15 September 2010

On the Edge of History: Will Europe Join in Promoting the SDR as the Global Reserve Currency?

There is a tide in the affairs of men.
Which, taken at the flood, leads on to fortune;
Omitted, all the voyage of their life
Is bound in shallows and in miseries.
On such a full sea are we now afloat,
And we must take the current when it serves,
Or lose our ventures.

Julius Caesar: Act 4, scene 3, 218–224

China and Russia and some of the other developing nations have been proposing a reformulated SDR, with less US dollar content, a broader representation of currencies, and the inclusion of gold and silver, as a suitable replacement for the US dollar as the global reserve currency.

The US and UK are opposing the SDR as replacement to the US dollar as the new global reserve currency. They prefer to delay and postpone the discussions, and to maintain the status quo for as long as is possible to support their primacy in the financial markets. Control of the money supply is a huge hand on the levers of financial and political power.

It will be most interesting to see where the European Union comes out on this issue, especially in light of the recent drubbing that their banks have taken via dodgy dollar assets and a vicious dollar short squeeze, alleviated by a rescue from the Federal Reserve. It could have gone otherwise, and that provides things to think about. No one wishes to be at the mercy of a small group of unelected financial engineers who are closely aligned with an equally small set of Anglo-American banks operating with a somewhat opaque discretion. Or the goodwill of totalitarian governments who are acting aggressively from their own mercantilist self-interest for that matter.

One hears things. A deal being offered to Germany by the financial interests, for example, as a counterbalance to sentiment for greater latitude and independence in the EU. The lines of discussion move, and sometimes blur. Currency wars are the continuation of diplomacy, and possibly a revival of the cold war, by other means, to paraphrase Clausewitz. And a chilling fog is rolling over the landscape. This is what the timeless metal has been telling us, as it sounds an historic warning.

This is just the latest episode in a long unfolding macro change I have been calling Currency Wars after the Chinese best seller authored by Song Hongbing in 2007. I viewed it as the definitive spike in the theory of The End of History by Fukuyama.

It will continue to proceed slowly, at least for now, but such events tend to accelerate and sometimes dramatically as they progress. However the longer term implications for a change to the de facto Bretton Woods arrangement in place since Nixon closed the gold window in 1971, are enormous and yet little remarked yet by conventional economists, who too often prefer to glare at photons, gaping in the light. It has all the hallmarks of a classic conflict yet unfolding.

Rather than standing fast on an unsustainable status quo, as noted in Triffin's Dilemma, that serves the special interests of a wealthy few, the US might be well served to reform its banks, and balance its economy between service and industry, and stand once again for independent freedom and the common good, rather than narrow power and greed of the monied interests, and their willing tools and frivolous assistants. That is to trust in the wisdom and altruism of a people and their leaders who have of late shown a greater propensity to greed, deceit, and self-destruction. And so I say we must be in God's hands, because I recoil from Caesar's deathly grasp.

Some worry about deflation and inflation. Those outcomes are both hedged easily enough. I am more concerned about the next global holocaust of human destruction, and the bonfire of the vanities yet to come. That is history.

Financial Times
Germany asks US to give up its IMF veto
By Alan Beattie in Washington
September 14 2010 22:31

The US should give up its veto over important decisions in the International Monetary Fund in return for Europe accepting a smaller say, Germany has proposed.

The suggestion, which experts say will be strongly opposed by the US, addresses a politically highly symbolic dispute about voting power and seats on the fund’s executive board. Shifting power towards emerging market countries is one of the central elements in the Group of 20 nations’ drive to make the fund and other international institutions more representative...

Read the rest here.

Lagarde says French G20 to discuss wider use of SDR
2010-09-01 18:06 (UTC)

JOUY-EN-JOSAS, France, Sept 1 (Reuters) - France will use its presidency of the G20 next year to discuss proposals for the wider use of IMF special drawing rights (SDRs) as a reserve currency as proposed by China, Economy Minister Christine said...

Read the rest here.