Last Lap for Bretton Woods

[EJ]

Dollar’s last lap as the only anchor currency

November 25, 2007 (Wolfgang Munchau - Financial Times)

It has been one of the most influential theories about exchange rates in the age of globalisation and it may be about to go up in smoke.

In 2003, the economists Michael Dooley, David Folkerts-Landau and Peter Garber* proposed what has since been known as the Bretton Woods II theory. The idea is based on the observation that newly industrialised countries peg their currencies to the dollar at an undervalued exchange rate in pursuit of export-led growth. In return, they reinvest their loot back into the US, which acts as an anchor and consumer of last resort.

[snip]

I can think of two scenarios. The first is that the dollar’s global monopoly will give way to a duopoly of the dollar and the euro. It is impossible to predict the timing of any such shift. Over time, as countries replace a dollar peg with a mixed basket peg, they are likely to readjust reserve portfolios as well.

Another, at least theoretical possibility is the emergence of regional exchange rate regimes, along the lines of what happened in Europe after Bretton Woods I. There has been a lot of talk for a long time about Asian monetary union, with little progress so far.

Either way, we are probably in the last long lap of the dollar as the world’s only anchor currency. We do not yet fully comprehend the new era, but it is fair to say that it is probably not going to be Bretton Woods III.

AntiSpin: Each person I have interviewed over the past year and a half has contributed at least one major insight to my understanding of how the aging international currency regime will go through a long overdue transition. Neither scenario Munchau forecasts will happen, and I'll tell you why.

Jamie Galbraith noted that a multilateral dollar/euro/yen global monetary system is limited by lack of a euro bond market, that is, while there is a market for German bonds in euros and French bonds in euros, etc., there is no institution that acts as a "euro Treasury" as a U.S. Treasury or Japanese Treasury functions, that is, no centralized euro bond institution. How can any currency act as a true global reserve currency without such an institution?

Louis-Vincent Gave of GaveKal contributed the insight that in an economic crisis the lack of a euro bond Treasury authority raises deflationary threats because inflation via bond monetization cannot be coordinated across the euro zone. This helps explain the recent investor rush during the credit crisis to short term treasury bonds while euro denominated bonds have not participated.




I have long warned that the euro is not stress tested. My seemingly odd obsession with gold over the euro as a dollar hedge since 2001 is predicated on worries about how the euro will fair in a crisis as national needs overwhelm euro loyalties. These appear, unfortunately, to be coming to pass.

Eurozone split as bond spreads hit 6-year high

Nov. 23, 2007 Ambrose Evans-Pritchard - Telegraph UK)

Investors in Europe have suddenly become wary of Italian, Greek, Spanish, and Belgian sovereign bonds, driving spreads over German government bonds to the highest level in six years.

Belgian Treasury promises no default

Yields on Italian 10-year bonds rocketed to 40 basis points over comparable German Bunds today as the flight to safety gathered pace. The spread had been stable at around the mid 20s for several years until this month.

The scramble to dump riskier bonds hit all the southern European countries, as well as Ireland and Slovenia.

While the markets have not begun to discount a possible break-up of the eurozone, they are clearly pricing in an ominous rift between the Latin and Germanic halves of the monetary system.

Ambrose Evans-Pritchard is getting carried away looking for European nations to split with the euro near term. I don't see that as a possibility unless and until a severe global recession spans European national elections.

Getting back to Munchau's report, regional currency regimes may be an outcome of the global currency regime crisis but cannot forestall the crisis.

I'm sticking to my 2001 forecast of a global currency crisis, emanating from a U.S. economic recession, as the most likely forcing function for a new global currency regime. A new regime can only be created out of crisis because the transition costs to a new global monetary system are too high for each member of the system, or for members collectively, to initiate or achieve avoidance of crisis through negotiation.

Dr. Hudson's contribution to my thinking in our interview this summer is that this ongoing currency and credit crisis can be viewed as a geopolitical "jump ball." Global players over the past few years have been pre-positioning for the grab. This gives context to otherwise inexplicable developments, such as the U.S. invasion of Iraq on a weak pretext, Putin's apparently urgent grab for power, and the development of new political and military alliances among oil producers and consumers.

Testing readers' patience by switching metaphors to poker, the U.S. held all of the cards after the long monetary crisis that started in the early 1930s and ended after WWII at Bretton Woods with a gold-based dollar standard in 1944. Almost 30 years later the U.S. still held enough cards in 1971 to force the world onto a U.S. Treasury dollar standard. Going into this new crisis, we need to ask, Who holds which cards and how will they be played? If we understand that, then we understand how the crisis is likely to turn out.

Bretton Woods II is a fiction. The shipping of oil exporters' and Asian nations' economic surplus to the U.S. is not a "system" but the adaptation of global economic players to an outdated global monetary system, a symptom of the perverse mismatch in production, wealth, and money flows that has developed within the confines of U.S.-centric Bretton Woods system.

My conviction is that as there is no single dominant economic, political and military power going into this crisis as in 1944 and 1971, the outcome remains highly unpredictable. It should be remembered that the last major global currency crisis started in the early 1930s. Resolution only arrived with the geopolitical finality of WWII. Assuming the current crisis is not compounded by a global economic recession on a scale which sets nations on unilateral economic defense paths and so does not escalate out of control, only a politically neutral global currency regime is likely to be acceptable to all parties, not one unilaterally dictated by a single dominant power as happened in 1946–because there is no single dominant power today.

Not dollars. Not dollars/euros/yen, either, for reasons discussed, but something else. A fourth currency.

One final point. The financial relationship between the U.S. and its creditors in a global economic crisis is not unlike the tie of a debtor colony to a colonial power. The political relationship is between sovereign nations, but this comes under strain; an economic crisis is foremost a political crisis.




The relationship between between bondholder and debtor represented by Newfoundland and Great Britain in the 1933 is instructive.

The British parliament accepted the proposals of the Amulree commission and passed legislation suspending Newfoundland's status as a self-governing dominion. The Labour Party strongly opposed the Newfoundland proposals on grounds that they were undemocratic and that it was morally indefensible to rescue bondholders who had made a bad investment. The Welsh Labour M.P., David Grenfall, said:

"If you invest in coal mines in this country you may lose money, as many investors have lost their money. If you invest in steel or railways you stand a chance of losing. Why should this (moneylending) class be subjected to special government protection, and why should we and the poor people of Newfoundland be pledged bodily, physically, socially, to guarantee the claims of the bondholders?"

The Labour leader, Clement Attlee, suggested that default was preferable to giving up democracy. Referring to Britain's own default on its wartime loans from the United States, he said "All the best countries default nowadays." But in the early 1930s it was impossible to imagine a British dominion defaulting. In 1932, the provincial premier of New South Wales, Jack Lang, had proposed to default on the state's debts. He was promptly dismissed by the royal Governor and went on to lose an election for the provincial parliament. As with Gough Whitlam in 1975, the voters upheld the prerogative of the crown to dismiss prime ministers threatening the law or unable to obtain supply. In the world of the early 1930s, it was commonly accepted that democracy should be subordinate to debt.

The Newfoundland lesson

Of course, I'm not suggesting that Asian creditors are in a position to force the U.S. into giving up its sovereignty. The point is that debts form the nexus of deep political conflicts; as the next global recession unfolds, the political debt to Asia represented by U.S. financial debt to Asia should not be understimated.

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[jk]

Re: Last Lap for Bretton Woods

Jamie Galbraith noted that a multilateral dollar/euro/yen global monetary system is limited by lack of a euro bond market, that is, while there is a market for German bonds in euros and French bonds in euros, etc., there is no institution that acts as a "euro Treasury" as a U.S. Treasury or Japanese Treasury functions, that is, no centralized euro bond institution. How can any currency act as a true global reserve currency without such an institution?

