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Fool's Gold and Dollar Reserves
|by Gaurang Bhatt, MD|
The great advantage of being a reserve currency is that the coin of the realm (mere worthless paper IOUs and promises) can be used to buy real tangible goods. Of course this requires a certain amount of wealth, power and acting with financial prudence and responsibility. Until the middle ages there was no such single country and gold and silver were the repositories of value. Britain and its currency, the sterling assumed the mantle up to WW2, when America replaced it. The backbreaking costs of the two world wars and the reality that all the blood had already been squeezed out of the colonies, which now needed transfusions of capital, combined with the determination of new hegemon's President Roosevelt to dismantle the British Empire, led to the demise of the pound as a reserve currency. The foolish guns and butter policy of Johnson limited American primacy to a few decades, before De Gaulle fired the first shot across the bow and sank the gold parity and convertibility of the dollar under the Nixon presidency. The Bretton Woods accord was abandoned and floating currencies came into being.
The subsequent roller-coaster gyrations of the dollar and the enlarging EU led to the Euro and the rising economic might of Japan, constrained by its military weakness led the Yen to become alternative minor reserve currencies. The irresponsible profligate spending of America under Reagan to Bush2 the last straw, has broken the American camel's back. It is following Keynesian deficit policy not for its original intent of stabilizing a recessionary sinking national economy and increasing employment, but for a reckless spending binge. It claims to be an engine of growth for the world. It does provide employment for manufacturers the world over, but it pays them in a depreciating worthless paper currency.
In 2004 China increased it reserves by over 200 billion dollars despite spending 50 billion dollars to refinance its bankrupt banking system. At some point the foolishness of accepting worthless paper for real tangible goods will stop as warned by the Federal Reserve Chairman Greenspan. America is getting a free ride by running the printing presses overtime to print more dollars. It knows that if one owes a creditor a big sum, the creditor owns you and can dictate to you, but if one owes the creditor the bulk of the creditor's worth then the debtor owns the creditor and can dictate to him. America is not unaware of the currency history of the Weimar Republic but knows that it is an unchallengeable and not defeated superpower. It thus writes checks which need not be honored. Shortsighted and unthinking parties or those without recourse accept the dollars and recycle them by buying US Treasuries at low interest rates, thus taking double losses of exchange rates and negative inflation adjusted interest rates, while stimulating the US economy and perpetuating the reckless spending binge of the irresponsible American consumer.
Japan has lost 14% of its dollar holdings value. Korea and India have lost 10%. China and Hong Kong have pegged their currencies to the dollar but China needs the exports to provide jobs for its masses and the latter is its puppet. The relationship like tat of an abused spouse reluctant to rock the status quo and plunge into the unknown realm of divorce is changing. China is diversifying its reserves into Euros and its companies are buying up huge international companies to acquire expertise, technology and to spend depreciating dollars. Thus it is signing energy deals with Sudan, Iran, Russia, Kazakhstan and Canada; buying France's Thomson TV manufacturing to become the world's premier TV manufacture and, America's IBM personal computer line and may even buy Unocal a major energy producer. It is signing deals with Australia, Brazil and Argentina for long-term supplies of ore, minerals and agricultural commodities and wooing small African nations with dollops of foreign aid.
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