Sunday, March 30, 2014

Christine Lagarde's speech to Chinese University Students

China is big key to whatever happens with monetary system change as we go forward. In recent years China has been carrying a lot of the load for global GDP growth. Recently IMF Director Christine Largarde was in China and delivered a speech to college students there. We can look at a few parts of this speech and make some observations related to monetary system change.

We will select a few quotes from her speech and make some comments in bold type below each quote. Then we will make a few concluding remarks.

"1. The New 21st Century World 
Two defining features of today's new global economy are the rise of Asia and the power of interconnections.
Less than fifty years ago, the emerging markets and developing countries accounted for less than a quarter of global GDP. Today, it is half and rising rapidly—very likely to two-thirds of global GDP within the next decade."
Here we see why China and the BRIC nations want more influence and voting power at the IMF. When the IMF was setup China (and Asia) were only contributing 25% or less of  global GDP. The IMF quota system is supposed to be based on how much various nations contribute to the global economy. Over time the Asian share has risen to 50% and is expected to climb to 65% within 10 years according to Lagarde. This is why the BRIC's (led by China) are unhappy with the current IMF quotas (voting power and borrowing power).  In their view, if they are carrying this much of the load, they should be getting more say at the IMF. 

"Just as this new global economy will continue to expand, it will also continue to draw closer together. Countries today are interconnected in ways that would have been unimaginable to your mothers and fathers when they were your age."
This is a constant theme for all supporters of global financial institutions. In their view the fact that countries are interconnected through trade and financial oblibations (they hold each others debt for example) is why they see a need for things like the IMF. A place where nations can meet to discuss differences rather than fight with each other.
"3.  The Importance of Global Citizenship
Which brings me to my third and last point—the importance of citizenship, especially global citizenship. In our fast-paced, interconnected world, success will depend, more than ever before, on recognizing our common challenges and our common hopes."
"Global Citizenship" ties in directly to the point made just above. Supporters of global institutions prefer to see the world as a "global community" rather than as a collection of individual sovereign nation states. They promote "global solutions" to "global problems".  This is where the IMF could become much more significant in the future if there is a new "global financial crisis". Jim Rickards points out that because the US FED is over extended now, there is no one left standing to try and deal with the next global crisis except the IMF. They have the only "clean balance sheet" left as he puts it. He thinks another crisis is coming (see his new book "The Death of Money") and that the IMF will step forward as the entity to deal with the crisis. This is what we keep an eye on here.

"I have called for a stronger form of international cooperation—a "new multilateralism" for the 21st century—to help us all adapt to this new world that is more interconnected, yet more dispersed in terms of power and decision-making. Increasingly, again as I have argued, a country’s own success will depend on how effectively it cooperates with others.

Christine Lagarde makes an appeal for global cooperation in most of her public speeches. This one is not an exception. Again, if the 2010 IMF reforms are not passed by the US Congress, the entire capacity of the IMF to function in a new global crisis is threatened. This is why it is so important to them and why they will not give up on it.
What we are watching to see is how long the BRIC nations will keep waiting on the reforms. At what point do they just move forward to create a regional financial system that just ignores the US dollar completely? Remember, they are projected to be 2/3's of global GDP in 10 years. That will dethrone the US dollar as sole reserve currency even if it does not happen at the IMF through a new global reserve currency.

Concluding remarks: 
It seems we are on somewhat of a collision course between a future as envisioned by the IMF (a world viewed as a "global community") versus a future where global cooperation breaks down and nation-states go their own way. 
In the IMF future, it becomes the new global "lender of last resort". It institutes a new global reserve currency modeled around its SDR when the next crisis arises. It may very well use a cryptocurrency that will circulate alongside national currencies to tie the "internal SDR" to an "external currency" that can be used by the general public and Central Banks alike.
On the other hand, if the nations do not cooperate, all this might never happen. Instead things could break down to where there are major regional power blocs led by China/Asia, Russia/EU, and the US/Western Hemisphere. In this world they would compete with each other for global financial and political power. Currencies would also compete.
In either future, the US dollar loses its position as sole global reserve currency and the US has a lower economic status in the world than it has had in the last century. We would expect major monetary system change under either of the above scenarios.
The wild card is if something suddenly causes a systemic global financial collapse that is unplanned and uncontrolled. In that case, chaos would rule for a time while things got sorted out.
The next key event in this process we are watching is the G20 meetings in April in Washington DC. Here we will get our next hint as to whether the IMF vision of the future is going to move forward or not. What will the BRIC's do if there is not progress on the 2010 IMF reforms?

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