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Consensus and all that rot
Wednesday, 1 April 2009
Hugo Salinas Price

Mr. Martin Wolf writes in today's “ Financial Times ”:

“…… No consensus exists on the underlying causes of this crisis or on the best ways to escape from it.”

For Mr. Wolf, who presumably earns his living by writing on such things as “the crisis” in the FT, it's no doubt a good thing that “there is no consensus on the underlying causes of this crisis”. He can go on cranking out articles on the subject for years to come, as things stand. A guaranteed stream of income, for him.

Mr. Wolf points out that none of the policies offered to counter the crisis are doing anything to correct the “imbalances” in the world economy. That is to say, there are countries with trade surpluses and countries with trade deficits, and things are likely to stay that way. He is quite correct.

Now, about “escape from [the crisis]”. Fact is, there is no escape. You allow your house to burn down – how do you “escape” from homelessness?

There is no painless “escape from the crisis”. It's going to hurt and will hurt some more than others. As Mike “Mish” Shedlock points out at, the main thrust of Secretary Geithner's plan to revive the American economy and get it back on the wagon is to make the crisis painless to the great big banks and their bondholders above all other considerations.

Now, it's really fortunate for the journalists at The Wall St. Journal and the Financial Times that there is no consensus on the causes of this crisis, for they will be able to sell a lot of words to their bosses at the papers. However, the cause of the crisis is quite plain: the dollar “went off gold” in 1971, and took the whole world with it in doing so.

All it takes to discover this, is to look at the chart showing how international imbalances erupted after 1971. The chart shows the growth of international reserves at Central Banks around the world since that date; international reserves exploded because there were growing imbalances caused by going off gold. Unbridled credit expansion was to blame, enabled in the U.S. and the rest of the world by going off gold.

The US credit expansion had begun well before 1971; had the US adhered to the policy imposed upon other less exalted countries, it would have had to devalue the dollar against gold – say, from $35 dollars an ounce, to $70 dollars per ounce. But, this was not to the liking of the US Government. It would have been rather humiliating. So instead, Nixon just merrily abrogated the obligation assumed at Bretton Woods, in 1944, by “closing the gold window” – a picturesque phrase.

Having eliminated the limit imposed by having to consider that further credit expansion would diminsh the gold stock of the US or cause devaluation, credit expansion in the US really got going. Those were the days!

As you can see from the chart, the “imbalances” in world trade exploded. From June 22 2007 to August 1 2008, the increase in international reserves at Central Banks went from $5.5 Trillion dollars to almost $7 Trillions: $1.5 Trillions increase in 14 months!

Quite suddenly, on August 1, 2008, the explosion finished and we are now witnessing an implosion of these reserves – currently at a rate of some $700 billion dollars y-o-y by August 1, 2009.

If there really were a desire to clean up world trade imbalances, there is only one way to do it: return to the gold standard. Of course, this would be painful.

Politicians in democratic societies do not like to adopt measures which must be painful, however salubrious. So it is highly improbable that we shall see a return to the gold standard. So, what then?

What then is that we shall see a lot of articles by Mr. Wolf and colleagues, writing about the latest improvisations to muddle through. Of course, muddling through will keep people busy talking, worrying and speculating. But muddling through – the classic British approach to problems – will not do. It will not restore prosperity and world trade, nor will it cure “imbalances”.

So, prepare yourself for a messy and poorer world for the foreseeable future.

The price of gold will be suppressed, until it can't. Disagreements among the world's trade surplus nations and trade deficit nations will become increasingly bitter. Finally, some nation or block of surplus account nations will simply say, “Enough! You want our goods, you pay in gold.” And that will be that. Hard to say when that will be, but it will happen. Disagreements don't just go on permanently. There comes a moment when the disagreeing must end and action, however painful, becomes preferable to more muddling.

Then Mr. Martin Wolf will have lots of articles to write about the new state of affairs – consensus or no consensus.