Dollar's latest threat is from its own backyard

Published on by www.coppertech.biz

 
The arbiters of front pages of most newspapers missed out on an astonishing story last week. It's about gold. Not about the soaring price of the yellow metal, but about its future. Lawmakers in Utah, a state in the US, have approved a Bill to make gold legal tender. What it means is, if you step into a shop in Utah, and offer to pay in gold, instead of dollar, the lady behind the cash counter will not say 'no'. Few in Utah are likely to hang around in shopping malls with gold pouches.

Many may scoff at the suggestion: 'Why on earth should I part with my gold for groceries?' But such a law can make the Average Joe wonder what it's all about. Why did the Senate have to do it? What' wrong with the dollar? Does it mean that soon there will be bank accounts where one can deposit gold, instead of cash, and earn a small return?... And who knows, some day they may hit upon the idea of converting their spare cash into gold. After all, if gold is dollar and dollar is gold, then why not get rid of paper bills under mattresses and money in banks, and move over to some real hard currency.

If at all it happens, it won't happen on one fine day. People don't think like that unless they fear an economic disaster. But if inflation rises slowly but surely, savings shrink by the day, an uncertain future stares at them and talk shows go on with dollar bashing, then one day a few people in Utah may go for gold. A week later some of their neighbours may try it out. And then some more who may think gold's cool. It will be fun to watch what happens if more US states pass a similar law in the days to come.

Think of a day when farmers in the wilds of Montana to traders in New York City start switching over from dollar bills to gold coins. Value of gold shoots as it becomes more sought-after, and the dollar loses whatever charm that it's left with. As more people switch to gold, the further they pull down the dollar. Utah's shopkeepers, till then indifferent to dollar or gold, will ask for gold (and only gold as the greenback turns worthless).
It's the D-Day for dollar-sceptics. For nearly a decade, they have forecast the demise of dollar as the pre-eminent global currency. Such a prophesy began with the birth of the euro, gathered steam with the dotcom crash, and appeared ominous after the fall of Lehman. But the currency survived the financial meltdown and the dollar die-hards were emboldened by a chaotic Europe.

But dollar-sceptics are growing in numbers with Fed, the American central bank , creating a trillion dollar of new money to restart a growth engine that's still sputtering. Some among them even nostalgically think of a day when the world will return to Gold Standard - a system that prevailed before the First World War where money could be freely converted into gold at a fixed price. Under such a monetary system, a central bank is held back from printing money till it has enough gold to back it.

For years, this tiny club of advocates of Gold Standard, with their members lost in universities and think-tanks, exchanged notes among themselves like freemasons. For them Utah is like a dim ray of hope: If American citizens start rejecting the dollar, someday the Fed will be forced to change its easy money policy. It can no longer create a new bubble with new money to lessen the pain when an old bubble bursts; and politicians and central bankers can no longer use a loose monetary policy to hide their mistakes.

The new law in Utah - a land named after the mountain tribe Ute, who fought bloody battles hundred years ago when outsiders came in for gold - may well remain a dormant legislation. But even if it goes down as a symbolic one, it's perhaps the most subtle attack on the dollar and Fed. This time around, the attack is not from China, US' strongest economic rival, or the Arab world, its biggest threat to peace. It's from within.
The Economic Times
 

Comment on this post