Up Next——Deflation In The Canyons Of Wall Street

Record high stock and bond prices are flashing danger signs to former Reagan White House Budget Director David Stockman. Stockman contends, ‘I don’t think we are going to have a liquidity crisis. I think it’s going to be a value reset. I think there is going to be a jarring downward price adjustment both in the stock market and in the bond market. This phantom or phony wealth that has been created since the last crisis is going to basically evaporate.’
So, what asset is safe? Stockman says gold and goes onto explain, ‘I think the time to buy (gold and silver) is ideal. Gold is the ultimate and only real money. Gold is the only safe asset when push comes to shove. They tell you to buy the government bond, that’s a safe asset. It’s not a safe asset at its current price. I am not saying the federal government is going to default in the next two or three years. I am saying the yield on a 10-year bond of 2.4% is way below of where it’s going to end up. So, the only safe asset left is gold. This crazy Bitcoin mania has drained off what would otherwise be a demand for gold. . . . When Bitcoin collapses, spectacularly, which it will because it’s sheer mania in the markets right now. When it collapses, I think a lot of that demand will come back into gold, as well as people fleeing the standard stock and bond markets for the first time in 9 or 10 years.’

This post was published at David Stockmans Contra Corner on December 27th, 2017.

We Are Stuck In Depression Until The Legend Of The ‘Maestro’ Finally Dies

ALHAMBRA PARTNERS / September 23, 2016
Alan Greenspan is confused – again. The man who admitted to the world a decade ago he didn’t know much if anything about interest rates is now trying to change that reputation by suggesting yet again interest rates are set to rise. In testimony before Congress in February 2005, the then-Chairman of the Federal Reserve actually said:
For the moment, the broadly unanticipated behavior of world bond markets remains a conundrum. Bond price movements may be a short-term aberration, but it will be some time before we are able to better judge the forces underlying recent experience.
To an economist, it was a ‘conundrum’ especially where econometrics and statistics and take the dominant view (if it can be called that). That is one facet to the Greenspan story that is so odd yet so compelling in all the wrong ways. Though he was an economist by schooling, he had more practical experience in the ‘real’ world. He served on boards of such illustrious companies as Alcoa, General Foods, even Mobil. But he was also a director for JP Morgan and Morgan Guaranty.
He should have known better, as his infamous 1966 essay on gold reveals. Thus, we can reasonably assume that what transformed his worldview was not economics (small ‘e’) but rather power. Not only had he been appointed to major corporate boards, he was heavily involved in politics, including the kinds that are the stuff of conspiracy theories.

This post was published at David Stockmans Contra Corner by Jeffrey P.Snider via.

The U.S. Economy: Bad Moon Rising

April 1969 saw the release of what would soon become Credence Clearwater Revival’s second gold single. Bad Moon Rising’s popularity quickly secured it a permanent spot in rock history. But it was also headed somewhere else, if not everywhere else, to places the young rockers never saw coming. In hindsight, it can only be said that while their music was great, their lawyer was lousy.
Why is that? Because, for years now, writers for both the big and small screen and all manner of productions have found the song’s addictive rhythm and lyrics impossible to resist and as a bonus, easy picking. Listen and you’ll hear it in An American Werewolf in London, My Fellow Americans, Twilight Zone: The Movie, Blade, Sweet Home Alabama, My Girl, Man of the House, Mr. Woodcock and (in the personal favorite department), The Big Chill. As for television, you’ll recognize the tune in Supernatural, Cold Case, Northern Exposure, The Following, The Walking Dead, Teen Wolf, and not to be relegated to the back of the line, Alvin and the Chipmunks, who belt out their own immensely irritating rendition.
There’s no doubt about it. John Fogerty hit a home run when he wrote Bad Moon Rising. As to why he wrote it and its meaning, he’s been quoted as calling it a description of, ‘the apocalypse that was going to be visited upon us.’ And what of all those bad scenes visited upon Fogerty’s lyrics?
We had no power in our contracts to veto where our music went. It was everywhere,’ lamented Fogerty on the ubiquity of the song in a 2014 interview. ‘For every good movie you’ve heard it in – for example An American Werewolf in London, which was a pretty cool movie – there were at least 10 more that were awful.’ To this day, it’s hard to predict just where that bad moon might next be rising.

This post was published at David Stockmans Contra Corner on August 31, 2016.

