Abstract
Systemic risk is popularly understood as the risk of collapse of an entire financial system, and we show that it is also a feature of democracy. Investors believe in the existence of systemic risk and in their ability to monitor it with the use of statistical methods. Through a historical review of monetary developments since 1913, we show that the collapse of the entire financial system is not a risk but the natural and logical outcome resulting from precise, explicit and purposeful actions carried out by governments.
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Notes
- 1.
To some mainstream economists, systemic risk is the risk that the sovereign defaults. This is not our assumption.
- 2.
Gerrymandering illustrates this point. Gerrymandering is the redrafting of electoral districts, to favour a certain constituency’s electoral results.
- 3.
According to Dr Huerta de Soto, the Peel Act of July 19, 1844, marks the beginning of this process.
- 4.
In Rodgers, Mary Tone and Wilson, Berry K. “Systemic Risk, Missing Gold Flows and the Panic of 1907”, The Quarterly Journal of Austrian Economics 14, No. 2 (Summer 2011): 158–187, there is an excellent discussion on the mechanics of adjustments under the gold standard, in reaction to failures. The authors sustain that the gold flows that ensued from Europe into the United States provided the liquidity necessary to mitigate the panic, without the need of intervention. This success in reducing systemic risk was due to the existence of US corporate bonds (mainly from railroads) with coupon and principal payable in gold, in bearer or registered form (at the option of the holder) that facilitated transferability, tradable jointly in the US and European exchanges, and within a payment system operating largely outside of the bank clearinghouse systems. The official story is however that the system was saved by a $25MM JP Morgan-led pool of liquidity injected to the call loan market.
- 5.
“Venture” is the operative word here, because the world never saw a pure gold standard take place.
- 6.
See The Genoa Conference and the Gold Exchange Standard, con E. Seghezza, Università di Genova, Disefin working paper, n. 7, 2008.
- 7.
A balance of trade deficit is the difference between exports from and imports to a nation or a currency zone.
- 8.
Brown, Brendan: “The Global Curse of the Federal Reserve: How Its Monetary Virus Stimulates Destructive Waves of Irrational Exuberance and Depression”, Murray N. Rothbard Memorial Lecture, presented at the A.E.R. Conference, 21 March 2013, Auburn, AL, ref.: https://www.youtube.com/watch?v=INDZe4KAZS4&feature=youtu.be&t=19m
- 9.
By stock imbalances I refer to the enormous debts accumulated by both the Allies (e.g. Great Britain with Argentina) and the Germany.
- 10.
Refer this excellent post by Zerohedge on the subject: “Desperately Seeking $11.2 Trillion In Collateral, Or How “Modern Money” Really Works”, May 1, 2013.
- 11.
- 12.
Statement of William McChesney Martin, Jr., Chairman, Board of Governors of the Federal Reserve System, before the Subcommittee on National Security and International Operations of the Committee on Government Operations United States Senate August 30, 1965. Refer: https://fraser.stlouisfed.org/files/docs/historical/martin/martin65_0830.pdf
- 13.
Jacques Rueff (1896–1978) was a French economist and adviser to Prime Minister Charles De Gaulle, in 1958.
- 14.
Here one must consider the reverse mechanism: Without currency swaps, the United States would not have the trade deficits they have. To put this in context, if President Trump was serious about addressing trade deficits without affecting free trade, his administration would have to intervene the Federal Reserve and forbid currency swaps with other central banks.
- 15.
The Eurodollar swap basis is a bilateral contract where a sum borrowed in euros is converted into US dollars. At expiration, the principal is converted back from US dollars to euros at the agreed (upfront) fixed currency rate.
- 16.
This observation is not idle. Should the sustainability of the Eurozone be put in doubt (as with important country members leaving the zone), the efficiency of currency swaps would be seriously impaired, precisely at a time of heightened capital movements.
- 17.
Nobody really knows what the People’s Bank of China holds as reserves, and how much.
Bibliography
Rodgers, Mary Tone and Wilson, Berry K.. (Summer 2011). Systemic Risk, Missing Gold Flows and the Panic of 1907. The Quarterly Journal of Austrian Economics Vol 14, No. 2. Pp. 158–187.
Seghezza, E. (2008). The Genoa Conference and the Gold Exchange standard. Università di Genova, Disefin working paper, n. 7.
Brown, Brendan. (March 2013). The Global Curse of the Federal Reserve: How Its Monetary Virus Stimulates Destructive Waves of Irrational Exuberance and Depression. Murray N. Rothbard Memorial Lecture, presented at the Austrian Economics Research Conference, Auburn, AL. Retrieved March 2013 from: https://www.youtube.com/watch?v=INDZe4KAZS4&feature=youtu.be&t=19m
Anonymous. (May 1, 2013). Desperately Seeking $11.2 Trillion In Collateral, Or How “Modern Money” Really Works. Retrieved from https://www.zerohedge.com/news/2013-05-01/desperately-seeking-112-trillion-collateral-or-how-modern-money-really-works
Group of Ten. (May 31, 1965). Report of the study group on the creation of reserve assets. Report to the Deputies of The Group of Ten. Retrieved April 2013 from http://www.bis.org/publ/gten_b.pdf
Rueff, Jacques. (1971). Le péché monétaire de l’Occident. Chapitre XI, p. 177. Paris: CD Librairie Plon.
Statement of William McChesney Martin, Jr., Chairman, Board of Governors of the Federal Reserve System, before the Subcommittee on National Security and International Operations of the Committee on Government Operations United States Senate Aug. 30, 1965. Retrieved May 2013 from https://fraser.stlouisfed.org/files/docs/historical/martin/martin65_0830.pdf
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Arisson, M. (2018). Systemic Risk. In: Investing in the Age of Democracy. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-95903-0_7
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DOI: https://doi.org/10.1007/978-3-319-95903-0_7
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