June 2011 ~ Tie the U.S. Dollar and Euro to Gold ~The Emerging New Monetarism: Gold Convertibility To Save The Euro, as well as the Dollar ...

Todays article ~ ESCAP ~ Euro Will Survive! Economist Mundell Expressed Confidence that 13-year Old Euro Currency Will Survive and Says Time for New a Global Currency



Bumped .. Four Months ago, Interesting article by Nobel Laureate, Robert Mundell.



Tuesday, June 14, 2011



The Emerging New Monetarism: Gold Convertibility To Save The Euro



It is time, and long past time, for the practical men of our era — such as our president and the Republican presidential aspirants — to throw off the shackles of various defunct economists,



Professor Robert Mundell urges gold convertibility for the euro, the currency which he fathered, as well as for the dollar. This is a major step forward. Thought leaders are abandoning “old monetarism,” which was vainly fixated on quantity. Even its chief proponent, Milton Friedman, acknowledged old monetarism as unsuccessful in a 2003 interview with the Financial Times. An emerging “new monetarism” is quickly taking its place — one that focuses on the quality, not quantity, of money.



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Empirical data suggest that the gold dollar represents the epitome of quality. As Forbes’ own Steve Forbes advised the presidential candidates last week, the “debate should be focused on what the best gold system is, not on whether we need to go back on one.”



Mundell recently endorsed the gold standard on Pimm Fox’s Bloomberg Television “Taking Stock.”



Pimm Fox: You’ve written about the role of gold in the world economy, Professor Mundell. Do you think that we’re going to see any kind of return to the gold standard?



Mundell: There could be a kind of Bretton Woods type of gold standard where the price of gold was fixed for central banks and they could use gold as an asset to trade central banks.



The great advantage of that was that gold is nobody’s liability and it can’t be printed. So it has a strength and confidence that people trust. So If you had not just the United States but the United States and the euro tied together to each other and to gold, gold might be the intermediary and then with the other important currencies like the yen and Chinese yuan and British pound all tied together as a kind of new SDR that could be one way the world could move forward on a better monetary system.



Mundell is the world’s most distinguished living economist. He is a Nobel Economics Laureate. He was the primary source of the original supply-side manifesto, “The Mundell-Laffer Hypothesis,” which led to the low-tax-rate, strong-dollar policy at the heart of Reaganomics. He has acted as a privy counselor to the Chinese government (which in appreciation has named a university for him). Mundell’s guidance, of course, is one of the reasons why mainland China has had 30+ years of uninterrupted double-digit economic growth. Mundell’s work also laid the foundation for the common European currency, the euro.



Although Mundell is less of a pop culture celebrity than Paul Krugman, another Nobel winner, the impact of Mundell’s life work is epochal, while Krugman caps his career as a New York Times blogger. I have argued elsewhere that Mundell’s work has helped create something like $100 trillion of new wealth. The world’s GDP in 1980 was around $11 trillion, reports the World Bank. Today it is around $60 trillion. Mundell had much to do with this.



The added $50 trillion-per-year capitalizes to over $100 trillion in new wealth — even when adjusted for inflation. Lower tax rates, free trade and more stable currencies moved something like 2 billion people out of dollar-a-day penury into prosperity. That achievement arguably makes Mundell the greatest living humanitarian. In becoming the first Nobel-class economist to advocate the gold standard it suggests that his greatest contribution to human flourishing may lie ahead.



Let us now take the next step from the 20th century’s “Mundell-Laffer Hypothesis” to a 21st century “Mundell-Tamny Hypothesis.” Tamny, editor of Forbes‘ Opinions page, proposed in his June 12 column that we:

… define the euro in terms of gold, and make euros redeemable in the yellow metal.



If so, the euro’s staying power and eventual rise to preeminence among currencies would almost be assured. Strong money that is stable in value is much demanded as a ticket used to exchange real wealth, and if the euro had a stable definition, it would quickly trump the dollar.



Of course the mythmakers predicting the euro’s demise would argue that a gold-defined euro would lead to certain debt default by Greece and Ireland (to name but two struggling countries), and that both would quickly exit the euro under such a scenario. The thinking here is wildly incorrect. ….



The governments of Greece and Ireland are having trouble with their debts to some degree because economic growth has withered alongside tax receipts. If so, far from a weight on growth, a strong, stable euro would attract the investment that would drive company formation and job creation that would bolster the ability of both governments to remain current on interest payments. For good or bad, economic growth is always the best fix for governments in arrears to creditors.



