Kuwait split raises questions over longevity of the dollar By Jim Grant
http://www.ft.com/cms/s/f2f3a8a8-0f12-11dc-b444-000b5df10621.html
Published: May 31 2007 03:00 | Last updated: May 31 2007 03:00
When the Roman emperor Constantine struck off a new gold coin, he expected
it to give good, durable service. And the extra-durable solidus did - about 700
years' worth. Modern monetary systems have a somewhat shorter shelf life.
That the current monetary system may not last for the ages was underscored
the other day by Kuwait's decision to uncouple its dinar from the US dollar.
For years, the two had been lashed together as a preliminary to the projected
creation of a common Persian Gulf currency.
But the more the dollar's value sagged, the more dollars the members of the
Gulf Co-operation Council have had to absorb just to maintain the desired
exchange rates. Naturally, the central banks of the participating countries did
not acquire their dollars with nothing. They printed the local currencies with
which to buy them and the more they printed, the more that inflation welled up.
Now Kuwait has chosen to go its own way, leaving Saudi Arabia, Qatar, the
United Arab Emirates and Bahrain to ponder their tolerance for open-ended
dollar-buying. Little Kuwait just might be the herald of big change, both in
the dollar's fortunes and the world's monetary organisation. To a degree, the
world turns on open-ended dollar buying and the muscular feats of
money-printing it calls forth.
Hard-working Asians (and oil-blessed Arabs) consume much less than they
produce. Americans, on the other hand, produce much less than they consume. But
the savers and spenders do have something in common. The workers are happy to
receive dollars, and the consumers are more than happy to print them. Unlike
the solidus, a greenback has no intrinsic value. It is faith-based. Here is a
new idea in the world. Certainly, the unsystematic world monetary system is a
new arrangement. Up until 1971, the dollar was collateralised by gold. If you
were a central bank, $35 would get you an ounce on demand. The system gave
good, durable service until the US started to run out of bullion. On August 15
1971, the dollar became uncollateralised. Exchange rates started to float - or
to sink or be pegged. Governments made it up as they went along.
That the paper dollar finds favour the world over must be counted as one of
the greatest achievements in the annals of money. To be sure, the central banks
of the Middle East and Asia have had their own reasons for stockpiling the
greenback and US securities. But their self-interest doesn't detract from the
rarity of the historical moment. To paraphrase Richard Nixon, the president who
closed the US gold window, we are all dollar bulls now.
Or rather, we are up to a point of saturation, a point that Kuwait seems to
have finally reached. Its neighbours, too, appear to be on the edge of dollar
surfeit. Broad money growth in the Gulf region is running at 20 per cent, in no
small part a consequence of rampant dollar absorption.
"Inflation is a hot topic in the kingdom," the Financial Times reported from
Riyadh recently, "as city residents feel the pinch of rental and price
increases suddenly feeding into an economy that has grown used to inflation of
around 1 per cent a year since the 1970s." The Saudi statistics gatherers today
acknowledge a current rate of 3 per cent.
Since the international gold standard perished in 1914, successive global
monetary systems have been brought down by external shocks or internal
contradictions. Inflation is the bane of our non-system system. Inflation is a
disease of one main cause but varied symptoms. A surfeit of money can cause
derangement at the checkout counter (India), in the real-estate market (Russia)
or on the stock exchange (China).
By upsetting the integrity of prices, it can disturb the architecture of
production. In most of the dollar-buying states, monetary growth is fast enough
to upset the eternal rest of Milton Friedman. In all cases, a slower pace of
dollar absorption is an integral part of a monetary cure. It will be said that
only some members of the dollar-buying bloc want to be cured. The rest -
notably, China - are happy to keep on cranking the monetary presses. But the
upward track of US interest rates and the downward path of the dollar exchange
rate tell a different story. One thing's for sure, the greenback ain't the
solidus.
Jim Grant is the founder and editor of Grant's Interest Rate Observer
With Regards
Abi
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