Saturday, 31 May 2014

World monetary orders. How long do they typically last ?


We had the classical gold standard from 1873 until World War I (43 years), the gold exchange standard between the two world wars (21 years), the Bretton Woods 1 system from 1944 until 1971 (27 years), and since 1971, the entire world has been on the Bretton Woods 2 system. Which started with  the Nixon wing job.

 How we got here
A negative balance of payments, growing public debt incurred by the Vietnam War and Great Society programs, and monetary inflation by the Federal Reserve caused the dollar to become increasingly overvalued.[35] The drain on US gold reserves culminated with the London Gold Pool collapse in March 1968.[36] By 1970, the U.S. had seen its gold coverage deteriorate from 55% to 22%. In 1971 more and more dollars were being printed in Washington, then being pumped overseas, to pay for government expenditure on the military and social programs. In the first six months of 1971, assets for $22 billion fled the U.S. In response, on 15 August 1971, Nixon issued Executive Order 11615 pursuant to the Economic Stabilization Act of 1970, unilaterally imposing 90-day wage and price controls, a 10% import surcharge, and most importantly "closed the gold window", making the dollar inconvertible to gold directly, except on the open market. Unusually, this decision was made without consulting members of the international monetary system or even his own State Department.
That  is the very definition of winging it. Little did Nixon know, his wing job would last just as long as the classical gold standard. As of this year, it has been 43 years since Nixon closed the gold window. It remains to be seen , how many years longer this system will last. Historically, it is already older then most. But until now, it was never the same age or older then the gold standard.

How Bretton Woods 1 ended

Robert Triffin accurately predicted the collapse of Bretton Woods and the end of an era of U.S. trade surpluses. Triffin told Congress that, at some point, foreign central banks would become saturated with Treasury securities and seek to redeem them for gold. European countries began to consider that the price of dollar-denominated inputs such as oil would fall dramatically if their currencies were revalued upward. By abandoning Bretton Woods, they could reduce their domestic inflation by reasserting control over their domestic money supply.

 Bretton Woods 2 is the sequel. We are back to square one minus gold. Instead of European countries , Asian countries will begin to consider that the price of dollar-denominated inputs such as oil would fall dramatically if their currencies were revalued upward.

The takeway

 Unmanageable price inflation outside the US's borders will be what brings an end to Bretton Woods 2.

Now that I am on the topic of monetary orders, lets have a quick look at the age of the USD as a reserve currency.

This chart shows the lifespan of the six reserve currencies that preceded the U.S. dollar; the average is 94 years. 2014  marks the 94th year of the U.S. dollar’s lifespan. 

And last but not least, the gold fixing schemes. 

 The London Gold Pool was the pooling of gold reserves by a group of eight central banks in the United States and seven European countries that agreed on 1 November 1961 to cooperate in maintaining the Bretton Woods System of fixed-rate convertible currencies and defending a gold price of US$35 per troy ounce by interventions in the London gold market.The London Gold Pool collapsed in March 1968.
 That lasted a rather short 7 years. 
 And the sequel to this
The London bullion market is a wholesale over-the-counter market for the trading of gold and silver. Trading is conducted amongst members of the London Bullion Market Association (LBMA), loosely overseen by the Bank of England. Most of the members are major international banks or bullion dealers and refiners. It was founded in 1987
 
This racket is now 27 years old. Which happens to be how long Bretton Woods 1 lasted.



35 comments:

  1. Hi M,
    yes the timetable is impressive. Could it be, because it is from a company that wants to sell you gold?

    Anyway, lately found some nice perspective from Armstrong:

    "According to the World Gold Council, the breakdown is:

    50% jewelry,
    18.7% investment,
    17.2% official holdings,
    12% other, and
    2.1% unaccounted.

    That makes the size of investment just under $40 billion – a tiny fraction of even the Fed’s quantitative easing at the monthly level of $85 billion. Yet to listen to the gold promoters, you would think the entire world is somehow in conspiracy against a market that is such a tiny fraction of the world economy estimated at about $85 trillion annually. Yet the entire world is wrong – they are right. According to them the entire world is manipulated to ensure gold declines despite the fact that gold is only .00000235294% of the world economy. "


    to be fair, could that change? Yes sure, if gold is no longer been used by jewelry (today 50%), but instead exclusively as a private saving vehicle and an exclusive official worldwide CB reserve asset (today 18%). But before the mechanics change, the saving vehicle part of gold has to absorb all the jewelry out there. How realistic is that? 1 to a million? Well, I go every weekend to get a lottery ticket just for fun, why not some gold?

