That the current monetary system may not last for the ages was underscored the other day by Kuwait’s decision to uncouple its dinar from the US dollar, writes Jim Grant, founder and editor of Grant’s Interest Rate Observer, in the FT. For years, the two had been lashed together as a preliminary to the projected creation of a common Persian Gulf currency.
But the more the dollar’s value sagged, the more dollars the members of the Gulf Co-operation Council have had to absorb just to maintain the desired exchange rates. The more local currency they printed with which to buy their dollars, the more inflation welled up.
Now Kuwait has chosen to go its own way, leaving Saudi Arabia, Qatar, the United Arab Emirates and Bahrain to ponder their tolerance for open-ended dollar-buying. Little Kuwait just might be the herald of big change, both in the dollar’s fortunes and the world’s monetary organisation. To a degree, the world turns on open-ended dollar buying and the muscular feats of money-printing it calls forth.
A greenback has no intrinsic value. It is faith-based. That the paper dollar finds favour the world over must be counted as one of the greatest achievements in the annals of money. To paraphrase Richard Nixon, the president who closed the US gold window in 1971, we are all dollar bulls now.
Or rather, we are up to a point of saturation, a point that Kuwait seems to have finally reached. Its neighbours, too, appear to be on the edge of dollar surfeit. Broad money growth in the Gulf region is running at 20 per cent, in no small part a consequence of rampant dollar absorption.
By upsetting the integrity of prices, a surfeit of money can disturb the architecture of production. In most of the dollar-buying states, monetary growth is fast enough to upset the eternal rest of Milton Friedman. In all cases, a slower pace of dollar absorption is an integral part of a monetary cure. It will be said that only some members of the dollar-buying bloc want to be cured. The rest – notably, China – are happy to keep on cranking the monetary presses. But the upward track of US interest rates and the downward path of the dollar exchange rate tell a different story.