Wednesday, September 20, 2017 / Perth Australia / By Niekie Jooste
In this edition of "The WelderDestiny Compass":
After a "heavy" welding focused edition last week, it is probably a good idea to go with a lighter topic, and talk some economics again.
In issue #006 of The WelderDestiny Compass, we looked at the effect of debt on the economic system. (Read more here if you are interested...) There we speculated that the days of fiat money (paper money backed by nothing) system was probably numbered. At the time we speculated that fiat money systems could be replaced by gold backed electronic currencies.
In the last few months there have been a number of moves that have made commentators think that this transition may have started to accelerate. The particular method of this transition appears to now be a threat to the status of the US dollar as the world's reserve currency. If this does eventuate, then the balance of world power will be significantly altered, which will impact everyone's lives, regardless of where they live, or what job they do.
Reserve currencies come and go, and are rather closely related to the current major world power. Before the US dollar, it was the British pound sterling that was the world's reserve currency. The transition from one reserve currency to the next does not happen overnight, but there does tend to be milestones along the way, and generally a "final straw on the camel's back" event that signals the "official" end of the old reserve currency.
The US dollar slowly grew in strength for a number of decades, as the power of the British empire waned, but the second world war was the final event that signalled the US dollar as the new reserve currency. This position was finally cemented in the 1970's when the USA made agreements with Saudi Arabia to price oil in US dollars. This was the birth of the so called "petro-dollar".
Today we will speculate how the potential changes may unfold, and what effect this change may have on the world around us. This will suggest how we need to position ourselves for this change.
If you would like to add your ideas to this week’s discussion, then please send me an e-mail with your ideas, (Send your e-mails to: firstname.lastname@example.org) or complete the comment form on the page below.
Now let's get stuck into this week’s topics...
Owning the world's reserve currency is a big advantage for a country. Especially in the era of fiat currencies, which really commenced in the 1970's, this advantage is huge. Owning the reserve currency means that most commodities are priced and traded in the single reserve currency. In our case, in the US dollar. This results in all the countries that want to trade those commodities having to keep a stash of US dollars handy to allow them to trade.
The only way for countries to accumulate such reserves of US dollars, is to sell more goods to the USA than they buy from them. In other words, the USA needs to run trade deficits with the rest of the world, to provide them with the US dollars. In short, the USA needs to import goods with "real value" in exchange for "pieces of paper". If you keep that up for a while, the "average American" will end up with a whole lot more material wealth than the citizens of their trading partners.
In addition, if you have the power to just print as much money as you want, to pay for stuff from other countries, then you theoretically need never actually do any real constructive value adding. This is in theory only. Practically this works differently. Practically it is the top 1% that gets things for nothing, while the rest still need to "work" (add value) for their money.
Another advantage of owning the world's reserve currency is that you have a strategic edge. If you want to "punish" another country or organisation, then you can just limit their access to US dollars, and also the US dollar payment system.
Obviously such a huge advantage tends to "grate" on competitor countries such as China, Russia, Iran and others. It is only natural that these countries would try to break free from such a USA controlled system. Till now this has not been possible, because the primary requirement for a reserve currency is liquidity. In other words, you need to have enough of the reserve currency freely available so that everyone can have enough to do their transactions.
A number of plans have been hatched under the radar for many years now, but they are starting to be put into action in the last few months.
The first major threat is coming from China. For many years China has been accumulating gold at a tremendous pace. This has been done not only by China, but also Russia and other smaller nations such as Iran. Of itself, this does not look very threatening, but something else has now surfaced.
China is starting up its own commodities exchange. In particular, it is focusing on energy commodities such as oil. Due to China's huge energy demand, it imports oil from many countries, in particular Russia, Saudi Arabia and Iran. China's energy exchange will be priced and traded in the Chinese Renminbi. They still have the problem with convincing other countries to actually accept Renminbi in exchange for goods, so they have an "ace up their sleeve". Any excessive Renminbi that is not in return exchanged for Chinese goods, can be exchanged with China for gold.
In one foul swoop, China has effectively created an international gold backed currency.
Countries with close ties to the USA, such as Saudi Arabia, will initially need to tread carefully when taking part in this arrangement. Other trading partners that are in any case not particularly friendly with the USA will be only to happy to be part of this arrangement. As the USA becomes a nett energy exporter, it may not be surprising to even see American companies also taking part in this arrangement with China.
Only time will tell how this plays out, but it is clear to see that this move from China has the potential to totally change the international trading currency dynamic, and erode America's economic and strategic advantage. In this process, we will probably see the value of the US dollar plunge.
In the mean time, the growth of cryptocurrencies such as bitcoin have really taken off. Some countries have already made bitcoin legal tender, while other countries are taking a long hard look at crypto's.
The most important move is however from a most unlikely source. It is from the International Monetary Fund. (IMF) The IMF has encouraged financial institutions to move towards cryptocurrencies.
Now, government type insiders rarely like to loose control of something as important as the ability to create and control money. I am therefore sceptical that the current cryptocurrency systems will remain as they are. I suspect that the final dominant cryptocurrencies may end up being state (or IMF) controlled and issued crypto's. In fact, I can almost see the Chinese gold backed system morphing into a Chinese controlled, gold backed cryptocurrency.
Now, the switch from one reserve currency to another will not happen overnight. This sort of thing takes many years, but I have a feeling that this time round it may just happen a whole lot faster than in the past. I will not be surprised if there is a slow transition for the next 5 or 10 years, and then have a final rapid transition when the next financial crisis hits. My best bet for when this will happen? Based on the work of some economists that study economic cycles, I am going to place my bet on 2026.
While there is no way of knowing how this will finally play out, and the form that the final reserve currency will take, there are clear signs that the days of the US dollar as reserve currency is numbered. Plan accordingly!!
Yours in welding
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