Gatsby, the dollar and staring blankly at the world falling apart

Bloomberg/John Authers/9-29-2022

“The ministerial intervention was successful and achieved what its backers wanted. The dollar has never regained its pre-Plaza highs from early 1985. But now, wishful thoughts are returning to the Plaza Accord once more.”

USAGOLD Opinion 1: We do not completely agree with Authers that a new Plaza Accord-type arrangement is impossible under the current circumstances, though we respect the strength of his argument. He agrees with a Morgan Stanley assessment that the US simply lacks the ammunition in terms of currency reserves to enforce a new rendtion of the Plaza Accord. Though the US ranks eleventh in terms of currency reserves, its positioning in that respect has always been low because it actually issues the world’s primary reserve currency. It doesn’t need to hold other currencies for defensive purposes. It simply needs to adjust monetary policy to achieve its intended results.

USAGOLD Opinion 2: If the Fed, for example, were to put a hold on rate increases, and resume quantitative easing (as Japan, China, Europe, and Britain have already done) while major dollar holders sold off their dollar reserves, it would likely bring the dollar to heel, and amount to a tacit resumption of the Plaza Accord – both in terms of intent and practice. Since the other major players have already adjusted their policies, it would only remain for the US to jump on board.

USAGOLD Opinion 3: The fact of the matter is that the Fed might be forced against its will to that course of action by the flow of events, as was the Bank of England last week. On the downside, the problem with all of this is that it would likely launch a second wave of worldwide inflation. In short, the Fed would go from dragon slayer to dragon feeder. As for the alternative, Authers makes reference to “another pearl from Gatsby.” The non-dollar economies, he says, must “feel like ‘they are watching their whole world fall apart, and all they can do is stare blankly.’”

USAGOLD Opinion 4: We rate Authers’ analysis a must-read. It offers an incisive overview of the global monetary developments now in play, and in the end, he (and Morgan Stanley) might be right about where we are headed. He cleverly juxtaposes references to F. Scott Fitzgerald’s The Great Gatsby with current monetary events throughout the piece – all centered around New York’s glittery Plaza Hotel, the lobby of which is shown above.

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Image attribution: Zinetv1, CC BY-SA 3.0 <https://creativecommons.org/licenses/by-sa/3.0>, via Wikimedia Commons