5 March 2009

Time to abandon the US dollar and go for gold?

Everybody knows that ‘quantitative easing’ or printing money is just around the corner, and the Bank of England yesterday was the first central bank in the world to receive government permission to go ahead.

Such is the size of the coming US budget deficit amid market interventions on an unprecedented scale that turning on the printing presses will be the answer. Karl Marx would likely see this as capitalism in its final death throws, but his face is still unlikely to appear on dollar bills.

However, it is a very socialist turn in world affairs and, to turn Marx back on himself, every experiment with socialism has ended badly; often with inflation ravaging the incomes of the poorest and retired in society, completely the reverse of the doubtless well intended effect.
Inflation guarantee

Printing money guarantees inflation. As Milton Friedman wrote inflation is always a monetary phenomenon. More money is by definition inflation.

So what is holding up the US dollar? Why has it rallied recently against every major currency?

First, this is a reflection of the even worse economic performance of national rivals: Japan is sunk in deep recession; the eurozone has a crisis over lending more than a trillion dollars to Eastern Europe; the UK is swamped by its outsized banking sector and housing crisis; even Switzerland’s economy is none too chipper.

Secondly, as global financial markets have sold off, and continue to sell off, then assets are liquidated mainly into US dollars and this creates a demand for dollars that supports its relative value.
Market bottom

So when will the inevitable impact of printing money catch up with the greenback? It surely has to come when financial markets reach a bottom and end their sell offs. That could take a matter of months but almost certainly not as long as a year.

And once money is piled high in dollar bills and treasuries, and stocks have a clear ‘buy’ sign over them, the stock market will rally and the dollar will crash in value along with bonds.

That will be the point at which you want your money out of the US currency and into hard assets like precious metals which will then be the currency of last resort. For as the stock market recovers all that newly printed money will flood into the system from the bank accounts where it is presently being hoarded, creating inflation and devaluing the dollar.

It will not take long for investors to catch on and this flood will be channeled into the narrow gold and silver markets creating huge price increases. If anybody has a better idea of the outlook for the US dollar please leave a comment.



Anonymous said...

I'm not super ofay with global economics, and in fact i totally agree with your take on the USD,
but what if an 'Amero' unit of currency for North, Central and South America appeared, superceding the USD -would all the poorer american countries still end up supporting USA debt, but not through dollar?
Is this possible or have I just regurgitated one of those baseless internet rumors.
Thanks for posts -this is always a great site.

Unknown said...

A link back to the source of this article http://arabianmoney.net/ would be appreciated.

Larry Hamelin said...

It would be helpful if you were to provide some practical information on how us ordinary people -- even us Yanks -- can actually buy gold without getting ripped off.