Tom Luongo is not trying to be cute and his points and arguments are clear, which is not always the case. He takes a complicated set of issues and makes them understandable. This is one of his best. From Tom Luongo at tomluongo.me:
Live images flashing by Like windshields towards a fly Frozen in that fatal climb But the wheels of time, just pass you by -RUSH, “Between the Wheels”
In part I of this series I told you the war over the US dollar was over because the bane of domestic monetary policy, Eurodollar futures, lost the battle with SOFR, the new standard for pricing dollars.
The ignominious end of the Eurodollar system is a study in the evolution of markets, as a new system replaces an old one. Old systems don’t die overnight. We don’t flip a switch and wake up in a new reality, unless we are protagonists in a Philip K. Dick novel.
More than a decade ago I looked at the responses to President Obama cutting Iran out of the SWIFT system as the beginning of the end of the petrodollar system. The goal was to take Iran out of the global oil markets by shutting Iran out from the dominant dollar payment system.
Out of necessity Iran opened up trade with its major export partners, most notably India, in something other than dollars. India and Iran started up a ‘goods for oil’ trade, or as Bloomberg called it at the time, “Junk for Oil.”
The stick of sanctions created a new market for pricing Iranian oil and a way around the monopoly of US dollar oil trading. India, struggling with massive current account deficits because of their high energy import bill, welcomed the trade as a way to lessen the pressure on the rupee.
Iran needed goods. They worked out some barter trade and the first shallow cuts into the petrodollar system were made.
The Nigerians are no fools. From Micheal Maherrey at schiffgold.com:
Violent protests in Nigeria reveal that getting average people to embrace central bank digital currencies (CBDCs) might be more difficult than government officials would like.
Nigerians recently took to the streets to protest a cash shortage caused by government policies adopted in order to push the country into the adoption of its central bank digital currency (CBDC).
Protesters attacked bank ATMs and blocked streets, and demonstrations turned violent in some cities.
According to The Guardian, “Nigeria has been struggling with a shortage in physical cash since the central bank began to swap old bills of the local naira currency for new ones, leading to a shortfall in banknotes.” According to reporting by the news outlet, the protests erupted when bank customers couldn’t access their cash or change old banknotes for new ones. Tensions ratcheted up when the government set a February deadline to change old notes.
The problem is there aren’t enough new banknotes to go around, and that appears to be on purpose. Bloomberg called the policy “demonetization.”
According to the Associated Press, the Central Bank of Nigeria introduced the redesigned notes last fall. The plan was to recover about 85% of the total currency in circulation outside the banking system. The Nigerian central bank said the policy was implemented to remove counterfeit currency from the system and to discourage cash ransom payments to kidnappers and other criminals. But there is an underlying reason for the new policy that The Guardian only mentions in passing.
Alan Greenspan initiated the “Fed Put” back in 1987 when the stock market crashed. Now, Jerome Powell may be the buy who ends it. From Charles Hugh Smith at oftwominds.com:
Choose one, and only one: a stock market that inflates and pops in an endless series of ever-more destructive bubbles, or a real economy that is no longer in thrall to the engines of wealth inequality and speculative frenzy.
“The Fed Put”–the implicit Federal Reserve policy of bailing out the stock market as soon as it swoons by unleashing a flood of monetary stimulus–is now accepted as a guarantee not unlike financial gravity. Regardless of the bleatings of Fed officials, “everyone knows” the Fed will quickly “pivot” should the market swoon, slashing interest rates and ramping up liquidity via Quantitative Easing (QE).
Recall the definition of excess liquidity: the difference between real money growth and economic growth. The Fed juices excess liquidity not to further expansion in the real economy but to force-feed new money into the stock market and other risk assets.
The only possible result of “The Fed Put” is a credit/asset bubble, which is why we’re currently experiencing the third such monumental speculative bubble in 23 years.
