Rothbard’s classic essay What Has Government Done to Our Money? gives a brief history of the rise and decline of the international monetary system, under The Monetary Breakdown of the West. Bob Landis’ recent essay, Fiat’s Reprieve: Saving the System, 1979-1987 takes the story from where Rothbard left it in the mid-70s up to the present, illuminating his commentary with the insights of Mises and Rothbard along the way.Landis shows why the fiat monetary system is inevitably headed for a crisis:
the confluence of factors that came together to save the system in the 1980’s. We think it clear from this exercise that this was a one-off event, an historical accident that could not be repeated even if there were an identical threat, a common understanding of the nature of that threat, and the political will to implement a solution.
Stephen Roach’s The Funding of America looks at the magnitudes and trends of the flow of foreign borrowing required to prevent a dollar crisis in the face of continued trade deficits, and concludes that “ For economies in disequilibrium, the venting function of financial markets ultimately cannot be denied.” Although the timing cannot be predicted, Roach suggests that some event will force the hand of one of the large players.
One of the favored assets of foreign purchasers of the dollar has been agency debt - bonds issues by the housing GSEs, Fannie and Freddie. The ability of these entitites to sell mortgage-backed securities to foreigners has enabled the current deficit to fund a domestic housing bubble. As their portfolios have grown, these entities have taken on various types of risk - repayment risk, credit risk, and interest rate risk. Martin Hutchinson explains why they are unable to properly hedge their risk and why they are having so much trouble coming up with accounting statements: much of their risk cannot be hedged and they are two large Houses of Cards. One of the stilts propping up the fiat monetary system has been the official management of the gold price. Like the manipulation of the CPI, management of the gold price is a key to containing inflation expectations. Canadian asset manager John Sprott discusses his recent paper on this subject in an interview.
Sprott: within the next five years I wouldn’t be surprised to see central banks in totality, all central banks, probably as a neutral factor because those that want to sell will be more than taken out by those that realise they’re sort of awash in US dollars and this is not a bad asset to hold as an alternative.
