America is now being humbled, just as Great Britain was in the last century
(when we were relatively even more powerful at the beginning). In America's
case it is something that has taken 70 years to start to become apparent.
The story needs to be told because events in the immediate future and for
perhaps a year or two to come will be so profound that they will affect
every person in the world (except perhaps the Andaman Islanders or some
other hunter-gatherers in New Guinea or elsewhere who have not yet been
discovered!).
America forced the superiority of the dollar on its Allies (except Soviet
Russia) in 1944 when it was clear that America's mighty military machine
would inevitably defeat Germany and Japan -- which it did in 1945. This was
the famous 'Agreement' at the Bretton Woods Hotel, New Hampshire, US.
By this 'Agreement', 43 currencies were thenceforth tied at a particular
rate to the dollar, and only the dollar was to be a 'real' currency backed
up by gold -- of which, by then, America had about 80% of the total world
stock in its vaults. From then on, if the 43 nations were having problems
with export prices, they could only devalue their currencies occasionally
against the dollar with discrete adjustments and, in effect, with the
permission of America. Meanwhile, America began printing more dollars
whenever it wished, thus devaluing them and enabling its own exports to
prevail over all others. Prosperity poured in. Americans were able to have
a standard of living far beyond anything that Europeans could dream of.
America was living off the rest of the world as effectively as if it were
extracting rent from it or taxing it.
But, 20 years later, the European nations began getting their industrial
act together and were beginning to earn dollars by exporting to America.
They then started to get stroppy -- the Germans and French more than others
-- and began to ask for their dollar earnings to be translated into gold.
This, under the Bretton Woods Agreement was obligatory. America had to do
so and gold began to shipped to Europe or moved into special vaults in the
New York Fed bank with the country's ownership label attached to it.
By the early 1970s America was losing so much of its precious gold that
President Nixon broke the Bretton Woods Agreement unilaterally. He
de-linked the America dollar from gold altogether. By the same act he also
allowed all the other signatories to devalue their currencies flexibly. All
currencies became freely exchanged against one another and started
see-sawing about (and downards when compared with commodity prices). By
this time, however, the American dollar had already accounted for as much
as 80% of the world's currency used in trade. This meant that America could
devalue its dollar faster than other countries and still hang onto a great
deal of the world's trade. It led the world in a devaluation --
inflationary -- race. In effect it was exporting inflation to everywhere
else -- and still is.
Because, in the 1970s, America still had a mighty military machine
arraigned against what were, by now, deadly enemies -- communist Russia and
China. Its tanks and missiles were stationed in Europe and its Sixth Fleet
in the Pacific Ocean protected Europe and Japan respectively. It still had
great power, and part of that power exercised against Europe and Japan was
the excoriation and outlawing of gold as currency. European and Japanese
central banks were pressured into selling their gold reserves in order to
push the price down to levels only suitable for ornaments and tooth-fillings.
They yielded until 1999 when the worms started to turn. Some West European
countries started a new currency, the euro, as a competitor to the dollar.
European central banks started to buy gold again. The price of gold started
to move upwards. Many gold mines which had previously been driven into
bankruptcy started to revive again.
This had happened very briefly once before in 1979/80 when America was
inflating the dollar faster than usual and investors started to rein back
on buying US Treasury bonds. The gold price spiked up to $2,300/ounce.
Volcker (then Chairman of the US Fed bank) raised interest rates to 20% and
investors immediately sold their gold and bought dollar bonds instead. The
gold price immediately collapsed. This time, however, gold has taken 11
years to rise and has done so steadily from about $300 to $1560/ounce. This
time, Bernanke (the present Chairman of the US Fed bank), dare not raise
the interest rate even by 0.25% for fear of plunging America into economic
depression. Nor can the Bank of England do so. The European Central Bank
has raised its low rate only very slightly in an effort to reduce
inflation. It cannot raise it to normal levels because, like America and
the UK the Eurozone stands on the edge of depression.
But it's America -- hitherto the central financial pivot of the world --
that's crucial. Its national debt, which was only 20% more than its annual
GDP at the time of Bretton Woods is now almost four times higher. As both
Europe's and Japan's debts, it is already higher than its taxpayers can
possibly repay. Sooner or later it is going to have to pay some or all of
its immense debts with gold -- when the price of gold reaches high enough.
There are those commentators who still say that the present rise in gold
price is a spike. But scores of central banks in the world, including China
and Russia and the vastly prosperous Middle East oil and gas countries,
don't think so. Gold speculators have almost been driven out now, such is
the heavyweight demand for the metal. Gold is now making its way back to
its traditional role as the background currency which doesn't inflate. You
can be certain that although Bernanke of the US Fed and Geithner of the US
Treasury are saying all sorts of brave things to the world, they are even
now thinking seriously of how to bring about a gold standard world trading
currency. This is what China and Russia have been asking for for years.
This is what Zoellick, of the World Bank suggested last November.
Does this mean that America is going to eat dirt? No, of course not -- no
more than the UK did when lost is British Empire. America will become an
ordinary country again over a period of decline of perhaps 50 years or so.
It still has vast resources and entrepreneurial energy. Its scientific
research and development still leads the world. But it is going to have to
learn to share these assets because the rest of the world is catching up.
And they'll do so even quicker when there's a level currency playing field.
Keith Hudson, Saltford, England http://allisstatus.wordpress.com/2011/04/
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