Thursday, September 29, 2011

The Titanic - or is it Spinning Straw Into Gold?

“In the United States neither paper currency nor deposits have value as commodities. Intrinsically, a dollar bill is just a piece of paper, deposits merely book entries. Coins do have some intrinsic value as metal, but generally far less than their face value. What, then, makes these instruments - checks, paper money, and coins - acceptable at face value in payment of all debts and for other monetary uses? Mainly, it is the confidence people have that they will be able to exchange such money for other financial assets and for real goods and services whenever they choose to do so."

- Federal Reserve Board - Chicago, 1961

As you know, dear reader, I have been banging the drum for a while about economic instability and also the potential for a coming problem of availability of cheap energy.

I am sorry if your eyes glaze over about some of this stuff, but I think we are living in a moment of history which could be as significant as the period of 1911-1920 where massive social change swept the world, regimes collapsed or were toppled, and new ways of living were introduced.

Of course, I could be wrong. But my purpose in discussing this is for us to seriously confront, as Christians, what happens when we may, for economic reasons and availability of resource reasons, no longer be able to jet-set around to air-conditioned conferences and different parishes flung far about (esp. the situation or Orthodoxy in the U.S. West), and we are forced to be closed to home, often without a parish anywhere near. And I think that in turn forces us to ask - what have we been about lately, anyway? And how should we, sojourners all, be passing through our societies, or local neighborhoods, our towns and environment?

This ship (the S.S. global economy) seems to have hit the iceberg already and while the band plays on the crew is frantically trying to calm those that can see there's a problem while trying to figure out what to do. Or are they simply organizing the limited lifeboats and who will be allowed to sit in them?

The quote of the last week:

"We need to find a mechanism where we can turn one euro in the EFSF into five, but there is no decision on how we could do that yet" the [EU] official said, speaking on condition of anonymity.

The means of that sort of leverage to get a 2 Trillion Euro facility seemed to be what some are calling the "CDO Squared" or the "Liesman rumor".

If you are confused, here is a somewhat succinct summary of the idea:

The complex deal would see the EFSF provide a loss-bearing "equity" tranche of any bail-out fund and the ECB the rest in protected "debt". If the EFSF bore the first 20% of any loss, the fund’s warchest would effectively be bolstered to €2 trillion. If the EFSF bore the first 40% of any loss, the fund would be able to deploy €1 trillion.

Using leverage in this way would allow governments substantially to increase the resources available to the EFSF without having to go back to national parliaments for approval, which in a number of eurozone countries would prove highly problematic.

As quid pro quo for an enhanced bail-out, the Germans are understood to be demanding a managed default by Greece but for the country to remain within the eurozone. Under the plan, private sector creditors would bear a loss of as much as 50% – more than double the 21% proposal currently on the table. A new bail-out programme would then be devised for Greece.


Spinning straw into gold? The only way to make 1 Euro into 5 legitimately is to devalue the currency, which some claim (with good evidence) to be the way of all fiat currencies and leading ultimately to their demise. We've had several such fiat currencies in North America prior to the current Federal Reserve Note. FRNs are only about 40 years old.

Fiat currencies work because of the faith of the users that the governments backing them will maintain value. So a massive devaluation of currency essentially risks the faith of the public. In the Euro zone these frantic maneuvers could lead to a destruction of that currency and possibly the economic union. Such a destruction could have large effects on the US and other nations as the Fed, using its monopoly powers, has committed to keep huge dollar swap lines open into Europe, essentially betting on the continued value of the foreign currency holding up, or risking the future labor of US taxpayers on the gambit (for if the currency were to fail . . .).

**A swap may be described thus: foreign central bank draws on its swap line with the Federal Reserve, the foreign central bank sells a specified amount of its currency to the Federal Reserve in exchange for dollars at the prevailing market exchange rate. The Federal Reserve holds the foreign currency in an account at the foreign central bank. The dollars that the Federal Reserve provides are deposited in an account that the foreign central bank maintains at the Federal Reserve Bank of New York. At the same time, the Federal Reserve and the foreign central bank enter into a binding agreement for a second transaction that obligates the foreign central bank to buy back its currency on a specified future date at the same exchange rate. The second transaction unwinds the first. At the conclusion of the second transaction, the foreign central bank pays interest, at a market-based rate, to the Federal Reserve.

Europe has largely thumbed their noses at this extreme idea, but they are still hoping for half-measures in bumping up the firepower of the EFSF - so some form of money "printing" may happen, unless some of the member states fail to ratify the changes.

Alright. Now your eyes are really glazed over. But friends, this is important. If you watch the world news (CNN World Edition, BBC, Reuters - etc. - forget Fox News and CNN domestic, it's drivel) you will quickly see that the economic elite are making statements nearly every day about this and that measure to shore up below decks. This is not normal. They are panicked.

And again, why should we care, as Christians? Well, big events have a way of restructuring whole societies - sometimes sweeping across the globe. If you were enjoying the summer of 1912, telephones and electric lights were barely coming in, as were motor cars. Could you have predicted that by 1918 there would have been a cataclysm of war, that three great world empires (Ottoman, Russian, and Austro-Hungarian) would have collapsed and entirely new and radical social structures arisen in their place? What effect did that have on Christians in Russia? On peoples in Germany? On the social mores of peoples in England and France? What continuing effects has the legacy of that collapse, only 100 years in remove, had on us today?

1912. 100 years ago. The reasons for massive social change potentially facing us are different today, but the rumblings of change itself are all around - the Arab Spring, the economic crisis, the after effects of 9/11, the rise of China and India as potential great powers. We should be prepared to think that things will not remain as they were, although how they will be is not entirely knowable.

However, I think, in rough outline we might see these sorts of things:

1. A collapse of the European monetary union as we know it now - whether to new drachmas and Deutschmarks or to some other type of currency is unknown.

2. A strong possibility of a loss of faith in the Federal Reserve Note in this country to the erection of another type of currency.

* I think such changes in money faith are always painful economically and socially

3. A possibility that the US currency will no longer be the de facto world reserve currency in which key products (oil, other commodities) are priced and traded

4. A rise in harsh and autocratic regimes in places where we might not have thought it possible in years past

5. A general lowering of the standard of living for a lot of people living in the West.

6. On a not-too-distant horizon, a concentration of life to more local concerns and reduction in travel using cars as transportation fuels relative to available money/wages becomes more expensive (note - absolute $ cost not issue here - gas could be $2.50/gal but if I'm unemployed, it's still expensive).

In the end, our economic woes may only be addressed by use of a fairly old idea - the idea of Jubilee, or something similar - where creditors are forced to take haircuts on their claims and debtor's debts are released. As always the question becomes "who gets relief." If it's primarily the wealthy, businesses and banks, then such things may only exacerbate misery for millions.

Here is a prescription to address the economic crisis.
I doubt that any politico has the guts to try to get such plans put to consideration, and I doubt that creditors would be willing to accept it. The Hebrews and the Mesopotamians had the decree of the Divine to enforce such actions. Who could speak with such force now?



Post a Comment

Links to this post:

Create a Link

<< Home