Re: The US Dollar and Gold

["Gary Santos" <evs@xxxxxxxxxxx>]

Thank you, William, for your comments. Your points on Bretton Woods are well
taken but if my recall of currency history serves me, the failure of Bretton
Woods can be attributed to  the devaluation policy some countries pursued in
order to get an edge over others, i.e. as productive resources came back on
stream. If you read the Mahathir speech which was equally a call for Muslim
unity against their common "enemies", if you consider current political
events, we might find out that they will be able to keep discipline amongst
themselves especially at this point in time when competitive pressures
internal to their group are at a minimum. I suspect therefore that the new
currencies (the Arab and Gold Dinar and most likely they will merge in their
next "seminar" late 2003) will take a foothold and, even, prosper beyond
their borders.

Your point that "they need the US more than the US needs them" is certainly
well taken. In general, that is true as many jobs depend on the US consumer.
But, doesn't this argument hold more for Japan and the like who largely
depend on the "modern" consumer for their jobs? For a single commodity
economy like Iraq, an extreme example, whose population only has simple
needs, the balance of who needs who more is not so clear. Secondly, it is
precisely the continuous supply of oil to the US consumer and the
accumulation of dollars over the decades that has brought them to this
quandry. What will they do with all of these dollar savings whose purchasing
power is eroding? With US manufacturing now in China, wouldn't it be better
to have renminbi? Or, Euro?

Besides, the issue goes above and beyond geo-politics and geo-economics. It
has to do with a re-examination of the concepts of savings and the vehicle
of these savings. When Greenspan said of the fiat system, "Monetary policy,
unleashed from the constraint of domestic gold convertibility, had allowed a
persistent overissuance of money. As recently as a decade ago, central
bankers, having witnessed more than a half-century of chronic inflation,
appeared to confirm that a fiat currency was ***inherently*** subject to
excess.", I took it to mean a possible return to his earlier pro-gold
position in 1968(?), i.e. he now doesn't know what to do given the fact that
the super structure is built on the US dollar.

Lastly, I have read enough policy papers to know that Bush's tax cut is a
Band Aid to a growing wound. The spending proposal of Bergsten appears to me
the best. I totally agree with you.

I would especially request your thoughts on the December statement of
Greenspan and store of savings. Can the US dollar preserve this role? Are we
now at the threshold of a multi-currency world - the Dinar, the Euro and the
US dollar?

----- Original Message -----
From: "William F Hummel" <wfhummel@xxxxxxxxx>
To: "Gary Santos" <evs@xxxxxxxxxxx>
Sent: Tuesday, January 07, 2003 8:06 AM
Subject: Re: The US Dollar and Gold


On Tue, 7 Jan 2003 02:04:52 +0800, you wrote:

>William,
>
>That the world has become frustrated with the US dollar  is precisely what
>is leading to the development of alternative currencies. "Learned to use
>fiat" as you put it has given certain countries this frustration. I attach
>Mahathir's speech for your perusal and comments. I recommend all to read
>this as it goes beyond the mere proposal of a currency. The same can be
said
>of what has led to the acceleration of the implementation of the Arab
Dinar,
>from 2005 to mid-2003.

Mahathir is proposing returning the Muslim nations to what is
essentially the Bretton Woods system.  That system functioned
well only in the immediate aftermath of WW2 while the US was the
main producer of goods in the world.  It began to show serious
problems about 10 years after it was installed, and finally
collapsed in 1971 after about 25 years of life.  I doubt that the
BW system would work any better if constrained to the Muslim
world.

I applaud Mathathir's decision to control capital flows in and
out of his country.  Other countries in difficulty managing their
economies, especially in world commerce, should be doing the
same.  Currency of all kinds, not just US dollars, can flow
freely as investments in a globalized system.  But the trouble is
they can flow out as fast as they flow in.  Short term debts in
foreign currencies are like a tinder box and should be avoided at
all costs by weak economies.  Chile has avoided the problems of
Argentina and Brazil by adopting capital flow controls.  It takes
good understanding of economics together with a government
relatively free of corruption to do it successfully.
>
>And, that the US will continue to be the destination of world capital
should
>be seriously questioned by the fundamentals -- real interest rates are
>negative, the economy appears to be headed toward a double dip and asset
>prices whether financial or real are high. It seems patent that the decade
>long trend has come to an end. From my stand point and from the information
>reaching me, there is a move to reduce the percentage of US reserve assets
>held.

I agree that the US economy is in the doldrums due to the
collapse of an over-priced asset market.  And it will probably
last at least two more years.  As for foreign countries reducing
their US reserves, how do you imagine they will do that if they
continue to trade at a surplus with the US?  The fact is they
need the US more than the US needs them.  I think the dollar will
ease slowly against other currencies, but the trade deficit will
likely continue.
>
>Catherine Mann of IIE has warned as early as 1998 on the unsustainability
of
>the current account deficit which I believe is now at that 5% of GDP
>threshold.

