Currency Wars: The Making of the Next Global Crisis (41 page)
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Authors: James Rickards
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Chapter 9
ARTICLES
171
In the classic formulation of nineteenth-century economic writer Walter Bagehot . . .
All references to Bagehot’s principles for central banking are from Walter Bagehot,
Lombard Street: A Description of the Money Market
, New York: Scribner, Armstrong, 1873.
In the classic formulation of nineteenth-century economic writer Walter Bagehot . . .
All references to Bagehot’s principles for central banking are from Walter Bagehot,
Lombard Street: A Description of the Money Market
, New York: Scribner, Armstrong, 1873.
174
“We conclude this crisis was avoidable . . .” The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States
, New York: Public Affairs, 2011, xvii.
“We conclude this crisis was avoidable . . .” The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States
, New York: Public Affairs, 2011, xvii.
175
In 2009, Janet Yellen, then president of the Federal Reserve Bank of San Francisco . . .
“Fed Seeks Power to Issue Own Debt When Crisis Ebbs, Yellen Says,” Bloomberg, March 26, 2009.
In 2009, Janet Yellen, then president of the Federal Reserve Bank of San Francisco . . .
“Fed Seeks Power to Issue Own Debt When Crisis Ebbs, Yellen Says,” Bloomberg, March 26, 2009.
181
Svensson’s paper is the Rosetta stone of the currency wars . . .
Lars E. O. Svensson, “Escaping a Liquidity Trap and Deflation: The Foolproof Way and Others,” Working Paper No. 10195, National Bureau of Economic Research, December 2003.
Svensson’s paper is the Rosetta stone of the currency wars . . .
Lars E. O. Svensson, “Escaping a Liquidity Trap and Deflation: The Foolproof Way and Others,” Working Paper No. 10195, National Bureau of Economic Research, December 2003.
182
“Even if the . . . interest rate is zero . . .”
Svensson, op. cit.
“Even if the . . . interest rate is zero . . .”
Svensson, op. cit.
182
“If the central bank could manipulate private-sector beliefs . . .”
Svensson, op. cit.
“If the central bank could manipulate private-sector beliefs . . .”
Svensson, op. cit.
185
In a famous study written just before the start of President Obama’s administration . . .
Christina D. Romer and Jared Bernstein, “The Job Impact of the American Recovery and Reinvestment Plan,” report prepared by the Council of Economic Advisers, January 9, 2009.
In a famous study written just before the start of President Obama’s administration . . .
Christina D. Romer and Jared Bernstein, “The Job Impact of the American Recovery and Reinvestment Plan,” report prepared by the Council of Economic Advisers, January 9, 2009.
185
One month after the Romer and Bernstein study . . .
John F. Cogan, Tobias Cwik, John B. Taylor and Volker Wieland, “New Keynesian Versus Old Keynesian Government Spending Multipliers,” Working Paper No. 14782, National Bureau of Economic Research, February 2009,
www.volkerwielandcom/docs/CCTW%20Mar%202.pdf
One month after the Romer and Bernstein study . . .
John F. Cogan, Tobias Cwik, John B. Taylor and Volker Wieland, “New Keynesian Versus Old Keynesian Government Spending Multipliers,” Working Paper No. 14782, National Bureau of Economic Research, February 2009,
www.volkerwielandcom/docs/CCTW%20Mar%202.pdf
186
Empirical support for Keynesian multipliers of less than one, in certain conditions, was reported in separate studies . . .
See Charles Freedman, Michael Kumhof, Douglas Laxton, Dirk Muir and Susanna Mursula, “Global Effects of Fiscal Stimulus during the Crisis,” International Monetary Fund, February 25, 2010; Robert J. Barro and Charles J. Redlick, “Macroeconomic Effects from Government Purchases and Taxes,” Working Paper No. 10-22, Mercatus Center, George Mason University, July 2010; and Michael Woodford, “Simple Analytics of the Government Expenditure Multiplier,” paper presented at the meetings of the Allied Social Sciences Association, January 3, 2010.
Empirical support for Keynesian multipliers of less than one, in certain conditions, was reported in separate studies . . .
