Best of the Week
Most Popular
1.UK General Election BBC Exit Polls Forecast Accuracy - Nadeem_Walayat
2.UK General Election 2017 Seats Final Forecast, Labour, Conservative Lib-Dem, SNP - Nadeem_Walayat
3.UK General Election 2017 Forecast: Conservative 358, Labour 212 Seats - Nadeem_Walayat
4.Theresa May to Resign, Fatal Error Was to Believe Worthless Opinion Polls! - Nadeem_Walayat
5.UK House Prices Forecast General Election 2017 Conservative Seats Result - Nadeem_Walayat
6.The Stock Market Crash of 2017 That Never Was But Could it Still Come to Pass? - Sol_Palha
7.[TRADE ALERT] Write This Gold Stock Ticker Down Now - WallStreetNation
8.UK General Election Results Map 2017 vs 2015 vs Opinion Polls - Nadeem_Walayat
9.Orphaned Poisoned Waters,Severe Chronic Water Shortage Imminent - Richard_Mills
10.How The Smart Money Is Playing The Lithium Boom - OilPrice_Com
Last 7 days
Gold Back With A Vengeance As Bitcoin Bubble Bursts - 26th Jun 17
Crude Oil Trade & Nasdaq QQQ Update - 26th Jun 17
Gold and Silver Ongoing Consolidation May End Soon - 25th Jun 17
Dollar May Become “Local Currency of the U.S.” Only - 25th Jun 17
Sheffield Great Flood of 2007, 10 Years On - Unique Timeline of What Happened - 24th Jun 17
US Stock Market Correction Could be Underway - 24th Jun 17
Proof That This Economic Recovery Narrative is False - 24th Jun 17
Best Cash ISA for Soaring Inflation, Kent Reliance Illustrates the Great ISA Rip Off - 24th Jun 17
Gold Summer Doldrums - 23rd Jun 17
Hedgers Net Short the Euro, US Market Rotates; 2 Horsemen Set to Ride? - 23rd Jun 17
Nether Edge By Election Result: Labour Win Sheffield City Council Seat by 132 Votes - 23rd Jun 17
Grenfell Fire: 600 of 4000 Tower Blocks Ticking Time Bomb Death Traps! - 22nd Jun 17
Car Sales About To Go Over The Cliff - 22nd Jun 17
LOG 0.786 support in CRUDE OIL and COCOA - 22nd Jun 17
More Stock Market Fluctuations Along New Record Highs - 22nd Jun 17
Understanding true money, Pound Sterling must make another historic low, Euro and Gold outlook! - 22nd Jun 17
Green Party Could Control Sheffield City Council Balance of Power Local Election 2018 - 22nd Jun 17
Ratio Combo Charts : Hidden Clues to the Gold Market Puzzle - 22nd Jun 17
Steem Hard Forks & Now People Are Making Even More Money On Blockchain Steemit - 22nd Jun 17
4 Steps for Comparing Binary Options Providers - 22nd Jun 17
Nether Edge & Sharrow By-Election, Will Labour Lose Safe Council Seat, Sheffield? - 21st Jun 17
Stock Market SPX Making New Lows - 21st Jun 17
Your Future Wealth Depends on what You Decide to Keep and Invest in Now - 21st Jun 17
Either Bitcoin Will Fail OR Bitcoin Is A Government Invention Meant To Enslave... - 21st Jun 17
Strength in Gold and Silver Mining Stocks and Its Implications - 21st Jun 17
Inflation is No Longer in Stealth Mode - 21st Jun 17
CRUDE OIL UPDATE- “0.30 risk is cheap for changing implication!” - 20th Jun 17
Crude Oil Verifies Price Breakdown – Or Is It Something More? - 20th Jun 17
Trump Backs ISIS As He Pushes US Onto Brink of World War III With Russia - 20th Jun 17
Most Popular Auto Trading Tools for trading with Stock Markets - 20th Jun 17
GDXJ Gold Stocks Massacre: The Aftermath - 20th Jun 17
Why Walkers Crisps Pay Packet Promotion is RUBBISH! - 20th Jun 17

Market Oracle FREE Newsletter

The MRI 3D Report

The Reserve Fiat Currency Triffin Dilemma Will Create a 3-G World

Currencies / Fiat Currency Apr 06, 2012 - 12:40 PM GMT

By: Richard_Mills

Currencies

Diamond Rated - Best Financial Markets Analysis ArticleTrade imbalances - deficits and surpluses - between nations are one of the major reasons for financial crises. Countries become trapped in a vicious spiral - they accumulate debt because they are sustaining a trade deficit, the bigger their debt grows year after year, the harder it becomes to generate a trade surplus.


