Agora Financial’s Rude Awakening

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London, England

• Airbuses and golden parachutes - the tale of two princes,
• “The dollar cannot remain solely the problem of others,” – Sarkozy,
• Final day for zero-downside “wealth insurance” and more…

Joel Bowman, reporting from the Dubai Air Show…

One Prince gets a golden parachute…another prince buys the whole aircraft.

Recently Chuck Prince stepped down as CEO of Citigroup, but not before
piloting his company into a deathly, multi-billion dollar nosedive.

Citigroup’s largest single investor, prince Alwaleed bin Talal of Saudi
Arabia, spoke exclusively to Forbes right around the time Citi was reaching
for the “abort mission” button. He had this to say:  

“You cannot come to the public and say that this normalization is expected in
the fourth quarter and then three weeks later, not three months later, you
come and say there is an $11 billion writeoff.

“This is unacceptable,” continued Alwaleed. “That’s when the events changed
completely. My backing was withdrawn dramatically. You should never commit to
something that you can’t deliver. Never.”

Around the time of this interview with Forbes, Chuck Prince was given his now
infamous golden parachute.

Yesterday, Prince Alwaleed, who owns 3.6% of the company, celebrated his old
pal’s depature, treating himself to one of these:

The Airbus A380 aircraft is the largest, most expensive commercial airliner
in the world with a capacity of 850 passengers and a price tag of $310
million…and that’s before the Prince even pimps his ride.

Unfortunately, in this fairytale, only one prince gets the happy
ending…provided, of course, Citi is able to curb its flight path. 

In today’s column, Adrian Ash discusses oil from Arabia, children’s toys from
China, and the increasing amount of dollars it takes Americans to buy all the
world’s “stuff.” Enjoy…

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Parlez-Vous “Dollar Crisis?”
By Adrian Ash

The French President was in Washington this week, speaking to Congress en
Français and telling the United States to stop dumping dollars and risking a
global financial crisis.

Ooh la la! Sounds just like old times…

“The dollar cannot remain solely the problem of others,” said Nicholas
Sarkozy before a joint session of Congress on Wednesday, riffing on the
(infamous) joke made by John Connally, Treasury Secretary to Richard Nixon in
the early ’70s.

Connally said the dollar was America’s currency “but your problem.” Au
contraire, replied Monsieur le President this week.

“If we’re not careful,” he went on – apparently using “we” to mean both
himself and the US Congress – “monetary disarray could morph into economic
war. We would all be its victims.”

Ooh la la again! Sarkozy’s remarks recall those of a prior French president,
Charles de Gaulle.

“What the United States owes to foreign countries it pays – at least in part
– with dollars that it can simply issue if it chooses to,” barked de Gaulle
during a landmark press conference in Februrary, 1965. “This unilateral
facility contributes to the gradual disappearance of the idea that the Dollar
is an impartial and international trade medium, whereas it is in fact a
credit instrument reserved for one state only.”

De Gaulle did more than simply grumble and gripe, however. Unlike Nicholas
Sarkozy, he still had the chance to exchange his dollars for a real, tangible
asset – physical gold bullion.

Gold “does not change in nature,” de Gaulle announced in that 1965 speech, as
if he was telling the world something it didn’t already know. “[Gold] can be
made either into bars, ingots, or coins…has no nationality [and] is
considered, in all places and at all times, the immutable and fiduciary value
par excellence.”

How to collect this paragon of assets? Back in the 1950s and ’60s, world
governments could simply stroll up to the Federal Reserve, tap on the “Gold
Window”, and swap their unwanted dollars for gold.

So that is what de Gaulle did.

Starting in 1958, he ordered the Banque de France to increase the rate at
which it converted new dollar reserves into bullion; in 1965 alone, he sent
the French navy across the Atlantic to pick up $150-million worth of gold;
come 1967 the proportion of French national reserves held in gold had risen
from 71.4% to 91.9%. The European average stood at a mere 78.1% at the time.

“The international monetary system is functioning poorly,” said Georges
Pompidou, the French prime minister, that year, “because it gives advantages
to countries with a reserve currency.

“These countries can afford inflation without paying for it.”

By 1968, de Gaulle pulled out of the London “Gold Pool” – the government-run
cartel that actively worked to suppress the gold price, capping it in line
with the official $35 per ounce ordained by the US government. Three years
later, and with gold being air-lifted from Fort Knox to New York to meet
foreign demands for payment in gold, Richard Nixon put a stop to de Gaulle’s
game. He stopped paying gold altogether.

De Gaulle called the dollar “America’s exorbitant privilege,” repeating a
phrase of his favorite economist, Jacques Rueff. This privilege gave the
United States exclusive rights to print the dollar, the world’s “reserve
currency,” and force it on everyone else in payment of debt. Under the post-
war Bretton Woods Agreement of 1946, the dollar could not be refused.

