The USD is the world’s reserve currency. It therefore makes sense that head winds emanating from the U.S. economy can fuel a global currency crisis. A global currency crisis is somewhat a complicated concept for a generation that has never experienced one but described simply, it is a financial crisis that manifests through massive exchange rate fluctuations and severe inflation. It then culminates in successive devaluation of currencies and economic depression on a global scale.
A currency crisis is often the result of years of trade deficits which skew balance of payments to a negative position. Negative balance of payments drain a country’s foreign currency reserves and renders it defenseless in the face of currency speculators. The situation then rapidly spirals out of control and a very devastating global financial crisis is created.
Financial assets that are hit the most are those that are traditionally deemed to be safe. Cash on hand, bank deposits, pension money, money market funds and all debt investments (bonds) decline in value. Prices of other financial assets like stock, commodities and real estate also decline eventually. This is the global currency crisis that is looming over our generation.
The American economy seems to be enjoying a lot of momentum. The Dow finally surpassed the 22,000 mark, the US dollar index reached 14 year highs, unemployment is below 5% and recent reports are that US GDP grew 1.6% in 2016. But nothing can be further from the truth. The story of the U.S. economy is one of structural weakness. A humongous budget deficit amounting to almost USD 20 trillion has seen government debt exceed 100% of GDP.
Huge trade deficits with virtually every important trading partner namely China, Mexico, Canada, Japan and the European Union point to a crisis hiding in plain sight. But the biggest blow to King Dollar and by extension the U.S. economy was the misuse of economics in the name of stimulating economic recovery. Gross Domestic Product (GDP) is the value of goods and services produced by a country in a particular period. It can be calculated as Consumption (C) + Government Spending (G) + Investment (I) + Exports – Imports (X) = GDP.
Countries with the highest GDP are the richest countries of this world and countries with the lowest GDP are the poorest countries of this world. Countries with the highest growth in GDP are the countries whose economy is growing at the fastest rate and the opposite is true for countries with the lowest growth in GDP. Countries with a shrinking GDP are experiencing contraction of their respective economies.
John Maynard Keynes was a great 20th century economist. The basic tenet of his revolutionary economic theory is the assertion that the most important driving force of an economy is the aggregate demand from households, businesses and the government. It justifies government intervention in the economy through public policies like deficit spending to stimulate aggregate demand with the aim of achieving full employment and price stability because left alone, free markets cannot lead to full employment.
U.S. policy makers seem to have been reading from this script in 2008. There was a rapid expansion in government spending. It rose from $ 5 trillion in 2008 to $ 6 trillion in 2010. To encourage consumption, the feds funds rate was dropped from 5.25% to 0.25% but the consumption variable of the GDP equation was operating close to its effective limit and could only do so much for the U.S. economy.
Americans were on a consumption binge. Many were low on Savings and many more had maxed out their credit cards. Balance of payments (Exports - Imports) was negative. This is the most potent variable of the GDP equation. Turning it positive would have resulted in a solid recovery of the U.S economy but curiously, policy makers did not bother to look in this direction.
Government spending in 2008 saw U.S. government debt to GDP rise to 76%. Government spending almost always increases with government debt. This is because governments have no money of their own. They have to print it, collect it in form of taxes or borrow it from their citizens or from foreigners. Since the debt to GDP was at 76% and was fast approaching 100%, you would have expected that policy makers at the time not to have resorted to Keynesianism to resolve the 2008 recession. But they did.
The U.S. government borrowed massively to spend and debt to GDP passed the 100% mark in 2012 reaching a staggering 104.17% in 2015. Most shocking, printing presses were simply turned on whenever spending needs went ahead of borrowed money. This leads us to the other misused economic theory. It is called Monetarism and it is mostly associated with the 1976 economics Nobel Prize winner Milton Friedman.
Friedman showed that increasing money supply to in turn cause an increase in GDP only works to a certain point beyond which, further increase in money supply will only be inflationary. In 2008, Keynesian economics had very little room to maneuver before U.S became technically insolvent. Monetarism was employed to supplement Keynesianism and money was printed to allow the U.S. government to spend its way out of the recession.
Before 2008, the hands of central banks were not very visible in financial markets. Price discovery of financial assets was largely determined by forces of demand and supply in the marketplace. The best opportunities lay in emerging economies like Brazil, Russia India and China. These are the BRICS, arguably the fastest growing economies of the world. Loose fit South Africa joined this club later.
