Sunday, September 2, 2018

America's dirty little secret about the dollar could actually be the catalyst for emerging markets returning to a gold standard

As emerging markets like Turkey, Venezuela, Brazil, and Argentina continue to implode through their declining currencies and dollar denominated debt, the U.S. continues to play dumb on who is exactly at fault for their monetary chaos.  And this is because America refuses to admit that nearly all the problems right now taking place are due to the actions taken from their central bank, and in the dollar continuing to be the world's sole reserve currency.

When gold was the global standard for money, its value remained constant and any fault emerging within a particular nation's currency could always be put squarely on that nation itself.  But ever since the gold standard was ditched back in the early 1970's, all currencies began to balance themselves against the dollar, which has rarely held itself to a constant value over these past 45 years.


It is ironic that Presidents, including Donald Trump, love to decry China as being a currency manipulator.  But China and nearly all others who peg their currencies to the dollar are simply guilty of adjusting their currencies in response to when the Fed raises or lowers interest rates, or when the Legislative and Executive branches institute new fiscal policies on the dollar.

If you control the global reserve standard, you can't be surprised or offended when other nations take appropriate steps to protect their own currencies each time you change the value of that reserve.

However like the havoc that the dollar and the Fed instigated on many currencies around the world following the 2008 Financial Crisis, so too are these same catalysts at the heart of today's emerging market turmoil.

Graph showing the how the Fed's QE programs directly led to the Arab Spring riots


The issue today besetting the emerging markets comes from Western banks willingness to lend tens of trillions of dollars to these markets during the time of the Great Recession when banks were unwilling to invest in their own economies.  And since these loans were made with extraordinarily cheap dollars thanks to interest rates being at near zero, borrowers had only to rely upon central banks keeping these rates low since the debt would eventually need be repaid upon maturity in dollars versus their own currency.

But as we know since late 2015, the Fed has not kept interest rates low and instead has begun a combined policy of higher rates and quantitative tightening.  And that is the crux of today's emerging market chaos... because as the dollar has gotten stronger, and emerging market currencies have gotten weaker, few of them can afford to pay back their debts and thus the Arab Spring scenario has now exploded into a global phenomenon.

So what remains then for the emerging markets is this... what is the solution if you can't 'fight city hall' (the dollar and the Fed)?

The answer more and more appears to be to leave the game entirely, and bring back a reserve currency that doesn't fluctuate from the whims of governments and central banks.

And that reserve currency is gold.
Independent analysts from Russia and Turkey to Brazil and Iran largely agree that the overwhelming factor in the current currency crisis is a reversing of the US Federal Reserve quantitative easing (QE) policy. 
As investment banker and risk manager Jim Rickards noted, QE for all practical purposes represented the Fed declaring a currency war against the whole planet – printing US dollars at will on a trillion-dollar scale. That meant mounting US debt was devalued so foreign creditors were paid back with cheaper US dollars. 
Now, the Fed has dramatically reversed course and is all-out invested in quantitative tightening (QT). 
No more liquid dollars flooding emerging markets such as Turkey, Brazil, Argentina, Indonesia or India. US interest rates are up. The Fed stopped buying new bonds. The US Treasury is issuing new bond debt. Thus QT, combined with a global, targeted trade war against major emerging markets, spells out the new normal: the weaponization of the US dollar
It’s no wonder that Russia, China, Turkey, Iran – nearly every major regional player invested in Eurasia integration – is buying gold with the aim of progressively getting out of US dollar hegemony. As JP Morgan himself coined it over a century ago, “Gold is money. All else is credit.” 
Every currency war though is not about gold; it’s about the US dollar. Yet the US dollar now is like an inscrutable visitor from outer space, dependent on massive leverage; a galaxy of dodgy derivatives; the QE printing scheme; and gold not being awarded its true importance. – A Times
As T.H. White once penned in a title, gold is indeed The Once and Future King of money and finance.

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