Without Gold, The US Dollar Is A Government Noodle

One thing that makes the whole world of investing difficult to penetrate is that the rod we use to measure value is as loopy as wet spaghetti.

If you've been following the strange story of the US dollar, you have noticed that it's being beaten by some unlikely competitors - namely, the Brazilian real, the Israeli shekel, the Turkish lira and the Philippine peso. What gives?

It's hard to know. We measure our wealth in our national currencies. We adjust for changes in the cost of living. But we don't really know what the currency itself is worth.

Gold used to provide a fixed scale...something that was sure, and universal. Gold used to give money real value. Not in terms of earnings...but in terms of something solid that couldn't be counterfeited, inflated, or readily debased.

But now, in the name of protecting national sovereignty and national currencies, governments insist upon being able to pass off as "money" whatever noodles they've got in stock.

An article in Foreign Affairs explains:

"Capital flows were enormous, even by contemporary standards, during the last great period of "globalisation," from the late nineteenth century to the outbreak of World War I. Currency crises occurred during this period, but they were generally shallow and short- lived. That is because money was then - as it has been throughout most of the world and most of human history - gold, or at least a credible claim on gold. Funds flowed quickly back to crisis countries because of confidence that the gold link would be restored.

At the time, monetary nationalism was considered a sign of backwardness, adherence to a universally acknowledged standard of value a mark of civilisation. Those nations that adhered most reliably (such as Australia, Canada, and the United States) were rewarded with the lowest international borrowing rates. Those that adhered the least (such as Argentina, Brazil, and Chile) were punished with the highest."

Yes, faithful DR reader. That is the way it ought to be.

But as we have been telling you - and any one else who will listen - that is not the way it is these days. Instead, however absurd the status of the US dollar may get, there are even more absurd foreigners willing to take it off our hands....and return it to us in the form of loans.

Keep your eye on our Crash Alert flag - the Bonnie Blue....and Black.

Bill Bonner
The Daily Reckoning Australia

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