Many economists are already considering restoring the classical gold standard. From the rising economies known as the BRICS, S.S. Tarapore, former deputy governor of the Reserve Bank of India, has publicly articulated the virtues of the gold standard. Zhou Qiren, dean of Peking University’s National School of Development and a member of the People’s Bank of China Monetary Policy Committee recently, while not minimizing the political challenges of doing so, told a reporter Ye Weiqiang:



If the currency of each major country is bound to gold, financial headaches would of course be reduced. Taking QE2 as an example, if this were the 1880s, the currencies of the major western countries would be measured in gold. Unless the U.S.Treasury suddenly gained a large quantity of gold reserves, it would be impossible for (U.S. Federal Reserve Chairman Ben) Bernanke to print US$ 600 billion to purchase long-term debt. If there is a commitment to a gold standard system, such as the Bretton Woods system in place until 1971, the Fed could not easily ease its monetary policy, because not only could each country with dollar holdings hold them accountable, they could also redeem their dollars for gold to see how much Uncle Sam’s promise is worth.



A gold standard also would eliminate exchange rate wars. Since all major currencies could be exchanged for gold or other currencies pegged to a currency that follows the gold standard, exchange rates would remain stable without anyone doing anything. Where would exchange rate disputes come from? In short, the gold standard would effectively prevent each country’s government from recklessly levying ‘inflation taxes’ domestically and passing troubles to others by manipulating currency exchange internationally.



Of course, this is an excellent monetary system.



This, of course, is but the tip of an iceberg with commentators such as Larry Kudlow pushing gold as the “crown” of an economic growth strategy, with the gold standard’s eminence grise, Lewis E. Lehrman, with whose eponymous institute this writer is professionally associated, emerging as a leading presence in the economic discourse, with American Principles in Action, with which this writer is professionally associated, teaming up with the Iowa Tea Party to raise public, and the presidential candidates’, awareness of the gold standard. And far more.



Keynes wrote, in The General Theory of Employment, Interest and Money:



The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.



It is time, and long past time, for the practical men of our era — such as our president and the Republican presidential aspirants — to throw off the shackles of various defunct economists, cease to distill frenzy from some academic scribblers, embrace the Mundell-Tamny hypothesis, and move forward, immediately, to multilateral convertibility of currencies to gold.



The gold standard is the key to human flourishing. If we grasp the opportunity of gold convertibility this still-dawning millennium beckons with the possibility of becoming a new golden age.





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Saudi riyal remains unaffected by dollar depreciation ...

30 November, 2011

Saudi riyal 'remains unaffected by dollar depreciation'

Arab News - During a seminar hosted by Sidra Capital, leading Turkish Economist and Strategist Erda Gercek reiterated that the Saudi currency would not be affected by the depreciation of the US currency. He emphasized that the currency exchange prices in the Kingdom and the world will remain stable thanks to dollar reserves.

Gercek's made the statement at the seminar during which the demise of the dollar and its future as world's reserve currency was presented. Gercek gave an overview of the global financial and economic situation and provided further insight into the future of the dollar and its impact on the riyal.

Hani Baothman, CEO of Sidra Capital, said: "We hosted this seminar in order to shed light on the current volatility in the market as a result of the euro crisis which has ballooned with each passing day, in addition to the festering economic crisis in the United States as a result of its political indecision to tackle the mounting budget deficit and the swelling of its public debt."

He added: "Our aim is to connect with our shareholders and stakeholders in order to provide them with the most relevant and most objective information as it pertains to the persistent doubts about the ability of the US administration to face the challenges ahead and what it means to the position of the dollar as a reserve currency and how that might affect its position against the worlds' major currencies."

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In its New World Economy Report, published by the IMF, the report predicted that the dominance of the dollar in the international financial system will end by 2025, and it will be replaced by a tri-polar system consisting of currencies including the greenback, the euro and the Chinese yuan. IMF report stated that this would happen when the dollar loses its position as an undisputed global currency by that year.

Gercek said the dollar remained the world's main reserve currency and that it would remain so for the foreseeable future. "This is based on structural reasons such as the size of the American economy, which is still the largest in the world, the depth and breadth of America's financial markets, which is still unchallenged and its liquidity remains unsurpassed. More importantly America's institutional framework and its robust strength are still superior, especially in the areas of governance and the rule of law, which are paramount if economic activity is to be created and sustained over the long term," he said.

"US can sustain larger trade deficits than any other country as capital inflows are almost guaranteed," Gercek said. "Reserve currencies come and go, but there is no obvious one to replace the dollar yet. This does not mean the dollar is on a constant depreciation path. Currencies are mostly part of the solution not the problem. And weak dollar is exactly what the doctor ordered for the US economy," Gercek said.

With regards to America's political standing, its dominance coincided with its emergence as the world's sole and undisputed power with the collapse of the Soviet Union in 1990. As such, and after the Bretton Woods system that came into existence in 1946, the dollar replaced the sterling pound as the world's reserve currency.

