94

The Everything Bubble, Fictitious Capital and Coronavirus

Frank Lee

The years since the 1970s are unprecedented in terms of their volatility in the price of commodities, currencies, real estate and stocks. There have been 4 waves of financial crises: a large number of banks in three, four or more countries collapsed at about the same time. Each wave was followed by a recession, and the economic slowdown which began in 2008 was the most severe and most global since the great depression of the 1930s.”
Manias, Crashes and Panics – Kindelberger and Aliber

Interestingly enough 1971 was the year when Nixon took the world off the gold standard, which had been in effect since 1944. Fiat-bugs please note.

More to the point, however. Booms and busts have always been normal in a capitalist economy. But in recent years this has been a feature which has been exacerbated by and involves that part of the economy indicated by the acronym FIRE (Finance, Insurance and Real Estate) and its growing importance in the economy in both qualitative and quantitative terms.

Financialisation is a process whereby financial markets, financial institutions, and financial elites gain greater influence over economic policy and economic outcomes. Financialisation transforms the functioning of economic systems at both the macro and micro levels. Its principal impacts are to:

  1. elevate the significance of the financial rent-seeking sector relative to the real value-producing sector
  2. transfer income from the real value-producing sector to the financial sector
  3. increase income inequality and contribute to wage stagnation

Since 1970 this part of the economy has grown from almost nothing to 8% of US Gross Domestic Product (GDP). This means that one dollar in every ten is associated with finance. In terms of corporate profits finance’s contribution now represents around 40% of all corporate profits in the US. This is a significant figure and, moreover it does not include those overseas earnings of companies whose profits are repatriated to their countries of origin.

Thus, the increasing presence and role of finance in overall economic activity and the increase of profits channelled to the financial sector represent the salient indicators as to what has been termed financialization. It is argued by some that financialization may put the economy at risk of debt deflation and prolonged recession.

Financialisation operates through three different conduits: changes in the structure and operation of financial markets, changes in the behaviour of nonfinancial corporations, and changes in economic policy. Countering financialisation calls for a multifaceted agenda that:

  1. restores policy control over financial markets
  2. challenges the neoliberal economic policy paradigm encouraged by financialisation
  3. makes corporations responsive to interests of stakeholders other than just financial markets
  4. reforms the political process so as to diminish the influence of corporations and wealthy elites

The rent-seeking nature of finance is common to all forms of insurance, banking, monopolistic pricing, and property. This has not always been the case, or at least wasn’t as pronounced as it is at present. There was a time when the banking system was junior partner in the relationship between banks and industry. Banks provided industry with loans for investment with a view to maximising profit for both. This is patently not the case today.

Generally speaking, banks will lend for property purchases, stock buy-backs, and perhaps loans for dubious mergers and acquisitions. Moreover, when we speak of ‘profits’ this has now assumed a rather obscure meaning. Profits were generally understood as a realization of surplus value.

Firms made stuff – goods and services – which had a value, which was then sold on the market at a profit. Given the competitive nature of the system, firms invested in increased capital formation and output which increased productivity, surplus value and ultimately profit.

With regard to Investment banks like Goldman Sachs and the commercial banks they do not create value; they are purely rent-extractive. For example, commercial banks make a loan out of thin air, debit this loan to the would-be mortgagee who then becomes a source of permanent income flow to the bank for the next 25 years.

Goldman Sachs makes year-on-year ‘profits’ by doing – what exactly? Nothing particularly useful. But then Goldman Sachs is part of the cabal of central banks and Treasury departments around the world. It is not unusual to see the interchange of the movers and shakers of the financial world who oscillate between these institutions. Hank Paulson, Mario Draghi, Steve Mnuchin, Robert Rubin … on and on it goes.

This financialised system now moves in ever-increasing levels of instability. But what did we expect when the whole institutional structure – its rules, regulations and practises – were deregulated and finance was let off the leash.

Thatcher, Reagan, the ‘Big Bang’ had set the scene and there was no going back: neoliberalism and globalization had become the norm. From this point on, however, there followed a litany of crises mostly in the developing world but these disturbances were in due course to move into the developed world. Serial bubbles began to appear.

