The Chinese have trillions of dollars, the Muslims have the most gold
Can a foreign power take advantage of a weak dollar?
As America sinks deeper into debt, worried investors have been trading in dollars for other currencies. Less demand has dropped the value of the dollar. Does that warn of trouble ahead? The author is the author of Terror Incorporated and Insurgent Iraq and Rogue Economics: the economics of illegal, criminal and terrorist activities worldwide. As Chairman of the countering terrorism financing group for the Club de Madrid, she brought heads of state from around the world together to create a new strategy for combating the financing of terror networks. She is a Fulbright scholar at Johns Hopkins University’s Paul H. Nitze School of Advanced International Studies in Washington DC and a Rotary Scholar at the London School of Economics and was interviewed by Newsweek.com.
by Loretta NapoleoniA weak dollar benefits some Americans. When euros, for example, can buy more American products, US exporters do more business. Since 2002 the euro appreciated from 0.86 to almost 1.60 dollars. The United States have regained second place among exporters, after China, a position that they had lost soon after Bush came to power. Meanwhile, the only European exports to grow in recent years are luxury items -- from Gucci bags to Swedish yachts -- thanks to the appetites of nouveau riche everywhere.
Because petroleum is denominated in dollars, Americans are hit almost daily by the rise in petrol. At the last OPEC meeting, Venezuelan president Hugo Chavez pointed out the dollar now buys less in order to convince the cartel to denominate oil prices in euros. Since 2000, Iran has been quoting its crude exports in euros -- while taking payments in dollars. Why? When Iran imports wheat and fertilizers from Ukraine or Russia, it must pay in dollars, not in euros. Exporting in euros and importing in dollars would add the exchange rate cost.
An OPEC decision to denominate exports in euros would increase demand for euros and there are not enough euros in circulation to satisfy it. European central banks would have to print more money and risk inflation or do nothing and let the euro appreciate. Either way, the adjustment period would be lengthy and putting currencies in flux would make balance of payments difficult.
In the vaults of its central bank, China has about 1.4 trillion dollars, followed by Japan with about 1 trillion. China is the largest exporter to America and America is the largest importer of Chinese goods. For the last three years Washington has been pressuring Beijing to revalue its yuan vis-à-vis the dollar without success. US imports from China declined and Chinese exports to the rest of the world rose.
The dollar standard was born in 1971, after the collapse of the Bretton Woods Accord, which had been signed in the immediate aftermath of World War II. Since then the greenback and the western monetary system have been in crisis at least twice every decade.
There is an inverse relationship between the dollar and gold; if the former drops then the latter increases. Close to $1,000 per ounce, gold has risen to levels not seen since the 1980s when Reagan’s America was in recession. The rise in gold is also due to uncertainty in major markets, gold being the preferred asset in times of crisis.
In the past, when all currencies were linked to gold whose value was fixed, the more a country exported the more gold flowed into their reserves and therefore the more their currency appreciated, and vice-versa. The gold standard lasted a hundred years, until the beginning of World War I. It marked a period of unprecedented economic growth for the West and also for the Orient.
Until the fall of the Ottoman Empire in 1923, the Islamic trading currency was the Gold Dinar. It lasted 13 centuries, much longer than the dollar. Today the oil producing countries, in particular those in the Arab world, hold the greatest gold reserves.
In 2001 Malaysia tried to reintroduce the Gold Dinar as the reference currency for central banks in Muslim countries. Prime Minister Mahathir hoped that by 2003 at least 10 of the 57 member states of the Islamic Conference Organization would have subscribed to this system. The effort failed for several reasons, amongst which the opposition from Washington managed to convince the IMF to prohibit its member states from re-linking their own currencies to gold.
Any country willing to use gold would not need vast quantities of bullion. It would be sufficient to link the currency to the price of gold mining shares and to use the fluctuations in the metal to regulate its value and exchange rate. This technique was used in the newborn United States of America; at the time, the young republic had no gold reserves.
Some day, competition from Islamic finance ministers might force US politicians to re-stabilize the dollar, possibly retreat to a gold standard.
JJS: Or, if the American people are lucky, policymakers could advance to a rational use of debt. Then they’d borrow only to afford long-term projects, like infrastructure, which augment the nation’s value. US currency would once again be as sound as, well, a dollar.
Jeffery J. Smith runs the Forum on Geonomics.
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