The US Dollar is being relegated to an also-ran status due to continuing high deficits, mounting national debt and an inability of our Congress to control it's spending.
Our standard of living is going to take a massive hit each time the US Dollar is taken another 'notch' away from being the worlds reserver currency. This is humiliating for America.
At G20, Kremlin to Pitch New Currency
17 March 2009
By Ira Iosebashvili / The Moscow Times
The Kremlin published its priorities Monday for an upcoming meeting of the G20, calling for the creation of a supranational reserve currency to be issued by international institutions as part of a reform of the global financial system.
The International Monetary Fund should investigate the possible creation of a new reserve currency, widening the list of reserve currencies or using its already existing Special Drawing Rights, or SDRs, as a "superreserve currency accepted by the whole of the international community," the Kremlin said in a statement issued on its web site.
The SDR is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries.
The Kremlin has persistently criticized the dollar's status as the dominant global reserve currency and has lowered its own dollar holdings in the last few years. Both President Dmitry Medvedev and Prime Minister Vladimir Putin have repeatedly called for the ruble to be used as a regional reserve currency, although the idea has received little support outside of Russia.
Analysts said the new Kremlin proposal would elicit little excitement among the G20 members.
"This is all in the realm of fantasy," said Sergei Perminov, chief strategist at Rye, Man and Gore. "There was a situation that resembled what they are talking about. It was called the gold standard, and it ended very badly.
"Alternatives to the dollar are still hard to find," he said.
The Kremlin's call for a common currency is not the first in recent days. Speaking at an economic conference in Astana, Kazakhstan, last week, Kazakh President Nursultan Nazarbayev proposed a global currency called the "acmetal" -- a conflation of the words "acme" and "capital."
He also suggested that the Eurasian Economic Community, a loose group of five former Soviet republics including Kazakhstan and Russia, adopt a single noncash currency -- the yevraz -- to insulate itself from the global economic crisis.
The suggestions received a lukewarm response from Foreign Minister Sergei Lavrov on Saturday.
Nazarbayev's proposal did, however, garner support from at least one prominent source -- Columbia University professor Robert Mundell, who was awarded the Nobel Prize in 1999 for his role in creating the euro.
Speaking at the same conference with Nazarbayev, he said the idea had "great promise."
The Kremlin document also called for national banks and international financial institutions to diversify their foreign currency reserves. It said the global financial system should be restructured to prevent future crises and proposed holding an international conference after the G20 summit to adopt conventions on a new global financial structure.
The Group of 20 industrialized and developing countries will meet in London on April 2.
Some background leading up to the G20 meeting on April 2.
This Friday and Saturday, the leaders of the world's largest nations are to meet in Washington at a summit of the G-20 members in order to develop a framework for extricating us from the worst financial crisis in 75 years. Expectations are not high. Although the crisis threatens to deepen, most pundits do not believe the G-20 can agree because their national agendas are so different.
Right now, we are presented with an historic opportunity to create a new economic world order. However, it is unlikely that this opportunity will be seized. Failure could mean a more severe crisis and economic chaos of the most severe kind. In this post, I will explain what sort of an agreement could work to restore some semblance of order and whether we may ultimately get to this framework.
Much of what I write here regarding fiat currencies, gold and inflation is unknown to the public at large even though the information is freely available. If more people informed themselves about economic history, we would be much better off economically.
Who are the G-20?
The G-20 is generally used as a proxy to represent the most inclusive list of the world's economic leaders. It is not all encompassing -- large, rich countries like Spain are not represented. However, it does bring together most of the major players. Below is a description of the organization from its own website.
The members of the G-20 are the finance ministers and central bank governors of 19 countries: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom and the United States of America. The European Union is also a member, represented by the rotating Council presidency and the European Central Bank. To ensure global economic fora and institutions work together, the Managing Director of the International Monetary Fund (IMF) and the President of the World Bank, plus the chairs of the International Monetary and Financial Committee and Development Committee of the IMF and World Bank, also participate in G-20 meetings on an ex-officio basis.
Therefore, a meeting of this group should be of great significance and lead to major outcomes to set us on the right path to dealing with the credit crisis. However, I am less optimistic about the prospect of a meaningful agreement toward eliminating global structural imbalances. Many nations have a vested interest in maintaining the status quo - the United States principal amongst them. Moreover, the U.S. is led by an administration that is just 2 months from its end. And, we probably have not seen enough carnage to force the relevant parties into developing a new framework. This will only happen at a figurative economic gunpoint.
The existing global economic framework
The existing economic structure came into being as a result of a 1971 decision by the Nixon administration to close the gold window ending the Bretton Woods framework that had lasted from 1944. This framework is based on floating exchange rates with the U.S. Dollar acting as the system's effective anchor and world's reserve currency.