For international investors, exposing investment portfolios to the BRICS was a no brainer. Emerging markets were taking the lead in almost every sector of the global economy. Political stability was improving, large scale commercial exploitation of natural resources was now possible, populations were becoming better educated, the middleclass was growing, business was booming and growth in GDP was often above 5%.
On the other hand, developed economies, with the exception of Germany and a few others, were mature economies where economic fortunes were declining. These economies led by the U.S. were experiencing trade and budget deficits which have now become the norm. They were no match compared to emerging economies. Around this time, the 9/11 terrorism reared its ugly head. This type of terrorism was so overwhelming and confusing for monetary policy makers.
Over the next few months following this attack, Federal Reserve Bank policy makers overreacted and dropped the Federal Reserve funds rate from 3.5% to 1%. Prior to this attack, the fed funds rate had been reduced from 6.5% to 3.5% to support an economy that was reeling in the aftermath of the dot com stock market crash. Lowering this key interest rate effectively brought down interest rates on commercial loans and reduced yields on treasury securities. Marginal borrowers could now afford financing costs and soon all manner of dubious and risky deals looked attractive. This is how the era of low cost of credit was ushered in. The direct result of this loose monetary policy action was a credit boom that turned out to be an immense boost to the economy.
The years that followed 9/11 saw phenomenal growth of the US economy. This change of economic fortunes was made possible by the low interest rate policy pursued by the Fed. Credit became very cheap and every Tom, Dick and Harry qualified for a mortgage. So, every Tom, Dick and Harry got a mortgage and the real estate bubble began to swell. Business credit was also very cheap. The stock market soared to record highs forming another bubble. Consumer credit was available to almost everyone who wanted to buy something. Life was really good!
Then suddenly, without notice, the bubbles began to burst. The credit boom had gradually ballooned over the years and eventually popped spectacularly in 2008 after the Fed gradually raised interest rates to contain rising inflation. It was dubbed the subprime mortgage crisis because it was a credit crisis that was caused by unsustainable debt mainly in the subprime mortgage market. The subprime mortgage market meltdown was the trigger that set off the series of bubble bursts in other financial assets.
The U.S. economy crashed and thanks to globalization, it brought down with it the entire global economy. We know that politicians are always mindful of their reputations, re-election prospects and legacies. Policy makers as usual look to build their resumes so that they get considered for higher office. Here they were in 2008, jointly looking for solutions to a catastrophic global financial crisis. The Fed Funds rate was lowered to 0.25% from a high of 5.25% in 2006, full scale Keynesianism was deployed and Monetarism unleashed to plug any remaining holes in the economy.
Lately, you may have heard the term ‘quantitative easing’ when monetary policy is being discussed. Simply put, it means the printing of money - blatant printing of hard currency. Calling it quantitative easing gives it the feel of some complex financial engineering undertaking but what actually transpires is as simple as a government creating money out of thin air and using this newly created money to buy bonds from commercial banks and blue chip companies.
Commercial banks then use this money in their normal business operations including lending it to their clients and buying government securities (financing government spending). Blue chip companies use this money to pay off existing debt obligations and to finance expansion programs. The Fed even bought stocks with this money! These interventions turned around the U.S economy. The resultant effect was job creation and growth in corporate revenues and GDP.
Quantitative easing works on the premise that an increase in money supply will lead to an increase in economic activity and by extension increase economic growth and in the process solve problems that come with a recession. Of course, people will spend money if they have money. Governments just need to figure out how to put money in people’s pockets. This concept works well initially but it begins to be counterproductive when the rate of money creation goes ahead of the rate of the resultant economic growth.
At this point, a lot of money will begin to chase a disproportionate amount goods and services. Then inflation begins to bite. After the recession of 2008, the US did three rounds of quantitative easing totaling to USD 4.5 trillion. USD 4.5 trillion created out of thin air! The European Union, weighed down by Greece, followed in U.S.’s footsteps and created EUR 1.1 trillion and United Kingdom created GBP 445 billion. Japan and Sweden have also gone down this road. In 2015, U.S. GDP was USD 18.56 trillion, the European Union was EUR 15.26 trillion and UK was GBP 2.15 trillion.
Put differently, the economic recoveries we saw in the U.S. after the 2008 recession and in Europe after the debt crisis of 2010 were a result of direct interventions by Central Banks. Low interest rate policies, deficit spending and quantitative easing were used as combined strategies. At the time of this writing, The Fed Funds Rate was at 1.25%, European Central Bank rate was at 0.00%, Bank of England rate was at 0.25% and Bank of Japan rate was at -0.1%. Yes, Japan is at negative 0.1%. That was not a typo.
