Eurozone to Boost Bailout Fund

The 17-nation eurozone is set to shore up its bailout fund to contain the debt turmoil that threatens to engulf more countries across Europe, and German MPs say the plan could boost the fund’s lending capacity to more than one trillion euro($A1.34 trillion).

A document obtained by The Associated Press shows the currency zone wants to boost the 440 billion euro ($A587.65 billion) bailout fund by offering sovereign bond buyers an insurance against possible losses and by attracting capital from private investors and sovereign wealth funds.

Eurozone governments hope that the enhanced European Financial Stability Fund, or EFSF, will be able to protect countries such as Italy and Spain from being engulfed in the debt crisis. To do that, however, it needs to be bigger or see its lending powers magnified.

Leading German opposition MPs, who were briefed earlier on Monday by Chancellor Angela Merkel on the plan, said the fund’s lending capacity will be boosted ‘‘beyond one trillion’’ (euros).

But the draft document by the eurozone working group - which Germany’s government was sharing with key MPs on Monday - did not provide a headline figure for the bailout fund, stressing ‘‘a more precise number on the extent of leverage can only be determined after contacts with potential investors’’ and rating agencies.

Because of the move’s significance, members of Merkel’s party proposed that the change receive full parliamentary approval on Wednesday - although it would have been enough for the parliament’s budget committee to approve the plan.

The changes look likely to pass by a wide margin in Germany’s parliament.

MPs will vote only hours before an EU summit in Brussels that is set to adopt the new rules for the EFSF.

The enhanced bailout fund rules are meant to guarantee ‘‘continued market access of euro area member states under pressure and the proper functioning of the sovereign debt market’’, the document said.

Therefore the EFSF is set to have the ability to provide investors with a partial insurance against losses from its member states’ government bonds, thus making them a safer and more attractive investment.

The eurozone document also foresees setting up one or several special investment vehicles that would partly compensate possible losses on sovereign bonds in a bid to attract outside investors such as sovereign wealth funds, combining ‘‘public and private capital to enlarge the resources available’’.

The draft document stressed that the EFSF would ‘‘benefit from the flexibility to deploy both options, which are not mutually exclusive’’.

The insurance model is designed to increase the demand for newly issued eurozone government bonds, lower the yields, ‘‘thereby supporting the sustainability of public finances’’, the document said.

Lowering the yields for troubled eurozone governments is a key step to counter the widening debt crisis because spiralling yields on debt issued by Greece, Portugal and Ireland eventually cut them off from market financing, forcing the eurozone to provide those nations with an emergency loan package.

In the event of a default, ‘‘the investor could surrender the partial protection certificate’’ and ‘‘receive payment in kind with an EFSF bond’’, the document said, referring to the insurance model.

The new investment facility, a so-called Special Investment Purpose Investment Vehicle (SPIV), is meant to create ‘‘additional liquidity and market capacity to extend loans, for bank recapitalisation via a member state and for buying bonds in the primary and secondary market,’’ the eurozone draft document said.

Any assistance from the fund for member states, however, would come with tough strings attached and the ‘‘appropriate monitoring and surveillance procedures’’, the document said.

Greece, for example, must implement harsh austerity measures in return for last year’s 110 billion euro ($A146.91 billion) bailout.

Beefing up the EFSF is one part of a three-pronged eurozone plan to solve the crisis.

The other two parts are reducing Greece’s debt burden so the country eventually can stand on its own and forcing banks to raise more money so they can take losses on the Greek debt and ride out the financial storm that will entail.

Greece’s private bondholders agreed in July to accept losses of 21 per cent on their holdings, and getting them to take deeper losses to lighten the country’s debt load is proving particularly difficult.

Experts agree that Greece needs to write off more of its debt - German officials have said up to 50 or 60 per cent - if it is ever to make it out of its debt hole.

But many say such a deal with private creditors needs to be voluntary. Imposing sharp losses against the banks through a so-called haircut could trigger massive bond insurance payments that could cause panic on financial markets.

Charles Dallara, managing director of a global banking lobby group currently negotiating a wider Greek debt reduction with eurozone officials in Brussels, cautioned that ‘‘there are limits to what could be considered as voluntary’’.