US stock prices [which of course would only ever go up] began to decline in the Spring of 2000, and fell by 40% in the next three years. Whilst the prices of NASDAQ stocks decline by 80%.”
Manias, Panics and Crashes – Kindleberger and Aliber

Chastened monies moved out of this market and into property speculation. It is common knowledge what happened next. The run-up to 2008 was floated on a sea of cheap credit. The price of stocks pushed property prices to vertiginous heights until – pop, went the weasel.

The reason was quite simple. Any boom and bust has an inflexion point where boom turns to bust. This is when buyers incomes, and borrowers inability to extend their loans could no longer support the rise in the price level. Euphoria turned to panic as borrowers who once clamoured to buy were now desperate to sell. 2008 had arrived.

The strange thing, however, regarding the property price boom-and-bust was that it was based upon pure speculation. Prices went up, prices went down. Some – a few – made money, quite a few lost money. Investors were wondering what had happened to their gains which they had made during the up phase. Where had all that money gone?

The short answer is – nowhere. It was never there in the first place. It was fictitious capital. Gains which had appeared and then disappeared like a will ‘o’ the wisp. As opposed to physical capital – machinery, labour and raw materials, and money capital which enabled through purchase the production of value to take place, we have fictitious capital which is a claim on future production. If my house goes up by 10% that is a capital gain, if everybody’s house goes up by 10% that is asset-price inflation

Fictitious capital is a by-product of capitalist accumulation. It is a concept used by Karl Marx in his critique of political economy. It is introduced in chapter 25 of the third volume of Capital. Fictitious capital contrasts with what Marx calls “real capital”, which is capital actually invested in physical means of production and workers, and “money capital”, which is actual funds being held.

The market value of fictitious capital assets (such as stocks and securities) varies according to the expected return or yield of those assets in the future, which Marx felt was only indirectly related to the growth of real production. Effectively, fictitious capital represents “accumulated claims, legal titles, to future production’’ and more specifically claims to the income generated by that production.

The moral of the story is that it is not possible to print wealth or value. Money in its paper representation of the real thing, e.g., gold, is not wealth it is a claim on wealth.

Of course, this would be lost on establishment economists, bankers, and financial journalists, whose view is that the policy should be QE, liquidity injections, and so forth. A one-trick pony.

And what has all of this to do with Coronavirus? Well, everything actually.

I take it that we all knew that the grotesquely overleveraged world economy was heading for a ‘correction’ but that’s a rather a soothing description. “Massive correction” would be a better description. That is the nature of the beast. The world was a bubble of paper money looking for a pin. It found one.

Have a nice day all.

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Martin Usher
Martin Usher

I don’t hold with the notion of deliberately engineered crises because I don’t think people are that smart or that organized. I do believe, though, that opportunism is rife and that a suitable problem like COVID-19 can be used to excellent advantage, just as the attacks on the twin towers were used as cover for a sea change in civil liberties in the US. Its just another take on Disaster Capitalism, spooking the population into accepting things they’d never swallow if just presented to them.

The problem with fiat currency isn’t the basic idea of issuing currency using the productive effort of a society as collateral instead of some fickle commodity like gold. Having flexibility over the amount of value in circulation helps to smooth out economic cycles, cycles that have the potential to provoke unrest and threaten the system. Its a great idea but it needs discipline to work, something that experience has shown us doesn’t exist when we’re faced with the illusion of free money. This might explain why Bretton Woods stuck with the gold standard, experience showed that politicians just can’t be trusted. We just went back to the boom/bust cycles of old, each one getting bigger than the last and each one destroying value primarily by transferring it from those with no power to those who have it.

We’d accept this as inevitable except that one or two societies have evolved beyond it. We don’t like these societies and tend to treat them as pariahs, crushing their economies under the weight of sanctions and even invading them militarily to destroy them. We describe them in scathing terms as lacking ‘freedom and democracy’ but realistically the only freedom they lack is the freedom of our capitalists to rape them. Ordinarily our sanctions and propaganda efforts are enough to keep them in check or even bring them down but this particular crisis is likely to do the opposite, its more likely to make them stronger. This is a big headache — after all, Bretton Woods et al was designed to demonstrate to our proles how much better off they were compared to communism but now we’re out of stuff to give away, we have nothing except paper (and its not even useful as toilet paper). How this will play out will be interesting; typically the next step is to provoke war but even that’s a bit problematical.

