Treasures from the threads - Number forty-five

The following comment from bastion calling for a return to money with a definable value is to an article by Ambrose Evans-Pritchard in the Daily Telegraph this morning, worth reading in itself if only for this paragraph "When the US Federal Reserve reveals suddenly that it may abandon its exit strategy and resort instead to another blitz of stimulus – ie, QE2 – it is surely worth asking why. Leaving aside the collapse in the ECRI leading indicator last week to -9.8 (a level that has always preceded recession in the post-war era, but may of course be wrong this time because we are in a zero-rate, mega-stimulus, fin de regime, total upheaval that makes any comparison with past cycles meaningless), there are some hard facts."

The selected comment was as follows:
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Today 02:14 AM

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Oh boy! We really are having a quite extraordinary retrospective history lesson today with all the fangs and talons showing. Suddenly we have coined the phrase "The Great Recession", presumably to distinguish this self-inflicted economic farce stoked by the "Great QE" from the better termed "Great Depression" which was alleviated by the "Great Keynesian introduction of FI(Fiduciary Issue)" which,in turn, has led to the "Great Inflationary Splurge" into worthless currencies.

Yet we are accepting unquestioningly the "The Great Globalised Free Market Experiment" a la Adam Smith without even discussing (or at least I haven't seen any sensible discussion) the merits and demerits or even the practicality of trying to operate such globalised free market economic policies within the existing financial system. The existing international trading system evolved logically over thousands of years. For a currency of exchange to be acceptable by an international trader in exchange for goods or services it needed to have to have an intrinsic value (ie backed by something of substantial practical value such as cowrie shells in the distant past or gold. comparatively recently). That was an absolutely logical and practical trading development from barter because such a currency represented a real store of value for the trader. This logical system began to be undermined by the adulteration of the backing of such currencies. Can anyone say with hand on heart that it is still logical for an international trader to exchange goods and services for paper which represents no more than an IOU which the market has no realistic way of valuing because, in the last resort, it can't be redeemed

It is this illogicality that lies at the heart of virtually every problem the financial system faces today. I suggest that all the talking in the world, all the blogs flowing from commentators pens, all the comments that we like to make on them in an attempt to be self-important and clever are an utter waste of time and an irrelevance unless we first discuss this underlying problem and find a solution to balancing the payments between nations and thereby living within our means. Forget measuring wealth in terms of GDP, get back to basics. Split external and domestic finance and make both balance like any household should do. There ain't no real difference between a household and a nation when you get down to basics.

Let's get real again!

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Money made worthless!

This blog has been stating the obvious regarding Quantitative Easing for so long it became pointless, for example here, so it is somewhat gratifying to see the supposed expert financial journals at last cottoning on to what is soon to occur, for example FT Alphaville this morning carrying a study by Morgan Stanley suggesting Central Banks will be the next to go bust, thus leaving money worthless, just as forecast over the years on Ironies and Ironies Too. Read the report from here. One quote from Morgan Stanley is this:

Yes, central banks can extend unlimited amounts of credit to banks and governments. But they do so by issuing ever more of their own liabilities – money. And just as the trust in banks’ and governments’ liabilities eroded when they issued ever more, we believe that the trust in money will erode if central banks issue ever more of it.

And who do they expect to be hit first? Yes you guessed it the poor old UK! No wonder BoE Governor, Mervyn King, is today reported to have refused a fifteen thousand pound salary increase!

What use fake pounds sterling when finals day tickets in the Royal Box at Wimbledon come with the job?

(Update - since posting this earlier I have just read this post on Samizdata, complex but seeming to draw the same conclusions).

Also again thanks to Samizdata for the following