Only the countries with a trade surplus have any room to manipulate policy, there's very little debtor nations can do.

In 1942-1943 John Maynard Keynes formulated a solution. His answer was to "persuade" the creditor nations to spend their surplus money back into the economies of debtor nations.

His proposed creation, the International Clearing Union, would be a global bank and issue its own currency, the Bancor, a supranational currency to be used in international trade as a unit of account exchangeable with national currencies at fixed rates of exchange.

The bancor would be used to measure a country's trade deficit or trade surplus. Every country would have an overdraft facility equivalent to half the average value of its trade over the past five years. Any country racking up a trade deficit of more than half of its bancor overdraft allowance would be charged interest on its account, have to reduce the value of its currency and prevent export of capital.

On the other side of the trade balance any nation with a trade surplus (a bancor credit balance) more than half the size of its overdraft facility would be charged interest, have to increase the value of its currency and permit export of capital.

Keynes proposed penalty for missed compliance on nations with a trade surplus was severe, it was designed to give nations with a surplus a powerful incentive to erase it and in doing so automatically clear other nations' deficits. By the end of the year a countries credit balance could not exceed the total value of its permitted overdraft, if it was the surplus would be confiscated.

"It would be difficult to exaggerate the electrifying effect on thought throughout the whole relevant apparatus of government ... nothing so imaginative and so ambitious had ever been discussed." ~ Lionel Robbins, British economist

Britain adopted Keynes's solution as its official negotiating position for the Bretton Woods conference in 1944 - the United Kingdom wanted to introduce the Bancor after the Second World War ended.

The US was vehemently opposed to the idea...

"We have been perfectly adamant on that point. We have taken the position of absolutely no." ~ Harry Dexter White, head of the US delegation at Bretton Woods

The Bretton Woods conference established the U.S. dollar as the worlds reserve currency.

"Lord Keynes was right ... the world will bitterly regret the fact that his arguments were rejected." ~ Geoffrey Crowther in 1944, editor Economist magazine

On April 13 2010, the Strategy, Policy and Review Department of the IMF published a comprehensive report entitled "Reserve Accumulation and International Monetary Stability." The IMF report advocates the adoption of a true global currency, the "Bancor" (so named in honor of Keynes), administered by a global central bank...

"A global currency, bancor, issued by a global central bank would be designed as a stable store of value that is not tied exclusively to the conditions of any particular economy. As trade and finance continue to grow rapidly and global integration increases, the importance of this broader perspective is expected to continue growing."

The Triffin Dilemma

When a national currency also serves as an international reserve currency conflicts between a country's national monetary policy and its global monetary policy will arise.

"In October of 1959, a Yale professor sat in front of Congress' Joint Economic Committee and calmly announced that the Bretton Woods system was doomed. The dollar could not survive as the world's reserve currency without requiring the United States to run ever-growing deficits. This dismal scientist was Belgium-born Robert Triffin, and he was right. The Bretton Woods system collapsed in 1971, and today the dollar's role as the reserve currency has the United States running the largest current account deficit in the world.

By "agreeing" to have its currency used as a reserve currency, a country pins its hands behind its back. In order to keep the global economy chugging along, it may have to inject large amounts of currency into circulation, driving up inflation at home. The more popular the reserve currency is relative to other currencies, the higher its exchange rate and the less competitive domestic exporting industries become. This causes a trade deficit for the currency-issuing country, but makes the world happy. If the reserve currency country instead decides to focus on domestic monetary policy by not issuing more currency then the world is unhappy.

Becoming a reserve currency presents countries with a paradox. They want the "interest-free" loan generated by selling currency to foreign governments, and the ability to raise capital quickly, because of high demand for reserve currency-denominated bonds. At the same time they want to be able to use capital and monetary policy to ensure that domestic industries are competitive in the world market, and to make sure that the domestic economy is healthy and not running large trade deficits.

Unfortunately, both of these ideas - cheap sources of capital and positive trade balances - can't really happen at the same time." ~ How The Triffin Dilemma Affects Currencies, investopedia.com

"Providing reserves and exchanges for the whole world is too much for one country and one currency to bear." ~ Henry H. Fowler, U.S. Secretary of the Treasury

In the wake of the financial crisis of 2007-2008, Zhou Xiaochuan the governor of the People's Bank of China, said that a national currency is unsuitable as a global reserve currency because the Triffin dilemma is today, the root cause of global economic disorder.

