NY Fed President Proposes "Paying" Bankers With Long-Term Debt

What a topsy-turvy world we live in thanks to Fed nonsense. Consider the outgoing NY Fed president's latest brainchild.

Outgoing New York Fed President William Dudley has a new proposal to mock.

Wall Street should force banks to share the pain of regulatory penalties by docking executives’ pay, a move that would help discourage bad behavior, Federal Reserve Bank of New York President William Dudley said Monday.

If bankers were paid more with long-term debt, it could “better align senior managers’ interests with the long-term safety and soundness of the firm,” he said. Such a change might need to be pushed by regulators, he said, because the banks “may be reluctant to adopt such pay structures on their own for competitive reasons.”

Brief Payment History

  • Millennials may be shocked to discover that people used to be paid with gold.
  • Roosevelt ended the gold payment system during the Great Depression, illegally confiscating everyone's gold. He should have gone to prison.
  • Following personal confiscation, international trade deficits were settled in gold until Nixon put an end to that in 1971.
  • After Nixon closed the gold window, people at least got paid in cash.
  • People collected interest on debt in US dollars and other currencies.
  • Lately, covenant-lite and toggle bond issuance has soared. Toggle bonds "pay" interest with more debt.
  • Now, Dudley proposes paying people with debt.

What's the difference anyway?

The dollar is in reality nothing but debt.

Dudley Gems

  1. Oh that “Elusive” Inflation! New York Fed President, William Dudley, says 2% inflation target will remain elusive even if price pressures pick up.
  2. Confident Dudley Expects Rate Hikes Will Continue, Hurricane Effect to Provide Long Run Benefit: "Hurricanes will boost economic activity over the long run.”
  3. NY Fed President Wants Consumers to Tap Home Equity: Didn’t We Try That Before? "People are leaving the wealth generated by rising home prices locked up in their homes."

Dudley will be gone shortly. He is retiring. The lead candidate is John Williams, the current San Francisco Fed President.

Williams has some "clever" ideas of his own. For discussion, please see All Hail the New Fed Triumvirate: Powell, Williams, Clarida.

For discussion of the gold window and faith in central banks, please see Rate Hike Cycles, Gold, and the “Rule of Total Morons”

It is precisely because of central bank foolishness and bubble-blowing episodes that people would be wise to own gold.

Those wanting a return to a gold standard should note that the price of gold cannot be pegged to the dollar. Instead, a dollar should be redeemable as a fixed quantity of gold.

Addendum Q&A

Q. Are you simply trying to say that each dollar should be backed by a certain amount of gold that physically resides in a Federal Reserve vault?

A. Nearly correct. The gold does not have to specifically be at the Fed. A dollar should be redeemable in a specific weight. Period. Local banks quite fine.

Mike "Mish" Shedlock

Comments (67)
No. 1-50
AWC
AWC

@mish, "The dollar is in reality nothing but debt." Precisely. The dollar is a bearer bond issued by the Fed. A "Federal Reserve Note." A "Promise to Pay" in, get this, more debt. We can exchange Two Ten Dollar Notes, for One Twenty Dollar note. Cool.

JJKthree
JJKthree

Beyond stupid. Why not just require that Sr. mgmt & Bod have a significant fraction of their net worth in equity, locked up until they retire or resign. It would focus attention like a hangman's noose.

tedr01
tedr01

Debt on top of debt on top of yet more debt. I hope we don't end up like Venezuela.

Mike Mish Shedlock
Mike Mish Shedlock

Editor

It's important to note that the price of gold cannot be tied to the dollar. Rather, a dollar should represent a fixed quantity of gold. - I am adding that to my article

flubber
flubber

How long can this sh*t show keep going on? I might as well watch the Bizarro World episode from Seinfeld.

Kinuachdrach
Kinuachdrach

There are advantages to paper (and now digital) currencies in place of lugging gold coins down to the 7-11 or somehow squeezing gold bars through our internet connection. Question is – should the unit of that convenient currency (Australian Dollar, German Euro, etc) be a fixed quantity of gold? Or should it be a fluctuating quantity?

Former British Prime Minister Harold Wilson devalued the once-mighty Pound Sterling, and then went on TV to tell his serfs most forcefully that “The Pound in your pocket has not been devalued”. (And you wondered where President Barry borrowed his “you can keep your doctor” shtick from?). Of course it had!

Most governments are assiduously promoting inflation as a way to reduce their unrepayable debts. By linking the currency to gold, that effective devaluation of the currency would be made more obvious, which might induce the Best & Brightest to seek other ways to retain their spaces at the trough – maybe even by cutting spending?

Gasmire
Gasmire

"Hurricanes will boost economic activity over the long run." Ok, lets get all the wind bags in Washington, DC to huff and puff in unison once a week and there will be enough hurricanes to lift even Venezuela out of the tank - in the long run.

