A Glimpse Into Our Monetary Future

The author of the yearly In Gold We Trust reports, Ronald Stoeferle, talks about the future of our monetary system in one of his latest interviews (courtesy: GoldBrokers). From the video interview (starting 24:30), we pick out the part related to our monetary future and add some excerpts from Stoeferle’s In Gold We Trust 2014 report.

They key trends that Stoeferle discusses are the de-dollarization, massive purchases of gold by the Chinese, and the push by the IMF to move to an SDR based global monetary system.

First, with a massive physical gold hoarding by China in recent years, it seems at first glance conflicting a potential evolution of the global monetary system to SDRs (“Special Drawing Rights,” the paper based currency promoted by the IMF). Stoeferle points out that China was facing a high inflation rate at the end of the 40ies / beginning of the 50ies. A similar situation occurred in Germany and Austria. It is no coincidence that people in those countries have a deep respect for gold’s value, both private citizens and central banks. Stoeferle’s estimate is that China owns 5 to 6k tonnes of physical gold, based on import numbers and private discussions with Chinese officials.

China is most likely evolving towards a gold backed Yuan. It’s probably not their objective to make a world reserve currency from the Yuan, but rather a much more important trade currency. They are already actively promoting the Yuan as a trade currency, as evidenced by almost daily announcements of bilateral swap agreements. Comments from politicans and cental bankers in China all point to a major – and growing – importance gold.

On the other hand, the nations of the BRICS announced their own monetary fund with an initial capital of 100 billion USD. That is not powerful yet, but it is evidence of a growing number of initiatives in which countries are moving out of the US Dollar.

The liberation from the US dollar is gaining ever more momentum is confirmed by numerous additional examples:

  • in reaction to Western sanctions, Russia’s central bank sold 20.5% of its US treasury bonds in March alone. Since March of last year, its stock of US treasuries has been lowered from USD 155 bn. to USD 100 bn.

  • the recent gas agreement between Russia and China is an important milestone in the strategic energy cooperation between the two countries. Until 2020, Russia will export 38 bn cubic meters of gas to China per year, after which the deliveries will be gradually increased to twice that amount. The precise value of the transaction is not known, but reports speak of up to USD 500 bn. For now, billing will take place in USD, however, the agreement can be changed to yuan or rubles at any time, after which the US dollar would no longer be needed. 48 additional economic agreements were signed in addition to this deal.

  • in October 2013, the ECB and the People’s Bank of China concluded a bilateral currency swap agreement amounting to 350 bn. yuan and 45 bn. euro: the ECB can henceforth provide yuan loans to euro area banks and the PBoC can offer euro loans to Chinese banks.

  • China’s central bank president would also prefer to see a “strong sovereign reserve currency” to replace the US dollar. In a study published on the PBoC’s web site, it is stated that an international reserve currency “free of the interests of individual nations” which is able to “remain permanently stable” would be a blessing for the financial system.

  • OMFIF recommends that gold should become part of the IMF’s special drawing rights. Apart from gold, the “R-currencies” should also receive higher status in the international monetary order and be added to the SDR basket.

  • The IMF has recently added the Australian and Canadian dollar to the list of official reserve currencies. With this move, the list of official reserve currencies has increased to seven.

  • The Eurasian Economic Union wants to create a common free trade area and become a counterweight to the European Union. A common currency called “Altyn” is planned to be issued within the next five years. The name is from the Tartar language and means “gold”.

  • The BRICS nations also want to become more independent in terms of currency policy. The five nations are working intensively on the creation of their own development bank, whose primary purpose would be the financing of infrastructure projects. The creation of a monetary fund is also planned.

  • The Shanghai Cooperation Organization (SCO) and the Gulf Cooperation Council are additional organizations working to intensify economic cooperation with the intention of achieving a decoupling from the dollar. The SCO promotes infrastructure programs and the geo-strategic interests of Asia. Its agendas far exceed mere free trade zones; it increasingly pursues monetary system related initiatives as well as military strategic goals.

Putting all this together, it seems that an SDR based reserve currency with a more important weighting of BRICS nation and some parts in gold, is a very likely scenario.

