Archive for July, 2011

Economic Policy, Gold Standard, Global Currency and Sustainability

The massive move to unbridled consumption began in the developed countries before 1971 and resulted in the decoupling of the US dollar from the gold standard. According to Mike Sheldock (MISH) in his article Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma; Gold’s Honest Discipline Revisited and Hugo Salinas Price’s article The gold standard: generator and protector of jobs, the Bretton Woods Agreements of 1944 held that the US currency was the standard currency based on the concept that, at any time, if any country had an excess of US currency, they could demand an exchange of Gold from the US Reserves. Accordingly, every country would at least make the attempt to maintain a trade balance. In 1971, Nixon declared that the US would abandon this agreement and no longer pay back demands for gold at any price because they had already accumulated substantial debt through the printing of US currency to pay for their growing needs, essentially giving themselves credit that was backed up, until then, by their gold reserves.

Prior to 1971, as a result of US money being backed by gold, all other countries followed the US dollar. The US had an obligation to try not to allow themselves to get too far out of alignment. However, as the US continued to allow their trade deficit to grow, being the only country with the right to print US currency, they eventually found themselves with a substantial trade deficit. So much US currency was in the hands of other countries that they could not be able to pay it back in Gold without bankrupting or substantially depleting their gold reserves. As a result the US dollar was sharply devalued against gold and the price of gold has continued to rise ever since.

By abandoning the gold standard, the US opened the doors to printing as much money as they wanted giving themselves unlimited credit and an unlimited trade deficit. Now that severe trade imbalances are showing up everywhere, it is becoming more and more difficult to reconcile accounts without extreme devaluation of certain currencies and getting hold of trade imbalances.

What Mike Sheldock and others are advocating is a return to the gold standard. The problem with the gold standard is that it would still be essentially controlled by one country and the temptation for that country to print money would still be more than it could bare. Would he advocate that standard if Chinese currency was the central currency? Probably not. » Continue reading “Economic Policy, Gold Standard, Global Currency and Sustainability”

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