What the U.S. dollar as the world's reserve currency has meant is that the United States Government effectively sets the standard on monetary policy. Other nations, holding most of their reserves in dollars, must follow the U.S. if they want to maintain a relatively stable currency peg to the U.S. dollar. And, that gives the U.S. government a license to print money and inflate. Therefore, the United States benefits the most from the current global system.
Before 1971, the United States Government was constrained by a fixed peg to Gold. In fact, this peg was set at $35 per ounce and the United States pledged to redeem any dollars presented to it by foreign central banks for gold. This effectively meant that an arbitrage situation existed where foreigners could hold the U.S. dollars in reserve if they felt those dollars were worth $35 an ounce. Or they could exchange their U.S. dollars for gold. If the United States ran an inflationary monetary policy, foreign central banks would lose confidence in the dollar and redeem their dollars for gold, stripping the U.S. coffers of all its money.
The problem for the United States was that it wanted to spend more money than it had. All governments, left unchecked, will spend to their hearts content. In the 1960s, the U.S. government ran a "Guns and Butter" policy of increasing spending domestically while increasing military spending to fund the war in Vietnam. The Johnson administration did not want to increase taxes, so the U.S. inflated the money supply by printing more dollars. Foreign central banks started to become suspicious and eventually the French under the often anti-Anglo-American Charles de Gaulle started to redeem its dollars for gold.
However, excess U.S. Government spending and the Vietnam War continued into the Nixon Administration and on August 15, 1971, Richard Nixon closed the gold window. The U.S. went off the gold peg and a floating currency regime came into existence.
The current regime has meant inflation
After the U.S. de-linked from Gold, it was free to inflate as it pleased. However, there were nasty consequences: oil prices rose, commodity prices rose, gold rose, inflation rose, and the dollar fell. During the 1970s, the new economic regime meant a period of severe weakness for the U.S. dollar and the U.S. economy.
This period ended when Paul Volcker became the Chairman of the Federal Reserve Board in 1979 and proceeded to hike interest rates to unseen levels above 15% -- which is unimaginable when compared to the 1% we see today. The result was a severe double-dip economic recession and stock market crash. But, the most important result was Volcker crushed inflation, setting the stage for an historic bull market during the 1980s and 1990s.
While Volcker's drastic actions were laudable, it did not stop the U.S. Government's urge to inflate. We were living in a world of fiat currencies. With the U.S. dollar still the world's reserve currency, the U.S. was free to run budget deficits, trade imbalances, and inflate. So it did.
Unfortunately this inflation was not the consumer price variety that we had seen in the 1970s. As the United States deregulated, as the U.S. government privatized and as U.S. industry moved overseas, inflation was seen mainly in asset prices.
Moreover, when the stock market crashed in 1987, the Federal Reserve learned that monetary easing can work wonders in helping ease crisis. As a result, the Federal Reserve under Alan Greenspan developed an asymmetric monetary policy that flooded the economy with money whenever crisis or recession became a threat.
So, as the 1990s took shape, the world was awash in dollars. These dollars funded severe asset price inflation, not only in the U.S. but abroad, leading to severe boom bust cycles in Mexico in 1994-1995, Emerging Asia in 1997-1998, Russia and Brazil in 1998. And Argentina at the beginning of this decade.
The emergence of China as a deflationary counterweight to the United States was also helpful in maintaining consumer price inflation at low levels as China used a beggar thy neighbor currency policy which allowed it to become the producer of choice and export low cost goods to the rest of the world.
The end of the super bubble
All of this produced a certain sense of Nirvana for many for a very long time. However, underlying this were massive trade, currency and fiscal imbalances and a shed load of debt. It is the debt that tells one we have been experiencing inflation. All measures of debt and deficit in the United States have been rising for nearly a quarter century to levels never witnessed in history. Only recently have we again started to witness consumer price inflation from this underlying monetary inflation.
However, the credit crisis has interrupted this whole process. We are witnessing the most severe financial and economic crisis in three-quarters of a century. This in large part because the financial system had become so unstable that more debt and leverage just was not possible. In essence, the subprime housing crisis was a trigger for massive de-leveraging globally. Nevertheless, monetary authorities are doing their level best to save this fiat currency monetary system by flooding the world with money - so much so that they must hide the mechanism behind this reflationary effort. I am skeptical as to whether they will succeed.
What the world needs now
We need an end to fiat money. Fiat money is what has caused the U.S. to inflate. And it is what has caused a massive super bubble and build up in debt.
If you go back in economic history, there have been numerous attempts to issue fiat money -- money based only on the promises of the issuer. Every single time, these monetary regimes have failed. In the United States, many states issued their own money in the 18th and 19th centuries. But, the temptation to inflate was too great and these regimes failed too.
