China Leads Global Credit Reform

The one thing that needs to be now remembered in our evolving dealings with China is that the country is now operated by political elites trained in the west and imbued with our ideas and responsive to what has worked in the past for us. They are naturally allergic to ideology considering the joys of Communism.

We on the other hand still tolerate and even sometimes elect political ideologues who are eager to denigrate the successes of their opponents in order to advance oft times incredible folly.

Recently these fools have attempted to downgrade the Reagan revolution in tax management in order to replace it with a terrible leftist agenda. It is as if they think we can support social programs by strangling the countries income. That our own leadership will turn over success is appalling.

What the credit crisis of 2008 proved is that the USA cannot be trusted to properly manage a global reserve currency. This was already obvious, but the crash ripped it apart. It is now necessary to unwind the role of the US dollar as the primary reserve. The cost will be borne to some degree by all, but the US in particular will be experiencing a new set of rules.

Expect the Chinese to attempt to create a better system. Let us wish them good fortune. The globe cannot tolerate another round of fast credit expansion as the last one in which available credit out stripped the supply of creditworthy customers.

Credit granting must be a conservative modestly profitable business. Add a point of profit and you accept ten additional points of risk. This is risk that cannot be escaped with mathematical modeling or even luck. It also takes an extraordinary mindset to preserve capital in the face of success.

You can appreciate my dismay when the investment banking crowd got loose in the banking industry a decade ago. History shows it cannot work and my own personal experience in the securities industry showed the same result. You can rest assured that the young Turks made sure the old hands were kept out of the credit kitchen. Yet that is always the way.

The challenge now is to see if it can be made to work a lot better.




September 3, 2009, 11:29 PM ET

China Starts Journey to New Reserve Currency

http://blogs.wsj.com/chinajournal/2009/09/03/china-starts-journey-to-new-reserve-currency/


China began the long journey to a new international reserve currency with a single step - agreeing to buy $50 billion in notes from the International Monetary Fund.

Another proverb, less distinguished than a quote from Daoist philosopher Laozi, also applies here: China put its money where its mouth is.

After calling for a super-sovereign reserve currency to replace dependence on any national currency, China’s leaders have made a concrete commitment toward achieving that far-in-the-future goal.

The IMF announced Wednesday that China had signed an agreement to buy $50 billion in notes denominated in Special Drawing Rights, the IMF synthetic asset which China favors as an alternative to the dollar as the world’s reserve currency. It’s the first such agreement in the history of the IMF.

The news didn’t come as a surprise, as China’s intention had been announced in June. It didn’t have a noticeable impact on markets because immediate foreign-exchange-rate effects are negligible.

Nevertheless, the formal signing of China’s agreement with the IMF is a significant development, albeit at the long-term policy level.

“The IMF’s relevance has returned in light of the financial crisis and this transaction represents a new way forward for the IMF to obtain funding,” wrote Gareth Berry, a currency strategist at UBS in London, in an email note.

Moreover, the purchase of IMF notes gives China the opportunity to increase its influence within the IMF, where it still holds disproportionately small voting power, Berry noted.

With Russia and Brazil on tap to buy similar IMF notes to the tune of $10 billion each, that gives the IMF about a quarter of the $283 billion it needs for SDR reserves. Early this week, the IMF said it had allocated $250 billion and another $33 billion would be added on Sept. 9.

This will increase the outstanding stock of SDRs to the equivalent of $317 billion. If the IMF were a country, it would have the fifth largest foreign-exchange reserves in the world, lagging slightly behind Taiwan but ahead of India.

In a statement on its Web site, the IMF said the agreement will “boost the Fund’s capacity to help its membership - particularly the developing and emerging market countries - weather the global financial crisis, and facilitate an early recovery of the global economy.”

So in one fell swoop, China has accomplished several things. It has shown that it’s serious with its push for reform of the international financial system. It has given SDRs more prominence than ever before. At the same time, it has found a safe parking place for a tiny part of its more than $2 trillion in reserves, one that doesn’t depend directly on the dollar or U.S. government debt.

Perhaps most importantly, China has demonstrated yet again it has considerable clout at the loftiest levels and isn’t afraid to use it in a constructive fashion. It’s backing its rhetoric with $50 billion in action.

–Robert Flint

Universal Currency

I must admit that I am conflicted when the idea of a universal currency is drummed by those who think a trend is inevitability. Our understanding is not good enough and our institutions are also possibly incomplete. Besides, the recent crisis has seen one financial center take leave of their senses and recreate the precise conditions that led directly to the great Depression. We are surviving the event only because the global financial system is way more robust than in 1929 and governments stepped up immediately to replace the losses to prevent massive forced sales of loans.

I think that the Euro system is sort of doing all right in its approach but I am not sure it has been truly stressed as the US has been. I have not checked, but somehow all the panic has ended in the eastern states that were most vulnerable. Meanwhile, California is left holding the bag today, and must establish its version of a state bank in order to put its fiscal house in order because the Eastern establishment is patently treating it like
Bolivia or worse is simply ignoring them.

