Quixote2
29th June 2010, 10:30 AM
http://www.jhuapl.edu/urw_symposium/proceedings/2009/Authors/Rickards.pdf
Introduction snipped from Jesse's Cafe:
"I am not quite sure where Rickards is coming from on this, but read the entire paper and judge for yourselves.
"Worse even than the long, slow grind along the bottom described in the foregoing section is a sudden catastrophic collapse. In that context, the greatest threat to U.S. national security is the destruction of the U.S. dollar as an international medium of exchange. By destruction we do not mean total elimination but rather a devaluation of 50 percent or more versus broad-based indices of purchasing power for goods, services, and commodities and the dollar’s displacement globally by a more widely accepted medium.
The intention of Central Bank of Russia would be to cause a 50 percent overnight devaluation of the U.S. dollar and displace the U.S. dollar as the leading global reserve currency. The expected market value of gold resulting from this exchange offer is $4,000 per ounce, i.e., the market clearing price for gold as money on a one-for-one basis. Russia could begin buying gold “at the market†(i.e., perhaps $1,000 per ounce initially); however, over time its persistent buying would push gold-as-money to the clearing price of $4,000 per ounce. However, gold selling would stop long before Russia was out of cash as market participants came to realize that they preferred holding gold at the new higher dollar-denominated level. Gold will actually be constant, e.g., at one ounce = 25 barrels of oil; it is the dollar that depreciates.
Another important concept is the idea of setting the global price by using the marginal price. Russia does not have to buy all the gold in the world. It just has to buy the marginal ounce and credibly stand ready to buy more. At that point, all of the gold in the world will reprice automatically to the level offered by the highest bidder, i.e., Russia.
Basically, the mechanism is to switch the numeraire from dollars to gold; then things start to look different and the dollar looks like just another repudiated currency as happened in Weimar and Zimbabwe. Russia's paper losses on its dollar securities are more than compensated for by (a) getting paid in gold for its oil, (b) the increase in the value of its gold holdings (in dollars), and (c) watching the dollar collapse worldwide."
Introduction snipped from Jesse's Cafe:
"I am not quite sure where Rickards is coming from on this, but read the entire paper and judge for yourselves.
"Worse even than the long, slow grind along the bottom described in the foregoing section is a sudden catastrophic collapse. In that context, the greatest threat to U.S. national security is the destruction of the U.S. dollar as an international medium of exchange. By destruction we do not mean total elimination but rather a devaluation of 50 percent or more versus broad-based indices of purchasing power for goods, services, and commodities and the dollar’s displacement globally by a more widely accepted medium.
The intention of Central Bank of Russia would be to cause a 50 percent overnight devaluation of the U.S. dollar and displace the U.S. dollar as the leading global reserve currency. The expected market value of gold resulting from this exchange offer is $4,000 per ounce, i.e., the market clearing price for gold as money on a one-for-one basis. Russia could begin buying gold “at the market†(i.e., perhaps $1,000 per ounce initially); however, over time its persistent buying would push gold-as-money to the clearing price of $4,000 per ounce. However, gold selling would stop long before Russia was out of cash as market participants came to realize that they preferred holding gold at the new higher dollar-denominated level. Gold will actually be constant, e.g., at one ounce = 25 barrels of oil; it is the dollar that depreciates.
Another important concept is the idea of setting the global price by using the marginal price. Russia does not have to buy all the gold in the world. It just has to buy the marginal ounce and credibly stand ready to buy more. At that point, all of the gold in the world will reprice automatically to the level offered by the highest bidder, i.e., Russia.
Basically, the mechanism is to switch the numeraire from dollars to gold; then things start to look different and the dollar looks like just another repudiated currency as happened in Weimar and Zimbabwe. Russia's paper losses on its dollar securities are more than compensated for by (a) getting paid in gold for its oil, (b) the increase in the value of its gold holdings (in dollars), and (c) watching the dollar collapse worldwide."