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Russia
and China have led an effort to replace the "dollar-centric"
currency system with something else. But what?
The
only answer that works -- in the long term -- is a world gold standard. You
can have other systems that work for a little while, but they soon collapse
under their inherent weaknesses, just as today's fiat-dollar-centric system
is breaking down. Let's see why:
1) Any
fiat currency system that relies upon bureaucratic decision making is going
to suffer the results of bad decisions, sooner or later; probably sooner.
2)
Countries want to stabilize their forex rates, for trade and investment
purposes, but they also want to avoid the consequences of being pegged to a
mismanaged currency. In other words, they want to maintain policy
independence, which produces floating forex rates. The only way to resolve
this is to cut out the bureaucrat, which means gold.
3) The
european single-currency arrangement will work as long as it is relatively
well managed. A string of mismanagement will create political pressure for a
breakup. Notice all the countries that dumped the Russian ruble in the early
1990s, and introduced their own currency. Note how many countries peg to the
yen today.
4)
Euro-style single currency systems tend to be accompanied by an unelected
supranational bureaucracy, with all the unpleasant consequences of that,
ranging from irritating fiscal guidelines to the eventual introduction of a
NWO globalist state.
All of
these issues are resolved by a world gold standard:
1) In
principle and in practice, using gold as a benchmark of monetary value is
much more effective at producing a currency of stable value than bureaucratic
fiat currency managers.
2) Any
country which pegs its currency to gold thus enjoys a stable exchange rate
with other gold-pegged currencies. Since the currencies are naturally stable,
instead of being mismanaged by incompetents, there is no need to leave the
system.
3) Any
country can join unilaterally. There is no need for supranational single
currencies or supranational governing bodies.
“The
most important thing about money is to maintain its stability …
You have to choose between trusting the natural stability of gold and the
honesty and intelligence of members of the government. With due respect for
these gentlemen, I advise you, as long as the capitalist system lasts, to
vote for gold.”
--
George Bernard Shaw, The
Intelligent Woman’s Guide to Socialism and Capitalism,
1928.
You
see, even in 1928 these issues had been around for so long that upper-class
housewives knew the answers. The
answer is always the same.
Let's
first remember how the world became "dollar-centric" in the first
place. This was the result of the Bretton Woods Agreement of 1944, although
it really reflected the state of affairs since 1931, when most European
currencies became unreliable, leaving the dollar as the best alternative
(although it too was devalued in 1933).
I talk
about this more in my book, Gold:
the Once and Future Money. I wrote this book so that someone
could pick it up, and they would have everything necessary in one volume to
construct a fully functional world currency system linked to gold.
Understanding history is important, so that one can appreciate how things
work in the real world, where people have gone wrong in the past, and the
nature of the various fallacies that persist for generation after generation.
To be
honest, I wrote the book for future generations, maybe fifty or a hundred
years into the future. I figured the present generation was a lost cause.
That remains largely the case in the U.S., but people in other countries are
not so knuckleheaded it seems.
In the
Bretton Woods system, the dollar was pegged to gold, and other currencies
around the world were pegged to the dollar. Thus, the dollar became the
"reserve currency" of choice.
A lot
of monetary policy gets done on the basis of superstition. Governments don't
actually need "reserves" at all. I've explained numerous times that
the real mechanism of monetary management is the adjustment of base money.
There may be reserves or there may not be: in the end, it's almost
irrelevant.
November 23, 2008: Redeemability and
Reserves
However,
just as there is a superstition among the general populace about the
importance of "reserves," there is a similar belief (couched in a
layer of academic jargon) among the policy elite. Thus, governments (or other
currency issuers) believe that they need something
as a reserve. In the distant past, this was gold bullion. However, beginning
around the mid-19th century, the expansion of financial and monetary systems
exceeded the rather slow expansion in the rate of gold mining. This resulted
in the use of "paper gold" among money issuers. In the late 19th
century, this used to be deposits with the Bank of England, or
pound-denominated government bonds, redeemable in gold-linked pounds. Thus,
instead of actual gold bullion, governments held gold-linked paper. The BoE
itself didn't hold much bullion (about 1% of the world total), so the whole
British pound-centric system didn't have much in the way of
"reserves." It didn't need them, as long as the BoE behaved itself
regarding the management of pound base money -- which it did.
This
system of holding "paper gold" reserves has been labeled the
"Gold Exchange Standard." This is typically taken as a sort of
"deterioration" of a "100% gold standard" by certain
people today, but in fact it was a perfectly functional gold standard, indeed
superior to the older, cruder systems. Currencies remained pegged to gold,
and you didn't have to fill vaults with expensive gold bullion.
So,
already by 1910 or so, most countries held British pound debt (or similar) as
the "reserves" in their monetary system. The British pound thus
became a "reserve currency." This arrangement was roughly
replicated in 1944, with the U.S. dollar as a "reserve currency"
instead of the pound.
