Friday, November 12, 2010

The US may be forced back to the gold standard

The other day, representatives of the Thai Real Estate Association, the Business Housing Association and the Thai Condominium Association held talks with Krirk Vanichkul of the Bank of Thailand over how to curb the speculation in the real-estate market. Developers and the authorities have been quick to assert that there are not yet signs of a real-estate bubble in Thailand.

They might be more inclined to pre-empt the bubble before the problem arises. Beginning January 2011, tougher requirements will be imposed on the banks so that they set aside higher reserves when they lend out money to home-buyers.

The overall situation reflects growing concern about asset bubbles, which can be traced directly to the massive flow of “hot money” from the United States. This zero-interest-rate cash from the US is chasing after oil, commodities, real estate, farmland and just about everything else. Thai stock prices have been jumping sky-high. If Thailand fails to curb the capital inflow, the country will face an asset bubble and runaway inflation, which could wreck the economy further down the line.

China has already raised reserve requirements for the banks by another 0.50 per cent to slow down the growth. It is battling against inflation, which rose by the fastest rate in two years at 4.4 per cent in October. This will keep pressure on the central bank to continue to tighten the monetary policy. The producer price index accelerated 5 per cent during the month, while food prices soared more than 10 per cent.

The US Federal Reserve’s second round of quantitative easing will fuel global inflation. It is not too difficult to see the end game. By deliberately debasing the dollar through this money printing strategy, the US aims to rectify the global trade imbalances by forcing the export-led economies to reduce their trade surpluses and focus more on domestic growth. But the side effects are going to be serious.
The credibility of the dollar as the world’s reserve currency of choice is eroding fast. If the dollar continues to plunge steeply, inflation will strike the US at some point. China is already facing economic bubbles and inflationary pressure.

Higher inflation will inevitably lead to higher costs of production. China will then export inflation to the world through higher prices for its manufactured goods.
The World Bank’s chief Robert Zoellick has recommended that the dollar be backed by gold once again. By saying so, Zoellick must have seen that dollar printing for a free lunch is about to come to an end soon. Since 1972, the US has de-linked from the gold standard, printing the dollar out of thin air. The US has abused this privilege of printing the dollar without any reserve back-up through over-consumption, trade deficits and indebtedness.

If the US goes back to the gold standard, it will mark the end of the dollar regime. But the question is whether the US will have enough gold to back all the cash dollars printed since 1972? How much gold the US now has in its reserves is also the subject of speculation. If there is not enough gold to back the dollar, the US could use its oil reserves.

This, in a way, will be good for the world’s monetary system because once the US oil reserves are released, oil prices will come down. This would sooth inflationary pressure and bring the costs of production and living under control.

We are living in interesting times. The end of the dollar regime will create a new global financial architecture. How Thailand can fit into this new financial architecture is a challenge for the future. The Nation, Bangkok

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