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A possible Pax Americana end game

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Part 2

It is disturbing to see the opinion of the gold subculture or "gold bugs" merge with mainstream economists, i.e., those that accept an economy denominated in something other than gold, and that does not leave me sanguine. I find merit in one gold bug's opinion that "the health of the dollar reflected in the price of gold, and the health of the dollar is now in foreign hands" lays out a progression that "foreign banks will diversify out of dollars [then] cease buying dollars [and] then they will sell them." I put even more merit in this gold trader when he adds that "Anyone cheering for a high price of gold should get on Prozac" as a healthy dollar will retain its position as a global reserve currency while gold demonetizes and remains at a commodity level but that a "mismanaged dollar" drives gold to rise in value, remonetizing in the process.

I should note that these opinions are unmoved by 9 June testimony by Federal Reserve Chairman Alan Greenspan that:

"Despite some of the risks that I have highlighted, the U.S. economy seems to be on a reasonably firm footing, and underlying inflation remains contained."

One can work wonders in a forecast by adjusting the range and underlying assumptions in what is a charged political atmosphere. Observers said that the testimony "heralded a continuation in the Fed's rate-rise campaign." T-bills prices eased and dollar weakened accordingly.

The gold subculture voices the same underlying concerns as traditional economists: consumer debt, federal deficit, and current account deficit that have driven the US into a debtor state of such magnitude that international concerns over the dollar are striking. Saddam Hussein was one of the first to promote the use of the Euro as an oil denominated currency in lieu of the dollar, albeit as a form of economic warfare. Russia has now warmed to the same idea as had Iran and China. (All this occurred before the Euro began to drop against the dollar in the aftermath of the French and Dutch 'no' votes on the European constitution, so it remains to be seen how much further this shift will proceed in the near-term. The point that I would make is that the dollar has weakened and other states are increasingly open to alternative currencies.)

The cessation in buying dollars is in evidence in the purchase of US treasury bonds by Asian central banks, notably Korea. (China keeps buying but I put that to Beijing's willingness to accept a depreciating dollar in return for rising economic growth and social peace at home.) An increase in cessation is not pretty:

A low-level panic about the debt crisis, and its possible effect on the American economy, is gathering strength. [Morgan Stanley's chief economist says that] "Our little post-bubble workout is not over, not by any stretch of the imagination" and believes that an adjustment is necessary and inevitable, and that when it comes, it will be very, very painful.

[Former Federal Reserve chairman, Paul Volker, added] that "there are disturbing trends" undergirding the U.S. economy, including "huge imbalances, disequilibria, risks [that demand] a strong sense of monetary and fiscal discipline [which is not in evidence by either US nationals or the US government such that] the circumstances seem to me as dangerous and intractable as any I can remember."

And if that does not get one's attention, the US Comptroller General, David Walker, summarized the long-term US debt crisis, assuming no mitigation, as "Argentina."

Part 4 Trends and timing

Believing (and Believing and Believing) in Bullion
By STEPHEN METCALF
New York Times
June 5, 2005

Military Obsession
Oscar Lurie, Associate Research Analyst
Center for Defense Information
Weekly Defense Monitor, Volume 3, Issue #05, February 4, 1999
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Gordon Housworth



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