Tuesday, August 16, 2011

40 Years of Nothing

Yesterday was the 40th anniversary of the closing of the gold window by President Richard Nixon.

I missed it, but then, probably so did 99% of the financial community. Let alone the general public.

But why the title today? Surely the last 40 years has been one of the most prosperous in history? Surely not having to be pegged to that 'barborous relic' gold has meant we could grow economies without restraint and look to a bright future with no want or need.

Post-war, the Bretton Woods agreement between the victorious allies, revealed a new and ominous system of doing business worldwide. The USA had come out of the war as the pre-eminant empire and was able to lobby for agreement that enabled the US dollar to be the world reserve currency, backed by gold at a price of US$35.00 per ounce. All foreign exchange transactions would be settled in US dollars and could be redeemed in gold bullion if required.

Then came  the Vietnam war and the era of large deficit spending. The US began printing money to finance this war, and Western countries began to see where this would lead.

France and General De Gaulle, were the ones to bring the charade to light. They could see the value of their exports decreasing as the US flooded the world system with dollars. So they called the US bluff and demanded gold for settlement. Gold began to rush out of Fort Knox at an intolerable rate. President Nixon couldn't let this happen. He announced on August 15, 1971 that gold would not now be swapped for US dollars.

The world had begun the great experiment of being on a totally fiat money supply system. Fiat money is money that has value only because of government regulation or law. There is nothing backing it. There is nothing maintaining it but confidence.

A link to a Youtube video of President Nixon' announcement is below. Notice the usual statements coming from him to justify the US position. 'Protecting the position of the US dollar as the pillar of monetary stability'. He talks up the crises in monetary policy around the world and uses jobs and investment as excuses. The real reason; too much expenditure by a rampant Government. It probably had nothing to do with foreign fiscal policy at all.

We hear the same reasons today used to justify money printing. To increase jobs for the common man and bring stability to the markets. How about, reducing the wealth of the common man through rampant inflation and sending jobs East?

What was unleashed on August 15, 1971, will end badly. Throughout history, all fiat currencies have sunk to their true values; zero. The debt bombs now ticking away in Western economies will explode and cause great disruption. All because of the promise of wealth and jobs in 1971 and because of lack of restraint in Government and public spending.

If you base something on nothing, you may end up having nothing.

Gold in New Zealand dollars: $2117.68 per oz
Previous all time high: $2243.75 per oz

Silver in New Zealand dollars: $47.64 per oz
Previous all time high: $59.19
per oz

The Anglo-Far East Company
The Original Private Gold and Silver Bullion Custodiann
Your reference: an-001

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