He insisted that any approach not based on co-operative discussions but unilateral actions would be tantamount to a Greek default, isolating the country for years from capital markets.

‘‘It would also likely have severe contagion effects, which would cost the European and the world economy dearly in terms of employment and growth,’’ Dallara said in a statement.

The European Central Bank, meanwhile, has been taking on the role of firefighter by buying the bonds of financially weakened governments on the open market. That keeps the bond prices up and the rates down, allowing the countries to borrow on financial markets at lower rates than they otherwise could.

The ECB said it bought 4.5 billion euro ($A6.01 billion) in government bonds last week. That was up from 2.2 billion euro ($A2.94 billion) the week before, bringing the total of sovereign bonds held by the ECB to 169.5 billion euro ($A226.38 billion).

The ECB hopes it will be able to stop the bond-buying program once the bailout fund’s new powers are active.

Read more: http://www.smh.com.au/business/eurozone-to-boost-bailout-fund-20111025-1mh80.html#ixzz1bnFvC8Ux

Doug Casey on Bitcoin and Currencies

We’ve had a num­ber of read­ers ask for your take on this new Bit­coin sys­tem. As a per­son who likes to see the pri­vate sec­tor com­pete in areas that gov­ern­ments try to reserve for them­selves, this seems right up your alley — what do you think?

Doug: It’s a sign of the times. Lots of peo­ple are actively look­ing for an alter­na­tive to the dol­lar. I think Bit­coin is a very good thing, in prin­ci­ple. But after the recent dis­as­trous hack, it’s prob­a­bly a dead duck, at least in ver­sion 1.0.

It’s appro­pri­ate, how­ever, that we’re talk­ing about Bit­coin — an Internet-driven phe­nom­e­non — while you are in Bishkek, Kyr­gyzs­tan and I’m in Beirut, Lebanon, and we’re speak­ing essen­tially for free over the Inter­net. Money is increas­ingly going to be Internet-related. But first we should explain what Bit­coin is.

L: Sure. There’s a Wiki entry, but the basic idea is that Bit­coin is an online (and there­fore dig­i­tal), non-government-backed cur­rency. It’s not backed by any­thing, actu­ally, but that doesn’t seem to be a prob­lem for many users. The sys­tem has been adopted by a grow­ing num­ber of peo­ple around the world in just the last two years. Peo­ple are used to cur­ren­cies not backed by any­thing, so I guess I shouldn’t be sur­prised, but I am. On the other paw, unlike gov­ern­ment cur­rency, the Bit­coin sys­tem is based on a decen­tral­ized com­puter sys­tem that no sin­gle per­son or entity — includ­ing any gov­ern­ment — has con­trol over. That’s part of a design to keep the num­ber of Bit­coins in cir­cu­la­tion (infla­tion) strictly in check. So I can see why some peo­ple would see Bit­coin as being just like gov­ern­ment cur­rency, but bet­ter, because it’s sup­pos­edly inflation-proof.

That’s the idea, any­way, but in my view, it’s still not money — no more than unbacked gov­ern­ment promises are. You can only use them among oth­ers will­ing to pio­neer this cyber-frontier, so I really was quite sur­prised to see them catch on as well as they have. I’ve seen esti­mates that the mar­ket value of Bit­coins in cir­cu­la­tion rose to about $130 mil­lion before they crashed last weekend.

Doug: Again, it’s quite encour­ag­ing to see that so many peo­ple are so dis­gusted with gov­ern­ment cur­ren­cies, and the total lack of pri­vacy in bank­ing. That’s why Bit­coin could catch on at all. But let’s go back to basics, and see if Bit­coin qual­i­fies as money. Money is a medium of exchange and a store of value. Bit­coin may work as a medium of exchange some­times, but not a very good one, because it’s prov­ing so unsta­ble. It has fluc­tu­ated so much in value over its short life that it is totally unsuit­able as a store of value. Over 2,300 years ago, Aris­to­tle iden­ti­fied the five essen­tial attrib­utes that are nec­es­sary for a good money…

L: It has to be durable, divis­i­ble, con­ve­nient, con­sis­tent, and have value in itself. But don’t for­get your own adden­dum of “can’t be cre­ated out of thin air infinitely.”