You will still be right if you said that financial markets in developed countries are propped up by Central Banks. Interest rates that are this low, mean that savers are not getting meaningful returns on their savings so saving is not on top of many people’s minds, yields on bonds are too low to be worth an investor’s time and negative interest rates are depleting savings in bank accounts. You may be wondering what people are doing with their money. Well, they are just buying stocks and real estate. This is the reason why, in the US, Europe and in fact in many countries in the world these two asset classes have been on steroids lately.
These Central Bank interventions have brought the world to the threshold of a global currency crisis. Massive amounts of currency have been injected into the global financial system. Stock markets in the Americas, Europe and Asia have recorded new highs on the back of this ‘hot money’ from central banks. This is inflation manifesting itself. This stellar performance should have instead come from strong corporate performance.
All bubbles burst eventually. The world will be consumed in massive inflation when this massive stock and property bubbles burst. Investors who have not cushioned their portfolios from the coming global currency crisis will see their investment portfolios almost get wiped out. Money in banks, stocks, pension funds and debt (bonds) will be severely ravaged by hyper inflation. There will be a frantic flight out of cash and from cash like assets which have no intrinsic value and into hard assets but central banks will not just sit and watch as they are being rendered irrelevant.
The financial system (banks and securities exchanges) will be shut down to give policy makers time to come up with a solution to the problem. When the financial system reopens, central banks will announce a new monetary system and then the public will realize that their cash and other cash like investments are worth just a fraction of what they were worth before the financial system was shut down.
Gold and silver have been used as money by many different civilizations in the history of mankind. They have brought prosperity to civilizations that respected their integrity but destroyed the same civilizations when they tried to cheat these two precious metals. Athens was one of the greatest civilizations of all time. They were the world’s first democracy and they are credited for developing the first free market system and a working tax system. Amazing architectural public works that are evidence to how great this civilization was can still be found in Greece to this day.
Athens flourished because coinage made commerce much easier. This new monetary system came with a lot of prosperity. But like all great civilizations, they got involved in wars that needed massive funding. After spending most their resources and money, they came up with clever ways to continue funding their wars. To make more coins, they began mixing copper with gold and silver in their coinage process. This effectively debased their money and inflation spiraled out of control in just a few years. The coins gradually lost value as the public woke up to this debasement. Pure gold coins now rare in Athens dramatically increased their purchasing power. This great civilization came to an end with the collapse of its monetary system. Unable to fund a war, they became an easy picking for Rome. Athens was conquered and it became a province of Rome.
Rome is also another great civilization of all time. Its coin based monetary and tax systems saw it flourish for centuries. Following the same pattern of great civilizations, they became involved in great public works projects - remnants still stand to date, social programs and several wars. They too debased their money in various ways to fund activities of great civilizations. They mixed lesser metals with their gold and silver, made smaller coins and clipped off edges of coins as tax when entering government buildings. These clippings were then smelted and minted into new coins. This expansion of money supply eventually caused hyperinflation. Commerce collapsed, the empire lost its revenue and it eventually collapsed on its own weight.
The nineteenth century monetary system was largely based on the gold standard. Man had become smart enough and paper notes and coins were now used alongside gold and silver. Commerce was now being done on a much a larger scale and gold and silver coins alone would have been such a bulky proposition. Under the gold standard, the value of paper currency in circulation is made equal to the value of gold kept in storage by banks and banks exchange paper currency notes for equivalent value in gold on demand.
Currencies achieve regional hegemony when they are widely used as the basis of international trade. The first and the second world wars helped to establish the U.S. dollar’s status as the world’s reserve currency. In both wars, European countries were waging serious battles with each other. The U.S. joined these wars in the final stages. Prior to joining these wars, the U.S. had the opportunity of supplying armaments and foodstuff to allied warring countries.
Like Athens and Rome, European countries consumed their resources and money in wars. War supplies and food stuffs were first paid for using a country’s USD and gold reserves, when all USD reserves and gold were spent, the U.S extended credit. Massive wealth transferred from Europe to the U.S. during this time and the U.S. became the super power of the world.
War is easily the most destructive, costly and wasteful human preoccupation of all time. In this era where the monetary system is based on fiat currencies, countries simply inflate their currency supply whenever they experience a shortage. This is the reason why wars coincide with deficit spending, reduction of interest rates and money printing known as quantitative easing in modern finance lingo.
