Where do we go from here? If the monetary system is broken, how do we fix it so that the global economy can be mercifully released from the “dollar’s” gripping vise? The short answer is that it is too complicated to contemplate in this setting. A better answer is that I don’t know because there is a great deal that I know I don’t know. In truth, there is likely a lot that nobody knows, an element equal of frustration and terror. And it is that part that stimulates questions about how to find an escape. After all, almost a decade is enough since the world will not be able to follow Japan.

The generic answer is often stability, as I am just as guilty in taking the easy way out by leaving in that shorthand. But “stability” means different things to different people; there are those who propose that the Federal Reserve should be relieved of its dual mandate and focus instead on some range of commodity prices. Others go much further and wish to see the gold standard’s triumphant return in an epic “I told you so.” Each time someone proposes those or something different but of similar intent all aimed rightly for “stability” I am left wondering each time, “HOW?”

Typically (actually in all cases that I have found) the scheme involves no awareness of how money actually operates in the 21st century. How does one impose a gold standard in the setting, for example, of a cross currency basis swap? I am not even considering the difficulties of trying to impose a price of gold among both sides of that transaction, rather how would the security actually function? Cash flows are exchanged, but would they be cash or gold? If the former, how would that be convertible into the latter? How we would figure out even in a ballpark estimate how much gold would be necessary to cover all potential liabilities arising from just the monetary obligations related to these swaps? It would be easy to say that you just banish all such complications and impose everything by sheer diktat, but that is not the world we live in (though that is why 2008 would have been the best time for these discussions). Considerations must be given for how to go from here to there, and that space in between is a quagmire of unthinkable complexities.  

Raising these questions doesn’t mean that I disfavor a gold standard or hard money, only that it would be far more complicated than most who propose this route make it seem. If you are simply replacing gold reserves for bank reserves that is one thing, but as we know very well from the eurodollar perspective the global money system is far, far more than that. A credit-based reserve currency brings up all the ways in which banks “manufacture” this credit as money.

Given that, I do think it points us in one direction of where this all could or even might begin. Among the first tasks of whatever reform program develops would be to scrap the Basel framework in total. Not only is it ill-suited to its task, it has actually become a perversion of that task. Capital ratios can be an effective means for analyzing a bank’s strengths or weaknesses, but in a regime where capital ratios determine everything they are instead the pathway to manipulation and distortion. The whole point is undermined by its own setup.