Colorado Peace Ride

By Anthony Rowley

Tokyo- (PanOrient News) Gold has been making headlines recently by rising to a record price (in nominal or non-inflation-adjusted terms) of US$1,600 or almost ?1,000 an ounce. But the real story is in the groundswell of calls being made – and not just by a lunatic fringe – for the global monetary system to revert to some form of gold standard.

Unlike his successor Ben Bernanke, who seems ready to go on printing dollars right to the bitter end, former US Federal Reserve chairman Alan Greenspan has spoken in favour of sort of gold standard, as has World Bank president Robert Zoellick as well as Nobel economic laureate Robert Mundell to name but three.

The surging gold price reflects not so much a sudden craze by investors – from central banks to proverbial widows and orphans – to hold precious metals, rather than paper money or bank balances, but a growing loss of confidence in the US dollar and the euro. In other words, currencies are going down rather than gold going up.

Surges in the gold price have happened before, many times, but what is different this time is the pervasive fear that golds ascent does not mirror a temporary depreciation of one or other major currency but something much more fundamental – an accelerating decline of confidence in the global monetary system.

The system is widely perceived to be without an anchor, which it has in fact been since 1971 when then-US president Richard Nixon broke the formal link between the US dollar and gold, thereby taking other major currencies off the gold standard too since their parities had until then been tied to gold via the US dollar.

Those defending Nixons move argued that it was absurd to tie the quantity of money to gold, silver or any other precious metal whose supply is finite – highly deflationary, they said. Perhaps, but is it not equally absurd that the Fed should be able to print unlimited quantities of money – highly inflationary on a global basis?

This current situation is producing some unlikely candidates as haven currencies – not least the Japanese yen which ought by rights to be depreciating now (reflecting Japans diminished fortunes) but is instead appreciating. Chinas Yuan is a more logical haven currency but it is not freely available.

But where are the G-20 and the International Monetary Fund (IMF) now, just when one would expect (or hope at least) that either or both of them would be convening some sort of global gathering to debate where the international monetary system should go from here?

Perhaps the major powers are just too busy trying to save their own skins – and their currencies. Key figures in the US administration are locked in mortal struggle with their political opponents over how to fix the national debt problem that is strangling the US economy.

In Europe, members of the euro zone are engaged in similar internecine warfare over who should take what share of the burden of national debt in peripheral economies of the continent. Japan has its own preoccupations. China looks on inscrutably at what is happening on the global monetary scene.

The one person who might be expected to be issuing calls to action – newly appointed IMF managing director Christine Lagarde who as former French finance minister expressed strong interest in reform of the international monetary system – is silent on the issue, at least for the moment.

Others are not, however, and the problem is that there appears to be no one with sufficient international institutional stature to focus the debate and to coordinate sporadic reform efforts into some sort of global design. John Maynard Keynes, where are you now when we need you most?

Do we need a gold standard, or do we need some form of globally accepted fiat currency such as the commodity basket-linked bancor which Keynes originally proposed (but which became diluted into IMF Special Drawing Rights or SDRs), or do we need a system based on a small basket of key currencies?

Bancor was intended to be a basket of 30 commodities designed to be less deflationary than gold alone, which had compounded in the Great Depression. This idea was revived by Chinas central bank head Zhou Xiaochuan two years ago as a way of curbing credit-based excess in the global monetary system.

Debate on reversion to some form of gold standard or anchor for monetary systems is strongest in the US, which is not surprising given the profligate manner in which Mr. Bernankes Fed has been printing US dollars as though there were no tomorrow (which there may not be for the dollar).

In Utah, Governor Gary Herbert has signed into law the Utah Sound Money Act, which declares gold and silver to be legal tender and eliminates state capital gains taxes on gold and silver coins used as currency. Iowa and South Carolina are considering similar legislation.

Tea Party members are in full support and it would be tempting to quote W B Yeats and say that the best lack all conviction while the worst are full of passionate intensity on gold were it not for the fact that a few authoritative figures are also on side with the idea of restoring a monetary role to the metal.

Mr. Zoellick, for example, has suggested that it is time to consider employing gold as an international reference point, while Mr. Mundell has urged European nations to consider making the euro a gold-backed currency.

This would no doubt go down well with China, Russia, Brazil, India and Middle East oil exporters who reportedly have diversified their US$7 trillion of their aggregate foreign exchange reserves into Euros over the past decade in order to reduce dollar exposure.

