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A worker unloads food in the Queens borough of New York City on June 4. Average wage-earners’ salaries have failed to keep up with inflation. Photo: AFP
Opinion
Harminder Singh
Harminder Singh

‘Nixon shock’ still a threat to global economy, 50 years on

  • Nixon’s 1971 decision resulted in a widening wealth gap around the world, irresponsible government spending and asset prices that have gone stratospheric
  • Hong Kong’s economy remains threatened as long as our currency is pegged to the crumbling US dollar and there are no plans in place in case of a currency reset
Harminder Singh
Harminder Singh
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Fifty years ago this month, US president Richard Nixon ended gold-to-US dollar convertibility to save the country’s gold holdings from exhaustion. This set the world on the path of a debt-based monetary system that we participate in today.

The move has resulted in a widening wealth gap around the world, irresponsible government spending and asset prices that have gone stratospheric.
Following World War II, 730 delegates from 44 Allied nations hammered out a new monetary system at Bretton Woods in the US state of New Hampshire in an effort to emerge from the economic devastation.

A key feature of the Bretton Woods System was pegging world currencies to the US dollar – becoming the world’s “reserve currency” – which would link itself to gold at US$35 per ounce. Allowing the dollar to be as good as gold brought confidence in the new economic system and encouraged free trade.

But this new economic order started breaking down in the mid-1960s. Debts incurred by the Vietnam war, welfare programmes and monetary inflation caused gold outflows from the US Bullion Depository at Fort Knox.

Gold’s bright quarterly performance no guarantee run-up will continue

Facing an emptying gold vault and a possible sovereign debt default after Britain asked to swap gold for dollars, Nixon announced the issuance of Executive Order 11615 on a Sunday night. This “temporarily” closed the gold window, making the direct convertibility of gold at US$35 per ounce no longer possible.

The “Nixon shock” brought an end to the Bretton Woods system, and the world entered into a debt-based system constructed with money backed by nothing tangible. And because the US government no longer had to pay a consequence for its spending, it was free to fund any programme, budget, bailout or war it needed.
The results have been a steady decline in the purchasing power of the US dollar, deindustrialisation, financialisation of nearly everything, funding of military adventures in the Middle East and North Africa, and pumping low-interest loans to banks and corporations, allowing them to get even larger or keeping them alive through a bailout when they would have been wiped out during a recession.

For the average wage-earner, this has meant salaries not keeping up with inflation. Assets such as property have become out of reach, household debt has grown and people are retiring later because the money they have saved does not stretch far enough.

On top of all this, the world economy is beginning to look more like the United States during the 1970s. There is high inflation coupled with low growth when you subtract the pandemic recovery.

The US Federal Reserve is out of bullets. How much more money can be printed? How much lower can interest rates go? How much more debt can the US central bank monetise?

Eventually, this house of cards will come down and be replaced by a new monetary system. Central banks and world leaders appear to be preparing for this inevitability.

The International Monetary Fund has called for a new Bretton Woods to hammer out a new global economic system. It recently issued US$650 billion in its own currency known as special drawing rights – made out of thin air and backed by nothing tangible – and distributed it to member states.
Central banks are working on their own sovereign digital currencies while also buying gold by the tonne.
Where does this leave Hong Kong? The Hong Kong dollar has been pegged to the US dollar since 1983, and we adjust our monetary policies based on moves by the Fed. What happens if there is a currency reset or even a currency collapse?

Hong Kong lawmakers need to begin asking monetary and Treasury officials, including Financial Secretary Paul Chan Mo-po, this question. While they are at it, these officials can also reveal what their plans are in case of the increasingly likely scenarios of stagflation or hyperinflation.

Harminder Singh is a Hong Kong-based journalist

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