Louis-Vincent Gave of GaveKal contributed the insight that in an economic crisis the lack of a euro bond Treasury authority raises deflationary threats because inflation via bond monetization cannot be coordinated across the euro zone. This helps explain the recent investor rush during the credit crisis to short term treasury bonds while euro denominated bonds have not participated.

anti-anti-spin-
1. the euro has already become a reserve currency by default. nations of all political stripes all around the globe have chosen to move assets into that currency in spite of its lack of a politically cohesive home, its lack of a treasury, its lack of a centralized and standardized bond market, its overvaluation on purchasing power parity, and its inherently fractured and flawed economic basis in the eurozone. some currencies are born with reserve status, some attain reserve status, and some have reserve status thrust upon them. like it or not, the euro is already a reserve currency.

2. gave's argument, at least as stated above, makes no sense. the fact that u.s. bonds can be monetized means that indeed there will always be cash to pay them off, but also means that their value can be diminished in unlimited fashion. a deflationary threat overhanging the eurozone should makes its bonds more valuable than ever.

3. the dispersion of power, of "cards in the hands" of the various players around the world, the lack of a central overarching power or authority to provide a natural and clearly acceptable alternative to the dollar centrality as a reserve means there will be no acceptable alternative. or at least there will be no alternative for several playings and reshufflings of the cards. the dollar will decline in both value and esteem, and nations as well as individuals will scramble for assets with which to replace it. when the ecb finally bends to the political will of southern eurozone leaders, and finds an excuse to cut rates and thus cheapen the euro, we will know we are in full beggar-thy-neighbor mode. protectionist legislation in the u.s. will be another step towards geopolitical turmoil.

4. we need not worry about the power of dollar bond holders. this will not be a replay of newfoundland. as long as the u.s. functions as a market for their goods, the dollar holders dare not precipitate a crisis. by the time the u.s. no longer functions as a market for their goods, the dollar holders will not be capable of precipitating a crisis, for the value of their dollars will have evaporated into an inflationary miasma.

5. if this is a replay of the '30s we must ask which nation holds the place of germany - with its unbearable burden of war debts hindering its economic growth.

[Spartacus]

Re: Last Lap for Bretton Woods

I was thinking the exact same thing - people SHOULD prefer the Euro (the currency that cannot be easily inflated) if they think inflation is possible worldwide.

2. gave's argument, at least as stated above, makes no sense. the fact that u.s. bonds can be monetized means that indeed there will always be cash to pay them off, but also means that their value can be diminished in unlimited fashion. a deflationary threat overhanging the eurozone should makes its bonds more valuable than ever.

The currency could deflate but if the underlying economies stumble badly, will the deflation matter - what assets can the deflated Euro be exchanged for, and with a stumbling economy, what'st he risk of default?

The creditworthiness of the issuing country will be the determining factor.

So it IS "Eurobond" but it's also "Greek/Spanish/Italian" etc ...

In the end it's a choice between a Greek bond paying in Euros, carrying a high [1] risk of default vs a much safer (or perceived to be safer) US dollar bond

[1] IMHO currently not quantifiable, but to bond investors "not quantifiable" must mean "high" that's what the spreads are probably telling us

[Uncle Jack]

Re: Last Lap for Bretton Woods

anti-anti-spin-
5. if this is a replay of the '30s we must ask which nation holds the place of germany - with its unbearable burden of war debts hindering its economic growth.

Could you be hinting at the U.S. with that line?

The supply-siders have argued that our debt is not a problem, but with the crisis of not being able to fund an ever-growing entitlement program, the U.S. was my first thought to your #5. Okay, it's not just war debt, but we've got some big burdensome debt hanging over our heads no matter where it came from.

Didn't 1930s Germany have the punitive Versailles Treaty to contend with, which helped fuel their hyper-inflation mess and Hitler's rise to power? Right, never mind you said "war debts." But anyway, our game plan seems very similar, an attempt to print our way out of it.

[jk]

Re: Last Lap for Bretton Woods

Could you be hinting at the U.S. with that line?

as a matter of fact, yes.

The supply-siders have argued that our debt is not a problem, but with the crisis of not being able to fund an ever-growing entitlement program, the U.S. was my first thought to your #5. Okay, it's not just war debt, but we've got some big burdensome debt hanging over our heads no matter where it came from.

