More Rope to Hang the Dollar?

By: Alex Wallenwein | Tue, Aug 19, 2003
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First of all, lets get one thing out of the way:

For many Americans, the dollar has become a national symbol for US economic power, ability, ingenuity, technological advancement, and the blessings of capitalism and free enterprise. We see the dollar's success around the world and its strength as a currency as a just outgrowth of our capitalist free market system, and as vindication of its principles and methods.

Unfortunately, this is about as far from the truth as could be. Although these things could all be said to be true about the "old" dollar (pre-1971, and especially pre-1933), at least to a certain degree, the "new and improved" fiat version of the dollar has only two things in common with the original: the fact that it is the official currency of the same country - and its name.

Our new, purely fiat, paper-dollar is about as "American" as the communist-founded United Nations, FDR's socialist policies and statist strangulations of the US Constitution, the "Federal" Reserve system, and the very concept of redistribution of private property through an "income tax" - which comes straight out of Karl Marx' playbook, by the way.

In fact, the pure paper dollar (a) centralized all the levers of money creation (and thereby inflation) in the hands of the government and/or the bankers, not the market, (b) allowed those same forces to rob Americans of the fruits of their labor through that very same inflation, and (c) allowed the government/banking elite to "paper over" almost any and all policy mistakes and abuses through that very same process: inflation (in the sense of unchecked money creation).

Now that we've got that settled, the question of whether arranging your personal affairs so that you can not only insulate yourself, but even benefit from the coming inevitable US fiat currency collapse would be somehow "unpatriotic" becomes far less of a real issue. It actually turns out to be a diversion to keep people focused on the wrong thing: unfounded feelings (emotions) of misguided patriotism versus actually thinking through and making sound decisions about their personal pocketbook (i.e., what asset to save their wealth in). Not coincidentally, it is the latter behavior that will help the US come out of its coming currency meltdown on a much more solid footing than otherwise.

Anyway, and to get back to the actual subject of this essay, many today believe that the European central banks' continued gold leasing is evidence that the Washington Agreement has no or little significance to the gold world. They say this because continued leasing appears to violate the spirit of the WA, which is to curtail world gold sales to support higher prices in the future. Tack onto that the recent rumor started by an unnamed ECB or member bank official leaking to the Financial Times that the renewal of the WA will be at a higher annual gold sales limit of 500 tons per year, and you have some reason to support that conclusion.

Particularly the German Bundesbank could be accused of continuing to do what central banks in general like to do: to bash gold. And since Germany is such a heavyweight among the Europeans, it is presumed that what the Germans do represents much of what the rest of the European CBs are really up to.

But, is that so?

Assume for a moment that you are "the Euro-Zone," and you want to establish your brand new designer-currency as the new model for currencies the world over, and eventually create enough depth and width to qualify for the status of a world trading medium, especially one that is fit to replace the dollar.

So here you are: you just barely came out of the starter-box with your currency launch. The computer blip and accounting part of it was successfully launched, but you don't even have hard cold cash circulating yet. It is 1999. Are you going to go "toe to toe" with the US, the economic giant of all ages, while it is at the height of an almost twenty-year boom, with the most powerful military force to back it up that has ever existed in the history of mankind?

I don't think so. If your goal is to eventually supplant the "almighty dollar," you are going to go real nice and slow, and accommodate the dollar faction at every turn possible, so as not to offend the elephant you are sharing your bed with, and keep him from turning over suddenly, burying you and all that is yours.

You also don't want to cause such economic havoc in the world that the world which your new currency may (or may not, at this point) take over one day would be only a mere shadow of its former self after all of the upheavals you have caused.

No, that would not be the way, would it? But what would you do instead? How would you handle this?