War On Cash: Discontinue Professor Rogoff’s Stupid Commentary, Not the $100 Bill

In a recent opinion piece for the Wall Street Journal, Harvard economist Kenneth Rogoff declared that there’s ‘little debate among law-enforcement agencies that paper currency, especially large notes such as the $100 bill, facilitates crime.’ Rogoff would like to discontinue the $100 in order to – try not to laugh – reduce crime.
Can the eminent economist really be so nave as to presume that the disappearance of a piece of paper would prove effective at making the U. S. (and the world) more honest and safe? Apparently he does, while lightly acknowledging what economists refer to as the ‘substitution effect.’ If $100 Federal Reserve notes prove scarce, then similar euro and Pound bills will do the job, as will 10,000 yen notes. If $100 bills simplify big criminal transactions, wouldn’t little gold coins simplify crime even more?
While Rogoff is fully focused on the problems presented by $100 bills for government, he ignores how problematic it is that our government is so large and intrusive as to want to take away something that we the people (law abiding and not) find convenient. Did it ever occur to Rogoff that maybe there are too many laws and too many crimes as opposed to too many $100 bills? To you the reader, if cocaine and heroin are legalized tomorrow, will you become users?
As opposed to wanting to abolish the $100 bill in order to increase our individual freedoms, Rogoff seeks an end to the $100 to increase the size and scope of government. A principle reason Rogoff is in favor of abolishing the C-note is because ‘Cash is also deeply implicated in tax evasion, which costs the federal government some $500 billion a year in revenue.’ Lower federal revenues are apparently bad in the eyes of Rogoff and his ilk, but they’re surely good for the rest of us. Ignored by Rogoff, or worse, understood by the Keynesian thinker, is that a dollar collected by the IRS is an extra dollar for Congress to spend.

This post was published at David Stockmans Contra Corner on August 30, 2016.

The Product of NIRP: Exposing Psuedo-Science

It wasn’t the introduction of statistics that led to the dire state of ‘science’, rather it was the jettison of common sense in favor of, and the total deference to, statistics. This was not a single event or a clean break, of course, as it happened slowly over decades. But in the 21st century what is often talked about and written up as science is almost exclusively some form of statistical study.
The true measure of science is repeated observation leading to prediction that can be replicated by anyone anywhere. While a gold standard for scientific inquiry, it just doesn’t apply so readily in the softer sciences of the humanities. Quantum physics has made a significant contribution to our daily lives from nothing more than statistics, even over the objections of luminaries such as Einstein, because the math works; repeatedly. In economics, there is nothing but a sea of variables increasingly disconnected from the world common sense still inhabits.
The August 28, 2015, edition of Science magazine, Volume 349, Issue 6251, featured a study of studies in psychology. Selecting 100 published experiments from three ‘high-ranking’ psychology journals, authors sought to replicate the findings in each but ran into great difficulty in doing so. In fact, in only one-third to one-half of them could they obtain the same results at near the same levels of significance. In the abstract, they point to the increasing disconnect between ‘science’ and perceptions of science:

This post was published at David Stockmans Contra Corner by Jeffrey P. Snider ‘ August 25, 2016.

The Inequality of Logic Behind The Increasingly Emphasized Magic Numbers

It is a basic element of logic that if A = B and B = C, then A must also equal C. In terms of action, if I do a thing and that thing always leads to a predictable outcome, not seeing that outcome causes one to question whether or not one actually did that thing. In other words, A must not have equaled B.
Central bankers all over the world are stumped. Nothing they have done has led to what was expected when one does such things. In very basic terms, we all know, as history has shown, that money printing leads to inflation. In most cases, it leads to the most extreme forms of inflation, which is why human history in financial and economic terms is really a study in how to keep official efforts from ever going in that direction (gold worked the best, which is why it survived for so long).

This post was published at David Stockmans Contra Corner by Jeffrey P. Snider ‘ August 22, 2016.

Negative Rates Are Backfiring – – Here’s Some Early Evidence

KORSCHENBROICH, Germany – Two years ago, the European Central Bank cut interest rates below zero to encourage people such as Heike Hofmann, who sells fruits and vegetables in this small city, to spend more.
Policy makers in Europe and Japan have turned to negative rates for the same reason – to stimulate their lackluster economies. Yet the results have left some economists scratching their heads. Instead of opening their wallets, many consumers and businesses are squirreling away more money.
When Ms. Hofmann heard the ECB was knocking rates below zero in June 2014, she considered it ‘madness’ and promptly cut her spending, set aside more money and bought gold. ‘I now need to save more than before to have enough to retire,’ says Ms. Hofmann, 54 years old.

