health of the country has undergone a gory public dissection. And yet, as Barack Obama prepares to take office, one particularly frightening problem has escaped public notice; indeed, it may not even make the agenda of the global summit being held this weekend, dubbed "Bretton Woods II" after the postwar system of currency controls. The international monetary system is in big trouble.

    For decades, the United States has relied on a tortuous financial arrangement that knits together its economy with those of China and Japan. This informal system has allowed Asian countries to run huge export surpluses with the United States, while allowing the United States to run huge budget deficits without having to raise interest rates or taxes, and to run huge trade deficits without abruptly depreciating its currency. I couldn't find a single instance of Obama discussing this issue, but it has been an obsession of bankers, international economists, and high officials like Federal Reserve Chairman Ben Bernanke. They think this informal system contributed to today's financial crisis. Worse, they fear that its breakdown could turn the looming downturn into something resembling the global depression of the 1930s.


    The original Bretton Woods system dates from a conference at a New Hampshire resort hotel in July 1944. Leading British and American economists blamed the Great Depression and, to some extent, World War II on the breakup of the international monetary system in the early 1930s and were determined to create a more stable arrangement in which the dollar would replace the British pound as the accepted global currency. The new system, devised by economists Harry Dexter White and John Maynard Keynes, fixed the dollar's value at $35 for an ounce of gold. National governments, rather than speculators, were to set the value of their currencies in relation to the dollar and would have to disclose any changes in advance to the new International Monetary Fund (IMF).

    The dollar became the accepted medium of international exchange and a universal reserve currency. If countries accumulated more dollars than they could possibly use, they could always exchange them with the United States for gold. But, with the United States consistently running a large trade surplus--meaning that countries always needed to have dollars on hand to buy American goods--there was initially little danger of a run on the U.S. gold depository.

    Bretton Woods began to totter during the Vietnam war, when the United States was sending billions of dollars abroad to finance the war and running a trade deficit while deficit spending at home sparked inflation in an overheated economy. Countries began trying to swap overvalued dollars for deutschmarks, and France and Britain prepared to cash in their excess dollars at Fort Knox. In response, President Richard Nixon first closed the gold window and then demanded that Western Europe and Japan agree to new exchange rates, whereby the dollar would be worth less gold, and the yen and the deutschmark would be worth more relative to the dollar. That would make U.S. exports cheaper and Japanese and West German imports more expensive, easing the trade imbalance and stabilizing the dollar.

    By imposing a temporary tariff, Nixon succeeded in forcing these countries to revalue, but not in creating a new system of stable exchange rates. Instead, the values of the currencies began to fluctuate. And, as inflation soared in the late 1970s, the system, which still relied on the dollar as the universal currency, seemed ready to explode into feuding currencies.

    That's when a new monetary arrangement began to emerge. Economists often refer to it as "Bretton Woods II"--not to be confused with the name given this weekend's gathering--but it was not the result of a conference or concerted agreement among the world's major economic powers. Instead, it evolved out of a set of individual decisions--first by the United States, Japan, and Saudi Arabia, and later by the United States and other Asian countries, notably China.


    Bretton Woods II took shape during Ronald Reagan's first term. To combat inflation, Paul Volcker, the chairman of the Federal Reserve, jacked interest rates above 20 percent. That precipitated a steep recession--unemployment exceeded 10 percent in the fall of 1982--and large budget deficits as government expenditures grew faster than tax revenues. The value of the dollar also rose as other countries took advantage of high U.S. interest rates. That jeopardized U.S. exports, and the U.S. trade deficit grew even larger, as Americans began importing underpriced goods from abroad while foreigners shied away from newly expensive U.S. products. The Reagan administration faced a no win situation: Try reducing the trade deficit by reducing the budget deficit, and you'd stifle growth; but try stimulating the economy by increasing the deficit, and you'd have to keep interest rates high in order to sell an adequate amount of Treasury debt, which would also stifle growth. At that point, Japan, along with Saudi Arabia and other opec nations, came to the rescue.
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    • #32
      Re: A return to the Bretton Woods international gold standard is inevitable

      Originally posted by EJ View Post
      The only intriguing output that passel of pattering public servants managed to produce is a rumor that the topic of gold came up in the meeting.
      And who is exactly spreading that rumor?

