Currency Wars_ The Making of the Next Global Crisis - James Rickards [122]
In the end, the IMF’s plan for the SDR as announced in its blueprint document is an expedient, not a solution. It confronts the imminent sequential failure of fiat money regimes by creating a new fiat money. It papers over the problems of paper currencies with a new kind of paper.
However, the plan has two potentially fatal flaws that may stand in its way. The first is timing—could the IMF’s new SDR solution be implemented before the next financial crisis? Creation of a new currency as envisioned by the IMF would take at least five years, perhaps longer. With growing budget deficits in the United States, an unresolved sovereign debt crisis in Europe and asset bubbles in China, the world may not make it to a widely available SDR without a collapse of the monetary system first.
The second flaw in the IMF’s plan involves the role of the United States. The United States has enough voting power in the IMF to stop the SDR plan in its tracks. The expansion of SDR printing and borrowing since 2009 has been accomplished with U.S. agreement, in keeping with the Obama administration’s preference for multilateral rather than unilateral solutions to global issues. A new U.S. administration in 2012 might take a different view, and there is room for the IMF’s dollar replacement strategy to emerge as a 2012 campaign issue. But for now, the SDR is alive and well and a strong entrant in the global currency sweepstakes.
Return to the Gold Standard
Gold generates more impassioned advocacy, both for and against, than any other subject in international finance. Opponents of a gold standard are quick to pull out the old Keynes quote that gold is a “barbarous relic.” Legendary investor Warren Buffett points out that all the gold in the world put in one place would just be a large block of shiny metal with no yield nor income-producing potential. Establishment figure Robert Zoellick caused elite fainting spells in November 2010 by merely mentioning the world “gold” in a speech, although he stopped far short of calling for a gold standard. Among elites in general, advocacy for gold is considered a trait of the dim, the slow-witted, those who do not appreciate the benefits of a “flexible” and “expanding” modern money supply.
Gold advocates are no less rigid in their view of modern central bankers as sorcerers who produce money from thin air in order to dilute the hard-earned savings of the working class. It is difficult to think of another financial issue on which there is less common ground between the opposing sides.
Unfortunately, the entrenched positions, pro and con, stand in the way of new thinking about how gold might work in a twenty-first-century monetary system. There is an unwillingness, rooted in ideology, to explore ways to reconcile the demonstrated stability of gold with the necessity for some degrees of freedom in the management of the money supply to respond to crises and correct mistakes. A reconciliation is overdue.
Gold is not a commodity. Gold is not an investment. Gold is money par excellence. It is truly scarce—all the gold ever produced in history would fit in a cube of twenty meters (about sixty feet) on each side, approximately the size of a small suburban office building. The supply of gold from new mining expands at a fairly slow and predictable pace—about 1.5 percent per year. This is far too slow to permit much inflation; in fact, a mild persistent deflation would be the most likely outcome under a gold standard. Gold has a high density; a considerable