Terrible news piles up in the financial world. The famous JP Morgan inexplicable $2B derivatives loss may be as much as $9B, making everyone wonder who is in charge. The obscurely infamous shifts in the London Interbank Overnight Rate (LIBOR) that signaled the start of the major financial collapse included a lot of manipulation and other illegal activity that’s only now coming to light. And China is experiencing a slowdown in manufacturing that is only deepening.
It all seems unrelated, and yet it all ties together in this thang called “Globalism” – what happens in one part of the world affects everyone. Yet there are few agreements and organizations that really have this tied together in a way that seems appropriate, at least making sure that corruption and disease in one place does not bring down the whole world. And this points to what will have to happen to get us all to start over again – something I have taken to calling “Jubilee”.
The basic Jubilee comes from the ancient Hebrews. Every 50 years there was a time of pushing the reset button on just about everything. Slaves were freed, prisoners were pardoned, debts were forgiven – even the fields were let fallow to renew the earth itself. The timing of it seems to suggest an early adaptation of the Kondratieff Cycle, back when it was tied to solar cycles as much as anything.
What would a Jubilee look like today? It would start with a few assumptions that seem to be irrefutably true:
- The global economy is not going to recover until there is debt forgiveness in the developed world, whether that happens in an orderly way or in a panic.
- There is likely to be another round of Quantitative Easing, as there is a clear shortage of cash at least in the US and Europe. Europe, in particular, will eventually have to print Euros if it wants to have growth.
- The previous rounds of Quantitative Easing, which bought mortgage backed securities and US T-Bills, did little good – and actually made things worse to the extent they injected more money into a system constantly throwing the dice harder and harder.
There is one more thing that we know, a simple observation. The global economic system was last pieced together at a conference in July, 1944 in the New Hampshire resort town of Bretton Woods. One month after D-Day, as troops were fighting to win the war, economists planned how we would win the peace. We have operated under variations on the system that they set out since then, more or less, without a complete overhaul.
It is time for a new Bretton Woods, which is to say a new economic system based on not the US Dollar as a reserve currency but on truly international standards. It is time that we adopt uniform principles across the world, including systems of insurance that allow quick take-over of banks so that nothing is “too big to fail”. Walls need to be placed between commercial and investment banking. And financial markets need to have universal limits placed on derivatives so that they do not become detached from the markets they supposedly serve.
But that’s still not Jubilee. The centerpiece of such a conference would be a one-time Quantitative Easing, the printing of more money, to buy out as much debt as possible. Imagine for a moment that the US Fed prints $1T to buy up debt while the European Central Bank (ECB) prints upwards of €1T ($1.2T) and Japan and the UK each print about $500B equivalent (their economies are about half the size). That gives us on the order of $3.2T of new money in the system to be used specifically for debt cancellation in a Jubilee.
Now, let’s hold this as a kind of auction. Over a short period of time, say a month, any bank or other institution with debt can register that debt to be paid down from the pool proportionally. For example, if $1.6T is offered for sale to the Fed, that would mean that it all pays out at 60 cents on the Dollar (about what I expect). That means that the world would see about $5T in total debt forgiveness and fresh start from the coordinated effort.
This is assuming that other nations, trying to avoid a currency war, don’t want to step in be a part of the Jubilee. There may be much more total forgiveness all around the world.
There are problems with this, not least of which is the “Moral Hazard” of constantly believing that governments will bail everyone out. That’s why a complete systemic overhaul has to be part of the mix – free bailout has to be billed as a one-time shot before we start a new system.
The details are not as important as the need for global action on both the nature of financial markets at the forgiveness of debt. A Jubilee is a time to start over. Can you think of anything more desirable as you read the constant spray of bad news in finance?
Barataria - The work of Erik Hare 
Yes, and yes. You should write a book on this and get on the talk show circuit. It is going to happen one way or another so why not make it so?
I might just write an eBook on this topic. I have been looking for a good angle and this could be it. May have some spare time shortly, too.
I was wondering when you would talk about the JPMorgan loss. That is just incredible that they could lose so much and not even know what their position was or what it means. The Moody’s downgrade was just the first step for them, they have a lot further to fall.
You are right that the debt will have to be written down and this may be a good way to do it. But there are a lot of details that have to be worked out first. If you want this in some global conference I don’t see it happening for a year or more and that would be too late probably. We may see another even like 2008 especially if JPMorgan falls like Lehman did. The LIBOR scandal is also huge and I can not believe they got away with it this long.
So the idea is good but it is like 2-3 years to late.
JP Morgan really is chilling, isn’t it? They are clearly just playing games with little regard to consequences. I agree that they could fail shortly and I would love to see Jamie Dimond squirm.
As for getting this going, we could convene the global conference and get this going right away as the first thing. I think that a lot of central bankers would agree to it, especially in unison, so it might help get things moving. Shared work is the best way to build community, so it might get them talking across many lines and help move the harder stuff forward.
I did call for a new Bretton Woods in 2009, but I thought it was so obvious with the new administration and all that I didn’t push it. I remain shocked that this has not happened. The best way to end a global shortage of dollars (ie, the reason why QE is attractive) is a new currency regime. Since we know one is coming, why not push it forward now? There will be a lot of support for such a move – and it will back China into a corner since they have been calling for this for a long time but still refuse full convertibility for the Yuan. It’ll be put up or shut up time for them.
