Well, the Preliminary G20 meeting of finance ministers and central bank
governors came and went this week-end, and the mountain produced a mouse.
This was the anaemic statement that countries will do their best to stop
devaluing their currencies competitively. Some hopes! South Korea -- the
host country -- was already doing so as the attenders were gathering!
But one interesting -- and possibly hopeful -- by product is that China has
now moved up to No. 3 position in the status order of the IMF. This, plus
Geithner's less aggressive statements against China very recently, plus the
comment by Germany's finance minister that America manipulates its currency
quite as much as China does, augers a bit more hopefully for a gradual
coming together of the Big Three towards some sort of stable world currency.
We'll have to see. It won't help if the US and UK unleash QE2s and thus
trip off more defensive devaluations around the world. It won't help either
if the riots in France work their up into a full-scale revolution as the
European Central Bank tries to hold to its present austerity plan. This
would only encourage the public service unions and the young in the UK,
Italy and other countries to do the same.
Thus there's a possible solution in the offing, but there's also the
possibility of mayhem in Europe and America (in its case tripped off by
their sub-prime foreclosures crisis?). If mayhem, how about the following
as a grand scenario? China, having recently saved Greece by buying its
bonds, might decide to save Spain, Portugal and Ireland as each in turn
reaches its next crisis, even if it sees its dollar holdings in the
American government decline in value. Maybe China, Germany, Brazil and
Russia between them will save Western Europe and allow America to dangle
somewhat while Obama, Bernanke and Geithner try to make up their minds in a
constructive way?
The whole situation is becoming very very fascinating. There was also the
interesting letter to the Financial Times on 13 October by Ted Truman (a
distant relative of ex-President Truman). This suggested the apparently
absurd idea that the central banks of Europe and America should sell all
their gold. To empty Fort Knox indeed!
Now who is Ted Truman? Apparently he's a Senior Fellow of the Peterson
Institute for International Economics -- an interesting and innocent enough
title for an economics researcher. But he's more than that. Much much more.
He is Edwin M. Truman and the eminence grise of American financial policy,
and the backbone of the International Monetary Fund (IMF). He is, if you
like, Keynes on earth. He is the retired Head of the Division of
International Finance at the US Treasury. Twenty-three years ago he was the
briefing tutor of Alan Greenspan when the latter was the newly appointed
Chairman of the Federal Reserve (the US central bank).
The timing of his letter was designed to "hit the market" just as dozens of
Finance Ministers and Central Bank Governors were buying their airplane
tickets for the conference mentioned at the beginning of this piece -- and
when there were very great hopes by the IMF that a surplus cap on excessive
exports would be readily agreed. So what happened immediately after
Truman's letter? The price of gold dropped $70 an ounce in three successive
drops in the followings days. This is a very big drop indeed. Some major
private investors in gold obviously took the hint from Truman and sold out
while the going was good. It could have been the start of a major panic. If
there had been any more big sellers then this could have been the most
eloquent argument imaginable to support the IMF's main proposal to be
quickly adopted.
But it wasn't adopted. And, even while the politicians and officials were
gathering together for their all-night session in South Korea, the gold
price started recovering. If anything, even quicker than it had dropped.
It's already regained $35 an ounce and today's trading has hardly started
at the time of writing. Ted Truman's argument was that, at present prices
(around $1345/ounce) the total gold stock in the world is only a small
fraction of the total amount of national currencies in the world.
And so it is. But it's to be realized that most of the paper currencies of
the world have been devaluing like crazy for years, particularly the
dollar. There are heaps more of them than there ever were. And, if you
like, the price of gold has been revaluing like crazy for years. Most of
the paper currencies of the world are, in fact, used up in rolling forwards
a massive wall of derivatives (insurance policies) amounting to about ten
times the value of all the world's annual production! (How many times more
do you insure your house against fire or subsidence? Derivatives will hit
us as a delayed hyperinflation sooner or later.)
The comparison should not be between the gold stock versus currencies but
between gold and the total of governmental debt in Western Europe and
America. If that's the case, then the price of gold will almost inevitably
proceed to around $6,000 per ounce before government debt can be
neutralized. In the meantime, China, India, Russia and many more
non-Western, fast-developing, governments in Asia and Latin America are
buying as much free gold as is coming onto the market. There's not a lot of
it every year (about 2,500 tons) and it is this relative scarcity, of
course, that's the reason why gold has been the basis of international
currencies for centuries until 1914. It doesn't grow on trees. it takes
hard work to extract it out of skimpy ores. Governments can't print gold as
they can with paper money. Governments can't devalue gold-backed money.
And this is why all the West European central banks -- and the Fed -- have
been in such a schizophrenic state in the past few months as whether to
extend money printing in a QE2 phase or not in order to avoid the
double-dip which is looming. At the same time, it is rumoured, they are now
trying to buy gold! They stopped selling gold in order to try and devalue
it sometime late in 2009.
There are still many economists around (the so-called Austrian school)
who've thought all this through very thoroughly but who cannot get
published either in the main media or in orthodox economics journals.
They'll be allowed to have their say when the real crisis hits us and the
Financial Times and Wall Street Journal decide to open their Letters Pages
to balanced discussion about currencies.
Keith
Keith Hudson, Saltford, England
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