How can the private sector help government navigate an uncertain second half of the 21st century?

As I shared in my last post, I see the current conflict in eastern Europe as a milestone in the United States government’s move toward a post petro-dollar world.  The jury is still out on the Biden-Harris administration’s ability to map out the best route through uncharted waters where the U.S. dollar is no longer the world’s reserve currency or finds itself sharing that status with the currency of an emerging China.  The first step the private sector can take in getting ahead of the U.S. government and helping direct a soft landing into the second half of the 21st century is by redefining the narrative on the role of the U.S. government.

The current narrative bought into by the electorate is that the federal government is a protector of individual rights and freedoms; inalienable rights of free speech and press; the freedom to choose their political leaders; the freedom to assemble and criticize government policy; the right to have a jury of their peers; and of other personal or commercial liberties.  Maintaining these narratives is necessary on the part of the federal government if it is to get the electorate to buy in to what I deem as the federal government’s primary mission:

  • To maintain the tax base;
  • To maintain the physical and social infrastructure that facilitates and expands the tax base; and
  • To define, design, and deploy money that transmits to domestic and global societies the underlying value (currency) of the U.S. government, a value created and supported by the government’s ability to coerce and extract taxes.

The private sector is charged by the federal and state levels of government to operationalize government’s primary mission.  Labor is converted into a source for taxes when the private sector employs it. 

The private sector accounts for and submits to the government payroll and income taxes derived from labor’s compensation.  The firms that comprise the private sector also submit taxes to the federal and state levels of government, also contributing to the tax base.

The private sector employs human, financial, and natural resources to construct and deploy the physical infrastructure that facilitates the discovery, extraction, processing, and distribution activities necessary for getting goods and services into the hands of the consumer/electorate.  The ability to efficiently move goods and services into consumer/electorate hands helps to encourage or incentivize the consumer/electorate’s compliance with taxation and laws.

Private social agents are primarily operationally responsible for maintaining America’s social infrastructure.  Schools, churches, mosques, and families are the primary suppliers of narrative, philosophy, and teachings consumed by individuals.  Unlike the commercial private sector that operates via state-issued license or certificate of public convenience, social agents, for the most part, receive their “license” from heritage, lineage, traditions, or other social customs.  Where government attempts to supplant lineage, traditions, customs, or philosophies is where the trouble starts, but more on that next time.

The last prong of the mission, the definition, design, and the deployment of money is also carried out by the private sector, specifically the banks.  The banks resell and distribute money by lending money to the consumer/electorate and business associations (firms).

I define “money” as the physical representation of the acknowledgment of the economic value you have generated for exchange with a counterparty.  “Currency”, on the other hand, is your knowledge, data, or intrinsic value, that you put into generating economic value.

The private sector in assisting government’s navigation of the 21st century has to first acknowledge an inconvenient truth.  The private sector is an agent of government.  The private sector is the creation of a public policy called “capitalism.”  As an agent, it advises the government on what the transactional portion of society is prioritizing.  Also, as an agent, it should advise the government on whether policies government wants to pursue actually facilitates the government’s aforementioned mission.

The private sector must re-evaluate the narrative behind its and the government’s existence and roles.

Alton Drew

22.03.2022

For consultation on how this political or legal event impacts your foreign exchange trade, request an appointment at altondrew@altondrew.com.

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Will isolationism force the U.S. government’s currency to compete with other domestic currencies?

Over the past month, Americans have been moving their attention from the pandemic to the war in eastern Europe.  Not fully appreciated by an American public glued to the media scenes of evacuees, missile fire, and troop advancements is the closer economic alliance of China and Russia.  United States government officials have been prognosticating with unfounded confidence that economic sanctions against Russia in addition to stiff resistance from Ukraine’s military will thwart Vladimir Putin’s plans to pull more of Ukraine into the Russian orbit.

What I am seeing is a greater incentive by Russia, China, and other nations to go their own way by expanding alternative payment systems that move capital that underlies trade between Europe and Asia.  Speculation has increased that sometime in the future, the world may go from pricing oil in dollars to pricing oil in yuan.  With Russia being amongst the world’s top producers of oil, accepting yuan as payment for oil would put Europe in a pickle: dumping the long established petro-dollar for yuan.

