Quote:
Originally Posted by thanixravindran But for payment in any foreign currency, there has to be equivalent demand for that currency in other markets. Example: If India is paying in Rupees, Russia should have something to buy in Rupees (Balance of payment) or use Indian rupee to buy something from some other county. For the sheer number of countries, I think this is practically infeasible as not every country can balance their trades. So I believe this is where Gold become the standard of exchange and later the dollar. So essentially all countries can use Gold or Dollar and buy anything across the globe. Am I right? A crude analogy I can think of |
If you look at what happened after WWII, global currencies were pegged against the US$ and the US$ against gold at a price of US$ 35 to a ounce of gold (Bretton Woods agreement). This meant that all national currencies were valued in relation to the US dollar since it had become a dominant reserve currency. The gold standard also increases the trust needed for successful global trade — the idea is that paper currency has value that is tied to something real.
The goal of this type of monetary policy is to prevent inflation as well as deflation, and to help promote a stable monetary environment.
But then USA had the Vietnam war happening and this is when governments don’t like the gold standard as a war increases expenditure and they don’t have enough gold in reserves to print more money against. However global leaders got suspicious about US in the 70’s that they were printing more than they had gold to back it so they started to give back US$ in exchange of physical gold.
By 1971, President Richard Nixon had called for a temporary suspension of the US$ convertibility. Countries were then free to choose any exchange agreement, except the price of gold. In 1973, foreign governments let currencies float; this put an end to Bretton Woods, and the gold standard was ousted.
From the 1970s to today, most countries have run on a system of fiat money, which is money issued by the government that is not backed by a commodity. The value of money is set by supply and demand for paper money, as well as supply and demand for other goods and services in the economy. The prices for those goods and services, including gold and silver, can fluctuate based on market conditions.
So now you understand how US used this to their benefit to print as much money as they want and the petrodollar to maintain demand for the excess cash printed...
Hence, countries like Turkey when they see economic hardship they buy up US$ as it will hold up value better than their own currency. But what will countries do if the US$ it self starts dropping in value what will they do with the US$ in the gold standard they would have at least got back gold against the US$ but now nothing...
Also, countries like China devalue their currency against the US$ and hence become a good market for exports and manufacturing. But the US$ they earn they don’t exchange it for their currency as it will increase the value of their currency and instead buy US treasury bonds so the money goes back in the US financial system. As the world feels US can never collapse and US$ can never loose it value but ultimately its just a piece of paper and has nothing tangible to value it against.
The increase in cost of living we see today aka inflation has all started after moving away from the gold standard. During the gold standard inflation never reached in double digits.
Now if you look at gold when does the value of it increases? Whenever the world looses confidence in global economy or markets. So who gains from keeping gold prices low? Individuals or governments? Also, who holds huge stack of gold? Individuals or governments? Hence, there is a belief that governments have been artificially suppressing the value of gold so that it doesn’t become a more valuable mean of exchange against the US$. Between 99 and 2002 the Bank of England sold a massive amount of gold and bought instead Euros and US$ against the sale. Other countries reserve banks like France, Switzerland also did the same thing. So, with such amount of gold put up for sale it keeps the price down.
Net net countries feel that gold is a competitor to their national currency as gold is money and their currency is basically a money substitute. Fiat money gives power to the governments and Real money keeps the power with the people. With Real money governments can only spend what they earn and if they want to earn more they need to tax their citizens more but with Fiat money they can print as much as they want. So now you understand how America has been able to fund so many wars when in reality a country takes decades to recover from a single war.
But with all the financial instability in the markets recently look at gold prices and where it has reached or could reach. And who has been buying more gold its the non mainstream central banks like Mexico, China, India and Russia and not the top central banks who are involved in the international bank of settlements.
With gold there is a saying that you don’t own it until you hold it. As most of the gold traded in the world stays either with new York Federal reserve or Bank of England and if these guys put sanctions on you you can’t even sell your own gold. Russia had already planned keeping these things in mind and prepared accordingly for the current situation.