This post was published at David Stockmans Contra Corner By Georgi Kantchev, Christopher Whittle and Miho Inada, Wall Street Journal ‘ August 9, 2016.

Are Negative Rates Backfiring? Here’s Some Early Evidence

KORSCHENBROICH, Germany – Two years ago, the European Central Bank cut interest rates below zero to encourage people such as Heike Hofmann, who sells fruits and vegetables in this small city, to spend more.
Policy makers in Europe and Japan have turned to negative rates for the same reason – to stimulate their lackluster economies. Yet the results have left some economists scratching their heads. Instead of opening their wallets, many consumers and businesses are squirreling away more money.
When Ms. Hofmann heard the ECB was knocking rates below zero in June 2014, she considered it ‘madness’ and promptly cut her spending, set aside more money and bought gold. ‘I now need to save more than before to have enough to retire,’ says Ms. Hofmann, 54 years old.
Recent economic data show consumers are saving more in Germany and Japan, and in Denmark, Switzerland and Sweden, three non-eurozone countries with negative rates, savings are at their highest since 1995, the year the Organization for Economic Cooperation and Development started collecting data on those countries. Companies in Europe, the Middle East, Africa and Japan also are holding on to more cash.
Economists point to a variety of other possible factors confounding central-bank policy: Low inflation has left consumers with more money to sock away; aging populations are naturally more inclined to save; central banks themselves may have failed to properly explain their actions.

This post was published at David Stockmans Contra Corner on August 9, 2016.

Coming Soon: Trumped! (Part 4 – -America’s Rolling LBO)

In effect, America has undergone a rolling national LBO since the Gipper’s time in office. It is the result of the Washington/Wall Street policy consensus in favor of permanent deficit finance, stock market-centered ‘trickle-down’ stimulus by the Fed and massive borrowing by the household and business sectors of the private economy.
So the U. S. economy is now stuck in the ditch because it has leveraged itself to the hilt over the past three decades. The vast majority of Americans are no longer living the dream because Wall Street speculators and Washington politicians alike have led them into a debt-fueled fantasy world that is coming to a dead end.
Indeed, this deformation has been long in the making and reaches back nearly a half-century. To wit, once the Federal Reserve was liberated from the yoke of Bretton Woods and the redeemability of dollars for gold by Nixon’s folly at Camp David in August 1971, financial history broke into an altogether new channel.
As shown in the chart below, since 1971 total public and private debt outstanding soared from $1.6 trillion to $64 trillion or by 40X. By contrast, nominal GDP expanded by only 16X. The very visage of the chart tells you that the former is crushing the latter.

This post was published at David Stockmans Contra Corner on July 26, 2016.

Even Utilities Are Now Joining Stock Market Bubble

Buying the stocks that Wall Street calls boring has paid off over the past six months – but now this ‘defensive’ strategy is starting to look pretty risky.
Utilities, a sector traditionally viewed as a safety play in times of market turmoil, have risen 21.2% in the first half of 2016 – the sector’s best first-half performance in over 25 years.
But if you ask some analysts, the run-up in prices leaves the sector extremely overextended and valuations dangerously high; some analysts believe the sector is in bubble territory.
Are some investors already catching on? Thursday’s decline marked the utilities sector’s sharpest daily drop, at 1.8%, in seven weeks.
Over the past six months, investors in search of yield and safety in a global environment of historically low yields, elusive growth and geopolitical uncertainties piled into anything that resembled defensive plays – Treasurys and gold prices soared as did share prices of utilities, telecoms, real-estate investment trusts, consumer staples and master limited partnerships.
The most commonly cited valuation metric, the 12-month forward price-to-earnings ratio of the S&P 500 utilities sector is currently at 19, above its 10-year average of 14 and well above the PE of the broader index, as shown in the chart below.

This post was published at David Stockmans Contra Corner on July 8, 2016.