In a speech titled "Reform the International Monetary System" Zhou argued that part of the reason for the original Bretton Woods system breaking down was the refusal to adopt Keynes' bancor. Calling Keynes's bancor approach "farsighted" Xiaochuan proposed strengthening existing global currency controls through the IMF by the adoption of International Monetary Fund (IMF) special drawing rights (SDRs) as a global reserve currency.

When Special Drawing Rights were originally created in 1969 one SDR was defined as having a value of 0.888671 grams of gold, equal to the value of one US dollar at that time. After the breakdown of the Bretton Woods system the SDR was redefined in terms of a basket of four currencies.

From January 1 2011, the IMF has determined that the four currencies will be assigned revised weights based on their roles in international trade and reserves.

Due to varying exchange rates, the relative value of each currency varies continuously and thus the value of the SDR fluctuates. The IMF fixes daily the value of one SDR in terms of US dollars based on the exchange rates of the constituent currencies.

The following is the current breakdown of the components of an SDR on Thursday April 5th 2012....

U.S. Dollar: 41.9 percent Euro: 37.4 percent Yen: 9.4 percent Pound: 11.3 percent

"A limitation of the SDR as discussed previously is that it is not a currency. Both the SDR and SDR-denominated instruments need to be converted eventually to a national currency for most payments or interventions in foreign exchange markets, which adds to cumbersome use in transactions. And though an SDR-based system would move away from a dominant national currency, the SDR's value remains heavily linked to the conditions and performance of the major component countries." IMF report "Reserve Accumulation and International Monetary Stability"

A Single Global Currency: Is it Feasible? By S. Korra, B. Gopal and S. Gollapalli

"For almost 2,500 years, countries across the world have experienced multicurrency foreign exchange (FX) transactions and its erratic currency fluctuations. The daily turnover in currency markets rose to $3.2 trillion, which was more than 10 times the world GDP. Daily volumes of cross-currency swaps grew by 281% between 2004 and 2007. International corporations were participating more actively in FX market. The US dollar remained the prominent currency in the FX market covering two-fifths of daily transactions. Emerging market currencies were also gaining equal significance on the FX front with 20% of all transactions by April 2008.

Turnover of foreign exchange options and cross-currency swaps more than doubled to $0.3 trillion per day. Though the multicurrency FX market stated a surge of 71% in volume since 2004, it was associated with various costs.

Transactions costs in currency trading were very huge at $400 billion in 2007. Frequent speculations in currency trading resulted in currency fluctuations and in extreme cases led to currency crises. On the contrary, these expensive costs in forex transactions would not be considered in the 3-G world (a Global Monetary Union, with a Global Central Bank and a Single Global Currency - Rick). The 3-G world is the implementation of a single global currency to be managed by a Global Central Bank within a Global Monetary Union. The successful examples were the euro and the dollar.

Moreover, the number of currencies declined to 147 from 159 in the early 21st century. With the implementation of a single global currency huge transaction costs would be saved. There would not be any currency fluctuations and currency risks while dealing in the FX market."

During a trip to China, International Monetary Fund director Dominique Strauss-Kahn said the days of one country's currency as the global benchmark are numbered, globalization demands a new global currency that provides representation for the growing importance of a variety of major economies.

"If we are to have a truly global economy, a single world currency makes sense." ~ Paul Volcker, former Governor of the Federal Reserve Board

Economist Robert A. Mundell says that the creation of a global currency is "a project that would restore a needed coherence to the international monetary system, give the International Monetary Fund a function that would help it to promote stability, and be a catalyst for international harmony. The benefits from a world currency would be enormous. Prices all over the world would be denominated in the same unit and would be kept equal in different parts of the world to the extent that the law of one price was allowed to work itself out. Apart from tariffs and controls, trade between countries would be as easy as it is between states of the United States."

The Council on Foreign Relations (whose founding members included J.P. Morgan, John D. Rockefeller, Paul Warburg, Otto Kahn, and Jacob Schiff - the same people who had engineered the establishment of the Federal Reserve System) 2007's article "The End of National Currency" advanced the idea of a global wide currency restructuring. After examining the European Monetary Union it turned to the prospects for monetary unions in North America, South America and East Asia. Regional Monetary Integration emphasizes "the economic and institutional requirements for successful monetary integration, including the need for a single central bank in the case of a full-fledged monetary union and the corresponding need for multinational institutions to safeguard the bank's independence and assure its accountability."

Of course this is only a follow up to numerous articles written earlier, such as the CFR journal, Foreign Affairs for July/August 1999. In the opening paragraph of his essay, From EMU to AMU?: The Case for Regional Currencies, Zanny Beddoes of Britain's The Economist pronounces: "By 2030 the world will have two major currency zones - one European, the other American. The euro will be used from Brest to Bucharest, and the dollar from Alaska to Argentina, perhaps even Asia."

