MD: The Mises Monks are always great fodder for illustrating the spread of confusion and delusions as to what money “really” is. Let’s dissect this one.

One of history’s greatest ironies is that gold detractors refer to the metal as the barbarous relic. In fact, the abandonment of gold has put civilization as we know it at risk of extinction.

MD: How’s that for an opening line? The Monks never disappoint. “Greatest Ironies”; “gold detractors”;” barbarous relic”: Yet they never seem to be able to tell us what money really is. But this may be going too far. Removing “gold” will “risk extinctions”?

Gold’s main use is in jewelry and plating electrical contacts. Once used to fill teeth, it’s been a very long time since gold was used for that (except for Negros who use it to decorate their faces.) And in no lifetime of anyone living today has gold served as money. And silver ceased serving as money in 1965…almost 10 years before Nixon declared the obvious…that the so-called gold backing of the dollar was a giant fiction…a fraud on which the French called them out.

The only risk to extinction was use of mercury amalgamating silver to fill teeth. It was shown to be poison…like lead in paint and gasoline. Precious metals have never been money. They are just clumsy expensive stand-ins for what money really is…”a promise”. And what do these Monks call real money? They call it “fiat money”…and make it a derogatory slur. Since when is a “promise” derogatory. Let’s continue.

The gold coin standard that had served Western economies so brilliantly throughout most of the nineteenth century hit a brick wall in 1914 and was never able to recover, or so the story goes. As the Great War began, Europe turned from prosperity to destruction, or more precisely, toward prosperity for some and destruction for the rest. The gold coin standard had to be ditched for such a prodigious undertaking.

MD: Served economies “brilliantly”? Economic panics were as regular then as pandemics are becoming today. And in 1913 (a year before this so-called brick wall), the Federal Reserve Act began to plague us with the money we have today…a money that States freely counterfeit…and that money-changers collect interest on…and that both manipulate to deliver the so-called “business cycle”. “Prodigious undertaking”? Oh please!

If gold was money, and wars cost money, how was this even possible?

MD: A Mises Monk might be close to getting something right here. You can’t support a war if you can’t pay for it. And if gold is money…with only about one ounce per person on Earth (less than $2,000)…you’re not going to support war with gold. But you can by counterfeiting. They claim Lincoln did this to finance the USA Civil War in the 1860’s…and that’s correct. But when that counterfeit money (Greenbacks) was paid back, it ceased to be counterfeit. It “proved” to be “real” money. That hasn’t happened with any war since. The State just rolls its counterfeit money over by taking out new loans to pay off the old.

First, people were already in the habit of using money substitutes instead of money itself—banknotes instead of the gold coins they represented. People found it more convenient to carry paper around in their pockets than gold coins. Over time the paper itself came to be regarded as money, while gold became a clunky inconvenience from the old days.

MD: Well, the Monks being right didn’t last long did it? Here at Money Delusions we know money is an “in-process promise to complete a trade spanning time and space”. It is only created by traders like you and me. It begins as a ledger entry…open to all to see. And it ends with delivery on the promise and reversal of that ledger entry documenting the promise…again for all to see. In the interim it may remain a ledger entry; it may become a “demand deposit” (i.e. check); it may become a paper chit (currency); it may become a token (a coin). As such, it becomes the most common object of every simple barter exchange. But in the end it becomes a reversing entry in a ledger and is extinguished forever…for that trading promise. And if the promise is broken (defaulted) an “interest collection” of like amount is immediately made to recover the “orphaned” money. This guarantees perpetual perfect balance of supply and demand for the money itself…and thus zero “inflation”.

Second, banks had been in the habit of issuing more bank-notes and deposits than the value of the gold in their vaults. On occasion, this practice would arouse public suspicion that the notes were promises the banks could not keep. The courts sided with the banks and allowed them to suspend note redemption while staying in business, thus strengthening the government-bank alliance. Since the courts ruled that deposits belonged to the banks, bankers could not be accused of embezzlement. The occasional bank runs that erupted were interpreted as a self-fulfilling prophecy. If people lined up to withdraw their money because they believed their bank was insolvent, the bank soon would be. People had no idea their banks were loaning out most of their deposits. They did not know fractional reserve banking, a form of counterfeiting, was the norm.

