- The USD is heading towards the garbage bin. How fast it falls still remains to be seen. China is increasingly opening up its Yuan to be an international trade settlement currency. It has signed currency swap agreements with many countries in the past 5 months. Notably Argentina, South Korea and ASEAN nations. What will unsettle the USD is when a currency swap agreement is signed with a major country like Japan or Germany.
- I do not seriously believe that the PTB western central banksters will allow their control over the printing of money to disappear. Nor will they let China take over the monetary system with its Yuan. They will drive for greater acceptance of the IMF’s Special Drawing Rights (SDR) as a global reserve currency.
- MoneyNews.com reports :
Zhu Min, executive vice president of the Bank of China, a government-run commercial bank, says that the Federal Reserve’s decision to print billions and billions in new dollars to head off the financial crisis would make the greenback irrelevant to global finance and trade. That will happen unless there is another global currency to balance it, he told CNBC. While the dollar remains a global currency, it can’t support the world economy by itself, Zhu says.
“Either we ask the U.S. to take the whole responsibility of the world economy, with the dollar as global legal tender, or else we need something else as an anchor,” Zhu says. He reiterated a call for the use of an International Monetary Fund (IMF) instrument to offset the dollar’s influence on international reserves and trade.
Known as special drawing rights (SDR), the practice dates back to the late 1960s, when the IMF used the vehicle to supply reserve assets to expand trade when gold and the dollar were in short supply. “The IMF’s special drawing rights could at least balance the dollar,” Zhu says. Zhu says, however, that the Chinese yuan, known domestically as the renminbi, has a role in global currency matters in the future.
“But we are seeing a new player in the international arena — that’s the renminbi. It will take a while before the renminbi will be convertible, but an interesting thing is happening.” The Chinese currency’s circulation is growing, he points out. “More and more, it will be used in trade settlements.”
- The world needs sound money. Money people can have total confidence in. The current Quantitative Easing mode in America, UK, Japan and even Switzerland does not bode well for fiat currencies. The ECB seems to be under pressure to move towards QE too.
- Although, I doubt we will ever go back to a full gold backed currency standard. More are calling for it. Russia and China have both sounded their desire to have a new reserve currency backed by commodities including gold.
- Gillian Tett comments :
A few months ago, Terry Smith, head of Tullett Prebon, the interdealer broker, chaired a panel at the World Economic Forum meeting in Davos which was asked to produce one concrete recommendation to fix the global financial crisis. The top pick? Not anything on toxic assets or fiscal spending. Instead, this gaggle of leading financiers called for a new reserve currency, akin to an old-style gold standard.
“Two-thirds of the world’s assets are denominated in a fiat currency issued by a country whose authorities are taking policy actions which seem inevitably to lead to its debasement,” explains Mr Smith, noting that “it seems … the Chinese have now concluded that this is not acceptable.”
Moreover, these musings about a gold standard are currently cropping up in all manner of unlikely places. One savvy European property developer (who aggressively sold most of his holdings in early 2007) recently told me that he is now moving a growing proportion of his assets from government bonds into gold, even at today’s elevated prices.
“The logical conclusion of where we will end up eventually is with some type of gold standard,” he explains, arguing that future inflation will almost inevitably cause a future collapse in government bonds.
Half a world away in the Middle East, some sovereign wealth funds now say that they are stocking up enthusiastically on food and gold, due to similar reasoning.
Meanwhile, in New York a (still) formidable American hedge fund recently circulated private research that echoes the reasoning of Mr Smith. Most notably, this hedge fund points out that since the world abandoned the gold standard on August 15, 1971 credit creation has spiralled completely out of control.
But this four-decade long experiment with fiat currency is not just something of a historical aberration, it argues – but potentially very fragile too. After all, the only thing that ever underpins a fiat currency is a belief that governments are credible. In the past 18 months that belief has been tested to its limits. In coming years it could be shattered, particularly if the current wave of extraordinary policy measures unleashes a wild bout of inflation.
Alan Greenspan himself wrote in support of a gold standard back in the 1960s, called “Gold and Economic Freedom”. …. In the years since he penned this essay, Greenspan has partly backed away from those ideas …. But now they look prescient.
“Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets . . . [but] in the absence of the gold standard … there is no safe store of value,” Greenspan wrote back then, pointing out that without a gold standard in place, there is little to prevent governments indulging in wild credit creation. “Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.”
Of course, for the moment all this muttering about gold is simply wild speculation. Even if Western leaders suddenly were to decide they wished to turn back the clock, the logistics of embracing a new gold standard would be mind-boggling. UBS, for example, calculates that the US reserves of gold are so small, relative to its monetary base, that a price above $6,000 an ounce would be needed to reintroduce a gold standard. To implement that standard in Japan, China and the US, the price would be more than $9,000. Moreover, right now few western governments have any motive to even entertain the debate, given that inflation may soon seem the least bad way to tackle the current overhang of debt.
But what this debate does show is just how much cognitive dissonance — and utter uncertainty — continues to stalk the markets. It might seem almost unthinkable to propose a return to a gold standard, in other words. However, the key point is that the last 18 months have already produced a stream of once unimaginable events.
Given that, shell-shocked investors are increasingly reluctant to rule anything out, as they stare at such uncharted waters. So while I would not bet today on a gold standard returning any time soon, I would also not bet that the debate dies away. Nor would I bet that the gold price crashes too far from its current rate of $900, while so much fear continues to stalk the world.