“The Fed Put” is the logical endpoint of neoliberalism, which places “markets” (and thus finance) at the core of the real economy. The neoliberal fantasy is that “markets” solve all problems via the magic of “the invisible hand” and so everything becomes subservient to the gyrations of “markets.”
The second part of the fantasy is that “markets” are self-regulating, meaning there’s no need for a moral order or government regulations; the magic of markets includes a godlike ability to restrict its own motivations, i.e. greed and exploitation to maximize gains by any means available.
A society’s well being is directly calibrated to its adherence to the brain standard.
The world is moving towards multipolarity. One axis, the West, is led by the U.S., the other—Eurasia and the global south—by Russia and China. Ukraine currently serves as a cauldron of the military conflict between the two axes. Taiwan may become a second such cauldron.
Through sanctions, the West has made economic and financial warfare a part of the conflict. The longest arrow in the U.S.’s quiver is the dollar’s reserve currency status. Western economies are based on credit. Central banks serve as the focal point of fiat debt issuance and monetization, interest rate manipulation, and currency debasement. Russia, China, and their cohorts are exploring alternatives to the dollar’s role and the West’s fiat currency, debt, and financialization, discussing arrangements based on gold and commodities, and economic activity centered on agriculture, mining, petroleum, manufacturing, and trade.
It’s a common sense conclusion that these are a more durable economic foundation than fiat debt, whose value is wholly dependent on the ever-shifting whims of politicians and monetary functionaries. Several commentators have hailed the shift away from the West’s fiat currencies and credit to that which is tangible and real. Currently, however, Russia and China’s currencies and credit are just as fiat as the West’s.
Oil was as tangible and real in 1600 as it is now. Why was it regarded as a useless nuisance back then and now it trades at around $76 (or about 1/24th of an ounce of real money, or gold) per barrel? What made oil valuable, the linchpin of the global economy, for which countries have been invaded and wars fought? Somebody figured out how to unlock and control oil’s energy and use it to generate light and power, and to distill it to derive chemicals now used in everything from fertilizers and plastics to pharmaceuticals and cosmetics.
Direct barter is the means of exchange in primitive economies. Money is the intermediary agent that allows a producer to indirectly trade his or her production for someone else’s, to the benefit of both parties. Gold’s suitability as money has been recognized for millennia. Credit allows those who consume less than they produce to invest their surplus in economic activity that generates returns higher than the interest charged.
******
Do you like what you’re reading? SLL cuts through the reams of intellectual clutter, nonsense, and lies that bombard us daily. SLL is based on the premises that freedom is the foundation of human progress and happiness, truth is paramount, and inquiry and logic are the essential tools for realizing those objectives. What readers value the most are its clarity and understanding. Please consider compensating SLL for value received. The payment links are on the right or click the button below. Thank you.
There is no mystery what the best and brightest seek: freedom to think, express, and produce; protection of property and contract rights; security from crime and war. The conundrum is how few times those conditions have even come close to being fulfilled. They stand out like isolated lighthouses, beacons shining through history’s all-too-frequent darkness and tempest tossed seas. There are no such beacons today; the world shuns the brain standard.
It is the human mind and productive activity that imparts value to oil, gold, and credit. The mind is the fountainhead of human progress and wealth. The world has always run on the brain standard. A society’s well being is directly calibrated to its adherence to that standard. Its requirements are not conceptually complicated, but throughout history its sporadic implementation has proven problematic.
Mostly because there are so many people out there who want something for nothing. From Nick Giambruno at internationalman.com:
Rapidly rising food, housing, medical, and tuition prices are squeezing Americans, and many do not understand the real cause of their falling living standards.
That confusion opens the door for opportunistic politicians who promise supposed freebies to ease the pain of inflation. Many, unfortunately, succumb to this siren’s call.
Perverse as it is, the policies offered to people suffering from inflation create even more inflation. In other words, inflation has a way of perpetuating itself, much like a heroin addiction.
We are already seeing cockamamie schemes in the US, like “inflation relief checks,” which attempt to solve the problems of inflation by creating more inflation.
