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October 07, 2009

The Currency Cabal
by John Browne

On October 6th, The Independent newspaper of London set off shock-waves around the world with a report that secret meetings were held between the OPEC states, China, Russia, and others, in which the participants charted a course toward a new world reserve currency. Not surprisingly, the U.S. dollar nosedived on the news. The rout was only stemmed by Saudi and Chinese officials publicly denying the story.

Whether or not this particular reporter got all his facts straight is largely immaterial. If such meetings have not been occurring, they soon will be. All the ingredients to stir financial discontent in these nations are present. It's not a question of if we will move to a post-dollar world, but when.

We have warned continually that if the U.S. government persists in profligate spending, financed by debt and currency debasement, the greatly privileged reserve status of the dollar will be in jeopardy. We have also argued that with shrinking confidence in the stability of fiat currencies, gold itself will resume its reserve role in some capacity, boosting its price considerably. The recent gold surge indicates that this view has wide support.

It is becoming clear that President Obama will offer no "change" from former President Bush II's policy of dollar debasement. It is a policy of covert war on the U.S. dollar. It has been coordinated and executed under both presidents by Fed Chairman Bernanke. While a cheaper dollar serves many interests from the U.S. government's perspective (easier repayment of debt, for instance), it will be a burden for the vendors of dollar-priced oil (OPEC) and the holders of large amounts of dollar-based reserves (China and Japan). As these interests become increasingly antagonistic, a currency crisis threatens.

In the early 1920's, the Pound Sterling was considered 'as good as gold.' At the 1922 Rome central bank meeting, the British were persuaded to allow their notes - which were fully convertible into gold - to become the first paper reserve currency. They would be held and used by central banks in place of each storing its own gold bullion. After the Great Depression, the U.S. dollar - also convertible into gold - emerged even stronger than Sterling and gradually eroded Sterling's influence. In 1945, the Bretton Woods Agreement confirmed the U.S. dollar's role as the world's reserve currency and cemented its status with the creation of the International Monetary Fund and World Bank.

Reserve status has bestowed very great privileges. Most central banks keep gold and U.S. dollar currency ('as good as gold') in their reserves. As a natural corollary of this policy, most internationally traded commodities are priced in U.S. dollars. As a result, governments and corporations buying international products, such as oil, have to change their domestic currency into U.S. dollars.

Furthermore, any country in trade surplus with America has found it advantageous to keep its reserves in U.S dollars and invest them in the U.S Treasury market. This built-in international demand for dollars has enabled the U.S government to finance enormous and persistent national debts. In turn, this has financed a standard of living beyond that which America could afford from its natural trade balance and domestic productivity.

With dollars so ubiquitous, global monetary policy has been essentially outsourced to the Federal Reserve. The downside for most of the planet is that America has been able to set interest rates at a level that best suits its own political needs at the expense of others economic needs.

Although a nation whose currency enjoys reserve status is given a great many advantages, the privilege does come with responsibility. Many nations believe that America has abused its privileges by debasing its currency. The criticism is justified.

First, a cheaper currency represents a covert trade tariff on imports and subsidy on exports. The U.S. government is desperate to boost its economy and may see this mercantilist strategy as in its interest.

Second, 'official' U.S. Treasury debt stands at some $11.8 trillion. But this is only half of the story. The 'off-balance sheet' debts and obligations of the U.S. government add up to an unimaginable $43 trillion and counting! In short, this debt can never be satisfied - at least in real dollars. The government is debasing the dollar in order to avoid the consequences of decades of reckless economic policies.

For some time, there has been talk of challenging the dollar's reserve status. But key nations have refrained in order to test the policies of President Obama. Instead of change, they have seen even more massive spending on health, education, and bailouts.

If this new currency cabal is successful at unseating the U.S. dollar, we will see rapidly rising prices domestically - especially for gold. Severe social and economic disruption may follow. But it is all due to Washington's unwillingness to restructure itself.

As a passing shot, Iran has just announced it will not accept U.S. dollars in payment for its oil. The last nation to offer such a challenge, Iraq, was invaded only months later by President Bush II. Already, President Obama appears to be considering joint strikes against Iran to 'protect Israel and the world from an Iranian nuclear threat.' Of course, none of this will change the fundamental economic dislocation that is causing America's descent. In fact, war is one of the most expensive propositions a government may entertain. One thing is virtually certain: if the missiles start to fly, then gold is sure to soar.

For a more in-depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar, read Peter Schiff's 2008 bestseller "The Little Book of Bull Moves in Bear Markets" and his newest release "Crash Proof 2.0: How to Profit from the Economic Collapse." Click here to learn more.

More importantly, don't let the great deals pass you by. Get an inside view of Peter's playbook with his new Special Report, "Peter Schiff's Five Favorite Investment Choices for the Next Five Years." Click here to dowload the report for free. You can find more free services for global investors, and learn about the Euro Pacific advantage, at www.europac.net.

John Browne, Senior Market Strategist
Euro Pacific Capital, Inc.

John Browne is the Senior Market Strategist for Euro Pacific Capital, Inc. Mr. Brown is a distinguished former member of Britain's Parliament who served on the Treasury Select Committee, as Chairman of the Conservative Small Business Committee, and as a close associate of then-Prime Minister Margaret Thatcher. Among his many notable assignments, John served as a principal advisor to Mrs. Thatcher's government on issues related to the Soviet Union, and was the first to convince Thatcher of the growing stature of then Agriculture Minister Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously pronounced that Gorbachev was a man the West "could do business with." A graduate of the Royal Military Academy Sandhurst, Britain's version of West Point and retired British army major, John served as a pilot, parachutist, and communications specialist in the elite Grenadiers of the Royal Guard.

In addition to careers in British politics and the military, John has a significant background, spanning some 37 years, in finance and business. After graduating from the Harvard Business School, John joined the New York firm of Morgan Stanley & Co as an investment banker. He has also worked with such firms as Barclays Bank and Citigroup. During his career he has served on the boards of numerous banks and international corporations, with a special interest in venture capital. He is a frequent guest on CNBC's Kudlow & Co. and the former editor of NewsMax Media's Financial Intelligence Report and Moneynews.com. He holds FINRA series 7 & 63 licenses.

Copyright © 2008-2009 Euro Pacific Capital, Inc.

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