“Modern financial theory” is nothing new. And, in fact, a lot of things are true. You can print as much cash as you want, i.e. accumulate source, as long as there is a corresponding accrual in demand, and the result will be a solid price currency. Between 1775 and 1900, the fundamental source of cash in the US dollar building rose about 163 times, but the price (compared to gold) was almost not replaced. That’s right: an accumulation of 163 times in the amount of cash did not result in any replacement in the price. But it took 125 years, when the United States experienced super-economic growth.
Things get confusing when sources accumulate beyond what’s required, resulting in a decrease in the price of the coin. This can come in two ways: a dramatic construction at the source or a dramatic reduction in demand. A “dramatic minimisation in demand” is infrequently referred to as “loss of confidence” and occurs regularly when a currency loses price (in the foreign exchange market, for example) and there is no coherent official reaction; or the official reaction is truly in favor of decline. Who would need to have that coin? Obviously, no one. As a result, the request for collapse; and the price of the coin is minimized. This can happen even when the font has not changed. This is what took place in the devaluation of the US dollar in 1933 or the Thai baht cave in 1997-98. (I see many episodes like this in my e-book Gold: The Monetary Polaris).
We were at a time when there was a massive build-up in the source of fundamental dollar cash through the Federal Reserve; and also, a massive increase in demand, which leads, in general, to a slight decrease in the price of the coin, but still not too much. This “cash impression” is fundamentally a natural benefit to the government and central banks, so of course they are emboldened through this and are willing to settle for all the arguments that they say can do more of that, which they now call “modern financial theory.”
In the afterlife, mainly between 1870 and 1960, banks had a lot of “liquidity” on the balance sheet. These were “bank reserves” or deposits in the Federal Reserve, a form of fundamental currency. Overall, this accounted for about 10% of deposits, even reaching 30% in times of unrest such as World War II. When depositors go to the bank to request a refund, that’s what banks would return to them.
Between 1960 and 2007, banks gradually replaced short-term loans with this “treasury” (Federal Reserve bank reserves), which provides a source of interest for income and increases profitability. This came to the point in 2007, where banks had virtually no genuine liquidity. Think of it as having a debit card in your wallet instead of $200 in bills. This painting, as long as the debit card issuing bank is willing to make payments. But in 2007, he didn’t paint anymore. The banks made the decision that they should pack genuine money or “bank reserves” with the Federal Reserve. Initially, the 2008 currency crisis, the bank borrowed this liquidity directly from the Federal Reserve in the “discount window”.
But this was never designed to be a long-term mechanism, when banks actually adopted their new long-term high-liquidity policy. This was codified in Basel III regulations agreed at the end of 2010 and was extended in a series of steps until 2019. This new base currency has to come from somewhere, and it came here from the acquisition and monetization of Treasury debt through the Federal Reserve. It seemed that the Treasury could simply factor the debt and would be acquired with the Federal Reserve’s “printing”, and in fact, that’s necessarily what happened. Since other maxims (I mean 99% of economists) are not consistent with the mechanisms involved, they have developed confusing new theories for this, now known as “modern financial theory”. The overall result is that the price of the dollar has increased through approximately $1,000 consistent with the ounce. gold in mid-2008 at approximately $1250/oz. 2013-18, which represents a price loss compared to gold, but not much.
The point is, we have enjoyed a period of “free money” as the base money supply has expanded (since 2008) to meet the new demand for base money “bank reserves” from banks, which have returned to a conservative 1950s-style balance sheet. This was a one-time historical adjustment.
I mentioned earlier that it was typical for banks to hold about 10% of their assets in the form of “cash” (base money in the form of “bank reserve” deposits held at the Federal Reserve) during prosperous times. But, when things get iffy, banks will often wish to hold higher levels of reserves than this. They want safety, not profitability. In extreme cases (Civil War and the Great Depression/World War II), banks have taken their reserve holdings as high as 30% of assets. At the same time, individuals feel the same way about banks: they would rather hold banknotes, rather than a bank deposit which may go kerflooey. So, in a crisis, banknotes in circulation rises.
Once again, we have an increase in demand, this time in reaction to crisis conditions; and to meet this increase in demand, the central bank will have to accumulate source or “print more cash” through the general acquisition of government bonds. Again, it turns out that we can print cash and get away with it, and in fact that’s true. Indeed, if the central bank did not respond to this requested accumulation through the source of construction, the result would be a “scarcity” with potentially disastrous economic consequences. Then you have to. The people of “modern financial theory” are very popular. For politicians, it turns out that there is no longer any restriction on public spending.
In the afterlife, World War I in Britain and the Great Depression/World War II in the United States, this crisis-induced accumulation of critical currency demand allowed central banks (the Bank of England and the Federal Reserve) to build the fundamental currency. approximately 3 times (bank reserves from 10% to 30%), without significant loss of financial value. There was a decline in the pound and dollar (then floating), but not enough to annoy many other people at a time when they had many other things to fear.