Doug: Right. Let’s see how Bit­coin stacks up. First, is it durable? As noth­ing more than ones and zeros on a com­puter net­work, it might seem that the answer is no — it’s cer­tainly not as sub­stan­tial as gold. But a Bit­coin is arguably a lot more durable than a piece of government-issued paper than can be lost, burned, or even fall apart in your jeans pocket if you for­get to take it out before doing the laun­dry. More­over, since the Inter­net was designed to be mul­ti­ply redun­dant, and even able to with­stand nuclear attack, it’s arguable the Bits won’t just disappear.

L: We should point out that the recent prob­lem with a bunch of user­names and accounts being exposed was not a fail­ure of the Bit­coin sys­tem itself, but appar­ently of the phys­i­cal secu­rity of an inter­me­di­ary busi­ness that inter­faces between the pub­lic and Bit­coin. There’s another attack put together by hack­ers, not try­ing to crack the integrity of the Bit­coins them­selves, but to get arti­fi­cially paid by the Bit­coin sys­tem for doing com­pu­ta­tional work. Some­one has also released a virus aimed at steal­ing users’ Bit­coin account information.

Doug: Yes, these are all seri­ous attacks, and there are likely to be oth­ers. But it remains to be seen if Bit­coin will sur­vive the crash in value last week­end — Bit­coins had been trad­ing as high as $30 each and dropped to $0.01 at one point. Since Bit­coins rest on noth­ing but con­fi­dence, it’s going to be hard to restore that con­fi­dence now that it’s lost. But it’s inter­est­ing that the Bit­coins them­selves have proven quite resis­tant to tam­per­ing. In short, they’ve shown sig­nif­i­cant dura­bil­ity. So they pass that criterion.

L: Okay. Divisible?

Doug: No prob­lem there; they’re elec­tronic ledger entries, so they can be divided and sub­di­vided as many times as you like.

L: What about con­ve­nience? You can’t spend Bit­coins at a gas sta­tion or a vil­lage in Africa.

Doug: Don’t be so sure. More and more peo­ple are on the Inter­net these days. We’ve both seen vil­lagers in Africa with smart phones. It won’t be long before most every­body has one. Any­one with Inter­net access can arguably deal in Bit­coins, so they could poten­tially be very con­ve­nient to use. That’s a lot more peo­ple than the num­ber who will take, say, Russ­ian rubles, Zam­bian kwacha, or Viet­namese dong.

And Bit­coins are cer­tainly con­sis­tent; each one has iden­ti­cal properties.

L: Do they have value in themselves?

Doug: There’s the rub; I don’t see that they do. Bit­coins are just an elec­tronic abstrac­tion. They can’t be used for any­thing else, nor are they made of some­thing that can be used for any­thing else. They are like one of those knots in a string that dis­ap­pear if you pull hard enough on the ends of the string. They are not backed by any­thing at all. Like gov­ern­ment fiat cur­ren­cies, they are a con game, func­tion­ing only as long as peo­ple have con­fi­dence in them, regard­less of whether that con­fi­dence is well placed or not.

I’ve always said that the dol­lar is an “I owe you noth­ing,” and that the euro is a “Who owes you noth­ing.” With Bit­coins — which no indi­vid­ual can be held account­able for and which have no value in them­selves — I’d have to say they are a “No one owes you any­thing.” It was inevitable, there­fore, that the scheme would col­lapse… at least in its present form.

Their main value seems to have been as a spec­u­la­tive medium. Worse, actu­ally, in that they are — or were — based on find­ing a “greater fool” to pass them on to, for some­thing of value. The bub­ble in Bit­coins is, how­ever, just one of many to come as peo­ple try to get out of paper cur­ren­cies in the years to come. With the bub­ble that arose in tulip bulbs in 17th cen­tury Hol­land, you might at least have wound up with a flower. This time, peo­ple just got stung. The mes­sage is clear: Get used to bub­bles, as gov­ern­ments print up more and more fiat money.

Bit­coin reminds me of the so-called “barter cur­ren­cies” peo­ple tried to start in the U.S. some time ago, sup­pos­edly trad­ing units of “barter.” Peo­ple traded chits, where a bar­ber might charge ten for a hair­cut, and a lawyer 100 for an hour of coun­sel. But they were just another paper cur­rency, based on con­fi­dence. And, when you’re deal­ing with total strangers, con­fi­dence is hard to come by…

L: Sounds like a con­tra­dic­tion; the whole con­cept of barter is trad­ing in goods and ser­vices directly, not via media of exchange.

