Posts filed under “Currency”
Vincent Farrell, Jr. is Chief Investment Officer of Soleil Securities, a New York based investment management company. Over his long career on Wall Street, he has worked for numerous distinguished firms. Mr. Farrell graduated from Princeton University in 1969 and received his M.B.A. from the Iona College Graduate School of Business in 1972.
The Mount Washington Hotel is in Carroll, New Hampshire. It is not the hotel featured in the Jack Nicholson movie “The Shining.” That was the Timberline Lodge near Mount Hood, Oregon. So it’s ok to stay in rooms 215 and 217 (or is it 415 and 417 ?) The hotel’s golf club-the course was designed by Donald Ross- has enshrined the locker used by Babe Ruth on his visits there. Because it’s near the Bretton Woods ski area, the conference of Allied world leaders held towards the end of World War II at the hotel was called the Bretton Woods Conference. That is a much better name than Mount Washington Resort Conference. The conference was held in July of 1944. The war was still raging. The D-day Normandy invasion of Europe was barely a month old and the tide of war had changed, but the outcome was not yet assured. The 44 countries that attended had been victims of unenlightened monetary and fiscal policies in the 1930′s and had come to realize international cooperation was necessary. Repeated currency devaluations to increase the competitiveness of exports had led to corresponding actions by other nations and only worsened deflationary spirals. In a sense, WW II was an economic savior as demand for goods was met by labor shortages and inflation fears broke the deflationary mindset.
But few, if any, believed the conditions that spawned the Depression were gone, so at the behest of the U.S. and Britain who had been talking and planning for a few years, the conference to figure a post war economic agenda was held.
The conferees decided on a fixed exchange rate for currencies pegged to gold, with the only currency worth anything after the devastation of the war, the dollar, as the “reserve” currency. In reality, the conferees knew the only country that had an industrial base capable of pulling the world back from the precipice was the United States. The rest of the world was in ruins. The organizations that became known as the International Monetary Fund and the World Bank were created. And it all more or less worked until the world outgrew the supply of gold and the U.S went off the gold standard in 1971.
This article originally appeared in a newsletter: The Objectivist published in 1966 and was reprinted in Ayn Rand’s Capitalism: The Unknown Ideal
An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense – perhaps more clearly and subtly than many consistent defenders of laissez-faire – that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.
In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.
Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.
The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.
What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible. More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term “luxury good” implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.
In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value, will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.
Jim Welsh of Welsh Money Management has been publishing his monthly investment letter, “The Financial Commentator”, since 1985. His analysis focuses on Federal Reserve monetary policy, and how policy affects the economy and the financial markets.
In his March 2007 letter, he warned that a tightening of lending standards by banks represented a sea change that would lead to a slowdown in the economy before the end of 2007, and more credit losses for banks. In October, he noted that technical weakness in the U.S stock market, combined with an economic slowdown would be bearish for stocks. In December 2007, he warned, “Most investors really don’t understand the credit creation process, and as a result, don’t comprehend the scope of this crisis, or the Fed’s limited ability to deal with it. It really is different this time.” In his March 2008 letter, he forecast a rally in the S&P to 1420-1440, before the bear market in stocks would resume. His analysis provides a unique blend of fundamental and technical analysis
This is his October 21, 2008 writing:
In the July letter I wrote, “Bank balance sheets are not only burdened by loans they are unable to
securitize, since global securitization is down 84%, but their capital base is being squeezed
unmercifully, as they write off bad loans and increase loan loss reserves. Unfortunately, large banks,
regional banks, and community banks will be forced to recognize more losses as home prices fall
further, and default rates climb on home equity and auto loans, credit cards and corporate debt, due
to weak economic growth. Oh, and commercial real estate prices have just started falling. It’s bad,
and it’s going to get worse.” Six months ago, the International Monetary Fund estimated global
losses would total $950 billion. Two weeks ago the IMF increased their estimate to $1.4 trillion. I
had noted in the July letter that Bridgewater Associates, a respected research firm, had estimated that
losses from the credit crisis could total $1.6 trillion. As estimates converge, confidence builds that
these estimates are at least in the ballpark. It is noteworthy that only $600 billion in losses have so far
been recognized. Despite all the turmoil and almost frantic efforts by global central banks and the
U.S. Treasury to address the credit crisis, the reality may be that we aren’t even half way through this
This perspective certainly is contrary to what one hears on CNBC, Bloomberg, and read in the
financial press. Within days of the stock markets reversal on October 10, a consensus has developed
that by mid 2009, the economy will have weathered the worst and begun to improve. And since the
market is a discounting mechanism, it will bottom soon (if it hasn’t already), and begin to advance in
anticipation of the better times ahead. If this story line sounds familiar, it should. After the market
reversed higher in mid-March, a cavalcade of analysts forecast a second half rebound in 2008, based
on Fed rate cuts and a $160 billion stimulus plan. In my February letter I offered this assessment of
their forecast. “I think the experts on Wall Street are asking the wrong question. The question is not
whether the economy will get a lift from the rate cuts and fiscal stimulus. It will. The more important
question is whether the boost will be enough to ignite a self sustaining economic expansion. This is
going to be made more difficult in coming quarters, since the availability of credit from banks and
the corporate credit market will not be supportive of consumer spending and corporate investment. If
the one-time lift from fiscal stimulus fails to launch a self sustaining economic expansion, the
economy will sink again, after the temporary effects of the tax rebate have been spent. Will the $160
billion in stimulus be enough to ignite a self sustaining economic recovery in the face of significant
headwinds? I don’t think so, which will give Wall Street experts forecasting a snappy recovery later
this year another unpleasant surprise.”