Mike Mish Shedlock
Mike Mish Shedlock

Editor

1/100,000 or even 1/1,000,000 seems about right

TheLege
TheLege

Sorry, but I am sick to the back teeth of people who say we can't have a gold standard because people don't want to haul gold around to the local store. FFS you don't ever have to touch gold (or even see it) to operate a gold standard. Equally, I suggest we shoot people who claim that "there isn't enough gold in the world to operate a gold standard". These various statements are hard proof of a complete lack of understanding of monetary matters (at best) and extremely low intellect (at worst).

Blacklisted
Blacklisted

Peg's ALWAYS fail, even a fixed amount of gold to the dollar.

Long VIX
Long VIX

Not sure I understood this comment mathematically correctly.

Are you simply trying to say that each dollar should be backed by certain amount of gold that physically resides in a Federal Reserve vault?

Is it different from "It's important to note that the price of gold cannot be tied to the dollar." in sense that this statment does not eplicitly mention that there must be enough gold reserves in Federal Reserve vault against which each dollar could be redeemed?

If I still did not understand correctly, care to give a concrete example?

Mike Mish Shedlock
Mike Mish Shedlock

Editor

Are you simply trying to say that each dollar should be backed by a certain amount of gold that physically resides in a Federal Reserve vault?

Nearly correct. The gold does not have to specifically be at the Fed. A dollar should be redeemable in a specific weight. Period. Local banks quite fine.

AWC
AWC

Sure. Worked well for ages, with silver. A dollar was a silver certificate, redeemable for one ounce of silver. Four quarter ounces (quarters), ten tenth ounces(dimes). No reason a dollar can't be a gold certificate, with the quantity of gold represented, readily convertible into silver. Banks could hold specie, roughly equal to the quantity represented by certificates in circulation. This would help keep them honest, (If that's possible, knowing bankers. ) But far better than this insane Fiat system we now have. And if trust waned, TPTB would know it, by the redemptions taking place. Honest money. That would fix myriad problems we are, and will be, facing.

AWC
AWC

Gresham's Law would sort out the real deal from the phony.

Long VIX
Long VIX

Bingo, and that is the real reason why it does not make sense to say that Gold Standard is coming back any time. Rhetorical question - Would it be a real Gold Standard, if people would already know that in few years there would be another peg readjustment; and then another one and then another one ...? Why just not let the dollar price be determined in a free market, like Forex? Why we have to make a step backwards and leave Free Market ideas by going to Gold Standard where few appointed Federal Reserve(?) members will command the price between dollar and gold?

I would like to hear from Gold Standard proponents - how they would avoid any dollar-to-gold peg readjustments in the future?

In my opinion debt, when it can't be paid back anymore, is the ultimate culprit for any historical dollar-to-gold peg readjustments. So, would lending and borrowing be banned in such Gold Standard system to avoid any need to repeg? Would eliminating debt be a good or a bad thing for economy?

Also, in my opinion, dollar-to-gold peg worked "somewhat fine" from 1700-1920, only because of gold mining era, where gold mining was similar to QE. You have too much debt? Go mine some gold and pay your debt [in gold] back. Gold mining increases money supply (It does not have to be neccessarily mined out to get reaction from population. It worked just as well as Draghi's bazooka because people back in 20 century had no idea how much more gold could be mined). So why we have to waste labor and energy to create money supply? We could just automate creation of money supply by pressing a button and "woila" you have new money.

As for possibility of insider trading by people affiliated with Federal Reserve members who are in control of pressing that button - I don't have a solution for this problem. But neither do Gold Standard proponents in Gold Standard system. Assuming new gold could be mined then people would start to loathe gold mining companies instead of Central Banks. Assuming new gold can't be mined anymore, then debt would need to be eliminated from such Gold Standard system.

AWC
AWC

Dunno,,,,,my ounce of gold still comes in at 31.1034807 grams. ;-)

Long VIX
Long VIX

My question was not "if you know how to convert ounces to grams". ;-)

My question was - "While on Gold Standard would you lend your 1 ounce of gold to your government or to some corporation? What would you do if they can't pay back?"

Greggg
Greggg

Saw it in half and see if there is a tungsten core. I was actually trying to figure out how to make a water displacement device that would detect weight vs volume.

AWC
AWC

@Vix, Depends on the collateral behind the loan.

Greggg
Greggg

We would need such a devise to ensure genuine product.

Long VIX
Long VIX

Let's assume that collateral on loan is that someone else promised them to give 1 ounce of gold, but haven't yet given it back.

Or it could just as well be anything else, like land. When you gave loan it was worthy to you. Now when he can't pay back the loan to you it has become few timess less worth.

I am trying to bring back domino memories.

AWC
AWC

@Greggg, there are ultrasonic devices that can detect soft core from brittle.

AWC
AWC

Kinda like the "Ring Test."

AWC
AWC

@Vix, leverage would definitely need to be re-thought out. As would risk premium. If I'm loaning gold against land, instead of Fiat against it, I might not need to factor in depreciation.

AWC
AWC

of the currency, that is.

AWC
AWC

And, knowing gold would limit government profligacy, maybe they would need to hold a bake sale instead of debasing the peoples currency every time they want to throw a war somewhere.