Doug: Well, barter chits were sup­posed to encour­age trade among those who used them. And they were also a tax dodge, since no offi­cial money changed hands. That was a major incen­tive for using them. But they all dried up and blew away, and the peo­ple who wound up hold­ing them had noth­ing. Sort of like when the Argen­tine peso col­lapsed ten years ago. The provinces decided to set up their own cur­ren­cies, but they weren’t backed by any­thing either, and they all dried up and blew away as well, leav­ing those who held them hold­ing an empty bag.

So, way before the dol­lar value of Bit­coins stepped off a cliff last week­end, I was telling peo­ple who asked me that I didn’t use them and didn’t plan to use them.

Frankly, I can’t see why any­one would, when there’s already an elec­tronic dig­i­tal cur­rency like Bit­coin but backed with gold: Gold­Money. I should dis­close that I’m a small investor in the com­pany. But I have to say that I really do like Gold­Money. It does every­thing Bit­coin does — or did — but is backed by some­thing of real value: gold. That means it’s not just an abstrac­tion, but an actual store of wealth. The ulti­mate proof of that is that you can take deliv­ery of your gold if you want to. With Bit­coin, there’s noth­ing to take deliv­ery of. I don’t under­stand why any­one would use Bit­coin when they can use Gold­Money, which does all the same things but has real backing.

L: Nei­ther do I. I was quite sur­prised to see that the idea had actu­ally caught on. I loathe the gov­ern­ment cur­rency monop­oly as much as any­one, but I wasn’t even tempted to try Bit­coin out, because it wasn’t backed by any­thing. Maybe it’s sim­ply Bitcoin’s case for being inflation-proof. This gets to your adden­dum to Aristotle’s five qual­i­ties: Peo­ple clearly placed great value on Bitcoin’s promise to limit cir­cu­la­tion to a finite num­ber. The per­cep­tion among peo­ple who’ve for­got­ten what money really is — which is most peo­ple — is that money is only a medium of exchange. In this case, the meme that “it’s bet­ter than gov­ern­ment paper” cre­ated enough per­cep­tion of value to keep the things in cir­cu­la­tion — or did until last week­end. Bit­coin looks more like “Bit the Dust” now. But in spite of its prob­lems, do you still seem pleased with the whole Bit­coin experiment.

Doug: I like the fact it’s untrace­able and secret. I like the idea that it was try­ing to be an alter­na­tive to the dol­lar; it’s great to see peo­ple try­ing to get out of the U.S. dol­lar. The dol­lar is a state monop­oly of the worst kind. It’s not only the world’s reserve cur­rency for cen­tral banks, but it’s become the world’s de facto inter­na­tional cur­rency. If you’re Cana­dian or Asian or African or South Amer­i­can and travel abroad, you pretty much need U.S. dol­lars as soon as you leave the bor­ders of your coun­try. Even the euro isn’t much good out­side of the euro­zone. That some­thing like Bit­coin can gain any trac­tion at all is a real — if early — chal­lenge to the supremacy of the U.S. dol­lar. This is quite sig­nif­i­cant. That was prob­a­bly one thing on Sen­a­tor Charles Schumer’s warped lit­tle mind when he referred Bit­coin to the Jus­tice Depart­ment for inves­ti­ga­tion recently. Schumer is always on the wrong side of absolutely everything.

The U.S. dol­lar has actu­ally become a major weapon in the hands of the U.S. gov­ern­ment now. All bank trans­ac­tions go through the U.S. SWIFT sys­tem. Even the Chi­nese and Rus­sians, who have no love for the U.S. gov­ern­ment, have to use dol­lars for inter­na­tional trade. They don’t like it. Mus­lims all around the world are com­ing to feel that they are ene­mies of the United States, so they don’t want to use the dol­lar either. And the more reg­u­la­tions the U.S. puts in place about how money is trans­ferred and used — like FATCA — the harder peo­ple will look for alter­na­tives. The U.S. gov­ern­ment is treat­ing everyone’s dol­lars as its per­sonal prop­erty. They’re becom­ing des­per­ate, and des­per­ate gov­ern­ments are espe­cially dan­ger­ous. This one is start­ing to thrash around like a large, stu­pid dinosaur in its death throes — stay out of its way.