    By the way, have you paid attention to the ECB? ABS is the new "reserve asset" of Europe :D
    Greets, AD

    ReplyDelete
  2. I think a good chunk of the jewelry is held by Indians. Over there is a practice of using jewelry as collateral for loans. The interest rates are predatory especially out in the rural areas, but the city slickers can get better terms.

    ReplyDelete
  3. "Over there is a practice of using jewelry as collateral for loans. The interest rates are predatory"
    which means what?
    yes, it is not saving!!!11111 People are parted from their gold and gold is liquidated for fiat, (and remember, while being in the rupi currency trading deficit zone) simple as that. Wounder why goldbugs look at that practise as a "gold to da moon" argument, although it is the opposite.

    ReplyDelete
    Replies
    1. Look at a chart of gold priced in Rupees. They never had a bear market in gold after the 80's.They don't have one now either. You are living within the US dollar mass delusion.

      Delete
    2. Sorry, but you live in some kind of gold delusion. Just because the people saving in gold havent lost as much as when saving in rupee, says nothing. Purchasing power of savings count.
      If you have been saving in $bonds since the 80s, you would have probably outperformed gold (depending on your personal taxation laws). Could that change? Sure, but this simply tells you that any kind past performance tells you ZERO about the future.

      Delete
  4. Gold isn't for savings. Gold is a lifeboat between monetary regimes. Gold is a nonexpiring option that is out of the money while credit game is good. But when a system reaches debt saturation...


    https://www.youtube.com/watch?v=sIYx8aA1Azo

    ReplyDelete
    Replies
    1. "Gold is a lifeboat between monetary regimes."
      always repeated but basically complete crap. Just look at history, never ever outperformed gold well over a currency reform, NEVER. It performed equivalent to any other mobil asset in average. Why? Because in the past gold was money, nowertimes it is not. How will it perform today in a "debt restructuring" (aka reset aka currency reform)? Nobody knows, everybody telling&promising something different is a liar or a cult follower or snake oil saleman.
      If you want a "lifeboat between monetary regimes" buy e.g. silver. One kilo silver has the same utility (and therefore real world value) before like after the currency reform.

      Delete
  5. @ AD

    During the classical gold standard and the exchange standard, savings generally was comprised 20 to 50% in gold. Today its under 1%

    ReplyDelete
    Replies
    1. yes, so what?
      You mean, when holding gold, you are front running on the speculation, that the general public will return to saving in gold? If that's the case, yes you're right and yes in that case you hold a big winning lottery ticket.
      But I always wonder how people assume that this thesis is so certain. Right now even my fellow german citizens gold savers are dishoarding gold. (Remember, here gold has NO CGT or VAT attached, it is the only asset with which you are not involved in taxes and you can buy&sell it in almost every local bank => IMHO ideal environment for gold).
      http://www.goldreporter.de/german-gold-retailers-report-rising-number-of-sellers/gold/42267/
      Why these people sell? I dont know. But some notorious delutionous goldbug simply refuse REALITY.

      Delete
    2. @ AD

      Maybe because your Kraut friends are fucking idiots.

      What are you saving in ? Stocks that yield less then inflation or bonds that also yield less then inflation ? Its not that goldbugs are delusional, its that the rest of humanity is.

      Tell me, what is the rationality in investing in negative returning "assets" ?

      Delete
    3. "Maybe because your Kraut friends are fucking idiots."
      no doubt about that, but that never changed, as Napoleon already noticed 200yrs ago: No lie can be figured out big enough that the germans would not swallow it.
      I always have to smile, when my french wife once in a while desperately yells at me "how can your compatriots be so moronic sheeple???ßßßß"

      "what is the rationality?"
      none. Who ever said that people are rational?

      Delete
  6. We've never had a credit bubble like this before on a global scale. Also we have a Central bank network vacuuming up the bad debt this time around. How will they save themselves?

