Tuesday, January 22, 2013

A New Gold Standard is Being Born- Evans-Pritchard

This is an excerpt from the Ambrose Evans-Pritchard article over at The Telegraph. The whole article is worth a read, if not two or three.

Personally, I doubt that Buba (referring to Bundesbank) had any secret agenda, or knows something hidden from the rest of us. It responded to massive popular pressure and prodding from lawmakers in the Bundestag to bring home Germany’s gold. Yet that is not the end of the story. The fact that this popular pressure exists – and is well-organised – reflects a breakdown in trust between the major democracies and economic powers. It is a new political fact in the global system. (this dove tails nicely with the warnings from Bundesbank's Weidman about the risk of a currency war and talk of central bank independence)

Pimco’s Mohammed El Erian said this may have a knock-on effect:

“In the first instance, it could translate into pressures on other countries to also repatriate part of their gold holdings. After all, if you can safely store your gold at home — a big if for some countries — no government would wish to be seen as one of the last to outsource all of this activity to foreign central banks.
If developments are limited to this problem, there would be no material impact on the functioning and well-being of the global economy. If, however, perceptions of growing mutual mistrusts translate into larger multilateral tensions, then the world would find itself facing even greater difficulties resolving payments imbalances and resisting beggar-thy-neighbour national policies.

“The most likely outcome right now is for Germany’s decision to have minimum systemic impact. But should this be wrong and the decision fuel greater suspicion – a risk scenario rather than the baseline – the resulting hit to what remains in multilateral policy co-operation would be problematic for virtually everybody.

As I reported on Tuesday, gold veteran Jim Sinclair thinks it is an earthquake, comparing it to Charles de Gaulle’s decision to pull French gold from New York in the late 1960s – the precursor to the breakdown of the Bretton Woods system three years later when Nixon suspended gold conversion.

Mr Sinclair predicts that the Bundesbank’s action will prove the death knell of dollar power. I do not really see where this argument leads. Currencies were fixed in de Gaulle’s time. They float today. It is within the EMU fixed-exchange system – ie between Germany and Spain – that we see an (old) Gold Standard dynamic at work with all its destructive power, and the risk of sudden ruptures always present. The global system is supple. It bends to pressures.

My guess is that any new Gold Standard will be sui generis, and better for it. Let gold will take its place as a third reserve currency, one that cannot be devalued, and one that holds the others to account, but not so dominant that it hitches our collective destinies to the inflationary ups (yes, gold was highly inflationary after the Conquista) and the deflationary downs of global mine supply. That would indeed be a return to a barbarous relic.

No comments:

Post a Comment