It's funny: nearly five years ago, when we first started, and said that the world is doomed to an endless cycle of bubble, financial crisis and currency collapse as long as the Fed is around, most people laughed: after all they had very serious reputations aligned with a broken and terminally disintegrating economic lie. With time some came to agree with our viewpoint, but most of the very serious people continued to laugh. Fast forward to last night when we read, in that very bastion of very serious opinions, the Financial Times [19], the following sentence: "The world is doomed to an endless cycle of bubble, financial crisis and currency collapse." By the way, the last phrase can be written in a simpler way: hyperinflation.
So ok then: we are happy to take that as an indirect, partial apology by some very serious people. Partial, because the piece's author, Robin Harding, doesn't explicitly come out and state that this cycle of boom and bust is a direct function of ever encroaching central-planning being handed over to a few economists with zero real world experience, whose actions result in ever more devastating blow ups once the boom cycle shifts to bust. Instead, it is their admission that this is what the world has come to. But, being economists, they naturally fail to see that it is all due to them. Instead, just like pervasive market halt, flash crashes, and everything else that now dominates a broken New Normal, this cycle which eventually culminates with currency collapse, or said otherwise, hyperinflation.
The FT's read on the paradox of modern finance and central banking is surprisingly accurate: in fact, it is almost as if it comes not from the FT but from a textbook on Austrian economics, or a Zero Hedge article:
All [the central bankers'] discussion of the international financial system was marked by a fatalist acceptance of the status quo. Despite the success of unconventional monetary policy and recent big upgrades to financial regulation, we still have no way to tackle imbalances in the global economy, and that means new crises in the future.
Indeed, the problem is becoming worse. Since the collapse in 1971 of the old fixed exchange rate system of Bretton Woods, the world has become used to the “trilemma” of international finance: the impossibility of having free capital flows, fixed exchange rates and an independent monetary policy all at the same time. Most countries have plumped for control over their own monetary policy and a floating exchange rate.
The rest of the article is also like reading early Zero Hedge. Or middle. Or late: in a world of instantaneous fungibility and global capital flows, the Fed is in charge of hot money everywhere, which incidentally is why it is the Emerging Markets that are getting destroyed (first, for now) as the global Fed-funded carry trade slowly but surely unwinds.
Yet all the debate was about how individual countries can damp the impact of capital flowing in and out. Prof Rey’s own conclusion was that it is hopeless to expect the Fed to set policy with other countries in mind (which would be illegal). She recommended targeted capital controls, tough bank regulation, and domestic policy to cool off credit booms.
In practice, this will never work well. It requires every country in the world to react with discipline to constantly changing capital flows. It is like saying we can cure the common cold if only everyone in the world would wash their hands hourly and never leave the house. Even if it did work, the necessary volatility of policy would still impose painful economic costs on the countries acting this way.
The shocking lucidity continues:
The flaws in the international financial system are old and profound, and they defeat any effort to work around them. Chief among them is the lack of a mechanism to force any country with a current account surplus to reduce it. Huge imbalances – such as the Chinese surplus that sent a flood of capital into the US and helped create the financial crisis – can therefore develop and persist.
Even the conclusion is straight out of a Zero Hedge article:
The flaws in the international financial system are old and profound, and they defeat any effort to work around them. Chief among them is the lack of a mechanism to force any country with a current account surplus to reduce it. Huge imbalances – such as the Chinese surplus that sent a flood of capital into the US and helped create the financial crisis – can therefore develop and persist.
Indeed, running a surplus is wise because there is no international central bank to rely on if investors decide they want to pull capital out of your country. There is the International Monetary Fund – but Asian countries tried that in 1997, and the experience was so delightful they have been piling up foreign exchange reserves ever since to avoid a repeat.
A reliable backstop is impossible when the international system relies on a national currency – the US dollar – as its reserve asset. Only the Fed makes dollars. In a crisis, there are never enough of them – a shortage that will only get worse as the world economy grows relative to the US – even if the problem for emerging markets right now is too many of them.
The answer is what John Maynard Keynes proposed in the 1930s: an international reserve asset, rules for pricing national currencies against it, and penalties for countries that run a persistent surplus. After the financial crisis there was a flood of proposals along these lines from the UN, from the economist Joseph Stiglitz, and even from the governor of the People’s Bank of China. None has gone anywhere.
Oh it will go somewhere... as soon as Bernanke leads the US to its own final "currency collapse", resulting in an inevitable shift in the reserve currency status as we have shown many times before, and as has happened in history so many times. Because no reserve currency is forever [20].
[21]
And finally, on that other topic, gold and systemic stability, here is what the FT has to say:
A stable international financial system has eluded the world since the end of the gold standard.
What else is there to say.
No really: when the FT becomes ZH, maybe everything that should be said, has been said?