Thursday, September 07, 2017

TOTD: The Return of the Gold Standards?

Thought of the Day - The Return of the Gold Standards?

(This is going to be a bit technical in economics)

In Economics term, we are living in an ever inflationary world basically because we are all using "Fiat" money which government around the world could just print money in the short term without caring the long term consequences.

Prior to 1971, US dollars were "convertible" to gold at the Federal Reserves if presented by other government. The Gold Standard was changed significantly when the Breton Woods Treaty was implemented after World War II. People could no longer exchange Gold for their money via their governments. It was a necessary step as the Great Depression of the late 1920s throughout the 1930s gave the Americans a very tough lesson on Monetary Policy. The Gold Standard has its limitation as it would reduce Money Supply when people just convert their money into Gold. This created a spiral effect on the economy with a reduction of Money Supply.

Breton Woods Treaty solved part of the problem of instability of Money Supply. However, Monetary play between countries took another toll on the arrangement with the Americans basically ceased the convertibility of US dollars into Gold in 1971.

But US dollars remains as a strong international currency basically due to the "Petrol Dollars" arrangement. It means that all trades in oil have to be done based on US dollars. This implicitly means that due to the high demand of oil and petrol, the US dollars are basically "backed by oil/petrol". That is why it is called "Petrol Dollar". It would also mean that the American governments could basically keep printing money to cover whatever trillions of deficits as it wishes without significant impact on its economy as most of these US dollars would be used in trading oil and other international trades.

But will this arrangement be sustainable? Apparently not. Oil would either face drastic reduction in demand due to the rapid growth of alternative renewable/Green sources of energy or it would just deplete and dry up. There will no longer be high oil trade to back US dollars up!

In 2001, Dr Mahathir proposed the revival of Gold Standard in terms of Gold Dinars among the Muslim countries. The largest Gold owners among the Muslim countries were Libya and Iraq. These two countries were oil exporter and supported the idea to trade oil in Dinars. This would mean that they are going to end the concept of "Petrol Dollar" earlier than its inevitable natural death! Now you know why the Americans invaded these two countries and the Gold stored in these two countries are unaccounted for!

The Gold Dinars idea was destroyed with the destruction of Libya and Iraq. However, a BIGGER Challenge evolves and they are not easy opponents like Libya and Iraq.

The BRICS led by China and Russia have been discussing the setting up of an alternative currency for international trades among themselves. This would also mean the sideline of the US dollars as the main international currency for trade. This new proposed currency will be back by Gold, partially, with a basket of currencies consisting of Chinese RMB.

It would mean a medium shake up or even sending shocks to the international trade and financial sectors. BRICS will be able to execute such bold plan because Russia is one of the largest oil exporter while China is one of the largest exporter of goods and services in the world! If they demand all oil or goods purchased by other countries from them need to be paid in this new BRICS currency, the US dollars would be totally made invalid and redundant.

US dollars will suffer a nose dive if that happened and it will create an unprecedented inflation within the US economy because those US dollars which could not be used in international trades will have to flow back and create a real demand on US economy!

But with the Gold which the US army had captured from Libya and Iraq, they could do something to anticipate such financial disaster. They could just use their new found fortune of Gold to create the new modern Gold Standards to neutralize that impact. At the same time, they will require other countries to support their effort by lending their Gold to US to create this new US dollars.

This is exactly what the Americans are doing, creating a new currency issued by its Treasury (instead of its Federal Reserves) which is theoretically and supposedly backed by Gold.

The BRICS arrangement will affect not only the US dollars but the Euros as well. This is the main reason why Germany is quietly demanding and shifting its Gold back from US in anticipating the "New World Currency Order". Germany is the LARGEST economy among the European Union. It will either have to use its economic muscles to back the Euro currency or to return to a Gold Standard Deutsche Mark in the event when Euros collapses due to the evolving of "New World Currency Order".

There will be turbulence ahead in the next few years and nobody knows exactly how it will work out. Will the world face inflationary pressures to the countries which didn't peg their currencies to Gold or will there be deflationary pressure on international trade when international currencies for trade will be restricted and limited from expansionary path?

Or would BOTH happen and we will be stuck in stagflation?

Goh Meng Seng

5 comments:

Anonymous said...

"If they demand all oil or goods purchased by other countries from them need to be paid in this new BRICS currency, the US dollars would be totally made invalid and redundant."

But China holds nearly $100 BILLION in U.S. treasury securities! Isn't it in China's interest to make sure that the US dollar remain strong and viable? Won't your so-called invalidity and redundancy of the US dollar be detrimental to China?

Admin said...

You are right and that is why China is selling down its holding of US Treasury bonds!

GMS

Anonymous said...

You are right and that is why China is selling down its holding of US Treasury bonds!
GMS

So who is stupid enough to buy US Treasury bonds from China? GIC? Temasek? LOL. $100 billion, u know, so easy to sell meh?

And the US is a major market for product exports from China, u know. Like that how not to have US$? In fact China buying US Treasury Bonds is like lending money to US to buy products from China, u know.

Anonymous said...

The US just need to create money (US$) in order to buy things from the whole world.

The US dollar is trusted and accepted as an international currency because USA is very strong in military and economically advanced, and also partly due to historical reasons.

And because of that, even teenage Sinkies like Amos Yee also want to seek asylum in USA. He did go to China, right?

Anonymous said...

Correction to 3:30 PM
Should be he did not go to China.