12 June 2009

He who has the gold, makes the rules..

The central reality of the dollar credibility crisis is that a trade deficit the size of the one possessed by the United States would have provoked the collapse of any other currency ages ago.

Without a doubt the US reserve currency status is maintained only on the basis of habit, the lack of alternatives and geopolitical keystones: the OPEC nations peg their currencies to the dollar.

The ability to buy oil in dollars independant and regardless of the actual state of the US trade deficit and domestic macro conditions is the last finger in a dike with lots of new leaks emerging. The other support for the dollar is a premium that might be considered "protection money" that is paid by Taiwan, Japan, Korea and others for protection from china and access to US markets.

None of this can last for much longer and is likely to founder on the geopolitical realignment of energy exporters in terms of immediate causes. Little wonder, therefore, on the real motives that support large and active western military deployments.

A new universal currency requires a credible supra-national issuer, true, but recent history suggests that like all magical power, it slowly subverts..

Much more likely, imo is that we move, in fits and starts ( wars and crashes) to a money system designed for the accumulation and rationing of economic resources for redeployment for the manufacture of capital goods based on both carefull prudential assessments and the price signals in local markets, one using a form of money that isn't a claim on a institution one without counterparty risk.

This seems to have been the role of gold in the past and will be in the future. It has always been the put option on monetary credibility and placing a coin in that fuse box can only result in its eventual promotion to the core role.

The aggressive policy adopted by the Fed in order to avoid the collapse of its financial system makes the current instability worse. An aggressive monetary policy might seem reasonable, but it comes at the price of the credibility of the US as an issuer of a reserve-currency. A status that required total victory in war, the accumulation of most of the worlds gold and a massive trade surplus based on both domestically produced technology and oil.

These heroic will have to be funded, in the final analysis, by the destruction of the real value of the future claims of dollar holders who accumulated them to avoid attack on their currencies in FX markets whenever dollar reserves were low.

This double standard offends those who after decades of recurring balance of payments crisis are lean and mean because in self defence they built economies well aligned to current realities and constitues an unstoppable force for dollar flight in all its forms.

Inflation and devaluation of the dollar are not an immediate threat but its potentially disrupting impact, on commercial and financial, as well as political relations is now baked in da cake. Hyperinflation is everywhere a currency phenomenon, even when the central bank sterilises the impact of expanding claims domestically, an attack on the currency by speculators because of the crisis in confidence it engenders cannot be avoided.

Over a period of twenty years or so a complete inversion in the current pattern of economic relationships between the developed and developing world seems to be a real possibility; sooner or later the truth of the golden rule will emerge; "he who has the gold makes the rules".

I like silver, myself.

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