Wednesday, November 10, 2010

The Tri-Polar Era

The Bretton Woods agreement of 1944 established the preeminence of the U.S. dollar as the world's sole reserve currency.  The six decades that followed were the Unipolar Era for matters monetary, even after  Richard Nixon in 1971 unilaterally canceled the dollar's convertibility into gold.

The Maastricht Treaty of 1992 set forth the requirements for the creation of the euro, the European Union's common currency, which started circulating officially in 2002.  Thus began the Bipolar Era, a time of increasing concern for the United States since the euro challenged its monetary preeminence and threatened the very foundation of The Dollar Empire.  

America's serial troubles with the stock market crash of 2000, the 9/11 terrorist attacks, the Iraq and Afghanistan wars and the housing and debt implosion which started in 2007 and is still ongoing, have  only added to the dollar's woes, since Americans have chosen to combat their intractable socio-economic problems with a mere placebo, an anodyne as it were.  To wit, the loosest possible monetary policy and increasingly massive quantitative easing, i.e. the printing press.  

Naturally the dollar is losing value against the euro, prompting virulent  and under-handed attacks against the latter's credibility by American and allied economists, bankers analysts and associated flotsam and jetsam.  For example, the hugely disproportionate negative publicity surrounding Greece's public budget deficit - a laughable 0.25% of the EU's combined GDP.
 
Much more dangerous for American living standards, however, is the loss of the dollar's value against wheat, corn, copper, gold, oil and all other commodities.  The CRB index has zoomed back to its all-time highs not because of strong current or incipient demand from industrial users - the global economy  being still quite weak - but because the dollar is increasingly viewed with well-founded suspicion (see chart below).

CRB Commodity Price Index

And that's where the third pole comes in: China has become the world's second largest economy, but when it comes to its currency it is still acting like a poor, underdeveloped country.  The yuan's hard peg against the dollar is not exactly a sign of national economic confidence, never mind pride.  It's like a 6 ft. tall teenager feeling so unsure about riding a bike that he keeps the side-wheels on. 

An economy of such magnitude and global importance as China's cannot and should not use another country's currency, as it is effectively doing now through the yuan's peg to the dollar.  "It just ain't natural"- and what's more, it's clearly no longer in  China's best interest.  To use but one adverse example, what are the likely consequences of QE2 on the roaring Chinese property bubble?

It is time for China to completely un-peg its currency from the dollar and allow it to float freely, thus causing the world to enter the Tri-Polar Era.  From the perspective of balancing trade and geopolitical power, the existence of three major globally and freely traded currencies is more desirable than only one, and even better than two (the third will act as a buffer).

Furthermore, a tri-polar exchange regime is far superior to antiquated gold benchmark notions currently being thrown about (hopefully containing no serious intent).

23 comments:

Daniel de Paris said...

It is time for China to completely un-peg its currency from the dollar and allow it to float freely, thus causing the world to enter the Tri-Polar Era. From the perspective of balancing trade and geopolitical power, the existence of three major globally and freely traded currencies is more desirable than only one, and even better than two (the third will act as a buffer).

With China offering significantly negative interest rates to its internal markets - and the Chinese population moving their savings en masse into highly leveraged mortgage positions, I expect your post is a joke.

There was a chance to get the yuan as a decent monetary reserve. That was in 2007, before the "Great Credit Leap Forward". That window of opportunity has been spoiled as I alas expected at that time. For some obvious political reasons.

There is no way you can be a r-e-s-e-r-v-e on a set of currency that offer massively negative returns on capital once discounted inflation (yes the one that matters, not the one in the information industry).

The fact a bunch of central banks coordinate on the subject will not change the bill. But as a person and a household, may I recommend you prepare your pensions using those great reserves.

Of course pension funds will have to buy the bullet and stay locked up in bond markets whilst banksters and their ex-colleagues in HF will play joyful and peaceful bets on commodity markets using those great reserves (that leak) ... Whilst individual investors will get locked up by revised versions of the good old exchange controls "à la chinoise".

But do not expect the individual savers and pensionners you clearly despise to buy it. And do not over-estimate their inability - especially those poor Chinese reaching pension age now - to get the picture clear and start moving their feet and opinions.

Do not expect the central banks outside the Tri-Polar polar world to buy this stuff.

Of course this system will be set up. But called such a fiat Triumvirate a Swap-and-bargaining toolbox why not! A monetary system is a joke, you got me started:)

A decent currency is a store of value as well.

Edwardo said...

It is unfortunate that you are putting forth the straw man argument that World Bank head Robert Zoellick has advocated a return to an old fashioned gold standard. He has not, but, rather, Mr. Zoellick has, rather sensibly, observed golds' recent prominence in monetary functioning. As a result he suggests that gold should play a meaningful-but unspecified- role in any reform of the present, deeply flawed, international monetary system.

The flaw in the system rests primarily in a condition whereby the world's reserve currency, the U.S. dollar, has been allowed to assume all three functions of money such that it is the unit of account, the medium of exchange, and the store of value. This is untenable.

