A View from the Trenches, September 21st, 2009: "Central banks close gaps...to stop the flood"
Please, click here to read this article in pdf format: www.sibileau.com
Today’s is unfortunately a short letter, as I have had a very busy
week and even busier weekend. Nevertheless, below I describe what I
believe was and will be a very relevant theme during the last and
coming weeks: Central banks coordination.
I’ve been trying unsuccessfully to edit a handwritten draft I wrote on this subject, but here is a main point:
In a global world with fiat money, if monetary policies are
coordinated, it is perfectly possible to see a certain mathematical
set, a certain path, of foreign exchange crosses compatible with
increasing demand for consumption and investment goods. In formal
There exists a set (usd/cad, usd/eur, usd/rmb,…., cad/nok,….., fx i/fx j) where: delta (C + I) / delta t > 0
This is Bernanke & Friends’ plan to get us out of this mess (For
those interested in the details, this framework was first suggested by
Patinkin, using a Walrasian model of a monetary economic system and
including the net wealth effect). The key for this undetermined system
(it is undetermined because multiple different foreign exchange crosses
or price relationships can potentially satisfy this recovery process)
to succeed is that there must not be a “deflator” for the main fiat
policies. In statistics, a deflator is a value that allows data to be
measured over time in terms of some base period usually through a price
index in order to distinguish between changes in the money value of GNP
which result from a change in prices and those which result from a
change in physical output (http://en.wikipedia.org/wiki/Deflator
). As such, it can also be used as a reserve asset. Gold therefore is a
perfect deflator. Thus, if you believe my thesis, the key is that gold
does not become a reserve asset.
This means that it is not possible to see multiple paths for delta
(C + I) / delta t > 0, when people challenge central banks and
change the set (usd/cad, usd/eur, usd/rmb,…., cad/nok,….., fx i/fx j)
for the following set:
(usd/Gold, cad/gold, gbp/gold, eur/gold,….Fx i/gold)
For gold not to become a reserve asset, central banks have to coordinate a way to slowly debase their currencies in synchrony.
This is what they are starting to do. China has been leading the way,
followed by Canada. China started the process with its swaps of
Agencies for Treasuries. Canada followed with the decision to issue
USD4BN in federal government bonds, which were going to fund its
capitalization portion in the IMF. But last week, we saw a firm
confirmation of this process with the announcement by Germany.
Last week, Germany decided to issue a $4 billion 3-year in the USD.
This would be the first time it borrows in USD, since 2005. Other
European nations have also approached the USD market (Spain, Belgium
The excuse is that the cost of raising USD is lower than raising
Euros. However, when governments can enforce fiat money upon its
citizens but choose not to issue debt in their own currencies, they are
not being efficient. In other words, these nations as well as Canada
are giving up their right to seigniorage (http://en.wikipedia.org/wiki/Seigniorage
). And there is no way you will ever convince me that a few bps
differential between interest rates can make up for the cost of giving
up this valuable right!
The real reason behind this that the political class of the world
seeks to coordinate a global bid for the USD, to prevent gold from
becoming a reserve currency. Politicians do not want the set:
(usd/Gold, cad/gold, gbp/gold, eur/gold, …. , Fx i/gold) to become a
reality. They do not want their deficits to be killed by the rigorous
benchmark gold represents.
This is indeed going to be a long and tiresome war. Get ready!
The comments expressed in this
website and daily letters are my own personal opinions only and do not
necessarily reflect the positions or opinions of my employer or its
affiliates. All comments are based upon my current knowledge and my own
personal experiences. You should conduct independent research to verify
the validity of any statements made in this website before basing any
decisions upon those statements. In addition, any views or opinions
expressed by visitors to this website are theirs and do not necessarily
reflect mine. My comments provide general information only. Neither the
information nor any opinion expressed constitutes a solicitation, an
offer or an invitation to make an offer, to buy or sell any securities
or other financial instrument or any derivative related to such
securities or instruments (e.g., options, futures, warrants, and
contracts for differences). My comments are not intended to provide
personal investment advice and they do not take into account the
specific investment objectives, financial situation and the particular
needs of any specific person.