All the chatter that accompanied gold hitting new highs this month made it hard not to think of "the gnomes of Zurich."
With that richly evocative image of sinister forces behind the pound sterling’s woes, Harold Wilson, the British Labour Party figure (and eventual prime minister) skillfully deflected attention from the British economic policies and policy-makers actually to blame.
The recent account in the British press that Gulf oil states and others are planning to abandon dollar pricing of oil came complete with "secret moves" and "secret meetings."
One prominent talk show host asked me on the air if this was part of a "shadowy conspiracy" against the United States." Politico.com ran a piece headlined, "Whodunit? Sneak attack on U.S. dollar," and reported that government circles were abuzz with whispers that behind it all were gold traders who wanted to tank the dollar.
If there is secretive business afoot, the conspirators are hiding in plain sight. My book, The Dollar Meltdown, also describes the likely development of a basket of currencies and gold’s role for global oil pricing. It was printed and being shipped to the nation’s book dealers when Robert Fisk’s reporting sent the dollar down and gold up.
It’s hard to believe anyone could have missed the discussions in OPEC circles about the repricing of petroleum. A year ago, an official of the Gulf Cooperation Council, consisting of six Persian Gulf states, discussed the council’s planning for a central bank and gold reserves.
About the same time, at a Moscow conference, Chinese Premier Wen Jiabao and Russia’s Prime Minister Vladimir Putin were nothing short of explicit about their interest in diversifying away from the dollar, a prospect Putin alluded to once again last week in Beijing.
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Despite global nervousness about the dollar/debt train wreck in the making, reporters immediately sought out officials to issue denials that any such oil-pricing meetings had taken place.
Two years ago, when Chinese officials first began discussing the so-called "nuclear option" of dollar disinvestment, a New York Times editorial writer thought it noteworthy that "China’s central bank announced that it had no plans to sell off its dollar assets." Only editorial writers would expect for market-makers to be notified about such plans in advance.
A more helpful approach would be to ask if a breakdown of the post-1971 dollar exchange standard is justified by objective conditions. That same realistic approach also justifies a skeptical view of pronouncements from Washington, as U.S. fiscal and monetary authorities continue to pledge their devotion to a strong dollar.
Now that the dollars has resumed its long-term decline, one might consider adopting the realism of Chinese students. At Beijing University last summer, when Treasury Secretary Timothy Geithner spoke about his faith in a strong dollar and insisted that "Chinese assets are very safe," they laughed.
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Commerce Secretary Gary Locke shed crocodile tears for the falling dollar last week, but only for a millisecond, before he proclaimed the prosperity that a cheap dollar would provide U.S. manufacturing. Isn’t that pretext wearing a little thin? After all, the U.S. dollar lost 20% of its purchasing power during Bush’s eight years – and a fourth of its manufacturing base, 4.4 million jobs at the same time.
If a cheap dollar doesn’t produce prosperity, could the gnomes in the Treasury and at the Federal Reserve have other reasons to opt for the devaluation of the dollar? They go about their subterranean toil, undermining the dollar seemingly heedless of the destructive forces unleashed by an unreliable currency, destructive to capital formation, the propensity of people to provide for their future and the very fabric of civil society itself.
Still, there remain proponents of "inflating away the debt," bad paper on the balance sheets of banks and other financial institutions, mortgage and corporate debt, and most especially government debt.
Dollar destruction can provide for the revaluation of what is otherwise unsustainable federal debt, both the explicit debt and unfunded liabilities. For example, a 4% inflation rate reduces the real value of a $12 trillion dollar debt by $480 billion. The Dollar Meltdown provides simple strategies for individuals to protect themselves and their families from the slow-motion debt repudiation of inflation and the chaos of a currency crisis.
On the subject of devaluation, it might be helpful to remind those who deny any prospect for a changed dollar role in oil markets, that even until the early 1970s a fourth of the global petroleum trade was still conducted in the British pound sterling.
But serial devaluations of the pound finally made it so unattractive that OPEC implemented its policy of 100% dollar pricing. Only this time, OPEC Secretary General Abdalla El-Badri has conceded, a change from the dollar would not take as long as the change from the pound sterling.
This article originally appeared on The Street.
October 22, 2009
Charles Goyette [send him mail] is the author of the upcoming book, The Dollar Meltdown.
