The Gnomes of Washington

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All
the chatter that accompanied gold hitting new highs this month made
it hard not to think of "the gnomes of Zurich."

With that richly
evocative image of sinister forces behind the pound sterling’s woes,
Harold Wilson, the British Labour Party figure (and eventual prime
minister) skillfully deflected attention from the British economic
policies and policy-makers actually to blame.

The recent
account in the British press that Gulf oil states and others are
planning to abandon dollar pricing of oil came complete with "secret
moves" and "secret meetings."

One prominent
talk show host asked me on the air if this was part of a "shadowy
conspiracy" against the United States." Politico.com
ran a piece headlined, "Whodunit? Sneak attack on U.S. dollar,"
and reported that government circles were abuzz with whispers that
behind it all were gold traders who wanted to tank the dollar.

If there is
secretive business afoot, the conspirators are hiding in plain sight.
My book, The Dollar Meltdown, also describes the likely development
of a basket of currencies and gold’s role for global oil pricing.
It was printed and being shipped to the nation’s book dealers when
Robert Fisk’s reporting sent the dollar down and gold up.

It’s hard to
believe anyone could have missed the discussions in OPEC circles
about the repricing of petroleum. A year ago, an official of the
Gulf Cooperation Council, consisting of six Persian Gulf states,
discussed the council’s planning for a central bank and gold reserves.

About the same
time, at a Moscow conference, Chinese Premier Wen Jiabao and Russia’s
Prime Minister Vladimir Putin were nothing short of explicit about
their interest in diversifying away from the dollar, a prospect
Putin alluded to once again last week in Beijing.

Despite global
nervousness about the dollar/debt train wreck in the making, reporters
immediately sought out officials to issue denials that any such
oil-pricing meetings had taken place.

Two years ago,
when Chinese officials first began discussing the so-called "nuclear
option" of dollar disinvestment, a New York Times editorial
writer thought it noteworthy that "China’s central bank announced
that it had no plans to sell off its dollar assets." Only editorial
writers would expect for market-makers to be notified about such
plans in advance.

A more helpful
approach would be to ask if a breakdown of the post-1971 dollar
exchange standard is justified by objective conditions. That same
realistic approach also justifies a skeptical view of pronouncements
from Washington, as U.S. fiscal and monetary authorities continue
to pledge their devotion to a strong dollar.

Now that the
dollars has resumed its long-term decline, one might consider adopting
the realism of Chinese students. At Beijing University last summer,
when Treasury Secretary Timothy Geithner spoke about his faith in
a strong dollar and insisted that "Chinese assets are very
safe," they laughed.

Commerce Secretary
Gary Locke shed crocodile tears for the falling dollar last week,
but only for a millisecond, before he proclaimed the prosperity
that a cheap dollar would provide U.S. manufacturing. Isn’t that
pretext wearing a little thin? After all, the U.S. dollar lost 20%
of its purchasing power during Bush’s eight years – and a fourth
of its manufacturing base, 4.4 million jobs at the same time.

If a cheap
dollar doesn’t produce prosperity, could the gnomes in the Treasury
and at the Federal Reserve have other reasons to opt for the devaluation
of the dollar? They go about their subterranean toil, undermining
the dollar seemingly heedless of the destructive forces unleashed
by an unreliable currency, destructive to capital formation, the
propensity of people to provide for their future and the very fabric
of civil society itself.

Still, there
remain proponents of "inflating away the debt," bad paper
on the balance sheets of banks and other financial institutions,
mortgage and corporate debt, and most especially government debt.

Dollar destruction
can provide for the revaluation of what is otherwise unsustainable
federal debt, both the explicit debt and unfunded liabilities. For
example, a 4% inflation rate reduces the real value of a $12 trillion
dollar debt by $480 billion. The
Dollar Meltdown
provides simple strategies for individuals
to protect themselves and their families from the slow-motion debt
repudiation of inflation and the chaos of a currency crisis.

On the subject
of devaluation, it might be helpful to remind those who deny any
prospect for a changed dollar role in oil markets, that even until
the early 1970s a fourth of the global petroleum trade was still
conducted in the British pound sterling.

But serial
devaluations of the pound finally made it so unattractive that OPEC
implemented its policy of 100% dollar pricing. Only this time, OPEC
Secretary General Abdalla El-Badri has conceded, a change from the
dollar would not take as long as the change from the pound sterling.

This article
originally appeared on The Street.

October
22, 2009

Charles Goyette [send
him mail
] is the author of the upcoming book, The
Dollar Meltdown
.

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