America's silence

According to renowned credit rating agency Fitch, if the US Congress doesn't increase the government's $14.3 trillion debt ceiling by August 2, the US might default (the second time after 1979) on part of its global debt due for repayment on August 15 - a red signal for the currencies pegged to the US dollar.
Earlier, the US Dollar's slide, particularly since 2008, led the now disgraced IMF chief Dominique Strauss-Kahn to conclude that global currency stability made it imperative for the world to stop relying on a single currency, as done since the end of the gold standard in 1971. Historically, governments guaranteed the redemption of their currencies in gold at a fixed price to build faith in paper money and gold certificates, though the gold backing those papers was quite small; 5 percent in the case of the British Pound - once the strongest currency.
To revive their economies after WW-I, many countries increased exports by devaluing their currencies against gold. But WW-II, during which the US amassed nearly 60 percent of the global stock of gold by exporting arms to the Allied as well as Axis powers, changed that system.
In the Breton Woods conference, the US guaranteed fixed parity of its dollar with gold and all currencies were pegged to the US dollar. The move brought stability in interest, currency and commodity markets, because, via US dollar, currency parities were re-fixed against gold.
Rebuilding a war-torn world required global economic stability to revive investor confidence. By 1959, gradually strengthened European currencies and their free convertibility into the dollar did that, and encouraged their acceptance as reserve currencies by their former colonies.
But US invasion of Viet Nam steadily weakened the US economy, and in 1971 America declared that it would no longer guarantee US dollar's fixed parity with gold. Yet, the dollar remained a key reserve currency because, supposedly, it was backed by adequate reserves of gold. Subsequent free floating of currencies triggered new risks and profit opportunities rooted in greed because new concepts of competition and profitability made stability appear a barrier. Over time, speculation distorted genuine demand and supply of everything and made engineered recessions more frequent.
But the cardinal error was to allow these markets to set the gold price, which began impacting the currency markets after the US started printing money (1980 onwards) to fund its escalating deficits. This trend worried the whole world, especially the Europeans, about the future viability of the US dollar.
Recessions in the 1980s and 1990s portrayed speculators' clout. According to a G-10 Central Bank survey, during 1997-98, daily turnover in forex markets was $1.49 trillion - 16 times that year's GDP of the OECD states. That trend induced the Middle Eastern oil moguls to convert more of their forex reserves into gold. Thereafter, speculators in the Far East too entered the gold market and London's Bullion Market Association began trading in volumes that far exceeded the global gold stock. That trend encouraged mounting speculation in gold and, as a corollary, in oil.
The US tried to stabilise the dollar-gold-oil price mix. Rumour has it that the US began selling its gold reserves on the quite, and since 1993, when the US Treasury began running out of cash very frequently the Europeans began thinking about creating an alternative to the US dollar - the euro.
Facts about US gold sales, that eroded America's gold reserves, remain shrouded in mystery because their exposure will have dire consequences for the US dollar and the currencies pegged to it but skyrocketing of the gold price since 2006 has triggered a variety of rumours.
Curbing these rumours required rebutting them with credible evidence, which the US did not. Instead, when Republican Congressman Ron Paul (a candidate for 2012 Presidential elections) introduced a bill in late 2010 to push for an audit of the US gold reserves, it was defeated by the Democrats.
This reaction didn't bolster faith in the size of US gold reserves. The US doesn't realise the damaging impact rumours can have on the global currency market; keeping mum is strengthening the speculators, who don't care about the loss of faith in the currencies pegged to the US dollar.
But Strauss Kahn had warned that IMF may finally be required to provide a global reserve currency similar to but distinctly different from its SDRs based on a basket of major currencies, and in February 2011, an IMF report dwelt on a possible replacement for the US Dollar as the global reserve currency.
According to John Perkins, author of "Confessions of an Economic Hit Man", Libya's Qadhafi too was advocating the creation of a new currency - the Gold Dinar - to rival the US dollar and the Euro against which African and Arab nations would sell oil and other resources.
The fate of Qadhafi and Kahn suggests that there is more than what the US wants us to see. Is this what the world's 'greatest' democracy that believes in "government of the people, by the people, for the people" be doing? This conduct renders every US action highly suspect.
In his last speech, Robert Gates - a proud Cold War veteran - damned the Europeans for ignoring the 'returns' on US 'investment' in Nato; he exposed the US (or the Roman?) mindset that treats invasions as investments but the Europeans know that such investments - the latest in Libya - have been disasters.
Democrat Dennis Kucinich called the unauthorised US invasion of Libya "a distraction" whereas the failing US economy demanded the attention of the Congress and the president. Jerrold Nadler, also a Democrat, said the president had become an absolute monarch and had to be stopped if the US is not to become an 'empire'. But, back in 1980, wasn't the desire to "give the Soviet Union its Viet Nam in Afghanistan" as imperialistic? It was this mindset that steadily pushed the US into a quagmire of deficits, the largest-ever debt owed by a nation, and loss of competitiveness in trade (except in lethal weapons).
In this backdrop, doubting the existence of the US gold reserves isn't dumb. As sought by Ron Paul, credibly rebutting the rumours that are eroding faith in currencies pegged to the US dollar is a US obligation. What keeps the US Dollar alive for now is the weakness of the euro, not the US dollar's strength, and it won't last.