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Sense and Nonsense on Petrodollars

June 17, 2024

Sense and Nonsense on Petrodollars

Folded dollar bill (featuring George Washington) against a map of Saudi Arabia.

Last week several reports suggested the termination of a US-Saudi petrodollar agreement, and speculated a Saudi Arabian move to sell oil on world markets in various currencies, including the Chinese yuan. The accounts were rife with inaccuracies: the Saudis’ have transacted in non-dollar currencies for decades, and there has never been a formal treaty, much less with a specified expiration date, governing the loose arrangement that has come to be called the ‘petrodollar system.’

But even the fragments of broken mirrors reflect reality, and despite their fundamental errors a significant trend is in evidence: Saudi Arabia is progressively reducing its dependence on the United States. Quite possibly reflective of its recent admittance to the expanded BRICS block it is exhibiting a greater inclination to settle oil transactions in currencies other than the US dollar. Owing to the US and Western Europe’s increasingly entangled alliances, and its own efforts to diversify away from dependence upon energy exports, Saudi Arabia has been increasing its diplomatic and economic engagements with China, Iran, Russia, nations considered primary US foreign policy adversaries. Recent moves toward accepting non-dollar currencies reflects broader geopolitical shifts away from US currency hegemony.

The concept of the petrodollar, established in the 1970s, was an informal arrangement where Saudi Arabia agreed to sell oil exclusively in US dollars in exchange for US military protection and investment in US Treasury securities. In the immediate wake of the collapse of the Bretton Woods system in 1971, the arrangement bolstered the value of the US dollar and secured US military support for Saudi Arabia. It also ensured relatively consistent demand for US government debt, a windfall which five decades later has become a millstone of damning heft.

…click on the above link to read the rest of the article…

De-dollarization Has Begun.

April 6, 2023

De-dollarization Has Begun.

Last week, China and Brazil reached an agreement to settle trades in one anothers’ currencies. Over the past 15 years, China has replaced the United States as the main trading partner of resource-rich Brazil, and as such that shift may have been inevitable. But within the context of recent circumstances, this appears to be another in a series of recent blows to the central role of the dollar in global trade.

As the world’s reserve currency, the US dollar is essentially the default currency in international trade and a global unit of account. Because of that, every central bank, Treasury/exchequer, and major firm on Earth keeps a large portion of their foreign exchange holdings in US dollars. And because holders of dollars seek returns on those balances, the ubiquity of dollars drives a substantial portion of the demand for US government bonds in world financial markets.

The switch from dollars to a yuan-real settlement basis in Chinese-Brazilian trade is only the latest in a growing trend. Discussions of a more politically neutral reserve currency have gone on for decades. The profound economic disruption experienced by Iran, and more recently Russia, after being evicted from dollar-based trading systems like SWIFT, however, have led many nations to consider imminent contingency plans. India and Malaysia, for example, have recently begun using the Indian Rupee to settle certain trades, and there have been perennial warnings about Saudi Arabia and other energy exporters moving away from the dollar. On that note, China also recently executed a test trade for natural gas with France settled in yuan.

DXY Index (1980 – present)

(Source: Bloomberg Finance, LP)

It’s not just the conscription of the dollar in economic warfare, but increasingly error-fraught monetary policy regimes that are driving various interests away from the greenback…

…click on the above link to read the rest…

‘We live in an Orwellian hell-scape’: Facebook fact-checks top economist for stating America IS in a recession after Biden refused to admit it

August 1, 2022

‘We live in an Orwellian hell-scape’: Facebook fact-checks top economist for stating America IS in a recession after Biden refused to admit it

  • Phillip Magness, the research and education director at the American Institute for Economic Research, believes the U.S. is in a recession
  • Economists usually say it is a recession when two successive quarters have seen negative growth: data on Thursday showed the definition had been met
  • The White House is instead relying on an ‘official declaration’ from the the National Bureau of Economic Research (NBER), which can be very slow
  • Magness’s post on Facebook about the U.S. being in a recession was fact-checked by Facebook and a warning posted online
  • ‘We live in an Orwellian hell-scape,’ he tweeted. ‘Facebook is now ‘fact checking’ anyone who questions the White House’s word-games’ 

Facebook placed a ‘fact-checking’ label on a post written by a top economist stating that the United States is now in a recession – a move he termed ‘Orwellian’.