It is worth noting that these dramatic increases in central bank balance sheets beyond the periods of crisis (World War I and World War II) took a position in the context of the gold standard. The price of the coin, the british pound and the US dollar, did not intend to change, compared to gold. These types of dramatic increases in cash supply, to cope with dramatic increases in demand for times of crisis, are fully consistent with the principles of the gold standard.
In practice, sterling and the US dollar floated from their golden anchors in this period. But it was not official: neither sterling nor the US dollar were “officially” devalued from their parity with gold in any of the world wars. And, after the wars, the two coins regained their pre-war gold parities, more or less as promised. Therefore, the “faith” of the people in their motto proved correct. They have not been permanently devalued. This “faith” (or really a rational expectation) naturally leads to a higher “demand”: you are more willing to have anything you trust.
Britain and the United States not only returned to the gold standard, to pre-war parities, in the 1920s and 1950s. They also particularly reduced wartime spending and had budgets close to balance. I didn’t want to “print money” to finance budget deficits.
Look at our conclusions so far: you can “print from scratch” potentially $7.2 trillion of new money, without consequences and even respecting a gold system, under safe “crisis” conditions, when other people’s “faith” (rational expectations) in currency reliability is solid. But, a coin can fall out of bed and fall to a third of its previous price, even without an accumulation in the source of money, when other people lose that “faith” (rationally they expect currency managers to allow the price of the coin to fall unsealed).
It’s a little weird. But that’s what’s happening in the real world.
Now let’s see where we are today. We had a COVID-induced crisis that led to a build-up of herbs in demand for fundamental currencies (bank reserves and banknotes). This requested accumulation has allowed central banks to finance a dramatic amount of new expenditure, with deficits now in the order of 20% of GDP in the United States, in fact, as in times of war. Turns out we can go out with anything now. Hooray for “modern financial theory”!
But as economic contraction dents tax revenue, while at the same time long-unresolved issues like entitlement expenses or State finances become acute, structural deficits on the order of 5% of GDP loom as far as the eye can see. There will be absolutely no interest in fixing any of this as long as you can get away with making it better by printing more money.
On top of that, a continuing weak economy, plus the sheer thrill of buying votes with printed money, will likely lead to a continuing stream of “stimulus” and economic support programs of one form or another, probably bringing deficits to the 10%+ of GDP range for a number of years.
The kind of camp that led Britain and the United States to return to the gold standard, particularly to spend and generate post-war budget surpluses, the kind of courage that made britain and the United States world leaders, is not currently in sight. Instead, we have a developmental adoption of print financing in any way, justified through confusing notions of “modern financial theory”.
Finally, I think the procedure starts now, this will lead to a “loss of confidence” in the currency. That’s when coins can really implod. The check will take position when there is a really large and significant decrease in the price of the coin (relative to gold, for example), and there will be no corresponding reaction by the coin managers, to the price of the currency through the contraction of the currency. base currency for example. It’s coming down a little bit, but will it continue? This contraction of the fundamental currency would mean at least ending the transitoryness of government bond purchases, meaning that there will be no more financing from the print media, and the bond market position will also locate yields that reflect today’s real dangers. In other words, the upper fiscal field and higher interest rates.
Smart cash thinks so and concludes: it may not happen.
But their numbers are still small. It is when the broad masses “lose faith” in their currencies that things really start to move. This will likely come about due to the continued embrace of giant deficit spending financed by the printing press, and justified by “Modern Monetary Theory” notions that are just true enough to get people into big trouble.
I guess he will in 2021.
But I’m not too involved in that. Years ago, I think it would be the end of the game, and no one can do much about it. I’m more interested in what comes next, when the political consensus goes to “print money, it’s fun!” “never again!”
Companies do it over and over again.
Nevertheless, we can conclude that we simply cannot leave the cash in the hands of the “wise”. Because we’ve noticed where it leads. Ugh
So, and not before that date, we’ll be in a position to return to gold-based silver. Throughout the centuries of history, the world’s dirtiest rich countries have had reliable coins founded on gold and silver. It’s the only thing that’s been a long-term success.
This can happen simply because we are placed in a scenario where the gold bullion is the only thing other people will settle for large-scale payment. This would not be the first time: the Ming dynasty’s paper cash formula nevertheless collapsed (in 17th-century China) when the army was only made up of coins. For nearly four hundred years later, the Chinese rejected any other paper cash fiduciary experiments.
There were 3 periods of primary crises in The history of the United States: the Revolutionary War, the Civil War and the Great Depression/World War II period. In each case, the currency was devalued and floated, and there was even a single hyperinflation in the revolutionary period. In each case, the United States returned to popular gold thereafter; and America’s long rise to global leadership continued.
Let’s do 4 out of 4.
I write about economic issues in classical culture or ‘parallel offer’. My is: newworldeconomics.com.