    Silver may indeed play a role in a new SDR and offer more upside to gold. If gold is to return to the system then silver will have to be addressed. Let's see what is announced during the BRICS summit in July. More details of the BRICS Development Bank are to be released.

    ReplyDelete
    Replies
    1. "We've never had a credit bubble like this before on a global scale."
      probably. So what does that mean? In todays system "credit" is a naked short position on money, yes? What is money? Read your laws, have not found anything about gold. It reads more like "physical coins and notes issued by your CB".
      What does this leaves us with? Real cash is the most underowned asset in the world, probably even smaller than gold.

      Cash - get you some ;)

      Delete
    2. Oh, I will. When real yields are positive, trending up, and the threat of default back to minimal.

      Delete
    3. you dont get it, but that's okay.

      Delete
    4. This is where the Dent crowd goes astray. Real cash still has counterparty risk even if it's held outside the bank in a mattress. The currency can be cancelled and a new one issued.

      Delete
    5. "The currency can be cancelled and a new one issued."

      I cant remember any time in history that it was cancelled. Even in Weimar Germany it was exchanged, or the $-Continental....
      Except that the devaluation in itself happened already before the exchange.

      So the question is, with what ratio of purchasing power will the exchange happen. (e.g. After WWII in Germany it did not matter, since if everything is broken purchasing power is zero anyway and had nothing to do with ratios.)

      Or ask the people in Cypress how they liked the "debts restructuring", coming to your FDIC town next time :D

      Delete
  7. M,

    very interesting day in the miners. Even with gold and silver flat there has been some big action in the juniors. If CIGA Bo and Nenner are right we should get one more chance at dirt cheap prices in July, then it goodbye to a HUI with a 200 handle. Oh man, the wet dreams I have at night spooning my Jim Willie and CIGA Bo blowup dolls. Imagine with 2000 gold what the HUI would be at. 800 at least. 1000? 1200?
    And silver! Would have to be over 50. SSRI and PAAS are going to be ripping.

    ReplyDelete
  8. AD,

    Listen to the following @ 1hr 27min mark https://www.youtube.com/watch?v=0wAr2xIUZ5I#t=5253
    July 15th is suppossed to be a "transitionary event" with silver beginning a big move. There does seem to be a brewing nexus for July:

    1. Brazil’s Fortaleza to Host Next BRICS Summit on July 15
    http://brics6.itamaraty.gov.br/

    "Among other topics, the Leaders will discuss the Contingent Reserve Arrangement (CRA) and the New Development Bank (NBD). The CRA is an additional line of defense available to the BRICS countries in scenarios of Balance of Payments' difficulties."

    2. Ukraine chaos



    ReplyDelete
  9. You can stick a fork in freegold.

    http://www.reuters.com/article/2014/06/24/gold-asia-pricing-idUSL4N0P42BW20140624

    "Singapore is set to announce the launch of a gold futures contract on Wednesday,...China, the world's biggest producer and consumer of gold, is set to launch three physical gold contracts in an upcoming international exchange in Shanghai's pilot free trade zone. It is also looking to launch gold derivatives later."

    I like this pyramid. http://67.19.64.18/news/2014/6-23ig/8.jpg

    ReplyDelete
  10. Anybody notice how the gold shares go up lately even if gold is flat. Quiet accumulation. Pull up google finance and do a YTD comparison of GLD and AEM. Gold up 10%, Agnico up 47%.

    ReplyDelete
  11. http://en.itar-tass.com/russia/739046

    Excerpt:
    The BRICS summit will be held in Brazilian cities of Fortaleza and Brasilia on July 15-16.“The leaders of the BRICS states will discuss issues on political agenda and global management problems. They are expected to sign several important economic documents to establish the BRICS Development Bank and the Foreign Currency Reserve Pool,”...

    ReplyDelete
  12. http://voiceofrussia.com/news/2014_07_04/Beijing-Seoul-agree-to-direct-trade-in-national-currencies-4477/
    Excerpt:
    "China's central bank has authorised the Bank of Communications, the country's fifth largest lender, to undertake yuan clearing business in the South Korean capital, the People's Bank of China (PBoC) said in a statement."


    To keep the dollar game going it needs an ever growing market share. If market share stops growing then game over. If it shrinks then game over faster.

    ReplyDelete
  13. Discovered a new blog.

    http://beyondjimwillie.blog.com/2014/04/22/welcome-page/

    Enjoy!