Two consecutive quarters of negative growth is the standard definition of a recession, and Phillip Magness, the research and education director at the American Institute for Economic Research, posted on Facebook a commentary about the country now being in a recession.

The post – which is no longer visible – was marked by Facebook’s fact checkers as being misleading.

‘We live in an Orwellian hell-scape,’ he tweeted.

‘Facebook is now ‘fact checking’ anyone who questions the White House’s word-games about the definition of a recession.’

Biden on Thursday (pictured) insisted that the country was not in a recession, despite new data showing a second consecutive quarter with negative growth

Biden on Thursday (pictured) insisted that the country was not in a recession, despite new data showing a second consecutive quarter with negative growth

Phillip Magness, an economic historian, believes the U.S. is in recession - but the White House disagrees

Phillip Magness, an economic historian, believes the U.S. is in recession – but the White House disagrees

…click on the above link to read the rest of the article…

Dissenters, Unite!

May 12, 2021

Dissenters, Unite!

Being contrarian is hard work. You need to withstand ridicule, the loss of friends, employment, and acquaintances, face the imminent possibility that most of the time you’ll be wrong, and abandon the warm fuzzy feeling of having your otherwise friendly peers confirming your bias.

Yet, authentic critics are crucially important, even if (and when) they are wrong. When at least some of us speak out against what is the prevailing wisdom on any given topic, we break the numbing spell that majorities have over groups. We temper extremities, flush out the overlooked assumptions in the majoritarian take, and encourage better decision-making.

Consensus, contrary to the “science is settled” mantra of climate change activists and affectatious Covid pushers alike, is not desirable. At least according to U.C. Berkeley psychologist Charlan Nemeth, who, in her 2018 book In Defense of Troublemakers: The Power of Dissent in Life and Business, summarizes research into majorities and minorities, consensus and dissent.

It’s not a pretty view for those who think bashing wrong-thinkers into silence and reeducating those with the wrong disposition are the treasured fights of our times. In very accessible chapters, Nemeth takes us through detailed analysis of how the lone dissenter in 12 Angry Men could persuade a powerful majority opting for a guilty verdict (majorities persuade quickly and in numbers; minorities quietly and through persistence); we get a comparison between the JFK administration’s internal information-processing in the Bay of Pigs disaster in 1961 and the more balanced and nuanced approach to the Cuban Missile Crisis the following year; we have a brief look at Edward Snowden and the gradual shift of him from a careless criminal to a courageous whistleblower.

…click on the above link to read the rest of the article…

The Everything Bubble and What it Means for Your Money

May 1, 2021

The Everything Bubble and What it Means for Your Money

In the aftermath of the Black Plague which swept across Europe between 1347 and 1353, wiping out between 30 and 60% of the population, the European economy changed dramatically.

Source: Jeremy Norman – HistoryofInformation.com

The Black Plague had a lasting socioeconomic impact; for example, towns and cities emptied, and the sudden reduction in the labour force saw wages rise. Meanwhile attitudes towards death – and life – changed. The Latin phrase, carpe diem, quam minimum credula postero – seize the day, place no trust in tomorrow – epitomised this profound shift in attitudes.

The current pandemic, whilst utterly tragic, has been far less catastrophic, but due to the policy response it too appears destined to leave its mark in changing patterns of living and working. Unlike the 1350’s, however, where the changing price of goods and services signalled imbalances in supply and demand, the valiant monetary and fiscal actions of governments and institutions have distorted this price discovery mechanism.

