On March 23, 2009, China made public announcements to overhaul the global monetary system, thereby questioning the role of the US dollar as the reserve currency.¹ Chinese officials have gone on record saying they want to move the global currency peg away from the dollar in favour of currency diversification as indicated by China's push for OPEC to price oil in a basket of currencies (including the yuan) instead of dollars.

The use of the Chinese yuan in China's neighbouring countries for transactions has been growing in recent years. Today the yuan is informally freely convertible in almost all countries bordering China.

The GDP numbers out yesterday, which showed economic growth at 3.5% in the third quarter, brought a deafening chorus from public and private economists who all agreed that the recession is officially over. With such a strong report, they are happy to tell us that not only has the Fat Lady finished her aria, but she has left the building and is sipping champagne in the bath. As usual, it falls on me to rain on the parade.

Even the giddiest commentators admit that the upside GDP surprise resulted almost entirely from government interventions. But, by pushing up public and private debt, expanding government, deepening trade deficits, and pushing down savings rates, these interventions have succeeded only in putting our economy back on an unsustainable path of borrowing and spending. Accordingly, they have prevented the rebalancing necessary for long-term health. Could there be a simpler illustration of trading long-term pain for short-term gain?

Rather than asking these pre-K economists to make such a three dimensional leap, it may be easier just to give them a brief history lesson.

Over the past two years, the federal government and the Federal Reserve have dispersed trillions of public dollars, run up enormous deficits, and kept interest rates at zero. In just about any economic textbook, this combination of policies would be described as the perfect recipe for inflation. Yet, with the exception of the usual increases in health care and education, prices by and large are not rising. Many have concluded that our economic leadership has simply outsmarted the textbooks.

The benign CPI figures are serving as a rallying point behind which the financial talking-heads are forming a parade of optimism. The low CPI is their 'proof' that inflation is not a pressing concern. This view is two dimensional.

Inflation is classically described simply as an increase in the money supply. Although these changes will impact price levels, it doesn't necessarily follow that prices will rise when inflation is high. Instead, inflation may merely result in stable prices at a time when prices would otherwise be falling.

In the mainstream media, we are peppered with optimistic economic forecasts and reports of any positive changes in leading indicators.  For example suggestions that the U.S. economy is on pace to grow at an annualized rate of 2% or 3% during Q4-2009. This is reported as an "annualized" rate in order to hide the massive contractions¹ of Q1 (-8.6%) and Q2 (-2.3%).

Curiously though, even as the Federal Reserve continues to sustain the Zombieconomy by massive injections of liquidity and/or monetization, The Chairman insists that "The United States must increase its national savings rate."²

I say "curiously" because, if this insistence is meant for the American people at large (i.e., he is urging Americans in the individual capacities to save money and/or pay down outstanding debt), this is at odds with the FOMC's decision to keep nominal interest rates at or near zero per cent.  All else equal, higher interest rates encourage savings, and lower interest rates encourage debt. When the nominal interest rates are nil, and real inflation is rampant, there is little incentive to save money (other than the precautionary motive, a classic "leakage"), and it is savings in the form of investments that spur real economic growth.

For the most part, the value of the dollar is given cursory attention by the financial media. Typically, its movements are assigned an importance on par with much less determinative metrics such as natural gas futures and construction permits. It's only when major milestones are reached that anyone really takes notice of the dollar. We are living through one of those times.

The great dollar rally of 2008-2009 has come full circle. When the financial crisis exploded in its full ugliness in mid-2008, the dollar, which had steadily declined over the previous four to five years, put in a rally for the record books. By March 2009, as investors across the world sought safety from the financial storm, the index had surged more than 25%. Since then, the dollar has steadily declined to the point where nearly all those gains have vanished. In short, the panic rally has given way to the long term trend.

So, as the dollar index makes fresh 52-week lows on a nearly daily basis, discussion on the greenback is heating up. And while real insight on the topic is hard to find, the debate centers on the battle between two conventional opinions – both of which are wrong.

In a small bit of Washington irony, a government panel convened this week under the guise of ensuring 'expressive freedom' on the Internet, while at the same time the Obama Administration put Fox News on notice that ideological rectitude would be a prerequisite for White House engagement.

This heightened wrangling with the media comes at a time when ordinary Americans are rapidly becoming disillusioned with the major parties. Their disgust is evident in innumerable web discussion sites that, for many, have replaced the major media outlets as the primary source of information. In its focus to keep control of the conversation, the Administration is seeking to disguise the fact that the 'change' Mr. Obama promised in the election is unlikely to materialize.

Wishful thinking of the Nobel committee aside, what we have seen thus far from Obama is simply more of what had been delivered by the prior administration.

When it's a jobless recovery, i.e., that fiction by which the Politicians and Fat-Cats pretend that everything is A-OK, in order to trick the rest of us into following their marching orders off the next goddamn cliff, next year or next decade.

But it's worse than "jobless", which suggests job neutrality.  In reality, jobs are disappearing.

Last November it was big news when the FT reported¹ that the world's economies lost 80,000 jobs. Now, we learn that the American economy shed 263,000 jobs in the month of September² alone, sending the national unemployment rate close to 10%. Adding insult to injury, people are remaining unemployed longer than ever: more than 50% of them have recently exhausted their public benefits. What happens to these people?

On October 6th, The Independent newspaper of London set off shock-waves around the world with a report that secret meetings were held between the OPEC states, China, Russia, and others, in which the participants charted a course toward a new world reserve currency. Not surprisingly, the U.S. dollar nosedived on the news. The rout was only stemmed by Saudi and Chinese officials publicly denying the story.

Whether or not this particular reporter got all his facts straight is largely immaterial. If such meetings have not been occurring, they soon will be. All the ingredients to stir financial discontent in these nations are present. It's not a question of if we will move to a post-dollar world, but when.

We have warned continually that if the U.S. government persists in profligate spending, financed by debt and currency debasement, the greatly privileged reserve status of the dollar will be in jeopardy. We have also argued that with shrinking confidence in the stability of fiat currencies, gold itself will resume its reserve role in some capacity, boosting its price considerably. The recent gold surge indicates that this view has wide support.