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FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Do We Need A New Single World Reserve Currency?

Currencies / Fiat Currency Jul 10, 2013 - 03:54 AM GMT

By: Andrew_McKillop


Gold bugs might think that so-called Currency Wars – a chaotic attempt at competitive devaluation of all major present currencies and the unpublicised main reason for Quantitative Easing – means that  gold's supposed 'natural role' as a strong, solid and reliable money standard can only be bolstered by the rush to devalue. However, as we know, gold itself has suffered massive coordinated attacks this year. Recent gold price falls have been so violent – while QE money printing remains so extreme – making it likely the time-hallowed central bankers' action to talk down gold prices, to bolster their fiat paper moneys, is running at a flat out pace. At the same time however, competitive devaluation by the bankers of their fiat paper moneys is also running flat out!

Since 1948 and the famous Bretton Woods conference, despite the 15 August 1971 decision of Richard Nixon to “break the gold peg” fixing the US dollar and gold, the dollar has remained the real world's nearest thing to a single reserve money. In the current situation the USD still serves as reserve currency but has no physical backing and is managed by US political deciders who have every rational reason to devalue under even the present favourable circumstances. Under adverse conditions, devaluation will be their first option. This threat is very well known.

For several convergent but flimsy reasons the “deadly climate changing gas” carbon dioxide was given a short whirl in the minds of monetary policy makers, as a possible vehicle or support for a new world money. Helping explain why the December 2009 Copenhagen climate conference was given such massive media and political support in most OECD countries, and by the IMF, but not by emerging China and India, nor Russia and the Arab petro-states, this ill-fated summit was used by the IMF's ill-fated director at the time, Dominique Strauss Kahn, as the platform venue for launching the idea of an entirely new 'carbon money'.

The idea was sketched out in a few unconvincing IMF working papers in 2009 and 2010. The few concrete parts of the concept included a global energy tax plus tradable carbon finance derivatives, using these to replace the dollar “over a transitional period” as the nearest thing to a new single world money. Linked to emissions credits and clean development credits, the new money, a sort of “CO2 Bancor” would have been used to part-finance a massive global emergency program to shift away from fossil fuels, starting with the shift away from coal and oil. The credibility and workability of this notion, as well as its real need can be immediately questioned.

Support to the IMF in 2009 airing its idea of a new world money not only came from G8 political leaderships – but apparently surprisingly also from Zhou Xiachuan, then governor of the People's Bank of China, in a March 2009 speech. Chinese support for Bancor is easily traced to Chinese worries about the future buying power of their trade surplus and 75%-majority US dollar currency reserves, roughly estimated at $3 trillion today. To be sure, China in 2009 was in no way amused by the Strauss Kahn carbon money gambit, due to it including European ETS-type disguised carbon taxes. Today, Chinese buying of metallic gold in exchange for paper gold, that is dollars, is running at extreme highs. Estimates given by Wikileaks and other sources place the combined Hong Kong and China purchases of gold in January 2012-May 2013 at about 1500 tons. When or if the US decides to devalue or demonetize the dollar, China will no longer have its FX currency reserves “filled with chaff dollars”. As a vote of no confidence in the USD, this is hard to beat.

For many “Austrian school” economists the idea of a single world currency is both absurd and preposterous. For the European Central Bank's former Chief Economist Otmar Issing one of the most basic causes of today's economic rout in Europe was the attempt to impose a single European currency, the euro, on countries with such different economies. The imposition of the US dollar as a world single currency can be considered an even more extremely ineffective and inappropriate, economically distorting project which can only fail. It however happened.

Keynes failed in his attempt to persuade leaders, after his death in 1946 at the 1948 Bretton Woods meeting where his major proposals were posthumously debated, to create a Bancor which would bundle together currencies as well as “high value physical assets”. To be sure, the Keynes gambit certainly did not include CO2 credits and tradable derivatives based on them.

