The Dollar versus the Euro

2003-AUG-21

There is a lot of insight in an email from Alex Wallenwein that is printed below.

His key point is that the US dollar is in trouble. And it is a conclusion to which I wholeheartedly agree.

It is important to get different perspectives on the dollar, particularly a well-reasoned analysis like the one presented by Alex. I trust that you will find his comments to be as interesting as I found them.

Dear James,

Your GoldMoney Alert of August 1st was an excellent and very instructive (and conclusive) essay on where gold has been and where it is going. It's amazing how backing up a few more decades (to see the entire timeline since 1960 exposed) can reveal the truth so simply and powerfully.

I want to remark on your last paragraph and expand on it a bit: You said:

"Only time of course will tell whether I'm right. But in the meantime, we do know why gold has been climbing since 2001 and is going higher still. It's the same reason today that drove gold higher in the 1960's and 1970's. The dollar is being debased."

There is more to the story. The dollar has technically never stopped being "debased" in that it has always depended on inflation for its function as a reserve currency, at least since Bretton Woods in 1945. The world simply needed dollars at that time.

But when Nixon closed the gold window, a new epoch started. Having nothing further to "base" itself on, except a powerful internal market and worldwide demand, inflation became the order of the day, but now no longer because the world needed it, but because the US needed (and liked) it.

As noted in your discussion about Richard Russel's "Fantasy Money" essay, the current dollar system is debt-based with no anchor. Debt servicing needs more printing, ergo: inflation.

The only thing that over time appeared to "discredit" the 'monetary inflation vs price inflation' distinction and allowed the powers that be to bury it was the fact that external dollar demand did not allow the normally resulting price inflation to appear - so everybody thought it was "safe."

That all worked well as long as the US dollar was the only game in town. But since the successful creation and launch of the Euro, this is no longer so. Suddenly, the US faction no longer has the support of the enitre Euro zone complex - and much of the rest of the world, which is gradually aligning itself with the Euro System.

The dollar has always been inflated, but now there is an alternative to attract world demand away from the dollar internationally. With less and less world demand, the eventual price inflation that we all know MUST result from money-supply inflation is now a given - and just a matter of time. Very little time, that is.

That is what is currently truly debasing the dollar. Fed inflation plus withdrawal of world CB support for the dollar, plus flagging world demand for the currency in private and trade use.

The only thing that is so far still preventing the dollar from falling further is the need of the Asian "tigers" to preserve their US export market. They do this by making sure their currencies do not rise too far against the dollar, which would make their exports less affordable for Americans.

The dollar is gradually being allowed to fail as these countries build their internal markets and shift their export focus to Europe, which will survive the current "so so" world recession and the coming hard-core world recession far better than we will.

Add to that the fact that the Euro is set in a positive relationship to gold (it benefits from a rising gold price by valuing its reserves quarterly at market prices). The US is stuck in a death-struggle with gold since it values its reserves at the otherwise meaningless "official" price of gold of $42.222.

In this situation, gold will help pull the rug out from under the dollar system. The dollar's losing battle against gold (demonstrated by your graph) is now entering its final phase as the gold price has broken above the down channel since 1980.

One thing is for sure: gold rocks, and it will continue to do so for the reasons outlined. The new world-policy (other than the US) is to allow it to "rock" to its heart's content. The US has found itself on the wrong side of gold. What we used to call American "capitalism" is now exposed as what it really is: American-style socialism, dependent in its functioning on distorting the markets through centralized power.

Ironic that it is the otherwise more socialistic-leaning Europeans, plus Russia, plus China, that are now teaching us this valuable but painful lesson in free-market capitalism. The world surely has become a twisted place.

Alex Wallenwein
Editor, Publisher
The EURO VS DOLLAR CURRENCY WAR MONITOR
www.a1-guide-to-gold-investments.com/Euro-vs-dollar.html
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