However, with the slow rise of other regional powers, notably China, India and Brazil, a multi-polar world order is likely to emerge over the course of the next few decades. With that rise and as a result of America's persistent budget deficits, mounting public debt and balance of payment problems, coupled with political indecision to solve its chronic structural problems, the supremacy of the dollar will likely slide in tandem with its retreating political and financial dominance.

The American dollar is described as Triffin Paradox, which refers to the conflicts of interest that occurs as a result of short-term domestic and long-term international economic objectives, given its position as a national currency and the international reserve currency. It is used as an international source of liquidity; as such the United States needs to run trade deficits to provide liquidity to the rest of the world and this has helped global growth over the last 30 years. Global imbalances and low US savings were obvious side effects of this policy.

Gercek discarded the rumors that America is printing more money. He indicated that the US currency's strong position comes from exchange of reserves in dollar between central banks and commercial banks. Thus, the American government is simply balancing its inflows and outflows.

He clarified that emerging markets cannot simply be bystanders to this process by hinting or engaging in a “currency war.” They were part of the problem during the buildup to the global imbalance. Now they need to be part of the solution and accept that the old model of mercantilist growth is no longer an option. Interconnectedness will make sure "one for all and all for one." Failure to see this will have dire repercussions for all.

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UAE buys US Treasuries And The Oil-rich Gulf Nation is Committed to Keeping its Currency Pegged to the US dollar ..

Tuesday, November 29, 2011

Europe not seeking UAE help, says Central Bank governor

UAE buys US Treasuries: Suwaidi

European leaders and the European Central Bank have not asked the UAE for aid to help contain the euro zone debt crisis, the country's central bank governor said on Tuesday.

Euro zone finance ministers are expected to agree on Tuesday on reforms of their bailout fund, the 440 billion euro European Financial Stability Facility, to expand its effective size through leverage. The EFSF will be able to attract cash from private and public investors to its co-investment funds.

European officials have raised the possibility of China and other cash-rich countries around the world investing, as a way to fight the crisis. But asked whether the UAE had been approached on this issue, central bank governor Sultan Nasser Al Suweidi said: "No, not at all."

"The Europeans need to organise themselves and they will solve their problems. These problems are of a sovereign debt nature and... can be handled over time, they need time," he told a news conference.

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The central bank said in October it had no exposure to euro zone debt in its reserves and that it only invests in countries and corporates rated AAA, as required by law.

US TREASURIES

Al Suwaidi also said the central bank was investing again in US Treasuries as interest rates were now reasonable. The 10-year Treasury yield hit a record low of 1.72 per cent in September and has since rebounded modestly to around 2.0 per cent.

"Now, we do (invest in US Treasuries) because the circumstances have changed. The interest rates are now reasonable," Al Suweidi said.

"It (volume) is fluctuating depending on what the yield is," he told reporters, but did not give details.

Gulf Arab oil exporters such as the UAE mainly invest in dollar assets since most peg their currencies to the US dollar with crude oil, priced in dollars, accounting for a majority of budget revenue.

The central bank said in July, when the risk of a US debt default was unsettling markets, that it did not hold any US Treasury bonds and that most of its foreign reserves, though denominated in dollars, were invested in non-US assets.

The central bank's foreign currency assets edged down to a three-month low of Dh199.1 billion ($54.2 billion) in June. But within that total, holdings of foreign securities rose to Dh86 billion in June, the highest level since at least 2007, the latest available data show.

Al Suweidi also said the UAE's bank lending growth rate of 4 per cent since the beginning of the year was "good" under current circumstances.

Asked whether he saw any signs of foreign banks scaling down their activities in the UAE, one of the world's top five oil exporters, given the headwinds they are facing in Europe, he said: "Even if they scale down their operations they are free to do so. They will scale down and then return."

Stands behind dollar peg

The UAE's Central Bank governor said on Tuesday that the oil-rich Gulf nation is committed to keeping its currency pegged to the US dollar and is reinvesting in US Treasury bills.

The exchange rate of the UAE's currency, the dirham, is linked to the greenback. But some analysts have questioned the value of the keeping the policy as the US economic struggles and the dollar remains weak.

Al Suwaidi countered that the dollar link has served the Emirates well, adding that "we are very much with the peg."

"There is absolutely no change ... The fixed peg has served our economy for many years," he said.

Saif Hadef Al Shamsi, assistant governor for monetary policy and financial stability affairs, added that the Central Bank's reserves were also invested in Japanese government securities.

Asked about the effect of sanctions ordered by the Arab League against Syria, Al Suwaidi said the Central Bank will comply if ordered by the UAE government but has not yet received guidance on what measures to implement.

"There are procedural issues. They have to communicate that with us," he said.

The Arab League on Sunday approved sweeping sanctions against the regime of Bashar Assad to seek an end to the violence against opposition groups. Syria's foreign minister called the Arab move "a declaration of economic war" and warned of retaliation.

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