Sgt Oddball
Sgt Oddball

“Congress Allocates $2 Trillion To Bail Out Struggling Bailout Industry”

– film at 11… 😉

https://politics.theonion.com/congress-allocates-2-trillion-to-bail-out-struggling-b-1842376525

Tim Jenkins
Tim Jenkins

Great article, Frank: totally on point …

And should anybody doubt what Frank says, you just have to answer this question, otherwise…

Why would the largest manufacturer of people’s vehicles suspend production globally (Saturday) and why
has the Guardian failed to report that VW have suspended global production ??
We have entered into VW territory, a Virgin Wilderness,
with no blueprints & corrupted Data.

Tim Jenkins
Tim Jenkins

Meanwhile: we have a TOTAL LOCKDOWN in Bulgaria, since last Friday night: military & police blocking all roads, leaving all cities, however …

We continue to import ITALIAN Waste to incinerate, in illegally run power stations. you can’t make this up, importing Italian waste not locked down…! But we people are locked down >>> heyho, not waste ! The BS EU environmental practices are poisoning Bulgarians and their originally pristine environmental air quality,
but who cares ? !

If you have have any spare corona/covid19 hospital waste that you are not sure what to do with, just contact Bulgarian PM Boyko Borisov … he would not understand the difference between low level radioactive hospital waste and a plastic bag, but, as long as you line his pockets, in some way …

MICHELE K. FIRTH

Absolutely brilliant, rigorous summary of how we have got to where we are, suggesting that the current coronavirus panic is bringing on (or being used to bring on) an inevitable correction of the immensely flawed economic system we have, exacerbated by Reagan/Thatcher’s neoliberalism.

John
John

The “gold” backed currency is just another myth of stability, gold is controlled by central banks and hoarded by the owners of such, the syndicate in pc terms for delicate ears. Meaning the syndicate can adjust it as they please and decide what gold is worth as they’ve done in the past on a weekly basis. Inflation and deflation are used to rob the vast majority of people and expect there to be deflation coming up as that is the worst of the two. Price stability is much more desirable across the staples that people actually need, not what backs the man made tool called currency. The goal of responsible civil government should be full employment of its citizens (and price stability of essential for living), especially in productive industries, not useless luxury industries which do not benefit in any way. Now QE is just another form of inflation on a massive scale, good if you have say a house that will go up, but the more currency you have the less it’s worth and the central banksters are using it. Prices rise but wages and salaries do not rise anywhere near inflation, it’s a slow sinking into poverty and vassalage of which mortgages are just a form of debt slavery. You can own nothing, you’re just a renter of all things to be molded and caged if necessary by the syndicate owners and their God-State. At some point no one will be able to afford houses and the crash will come. They DO NOT CARE if you payoff the debt, what’s important is that you pay to service the debt thus keeping you in line. If you go out of line they can just demand the money now, thus putting you in the streets. When the time comes the God-State will take possession of all housing, all industry etc and the slavery will be complete. Just like the Soviet Union there will be an elite that are immune “gods” to all this, there is actually already this today, the “olympians” kingpins etc whatever you want to call them.

Francis Lee
Francis Lee

Yeah we know the gold price in manipulated – unsecured shorts are dumped in the Comex futures markets. But then you have to explain why the gold price has risen relentlessly concurrently with the present downturn. You might also like to explain why China and Russia and other central banks have been hoarding gold as part of their de-dollarization strategy. What might also be considered is why, if gold is such a barbarous relic the US sees fit to retain some 8000 tonnes, and the EU has some 10,000 tonnes. You will also note that Foreign central banks other than China have been dumping US Treasuries for 17 months.