Mohamed Mohatir in Malaysia, fol­low­ing the dic­tates of the Koran, which I under­stand states that only gold and sil­ver should be used as money (the dinar and dirham), actu­ally made moves towards estab­lish­ing a new gold stan­dard. He tried to get other Islamic gov­ern­ments to buy into it, and cut the dol­lar out of their inter­na­tional trade. But most of those gov­ern­ments — then as now, although things may be chang­ing — are both U.S. stooges and klep­toc­ra­cies, so they weren’t inter­ested in hon­est money.

There’s huge and grow­ing appetite around the world for alter­na­tives to the dol­lar. Bit­coin is a beta ver­sion of what’s com­ing in the post-dollar world. Gold­Money, how­ever, is already a proven ver­sion 2.0.

L: So … Invest­ment implications?

READ ON... at Howestreet.com

Shekel Drops to Week-Low as Fischer Bids for IMF Job; Bonds Fall

The shekel fell to the lowest level in more than a week amid concern about Israel’s ability to maintain economic stability as central bank governor Stanley Fischer bid for the International Monetary fund’s top job.

The country recovered from the global recession faster than many other developed economies during Fischer’s tenure, with growth of 4.7 percent in the first quarter of 2011 and 7.6 percent in the fourth quarter of 2010. The economy is likely to expand 5.2 percent this year and 4.2 percent in 2012, the central bank said in a June 1 forecast.

“The possibility of Fischer leaving the country is creating uncertainty about the economy, which is a concern for investors because there is no adequate replacement,” Rony Gitlin, head of spot trading at Bank Leumi Le-Israel Ltd. in Tel Aviv, said by telephone. “There are bets on whether Fischer will succeed in the candidacy, but he wouldn’t bid for the post if he wasn’t sure he will succeed. He must know something we don’t.”

The shekel weakened as much as 0.9 percent to 3.4386 per dollar, the lowest since June 2, and was down 0.8 percent at 3.4348 at 11:53 a.m. in Tel Aviv.

Fischer, 67, is betting his experience and a shortage of candidates will prompt IMF members to waive an age requirement that would exclude him from the position, a person familiar with the situation said yesterday. French Finance Minister Christine Lagarde and Mexican central bank chief Agustin Carstens also are running.

Greece Dispute

“At the end of the day, the country’s economy doesn’t depend on any one person,” Sagi Stein, chief executive officer of Migdal Mutual Funds, said in a telephone interview yesterday. “I don’t believe it would harm the economy” if Fischer left, he said.

The shekel also is weakening because a dispute about Greece’s financing needs is increasing demand for the relative safety of the dollar, Leumi’s Gitlin said.

European Central Bank President Jean-Claude Trichet and German Finance Minister Wolfgang Schaeuble are at odds over investors’ role in the second Greek rescue in 14 months. Unless a deal can be struck to guarantee Greece’s financing needs for the next 12 months, the International Monetary Fund has threatened to withhold its share of what remains of Greece’s original 110 billion-euro ($158 billion) bailout.

The yield on Israel’s 5 percent Mimshal Shiklit bond due January 2020 rose five basis points, or 0.05 percentage point, to 5.15 percent, the highest since May 24.

To contact the reporter on this story: Sharon Wrobel in Tel Aviv at swrobel4@bloomberg.net

United States Treasuries Snap Decline as Fed Plans to Purchase Notes Today

US Treasuries snapped a decline from yesterday as the Federal Reserve prepared to buy as much as $6 billion of U.S. debt today, after saying it intends to stick to its plan to purchase $600 billion of securities by June 30.

Yields have risen too far given that inflation is running slower than the Federal Reserve wants, according to Nikko Cordial Securities Inc., a unit of Sumitomo Mitsui Financial Group Inc., Japan’s third-largest publicly traded bank. The U.S. government is scheduled to sell $29 billion of seven-year debt today, the last of three note auctions this week.

“It will take a few quarters for inflation to pick up,” said Hiroki Shimazu, an economist at Nikko Cordial in Tokyo. “That will make Treasury yields fall in the next few months.”

