hypothetical central bank agreement

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cedar's picture
cedar
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hypothetical central bank agreement

I have been trying to figure out what the governments are doing and why. Until recently I thought their policies were complex and stupid. Then I asked myself, what if they are not stupid? Could there be a simple explanation to everything we are seeing? This is my current theory.

Imagine this PowerPoint presentation being given at the end of a long meeting between the heads of the world's central banks:

  • we agree there is more debt than can be repaid through real growth
  • we agree that allowing the debt to default is politically unacceptable
  • we agree to collectively print money
  • we agree to publicly call the new money a "stimulus package"
  • we agree to allow our currencies to fall in unison to inflate away the excess debt
  • we agree to collaborate in the future to prevent runaway inflation
Ready's picture
Ready
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Re: hypothetical central bank agreement

Interesting...

What do you think the representative from China would say at this point in the meeting?

Rog

cedar's picture
cedar
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Re: hypothetical central bank agreement

I am not sure. Perhaps China has decided that keeping their people employed selling stuff to Americans is more important than trying to force repayment of money they know cannot be repaid. What do you think?

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malpert
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Re: hypothetical central bank agreement

A coordinated devaluation amongst fiat currencies will not eliminate the risk of hyperinflation. 

Ultimately, the increasing supply of fiat currency will manifest itself in a declining value of that currency versus actual goods and services.

If the rate of change is alarming or disruptive, it alters expectations and the demand shift to non-fiat assets becomes self-reinforcing.

Interestingly, but not coincidentally, coordinated inflation is one of the key "benefits" of domestic central banking.  The cartel-like arrangement of the Federal Reserve System allows all banks to inflate together under uniformly aggressive reserve ratios and a single currency issued by the Fed.  This prevents one bank from making on a run on another bank and destroying the value of its local notes, but it does not eliminate the risk of inflation.

Similarly, collaborative international devaluation may eliminate the catalyst of a run on the dollar or another fiat currency, but it does not solve the inflation problem, which is always a monetary phenomenon. 

 

cedar's picture
cedar
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Re: hypothetical central bank agreement

I agree they will not be able to prevent high inflation. But I can imagine them agreeing to try.

I can also see a country like Canada or Australia in the room saying, hmmm... we'd really rather not devalue our currency but if we don't get on board our resources will be too expensive for the American's to afford.

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caroline_culbert
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Re: hypothetical central bank agreement

I don't think Russia would agree.

malpert's picture
malpert
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Re: hypothetical central bank agreement

An international authority would be required to enforce the cartel arrangement.  Although collaberative devaluation seems plausible, the reverse is politically unpalatable as it stifles the local economy.  It would not be expected that members of a cartel would agree to suffer the temporary economic ills of responsible fiscal and monetary responsibility in order to combat inflation abroad.

Indeed, the men behind close doors may be discussing such an international authority. 

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scepticus
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Re: hypothetical central bank agreement

"Ultimately, the increasing supply of fiat currency will manifest itself
in a declining value of that currency versus actual goods and services."

No, no, no.  Please understand that the banks create the money supply and if they choose not to lend and/or borrowers choose not to borrow then the new currency being printed is not inflationary. so:

q: When will the banks lend?

a: when there is a recovery

q: when will there be a recovery?

a: when the banks lend...

There will be no recovery until the debt is paid down. Re-inflation cannot be used to retsart the economy unless wages rise in tandem with the prices of goods. Printing money will not make wages increase when there is falling demand for goods. 

Traditional notions of how fiat currencies operate need tobe re-evaluated in the context of a GLOBAL liquidity trap. See the article at debtdefaltion.com (Steve Keen) via the thread on that subject posted recently.

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ckessel
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Re: hypothetical central bank agreement
scepticus wrote:

"Ultimately, the increasing supply of fiat currency will manifest itself
in a declining value of that currency versus actual goods and services."

No, no, no.  Please understand that the banks create the money supply and if they choose not to lend and/or borrowers choose not to borrow then the new currency being printed is not inflationary.

scepticus,

Certainly you are not serious .........are you?

 

Cedar,

I would hazard a guess that you are very close to the truth. How the various nations respond will be the key to our collective well being. In the past these disagreements have led to war (which we allready have) but the nations generally have required some sort of rally cry. The Lusitania in WW I, Pearl harbor in WW II, Communism in Korea and Vietnam and Terrorism/Trade Center attack for Iraq.

I sincerely hope it is different this time.

Coop

 

scepticus's picture
scepticus
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Re: hypothetical central bank agreement

deadly serious. Please see here.

Follow the link to ' Steve Keen’s DebtWatch No 31 February 2009: “The Roving Cavaliers of Credit”'

 

 

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