Silver as an investment

Currency Wars!



26 Wellington Street East, Suite 900, Toronto, Ontario, M5E 1S2

Phone (416) 604-0533 or (toll free) 1-866-269-7773 , fax (416) 604-0557 / By David Chapman / February 28, 2013

The US$ is the world’s reserve currency and has been since the Bretton Woods agreement of July 1944. The purpose of the agreement was to regulate the international monetary system by setting up rules, institutions and procedures. It brought about the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD). They are today part of the World Bank.

Under the Bretton Woods system there was an obligation on each country to adopt a monetary policy that maintained its exchange rate by tying its currency to the US dollar, which was convertible into gold at a fixed rate of $35 per ounce. This system remained in place until August 1971, when the US unilaterally terminated the convertibility of the US$ into gold. Thus began the era of floating exchange rates. All currencies became fiat currencies.

Today the world is “buried” in debt. The US is the most indebted nation in the world with $16.5 trillion of official debt, plus “off balance sheet” or unfunded liabilities estimated to be between $70 and $100 trillion. Most economists agree that the US will never be able to repay these debts. The only way out is to attempt to inflate the debt away through currency devaluation. This has helped to set up the current era of currency wars.

Not only is the world buried in debt, the global financial system has become increasingly unstable. Since August 1971, the world has gone through a series of financial crises. They were seen in 1973-1974 (oil, US$ becomes the petrodollar); 1979-1982 (oil, high interest rates); 1987 (stock market); 1992 (British pound); 1997 (Asian contagion); 1998 (Russian default, Long Term Capital Management); 2000-2002 (high tech/internet, 9/11); and 2007-2009 (subprime loans, banking crisis).

Each crisis has been more intense than the last. It takes ever-increasing amounts of debt to purchase an additional dollar of GDP. The result has been that debt in the major economies – the US, the Euro zone, Japan – has reached unprecedented levels. The current ratios of public plus private debt to GDP for the major economies are as follows, with public debt to GDP in brackets: US 290 (102); Japan 512 (226); United Kingdom 512 (87), Germany 278 (83), Italy 314 (121), France 346 (86), and Canada 276 (85).

Of that group, only Canada and Germany currently hold an AAA credit rating. The United Kingdom, the US and France have all been dropped to AA+ while Japan is down to AA- and Italy is BBB+. A number of them including the US are on negative credit watch for potentially further downgrades.