RE:A decent lay summary...I accepted the suggestion by merlin991 to "
read the following article at least twice". https://www.goldmoney.com/research/goldmoney-insights/the-commodity-currency-revolution
For the convenience of fellow BB posters I summarize the messages that I identified: The arguments in favour of decoupling from the dollar-dominated monetary system have suddenly become compelling.
- The truth behind prices measured in unbacked currencies is demonstrated by the cost of oil priced in gold having declined about 30% since the 1960s. It is only in fiat currencies that prices have soared.
Following the Fed’s monetary policies of March 2020, when it reduced its funds rate to the zero bound and instituted QE at $120bn every month, the signal concerning the dollar’s future debasement was clear and China recognised these dynamics and began to stockpile oil, commodities, and food — just to get rid of dollars.
- This contributed to the rise in dollar commodity prices, which commenced from that moment, despite falling demand due to covid and supply chain problems. Furthermore, the Chinese have been prescient enough to accumulate stocks of grains. The other 80% of the world’s population will almost certainly face acute shortages this year as exports of grain and fertiliser from Ukraine/Russia effectively cease.
It appears that Russia has found a way of tying her currency not to the dollar, but to commodities through gold.
- There is also the problem of gold leases and swaps, vital for providing liquidity in bullion markets, but leads to false counting of reserves. This is because under the IMF’s accounting procedures, leased and swapped gold balances are recorded as if they were still under a central bank’s ownership and control, despite bullion being transferred to another party in unallocated accounts. Countries which have been happy to earn fees and turn gold bullion storage into a profitable activity are at the margin now likely to not renew swap and lease agreements and demand reallocation of bullion into earmarked accounts, which would drain liquidity from bullion markets. A rising gold price will then be bound to ensue.
According to the US Treasury TIC system, foreigners own $33.24 trillion of financial securities and short-term assets including bank deposits. To prevent foreign selling of the $6.97 trillion of short-term securities and cash, interest rates would have to be raised… not just to tackle rising consumer prices.
- Unfortunately, sufficiently high interest rates to encourage short-term money and deposits to stay would destabilise the values of the foreign owned $26.27 trillion in long-term securities — bonds and equities. The dilemma for the Fed is made more acute by sanctions against Russia exposing the weakness of the dollar’s position. The fall in its purchasing power is magnified by soaring dollar prices for commodities, and the rise in consumer prices will be greater and sooner as a result.
As securities’ values fall with rising interest rates, unless the US Government takes a very sharp knife to its spending at a time of stagnating or falling economic activity, the Fed will have to step up with enhanced QE. The excuse that QE stimulates the economy will have been worn out and exposed for what it is: the debasement of the currency as a means of hidden taxation.
- Neither China nor Russia, whose currencies can be expected to survive the transition from financial to commodity orientation, run large budget deficits. That, indeed, will be part of their strength.
Policy makers find themselves torn between consumer price inflation and declining economic activity.
Peace,
Good decision-making to All,
ElJ