Monday, August 8, 2011

Gold alone will glitter when fiat currencies collapse

Yesterday and today the business news papers , including the electronic media are filled with sensational news that credit rating of U.S.A has been downsized from AAA+ to AA+, indicating that the policy of the American president is less stable and less predictable with regard to the management and containment of spiraling U.S debt . Depending upon the vested interest- the pro and anti U.S. attitudes, editorials and the articles will be written either to subscribe to the news of rating agencies or attacking them as the prime villain of the piece. Being one of the serious and sincere students of international finance and breathing the nature and intensity of the Dollar crisis for more than four decades I feel vindicated that the world economy has started testing the U.S turbulent economic waters. It is my misfortune that I could not write more in the recent times although I articulated more about the ailment of Dollar in 2003 itself.

At this moment I would like to recollect the conversation that I had in a more relaxed atmosphere with my Professor, Bokil . at IFMR in the early 80’s. Ina lighter vein he asked me whether we could suggest to write off the U.S debt. That was a period when many poor Latin American countries were suffering from debt problems. I told him that the U.S being a major key currency country under floating exchange rate must generate more export revenue through the depreciation of the Dollar and also it should manage its budget well. U.S. could not be treated as a third world country. In the last three decades the U.S debt problem has intensified to an unsustainable level. Huge amount of current deficit mirrors the image of current account surplus in Asia. By treating U.S as a safe haven, both the governments and international investors had given an undue respect to the Dollar, which it does not deserve. Gone are the days when the U.S could seduce and fool the world economy by selling treasuries at ridiculously low interest rate. I have articulated this view point in many articles in Business Line way back in 2003.

At long last I am happy that U.S will be made to behave as a normal economy in a distant future. Neither the U.S economy not the Dollar will die quickly. Now, the countdown has begun for the U.S to put its fiscal house in proper order. Regardless of any kind of supportive arguments for the U.S and against credit rating agencies, one thing is sure enough, U.S cannot continue to travel on the road accustomed to it. It has to now travel on the road less travelled by. That alone can make a difference in future. All over the world, countries suffer under the weight of the debt. The confidence on the fiat currency has been fully shaken. Everything is reflected in one single yellow metal, which is not money now but only a commodity, but having the capacity to derail all the monies under the Sun .

The present is tense, future is uncertain and Dollar and other weak currencies are really thrown in to vortex of unknown. Even God cannot save this flat world, dominated and frustrated by fiscal irresponsibility on the part of many government and rampant corruption, making all the inroads in to the vitals of the system effortlessly. Criminality and venality in the corporate sector, combined with crisis of leadership in many Asian countries will compound the crisis. Excepting the oil, (black gold and the yellow metal, the super commodity called gold there is nothing in the system today which can put any effective control. Many countries will be tempted to inflate away the debt by printing money. If that happens that will be the greatest disaster far worse than any nuclear catastrophe or God’s tsunami. Rating down the U.S is just a beginning in a series of humiliation and economic confusion that are going to follow close on the heels of a series of Dollar crisis which are going to visit at discrete time interval.

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