QEII unintended consequences, unseating the dollar and GOLD speculation

Well experts across the pond think that the U.S. markets have already largely priced in at least $500 billion in new money courtesy of QEII expected in just a few days.

Which means if there less than the anticipated amount or, Mammon forbid, the whole thing is put off till December, then we can expect some regurgitation on the stock market.  If, however, all goes as paid, sorry planned, then we can look forward to the intended, and much more entertaining, unintended consequences of flooding the world with free Greenbacks.

Personally I think it will go ahead and on time because there is not much other money around to play with.  The fact to be faced in the States is that the only way the government is going to keep money moving is if it does it itself.  The banks, there as here, are still not really lending domestically.  The U.S. consumer though saving less and less is not actually buying that much either.  I can’t help but suspect that increased consumer spending has less to do with a ‘recovery in spending’ and more to do with inflation.

Which of course will be one of the consequences of QEII.  Oil is already up and forcing the dollar down will make it go up even more (in dollar terms at least).  For an economy dependant on oil that should be interesting.  Americans will not enjoy a hike in the cost of petrol, diesel and heating oil.

The new dollars will also be an unwelcome Christmas present for emerging economies.  Brazil won’t be pleased. Neither will S.Korea, India S. Africa and a whole host of other places where those dollars will be sent to sniff out anything that can be turned into a speculative bubble.  QEII will be another step toward a disorderly break up of whatever was left of G20 cooperation and coordination.  I think the Fed knows this and no longer cares.  Once other countries become clear that the Fed, despite talk of cooperation, has in fact opted for a ‘me first you last’ policy, then we should start to see more retaliatory measures.

Which brings me to a little bit of scurrilous speculation.  Various countries have been buying gold.  Russia, China, India have all bought a lot.  China has been talking about buying but has not been seen buying and some have taken this to mean China isn’t keen on Gold.  The fact is China produces 12% of the world’s gold and ‘buys’ a lot of what it produces. So even if we don’t see them buying, they are still accumulating.

Which brings me to my speculation.  The list of countries accumulating gold is similar to the list of countries that were reported to be talking about the need for a new reserve currency to replace the dollar. It was reported that perhaps the new IMF quasi currency, the Special Drawing Rights, SDRs , might serve as global and reserve currency.

I personally think this is the usual sort of ‘brain in small echo filled box’ that describes most Western elite thinking.  They think of what they would like, and imagine they heard it somewhere.

What the hell would China want with a global currency being run by another Bretton Woods quango based in Washington DC?  They are better off with the dollar which at least they can apply significant pressure to whenever they feel the need via their dollar debt holdings.

No.  I wonder if those who are seriously thinking of trying to unseat the dollar and create a currency which is backed by something other than debt and is not under the control of America’s corrupt banks and even more corrupt government, are investing in gold as a precursor to making a real bid for a new currency.

If you want to create a new and attractive currency you could do worse than back it with gold.  Of course the western banks would hate it.  They need the dollar as a limitless and fully controlled  fire hydrant of free money.  But, the emerging economies might love such a gold backed currency.  They might see it as a way of beginning to close the flood gates of destructive dollar printing.

If several big economies had the gold, put it in a new repository and said this is the backing for a new and hard currency you can trust – it would give them immense new standing, would send shock waves through America and to a lesser extend Europe and would redraw international relations over night.

Imagine Iran, Russia and China all behind a new gold backed currency.  They would set themselves as a major new alliance. An attack on Iran would suddenly become an attack on the global economy. China and Russia would create ties which strengthened them without interfering in their right to be bad tempered with each other in all other spheres.  I see it as offering them all something valuable.

lastly I think Europe would in the end see major advantages for them too.

Result – isolation for America and a sudden diminution of her pre-eminence in controlling global currencies and of her ability to finance her own debt.

As I said its pure speculation.

24 Responses to QEII unintended consequences, unseating the dollar and GOLD speculation

  1. Unclear November 1, 2010 at 4:47 pm #

    Some contextual stuff that may be of interest.

  2. DopeAddict November 1, 2010 at 6:11 pm #

    A new reserve currency doesn't need to be backed by gold. It just needs to be backed by the confidence of the countries using it. Backing it with gold merely puts unnecessary restrictions on it. The whole reason they don't want the dollar as the reserve currency is that it's a finite resource since they don't control it.