In the meantime, per Winston Churchill's observation that the U.S., can be relied on to do the right thing (only) after it has exhausted all other possibilities, gold will, once other proposals have been found wanting, likely be employed in the new world monetary order.

But, for gold bugs, I must warn you, it won't be employed for the purpose of creating hard currencies. It will, instead, be allowed to float freely against all currencies.

The enormous public debt loads that are a feature of all the western economies can, upon gold's revaluation, be extinguished in this manner. In fact, the architects of The Euro devised their currency with the concept of (what some call) "freegold" in mind. It's time is fast approaching, and I choose to believe that freegold, where gold floats freely against all currencies, is what Mr. Zoellick is groping toward.

Daniel de Paris said...

I am sorry to be that harsh.

Getting near pension times, financiers - that happened to be members of my very own family - tried to sell me this current fiat-based bond system back in 2006-early-2007.

This call for a tri-polar system is a "Déformation professionnelle", has they say here.

A cognitive bias, in your case or Bernanke's. Certainly not for Goldman and al staff!

I remember exactly their call on gold (which I ultimately purchased on the base of the out fashioned academic work by Rueff and Mises) lost me some very serious money on this stupid assumption that bankers now better on money...

You work in an industry based on a currency that has been provided to you in a fully asymmetric fashion. On the very shoulders of cash-based-instruments that any sensible pensioner has to be. At least in sensible times...

I remember you call on the dollar at that very time since I was one of your very early readers.

Jacques Rueff did not call specifically for gold. As he said vehemently during his voyages in the US during the 70s, any commodity that cannot manipulated massively (please check commodity markets...) would do!

This Tri-polar will live. But certainly not longer than the political triumvirates.

One could easily set a Christian parable on a story starring a paralytic, a blind and a lame. Not an international system for exchange and credit.

There a recent ZH post on the subject. Having a Moody's upgrade China when its own banking system is getting insolvent ... That's bordering to comical!

And indeed in view of the situation of the Chinese bankers, their call bears some resemblance to their previous activity in the MBS field...

Concerning your call for the yuan as a "reserve", does that includes an active and transparent (à la WS...) international market for 30-years bond?

"Kneepads In Tow, Moody's Responds To Dagong's Downgrade Of The US By Upgrading China"

Hellasious said...

My call is for China to - finally - have its own currency instead of piggy-backing on the dollar. A floating yuan will solve a bunch of current trade, monetary and fiscal imbalances.

I don't know if then the yuan will become a major reserve currency. I greatly doubt it, myself. But I would be extremely content to see it become a TRADED currency and thus force importers and exporters to pay the REAL price for Chinese goods, instead of relying on the dollar to shield them.

I don't see how free global trade of goods and services can possibly continue at this scale with a pegged yuan. Something is going to give...

Dr John said...

Edwardo wrote"The enormous public debt loads that are a feature of all the western economies can, upon gold's revaluation, be extinguished in this manner. In fact, the architects of The Euro devised their currency with the concept of (what some call) "freegold" in mind. It's time is fast approaching, and I choose to believe that freegold, where gold floats freely against all currencies"

Edwardo pardon my ignorance but can you please elaborate further on how this would actually take place? How would gold float freely in a manor that it does not currently and what would this mean to the price of gold? Is it not longer sold as a commodity but traded as a currency?


Again forgive my rudimentary understanding of this matter.

Edwardo said...

Hi Dr. John,

Euphemistically speaking, gold trades with a lot of interference, mostly from the U.S. and Great Britain, who have, over many years, through their surrogates, engaged in various sorts of scams, the latest-latest being defined as over the last ten years-being the creation of paper gold vehicles such as GLD and SLV.

These instruments are essentially scams because these exchange traded funds almost certainly do not hold anything like the quantities of gold they purport to have, and because, these instruments exist primarily to suppress the price of the physical metals themselves. They are defaults waiting to happen, as are all the various sorts of massive derivative positions (shorts) held on both gold, silver and junior mining shares. This is not conjecture, mind you, but fact.

In Freegold this sort of jiggery pokery would be eradicated, and global monetary authorities would carry physical metal on their books marked to market. The Fed presently does not do this, but the ECB does, and for good reason. Freegold is not like gold standards of yore as it would not afford the holder of currency the right to exchange it for metal at the teller's window, so to speak. Gold could instead be obtained, as it is presently, on the open market. Freegold is a process that is, as per The Euro's construction, already underway. Don't expect a new Bretton Woods or Maastrict to occur where Freegold is decreed, it will continue to evolve, for lack of a better word, organically.

Hellasious said...

Freegold... I understand that some of its advocates are predicting gold will go to $50,000/oz.

Sounds suspiciously similar to "Dow 100,000", a prediction made right before the dotcom crash, if memory serves?

Brian Woods said...

Hi Hell,

The term Unipolar - is that your own or do you have a ref for it?

Ditto for Permagrowth. I want to use these terms in a paper so a peer-reviewed ref is necessary. Thanks.

Seen our Bond yields? We are in the most interesting of times. Ten econs published a piece in the Irish Times today - about the problem of neg equity debt and proposals to write some off and make our banks even more insolvent! Triggered a very visceral response!