      Originally posted by EJ View Post
      Judy Sheldon.....
      Enough said, next we are going to see quotes by Ben Stein.

      It is myopic IMHO to assume that debt deflation is the root problem. Economies cycle from up to down and back that is simply an historical given.

      We are in a global economic slump and I think we have a serious chance of going into a global economic depression. To assume that going to a gold standard is going to solve any of those problems is not just wrong but also misleading.
      Last edited by Tulpen; November 17, 2008, 05:15 AM.

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      • #33
        Re: A return to the Bretton Woods international gold standard is inevitable

        Assuming a general confiscation of physical gold I would bet that an exception would be made for nuministic gold coins. This may be the best way to have your cake and eat it too

        nonrev

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        • #34
          Re: A return to the Bretton Woods international gold standard is inevitable

          I am interested in the estimated inflation which would be created instantaneously should bretton woods mark 3 come into being.

          You mentioned 40% was created instantaneously during Bretton Woods mark 1.; 100% inflation in the year following WW2.

          What percentage are we looking at now?

          Let's say it is 100%. If my maths is correct (it's a bit dodgy), then that devalues the currencies by half, doesn't it?

          So debts are only half as big. Will this be enough to help the banks to lend again? Will this be enough for the consumer to borrow once more? Can this allow supply side economics to start afresh? Will interest rates spike immediately proceeding this agreement?

          If not, what level of inflation is needed?

          Is it possible to rack up the instant inflation more than once?


          As I understand it, supply side tinkering is dead, gold or no gold.

          Perhaps this is just to create a stable base for Anglo reindustrialisation to occur. It will create more poverty in the short term, won't it?

          Decreasing the purchasing power of cash buyers but not increasing the amount of debt in the system is very dangerous. I am assuming here of course that supply side econ. can not be resurrected to increase more debt.

          A depression in 2010, sure. If this is implemented, then won't something worse than a depression be started?

          How much unemployment can a Western soceity take before we see signs of collapse?


          This measure is like an instant wealth destroyer, isn't it?

          I also assume that there will be no WW3 unless it is started in around 9 years time to a new Rep. administration. It could happen if Obama fails to reindustrialise the US.

          Sorry for all the distracting questions.

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          • #35
            Re: A return to the Bretton Woods international gold standard is inevitable

            great article. thanks

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            • #36
              Re: A return to the Bretton Woods international gold standard is inevitable

              Would the government have to physically confiscate gold? Couldn't they just destroy the marketplace for it such as by banning the public selling of gold? That would drive it to the black market, but likely at much lower prices.

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              • #37
                Re: A return to the Bretton Woods international gold standard is inevitable

                If curriences get devalued against gold whats going to happen to oil and other commodities ?

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                • #38
                  Re: A return to the Bretton Woods international gold standard is inevitable

                  yeah I must admit I do still struggle to see the point in gold at times. it seems like the gold standard is supposed to stop these imbalances from happening but this unofficial policy of surplus countries accepting IOU's instead of gold could still have happened under gold standard couldn't it? were treasuries convertible into gold? Gold standard does help highlight the insanity of the imbalances though, but what does it matter when things get out of whack they'll just default on the gold standard again.

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                  • #39
                    Re: A return to the Bretton Woods international gold standard is inevitable

                    you have similar questions to me. All this talk of simply inflating 100% and problem solved seems grossly simplistic and misleading to me. The more you think about it the more questions there are and there doesn't seem to be much discussion of these types of questions. I think they're very relevent.

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                    • #40
                      Re: A return to the Bretton Woods international gold standard is inevitable

                      Originally posted by amitsaluja View Post
                      If curriences get devalued against gold whats going to happen to oil and other commodities ?
                      Well during the 25 year FIRE economy the world didn't need commodities, and priced them accordingly. And now that the FIRE economy is dying the world apparently still doesn't need commodities and is pricing them accordingly...;)

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                      • #41
                        Re: A return to the Bretton Woods international gold standard is inevitable

                        Originally posted by Tulpen View Post
                        And who is exactly spreading that rumor?


                        Enough said, next we are going to see quotes by Ben Stein.

                        It is myopic IMHO to assume that debt deflation is the root problem. Economies cycle from up to down and back that is simply an historical given.

                        We are in a global economic slump and I think we have a serious chance of going into a global economic depression. To assume that going to a gold standard is going to solve any of those problems is not just wrong but also misleading.
                        I didn't read into EJs post any "assumption" that this was going to "solve" anything in the near or even medium term.

                        I read it as an inevitable outcome from [or, if you wish, consequence of] these very problems and a chronically dysfunctional global monetary order, that is now more visible than ever.

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                        • #42
                          Re: A return to the Bretton Woods international gold standard is inevitable

                          Everyone has some really interesting questions and perspectives on this. I have a couple myself so here goes.

                          1). Since we are not on a gold standard and no one else is either, why would having CB's revalue their gold holdings to say $10K/oz have any immediate flowthrough effect whatsoever on either the amount of money in circulation OR the prices of unrelated commodities or other goods? Is it because the US would have to exchange cash for gold with it's citizens and this would create more dollars in our economy?

                          I can see where there would need to be an international consensus with perhaps a world body (IMF?) to hold the gold and issue the redeemable certificates to settle international trade since the US dollar would not remain the settling currency under a new system. No one currency could be the settling currency without risk of serious inflation of that currency, it would seem to me, so I'm not sure how this would work? basket of currencies all pegged? Clearly there would be a lot of issues to be dealt with but in general it seems like there could be a possible solution in there somewhere.

                          2). Wouldn't this allow the US to utilize it's gold hoard to eliminate it's outstanding foreign debt and essentially recapitalize?

                          Assuming they set the price of gold high enough, it would seem to be the perfect choice of doing a currency reset, settling international account imbalances and arriving at a concensus for a reserve system going forward.
                          I don't see the mechanism for causing huge inflationary problems? Wouldn't this swap of gold for outstanding foreign held US treasury instruments allow the US to retire those instruments without fear they are "cashed in", which would be inflationary, as well as reduce it's interest payments/deficit?

                          I know this is simplistic and I'll probably regret posting these questions, but what are some of the problems I'm missing here?

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                          • #43
                            Re: A return to the Bretton Woods international gold standard is inevitable

                            Originally posted by skidder View Post
                            having CB's revalue their gold holdings to say $10K/oz
                            I'm no expert on these things, but it seems to me that a $10k/oz gold price would result in a lot of non-investment gold (ie jewelry) returning to the market. If CB reserves only account for 15% of gold in the world, how much of the rest of it would come rushing out of pockets and jewelry boxes at $10k/oz? Would this have significant effects?

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                            • #44
                              Re: A return to the Bretton Woods international gold standard is inevitable

                              Originally posted by GRG55 View Post
                              I didn't read into EJs post any "assumption" that this was going to "solve" anything in the near or even medium term.

                              I read it as an inevitable outcome from [or, if you wish, consequence of] these very problems and a chronically dysfunctional global monetary order, that is now more visible than ever.
                              that's how i read it, too. inflating the debt away by repricing currencies against gold is like sawing off a gangrenous leg... unpleasant, but necessary. it will be put off by the patient and doctors as long as possible. we might need new doctors... these keep injecting antibiotics even as the poison climbs up to the groin. they don't even appear to comprehend the nature of the infection.

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                              • #45
                                Re: A return to the Bretton Woods international gold standard is inevitable

                                Originally posted by hayekvindicated View Post
                                Powerful stuff. This raises the important question that owning physical gold is not enough in and of itself. You need to own physical in the "right jurisdiction". The choices here are shrinking rapidly. My favourite choice here would be Singapore.

                                Funnily enough, while the US may eventually be the proud owner of a worthless currency, the US also holds a quarter of all official CB gold reserves. China's gold holdings are puny by comparison. Unfortunately for the Chinese, it may be too late - Sellers in the quantities the Chinese Government may want are few and far between.
                                Hi -

                                Like several of your previous posts, this one made me stop and think.

                                But one quick question please to you or anyone else here at itulip -

                                When was the last time there was an independent, third-party audit of the American government's gold reserves?

                                Would be very interested in an answer to this.


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