10/01/10 Baltimore, Maryland – “Monetary warfare!” says The Financial Times. In North America, the US is pointing its heavy guns at China… The US Congress has proposed a bill naming China as a “currency manipulator.” How, exactly, is China manipulating the renminbi? It is holding steadfast to the dollar! This, says US Speaker of the House, Nancy Pelosi, “translates into a significant subsidy, artificially making US products more expensive, and jeopardizing efforts to create and preserve manufacturing jobs in America.”
In South America, Brazil fires salvoes at Japan, South Korea and Taiwan. “We’re in the midst of an international currency war,” said Guido Mantega, Brazil’s finance minister, on Monday. What makes the Asian countries a target of Brazil’s artillery? They intervened in the currency markets directly, selling their own currencies and buying, among other things, Brazil’s real.
The remarkable thing about these battles is that admirals scuttle their own ships. Generals spike their own cannon. All the combatants send out their currencies like foot soldiers – and then shoot them in the back. They are all trying to “manage their currencies down,” the FT explains.
Meanwhile in Europe, Ireland cannot assassinate its own homegrown currency. It doesn’t have one. It signed on to the euro. For the moment at least, the euro managers hesitate; Ireland will have to cheat its people and its creditors flagrantly rather than surreptitiously. On Thursday, it put another 5 billion euros into Anglo-Irish Bank.
These strange facts incite the following reflection on the whole scammy system. The trouble with today’s capitalism is that there is little honest capital left in it. It has been drained away by quackery, debt and fraud. Real capitalism requires solid capital – money you can trust. But real money disappeared nearly 40 years ago. That was when the last traces of gold were removed. Since then, all currencies have been “managed.” No longer fixed measures of real wealth, they have become tools…supposedly used by the authorities to promote full employment and growth…but in fact little more than monetary felonies.
From the end of the Napoleonic wars until the beginning of World Wars of the 20th century, the world’s money system was backed by gold. You couldn’t “manage” it. You couldn’t devalue it. You couldn’t talk it up or talk it down. You couldn’t beggar thy neighbor by cheapening it or enrich him by making it more dear. It was what it was. The new experimental money system began in the Year of Richard Nixon, 1971. Thereafter, the supply of money could increase much faster than the supply of goods and services. US money supply (M2) rose 1,314% between 1970 and 2008, from $624 billion to $8.2 trillion. What did all this ersatz new money do? First it flattered…then it corrupted…and finally, it robbed.
America’s working stiffs were the first to get whacked. Inflation made them feel like they were earning more; but they haven’t had a real, hourly raise since the system was put in place 4 decades ago. And now, America is struggling to make sure they get none in the future either. Lowering the dollar against the renminbi increases the cost of probably 90% of the goods in Wal-Mart and Costco – where the working classes shop.
But this has been going on ever since the managers began taking liberties with the dollar. In the 1960s, the working man – 90% of the population – got 60% of the income gains of the period. By the end of the bubble years – 2001- 2007 – he got just 11%. This has resulted in a “record income gap,” says this week’s news. Half the nation’s income goes to the top 20% of the population, nearly twice as much, compared to the bottom 20%, as in 1967; it’s the biggest gap since they began keeping track.
Consumer prices rose 5 times over the last 40 years. The stock market went up 15 times – from 800 in January 1970 to over 12,000 in 2008 – roughly in line with the increase in the money supply. But the phony money betrayed the rich too. Investors were misled. Capitalists erred. Trillions of dollars went down rat-holes. Consumers were spent out, but the capitalists kept building shopping malls. Now, stock market prices have gone nowhere for more than a decade. And household net worth – most of it in the hands of the wealthy – has declined $12.3 trillion from the peak. When the mistakes are finally flushed out, they could be down another $12 trillion.
The horns have sounded and bells have been rung. It is 1939 in the currency war – just the beginning. When it is over, every managed currency in the world will be dead or wounded. But we will be wiser, too. When the new managed dollar was introduced in the “Nixon Shock” of August, 1971, nobody knew what it was worth. When the end comes, everyone will know.
Regards,
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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You are correct.
Anyone think China wants to go the way of Thailand, Mexico or Russia? If they float their currency,,,, their toast!
Great article, Bonner at his very best.
Am I better off than someone in my occupation 40 years ago? Yes and mostly no. Like many others, the housing boom meant more house leveraged with negative interest rates. Paid more than I should have, but also occupy a house 20% larger than what would have been possible without the misguided economic policies of George Jr.
Provided nothing goes seriously wrong, and nothing forces me to sell, at least in as far as housing is concerned I am actually better of than someone like me 40 years ago.
Unfortunately, that’s the only upside, nearly everything else has been washed away or diluted.
Even with insurance, if I got seriously ill chances are I would be wiped-out in a few years.
But when I say “nearly” of course there is an exception besides housing. 40 years ago I couldn’t legally own gold. That changed in 1975.
For all the talk of returning to a gold standard, I would propose that we are already on one. So long as dollars and gold are exchangable, you can rightfully say the dollar is backed by gold. The thing is, it isn’t a fixed exchange rate. And the dollar is being backed by less and less gold with each passing day.
We’re already on a gold standard, -have been since 1975 when it became legal to own gold again. That the exchange rate is not fixed in immaterial. It still amounts to a gold standard so long as I can freely exchange one for the other.
Well don’t blame the leaders for monetary larceny. In 90% of nations today, the leaders are chosen by the peasants. So let them lower and middle classes get what they deserve.
Interesting thought, Bruce, I never thought of it quite that way.
It reasons then that those as wear fine hats cannot let it stand. Right now there is a 28% “collectibles tax” (really…) on bullion. Minnesota charges sales tax on bullion transactions. This sort of skulduggery will – necessarily must, in the perception of those with the most to lose in a gold standard environment – occur.
Bill how about coming up with a NEW world financial system that could work based on gold/silver/plat relationship related to the volume of the worlds currencies???
I think you might find more interest in a solution rather than fragging on about what most NON-zombies all ready know is coming.
tks
Ralph
Bill,
Good article again. No blame on public employees for our travail.
Gobalization is at fault. The capitalists of the world united against the proles who are too uneducated, complacent, and stupid to care or understand at first. All this is about to change. Why should the Chinese prole labor and sweat for a ridiculous salary? – Why should the West Virginia peon work at McDonald’s for minimum wage? – As long as Americans could live off credit, they were OK, but the credit bubble has burst, the proples need to pay the piper, and the proles are getting very unhappy.