AWC
AWC

I'm not loaning my gold to .gov to fight some undeclared brush fire in some third world country somewhere. ie; not transferring it on to the MIC, to go break windows.

AWC
AWC

When the people control the currency, they have much more control over their government. When the government controls it, the government has control over the people.

AWC
AWC

Also, if gold is irrelevant given our present fiat system, why are Central Banks keeping so much in their vaults?

AWC
AWC

The day will certainly come when all current accounts will be settled. I'm confident gold will play a part in it. As will all commodities, and tangibles.

AWC
AWC

What's kinda crazy in all this is, a silver quarter will still buy the same quantity of gasoline as it did in 1964. Go figure?

Greggg
Greggg

When GE doesn't price this equipment, you know it's really expensive.

Greggg
Greggg

All I got was a "Give me a Quote" button.

AWC
AWC

Try Dakota. I first heard about the ultrasound adaptability from a guy in Silicon Valley who was using a Dakota device to detect thin spots in metal tanks, caused by internal corrosion. Not hard to set up test samples using known authentic coins as a sample, then testing others. For the most part, sticking with good suppliers and common coins, very closely scrutinized, is enough. Size, diameter, and weight will thin out most alternative metals used in coins, (Fisch) but you are right on the tungsten. Same with specific gravity on silver and tin.

AWC
AWC

Now I'm going to need an underwater metal detector to try and figure out where I last my coins in the deep, deep lake. ;)

Mike Mish Shedlock
Mike Mish Shedlock

Editor

"I would like to hear from Gold Standard proponents - how they would avoid any dollar-to-gold peg readjustments in the future?"

One can never guarantee against government stupidity. It's how we got here in the first place. We are proposing there be no peg. It seems you do not understand the concept.

AWC
AWC

If it's any help, back in the late 60's, when gold was "pegged" at $45, I walked into a jewellery store in the Carlin area of Nevada, with a gold miner friend, who negotiated a price of $110 cash green, no receipt. The greenbacks he received, as I recollect, were not Gold Certificates, either. Other than that, gotta go now, but lets all keep this going.

AWC
AWC

Official price isn't always market price.

AWC
AWC

So, maybe the market should set the price, rather than the central planners? But, the money would need to be returned to the people. Uh, oh, don't think the planners would go for that. But, it is coming anyway, someday when no one will take Fiat.

Long VIX
Long VIX

If you want to be technical, then "Currency is backed by X" is a special case of "Currency is Pegged to X" when there is enough of X in some institutions vault to redeem all currency notes in X. Feel free to Replace X with Gold or Euros or Dollars.

In anything, but Full Reserve Gold Standard, the "dollar will be actually pegged to gold" and not "backed by gold", because there will not be enough of gold in the before-mentioned institution's vault to redeem all currency notes. So it is completely OK to use more general term "currency is pegged to gold" unless you can and want to be more specific.

Anyway, if you want, you can come up with your own "Currency is pegged to X" definition by using my "Currency is pegged to X" definition and subtracting all cases of "Currency is backed by X" definition. However, that is just a technicality and then you have to come up with a new term to call what I was previously calling as "Currency is pegged to X" that includes both.

In other words, when I say "currency is pegged to X", it meant that currency may or may not be fully backed by X. It does not seem to contradict with "pegged to" definition used in Wikipedia - https://en.wikipedia.org/wiki/Fixed_exchange-rate_system

AWC
AWC

May I suggest "Economics of a Pure Gold Standard." By Mark Scousen.

BornInZion
BornInZion

"Hurricanes will boost economic activity over the long run.” // We could task the military with bombing a designated America city each month! (Mandatory evacuations prior to the event, of course.) The Fed would compensate insurance companies losses with long term debt. ...Am I taking Mr. Dudley's idea's too far?

AWC
AWC

@Vix, I'll look into that when I get a chance. Meanwhile, suffice it to say, I doubt there will be anything resembling the checks and balances a pure gold standard would impose on the present Central Banking system we now serve under. But, I thank my lucky stars Gerald Ford made gold legal again, in effect, floating the dollar against it. No peg, just an optional way to participate in a private sort of "gold standard," at the individual level. $1345.00. It appears the market has spoken.

AWC
AWC

And certainly, a Fractional Reserve Gold Standard would accomplish nothing. Especially if run by the "Potent Directors."

AWC
AWC

And I'll be looking for Austrians on the khan site, as well. Been through the Monetarists and Keynesians already. They didn't float my boat.

Greggg
Greggg

US Mint (West Point) is charging $1677.50 for a 1 ounce gold coin. Found one on Ebay (Bay Precious Metals) for $1366.60. Last year the US was charging about a hundred dollar premium over paper gold price. I check many times in 2016, and 2017. Now it's a $300+ premium.

Mike Mish Shedlock
Mike Mish Shedlock

Editor

I do not pay a premium for gold. I do not understand why someone would other than small quantities to look a beautiful item