Friday, September 19, 2014

The Scotand Vote - What Does It Imply?

This NY Times article suggests it is about more than just one local vote for  independence. While results now indicate that Scotland will not vote to leave the UK, the desire for a vote at all (and the ability to get 46% of the voters to vote for independence) suggests a continuation of a global trend away from centralization of power. 

Recently, UK Independence Party got its largest vote ever. The vote was widely interpreted as UK voters unhappiness with the EU and its leaders. Spain is struggling with areas within its borders that would like a shot at an independence vote. Nearly 25% of Americans are in favor of thier state seceding from the United States.

In the US, the rise of the tea party reflected a desire to speak out against a more powerful centralized government. It changed the makeup of the Congress. It appears as though it may change even more this November in that direction. This Congress is far less supportive of things like the IMF 2010 reforms which would increase funding to the IMF and increase voting power to some BRICS nations. 

All of this indicates, as the NY Times article suggests, there is a growing trend of disatisfaction with the handling of things by the elites who run the centralized institutions of finance and government.  Here are some quotes from the article:

"When you get past the details of the Scottish independence referendum Thursday, there is a broader story underway, one that is also playing out in other advanced nations."

"It is a crisis of the elites. Scotland’s push for independence is driven by a conviction — one not ungrounded in reality — that the British ruling class has blundered through the last couple of decades. The same discontent applies to varying degrees in the United States and, especially, the eurozone. It is, in many ways, a defining feature of our time."

"The rise of Catalan would-be secessionists in Spain, the rise of parties of the far right in European countries as diverse as Greece and Sweden, and the Tea Party in the United States are all rooted in a sense that, having been granted vast control over the levers of power, the political elite across the advanced world have made a mess of things."

"What distinguishes the current moment is that discontent with the way things have been going is so high as to test many people's tolerance for the governing institutions as they currently exist."
My added comment: 

So what does this have to do with the future of the monetary system?
Maybe a lot. One thing that is clear from the articles we have covered on this blog since it began is that the powers that be who run the current system do have a plan for the future. That plan certainly does not include a break up of the current system into a hodge podge of decentralized entities. Notice how fearful they were that Scotland might vote yes.

While the assumption by most people is that the current global institutions will remain powerful and probably only increase in power in the future, this is by no means a certainty. All these trends noted in the NY Times article are clear evidence the people can become so frustrated and disillusioned that they just reject centralized institutions in general. At some point after decades of poor growth, exploding debt, and high unemployment, people get fed up and simply don't trust their leaders any more.

All of this comes into play when trying to make some kind of projection for the future, including the future of the monetary system. Let's take 3 different scenarios:

1- Things stay pretty much on the current path where a slow and steady transition from the monetary system we have had for decades now morphs into a new more global one over time. The US dollar based system gives way over time to a more balanced array of currencies. The Yuan and the Euro become more influential. Eventually, a globally used currency (the SDR for example) takes over. Perhaps the SDR is even connected to the Klickex GSD for use by individuals some day. All of this assumes the existing centralized institutions (Central Banks, the IMF, the BIS, etc) retain their positions of control and influence and the confidence of most people. The process unfolds over anywhere from 5 to 20 years slowly and steadily.

2- A sudden new global financial crisis arises. The existing centralized financial institutions (the IMF, BIS, World Bank, Central Banks, etc) spring into rapid response mode. They do this in order to maintain the system, but are forced to meet to change "the rules of the game" in a very short time frame. They manage to preserve the system and their role in it, but only after making significant major changes in a relatively short time frame. Perhaps they move to a global central bank (the IMF) and a global currency (the SDR, maybe gold backed to restore confidence) as Jim Rickards suggests. 

3- A sudden new global financial crisis arises. The existing centralized financial institutions try to mobilze quickly to deal with it. But because the public has turned against "centralized solutions" and institutions (they see them as the cause of the mess), they are unable to muster the political support to deal with the crisis. Instead of an increased centralization of the system, it breaks down into decentralized factions with no one centralized authority. These institutions suffer a massive loss of credibility and influence. The existing monetary system disintegrates into an unknown future.

All of these 3 are very possible scenarios. And the last one becomes more probable if the trend noted in this NY Times article keeps growing. There is a lot at stake for all concerned if a new global financial crisis does happen (as Jim Rickards and others predict). Will the people willingly accept a centralized solution from the current global institutions or will they blame them for the mess? Does that lead to a breakup of the current power structure into decentralized regions and zones or a new global bank and currency? 

If Scenario #1 is what happens, it is likely that most people will be content to allow the current institutions to handle things. People don't react that much to slow change where their lives are not disrupted in a noticeable way. But if we get two major global financial crisis within a decade, these movements for independence suggests people may just decide they have had enough. It's a very big unknown and just another piece of the puzzle to consider. In a complex system, it is impossible to predict future results with certainty.

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