Posted by Michael McKay April 2, 2012
When reading the highly recommended book by Adam Ferguson, When Money Dies, one of the most important things to note is what kind of money people spontaneously moved to when their “money” was dying; in other words what other money was widely viewed as a viable alternative by the Market Participants.
In recent times, in Zimbabwe, it is notable that the US Dollar was the go-to money when the Zimbabwe Dollar was dying.
With this in mind it is timely to look through this lens at the recent moves by major trade partners.
Next week the BRICS, Brazil, Russia, India China and South Africa, are meeting because of the US/EU’s use of SWIFT as a weapon of war.
Should we expect the formation of a competitive SWIFT system?
As a result, is this the year that the US dollar will suffer from a significant drop in utilization as the international settlement currency?
The utilization of the SWIFT system as a means of war against Iran was, I believe, a grave political mistake by the US/EU.
I expect we will see an acceleration of the race to the bottom among the World fiat monies.
Ironically, while they all try to keep the functioning of their fiat monies I expect the country – or group – who declares it’s money linked to gold/silver will become the next go-to Unit of Account (Price-Metric used in trade) and Unit of Settlement (Currency used to settle the trade).
Which kind of country/group would be inclined to do this? Would it be the USA, which for the past several decades is THE most used Unit of Account (Dollars) and Unit of Settlement (Dollars) and therefore has the most to lose?
Perhaps, and indeed one could make that case.
Or would it be the country/group that has the least to lose by restructuring their money – or on decreeing something different?
Certainly the US and EU have the most to lose so they will, in my estimation, not lead this possibility even though they would be forced to follow in some way.
I tend to think it will be the latter. Watch for smaller groups than the BRICS for these signs.
I think the bigger players will be forced into Sound Money by players who today are not being watched as closely, like the Shanghai Cooperation Organization and especially the Organization of Islamic Cooperation (and it’s affiliate World Islamic Economic Forum), which have discussed a return to the Gold Dinar and Silver Dirham for quite some time. Here is one paper (oddly titled) that makes the accurate statement in it’s conclusion “implementation of gold Dinar on several factors such as consumerism, political, religion, social order, technology and globalization would also increase the economic stability of Muslim countries“.
My contention is that most Fiat Money Loving Governments will do anything to keep their money “fiat” until the bitter end, and that the more they get from having (and having had) their Fiat Money the more likely they are going to try to keep it and make it even more “fiat“, even more chimerical.
In fact they are making a full court press to eliminate “paper and coin” money altogether so that Fiat Money will be 100% digital.
Yesterday, the popular program, CBS Sunday Morning, had as it’s cover story Why Cash is Losing it’s Currency which you can watch here. Of course, in the process of this total Fiat-Money-Sell-Job the point was made that Physical Money is bad for the Public Health when they stated at the end of the piece that the Flu Virus can live for three days on paper money. NOT ONE word was mentioned about Privacy or, of course, Sound Money.
I believe that when a GROUP of trading partners realizes that referencing the money they use as a Unit of Account and a Unit of Settlement to a Sound Money, especially Gold, will cause that group to become THE most attractive alternative to the various Fiat Money options who are winning the Race-To-The-Bottom.
Interesting times indeed.
Brics’ move to unseat US dollar as trade currency
Thandeka Gqubule and Andile Ntingi
South Africa will this week take some initial steps to unseat the US dollar as the preferred worldwide currency for trade and investment in emerging economies.
Thus, the nation is expected to become party to endorsing the Chinese currency, the renminbi, as the currency of trade in emerging markets.
This means getting a renminbi-denominated bank account, in addition to a dollar account, could be an advantage for African businesses that seek to do business in the emerging markets.
The move is set to challenge the supremacy of the US dollar. This, experts say, is the latest salvo in the greatest worldwide currency war since the 1930s.
In the 30s, several nations competitively devalued their currencies to give their domestic economies an advantage over others.
And this led to a worldwide decline in overall trade volumes at the time.
The north will be pitted against the entire south in a historic competitive currency battle – whose terrain has moved to the Indian capital New Dehli – where the Brics (Brazil, Russia, India China and South Africa) nations will assemble next week.
China seeks to find new markets for its currency and to lobby to internationalise it throughout the Brics states.
For China this is not a new game. In 2009, senior Chinese banking officials issued a statement that the international monetary system was flawed owing to an unhealthy dependence on the US dollar and called for a “super-sovereign” international reserve currency.
Experts say Beijing’s first step is to internationalise its currency (by expanding its reach beyond China), liberalise it (to allow its value to be determined by the market instead of actively managing it as they currently do) and then make it a reserve currency for many nations in the developing world.
Africa’s largest bank, Standard Bank, says in a research document: “We expect at least $100 billion (about R768 billion) in Sino-African trade – more than the total bilateral trade between China and Africa in 2010 – to be settled in the renminbi by 2015.”
The bank anticipates that the use of the renminbi will lower transaction costs in Africa, thus lowering the barriers to doing business.
It also says that the Chinese will be more successful in transacting in renminbi in Africa than anywhere else because most currencies are weak and somewhat localised.
Not only will the US dollar be challenged, but also the entire international financial regime – led by the World Bank and the International Monetary Fund – which has been dominant since the end of World War II.
South Africa’s place in the emerging international financial regime is set to be enhanced.
Zou Lixing, vice-president of the Institute of Research of the China Development Bank, told the Brics preparatory meeting recently that “although the economic aggregate of South Africa is small relative to the Brics, South Africa provides a gate for the Brics to get access to the huge African market”.
The five-member nations have collectively called for an end to the tacit agreement between the US and Europe that ensures that the head of the World Bank is an American citizen, and the International Monetary Fund head is European.
They have proposed that an emerging market candidate be fielded when the term of the current World Bank head, Robert Zoellick, expires in three months.
Fundacao Vargas, a member of the Brazilian delegation, said Brics could confront “existing governance structures”, and seek to strengthen the blocs’ influence in established institutions like the World Bank and the International Monetary Fund, while creating alternatives.
The demand for greater political say in international affairs dovetails with China’s expected rise as a financial superpower in the next eight years.
Vargas showed the preparatory meeting projections indicating that China’s economy will have eclipsed that of the US by 2020, hence the promotion of the renminbi as the preferred currency of the south.
The renminbi has traditionally traded at a deliberately lower exchange rate, which gave a huge boost to China’s domestic economic sectors and enabled its booming industrialisation and growth.
The US and other trading partners have long accused China of being a “currency manipulator”.
Last week, Brazil declared its commitment to keep its own currency – the real – low. Its finance minister, Guido Mantega, reiterated his November 2010 declaration that a global currency war has broken out.
He said: “We do not want to lose our manufacturing sector.
We will not sit back and watch while other countries devalue their currencies.”
Brazil and China cried foul last year when, through a slew of initiatives dubbed QE2 – Quantitative Easing Two – the US indirectly devalued its currency by pumping about $600 billion into its economy to protect the economy from sliding back into recession.
South African economists were in two minds about the moves to extend the influence of the renminbi.
Economist and academic Peter Draper told City Press recently that the decision to establish a Brics development bank and to enlarge the renminbi’s sphere “is political and related to the current political dynamics within the World Bank” and the established international financial system.
Tom Wheeler of the South African Institute of International Affairs said developments in New Delhi (India) were “giving substance to the previously (and) loosely arranged economic block”.
– City Press