Slither

Gold $7.04, the British pound bumping up against $2.03. Is the system settling for a controlled skid?

UPDATE

A day later, gold is up another 1%, (or would that be, the dollar is down 1% against it?), the pound is marginally nearer $2.03, and the Dow is rising.

More on gold and the money supply

At last, I've found something to help me see currencies in the context of official gold reserves - a brilliantly useful essay by Mike Hewitt in The Market Oracle (July 31).

The above chart (one of several in his exposition) shows that the Euro zone has a better ratio than the USA of gold to currency, and as I tried to demonstrate yesterday, within Europe Germany is particularly strong. And Europe's economy is also of a size to make it a possible reserve-currency contender.

As a footnote, my fellow Brits must be dismayed at the UK's pathetic weakness.

A note of caution about the Gold Standard, and the Euro

Until I looked it up (isn't the internet wonderful?) I had thought that the "Geddes Axe" (which slashed UK public expenditure) was a response to the Depression. Far from it: some would say it was a major cause. It turns out that after the First World War, our politicians wanted Britain to be great again, and thought that meant getting the pound back up to its former exchange rate against the dollar - just as I dream about getting into my old teen jeans.

They managed to do it for a while, but the result was a deflation that failed to take into account Britain's postwar economic weakness, and the 1925 restoration of the gold standard at this fatally high level prolonged the suffering. Then the zip bust.

More recently, some felt that lacing the pound into the Euro would stiffen our backs. Or perhaps this idea owed more to fuzzy notions of European brotherhood, modernity etc - we in Britain have had ten years of being led by a fuzzy thinker.

But not all agreed that the time was right - see the 2002 Cairncross lecture by Ed Balls. This lecture, by the new Prime Minister's former economic adviser (see Wikipedia bio), sets the historical context for the "five tests" that he formulated with Gordon Brown in a New York taxi in 1997. The tests were designed to determine the timing of the UK's entry into the Euro - for details, see this Scotsman article of 2003, which also reviews progress. Perhaps the timing will never be right.

Some hope that's the case -because it's not just about economics. Can Europe ever be a country? What will happen to our mode of government, civil liberties and economic prosperity in this herd-rush towards an "ever-closer union" commanded by a remote, opaque elite?

Is currency stability generally desirable? Sure; but another return to fixed exchange rates would certainly need extremely careful management, especially in fundamentally unstable conditions. I don't think Western trade deficits are purely due to monetary inflation; China's rapid rise from poverty seems just as challenging to our budgets as the Great War that drove us off the gold standard.

End of the dollar bill will mean the end of the dollar

Here's an article about the introduction of a dollar coin. Bad idea. We have a pound coin in the UK. A friend remarked on this to his wife when it came in; she replied, "It's so people will expect less."