”Central bank demand came in at 650.3 tons in 2019. That was the second-highest level of annual purchases for 50 years, just slightly below the 2018 net purchases of 656.2 tons. According to the WGC, 2018 marked the highest level of annual net central bank gold purchases since the suspension of dollar convertibility into gold in 1971, and the second-highest annual total on record …”

Zero Hedge 17 March 2020

Gold a barbarous relic? Yeah, sure it is.

simply put
simply put

You might also like to explain why China and Russia and other central banks have been hoarding gold as part of their de-dollarization strategy.

Gold is a safe investment. They are not planning to replace their currency with gold.

Biff
Biff

Yes, the contrived-virus (convid19) is most certainly a smoke screen for global financial collapse. Another day down under and another super tanker full of media hype and horseshit arrives. But then it struck me. Most of us know that Convid19 is about as deadly as the common cold. In fact the Government even tells you this if you listen carefully to press conferences. This to me can only mean one obvious thing. The media and the Government are in lockstep. They are quarantining areas and locking down, not to contain the virus but to contain the ensuing violence when people finally and hopefully figure out that they are getting royally screwed. The warning flag will be shutdown of social media services or the internet in your area. Then watch out. They have created a world where our only means of communication is the internet. You can’t even make a phone call in Aus without the internet. Imagine it’s not there.

Robbobbobin
Robbobbobin

“Yes, the contrived-virus (convid19) is most certainly a smoke screen for global financial collapse.”

Are you saying that if COVID-19 were not contrived but a genuine public health problem then it could (so would) not be used as a smokescreen, i.e. that the contrivance of a virus of some sort (in this case COVID-19) is an essential aspect of your narrative; that if there were no pathogen engendering a pandemic problem then a serviceable smokescreen could (so would) not be contrived based on some factor other than a biological one, or are you saying something else altogether?

simply put
simply put

Money exists to facilitate trade.
So if the economy grows you need to put more money into circulation, if it shrinks you need to take money out of circulation.
That’s why a gold standard does not work very well in a modern world, it cannot adapt to the changing environment, you cannot increase or decrease the amount of gold in the world (not as needed anyway) so you end up with not enough “money” available (or too much), both disastrous for the economy.

The banking system is corrupt, but not because of fiat money.

Ken Kenn
Ken Kenn

Lenin talked about making Statues out of Gold post a Communist Society so its’ inherent worth is in the eye of the shareholder in its price or it’s perceived future price.

Money ( fiat or otherwise ) is only an agreed exchange of labour to price of goods between a group of swindler Capitalists who ideally would wish that all the other Capitalists to pay their workers more so that they can buy the other Capitalists goods who don’t pay their workers more.

The state of play at the moment is a bit Rooseveltian.

Is it better to be a poorer capitalist temporarily than not a future capitalist at all?

the UK Neo – Liberal position says yes only because there is a tiny chance that the masses will twig what’s going on and why it’s going on in this way.

80% of wages is better than 0% of wages/income.

This is predicted to last just 3 months.

If it lasts a year watch it all change.

Fact is- in the end the Middle Classes and down will pick up the tab.

And if the ‘We ‘ are picking up the tab anyway ‘ We ‘ may as well demand and get 100% of wages/income.

As Thatcher said – It’s our money – not the State’s.

theretically of course in a democracy.

Francis Lee
Francis Lee

”That’s why a gold standard does not work very well in a modern world …” Like the fiat standard does!

simply put
simply put

The banking system is corrupt, but not because of fiat money.

Toby Russell
Toby Russell

I don’t believe this or that form of money can ever be the be-all-and-end-all form. Fiat has its place, a gold standard has its place, shells have their place, gift exchanges, IOUs, etc. There are reasonable arguments to be made for each, but each reasonable argument, to be reasonable, would have to include historical context / societal conditions as a very large part of its logic.

Far more important than ‘money as wealth’ is how we culturally understand the nature of wealth that money can only ever be a claim on (an important function, an important component of wealth). As Rhys points out below, wealth is a slippery thing – it’s subjective to a considerable degree after all – but if one thing unites all ‘instances’ of it, that would be its networked nature. There is no wealth at all without some sort of complex, living and healthy ecosystem to generate it, continually, dynamically. So another feature of wealth would be its dynamic and ever evolving nature. Another would be that there is thus no final guarantee of Always Having So Much Wealth I Never Have To Work Again. (Whatever work is. Bullshit jobs, anyone?)

