Yesterday’s Top Story: Dollar crash now or crash later. How long can gold be kept in the box?

Dr Paul Craig Roberts, former U.S. Assistant Treasury secretary, reckons Fed QE policy, and attempts to unwind from it, will lead to a dollar crash and ultimately an explosion in the gold price.

DENVER (MINEWEB) –

Commenting on the dollar, the U.S. Fed tapering agenda, the state of the U.S economy and the gold price makes it open season for economists, and would be economists with almost as many different views being expressed as there are commentators.  But, broadly, the consensus seems to fall between two camps – those, mostly on the right, who feel that the current economic situation, and the solutions being applied are just a house of cards waiting to come crashing down and, when it does, gold will explode, while those who are mostly more left-inclined will comment that current Fed policy, tapering or no, is the only way of saving the U.S. (and the world) economy and that Ben Bernanke et al have rescued us from a recession at least as deep as that of the 1930s.

To this non-economist (an engineer by background, which does at least suggest a pragmatic outlook) both sides may well have a point.  (It may also be because my star sign is Libra for which astrologists suggest that one sees both sides of any argument). However, there is little doubt that QE has been of huge benefit to some sections of the community and has, so far, been successful in warding off an economic depression.  Those predicting that hyperinflation has to follow on have been put in their place – for now – but it is the haves who have been benefitting, not the have-nots with median household incomes in the U.S. no higher than they were 25 years ago (according to a new York Times investigation published last week).  Indeed the NY Times findings indirectly suggest that things have actually got worse for the lower end of society, while the rich – and the bankers in particular – have been bucking the lower income trend.  Indeed the NY Timers commented that standards of living in the U.S.have fallen over the past quarter of a century – and this is paralleled in other G20 nations.

Now, most of the pundits commenting on the Fed’s actions and their effects on the economy are outsiders – many just trying to make a name for themselves by predicting the outcomes of these policies and when they occasionally get a significant event right they live on that for evermore, totally disregarding all the times they have called it wrong.  They are mostly trying to second-guess Fed policies and their likely effects.  One can mostly discount politicians’ views – they always have an underlying, self-serving, or at least political party-serving, agenda – but when you get a former insider commenting, it is perhaps worth sitting up and taking notice.

Thus, an interview by King World News on Friday with Dr Paul Craig Roberts, former Assistant Secretary of the U.S. Treasury and one of the instigators of Reaganomics, should make one sit up and listen.  The full interview can be found at this link.

Roberts reckons that the current Fed QE programme is going to be virtually impossible to unwind – indeed the suggestion is that it might even have to be extended.   If the Fed does to decide to start to unwind in any significant manner, the U.S. economy, which has been weaned in recent years on ever growing money being printed and pumped into it, will crash – and the dollar with it.  If QE is continued at least at current levels, which he feels it will now have to be, eventually the dollar will also crash as dollar holders around the world realise the ultimate debilitating effects on the current global reserve currency of just printing more and more money without any economic strength to back it.  There will, Roberts avers, eventually be a huge flight out of the dollar leading to an explosion in gold.  But, when questioned on timing he admits he has no idea how long this would take to occur.  Indeed, he says that he would have thought it would already have happened by now.

Gold plays a very important part in this – and Roberts comes down very much on the side of those like GATA who firmly believe the gold price is being suppressed as an integral part of Fed policy, in collusion with their bullion bank allies, and with other foreign central banks, to ensure gold is kept in the box.  As long as the bullion banks can keep shorting paper gold in unlimited quantities, this situation can persist, and Roberts feels that to keep gold within the $1200-1400 level is the target of this naked shorting of the yellow metal.  The reason being that gold rising sharply against the dollar would be seen as an indicator that the Fed has lost control by foreign dollar holders and would lead to a huge run on the greenback which, once started, would be virtually impossible to counter.

While some economists have predicted that the Fed will now announce a start to tapering at the December FOMC meeting, Roberts sees this as highly unlikely for the reasons noted above, and also he thinks that the U.S. economy, rather than getting better despite massaged figures, will be seen to be still on the downward path and even a token taper would have an additional adverse effect.  Household incomes are not rising, personal debt is at such high levels that it is becoming impossible to borrow – and the banks won’t lend in any case – so there is no additional money out there to support domestic sales growth and thus boost the economy.

With no pickup internally, Roberts feels that Bernanke will put off any decision on tapering, thus leaving it to his successor as Fed chairman next year.  If his successor does instigate tapering and the economy crashes as a result, it will be ‘the next guy’ who gets the blame leaving Bernanke’s reputation relatively unscathed!

Writing from an independent viewpoint, what can interrupt the naked shorting of paper gold and containing the gold price indefinitely in this manner?  As a number of the pro-gold commentators have been pointing out ,the flow of gold from weak hands in the West to much stronger hands in the East is likely to be significant.  Paper gold ultimately needs some physical backing and, as Western gold stocks diminish and are not being replenished by newly-mined metal which is all being taken up in the East anyway, there will be a crunch as perhaps more and more people start demanding physical gold delivery.  There is already some anecdotal evidence of banks refusing to supply physical gold to holders who have gold deposited with them but paying them off in currency instead.  If this moves from becoming a trickle to a flood then it is hard to see a lid being kept on the metal price with huge premiums starting to become the norm for delivery of physical metal.  That is a de facto increase in the gold price whatever the bullion banks may try and do,

Ultimately, of course, economic history indicates one just can’t go on printing more and more money without devaluing the currency, leading to ever increasing inflation.  Those economies that have tried to do this in the past have ultimately seen hyperinflation as a result.  Is that the fate which awaits us ahead?

Do listen to the Roberts interview, it is enlightening, particularly as it comes from someone who really understands how the U.S. Treasury, the Fed and government economic policy works.  You can’t just discount his viewpoint as being those of a crazy right wing gold bug, but of someone who has been at the heart of the U.S. economic establishment.

It will be interesting to see if any of these worrying views find support from speakers at the Denver Gold Forum this week – perhaps the premier annual event for the gold mining sector with a top lineup of gold industry and economic expert speakers..

iPad Version: Picture – Gold bars are pictured at the Ginza Tanaka store during a photo opportunity in Tokyo: REUTERS/Yuriko Nakao