Leaping Toward The Keynesian Dream

11/30/11 The Fed’s latest inflationary scheme sounds like a technocratic innovation. It lowered the costs of currency swaps between central banks of the world with the idea that the Fed would do for the globe what Europe, England, and China are too shy to do, which is run the printing presses 24/7 to bail out failing institutions and economies. In effect, the Fed has promised to be the lender of last resort for the entire global economy.

It sounds new, but it is not. Following the Second World War, John Maynard Keynes pushed hard for a global paper currency administered by a global central bank. This was his proposed solution to the problem of national currency disputes. Let’s just take the inflation power away from the national state and give it to a world authority. Then we’ll never have to deal with a lack of coordination again.

The idea didn’t fly but the institutions that were supposed to administer such a system were nonetheless created: the International Monetary Fund and the so-called World Bank. It didn’t work out that way. Instead, nation states retained their monetary authority and the new institutions became glorified welfare providers, conduits for transfer payments and loads to developing nations.

The dream lived on, however. The creation of the Euro and its central bank was a step in that direction. So was Nixon’s closing of the gold window. Each new currency crisis has created the excuse for further steps toward what Murray Rothbard calls the Keynesian dream.

Why hasn’t it happened yet? Many reasons. Nation states do not want to give up power. The World Bank and the IMF are institutionally unsuited to the task. Many people in the banking world are also downright squeamish about the idea, with full knowledge of the ravages that unchecked inflationary credit can bring to the world economy. Mostly, there hasn’t been a crisis big enough to warrant such extreme measures.

However, that crisis might have finally arrived. Since 2008, the Fed has demonstrated that among all the world’s central banks, it alone is brave enough to embrace gigantic inflationary measures without wincing. The European Central Bank is under some strictures to not act as a monetary central planner. China is unconverted to the inflationary faith. The same holds true for England.

Ben Bernanke, however, is different: he is revealing himself to be an unreconstructed Keynesian with an unlimited faith in the power of paper money to solve all the world’s problems.

What this means is that it is left to the Fed alone to bail out the world. There is a perverse logic to this. After all, if you are going to be a world empire, operating under the assumption that nothing on the planet is outside your political purview, you bear certain responsibilities as well. Foreign aid and troops in every country are just the beginning. You must eventually embrace your financial responsibilities too. A globalized economy addicted to debt needs an institution willing to step up and guarantee that debt and provide the liquidity necessary to get us through the hard times.

As soon as the announcement of the new Fed measures came, the smart set of the worldwide web lit up with the obvious observations that these measures come with massive risk of setting off a global inflationary crisis. It could lead to the final crack-up boom.

The Fed assures us otherwise. It “bears no exchange risk” in undertaking such actions. But as economist Robert Murphy explains “strictly speaking this isn’t true. If the Fed gives $50 billion in dollars to the ECB, which (at those market prices) gives $50 billion worth of euros to the Fed, then the ECB lends out the dollars to private banks and, before they repay the loans, the euro crashes against the dollar…then the ECB has no means of acquiring dollars to repay the Fed. Even though the ECB has a printing press, it is configured for euros, not dollars.”

He further states what everyone knows but no one is willing to say: “The current round of interventions will not solve the problem. Down the road — probably much sooner rather than later — the central banks of the world will engage in some further extraordinary measures, again lest the whole world fall apart. Even so, printing money doesn’t fix the underlying problems. No matter what they do, eventually the whole financial world will fall apart.”

The speed at which all of this is happening is startling to behold. It was only 36 hours ago that we heard the first public worries about the drying up of credit in Europe. Large corporations were seeing their credit lines tightened. Banks were starting to become more scrupulous in their operations, which is hardly a surprise given that zero interest rates have made it nearly impossible to make a profit in conventional lending operations.

Where in the fall of 2008, the Fed let the worries about tight credit grow to the point of international mania before it acted, this time it jumped in to anticipate the inevitable warnings about the imminent death of civilization. Only trillions in paper money can save us now! The Fed saw what was coming and decided to do the deed even before the demand came.

But rather than settle markets down, the real effect is the opposite. If you go to the doctor with a head cold, and he rushes you to the hospital for surgery, you don’t merely congratulate him for being thorough. You figure that he knows something that you don’t, namely that your condition is way more serious than you thought. Your family is likely to fly into a panic.

For this psychological reason alone, this action is likely to roil markets in crazy ways. The Fed is now paper-money printer for the entire world. It’s a new world, and a brave one. If you think that a new era of prosperity, peace, and stability awaits, you have been living under a rock for at least a century. There’s not a soul alive who will sleep soundly knowing that Ben Bernanke has elected himself the loan officer of the entire globe.

We’re supposed to believe we’re led by the “best and brightest”, and these people come up the scheme of simply printing money to make debt problems go away like magic. If it were only so easy.

It’s the financial switcheroo on a world scale. Buy real things with money you don’t have and just print money to pay for it. Magic. It hides who really pays for it; each and every working man who attempts to save sees their savings eroded by inflation. Dollars gravitate toward zero worth; because they are indeed made worthless. It is the ultimate stealth tax increase on the productive.

According to Worldview.com, John Maynard Keynes was a sodomite who brought boys to his homosexual orgies. It is that “worldview” of paganism/Marxism/fascism/occultism which prevails among the elite university types (Penn State)—this pagan recreation of the world where there is no sexual “sins”—religion is unnecessary—in fact,evil because it dared state that the elitist lifestyles were despicable.

It is why the homosexual push at colleges and this indoctrination of all children through the mass media to think something intrinsically evil and dysfunctional is “good” and designed by God. The fact is—it is learned behavior as the study of all history proves and even the current study of Afghanistan proves that homosexuality (and hatred of women) is learned by children and sodomizing boys is the grooming into that hideous lifestyle.

Anyone who is for “homosexual rights” is for molestation of boys. It was how boys became homosexuals in Greece, Rome, the Middle East, Asia, Africa,the Samurai culture, etc. Jerry Brown is probably a sodomite also....they are trying to destroy Christianity—that which put that despicable behavior in the closet—which freed boys to form character and learn to relate to women in a mature, sexual way.

Christianity rid the world of rampant pederasty and homosexuality, but with the “sexual revolution” by the Marxists/pagan/occultists, they are trying to recreate the slavery of the Ancient world—where the masses were pawns and women were slaves or second class citizens. Boys are the chief recreation for homosexuals—read their “fantasy” literature. Look at Barney Frank’s creepy parties (orgies).

Keynes never proposed a “global paper currency”, what he proposed was “Bancor”, which was to be a supernational accounting unit (valued in gold, BTW), which would essentially function as a “global reserve currency” - countries would have retained their national currencies, just as they have over the last few decades when the US dollar essentially served some of the same functions.

Keynes proposal addressed some very real problems (for example, GOOGLE “Triffin dilemma”), some of which are again becoming apparent due to the destabilization of the dollar as a reserve currency.

As a result many proposals based in part on Bancor-like systems have been advanced by economists and politicians across the political spectrum, for example the use of IMF Special Drawing Rights to serve the same functions.

>> The goal is a symbolic backstop and a minor, real, liquidity window for banks that are facing a run.

Let them handle their own runs, then. And let the chips fall where they may.

If we don’t sober up and kick out the props, the chips will just get bigger and bigger and bigger — and one day they WILL fall, with a vengeance.

It’s hard medicine now, but the alternative is harder medicine for our kids and grandkids. What kind of responsible adult chooses that path for their progeny?

for example, GOOGLE “Triffin dilemma

An excellent suggestion. Let me post an excerpt here -- it's important.