And as for productivity, well, what’s that? Is productivity only productive when wealth is produced? On what definition of wealth? Good sleep produces health, assuming good exercise, good diet, healthy soil, richly biodiverse ecosystems, etc. The same is true of friendships, community, trust, fun… All things that cannot be manufactured. Not that there’s anything wrong with manufacture, which etymologically comes from manual, the hand, thus skill, craftsmanship, etc. All that good stuff.

So it’s slippery, nuanced, open to discussion. What kills wealth, on the other hand – and is killing wealth right in front of our eyes – is narrow, dogmatic assertions about what it is. One’s thing’s for sure: it’s not money (he asserts dogmatically). Money needs a thorough demotion, in my view, and things like sleep, community and trust need a great big cultural promotion.

Yet again, we are at a strange and mighty inflection point historically. They’re popping up now with alarming regularity! Something is obviously in the offing.

Will our imaginations and courage fail us this time around?

RobG

Think of Henry Ford’s famous quote.

Here in France last weekend was Acte 70, with a huge number of gilets jaunes out on the streets for the 70th consecutive week, protesting against ‘austerity’ and neoliberalism. This weekend, Acte 71, thus far there’s been no street protests. I guess the gilets jaunes will know that it will bring bad publicity for them at the moment. What they are doing instead is issuing a massive call for everyone to open windows on their home this evening at 9pm, and bash pots and pans as loudly as possible. It’ll be interesting to see how many people will do this.

No singing on balconys baloney here.

Alan Tench
Alan Tench

Please speculate: why is the number of deaths compared to infections very much lower in all the Scandinavian countries than elsewhere in Europe? Let’s just assume the figures might be reasonably accurate for this one. Also, looking at all the figures (sorry, I used Wikipedia for this), am I right in suspecting that the number of recoveries is being blatantly unreported in just about every country?

austrian peter

I join you in your confusion Alan. Russia doesn’t seem to have a problem, China is supposedly solved, and as you say there are many countries not even affected – nothing much from Africa yet.

Something doesn’t add up but I can’t see where. When they report 1,000 deaths in Italy over the weekend, does this include the 1,750 that die each day normally in Italy (UK is approx 1,500) or is it over and above that? Are we then seeing a sudden increase in deaths and this is gumming up the health systems temporarily or is there some form of misreporting going on with the purpose of I know not what, except that it is crashing our economies to the point of an extended depression?

JohnB
JohnB

Anyone know the position of private clubs and hotels, with respect to this enforced closure nonsense, please ? (Asking re the UK).

IANA
IANA

I booked a hotel yesterday for next week working away as well as a hire car – no problem yet. Be interesting to see what happens and how the hotel will manage things. Whats the difference between that an a night out for a meal and a drink?

Ted
Ted

The oil markets are playing a role in the market turmoil. And its not the Corona virus, but the radical state overreaction aided by the cynical shameless hype mongering media that has crashed the markets. As the evidence rolls in, the actual Corona virus, and not whatever it is that is going on in Italy (a radical statistical outlier among all world nations), is rather boring. Much more boring than the normal flu virus. And let’s not forget the possibility of an epidemic of false positives in a radical increase in PCR testing for Corona virus. Here in the West of the US, only 7% or so of tests yield positive results … what if 100% of those are false positives during the normal tail end of flu season? see for example:

https://www.doh.wa.gov/Emergencies/Coronavirus

DunGroanin
DunGroanin

Doh incomplete email. Soz.

Robbobbobin
Robbobbobin

^hzled?

Steve Hayes

Before me I have a five pound note, issued by the Bank of England. It clearly states: “I promise to pay the bearer the sum of five pounds on demand.” It is signed by the Chief Cashier on behalf of the Governor of the Bank of England. However, if I were to take this bank note to the Bank of England and demand my five pounds, I would be swiftly escorted from the building. Money is a fiction, a fiction of our collective imagination. There is no money. What people call money is a token of debt; it can be exchanged for another’s labour, but if the other does not wish to provide such labour, the money is nothing more than a useless piece of paper.