Unlike
the BoE, the U.S. government did indeed hold lots and lots of gold bullion
reserves, in the late 1940s. An absolutely mammoth amount, equivalent to
about 50% of all the gold in the world!
So,
the world all owned U.S. Treasury bonds as "reserves" and the U.S.
owned gold. The use of Treasury bonds as "reserves" was a little
more sensible here, as the system really was set up as currency boards linked
with the U.S. dollar. Typically, currency boards use a 100% reserve system
with the foreign currency as "reserves," although this is not
actually necessary.
Unfortunately,
despite its enormous gold holdings, the U.S. did not manage the dollar
correctly, and instead indulged in all sorts of money manipulation games as
had become popular since the 1930s. The result was that the gold gradually
left the vaults, as is inevitably the case in these situations. In 1971, the
desire of the Fed to goose the economy with easy money and the consequent
large gold outflows reached a crisis point, and the U.S. stopped redeeming
dollars in gold. This was the end of the U.S. dollar-gold link.
However,
the other countries remained pegged to the U.S. dollar. This lasted until
1973, when most dollar pegs were abandoned (voluntarily) and major currencies
floated freely.
It was
imagined at the time that this removed the need for countries to hold
"reserves." They weren't pegged to anything anymore. However, they
soon learned that wild forex swings were unpleasant, especially for the
European countries (and Japan) which were deeply engaged in trade with each
other. It wasn't long before governments were anxious to temper the exchange
rate movements. To do this, according to their conception although it was not
really necessary, they needed reserves.
This
is sort of a rough sketch of how we got where we are today. Oddly, currency
boards have not been very popular. They work fine until the currency that is
being pegged to has some sort of problem, and then the linked currency ends
up with the same problems. Also, it has become something like a point of
national pride to have an independently managed currency, although the result
is often quite disastrous.
There
used to be a number of countries that pegged to the dollar using a crude
system of what amounted to government coercion. This doesn't work at all, and
the result was an epidemic of blown-up currency pegs in 1997 and 1998 (and
1982 before that). The lesson that many emerging market governments took away
from that episode, however, was not that their system of manipulation didn't
work, and it was time to learn how to do something that did work, but that
their stupid blowup-prone system had to be made much "stronger" via
enormous increases in the foreign reserves. This leads us to today, when
countries like Russia or China hold absolutely silly amounts of foreign
currency reserves.
Russia
is a recent case in point. The government held reserves equivalent to 350% of
the ruble monetary base! This is utterly inane, but the lesson has been not
that their system doesn't work -- the recent currency crisis in Russia
demontrates that yet
again -- but that the government needs even more reserves to
properly maintain some control over their currency.
November 24, 2008: Russia's Currency Crisis
November 16, 2008: How To Stabilize the Ruble
October 27, 2008: Making Currencies that Last
Let's
look at the present situation.
In the
end, it is understood by virtually everyone except economists that stable
currencies are good. It did not take long after 1973 before governments
everywhere began to move towards stabilized exchange rates. In 1978, plans
began for a European single currency, which led directly to the introduction
of the euro.
The
move toward "unified currencies" like the euro stems in large part
from the incompetence of monetary managers around the world, who seem
incapable of implementing a simple currency-board-type currency link. Or,
maybe they aren't being allowed to, so that the NWO world-government types
can get their dream of a single world currency controlled by them.
Whether
a euro-style single currency, or a system of currencies linked to some
central currency (like the dollar under Bretton Woods), it should be obvious
that, in the end, you need to have some sort of central thing that you are
linking to.
The
"central thing" in the past was gold. Now, it was not necessary to own gold.
Gold was simply the benchmark that guided the management of the monetary
base. And, we see that in the case of the BoE-centric system, nobody actually
owned a significant amount of gold, including the BoE! (Not all governments
owned only British pound bonds and deposits. France and Russia, in
particular, opted to hold bullion in large quantities.) In the 19th century,
people used to say that gold was like Polaris -- the star that moves least in
the heavens, which can thus be used for navigation. If you were piloting a
ship, you could keep your eye on Polaris, and thus maintain your course even
as the ship was affected by wind and tide and current. By adjusting the
steering of the ship constantly, via a hand on the tiller, according to the
"signals" provided by Polaris, you could effectively pilot the ship
to the destination. The "hand on the tiller" is analogous to the
daily adjustment of base money that takes place in a gold standard system, to
maintain the currency's value at its specified gold value. You don't have to own the star
Polaris for this to work. You just need to keep a hand on the
tiller. Also, if you
don't have a hand on the tiller, you aren't going to keep the ship straight
even if you own Polaris. (The U.S. just about "owned
Polaris" after World War II, and it didn't work because they didn't have
a hand on the tiller.)
