Sunday, May 01, 2011

The final humbling of America

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.

No comments: