[DEBATE] : Digital gold as replacement for dollar is cited in Washington Post
Riaz K. Tayob
riazt at iafrica.com
Mon Nov 12 17:18:22 GMT 2007
Digital gold as replacement for dollar is cited in Washington Post
Submitted by cpowell on 08:39AM ET Monday, November 12, 2007. Section:
The Dollar in Danger
By Sebastian Mallaby
Monday, November 12, 2007
For a quarter-century after World War II, money was based on a loose
version of the gold standard. The U.S. dollar was pegged to gold; other
currencies were pegged to the dollar; stable prices underpinned the
prosperity and soaring trade of the 1950s and '60s. Then in 1971 Richard
Nixon balked at the high interest rates necessary to maintain the
dollar's link to gold. For the rest of the decade, inflation ripped. The
cure, starting in 1979, involved two recessions in the United States and
the Third World debt crisis.
Now we face another potential watershed in the world's system of money.
Since the breaking of the gold link, the dollar has become the world's
primary measure of value, so much so that bank deposits in Uruguay and
bribes paid in Russia are mostly denominated in dollars. But the dollar,
like the gold standard before it, is under pressure. Last week even
Giselle Bundchen, the world's top supermodel, was reported to be
steering clear of greenbacks.
Inflation was the cause of the gold standard's collapse as well as its
main consequence. As long as the dollar was convertible, investors could
choose between owning one dollar and owning one-35th of an ounce of
gold; when inflation eroded the greenback's purchasing power, gold was
the more attractive option. Foreigners traded in their dollars until
U.S. gold stocks were close to exhaustion. Higher U.S. interest rates
could have lured foreigners back into dollars. But Nixon wouldn't
tolerate high rates the year before an election.
Today's problem is different. The Fed has kept a lid on inflation, but
the dollar's vulnerability is caused by debt -- the debt of the federal
government and of American households. Year after year, foreigners have
provided Americans with the savings that they refuse to generate
themselves, and this stream of money has supported the U.S. currency.
But if foreigners tire of handing over their savings, the unsupported
dollar is almost bound to fall. That is what has happened recently.
You can hardly blame the foreigners. They sent their money to the United
States because they thought the U.S. financial system was transparent
and sound; the subprime mortgage mess has forced them to think
differently. They sent their money to the United States because the
greenback was expected to hold its value, but its purchasing power has
fallen sharply against oil, metals and other commodities. Once a
currency ceases to act as a store of value, its days as a reserve
currency -- that is, a currency in which foreigners are happy to hold
savings for the long term -- may be numbered.
As in 1971, the Federal Reserve could do something. It could keep
interest rates high enough to entice investors to hold dollars. But as
in 1971, this is not an attractive option. The U.S. economy is reeling
under the impact of an oil shock, a housing shock and financial turmoil.
Forced to choose between upholding the dollar's role as an international
store of value and avoiding domestic recession, the Fed is likely to
Nixon's Treasury secretary, John Connally, told furious Europeans that
the dollar was "our currency but your problem." The same could be said
for today's dollar trouble, which is why French President Nicolas
Sarkozy said plaintively last week that "the dollar cannot remain
someone else's problem." For the United States, a falling dollar means
pricier imports but also an export boom that could carry the U.S.
economy through its housing bust. Yet for France and other countries
that use the euro, a weak dollar means a loss of competitiveness -- not
only against U.S. producers but also against dollar-pegging Asian exporters.
The falling dollar is a headache for the dollar-peggers, too. Their
problem is the mirror image of the European one: Countries such as China
and the Arab Gulf states are already experiencing an export boom that is
overheating their economies. As a falling dollar drags down their
currencies, this overheating gets worse. Meanwhile, they have
accumulated vast piles of dollar assets that are now losing value.
Saving on America's behalf turns out to be expensive.
So the world faces a dilemma. The last thing it wants is more dollar
weakness, which is why central bankers in East Asia and the
petro-states, which control most of the world's official reserves, are
not about to dump U.S. bonds and trigger a collapse in the greenback.
But the world may also draw the lesson that an alternative global
currency needs to be the long-term goal. Households don't like saving in
a currency that won't hold its value. Companies don't like building
global supply chains based on a unit of account that fluctuates unstably.
Most economists assume that the dollar will continue to act as the
global currency because there is no alternative. But one of my
colleagues at the Council on Foreign Relations, Benn Steil, has proposed
another option -- a privately created currency that would confer an
inflation-proof claim on gold or a basket of commodities. Steil calls
his idea "digital gold," which has a nice back-to-the-future ring. The
more the dollar slides, the less Steil's suggestion sounds like a
fantasy from a movie studio.
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