During the first months of the lockdown, economic growth declined and the price of many equities – and even bonds – fell rapidly. Central banks responded, as they had during the Great Financial Crisis (GFC) of 2008/2009, by cutting interest rates, or, where interest rates could be cut no further, by increasing their purchases of government bonds and other high grade securities. As a result of these purchases, major central banks balance sheets have swollen to $29trln: –

Total Assets of Major Central Banks
`Source: Yardeni, Haver Analytics

The effect of central bank actions has spilled over into a ballooning of global money supply: –

Global Monetary Growth
Source: Yardeni, Federal Reserve

Governments, cognizant of the limitations of their central banks, also reacted, providing loan guarantees, supporting the furloughing of employees and sending direct payments to the rising ranks of the unemployed…

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What My Friends on the Left Need to Know About the Green New Deal

August 28, 2019

What My Friends on the Left Need to Know About the Green New Deal

“Nowhere has our public discourse failed us more egregiously than on the environment and climate change,” I wrote last year while reviewing the first sketches of a proposed Green New Deal. It’s since become a buzzword, but until now it remained only vaguely defined.

Now Senator and Democratic presidential candidate Bernie Sanders has significantly upped the ante. Sanders’ Green New Deal proposal is very specific, earmarking $16 trillion over 10 years to initiatives from “reaching 100 percent renewable energy for electricity and transportation by 2030” to reauthorizing the New Deal-era Civilian Conservation Corps to “coming together in a truly inclusive movement that prioritizes young people, workers, indigenous peoples, communities of color, and other historically marginalized groups.”

The opening to the Sanders campaign’s new page on the Green New Deal encapsulates the candidate’s view of the issue:

The climate crisis is not only the single greatest challenge facing our country; it is also our single greatest opportunity to build a more just and equitable future, but we must act immediately.

Sanders and I wouldn’t disagree that his plan represents a sea change in the way our government, society, and economy interact. The plan is gigantic. I want to fill page after page with factoids about how big it is, but just a few will suffice:

  • The proposal’s total cost is $16 trillion, over 20 times the cost of the New Deal (in today’s dollars, just under $700 billion).
  • If the proposal succeeded in creating 20 million jobs, it would raise the percentage of the workforce employed by the government to around a third, double what it is now.
  • Remember that goal of 100 percent renewables by 2030? We’re only at 15 percent now, meaning almost the entire U.S. energy system would be overhauled.

 …click on the above link to read the rest of the article…

Krugman and the Goldbugs

August 24, 2019

Krugman and the Goldbugs

The announcement that President Trump would nominate Judy Shelton, a long-time advocate of the gold standard, for a seat on the Federal Reserve’s Board of Governors got Paul Krugman thinking: why do some economic commentators become goldbugs?

Krugman offers a rather cynical view. It is difficult “to build a successful career as a mainstream economist,” he writes.

Parroting orthodox views definitely won’t do it; you have to be technically proficient, and to have a really good career you must be seen as making important new contributions — innovative ways to think about economic issues and/or innovative ways to bring data to bear on those issues. And the truth is that not many people can pull this off: it requires a combination of deep knowledge of previous research and the ability to think differently. 

So what’s an aspiring if not so smart or creative economist to do?

“Heterodoxy,” Krugman writes, “can itself be a careerist move.”

Everyone loves the idea of brave, independent thinkers whose brilliant insights are rejected by a hidebound establishment, only to be vindicated in the end. And such people do exist, in economics as in other fields.… But the sad truth is that the great majority of people who reject mainstream economics do so because they don’t understand it; and a fair number of these people don’t understand it because their salary depends on their not understanding it.

In other words, Krugman suggests most gold standard advocates are either ignorant or disingenuous — and, in some cases, both.

According to Krugman, “events of the past dozen years have only reinforced that consensus” view that “a return to the gold standard would be a bad idea.” 

 …click on the above link to read the rest of the article…

The Dollar, Not Crypto, Is a National Security Issue

July 17, 2019

The Dollar, Not Crypto, Is a National Security Issue

U.S. Treasury Secretary Steve Mnuchin piled on to comments made recently by President Donald Trump by calling cryptocurrencies a “national security issue.” Bitcoin and crypto proponents more broadly have long wondered if (and how) the government of the United States would recognize the slow but steady encroachment of decentralized assets, and it appears to have begun. Facebook’s announcement of the Libra project on June 18, 2019, will likely prove the point on countless future historical timelines at which the U.S. government began a slow, ultimately ineffectiveassault upon the cryptocurrency realm.

