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Monday, 20 October 2008

Time to Dump the Dollar Standard

The torrent of dollars unleashed by the U.S. trade deficit fueled ever larger bubbles around the world as credit expanded without limit. A crisis too big to be inflated away has inevitably arrived.

Why is the global economy in danger of collapse? So far explanations have focused on the proximate causes, like banks’ imprudent mortgage lending and use of complex financial instruments. But behind these missteps lie deeper problems with the world’s financial system, flaws that made a crisis of this magnitude inevitable.

The recent rapid growth of international trade and investment was built on foundations made of paper money. Over the last four decades, the global economy has prospered thanks to the greatest expansion of credit in human history.

When the money was flowing freely it was easy to forget that throughout history, whenever the link between money and gold has been severed, disaster soon ensues. And so it is again today.

The events of September 2008 represent nothing less than the breakdown of the credit-driven Anglo-Saxon economic model. The consequences for the global economy will be dire. Having benefited most during the boom, Asia may well suffer most in the bust.


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