Deficit spending involves spending of borrowed money and transferring the burden of payment to future generations, lowering interest rates is meant to smoothen the way for borrowing of money and money printing is just money printing - a legal activity if done by a government but an illegal activity if done by a private entity or individual. This is how governments expand currency supply in our time. The many wars that the U.S has fought in the twentieth and twenty-first centuries have taken their toll on the dollar. Here goes Athens and Rome again.
We have reached the stage where the monetary system is supposed to collapse and you may be wondering why then has the dollar not collapsed. First let us look at what a proper monetary system should look like. For anything to be considered money, it has to exhibit the following characteristics: it has to be scarce, portable, divisible, hard to imitate, widely acceptable, stable in value and durable. Gold and silver fulfill these conditions naturally and were used as money even before the time of Jesus. Paper money evolved out of the practice of issuing receipts for gold stored in vaults.
These receipts were freely exchanged for goods or services during trade and any bearer of such a receipt could claim the gold it represented from a vault. All paper money was effectively backed by gold under this system. This is what is known as the classical gold standard. This gold standard ensured stability of the economy because the money in use had real value and its rarity meant that only so much of it was naturally introduced into the economy. Economic cycles followed gentle boom, inflation and deflation patterns but never boom, bubbles, bursts and gloom like we have today.
Let us also understand the fiat monetary system in use today. This is the monetary system in use today by our generation. It is called fiat money because it became money by decree or it was made legal by law. It does not have any intrinsic value. It is supported only by faith, faith that the government that backs the paper money is sound and honest. Fiat money is generated by the fractional reserve banking system.
There is a ratio called the currency reserve ratio which central banks determine and adjust from time to time. It is a ratio of the amount of money that commercial banks are supposed to keep as cash reserves to meet their daily liquidity requirements. If for instance, a central bank sets the currency reserve ratio at 10% of deposits, commercial banks will be allowed to advance loans equal to 90% of their deposits. If the currency reserve ratio is set at 20%, commercial banks will be allowed to advance loans equal to 80% of their deposits.
Once your loan is processed and is credited to your bank account, it expands the bank’s deposits and also the amount your bank can lend as per the currency reserve ratio. Each loan issued by a bank expands the money supply. Tweaking the currency reserve ratio is one of the ways central banks make changes to money supply.
It is sounds ridiculous but that banks source funds for their loan book from customer deposits is just a myth. What actually transpires is banks create funds for their loan book out of thin air. Digital entries are made into the loan book and the principal plus interest you have to pay back magically beam into existence. None of it comes from deposits. A currency reserve ratio of 10% allows banks to create currency equivalent to 90% of their deposits as long as a willing debtor can sign on the dotted line.
If there is a run on a bank, the bank will draw from its excess reserves. When excess reserves get exhausted, fractional reserve banking will be viciously thrown into reverse. In the 10% currency reserve ratio scenario, the bank must liquidate $9 of loans just to pay $1 of deposits. If a loan gets defaulted on, that currency simply disappears into the computer screen of origin. If many loans get defaulted on, a lot of currency simply disappears into their computer screens of origin.
Currency supply will then contract and the economy will experience deflation. Since fiat currency is designed to lose value, fractional banking system will still implode even if no bank run or credit crisis happens. Each new unit of currency that enters circulation devalues all other units of currency in existence. This is because more currency starts chasing the same amount of goods and services. Inflation is an inbuilt feature of the current monetary system.
The classical gold standard worked extremely well for the economy but very badly for politicians. It restricted politicians from achieving their ambitions. Big ambitions like fighting and winning wars, massive infrastructure projects and social programs for their people needed massive funding. Under the gold standard, the gold that was stored in vaults dictated the supply of money. Money supply expanded in trickle from gold mining or substantially from trade surpluses and contracted in proportion to increases in trade deficits.
Politicians had to trim their ambitions to fit the current money supply. They hated this state of affairs and gold was kicked out of the monetary system. Then in came the fiat monetary system and fractional reserve banking. It is now possible to expand money supply with the stroke of a pen. Politicians and policy makers can now sign to lower interest rates, print money and authorize deficit spending. World War 1 found most of the developed world on the gold standard. But the warring countries did what countries usually do in times of war.
Money supply was inflated through deficit spending and money printing. After the war, the world found out that commerce was seriously hampered by runaway inflation. The world desiring the good old days when trade was robust and the economy stable started to journey back to the gold standard. But the journey became very painful when the world realized that currency units had to be devalued to match the units of gold that backed the currency. So they settled for a quasi gold standard they called the gold exchange standard.
The year was 1922 and the venue was Genoa, Italy. It was agreed that under the gold exchange standard, the USD and GBP could be exchanged for gold and that world central banks could keep the USD and GBP alongside gold as reserves. However, only the USD was backed by 40% gold reserves. Other countries could hold USD and GBP as gold proxies. This made sense because international trade at the time was dominated by the two currencies and gold. The price of gold was then fixed at $20.67 an ounce. Departure from the gold standard had commenced.
Germany and France devalued their currencies in 1921 and 1925 respectively to gain export advantage over the U.S. and Great Britain. Great Britain followed suit in 1931 and devalued its currency to regain the export advantage it lost to France and consequently defaulted on the gold exchange standard. In 1933, the U.S also defaulted on the gold exchange standard when it devalued the dollar by 70% relative to gold to regain lost competitive advantage on exports. The price of gold was now fixed at $35 an ounce. Then France and Great Britain devalued their currencies again to get even with the U.S. By the way, this is how a currency war is fought. Does the currency manipulation rhetoric currently coming out of Washington now make sense?
In 1944, the world met again in Bretton Woods, New Hampshire, USA. The agenda was to find a solution to the currency wars that were crippling international trade. It was agreed that all countries would peg their currency to the dollar and the U.S would make the dollar redeemable in gold to foreign central banks only at $ 35 an ounce. When a country fixes its currency to gold, it has to buy or sell as much gold as is offered or demanded to maintain that currency price. To avoid being cheated out of its gold, France redeemed $150 million of reserves for gold in 1965 and announced plans to redeem another $150 million. France had found out that by printing money to fund the Vietnam War, the U.S had compromised its ability to convert dollar reserves of other countries into gold.
Spain also converted $60 million of its USD reserves into gold. In 1967, Britain caused a run for gold when it devalued the pound to help correct rising inflation and a negative balance of payments position. By 1968, claims on gold by overseas USD holders became epidemic. To stem gold outflows, a two week bank holiday was declared on March 15th and congress used this time to repeal the requirement for a gold reserve to back the USD. U.S. gold supply then became available for sale at the price of $35 an ounce but gold had already found a higher price in the free market abroad.
Gold was eventually expelled from the monetary system on August 15th 1971. President Richard Nixon announced on prime time TV that the USD will no longer be convertible to gold. The USD became a fiat currency and so did all world currencies since they were all pegged to gold through the dollar. Amazingly, other countries did not protest against demotion of their currencies to the dollar standard. For many countries, memories of the two devastating world wars reminded them that they were better off as allies of the U.S. and Squabbling over currency with the U.S was not the prudent thing to do.
The U.S had had in the meantime bled most of its gold reserves and speculators were angling for even more. Public will and the free market had completely overwhelmed the Bretton Woods system. The USD was freed from any fiscal constraints and now the U.S. prints the USD at will. Gold was also freed from the dollar and it became its own free floating international money not bound to any country. Its value has appreciated from $35 an ounce in 1975 to $ 1,286 at the time of this writing. A 3,574% rise! The fiat monetary system in use today is backed by thin air and is designed to eventually lose value and collapse.
We are just months away from when the world will have to yet again hold a conference to discuss a stable monetary system that will reliably promote international trade. A few alternatives will be proposed but so far no system works better than the classical gold standard. The barbaric relic will do a proper accounting of the excesses of the fractional reserve banking system when world central banks begin the mad rush to back their currencies with gold. The fortunes it will create for those who were wise enough to own it will be mind blowing.
Americans rightly sensing that something really serious was amiss with their economy elected the most unlikely of presidential candidates but ironically, he may just be the kind of president the U.S. needs. The USD is now in a position to come out of the other end of the coming global currency crisis with some value. The Obama regime and Clinton’s campaign had countering Russian aggression, globalization, Middle East conflicts, social programmes and minority rights as their main agendas. Foreign policy seemed to be of utmost importance to them.
Trump summarized his agenda in one simple short sentence; Make America great again. Throughout his campaign, he lamented about the humongous budget and trade deficits, porous borders, poorly crafted trade deals, loss of jobs to overseas outsourcing, the choke hold of overregulation on business among other things. Finally someone was calling the problems the U.S. was facing by their real names. In one of the presidential debates, Trump warned that the U.S. was in a big, fat, ugly bubble and that the stock market would crash if the Fed raised interest rates even a little bit.
