Honest Money

Morgan Stanley UAE wants a world where the USA dollar regime can continue to unilaterally export its hyper-inflations over the planet.

Last October, the United Arab Emirates (UAE) Central Bank, whose currency, the dirham, is pegged to the USA dollar refused to follow the USA central bank, the Fed, in cutting interest rates.

“Dollar peg pays off” headlines The National in Abu Dhabi this morning. (1)

The unexpected move has been successful “so far”, says The National, because the country’s economic needs differ from those of the USA. The UAE needs to keep a check on inflation
[Ivo: check on inflation – inflation which was exported to the UAE and the rest of this planet by the USA and its dollar regime]
while America needs growth, which is why the USA Federal Reserve reduced its key interest rate by half a percentage point in late October, argues The National.

What? There is no danger of inflation in the USA? Does The National really think that the USA bailouts can be financed in another way than through printing more unbacked paper money out of thin air (the metaphor of “printing” money is still being used for creating worthless digital liquidity representing “money” out of thin air)?

Economists have decreed that there is now shift of market sentiment allowing the UAE Central Bank to keep its key interest rate slightly higher than the Federal Reserve’s, says The National. The newspaper quotes Mohamed Jaber, an economist at Morgan Stanley, as saying that contrary to what was thought possible a few months ago, forward markets are now pricing in a depreciation of the dirham. I suppose that’s vis-a-vis the USA dollar to which the dirham is pegged. How is a depreciation vis-a-vis the USA dollar possible if the dirham is pegged to that worthless piece of paper?

And then it comes:
Standard economic wisdom dictates that maintaining a fixed exchange rate in relation to the dollar requires a country to mirror US monetary policy exactly, or risk creating a situation where speculators could borrow money in the US at lower rates and deposit it here for an easy profit. Such cash flows would be large and rapid, and likely to destabilise the economy.
However, despite predictions to the contrary, economists say the Central Bank seems to have been able to prevent such flows of money. The fact that the markets are now betting on a slight devaluation of the dirham during the next 12 months has allowed the Central Bank to maintain slightly higher interest rates than the US without inviting in large amounts of speculative money,
says The National

The refusal to follow the USA Fed rate cut was in October 2008.

And now, only two months later, the economists quoted by The National can already argue that standard economic wisdom has been turned upside down.

Dr Henry Hazlitt teaches that standard economic wisdom looks not merely at the immediate but at the longer effects of any act or policy; and that standard economic wisdom consists in tracing the consequences of that policy not merely for one group but for all groups. (2)

One thing is certain; the economists quoted by The National only look at the short-term consequences of the Central Bank’s decision not to follow USA interest rate cuts.

I am not sure that these economists will still hold the same view when the USA dollar will accelerate on its path towards hyper-inflation.

Yes, our American Masters are still thinking they will be able to subdue the monster of the USA dollar hyper-inflation.

This mastering by the USA of the imminent USA hyper-inflation will be one of the factors which will demonstrate whether the economists quoted by the National can be taken seriously when they argue that the dollar peg is good for the UAE.

If the dollar peg was really that good, why does the UAE not scrap the dirham and adopt the USA dollar? Because then it could not take independent interest rate decisions?

According to Mr Jaber, it is in the interest of the Central Bank to keep interest rates slightly higher, given that lowering them could add to inflationary pressures by making foreign goods more expensive, says The National.

Lowering interest rates would, I suppose, lead to the lowering of the exchange rate of the dirham, thus to higher USA dollar-denominated oil export revenues. Remember that Dr Hazlitt said that the art of economics consists in looking for the consequences of interest rates for ALL groups in society.

If the 29 and 30 December 2008 Muscat, Oman, Gulf Co-operation Council (GCC) Summit decides to pool the GCC gold reserves, make this pool the reserves of the Khaleej dinar and periodically mark these reserves to market (-price), then every increase in the price of gold will automatically lead to an increase in the price of oil.

By same token, the present indecently low USA dollar-denominated oil prices will immediately come to an end.

I am afraid, the UAE dollar peg, and the hyper-inflations unilaterally initiated by the dollar regime, will have to suffer the same fate and be relegated to the dustbin of history.

Ivo Cerckel
Siquijor, 11 December 2008

Malaysia, Russia and Europe want multi-polar world
December 11th, 2008 by Ivo Cerckel
http://bphouse.com/honest_money/2008/12/11/malaysia-russia-and-europe-want-multi-polar-world/
If this link does not work, try to copy and paste it in your browser.

NOTES

(1)
Dollar peg pays off
Travis Pantin
Last Updated: December 10. 2008 8:35PM UAE / December 10. 2008 4:35PM GMT
http://thenational.ae/article/20081210/BUSINESS/960292012/1005

(2)
Henry Hazlitt, “Economics in One Lesson”, New York: Arlington House Publishers, 1978, 2nd ed. (first ed. published 1946 by Harper and Brothers), p. 17
http://jim.com/econ/chap01p1.html

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