Central banks around the world, meanwhile, became net buyers of gold against last year, after two decades as a steady source of supply to the market. The IMF sold 200 tonnes of gold to the Reserve Bank of India last year, 10 tonnes to Sri Lanka, 10 tonnes to Bangladesh and two tonnes to Mauritius.

One great and frequently overlooked irony in all this is that the country which appears to have most to lose from reversion to a gold standard – the US which has profited enormously by being able to print vast quantities of the worlds leading reserve and transaction currency, the dollar – also happens to be the worlds biggest official holder of gold.

US holdings total 8,133 tonnes – vastly larger than those of any other single country or of the IMF. So, if does go on to break through US$2,000 an ounce and finally breaches US$5,000, with corresponding surges against other currencies, then the US will be very rich.

Some have suggested Washingtons strategy is to debauch the dollar and then propose its massive formal devaluation against gold, whereupon the US would be able to pay off its debts with a fraction of its gold holdings while still remaining the worlds richest power. If so, reform of the international monetary system will have to wait a while.

The Swiss parliament, meanwhile, is reportedly considering issuance of gold francs in parallel with ordinary Swiss francs. The price of these could be allowed to go through the roof without imposing massive stress on the domestic economy through appreciation of the regular franc and the country would net a nice profit. Very Swiss.

Anthony Rowley is a long-standing expert on East Asian economic and financial affairs, resident in Tokyo

PanOrient News

Tags: Monetary

LONDON (Reuters) – Representatives of leading emerging market countries at the International Monetary Fund have warned the Funds management against pouring more large sums of money into Greeces second bailout, the Financial Times reported on Thursday.

Citing conversations with representatives of non-European economies, the paper said several governments were unwilling to risk financial contagion by curtailing IMF lending to Greece, but alarmed at the risks the fund was taking.

It said Brazils IMF director Paulo Nogueira Batista, a member of the 24-strong Executive Board which steers the Funds day-to-day operations, believed the Greek governments austerity plan was too tough and that the restructuring of Greek debt held by European banks was too small.

Greece is not having an easy time, the paper quoted him as saying. The mostly European private creditors of Greece have had an easy time.

It also quoted another director, Indias Arvind Virmani, as saying the deal agreed by euro zone leaders last week dealt with short-term cash flows but left Greece with a large and precarious sovereign debt stock, threatening further defaults.

I am not convinced lt;the plangt; addresses the basic problem of liquidity versus solvency, the FT quoted him as saying.

The second Greek bailout envisages 109 billion euros in additional official funding from Europe and the IMF, but euro zone leaders have not said how much they expect the IMF to contribute, and the Fund has not commented. In past euro zone bailouts, the IMF has contributed one-third of the total sum.

(Reporting by Patrick Graham; Editing by Andrew Torchia)

Tags: Monetary

(Adds press digest)

BUCHAREST, July 28 (Reuters) – Here are news stories, press
reports and events to watch which may affect Romanian financial
markets on Thursday.

IMF MISSSION

An International Monetary Fund mission is in Bucharest to
review Romanias 5 billion euros precautionary aid deal until
August 1.

JOB LOSSES

Romanias centrist coalition government will lay off 1,300
employees in three state-owned energy companies this year as
part of a restructuring drive to shore up public finances, it
said on Wednesday.

EURO DEBT TENDER

Romania sold a less than planned 463 million euros ($672.6
million) in four-year bonds on the domestic market on Wednesday
at 4.85 percent, central bank data showed.

PRIVATISATIONS

Sales of government stakes in Romanian companies should
continue despite the failure to place 9.8 percent of Petrom
, Fondul Proprietatea manager Greg Konieczny said.

Ziarul Financiar, page 5.

VOLKSBANK

Volksbanks Romanian unit is still up for sale, its
president Johann Lurf said.

Agerpres.

CROWN TOPS REGION AS CZECH OUTLOOK SEEN SOLID

The Czech crown hit a two-week high against the euro on
Wednesday propped by a solid economic outlook, outperforming
emerging European currencies which were weighed down by the
US debt stalemate.

NOTE- For a diary of forthcoming Romanian events, double
click
, and a calendar of east European economic indicators,
see .

For other related news, double click on:
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Tags: Monetary

MUMBAI, July 26 (Reuters) – The following are highlights of
comments made by the Indian central bank governor Duvvuri
Subbarao and deputy governor Subir Gokarn to reporters after the
Reserve Bank of Indias monetary policy statement.