There are a ton of details to this concept, some of which I could never anticipate on my own. But it really has to happen.
(correction – it was October 2008 I wrote about Bretton Woods, and I saw an upcoming conference on the financial situation as the place where it would happen. Wow, was I naïve! https://erikhare.wordpress.com/2008/10/20/out-of-the-woods/ )
“..making sure that corruption and disease in one place does not bring down the whole world.”
This is what I would like to hear more about. Why should what happens in Europe be such a big problem for us? There has to be some way to make it so that things that happen outside the US don’t kill us. As long as Europe can bring us down I think we have a real problem. They never seem to get everything right.
I didn’t have any specific ideas on this with regard to international boundaries, but separating commercial banking from investment banking (ie, a new Glass-Steagal Act) would go a long way. Commercial banking is largely internal to any nation, and investment banking bleeds across borders all over. It’s the best I can think of without really intervening in the free market, but there may be other steps that are worth taking. I tend to be pretty conservative when it comes to regulation.
But I’m willing to hear other ideas.
Let me get this straight. You say there is room to print 3.7 trillion dollars because the velocity of money is down or it doesn’t turn over enough. But if we print money to make the difference what happens when it starts turning over again? Doesn’t that cause inflation?
Yes! That is exactly what I’m talking about! A little inflation will help us right now, to be honest. It would allow the Fed to raise rates and get out of the liquidity trap. It would also stabilize housing prices among other things.
Just 5 years ago, in 2007, the rate on the 10yr TBill was over 5%. That’s much more normal. Even if inflation was near 5% (versus less than 2% now) it would be a net gain for banks, because the real rate of return would actually be positive (!!). It would open up lending once again.
So yes, some inflation is part of the plan. I would never advocate printing $3.7T right now, but printing $1T with an effect on the economy of more like $1.6T (just my own estimate) would be a great start! We could always have QE4 later if we had to, but I doubt it would be necessary.
The other thing that is important is that if currencies all around the world print about as much (relative to their own economies) there would be inflation, yes, but the order of everything would stay pretty much intact. For the same $3.2T I’m talking about here among the top 4, the total world could theoretically print the equivalent of about $5T and forgive even more debt – and we’d all be in about the same place.
I know gold is really popular and a lot of people like to rant about the inherent instability of “fiat” currencies like we have around the world, but the real problem is that we aren’t using our “banking” currencies (alternative word) to their full potential right now. There’s a shortage of cash all around the world, and a true “reflation” along with debt forgiveness will help a lot! But … here’s the catch … it suggests that we really make a full reset and don’t just throw cash into the old, decaying structures we have now. We need to make it a true investment in the Next Economy and a clear one-time shot.
I think we need to give Alan Greenspan credit for correctly stating the cause of the depression in the US. Savings from around the world became credit available to Americans. For items that have a fixed supply like land, increasing credit increase the price of land, which in turn fed the housing inflation and inflation in assets or financial instruments related to housing.
I think you had said Alan Greenspan was a political animal, some sort of criticism of him. Personally I don’t he did anything wrong.
The main thrust of Barataria has been about finance. Rightly so since the expansion of credit in the post WWII era has been related to economic growth. The dollar problem has been discussed. Keynes suggested a global currency. I think that is correct economically, because who really need exchange rate risk. That’s nonsense. But currency is in some measures is a matter of national pride, sovereign prerogatives on policy making and a source of power, so it it understanbly not given up easily.
I am never quite sure about Greenspan. He did understand the deflationary risk long before anyone else, but they had the data no one else did.
Yes, I write about finance. I try to write about the stuff ordinary voters really should know – but somehow never makes it onto the news. There’s a ton of background that seems to occupy a lot of space!
As for a global currency, I think we can define one pretty easily. I’ve been thinking about this a lot, actually. Let’s call it the “Trade Weighted Exchange” or TWX. It can be defined as a basket of the top currencies or a basket of top commodities, probably both. It would be great to have a “Central Bank” that does nothing but maintain the TWX and has no interference in sovereign nations. Here are the nations that together make up 50% of world trade (in 2011) with total imports and exports in $T:
European Union $4,475 1
United States $3,825 2
China $3,641 3
Japan $1,596 4
United Kingdom $1,150 5
South Korea $1,082 6
Canada $921 7
India $793 8
Russia $748 9
If the TWX was half this and half the top commodities (not sure what they are right now, but I know it would include wheat, rice, oil, steel, and coffee!) weighted by their relative share, we’d have an exchange medium that would minimize the variation / risk.
A Central Bank could hold reserves of each of these in the right proportions totaling about $5T ($14T total world trade less the roughly 2.8 turnover per year – just an estimate, tho!). Commodities could be purchased as futures in a way that helps stabilize the markets, then sold as they reach maturity for a small profit that would pay down the debt needed to capitalize such a bank.
What you think? 🙂
I like the idea. Diversifying away from the dollar in my view is the right idea. Personally I don’t like that nations and individuals save in dollars. Some of that doesn’t make sense. There needs to be an orderly transition away from the dollar and that will help the US adjust.
The world has been offering the US inexpensive credit for a long time. I would want to see that trend change. Countries that are in the lower 2/3 of the world income distribution, they need to have faith in themselves and give credit and investment to help poor people in their own countries so they can produce and consume more.
I think a world currency and things priced in a world currency will help people and countries analyze their situations better in comparison to where they want to be.
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