By Jeff Thomas, International Man
By now it will be common knowledge that Fed Chairman Ben Bernanke has committed America to Quantitative Easing (QE) for Europe.
It matters little whether the Fed distributes the funds individually to specific countries, or whether it credits the International Monetary Fund (IMF) or the European Central Bank (ECB) for them to distribute. At the very least, the objective is a delay in the financial collapse of the EU, which would, in turn, delay a similar crash in the US.
It is hard to imagine, but it is also possible that Mr. Bernanke actually believes that the creation of more fiat currency may be an actual solution to the EU's fiscal problems.
For those who believe, as I do, that the situation is beyond redemption and that the EU QE will only exacerbate the problem, the damage that it will do to American and European taxpayers is unconscionable. This latest grandstand play will only serve to make the ultimate crash deeper and more prolonged. Long after those who have concocted the scheme have retired to their villas, the average citizen will still be paying for their intervention.
But there is an interesting side issue that, as yet, does not seem to be under discussion. If the US is to loan billions, or even trillions, to the EU, it would not be unreasonable for them to request that the loan be securitised. After all, this is the normal manner in which banking is done.
On the surface of it, this might seem unlikely, as the Fed would appear a bit chintzy if it were to insist upon holding a note for, say, the Acropolis or the Tower of Pisa. However, a far more reasonable and far more logical possibility exists. At present, an estimated 6,000 tonnes of gold is held in the cellars of the Federal Reserve Building in New York that belongs to EU countries. It would not seem at all unreasonable for the US to wish to collateralise the debt to the EU, using the EU gold in New York.
The kicker here is that, however much fiat currency they credit the EU with, they will never see that money again. It is not possible that it can be repaid, since the EU cannot even pay its existing debt.
So, what would be the wrinkles in such a move?
First, it could be suggested that the EU would not wish to sign over the gold. After all, the QE will not be repaid, which virtually guarantees that they would lose their gold to the US government. Second, the European people are beginning to figure out that it may not have been such a good idea to let the Americans store EU gold, and many are now asking their governments to have it shipped to European banks. So, what would be the reply from the Fed if, say, the Bundesbank were to order that the German-owned gold be delivered to Frankfurt?
I am inclined to believe that it would not be one that the German people would wish to hear.
Another argument against the premise of securitisation for the EU QE would be that the US continues to maintain that gold is a barbarous relic that should not be thought of as currency. If they were to demand gold as security, would they be opening up a can of worms? My guess is that they would not. That can is in the process of opening of its own accord, as major American institutions are now buying gold. Therefore, the veil is falling from that particular ruse in any case. As it does, the US could only appear prudent to its populace by requesting securitisation.
But the larger issue is the future. The Euro is headed for a fall. The US dollar, in turn, would be likely to fall. A currency scramble would then ensue, with possibly the yuan, the ruble, the rupee and other currencies vying for greater use as world currencies. In addition, the IMF may well create its own paper currency and run it up the flagpole.
The US would be likely to make a stab at a new dollar of some sort. However, once a currency has crashed, the currency that created it generally has a difficult time re-establishing its previous position of importance. If the US were to stay in the game as the world's provider of a default currency, it would need something more than it can presently offer.
Many economists project that, following the crashes of the Euro and the dollar, a return to gold-backed currencies would appear as a world trend. This is only natural, as the fiat currency concept would have been shown to be the farce that it is.
This being the case, at gold's current spot price there is not enough of it in circulation to cover the amount of currency units in existence in the world. It is entirely possible that all currencies could receive a shake-up, and an entire worldwide system of gold-backed currencies may develop. If this were to occur, the countries that held the largest amounts of gold at that time would be out in front economically. Which countries had made the most severe economic mistakes in the immediate past, would become less important than who was holding the precious metal after the fall had occurred. Certainly, the Asian countries see the writing on the wall. It is no secret that they are acquiring gold in a very determined way.
Certainly, they hope to have a bigger share of the pie after the crashes take place in the First World.
As to whether the US chooses to attach the EU gold to their QE of Europe, only time will tell, but it would certainly seem to be the wise move.
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About the Author: Jeff Thomas is British and resides in the Caribbean. The son of an economist and historian, he learned early to be distrustful of governments as a general principle. Although he spent his career creating and developing businesses, for eight years, he penned a weekly newspaper column on the theme of limiting government.
He began his study of economics around 1990, learning initially from Sir John Templeton, then Harry Schulz and Doug Casey and later others of an Austrian persuasion.
In 1999 he began his predictions for a second Great Depression and has since focused his attention on its ramifications and how it would affect the world.