From
1980 to the present, the management of the U.S. dollar was tolerable enough
that it could be used as the "central thing" in the ad-hoc world
monetary system that appeared after 1973. There is an interesting story
behind that, particular regarding the Greenspan period from 1994-2003 or so.
However, that may not be the case going forward, and governments are sensing
that they need to prepare for something new. This is particularly the case
for China, which not only has a whole lot of dollars, but remains with a
dollar-linked currency system.
Maybe
China and Russia are really mumbling about their own inadequacies. They could
peg their currencies to a basket, using currency-board-type techniques,
without needing any sort of international cooperation. Singapore does this. I
had some hopes that the Russian and Chinese governments had some of the
requisite skills in this regard. They have some high ideals and principles,
and a willingness to take a leadership role, but don't seem to be able to
back them up.
In
fact, in 2005 I personally asked a member of the Bank of China about this at
a public conference. At the time, they were planning a new system to replace
their fixed rate peg with the U.S. dollar. I asked: Were they considering the
use of a Singapore-style currency basket peg? The BoC person acutally laughed at me, like I
was speaking incomprehensible nonsense, and they were embarrassed to have to
answer a nonsense question from a crazy person at a reputable conference --
although this is roughly the solution now being proposed by the Chinese
government. (And how did I know that was likely to happen?) This suggests to
me that the talent pool in China is rather shallow. In that sense, recent
calls from China resemble a call for "please someone tell us how to do
this!!!" rather than saying "we know how to do this, and you should
do it our way." But then, the world financial system is sort of a
European invention, and more specifically an Anglo (Anglo-Jewish) invention.
Chinese bankers get their suits made on Saville Row.
There
is even talk about China pushing for the yuan to become a "reserve
currency" in Asia! I appreciate the ambition here, but I still don't
think they know what they are doing. There are reasons why the yen is not a
reserve currency in Asia, and they are: 1) the yen was horribly mismanaged in
the 1990s, causing hideous monetary deflation, and who wants to join that
club? 2) This deflation of the 1990s came about due largely to U.S. pressure.
The yen is not a politically independent currency; 3) Japan doesn't have a
significant military. China is doing reasonably well with 3), but regarding
2), China has had a dollar peg for decades, which has recently become a
crawling peg. Thus, China doesn't have any history of an
independently-managed currency at
all, which is hardly inspiring. These issues could be resolved if
China adopted a gold standard policy, and demonstrated that they knew how to
manage and maintain it, which means the base money-adjustment ("hand on
the tiller") techniques described above. Then, the yuan would be 1)
properly managed, via a gold standard system; 2) politically independent; 3)
backed by a significant military. (You don't really need a significant
military to have a gold standard -- a bomb can't manage the supply of base
money -- but it helps to maintain political independence.) Thus, China would be all those things
that the U.S. was, when it began to take over leadership of the
world monetary system in the 1930s.
At the
end of the day, all roads lead back to gold. The gold-linked system was
always the foundation of capitalism, and today we are finally starting to
learn why
things were that way. Under a world gold standard, all forex rates remain
fixed. This radically improves the conditions for trade and foreign
investment. However, there doesn't need to be a single world currency, or
even a dominant currency like the U.S. dollar was under Bretton Woods. Any
country can participate unilaterally, and there is no need for restrictive
rules and regulations such as the Eurozone puts up with. There is no
Brussels-like or IMF-like central operating bureaucracy. There is no need for
gold reserves or foreign exchange reserves, although both can be a voluntary
part of the system, according to each country's individual preference.
Everyone just keeps their hand on the tiller and their eye on Polaris.
* * *
Reuters: Russia wants ruble, yuan, gold in currency basket
Making
progress.
* * *
Economists
Agree: Print. Money. Now. Salon magazine looked over the landscape,
and reported what they saw.
Economists Agree: Print. Money. Now.
Am I
the only one who thinks this is nuts? This is definitely nuts.
* * *
I
don't think any gold-linked world monetary system is going to appear at the
April 2 G20 or indeed any time this year. Probably something more like this:
Karl Denninger: The End Game Approaches
Gerald
Celente: Top Trends of 2009
Global Europe Anticipation Bulletin: Beginning of phase of global
geopolitical dislocation
Nathan
Lewis
Nathan
Lewis was formerly the chief international economist of a leading economic
forecasting firm. He now works in asset management. Lewis has written for the
Financial Times, the Wall Street Journal Asia, the Japan Times, Pravda, and
other publications. He has appeared on financial television in the United
States, Japan, and the Middle East. About the Book: Gold: The Once and Future
Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is available at
bookstores nationwide, from all major online booksellers, and direct from the
publisher at www.wileyfinance.com or 800-225-5945. In Canada, call
800-567-4797.
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