You would first of all ascertain the survivability of your opponent is at his current stage of being. You would ascertain that stage of being is: is he "over the hill" yet, or is he merely approaching that stage? If he is not quite over the top yet, you want to do everything you can to nudge him along, to help him over there - lest he might loose steam and fall back onto YOU instead, taking you with him in his uncontrolled descent down the wrong side of the hill. You know that, once he is "ever the hill" and you stay on this side of the summit, his accelerated self-destruction will at least not happen on top of your own head.

If you are engaged in a tug-of-war, and you know your opponent is about to get tangled up in the rope and hang himself, what do you do? You give him just enough rope to make sure he succeeds.

All right. Enough with the metaphors and similes. What are we actually talking about here?

We are talking about the US dollar's "value engine," or at least its value "bulwark," the structural mechanism by which the US maintains (or seeks to maintain) its dollar-supremacy. And that engine, that bulwark, happens to be comprised of the US controlled and initiated paper-gold markets in New York (COMEX), and London (LBMA), for the purpose of managing the dollar price of gold..

These markets are where the world's gold derivatives are created. I have posted a few essays that touched on the subject already, so we'll just re-draw some of the outlines in this essay. (Besides, everybody on Gold-Eagle knows this stuff forward and backwards, anyway.)

Paper gold is how the price of gold is controlled. Paper gold creates artificial volume that is traded as if it was physical gold, and through the resulting artificial supply creates a price illusion that the entire world was trained, in almost Pavlovian fashion, to regard and accept as "the" price of gold. The price is artificially depressed by literally using derivatives to "inflate" the apparent availability of gold.

Unlike the dollar inflation over the decades since 1971 (which found unprecedented world-wide demand in the practicality of fiat-use in international and domestic commerce, as well as in the structural currency reserve demand), paper-gold inflation does not have the same advantage. This is so especially because (also unlike the dollar) is in fact at least presumptively backed by physical gold, which is indeed very rare -- despite all the BS coming out of the mainstream media.. So in the paper gold market, the threat of people (and central banks) lining up "at the counter" to demand their physical gold is at least an actual possibility, if not (yet) a reality.

For that reason, paper gold inflation is much more likely to reach its physical limits than fiat-dollar inflation which - at least until the creation of its competitor, the euro - could bank on virtually unlimited demand (and international support) to keep it from pushing up prices at home in the US.

So, ...

... you as the Euro-Zone now figure: hey, why not pump more air into that old fiat dollar-balloon? In fact, why not pump so much air into it that its physical limits are exceeded and cause it to bust? Why not, especially when that is exactly what the US dollar system appears to require of all former participants - more gold, more "support"?

This way, the ultimate "Judo-trick" is being pulled on the US: Give the dollar faction exactly what it wants, but so much of it that its balance is upset and it ends up tripping all over itself. That way, that big elephant in your bed could never complain that you were being "hostile" to it and start to turn over on you - at least not until it's too late.

So, what's required to hyper-inflate the paper gold market? More loaned central bank gold, and what's more, more posturing and public statements of an (at least apparent) willingness to sell or lend even more gold. And that's exactly what "Herr Welteke" did when he kept blabbing his "intentions" to sell more and more gold, and that's what the German "BuBa" (Bundesbank) did when it engaged in the gold swaps so ably documented by GATA. The result? More rope ...

In short, if Euro policy can achieve both (a) its aim of helping the paper-gold system self-destruct, and (b) a smoooth transition from a dollar-only to a shared world reserve system, leading to an eventual total eclipse of the dollar's world reserve function, then why not sell just a little bit more gold, loan just a little bit more gold, talk gold down just a little bit more, just to keep the gold price from blowing the lid off in an uncontrolled fashion? Considering the benefits, the "price" to be paid (in lost physical) is very cheap, indeed - and will be made up more than ten times over when the real physical gold valuation outside any (US or otherwise controlled) paper-gold markets comes.

In future generations, this well thought-out operation might very well become known as the "European rope trick."


 

Author: Alex Wallenwein

Alex Wallenwein
Editor, Publisher
The Euro vs Dollar Monitor

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