The Triffin dilemma (or the Triffin paradox) is a theory that when a national currency also serves as an international reserve currency, there could be conflicts of interest between short-term domestic and long-term international economic objectives. This dilemma was first identified by Belgian-American economist Robert Triffin in the 1960s, who pointed out that the country whose currency foreign nations wish to hold (the global reserve currency) must be willing to supply the world with an extra supply of its currency to fulfil world demand for this 'reserve' currency (foreign exchange reserves) and thus cause a trade deficit.
The use of a national currency (i.e. the US dollar) as global reserve currency leads to a tension between national monetary policy and global monetary policy. This is reflected in fundamental imbalances in the balance of payments, specifically the current account: some goals require an overall flow of dollars out of the United States, while others require an overall flow of dollars in to the United States. Currency inflows and outflows of equal magnitudes cannot both happen at once.

I wish those FReepers who think our trade deficit is caused by our high wages and can be fixed by tariffs on imports would read the above carefully. Our long-running trade deficit is caused by the Fed's half-century of inflationary policies combined with our status as the world's reserve currency issuer. The inflation raises prices and wages at home and the demand for dollars abroad prevents the dollar's foreign exchange value from dropping enough to compensate for the price spiral.

It leaves us uncompetitive (taxes and regulations don't help any).

The result is a trade deficit that has been growing since the LBJ administration which is, coincidentally, when the Fed began its massive inflation. If we returned to a gold reserve standard, many of the ills that beset the American economy would fix themselves virtually overnight.

If we returned to a gold reserve standard, many of the ills that beset the American economy would fix themselves virtually overnight.

When is gets seriously considered by international economists, they generally prefer to tie currencies to some sort of "basket" of commodities rather than to just one (gold).

And however well this might work in the long run, the effects of unilaterally tying the dollar to any such standard in the short tern would be a *massive* decrease in US wage levels - our situation would be roughly analogous to the British post WWI, who having gone of the gold standard during the war tried to return sterling to its pre-war peg from a similar position of a debtor nation of declining structural competitiveness. Faced with the prospect of what amount to slow-motion economic collapse with no bottom in sight, they were forced to abandon the attempt, accompanied by a sterling depreciation of around 25%.

It would have be a lot less painful (and less demoralizing) to have just accepted reality to start with.

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If someone wants to take the time to understand the evolution of Keynes thought in response to the post WWI economic collapse and on to the creation of Bancor (which, BTW, is actually a quite "conservative" proposal, economically), IMO the place to start is Vols 2 & 3 of the Keynes biography by the *conservative* English economist and politician Robert Skidelsky - it's tough going, but an invaluable resource if you want to understand the very disquieting parallels between the political and economic situation in the inter-war UK and the US today.

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Unfortunatly, trying to talk to many Conservatives about Keynes' proposals to deal with balance of payments problems is a lot like trying (as I was reminded again at dinner last night) to talk to many liberals about Milton Friedman's uncannily prescient analysis of the current problems in the Euro block: in either case fingers usually get stuck firmly in ears by people reacting to simplistic preconceptions of who they were and what they said.

"7 day loans"

Which limits the total amounts involved, I agree. But we should keep in mind the danger of an extension of this time period and an eye on the amounts involved. Putting a quote from the article and a later posting together, along with a comment on CNBC yesterday:

"The Fed assures us otherwise. It “bears no exchange risk” in undertaking such actions. But as economist Robert Murphy explains “strictly speaking this isn’t true. If the Fed gives $50 billion in dollars to the ECB, which (at those market prices) gives $50 billion worth of euros to the Fed, then the ECB lends out the dollars to private banks and, before they repay the loans, the euro crashes against the dollar…then the ECB has no means of acquiring dollars to repay the Fed. Even though the ECB has a printing press, it is configured for euros, not dollars.”"

Now combine this quote from the article with this later posting:

"The Triffin dilemma (or the Triffin paradox) is a theory that when a national currency also serves as an international reserve currency, there could be conflicts of interest between short-term domestic and long-term international economic objectives."

Now to paraphrase a CNBC comment: 'If the amounts involved in this exchage of dollars and euro's grows too large, the US could face huge potential losses in the crash of the euro. The Fed could then consider the Eurozone "too big to fail", leading to more intervention.'

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