Let me be pretty blunt in this commentary. Growth is stalling almost everywhere due to the gargantuan amount of debt (public and private). Central banks have been exploiting their balance sheets, applying placebo treatments to their sick economies. These treatments are nothing but sham procedures based on wrong diagnostics. These sham procedures aim at buying time, but have been experiencing diminishing returns. The time will come that we cannot have two main fiat reserve currencies (the USD and the Euro). One has to go away and that will be the Euro, (unless war erupts as the deus ex machina).

The therapeutic applications of placebo treatments are inept in affecting the real things that matter, such as productivity. The central banks seem willing to supply unlimited reserves (but careful not to allow those reserves to become actual money supply) for unlimited time, until the patient (economies) in their delusion – where perception is reality – proclaim that they are better. Like in a dream it seems that the fight between the horizontalists (those who advocate that the central banks simply accommodate credit demands) vs. the verticalists (those who believe that central banks control credit) is over, and the winner seems to be the horizontalists. The reason being the total amount of credit created (due to “innovative” financial instruments) will either have to be restructured or those demands be accommodated by the central banks for some time until a new system emerges.

Hence, unless new sources of growth are identified along with new resources, economic growth as it has been known since the end of WWII is done. The snowballing of repaying the debts and the paying up for all the unfunded liabilities has a dual effect: First, it depletes existing incomes by paying up for interest and principal; and second, it disrupts the fertilizing process of productivity growth due to fears that the ecosystem of credit is unstable.

This situation could not have been created under the gold standard since the issuance of credit was limited by the presence of physical gold which is finite. To some extent it was also under control when the global regime operated under the gold exchange standard (1944-1971) with fixed exchange rates, (where nations could exchange their dollar reserves for physical gold). Both systems were anchored, and an anchored system is stable. The accumulation of liabilities and trade imbalances on behalf of the US in the 1950s and the 1960s allowed for the accumulation of dollar reserves abroad. When the fear started settling in that the US may not have enough physical gold to exchange for those reserves, the fertilizing process was disrupted (first in 1967, but the US pulled its first surprise card of not converting dollars for gold in the domestic market), and inflationary pressures appeared. However, the further accumulation of liabilities i.e. dollar reserves abroad continued unabated, after the 1967 surprise card was pulled. Concerns mounted as to ability to convert those dollar liabilities into physical gold, and growth started stalling while the US was losing ground against other currencies and against the anchor (gold).

It was time then for the second surprise card, called suspension of the gold window for the international markets. On August 15th 1971, the US pulled that card and growth stalled for good, while stagflation prevailed. The process was completed two years later when the fixed exchange regime was abandoned. The US was forced to not only use its income to pay off debts (and hence limiting its growth potential), but also the fears about the stability of the system did not allow the productivity machine i.e. the fertilizer to function. The indicator that the fiat money system was unstable was reflected in the price of gold which run from $35/oz to close to $500. Some might claim that any similar run up in gold prices over the last decade is coincidental. We would simply refuse to engage with such convoluted rationale.

If the fiat money system were to survive it had to pull another surprise card. On October 6, 1979 the Fed pulled that card, abandoning the interest rate target and adopting a monetary target. The surprise card gave life to the system for almost thirty years while it also allowed the presence of a new fiat currency, the Euro. The crisis that erupted in 2007 was the natural outcome of an aged system that lacks an anchor. This crisis opened the door to the current intermediate period, where either the total fiat credit money system gives in and collapses through a period of deleveraging, deflation, devolution and depression, or consolidates until a new international monetary regime is engineered (hopefully it will have an anchor this time).

Simply put, this consolidation period dictates the presence of only one main reserve currency, and by default that has to be the US dollar. There is no doubt that there have been periods where two currencies played the role of reserve currencies simultaneously. However, such incidents need to be viewed in their historical and geopolitical context, both of which are totally different nowadays.

Hence, the abolition of the Euro (what we have been calling controlled disintegration for several months now) in the ecosystem of money and credit creation may turn out to be a necessary condition towards the transition to the new international monetary regime. If that is the case, then, the placebo monetary operations via increasing the monetary base are designed not only to alleviate (in the designers’ mind) the transition pains but also to buy time.

It could be that in his song “A Series of Dreams” Bob Dylan saw the nightmare:

I was thinking of a series of dreams
Where nothing comes up to the top
Everything stays down where it’s wounded
And comes to a permanent stop

Like in a dream when someone wakes up and screams
Thinking of a series of dreams
Where the time and the tempo drag
And there’s no exit in any direction
Except the one that you can’t see with your eyes

We could only add then: Ode to exits that cannot be seen with the eye!