    Backing a new one with gold would be the same thing in different form. They wouldn't be in control of it's value, but rather subject to the floating price of gold. Without a central bank to control it, they wouldn't be able to fiddle with its value like the US can with QE2 or whatever mechanism.

    Right now these countries are subject to the floating price of dollars, so I don't see how this would be different. However, I don't fully understand this issue, so am not claiming to be an expert.

  3. DopeAddict November 1, 2010 at 6:13 pm #

    Oh, and what's to stop the US from rolling out the gold bars from Ft. Knox & flooding the world market with gold to depress its value? I am really talking out of my arse today.

  4. Golem XIV - Thoughts November 1, 2010 at 7:09 pm #

    I agree they don't have to have gold to back a new reserve currency. They could just print one up. Question is would anyone else want or trust it? What would it offer the dollar does not? This has been the Euro's problem. Which it is now beginning to get past.

    A currency backed by gold, however, might be attracttive precisely because it would be resttricted. The idea of a gold backed currency would be to set a relationship between the value of the currency and the gold. You could set a weight relationship or a gold taded value. They would do different things. But either way you could assure those holding your new currency about how much of your new reserve currency was in the world. The idea would be to offer a currency not debaseable in the unlimited way the dollar is being devalued.

    Those countries could still retain their own currencies if they wanted to. They would then use their local currency and the new reserve just as the currently use both their local and the dollar.

    As the link unclear posted talks about one could also use oil. The start of the Iraq war was coincident with Iraq deciding to settle, or at least say it might start to settle its oil in euros. At the time many of us remarked at the coincidence. Only to be told we were conspiracy nutters.

    Maybe we were maybe we weren't. One thing I stick to and agree with the article about. There is little love lost between certain elements within Europe, especially elements inside France and Germany, and the U.S.A.

  5. Ben Gabel November 1, 2010 at 8:36 pm #

    what happened to part 3 of The Gathering Storm?

  6. Golem XIV - Thoughts November 1, 2010 at 9:12 pm #

    Good question.

    The honest answer is with the recent filming it simply went from my mind. It may sound fatuous or precious but the filming made me very anxious because of what it required me to think and talk about.

    I will get it written now. It's not going to be any sort of greand revelation though. Just a last thought to put a ful stop at the end of the thoughts in the first two.

    Sorry for the delay.

    Quick UPDATE ON TALKS: -

    It now seems I will be giving two talks in Lancaster and another in Leeds. There is also a chance of a talk being arranged in Edinburgh. If any of you would be interested in that one please let me know.

  7. 24K November 1, 2010 at 9:27 pm #

    Have you guys seen this http://www.youtube.com/watch?v=kQhhrzHKMhI Robert Newman History of oil.

    I tried to hyperlink it but failed. I apologise for my stupidity

  8. mebumu November 1, 2010 at 9:33 pm #

    Hi Golem

    Could you give us a clue about the content of your current filming? I know you can't be specific due to various reasons. My guess is you are doing a BBC documentary on your book!

    I love all your documentaries and continue to enjoy your excellent work here and also your blogging on the Guardian

  9. Golem XIV - Thoughts November 1, 2010 at 9:44 pm #

    Hello mebumu.

    How I wish. Sadly I am not making a documentary on the book. Perhaps if the book became at all popular…

    No, the documentary is about waves – ordinary waves on the sea, which I have tried to expand to also be about seeing the world in terms of process rather than objects, about ourselves as process and finally about mortality. It is the last link in that argument which became personally difficult for me this last year.

    I am glad you like some of my films. Turns out I am giving a lecture on film making in Bradford at the museum December 8th. If you can make it we could say hello.

    Otherwise thank you for reading and for commenting.

  10. mebumu November 1, 2010 at 10:12 pm #

    Hi Golem

    Thanks for the quick response. Hope I did not hit a raw nerve, it was not my intention to cause any offence. I hope whatever you are going through at the moment resolves itself and wish you all the best for the future

  11. Golem XIV - Thoughts November 1, 2010 at 10:20 pm #

    Absolutely no offence taken

  12. PETER November 2, 2010 at 1:17 pm #

    'Result – isolation for America and a sudden diminution of her pre-eminence in controlling global currencies and of her ability to finance her own debt.'

    … a delicious prospect, but I just can't see the US taking it lying down. I do know that Legarde has been in discussions with the Chinese, behind closed doors, about an alternative reserve currency.

  13. Golem XIV - Thoughts November 2, 2010 at 1:30 pm #

    No absolutely they will not take it lying down.

    As I alluded to, there is an argument to say that the Iraq war was in part prosecuted because Iraq was going to switch to selling its oil in euros. That fact was certainly why France in particular and Germany to a slightly lesser extent were so keen on diplomatic dialogue with Iraq and why they would not back the various UN resolutions the U.S. kept coming up with.

    It is also certainly part of the acidic nature of the Bush Administration's response to France. National pride, the status fo the dollar as reserve currency and the personal enmity of Cheney at Halliburton.

    Europe wants the euro to take away the dollar's pre-eminence. Others have their own agendas. The US has been playing too big to fail with its sovereign debt for a decade and more. They invented the idea before Wall Street.

    The politics of this are getting serious. And after the Fed announces QEII, Wall Street rockets and the money starts to move off-shore to emerging markets it will get even more serious and urgent.

    Fun times.

  14. Trying to make November 3, 2010 at 4:25 pm #

    Let us not forget Iran proposed (or enacted?) that its oil exchange would trade in Euros. Now it’s firmly in the cross hairs. But now Russia and China have signed a energy deal [1] and rumour is that it will not be priced in USD. Since Russia is one of the biggest suppliers of Oil [2] and a huge supplier of natural gas this is very significant.

    DopeAddict you want a finite reserve because when you inflate the paper bills that represent the reserve, inflation becomes immediately apparent and people can trade the paper bills for the reserve if there is a loss of confidence.

    Add in the feature of the bills being exchangeable into the finite reserve (as was the case in the U.S. for individuals in the 1900s and for Countries post WW2 as part of the Brettan Woods agreement) and you have a check on the system’s ability to QE or inflate its currency. Which is a good thing as this is a necessary precursor for war (America fully came off the gold standard in 1971 to turn on the printing presses to finance the Vietnam war). In fact steps towards a local alternate precious metal based currency have been taken in Idaho [3], Michigan [4] and Kelantan, Malaysia [5] as well as online [6].

    But you are right there isn’t enough gold, at the current price, to supplant fiat but it is suggested that a dual gold/silver reserve would be sufficient if these metals were priced taking inflation into account. Especially if you cut all the fictitious derivative crud out of the system 1st.

    The gold bars in Fort Knox is an interesting one. Fort Knox has never been independently audited there is real concern that it’s not all there. However the flood of gold that could be unleashed is a trickle compared to the tidal wave of paper/digital money/stocks that could come the other way. In an interesting twist it’s recently been suggested that the US could go back onto the gold standard by appropriating the major gold holdings on US soil, including the German central bank stock [sorry can’t source the link right for this right now], and this is a backstop to the collapse of their fiat world reserve currency.

    But ultimately Dope Addict you are right it doesn’t have to be backed by gold. The State owned Bank of North Dakota [7] demonstrates with its States’ relative solvency, compared to other US states, that all you really need is localised control of money. Beyond that as Golum said it is a matter of confidence.

    [1] http://www.chinadaily.com.cn/china/2010-09/28/content_11355858.htm
    [2] http://www.bloggingstocks.com/2009/09/08/russia-beats-saudia-arabia-to-become-the-worlds-biggest-oil-exp/
    [3] http://www.youtube.com/watch?v=1sI01CwhLEk
    [4] http://globaleconomicanalysis.blogspot.com/2010/07/ron-paul-silver-ounces-accepted-at.html
    [5] http://blogs.ft.com/beyond-brics/2010/08/13/malaysia-looks-to-ancient-alternative-currency-gold/
    [6] http://goldmoney.com
    [7] http://www.banknd.nd.gov/

  15. Bob2000 November 3, 2010 at 5:20 pm #

    Confused from Cambridge writes…

    As I see it, the initial thrust of your article is that QE dollars are effectively being used to pay offshore investors the interest (or principal) on their dollar-denominated assets. Those investors are therefore holding dollar bills.