JohnB
JohnB

Would you get into the building in the first place, Steve ? 🙂

Steve Hayes

The Bank of England is open to the public: Monday to Friday from 10am to 5pm, excluding bank holidays.

Robbobbobin
Robbobbobin

‘I have a five pound note, issued by the Bank of England. It clearly states: “I promise to pay the bearer the sum of five pounds on demand.” It is signed by the Chief Cashier on behalf of the Governor of the Bank of England. However, if I were to take this bank note to the Bank of England and demand my five pounds, I would be swiftly escorted from the building.’

Unlikely. If they could not oblige you there they would certainly refer you to a nearby commercial bank who would be happy to pay you five one-pound coins, or the equivalent in any lesser denomination, on their behalf, as promised. Of course, that would not counter your point, but it would keep their promise.

Steve Hayes

Robbobbobin No, it would not. The lesser denominations are equally fictitious. A pound was actual a pound (in weight) of silver.

Robbobbobin
Robbobbobin

“No, it would not.”

Not what? Not counter your point (that the promise on your fiver is only a promise to pay you five quid) or paying you a fiver in lesser denominations would not be keeping their promise? In what way do you imagine anything I wrote contradicts anything you wrote, except that I disagreed with your claim you’d be escorted out?

MrShigemitsu
MrShigemitsu

The fiver is an IOU, issued by the Government-owned central bank. In and of itself, it’s worthless – but, as a Government IOU, it’s your asset, and the government’s liability – in other words, it’s five pounds worth of government debt.

The government is able to enforce the general acceptance of this otherwise worthless currency by imposing taxation in that same currency.

This allows the government to command real resources from the private sector into the public sphere, because the currency needs to be earned in order to pay taxes imposed. (The British brought in the Hut Tax in Kenya for this purpose, obliging otherwise reluctant Kenyans to work for Sterling in order to pay the tax.)

While this sounds draconian, in practice this allows a public sector to function, and the general population to benefit as a result. It also allows the efficient clearing of transactions, because all parties accept the currency. In extremis, eg during wartime, alternative currencies can be used, such as US$, gold, cigarettes, etc, but this is really not desirable, and a general acceptance of the national currency is essential for society to function properly.

The UK, (and most other non-eurozone countries) now has a free-floating, non-convertible, fiat currency, and this is a good thing.

When currencies are linked to the price of a limited commodity – such as Gold, pegged to another country’s currency, or a nation adopts a supra-national currency – such as the euro, the fiscal space for manouvre by democratically elected governments is curtailed – sometimes quite severely.

Unless a nation is a net exporter, the only way for its economy to remain competitive (the option of currency devaulation being withheld) is to borrow in a foreign currency (allowing markets to dictate terms, with disastrous effect), or internally devalue (with equally disastrous effects for the population eg, Greece, Italy).

Don’t knock the monetary system we have, especially in the current Covid-19 related mess. The UK, US, Aus, etc are fortunate to have fiat, free-floating, non-convertible currencies – this allows the necessary massive deficit spending to occur, without repercussion.

Robbobbobin
Robbobbobin

“The UK, US, Aus, etc are fortunate to have fiat, free-floating, non-convertible currencies – this allows the necessary massive deficit spending to occur, without repercussion.”

Rationality will only get you downvotes in these parts MrShigemitsu. The poor fuckers around here can’t even read. Though I would suggest that a commodity currency fiat-pegged to something (which could be equally fictional) that is unique to the jurisdiction concerned could provide a pushmepullyou that could–provided it were meaningfully constitutionally incorporated–afford some measure of protection against political destabilisation by wannabe internal autocrats and ingenious external currency warriors* alike while still allowing that jurisdiction the sovereign monetary and fiscal flexibiliity it needs both to weather financial storms and to convert corporate equity into social equity (where ‘could’ ≠ ‘certainly would’, the price of freedom being eternal vigilance amongst other things).

