We are approaching rapidly a series of currency crises of a greater magnitude than ever seen before in history. Whilst the U.S.$ will be the prime recipient of these, many currencies trying to protect their international competitiveness or their own stability will be dragged into the crisis that will affect to a greater or lesser extent the bulk of currencies across the world. There will be few currencies and consequently their economies that will escape the ripple effects of the dramatic changes in exchange rates. Why will this happen? To understand this a look at the history of the 4 over the last 50 years becomes pertinent. We take a brief look at the monetary system and its recent past to see how the toppling from financial power and its extent is likely and the full extent of that power.

With its dominant influence over the I.M.F., where its voting power of over 16% placed it in complete control of any vote [because a basic requirement of the I.M.F. is that for any issue to be passed, it must have the support of 85% or more of its members votes. This left the U.S.A. in control of not just of the most important of the globe’s financial institutions but of the global monetary system. Through the $ being the currency in which oil was priced, it reinforced this strength and dominated global trade through oil. The tribute [tax] it then drew from the world through the printing of the $ for international trade, was the equivalent of the tribute Britain drew in the days of its global empire. The expansion of the Trade deficit is serving the same function, which explains why little is being done to correct that imbalance. With recipients of the $ content to reinvest their surplus $’ back into U.S. Treasuries and bonds, the States is receiving cheap financing of its economy. So all looks fine as the U.S.A. draws off the benefits of its pivotal position.

The only action being taken to adjust this at present is a trip [which we believe will be a failure before it begins] by the Chairman of the Federal Reserve Ben Bernanke and the Treasury Secretary Paulson to China. Ostensibly this is to persuade the Chinese to revalue their currency. The Chinese authorities have responded to this request many times already and forcefully, so why the trip? Is it a posturing that it is the Chinese that is at fault or what? Needless to say any responses from the trip will do little to strengthen the $. This trip does little to address the growing problem of the falling $ in the foreign exchanges, the ultimate measure of the true value of the $.

But the process of Asia’s enormous growth is that it is moving toward being the most important economy in the world alongside India and other emerging economies. As such it will move to take the reins of global financial power.

The tipping of that power towards the East has to precipitate the end of the reign of the U.S.$ as the key global currency. The Chinese Yuan is by no means ready to take those reins, nor we suspect, is the €. Nevertheless, the $ is on the decline long-term due to this shift in power. Even if this concentrated power is re-distributed to several other currencies, the decline of the $ will continue and with a growing ace.

As we have often said in these columns, we do not expect the $ to decline down a gentle slope, but to move along a plateau, before dropping down a cliff to the next level at which it will plateau before the next fall. Steadily we will see the pressures from excess U.S. $’ bring not only a value decline but also a heavy loss of confidence in the $ from outside the U.S. of A.

It appears that we are very close and have possibly begun the first cliff edge fall to the next low. The fall may be steeper and greater than most have imagined.

Many monetary officials in the U.S.A. have expressed their lack of knowledge of what lies ahead in this type of situation. But the very structure of nations self-interest will cause a weakening $ to fall further once the falls really begin. We have to say that such $ crises in the global foreign exchanges have the potential to structurally damage the globe’s monetary system in ways never seen before. What we take for granted as being an exchange rate crisis will pale against the breadth of this impending drama as it encompasses several currencies in its wake.

As we wait on the brink of these changes, we can be certain that both gold and silver will rise further to take on the mantle of safe currencies beyond the reach of Central Bankers, who may likely support their role as an alternative currency. What is certain is that once confidence in the $ starts to become visible in the markets the gold price will rise in a manner completely inconsistent with its role as simply a metal, a commodity.

Hence we ask our readers to be prepared for more than seems ‘normal’ in the days to come.

© 2006 Julian D. W. Phillips
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