See Charles Freedman, Michael Kumhof, Douglas Laxton, Dirk Muir and Susanna Mursula, “Global Effects of Fiscal Stimulus during the Crisis,” International Monetary Fund, February 25, 2010; Robert J. Barro and Charles J. Redlick, “Macroeconomic Effects from Government Purchases and Taxes,” Working Paper No. 10-22, Mercatus Center, George Mason University, July 2010; and Michael Woodford, “Simple Analytics of the Government Expenditure Multiplier,” paper presented at the meetings of the Allied Social Sciences Association, January 3, 2010.
187
Christ was saying that the impact of Keynesian stimulus . . .
Carl F. Christ, “A Short-Run Aggregate-Demand Model of the Interdependence and Effects of Monetary and Fiscal Policies with Keynesian and Classical Interest Elasticities,”
The American Economic Review
57, no. 2, May 1967.
Christ was saying that the impact of Keynesian stimulus . . .
Carl F. Christ, “A Short-Run Aggregate-Demand Model of the Interdependence and Effects of Monetary and Fiscal Policies with Keynesian and Classical Interest Elasticities,”
The American Economic Review
57, no. 2, May 1967.
192
The role of VaR in causing the Panic of 2008 is immense . . .
The House of Representatives held one hearing on this topic, at which sworn testimony was provided by
Black Swan
author Nassim Nicholas Taleb, bank analyst Christopher Whalen and myself, among others. This hearing was held by the Subcommittee on Investigations and Oversight of the Committee on Science, Space and Technology on September 10, 2009. The ostensible reason for using the Science Committee was that VaR is a quantitative and therefore scientific discipline; however, I was informed that this was actually done at the request of Financial Services Committee chairman Barney Frank in order to establish a record on VaR while avoiding the lobbyists who typically influence witness selection and questions in the Financial Services Committee. The consensus of the witnesses was that VaR is deeply flawed and contributed significantly to the financial crisis of 2007–2008. However, this hearing had little impact on the final form of the resulting Dodd-Frank legislation, as no limitations on the use of VaR were imposed. The record is available at
http://gop.science.house.gov/Hearings/Detail.aspx?ID=166
.
Chapter 10The role of VaR in causing the Panic of 2008 is immense . . .
The House of Representatives held one hearing on this topic, at which sworn testimony was provided by
Black Swan
author Nassim Nicholas Taleb, bank analyst Christopher Whalen and myself, among others. This hearing was held by the Subcommittee on Investigations and Oversight of the Committee on Science, Space and Technology on September 10, 2009. The ostensible reason for using the Science Committee was that VaR is a quantitative and therefore scientific discipline; however, I was informed that this was actually done at the request of Financial Services Committee chairman Barney Frank in order to establish a record on VaR while avoiding the lobbyists who typically influence witness selection and questions in the Financial Services Committee. The consensus of the witnesses was that VaR is deeply flawed and contributed significantly to the financial crisis of 2007–2008. However, this hearing had little impact on the final form of the resulting Dodd-Frank legislation, as no limitations on the use of VaR were imposed. The record is available at
http://gop.science.house.gov/Hearings/Detail.aspx?ID=166
.
197
Robert K. Merton’s most famous contribution . . .
Robert K. Merton, “The Self-Fulfilling Prophecy,”
The Antioch Review 8, no. 2
(Summer 1948): 193–210.
Robert K. Merton’s most famous contribution . . .
Robert K. Merton, “The Self-Fulfilling Prophecy,”
The Antioch Review 8, no. 2
(Summer 1948): 193–210.
197
A breakthrough in the impact of social psychology on economics . . .
This work on what became the foundation of behavioral economics is contained in two volumes: Daniel Kahneman and Amos Tversky, eds.,
Choices, Values, and Frames
, Cambridge: Cambridge University Press, 2000; and Daniel Kahneman et al., eds.,
Judgment under Uncertainty: Heuristics and Biases
, Cambridge: Cambridge University Press, 1982.
A breakthrough in the impact of social psychology on economics . . .
This work on what became the foundation of behavioral economics is contained in two volumes: Daniel Kahneman and Amos Tversky, eds.,
Choices, Values, and Frames
, Cambridge: Cambridge University Press, 2000; and Daniel Kahneman et al., eds.,
Judgment under Uncertainty: Heuristics and Biases
, Cambridge: Cambridge University Press, 1982.
201
If they are diverse they will respond differently to various inputs producing . . .
