Dollar peg will not help inflation June 2, 2008
Posted by mylastresort in analysis, qatar, rumors, saudi arabia.Tags: Abu Dhabi, currency, Dirham, Doha, Dollar, Gulf, Henry Paulson, inflation, Pegs, qatar, Riyal, Treasury Secretary, uae, US
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According to U.S. Treasury Secretary Henry Paulson abandoning the Gulf’s currency pegs to the dollar will not solve their vexing inflation problems. Speaking to reporters on his plane from Qatar to UAE, Paulson said the Gulf rulers in the region have… “quite an awareness that the peg does not influence inflation to a significant degree… They recognize that inflation is the overriding issue. Ending the peg is not the solution to the inflation problem.”
Economic policy is not a politcal decision that can be altered via public relations, it is a sovereign matter. Paulson stated that he could not rule out any moves by Gulf states to abandon their peg’s.
Economic policy is a sovereign matter?
The etymological origin of the word “sovereign” is the medieval Latin “superanus” and the classical Latin “superus”. Both mean “superior”, says the French dictionary Le Nouveau Petit Robert.
Is Paulson not recognising that, if not prevented from doing so by government interference, the market itself would take all of the necessary precautions against the destruction of money by choosing Gold as a wealth reserve?
Is he not recognising that the market would prepare the ground for the emergence of Gold as a wealth reserve?
Gold would indeed become a wealth reserve, if it was sought as a store of value by a substantial part of the population.
Since 15 August 1971, the US dollar is however inconvertible to Gold directly, except on the open market. Its redeemability has been revoked. Not its link to Gold.
The GCC-countries should ALL follow Kuwait’s example and depeg from the dollar in order to sever the link between their currencies and Gold.
Gold will then be viewed as a wealth reserve, not as a currency like their … currencies.
This will lead to a freely floating price of Gold as an alternative to the dollar regime, Gold becoming the natural vehicle to temporarily or eternally store one’s wealth in, in order to be able to later convert it into tangible wealth.
FreeGold in the central banks’ strong-rooms has the same role to fulfil as the Mona Lisa in the Louvre-museum in Paris, a wealth reserve which would now be in the strong-room (the Louvre) of a monetary union.
The GCC-countries should ALL follow Kuwait’s, example and depeg from the US dollar in order to clearly distinguish between Gold as a wealth reserve and their currencies as … currencies.
Paulson is recognising that this would happen automatically if not prevented by government interference.
While the National Bank of Ukraine calls for an end to the dollar peg,
Paulson seems to be arguing that the dollar peg is the cause of high oil prices.
I am not sure Paulson’s reasoning is correct.
but if it can help ditching the peg, I’ll accept it.
Ukraine national bank head suggests cancellation of dollar peg
02 Jun 2008
bbj.hu
http://www.bbj.hu/main/news_40074_ukraine%2Bnational%2Bbank%2Bhead%2Bsuggests%2Bcancellation%2Bof%2Bdollar%2Bpeg.html
SNIP
The head of the National Bank of Ukraine (NBU) on Friday called for a cancellation of a peg of the national currency the hryvna to the dollar, Korrespondent magazine reported.
NBU chairman Volodymyr Stelmakh said hryvna in recent years had become a stable currency and argued there was no longer a need for the government to intervene in currency markets to keep the value of the Ukrainian money within a set corridor. “We have already passed our period of childhood and youth (for the Ukrainian currency),” Stelmach said at a Kiev press conference.
Published: Monday, June 2, 2008
Treasury chief Paulson says there’s no ‘quick fix’ on oil
By BARBARA SURK The Associated Press
http://www.nashuatelegraph.com/apps/pbcs.dll/article?AID=/20080602/NEWS03/488454081/-1/news03
SNIP
Paulson said inflation in the Gulf is “significant” but suggested that Gulf countries pegging their currencies to the weak dollar was not the only reason for it.
[Depegging would] raise the awkward question of whether oil should remain priced in dollars,
says a Lex-column in Financial Times.
Gulf currency pegs stick
Published: June 2 2008 09:55 | Last updated: June 2 2008 11:58
http://www.ft.com/cms/s/1/a2fbcc36-3081-11dd-bc93-000077b07658.html