The political-inflation cycle follows a clear pattern:
Step #1: In a fiat currency system, the government will inevitably print an ever-increasing amount of currency to finance itself.
Step #2: This makes prices and living costs rise faster than wages.
Step #3: The average person feels the pain but doesn’t understand what’s happening.
Step #4: More people support politicians who promise freebies to relieve the pain inflation causes.
The good is not all that good, the bad is very bad, and the ugly is extremely ugly. From Alasdair Macleod at goldmoney.com:
There has been much comment over the likelihood that central bank digital currencies will be introduced. I conclude they are unnecessary — a red herring. But it does allow us to discuss their possible relevance to a new Asian super-currency.
Earlier this month, the Bank of England in partnership with the UK Treasury produced a white paper on the subject, which waters down the objectives identified by the Bank for International Settlements considerably. The British proposal is a bad idea because it is pointless and I explain why.
In this article, I describe how a new gold-backed currency can do away with the US dollar for trade settlements and commodity purchases entirely between participating nations in the Russia China axis. Some informed commentary on the topic suggests that a blockchain will be involved, and Sberbank, the Russian state-owned lender has already issued a gold-linked fund designed to be available to the public by being compatible with ethereum. Perhaps it is front-running developments…
The ugly side in our title is found in the BIS’s dystopian proposals, which sees CBDCs as an opportunity to allow central banks to double down on their attempts to manage economic outcomes while restricting personal freedom.
Messing about with fiat currency alternatives such as CBDCs could end up revealing the formers’ fragility. CBDCs will take years to implement in any major currency anyway, during which fiat currencies led by the dollar are likely to fail anyway.
Introduction
It is not clear what encouraged central banks to think about introducing their own digital currencies, other than possibly a feeling that if they didn’t do something, then private sector money could threaten their monopoly.
Initially, bitcoin was touted as sound money with a hard stop of 21,000,000 coins and proof of ownership recorded on a blockchain. Bitcoin’s strength was to be the opposite of fiat currency weakness, whose expansion is the primary means by which a central bank stimulates an economy. But if central banks think that bitcoin could overturn fiat currencies, they merely exposed their own ignorance about the nature of money and credit.
Much more tax extortion coming for the American people, mostly ordinary working stiffs. From Ron Paul at ronpaulinstitute.org:
According to the January report of the Consumer Price Index, price inflation increased by 0.5 percent last month. This follows a 0.1 percent increase in December. The total increase over the last 12 months is 6.4 percent. The official government statistics, which are manipulated to understate the true rate of price inflation, show even greater increases in some costs. Over the last 12 months, food prices increased by 10.1 percent, energy prices increased by 8.7 percent, and shelter costs rose by 7.9 percent.
The government’s figures also record a 0.2 percent decline in real wages in January and a 1.8 percent decline from a year earlier. Keep in mind that actual real wages losses have been larger because the government’s real wage numbers are calculated using the government’s understated price inflation numbers. The Federal Reserve-caused decline in purchasing power disproportionally harms middle- and lower-income Americans, many of whom were already living paycheck to paycheck before the Federal Reserve’s unprecedented money creation caused especially large increases in price inflation.
David Stockman gives the balloon episode the derision it deserves. From Stockman at antiwar.com:
Well, at least we are starting to get some clarity. America is not being attacked by aliens and probably not by the Red Chinese, either. However, it is definitely being bombarded by inflation, war fever and, apparently, the Northern Illinois Bottlecap Balloon Brigade (NIBBB).
Let us unpack.
Last week’s media frenzy about intruders in the skies has gone stone cold silent on the likes of CNN and in The New York Times. Maybe that’s because Sleepy Joe himself has now assured us that the last three intruders shot down with half-million dollar Sidewinder missiles were not sent by the Chicoms, after all.
