Yesterday, I finished reading James G. Rickards' new book, The Death of Money. It's a book that asks a lot of important questions.
The book speculates about potential future changes to the international monetary system. Today, the main reserve currency in the world — used for the buying and selling of energy, resources, and other international trade, as well as a store of purchasing power for governments, corporations, and international institutions — is the United States dollar. Over 60 percent of countries' monetary reserves are held in U.S. dollars.
This demand for dollars means that the international monetary system today is highly beneficial to the United States; French President Valery Giscard d'Estaing called these advantages America's exorbitant privilege. What are these privileges?
First, because dollars are the medium of exchange for buying resources and energy in international markets, it guarantees America easy access to resources like oil in international markets because unlike other countries like Argentina, the U.S. can never run out of dollars.
In the iconic movie Goldfinger the villain, Auric Goldfinger, pursues a nefarious scheme, code-named “Operation Grand Slam,” to contaminate America’s gold horde at Fort Knox, thereby leveraging the value of his own, uncontaminated, holdings.
Bond: Yes, well, I’ve worked out a few statistics of my own. 15 billion dollars in gold bullion weighs 10,500 tons. Sixty men would take twelve days to load it onto 200 trucks. Now, at the most, you’re going to have two hours before the Army, Navy, Air Force, and Marines move in and make you put it back.
Goldfinger is a superb metaphor for what really occurred to contaminate the gold standard’s reputation, keeping it off the policy table for 80 years — longer than even Goldfinger’s ambitions. The contaminating events produced an intellectual trauma that brings economists such as Obama adviser Austan Goolsbee to tweet such nonsensical doggerel as “Roses are red. Violets are pink. Don’t listen to goldbugs. No one cares what they think.”
Last week, the Federal Reserve shocked the world when it said that it has yet to begin tapering its large-scale asset purchase plan. Also known as quantitative easing (QE), this accommodative monetary policy involves the monthly purchases of $85 billion worth of Treasury securities and mortgage-backed bonds.
However, the Fed is not the only central bank in the world keeping monetary policy easy in its effort to stimulate its economy.
At its Global Economics & Strategy Day last Friday, Morgan Stanley circulated a 97-page slide presentation that included this chart from Chief International Economist Joachim Fels.
It roughly shows where the world's central banks stand on monetary policy, and the colors show where they intend to go.
As you can see, most central banks are in loose, expansionary mode with a bias toward easing.
The emerging markets, which have been struggling to bolster their currencies, have been a little be tighter with Brazil and Indonesia showing a bias toward further tightening.
The close, but not always cozy, relationship between Keynes and Hawtrey was summed up beautifully by Keynes in 1929 when, commenting on a paper by Hawtrey, “Money and Index Numbers,” presented to the Royal Statistical Society, Keynes began as follows.
The tension between these two friendly rivals was dramatically displayed in April 1930, when Hawtrey gave testimony before the Macmillan Committee (The Committee on Finance and Industry) established after the stock-market crash in 1929 to investigate the causes of depressed economic conditions and chronically high unemployment in Britain. The Committee, chaired by Hugh Pattison Macmillan, included an impressive roster of prominent economists, financiers, civil servants, and politicians, but its dominant figure was undoubtedly Keynes, who was a relentless interrogator of witnesses and principal author of the Committee’s final report. Keynes’s position was that, having mistakenly rejoined the gold standard at the prewar parity in 1925, Britain had no alternative but to follow a policy of high interest rates to protect the dollar-sterling exchange rate that had been so imprudently adopted. Under those circumstances, reducing unemployment required a different kind of policy intervention from reducing the bank rate, which is what Hawtrey had been advocating continuously since 1925.
Central bank governor Zhou Xiaochuan yesterday raised an alert about rising inflation and formally declared a shift to a tighter monetary policy this year.
The government may also roll out new measures to control the property market, he told a news conference on the sidelines of the National People's Congress.
Zhou's tough talk confirmed an observation made by many economists that the People's Bank of China has sought to curb credit from expanding too fast.
The remarks contrasted with Zhou's usual approach of treading delicately while speaking to the public on policy directions in order to avoid causing market jitters.
Some analysts said Zhou's comments were aimed at damping inflation expectations and highlighting concern about surging property prices fuelled by accommodative monetary policy in the past several quarters.
Last month, inflation rose unexpectedly to 3.2 per cent.
"Inflation merits high vigilance. We plan to stabilise consumer prices and inflation expectations through monetary policy and other tools," Zhou said, although he added that holiday effects may have distorted the number.