John Hathaway: Meltdown for the World's Monetary System?

John Hathaway, writing today for Bloomberg, asserts boldly that

The world’s monetary system is in the process of melting down. We have entered the endgame for the dollar as the dominant reserve currency, but most investors and policy makers are unaware of the implications.

This caught my attention. It's the lead piece at Real Clear Markets, my favorite daily finance resource along with Yves Smith's Naked Capitalism. Hathaway's assertion was a shocker for me; it's far and away the boldest statement I've seen in a year about the dollar's status as global reserve currency. And it will shock others, as Hathaway notes:

It’s amazing that there is no intelligent discourse among policy leaders on the subject of monetary rot and its implications for the future economic and political landscape. Until there is fundamental monetary reform on an international scale, most economic forecasts aren’t worth the paper on which they are written.

This man is no optimist. And he goes on to assert that

The prospects for an orderly unwinding of the extreme posture of global monetary policy are zero. Bernanke, Jean- Claude Trichet and Mervyn King, his counterparts in Europe and the U.K. respectively, are huddling en masse upon the most precarious perch in the history of monetary affairs. These alleged guardians of monetary stability, in their attempts to shore up the system, have simply created the incinerator for paper money. We are past the point of no return. Quantitative easing may well become a way of life.

Wow. But even as I write this post, I hear market-watcher Art Cashin of CNBC quipping at 1:40 of this clip that "The fear is that QEII, which originally looked like the Loveboat, may turn out to be the Titanic."

So wow again. A month ago, John Authers of the Financial Times sounded a note of alarm about the failure of central bankers to reform the world's financial markets since the fall of Lehman Brothers in 2008:

Two years on, then, the world’s financial regulation has changed less than I predicted. Regulators can argue, with some justice, that they had no choice but to be lenient when banks’ very survival seemed in doubt. Now, they can get tough. But it looks alarmingly as though an unrepeatable opportunity to make the world’s financial system safer has been missed.

Auther's alarm sounds like a modulated version of Hathaway's message. More recently, in the October 18 Financial Times, economist Michael Hudson, writing from a global perspective, came out strongly against QEII, warning that it will short-sightedly create a world of competing blocs of developed and developing countries:

The real threat is a world broken into two competing financial blocs, one centred on the dollar, the other on the Bric nations of Brazil, Russia, India and China. Tentative steps in this direction occurred last year when China, India and Russia, along with Iran and members of the Shanghai Co-operation Organization took early steps to use their own currencies for trade, rather than the dollar. China took a simpler path last month when it supported a Russian proposal to start direct trading using the renminbi and the rouble. It negotiated similar deals with Brazil and Turkey.

And Hudson had two recommendations:

To deter this the US and Japan should refrain from QE2, even at the cost of lower US growth. An even better response, however, would be new regulations stopping western banks from speculating in foreign currencies, by using heavier reserve requirements or a short-term tax on foreign currency trades and options. Without such steps other countries will soon move to protect their currencies. If they do it will have been US policy short-sightedness, conducted without concern for its effect on developing economies, that will ultimately have isolated the dollar and its users.

So what chance is there for the regulations that Hudson calls for? Probably nil, says my cynical self. The banks run the show. I hasten to add that I'm uninformed on this point.

Hudson, who sees the 2007-08 meltdown as a "once-in-a-century transfer of wealth" (from the not-so-rich to the super-rich), is himself quite modulated in this column. It's Hathaway who minces no words. So who is he? I guess he's a goldbug. But Harvard-educated. From his bio:

JOHN C. HATHAWAY, CFA, Senior Managing Director, is a Portfolio Manager and a member of the Investment Committee at Tocqueville Asset Management L.P. Mr. Hathaway, who has 39 years of investment experience, manages the Tocqueville Gold Fund, Tocqueville Gold Partners and separate accounts for individual and institutional clients following a gold strategy. Mr. Hathaway has a B.A. degree from Harvard College, an M.B.A. from the University of Virginia and is a CFA charter holder.

In closing, by way of attempting to give balance to the above dismaying thoughts, I offer this piece from the latest Economist about America and Obama doing better than Americans think. The piece concludes:

Despite its problems, America has far more going for it than its current mood suggests. It is still the most innovative economy on earth, the place where the world’s greatest universities meet the world’s deepest pockets. Its demography is favourable, with a high birth rate and limitless space into which to expand. It has a flexible and hard-working labour force. Its ultra-low bond yields are a sign that the world’s investors still think it a good long-term bet. The most enterprising individuals on earth still clamour to come to America. And it still has a talented president who can surely do better than he has thus far.

Those ultra-low bond yields: do they reflect safe-haven confidence, as the Economist would have it, or any-port-in-a-storm fear?