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The SWIFT Settlement
System
In our previous article we looked at whether the U.S.
Dollar was headed for a major fall or not. We demonstrated how the dominance
of the U.S. dollar was almost entirely dependent on the grip it had over oil
producers and this allowed the oil price to be designmnated in the U.S.
dollar. The U.S. has gone to war in Kuwait and Iraq over this issue under the
guise of destroying “weapons of Mass Destruction” as it appears
on the verge of doing in Iran. It is no coincidence that Iran has long since
ceased using the dollar to price its oil. It has also eliminated the U.S.
dollar from its reserves. But of greater importance to the emerging world has
been the use of the Belgian-based SWIFT system of international settlements.
Not only has the move stopped the sale of Iranian oil, but it has also
interfered with an important source of oil to the emerging world.
Right now there are ongoing discussions between the BRICS
(Brazil, Russia, India, China and South Africa) countries over ther use of
the SWIFT system of international settlements as a ‘weapon’
against Iran. The full extent of the impact of this appears to have been
ignored. With China and India as two of Iran’s clients, they found that
the U.S. could hurt them considerably with this action. If they can hurt them
in this way, then they can hurt them the same way on other issues. So the
question that the BRIC nations are now asking is, “Must we be subject
to the financial will of the U.S.?”
The question has long-term implications that could affect
these nation’s freedom of financial activity. The question demands to
see just how powerful the U.S. really is. It is very clear to these emerging
nations that if they are to keep on growing, unfettered by the U.S. will,
they must set up a system that is not vulnerable to U.S. influence and to
reduce the influence of the dollar itself.
What is being realized slowly is that the actions that come
out of this conference may well mark a watershed in the shift of power from
West to East and the significant reduction in the power of the U.S. as the
globe’s main financial influence. Consequently, these nation’s
will have to lower the influence of the U.S. dollar on their affairs if they
are to achieve real financial independence. This has to be a future and
extremely negative influence on the international value of the U.S. dollar.
While the SWIFT settlement system is a
Belgian-based international banking settlement agency, the U.S. influence
over it was sufficient to halt all Iranian interbank transfers. It is not the
system that is faulty but the influence of the U.S. over it that is the danger
to the BRIC nations.
China, the Rising Dragon
China,
for the last two years has been moving to expand the influence of her
currency around the globe, initially with her main trading partners. She has
been developing her banking system, using the Yuan in a limited way in her
trade with outside nations, from whom she imports a great deal and is
developing her monetary systems so that the Yuan will become a global reserve
currency one day.
That
day is still expected to take up to a decade to achieve, but as history has
shown so far, China is moving far faster than all expectations have thought.
Nation by nation, strategic item by strategic item, China has been
introducing the Yuan as the payment currency in a series of
‘swap’ arrangements. The latest is Australia with South Africa
coming on stream by 2015. This will take the Yuan deep into the heart of
Africa. By then we fully expect to see the Yuan an internationally acceptable
currency in which to deal.
Her
progress to date has targeted growth-markets, mainly other rapidly developing
economies, as well as the whole Asian continent, and no longer just the U.S.
and Europe. One of her key strategies through the Shanghai Cooperation
Organization is to build a pan-Asian security and trade bloc in partnership
with Russia. The last element of this 10-year old plan is to settle
cross-border trade without using the West’s financial system. China
expects to play a major part with her currency, which explains why she is
adding to her gold reserves. The relevance of gold is that China will have to
show to the people of Asia that her currency has better long-term prospects
than the dollar, which goes some way to explaining why so many of the
countries associated with the S.C.O. are now also accumulating gold.
To
date, China has had to be extremely careful in moving away from the dollar,
for the value of over $3.18 trillion in her reserves needs to be maintained.
A sudden withdrawal would badly damage this, which China cannot afford right
now. At worst, a global systemic collapse of the monetary system could happen
if the evolution away from the dollar were handled badly.
The
latest moves by the U.S. are deeply disturbing to China, as they have the
power to directly hurt the spread of the Yuan on a global basis, if the U.S.
so decides. Consequently, China is threatened right now! China has been
working on alternatives so far, but the moves on the SWIFT system by the U.S.
have made the issue urgent as she now faces a security threat. As
China continues to develop, she will face a massive demand to be able to
provide financing for expensive capital goods. China can no longer afford to
depend on the U.S. dollar as the financing currency for its goods, as it is
technically possible, although unlikely, at the moment, to face threats from
the U.S. even on this subject.
It
is clear to the BRICS nations that they need to set up institutions at the
heart of the present world financial systems to act as an alternative to the
World Bank and the International Monetary Fund and perhaps a replacement to
the SWIFT system for transactions with the emerging world. It will not be
sufficient to just have an important role in the developed world
institutions. It will also be inappropriate to rely on the U.S. dollar as the
currency of the emerging world as it is now.
Gold is Critical to any Change in
Currencies on the Global Monetary Scene
Perhaps
the largest flaw in the current global monetary system is its reliance on
foreign acceptance of national currencies. When the U.S. was unquestionable
and unchallengeable, there was no doubt that it ruled the global monetary
system completely.
What
is relevant is that these emerging nations are headed towards financial
independence from the U.S. and are moving toward a separate currency system,
which is not held hostage to the U.S. The attack on Iran simply emphasizes
the point. But let’s take that one step further and ask, “At what
point in time will the emerging world have economic independence from the
developed world?” We can see this on the horizon, as the developed
world demonstrates its ability to make anything that the developed world is
making, but cheaper. We cannot say how close this day is but the issue is in
front of us now, and financial systems must accommodate this change or suffer
ruptures similar to those we have seen since 2007…or worse.
In
a financially hostile world, currencies –like the main ones of the
developed world—must have a good stockpile of gold in their vaults to
weather those days when other nations fear holding any particular national
currency, no matter how seemingly important it is. When doubts about a
nation’s currency rise, the use of gold as collateral facilitates
transactions and lowers the interest rate charged.
At
the moment the emerging world has far too little gold to weather such storms.
China is aware of this and is doing something about it and doing it in a
hurry. We don’t know how much gold they are buying, but that need is
amply demonstrated by the law that forbids exports of gold from China. Please
note that Chinese gold is held in China or Hong Kong. The brand new gold
vault near the airport in Hong Kong is ideal for storing the gold of China
and its trading partners (as an alternative to the Fed or the Bank of
England, et al). As the emerging world seeks an alternative system, they will
have to follow China’s lead as that will be the ‘tree
trunk’ of the new currency system with other nations being the branches
springing out of it.
Gold
will always remain international money completely free of national markings.
It is the one ‘currency’ that can be exchanged that is trusted
between enemies. And therein lies its value! Gold in
national vaults gives a certain weatherproof quality to a nation’s
wealth. That’s why it is pointless in giving it a currency price. When
extreme times arrive, that price will change in line with the credibility of
the currency pricing it. That’s when gold becomes priceless! The fact
it remains internationally exchangeable when currencies are not, makes it a
vital reserve asset and one that an internationally trading nation must stockpile.
That’s
why the pretense of removing gold from the monetary system can only happen
when such pressures are absent. Once they are present gold comes back in a
rush. We have been on the re-monetization of gold since before 2009!
Extreme Times
The
‘national’ aspect of currencies will come to the fore when
political differences and economic competition and self-sufficiency takes
hold in the emerging world. Confrontations such as we are seeing now over
Iranian oil will hasten that day. So the need for a currency and currency
system that retains credibility when political and financial hostility come
to the fore is critical. At those times the international acceptability of a
nation’s currency is questioned, no matter who it is. We look back at
history and say it was no coincidence that the U.S. confiscated
citizen’s gold in 1933 and accumulated above 26,000 tonnes
of it ahead of the Second World War.
All
currencies, like airlines, have their national ‘hub’. Each
national currency is deposited in the financial capital of their home nation,
even when owned by foreigners. Their acceptability is reliant on the
government of that day. After all, every dollar goes through New York, no
matter who owns them. So, new international currencies must follow the same
road. All Yuan will pass through either Hong Kong or Shanghai as it expands
across the world.
Simply
the separation of the emerging world financial system from that of the
developed world will bring about their own systemic
threats. On the emerging world these will be minor as they are starting out
afresh.
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