“The intelligence community’s current assessment is that these three objects were most likely balloons tied to private companies, recreation, or research institutions studying weather or conducting other scientific research,”
Then for good measure, the White House’s always risible press secretary, Karine Jean-Pierre, assured that they weren’t the spawn of extraterrestrial aliens, either.
“I know there have been questions and concerns about this, but there is no – again, NO – indication of aliens or extraterrestrial activity with these recent takedowns.”
Whew! Good to know.
Still, we now learn that there is even more good news. According to a report from Aviation Week, at least one of the objects may have been a hobby balloon reported missing by a club in Illinois that launches small balloons with tracking devices that are capable of traveling the globe at high altitudes.
Tired of fiat currencies and ceaseless debasement, much of the world may adopt a currency or currencies tied to gold. From Alasdair Macleod at goldmoney.com:
The consequences of Russia and her Asian allies embracing gold backing for their currencies are poorly understood in western capital markets. This move could lead to the destruction of the global fiat currency system.
According to evidence which is widely ignored in western capital markets, a move by Russia to put a new trade settlement currency and possibly the rouble as well onto a new gold standard is becoming a certainty. As a weapon of mass fiat currency destruction, the timing is probably bound up in on-the-ground military considerations, which are already showing signs of escalating in Eastern Ukraine.
As well as using gold to undermine the western currency system, a return to a credible gold standard has significant advantages for Russia and for her allies in the Shanghai Cooperation Organisation, the Eurasian Economic Union, BRICS+, and all their commodity suppliers beyond Asia. At the same time, it would destroy the west’s fiat currencies and financial system.
This article explains how one part of the global economy can thrive while the other collapses.
Introduction
Recently, I have written about the signals emanating from Russia that President Putin is minded to re-adopt sound money by returning to some sort of gold standard. We do not yet know the details, but consider what he said at the St Petersburg International Economic Forum in June last year:
“Caught in the inflationary storm, many nations are asking, why bother exchanging goods for dollars and euros when they are losing value right before our eyes? Indeed, the economy of imaginary wealth is being inevitably replaced by the economy of real valuables and hard assets.
“According to the IMF, today’s global foreign currency reserves contain 7.1 trillion dollars and 2.5 trillion euros. And this money is depreciating at an annual rate of about 8%. Moreover, it can be confiscated or stolen at the whim of the US if it disapproves of something in a country’s policy.
I think this has become a very real threat for many countries that keep their gold and foreign exchange reserves in these currencies. According to objective expert analysis, in the coming years a conversion process of global reserves will get under way. Reserves will be converted from weakening currencies into tangible resources like food, energy, commodities, and other raw materials. Clearly, this process will further fuel global dollar inflation.”
Bitcoin is a call on a generalized currency collapse. From Nick Giambruno at internationalman.com:
As told in the movie The Big Short, a group of hedge fund managers who saw the housing crash coming used Credit Default Swaps (CDS) to make a fortune.
These exotic financial instruments conveyed information crucial to seeing the 2008 financial crisis in advance. That knowledge allowed astute speculators to get positioned for massive profits as the crisis unfolded.
In the coming crisis—which has already started—I expect CDS will again play a key role in telegraphing important information shrewd speculators can use to their advantage.
A CDS is a contract between two parties. Think of it like an insurance policy against a borrower—typically a large company or a government—defaulting. One party underwrites the insurance policy, and another buys it. If the borrower defaults, the CDS issuer pays out the CDS buyer.
CDS trade in the open market and reflect investor expectations of the default probability of a particular borrower. The more likely the underlying entity is to default, the more expensive the insurance (CDS) will cost.
SLL HAS MANY OF THE SMARTEST AND BEST INFORMED READERS ON THE INTERNET. IT REQUIRES TIME AND EFFORT TO MAINTAIN THE SITE AND FEATURE THE ARTICLES YOU WANT TO READ. PLEASE CONSIDER MAKING A PAYMENT AS COMPENSATION FOR THE VALUE YOU RECEIVE FROM SLL. THANKS.
STRAIGHT LINE LOGIC 