Earlier on Tuesday, the central bank stunned investors by
raising interest rates by 50 basis points, showing unexpected
resolve in fighting persistently high inflation despite slowing
growth in Asias third-largest economy and uncertainty about
global demand.

RBI GOVERNOR DUVVURI SUBBARAO:

ON POSSIBLE US DEBT DEFAULT:

As far as a possible US debt default and the current
impasse of debt ceiling, we have reviewed the position and
believe we have sufficient liquidity to manage the situation; so
that we are prepared for possible repercussion in the market.

But whether they would actually default, what implication
it might have, is uncertain at this point of time.

On whether we are in touch with the U.S government? Not
from the Reserve Banks side. We had consultation, which is a
scheduled bilateral consultation with the US, end of June, but
nothing to do with debt impasse.

ON INFLATION:

Until we see a sustained downward trend in inflation, we
have to persist with our anti-inflation stance. Its difficult
at this point and even not possible for me to define exactly
what the calibration going forward will be.

But as long as inflation persists, there will be no
significant change in our stance.

ON POSSIBLE SHIFT OF MONETARY STANCE TO FOCUS ON GROWTH:

If consistently growth falls below 8 percent, then we would
...perhaps the balance would shift... as soon as the first
number comes below 8 percent the balance will not shift. It has
to be significantly consistently below that.

ON REPO RATE PEAKING

It is not as if in 2008 we were at 9 percent (repo rate)
and we need to go back there and a number of other factors are
different today than in 2008...So, I think to compare todays
monetary policy with what happened in 2008 would be misleading.

ON FISCAL DEFICIT

If the fiscal deficit is higher than it is projected today,
it will add to demand (government borrowing) and, therefore, add
to inflation pressure. That is one component of this output
equation that is fairly interest rate insensitive. So we hope
borrowing and fiscal deficit will be contained in budgetary
limits.

ON STANCE AHEAD

Until we see a sustained downward trend in inflation we
will have to persist with our anti-inflationary stance. It is
difficult at this time, and indeed not possible for me to define
exactly what the calibration will be going forward. But as long
as inflation persists, there will be no significant change in
our stance.

RBI DEPUTY GOVERNOR SUBIR GOKARN:

ON LIQUIDITY INFUSING STEPS:

Given our anti-inflationary stance we want to see liquidity
in deficit, that has been our objective for liquidity
management. At the same time we dont want it to become
disruptively deficit which is what motivated us to do some OMO
(Open Market Operation), tactical liquidity management in late
2010.

At this point, we dont see that scenario emerging. There
might be some temporary stresses in September with tax outgoings
and festival pressures but those are predictable and not shocks.
We would be looking to manage it in minus 1 percent mark on a
sustained basis.

(Reporting by Neha DSilva and Shamik Paul, compiled by Aditya
Phatak and; and Suvashree Dey Choudhury; editing by Malini Menon
and Aradhana Aravindan)

Tags: Monetary

WASHINGTON (Reuters) – The US Federal Reserves much criticized bond buying spree had only mild side-effects on other economies but the process of tightening monetary policy eventually may reverberate more harshly, an IMF report said on Monday.

The end of the Feds second round of quantitative easing, referred to as QE2 and aimed at boosting a tepid recovery, was widely anticipated and caused no market ripples, the International Monetary Fund said in a report on the spillover effects of developments in the worlds largest economy.

With QE2 having limited spillovers, its fully anticipated ending will have even less effects, the IMF said in a report on how the US economy affects other economies around the world. The international monetary agency is issuing similar reports for other major global economies.

Recent US monetary policy has been sharply criticized, in particular by many in emerging markets, for fueling a surge of money into fast-growing economies as investors seek higher returns.

QE2 ended in June and Fed officials have said their next policy step will depend on whether a weak recovery gains strength.

The IMF said the principal risk to other economies from US monetary policy comes from the eventual tightening of financial conditions, which could cause an outflow of capital from emerging markets. Higher yields on Treasury securities would also be likely, the international agency said.

The Fed cut rates to near zero in December 2008 and then launched two rounds of quantitative easing in which the central bank bought a total of $2.3 trillion in bonds to pull the US economy out of a sharp recession.

The Feds announced $600 billion in bond purchases under QE2 provoked an outcry internationally and domestically as critics argued it was driving up commodity prices and unleashing a potentially destabilizing flood of capital into emerging markets.

US officials defended the buying spree, saying rising demand for commodities in large economies like China was also to blame for price rises.

(Reporting by Mark Felsenthal; Editing by Andrea Ricci)

Tags: Monetary