The current account deficit is ultimately self-correcting.  I
doubt that there is some particular percentage of GDP that
becomes unsustainable.  As long as other countries see the US as
a good place to invest, even though the forex value of the dollar
may be working against them, the trade deficit will continue.
The Euro zone and Japan have serious problems too.
>
>But, William, let us assume that the decade long trend has been broken and
>that the dollar is in a secular bear market, what are the possible policy
>responses of the Fed in your mind? The widespread complacency to the
>scenario is troublesome.
>
The Fed is pretty much out of elbow room with its very low Fed
funds rate.  The only effective policy tool now is well-designed
deficit spending.  Sadly the Bush administration is going about
it all wrong.  They see the problem as a supply side problem,
meaning a lack of investment incentives.  In reality the problem
is on the demand side, as it almost always in a recessionary
environment.  The benefits of deficit spending must flow to the
middle and lower income sectors who will spend rather than save.
The proposed tax cuts flow almost totally to the upper income and
idle rich sector, even though there is no shortage of funds now
for investment.

William F Hummel
>
>
>----- Original Message -----
>From: "William F Hummel" <wfhummel@xxxxxxxxx>
>To: "Gary Santos" <evs@xxxxxxxxxxx>; <pkt@xxxxxxxxxxxxxxxx>
>Sent: Tuesday, January 07, 2003 1:09 AM
>Subject: Re: The US Dollar and Gold
>
>
>Gary Santos wrote:
>
>>I would like to get comments on the above issue especially what policy
>>response is likely on the part of the Fed in light of the introduction of
>>Mahathir's Gold Dinar, the Arab Dinar and other such new currencies. I was
>>made to understand that some policy circles have proposed a new currency
>>based on a basket of commodities.
>>
>>As for my thoughts, I append below an email I recently sent to another
>>discussion group:
>>
>Gold will remain a commodity.  It's price against the US dollar
>will fluctuate for a number of reasons, but not high on the list
>is the US trade deficit.  That deficit will continue to grow as
>long as the US is seen as a better place to invest than in the
>domestic economies of those nations running trade surpluses.
>Another factor is the prevalence of national policies that
>promote trade surpluses to maintain their domestic employment
>levels.  Other nations that may be playing with gold are just as
>eager as ever to accumulate reserves of US dollars.
>
>Only if the US runs a serious and protracted inflation or its
>economy suffers a major blow from terrorists or from a natural
>disaster would there likely be a collapse in the dollar as the
>world's primary reserve currency.  Gold coins as money are a
>trivial part of the picture, a relic of the past.  Now that world
>commerce has learned to operate on fiat money, there is no
>turning back to a commodity based monetary system.
>
>William F Hummel
>
>
>
>>----------------------------------
>>
>>I did not want to bias anyone with my prognosis but here are my thoughts
>>which I hope will solicit more from the group:
>>
>>There are three factors that are putting heavy pressure on the US dollar:
>>
>>a. A deteriorated and deteriorating external position. Deficits in the
>trade
>>and current accounts and a hugely negative net investment position.
>>
>>b. A frustrated world that has its savings and central bank reserves
>largely
>>in US dollars and has seen its purchasing power deteriorate since 1971.
The
>>gold dinar of Mahathir and the Arab dinar of Saudi Arabia et. al. are just
>>present manifestations of this frustration. I understand the Russians
>>reintroduced a gold coin (last year, was it?), the chervonet, and are
>>currently talking of a Gold Ruble.
>>
>>c. Improving (and that's an understatement) gold fundamentals given a
>>demand-supply deficit of 1,000 tons per annum and what appears to be a
>>humongous short position in gold with producers unwinding their hedges.
>>
>>It certainly doesn't help that China opened a gold exchange in Shanghai
>last
>>October and that Governors Greenspan and Bernanke gave those "We can print
>>money" speeches last November and December. From the news coming out of
>GATA
>>and LeMetropole, it would seem by the timing of the price of gold that the
>>Chinese and Arabs have stepped up their gold buying. Gold just broke $354
>(a
>>magic number according to the gold bugs as it is tied to the hedging
>>programs of the shorts) as I write this note.
>>
>>As for the counter, I suspect that it would be best for the slide of the
>>dollar back to support levels be accomplished (there are those who think
>>that the dollar decline so far is being managed downwards) before the Gold
>>Cover Clause is reinstated given the gold the US has in West Point(?).
But,
>>now you tell me that that gold is gone??? (***Please send me a copy of
this
>>Fed report and of the commodities-currency report as I would certainly
want
>>to read it for myself.***) If that is indeed the case, I can only think of
>>one other thing -- food. If there is one thing that the Arabs don't have
>and
>>that is America's strength, it is food. Food for oil. Perhaps, this is the
>>gist of that move for a currency backed up by commodities.
>>
>>The interesting thing in this Longwave forum is the cyclical nature of the
>>currency-gold issue -- we have come back full circle to the 1930's, don't
>>you agree? Now that I said this, all the more I believe a war is upon us.
>>Any stalling on the part of the US and Britain is only because of the
>>trouble Venezuela is causing to the effort.
>>
>