A Crisis to Shatter the World
By Adrian Ash
November 10, 2007
If the US won't swap Dollars
for gold, the rest of the world will just have to make the
exchange itself...
THE PRESIDENT of FRANCE went to Washington this
week. He spoke to Congress en Franηais and told the United
States to stop dumping Dollars on the rest of the world, risking
a global financial crisis.
Zut alors! Sounds just like old times...
"The Dollar cannot remain solely the problem
of others," said Nicholas Sarkozy before a joint session of
Congress on Wednesday. He was riffing on the (infamous) joke
made by John Connally, Treasury Secretary to Richard Nixon in
the early '70s.
Connally had told the world that the Dollar was
America's currency "but your problem." Au contraire,
replied Monsieur le President this week.
"If we're not careful," Sarkozy went on
apparently using "we" to mean both himself and the
US Congress "monetary disarray could morph into
economic war. We would all be its victims."
Ooh la la! Did Sarkozy need to take a little Dutch
courage before speaking his mind to US legislators and wonks?
(As the Belgian news anchor in this
clip from June's G8 summit puts it, M.Sarkozy only ever
drinks lots of water.) Telling the US to take responsibility for
its actions and its currency is a gambit for only the
brave.
It weighs heavy with history, too. "What the
United States owes to foreign countries it pays at least in
part with Dollars that it can simply issue if it chooses
to," barked French president Charles de Gaulle in a
landmark press conference of Feb. 1965.
"This unilateral facility contributes to the
gradual disappearance of the idea that the Dollar is an
impartial and international trade medium, whereas it is in fact
a credit instrument reserved for one state only."
De Gaulle did more than simply grumble and gripe,
however. Unlike Nicholas Sarkozy, he still had the chance to
exchange his dollars for a real, tangible asset physical
gold bullion at the Federal Reserve.
Gold "does not change in nature," de
Gaulle reminded the world in that 1965 speech. "[Gold] can
be made either into bars, ingots, or coins...has no nationality
[and] is considered, in all places and at all times, the
immutable and fiduciary value par excellence."
How to collect and hoard this paragon of assets?
Back in the 1950s and '60s, world governments could simply tip
up at the Fed, tap on the "Gold Window", and swap
their unwanted dollars for gold.
So that is exactly what de Gaulle did.
Starting in 1958, he ordered the Banque de France
to increase the rate at which it converted new Dollar reserves
into bullion; in 1965 alone, he sent the French navy across the
Atlantic to pick up $150-million worth of gold; come 1967 the
proportion of French national reserves held in gold had risen
from 71.4% to 91.9%. The European average stood at a mere 78.1%
at the time.
"The international monetary system is
functioning poorly," said Georges Pompidou, the French
prime minister, that year, "because it gives advantages to
countries with a reserve currency.
"These countries can afford inflation without
paying for it."
In 1968, de Gaulle then pulled out of the London
"Gold Pool" the government-run cartel that
actively worked to suppress the Gold
Price, capping it in line with the official $35 per ounce
ordained by the US government. Three years later, and with gold
being air-lifted from Fort Knox to New York to meet foreign
demands for payment in gold, Richard Nixon put a stop to de
Gaulle's game. He stopped paying gold altogether.
De Gaulle called the Dollar "America's
exorbitant privilege", repeating a phrase of his favorite
economist, Jacques Rueff. This privilege gave the United States
exclusive rights to print the Dollar, the world's "reserve
currency", and force it on everyone else in payment of
debt. Under the post-war Bretton Woods Agreement of 1946, the
Dollar could not be refused.
Indeed, alongside gold with which the Dollar
was utterly interchangeable until 1971 the US currency was
real money, ready cash, the very thing itself. Everything else
paled next to the imperial Dollar. Everything except gold.
And today?
"Printing a $100 bill is almost costless to
the US government," as Thomas Palley, a Washington-based
economist wrote last year, "but foreigners must give more
than $100 of resources to get the bill.
"That's a tidy profit for US taxpayers."
This profit paid in oil from
Arabia...children's toys from China...and vacations in Europe's
crumbling capital cities has surged since the Unites States
closed that "Gold Window" at the Fed, and ceased
paying anything in return for its dollars.
Now the world must accept the Dollar and nothing
else besides. So far, so good. But the scam will only work up
until the moment that it doesn't.
"The US trade deficit unexpectedly narrowed in
Sept.," reported Bloomberg on Friday, as "customers
abroad snapped up American products from cotton to
semiconductors, offsetting the deepening housing recession that
is eroding consumer confidence.
"Exports have reached a record for each of the
past seven months, the longest surge since 2000," the
newswire goes on, which "may help explain why the Bush
administration has suggested it's comfortable with the Dollar's
drop. It has declined in all but one of the past five years,
even as officials say they support a 'strong' Dollar."
What Bloomberg misses, however, is the surge in US
import prices right alongside. They rose 9.2% year-on-year in
October, the Dept. of Labor said on Friday, up from the 5.2%
rate of import inflation seen a month earlier.
Yes, the surge in oil price must account for a big
chunk of that rise and the surge in world oil prices may do
more than reflect Dollar weakness alone. The "Peak
Oil" theory is starting to make headlines here in London.
Not since the Club of Rome forecast a crisis in the global
economy in 1972 have fears of an energy crunch become so
widespread.
But if you an oil producing nation were
concerned that one day soon your wells might run dry, wouldn't
you want to get top dollar for the barrels you were selling
today? Especially if the very Dollar itself was increasingly
losing its value?
"At the end of 2006, Chinas foreign
exchange reserves were $1,066 billion, or 40% of Chinas
GDP," notes Edwin Truman in a new paper for the Peterson
Institute. "In 1992, reserves were $19.4 billion, 4% of
GDP. They crossed the $100 billion line in 1996, the $200
billion line in 2001, and the $500 billion line in 2004."
What to do with all those dollars? "If all
countries holding dollars came to request, sooner or later,
conversion into gold," warned Charles de Gaulle in 1965,
"even though such a widespread move may never come to
pass...[it] would probably shatter the whole world.
"We have every reason to wish that every step
be taken in due time to avoid it," the French president
advised. But the step chosen by Washington rescinding the
right of all other nation-states to exchange their dollars for
gold only allowed the flood of dollars to push higher.
Nixon's quick-fix brought such a crisis of
confidence by the end of the '70s, Gold
Prices shot above $800 per ounce and it took
double-digit interest rates to prop up the greenback and restore
the world's faith in America's paper promises.
The real crisis, however the crisis built into
the very system that allows the US to print money which no one
else can refuse in payment was it merely delayed and
deferred? Are we now facing the final endgame in America's
post-war monetary dominance?
If these sovereign wealth funds owned by
national governments, remember cannot tip up at the Fed and
swap their greenbacks for gold, they can still exchange them for
other assets. BCA Research in Montreal thinks that
"sovereign wealth funds" owned by Asian and Arabian
governments will control some $13 trillion by 2017 "an
amount equivalent to the current market value of the S&P500
companies."
And if China doesn't want to buy the S&P500
and if Congress won't allow Arab companies to buy up domestic US
assets, such as port facilities then the sovereign wealth
funds will simply swap their dollars for African copper mines,
Latin American oil supplies, Australian wheat...anything with
real, intrinsic value.
They might just choose to Buy
Gold as well. After all, it remains "in all places
and at all times...the immutable and fiduciary value par
excellence," as a French president once put it.
Charles de Gaulle also warned that the crisis
brought about by a rush for the exits out of the Dollar
might just "shatter the world". It came close in
January 1980. Are we getting even closer today?