    Maybe this is the intention of QE?

    The more that the USA can tie in the rest of the world to its currency, the more likely it is that the USA can renegotiate the terms of that debt. ("We're a country that's too big to fail")

    You speculated previously that central banks are buying each others debt which suggests to me that any sudden decimation of the dollar will leave the other major economies looking shaky also.

    Shouldn't we be looking for evidence that central banks are off-loading American debt holdings as evidence that the dollar's days are numbered? Why are they still buying if they're planning a new reserve currency? Why are their economies still selling to the USA if they're being paid with worthless paper?

  16. Golem XIV - Thoughts November 3, 2010 at 7:26 pm #

    Bob2000,

    Yes, that's what I'm arguing. The banks have debts they need to pay and without cash flow of their own they need ours. That is, in part, what QE is about.

    And I think the USA is playing too big to fail with its own debt and currency.

    And yes I do think the central banks have been buying each other's debt. Which does mean they are all holding dollar debt. This would indeed get crushed if the dollar were to take a dive. And this is worrying them. But up till now I don't think they had much choice. They all needed to sell debt and needed a ready buyer. I think they provided that for each other which also meant no actual money changed hands. They all colluded in an accounting trick. I hold your debt as capital and you hold mine. We all sold our debt and are all richer to boot.

    Now however they may not be feeling so clever.

    None of them can afford to start selling and be seen to sell dollar debt. If they did, and caused a dolar debt sell off, they would all be the losers because what they had not sold would then be worth a lot less.

    The trick is how to get rid of dollar debt without being obvious about it. The best way is to sell long dated debt and buy short term debt in its place. Total change in your dollar holdings – nil. But you can now start to quietly buy less going forward. Which means as the shorter term debt matures you simply don't replace it. You're not selling any debt. But you will end up holding less and less.

    I think you'll find the Fed buying up more and more long dated debt to mop up excess on the market.

    They are buying dollar debt because what else is there until a new stronger currency comes along? Today, if they don't buy dollar debt they have to buy euro or swiss or ???

    And euro and swiss debt is being bought.

    I think what you are noticing is that their actions seem to suggest a change in strategy. And I think this is what has happened. They were all persuing one strategy with the idea that it would all work and fairly quickly as per the 'it's all under control and will be over by christmas.' I think they believed it might be and acted accordingly. Now it is opbvious they were wrong and they are having to change course. Sadly for them, they now have different needs and agendas and are finding they are cutting across each other. So the change is accrimonious and disorderly. And may end in serious confrontations.

    Hence I keep saying it is now political and nasty.

    They are caught between, on the one hand, what they must do given the way the world still is – America powerful and a large though collapsing market, and on the other, the way it might evolve and the way they might like to push it – America and the dollar now a player among equals.

    A large part of QE is America trying to keep its place as the pre-eminent strong economy going by the goverment trying to replace private American spending. If you closed your eyes you might still think America was a strong economy. It is spending, dollars are flowing and the value of its big companies and stock markets are rising.

    As long as everyone keeps accepting the dollars then America is still a strong economy – THE strong economy. If the dollars stop moving – because of no government stimulus – or people stop accepting them – either one, and its game over for America as a global power.

  17. Bob2000 November 4, 2010 at 9:49 pm #

    Thank you for your detailed reply, Golem.

    It would seem disadvantageous for any economy to hold large cash reserves. Money is being created to pay off speculators who just look for the next bubble. The value of money should be falling sharply.

    Having said that, I'm a bit surprised that the oil price hasn't risen more as it would seem an ideal way to use up risky dollars on something tangible. Maybe there is some unholy equilibrium between the QE money coming into the financial system and the amount of worthless debt falling due for repayment.

    On the political side, it's difficult to speculate with any confidence on the imperatives driving the various currency blocs. Are secret alliances being created or is it simply 'every man for himself'?

    I'm just hoping that the resolution doesn't involve bombs.

  18. Fuck The Government November 9, 2010 at 5:52 pm #

    Hello Mr XIV.

    Admit it, you're a little bit "libertarian curious", aren't you? ;)

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