The Emperor's New Clothes

Published: 01st July 2007
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Would you lend money to a counterfeiter? I wouldn't think so. Then why do countries such as China and Japan hold over $1 trillion each from the US which has recklessly been printing greater and greater amounts of money since going off the gold standard? Perhaps because they are counterfeiters themselves.

Han Christian Andersen's The Emperor's New Clothes is a metaphor where an overwhelming majority of observers willingly share in a collective ignorance of an obvious fact, despite individually recognising the absurdity.

That 19th Century fairy tale could become the 21st Century's worst nightmare.

The Emperor's New Clothes is being rewritten for the new millenium with the greenback in the leading role. The US dollar used to be backed by gold to the tune of US$35/ounce until Nixon closed the gold window in 1971. It now takes over US$600 to purchase an ounce of gold.

The USD used to be worth €1.33. Now it trades around €0.79. This is not to say that the Euro is immune to the inherent risks associated with the USD. Both are fiat currencies backed up by nothing more than government promises. Last I saw, important commodities such as copper, gold and oil were increasing in the price of Euro as they were in USD, albeit at a slower pace - for the moment.

Back in 2001 Britain Chancellor Gordon Brown decided to reduce Britain's gold reserves by 60% from 715 tons to 300 tons. In its place, Britain could "invest" in government instruments such as 5% yielding US T-Bills.

Since then gold has risen from about US$300/ounce to over US$600/ounce while the USD has fallen more then 40% in value.


The US national debt now stands at US$8.35 trillion. The last $2 trillion were added in the last three years.

America's total debt (defined as the sum of all recognized debt of federal, state & local governments, international, private households, business and domestic financial sectors, including federal debt to trust funds) stands at a staggering US$44 trillion and this excludes the huge contingent liabilities of social security, government pensions, Medicare and other government off-budget items.

That said, the United States is the world's most privileged nation for having the exclusive rights of printing the world's reserve currency at will and at a cost of nothing but the paper and ink it is printed on. There are already at least three times as many U.S. dollars in ciculation outside the U.S. as within.

Where once the dollar was a mighty symbol of a wealthy nation, it now represents debt that will never get paid in full. By simply printing more, the U.S. can pay for it using devalued dollars.

Trillions of wallet-sized IOUs, valuable only because people - not unlike the townspeople cheering the Anderson's fabled naked emperor - still believe in it.

But how long until the someone announces that he has no clothes?

Published on - May 20, 2006.

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