China QE Dwarfs Japan And EU

Crescat Capital letter to investors for the second quarter ended June 30, 2016
See more great hedge fund letters here – also Crescat’s whole letter is great as always but the stat on China in the headline is mind-boggling – check it all below.
Dear Investors,
The markets have been turbulent in the wake of the unexpected Brexit vote. Crescat’s hedge funds were well prepared for the shock based on our diversified global macro themes, well hedged long/short positioning, and disciplined risk model. As evidence, our Global Macro Fund posted gains on both Friday and Monday when the S&P 500 was down 3.6% and 1.8% respectively. Crescat Large Cap, our long-only strategy, was also well prepared for Brexit with its large cash position, precious metals exposure, and ample defensive equity holdings. Even after the sharp snap back rally on Tuesday and Wednesday, all three Crescat Strategies are ahead of the S&P 500 in June month to date through yesterday’s close with the S&P 500 down 1.1%.
Far and away, our best performing macro theme year to date remains Global Fiat Currency Debasement, our long precious metals theme across all three strategies. Gold, the world’s perennial reserve currency, remains near a historically low valuation relative to the global fiat monetary base. Meanwhile, silver remains near a historically low valuation relative to gold. The problems caused by debt-to-GDP excess in Europe, China, Japan, and elsewhere auger well for further global central bank fiat money debasement and substantial future hard money, i.e., gold and silver, appreciation. Brexit is just one of the catalysts.
Despite a broadly rallying market in April and May, we also saw positive returns in the hedge fund strategies from our short-oriented China Currency and Credit bubble theme. We believe that this theme, along with our New Oil and Gas Resources and Asian Contagion themes represent significant opportunities for the second half of 2016. In addition, our Yahoo/Alibaba Spread trade has continued to be a low volatility and high return winner for the hedge fund strategies. We think this has much further to play out in our favor as we show below.

This post was published at David Stockmans Contra Corner on July 1, 2016.

Jim Grant: Gold’s Not A Hedge Against Monetary Disorder – – It’s An Investment In It

Jim Grant, founder of Grant’s Interest Rate Observer has long been a proponent of gold, and equally a critic of central planners. He sat down recently for an interview at John Mauldin’s strategic economic conference to discuss his views on gold, and how he struggles to understand those who view gold as an irrelevant curiosity.
Grant is always worth a read and/or listen.
On his current view regarding gold, Grant’s humor was on display as he described to what degree he was bullish on gold, and that he wouldn’t categorize gold as a hedge against monetary disorder but rather a bet on it.
‘This is not going to be any news, Jim Grant is bullish on gold. The degree I would characterize as ‘very’. I would characterize gold not so much as a hedge against monetary disorder, but as an investment in it. People will say well that’s a hedge against armageddon, no, armageddon doesnt’ happen mostly, but what we are in the midst of is monetary shenanigans, and I see no real chance of being fewer of them, and a great chance there will be more of them.’
Regarding Western central banks having different ideas on whether or not to even own gold, for example the Canada, who recently sold all of its gold reserves, Grant pokes a bit of fun at the monetarist view of the world, and cautions that when Western central banks start to sell gold it’s time to pay attention because that’s a signal of significant distress in the world.

This post was published at David Stockmans Contra Corner on June 2, 2016.

Academic Skullduggery – -The Complete Lunacy Of Monetary Rules Including Taylor’s

In the 1970s economists started to incorporate rational expectations into their models and not long after the seminal Kydand & Prescott (1977) article named Rules Rather than Discretion: The Inconsistency of Optimal Plan was published. Their work has been driving the mainstream macroeconomic debate ever since. The question raised in this debate is how policy-makers can credible commit to promises made today when future events may cause short-term pain if restricted by stringent rules from taking action?
For example, in the Treaty on the Functioning of the European Union Article 125 it clearly states that ‘the Union [or any Member States] shall not be liable for or assume the commitments of central governments, regional, local or other public authorities…’ it also says in Article 123 that’[o]verdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States… …in favour of Union institutions… …shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.’Both rules are there to credibly commit to not bail out EU nations either through ECB inflation or with other member states tax euros. Needless to say, after SMP, OMT, ELA, EFSF, ESM, maturity extensions and interest rates reductions these rules turned out to be useless. Rational actors obviously adapt their behaviour accordingly as the European Union turns into tragedy of the commons where moral hazard abounds. Actually, the whole monetary union has been a monetary tragedy of commons since its inception as credit expansion in one country did not have any of the adverse effects associated with either falling exchange rates or gold outflows. The euro area essentially incentivises maximized inflation with no natural correcting mechanisms apart from gargantuan capital consumption that goes along with it.

This post was published at David Stockmans Contra Corner on May 24, 2016.

Stanley Druckenmiller: Bull Market Exhausted, Buy Gold

Stan Druckenmiller, the billionaire investor with one of the best long-term track records in money management, said the bull market in stocks has ‘exhausted itself’ and that gold is his largest currency allocation.
Druckenmiller, speaking at the Sohn Investment Conference in New York on Wednesday, said while he’s been critical of Federal Reserve policy for the last three years he expected at that time it would lead to higher asset prices.
‘I now feel the weight of the evidence has shifted the other way; higher valuations, three more years of unproductive corporate behavior, limits to further easing and excessive borrowing from the future suggest that the bull market is exhausting itself,’ said Druckenmiller, who averaged annual returns of 30 percent from 1986 through 2010 at his Duquesne Capital Management. He’s up 8 percent this year, according to a person familiar with the matter.
As bankers experiment with ‘the absurd notion of negative interest rates,’ Druckenmiller said, he’s wagering on gold. ‘Some regard it as a metal, we regard it as a currency and it remains our largest currency allocation,’ he said, without naming the metal.

This post was published at David Stockmans Contra Corner on May 5, 2016.

China’s Latest Casino – -Madness In The Iron Ore Futures Pits

SYDNEY – The price of iron ore for decades was hammered out in secret talks between the world’s biggest miners and steelmakers.
Now, the dominant force is an obscure commodities market in northeastern China, a stark example of how pricing power for everything from steel to copper is shifting east.
The change has been driven by Chinese investors who have poured billions of dollars intoiron-ore futures traded on the Dalian Commodity Exchange. Their bets, reminiscent oflast year’s frenzy in Chinese stocks, have generated as much dollar volume as gold futures in New York, according to data fromCitigroup Inc. They also have created something that had never existed before in the clubby market for iron ore: visible, real-time prices.
Those prices are surging. Despite an expected glut of iron ore in 2016, Dalian iron-ore futures have climbed 46% since the start of the year. Prices for physical iron ore have risen 52%, reaching a 15-month high of $68.70 a metric ton April 21. On Friday, the physical commodity traded at $65.20 a ton, while the most active contract on the Dalian exchange settled at 462 yuan ($70.36) a ton.

This post was published at David Stockmans Contra Corner on May 3, 2016.

Wheel Spinning On China’s Dealer Lots – -Another Case Of Massive Overinvestment

China has set six straight annual records for the most new vehicles bought by any country in the 150-year history of the automobile. And yet, a troubling trend has emerged among the dealers moving all that metal – most are just spinning their wheels.
Three-in-four dealers were either unprofitable last year or just breaking even, according to the China Automobile Dealers Association. With little sign of improvement in the economy and carmakers pushing too much inventory onto their ever-growing networks of retailers, the situation may worsen this year, said Zhu Kongyuan, secretary general of the China Auto Dealers Chamber of Commerce.
‘It’s getting more and more difficult for dealers to stay in business, as new car sales are not making much profit anymore with all the competition on price,’ said Zhou Jincheng, an analyst at researcher Fourin Inc. in Nagoya, Japan. ‘Under this situation, dealerships won’t stay as they are. They’ll be reorganized, and some may be integrated.’
China’s auto industry operates in a Gold Rush-like atmosphere. Manufacturers have raced to fill their lineups and expand their dealer networks to stake their claim of a market that’s grown six-fold in the last decade.

This post was published at David Stockmans Contra Corner on April 25, 2016.

How The Money Printers Enable Big Government

Sound money advocates are often hit with the charge of being ‘doom and gloomers.’ Yes, we do warn that unsound monetary policies enable unsustainable fiscal commitments, which will lead eventually to a currency crisis.
Sound money advocates are also often portrayed as party-poopers. Yes, we do seek to take away the bottomless punch bowl of easy money and replace it with something more solid. However, we are not pessimists or killjoys by nature.
To the contrary, we are quite optimistic about the ability of genuinely free markets to generate ever greater levels of prosperity for ever greater numbers of people. To advocate hard money, as in a gold and/or silver standard, is simply to be a hard-nosed realist about the dangers of giving governments the power to issue unbacked fiat currencies.
The case for hard money is based on the proposition that real wealth is generated by productive activity in the real economy. When governments and central banks assume the power to set interest rates artificially low, to expand the supply of money and credit at will, and to bail out ‘too big to fail’ financial institutions, they are engaging in massive wealth transfers. They are stealing purchasing power away from productive workers in the real economy and transferring it to bankers and bureaucrats.
As the late economist and Nobel Laureate Friedrich A. Hayek noted, ‘With the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people.’

This post was published at David Stockmans Contra Corner on April 21, 2016.

