US dollar not dead yet as Geithner visits the Gulf
US Treasury Secretary Timothy Geithner arrives in the Persian Gulf this week to reassure Arab states that their dollar assets are safe. Yet he will find himself largely preaching to the converted.
Arab central bankers are pragmatic folk, and the first question they ask about abandoning the dollar is what is the alternative. It is a fair point.
Alternative assets
Saudi Arabia has massive gold reserves. The UAE chooses to have none. There is an element of diversification into currencies like the euro, yen and pound in foreign reserves, but the major diversification is achieved in the sovereign wealth funds whose assets are broadly spread geographically.
It has to be said that short-term thinking often seems to predominate in Gulf banking circles and this again favors the dollar. The short-term horizon has the dollar as a safe haven asset whose strength was well proven in the financial crash of last autumn.
Indeed, in any further financial crisis – such as an end to Wall Street’s current secular bear market rally – then the dollar would strengthen further as stocks are turned into cash and bonds. The problems lie further out.
The US Government is going to have to borrow massive amounts of money to finance its public spending and trade deficits, and is already effectively printing money through its quantitative easing process.
All the history of monetary policy dictates that a higher volume of money in circulation must eventually result in inflation and devaluation of a currency. If you hold this money then you will lose out, big time.
Double-talking
Mr Geithner has to argue that black is actually white, and do it with a straight face. He will be closely listened to in the Arab World where personal relationships and judging individuals is often given more attention that facts, figures and analysis.
Of course, Arab countries have political agendas for supporting US monetary policy as well as purely economic objectives. The holder of the world’s reserve currency also holds a monopoly on military power.
However, it is more than that. If the Gulf States exchanged their dollars they would produce a devaluation of the US currency that would damage the value of their dollar assets that could not be so quickly liquidated.
Perhaps if we are all in the same boat nobody is going to pull the plug, but the problem is that it is sinking anyway. Quietly transferring more money into gold and silver would make obvious sense.
Let’s see if I got this right:
1. Fast Boat to China:
In early June 2009, the Obama administration was in a panic over the stability of the US dollar and US Treasuries. So the administration sends Geithner on an “unannounced but important” trip to China, where his primary mission was to beg the Chinese government for mercy (i.e. “please don’t sell those US Treasury bonds!). Geithner told the Chinese government that the Obama administration’s “plan” was to shrink the US budget deficit to 3% of GDP in a few years (it’s gonna hit 13% by next year!!!) But the Chinese people just laughed at him; they could see that he was wearing no clothes.
2. Slow Train from Italy to Switzerland:
Then a few days later, we learn that the Japanese were trying to sell some of their very old US Treasuries, when 2 officials from the Japanese Finance Ministry were caught trying to carry their US Treasuries into Switzerland to sell them. Of course, the US government had to create a cover-up, by saying that those old US treasuries were counterfeit . . . subsequently, the few US citizens who bothered to read about this story took the bait, and promptly forgot about the matter.
3. Fast Forward to mid July 2009:
Now the Obama administration is sending Turbo-Tax Timmy (“Gosh, I cheated on my taxes for only 4 years. Really!”) to another area of the world that has massive US dollar holdings, including US Treasuries.
How Do You Say This in Arabic?
“you’re wearing no clothes, Timmy.”
The Obvious Solution:
As you’ve stated, Peter, “quietly transferring more money into gold and silver would make obvious sense” . . . and the best way for Sovereign nations to do this would be to buy gold whenever the US Government/JPM team shorts the gold price (Hint: watch their movements before and during the Sydney open!). After all, the US Government does not intend to cover their shorts, which now amount to about 20 million ounces.
PS: Forgot to mention great post!
obewon
July 14, 2009 at 10:34 pm
Look at the ECB’s balance sheet, it’s bigger than the Fed’s. You note:
“All the history of monetary policy dictates that a higher volume of money in circulation must eventually result in inflation and devaluation of a currency.”
But it’s not clear that this is currently happening. M2 growth has flattened, the credit system in the U.S. is broken, qualified borrowers can’t get loans. Additionally, cash hoarding has lead to a fall off in money velocity.
As Greenspan said, “… We have a problem trying to define exactly what
MONEY is…the current definition of MONEY is not sufficient to give us a
good means for controlling the Money Supply…”
Disinterested Observer
July 14, 2009 at 8:39 pm
Let’s see if I got this right:
1. Fast Boat to China:
In early June 2009, the Obama administration was in a panic over the stability of the US dollar and US Treasuries. So the administration sends Geithner on an “unannounced but important” trip to China, where his primary mission was to beg the Chinese government for mercy (i.e. “please don’t sell those US Treasury bonds!). Geithner told the Chinese government that the Obama administration’s “plan” was to shrink the US budget deficit to 3% of GDP in a few years (it’s gonna hit 13% by next year!!!) But the Chinese people just laughed at him; they could see that he was wearing no clothes.
2. Slow Train from Italy to Switzerland:
Then a few days later, we learn that the Japanese were trying to sell some of their very old US Treasuries, when 2 officials from the Japanese Finance Ministry were caught trying to carry their US Treasuries into Switzerland to sell them. Of course, the US government had to create a cover-up, by saying that those old US treasuries were counterfeit . . . subsequently, the few US citizens who bothered to read about this story took the bait, and promptly forgot about the matter.
3. Fast Forward to mid July 2009:
Now the Obama administration is sending Turbo-Tax Timmy (“Gosh, I cheated on my taxes for only 4 years. Really!”) to another area of the world that has massive US dollar holdings, including US Treasuries.
How Do You Say This in Arabic?
“you’re wearing no clothes, Timmy.”
The Obvious Solution:
As you’ve stated, Peter, “quietly transferring more money into gold and silver would make obvious sense” . . . and the best way for Sovereign nations to do this would be to buy gold whenever the US Government/JPM team shorts the gold price (Hint: watch their movements before and during the Sydney open!). After all, the US Government does not intend to cover their shorts, which now amount to about 20 million ounces.
obewon
July 14, 2009 at 7:43 pm