Brian P

Museice said...

Hellasious: If you are interested in why, according to Freegold, the dollar price of gold will be around $55,000, read FOFOA.

http://fofoa.blogspot.com/

In my simple way I will say: Freegold is not a Gold Standard. It is a natural, freely found price of gold that allows all currencies to float around it.

Dr John said...

Hi Edwardo.

I have some IShares Gold as well as some precious metal funds like Midas and Tocqueville. The performane of both Midas and Tocqueville has been spectacular over the past 6 months but it sounds like you see them all as time bombs.

Can you expand on why these are "defaults waiting to happen"?
Thanks again. John

Hellasious said...

Unipolar and Permagrowth are terms coined by yours truly.

Oh yes, I do watch bond yields very closely. There's a lot of hay being made of PIGS-lets these days. Way out of proportion, in my opinion...

Best,
H.

Hellasious said...

Re: Gold price

According to some estimates there are about 10 billion oz. of gold in the world today.

At $55,000/oz that would put its value at $550 trillion.

I note that annual global GDP is about $60 trillion... Is gold alone going to be worth around 10 times GDP?

Edwardo said...

"According to some estimates"...I don't know who is coming up with such estimates, but they are fantastic. I think you'll find most responsible estimates are a fraction of that, say 130 to 150K tons.

If one wants to include every objet d'art with gold in it in one's estimates then, maybe, there is a lot more than 120-150K tons. But very few folks are going to melt down all sorts of items from antiquity containing gold, because these items have extraordinarily special value that would be destroyed the instant they were exposed to the smelter.

I can't speak directly to the Tocqueville Fund, but paper claims to assets that can not be absolutely verified via thorough audits, that have "counterparty" risk, which physical in one's possession does not, are subject to very rapid collapse back to their intrinsic worth. This is not to say that up until the bonfire in paper metals commences that one does not stand to make spectacular profits, but, by the same token, those profits are subject to great risk beyond the usual caveats.

Nile said...

A decent currency is a store of value as well.

Touche!

Crito said...

"A decent currency is a store of value as well."

Maybe a more important aspect of currency is flexiblity to societies' needs and survival.

What good does it do society to have people hanging on to an asset that produces nothing and shelters nor feeds anybody?

Temporary store of value, OK, but better to have the currency in circulation rather than hoards.

Anonymous said...

".... My call is for China to - finally - have its own currency instead of piggy-backing on the dollar. A floating yuan will solve a bunch of current trade, monetary and fiscal imbalances...."

And they will..... But they will do this when it suits them and not particularly when we want them to.... These bunch of current trade, monetary and fiscal imbalances, are all to the benefit of China and they want to keep it that way for the time being. I can't say that I blame them one bit.

They seem to have the "big stack" at the table and that's a nice place to be.....

Best regards,

Econolicious

Brian Woods said...

Hell,

Many thanks for the reply. I did believe the terms were yours. Now I have to find a way to incorporate them into some 'mainstream' writing that gets around the need for 'peer reviewed' refs.

Some 'unfortunate' and 'misquided' econs wrote an article in I Times during the week - re: debt 'forgivness' for people who are unable to pay mortgages. Unleashed a storm of visceral opinion. Mortgage originators were cast as saintly??? Borrowers as 'they-knew-what-they-were-doing' - so tuff luk! Bank of Ireland is STILL giving 90% L/V mortgages!!!

Res Prop is down about 50% since top. Lots of Neg Equity. Big debt predicament. Heroic attempts to 'hide-the-parcel'.

Thanks again.

Brian

camabron said...
This comment has been removed by the author.
camabron said...

Quantitative Easing Explained Cute!

Dr John said...

Econolicious or other posters, do you see this move for China to "have its own currency instead of piggy-backing on the dollar" causing a near "acute" collapse of the dollar globally? If so when do you believe this could occur?

Hellasious said...

Re: Gold in the world

Apart from truly priceless objects of art made of gold, almost everything else can be melted down to become bullion once the price is high enough.

In the early 1980's I remember people lining up outside of places that bought gold for cash. Little old ladies were selling bangles, bracelets and chains by the score.

Edwardo said...

Clearly, then, the price isn't nearly high enough.

Crito said...

I'm curious about Hellasious's comment on this or any other knowledgeable Fed maven. Is this IYHO the Fed falling on its sword to save the Banks and or force a new financial regime? Or is Astrology a better course of knowledge?

For us, the Fed’s decision to initiate a second round of quantitative easing was not really motivated by a desire to lead the United States and the world out of the current economic crisis, but rather from the need to save US banks and their top officials from the consequences of an unimaginable mess (or deceitful system), which was built up over at least the past decade. The only deliberate thing here is the  decision to sacrifice precisely the very same Fed itself. This was decided  not only to save big financial corporations and their leaders, but also to lay the ground for either a world Federal Reserve, a sort of SuperFed, or (if the former fails) at least one for a North American Fed that would rise out of the ashes left by the existing Federal Reserve, now destined to explode as a result of hyperinflation.

Maurizio D'Orlando of AsiaNews.it