“From its creation in 1913, the most important Fed mandate has been to maintain the purchasing power of the dollar; however, since 1913 the dollar has lost over 95 percent of its value” James Rickards

One of the least talked about proposals of the future Trump administration is the one that aims to penalize with economic sanctions those countries that manipulate their currency … even the US.

The proposal is not entirely new, and has been defended by Republicans since 2014, but the novelty is to penalize monetary manipulation.

On the one hand, Republicans have two proposals, one in the House of Representatives Financial Services Committee -of 2014- and another, of 2015, in the Senate Banking Committee by which the Federal Reserve would be prevented from making decisions on interest rates and balance sheet expansion if they deviate by more than two percentage points from a predetermined Taylor Rule. Let’s explain.

If the Federal Reserve targets a level of inflation and employment for a level of rates and monetary policies, it would have to explain to Congress or the Senate why it changes or deflects the normalization when these targets are met.

Why? Very few representatives of the Republican party deny that the dramatic cut in interest rates led to a huge bubble that generated the 2008 crisis, and that prolonging the so-called expansive policies in recent years has generated another bubble in bonds and an excess of euphoria in financial assets with no discernible impact on the real economy ( read the results here )

The indiscriminate creation of money not supported by savings is always behind the greatest crises, and there is always someone willing to justify it as both a problem and its solution.

Add to this that the economists of the Federal Reserve and its chairpersons were all unable to alert or even recognize the risk of such bubbles (from Greenspan to Bernanke or Yellen) and you will understand why there is a growing body of politicians concerned about monetary policies that are always launched as if they had no risk and then justified with the lame argument of “it would have been worse.”

Of course, the Federal Reserve rejects such limitations. When the central bank becomes the largest hedge fund in the world under the premise that there is “no inflation” despite a massive bubble in financial assets, it is difficult to change the methodology of the entity. But after consistently erring on estimates, impact and consequences, it is normal that the Republican Party and many Democrats put the mandate of the central bank in question .

Carl Icahn, one of the world’s top investors and Trump’s newly appointed regulation adviser, still holds the napkin where he took note of the Federal Reserve chairman’s response to his question on whether they had gauged the negative consequences of the Fed´s monetary policy. ” We don’t know “, was the answer.

But I am especially interested in the idea of penalizing countries that implement devaluation policies of ” beggar thy neighbor ” after the currency war seen in recent years. Read here.

Several years ago, in 2009, I had the opportunity to chat at a meeting with the incoming US Secretary of State, Rex Tillerson, and he was already saying that the greatest threat to the world was the spread of currency wars.

Now, only a few days away from getting a clear picture of the entire US government team and advisors, Rex Tillerson, Mick Mulvaney and Carl Icahn are clearly against the policies of financial repression. Even Steve Mnuchin himself has often commented on the risk of inflationary policies.

But the US cannot prevent central banks from other countries from continuing to impoverish their citizens through devaluations and brutal increases in money supply … Unless they are fined for doing so. And that penalty can have dissuasive effects and, in addition, prevent the generation of larger bubbles that lead us to another financial crisis. It is no coincidence that Mick Mulvaney applauds initiatives like Bitcoin  and the depoliticization of currencies.

It is not about returning to the gold standard or anything like that. In fact, what this group of representatives of the Republican party demands – and in that they are absolutely right – is the end of uncontrolled monetary excess without any responsibility on its consequences. Rejecting a system that encourages bubbles and over-indebtedness under the excuse that “it could be worse.”

We do not know if these measures will be implemented, but I think it is important and healthy that the debate over the excesses of central banks is raised at government level in the world’s leading economy. Trump himself, who once said that “America can print all the money it needs,” has abandoned that ridiculous comment.

In any case, just as the crisis of 2008 ended the open bar excesses of some financial operators, it is time to alert that central banks´balance sheet cannot be used indiscriminately as if they were high risk funds to perpetuate the bubble , when the result has been more than disappointing. Recovering a little sanity, even modestly, will not hurt anyone. We shall see.

Daniel Lacalle is PhD in Economics and author of “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)

@dlacalle_IA

Article published in elespanol.com in Spanish

Cartoon courtesy of @Hedgeye

Much has been said these days about 2016 for stock markets, financial assets, winners and losers in a certainly complicated year.