Paul Brodsky & Lee Quaintance run QB Partners, a private macro-oriented investment fund based in New York.”
In our sparsely populated office – a beacon of both waste and hope – hangs a framed poster of Albert
Einstein and his quote: “imagination is more important than knowledge.” The poster is different from
the other “art” hanging on our walls – not because of its cheesy cheapness or because it makes an
otherwise stark white wall only slightly more interesting. (That is common in our office, where
taciturn riveters laze on I-Beams perched 800 feet above what would become Rockefeller Plaza.).
No, the Einstein poster is different because its simple declarative is neither ironic nor banal. The
most brilliant man of his time noted the importance of imagination, which we’re sure was an
acknowledgement of its scarcity.
Maybe Einstein recognized early something the rest of us just confirmed? Senators McCain and
Obama spent two years competing to convince us that each was more naturally at ease with political
dynamism and that change was the secret sauce to fix a world where US democracy- and wealth-
spreading machines had run into a ditch. People didn’t need convincing. The wars became pointless
to most Americans and the economy became more important to most people than merely glancing at
the closing level of the Dow Jones Industrial Average. Within this context, electing Obama would be
a rational choice – not because his ideology was necessarily better for the times but because the
country’s economic situation had no precedent from which age or experience would add any value.
Change seemed like a reasonable priority and Americans voted for the candidate they felt could
execute it best – the one with the better imagination.
There are no formal elections held on Wall Street, where daily money flows are the only votes cast.
Such a free-market approach should, theoretically, reflect (or guide) confidence levels as well as the
speed and quality of capital formation and regulation. But it isn’t that easy. The markets are
comprised and dominated by dedicated investors – institutions that must allocate all their money into
markets no matter what the outlook, and by extrapolators – Pavlovian sages who can recite
conditional responses chapter and verse – why the market or economy should go in a certain
direction because “eight out of the last ten times this did that, then…” and who shame their flocks
(usually with a chuckle and wink) “not to buy into the notion that this time is different!”
Well, this time is different. You know that and we know that, but an expert can’t be an expert if he
doesn’t have expertise (real or perceived) and expertise regarding the current economic situation
can’t be extrapolated. It must be game-theoried and theoretically applied. It must be imagined, the
way a German patent clerk did while global academic institutional extrapolators did not.
Wow, back to 1954: The Bank of England unexpectedly slashed the benchmark interest rate by 1.5 percentage points as policy makers tried to contain the damage caused by a recession. The nine-member Monetary Policy Committee, led by Governor Mervyn King, slashed the bank rate to 3 percent. The move was predicted by none of the…Read More
Not too shabby a week — plus 11% across the major indices, with some areas even stronger. Of course, that comes from deeply oversold levels, with stocks peak trough down 27% within October. The key question going forward is whether or not this past week’s snapback rally has legs. But rather than guess about that, let’s look at some of the more intriguing data points from October 2008.
Gee, I picked a bad month to stop sniffing glue:
• October was the worst month for the Standard & Poor’s index of 500 stocks in 21 years — since the 1987 stock market crash. (NYT)
• The Dow dropped 14% drop over the past four weeks — the biggest October decline since 1987, when the crash sent markets down 23% for the month. The S&P 500 was down 17%, and Nasdaq fell 18%. This ranked as the 15th worst monthly decline for the Dow Industrials since 1900.
• October 2008 was the most volatile in the 80-year history of the S.& P. 500. (see NYT chart, at right)
• We had the most down days in a single month since August 1973. (Marketwatch)
• Compare 3 recent SPX Bear Markets: -46% from October 2007; Compare that with 1973-74 down 48% over 23 months. The 2000-03 bear was 49 percent over nearly 3 years.
• The S&P 500 had the most volatile month since November 1929 (1% moves higher or lower).
• October had two days where the indices were up more than 9% — the 10th time this has occurred over the past 80 years. (NYT)
• During an eight-day losing streak at the beginning of the month, the Dow lost 2,396 points.
• Consider days with 4% moves up or down: None from 2003 through 2007; Three throughout the 1950s and two in the 1960s. October 2008? 9 days with four percent plus or minus. That edges out September 1932′s record of 8. (NYT)
• The Dow had its second-biggest point drop on record, of 733 points. The Dow posted two of it biggest point gains, climbing by 936 points (October 13th) and 889 (October 28th)