The title of our Global Report in the Late September issue of The Privateer (#485 - September 28. 2003) was: G-7 - Deadly Inanities. In that issue, we emphasised a portion of the G-7 statement issued at the end of that meeting. Here's the quote:
"We emphasize that more flexibility in exchange rates is desirable for major currencies or economic areas to promote smooth and widespread adjustments in the international financial system based on market mechanisms."
This was lauded at the time as a sea change, a "watershed" in international finance, and a "triumph" for the Bush Administration, the Fed, and the Treasury. Is this true? No, it isn't. What happened was very simply that the major players in the "international financial system" got together in Dubai and attempted to make a virtue out of an inevitability. The US Dollar has been falling for the best part of two years now. Its fall accelerated at the beginning of September, notably against the Yen, despite all the efforts of the Bank of Japan to blunt that fall by buying Dollars for Yen.
Of course, by the phrase "flexibility in exchange rates" the G-7 were talking about a "controlled" fall in the US Dollar exchange rate. They didn't say so - it is the ultimate in bad form in diplomatic circles to call a spade a shovel - but they were confident that this would be the "interpretation" of the world. And so it has proved to be.
The absolutely inevitable, and well underway, fall and FALL of the US Dollar had been transformed into international policy. And, now being international policy, it must necessarily be a "good" thing, must it not? Tell that to the Asians, whose net purchases of $US Treasury debt paper came to an annualised $US 402 Billion in the second quarter of 2003. It is estimated that in that second quarter, "foreigners" (mostly Asian) bought almost HALF (45.2%) of the Treasury debt on offer. It has been further estimated that foreigners now own 35.6% of ALL US Treasury debt outstanding.
It is now international policy that ALL of this paper will now progressively decline in value as measured in $US Dollars, and will decline even faster in terms of the currencies of the "investors" who now own 35.6% of it. All this is "OK" because it now wears the G-7 seal of official approval.
It should by now be obvious to everyone, and it is becoming obvious to more and more people every day, that such a situation is utterly unsustainable. If a large part of your investment portfolio was officially guaranteed to decline in value (in a controlled manner) for the indefinite future, would you hold onto it? Or would you dump it and look for something that at least gave you some chance of maintaining your purchasing power?
Central Bankers and government financial officials don't work like that, you say. Eventually they do, as the history of currency and financial crises down the ages illustrates with eloquent precision. This "decision" by the G-7 has served only to make the final crack up worse than it would have been without it.
That's diplomatic "triumph" number one. For number two, we move to the United Nations on October 17 and the unanimous (15-0) vote in favour of the US sponsored resolution on the "future" of Iraq. Even the Syrians voted in favour, surely a "diplomatic" triumph of massive proportions for the US.
In reality, the resolution had little to do with the "future" of Iraq. It had everything to do with offering - in the words of US Ambassador to the UN, John Negroponte - "a solid base for expanded international engagement" - in Iraq. The US is desperate to get the rest of the world to take some of the financial and military burden of Iraq off their shoulders. How desperate? There is a "donors conference" to be held next week in Madrid at which the US (and the UK) hope to receive concrete commitments of both troops and money for Iraq.
The problem here is that no sooner was the vote cast at the UN than a joint statement from Germany, France, and Russia came out which made it clear that none of those nations was about to commit ANY troops or ANY money for the Iraqi effort.
The thing that the rest of the Security Council WAS in favour of in the resolution is that it endorses a political transition to eventual "home rule" for Iraq. There is no timetable on the achievement of this transition, but the resolution does recognise that this is the goal of the present occupation.
Is this a diplomatic triumph for the US? Most mainstream US commentators reckon it is, because the resolution opens the way for the rest of the UN to "contribute" to the occupation of Iraq while the US has not given up their controlling role in Iraq in return. Most of the other members of the Security Council focus on the "eventual" return of domestic control to Iraq, and while they recognise that the resolution invites them to take part in the occupation, there is no requirement that they do so. Germany, France, and Russia have already made it very clear that they will NOT participate. Japan will, to the tune of $US 1.5 Billion and 150 "troops".
Here again, the US is trying to make a virtue out of a necessity. The cost of the Iraqi occupation, both in monetary and in military terms, is blowing out dramatically. The US cannot afford it, and the Bush Administration cannot afford it as 2004 and the Presidential elections loom with Mr Bush's poll ratings falling by the day. The US wants the other nations of the UN, which were overwhelmingly dead set AGAINST the Iraqi war in the first place, to now step in and relieve the burden.
We can confidently predict that whatever nominal "donations" are trumpeted in coming days and weeks, they will leave the US with the overwhelming majority of the cost of Iraq. Much more serious, both these "diplomatic triumphs" - at the G-7 and now at the UN - have exposed the underlying weakness of the US position to those (and there are many of them) discerning enough to see it.
To sum up, the Bush Administration is utterly dependent on the rest of the world for BOTH their continued financial well being and their aura of being the world's only remaining "superpower". A truly strong nation would not have to rely on the rest of the world to take now guaranteed losses by buying the debt paper it must issue to remain "solvent". A truly strong nation would not need a "donors conference" to shore up a military logistics situation which it cannot put right on its own.
It all goes back, finally, to the money. The Dollar is the bedrock underneath the global financial system. It is the bedrock beneath the perceived power of the US government. It is the bedrock without which neither the Iraq war nor the Iraq occupation would have been possible. The policies of the Bush Administration have now reduced the US to the point where it cannot maintain even the illusion of its status in the world without active assistance, in men and treasure, from the rest of the world.
This assistance is the only thing left to hold off financial and geo-strategic chaos, a situation which always occurs when the smoke finally clears and the world observes the reality of a situation which had been covered up by international "co-operation". This co-operation now depends totally on the rest of the world's capacity" to absorb losses of money, of men, and of materiel. This capacity is finite, and is fast reaching its limits.
Gold's "fate" now rests, as it has for more than two decades, on this realisation dawning on a sufficient number of people - both outside and INSIDE governments - to form what could be called a "critical mass". As the imbalance betweeen the true situation and the present "price" of Gold increases - the pressure will grow. Richard Russell, the great market analyst and newsletter writer, has recently called Gold the safest investment in the world. It is fast becoming one of the very few safe investments in the world. The more "diplomatic triumphs" like the two discussed here that the US enjoys, the closer to the breakout Gold will get.