Everything that Mnuchin attributed to Bitcoin — for one thing, that it has been used in concert with such “illicit activity [as] cyber crime, tax evasion, extortion … illicit drugs, and human trafficking” — can be said, and to degrees an order of magnitude or more larger, about the U.S. dollar. It’s an argument suitable for children.

All of this is extremely bullish for Bitcoin and the entire cryptocurrency complex. A bipartisan political salvo against crypto assets will undoubtedly accelerate the pace of innovation as well as increasing the value proposition, and ultimately the market price, of assets that ensure privacy. Higher prices will draw more crypto developers into the market and direct more resources at capturing market share, which means — as in any market — that consumers are the ultimate beneficiaries.

Mnuchin isn’t wrong, though. There is a tremendous risk to American national security where currencies are considered: the dollar. Those who habitually cite its reserve-currency status as a reason not to worry are making an argument that stands on increasingly precarious foundations: since 2010, the U.N. and other groups have cited the dollar’s downward slide in value, urging the adoption of an alternate system of reserves.

 …click on the above link to read the rest of the article…

MMT Is a Recipe for Revolution

April 2, 2019

MMT Is a Recipe for Revolution

Historian Stephen Mihm recently argued that based on his reading of the monetary system of colonial Massachusetts, modern monetary theory (MMT), which he cheekily referred to as PMT (Puritan monetary theory), “worked — up to a point.”

One can forgive him for misunderstanding America’s colonial monetary system, which was so much more complex than our current arrangements that scholars are still fighting over some basic details.

Clearly, though, America’s colonial monetary experience exposes the fallacy at the heart of MMT (which might be better called postmodern monetary theory): the best monetary policy for the government is not necessarily the best monetary policy for the economy. As Samuel Sewall noted in his diary, “I was at the making of the first Bills of Credit in the year 1690: they were not Made for want of Money, but for want of Money in the Treasury.”

While true that colonial governments controlled the money supply by directly issuing (or lendin)  and then retiring pieces of paper, their macroeconomic track record was abysmal, except when they carefully obeyed the market signals created by sterling exchange rates and the price of gold and silver in terms of paper money.

MMT in the colonial period often led to periods of ruinous inflation and, less well-understood, revolution-inducing deflation.

South Carolina and New England were the poster colonies for inflation, in part because they bore the brunt of colonial wars against their rival Spanish and French empires. Relative peace and following market signals eventually stabilized prices in South Carolina. 

In New England, however, Rhode Island for decades was able to act as a “money pump” that forced inflation on other New England colonies until they abandoned MMT entirely in the early 1750s.

 …click on the above link to read the rest of the article…

The Real Significance of the French Tax Revolt

December 5, 2018

The Real Significance of the French Tax Revolt

The gilets jaunes (Yellow Jacket) anti-tax riots in France escalated over the past weekend, again citing the impact of higher taxes on fossil fuels –and high levels of taxation in general – on everyday life. French citizens, already subject to the highest taxes in the OECD, are being crushed by both new and systematically increasing taxes, and have taken to the streets by the hundreds of thousands in a “citizen’s revolution”. Recommendations to declare a state of emergency have for the time being been tabled.

With no sense of irony whatsoever, in a press conference on Saturday French President Emmanuel Macron stated: “I will never accept violence.”

Yet violence is the core component of his chosen vocation as a statesman.

Taxation poses as an equitable transaction – goods and services provided by a government in return for a fee (more galling and Orwellian, a “contribution”) from the taxpayer – but the nature of the interaction is obvious to all but the indifferent or determinedly thoughtless. It is not voluntary and does not follow from reason; neither will even the most indefatigable defenders of state appropriation, given the choice (and confidentiality), miss an opportunity to skirt the taxman and retain their property.

The force of violent compulsion is the quintessence of taxation and tax policy, thinly ensconced behind a thin veil of platitudes regarding social goods and general welfare. In Paris, an oft-repeated phrase among the protesters is that they’re “fed up.” Ambulance drivers have joined the protests, as have both teachers and students in at least 100 schools across France.

Levying taxes on individuals to combat climate change – or for the accomplishment of any social betterment project – is unfailingly undertaken in the name of the sanctity of life.

…click on the above link to read the rest of the article…

Olduvai IV: Courage
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Olduvai II: Exodus
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