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Time is now for intervention to prop dollar: James Saft
James Saft
Reuters
Friday, July 18, 2008
LONDON (Reuters) – The time may have come for sustained coordinated intervention by governments to support the wilting U.S. dollar.
The dollar has taken another leg downward on fear surrounding the bailout of Fannie Mae and Freddie Mac and the perilous state of banking in the United States, briefly breaching $1.60 against the euro and now down almost 7 percent this year against a trade-weighted basket of currencies .DXY.
Intervention by the U.S. Federal Reserve, undertaken in concert with the European Central Bank and other global economic powers, could be an inflexion point for the dollar after its 6 year fall.
(ARTICLE CONTINUES BELOW)
And with the falling dollar playing a substantial role in rising oil prices, official action to back the currency could provide relief for consumers and ease the pressure from inflation, both in the United States and globally.
It would also be a very useful and timely insurance policy against any run on the dollar should global holders of U.S. debt take fright at what may be a massive bill, and proportionally huge supply of new U.S. debt, to backstop Fannie and Freddie and sort out problems in U.S. real estate and banking.
“This is a situation crying out for intervention and leadership,” said Nick Parsons, head of market strategy at nabCapital in London.
“The benefit to (U.S.) exporters has been more than outweighed by the costs to consumers of a weak dollar.”
The falling dollar is a problem — and not just for the United States — because it is associated with the rising cost of energy, which in turn feeds inflation and chokes off consumption.
Fed Chairman Bernanke acknowledged both the problem and the link with oil in June, when in highly unusual comments he said he was “attentive” to the inflationary impact of a sinking dollar, combining this with tough talk about inflation that led investors to bet U.S. rates were heading upward.
A study by the Fed said that about a third of the rise in the price of oil between 2003 and 2007 was caused by a falling dollar.
Bernanke on Wednesday told Congress there “may be conditions in which markets are disorderly where some temporary action may be justified.”
Treasury Secretary Hank Paulson has been doing his bit too, saying time after time that a strong dollar, set by free markets, is in the best interests of the United States and the world.
Problem is that markets have called Bernanke’s bluff and now realize that, with finance in an abject state, he’s in no position to raise rates to support the dollar and choke off inflation.
As for Paulson, the market long ago concluded that the strong dollar mantra is a meaningless piety, though he did say in June he’d never take intervention “off the table.”
Bernanke on Wednesday told Congress there “may be conditions in which markets are disorderly where some temporary action may be justified.” A pattern of intervention comments from both sides of the Atlantic is probably a precondition for actual intervention.
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10 Responses to “Time is now for intervention to prop dollar: James Saft”
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July 18th, 2008 at 10:17 am
I keep hearing it suggested or implied that the solution to the current monetary crisis is (at least in part) for the Fed to raise the interest rate. But that would be no more of a “solution” than cutting off one’s head would be a “solution” to one’s headache. It would be deflationary “cure” far worse than the inflationary disease.
The reason has to do with the nature of our debt-based money system.
Under the current system all money is created out of nothing by private banks and then loaned into circulation at interest — first by the “Federal” Reserve, via its purchase of government bonds; and second by commercial banks, via fractional reserve lending.
There are two critical problems with this process that we must always bear in mind, lest we advocate a false “solution.”
First, when banks loan money, only the principal gets created, not the interest. This is why the overall indebtedness of the economy is always many times greater than even the most liberal estimate of the money supply. Granted, if no one borrowed, there would be no interest to pay; but there would also be no money supply, and thus no economy.
Second, because all money is created as a loan, whenever the principal of a loan is paid back, the money supply is *reduced* by that amount.
Say, for instance, the money supply is currently zero. If a bank loans Person A and Person B $100 each and charges them 10% interest, the money supply increases to $200, yet total indebtedness increases to $220. As a result, the only way either one can pay the interest he owes is to **capture a portion of the other person’s loan principal through the process of commerce.**
Thus, if Person A captures enough of Person B’s loan principal to repay his loan plus interest, the money supply is reduced to $90. Of the $110 the bank receives from Person A, $100 — the principal portion of the loan — immediately vanishes back into the nothing from which it was created, which means the only portion the bank can spend back into the economy is the $10 it receives as interest. Doing so increases the money supply to $100, leaving Person B with $10 of unpayable interest debt –- a debt that will now proceed to *compound* over time (see http://www.wealthmoney.org/wonder.html).
