Evil Thoughts [1]

The 'petro-dollar and protection racket' are, in addition to fiat money, significant contributors to the avoidable injustices that we see in the world today.

I think it is worthwhile to speculate about how these things may be perpetuated and strengthened by 'the powers that be' so that we can be better to equipped for the struggle to defeat these monstrosities completely.

Suppose the Americans were able to convince 'the market' that the lowest safe level for the US dollar index is 70 instead of 80. Suppose they, in collusion with their allies, were able to engineer an 'organised decline' down to the level of 70. This would help destroy the view held by some that a decline below 80 could seriously jeopardise the dollar's role as the world's primary reserve currency. By duly informing the 'big players' of the new policy before communicating it to the market at large this would provide an opportunity to make huge profits that would more than offset the fall in the value of US dollar denominated assets. Some of these profits could be used to reduce - or at least continue to cope with - some of the imbalances that have been built up in the global economy e.g. keep some of these profits in undisclosed accounts - and 'off-budget' - so that they can be used to finance budget deficits if and when normal demand for new issues of governmental debt is deemed too low. Another example would be to clandestinely provide financial support to some of the major pension funds that are currently underfunded.

[Doug Noland provides a fascinating insight into the 'un-dollar trade':

"Do not downplay the importance of Wall Street having had four fruitful years to develop instruments, products, derivatives and strategies to generate heady profits (for clients and themselves) from a declining dollar. As I have written previously, a strong inflationary bias has developed in non-dollar asset classes – the emerging markets, commodities, metals, global private-equity, and global equities and securities generally. The global leveraged speculating community is infatuated with the “un-dollar” trade. And, increasingly, U.S. institutions and individuals combine for huge and escalating flows from dollars to better-performing global asset classes. Any policy shift from “benign neglect” to “weaker dollar” would at this point be playing with (a disorderly) fire."]

As the Fed rapidly increases the money supply in order to move the dollar index closer to 70 it could monetize gold along the way. This could trigger a gold rush that would help re-liquify the stock markets [if the new dollar policy causes a major fall in the major equity indeces] as the shares of gold mining companies become the 'next hot thing'. As investors/speculators sell their shares in gold mining companies this would mean greater tax receipts for governments via capital gains taxes. More importantly, the increased stock of gold will become a potent weapon once the market accepts the new safe level of 70. To elucidate, the stock of gold can be used strategically to cause sharp drops in the price of gold which will reduce the likelihood of gold being used widely as money. Perhaps the leaders of China would prefer to see a gold rush (of short duration) as opposed to a generalised boom involving the commodities that they require for continued rapid industrialisation.

The envisaged end result would be a continuation of dollar hegemony but at a lower level (in terms of relative exchange rates) and with more of the profits shared with non-US 'big players' such as China. A case of 'if you can't beat 'em, join 'em'.