Didn't 1930s Germany have the punitive Versailles Treaty to contend with, which helped fuel their hyper-inflation mess and Hitler's rise to power?

yes, the german war debt was imposed by the versailles treaty after wwi. we had a lot more fun accruing our debt, didn't we?
this reminds me of an interview with an argentine economist after argentina dropped the dollar peg and then defaulted on its bonds. the economist was asked what happened to all the money that had flowed into argentina. he replied: "we enjoyed it very much."
i just hope the politics of inflating away the debt plays out a little softer here.

[Guest]

Re: Last Lap for Bretton Woods

Very popular idea circulating on iTulip that runaway debt to GDP leads inevitably to totalitarianism.

Italy has a 106% Government debt to GDP ratio, and has fluctuated around in those unholy levels for a couple of decades. No totalitarianism that I can discern. They had a thriving export sector with the weak Lira until they were yoked into the strong Euro (weak USD doesn't get yoked to anything ).

Has anyone actually questioned this hoary accepted wisdom on iTulip before - that the US runaway public debt 'must' lead to totalitarian solutions? Italy had far better excuses for the past 30 years but never went down that road.

[metalman]

Re: Last Lap for Bretton Woods

anti-anti-spin-
1. the euro has already become a reserve currency by default. nations of all political stripes all around the globe have chosen to move assets into that currency in spite of its lack of a politically cohesive home, its lack of a treasury, its lack of a centralized and standardized bond market, its overvaluation on purchasing power parity, and its inherently fractured and flawed economic basis in the eurozone. some currencies are born with reserve status, some attain reserve status, and some have reserve status thrust upon them. like it or not, the euro is already a reserve currency.

2. gave's argument, at least as stated above, makes no sense. the fact that u.s. bonds can be monetized means that indeed there will always be cash to pay them off, but also means that their value can be diminished in unlimited fashion. a deflationary threat overhanging the eurozone should makes its bonds more valuable than ever.

3. the dispersion of power, of "cards in the hands" of the various players around the world, the lack of a central overarching power or authority to provide a natural and clearly acceptable alternative to the dollar centrality as a reserve means there will be no acceptable alternative. or at least there will be no alternative for several playings and reshufflings of the cards. the dollar will decline in both value and esteem, and nations as well as individuals will scramble for assets with which to replace it. when the ecb finally bends to the political will of southern eurozone leaders, and finds an excuse to cut rates and thus cheapen the euro, we will know we are in full beggar-thy-neighbor mode. protectionist legislation in the u.s. will be another step towards geopolitical turmoil.

4. we need not worry about the power of dollar bond holders. this will not be a replay of newfoundland. as long as the u.s. functions as a market for their goods, the dollar holders dare not precipitate a crisis. by the time the u.s. no longer functions as a market for their goods, the dollar holders will not be capable of precipitating a crisis, for the value of their dollars will have evaporated into an inflationary miasma.

5. if this is a replay of the '30s we must ask which nation holds the place of germany - with its unbearable burden of war debts hindering its economic growth.

the best back seat driving on itulip, for sure!

how'd you arrive at these wisdoms? looking for, ya know, a few thousands pages of stuff over, ya know, ten years or so.

i'm no expert but let me take a crack at... anti-anti-antispin!

1. the euro has already become a reserve currency by default. nations of all political stripes all around the globe have chosen to move assets into that currency in spite of its lack of a politically cohesive home, its lack of a treasury, its lack of a centralized and standardized bond market, its overvaluation on purchasing power parity, and its inherently fractured and flawed economic basis in the eurozone. some currencies are born with reserve status, some attain reserve status, and some have reserve status thrust upon them. like it or not, the euro is already a reserve currency.

reserve currency in good times, that is. you missed the one strength of the euro: the lack of a politically cohesive home, lack of a treasury, lack of a centralized and standardized bond market = politically independent.

where's the paulson of the euro?

