Doubts Emerge Over Dollar’s Role As a Reserve Currency

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With Congress readying a vote on whether to elevate Judy Shelton to the board of the Federal Reserve, Goldman Sachs has just put out a startling research report. It’s not about — and doesn’t mention — Ms. Shelton or Mr. Trump’s other nominee to the Fed board, Christopher Waller. It does make clear that Ms. Shelton is not the only serious person thinking about the question of a role for gold in the monetary system.

Goldman’s report, issued three days ago, is called “Gold Views: In Search of a New Reserve Currency.” It notes that the collapse in the value of the dollar — the phrase it uses is the “recent surge in gold prices to new all-time highs” — has outpaced the rise in real rates and other U.S. dollar alternatives, like the Euro, Yen, and Swiss Franc. It believes this is being driven by a “potential shift in the US Fed towards an inflationary bias.”

Combined with “a record level of debt accumulation” by the American government, says Goldman, “real concerns around the longevity of the US dollar as a reserve currency have started to emerge.” Then it says: “We have long maintained gold is the currency of last resort, particularly in an environment like the current one where governments are debasing their fiat currencies and pushing real interest rates to all-time lows.”

What caught our own attention in the Goldman report was its suggestion that it’s “important” to “distinguish between debasement and inflation.” The “key,” it says, “is that the current debasement and debt accumulation sows the seeds for future inflationary risks despite inflationary risks remaining low today. While debasement in many cases leads to inflation, it is not always the case as witnessed over the past decade.”

The Goldman report suggests the right hedge for the longer term danger — inflation — is oil. Today, though, it reckons the “risk is from debasement of fiat currencies that sows the risk for inflation and gold is the best hedge against debasement.” Much of its discussion is advice for investors. What interests these columns is the message for the stewards of the political economy: the dollar’s status as a reserve currency may be waning.

Which, we would add, can be seen as a positive development. The very subtitle of Lewis Lehrman’s book “The True Gold Standard,” after all, is “A Monetary Reform Plan Without Official Reserve Currencies.” We don’t take Goldman’s research report to be a comment on Mr. Trump or his nominees to the Fed. It does, though, mark the possibility that Ms. Shelton and other advocates of monetary reform may yet emerge in the van.

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