I remember sitting at a railroad crossing in a school bus in 1962 wondering if the world was coming to an end over missiles in Cuba, as close to US borders as it gets. And now we watch in horror as another crisis unfolds in Ukraine, as close to Russia’s border as it gets. Somehow I do not think we are staring a nuclear holocaust in the face. But I do think that a full scale economic war could erupt and the equivalent of economic nuclear war could waged against the dollar.
The dollar as we know it is on a 70 year run. Bretton Woods established the US dollar as the Reserve Currency, backed by gold and by the most productive economy in the world untouched by the ravages of war. For 70 years our friends and our enemies have needed to hold dollars for the purposes of trade. This means that we could and did create new dollars out of thin air and have them soaked up by central banks everywhere and not have them come back to haunt us, effectively subsidizing our rapidly rising standard of living. This system was reinforced by the creation of Petro-dollars. The only way to buy oil was with dollars. Another shot in the arm to our economy. The party was on now, in full swing.
In 1971 the French and the Swiss said wait a minute, this is going too far and started redeeming dollars for gold. We faced a choice. Tighten our belts or renege. We did not tighten our belts. Nixon took us off the gold standard. Now all we had backing the dollar was a nuclear shield. The Soviets could not keep pace with our world subsidized economy and the end was in sight when they resorted to shipping gold to pay their bills (unlike dollars central banks were not required to take Rubles). The Soviet Union fell apart within six months of their shipping gold with Czarist stampings on it. They had reached the bottom of the barrel.
Speaking of the bottom of the barrel. Last year Germany asked for 300 tons to be returned (20% of the total 1500 tons) of their gold being stored here (to be more secure in the cold war?). We agreed to comply but said we needed 7 years to do it. 7 years? We started with 5 tons that had to be recast in Switzerland. That’s all we could muster in a year. But in one month alone, January of 2014, we exported 80 tons of gold. To where? 57 tons of it went to Hong Kong. China must be saying, "you keep sending us gold and we will not pull the plug on the dollar." And they also must be saying, “you keep driving the price of gold down so that we can keep stocking up and we will play this game a little longer.” We are producing 20 tons of gold domestically per month.* We last audited our stockpile in the 1950’s. Do the math.
It is commonly accepted that gold, real gold that is, is flowing from the West to the East. The dollar cannot withstand a large gold price rise. And so we have 100 times as much paper gold in the form of contracts and derivatives as there is real gold in the world. JP Morgan is the agent responsible for manipulating this paper gold market to keep the price suppressed, illegally dumping 400 tons of fake gold on the market in 15 minutes on April 15th, 2013, for example. India and China are soaking up most of the real physical gold flow but there are many countries actively buying in the physical gold market. How long can this be sustained? There are reports of US gold fabricated in the 1950's turning up in the market. A sure sign that we are running out of gold to keep the game going. Six months after Czarist gold started appearing… oops, I already said that.
So what does the economic version of the nuclear option look like? Russia says, “You want to buy natural gas to heat Europe? Pay in Rubles please.” China says, “We have US Treasuries for sale, for 50 cents on the dollar. If you have gold to sell, 25 cents on the dollar.” Saudia Arabia says, “We will take Yuan or Rubles for oil. The Petro-dollar system is over.” Every country in the world rushes to liquidate the T-notes they hold in reserve. Quantitative Easing (QE) becomes a joke. The US is exposed. We are printing money out of thin air and not even Belgium steps up to buy the paper. Trade alliances abound. Barter becomes the norm: iron ore for bananas, oil for computers, corn for garments… Bretton Woods is dead. The dollar falls like every fiat currency has in the history of the world. The scam called the Fed, but really a private bank, designed in 1913 to replace pesky gold with fiat paper is revealed to be a Ponzi scheme.
So does that mean Russia and China win? Not really. Like with any “nuclear war” there are no true winners. Everybody suffers from the fallout. China has a debt bubble of its own to contend with. Russia does not have the standing to have the Ruble be the new Reserve Currency. But they will have more chips than the US does when the next version of Bretton Woods is negotiated. And I predict it will not be held at the Mount Washington Hotel in New Hampshire. Hong Kong maybe?
It will be a long hard cold nuclear winter.
*see 2 posts: Fort Knox Is Empty and Rehypothecation And The Shadow Banking System