Indeed, alongside gold – with which the dollar was utterly interchangeable
until 1971 – the US currency was real money, ready cash, the very thing
itself. Everything else paled next to the imperial dollar. Everything except
gold.

And today?

“Printing a $100 bill is almost costless to the US government,” as Thomas
Palley, a Washington-based economist wrote last year, “but foreigners must
give more than $100 of resources to get the bill.

“That’s a tidy profit for US taxpayers.”

This profit – paid in oil from Arabia…children’s toys from China…and
vacations in Europe’s crumbling capital cities – has surged since the Unites
States closed that “Gold Window” at the Fed, and ceased paying anything in
return for its dollars.

Now the world must accept the dollar and nothing else besides. So far, so
good. But the scam will only work up until the moment that it doesn’t.

“The US trade deficit unexpectedly narrowed in Sept.,” reported Bloomberg on
Friday, as “customers abroad snapped up American products from cotton to
semiconductors, offsetting the deepening housing recession that is eroding
consumer confidence.

“Exports have reached a record for each of the past seven months, the longest
surge since 2000,” the newswire goes on, which “may help explain why the Bush
administration has suggested it’s comfortable with the dollar’s drop. It has
declined in all but one of the past five years, even as officials say they
support a ’strong’ dollar.”

What Bloomberg misses, however, is the surge in US import prices right
alongside. They rose 9.2% year-on-year in October, the Dept. of Labor said on
Friday, up from the 5.2% rate of import inflation seen a month earlier.

Yes, the surge in oil price must account for a big chunk of that rise – and
the surge in world oil prices may do more than reflect dollar weakness alone.
The “Peak Oil” theory is starting to make headlines here in London. Not since
the Club of Rome forecast a crisis in the global economy in 1972 have fears
of an energy crunch become so widespread.

But if you – an oil producing nation – were concerned that one day soon your
wells might run dry, wouldn’t you want to get top dollar for the barrels you
were selling today? Especially if the very dollar itself was increasingly
losing its value?

“At the end of 2006, China’s foreign exchange reserves were $1,066 billion,
or 40% of China’s GDP,” notes Edwin Truman in a new paper for the Peterson
Institute. “In 1992, reserves were $19.4 billion, 4% of GDP. They crossed the
$100 billion line in 1996, the $200 billion line in 2001, and the $500
billion line in 2004.”

What to do with all those dollars? “If all countries holding dollars came to
request, sooner or later, conversion into gold,” warned Charles de Gaulle in
1965, “even though such a widespread move may never come to pass…[it] would
probably shatter the whole world.

“We have every reason to wish that every step be taken in due time to avoid
it,” the French president advised. But the step chosen by Washington –
rescinding the right of all other nation-states to exchange their dollars for
gold – only allowed the flood of dollars to push higher.

Nixon’s quick-fix brought such a crisis of confidence by the end of the ’70s,
gold prices shot above $800 per ounce – and it took double-digit interest
rates to prop up the greenback and restore the world’s faith in America’s
paper promises.

The real crisis, however – the crisis built into the very system that allows
the US to print money which no one else can refuse in payment – was merely
delayed. And we may now be facing the final endgame in America’s post-war
monetary dominance.

If these sovereign wealth funds – owned by national governments, remember –
cannot tip up at the Fed and swap their greenbacks for gold, they can still
exchange them for other assets. BCA Research in Montreal thinks that
“sovereign wealth funds” owned by Asian and Arabian governments will control
some $13 trillion by 2017 – “an amount equivalent to the current market value
of the S&P500 companies.”

And if China doesn’t want to buy the S&P500 – and if Congress won’t allow
Arab companies to buy up domestic US assets, such as port facilities – then
the sovereign wealth funds will simply swap their dollars for African copper
mines, Latin American oil supplies, Australian wheat…anything with real,
intrinsic value.

They might just choose to buy gold as well. After all, it is “in all places
and at all times…the immutable and fiduciary value par excellence,” as a
French president once put it.

Charles de Gaulle also warned that the crisis brought about by a rush for the
exits – out of the dollar – might just “shatter the world”. It came close in
January 1980. Are we getting even closer today?

[Joel's Note: Formerly City correspondent for The Daily Reckoning in London
and head of editorial at the UK’s leading financial advisory for private
investors, Adrian Ash is the editor of Gold News and head of research at
BullionVault – where you can Buy Gold Today vaulted in Zurich on $3 spreads
and 0.8% dealing fees.

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Rude Endnote: We’re up and out the door early today to attend the third day
of the Dubai Air Show. We’ll have more for you tomorrow.

Cheers,

Joel Bowman
Rude Awakening