At this point, the *only* way Person B can avoid bankruptcy is for someone else to obtain an interest-bearing loan from a bank, making it possible for Person B to capture the necessary portion of that someone else’s loan principal to get out of debt.
What does all this mean? Two things.
First, it means that, under the current debt-based, musical chairs-style monetary system, there is actually a built-in SHORTAGE of money, due to
(a) the fact that money is “uncreated” whenever the principal of a bank loan is repaid; and
(b) the fact that the money needed to pay the interest on that loan is never created in the first place (which means interest can never truly be paid off, but merely shifted to someone else).
Second, it means that, while increasing the rate of money supply expansion far beyond the growth rate of economic output is certainly “a” cause of price inflation, it is not the “only” cause, nor even necessarily the primary cause in every situation.
Another major cause is the **silent incorporation of usurious interest costs into the selling price of everything we buy.**
Why?
Because most businesses have to indebt themselves to private banks just to get started; and because private banks (as I explained above) never create the money needed to pay the interest on all the money supply-expanding loans they make, thus leaving countless business owners no choice but to charge higher prices (higher prices being the only way they can capture the necessary portion of other people’s loan principal to pay the interest they owe).
So the real root cause of our monetary crisis is not that we have “too much” money chasing “too few” goods, but that we have **too much unpayable interest debt chasing too few dollars.**
We cannot — I repeat, cannot — solve nor even mitigate a musical chairs-style problem like that by haulting or slowing (via interest rate hikes) the expansion rate of our debt-based money supply.
Why?
Because the countless billions in unpayable interest debt being tossed around the economy like hand grenades with the pins pulled out will go **right on compounding.**
Thus, far from solving or mitigating anything, as anyone who’s seen “The Money Masters” — http://www.themoneymasters.com — knows, it would merely excellerate the speed by which the banking elite could foreclose on countless properties and businesses nationwide.
That’s called “burning down the house to roast the pig.”
That wouldn’t be a market-based “correction.” It would be a fraud-based LOOTING (”fraud-based” because fractional reserve lending is *itself* a fraud), and would only concentrate that much more of our wealth into the hands of the very banking criminals who created this crisis to begin with.
As Bill Still suggested recently on Alex’s show, the only way to solve this problem *without* precipitating a depression-inducing money supply contraction in the process — such as the 1/3 contraction that occurred between 1929-1933, despite Federal Reserve Notes being “redeemable in” (and hence “backed” by) gold at the time -– is to implement the type of structural reform called for in “The Money Masters.”
That is to say: to replace the current collapsible, debt-based fiat money supply with a non-collapsible, debt-free fiat money supply; and to guard against both inflation *and* deflation with a Constitutional mandate that the expansion rate of this money supply be pegged by law to *objective criteria* such as population growth (as opposed to the *subjective whims* of either bankers OR politicians).
July 18th, 2008 at 10:54 am
EVERY American needs to Google , and watch “The Money Masters”
Or at the very least Monoply men federal reserve fraud.
July 18th, 2008 at 12:57 pm
As Ron Paul says on the YouTube clip regarding Ben Bernake: Inflation is a form of Taxation and the Federal Reserve is the biggest Taxer on the American People. When you think about how much inflation we have had relative to the stability of gold its easy to see how it is a continuous tax that is accelerating as they print more and more money without any accountability. For example… economy gonna crash? Print more Money and hope it doesnt devalue too much for your rich friends!
July 18th, 2008 at 1:30 pm
What? Does this not tell us that our currency is super saturated with debt? And what action can be taken that will ensure our currency will not collapse? None, of course.
The basis of our currency being issued through the Treasury at the behest of the Federal Reserve Bank is the entire reason our currency is debt ridden and collapsing. Our currency is only backed by a promise that the note is good made by our government. It’s backed by criminals for criminals. And, unfortunately, WE are the collateral. The people, homes, land, dollars and other assets in this country may very well be up for a serious margin call soon.
