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Is there an alternative to the dollar? I heard that question several times
in the last few months. First, let me tell you that as much as you like it or
not there is always an alternative to almost anything. It doesn’t have to be
better or worse, but there is one. It is arrogant and shows a lack of
understanding of history and nature to pretend there is no alternative to the
dollar. The world existed before the British pound and before the US dollar,
and it has survived the British pound and will survive also the US dollar
when it collapses. To pretend that the world will collapse or disappear
without the dollar is simply American egocentrism. I’ve always heard this
sentence, “there is no alternative to …” every time at the top of some
bubble. My first recollection is gold and oil in the ‘70s, the Japanese stock
market in the ‘80s, the U.S. stock market in the ‘90s, etc. The only question
is how and when it will collapse. I think sooner than later.
Since paper currencies but even before that, the currency of the country
with the best economy has become the standard and ended when the social,
political and economic system of that country collapsed. Gold has survived
through all of these currencies as the only money and especially “money in
extremis”. The reason that makes me believe the U.S. will collapse, slowly at
first, then faster, is that I do not see any desire by Americans to clean up
the debt/deficit problem, rather only to push it into the future and using
the dollar to force the world to support the U.S. to infinity. Regularly I
hear Americans say: “Problem? What problem? Look elsewhere. Nothing to see or
worry about in the U.S.”. As long as you don’t admit you have a problem you
can’t solve it. Several times this year I heard eminent people in the
American financial industry state that “the world has to lend us (U.S.) money
because we have the most powerful army in the world.” It is evident that the
underlying message of this statement is the use of the military superpower to
force the world to finance a lavish lifestyle that the U.S. can’t afford
anymore.
Hongbing Song, in his book, The Currency Wars – China and the new world order,
says, “The dollar bubble seems gigantic at first sight, but its mortal
acupuncture point is trust, and gold is the piercing point of this trust.”
This book, written in Chinese in 2007 and translated in French in 2013, is a
must read by business people and politburo members in China.
The present international monetary system, based on the US dollar, is sick
and everybody knows it. It has become so bad that even top people are
starting to admit it. First in private conversation and more recently on the
record. Ben Bernanke, past chairman of the U.S. Fed, said to Jim Rickards, author of Currency Wars, in Seoul, South
Korea in 2015: “The international monetary system (dollar based) is not
coherent.” And he added, “We need new ‘rules of the game’.” Mark Carney,
the former Governor of the Bank of Canada, said at the end of 2011 that our
financial system was on the verge of a collapse: “The global Minsky
moment has arrived.” He is now the Governor of the Bank of England.
The previous President of the China Gold Association, Sun Zhaoxue, said in 2012 that, “Currently, there are
more and more people recognizing that the ‘gold is useless’ story contains
too many lies. Gold now suffers from a ‘smokescreen’ designed by the U.S.,
which stores 74% of global official gold reserves, to put down other
currencies and maintain the US dollar hegemony.”
Two countries that are at the core of the challenge against the “hegemon”and
the “exorbitant privilege” of the dollar today are Russia and China. The
recent sanctions against Russia have been a gift from Heaven to China’s
strategy to supplant the U.S. as the world’s dominant power by 2049, as
Michael Pillsbury, author of The Hundred-Year Marathon, says in his book. 2049 is
the one hundredth anniversary of the founding of the People’s Republic of
China by Mao Zedong. The Yuan is at the core of this strategy. China understands
it can’t do it alone and it is using an excellent strategy taken from Sun Tzu’s The Art of War, written 2,500 years
ago. The Chinese grand strategy is a long term strategy that entails
encircling an enemy by building up one’s coalition while simultaneously
undermining the opponent’s coalition to prevent him from encircling you.
China understands it can’t challenge the dollar with the Yuan alone. In
the last two years, China has signed several trade agreements with the clear
intention of eliminating the dollar as much as possible from international
trade and, I would say, very successfully until now. In a recent statement Vladimir Putin also said he “wants to ax the dollar from
Russian trade” and that “We (Russia) need to seriously consider strengthening
the role of the ruble in (international) settlements”. The recent U.S.
neo-con strategy in Ukraine has also antagonized the European Union (EU) and
could jeopardize the U.S.-EU alliance. These events have been favorable to
China and its strategy of encircling the U.S., by building up its coalition,
while simultaneously undermining U.S.’ coalition to prevent it from
encircling China.
China understands very well that a move as proposed by the IMF towards a “multiple
reserve currency system” based on the SDRs (Special Drawing Rights), which is
based on underlining national currencies (US dollar, EU euro, British pound,
Japanese yen and soon the Chinese Yuan) will not last. In a recent speech in
2009 the governor of the People’s Bank of China (PBoC), Zhou Xiaochuan, said
that the SDR “serves as the light in the tunnel for the reform of the
international monetary system.” He also added, “… developing SDRs into a
‘super-sovereign’ reserve currency disconnected from individual
nations and able to remain stable in the long run”. I wondered
what the PBoC governor meant by “disconnected from individual nations” until
recently, when I read a book, Against the Consensus, written by a Chinese and
former chief economist of the World Bank, Justin Yifu Lin. In this book Lin
says that, “The SDR is not an asset external to the monetary system, as gold
is, with an independent value, so expanding the supply of SDRs expands claims
on the underlying currencies. As a composite fiat money, the SDR’s role as a
store of value depends on the credible solvency of the sovereigns that issue
the underlying currencies.” He also adds that “The international monetary
system must always operate by consensus” in such a
SDR based system. He proposes a new global reserve currency called paper gold
(“p-gold”). P-gold would be an international currency that has the
flexibility of paper money, in that it could support liquidity growth as the
global economy expands, but that – like a commodity such as gold – would be “outside”
the system of national currencies. This sounds very much
like the international reserve currency proposed by the governor of the
central bank of China. This new currency would have the advantages of fiat
paper money plus the stability of gold, and so could be called paper gold
(p-gold), says Lin. “The supply of p-gold would follow Friedman’s k percent
rule (or a modified Taylor rule) based on a projected measure of global
economic and asset transaction growth.”
Would it be accepted internationally? I doubt it. In my opinion its
implementation also requires consensus. Could this proposal by the governor
of the PBoC be a diversion not to alert the “hegemon”, as
the U.S. is often called in China? I think so. The large accumulation of gold
by China through the PBoC and “its people” is a confirmation to me of this
hypothesis and part of the Chinese grand strategy.
Robert Mundell, Nobel prize of economics, said in a lecture (The
International Monetary System in the 21st Century: Could Gold Make a Comeback)
in 1997:
“The problem with the pure dollar standard is that it works only
if the reserve country can keep its monetary discipline.”
“The United States would not talk about international monetary reform …
because a superpower never pushes international monetary reform unless it
sees reform as a chance to break up a threat to its own hegemony.”
“The United States is never going to suggest an alternative to its present
system because it is already a system where the United States maximizes its
seigniorage.”
“The United States would be the last country to ever agree to an
international monetary reform that would eliminate this free lunch.”
Both China and Russia know it and are using gold as the dollar’s Achilles
heel to eliminate this “exorbitant privilege” of the dollar in the
international monetary system by using the IMF and its SDR (originally, in
1969, the SDR was valued in gold – 35SDRs = 1oz of gold). China and Russia are
not interested just to play second fiddle to the U.S. in the international
monetary system. They want at least equal status.
“There cannot be two suns in the sky, nor two emperors on the
Earth.” Confucius
 
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