Currency Wars

[Integral]

Interestingly, a similar crisis was brewing in the years immediately before the First World War. The French were the ones who started the hoarding pattern; by 1903 a third of the world gold supply was either in domestic circulation or in the reserves of the Banque de France. Four years later, when the Panic of 1907 hit Wall Street and the City, the Bank of England was caught below its cover ratio and the Banque de France and the Reichsbank had to support it from their reserves. The Panic brought more gold to the United States - where the Treasury promptly began to hoard it (by 1910 31% of the world's gold was in American hands) - and terrified the French and Germans into acquiring more for themselves, too. At the beginning of 1914, over 60% of the global gold supply was in the reserves of national banks.

For the longest time, the Bank of England didn't subscribe to this sort of "monetary nationalism", focusing instead on the ability to manipulate the City markets with the prototype of modern monetary policy and claiming that gold was "a commodity to be used". Even after the Panic of 1907, the Bank did not increase its gold reserves to meet its cover ratio. This made the country's clearing banks uneasy, because by the early 1910s they possessed more gold than the Bank did, but the Bank was their lender of last resort; in any financial crisis, the Bank would have to increase its gold reserves, preventing it from lending any gold to its needy client banks. Efforts by the clearing banks to induce the Bank of England to change its cover policy in early 1914 were ignored, and a run on gold had already begun to start - albeit in somewhat slow motion - in May, aggravated by concern over the Irish crisis. It's not clear how this would've turned out if the onset of war hadn't caused a massive discontinuous crisis in European financial markets.

Good stuff!

Does the steeply rising private-deb-to-GDP ratio during the Great Moderation not worry you in the slightest?

If NGDP level targeting was applied in 2007-2008, would you have expected a business-as-usual continuation of the Great Moderation to occur with private-debt-to-GDP rising to even further extremes?

NGDP targeting would have made the US (financial) experience in 2007-08 look similar to its experience during and after the 1987 stock market crash. The 2007-08 recession would have looked a whole lot more like 1991 or 2001 than 1937, but perhaps on a somewhat larger scale: some of the underlying shocks were larger than other Great Moderation shocks, and there are limits to what the Fed can do in real-time. However we wouldn't have seen 10%+ unemployment and we wouldn't still be stagnating now.

I certainly think it's possible to have a stabilization in the debt-to-GDP ratio without inducing a recession. The whole line that "the growth in the past 35 years has been fuelled by debt" isn't particularly convincing: long-run levels of GDP depend on technology, the capital stock, population and its education level, not on the number of debt instruments out there. There's no clear relationship between debt instruments and any of those, largely supply-side, factors.

 

[kronic]

I certainly think it's possible to have a stabilization in the debt-to-GDP ratio without inducing a recession.

And I certainly think that's not going to happen either way.

 

[AL_DA_GREAT]

Not until you sell it. When will you do so (genuinely curious)?

I am not completely sure. I will go back to school in about 1,5 years. I will probably be able to go to school for several years before I start to sell gold. Otherwise the day I buy a house to start a family in.