current "currency games". It is rather interesting, and I do think we are about to see an evolution, once again, in the world monetary policy.
The author sees the rememdy as returning to the gold standard, but that is not the reason for my posting it. (Don't want to get that "Gold-bug" label.)
Who really knows what it will evolve into. I believe the important part is that there is growing recognition that it is time for a change.
http://www.kitco.com/ind/Appel/feb132004.html snip>
All of these factors worked well for quite some time. In the U.S., it allowed our citizens to lead a far better lifestyle and enjoy a higher standard of living than would have otherwise been the case. We did not have to sacrifice our precious gold hoard, as we would have under the gold standard, in order to settle our balance of payments deficits. We not only weren’t forced to reduce our money supply, but were able to expand it. Foreigners continued to treat the dollar as if it remained as good as gold. We simply transferred electronic dollar credits to pay for our foreign purchases. Additionally, the abrogation of the gold standard forestalled a serious economic decline that would have been mandatory under its rule. Each time our economy has contracted the Fed effortlessly expanded the money supply and reduced interest rates. Even today this method appears to be working. However, the time will come when the piper will have to be paid, and time may be running out.
The other nations are beginning to recognize the trap into which they have fallen. They see the dollar declining and gold rising in value and have heard from the lips of Fed Chairman Alan Greenspan and Fed Governor Ben Bernanke that the U.S. has the ability to create dollars at will. Large foreign dollar holdings have been converted into euros and some into gold. Further, there is talk of not only repricing oil in euros but in the creation of new gold backed currencies. Either of these events will play havoc on the dollar as its usefulness to the rest of the world will decline, and with it both the dollar’s desirability and worth. For these reasons, I believe that the dollar is destined to gradually lose its global importance.
Additionally, Japan is aggressively purchasing dollars with newly created yen credits. They are attempting to support the dollar in an effort to maintain their competitive trade advantage. This is acting to limit an increase in the U.S. money supply because the dollars purchased are removed from our domestic measures of money. Instead, the dollars are used by Japan to acquire U.S. Treasuries. This is likely the primary reason for our surprisingly strong bond market.
At some juncture I believe that it is inevitable that the U.S. will be forced to again back the dollar with gold. It will not likely occur until the dollar appears to be in the process of or loses its status as the world’s reserve currency. Or, if this is preempted by an economic accident. That is likely the only fashion in which the dollar will have the opportunity to again become universally desirable. This will not occur overnight! Until that time comes, gold and secondarily silver and gold and silver stocks, as well as tangibles, will be the prime beneficiaries of the termination of the gold standard.