2. gave's argument, at least as stated above, makes no sense. the fact that u.s. bonds can be monetized means that indeed there will always be cash to pay them off, but also means that their value can be diminished in unlimited fashion. a deflationary threat overhanging the eurozone should makes its bonds more valuable than ever.

you saying gave makes no sense or ej's interpretation of gave makes no sense?

"the fact that u.s. bonds can be monetized means that indeed there will always be cash to pay them off, but also means that their value can be diminished in unlimited fashion."

huh? his point is about deflation not inflation. did you miss the point?

3. the dispersion of power, of "cards in the hands" of the various players around the world, the lack of a central overarching power or authority to provide a natural and clearly acceptable alternative to the dollar centrality as a reserve means there will be no acceptable alternative. or at least there will be no alternative for several playings and reshufflings of the cards. the dollar will decline in both value and esteem, and nations as well as individuals will scramble for assets with which to replace it. when the ecb finally bends to the political will of southern eurozone leaders, and finds an excuse to cut rates and thus cheapen the euro, we will know we are in full beggar-thy-neighbor mode. protectionist legislation in the u.s. will be another step towards geopolitical turmoil.

uh, care to unpack that for us? reads like hand waving.

4... by the time the u.s. no longer functions as a market for their goods, the dollar holders will not be capable of precipitating a crisis, for the value of their dollars will have evaporated into an inflationary miasma.

this is so unlike you. this makes no sense at all!

5. if this is a replay of the '30s we must ask which nation holds the place of germany - with its unbearable burden of war debts hindering its economic growth.

why does anyone gotta play 1930s germany? these are parallels not exact replicas. this ain't hollywood.

who stole our jk and replaced him with a mish-esque replica?

[metalman]

Re: Last Lap for Bretton Woods

Very popular idea circulating on iTulip that runaway debt to GDP leads inevitably to totalitarianism.

what are you talking about? am i on a different site? where does anything here say that?

Has anyone actually questioned this hoary accepted wisdom on iTulip before - that the US runaway public debt 'must' lead to totalitarian solutions? Italy had far better excuses for the past 30 years but never went down that road.

"hoary accepted wisdom"??? silly.

let's talk serious. what kind of olive green pinto do yo drive?

[GRG55]

Re: Last Lap for Bretton Woods

Could you be hinting at the U.S. with that line?

The supply-siders have argued that our debt is not a problem, but with the crisis of not being able to fund an ever-growing entitlement program, the U.S. was my first thought to your #5. Okay, it's not just war debt, but we've got some big burdensome debt hanging over our heads no matter where it came from.

Didn't 1930s Germany have the punitive Versailles Treaty to contend with, which helped fuel their hyper-inflation mess and Hitler's rise to power? Right, never mind you said "war debts." But anyway, our game plan seems very similar, an attempt to print our way out of it.

Seems to me the US today is more analagous to Great Britain in the run up to the last currency crisis. At that time the Pound was in its last days as the world's reserve currency, and Britain's WWI debts and gradual loss of colonies, were indicative of a structural decline in many of its previously dominant economic sectors. I also think that Britain's resistance to let go of its last major colony, India, with its East India Company materials supply chain, has some similarities to the behaviour of the US today, particularly towards the "colonies" that supply its most important raw material, oil.

In the late 1920's it was Britain that had the overvalued currency (in 1925 then Chancellor of the Exchequer, Winston Churchill returned the Pound to the gold standard at the pre-WWI exchange rate of $4.86). One of Britains most valuable exports had been coal, but the displacement of this energy source with oil, which Britain didn't produce but the USA did, was already well advanced.

All these factors made the British economy uncompetitive, especially against the USA with its new, more efficient, and growing infrastructure of railways, electricity grid, roads and skyscrapers. Today it's Asia in that role, of course.

That suggests that if there is another economic calamity like the Great Depression (precipitated by the credit collapse now underway?), perhaps its effects will be felt most in the developing economies instead of the USA (de-coupling anyone?). Let's pray we can make it through this transition without that sort of economic calamity or, even worse, the cataclysm of global war, as happened last time.

