Dr Dooms are aplenty when it comes to predicting the course of the US economy, the world’s largest by a wide margin. Noureil Roubini and others earned their spurs foretelling the 2008 financial crisis. Amidst ongoing scepticism, critics are once again scrutinising the stability of the US economic system, particularly its fundamental reliance on “Dollar Almighty.”
RIP USD 1971-202X, a starkly pessimistic forecast for the US economy authored by Shanmuganathan N, offers a searing criticism of the fiat currency model that has dominated the monetary landscape, since the Nixon shock of 1971. With no tangible anchor for national currencies today, the dollar, once convertible to gold at a rate of $35 per ounce, now operates without such a guarantee.
A creation of central banks
The modern monetary system has evolved around the concept of money as a creation of central banks, generated out of thin air, as it were. Analysts and experts often refer to the VUCA (Volatility, Uncertainty, Complexity, Ambiguity) factor, which is significantly influenced by this modern monetary architecture.
For example, if the RBI Governor were to state, “I promise to pay the bearer the sum of 500 rupees” on an Indian currency note, the question “500 rupees of what?” remains unanswered, critics say. The value of currency, some observers argue, is more illusionary than all the “Maya” the world’s Advaitins could ever describe. Shanmuganathan reinforces this notion.
“One of the most critical points for readers to grasp is the difference between the gold standard and unbacked paper currency that central banks can issue at will. While many today view paper currency as an innovation, it is, in fact, one of the most regressive steps in human history. The damage this paper-based monetary system is poised to inflict on the world economy in the coming years will rival that of the two World Wars combined,” he asserts.
Although Shanmuganathan is not widely known as an economist, he constructs a compelling argument against the current unstable monetary system, despite a noticeable extremist tone in his conclusions. Consider this statement from the section titled “How to Read This Book,” located just after the preface: “What I aim to convey through this book is that we should abandon any hope of a mild economic downturn (for the US). If we experience only a crisis akin to the 2008 GFC, it will be a miracle. To put it plainly, this is the end of the world as we know it.”
The book is structured into five concise chapters. It begins with an overview of money, differentiating between money and currency, and explaining how gold came to be recognised as a form of money. Aristotle, for instance, identified five attributes necessary for gold to serve as a monetary unit: desirability, durability, divisibility, convenience, and consistency. Each chapter concludes with a summary of key points and recommendations for further reading.
Included as an annexure, Alan Greenspan’s 1966 essay, “Gold and Economic Freedom,” offers intriguing insights. Greenspan discusses why gold and economic freedom are intrinsically linked. While Shanmuganathan criticises unbacked paper currency as a major historical regression and dedicates an entire chapter to this argument, Greenspan’s perspective is explored in the subsequent chapter.
The absence of a stable anchor for fiat currencies has led to massive debt accumulation and, more critically, granted governments (particularly the US government) the power to inflate the economy by creating more currency at will. This practice fosters malinvestments, or bubbles, which are followed by crashes in asset prices. The more extensive the monetary inflation during an artificial boom, the more severe the resulting bubble burst.
Return to gold
Shanmuganathan forecasts a return to a gold-based currency system with the fall of the dollar. “A very probable scenario is that a group of nations issue a gold-backed convertible international currency that could function as a reserve currency. If the US dollar does not revert to its pre-1971 form in the next few years, other countries will have no option but to switch to the above alternative reserve asset,” he concludes.
The author presents a grim narrative largely based on verbal logic, characteristic of the Austrian school of economics he adheres to. Although his arguments are bolstered by data, they remain heavily conceptual.
And, several questions remain unanswered: What is the inherent value of gold itself as a measure of money? Will a new Bretton Woods-like system emerge to validate a new currency system? Who will initiate this process?
Finally, in the context of this eminently readable book of 200 pages, do recent market events signal an ominous turn to nowhere ? Shakespeare’s famous stage direction in The Winter’s Tale, “Exit, pursued by a bear,” may acquire a new meaning if Shanmuganathan’s dire predictions come to pass, casting the Bard’s lines in a fresh light for the global monetary system.
Title: RIP USD 1971-202X... and the Way Forward
Author: Shanmuganathan N
Publisher: Notion Press
Price: ₹1,500
The reviewer is a commentator on banking and finance
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