In 1971
President Nixon closed the window that allowed U.S. dollars to be sold for
gold owned by the U.S. Just before that, the price of gold was $35 an ounce.
Since then gold has been called a ‘barbarous relic’, a term used
by Keynes, the famous economist.
From that time on, the world’s currencies stood merely on the
confidence their governments engendered and the control they exercised over
international financial dealings of all kinds. That confidence lasted until
2007 when the credit crunch brought government financing on both sides of the
Atlantic into question. Up until now the performance of the underlying value
of currencies has hidden these questions as exchange rates are adequately
‘managed’ through swap arrangements to stabilize exchange rate
movements to the extent that violent moves don’t happen. But the real
value of currencies in terms of their real solvency is now a matter of open
debate. As of now, relative to the amount of gold available to markets, the
price of gold is the only measure of value that currencies can be held to. We
look at that and look at the conditions that are determining the value of
currencies now and in the future.
The Currency Experiment
When
Nixon closed the ‘gold window’ to European governments in 1971 he
relied on the oil producers of the world to price oil in U.S. dollars only.
This made the USD a necessity. Except for the few oil producers who refine
their own oil, every country needs to import oil after using the U.S. dollar
to buy it. This gave the U.S. the control they needed over currency markets,
to ensure that the dollar became and remained the sole global reserve
currency until now.
A
look at the euro, which –although the world’s largest trading
bloc— shows that if a currency is measured solely on the performance of
its government and Balance of Payments, it remains vulnerable to market
forces that react to that measurement. With oil in backup, that vulnerability
fades. That is, until profligate printing of that government’s currency
becomes so obvious that it cannot be ignored. This is where the U.S. dollar
is coming to now.
The
‘currency experiment’ has persisted for 41 years, but for the
last five, it has faltered and continues to do so. With the focus on the
short-term, the real consequences of that experiment have been largely
ignored. It’s time to take a more distant view of what has happened so
that we can get a balanced perspective of its cost.
Value of Paper Money – The Harsh
Reality
During the 42 years of the currency
experiment with no gold or silver standing behind currencies we have seen the
gold price multiply from $35 to $1,770. That's over 50 times in 42 years. And there's still much more to come it
seems, with the assistance of governments.
If
one was fortunate to get out at anywhere above $800 back in the eighties and
back in at $300 in the next twenty years that number goes up to 64 times $35.
That’s what solid long-term funds should have done, to maximize
profits. (It is far better than trading and far less nerve-racking.)
But
don't look at that as a profit figure. That’s not the point we are
making here. Look at it as a statement on the failure of the currency
experiment and currencies' ability to measure value. Now translate that into
the value of savings over that period –a harsh reality indeed!
Pension Funds
A
Pension fund is measured on the money flowing in and less the money flowing
out. The assets in the middle should be rising to cover the additional costs
of paying pensions when the workers retire and the cost of living increases.
That’s why they depend on Pension Fund Managers and Pensions. If the
money leaving is more than that coming in, then the fund is moving to
insolvency.
As
Alan Greenspan pointed out so strongly, this is happening now and with
‘baby boomers’ retiring now, that is the current situation in
most Pension Funds (such as is now reported about the Chicago Teachers). The
future of such Pensioners even now as well as the Pensions of those working
now looks bleak.
If
you strip out the causes of higher prices that are due to supply and demand
factors (which usually readjust over time) then you are left with monetary
inflation. A rate of monetary inflation of 2.5% has been deemed acceptable
because it is manageable and gives the impression of growth.
Today’s
quantitative easing in the U.S., Europe, Japan and China has now accelerated
to a much faster pace in the hopes of stimulating faster, sustainable growth.
QE1 and QE2 may have staved off a depression, but they have not translated
into sustainable growth. We are all now waiting to see if QE3 will do so.
We’ve
all become aware that money printing lowers the value of a currency; however,
the benefits of increased liquidity in the system –it is hoped—
will compensate for that. Savers are the victims of such a policy, if they
save those currencies even when growth is resuscitated.
Some
savvy enough may turn to currencies, which they believe will not be devalued
in the same way and retain their value, i.e. Yen or Swiss Franc. But for the
last year or so, both the Swiss and Japanese governments have interfered in
the market place to lower the value of their currencies internationally, so
they can retain their international trade competitive levels. The Yen is
still being treated as a ‘safe-haven' currency even though the Bank of
Japan has made it clear that it will engineer a weaker Yen for a long time to
come. The same is true of the Swiss Franc, both countries placing their
export competitiveness above the value of their currencies.
We
can therefore state: The concept of a
currency as a measure of value has now departed completely.
Such
currency market changes leave room for gold and silver to act as that measure
of value, as currencies fall against them. Look again at the price of gold
before 1970 and now. It translates into a 100%+ gain every single year for
the last 41 years. (So much for an item you dig up, then put back in the
ground.) But this is a measure of decline in currency value over that same
period! The culture that precipitated this history is still in control and
certainly intends to continue down that road. Some commentators believe that
the gold price can triple in the next few years. That would change the rise
from $35 until then to 317% per annum
since before the 1970’s. What will that tell you about the value of currencies
the world over? And what does that point to in the future?
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