•As we have discussed in the past, the mechanics for currency devaluation are straightforward and would be simple to exercise.
•Global banks, having already been de-levered and finding the quality of their loan books to be pristine following the devaluation, would be eager to lend again.
(The fractional reserve banking system would not be altered.)
The devaluation would be economically stimulative.
In our view, public arguments by Fed members and observers of future balance sheet reduction using normal asset sales or amortization seem specious.
The most visible, politically expedient and most likely path seems to be the path usually taken: inflation. In the case of the Fed and other central banks, we assert the magnitude of the systemic leverage problem will be met with equal inflationary force.
1. From “Locked & Loaded” February 2013:
“Today, the Federal Reserve System announces a program of gold monetization in which the Fed offers to tender for any and all gold in qualifying forms at a price of US $20,000 per troy ounce.
The program will be conducted through participating U.S. chartered banks, which will be instructed to properly assay gold and exchange it for U.S. dollars to be placed in customer bank accounts as deposits.
Deposit holders will be entitled to make withdrawals in the form of dollars or gold at the fixed exchange rate.
By establishing the fixed exchange rate substantially above past market prices for spot gold, the Board of Governors believes enough gold will be tendered to produce a supply of new base money sufficient to adequately reserve the stock of U.S. dollar-denominated deposits in the global banking system.
The Fed will monitor the tender process to ensure the soundness of the exchange rate and the ongoing viability of the US dollar.”