[jk]

Re: Last Lap for Bretton Woods

the best back seat driving on itulip, for sure!

how'd you arrive at these wisdoms? looking for, ya know, a few thousands pages of stuff over, ya know, ten years or so.

i'm no expert but let me take a crack at... anti-anti-antispin!



reserve currency in good times, that is. you missed the one strength of the euro: the lack of a politically cohesive home, lack of a treasury, lack of a centralized and standardized bond market = politically independent.

where's the paulson of the euro?

i agree, this is attractive in a reserve currency.

you saying gave makes no sense or ej's interpretation of gave makes no sense?

i didn't track it back to its source. i'm just saying it doesn't make sense irrespective of the source.

"the fact that u.s. bonds can be monetized means that indeed there will always be cash to pay them off, but also means that their value can be diminished in unlimited fashion."

huh? his point is about deflation not inflation. did you miss the point?

the original point [not mine] was that there was a deflationary cloud over the euro. my point is that such a cloud makes sovereign euro denominated bonds more, not less, attractive. and, mutatis mutandi, the ability of the u.s. to inflate makes its bonds less attractive. more broadly, there are different populations of purchasers. the dollar drops as foreign investors, and some domestic ones as well, head for the exits. the u.s. is experiencing capital flight, just like argentina did. in the meantime institutions with domestic mandates and an inability to short seek what refuge they can by buying treasuries, spurning other debt instruments for fear of counterparty risk.

uh, care to unpack that for us? reads like hand waving. {refers to passage about the lack of a dominant player, the dispersion of power and claims, the risk of beggar-thy-neighbor and of protectionism}

unpacked, i was attempting to say that there is a huge potential for CHAOS and conflict. i am most skeptical that there can be a negotiated solution until well AFTER the shtf.

this is so unlike you. this makes no sense at all!

i expressed this poorly, but my point is that i am doubtful that our debt holders have much power over us. we will inflate away their claims. more acutely, there is the saying that if you owe the bank a million dollars, you have a problem. but if you owe the bank a hundred million dollars, the bank has a problem. or, if you prefer, the quote from john connally in the '70s, addressing our trade partners: "the dollar is our currency but your problem."

why does anyone gotta play 1930s germany? these are parallels not exact replicas. this ain't hollywood.

i slip into dark moods when i start worrying about the possible political fallout of the economic disaster that i see unfolding, and i think about the erosion of rights in the name of antiterrorism, the u.s. branded by a policy of torture, and so on. perhaps lukester, in his post above, is right-- we should look to italy, not germany, as an inspiration and guide in learning to enjoy life in the face of economic and political chaos. it provides a charming and attractive model.

who stole our jk and replaced him with a mish-esque replica?

i'm touched.

[Guest]

Re: Last Lap for Bretton Woods

My PINTO is a faded out pink, with flat tires, bricks under the axle, a leaking tranny, and yeller polka dots. I've got a mini-bar and a waterbed built into the back.

But I think we better take this frivolous conversation elsewhere because E.J.'s just posted one of his more serious updates here and however enlightening and rewarding our PINTO discussion is to the general readership, it's probably off-topic, eh? (FRED may SWAT us? )

[jk]

Re: Last Lap for Bretton Woods

Seems to me the US today is more analagous to Great Britain in the run up to the last currency crisis. At that time the Pound was in its last days as the world's reserve currency, and Britain's WWI debts and gradual loss of colonies, were indicative of a structural decline in many of its previously dominant economic sectors. I also think that Britain's resistance to letting go of its last major colony, India, with its East India Company materials supply chain, has some similarities to the behaviour of the US today, particularly in the "colonies" that supply its most important raw material, oil.

In the 1920's it was Britain that had the overvalued currency (in 1925 then Chancellor of the Exchequer, Winston Churchill returned the Pound to the gold standard at the pre-WWI exchange rate of $4.86).

All these factors made the British economy uncompetitive, especially against the USA with its new, more efficient, and growing infrastructure of railways, electricity grid, roads and skyscrapers. Today it's Asia in that role, of course.

