As the world’s leaders in Copenhagen labour mightily to bring forth a gnat, they might consider one area that John K Galbraith oft-quoted Lenin, saying that the best way to destroy a nation is to destroy its currency. It seems to be stacks on the currency mill time in Europe, but the “contradictions” and diversions overwhelm.

As the US President accepts a Nobel, his Federal Reserve chairman Ben Bernanke looks out on the newsstands to see himself on the cover as Time’s man of the year.

Exquisite timing. Indeed the man-of-the-year title might have just done the job for the beleaguered chairman, who, last night as the ink dried, was confirmed by the Senate finance panel. He still faces problems before the Senate next year and the holiday recess might strengthen the anti-Bernanke sentiment, but Bernanke, though wounded, seems safe.

Meanwhile, a huge vote of no-confidence came from the nations of the Gulf as Kuwait’s finance minister, Mustafa al-Shamali, speaking at a Gulf Co-operation Council (GCC) summit in Kuwait, announced “The Gulf monetary union pact has come into effect.”

The London Telegraph reports: “The move will give the hyper-rich club of oil exporters a petro-currency of their own, greatly increasing their influence in the global exchange and capital markets and potentially displacing the US dollar as the pricing currency for oil contracts. Between them they amount to regional superpower with a GDP of $1.2 trillion ($A1.3 trillion), some 40% of the world’s proven oil reserves, and financial clout equal to that of China.”

The long-rumoured and much-sneered at plan is now real, and Gulf States will be forming a common currency, breaking the formal and informal dollar pegs that have controlled the price of oil and kept the petro-dollar recycling mill operating, allowing the US to force its inflationary policies down the Arabs’ throats.

What a vote of confidence in Bernanke.

The GCC also agreed to create a joint military strike force — akin to the EU’s rapid reaction force — and added “any military action against Iran” by Western powers would be unacceptable.

There you have it.

China will soon have led a Pan-Asian common currency and exchange system. This act by the Gulf States makes that inevitable. By breaking the oil and US dollar-oil peg, the Gulf States have told China they are free to play in their own, er, sandpit.

As Karl Denninger comments: “Bernanke is entirely responsible for this.  By encouraging the bubble economy during Greenspan’s time in the Fed (Bernanke was the chief agitator for 1% interest rates — and holding them too low during the early part of the 2000s) and trying to restart the bubble economy this time around …  shielding those who made bad decisions while cramming the inflationary pressures down the throat of trading partners, Bernanke has guaranteed the loss of global reserve currency status for the dollar.

“Our Senate is too stupid to recognise this and stop his re-nomination. You can take that to the (insolvent) bank.”

But the action has moved to Europe — not Bernanke’s domain but increasingly vital to the stability of the banks, the euro, and currency stability worldwide. Yesterday the credit rating agency Standard & Poor’s downgraded Greece’s credit rating following Fitch’s downgrade last week. As huge crowds took to the streets to protest, among many things planned savage public sector cutbacks the World Street Journal announced headlined the crisis Debt Fears Rattle Europe, and blamed Greece’s generous social security.

That, it seems, will have to go, and it won’t stop with Greece.

The European countries with huge budget deficits are Portugal, Ireland, Italy, Greece and Spain – now dubbed as “PIIGS” by traders.

The external debt of Greece stood at $552 billion at the end of Q2 2009 having risen 481.87% in 2008. Could a selective devaluing of currencies be on the cards? Steve Barrow, at the Standard Bank, London, stated that something was afoot with Greece and Ireland’s currency (suggestions of a duo-euro?) for nations struggling to save their societies. The Finance Ministry in Dublin responded with “uniformed comment”. The Greek PM was very clear on the topic. “No chance Greece would leave.”

The central banks think they have no choice. The countries that are at risk have issued mammoth amounts of debt in euros. If some form of two-tiered Euro were the result the cost of revaluing, the debt for the public and private sector would be devastating.

But Greek PM Papendreou’s suggestion of an expenditure cutback of 8.5% will, given current unrest and anger, pour fire on the crisis. But then again, they have no choice. Being part of Europe means being subject to the budget limits. And Greece is not the only nation suffering.  Spain, Ireland, Italy, Portugal … these PIIGs won’t fly.

But they may float.

Just released upon going to press:

Almost as if they had read this, Credit Suisse reports: “the unwinding of the so-called US dollar carry trade may pose the biggest threat to the global economy next year.”

Bloomberg reports: “The carry trade is ‘the biggest time bomb’,” Tao Dong, a Hong Kong-based economist at Credit Suisse said overnight at a press briefing in the city. He was referring to investors buying higher-yielding assets with money borrowed in nations with low interest rates.

“Such transactions may involve between $1.4 trillion and $2 trillion and ‘unwinding’ the investments could cause volatility in currencies, commodities and emerging market stocks,” Tao said.

“Hong Kong’s central bank yesterday said that the city may face “sharp corrections” in asset prices should fund flows reverse, adding to concerns voiced by Japan, China and South Korea on the dangers from speculative capital. Donald Tsang, Hong Kong’s chief executive, said November 13 that he was “scared” that money flowing into Asia and driving up asset prices could lead to another crisis.

“The greatest risk in 2010 is the US dollar and the unwinding of the carry trade,” Tao said.