"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Sunday, October 17, 2010

A Gold Standard, of Sorts, In the Making?

It is no secret that France, soon to have the upcoming chief role of chair/presidency of the G20, wants to facilitate tremendous change within the current global monetary system.

It is also no secret that France, Germany, and Russia, will meet in French town of Deauville tomorrow.  The US, was noticeably not invited, as I discussed in my post Pre - G20 Meeting between France, Germany, and Russia - What's Cooking?   And also, the US response to this meeting from a New York Times article was not receptive to this new clique of countries:

“Since when, I wonder, is European security no longer an issue of American concern, but something for Europe and Russia to resolve?” asked a senior American official, who spoke on condition of anonymity. “After being at the center of European security for 70 years, it’s strange to hear that it is no longer a matter of U.S. concern.”   (link)
That said, there was a recent article from Ambrose Evans-Pritchard in the Telegraph.  The article dealt with currency wars, and the US's position as well as the East-West conflict in global trade.  But what really caught my eye, was something Evans-Pritchard wrote about Christine Lagarde, France's Finance Minister.  Here is the relevant portion, emphasis mine:

And while the French deny that they are in talks with China over the creation of a new currency regime, I heard French finance minister Christine Lagarde say in person at a meeting in Italy that France would use its G20 presidency to push for an alternative to the dollar. She specifically cited the “Bancor”, the idea floated by Keynes in the 1940s for a commodity currency priced off a basket of metals. The US risks gambling away the “exorbitant privilege” it has enjoyed for two thirds of a century as currency hegemon.
The "exorbitant privilege" Evans-Pritchard writes of is regarding the US's unique position of hosting the world's reserve currency.  By having the reserve currency, the US must constantly print dollars as the global economy grows.  But there are by-products to this printing.  One is that the US gets to export its inflation, due to the global demand for US dollars.  The other involves what economists call the "Triffin Dilemma"  that is, the US must constantly run a trade deficit, i.e. the US gets to consume a disproportionate amount of the world's resources and economic output as a result of having the world reserve currency.  Yes, the US gets to print, at will, the currency that is used to buy oil and other commodities.  That truly is an "exorbitant privilege."

But as the world get smaller from global trade, and economic power becomes more dispersed, this "exorbitant privilege" is coming under increased scrutiny.  The Triffin Dilemma I wrote about above also describes the dilemma the US faces.  As I mentioned, because it has the world reserve currency, it must constantly run trade deficits.  If it does not, and dollars (along with inflation) were not "exported" fast enough, global trade would contract.  That's the dilemma - no nation can keep running trade deficits forever.  It's not sustainable.

The world needs a common currency for global trade.  Yet it also demands a system that is sustainable and equitable.

Will it be the SDR, which so far, has been described as a basket of currencies?  Will it be this bancor tied to metals, including, I would assume, gold?  Or will the dollar continue until it, along with the global financial system, crashes?  Will a new system emerge through cooperation and before a new crisis erupts?  Or will a new system be born out of conflict and crisis - a defacto, and by default system?

That's the real dilemma the world faces today.

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