Our currency, under this system, revolves around the fabrication of debt. The bankers must fabricate debt in order to make our economy grow. This is the reason that inflation occurs. Under fractional reserve banking, inflation potential is constant. And if debt instruments (US dollar assets) like treasury bills, bonds, and securities have a slide in demand, the inflation will run higher and the currency will fall in value relative to other currencies. And if other countries and international corporations attempt to sell or dump their US dollar assets at the same time, the collapse of the currency is ensured. And we’ve reached the point of elasticity where our currency can take no further debt…so guess what is going to happen? Bye, bye currency. But have no fear. The real plan is a nice shiny new currency under the same banking method.
So trash the dollar and collapse our economy you criminal bankers. Your actions are going to send the entire world into recession or depression because we consume 25% or more of everything manufactured on this planet. Then the slave masters can unleash their weapons and diseases and pretty much do anything they want under a world wide state of fascism.
Welcome to Earth, a wholly owned subsidiary of Insane, Inc.
July 18th, 2008 at 2:01 pm
Chuck,
Don’t worry; soon we’ll have 8 more years of communism, and as you know, communism is fascism perfected.
July 18th, 2008 at 2:46 pm
Howard,
Comparing communism to fascism is like comparing a car to a boat. They are completely different tools. Which one is better or worse depends on the purpose of the tool user. It actually makes more sense to compare communism with capitalism. Despite what most western people think, communism was not so much a political system but rather economical system. The political system in USSR was called totalitarianism. And that is what is happening in the US right now. And if US will be able to successfully combine totalitarianism with capitalism, I don’t see any reason why some country can’t combine communism with democracy.
Besides, I miss the good old USSR where I didn’t have to pay for eduction and health care. And my 3 bedroom apartment which my parents got from the state for free. No mortgage!:)
July 18th, 2008 at 2:58 pm
Intervention by the U.S. Federal Reserve, undertaken in concert with the European Central Bank and other global economic powers, could be an inflexion point for the dollar after its 6 year fall…
Did I miss something? Hasn’t the federal reserve done enough for us in the last 70+ years? The same goes for the central banks and “other global economic powers”. As I see it, these are the exact same institutions that created the power/wealth shift that is finally starting to show its face in full view of a significant portion of the world today. These are the exact same institutions set up for the purpose of enslaving us to which we have absolutely no escape. Whenever Greenspan (and now Bernanke) opens their mouths I envision a toilet that is so backed up it spews forth poop for the people. Even if the governments of the world were set up in such a way as to not be wrapped around the bankers, the inevitability of corruption and evil men would finally put us in the exact same mess we are in now: a completely broken system marching forward to one world government and the mark of the beast.
July 18th, 2008 at 3:54 pm
“That is to say: to replace the current collapsible, debt-based fiat money supply with a non-collapsible, debt-free fiat money supply; and to guard against both inflation *and* deflation with a Constitutional mandate that the expansion rate of this money supply be pegged by law to *objective criteria* such as population growth (as opposed to the *subjective whims* of either bankers OR politicians).”
I believe Mr. Still’s solution in theory – however in practice a free system of government is too corruptible to allow it to work for long. If we managed to get an honest money system like Mr. Still suggests, once the lessons of the current crisis are forgotten, which they most certainly will be (anyone remember the 1836-1839 depression, its root causes, and symptoms?), legal acrobatics is all that is required to switch from a debt-free fiat money supply back to a debt-based fiat money supply.
In sum – all fiat currency systems require good people in government. As Alex Jones has tirelessly explained – and our founding fathers taught – good people are rarely attracted to government, yet tyrants always are, and in much greater degree. Any system that requires morality in government is doomed to fail.
Backing currency with commodities is a much more sound system, because the power is in the general populace – the producers and bearers of the commodity – rather than the money masters. One thing that Bill Still fails to acknowledge in his video is the negative effect of price and wage laws on the great depression of the 1930’s. Contraction of the money supply is only a problem IF prices, wages, and other payments and earnings cannot contract proportionately. Or, in the alternative, if the value of scarce money cannot freely increase as compared with surplus goods/services. The depressions of the 19th century rarely saw the great economic upheaval as did the 1930’s, because the value of the exchange medium was much more free to fluctuate v. the price of goods and services.
Thus, when money becomes scarce, its value increases, and prices drop. I think the main reason that this is not taught and almost completely out of the global economic conversation since the turn of the 20th century, is that decrease in money supply/increase in money value discourages long term lending (people are less likely to borrow if money becomes scarce/value increases in the long term), which drastically reduces the power of the money masters.
