Frank Giustra: The Fed’s inescapable trap

A Wall St. sign next to the New York Stock Exchange. SPENCER PLATT / Getty Images

It is necessary to talk about the inescapable trap of the Federal Reserve. Regarding this, the standards for a reserve currency are known to be even higher given its status in world trade and finance. Throughout history, there have been many reserve currencies and all have eventually failed.

It should be noted that the average useful life of a reserve currency is approximately 100 years. Now, does anyone remember today the importance of the French Livre or the Dutch Guide in world trade? They were the “US dollar” of their time. At its peak, no one questioned its durability in the same way that, until recently, most did not question the durability of the US dollar. But for some enthusiastic observers, the writing has been on the wall for several decades.

It is worth mentioning that in the late 1990s there was a change in the behavior of the Federal Reserve under Alan Greenspan. And it has been expressed that he came to the rescue of the markets under the pretext of protecting the financial system with increasing frequency. During this same period, Greenspan, with the help of the media, helped fuel the dot-com bubble that finally burst in 2000.

Patterns that could be repeated

Indeed, the September 11 terrorist attacks occurred in September 2001, while the Fed, under Greenspan, began its policy of keeping interest rates “accommodative” permanently and also showed evident contempt for its independence from the policy. from the federal government. It is clear that by then, the behavior of the Fed and the federal government had begun to seem familiar. And any history student knows that certain patterns repeat themselves over and over again over the centuries.

Thus, historically, the rise in reserve currencies is known to be based on a gold backing that tends to create fiscal discipline. As countries reach world power status, the temptations to loosen those shackles become too tempting. At first, it happens slowly, but eventually, these countries completely untie their connection to gold.

Now, speaking of today, it is well known that Powel recently recognized what many have known all along. History has proven time and time again that this will not end well. Being that in fact confidence is already declining. China may be the first to exit the US dollar. There is no current alternative to the US dollar, so it is suggested that another global business and the financial unit will eventually emerge, perhaps one made up of a combination of currencies or linked to a basket of commodities.

Source: Frank Giustra | Vancouver Sun