|
Relevance of Previous Articles
In our last two articles we discussed
just how the U.S. dollar came to be the central part of the world’s
monetary system and held onto that position when its economy and balance of
payments were structurally inadequate to do so. In the second article, we described
how the U.S. was flexing its muscles in taking action to stop Iran from
selling its oil and receiving payments for it.
The collateral damage from this exercise
embraced China, India and other nation’s, who
were the customers of Iran. It has become clear to these nation’s that
the power in the hands of the U.S. in oil matters is far too great for their
future, and that they should be making plans to remove the impact of that
power from off them. If they are (China in particular) to be able to make their
own decisions in the future –particularly on oil and
currencies—then they must develop a monetary system that is independent
of the U.S.
However, this will mean that the world
must move from a world united under the USD to one where there is a fragmented
monetary system with at least two parts to it. This break demand a period
where uncertainty, fear confrontation, and conditions generally detrimental
to financial harmony must be endured until a new order is established. The potential for damage to the current
monetary system is huge as it will be the one in decline while the new system
is on the rise.
New Emerging
World Monetary System
The key participants in these new
developments are the emerging world’s key players: Brazil, Russia,
India, China and South Africa. Of these the main drivers in order of power
are China, Russia, Brazil and then India. South Africa will remain the road
into Africa’s commodity supplies. Of course they have a hard road to
travel as they have to weather the storms that may attempt to derail their
attempts. Because of this, the initial steps we are watching are cautious,
steady and solidly made.
To date, we have seen the accumulation
of $3.18 trillion in China’s reserves as well as much smaller amounts
accruing to the other BRIC nations. This week saw these nations in
discussions, in which the formation of the equivalent of the World Bank, for
these nations was discussed.
According to the departing head of the
World Bank, Mr. Robert Zoellick, the objective for
China in the formation of this bank is to assist in the internationalization
of their currency, the Yuan. India’s objective would be to facilitate
the construction of its infrastructure. Russia’s objective was still to
be decided. To us, it is a step forward in the building of a financial system
to care for the BRICS nation’s needs outside the current World Bank and
the I.M.F. and free from U.S. dominance.
The
Consequences
How far will the development of this
system go? As far as is necessary for financial independence to be achieved!
The most dramatic consequence of these developments will be twofold:
1. The ability
of these countries to access oil in their own currencies and not the dollar.
2. A large fall in the use of the dollar internationally, in line
with the rise of the BRIC currencies, with the Yuan acting as the
‘hub’ of this new monetary world.
This will not mean that they will not use the dollar or any other of the
developed world currencies in daily trades, but simply remove themselves from
U.S. dollar dominance.
We are under no illusion that the
emerging world governments will follow the same course as developed world
economies in the management of their monetary system. The ailments of the
present system may well attend the new one. After all, the overriding element
of the developed world system that decided its shape was control by government institutions. The government of money is
necessary for governmental control of the people as well as the other
channels of government.
Having said that, both the transition to
the new system and the following one, will see
similar policies regarding money management. Both will demand an
“anchor of value”. And the uninterrupted presence of gold as a
vital reserve asset in the developed world central banks –regardless of
the words against gold spoken over those years—is sufficient evidence
of the future vital role of gold in any monetary system.
Relevance of
Gold
Since 2009 the emerging world has been
accumulating gold for their reserves alongside the acquisition or surplus currency
reserves. China has ensured it has access to the gold its citizens have also
acquired in the retail market, by banning exports of gold. It’s a small
step from there to the confiscation of gold. India’s citizens have
approximately 20,000 tonnes of gold all over India.
Russia has had a policy of increasing its gold reserves, supported by
President Putin. He has stated that Russia should reach 10% of its reserves
in gold. Russia’s has a slow but persistent buying program of gold over
the last few years. Several South American, central Asian and other nations
have built gold reserves for themselves and continue to do so.
Why? It is to defend themselves against
the falling value of all currencies (including their own) in times of crisis.
With the emerging world starting to
build an alternative system to that of the western world, the times ahead are
likely to be turbulent, uncertain and volatile. It’s in this climate
that gold acts as an anchor, a stabilizer and helps to keep the flow of
international money going. The emerging world has to ensure that gold is a
significant part of that new Yuan-based system.
We expect this system to develop over,
approximately, the next five years before it is mature enough to stand on its
own. Once there, it will not oppose the developed world system, it
won’t work against it, but it will walk its own road, refusing to
cow-tow to the U.S. political and financial requirements. It will continue to
suck wealth and power from the west. That’s why it needs to stand alone.
Once Chinese exporters quote prices in the Chinese Yuan, then the separation
of the two systems will have been completed.
|