As the United States continues to lead from behind on the eastern European portion of the world stage, I don’t hear many Americans contemplating what a new world order would look like where the United States issues a currency that finds itself limited to buying Caribbean vacations.

One currency scenario in a post petro-dollar world could see the greenback sharing legal tender status with alternative currencies.  These currencies could be digital, virtual, or actual (paper & coin).  The issuers, from 30,000 feet down, look like competitors, with potentially hundreds of communities issuing, circulating, and using their own currencies.  Right now, I would classify the issuers in this post petro-dollar world into three main entities.

The first entity is the public corporate body or government.  The government issues a currency in exchange for tax receipts.  The public corporate body’s currency is created by its ability to coerce, by law and force, individuals to pay a tax in exchange for protection of property and person.

The second entity is the private corporate body or corporation.  The corporation issues currency to consumers in exchange for revenues.  The private corporate body’s currency is created by its ability to provide the consumer with goods and services that consumers are willing to exchange their work energy for.  The private corporate body’s currency is backed by goods and services.  The greater the quality of these goods and services, the higher the demand for their attached currency.

Last is the private bank.  The private bank’s currency is created by its ability to store and secure its customer’s commodity wealth.  The currency the private bank issues, the tradeable receipt, allows the bearer of the currency to redeem her tradeable receipt in the form of a commodity.  The currency is commodity-backed.

An isolated U.S. government means that the currency it issues will incur reduced demand and a lowered value.  Domestically, the government issued currency will purchase fewer goods as competing imports diminish in availability.  The currencies of private corporations that provide valuable goods and services and private banks may see an increase in their value.  The taxpaying consumer will want to make a switch.

Under this scenario, government, if it is to survive, may have no choice but to enter agreements with private banks and private corporations to set a domestic exchange rate which in turn allows government to collect taxes via the use of alternative currencies.

The war in eastern Europe may set in motion events leading to competing currencies in America. 

Alton Drew

21.03.2022

For consultation on how this political or legal event impacts your foreign exchange trade, request an appointment at altondrew@altondrew.com.

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The Caribbean: Foreign exchange rates as of 10:15 am AST

Currency Pair14 March 202215 March 202216 March 202217 March 202218 March 2022
USD/BSD1.00001.00001.00001.00001.0000
USD/JMD151.469151.847151.451  
USD/HTG105.441105.114104.584  
USD/DOP54.587554.510754.424  
USD/XCD2.70002.70002.70002.70002.7000
USD/BBD2.00002.00002.00002.00002.0000
USD/TTD6.645496.665676.65304  
USD/GYD199.77200.46200.121  
USD/VEF428,490.0428,249425,659  
Dollar Index98.9198.6798.59  
Sources: OANDA, MarketWatch

Part of reading the United States’ currency value is reading the underlying shift in its cultural values.

Commentary

The United States is at a crossroads in terms of its culture. A corporate democracy such as this one sees elected officials willing to deficit spend on programs designed to buy votes from an electorate increasingly under stress due to the uncertainty of an economy that may not be able to provide for their wants and needs. According to the Congressional Budget Office (CBO), America’s fiscal year 2021 budget deficit is approximately $3.003 trillion. While estimated revenues totaled $3.842 trillion, FY2021 outlays were estimated at $6.845 trillion. Fiscal year 2020 saw estimated revenues at $3.420 trillion with outlays estimated at $6.552 trillion. The FY2020 deficit was higher than FY2021, coming in at $3.142 trillion.

I would expect the Administration to argue that the last two years saw the federal government increasing its outlays to combat the Covid-19 pandemic, but if we go back 40 years, we find not only expected increases in outlays and revenues, but increases in outlays far outstrip increases in revenues. For example, FY1982 outlays were $.746 trillion compared to FY2021 outlays of $6.845 trillion, amounting to a 818% increase over the 40 year period. The increase in revenues over the same period amounted to 522%, where FY1982 revenues totaled $.618 trillion and FY2021 revenues came in at $3.842 trillion.

In addition, mandatory spending, which is dictated by past law that sets out mandatory requirements for spending on items such as social security, Medicare, and income security programs, increased 1,211% between FY1982 and FY2021. Meanwhile, discretionary spending, where a program is approved during the congressional appropriations process, saw a 407% increase in outlays between FY1982 and FY2021. The programs funded during this process include national defense, transportation, education, and housing.

Democracy is expensive. As politicians carve out “alphabet fiefdoms” ie, BLM, LGBQT+, Latinx, DEI (diversity, equity, inclusion programs) etc., the promises made convert into programs that have to be paid for. Low interest rates over the last decade and a half have accompanied the expansion in spending. Cheap money leads to more spending. For example, according to data from the Federal Reserve, the current prime lending rate is approximately 3.25%. This represents a 70.4% decline in the prime rate since 8 August 1983.

In addition, the rates on Treasury debt issued to fund government programs have been falling steadily since January 2000. According to data from the US Treasury, interest rates reflecting long term composite debt in excess of ten years has fallen from 6.87% in January 2000 to 1.89% in December 2021.

Democracy is expensive, but the current low interest rate environment gives American politicians the impression that democracy is affordable. With every new demand from small but vocal factions along the political spectrum, the wider the interest-rate driven deficit.

I have started to liken a currency to a coupon you get from a fast food restaurant. No matter how deep the discount, the crappier the food, the less valuable the coupon. The US Treasury-Federal Reserve Fast Food Corporation is no different. The current rate of inflation (6.8%) that destroys its spending value compounds the damage from lower rates of return and from increased government spending designed to buy votes while providing little other value to the currency holder.

Alton Drew

9.01.2022

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Disclaimer: The above is provided for informational purposes and should not be construed as financial or legal advice or as creating an agreement to provide financial or legal advice.

The J-Cubed Corporation and its discount currency …

The J-Cubed Corporation (Jay Powell, Janet Yellen, and Joe Biden) are responsible for wholesale production of a currency ( a fast food restaurant coupon) and creating an underlying value for that currency that makes it attractive to other public corporations ie nations.

The banks, (licensed resellers or “currency pimps”) are responsible for getting the currency into the hands of individuals and businesses that put the coupon to its best use while generating taxes for the J-Cubed Corporation and steady bond yields for individuals (“The Global Johns”).

Are the wholesalers and resellers putting out too much currency? Since October 2020, the U.S. monetary base (currency in circulation plus reserves held in accounts at Federal Reserve banks) has increased by approximately 28.8%. Meanwhile, the Federal Reserve’s preferred metric for inflation, the personal consumption expenditure index, has increased approximately five percent during the same period.

The yield on U.S. 10-year bonds is at 1.49% at the time of this print, up 57 basis points since December 2020.

My question is, will Joe Biden be able to create a narrative that scores him some political points between now and when inflation is expected to abate, which is between early spring and the fall of 2022.

As Bill Clinton learned quickly and clearly in 1994, a sound economy and a path to re-election is about keeping The Global Johns happy. Any other reference to “economy” is just refried noise for the business media to transmit …

Alton Drew

24.12.2021

Contracting out the circulation of the U.S. political economy’s currency … and the never-ending threat of intervention

Article I, Section 8 of the United States Constitution describes Congress’ duty to regulate money.  Specifically, Congress has the duty to:

“Coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures…”

While the government has maintained the responsibility of minting coin and cash, the regulation of its value as well as that of foreign coin, is left up to the markets.  I am curious, though, as to how the law defines, “money”, “coin”, and “currency.”

A quick and dirty Black’s Law Dictionary definition of “currency’ is coined money and such banknotes or other paper money as are authorized by law and circulates as a medium of exchange.  31 CFR § 1010.100 defines currency as:

“The coin and paper money of the United States or of any other country that is designated as legal tender and that circulates and is customarily used and accepted as a medium of exchange in the country of issuance. Currency includes U.S. silver certificates, U.S. notes and Federal Reserve notes. Currency also includes official foreign bank notes that are customarily used and accepted as a medium of exchange in a foreign country.”

In the United States, the US Treasury and the Federal Reserve System source the currency.  They are the “farmers’ of the commodity we call currency.  According to Federal Reserve data, as of October 2021, there is approximately $2202.9 billion of currency in circulation.  When you factor in currency held in reserve at the Federal Reserve, the total monetary base of the United States as of October 2021 is approximately $6331 billion. 

The banks that the Treasury and the Federal Reserve charter and regulate participate in the interbank market, the market in which foreign exchange rates for currency is set.  I like to think of these banks as the wholesale/retail enterprises that are responsible for circulating currency, transmitting the value of the US political economy globally.  While I believe the US government could technically set these rates itself, the capitalist economic policy implemented by the US government prefers private institutions carry out this mission.

I would think that wholesale (bank) and retail traders and brokers prefer this model because they determine the share of income (profit) garnered via foreign exchange.  Because the Treasury and the Federal Reserve are the “farmers” of the currency and are primarily held responsible by the Congress for the day-to-day valuation of the currency, traders and brokers should stay mindful that the cloud of potential government intervention in the market always looms.

Keeping the dark cloud of potential intervention into the foreign exchange market dispersed can only occur via constant monitoring and initiatives to keep government at bay.  That is the trader and broker’s daily call to action.

Alton Drew

24.11.2021  

Interbank Market News Scan: The world waits for the Fed’s decision on tapering …

Interbank, China. The following are the parity rates for the Chinese renminbi. https://www.bignewsnetwork.com/news/271640484/market-exchange-rates-in-china—-nov-3

Interbank, India. The rupee appreciated by 22 paise to close at 74.46 (provisional) against the US dollar on Wednesday on the back of easing crude oil prices and foreign fund flows into domestic IPOs. https://www.business-standard.com/article/markets/rupee-appreciates-22-paise-to-close-at-74-46-against-the-us-dollar-121110301094_1.html

Interbank, foreign currencies, Afghanistan. Taliban bans foreign currencies in Afghanistan. https://www.bbc.com/news/business-59129470

Interbank, central bank digital currencies. A network among multiple central bank digital currencies could create efficiencies in the tens of billions of dollars and benefit all participants, according to a new report. https://www.bloomberg.com/news/articles/2021-11-03/what-a-global-central-bank-digital-currency-network-might-do?sref=oriheOus

Interbank. There is a disconnect between exchange rates and the classical variables that explain them. https://insight.kellogg.northwestern.edu/article/why-currency-exchange-rates-fluctuate

My Morning Takeaway: The trader should seek out best information sources on the future …

The Bloomberg article I note above has me thinking about how currency trade will look in the near future.  I am not surprised about the discussions being held regarding how a central bank digital currency will be distributed globally.  If efficiencies are created by a network of central bank digital currencies, especially where banks can save on settlement costs, then the trader, in my opinion, should get as much insight into the degree of volatility spawned by an increasingly efficient network.

If we assume efficiency involves an increase in data that can be analyzed at a faster rate, then a broker should be able to convey this information to a trader using her broker network.  Again, the ability of a broker to provide this type of information thus giving the trader insights on how volatility may impact price movements will prove invaluable to both the trader and broker.

Another side-note thought on the future: the role of the bank in a central bank digital currency future.  I don’t see the banks being cut out of the payment system per se.  The banks’ strategic and tactical position in the payments system makes them too valuable for central banks to kick to the curb.  Credit creates money and the banks will continue their role as the retail distributors of the currency whether that currency is a central bank distributed coin or not.

Alton Drew 3.11.2021

A quick thesis statement on trade and currency …

Man engages for the sole purpose of exchanging value. The carry trade is the movement of value from a place of low returns to a place of higher returns. A payment system is the conduit for extracting value where that value is captured in a currency. Labor and capital are the forces that combine to extract value. An optimal exchange of value is a function of a transparent, quick, efficient payment system, untaxed, with no leakage. Public policy should be in line with this philosophy of a payment system.

An importer wants to short the dollar …

Tywin Lannister decides to invest in the import/export business.  He wants to import certain goods from the United Kingdom and resell them in the United States.  He estimates that he will need 7.5 million British pounds (GBP) to purchase, package, process, and deliver his British goods to the U.S. 

At an exchange rate of $1.3740 per British pound, he estimates borrowing $10.305 million from his US bank.  The borrowed amount also includes his estimated profit.

To sweeten the deal with the prime brokerage division of his bank, he offers up $1.05 million dollars in cash and securities as collateral.

Lannister’s business venture so far in Great Britain is a success.  His take comes in (for the purpose of this discussion) at the estimated 7.5 million GBP which also includes his profit.  He would not mind expanding his profit so he hopes that the dollar weakens or depreciates. Fortunately for Lannister the dollar price of a pound has increased to $1.5801.  After converting his pounds to dollars, he realizes $11.85 million, and after repaying his loan, he takes home approximately $1.54 million in profit from his venture.

Lannister likely benefited from a number of market forces.  For example, incomes in the US may have been increasing faster than those in the UK thus increasing demand for the UK’s exports and currency.  The UK’s currency appreciates versus the US.

Prices in the US may have been rising rapidly when compared to prices in the UK. The resulting demand for lower priced UK products would have resulted in an appreciation of the UK’s products and currency.

In addition, interest rates in the UK may have risen higher than in the US, incentivizing the movement of money from the US to the UK resulting in an appreciated UK currency.

A trader’s sound monetary policy strategy will emphasize interest rate moves, but will not discount to zero the other market forces that impact currency values.  Lannister no doubt kept his eyes on all the factors, but given that a central bank is the “farmer” of its nation’s respective currency, Lannister, and any other importer, will pay close attention to the interest rate actions (monetary policy) of its central bank.

Alton Drew 23 September 2021

Interbank Market News Scan: The fallacy of free markets

1 September 2021

It is in the best interest of governments and their central bank underwriters that government maintains some control over the market price for currencies.  As a reflection of the underlying value of a political economy, currency prices signal a country’s capacity to entertain investment.  Stable currency prices transmit a message that the underlying economy operates in an environment of legal, social, and regulatory certainty.  Whereas financial markets enjoy the profits and arbitrage opportunities that volatility may bring, governments and their central bank underwriters prefer a law-and-order environment for trade.  Certainty of domestic and foreign investment along with tax and customs collection is the higher priority for government.

There is a lot of noise that, in my opinion, blocks out these basic tenets of political economy.  It is no wonder that chartists or technical analysts focus primarily on pip movements on their bar graphs.  Pontification on future government moves can cause hair to be pulled out and put a trader into a state of mental numbness.  The trader cannot, however, take her eyes off of the policy ball for it is the policy maker, in this case the Federal Reserve, that provides the nutrients for currency growth and circulation.  It is their narrative that drives prices.  It is their decisions on reserve requirements, asset purchases, and fed fund and discount window rates that signal to their currency vendors, the banks, the varying rates that currency is sold to the public.

And thus, this is part of the fallacy; that banks are somehow free market players charging a market-driven interest rate for loans.  On the contrary.  Banks are more like government chartered (commissioned) privateers who sell currency to the public either via loans or directly over the counter during foreign exchange transactions.  Banks are merely doing the bidding of a government that needs its currency to flow to activities that eventually generate taxable events.  Banks provide government with a low-cost information search alternative for seeking out and financing high-yielding taxable events.

The trader should maintain focus on policy narratives and decisions that will impact the price of the dollar, currently the world’s most prevalent reserve currency.  Central banks are consuming economic, political, and these days more social data and inputting this information into their narrative.  The narrative creates the marching orders for their chief currency vendors, the banks.  There is no free market when your marching orders come from the central bank.  The free market is a fallacy that serves only to create a lot of noise from amongst the chattering classes.

Alton Drew

For a consultation on any regulatory or legislative discussions or announcements, please reach out to us at altondrew@altondrew.com for information on consultation rates and to reserve an appointment.