* Nothing can protect jurisdictions like Venezuala, Iran, or anywhere else against the financial depradations of business enterprises like Trump & Co.

Seamus Padraig
Seamus Padraig

OT: If anyone here wants a good laugh, read the comments on this ridiculous tweet.

https://twitter.com/cia/status/1241052116141178882

Gary Weglarz
Gary Weglarz

Thanks Seamus, I needed that.

stupid iriot
stupid iriot

Very amusing Seamus (but not funny for the victims) however, having read through all the tweets I didn’t see one advocating “Spend many happy hours building your own Lego model of Netanyahu’s bulldozers”

Jen
Jen

CIA must be desperate to recruit kiddies to spy on their parents through online games.

Francis Leef
Francis Leef

Let’s just make a comparison: Gold or Paper money.

1944-1971 World on a gold standard. More precisely world on a dollar standard but dollars be convertible for gold between states. This was a period of rapid expansion of trade, falling unemployment, high wage levels, high levels of investment, low inflation and corporate profitability. These are just facts I am afraid.
1971-2020. World on a fiat standard. Dollars no longer convertible as gold was flying out of America due to Europeans cashing in their surplus dollars for gold. Europe and Japan and China and Saudi Arabia were surplus dollar countries who could only trade the dollars for US Treasuries which were never going to be paid. In short, the US was being subsidized by the rest of the world an arrangement cemented by Kissinger with the petrodollar. The reasons for the US’s bankruptcy was its wars in Indo-China and Korea, as well as the ‘Great Society’ programme dreamed up by LBJ. As long as the US could palm off its creditors with worthless Treasuries it could continue with its wars and subsequent trade deficits in perpetuity. Then there was the maturation of the Triffin dilemma – but let’s not pile on the agony.

The period also saw ongoing crises of differing magnitude which included

1. The 1985-89 house price bubble in Scandinavia.2. The east Asian crisis of 1997-08. The bubble in real estate stocks in Thailand, Indonesia, Malaysia and several other Asian countries. Excepting China that is, who had capital controls. And the surge in foreign investment in Mexico 1990-98

3. The bubble in over-the-counter stocks and the US dot.com bubble 1995-2000
4. The real-estate bubble which spread into a whole new class of securities – derivatives in 2008.

5. And now ….?

It should also be noted that the fiat-age has been characterised by a rampant class war with increasing unemployment, low wages, the gig economy the smashing of trade unions, grotesque income and wealth inequalities. This wasn’t supposed to happen, but it did, and it did so not by accident but by design.
Is anyone seriously suggesting that the fiat-age produced results that were superior to the nasty age of ‘the barbarous relic. Doesn’t look like it to me.

Mike Ellwood
Mike Ellwood

Now make the comparison with the pre-WW2 Gold Standard.

That was not a happy time, economically.

I am in the process of reading the Robert Skidelsky 3-part biography of J.M.Keynes. Has quite a lot about the (actual, pre-WW2) Gold Standard. Interesting reading.

I think the post-WW2 period of prosperity was not a direct result of the Bretton Woods currency agreement (where the USD was pegged to the price of gold, and other major currencies were pegged (with some felxibility) to the USD. It was more to do with the determination of most of the countries who had been at war to rebuild their economies, with, in many cases, what you might call “Keynsian” ideas in mind, and a certain amount of democratic socialism involved.

The Bretton Woods arrangement broke down for the reasons you state, but I think it would have broken down in any case, sooner or latter.

Gold is no panacea, and is no more “real money” than is fiat money.
It’s a commodity that is traded, and whose value varies quite a bit. That should tell you something.

MrShigemitsu
MrShigemitsu
Fair dinkum
Fair dinkum

“Daddy? Why did you buy a gun?”
“To make sure no one takes what we’ve got son”
“But if they take our lives, what will we have then?”

sabelmouse
sabelmouse

surely the gun would be for defending the lives as well

wardropper
wardropper

If the would-be thieves also have guns, it’s just a good ol’ Wild West shoot-out, and anybody could win.
That’s why we like to think the Wild West is restricted to the history section of our local library, or perhaps to a Wikipedia page.
But it clearly isn’t.