    ReplyDelete
  14. http://en.itar-tass.com/economy/739845
    BRICS bank to be headquartered in Shanghai

    "The national banks of the BRICS states will be keeping their resources designated as stakes in the pool within their gold and forex reserves."

    ReplyDelete
    Replies
    1. ...Forming a big club of losers.

      To put the numbers into perspective: Russia contributes $2billion (over a period of seven years). Wow, great, isnt it?

      Just the budget of this stupid useless FIFA soccer cup by which we are currently being annoyed, is even bigger than that, just for a few weeks of soccer.

      So before you come up with such nonesense next time, put the numbers into perspective.

      Delete
  15. The BRICS Bank is likely to be a counterweight to the BIS. Or perhaps the Nazi Swiss Templars have struck a bargain with their Eastern brethren and with get a piece of the action in this new gold settlement system. The 100B figure is meaningless. It's just a figure to throw out in a press release. Enough to raise eyebrows but not so much to threaten the status quo. Let's see what the capitalization of this bank is after gold is revalued.

    ReplyDelete
  16. "Tomorrow, the fall of the wall of the Dollar"--Bruno Paul

    http://conscience-sociale.blogspot.com/2014/07/demain-la-chute-du-mur-du-dollar.html

    Gold gets knocked down 2.5%, yet the miners only go down 2.5%. AEM doesn't want to go down. I think the professionals are beginning to figure out that shorting the general stock market will not work. Instead of buying S&P puts some are buying PM shares. The volume isn't there yet not like 2008-2009, but it will come as holding gold shares will become the zeitgeist amonst the institutional crowd. This is something the physical gold advocates can't comprehend. Institutional money cannot just sit in gold bullion. Like a shark always needing to swim, managed money needs a yield, a cashflow. Here's an interesting anti-gold view:

    Valuing Wall Street with Andrew Smithers ( No, not the "women and seamen don't mix" Smithers) http://mcalvanyweeklycommentary.com/andrewsmithers-2/

    ReplyDelete
  17. For shits and giggles do a google news search for BRICS Bank.

    China Seeks Clout With BRICS Bank- U.S. News & World Report

    Guest post: does the world really need a Brics bank?-FT.com

    BRICS Fight Waning Clout With $150 Billion Deal at Summit- Bloomberg

    Negotiations To Launch New BRICS Bank Hit Snag: Reuters

    The Brics try to reshape the world- FT

    Are the BRICS Nations Too Splintered To Be a Bloc?-Businessweek

    The BRICS Don't Need Their Own Bank-Bloomberg

    BRICS Nations to Discuss New Bank- Voice of America


    Nay there's no Western slant. Notice the subjunctive slant.

    But here's something interesting from the Illuminati mouthpiece, Foreign Policy:

    http://southasia.foreignpolicy.com/posts/2014/07/11/move_over_imf_brics_bank_aims_to_rewrite_the_rules_of_development

    ReplyDelete
  18. Approaching neckline of inverse H&S for the HUI:Gold ratio.

    Since 12/31/13 was a bottom for gold it's easy to do a ytd comparison.

    Gold up 8.6%

    HUI up 23%, close to a triple of gold's move.

    TGLDX up 36%

    FSAGX up 32%

    UNWPX up 28%

    AEM up 58%

    ReplyDelete
  19. ‘BRICS Bank capital might not be held in US dollars’ ---No shit,Sherlock.

    http://thebricspost.com/brics-bank-capital-might-not-be-held-in-us-dollars/#.U81ilDSwJcQ

    This from Martin Armstrong settles it for me. He's either a clueless charlatan or he's carrying water.

    http://armstrongeconomics.com/2014/07/21/the-energy-hidden-agenda/

    ReplyDelete
  20. here's a runaround link to "US dollar clearing rules make gold the new green"

    http://www.gata.org/node/14199

    The article depicts gold as being cumbersome for trade settlement. Well that is why the BRICS Bank and gold trade notes are being developed. This won't be freegold. A 30X revaluation may not be in the cards. We could be looking at a more modest price level. Remember collateral can always be surrendered to settle debt. Think Alaska and Hawaii. New mine supply will be encouraged. The stock will have to inflate.

    ReplyDelete
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