Bennett Group Financial

44 Years Later: The Nixon Shock Goes to China, by Dawn Bennett


Washington, DC -- (ReleaseWire) -- 08/19/2015 --This past Saturday, August 15th, was the 44th anniversary of one of the most cynical acts of one of the most cynical presidents in United States history, and a day that should live in infamy. It was on August 15, 1971 that Nixon unilaterally ended the gold standard for the United States, and much of the world, by canceling the direct convertibility of the United States dollar to gold. Ancient history, though, right? To quote Nixon's television address on that very day: "Now, what does this action — which is very technical — what does it mean for you?" Let's have a (very) quick history lesson.

In July of 1944, representatives from all of the Allied nations met at a hotel in Bretton Woods, New Hampshire to discuss ways to rebuild the world's economic systems after the end of a war that was still very much raging on all fronts. Over the course of three weeks, delegates hammered out what came to be known as the Bretton Woods agreement, which formalized ways for governments to manage currency exchange on a global level. One of the central principles of the agreement was that each country would maintain exchange rates by tying their currencies to gold, using the dollar as a reserve currency. The U.S. then guaranteed that dollars could be exchanged directly for gold. The Bretton Woods system was intended to provide a degree of stability and accountability, as well as ensuring that governments were less able to engage in direct currency wars.

Fast-forwarding now, to 1971. The dollar was under pressure from other currencies, particularly the Deutschmark, and other nations started demanding gold in exchange for dollars they were holding. In early August, Congress recommended devaluing the dollar as protection against "foreign price gougers." Unemployment and inflation were rising, as well, and on the 15th, President Nixon shocked the world with the stroke of a pen, instructing his Treasury Secretary, John Connally, to suspend the conversion of the dollar into gold except under very limited circumstances. Foreign governments could no longer exchange their dollars for gold. The President claimed that he intended to end re-open the gold window after reforms to the Bretton Woods system, but in fact that never happened. Instead, by 1973, the world's monetary systems were interlinked in a free-floating regime of fiat currencies, tied to nothing but the whims of governments and central banks.

Since the United States abandoned the gold standard, the world has suffered from 12 financial crises, beginning with the Oil Shock in 1973 and culminating in the crisis of 2008 and 2009. Now we face debt crises in Europe and Puerto Rico, and the growing U.S. federal deficit. Conversely, between the establishment of the Bretton Woods system in 1947 and 1967, there was only one currency crisis, and that involved the British pound. No major bank failures occurred during those two decades, no Wall Street meltdowns or bailouts. Nixon thought that we were invincible, but this was a false promise. We are not and have not ever been invincible.

Even in the years leading up to the Great Depression, there were many mainstream experts and politicians who discounted the possibility of a financial collapse here in the United States, and most were ready to believe them, because they were the experts. It's important to remember, though, that the establishment, even highly educated economists, can often be at best wrong, and at worst completely useless. You have to do your own homework when evaluating public statements, and especially when managing your own portfolio. The appearance of prosperity means nothing if the fundamentals don't support the optimism. The fundamentals always matter, and the media doesn't, despite how often they tout bullish markets and carefully manicured unemployment numbers. The markets can't hide from reality forever, and neither can the economic numbers.

A case in point is the jobs picture. A few weeks ago, Challenger, Gray and Christmas released their report on monthly job cuts for July in the United States. There were 105,696 job cuts, the highest number since 2011. That's 136% higher than the number for June, which was 44,842. This is a fact that should stick out for Americans, both in and out of the workforce. The headlines and the headline numbers simply don't tell the whole story about unemployment and the workforce. More and more of the jobs that are created are part-time or minimum wage and more and more people have effectively given up on re-entering the workforce. This is not the optimistic scenario we've been sold.

Nixon also famously visited China, and it seems that he might have left some of his thinking behind. This week we watched China seem to take a page out of his playbook, devaluing their currency, the yuan, and causing a shockwave to ripple through world. The Premiere has made many of the same promises to his people as Nixon did 44 years ago, saying that the intent is to reinvigorate Chinese exports and shore up employment by making goods cheaper in foreign markets. This will, of course, increase pressure on U.S. companies, especially the multinationals that have been deriving so much profit from doing business in China. Make no mistake, this is a currency war, and it's one that we've been talking about for more than three years. So far, they've devalued the yuan by about 3 percent, and although China doesn't make their plans or actions known, many analysts believe that they're looking at a target of 10 percent before all is said and done.

Nixon's devastation of the world's monetary system left us open for central bank manipulation, without achieving the goals he claimed to be reaching for. China's devaluation of the yuan is unlikely to have the sought-after lasting benefits for its people and businesses, and will certainly cause turmoil in global markets. As our own markets suffer under the dark cloud of a likely interest rate hike from the Federal Reserve, investors need to stay aware of global impacts and keep a skeptical eye on the news from home. False promises and unintended consequences abound, and we need to evaluate all the available information to invest wisely.

All data sourced through Bloomberg

Securities offered through Western International Securities, Inc., Member FINRA & SIPC. Bennett Group Financial & Western International Securities, Inc. are separate and unaffiliated companies.

About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting

She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.

She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett or