Reading last night -- or trying to read -- The Future of Finance (a free
downloadable book) written by some of the leading financially-savvy Great
and Good of England, and then reading pessimistic comments in "An
Unsettling End to Wall Street's Week" in the New York Times this morning,
confirms my growing feeling that we are now at a significant turning point
in the world's economic affairs.
It is not that I think that anything dramatic will happen imminently, only
that, as a preliminary, we will be finally entering the double dip that has
been feared by many.
Only historians in the future will be able to clearly see what are the real
trends going on beneath the surface at the present time. But there are two
clear facts about the present situation.
The first is that financial experts in the Western part of the world are in
total disarray as what to do for the best. Some countries have already
chosen the path of austerity, others want more quantitative easing. At
present the chief actor in the scene, America, is poised between the two,
but will probably go along the money-printing route -- with the probable
danger of runaway inflation sooner or later. In either event, the
credibility of Western governments will decline at an even faster rate than
it has been doing in recent decades and the danger of social upheaval is
possible, even probable.
The second is that three of the most powerful non-Western economic powers
in the world -- amazingly disparate in their governmental structures and
cultures -- are united in calling for a new world currency instead of the
paper ones which came into existence a century ago and which became
increasingly dominated by the American dollar since the Bretton Woods
currency fix of 1944.
The three powers are: (a) Russia, on whose gas and oil Western Europe now
depends, (b) the Middle East, on whose oil America now depends, (c) China,
on whose cheap consumer goods both America and Western Europe now depend.
As it happens, these three blocs are also buying gold as part of their
foreign exchange reserves. Could this be coincidental to their call for a
new world currency? Hardly.
Because Western nations were so successful in disparaging gold as a
currency in the eyes of the public ever since Bretton Woods (and even
earlier) then it may be surprising to know that Western central banks, far
from continuing to sell their "junk" gold to the trinket market, are now
hanging onto it grimly. Indeed, rumour has it that most of them are now
buying gold against the 'Big Three' and it is a fact that the Bank for
International Settlements, the so-called 'central bank of central banks',
bought a very large chunk of it -- 300 tons -- recently. (Rumour has it
that because this was almost precisely the amount of gold that Portugal
possessed, then this is a last-ditch effort by that country to save itself.)
Rumour has it that the big item -- perhaps the only item -- on the agenda
for the next G20 meeting in November will be a new world currency based on
a new paper currency along the lines of the present Special Drawing Rights
-- whatever they're supposed to be in the real world of economics! But
Russia, China and the Middle Eastern countries are hardly likely to go
along with that because America will want the new currency, whatever it's
called, to be a package of existing paper currencies dominated by dollars.
Germany is unlikely to go along with it because its exporters are happy
with the euro at present (but could easily change to its former
deutschemark if the EMU collapses), the UK is unlikely to because it is
still sentimentally proud of its pound, Switzerland is unlikely to because
of the reputation of its franc, and Japan is unlikely to because China is
now buying its yen debts and turning away from America's dollar debts.
As an element there is nothing unique about gold. It emerged as the
ultimate personal status symbol about 5,000 years ago. It wasn't even
considered to be "wealth" as we know it today in those eras and early
civilizations. It was kept in insecure rooms (of Aztek Kings) or buried in
highly plunderable graves (as at Sutton Hoo and many sites in central
Europe and Asia). Later (while retaining its high ornamental status),
because it could be chopped up easily into pieces of many different sizes,
it became a useful currency (alongside nails, cowrie shells, sheepskin
squares, silver, etc). Only later still, in 19th century England, did it
radiate outwards to become the main international currency. It was a case
of the survival of the fittest material. It was only when England and many
other industrializing countries wanted to pay for armies and expensive
armaments that paper currencies, unbacked by gold, began to be printed --
and we've had inflation ever since.
Because China, Russia and the Middle East -- at a crunch (albeit extremely
stressful even for them) -- could survive the demise of the West (there are
plenty more potential consumer markets in the world), the latter couldn't
survive without the former. Unless we have universal warfare, this is why
gold will resume its role as a world currency before too long -- as future
historians will relate (with some amazement no doubt that America was so
resistant). And it will probably occur when the likes of Goldman Sachs and
JPMorgan Chase decide to turn from poachers to gamekeepers for a bigger --
but more law-abiding -- future, not because of any particular G20 summit.
Keith
Keith Hudson, Saltford, England
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