But if there should be an honourable mention, that should go to Bitcoin, the virtual currency that has surpassed all expectations of revaluation and reached $1000 on January 1st. Up more than 87% in 2016  supported by strong buying from Chinese and Indian citizens on expectations of huge devaluations of their local currencies.

The resurgence of the shelters against the destruction of currencies by governments is not a novelty of 2016, but was accelerated with the generalisation of financial repression policies -devalue and cut rates- that more than 25 central banks carried out since 2008.

The assault on the saver has been incessant with the disastrous monetary policy that seeks to extract from citizens their savings to maintain unsustainable government and debt imbalances.

The search for ways to preserve wealth in a society which owns most of it in deposits, makes citizens seek any way to avoid the assault on their savings from the massive printing of money through increase of money supply.

This monetary assault is the most antisocial policy that exists, it destroys the middle class and savers, and is justified by economists with completely fallacious, almost religious arguments, fake expectations of growth and science fiction improvement of the economy that are never achieve and then excused with the infamous “it would have been worse,” “it was not enough “and” we must repeat “.

For this reason, the search for a currency whose control is not in the hands of States has been a constant in preserving capital since Nero came up with the “brilliant” idea of ​​creating money “for the people” by putting other metals in silver coins or the times of the terrifying Assignats in France… The race against the assault on the wealth of citizens by inflationists has always existed.

Whenever government’s imbalances soar, the “solution” almost inevitably comes from “dissolving” the wealth of citizens and appropriate it via inflation – the tax of the poor – and devaluation.

We have a surprising paradigm. And why not gold? Well, gold has appreciated 8.5% in 2016 as well. In history, it has almost always served as a means of payment in any country and transaction.

The difference between Bitcoin and gold in recent years is basically that, while one has been rising fast as a possible currency and as a store of value as doubts dissipated ( read “Bitcoin , free currency, bubbler or Ponzi scheme?” ) on the other hand, gold was not as strong because the monstrous monetary policy implemented worldwide generated disinflation due to the collapse of the velocity of money and perpetuation of overcapacity. In fact, gold lost part of its attractiveness as a reserve of value as hyperinflation risks were limited. This excess of inflation occurred aggressively in financial assets – bonds in particular – and Bitcoin replaced part of that value reserve.

Bitcoin is not yet a reality as a free currency for global use, its evolution depends on being able to implement it globally and clarify doubts about its value as a refuge.

Bitcoin is a currency startup. A means of payment where states cannot interfere in the amount and cost of money available, where it is not possible to create fake money not backed by savings, and where one can ‘escape’ and take refuge from the assault to the saver which is the growing financial repression imposed by governments and central banks. Doubts come because the ‘shelter’ is virtual, and therefore always subject to computer attacks. In addition, history makes me fear the confiscatory reaction of States when it reaches – if it does – a “dangerously high” level of implementation. Remember Roosevelt when he decided to confiscate the gold of his citizens in 1933. “For their own sake,” of course.

Bitcoin is proving to be a powerful exchange network and its revaluation shows that those who trust in that network maintain their positions in the medium term. As the increase in supply is limited, it is revalued in the face of increased demand. A financial asset where its scarcity, future demand and its quality are valued against the possibility of exchanging it for other currencies, goods or services in the future. The fact that you can liquidate that asset and pay debts and taxes with the profits generated is positive. But it is not a currency until it can be used as a generally accepted means of payment for goods, services, taxes and debts.

What Bitcoin and the revaluation of the gold in 2016 sow us is that a growing part of the population continues to look for ways to shelter their savings against the assault of a monetary policy that aims to use the deposits of the savers to pay the debts of the inefficient. We shall see.

The new administration of the United States is starting to openly speak of penalties to countries who manipulate currencies even its own Federal Reserve. If the US ends this monetary madness, we may see a drop in interest in independent currencies or reserves of value, that is why we said here that the dollar may be the new gold. But citizens will continue to seek alternatives to defend themselves from the temptation of some States to appropriate the wealth of the savers to cover the excesses of the wasteful.