"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Friday, December 24, 2010

Robert Zoellick, World Bank President Reaffirms A Global Role for Gold

I have written on Robert Zoellick's recent mention of gold HERE.  From what I recall, he pulled back somewhat on his comment, yet just two days ago, he reiterated his position.

Hat tip to Fauvi for the find:
World Bank head reaffirms gold as "reference point" to monetary system reform 
Wednesday December 22, 2010 14:30:43 EST 
PARIS, Dec 22, 2010 (Xinhua via COMTEX News Network) -- 
World Bank President Robert Zoellick reaffirmed his proposal to use gold as a "reference point" to reform the current international monetary system on Wednesday in Paris. 
"What I suggested is that gold serves as a key reference point to allow people to assess the relations between different currencies," Zoellick told the press here at the end of his meeting with French President Nicolas Sarkozy in the Elysee Palace. 
"It's an approach that we can take, others also estimate that we can establish a benchmark against prices of principal commodities," the World Bank president said in response to a journalist's question. 
"I didn't propose a gold standard, which is an important distinction because it would directly link currency to gold," said Zoellick, denying reports that he had called for a return to the " gold standard" to modify the present monetary system, which he called "Bretton Woods II." 
"The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values," Zoellick wrote in an article published in Monday's Financial Times. 
Some media said Zoellick's proposal to revive gold's role in guiding exchange rates worked as a shock wave to current discussions and disputes over the international monetary system. 
The "gold standard" is a system in which the standard economic unit of account is a fixed weight of gold. 
Under the Bretton Woods system, which was set up in 1944 in the United States, the U.S. dollar was directly pegged to gold -- 35 dollars equaled per ounce -- while other currencies were pegged to the dollar. The Bretton Woods fixed exchange rate regime broke down in 1971, when the United States unilaterally terminated convertibility of the dollar to gold.

Source HERE.

Misthos here.  The most important global currency relationship that exists today is the Chinese RMB and the US Dollar.  The US needs to desperately depreciate its currency to better manage debts and to increase exports, and historically, there has always been a strong currency (or gold) to devalue against.  However, China is not allowing this to happen, or at least not as fast as the US would like, and so we have the situation we have today:  A currency war of exporting inflation by the US to China.

Would gold be a better "currency" to depreciate against?  And if this is not "technically" a gold standard, isn't this policy espoused by Zoellick giving gold a recognized monetary status?  After all, those that believe that gold has a monetary status of sorts are usually ridiculed and consigned to the tin foil hat brigade.  (myself included)

Nonetheless, knowing how governments love to spend, such a policy, in my opinion would be extremely inflationary to gold.  There's a lot of debt out there, and a lot of global trade re-balancing to be done.  The real question is:  Are these goals possible, or realistic?  Or will the system breakdown on its own, forcing the gold issue upon reluctant governments?

Time will tell.


Jim Slip said...

Let me see if I get this straight, what Robert Zoellick proposes is a system of semi-flexible exchange rates, where the price of gold is gonna be a decisive factor in "assessing the relations between different currencies". OK.

Seems to me like a needlessly complex solution. Here's a more practical one. Abolish the dollar as the world's reserve currency, abolish all artificial manipulations of the exchange rates, and finally let the exchange rates do what they're supposed to do (reflect the strength of an economy so economic activity rebalances).

Much talk has been had about how USA exports it's inflation, or about how China manipulates it's exchange rate, but what about Germany? By being part of a single currency zone, and by suppressing it's economy to remain competitive, Germany (or rather it's banks) exported what was supposed to be Germany's inflation (savings that weren't invested in Germany) to the European periphery. Then the European periphery, who had never learnt how to have an international competitive economy, spent all the money that was "invested" in non-productive activities (real estate, bloated public sectors etc).

It's interesting to see how things are gonna play out within the Eurozone. What I consider certain, is that no matter how much austerity is being imposed on them, countries like Greece will never ever become like Germany. It wasn't done in the age of Drachma. It will never be done with the Euro.

Misthos said...

Jim - spot on about Germany!

That's a great way to describe how the internal EU imbalances got out of control with the introduction of the Euro.

Here in Greece, I have met many people that have traveled and worked abroad, and they are well educated.

And they believe that Greece should keep the Euro and try to be like Germany. I say it won't happen. It can't happen. That's not to say it isn't a lofty goal and that they shouldn't try. Greece should.

But Germany OWNS Europe. The periphery is being told to go through a deflationary episode, yet not default, and they can not devalue either. It's a recipe for disaster. How do you grow an economy when you can't expand the monetary supply yet interest rates stay well above gdp levels? It's a mathematical impossibility.

Your suggestion however to "abolish manipulation of the exchange rates" would require an end to central banking as we know it. After all, that's what central banks do.

The US will never give up reserve status. It's a national security issue and allows the US to be the "policeman" of the world - that is, the rest of the world finances the US Military because the rest of the world needs to use US dollars for trade.

However, amongst banking circles this discussion is well underway. I believe it was last Spring that the IMF and Swiss National Bank held a conference to discuss the issue of a new world reserve currency.

And so, we have reached a convergence of crises - monetary, economic, and geopolitical. The monetary crisis is due to the issues of debt backed money and the accumulation of debt and interest at unsustainable levels. The Economic issue is the massive trade and wage imbalances that exist in the world. They can not be addressed easily and without pain. The final issue is geopolitical. The current system was born from the ashes of WWII, and modified during the cold war in 1971. During that era, a nation was either a part of the East bloc, the wealthy west, or the third world - and the third world basically was nonexistent economically.

Today, the geopolitical situation has changed dramatically. There is very little left of the third world, Russia is a resource power, the rest of the BRICS are challenging US dominance, and everyone, and I mean EVERYONE needs oil to prosper.

Yes, the US is by far the dominant military power. But that is so long as the US Dollar is the world's reserve currency.