BRETTON WOODS : TIME FOR RENEWAL & REVISION?
The New Bretton Woods Initiative:
The meeting of G20 heads of state hosted by President Bush last month to address the global financial crisis was, at least in the vision of French President Sarkozy and British Prime Minister Gordon Brown, intended as a first step to a new financial architecture for the 21st century. A new Bretton Woods. When the Obama administration is settled in office the plans may be taken further. But for now the agreement reached at the meeting to relieve the current crisis via monetary policy and fiscal relief on a national basis has already proved to be useful and initiatives to improve financial regulation are in progress.
Readers interested in gaining a better understanding of current macro developments will find the web site The Baseline Scenario maintained by former IMF Chief Economist MIT Professor Simon Johnson a comprehensive and accessible source of information on both current issues and the background to the financial crisis. The Financial Crisis for Beginners page is excellent.
The Goldwatcher Chapter 5 addresses The Gold Standard and reviews the ‘Deficit Without Tears’ fault line in the dollar standard. The so called ‘Bretton Woods 2′ arrangements, where major emerging economies, particularly China, manage their currencies to keep them competitive and reinvest the proceeds in US securities following the ’America spends Asia lends’ formula are explained and discussed. Recent comment from Brad Setser suggests that ‘Bretton Woods 2′ is still alive and well.
Leadership and the US and Global Financial and Economic Crises:
These are the concluding comments on gold price prospects in The Goldwatcher page 191 ‘Without reassurance on future policy commitments the chances of a systemic solvency crisis, resembling in some ways the crisis experienced in the 1930s, can’t be ignored……………..(but) we know that in the past daunting challenges have been overcome in countries with strong economies, resolve and committed leadership……Gold bugs are now urging investors to bet the ranch on gold. On my analysis that would be foolhardy. Frank Holmes also advocates moderation in the following chapters (11-13).
With President elect Obama being advised by Larry Summers with Paul Volcker at his side, Tim Geithner as Treasury Secretary and Peter Orszag as Director of the Office of Management and Budget we have serious reassurance on leadership. But, as commented in previous Goldwatcher postings, they start with an unholy financial mess.
In this context owning some physical gold can be motivated as essential insurance against the ’system’ being damaged beyond repair.
Quantitative easing and the Zimbabwe model:
The Guardian business glossary gives this crisp definition: ‘Quantitative easing is what non-economists call ‘turning on the printing press’ adding ‘In extreme circumstances, governments flood the financial system with money, easing pressure on banks by giving them extra capital. Ben Bernanke, the chairman of the Fed, won the nickname ‘helicopter Ben’ when he floated just such an idea earlier this decade.’
Yesterday in a speech on ‘Federal Reserve Policies in Financial Crisis’ Bernanke spelled out policy being implemented through conventional and unconventional means.Trillions of dollars of funds are being injected into the financial system. Bernanke, however, argues inflation will not necessarily follow as ‘ To avoid inflation in the long run and to allow short-term interest rates ultimately to return to normal levels, the Fed’s balance sheet will eventually have to be brought back to a more sustainable level. The FOMC will ensure that that is done in a timely way. However, that is an issue for the future; for now, the goal of policy must be to support financial markets and the economy.’
The dramatic fall in the gold price yesterday may or may not have been influenced by Bernanke’s assurance he is not turning on the printing press and steps will be taken to control inflation in future. But it’s more likely gold price falls followed another bout of selling by investors seeking only cash or Treasury securities at the same time as leveraged funds and other investors were forced to meet margin calls or redemptions.
In his gloomdoomreport yesterday Dr Marc Faber repeats his disdain for Bernanke’s ‘money printing’ and restates his preference in current volatile markets to seek protection from the safe haven credentials that come with owning gold, adding that gold miners and silver could outperform for a while.
This amazing quotation from Dr G. Gono, Chairman of the Zimbabwe Reserve Bank adds a touch of humour to Marc Faber’s report:
“As Monetary Authorities, we have been humbled and have taken heart in the realization that some leading Central Banks, including those in the USA and the UK, are now not just talking of, but also actually implementing flexible and pragmatic central bank support programmes where these are deemed necessary in their National interests. …That is precisely the path that we began over 4 years ago in pursuit of our national interest . …Here in Zimbabwe we had our near-bank failures a few years ago and we responded by providing the affected Banks with the Troubled Bank Fund (TBF) for which we were heavily criticized even by some multilateral institutions who today are silent when the Central Banks of UK and USA are going the same way and doing the same thing under very similar circumstances thereby continuing the unfortunate hypocrisy that what’s good for goose is not good for the gander. …As Monetary Authorities, we commend those of our peers, the world over, who have now seen the light on the need for the adoption of flexible and practical interventions and support to key sectors of the economy when faced with unusual circumstances.”