This is the second part of a three-part series on how gold will return to the monetary system globally but not in the form of the defunct gold standard.
What Alan Greenspan said still holds true today. But now we have to replace welfare statistics for central banks and other financial institutions in a global world. We see it in the financial debt problems of nations, of individual states, in banks and in many corporations, as many wobble in the face of bankruptcy. The issue of more currency either through swaps to the Eurozone or though quantitative easing in the U.S. has neatly postponed the problem but in doing so has exacerbated it. The banking crisis has been alleviated but the national debt problems have not yet been alleviated. Even the U.S., with a debt-to-GDP level of 90%, is such a candidate.
So Far, So Good
However, until today the system has worked well, as everyone accepted the dominance of the dollar. Surely the control the U.S. has on money through its grip on oil will hold and allow such profligacy? There is no doubt that citizens can be made to obey governments through the rule of law. Citizens are dependent on government for the issue of sufficient money to create a thriving economy that provides all they want. Even if money has ceased to represent a reliable measure of value, citizens can be forced to use it. Inflation is eventually beyond the control of governments and citizens when it truly reflects profligacy, but in the interim, a postponement of such consequences can be achieved.
Today we face the two almost compensating forces of inflation and deflation. Deflation diminishes asset values through falling prices. Inflation diminishes value through rising prices. When they strike together, it appears that stability is achieved, with low net inflation and low net deflation. But this is a dangerous balancing act that can, after a while, turn very mercurial. Central bankers fear deflation more because deflation can sap economic activity, whereas inflation, when relatively low, does not. But if deflation falls away as an economy sees a recovery take hold convincingly, then inflation is unfettered. That's when central bankers have to do as they did in the mid-80s, when U.S. interest rates leapt to 25%+ and killed inflation. That was successful because the economy was strong and robust, taking the blow in its stride.
Two Critical Factors
Today two factors stand that would defeat such national controls:
- The U.S. dollar is a global currencies used unwillingly by an emerging world. That emerging world will not let the U.S. dollar dominate for longer than is absolutely necessary and will replace it with a Chinese yuan as soon as it can. The emerging world will as soon as practical also accept other currencies in international trade and pressure sufficient oil producers to accept the Chinese yuan as they need. This will considerably reduce the need to the U.S. dollar in world trade. The U.S. dollar system on payments will not be able to survive only partial control. It can only work when that control is complete worldwide.
- The Muslim world has begun what Europe faced for 100 years in the Middle Ages—religious wars. The Sunni-dominated nations of the Middle East—where they believe that state is first and religion second—are facing off against the Shi'ite Muslims who place religion above state. The bloodshed is creeping through the entire region. While Western media reports this in political terms, naming nations and political parties in a "search for democracy," what in reality we are seeing is the Christendom's equivalent of Protestantism and Catholicism in the Middle Ages.
China and the Emerging World
On the surface, we are seeing a battle to access oil resources—China has a policy of ignoring the political nature of countries and just trading and investing in whomsoever. China is struggling but succeeding in many countries such as Angola (oil), Russia (oil, etc.) and in many other countries for other resources. The U.S. has to give ground as China emerges.
We’re seeing China rapidly develop a system that can accommodate successfully a global yuan. It has reached the point where the banking system in China does issue the yuan to foreigners, and where swap arrangements for the Use of the yuan in global trade are being issued to more and more countries. Its alliance with the BRIC countries is allowing it to access its needs from parts of the world that can afford to "offend" the U.S. Last week there were discussions on the formation of a bank with a similar role to the World Bank, but exclusively for the emerging world. Within around five years, it is possible that we see a self-sufficient China, with satellites of nations with which it trades in yuan exclusively and who supply its needs on a broad front. These nations have the surpluses, as well as the resources, to be independent of the U.S. politically, economically and financially, and are developing systems to achieve that goal as fast as they can.
But they are short of the gold that will prove a must for them to weather the storms these changes will bring as they are implemented.
The U.S. declared the Persian Gulf states part of its "vital interests;" it would go to full-scale war if these nations were interfered with. And we saw this promise carried out in Iraq and Kuwait and we may see that in Iran. Iran is a particular sticking point. It is the heart of the Shi'ite side of Islam and supports Shi'ites throughout the Muslim world. Originally Persia, until the Shah and his family were taken to Santa Barbara to avoid being killed, the country is very firmly under the control of the Shi'ite side of Islam.
Even today in Syria, this theme is being played out. But it does affect the oil world and price. Iran has long stopped accepting the dollar in payment for oil and removed all dollar holdings from its reserves. This is a thorn in the side of dollar dominance and could threaten it. We would go so far as to describe the Middle Eastern events as a clash of religion against commercialism and U.S. politics. It has the potential to suppurate into a considerably deeper crisis that affects the lives of all humans who use oil in their daily lives.
While we have been reassured by the U.S. government that Iranian oil supplies can be blocked without causing the oil price to rise, the U.S. state department has stated that it is uncertain of how great this control is. If wrong, we could see a $150/barrel oil price or higher. That would be the trigger to cause considerable worldwide unrest in so many quarters. The fanaticism of religion in the Muslim world is such that financial and economic penalties are simply tribulations to be endured to have an acceptable relationship with their god. Hence, the U.S. has little to offer them in the hope of restraining them. All the U.S. can do is what they are doing now, which is to wage financial and economic war on the Shi'ites as unobtrusively as possible.
(The next part of the series will look at the return of gold to both future parts of the global monetary system, and at the gold standard.)
Julian Phillips, The Gold Forecaster
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