How important, how widespread and far reaching is the Council on Foreign Relations (CFR)?

"Since 1934 almost every United States Secretary of State has been a CFR member; and ALL Secretaries of War or Defense, from Henry L. Stimson through Richard Cheney...nearly ALL presidential candidates have been CFR members. President Truman, who was not a member, was advised by a group of "wise men," all six of whom were CFR members, according to Gary Allen. In 1952 and 1956, CFR Adlai Stevenson challenged CFR Eisenhower.

CFR candidates for president include George McGovern, Walter Mondale, Edmund Muskie, John Anderson, and Lloyd Bentsen. In 1976 we had Jimmy Carter, who is a member of the Trilateral Commission, created by David Rockefeller and CFR member Zbigniew Brzezinski with the goal of economic linkage between Japan, Europe, and the United States, and: "...managing the world economy...a smooth and peaceful evolution of the global system.

We have also had (though his name strangely disappears from the membership list in 1979) CFR director (1977-79) George Bush, and last but not least, CFR member Bill Clinton." ~ William Blase, The Council on Foreign Relations (CFR) and The New World Order

President Obama has surrounded himself with CFR members ie Susan E. Rice, is a prominent member of the Council On Foreign Relations and serves as the U.S. Permanent Representative to the United Nations and is a member of President Obama's Cabinet. Rice will lead the U.N. Security Council and is considered a leading contender for secretary of state if Obama wins a second term

The Bank for International Settlements (BIS) - established in 1930 and self described as the central and the oldest focal point for coordination of global governance arrangements is, in reality, the central bank for the world's central banks and is the one true authority in terms of 'global governance' - has publicly endorsed a global currency.

Conclusion

With a global government not yet in place how will the process of a global currency be accomplished? The process is already well established (and unrecognized by most) with the advancement of regional currencies such as the Euro, SUCRE (South America), floating the idea of the AMERO (US, Canada and Mexico), the Franc of the African Financial Community, an Asian currency and a Arabian Gulf regional currency.

Once 147 national currencies are five or so regional currencies, with most of the world's population involved, it's a logical step down to one global currency built around the regional currencies.

It isn't if we get a global currency, it's when, the only question being will gold play a part?

The Dream of a World Currency, Interview of Tommaso Padoa-Schioppa by Alberto Orioli

AO: Thus the lesson for the future is a single currency, as China is asking for?

TPS: As a former central banker, I think that when you talk about global standards, you should first think about monetary standards and then about legal ones, because that is a functional economic fact, even though it rests on a legal basis. In other words, I do think this crisis poses the problem of a new international monetary standard. Its absence, and the absence of the discipline that it would impose are one of the deep reasons of the present crisis.

AO: Once the currency was pegged to gold...

TPS: If that peg still existed, in the last few years the countries that were accumulating big external deficits - such as the United States - should of had to convert a part of it into gold; the consequent scarcity of gold reserves would have obliged them to change their course."

Today no country is on a gold standard and all currencies are fiat. If a future fiat global currency were to be put in place without full, or at least a hefty partial gold backing, then we'd simply be repeating Bretton Woods - the 1944 US dollar failed reserve currency experiment - except it'd be on a much grander scale.

A future 3-G world, and a re-introduction of gold into the global monetary system, should be on all our radar screens. Is it on yours?

If not, maybe it should be.

By Richard (Rick) Mills

www.aheadoftheherd.com

rick@aheadoftheherd.com

If you're interested in learning more about specific lithium juniors and the junior resource market in general please come and visit us at www.aheadoftheherd.com. Membership is free, no credit card or personal information is asked for.

Copyright © 2012 Richard (Rick) Mills - All Rights Reserved

Legal Notice / Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified; Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.


© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Morrison Bonpasse
09 Apr 12, 08:05
Single Global Currency

The success of the euro shows that monetary union is the best way to ensure monetary stability. If 17 countries can use the same currency, why not 192? The world should begin researching and planning now for a Single Global Currency, which will would eliminate the current foreign exchange trading expense of $200-400 billion annually, eliminate the need for expensive foreign exchange reserves, eliminate currency fluctuations, and bring other benefits worth trillions.

The Single Global Currency Assn. promotes the implementation of a Single

Global Currency by 2024, the 80th anniversary of the 1944 conference.

That's only 12 years away. The Assn's website is www.singleglobalcurrency.org. See, also, the book, "The Single Global Currency - Common Cents for the World."

Morrison Bonpasse

President

Single Global Currency Assn.

Newcastle, Maine, USA


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife