As you undoubtedly know, in the two weeks since President Bush signed into law the "bailout bill" designed to take at least some of the toxic debt off the books of the US banking system, a global chorus has slowly swelled. At first, it was merely a "suggestion" that the G-8 Heads of State (plus others) should get together to "discuss" the global financial crisis. But over this past week in particular, the focus has narrowed.
Several global leaders, notably the French, British, Italian, Japanese, Chinese and Canadian Heads of State (and others), are calling for what amounts to a meeting to craft a "new" Bretton Woods agreement. Bretton Woods was, of course, the meeting which took place in 1944 and designed the post-war global monetary system with the US Dollar (redeemable in Gold by foreign governments and central banks at $US 35 per ounce) as the "reserve" currency.
As this is being written, President Sarkozy of France is in the US to meet with President Bush with just such a meeting firmly on the agenda. Mr Bush has already made known his willingess to participate in such a meeting before the year is out, but he has carefully avoided any mention of another "Bretton Woods". The reason for this is clear, of course, the US economy would never survive the dethroning of the US Dollar as the world's reserve currency.
Here is a quote which is typical of what is now being said:
"Perhaps what we need is to go back to the first Bretton Woods, to go back to discipline. It's absolutely clear that the financial markets need discipline: macroeconomic discipline, monetary discipline, market discipline"
ECB chief Jean Claude Trichet - speech to the Economic Club of New York on October 14.
Please note Mr Trichet's use of the phrase - "the first Bretton Woods" (emphasis by The Privateer). The "first" post Bretton Woods era - 1944 to 1971 - was the era of fixed exchange rates between currencies brought about by the simple fact that the "reserve currency, the US Dollar, was still redeemable in Gold. The "second" post Bretton Woods era - 1971 to date - has been the era of fiat floating currencies with no tie to anything at all but still supposedly buttressed and underpinned by a "reserve" US Dollar. Mr Trichet is well aware of this, he did not choose the term "first Bretton Woods" by accident.
In his speech, Mr Trichet went on to say this:
"The explosion of the first Bretton Woods in a way could be interpreted as a rejection of discipline."
Indeed it could, and it is about time somebody in a position of monetary "authority" stood up and said so. In 1971 the US had three choices:
In case anybody reading this does not know which choice the US made, on August 15, 1971, President Nixon declared to the world that nobody anywere could redeem their US Dollars for Gold. He "closed the Gold window" and by doing so, threw all "discipline" to the four winds. The US began it, the rest of the world was not slow to follow. Within 18 months, the first Bretton Woods era of fixed exchange rates was over.
Today, the US faces a choice again, made inevitable by what Mr Nixon did in 1971. The problem is that it cannot revalue the US Dollar against Gold since the US Dollar has no official tie to Gold. And it has no "Gold window" to close. That leaves only the first choice (minus the $US 35 redeemability aspect). This choice is eventually certain to be forced on Washington DC by default since there is next to no chance that ANY future Administration will do it voluntarily.
What Mr Trichet and all the other world leaders (and most financial, economic and monetary analysts) are not YET making clear is a simple fact. The world CANNOT go back to the "first" Bretton Woods (let alone a more rational system) unless and until Gold is once again officially recognized as a global form of MONEY. Nobody has said that yet. Inevitably, somebody in a position of influence eventually will. It will be interesting to see who it is.
Gold had another "bad" week this week as the continuing rush of margin calls and liquidation led to yet another rush to raise some "cash" from somewhere. Even if this were not the case, it is a very safe bet that all efforts will be made to control the Gold "price" in $US terms until two events have run their course. The first is the US Presidential elections on November 4. The second is any global "Bretton Woods Mark III" meeting, which will almost certainly not take place until AFTER November 4. Should it do so, then there will in effect be two US "Heads of State" there. One will be the lame duck Mr Bush. The other will be the new President-elect - likely to be Mr Obama.
Looking at Gold in a bigger context, however, it has done very well indeed given the deflationary carnage on the paper markets. As recently as last Wednesday (October 15), Gold was right at the level at which it began 2008, despite a US Dollar which had risen nearly 8 percent on a "trade-weighted" basis. Compare that to almost any other commodity or paper asset in the world.
And while you are comparing, have a look at the two tables below. They show the relative performances of $US Gold and the Dow during the "second" Bretton Woods era - the fiat floating currency era of 1971 to date. Please note in particular the relative performances over the two decade period 1980-2000, the two decades during which the world became convinced that a fiat currency world could "work". Then compare the era since 2000, when the doubts which are now in the process of sinking the system began to grow.
And finally, note the relative performances over the ENTIRE period of the "second Bretton Woods" - the one since 1971 and the repudiation of Gold as MONEY.
|
| ||||||||||||||||||||||||
And here are the charts of the Dow and $US Gold since the "first" Bretton Woods ended.
We began the table below in 2007 and have extended it into 2008, even though Gold in all four currencies in the table remain well above their 2006 highs. Gold breaking out to new all time highs in $US terms at the end of January led to bull market highs in all four currencies. And as you can see, in March, Gold improved upon those January levels in all four currencies as spot future Gold closed above the $US 1000 level for the first time ever in the middle of March.
In mid (northern) summer, we had a new entry on the table for the first time since Gold topped the $US 1000 level in March. On July 17, Gold rose to 103233 Yen. That was a new 2008 high for the metal in terms of the Japanese currency. Then the Fannie/Freddie bailout plan went to work. Last week. on October 8, with the announcement of co-ordinated interest rate cuts by SIX major world central banks (including the Fed), Gold hit new all time highs in terms of the Australian Dollar, the Euro and many other major world currencies.
| |||||||||||||||||||||||||||||||||||||||||||||||||
