Creating a New Currency

THIS IS THE PRIMARY ARTICLE

    Link: A review of Warren Coats’ new book.
    (see a list of his articles and books)

ADDITIONAL LINKS of Interest:

Stronger currencies despite central bank policies to weaken

Gold as a Parallel Currency Shows Promise in Foreign Exchange transactions, using the technology of a Blockchain.

Why Dollar-Alternatives Are Non-Starters, e.g. the SDR.

The Appeal of the Gold Standard

The appeal of the Gold Standard is that classic image of the Gold Coin in the minds of people. It is a concrete mental picture. Our paper money system is something else. People know the Federal Reserve dollars are slowly losing value (“inflating”). The gold coin you see in your mind’s eye is more than just a physical object; it is a belief in permanence, a belief in objective reality (and in some sense, “natural law” i.e. chemistry, mechanics).

31.1g AU coin
31.1g AU coin

Economists would want to promise a “Stable Price Level” as a monetary standard. It is not believable. The Federal Reserve cannot even “manage expectations” about their plans for interest rates in 2016. Seeking this elusive ideal, government “planning” crowds out financial planning by individual families and businesses, because “the language of future prices/values” becomes fuzzy. The ideal of their success – a “stable price level” – is not believable (another example, perhaps, of believing in unicorns).

    [ from the page on this site, “Gold as a Parallel Currency,” — continuing to “A Modest Proposal” — Gold kilogram 50-yr.Treasury bonds. ]

US Economic Growth vs. Rest-of-World

The graph below shows with a RED LINE the relative growth rate of the U.S. Economy and the BLUE LINE shows the relative growth rate of the Rest of the World’s economies. The connection is that foreign demand pulls exports from the United States for use in foreign countries. Imports are what Americans demand to add to domestic production to create U.S. economic growth. Imports increase when the economy grows, and they increase faster when the USA grows faster. (“Production” is an inclusive term meaning whatever increases individual standards of living and personal flourishing, even if it is a cheap toy from China “to produce” your baby’s smile.)

The RED LINE also shows what has happened to the CAPITAL ACCOUNT in the Balance of Payments. The Capital Account has been in consistent SURPLUS both because the Rest of the World demands U.S. Dollars in the form of U.S. Treasury bonds, but also because foreign nationals need to buy real estate and build factories in a country where the government does not confiscate wealth and infringe liberty as much as in, e.g., China.

The graph on the left side begins with the Smoot-Hawley Tariff of 1929-30. The stock market crash happened when the House of Representatives passed the bill in October 1929 and the Great Depression began (after a stock market recovery) the following spring of 1930 when the Senate passed and President Hoover signed the Tariff Act, dramatically increasing the tax Americans had to pay for anything imported.

Since the Rest of the World, particularly Europe, in 1930, could not so easily sell goods to Americans (who had to pay the tariff-tax on imports), they stopped buying large volumes of agricultural exports from the Midwest.

SAY’S LAW: Foreign buyers need to raise money to buy US goods, and if their own sales have been taxed to minimal, they no longer can pay US farmers.

That caused small banks in those small farm towns to collapse, which rapidly spread to collapse in the money-center banks. The rest of the story is well known. The Great Depression lasted over a decade. Thank you, government policy Hoover-F.D.R. “admininstrative state.”

How long will the Great Trump Depression last?

A Floating Exchange Rate World

I think we are living in a “floating exchange rate world,” in which we have lost visual control over what we might believe our assets and liabilities are “worth.” Value is hard to measure, and we Americans normally think about how many “dollars” each value might be. It is a yardstick.

I am studying how to trade in the foreign exchange spot market. It is interesting to me as an economist, to play with the numbers. I like to make lines and colored boxes on charts of daily movements in currency pairs. I watch the dollar-value of the gold and silver ounce, and also some curiosity items like bitcoin, oil, junk bonds, and the DXY. Then I look seriously at the currency pairs, and some of them are paired so we say one euro is $1.0624 (11/25) but others are priced inverse, just for convention and trading such as the Chinese 6.421 (11/25) for $1.00 USD. [update: 8/22 EURUSD $1.1320 and USDCHN 6.659]

What is your house worth? How would you find out? Is that a “hard number” or just a guess? What would a Chinese person think about the price of your house, if they wanted to buy real estate in the United States? We can see if you went to Europe everything would seem about 6 percent more expensive, generally.

We live in a floating exchange rate world, but “one dollar” is not like the “inch” on a yardstick, nor a “meter” in the SI. It is like rubber, and we know the dollar is shrinking continuously in value. The Fed says it is trying to diminish the value of dollars at 2% annually. So far their theory seems not to work very well. I believe the strong overseas demand for the USDollar is having a dominant effect; the USD as a unit of accounting, is strong as a safe haven, and because US Treasury bonds are payable in USD.

The great unified “Accounting System of the universe” has chosen the US Treasury bond as its new gold. But never take your eyes off of gold, because you have few other true references. Perhaps also oil, due to its importance and it is priced in USD. Watch OPEC for any discussions of using a different international Unit of Accounting for oil barrels, but so long as the trading in New York is leading the commodity-price methodology, the USD will remain “reserve currency” and the US Treasury bond will be the ultimate “reserve asset.”

What do they say at the end of some 1950s scary “invaders from Mars films? “Watch the skies.”  The danger of another 2007-08 can come again, in this puzzling financial universe of Federal Reserve interest rates near Zero for more than 7 years and quantitative easing, seemingly not to very much effect.

I claim the foreign exchange phenomenon explains much of the picture, but it could change very quickly. Watch the horizon for scary events. What if Donald Trump were sworn in as the 45th President of the United States in 2017?