That suggests that if there is another economic calamity like the Great Depression (precipitated by the credit collapse now underway?), perhaps its effects will be felt most in the developing economies instead of the USA? Let's pray we can make it through this transition without that sort of economic calamity or, even worse, the cataclysm of global war, as happened last time.

i agree with the parallels you draw. i think we are in a transition in which a hyperpower, as britain was in the mid-late 19th century and the u.s. in the late 20th, gives way to a multipolar world, preceding perhaps the emergence of the next hyperpower. i hope we can avoid the wars required for the last such transition. i guess it's too late for that - we can count korea, vietnam, the cold war arms race, afghanistan and iraq, perhaps lebanon, and on and on. so maybe, at least, we can avoid wars as big as last time.

my mention of germany was elicited by ej's reference to the power of the u.s.'s asian creditors. the "winners" of wwi became germany's creditors - or at least the putative beneficiaries of the debt imposed on germany after that war. trying to collect on that debt proved unrewarding, to say the least, because the attempt to collect on the debt drove dark political processes within the debtor country. my point was that the u.s.'s debts make the u.s. vulnerable, and also make the u.s. dangerous because of the risks that economic pressure will trigger unfortunate political processes in the u.s. i hope i am being foolish and alarmist in having such thoughts.

[Spartacus]

Re: Last Lap for Bretton Woods

But if you believe Hussman, the FED is powerless - just completely impotent, and bond monetization is not worth considering except for a miniscule, academic side issue.

So if it's the private banking system that is the real source of 99% of today's inflation (including in Europe) the Euro's rise means .... something I can't figure out at the moment.

and the Eurobond question is moot.

2. gave's argument, at least as stated above, makes no sense. the fact that u.s. bonds can be monetized means that indeed there will always be cash to pay them off, but also means that their value can be diminished in unlimited fashion. a deflationary threat overhanging the eurozone should makes its bonds more valuable than ever.

[Spartacus]

Re: Last Lap for Bretton Woods

4. we need not worry about the power of dollar bond holders. this will not be a replay of newfoundland. as long as the u.s. functions as a market for their goods, the dollar holders dare not precipitate a crisis. by the time the u.s. no longer functions as a market for their goods, the dollar holders will not be capable of precipitating a crisis, for the value of their dollars will have evaporated into an inflationary miasma.

You're putting all the big holders on an equal footing. As far as causing trouble, they've all had an equal dis-incentive to do it until now - that doesn't have to hold into the future.

IMHO the petroleum producers could demand their pound of flesh from the US. If their reserves become worthless, they can demand something be done - China, India, Japan and Europe, maybe not.

[GRG55]

Re: Last Lap for Bretton Woods

i agree with the parallels you draw. i think we are in a transition in which a hyperpower, as britain was in the mid-late 19th century and the u.s. in the late 20th, gives way to a multipolar world, preceding perhaps the emergence of the next hyperpower. i hope we can avoid the wars required for the last such transition. i guess it's too late for that - we can count korea, vietnam, the cold war arms race, afghanistan and iraq, perhaps lebanon, and on and on. so maybe, at least, we can avoid wars as big as last time.

my mention of germany was elicited by ej's reference to the power of the u.s.'s asian creditors. the "winners" of wwi became germany's creditors - or at least the putative beneficiaries of the debt imposed on germany after that war. trying to collect on that debt proved unrewarding, to say the least, because the attempt to collect on the debt drove dark political processes within the debtor country. my point was that the u.s.'s debts make the u.s. vulnerable, and also make the u.s. dangerous because of the risks that economic pressure will trigger unfortunate political processes in the u.s. i hope i am being foolish and alarmist in having such thoughts.

Maybe there's some reason for hope jk. The last transition saw one Anglo-Saxon power give way to another. Asians generally value harmony over conflict (a constant source of frustration for us westerners when we find ourselves in protracted business negotiations). If indeed this transition is towards "the Asian century", then perhaps it will play out over a longer period of time, but with less conflict than last transition?