The Nation



Will the global monetary system go for gold?

The fiat currencies are in trouble.

And their era might end soon. Silver and gold prices are rising sky-high. The modern economy is debt-based. The paper currencies fuel economic growth. Along the way, this fiat-currency system has become vulnerable to abuse.Central banks create money out of thin air to inflate growth. Banks also create money out of thin air through fractional lending and other financial instruments and derivatives. Global growth so far has been driven by debt rather than actual productivity.This modern monetary system, evolved over centuries, is now arriving at a dead end. For no matter how much money is injected, economic growth, which has reached its debt limit, will not come to pass. Much worse, monetary injection creates the risk of hyperinflation, which destroys the value of currencies.When the economic system crumbles, its fiat currency will go down with it. The 1997 crisis saw the Thai baht collapse from Bt25 to Bt56 to the US dollar in six months. The Thai banking system became insolvent. Now the Greek tragedy is a symptom of the full-blown crisis in Europe. Other countries are also in bad financial shape - Ireland, Portugal, Spain and Italy. The European banks, as a result, are holding assets (Greek bonds for instance) that will go sour. This will eat into their capital. When they are short of funds, they will turn to the European Central Bank. And the ECB will be at risk of holding the collateral of these European banks in exchange for short-term lending. The crisis is now playing out to the limit.The situation in the US is equally grave. If Europe were to fall, it will drag down the US financial system. US growth is now flat, with chronic unemployment. There has been talk of another round of money printing later this year to inflate the economy and to bail out banks. That will further erode the dollar's value.So far the Federal Reserve has pumped in US$14 trillion - equal to the US gross domestic product - to bail out the financial system. This massive bailout can only mean that the system has become insolvent.Confidence in the US dollar as a reserve currency is waning. Many countries in Africa, such as Nigeria, have instead turned to the Chinese yuan as a medium of international transactions. The oil-producing countries in the Middle East are reluctant to hold the dollar, whose value keeps falling with monetary inflation. China is waiting in the wings, ready to float the yuan to replace the dollar as the global reserve currency. But the Western powers won't allow this to happen. But they can't bail out the banks in another round without the risk of bankrupting their currencies. Jim Rickards, senior managing director at Tangent Capital Markets, said the global monetary system is likely to go back to the gold standard. But the G-20 countries, led by the US, will try to replace the dollar with the International Monetary Fund's Special Drawing Rights. The SDR is an accounting unit of currency created by the IMF, which is not an elected institution.The US and Europe are tempted to rely on the SDR to recapitalise their banks in the event of the collapse of the euro and the dollar."With the G-20 coming up, I think they are going to dust off the SDR solution. The next time there is a major global financial crisis, the Fed isn't going to be able to bail out the world because they are out of bullets, but the IMF and G-20 will be able to print SDRs," said Rickards ("At that point the game really is over. It will be very transparent that we're just replacing one kind of paper money with another kind of paper money, and that is going to accelerate the rush to gold. "As soon as people do the math, this is where you start to see these $5,000, $6,000, $7,000 an ounce price targets for gold. That's coming sooner than people expect. Some time in the next couple of years we will see that radical transformation of the international monetary system into gold." But don't rush to a quick celebration. For the gold standard can still be manipulated as conveniently as the fiat currency system. The Gold Anti-Trust Action Committee ( has issued a stern warning of potential abuse of the gold standard."As long as prospective purchasers of gold are content to leave their metal in the custody of bullion banks like HSBC and JP MorganChase, forfeiting their metal to the Western central bank fractional-reserve gold banking system, where their metal is turned against them, then infinite amounts of imaginary gold, paper gold and gold derivatives, will be able to keep suppressing the gold price indefinitely."Whether it's the dollar, the SDR or gold, the system is locked in for ugly abuse on a historic scale. It is time to think of an alternative system that keeps the global bankers, who control the central banks, reined in.

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