DunGroanin
DunGroanin

How many guns and from what?

IANA
IANA

Then you won’t need to worry son.

But as long as we have this gun the chances of that happening are significantly remoter.

DunGroanin
DunGroanin

Ok dad i’ll shoot and eat you before you do me.
Eat these bullets. Yum!

Igor
Igor

You assume that buying a firearm precludes buying food.

DunGroanin
DunGroanin

Isn’t the reason to have firearm that there is no food to buy?

Rhys Jaggar
Rhys Jaggar

‘Wealth’ is anything that can be traded for other items of value.

Gold and silver are regarded as ‘LONG TERM STORES OF WEALTH’.

That is particularly of value to those with excess capital who may not need access to it for years or even decades.

It is of less relevance to those who need to spend their weekly income feeding themselves, housing themselves and clothing themselves.

Fresh vegetables are TRANSIENT stores of wealth. They provide healthy food but if not eaten quickly, they go off. Water in a desert is a vital store of wealth. You will die if you cannot access it.

Scotch whisky is a medium-term store of wealth. It takes up to 20 years to make it, but it will last when made for some decades.

Property is a medium-term store of wealth, but it is liable to fire, vandalism, things wearing out and the structural foundations eventually giving way. It’s value is directly proportional to how well contract law can be enforced and how much private ownership of land and property is legally underpinned.

Seeds are a medium term store of wealth: they allow you to grow food and they are very transportable across the world, even if they may not work quite so well in different climates. But they are certainly tradable.

Arguing about ‘what wealth is’ is academic. As long as private transactions can take place, any of us can decide what we consider to contain and retain wealth.

Mike Ellwood
Mike Ellwood

Quite. As Minsky said, anyone can create money. The trick is to get it accepted.
Governments who issue currency give it value simply by insisting that their citizens pay them tax in it. And how do the citizens get the currency in the first place? Governments spend it into the economy.

If you had a closed, autarkic (no imports or exports) economy, government could control the value of its currency pretty closely if it chose to. It gets more complicated in the real world, where you need to import real resources, and your currency is being traded in the Foreign Exchange market. It helps if you have something that other countries want, that you can export.

At the end of the day, what matters are real resources (people, as well as things). As we see with the toilet roll panic (and other, more serious shortages).

Toby Russell
Toby Russell

Your comment gets my vote, though I would argue that this discussion, and the point you make, needs much more airing. As such, the argument is not academic, but vital. And this new Bizzaro World we just burst into is the right place for it. And loudly.

Seamus Padraig
Seamus Padraig

By the way, Ben Swann did a great show the other night analyzing the media hype surrounding Corona Virus data. Enjoy …

Ted
Ted

See https://www.medrxiv.org/content/10.1101/2020.02.12.20022434v2

A crude mortality ratio of .04% for Covid cases once a population estimate is produced for Wuhan.

See also: https://www.japantimes.co.jp/news/2020/03/20/national/coronavirus-explosion-expected-japan/#.XnYruC9lChB

The Japan numbers have puzzled me for a while, since they are no slouches when it comes to managing epidemics. Where are the exploding numbers for this modern plague in Japan?

At some point, folks gotta say that the WHO needs to be reformed or closed down.

John Pretty
John Pretty
John Pretty
John Pretty

Sorry, I think it’s the same article, just a different source.

Jen
Jen

Japan may have a healthier elderly population compared to the same age demographic in China and other parts of the world due to diet (less Western junk food consumption over past decades) and rates of smoking probably lower as well. Air pollution levels in Japan probably much lower due to greater use of public transport and Shinkansen bullet trains in particular since 1960s. No wonder Japan still wants to go ahead with Tokyo Olympics.

Seamus Padraig
Seamus Padraig

Another ringer from Frank Lee!

But then Goldman Sachs is part of the cabal of central banks and Treasury departments around the world. It is not unusual to see the interchange of the movers and shakers of the financial world who oscillate between these institutions. Hank Paulson, Mario Draghi, Steve Mnuchin, Robert Rubin …

They don’t call it Government Sachs for nothing.

#CoronaHoax