You know it’s a crazy old world when the US dollar acts as a beacon of safety in a sea of risk. But the dollar has one important attribute: it’s liquid. For investors who are worried that rising government bond yields in Spain and Italy are a sign of more crisis ahead, the dollar is as good a place to hide out as any currency, and better than most, at least when it comes to liquidity.
Europe is doomed. It has been since 2007. That’s when the rot in the global financial system begin moving from the dodgy outskirts (subprime lenders in America) on its long and winding path to the very heart (the US dollar as a global reserve currency). Every stop in between—Lehman Brothers, Greece, Italy, Spain, China—takes us one step closer to the end of the line for government money not backed by real assets.
We’re only mentioning that fact again (the end of fiat money) because it gets lost in the day to day noise from markets. This noise can lull you to sleep. But never forget we’re in the middle of what history will see as the defining monetary event of the era, the shift in global power that results when an Empire and a currency collapse.
The battle for control of the International Monetary Fund (IMF) is one example of the global monetary power struggle. The IMF (like the World Bank) is a kind of weapon wielded by European and American banking interests to get what they want around the globe. In January, IMF director Christine Lagarde said the agency would need close to US$600 billion to help “innocent bystanders” affected by the European debt crisis.
Really? Do you reckon those “innocent bystanders” are friends of US and European banking interests? Or are they, say, savers and pensioners whose retirement plans have been wrecked by bad monetary policy?
In the event, the idea of a slush fund to help countries or financial firms that would go bust without it is kind of a joke. It’s a joke because European countries agreed to contribute up to $300 billion of the fund. These are the same countries getting back-door bailouts from the European Central Bank.
A bankrupt country can only contribute money to a bailout fund in a world where money isn’t real. Europe and America, the architects of this money system, are trying to keep other countries in line. What’s more, they want other countries to fund the bailout fund. But countries like China, Brazil, and Russia want more say in the running the IMF (the world’s money system) in exchange for contributing to the bailout fund.
The most obvious reform is to give the countries who actually have money (savings) more voting power in the IMF. The world’s creditors would have more political and economic say in the global system. The world’s debtors would have less say. This is hard to argue with.
A more earth-shattering reform would be including the currencies of BRICs countries in the internal accounting unit used by the IMF, the Special Drawing Rights (SDRs). Our view is that China doesn’t want to replace the dollar system with a Yuan system. China’s own financial system is not yet robust enough to withstand a fully exchangeable Yuan.
But if the Yuan and other BRICs currencies are included in the 2015 weighting of the SDRs, then economic power will have shifted a little more from the developed world to the developing world (emerging markets). You can imagine the developing world resisting this. But then, the developing world is also broke.
The mechanics of making the Yuan “fully convertible” are arcane and beyond the scope of today’s reckoning. We’ll come back to them some other time. And at the time, we’ll closely consider how gold fits into the whole story. It’s fascinating.
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From the Archives…
What the News on Bond Yields Say About the “Resolved” Eurozone Crisis
2012-04-13 – Eric Fry
The Art of Selling Stocks
2012-04-12 – Chris Mayer
Misguided Faith in an Economic Recovery
2012-04-11 – Joel Bowman
Beware the Big Government Debt Switcheroo
2012-04-10 – Dan Denning
The Discount Rate: Borrowers, Lenders and Bonds
2012-04-09 – Nick Hubble