US Strength in the Upcoming Monetary Shift

Kyle Bass, in my opinion will be one of the best money managers of the next 40 years.  His ideas often mirror my own, and when he speaks I always make it a point to listen.  A Bloomberg interview recently done with Kyle, shown below, prompted me to republish a piece I did a couple years ago.




Below was initially published in March 27th 2015

There is one thing that the current Austrian economic minded Libertarian community seems to pride themselves on and that is challenging the mainstream narrative. I count myself among them. I would like to turn some of that skepticism back on some of the standard trains of thought that are often touted as self evident by many among us in a series of posts.







The first accepted ‘fact’ I would like to question is that during the next world monetary overhaul the United States will be doing so from a position of weakness. Here is a quote from Mike Maloney when answering a question about which countries will be hurt most and which ones will do well in the upcoming turmoil when the current system comes crashing down: “The countries where most of the currency supply is base money circulating as paper bills in the public are going to suffer a whole lot less than countries like the United States that is rigged up on credit that’s leveraged by credit that’s leveraged by credit.” This quote exemplifies how many Americans with an Austrian economic view feel the US will fare when the crisis happens and a new system is required. I certainly agree with much of what Mike has to say but this belief that the US will fare the worst in the monetary shift at very least should have its merit evaluated.



Let’s be honest the nations that are leveraged on credit over and over, China included, are the most powerful in the world and I wonder if those that have the majority of their money supply in paper bills will even have a seat at the table in determining what the next world monetary system will be. But before we get too deep into other nations pro’s and con’s let’s look at the United States objectively to see if they will have a seat at that table.

Think of the technological changes that make our world different and arguably better than the world of 30 years ago. Certainly computers come to mind, the internet and all of the advantages it has brought. Online commerce has revolutionized nearly everything, from how we make purchases, banking/investing, news, to communication. I would also put GPS near the top of the list of new inventions of the past few decades. Apple has been the main developer in bring all of this to our fingertips with iPads and iPhones. One of the most impressive aspects of these devices is how some of their features are what I pictured 25 years ago as futuristic but feel like an afterthought and taken for granted. Facetime is one of these features, as a kid I always imagined the step after telephones would be to see the person you were talking to. Of course teleconference has been around a while but Apple’s face time certainly took it to the next level, and I don’t even remember Apple advertising about it.

What do all of these innovations have in common, well that’s pretty easy, they are all American. For whatever reason the US is still, by far, the most innovative nation on earth, and don’t kid yourself, this is no small advantage.

The US is also a resource rich nation, the US may not have the most natural resources but have much more to work with than countries like Japan, or the UK.

I know there are the rumors that the 8133 tons of US gold reserves are gone and though that may be possible I think it is much more likely that the gold is still in the vaults, though it may be leased out. Even if it is leased out, as we have all heard, possession is 9/10ths of the law, and if there are multiple claims on that gold, the US being one of them, I have no doubt who would end up controlling it. With China’s holdings in question I don’t know if those 8133 tons will put the US at the top of the gold holding list but it is still significant.

As we all know the US was the head of the coalition that hammered out the Bretton Woods monetary system after World War 2 as well as unilaterally ushered in the following monetary system when Nixon suspended the convertibility of the dollar into gold in ‘71. There is no question that these monetary systems have gotten us into this mess but who would know better the flaws of our monetary system, when it might come crashing down, and be able to deal with the fallout of its failure than the architect? I have my doubts about the powers in banking and the government being as clueless as many in our community seems to think.

There are certainly other advantages such as a powerful military, and strong corporate and governmental institutions, and we know there is a long list of disadvantages but let’s take a look at the rest of the world for a moment to see what the US is up against.

While on most points I agree with Peter Schiff, as with Mike Maloney, his focus on the flaws of the US economy appears to make him blind to the deficiencies of other nations. If my father were the political prisoner in a nation I would have some pretty strong biases as well. Unfortunately his bias allowed him to favor Japan in recent years when the issues of Japan are similar to the United States only on steroids.

Europe as a whole is a basket case, and there will be no real leadership coming from there until they realize the monetary union is a failure. Depending on the time line the fallout from that failure will probably follow through into the next monetary system. In addition, after the financial crisis, the US essentially recapitalized its banking system, even if immoral to do so. Europe never recapitalized, and this is why they are so much more levered than the US banks, yet another issue that will have to be dealt with that will hamper the European powers.

For some reason alternative media seems to embrace Russia, but they’re economy is overly dependent on the resource sector not to mention thoroughly corrupt.

Another one of Schiff’s darlings is China, and there is no doubt China is an economic force to be reckoned with in the 21st century, yet she is far from perfect. The leaders of China over the past few decades have taken note of what works, namely capitalism, and it has done what it does best and brought prosperity to many. That said those same leaders have not been able to let go of one of, if not the biggest enemy of capitalistic prosperity, central planning.

China’s monetary system is still debt based and as such it has developed far too much debt, granted it is in the private instead of public sector, although the line between private and public sector is much more blurred than in other advanced economies. That debt being in the ‘private’ sector hasn't prevented misallocation of resources with not just empty buildings but empty cities built. Like Russia, corruption is rampant in China, and the one thing the leaders fear is a massive population that is not easy to placate without constant economic growth.

There is no question that China is gaining market share on the world stage and may even be more than an equal to the US during the upcoming monetary changes. Though they may be a balance to the US, I doubt they will be a replacement.

I listed the US being at the center of the past monetary systems as a possible advantage, where as critics may see this as the reason the US should bear the brunt of the repercussions for its failure. While I certainly understand wanting to see punishment for those that are responsible, it is no way to rationally analyze what nation will be hurt most in the next monetary shift. Our world is often not fair.

There is no question that watching the US get burned in a economic collapse would feel like justice, but those who take it as a given may be satisfying what they want for the future and not performing their due diligence as analysts. We must not only question the mainstream’s commonly held beliefs but also some alternative beliefs that we may take for granted.

1 comment:

  1. You have indeed written a great article, but because I have just started studying economics, maybe I'll come back some time later and then really understand it.

    ReplyDelete