Locking the doors

The dethroning of the US dollar as the international trading currency is under way. New bonds issued by the International Monetary Fund in the form of "Special Drawing Rights" are related to a basket of currencies, thus diluting the dollar element and reducing America's opportunity to cheat the world by devaluation.

The same article describes a Chinese proposal to start issuing bonds denominated in renminbi, so that if the dollar does drop against the Chinese currency, all that will happen is that the dollar cost of the capital debt will increase.

It occurs to me that such extra security for lenders may help interest rates to remain lower than they otherwise would be. So the threat to borrowers is not that interest rates will increase, but that debt outstanding will continue to feel heavy, since inflation won't lighten the burden. In fact, the burden of foreign debt could get worse, if the dollar weakens in this new foreign-currency-mortgage era.

Another factor, which may be a deliberate strategy with an eye to the above, is China's own expansion of credit. If monetary inflation goes global - including in the East - then there's less hope that Western businesses could use relative currency devaluation to increase the demand for their goods and services. Manufacturers here will still be unable to compete and debt will grow. Our creditors will own us - we'll "owe our soul to the company store".

It's time to grasp the nettle - bust the banks who got us into this, have a tremendous clearout of debt from the system, reset wages and prices at lower (more internationally competitive) levels, get the people back to work and shrink the dead weight of government and its dependants.

That, or see what's left of our wealth leak away, and then suffer all the above as well - at even lower levels of per capita assets and income.

Doubtless the politically-favoured option is the latter - "Let it all happen on someone else's watch, after we've made ourselves into the New European Aristocracy and gone to our country estates." This would be a mistake. The palace of Versailles didn't protect Louis XVI, nor Waldsiedlung the East German communist elite.

Could the Dow AND gold BOTH go up?

In unusual circumstances, normal behaviour changes, as Richard Bookstaber recently observed. If the dollar's decline continues, and gold maintains its "real" value, a 17% dollar devaluation would mean a corresponding 20.48% increase in the price of gold, carrying the yellow metal over the $800 threshold.

A weaker dollar makes imports more expensive - both finished goods and raw materials - but is a stimulus to some exports. Maybe, if it didn't all happen too suddenly and scare everyone off the market, the Dow would rise.

It would also mean paying back foreigners with cheaper money, a trick played on the world by Britain's Harold Wilson in the devaluation of 19 November 1967, when the pound's foreign exchange value was cut abruptly by 14%.

The US Treasury's figures for May 2007 show there's a total of $2.18 trillion in foreign-held securities. A Brit-style 14% devaluation would lose Uncle Sam's partners about $305 billion. John Bull's share of that loss would be some $23 billion, or around £11.5 billion.

Maybe that would finally get the British news media to notice the recent huge UK support for US government debt. I can hardly wait. Be still, my beating wallet.

There's a political price to pay, but US Presidents can't serve more than two terms anyway, not since they changed the Constitution to stop another Roosevelt reign.

Harold Wilson resigned in 1974, citing ill health, but I did once hear a rumour that the IMF, which bailed us out in 1975, had made Wilson's resignation a precondition of the loan. In these document-shredding and email-deleting times, a paranoid would say you know it's the truth when it's officially denied.

Meanwhile, please place your bets in the two polls opposite!