I am beginning to think that a universal currency is possibly a good idea but that a distributed federal reserve system is also a very good idea. Such a system would have legislated governors on their behavior and their regionality would force global players to break up their offerings. Somewhere there is a proper system of natural checks and balances able to fend of individual greed and duplicity.

I am becoming less and less enamored with huge centralized organizations which create an umbrella for hundreds of independent fiefdoms who hunker down and are effectively no longer accountable to anyone. I have a lot of respect for the way GE has managed its 600 plus divisions. They have done it better than anyone. I would be even happier if GE spun out majority control of each such division. It would abruptly convert from a 900 pound gorilla to a dynamic 900 pound gorilla simply because every division would attract PR that solidifies business.

The fact is that centralization becomes weakness. GE was damaged last year only because its finance division faced a drought of cheap money. That I am sure is long since remedied.


Towards a Global Currency?
Towards the integration of the Dollar and the Euro?

By Michel Chossudovsky

URL of this article: www.globalresearch.ca/index.php?context=va&aid=14461

Global Research, July 20, 2009

With a view to restoring financial stability, World leaders have called upon the Group of 20 countries (G-20) to instigate a new global currency based on the IMF's Special Drawing Rights (SDRs). The media has presented the global currency initiative as a consensus building process, in which BRIC countries (Brazil, Russia, India and China) would participate in the revamping of the international monetary system.

Russia and China have put forth "proposals" which have been highlighted as possible alternatives to the dollar. China has proposed the formation of a new global currency based on a reform of SDR system:

"It is a feasible plan to reform the present SDR and make it into a real settlement currency, a universally accepted 'currency basket' that would replace the dollar at the heart of the monetary system," (Li Ruogu, chairman of the Export-Import Bank of China, Reuters, 6 July 2009)

China's proposal does not imply a major shift in global banking arrangements, nor does it open up a window of debate regarding monetary reform.

On the other hand, Russian President Dmitry Medvedev has explicitly questioned the composition of the SDR basket and has called upon the IMF "to expand the currency basket of SDRs to include the Chinese yuan, commodity currencies and gold in order that it matures into a reserve currency."

GeopoliticsGlobal Geopolitics bears a relationship to the international monetary system. Control over money creation is an instrument of economic conquest. The invasion and occupation of Iraq was to exclude rival Russian and Chinese interests from the Middle-East and Central Asian oil fields. The reform of the international monetary system is a project of the dominant financial elites, which is discussed behind closed doors. It is unlikely that Russia and China, which in large part remain subordinate to Western banking interests, will perform a significant role in central banking functions at a global level. Moreover, this initiative occurs at a time of East West confrontation, amidst veiled US-NATO threats directed against Russia as well China. The establishment of a new global currency and central banking system is an instrument of global economic domination which is intimately related to the broader US-NATO military agenda.

While the SDR basket composition could be modified or revised, it is unlikely that the Yuan and the Ruble would be allowed to perform a role as major reserve currencies. What is more likely to occur is the formation of a global proxy currency predicated largely on the Euro and the US dollar. In response to the Dollar-Euro hegemony, Russia, China and the member states of the Shanghai Cooperation Organization (SCO) may decide to develop bilateral trading arrangements in Rubles or Yuan (renminbi).

Special Drawing Rights

SDRs are a composite accounting unit used by the IMF and the World Bank in loan agreements with member countries. The SDR is a basket of essentially four major currencies: the US dollar, the Euro, the British pound and the Japanese Yen.

The IMF has recently presented a plan for issuing debt denominated in SDRs rather than US dollars. The media has heralded this decision as a major innovation, when in fact the Bretton Woods institutions have, for many years, been issuing debt denominated in SDRs.

"Today, the SDR has only limited use as a reserve asset, and its main function is to serve as the unit of account of the IMF and some other international organizations. The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members." (IMF Fact Sheet on SDRs)

What would happen if a new global currency were to be devised using the existing SDR framework?

SDRs would no longer be an accounting unit but a unit of currency in a basket. Actual central banking functions, however, would not necessarily be transferred to the IMF, they would remain in the hands of four constituent central banks: The US Federal Reserve, the European Central Bank based in Frankfurt, the Bank of England and the Bank of Japan. I

The IMF is a bureaucracy which serves the interests of major private financial institutions.

While the IMF would formally be responsible for overseeing a global currency, the IMF would not actually be responsible for monetary policy. Under the existing SDR composition, the central banking functions would be divided between four central banks. These central banks are in turn controlled by a handful of private banking interests.

A global currency based on the existing SDR arrangement would not fundamentally change the global monetary order.

The SDR would be a proxy currency. Under the present composition of the SDR, what we would be dealing with is an alliance between US, British, European and Japanese banking institutions, ultimately with the US dollar and the Euro predominating.