In order to promote stability, money must be backed by something of value like gold. Gold is a valuable commodity in limited supply. Because the supply cannot be increased, money supply cannot be increased excessively when the currency is backed by gold. Otherwise one runs into the problem that the U.S. ran into when it closed the gold window in 1971.
It also must be noted that the limited supply of gold is critical. If you look back in time to the 16th century, the Spanish economy went off the rails after it started to import lots of gold from the new world. The Spanish were the world's superpower at the time. They found lots of treasure in the new world, particularly gold in the Incan empire. While stealing gold from the Incas seemed a blessing, it was a curse in disguise for Spain because it inflated the money supply, resulting in severe inflation in the Spanish economy and eventually economic collapse and ruin.
However, there is one problem with the gold standard right now: prices. The Federal Reserve has gold holdings of about 286 million ounces. However, the Fed has been inflating their balance sheet at an unprecedented rate to deal with this crisis. The Fed's balance sheet liabilities were $900 billion in August. They are now approximately $2 trillion and well on their way to $3 trillion by the end of the year.
Therefore, the US dollar would have to be pegged to gold at over $7,000 an ounce and as high as $10,000 an ounce. Gold trades around $700 an ounce in the open market. In a recent paper, QB Partners has also done the math for other currencies as well.
Aggregating the gold holdings of the ECB and the legacy central banks that comprise the Eurozone would imply a $6,300 gold price. Again using the Bretton Woods system as a model, the US dollar and Euro might be designated as “global reserve currencies” because they could most easily be converted to gold. The remainder of participating global currencies could then be made exchangeable into US Dollars/Euros at fixed, but amendable rates (floating foreign exchange rates).
The trickier part of converting paper currencies to a global gold standard would be persuading economies with high paper currency-to-gold ratios. Their paper currencies would suffer devaluations versus currencies with higher gold reserves. For example, the Japanese Yen’s gold price equilibrium would equate to nearly $40,000/ounce when calculated against the Bank of Japan’s gold holdings and the Chinese Renminbi’s gold price equilibrium would equate to about $117,000/ounce when calculated against the People’s Bank of China’s published gold holdings.
This makes a gold standard rather untenable. Moreover, the U.S. and the U.K., with high debt levels, are two economies that want to inflate in order to reduce the burden of their debt loads as everyone de-leverages. China, Russia, Brazil and the Middle East, with massive dollar reserves, have zero interest in going to gold because it would mean an enormous economic loss for these countries holding dollars.
So, my conclusion is that there can be no agreement to solve this crisis until we have a global economic shakeout, forcing the various interested parties to the table. In all likelihood this would mean severe economic turmoil and depression unless the monetary authorities can successfully reflate our way out of crisis. So, we will get a new world order only by plumbing the depths of a depressionary crisis or through the successful efforts of central banks to inflate their way out of trouble.
Whether we experience depression or see a successful reflation effort, the future after the crisis looks to be one predicated on much debt. De-leveraging will continue apace for some time and that is a very good thing.
Quote:However, there is one problem with the gold standard right now: prices. The Federal Reserve has gold holdings of about 286 million ounces. However, the Fed has been inflating their balance sheet at an unprecedented rate to deal with this crisis. The Fed's balance sheet liabilities were $900 billion in August. They are now approximately $2 trillion and well on their way to $3 trillion by the end of the year.
Therefore, the US dollar would have to be pegged to gold at over $7,000 an ounce and as high as $10,000 an ounce.
Are you reading, Eric??????
Well their saber rattling worked on you Phil. A little late for China to pull that move, they're pregnant with our notes. The irony isn't lost on me here that China pegged their currency to our dollar for years. Screw them.
They'll realize how nasty the money people that run this country can get if they try that move, the dollar will be deflated and China will effectively slit their own throat. Good luck collecting on your devalued T-Notes China, they'll be worthless. That may have been their goal all along.
Quote:A little late for China to pull that move, they're pregnant with our notes.
The Chinese and Russians are in it for themselves, DB. They're sitting on Trillions of Dollars and they don't want to see them go to hell in an onset of inflation.
This is a shot across our bow and we better be listening. If they refuse to buy our Treasury Bills we're screwed-big time. They have us by the balls.
BS. They are exposed as hell and they don't know any other way than to threaten, they talk the world into converting to a new standard of currency, the dollar goes to chit and their T-Notes aren't worth a "tinkers damn". We don't have to listen, they have to walk gingerly and ensure that we can pay it back! I'd hate to be them.
They just realized the pickle that they're in.
If you haven't noticed, they've bought up our T-Bills, now the fed has cratered the dollar by buying up the balance and they will continue to do so if the foreign countries don't keep buying. They're stuck, this time.
Sorry, you're wrong on this one. If you think they're in a position of having to put up with whatever we do because they have a $ Trillion or so in US Treasury Bonds you're deluding yourself.
