Two very recent developments have transpired that I think warrant mention. I will be incorporating these developments in my Part III of my Fiat Evolution series. But as this blog has always emphasized: it is geopolitics that in the end, will determine the next monetary system. Will it be through geopolitical cooperation or conflict? That's the question.
We have all seen the many photo ops at the recent G20 Summits, the empty promises, the fake smiles, the multitude of pronouncements of "lofty goals" etc.. But now that the most recent G20 Summit is but a couple weeks behind us, China and Russia are openly challenging US Economic, and by association, US Military, might. Keep in mind that the US has the world's reserve currency. It prints money with a lot less inflationary impact that other countries would normally face. Why? Because the US Dollar by far, is the most used international currency in global trade. This actually REQUIRES that the US print excess money to keep the global economy growing. But it also creates the Triffin Dilemma: the US needs to also consistently run trade deficits in order to "export" its dollars. That is not a sustainable model, as trade deficits cannot mathematically run forever.
But back to the open challenges to US Supremacy, first, from Bloomberg:
PBOC Researcher Calls on U.S. to Sell Gold Reserves, People's Daily Says
The U.S. should cut its government spending and sell some gold reserves to balance its budget and fund its recovery, the People’s Daily overseas edition reported, citing Xia Bin, an adviser to the People’s Bank of China.
The U.S. has to resolve its “twin deficits” in the government budget and the current account, Xia was quoted as saying. Three ways that may help the U.S. achieve that target include reducing military expenses, selling part of its gold reserves and relaxing some export limits on technology, he said.
“The U.S. has more than 8,000 tons of gold reserves; why can’t it sell some of it since the country wants to raise funds for economic recovery but doesn’t want to add more burden to the fiscal deficit,” Xia told the newspaper. He didn’t mention whether China would be willing to purchase any gold from the U.S.So let's translate this. China is basically telling the US to 1) sell its gold reserves, 2) reduce its military, and 3) give China more access to its technologies. Now I know that this comes from an advisor to the People's Bank of China, but to me, it is not some last minute random trial balloon. This is real. China is openly questioning the US's role in the world, and by association, questioning the US Dollar's role. China is speaking to the US the way Germany lectured Greece earlier this year.
This is cause for concern. We are speaking about a rising power challenging the current (let's face it) Imperial Power. Rome was just told to step down! This amidst the recent North/South Korean confrontation, the yet to be fully explained "missile launch" off the coast of California, and the Russian/Chinese deal to omit the US Dollar from their trading.
To me, these events are all tied together (with the possible exception of the recent "missile launch" that has yet to be officially explained). There will be no global cooperation in a transition to a new monetary order. Sarkozy will lead the G20 next year as France assumes the G20 presidency. But it will be pointless, he is no de Gaulle, and the world is becoming increasingly fractured.
And now, this from Russia:
Vladimir Putin said it is "quite possible" that Russia will one day join the eurozone and create a currency that would eclipse the US dollar as the global reserve standard.
Speaking at a conference in Germany the Russian prime minister, who is in the country for talks with Chancellor Angela Merkel, said he was convinced the euro would stabilise and strengthen despite the current sovereign debt crisis.
He said: "Yes, there are problems. But the economic policy of the European Central Bank and of the governments of leading European economies ... convinces me that the stability of the euro will be ensured."
He added: "We know there are problems in Portugal, Greece, Ireland and the euro is wobbling a bit. On the whole it is a solid, good currency and it should take its place, its role as a reserve currency."
Speaking at the same event, Josef Ackermann, chief executive of Deutsche Bank, echoed Mr Putin and said he could imagine Russia joining a common European currency.
Now this is a little more complicated. What is the goal of this pronouncement? Is Russia trying to jab at the US Dollar, and the US's role in having the world's reserve currency? Is Russia giving an open vote of confidence to the flailing Euro because it has so much at stake in the Euro? Does Russia want to someday merge economically with Germany - one is rich in natural resources, the other in manufacturing know-how? I say it's all of the above.
And so, we are facing a world that seems to me to be lacking order. These are the times that history shows are watershed events. There are only two outcomes here in classical geopolitical theory: 1) Either the existing hegemon reasserts its power or 2) a new hegemon assumes leadership. Neither scenarios occur peacefully. I am not saying that a major war is at hand. But I believe that we will be witnessing proxy wars in the near future. Look to Iran, North Korea, and Venezuela. They seem to be the next battle grounds.
And what does this mean to the current monetary order? As conflict escalates, and the US Dollar is used less in foreign trade or is continually openly challenged or avoided, the US will be faced with a decision: to deploy its guns or gold, or both. Nations store gold and weapons for a reason. Historically, the nation with the most guns and gold wins. But Russia is the one that can tip the balance here, as it has increased its ties to both China and the EU. In my view, a gold backed dollar is not out of the question. The US is becoming increasingly alone, and its paper money is being questioned. Once one country goes the way of gold, all else are forced to follow, as all fiat money immediately collapses with the reintroduction of gold.
Which will the US deploy?