Friday, January 31, 2014

Scratching Below the Surface - Global Monetary Power Struggle?

In an earlier post we looked at a sign post to watch for that can lead to global monetary system change. In this post I want to explore that idea more in depth as regards a possible ongoing power struggle that can be seen if you dig a little below the surface.

We noted that there is a strong effort being made by what we will call the developing or emerging nations to gain more say at the IMF and other global institutions. In 2010 reforms that would give the BRIC nations a voting voice were introduced. But they have not been passed by the US Congress yet. I found this interesting article that goes into this issue from the perspective of those who feel their interests are not represented well enough under the present power structure.

Let's note this paragraph in the article linked above:

"The failure so far of the US Congress to ratify the IMF reform package agreed to by G-20 finance ministers and central-bank governors in 2010 is the latest breach of trust one that makes the promise of adequate representation for emerging economies seem like a shell game. America’s unwillingness or inability to ratify the package – which includes doubling the IMF’s funding quota and shifting 6% of the new total, together with two directorships, to developing countries – undoubtedly contributed to the decision by the BRICS (Brazil, Russia, India, China, and South Africa) to establish their own development bank."

Most people don't follow things like this and probably have their eyes glaze over when you start talking about it. They just don't see how any of this would matter to them. But if you understand the depth of the bitterness building around the world against the US and western nations at the IMF, you realize that all this is leading to things that could cause BIG changes in the global monetary system. One way or another. And it will eventually impact us all quite directly.So we need to learn and try to understand.

These developing/emerging nations have lost patience with the US and the IMF. They feel the big financial crisis that hit the world a few years ago was started by us. And then our FED bailout has caused the US dollar and US bonds to lose value and become higher risk to hold. Meanwhile, they are told that we understand how they feel and we want them to have more say about things at the IMF. But time goes on and nothing changes. 

This leads to a natural reaction. When ignored, people move on and start thinking about protecting their own interests first. As pointed out in the article I linked above, the eastern world has decided if we are going to ignore them and don't care how actions by our FED hits them, they will just start working on ways to bypass us and go it alone. They have been making new trade deals excluding the US dollar. As noted in the article, they have setup their own version of a "World Bank". They are buying gold in record amounts. They are taking US bonds in their reserves and buying up tangible assets all over the world. They are slowly but surely positioning themselves to tell us to go jump in the lake when they no longer need our US dollars. 

There is a popular (and I think somewhat arrogant) attitude in the West that goes something like this. The BRIC nations don't have the nerve to leave the dollar. It would cause them to take a huge hit on our bonds that they hold. So we kind of have them held financial hostages. 

Maybe that has been true in the past, but they are tired of being treated like hostages. Just this week we have seen how one little US FED announcement of further tapering has clobbered currencies all over the emerging world. India is not happy about it.  Lots of other nations agree. At some point they will get pushed too far. They may make a calculation that whatever hit they take is worth getting free of our dollar risk. There is a reason they have been working all these years to bypass us. There is reason they are buying gigantic quantities of gold. 

All this is why we think major monetary system change is coming, one way or another. Either by mutual agreement to make major changes in the system (that everyone will feel around the world) or by disorderly, uncontrolled change when the current system breaks down due to overwhelming debt loads. 

This is why trying to guess timing on this is so tricky. In some scenarios, change might take place in a more controlled orderly fashion. It might happen over a period of years. In other scenarios (things break down and its everyone for themselves), change might come very quickly and probably very unpleasantly. There will be winners and losers no matter how it happens.

It's why we have this blog. It's why it is important for all of us to follow this issue and try to understand. It is not nearly as much fun as the Super Bowl for sure. But it is going to impact us a lot more than who wins this year (Denver is my choice). We'll keep an eye on it here as best we can for as long as it takes (unless Google decides to close down Blogspot :)

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