It has become evident that debt-to-GDP ratios of 80, 90 or 100 percent will sooner or later cast doubt on a country's creditworthiness. Even supposed paragons of fiscal virtue such as Germany must be careful. The German debt ratio of 83 percent is too high, given the ageing population. Who is supposed to pay down that debt in the future?I am not entirely convinced that the story supports their headline, but it is nevertheless interesting to see recognition that the current situation cannot continue. Perhaps even more startling is Edmund Conway in the Telegraph. Regular readers will remember that I was extremely critical of his stance on quantitative easing (money printing) by the Bank of England, but he seems to have completely reversed his previous support for this dangerous policy. In a surprising article, he traces the roots of today's crisis to the abandonment by Nixon of the gold standard. This is an example of his analysis:
Even more interesting is the growing view that the $US is looking ever more fragile as the world's reserve currency. For example, the New York Times is taking a moderate position, where they posit that the $US has a long while to go yet as the reserve currency, but nevertheless see the writing on the wall:
Over the past 40 years, in the absence of a coherent international monetary system and under the veil of floating currencies, countries which would otherwise have been penalised for doing so were allowed to borrow enormous amounts (eg. The US and UK, or Greece). Other countries (eg. China or Germany) indulged them by lending enormous amounts. In the meantime, investors convinced themselves that the apparent economic growth fuelled by this debt was genuine rather than an artificial product of a binge.
The 2008 crisis represented the first recognition that those increases in asset prices and economic growth were chimerical. The recent relapse represents a recognition that the losses have merely been transferred on to sovereigns' balance sheets.
Still, recent actions have clearly hurt the dollar more. And it is the bleeding from a thousand cuts, both inevitable and self-inflicted, that will eventually cost the dollar its dominance.Even more interesting is commentary from Peter Hartcher of the Sydney Morning Herald. He commences his story with a comparison between US defence cuts and China's first aircraft carrier being completed. His story is rooted in the shift in power between East and West, and he sees the $US decline as a key element in the shift:
It's not just that the creeping shift of power from West to East has become a rush. We've known about that for years. There is something else going on, too. You can see it in the price of gold. An ounce of gold traded for about $300 a decade ago. This week it hit an all-time high of $US1800. Why?
Some investors have lost faith in the US dollar. It was the official global reserve currency for the first 25 years after the Second World War and the de facto reserve currency after that. Even the governments of the G-20 nations are actively discussing the idea of spreading the risk, creating a new reserve system comprising the currencies of multiple countries. This was unthinkable just a couple of years ago.
But while confidence in the US might be sinking, there is no corresponding rise in confidence in China. "You can see it in the price of gold," observes one of Australia's leading investors, Kerr Neilson, the head of Platinum Asset Management. "There is a system change under way."