New regulatory horizons beckon...
On Friday 7th May 1999, Gordon Brown announced that he was going to sell off more than half of the UK's gold reserves, amounting to around £4Bn, in order to buy...dollars, yen and euros.
On April 15th 2007, when the chickens came home to roost, The Times reported that the Treasury never asked the Bank of England for its advice, and that the BOE were warned by gold bullion experts of the folly of this action and gave written warnings to the Treasury. I know one of those experts - their warnings were certainly heartfelt and vociferous and...ignored. All to no avail. The deal subsequently went through, our gold reserves were decimated and Grant Thornton calculated in 2007 that the Treasury managed to lose around £2Bn in the process.
In the chart below, we show the price of gold over a period of 105 years. It is almost impossible to imagine timing that could have been more inept than this.
A little further back in time, in 1971 Richard Nixon took the United States off the gold standard which had hitherto provided price stability on an international basis, and which had been been adhered to by most industrialised nations since the end of WW2 under the Bretton Woods system.
Welcome to the Great Dollar Standard era (as Addison Wiggin calls it). We effectively entered a new world of the 'fiat' money system - or not so new, actually - a somewhat notorious Scotsman, John Law, had experimented disastrously with paper money in France, a venture which ended in tears in 1720. This is a world where paper money is no longer asset backed - where it becomes, in effect, an IOU - and where governments appear unable to fight the temptation to print more and more of the stuff to get themselves out of a mess. This is a house of cards economy - writing in 2005, Addison Wiggin painted the following nightmare scenario for us all to see:
- foreign countries dump their US dollar reserves (have you seen what's been going on over the summer?)
- oil prices increase catastrophically (??)
- trade and budget defecits at the same time
Any of this sound familiar?
Which brings us back to the present crisis. Undoubtedly the banks are to blame. All of us can see the folly of a system which rewards the lucky ones speculating with other people's money, and then goes cap in hand to the government when things go pear-shaped. The crisis is, fundamentally, however about disastrous financial management at a governmental level. If it is right to point the finger at sub-prime lenders, taking valueless securities as collateral, then it is equally appropriate to criticise governments for removing the asset-backing to our currency. This is a crisis where regulation is a very small part of an effective answer.
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