Euro-Dollar Rivalry

From the outset in 1999, there has been a clash between the Euro and the dollar. In Eastern Europe, the former Soviet Union, the Balkans extending into Central Asia, the dollar and the Euro are competing with one another. Ultimately, control over national currency systems is the basis upon which countries are colonized. While the U.S. dollar prevails throughout the Western Hemisphere, the Euro and the U.S. dollar are clashing in the former Soviet Union, Central Asia, Sub-Saharan Africa and the Middle East. Prior to the invasion of Iraq in March 2003, there was a political confrontation between the Franco-German alliance and the dominant Anglo-American military axis. With the election of pro-US governments in both France and Germany, a political consensus seems to have emerged with regard to the Middle East war. In turn, this consensus regarding the US-NATO military agenda favors greater cooperation and integration between the US and the EU in global financial and monetary affairs. Would this potential "alliance" between powerful overlapping American, British, European and Japanese banking interests lead to the integration of the Euro and the dollar into a single global currency? This integration would lead to reinforcing the hegemonic control of a small number of global banking and financial institutions over the process of money creation. This, in turn, would overshadow the functions of national central banks, encroach on the sovereignty of the Nation State and eventually lead to a new phase of the global debt crisis.

Global Reserve Banking

A timely essay out of China on the need to create a global reserve currency that is able to obviously discipline members. This a natural response to the crash and burn imposed by the US financial leadership and equally the European financial leadership. The built-in conflicts of the current regime make it unlikely that such will be led by the USA particularly. After all, global acceptance of the US dollar is what greased the current disaster. It has been the golden goose until everyone became insanely greedy.

China and India need to join forces and start the process moving. If they create a viable reserve currency situation and convince most other countries to participate outside of America and Europe, the momentum will be established and the real problem can then be addressed. That is how to retire the ocean of US currency now acting as the reserve currency.

Odds are it will then have a natural solution that everyone is happy with.

China and India today have the growing moral authority to pull this off and it will also enhance their growing stature as they consolidate their economic gains. They needed this market break as badly as the overheated US did. Their cooperation now would be massively beneficial to the global economy.


China: Time For a New Global Currency

Tuesday, March 24, 2009 8:21 AM

China is calling for a new global currency controlled by the International Monetary Fund, stepping up pressure ahead of a London summit of global leaders for changes to a financial system dominated by the U.S. dollar and Western governments.

The comments, in an essay by the Chinese central bank governor released late Monday, reflect Beijing's growing assertiveness in economic affairs. China is expected to press for developing countries to have a bigger say in finance when leaders of the Group of 20 major economies meet April 2 in London to discuss the global crisis.

Gov. Zhou Xiaochuan's essay did not mention the dollar by name but said the crisis showed the dangers of relying on one nation's currency for international payments. In an unusual step, the essay was published in both Chinese and English, making clear it was meant for an international audience.

"The crisis called again for creative reform of the existing international monetary system towards an international reserve currency," Zhou wrote.
A reserve currency is the unit in which a government holds its reserves. But Zhou said the proposed new currency also should be used for trade, investment, pricing commodities and corporate bookkeeping.

Beijing has long been uneasy about relying on the dollar for the bulk of its trade and to store foreign reserves. Premier Wen Jiabao publicly appealed to Washington this month to avoid any steps in response to the crisis that might erode the value of the dollar and Beijing's estimated $1 trillion holdings in Treasuries and other U.S. government debt.

The currency should be based on shares in the IMF held by its 185 member nations, known as special drawing rights, or SDRs, the essay said. The Washington-based IMF advises governments on economic policy and lends money to help with balance-of-payments problems.

Some economists have suggested creating a new reserve currency to reduce reliance on the dollar but acknowledge it would face major obstacles. It would require acceptance from nations that have long used the dollar and hold huge stockpiles of the U.S. currency.

"There has been for decades talk about creating an international reserve currency and it has never really progressed," said Michael Pettis, a finance professor at Peking University's Guanghua School of Management.

Managing such a currency would require balancing the contradictory needs of countries with high and low growth or with trade surpluses or deficits, Pettis said. He said the 16 European nations that use the euro have faced "huge difficulties" in managing monetary policy even though their economies are similar.

"It's hard for me to imagine how it's going to be easier for the world to have a common currency for trade," he said.

China has pressed for changes to give developing countries more influence in the IMF, the World Bank and other finance bodies. G20 finance officials issued a statement at their last meeting calling for such changes but gave no details of how that might happen.

Russia also has called for such reforms and says it will press its case at the London summit.

Zhou said the new currency would let governments manage their economies more efficiently because its value would not be influenced by any one nation's need to regulate its own finance and trade.

"A super-sovereign reserve currency managed by a global institution could be used to both create and control global liquidity," Zhou wrote. "This will significantly reduce the risks of a future crisis and enhance crisis management capability."

Zhou also called for changing how SDRs are valued. Currently, they are based on the value of four currencies - the dollar, euro, yen and British pound.

"The basket of currencies forming the basis for SDR valuation should be expanded to include currencies of all major economies," Zhou wrote. "The allocation of the SDR can be shifted from a purely calculation-based system to one backed by real assets, such as a reserve pool, to further boost market confidence in its value."