In the 1981 report “The Case for Gold” Ron Paul and other minority members of Reagan’s Gold Commission outline the differences between the recessions/depressions of the 19th century – with little or no wage/price regulation – as compared with those of the 20th century – having wage/price regulation. The disparity in capital investment, unemployment, duration and severity of those centuries’ economic cycles are staggering.
In sum – I agree whole heartedly that removing the debt-based currency and ending fractional reserve lending as Mr. Still suggests will remove all boom/bust cycles and end the persistent fleecing of market investors by the moneyed interests. That will solve 99% of the problem. As an addendum, I think that we need to back the new currency with a hard commodity, easily owned and tradeable by the average person, to make the new currency much more resilient to future corruption. Furthermore, allowing the medium of exchange to float in value as determined by the market will greatly mitigate or avoid economic recessions. Most importantly, allowing the value of the exchange medium to float will greatly encourage saving and discourage long-term lending, further reducing the power of the moneyed interests.
July 18th, 2008 at 5:59 pm
Matt writes: “however in practice a free system of government is too corruptible to allow it to work for long….good people are rarely attracted to government, yet tyrants always are, and in much greater degree. Any system that requires morality in government is doomed to fail.”
If an elected government is so inherently trustworthy, then why stop there? Why not turn the power to wage war over to private mercenary groups like Blackwater? Why not turn the power to tax over to private companies like Enron? Why not turn the power to enforce laws against such things as theft and murder over to private, mafia-owned security firms?
A person from the “privatize everything” crowd would probably argue that doing so would make these needed functions “free from politics.” But what it *really* does is keep the private oligarchs who profit it from them “free” from **public accountability**.
Sorry, not buying it.
The notion that the current government is untrustworthy is no more a valid argument against the debt-free fia money system called for in The Money Masters anymore than it is a valid argument against keeping the Constitutional power to declare war in the hands of Congress. What it *is* a valid argument against is the idea that *any* urgently needed reform — whether having to do with economics, civil liberties or foreign policy — will have any chance of being implemented in the absence of ELECTION reform.
The solution to a corrupt government that no longer serves the public is not, therefore, to simply turn its key functions over to the very private interests that corrupted it to begin with — which is *exactly* what would happen if we simply abolished the Fed without and turned money issuance over to the euphemistically titled “free market” — but to reassert the public’s control over governent through such measures as instant runoff voting, proportional representation, ballot access reform, and hand-counted paper ballots.
Matt also writes: “Backing currency with commodities is a much more sound system, because the power is in the general populace.”
If anyone reading this will take the time to read Stephen Zarlenga’s masterwork, The Lost Science of Money — http://www.monetary.org/lostscienceofmoney.html — he or she will discover that that simply isn’t the case.
It’s sad that so many in the freedom movement have bought into the propaganda of the monetary flat-earthers in the Austrian School. It doesn’t take much reading to learn that history simply does not support their fairy tale view of commodity-backed money:
http://www.monetary.org/refute.htm
http://www.huppi.com/kangaroo/L-gold.htm
I could go on at length about this, but in the interest of time I’ll close with the following two quotes:
“Those who proclaim that no gold and silver money system has ever failed should consider that whether you are a laborer, farmer, or industrialist, the money system’s success or failure is not measured by the value of a piece of metal. When your job, your farm, or factory has disappeared in a monetarily caused depression, the system has failed!” — Stephen Zarlenga, The Lost Science of Money, p. 426
“Modern-day Greenbackers, while having the highest regard for Congressman Paul’s valiant one-man crusade, would no doubt debate the details; and one highly debatable detail is that it is the *government* that now has monopoly control over money, and it is the *government* that is counterfeiting the money supply. Wars are fought, the Greenbackers would say, not to preserve the dollars of the U.S. government but to preserve the Federal Reserve Notes of a private banking cartel. It is *this* private cartel that has monopoly control over money, and its monopoly grew out of a shell game called ‘fractional reserve banking,’ which grew out of the very ‘gold standard’ the Goldbugs seek to reinstate.” — Ellen H. Brown, Web of Debt, p. 361
http://www.webofdebt.com
July 18th, 2008 at 6:02 pm
Typo correction for the 2nd paragraph of my last comment:
“If an elected government is so inherently trustworthy,”
“trustworthy” should read: “untrustworthy”