In 1948, developed country leaders preferred to accept the Keynes idea of an IMF and World Bank, but 'near money Bancor' was, and still is restricted to IMF Special Drawing Rights which are almost equivalent to US dollars. SDRs were and still are considered by many as “poor man's Bancor' used in complex debt arbitration for countries in debt, deficit and trade imbalance crises, often involving the swap of physical gold from the deficit-country central banks, for SDRs issued by the IMF. 

As we know, the so-called Bretton Woods system fell apart nearly 42 years ago, as the US dollar ceased to have a “gold peg” fixed relation to physical gold. At the time, China's massive trade surpluses of today (now declining) were at most remote specks in the crystal ball of global money managers and economic deciders. National debt, both in large and midsize OECD countries was tiny relative to GDP, but since 2008 this has grown by vast amounts – by a country average of more than 50% for a total growth of at least $9 trillion.

This in fact is an extreme-low estimate, shown by a 2012 internal OECD Secretariat study only concerning the EU27 states since 2008, by Adrian Blundell Wignall, titled 'Solving the Financial and Sovereign Debt Crisis in Europe'.  This estimates that only the derivatives category of sovereign debt-related exposure, only in Europe, grew from 2.5 times total European GNP to 12 times total European GNP in 2008-2012, reaching about $180 trillion in 2012. This additional debt has been piled on to already tottering accumulated debt piles built up since the late 1970s and early 1980s.

Climate catastrophe is usually set by its promoters as likely by “about 2050”, but real debt and its forgiveness for the rich countries, since 2008, is a real world crisis that cannot be magicked away.  Greece, Italy, Cyprus, Portugal, Spain and Ireland prove this on an almost daily basis. Debt forgiveness for the rich nations, in fact formerly rich nations, is at least as urgent as forgiveness  of debt for poor countries was through the 1980s and 1990s, when this was a favoured theme of the so-called altermondialists –  but of course with no serious debt forgiveness resulting.

Creating a Bancor anytime soon would be a handy and quick, but in no way painless way to compress debt piles, through operating 'generous discounts' on the future value of remaining debt when denominated in Bancor. Capital surplus countries, led by China and the Gulf Arab petro-states would of course be the big losers – explaining their point blank refusal to accept the December 2009 Copenhagen package of carbon-constraining legislation and financial mechanisms , hinting at the notion of “carbon money”.

We are obliged to ask why the IMF has had the time to play around with a CO2 Bancor idea, when the house is burning – no doubt releasing CO2. Possible answers include the suggestion that carbon money is only a little less fantasist than a fully functional, global gold-backed money. Despite what gold bugs say, its impossibility can be judged by comparing world annual GNP of about $65 trillion, with the total value of either world central bank gold stocks (about 30 000 tons) or world annual gold production (about 2600 tons). The readout is very clear. At a current gold price around $1235 per ounce, substituting gold for the USD would only, and could only be massively deflationary.

This brings up the real question of “why we need a new world money”, with the answer that it is the last thing on earth we need.

The only real reason, today, for promoting the concept of a new single reserve currency is to make sovereign debt piles shrink. The hoped-for trick would concern haggling on what rate or rates would be used for various money aggregates used to quantify sovereign debt, from M0 through M1, M2, M3, M3c, M5 and their conversion to the future Bancor made up of financial derivatives, swaps and other financial instruments, possibly including carbon credits.  At the same time, extending the miracle, the Keynesian doctrine of spend now and tax later (or devalue and inflate later) would be maintained, supposedly enabling the growth of world economic activity. Both economic growth and debt destruction are fondly and foolishly imagined as possible with a new single reserve currency.

As we know (whether Paul Krugman accepts this or not) devaluation, inflation and debt avoidance do not increase economic growth, but cut economic growth, sometimes to nothing or less than nothing. The Keynesian recipe does not work or apply in the developed countries of today. The reign and role of the US dollar as the nearest thing to a single reserve money has extended far beyond its expiry date. Overall and due to too many years of pseudo debt avoidance through attempts at stimulating economic growth using methods that do not work,  we have an endgame situation where it is simply not possible to create a new world money, certainly not with CO2 hot air credits.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2013 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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