America at the Financial Crossroads
America must now take one of two divergent roads. First, America may persist on the road of soft indulgence afforded by the unstable dollar’s official reserve currency role—the enabler of ever-rising budget and balance-of-payments deficits, therefore of immense American foreign debt. Though the centrality of the world dollar standard may gradually decline, it may still continue for another generation because of the unique amplitude and liquidity of the dollarized financial markets, repositories for vast sums not easily stored elsewhere as official national reserves. Therefore, the “exorbitant privilege” of the dollar’s role as the world’s primary reserve currency may enable American authorities, policy makers, and academic economists to persist in rationalizing the misleading mask of this reserve currency privilege as a boon, instead of a deadly economic malignancy leading ultimately to national insolvency. Or, second, American leaders may acknowledge the dollar’s world reserve currency role as an insupportable burden, instead of a privilege. It is a burden because decades of supplying dollar reserves to the world in the form of dollar debt has caused an exponentially rising burden of United States foreign and domestic debt. This process enables America to finance rising American budget and balance-of-payments deficits without institutional limits. These monetized deficits of the reserve currency country entail arbitrage mechanisms which cause inflation followed by deflation both at home and abroad. If American leaders continue to choose option one—rising debt and deficits financed by the dollar’s reserve currency role—the reserve currency fantasy may carry on for several more decades before its complete collapse. Historians have analyzed the very same pattern of gradual reserve currency decline of the British imperial pound as it persisted after World War II—lingering as it did on life support for three more decades, then collapsing, finally making clear to the world the general collapse of British power. If American leaders choose option two, they will reject the siren song of the reserve currency’s “exorbitant privilege.” They will acknowledge the insupportable burden of the dollar’s official reserve currency role. They will plan now for the termination and wind up of the dollar’s reserve currency role, restore dollar convertibility to gold, define by statute the dollar as a certain weight unit of gold, and propose gold as the sole international reserve currency, thereafter settling all residual balance-of-payments deficits in gold alone. For America to choose option one is not unlike an intelligent, insouciant dare-devil, Icarus, who—well-suited for the leap—takes off from the fiftieth floor of his skyscraper, secure in the knowledge that he is feeling fine ten floors down, the street level still forty floors far below. To choose option two is to choose the American Constitutional roadmap to monetary reconstruction on the bedrock of a stable dollar, shorn of the crushing weight of trade disadvantages and the accumulating dollar debt intensified by the reserve currency system. American monetary and economic reconstruction on this historic basis will lead to a resurgence of rapid economic growth empowered by a sound and stable dollar and the renewed confidence and certainty born of market expectations of a stable long-term price level. These fundamental incentives will engender a vast increase of true savings available for long-term investment from current income—investable savings—and much more from dishoarding. The outpouring of savings will be redeployed by entrepreneurs in new and innovative plants, technology, and equipment, minimizing unemployment as skilled and unskilled workers are hired to manage the new facilities. The United States export production machine will be reoriented to the world market under free and fair trading conditions. This is the true road of American monetary and economic reconstruction. The Rising Cost of Art and the Declining Dollar
Auction houses posted substantial sales gains last year due, in large part, to the increasing value of rare art work. The Wall Street Journal reported gains of 14% for Christies International over the prior year while Sotheby’s reported increased art sales of 14.5%. Art values, overall, posted gains of more than ten percent last year. The top ten priciest pieces sold by Christies ranged in price from $22.5 million to more than $43.2 million. While global markets and sovereign nations teeter on the brink of insolvency, why are investors purchasing rare works of art at record-setting prices? As Lewis E. Lehrman has explained, when the dollar—the world’s reserve currency—loses its value, investors flee to other articles of wealth in an attempt to find a stable store of value over time. Since the dollar has lost more than eight-five percent of its value over the last forty years—and its declining value shows no sign of abating—investors are rationally attempting to find enduring stores of value. So they invest in things like art during periods of economic turmoil. There is a way to reverse this trend, unleashing vast stores of capital for productive economic use which would benefit all market participants. Restore the dollar of the Constitution, once again establishing dollar convertibility to gold by law. Advisor to TheGoldStandardNow.org James Grant draws a useful Constitutional analogy between the limitations of the judiciary and the Treasury. In Money of the Mind, Grant writes, “…the gold standard was the rule of law applied to money. As the Constitution restricted the freedom of action of the Justice Department, so did the gold standard curb the activities of the Treasury. Bound by the legal definition of money, the government could not print its way out of a jam.” Today, however, neither the Treasury nor the Fed abide by the legal definition of money set out in the Article I of the Constitution. Instead, they “create money out of thin air,” injecting billions of unwanted dollars into the world economy. Because these dollars are not a result of true economic growth—that is, demand does not exist to offset their supply—over time these newly created dollars tend to cause inflation at home and abroad. Through this grotesque mechanism, all prices rise—including the prices of things like art and gold. According to Professor Larry White, “with dollar inflation risk dramatically reduced, the dollar-inflation-hedging demand for gold…will fall dramatically. [This] effect is likely to dominate, seeing that hedging demand is the main reason why the real price of gold is higher now than it was when the United States abandoned the last vestiges of gold redeemability in 1971.”
Today’s paper dollars with their ever-declining value create hedging demand—and encourage speculation. Hence, the record-setting year in sales of rare artwork from Cezanne’s The Card Players to self-portraits of Andy Warhol. The long-term solution to such speculation (or what Dr. White refers to as hedging demand), proposed by Lehrman and recounted by Grant, is elegant in its simplicity. “The world must return to gold…and the Federal Reserve must stop its frenetic buying and selling of government securities. It must throw in the towel on trying to control the nation’s money supply, which it could not even count.” The FT notices: "biggest central bank gold rush in 40 years"
"Biggest central bank gold rush in 40 years?" "Largest purchases of gold in four decades ..."? That's a headline in the London FT, front page, second section, on November 18th, and pre-posted on the Web as "Central bank gold buying at 40-year high," by reporter Jack Farchy, who ledes: "Central banks made their largest purchases of gold in four decades in the third quarter after a sharp drop in prices in September spurred buying to diversify [foreign exchange] reserves. The scale of the purchases ... puts central banks on track to buy more gold than at any time since the collapse of the Bretton Woods system 40 years ago, when the value of the dollar was last linked to gold." With Thailand, Russia and Bolivia reportedly leading the way, the World Gold Council expects as much as 450 tons bought by central banks in 2011.
Of at least comparable interest is FT's THE LEX COLUMN, in the same edition, in a box entitled Banking on bullion, which observes "'Tradition', That was Ben Bernanke's succinct reply recently when asked why central bankers continue to hold so much gold even while insisting that it is not money. ... But while the dollar amounts ("$8bn, amount to a rounding error in the scope of global reserves" of such purchases) may be paltry, Mr. Bernanke must grasp that the symbolism is anything but. ... What it does mean is that some very influential people fear that one day [paper money] may no longer be worth the paper it is printed on." Healthy Currency: Swiss Parliament addresses a gold franc.
"Swiss Parliament to discuss gold franc." A striking headline in July 8, 2011 edition of the Wall Street Journal Digital Edition's MarketWatch. Coincidentally reported precisely 115th years to the day of Bryan's famous, or infamous, "cross of gold" speech .... Reports the Journal: ZURICH (MarketWatch) — The Swiss Parliament is expected later this year to discuss the creation of a gold franc — a parallel currency to the official Swiss franc, with the fringe initiative likely triggering a broader debate about the role of the precious metal in the Alpine nation. The initiative is part of “Healthy Currency,” a campaign sponsored by politicians from the right-wing Swiss People’s Party (SVP) — the country’s biggest — that is seeking to capitalize on popular fears about global financial turmoil and inflation to reverse the government’s current policy on gold. “I can imagine that this will spark some sort of debate about gold and there may be some pressure to accept the parallel currency,” said Dr. Gebhard Kirchgaessner, an economics professor at St. Gallen University. “But it won’t have any real effect on the economy. It seems incredible to imagine that there are people out there willing to buy millions of these things.” Switzerland, which in 2000 became one of the last countries to decouple its currency from gold, is not the only place to contemplate a change in the precious metal’s role amid controversy over government involvement in the economy. In March, Utah became the first state in the U.S. to legalize gold and silver coins as currency, while similar legislation was considered in Montana, Missouri, Colorado, Idaho and Indiana. “I want Swiss people to have the freedom to choose a completely different currency,” said Thomas Jacob, the man behind the gold franc concept. ”Today’s monetary system is all backed by debt — all backed by nothing — and I want people to realize this.” It seems odd to describe an initiative sponsored by the dominant political party in Switzerland's Federal Assembly as "fringe." This Journal reporter, while leading the pack internationally, appears still struggling to catch up with the gold standard's having gone mainstream as noted here. Herr Jacob has been interviewed at some length, here. Of the Swiss People's Party, the Wikipedia reports: The Swiss People's Party (German: Schweizerische Volkspartei, SVP), also known as the Democratic Union of the Centre (French: Union démocratique du centre, UDC), is a conservative political party in Switzerland. Chaired by Toni Brunner, but spearheaded by Christoph Blocher, the party is the largest party in the Federal Assembly, with 58 members of the National Council and 6 of the Council of States. Keynes Disavows the Golden Calf
On May 23, 1944, John Maynard Keynes, newly ennobled, spoke in the British House of Lords in defense of a plan to establish order in the international monetary system. In particular, Lord Keynes defended himself against suggestions that he was reestablishing a gold standard: "...was it not I, when many of to-day's iconoclasts were still worshippers of the Calf, who wrote that 'Gold is a barbarous relic'? Am I so faithless, so forgetful, so senile that, at the very moment of the triumph of these ideas when, with gathering momentum, Governments, parliaments, banks, the Press, the public, and even economists, have at last accepted the new doctrines, I go off to help forge new chains to hold us fast in the old dungeon? I trust, my Lords, that you will not believe it." Keynes, who once called gold a "barbarous relic," had no such intention. Both Keynes and American Harry Dexter White had developed post-war monetary plans, which were published in 1943, but the U.S. rejected the British plan. Keynes wanted to eliminate gold’s monetary role by establishing a new international currency – the “bancor.” Instead, a negotiated Anglo-American plan – called the "Joint Statement by Experts on the Establishment of an International Monetary Fund" – was agreed upon and published in April 1944. Keynes himself was in ill health and insisted that the Bretton Woods conference that would approve the monetary plan be held far from humid Washington, D.C. He warned White that holding the conference in D.C. would be “a most unfriendly act.” Shortly after Keynes’ General Theory was published in 1936, he had suffered a major heart attack and never fully recovered. After Bretton Woods, White went on to become the first U.S. director of the IMF. Keynes went on negotiate a loan with the U.S. to sustain post-war England. He called those negotiations "absolute hell." Some might use that phrase to describe the results of Bretton Woods. More Articles...
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