Ten-year notes yielded 3.41 percent as of 6:51 a.m. in London, according to BGCantor Market Data. The 2.625 percent security maturing in November 2020 traded at 93 1/2. The yield increased eight basis points yesterday.

U.S. government securities have fluctuated between gains and losses for the past eight sessions. The 10-year rate will fall to 3 percent by March 31, Shimazu said.

The Fed will buy $4 billion to $6 billion of notes maturing from July 2012 to July 2013 today, according to its website.

The euro was near a two-month high versus the dollar before a German report forecast to show consumer prices rose at the fastest pace in two years. The 17-nation currency rose to $1.3722 yesterday, the strongest since Nov. 22.

Extra Yield

The extra yield investors demand to hold two-year German notes instead of similar-maturity Treasuries expanded to 70 basis points today, the most since January 2009.

The difference between 2- and 30-year rates was 3.96 percentage points. The spread widened to a record 3.98 percentage points on Jan. 20 based on closing levels, indicating investors have been demanding greater compensation for rising costs in the economy.

Ten-year Treasury Inflation Protected Securities show bondholders expect the consumer price index to increase 2.27 percentage points annually on average over the life of the debt. Economists surveyed by Bloomberg forecast an inflation rate this year of 1.7 percent.

Treasuries fell yesterday as the Fed maintained its bond- purchase program while saying the pace of economic expansion is insufficient to lower unemployment. The jobless rate has been more than 9 percent for 20 months.

Government securities also declined after the U.S. sold $35 billion of five-year notes and a report showed sales of new homes rose more in December than economists forecast.

‘Full Speed Ahead’

While commodities have risen, “longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward,” the central bank said in a statement yesterday after its two-day meeting.

The inflation gauge watched by the Fed, which excludes food and energy costs, increased 0.8 percent in the 12 months through November. The figure is below the 1.6 percent to 2 percent range central bank officials say is consistent with achieving their legislative mandate for stable prices.

Treasuries are heading for a fourth monthly decline on signs the economy is improving. U.S. debt has handed investors a 3 percent loss since the end of September, based on Bank of America Merrill Lynch data.

The MSCI All Country World Index of stocks returned 11 percent in the period, according to data compiled by Bloomberg. U.S. corporate bonds fell 0.2 percent, the BOA indexes show.

Durable Goods

Orders for U.S. durable goods and pending home sales both rose in December, economists said before government and industry reports today. At General Electric Co., the world’s biggest maker of jet engines, operating earnings will increase “nicely” this year, Chief Executive Officer Jeffrey Immelt said Jan. 21.

The Fed’s purchases of Treasuries and mortgage debt reduce the supply of those securities, according to Fidelity Investments, the Boston-based fund manager that oversees $1.6 trillion of assets.

“The corporate bond market is still reasonably attractive,” David Prothro, a debt fund manager at Fidelity, wrote in a report yesterday on the company’s website. “The U.S. economy is stabilizing.”

The seven-year notes being sold today yielded 2.77 percent in pre-auction trading, compared with 2.83 percent at the previous sale of the securities on Dec. 29.

Investors bid for 2.86 times the amount on offer last month, up from 2.63 times in November. Indirect bidders, the class of investors that includes foreign central banks, bought 64.2 percent of the debt, versus a 10-sale average of 50.9 percent.

--Editors: Nicholas Reynolds, Jonathan Annells

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

Can Malaysia's Islamic gold dinar thwart capitalism? Economics Theory

Muslim advocates of the dinar believe it will stop the excesses of capitalism, but it is just another avenue for exploitation

Imagine a world trading solely in gold and silver coins. Imagine the size of your wallet.

Yet this is the ideal world envisaged by some of Malaysia's activists championing the Islamic gold dinar and silver dirham as a new form of legal tender to replace paper money – a utopia that could see the light of day as early as the middle of next month.

This is when one such group, Muamalah Council, plans to implement the dinar system in Malaysia's northern state of Kelantan. If information on its website is to be believed, the council has the blessing of the state's Islamist government, Parti Islam SeMalaysia (Pas), to kickstart the dinar in three moves.


First, the state will pay a quarter of its public servants' salaries using the dinar. Second, all state companies will accept dinar payments. Lastly, some 600 commercial enterprises will also embrace this currency.