Stoeferle explains that SDRs will become probably much more important. He sees in SDRs the “next stage of the monetary system.” Why? Because it is a derivative on a derivative. To illustrate that, it is useful to take the analogy of Peter Millar who explains SDRs as follows: “Money used to be ‘I owe you gold,” next money was ‘I owe you nothing,’ and an SDR is ‘who owes you nothing’.”

The In Gold We Trust 2014 report had an excellent excerpt related to SDR’s:

The sesquipedalian term ‘special drawing rights’ (SDR) designates a currency unit introduced by the IMF, which isn’t traded on foreign exchange markets. Currently, the units consist of 41.9% USD, 37.4% euro, 9.4% JPY and 11.3% pound sterling. Aside from the function as a currency unit, the IMF can actually issue SDRs. However, this has so far not yet happened to any significant extent. SDRs were last created in 2009 to the tune of USD 188.6 bn. That was approximately equivalent to USD 282 bn. What isn’t widely known is that special drawing rights are already used in many places. For instance, they are employed as a unit of account in international guarantee claims, in air transport, shipping, and in the event of oil-related accidents on the high seas.

In a study well worth reading, the IMF makes critical remarks regarding the dollar’s dominance and stresses the importance of SDRs: “The current system has serious imperfections that feed and facilitate policies—of reserves accumulation and reserves creation—that are ultimately unsustainable and, until they are reversed, expose the system to risks and shocks that a reformed system could minimize.” In order to solve this problem, the IMF proposes the establishment of a global reserve currency, which would “in principle only be an extended SDR, which could however have regular or economic cycle dependent issuance adjusted to the size of reserve accumulation. Such a system could contribute to global stability, economic strength and global equality”

The IMF makes no bones about its ambition to replace the dollar with SDRs. A multi-stage plan was presented in the form of a study, which discusses how to position SDRs as a global reserve currency. The IMF recommends increasing SDR liquidity by means of corporations such as IBM or Volkswagen issuing bonds denominated in SDRs. Sovereign wealth funds should buy such bonds for reasons of foreign exchange diversification. The study recommends that the SDR bond market should replicate the US Treasury bond market as precisely as possible. That the establishment of a global currency is an explicit goal of the IMF can be seen in the following chart:

IMF_monetary_roadmap_2014

The Economist magazine predicted already in 1988 that there would be a common global currency by 2018. In the wake of the crash of 1987, the idea of a common currency by the name of “Phoenix” was considered, which would so to speak rise from the ashes. The IMF was supped to become the new central bank and issue a global reserve currency.

economist_cover_global_currency

Conclusion: The next big crisis could lead to a realignment of the global monetary order. Most of the proposals concerning the use of special drawing rights appear not very sensible from an “Austrian” perspective, as a global institutionalized fiat money cannot avoid the system-immanent problems of the debt money system as such. Special drawing rights are derivatives of derivatives, insofar it seems doubtful whether such an instrument would generate much confidence. One should nevertheless not underestimate the political will behind such proposals. An expansion of special drawing rights and the transformation of the IMF into a global central bank would not only agree with the mentality of the central economic planners in both East and West, but would from their perspective also have the advantage that governments could continue to finance various projects via a hidden inflation tax. The tongue twister “special drawing right” moreover sounds a lot more pleasant than the term “currency reform” and yet could amount to one arriving through the back door. It would also be politically attractive because in the event of rapidly rising inflation, no one could really be made responsible, as the IMF is similarly intangible to most people as terms such as QE, LTRO or OMT.

 

Stoeferle believes that a huge financial crisis is a likely scenario, one that force the monetary system to its next stage. The financial system is much more fragile than in 2008 because of the interconnectedness between financial market participants. It means that the “too big too fail” institutions became much bigger.

More importantly, in 2008, central banks were able to lower interest rates; they were also able to launch initiatives like “Quantitative Easing” (in simple words, monetary easing, or money printing). Today they have much less measures, as several countries have already applied an extreme monetary stimulus. Debt to GDP ratios are up compared to 2007. What are the measures available to central planners and policy makers once a comparable crash as the one in 2008 starts? Based on the latest junk bond index and some other technical indicators, it appears we are not too far a way from at least a major correction. It will be interesting to see how central banks will react, says Stoeferle.

 

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