The Evolution of Credit
After fifty-one years from the end of the Bretton Woods Agreement, the system of fiat currencies appears to be moving towards a crisis point for the US dollar as the international currency. The battle over global energy, commodity, and grain supplies is the continuation of an intensifying financial war between the dollar and the renminbi and rouble.
It is becoming clear that the scale of an emerging industrial revolution in Asia is in stark contrast with Western decline, a population ratio of 87 to 13. The dollar’s role as the sole reserve currency is not suited for this reality.
Commentators speculate that the current system’s failings require a global reset. They think in terms of it being organised by governments, when the governments’ global currency system is failing. Beholden to Keynesian macroeconomics, the common understanding of money and credit is lacking as well.
This article puts money, currency, and credit, and their relationships in context. It points out that the credit in an economy is far greater than officially recorded by money supply figures and it explains how relatively small amounts of gold coin can stabilise an entire credit system.
It is the only lasting solution to the growing fiat money crisis, and it is within the power of at least some central banks to implement gold coin standards by mobilising their reserves.
Evolution or revolution?
There are big changes afoot in the world’s financial and currency system. Fiat currencies have been completely detached from gold for fifty-one years from the ending of the Bretton Woods Agreement and since then they have been loosely tied to the King Rat of currencies, the dollar. Measured by money, which is and always has been only gold, King Rat has lost over 98% of its relative purchasing power in that time. From the Nixon Shock, when the Bretton Woods agreement was suspended temporarily, US Government debt has increased from $413 bn to about $30 trillion — that’s a multiple of 73 times. And given the US Government’s mandated and other commitments, it shows no signs of stabilising.
This extraordinary debasement has so far been relatively orderly because the rest of the world has accepted the dollar’s hegemonic status. Triffin’s dilemma has allowed the US to run economically destructive policies without undermining the currency catastrophically. Naturally, that has led to the US Government’s complacent belief that not only will the dollar endure, but it can continue to be used for America’s own strategic benefits. But the emergence of rival superpowers in Asia has begun to challenge this status, and the consequence has been a financial cold war, a geopolitical jostling for position, particularly between the dollar and China’s renminbi, which has increased its influence in global financial affairs since the Lehman crisis in 2008.
Wars are only understood by the public when they are physical in form. The financial and credit machinations between currency-issuing power blocs passes it by. But as with all wars, there ends up a winner and a loser. And since the global commodity powerhouse that is Russia got involved in recent weeks, America has continued its policy of using its currency status to penalise the Russians as if it was punishing a minor state for questioning its hegemonic status. The consequence is the financial cold war has become very hot and is now a commodity battle as well.
Bringing commodities into the conflict is ripe with unintended consequences. Depending how the Russians respond to US-led sanctions, which they have yet to do, matters could escalate. In the West we have comforted ourselves with the belief that the Russian economy is on its uppers and Putin will have to either quickly yield to sanctions pressures, or face ejection by his own people in a coup. But that is a one-sided view. Even if it has a grain of truth, it ignores the consequences of Putin’s military failures on the ground in Ukraine so far, and his likely desperation to hit back with the one non-nuclear weapon at his disposal: Russia’s commodity exports.
He may take the view that the West is damaging itself and little or no further action is required. And surely, the fact that China has stockpiled most of the world’s grain resources gives Russia added power as a marginal supplier. Putin can afford to not restrict food and fertiliser exports, blaming on American policy the starvation that will almost certainly be suffered by all non-combatant nations. He could cripple the West’s technology industries by banning or restricting exports of rare metals which are of little concern to headline writers in the popular press. He might exploit the one big loophole left in the sanctions regime by supplying China with whatever raw materials and energy it needs at discounted prices. And China could compound the problem for the West by restricting its exports of strategic commodities claiming they are needed for its own manufacturing requirements.
While everyone focuses on what is seen, it is what is not seen that is ignored. Commodities are the visible manifestation of a trade war, while payments for them are not. Yet it is the flow of credit on the payment side where the battle for hegemonic status is fought. The Americans and their epigones in Europe have tried to shut down payments for Russian trade through the supposedly independent SWIFT system. And even the Bank for International Settlements, which by dealing with both Nazi Germany and the Allies retained its neutrality in the Second World War, is siding with the West today.
But step back for a moment to look at how broadly based the West’s position is in a global context, because that will be a factor in whether the dollar’s hegemony will survive this conflict. We see America, the EU, Japan, the UK, Canada, Australia, and New Zealand on one side. In population terms that’s roughly 335, 447, 120, 65, 38, 26 and 5 million people respectively, totalling 1,036 million, only 13% of the world population. This point was made meaningfully by the Saudis who now want to talk with Putin rather than Biden. As long ago as 2014, this writer was informed by a director of a major Swiss refinery that Arab customers were sending LBMA 400-ounce bars for recasting into Chinese four-nine one kilo bars. The real money saw this coming at least eight years ago.
Even if the US’s external policies do not end up undermining the dollar’s global status, it is becoming clear that the King Rat of currencies is under an existential threat. And the Fed, which is responsible for domestic monetary policies, in conjunction with the Biden administration is undermining it from the inside as well by trying to manage a failing US economy by accelerating its debasement.
A betting man would therefore be unlikely to put money on a favourable dollar outcome. Whether the dollar suffers a crisis or merely an accelerated decline, just as Nixon changed the world’s monetary order in 1971 it will change again. That the current situation is unsatisfactory is widely recognised by multiple commentators, even in America, calling for a financial and currency reset. And it is assumpted that the US Government and its central bank should come up with a plan.
There are two major problems with the notion that somehow the deck chair attendant can save the ship from sinking by rearranging the sun loungers. The first error is insisting that money is the preserve of only the state and is not to be decided by those who use it. It was the underlying fallacy of Georg Knapp’s State Theory of Money published in 1905. That ended with Germany printing money to arm itself in the hope that it would win: it didn’t and Germany ended up destroying its papiermark.
The second error is that almost no one understands money itself, as evidenced by the whole financial establishme
Article from LewRockwell