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In a recent article,
The Economist
expressedconcern over the future of the international
monetary system we’ve had since 1971. On
August 15
th
of that year Richard Nixon closedthe gold window and took the world off the goldstandard. For the first time in history, the entire
world’s monetary system was based on fia
tmoney. This monetary experiment has beenrunning for 38 years and some would arguecontributed to global trade imbalances thatcontributed to the crisis and the huge build up of
debt in the western world. “It is hard to think of
a parallel in history. A country heavily in debt toforeigners, with a government deficit it ismaking little attempt to control, is creating vastamounts of additional currency. Yet it is allowed
to get away with very low interest rates”
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.We have heard for some time now that recoveryis imminent and that government policies haveaverted total collapse. Some economists arguethat the crisis has not been averted, but merelypostponed. The transfer of debt from banks andthe private sector onto the balance sheets of central banks and governments poses a seriousrisk of a sovereign debt default or currencycrisis in the medium to long term.We could yet have another phase where, insteadof credit drying up for banks and privatebusinesses, credit dries up for governments andinterest rates sky rocket along with inflation.David Bowers of Absolute Strategy Research
says; “It’s the last game of pass the parcel.
When the tech bubble burst, balance sheetproblems were passed to the household sector(through mortgages). This time they are beingpassed to the public sector (through
governments’ assumption of banks’ debts).There’s nobody left to pass it to in the future.”
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Economists Philipp Bagus and Markus H.Schiml recently wrote an article on the FederalReserve showing that its balance sheet isleveraged at 50:1. This means that a 2% fall in
the value of the fed’s assets would declare the
central bank insolvent.
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Even the Bank of International Settlements (BIS) has expressed
concern with recent policy actions. “The big and
justifiable worry is that, before it can bereversed, the dramatic easing in monetary policywill translate into growth in the broader
monetary and credit aggregates”. This will “lead
to inflation that feeds inflation expectations or itmay fuel yet another asset-price bubble, sowingthe seeds of the next financial boom-bust
cycle.”
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With the central bank of the US on the edge of insolvency and the US government having toborrow $6 billion a day just to survive, wecannot expect the world economy (particularlythe West) to begin a period of healthy economicexpansion. Russell Napier, stock markethistorian and author of Anatomy of the Bear,recently said in an interview that "The mostmispriced financial instrument on the planettoday is US government debt and the unwindingof that will be the story of this generation," Withbond vigilantes and gold bugs circling the USDollar and Treasuries like vultures, we can onlyexpect further crises in the future; only this timegovernments and central banks being the mainfocus
.
References:
1.
Economics in One Lesson,
Henry Hazlitt, Three RiversPress 1946, pg 17, lines 9-12.
2.
Greenspan says Fed balance sheet an inflation risk
http://www.reuters.com/article/newsOne/idUSTRE5913TX20091002
3.
The Economist,
Chucking the buck, September 26
th
-October 2
nd
, pg. 90.4.
U.S. Needs More Inflation to Speed Recovery, SayMankiw, Rogoff, Bloomberg, Rich Miller, 19/05/095.
Financial Times,
A Risky Revival, John Authers,26/09/09, pg 8.6.
7.
BIS Sees Risk Central Banks Will Raise Interest RatesToo Late,
Simone Meier, Bloomberg,http://www.bloomberg.com/apps/news?pid=20601068&sid=aOnSy9jXFKaY
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