The US is by far the biggest economy in the world. Its financial markets —
be it equity, bonds or derivatives markets — are the largest and most liquid.
The Greenback is the most important transaction currency. Many currencies in
the world — be it the euro, the Chinese renminbi, the British pound or the
Swiss franc — have actually been built upon the US dollar.
The world is effectively on a US-dollar-standard, and the US
Federal Reserve (Fed) has risen to the unofficial status of the world’s
central bank. The rise of the Greenback has to a large extent been propelled
by international banking, which has basically “dollarized” in terms of its
lending and issuing activities.
The Fed Sets Global Policy
The Fed’s policy not only determines credit and liquidity conditions in
the US, but does so in many financial markets around the world as well. For
instance, movements of long-term US interest rates regularly have effects on
credit and equity markets in, say, Europe and Asia. The Fed’s actions are the
blueprint for monetary policymaking in many countries around the world.
The graph shows the Fed’s supply of newly created US dollar liquidity sent
to other central banks around the world. It also shows the so-called “euro
cross currency basis swap,” which can be interpreted as a “stress indicator”:
If it drops into negative territory, it means that euro banks find it
increasingly difficult to obtain US dollar credit in the free market place. The
Fed’s injection of new US dollar balances into the financial system has
helped to reduce the euro currency basis swap. Since late 2016, however, it
has started to venture again into negative territory — potentially
signaling that euro banks are again heading for trouble.
The financial and economic crisis 2008/2009 has increased further the
dependency of the world’s financial system on the US dollar. As early as
December 2008, the Fed provided so called “liquidity swap
agreements.” Under the latter the Fed is prepared to lend newly created US
dollars to other central banks around the globe.
For instance, the European Central Bank (ECB) can obtain US dollars from
the Fed and lend the funds on to shaky domestic banks in need for US dollar
funding. In other words: Liquidity swap agreements can easily replace foreign
currency funding in the market place by foreign currency credit provided by
central banks.
Meanwhile, all major central banks around the world — the European
Central Bank, the Bank of Japan, the Chinese central bank, the Bank of England,
and the Swiss National Bank — have joined the liquidity swap agreement
club. They also have agreed to provide their own currencies to all other
central banks — in actually unlimited amounts if needed.
It is no wonder, therefore, that credit default concerns in financial
markets have declined substantially. Investors feel assured that big banks
won’t default on their foreign currency liabilities — as such a credit
event is considered politically undesirable, and central banks can simply
avoid it by printing up new money.
Moving Toward a Worldwide Central Bank
The close cooperation and coordination among central banks under the Fed’s
tutelage amounts to an international cartelization of central banking — paving
the way toward a single world monetary policy run by a yet to be determined
single world central bank. Such a development is, or course, in the very
interest of those in favor of establishing a single world government.
How will President Donald J. Trump and his administration deal with the
cartelization in central banking? Mr. Trump doesn’t seem to be an
“internationalist,” seeking to build a new world order by political and
military means. If that is so, he will sooner or later have to come to grips
with the Fed’s policies — most notably with its liquidity swap
agreements.
The Fed’s policy has made the world’s financial system addicted to ever
greater amounts of US dollars, easily accessible and provided at fairly low
interest rates. From this the US banks benefit greatly, while average
Americans bear the brunt: they pay the price in terms of, for instance, boom
and bust and an erosion of the purchasing power of the US dollar.
What Trump Should Do
If the Trump administration really wishes to live up to its campaign
promise “Make America great again,” there is no way of getting around
addressing Fed policy. A first step in that direction is the idea to subject
the US central bank to public scrutiny (“Audit the Fed”), bringing to public
attention the scope of the Fed’s interventions into the world’s banking
system.
Of course, the liquidity swap agreements in particular can be expected to
be heavily defended by central bankers, bank representatives, big business
lobbyists, and mainstream economists as being indispensable for financial
system stability. And for sure, a sudden withdrawal from this practice would
almost certainly deal a heavy blow to financial markets.
If push comes to shove, it could even make the worldwide credit pyramid,
built on fiat money, come crashing down. However, the really important
argument in this context is that the continuation of the practice of central
bank cartelization will eventually result in a despotic regime: and that is a
single world fiat currency regime.
Of course, change for the better doesn’t come from politics. It comes from
better ideas. For it is ideas that determine human action. Whatever
these ideas are and wherever they come from: They make humans act. For this
reason the great Austrian economist Ludwig von Mises (1881 – 1973) advocates
the idea of the “sound money principle”:
The sound-money principle has two aspects. It is affirmative in approving
the market's choice of a commonly used medium of exchange. It is negative in
obstructing the government's propensity to meddle with the currency system.
Mises also explains convincingly the importance of the sound money
principle for each and every one of us:
It is impossible to grasp the meaning of the idea of sound money if one
does not realize that it was devised as an instrument for the protection of
civil liberties against despotic inroads on the part of governments.
Ideologically it belongs in the same class with political constitutions and
bills of right.
Mises’s sound money principle calls for ending central banking once and
for all and opening up a free market in money. Having brought to a halt political
globalism for now, the new US administration has now also a once in a
lifetime chance to make the world great again — simply by ending the
state’s monopoly of money production.
If the US would move in that direction — ending legal tender laws and
giving the freedom to the American people to use, say, gold, silver, or
bitcoin as their preferred media of exchange — the rest of the world
would most likely have to follow the example. That said, Mr. Trump could
really make a real change, simply by embracing Mises’s sound money principle.
Dr.
Thorsten Polleit, Chief Economist of Degussa, Honorary
Professor at the University of Bayreuth, and Partner of Polleit & Riechert
Investment Management.
