Several articles have appeared in the mainstream press over the past several months discussing some alternative to the U.S. dollar as the reserve currency of the world. Special Drawing Rights (SDR) sponsored by the International Monetary Fund (IMF) has been mentioned. Some time ago, an article on Reuters indicated a United Nations panel has decided much of the world would like to move away from the American currency as the world’s reserve currency. This panel wanted to look into a “basket of currencies” or perhaps another entirely different, new currency to replace the U.S. dollar. Additionally, both the Russians and Chinese have indicated similar concerns.
Action has been taken to move in this direction, for example Russia and China have agreed to do some trading using each others respective currencies bypassing the need to move into U.S. dollars. There have been rumors over the years that some of the North African nations, and Middle Eastern nations were wishing to settle the oil trade in Euro’s rather than dollars.
These events and postulates don’t surprise me in the least. If we go back a few years, it was only the Austrian school thinkers that stepped forward and said the U.S. dollar, or any fiat currency, was eventually doomed. Now other nations and the U.N. are saying they really don’t trust the U.S. dollar, which is what this amounts to. I wrote about something similar happening many times and one currency that I spoke about years ago was the golden Yuan (renminbi). There was a meeting in Southeast Asia years ago, about a gold-backed Yuan. I believe any basket of currencies may be tried it will most likely fail, because none of these currencies are tied to real value.
At some point the world monetary system will probably go back to some sort of a gold standard, but in my view it will not be a true gold standard but some kind of pseudo gold standard. No one really knows the future, and I’ll be the first to admit it, but what we are seeing now is what we see at the end of all great inflations and that’s a distrust of the fiat money system and/or a distrust of the leading currency. Russia and many nation states are raising their hand and asking, “Why should anyone trust the U.S. to get it financial house in order?”
There are so many U.S. dollars in the financial system. In my view it is collapsing, and it may never collapse to absolute zero but as things unwind further it is almost certain that the monetary authorities will provide “solutions” to the problem. Right now the velocity of money is low even though a great deal of stimulus has been forced into the system via QE1 and QE2 not to mention some “off book” digital entries into the banking system globally. Yet is because the U.S.’s trading partners, such as China and Japan, and others are holding on to dollars (low velocity) that we have not seen more inflation. Simply stated they’re not putting them into circulation, but once that happens or they get scared or try to exchange too many of those U.S. dollars for real goods or services, it could ignite more than an inflation — it could start a currency crisis.
Most of us know that there is manipulation going on in currency markets and in the financial system as a whole. The Working Group of Financial Markets (WGFM, also known as the Plunge Protection Team) was established after the crash of 1987 and was developed to prevent another crash. I must say again, “Great job, gentlemen.” It does not work on a long-term basis. Just take a look at the stock market averages; the very idea that any group is bigger than the market is ludicrous.
Many have asked where this will lead. If you review history and what happened to the Great British Empire when America started coming to the fore, you get a pretty clear picture of where the U.S. is going to go. The pound sterling was the settlement currency on an international basis. It had all the power, all the financial clout; but then here comes America, the up and comer, and they have CAPITAL — which, in the Austrian school of economic thinking, is the means of production. So when the waning of the United Kingdom was going on and the buildup of America began, it was a transition, meaning it was harsh but it was achievable.
That same scenario is taking place right now, except it’s the U.S. dollar that isn’t being trusted instead of the pound sterling, and Asia is the “capitalistic” society because they have a great deal of the means of production. The Asian countries are producing almost everything. And I think you’re going to see them continue to produce over the next decade or so, and you’ll see a continual decline of the U.S. Empire. It doesn’t mean America is going away but it certainly is not going to be the number one productive nation in the world. It’s going to be the Asian countries, primarily China.
Yes, China has problems and in my view primarily because they have too many make work projects and built many massive cities that are empty. There are issues all over China and look for some short term slow down in Asia overall.
However, I’m still bullish on America in some aspects. One is food; the U.S. can certainly get high yields out of the farmland it farms, although nutritional value is another matter and outside this discussion. Second is ingenuity; I think it’s almost built in to the gene pool that the American spirit is pretty much entrepreneurial. They are out looking for good ideas. How to build a better mousetrap, think outside the box, etc. And the third is education; when you look at it objectively, China is sending all their best students to American universities and there’s a reason for that. They still get the best education in math/engineering and science in the USA. America has a poor record during the mid to high school ages, but from the university level on up, America probably still has one of the best educational systems around.
Most Americans have gotten politically lazy and they’re going to pay for that in the future. They don’t read enough, they’re undereducated, and they refuse to get involved in the political system. They basically don’t have the American spirit that once prevailed. They’ve just become dulled down, but I believe — because of this economic “rearrangement,” if you will — that is going to reverse. So I’m very positive in the longer run that the American populace is not only going to wake up but shape up and move forward. It will be a leaner, meaner, and much more aware American in the next five years. And it’s going to be a tough transition for some and almost impossible for others.
Do gold and silver fit into this picture? Yes! To make the transition as painless as possible, everyone needs some gold and silver. The precious metals can be traded for any currency anywhere on the planet. Regardless of hearing more deflation talk in the news or inflation around the corner, the metals are a crisis hedge, a sure thing in a world of growing uncertainty.
Sincerely,
David Morgan
Asahi recently posted a story about Japanese pensioners who are selling their gold. Remarkably the perception of gold has been quite a bit different in Japan than around the rest of the world. The country as a whole has been a net exporter of gold since 2006 and according to the World Gold Council, Japan is the only major economy where the demand for gold is decreasing.
I can’t remember the last time I watched the local news. It’s probably been at least two decades – and for good reason. It tends to consist of people repeating information on topics that they have little inherent knowledge of. Take a look at the clip below in which the reporter attempts to explain the recent drop in the price of gold. She claims that people are starting to see the dollar as a safer investment than gold, as it is backed by the US Government and the Federal Reserve. She notes that gold, on the other hand, is backed by nothing. Is it any wonder that Americans are completely ignorant as to the true nature of money and our monetary system?