He went on to say that by keeping artificially low interest rates, the Fed was being even more political than Hillary Clinton because interest rates were being maintained at artificially low levels to protect the Obama administration from the embarrassment of an economic crash. Then he went on to wonder what will happen to the U.S economy when market conditions force the Fed to raise interest rates after Obama has retired to play golf. This was very telling.
In his 2017 CPAC speech, Trump said, “there is no such thing as a global anthem, a global currency or a global flag. This is the United States of America that I am representing”. I understood that he was alluding to the fact that dollar has to be cheaper to give the U.S. competitive export advantage over its trading partners and foreign policy was not going to be the most important consideration in his administration. In less than 50 days in office, Trump soured the cordial relations that Mexico, China and Germany had with the US.
He is going to build a wall on the U.S. - Mexico border to stop drugs and illegal immigrants from getting into the U.S., called China a currency manipulator and there is simply no chemistry between him and Angela Markel. The common denominator that these countries share is the trade surpluses they enjoy from trading with the U.S. All top the five trading partners of the U.S. enjoy huge trade surpluses. Trump has fired warning shots on three of these countries. He has committed to reversing this trend and a weak dollar is his secret weapon.
Right now, the U.S. is at the wits end of monetary policy and the Fed is now seriously contemplating interest rate hikes to try and reduce currency supply and hopefully avoid the impending hyperinflation. If the Fed raises the feds funds rate, repayments on existing debt will go up. It is interesting to see how things will pan out given that the U.S. is choking on huge public and private debt. It should be very alarming that that the new Trump administration and the Fed are pulling in opposite directions. Ideally, central bank policies should augment government objectives.
The Fed is considering interest rate hikes which will strengthen the dollar but Trump needs a weaker dollar to help reverse the trade deficit that the U.S. has been experiencing. Another round of quantitative easing is not feasible. Each extra dollar that is printed beyond the 4.5 trillion that has already been printed will accelerate the rising inflation trend. The stage for a global currency crisis has been set. Remember world currencies are still pegged to the dollar. If the dollar depreciates or devalues, other world currencies will also have to head in the same direction otherwise the exports they represent will reduce to the detriment of the economy of the issuing country.
In the last 20 years, the global financial system has come close to a total shut down on two occasions. The first time was in 1998. This crisis was caused by a hedge fund called Long Term Capital Management (LTCM) that was led by two Nobel Prize winning economists and other leading economists. The investment strategy was borrowing heavily and using complex mathematical models to invest in arbitrage opportunities in bonds for huge returns. The mathematical models that informed this hedge fund’s trades failed to anticipate the Asian currency crisis of 1997 and Russian currency crisis of 1998 and the fund blew up with over $100 billion in liabilities owed to Wall Street banks.
To prevent the collapse of these banks and the resulting chain reaction of bank failures, the Fed organized the same Wall Street banks to bail out LTCM and the world was saved from a catastrophic banking crisis. The next time the world came to within hours of a total shutdown of the global financial system was in 2008. The story of how wall street banks went broke after many of the loans they had cavalierly advanced their clients went bad has been told many times. The problem was again the domino effect the collapsing banks were having on the financial system. This time, the government bailed out Wall Street and the world was saved from another catastrophic banking crisis.
We are yet again facing a financial crisis of global proportions but the U.S. government went broke bailing out Wall Street. European governments are also in the same predicament since they also bailed out their banks during the European debt crisis in 2010. The question is who will bail out governments this time around? This is the dilemma that is facing world currencies. Gold and silver should have rallied much more by now but the Fed resorted to manipulating the price of gold in the same way it used to during the gold exchange standard days when it formed the Gold Pool to maintain a fixed price of gold at $35 an ounce. The Fed has to maintain public confidence in the dollar otherwise a sharp gain in the prices of gold and silver will alert the public to the structural weakness of the dollar and cause a run on banks.
When gold appreciates, its value goes up against currencies. The failure of monetary policy from central banks especially the Federal Reserve Bank will then be exposed. This will force an embarrassing reset of the monetary system. So there is enough motivation to manipulate the price of gold and silver. The Fed can keep manipulating the price of gold and silver for as long as its resources outstretch the investing public’s resources but years of gold and silver price manipulation have already built so much pressure into the fiat monetary system. Very soon, just like it happened in 1971, sheer public will and market forces will overwhelm the Fed. We are just months away from a spectacular implosion of the monetary system. The currency crisis will become bigger than any amount of gold and silver price manipulation can handle. Wealthy will be those who will have some gold or silver to their name.