The Tragic Bull Market Culture

‘Like champagne, bull markets remove inhibitions.’ -James Grant
My readings over the last several weeks have consisted primarily of David Stockman and Jim Grant – two sane voices in the insane financial world. Each have contributed wondrous thoughts and reflections on the nature of 21st century finance, which is primarily a story of the ‘corruption of capitalism’ (to use Stockman’s phrase) and the rise of bubble finance. This tragedy of course, is a result of the slow and pernicious takedown of free markets, especially in the area most people refuse to look: money and banking.
The consequences of the financialization of the world, which began to manifest as ‘fiat money’ was disconnected to its underlying commodity (gold) in the 1970′s, eventually led to a corruption of financial culture – not only the culture of Wall Street itself, but also down to the way Main Street treated its relationship with savings and ‘investments.’ There was a catastrophic shift in the mentality of the people as the Fed moved forward to an era of what David Stockman calls ‘Prosperity Management.’
The middle class in America forgot all about the importance of savings and frugality and instead bought into the lie that one’s future would be ‘taken care of’ if only it threw its money into the stock market. An important mechanism for the allocation of scarce resources into productive investments, the stock market is a vital piece of a free market capitalist economy. But when the United States government decided that money, credit, and interest rates would be controlled and managed solely by the whims of the central planners, no longer having anything to do with the multi-century long underlying commodity of gold, the stock market quickly became a betting center – a gambling house.

This post was published at David Stockmans Contra Corner on April 15, 2016.

UBS Calls Top – -Profits Skidding, Stock Buybacks At Dangerous High

Big banks usually promise their clients all sorts of things and always continue to issue recommendations to continue to invest in stocks and bonds (obviously to rake in their fees), UBS chartists and technicians Muller and Riesner have now publicly stated we might have seen another top of the S&P 500 index.
And when Muller and Riesner speak up, the investment community listens, as these two technical analysts have correctly predicted the two previous corrections (and the recent increase in the gold price), so they do enjoy some respect in the market. They were already correct in seeing the S&P hitting their target at 2050 points earlier this week, but this target was reached much faster than originally anticipated, and we think it’s now fair to say we have seen two V-shaped corrections on the stock market and these corrections might have been wiped out too fast, too soon. Indeed, apparently to the UBS-analysts, the S&P index has now reached its most overbought situation since 2009, and that’s quite a statement to make!

This post was published at David Stockmans Contra Corner on March 28, 2016.

Origins Of The Global Dollar Short – – -A Note On The Rise Of The Eurodollar

There is certainly not enough attention paid to the evolution of eurodollars and even less devoted to how it all started. In my analysis, those two facets are inseparable as the origins of the eurodollar space tell us a lot about how and why it became what it is. The Japanese, for instance, were being squeezed by really unrelated funding pressures in 1963 that began in Italy, worked through Switzerland and ended up with the Japanese government actually selling US Treasuries to fund what was among the first problems with the ‘dollar short.’ In many ways, things have never changed even if the format has and complexities greatly proliferated.
According to some theories, the start of the eurodollar (or a strand of it) can be traced back to one British outfit – Midland Bank. The context was the middle 1950′s and it has to be understood the systemic nature of sterling at that moment in history. For several reasons, British monetary policy was exceedingly ‘tight’ and not just in the normal central bank interest rate scheme. The Chancellor of the Exchequer in 1957 even went so far as to prohibit the pound from financing trade between parties unrelated at all to the British currency – the very essence of what a reserve currency is supposed to do. In other words, with sterling already in crisis, UK authorities banned foreign counterparties from using the pound to facilitate exchange between two (or more) non-sterling currencies. Unless the ultimate transaction was settled in pounds at the start or at the end, banks were supposed to turn away the business.
That opened the door for some other medium of exchange that could be both very flexible and less susceptible to such interference, and given that there was only one other candidate (gold being increasingly disfavored in this context despite the lip service of Bretton Woods) it was only a matter of time before dollars would fill the gap. US monetary and government officials, however, were not particularly enthusiastic over the possibility as it would mean further pressure on the US current account – dollars would have to flow overseas in order to build up enough ‘gravity’ to act as fluid global agent of exchange. That was already the case in certain money centers where US dollar trade had already been taken up, but even as late as the 1950′s there was still an enormous proportion of global geography conducting trade in sterling that would need transition.

This post was published at David Stockmans Contra Corner on March 22, 2016.