Inspired by selective religious sources and backed by historical precedents within the annals of Islamic history, the gold dinar system is touted by certain fiercely proud Muslims as the Islamic answer to thwart capitalism's woes.


The idea was first mooted by Malaysia's former prime minister, Mahathir Mohamad, in the aftermath of the 1997 Asian financial crisis. He argued that the coins would never hang their possessor out to dry in the same way that paper money had. As precious metals with intrinsic value, gold and silver are more resistant to market fluctuations and devaluation compared to the US dollar – an argument he took to the Organisation of the Islamic Conference as a tool to battle western hegemony.


Today, Islamic gold dinar advocates would cite the recent credit crunch as proof. Indeed, the rocketing price of gold – possibly transcending a record high of $2,000 an ounce – can only strengthen their pitch.


While Mahathir's grand plan for Malaysia to implement the dinar system by 2003 may have been unceremoniously scrapped by his successor, Abdullah Badawi, the idea has since gained currency beyond Malaysia's shores.


In neighbouring Indonesia, for instance, an outfit known as Wakala Induk Nusantara (WIN) had begun minting Islamic gold coins for use in Australia, Malaysia and Singapore. Its spokesman, Riki Rokhman Azis, claims that the number of dinars used in the world's most populous Muslim nation has more than doubled in 2009 to 25,000 pieces.


What is perhaps more striking is the UK connection to the increasingly globalised Islamic gold dinar movement. The Indonesian grouping is adhering to a fatwa issued by the South African-based cleric Sheikh Abdalqadir as-Sufi, a Muslim convert in Cape Town formerly known as Ian Dallas of Scotland.


Then there is Dinar Exchange, the British equivalent of Indonesia's WIN. As the "official certified supplier of Islamic gold dinar and silver dirham in the United Kingdom", the company had just concluded a month-long series of roadshows in May that saw it promoting the gold dinar to Muslims in key UK cities such as London, Birmingham and Edinburgh. The group is inviting more to spread this Islamic vision as dinar agents. For a fee, of course.


As the dinar movement gathers momentum, its propagators – which include some of the Muslim world's most polemical figures such as the Trinidad-born cleric Imran Hosein – would doubtless dismiss Antony Lerman's recent suggestion in the Guardian that no credible anti-capitalist doctrine exists today. To them, the Islamic gold dinar is perhaps mankind's best-formulated answer to beat capitalism's excesses.


Yet, as an anti-capitalist weapon, the Islamic gold dinar is far from mint.


It is motivated by politics more than benign religious values. The Kelantan example is instructive. Implementing the Islamic dinar serves as a political statement to Muslim voters that Malaysia's Islamist opposition party, Pas, is more Islamic (and hence more legitimate) compared with its competitor, the United Malays National Organisation. Even in its pristine form, the idea as it is originally propagated by Mahathir could be read as a radical attempt at power politics.


But a more serious flaw lies in its contradiction. At the heart of the dinar system can still be found the same capitalistic spirit of commodification.


It lacks the egalitarian spirit embodied in socialism's virtue of the common good. Its advocates say that the poor could never be taken advantage of because the coins they own have intrinsic value. But Britain's recent gold-rush dilemma suggests that the poor do not always get their money's worth – even when trading gold.


Like paper money, gold is also vulnerable to the manipulations of valuers, our gatekeepers of wealth. And let's be honest, how many of the poor have stacks of gold already in their possession? Gold is a precious metal precisely because it is so rare.


On a wider scale, who is to prevent gold-rich nations from banding together as a cartel to fix prices at exorbitant amounts in the same way that the oil-producing nations of OPEC did?

Or multimillion corporations from exploiting poor but gold-rich nations? This is best exemplified in the case of Pacific Rim, a Vancouver-based firm that has filed an appeal via the Central American Free Trade Agreement (Cafta) to bypass local legislation so they can mine for gold in El Salvador despite local objections. In a world mired by climate change troubles, one also needs to mind the environmental cost of gold mining – an operation that involves huge amounts of water and toxic chemicals.

The Islamic gold dinar could not thwart capitalism's excesses. It is only providing one more avenue for exploitation. For this reason alone, it will not have my buy-in.