The extended analysis that follows, including elements of diversity, connectedness, interdependence and adaptability, draws on a series of lectures under the title “Understanding Complexity,” delivered in 2009 by Professor Scott E. Page of the University of Michigan.
If they are diverse they will respond differently to various inputs producing . . .
The extended analysis that follows, including elements of diversity, connectedness, interdependence and adaptability, draws on a series of lectures under the title “Understanding Complexity,” delivered in 2009 by Professor Scott E. Page of the University of Michigan.
207
However, there is strong empirical evidence, first reported by Benoît Mandelbrot . . .
This discussion of fractal dimensions in market prices draws on Benoît Mandelbrot and Richard L. Hudson,
The (Mis)Behavior of Markets: A Fractal View of Risk, Ruin, and Reward
, New York: Basic Books, 2004.
However, there is strong empirical evidence, first reported by Benoît Mandelbrot . . .
This discussion of fractal dimensions in market prices draws on Benoît Mandelbrot and Richard L. Hudson,
The (Mis)Behavior of Markets: A Fractal View of Risk, Ruin, and Reward
, New York: Basic Books, 2004.
218
Chaisson posits that the universe is best understood . . .
The discussion of Chaisson’s theory of free energy rate densities is from Eric J. Chaisson,
Cosmic Evolution: The Rise of Complexity in Nature
, Cambridge: Harvard University Press, 2001. Chaisson’s specific values for free energy rate densities are given as:
Chaisson posits that the universe is best understood . . .
The discussion of Chaisson’s theory of free energy rate densities is from Eric J. Chaisson,
Cosmic Evolution: The Rise of Complexity in Nature
, Cambridge: Harvard University Press, 2001. Chaisson’s specific values for free energy rate densities are given as:
219
In his most ambitious work . . .
Joseph A. Tainter,
The Collapse of Complex Societies
, Cambridge: Cambridge University Press, 1988.
In his most ambitious work . . .
Joseph A. Tainter,
The Collapse of Complex Societies
, Cambridge: Cambridge University Press, 1988.
219
Tainter stakes out some of the same ground as Chaisson . . .
Tainter, op. cit.
Chapter 11Tainter stakes out some of the same ground as Chaisson . . .
Tainter, op. cit.
227
Barry Eichengreen is the preeminent scholar on this topic . . .
For Eichengreen’s views on the prospects for multiple reserve currencies, see Barry Eichengreen,
Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System
, Oxford: Oxford University Press, 2011; and Barry Eichengreen, “The Dollar Dilemma: The World’s Top Currency Faces Competition,”
Foreign Affairs
, September/October 2009: 53–68.
Barry Eichengreen is the preeminent scholar on this topic . . .
For Eichengreen’s views on the prospects for multiple reserve currencies, see Barry Eichengreen,
Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System
, Oxford: Oxford University Press, 2011; and Barry Eichengreen, “The Dollar Dilemma: The World’s Top Currency Faces Competition,”
Foreign Affairs
, September/October 2009: 53–68.
236
“Countries that left gold were able to reflate their money supplies . . .”
Ben Bernanke, “The Macroeconomics of the Great Depression: A Comparative Approach,”
Journal of Money, Credit and Banking
27 (1995): 1–28.
“Countries that left gold were able to reflate their money supplies . . .”
Ben Bernanke, “The Macroeconomics of the Great Depression: A Comparative Approach,”
Journal of Money, Credit and Banking
27 (1995): 1–28.
237
In support of his thesis that gold is in part to blame . . .
Bernanke, op. cit. Bernanke’s specific model states:
In support of his thesis that gold is in part to blame . . .
Bernanke, op. cit. Bernanke’s specific model states:
M1 = (M1/BASE) × (BASE/RES) × (RES/GOLD) × PGOLD × QGOLDWhereM1
=
M1 money supply (money and notes in circulation plus commercial bank deposits),BASE = monetary base (money and notes in circulation plus reserves of commercial banks),RES = international reserves of the central bank (foreign assets plus gold reserves), valued in domestic currency,GOLD = gold reserves of the central bank, valued in domestic currency = PGOLD × QGOLD,PGOLD = the official domestic currency price of gold, andQGOLD = the physical quantity (for example, in metric tons) of gold reserves.
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