If the loan recipient defaults it hurts the bank, but not as much as it hurts the borrower. Further, the Chinese and Russians can place a claim against the Fed in our Courts to be compensated in GOLD bullion, property, whatever.
The citizens of the United States of America are in far greater danger from other nations refusing to buy our debt than the other nations are from losing their Dollar denominated investments.
The borrower doesn't have the bank over a barrel, it's the other way around McDuff.
This time when the borrower is a world power in economic and military terms they do. You're projecting your limited understanding of international currency onto this situation. They move to get away from the dollar, they hurt themselves, this is saber rattling, nothing more.
They need us, let's be realistic.
Quote:You're projecting your limited understanding of international currency onto this situation.
You pompous sack of snake chit, I've forgotten more about international finance than you ever knew.
The Chinese are perfectly free to buy EURO Treasury Bonds instead of US Dollar Treasury Bonds should they deem it a safer and more profitable investment. If I were them I'd feel that way, since Uncle Sugar shows no desire to control deficits.
But you go ahead and keep on feeling the borrower is in a position of authority with respect to the lender. Take it a step further and dictate payment terms to your mortgage holder. I'd love to see you doing the Jackie Gleason "abadaabadaabadaabada...." as they haul your ass away to jail!
There you go again. I'd crack up if China bought EURO Treasury Bonds, it's a worse investment than US Bonds. Sad as it is, we're the safest bet in the world for them.
BTW, simpleton, if you are in a position of relative strength, you CAN and SHOULD dictate payment terms to the lender. Now go play with your slide rule....
Quote:I'd crack up if China bought EURO Treasury Bonds, it's a worse investment than US Bonds.
As evidenced by the 50% appreciation of the EURO with respect to the Dollar in the last couple of years.
With every word you're only building a bigger platform for your monumental ignorance to display itself on. STFU.
The EURO has cratered more than the dollar, you're the ignorant one here Phil. Their bank bailouts have made ours look tiny.
If you don't like my take on it, try Volker's. He's the last real head of the Fed who did anything fiscally right and put the long term health of the country first.
Quote:At the WSJ’s Future of Finance Initiative, former Fed chairman Paul Volcker rebuked China for its “disingenuous” position: “They hold all these dollars because they chose to buy the dollars, and they didn’t want to sell the dollars because they didn’t want to depreciate their currency,” Volcker said. “It was a very simple calculation on their part, so they shouldn’t come around blaming it all on us.”
This stuff will all even out. The day will come when Chinese people will shopping at Great Wallmart and will be complaining that their chop sticks, like everything else they buy, is made by cheap American labor, with shoddy American workmanship.
You might be on to something. I actually liked Geithner's being open to the dollar not being the standard for international exchange, this symbiotic relationship between the U.S. and China (with Japan) with them propping up our deficits and us buying their goods has to end sometime.
If it ends now, China is left holding the bag, f-you very much China.
Plus, our system of having Wall Street Insiders grade the quality of investments (ratings agencies) working right next to those investment houses on Wall Street and having lunch with them was basically a fox watching the henhouse system. A new exchange fund would mitigate the risk of that again happening and throwing us into a financial crisis.
So what's Volker going to say, Fool? The Dollar has one foot over the precipice and the other on a banana peel? He's a Fed guy, rightly or wrongly he backs up the LOSERS who got us into this position in the first place.
The one good side to all of this is the Federal Reserve Central Bank is going to FALL and take their fiat US Dollar along with them. Then Americans will start using a real currency again, like we did before 1932. One backed by GOLD not by promises to maintain inflation targets from a bunch of snake oil salesman from the Fed.
They had their chance and they phucked it up. If it takes the Chinese turning the thumb screws to bring on the collapse so be it. We'll be a better nation after the dust settles, and maybe a smarter one this time.
The whole model with the dollar as a standard is outdated and helped get us into this mess. We need to invest in our own infrastructure and see a real, extended increase in GDP.
Volker's point, and I'll type it slowly for you, is that China is throwing a red herring, they bought all those T-Notes in order to solidify their position, now they're saying we exposed them? Takes two to tango pal. Although, with your "engaging" personality, I'm sure your tango days are well behind you.
Stupid is as stupid does. I offered you a way out and you clung to your clueless position like a drowning man to a board.
Keep on buying up those monthly US savings bonds, there's one born every minute!
Who's buying savings bonds? I could suggest guns, ammo and heading for the hills too. Hey, I didn't lose half of my retirement this downturn, don't be all smug with me.
What's lost? I'm waiting for the next bubble to unload my commercial paper and head for the hills. And I have my guns and survival stash all ready, the starving hordes ain't gonna get ahold of BroncoPhilly nossir!!