Posted on 10/07/2009 8:25:20 AM PDT by Shane
The report yesterday in the UK's Independent newspaper by Robert Fisk triggered several slightly bizarre reactions which ranged from brandishing the respected reporter as a conspiracy nut to dismissing the allegations as not very useful since Mr. Fisk is not by training an economist. (Actually I would have thought that was to his credit).
What was questionable about the Independent article was the emphasis that was placed on the notion that pricing oil in another currency than U.S. dollars was really the thin end of the wedge which will lead to a phasing out of the greenback's role as the global reserve currency.
The problem with that part of the story is that it was not news, and nor does the pricing of oil really address the core issue which is the appetite that foreigners will have for dollar denominated securities, and in particular U.S. Treasuries. I have expressed views on the unsettling implications of relying solely on the U.S. dollar as the global reserve currency several times before including here, in this article , and also here.
As is often the case the Daily Telegraph's Ambrose Evans Pritchard has a good piece on the issue.
Beijing does not need to raise money abroad since it has $2 trillion (£1.26 trillion) in reserves. The sole purpose is to prepare the way for the emergence of the yuan as a full-fledged global currency.
"It's the tolling of the bell," said Michael Power from Investec Asset Management. "We are only beginning to grasp the enormity and historical significance of what has happened."
It is this shift in China and other parts of rising Asia and Latin America that threatens dollar domination, not the pricing of oil contracts. The markets were rattled yesterday by reports – since denied – that China, France, Japan, Russia, and Gulf states were plotting to replace the Greenback as the currency for commodity sales, but it makes little difference whether crude is sold in dollars, euros, or Venetian Ducats.
What matters is where OPEC oil producers and rising export powers choose to invest their surpluses. If they cease to rotate this wealth into US Treasuries, mortgage bonds, and other US assets, the dollar must weaken over time.
"Everybody in the world is massively overweight the U.S. dollar," said David Bloom, currency chief at HSBC. "As they invest a little here and little there in other currencies, or gold, it slowly erodes the dollar. It is like sterling after World War One. Everybody can see it's happening."
What I find most unsettling about the way in which many pundits continue to dismiss the de facto decline in confidence in the U.S. dollar is the the highly complacent notion that policy making with respect to the state of the U.S. public finances is fundamentally a domestic, Washington-based matter. Until the global financial system has moved further along the path of diversifying itself away from dependence on a single reserve currency, the trillions of dollar which are piling up on the public balance sheet in the U.S. are not issues which can be decided upon by interest groups, politicians and a central bank in Washington acting only with regard to their domestic agenda.
A crisis in confidence in U.S. government securities, brought on by the ongoing attrition in the dollar as a store of value, would lead to an avalanche of liquidations which would completely overshadow the near meltdown of last October.
In the dire circumstance where there is a serious questioning as to whether to continue to prop up an asset class which has passed its "sell-by" date, cleverly chosen phrases from Messrs. Bernanke and Obama about further guarantees, underwritten by U.S. taxpayers, would be unlikely to restore calm and appease anxious foreign sellers of U.S. securities.
The time to move forward on further reserve currency diversification is sooner rather than later and the gold market is now sending that message loudly and clearly.
It should be unsettling to all. I am sure the founding fathers would cringe at the powers of the Federal Reserve to depriciate without representation. Certainly the result is not just the same but worse as taxation. For it destroys the value of our assets by destroying the value of the US dollar. This amounts to takings.
The founding fathers were careful even not to give Congress this power. Accordingly, the government only has the rights to tax you on what you make (although this has been eroded) not what you already have.
In effect the Federal Reserve is increasingly putting the US in an untenable position of deciding to either accept a depression to save the dollar or accept letting the dollar drop to nothing in which your assets go up in smoke, thereby lettting the banks seize most everything through forclosure and collections. Both these futures merely shift hard assets to banks at the expense of everyone else.
Even gold is not safe in these scenarios. In a depression money becomes king and as long as you have debt you must sell any asset to settle the debt (at a very low price). In a inflationary environment, all you do is protect the asset value you have against inflation. You don't actually benefit. and you must pay for your synthetic capital gains when you sell even though they are only the synthetic results of currency depreciation.
Thus the only real solution is to demand that the Federal Reserve ceases or stops it's persistent campaign at currency devaluation and that the US government ceases to run deficits when there is no recession or depression. Only then can we hope to right this ship of state.
Ugh, I can’t believe I’m saying this, but I honestly don’t blame the rest of the world for wanting to diversify the global currency - because our monetary policy sucks. Still, I hope to God they don’t do it, at least not for a long time, and hopefully by then we’ll have fixed the problem on our side. Ok, well, that last part will never happen - we’re screwed.
It’s called One World Order. If the United States bowed its back, drilled its own oil and natural gas and stayed with the dollar, no matter what.....the rest of the world would tell these other controllers to go jump in the lake. If we allow our government to knuckle under, it’s over. People of the world will follow the United States if we remain strong. If we are perceived to be weak, they will turn on us and go some place else.
The only way they can diversify away is if there is a safe, secure , stable suitable alternative and there isnt. You have to remember the last couple ofhundred years of free western trade was led by the US and the G7. Today , there is no replacement. Look at the debt alone.
The only time this can happen is if it is forced through someone like Obama destroying the American economy, thereby wiping out the G7.
The rest of the world lacks the know how and the stability.
Sure there was a hickup and a fart, but its not the end of the world.
Marxism in the US is the end of the world.
Unfortunately, hope is not a strategy. Worse, any strategy involving an attempt to rescue of the dollar with the current administration or congress isn't either.
This is one of my fears. If Obama is allowed to ruin this country, even gold would be worthless. Becareful how much you invest in gold and watch it carefully. The government can let gold fall off, then call it all in and force you to take what they want to give you.
Gold at Record Highs Now What?
From: http://preview.tinyurl.com/yc54xqw
Excerpt:
Having risen approximately 300% since the start of its bull run in 2001, Gold has far outpaced the investment gains in virtually every other investment class, including stocks, bonds, real estate and cash. Gold bugs feel certain that this time will be the ‘big one,’ and that the precious metal will likely hit $2,000 - $3,000 an ounce, if not higher.
Yep, Gold’s where it’s at. Gold is actually a great basis for currency. Its a very heavy metal, and thus super rare, and can only be created through the unthinkable conditions of a super nova. “Dollars”, on the other hand, are just paper - and our government has shown us just how easy it is to make lots of paper. We need to go back to the gold standard.
That aside, the drive to augment, not necessarily replace, the dollar in this field is an old idea that may finally have found its time. It is to be noted that most of the people necessary to effect it are major holders of U.S. dollars at the moment, which provides a certain pressure toward moderation. Those most strident about using it as an economic weapon are the ones least exposed and hence least able to make it happen.
There is gold in the gloom - it will provide an impetus away from the Luddite insanity that was energy policy dictated by the environmental Left. Probably about twenty years too late but it's something.
Its up to the people to retake the government... bitch, complain, .... do not support the bastards. Reagan , Bush and others had it right. Keep the government small and out of peoples lives. Let them perform the essential services.
Now you have a welfare state coming on where big govt wants to tell you what to do , when and how . Obama care is one of those examples of encroachments on freedoms and rights.
If this continues, the US of A will become a obamanana republic. It is well on the way NOW.
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