MD: That’s not a “habit”…it’s by design. Money-changers instituted the State. The State chartered the Banks (owned by the Money-changers)…and gave them a 10x leverage advantage over traders like you and me. And when those scoundrels abused even that enormous privilege, the State they created defended them…as designed. It’s not a government-bank alliance. The State is a “creation and tool” of the Money-changers. And the State fiction of Laws sealed the deal. They pass one law that dilutes the golden rule and bammo…everything else that isn’t against the law (but violates the golden rule) is suddenly legal. And that obvious problem created here brings us 40,000 new laws each year…trying to put the Genie back in the bottle…trying to make us comply with that one simple golden rule.

And why didn’t the people know this was going on? Because there was “secrecy” in banking. Money requires “authentication” of the trader creating it and “transparency” of the promise to all lookers. And “defaults” are evident to all lookers “immediately”…and immediately mitigated by “interest collections” of like amount.

Here again, the Monks get close to saying what’s going down. Money “is” fiat…and that’s good. It’s what makes it so efficient in trade. But a “real” money process gives “no” trader an advantage…not even the Money-changers; their States; or their Banks. In this context, the “fraction” is not 10x…but rather infinite to the trader. And there is no reserve. Unlike a water well, you don’t have to prime the pump. But if you don’t replace the water you pump, you don’t get to pump again…until you replace that water. Lots of metaphors going on here.

Gold coin redemption requirements put limits on fractional reserve banking. Such limits were not welcomed by banks. Since banks could loan to the government, limitations also capped government spending, so the government did not like the limitations of gold coin redemption either.

MD: What “coin redemption requirements”? They were always a fiction. Gold coins were never used in my lifetime. And silver coins quit being used in 1964…and changed nothing in the behavior of traders… proving that precious metal was not money. Rather, it was the “token” that was money. At the same time, the paper money which said “Silver Certificate” changed to saying “Federal Reserve Note”…and as far as traders like you and me were concerned, nothing changed.

We never asked for the silver promised by those certificates. We had no use for it. It weighed too much and was too bulky. But for non-traders, the change was large. These non-traders are called “investors”. They’re really just gamblers. And they immediately gobbled up all the silver. You can now buy it on eBay (google “Silver Roosevelt Dimes 90% Junk Constitutional Circulated *Guaranteed Cheapest!”). It sells for (i.e. trades for) $4.50 for 10 dimes…dimes that used to trade for two candy bars…before State counterfeiting withered the dollar to its current condition.

And “government limitations”? Does anyone really believe there is such a thing as a government limitation? All governments are by their very definition “unlimited”!

Which brings us to the wall gold allegedly hit.

Preparing for War Means Preparing for Inflation

In his 1949 book, Economics and the Public Welfare, economist Benjamin Anderson tells us, “the war [in 1914] came as a great shock, not only to the masses of the American people, but also to most well-informed Americans—and, for that matter, to most Europeans.” And yet, Germany, Russia, and France began accumulating gold prior to the war (with Germany starting first in 1912). Gold was taken “out of the hands of the people” and carried to the reserves of the Reichsbank, the German central bank. People were given paper notes “to take the place of gold in circulation.”

MD: It goes all the way back to the Battle of Waterloo! … and for all time before that! All wars are “bankers” wars (i.e. money-changer wars). And if they had a “real money process” back then, they could have taken up all the gold they wanted. Traders had no use for it. There are no “reserves” in a real money process. It’s promises with which we deal. The only thing that can destroy a promise is to destroy the record of the promise…or destroy the person who made the promise. And a “real money process” mitigates such contingencies with “interest collections of like amount.” It’s simple arithmetic. Who pays the interest? Only traders who have a propensity to default pay it. And those traders have to work that much harder if they want to continue to trade at all, because once the defaults get too large, the marketplace ostracizes them.

When war broke out in August 1914, Gary North explains that the pre–World War I policy of gold coin redemption was

independently but almost simultaneously revoked by European governments. . . . They all then resorted to monetary inflation. This was a way to conceal from the public the true costs of the war. They imposed an inflation tax, and could then blame any price hikes on unpatriotic price gouging. This rested on widespread ignorance regarding economic cause and effects regarding monetary inflation and price inflation. They could not have done this if citizens had possessed the pre-war right to demand payment in gold coins at a fixed rate. They would have made a run on the banks. Governments could not have inflated without reneging on their promises to redeem their currencies for gold coins. So, they reneged while they still had the gold. Better early contract-breaking than late, they concluded.

MD: Earth to Monks. You just made our case. You’ve shown that precious metals are no cure to State deviance and malfeasance. A “real money process” has no State sponsorship. It has no Money-changer sponsorship. It has only trader and their marketplace sponsorship. And it depends on “authenticating” the trader and “accounting” for the trader’s promises. By the classical triple “A”s of trade: (1) Authentication; (2) Authority; (3) Accounting; all “responsible” traders (i.e. those with no propensity to default) have equal “authority” to create money. Those with non-zero propensity to default pay insurance “premiums” which are called “interest collections”. And they’re not arbitrarily set in the smokey rooms of LIBOR . They always equal “defaults incurred”. I’ve always wondered why banks always tell us the “prevailing interest”…but never show us the “prevailing defaults”. Now I no longer wonder. It enables their “business cycle”. It enables the “front running”of economic perturbations they themselves cause by “throttling” the money supply …supposedly in the interest of controlling inflation (which they cause) and maintaining full employment (which they can’t control at all).

If governments had not broken their promise to redeem paper notes for gold coins, they would have had to negotiate their differences rather than engage in one of the deadliest wars in history. Abandoning the gold coin standard, which had always been under government control, was the deciding factor in going to war.

MD: Duh! How about we do an “iterative secession”. How about we do without government altogether.

Though the US did not formally abandon gold during its late participation in the war, it discouraged redemption while roughly doubling the money supply. Blanchard Economic Research discusses the situation in “War and Inflation”:

MD: If gold is money, how did they “double” the money supply? These Monks are beyond stupid. In a “real money process”, you can only double money supply by doubling trader promises. And traders don’t make promises they can’t see clear to delivering. But get rid of government and the money-changers that create it and bammo…a doubling of trade would be minuscule.

War also causes the type of inflation that results from a rapid expansion of money and credit. “In World War I, the American people were characteristically unwilling to finance the total war effort out of increased taxes. This had been true in the Civil War and would also be so in World War II and the Vietnam War. Much of the expenditures in World War I, were financed out of the inflationary increases in the money supply.”

MD: When it comes to money, there’s only one type of inflation. That is when supply exceeds demand for the money itself. And this is impossible in a “real money process”. And as we pointed out earlier, the Civil War was different from all following wars. The Greenbacks were “all” recovered (“Greenbacks then became freely convertible into gold“)

Governments had a choice to make: fight a long, bloody war for specious reasons, or retain the gold coin standard. They chose war. US leaders found their decision irresistible. It was not J.P. Morgan, Woodrow Wilson, Edward Mandell House, or Benjamin Strong who would be fighting in the trenches.

MD: Wars happen when the money-changers’ “economic hitmen” fail. See “The New Confessions of an Economic Hitman” by Perkins.

When we hear that “going off gold” was the prerequisite for global peace and harmony, we should remember places such as the Meuse-Argonne American Cemetery in France, where grave markers seemingly extend to infinity. These are mostly the graves of young men who died for nothing but the lies of politicians and the profits of the politically connected. Gold wanted no part in the slaughter. But politicians and bankers knew a paper fiat standard was the monetary prerequisite to achieving their goals.

MD: Every time I ask one of the Mises Monks how you can use gold as money when there’s only one ounce per person on Earth? …i.e. less than $2,000…1/2 what someone at Home Depot makes in a month! The line goes dead.

Conclusion

John Maynard Keynes, who coined the term “barbarous relic” in reference to the gold standard, wrote about the world that was lost when gold was abandoned:

What an extraordinary episode in the economic progress of man that age was which came to an end in August, 1914! . . . The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep. . . . He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality, could despatch his servant to the neighboring office of a bank for such supply of the precious metals as might seem convenient, and could then proceed abroad to foreign quarters, without knowledge of their religion, language, or customs, bearing coined wealth upon his person, and would consider himself greatly aggrieved and much surprised at the least interference. But, most important of all, he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable.

If Keynes had read what he wrote, he might have been a better economist. And we might be living in a better world today.

MD: This is shades of the Red vs. Blue; The Donkeys vs. the Elephants; the Harlem Globe Trotters vs. the Washington Generals; the Keynesians vs the Mises Monks. You’re never going to solve a problem when you’re given two choices, both bad, and both controlled by a single non-choice. Such is democracy. Long live democracy.

Author:

George Ford Smith

George Ford Smith is a former mainframe and PC programmer and technology instructor, the author of eight books including a novel about a renegade Fed chairman (Flight of the Barbarous Relic), a filmmaker (Do Not Consent), and an advocate of stateless market government. He welcomes speaking engagements and can be reached at gfs543@icloud.com.

May 23, 2022May 9, 2023

Five Warning Signs The End Of Dollar Hegemony Is Near… Here’s What Happens Next

Five Warning Signs The End Of Dollar Hegemony Is Near… Here’s What Happens Next

https://www.zerohedge.com/geopolitical/five-warning-signs-end-dollar-hegemony-near-heres-what-happens-next

by Tyler DurdenSaturday, May 21, 2022 – 01:30 PM

Authored by Nick Giambruno via InternationalMan.com,

MD: This article is so typical of what we see coming out of ZeroHedge.com. These people actually believe what they write. As usual, we’ll dissect the article in place and expose the delusions. We’ve done it repeatedly before. The trouble is, they either will never get it…or the are an active part of the scam.

It’s no secret that China and Russia have been stashing away as much gold as possible for many years.

MD: And if they had a clue they wouldn’t be doing that. At the point where gold can have meaning in economics, the game is already over. There is only enough gold on the planet for each person to have less than 2 ounces…less than $4,000. If gold were actually the media of exchange, it would have to trade for a few orders of magnitude greater than that. And if it did, people would be digging up their own back yards looking for the stuff. It’s beyond stupid. Miners who actually know how to find and refine gold would become enormously wealthy, but could never create enough for the rest of us to use it in trade…i.e. as money.

China is the world’s largest producer and buyer of gold. Russia is number two. Most of that gold finds its way into the Russian and Chinese governments’ treasuries.

MD: Where it does absolutely nothing for the benefit of anyone.

Russia has over 2,300 tonnes—or nearly 74 million troy ounces—of gold, one of the largest stashes in the world. Nobody knows the exact amount of gold China has, but most observers believe it is even larger than Russia’s stash.

MD: Ok. Take that number. 74,000,000 ounces. Divide that by the 7 billion people on the planet. That comes to about 0.01 ounces per person on the planet. Times $4,000 per ounce you have $40. That’s 4 trips to McDonalds. Now what?

Russia and China’s gold gives them access to an apolitical neutral form of money with no counterparty risk.

MD: Counterparty risk? What does that have to do with anything. Money is an “in-process promise to complete a trade over time and space.” It is always, and only, created by traders like you and me. And it is always properly destroyed when we deliver as promised. In the mean time it circulates as the most common object of every simple barter exchange. It’s a record keeping problem…and a discipline problem if the trader fails to deliver as promised.

Remember, gold has been mankind’s most enduring form of money for over 2,500 years because of unique characteristics that make it suitable to store and exchange value.

MD: This stupid argument won’t even play in Peoria… let alone throughout the world.

Gold is durable, divisible, consistent, convenient, scarce, and most importantly, the “hardest” of all physical commodities.

MD: And here we have an open admission of ignorance about money. Durable isn’t an issue. An open record keeping system (e.g. ledger) is durable. Divisible? You can divide a number to any number of pieces you choose. If you buy a car by creating $70,000 in new money, that money can circulate as any denomination the marketplace requires. In the USA the smallest denomination is one cent…and most people won’t bend over to pick one up. Consistent? What does that mean? A promise is a promise. Delivery is delivery. What’s to be inconsistent? Convenient? What in the world is more convenient than a record keeping system? Create checks, currency, coins, … they’re just convenient place holders for what is recorded in the ledger. Scarce? This is the one that gets me most. The media of exchange should never be scarce. Quite the contrary, it should be in perpetual free supply. It should resist trade not at all. Hardest? As in harder than a Hershey bar? How ridiculous! And the one they left out…which is historically the biggest problem with any substitute for “real” money…it must be non-counterfeitable! And who is the biggest counterfeiter in “all” cases? Government!

In other words, gold is the one physical commodity that is the “hardest to produce” (relative to existing stockpiles) and, therefore, the most resistant to inflation. That’s what gives gold its superior monetary properties.

MD: Another open admission to stupidity. The money relation is: INFLATION = DEFAULT – INTEREST. Counterfeiting, the biggest cause of default not mitigated by interest collection, is the biggest source of inflation. It’s a very small fraction of traders who don’t deliver as promised. And when that happens, a “real money process” makes an immediate and equal interest collection of like amount. This guarantees that inflation will be perpetually zero.

Russia and China can use their gold to engage in international trade and perhaps back the currencies.

MD: Only as long as ignorance regarding real money prevails.

That’s why gold represents a genuine monetary alternative to the US dollar, and Russia and China have a lot of it.

MD: And of course there is no shortage of “stupid” people who think that matters. Real traders will “create” a “real money process” every time if not conflicted by the money-changers and the governments they institute. I’m now going to let him spew on as long he purveys the same ridiculous fiction. If he comes up with some new nonsense I’ll break back in.

Today it’s clear why China and Russia have had an insatiable demand for gold.

They’ve been waiting for the right moment to pull the rug from beneath the US dollar. And now is that moment…

This is a big problem for the US government, which reaps an unfathomable amount of power because the US dollar is the world’s premier reserve currency. It allows the US to print fake money out of thin air and export it to the rest of the world for real goods and services—a privileged racket no other country has.

Russia and China’s gold could form the foundation of a new monetary system outside of the control of the US. Such moves would be the final nail in the coffin of dollar dominance.

Five recent developments are a giant flashing red sign that something big could be imminent.

Warning Sign #1: Russia Sanctions Prove Dollar Reserves “Aren’t Really Money”

In the wake of Russia’s invasion of Ukraine, the US government has launched its most aggressive sanctions campaign ever.

Exceeding even Iran and North Korea, Russia is now the most sanctioned nation in the world.

As part of this, the US government seized the US dollar reserves of the Russian central bank—the accumulated savings of the nation.

MD: Oh I would so like to have Putin’s ear here. The best thing he could do is institute a “real money process” and use his gold to allay his doubters…he’d never have to touch any of it. In fact, I would like to see Elon Musk do it, rather than buy Twitter (that will bury him in criminal lawsuits should he succeed there).

It was a stunning illustration of the dollar’s political risk. The US government can seize another sovereign country’s dollar reserves at the flip of a switch.

MD: …until its counterfeiting is so obvious and egregious it deals itself out of the game all together.

The Wall Street Journal, in an article titled “If Russian Currency Reserves Aren’t Really Money, the World Is in for a Shock,” noted:

“Sanctions have shown that currency reserves accumulated by central banks can be taken away. With China taking note, this may reshape geopolitics, economic management and even the international role of the U.S. dollar.”

MD: Is anyone getting the dozen or so calls a day that I’m getting…from so-called investors who want to trade dollars for my real property? Why do that unless you know the dollars you hold are about to be worthless.

Russian President Putin said the US had defaulted on its obligations and that the dollar is no longer a reliable currency.

The incident has eroded trust in the US dollar as the global reserve currency and catalyzed significant countries to use alternatives in trade and their reserves.

China, India, Iran, and Turkey, among other countries, announced, or already are, doing business with Russia in their local currencies instead of the US dollar. These countries represent a market of over three billion people that no longer need to use the US dollar to trade with one another.

The US government has incentivized almost half of mankind to find alternatives to the dollar by attempting to isolate Russia.

MD: I vote for a competitive HUL (Hour of Unskilled Labor) based “real money process”. The HUL is valued today (i.e. trades for the same size hole in the ground) as it has for all time…recorded or otherwise.

Warning Sign #2: Rubles, Gold, and Bitcoin for Gas, Oil, and Other Commodities

Russia is the world’s largest exporter of natural gas, lumber, wheat, fertilizer, and palladium (a crucial component in cars).

It is the second-largest exporter of oil and aluminum and the third-largest exporter of nickel and coal.

Russia is a major producer and processor of uranium for nuclear power plants. Enriched uranium from Russia and its allies provides electricity to 20% of the homes in the US.

Aside from China, Russia produces more gold than any other country, accounting for more than 10% of global production.

These are just a handful of examples. There are many strategic commodities that Russia dominates.

In short, Russia is not just an oil and gas powerhouse but a commodity superpower.

After the US government seized Russia’s US dollar reserves, Moscow has little use for the US dollar. Moscow does not want to exchange its scarce and valuable commodities for politicized money that its rivals can take away on a whim. Would the US government ever tolerate a situation where the US Treasury held its reserves in rubles in Russia?

The head of the Russian Parliament recently called the US dollar a “candy wrapper” but not the candy itself. In other words, the dollar has the outward appearance of money but is not real money.

That’s why Russia is no longer accepting US dollars (or euros) in exchange for its energy. They are of no use to Russia. So instead, Moscow is demanding payment in rubles.

MD: Bingo. Game over for the Earth’s, and History’s, most egregious counterfeiter.

That’s an urgent problem for Europe, which cannot survive without Russian commodities. The Europeans have no alternative to Russian energy and have no choice but to comply.

European buyers must now first buy rubles with their euros and use them to pay for Russian gas, oil, and other exports.

This is a big reason why the ruble has recovered all of the value it lost in the initial days of the Ukraine invasion and then made further gains.

In addition to rubles, the top Russian energy official said Moscow would also accept gold or Bitcoin in return for its commodities.

“If they want to buy, let them pay either in hard currency—and this is gold for us… you can also trade Bitcoins.”

Here’s the bottom line. US dollars are no longer needed (or wanted) to buy Russian commodities.

Warning Sign #3: The Petrodollar System Flirts With Collapse

MD: I’m really skimming now. This guy is so far off the tracks there’s no hope of bringing him back. I think I’ll quit here.

Oil is by far the largest and most strategic commodity market.

For the last 50 years, virtually anyone who wanted to import oil needed US dollars to pay for it.

That’s because, in the early ’70s, the US made an agreement to protect Saudi Arabia in exchange for ensuring, among other things, all OPEC producers only accept US dollars for their oil.

Every country needs oil. And if foreign countries need US dollars to buy oil, they have a compelling reason to hold large dollar reserves.

This creates a huge artificial market for US dollars and forces foreigners to soak up many of the new currency units the Fed creates. Naturally, this gives a tremendous boost to the value of the dollar.

The system has helped create a deeper, more liquid market for the dollar and US Treasuries. It also allows the US government to keep interest rates artificially low, thereby financing enormous deficits it otherwise would be unable to.

In short, the petrodollar system has been the bedrock of the US financial system for the past 50 years.

But that’s all about to change… and soon.

After it invaded Ukraine, the US government kicked Russia out of the dollar system and seized hundreds of billions in dollar reserves of the Russian central bank.

Washington has threatened to do the same to China for years. These threats helped ensure that China cracked down on North Korea, didn’t invade Taiwan, and did other things the US wanted.

These threats against China may be a bluff, but if the US government carried them out—as it recently did against Russia—it would be like dropping a financial nuclear bomb on Beijing. Without access to dollars, China would struggle to import oil and engage in international trade. As a result, its economy would come to a grinding halt, an intolerable threat to the Chinese government.

China would rather not depend on an adversary like this. This is one of the main reasons it created an alternative to the petrodollar system.

After years of preparation, the Shanghai International Energy Exchange (INE) launched a crude oil futures contract denominated in Chinese yuan in 2017. Since then, any oil producer can sell its oil for something besides US dollars… in this case, the Chinese yuan.

There’s one big issue, though. Most oil producers don’t want to accumulate a large yuan reserve, and China knows this.

That’s why China has explicitly linked the crude futures contract with the ability to convert yuan into physical gold—without touching China’s official reserves—through gold exchanges in Shanghai (the world’s largest physical gold market) and Hong Kong.

PetroChina and Sinopec, two Chinese oil companies, provide liquidity to the yuan crude futures by being big buyers. So, if any oil producer wants to sell their oil in yuan (and gold indirectly), there will always be a bid.

After years of growth and working out the kinks, the INE yuan oil future contract is now ready for prime time.

And now that the US has banned Russia from the dollar system, there is an urgent need for a credible system capable of handling hundreds of billions worth of oil sales outside of the US dollar and financial system.

The Shanghai International Energy Exchange is that system.

Back to Saudi Arabia…

For nearly 50 years, the Saudis had always insisted anyone wanting their oil would need to pay with US dollars, upholding their end of the petrodollar system.

But that could all change soon…

Remember, China is already the world’s largest oil importer. Moreover, the amount of oil it imports continues to grow as it fuels an economy of over 1.4 billion people (more than 4x larger than the US).

China is Saudi Arabia’s top customer. Beijing buys over 25% of Saudi oil exports and wants to buy more.

The Chinese would rather not have to use the US dollar, the currency of their adversary, to buy an essential commodity.

In this context, The Wall Street Journal recently reported that the Chinese and the Saudis had entered into serious discussions to accept yuan as payment for Saudi oil exports instead of dollars.

The WSJ article claims the Saudis are angry at the US for not supporting it enough in its war against Yemen. They were further dismayed by the US withdrawal from Afghanistan and the nuclear negotiations with Iran.

In short, the Saudis don’t think the US is holding up its end of the deal. So they don’t feel like they need to hold up their part.

Even the WSJ admits such a move would be disastrous for the US dollar.

“The Saudi move could chip away at the supremacy of the US dollar in the international financial system, which Washington has relied on for decades to print Treasury bills it uses to finance its budget deficit.”

Here’s the bottom line.

Saudi Arabia—the linchpin of the petrodollar system—is flirting in the open with China about selling its oil in yuan. One way or another—and probably soon—the Chinese will find a way to compel the Saudis to accept the yuan.

The sheer size of the Chinese market makes it impossible for Saudi Arabia—and other oil exporters—to ignore China’s demands to pay in yuan indefinitely. Moreover, using the INE to exchange oil for gold further sweetens the deal for oil exporters.

Sometime soon, there will be a lot of extra dollars floating around suddenly looking for a home now that they are not needed to purchase oil.

It signals an imminent and enormous change for anyone holding US dollars. It would be incredibly foolish to ignore this giant red warning sign.

Warning Sign #4: Out of Control Money Printing and Record Price Increases

In March of 2020, the chair of the Federal Reserve, Jerome Powell, exercised unfathomable power…

At the time, it was the height of the stock market crash amid the COVID hysteria. People were panicking as they watched the market plummet, and they turned to the Fed to do something.

In a matter of days, the Fed created more dollars out of thin air than it had for the US’s nearly 250-year existence. It was an unprecedented amount of money printing that amounted to more than $4 trillion and nearly doubled the US money supply in less than a year.

One trillion dollars is almost an unfathomable amount of money. The human mind has trouble wrapping itself around such figures. Let me try to put it into perspective.

One million seconds ago was about 11 days ago.

One billion seconds ago was 1988.

One trillion seconds ago was 30,000 BC.

For further perspective, the daily economic output of all 331 million people in the US is about $58 billion.

At the push of a button, the Fed was creating more dollars out of thin air than the economic output of the entire country.

The Fed’s actions during the Covid hysteria—which are ongoing—amounted to the biggest monetary explosion that has ever occurred in the US.

When the Fed initiated this program, it assured the American people its actions wouldn’t cause severe price increases. But unfortunately, it didn’t take long to prove that absurd assertion false.

As soon as rising prices became apparent, the mainstream media and Fed claimed that the inflation was only “transitory” and that there was nothing to be worried about.

Of course, they were dead wrong, and they knew it—they were gaslighting.

The truth is that inflation is out of control, and nothing can stop it.

Even according to the government’s own crooked CPI statistics, which understates reality, inflation is rising. That means the actual situation is much worse.

Recently the CPI hit a 40-year high and shows little sign of slowing down.

I wouldn’t be surprised to see the CPI exceed its previous highs in the early 1980s as the situation gets out of control.

After all, the money printing going on right now is orders of magnitude greater than it was then.

Warning Sign #5: Fed Chair Admits Dollar Supremacy Is Dead

“It’s possible to have more than one reserve currency.”

These are the recent words of Jerome Powell, the Chairman of the Federal Reserve.

It’s a stunning admission from the one person who has the most control over the US dollar, the current world reserve currency.

It would be as ridiculous as Mike Tyson saying that it’s possible to have more than one heavyweight champion.

In other words, the jig is up.

Not even the Chairman of the Federal Reserve can go along with the farce of maintaining the dollar’s supremacy anymore… and neither should you.

Conclusion

It’s clear the US dollar’s days of unchallenged dominance are quickly ending—something even the Fed Chairman openly admits.

To recap, here are the five imminent, flashing red warning signs the end of dollar hegemony is near.

Warning Sign #1: Russia Sanctions Prove Dollar Reserves “Aren’t Really Money”
Warning Sign #2: Rubles, Gold, and Bitcoin for Gas, Oil, and Other Commodities
Warning Sign #3: The Petrodollar System Flirts With Collapse
Warning Sign #4: Out of Control Money Printing and Record Price Increases
Warning Sign #5: Fed Chair Admits Dollar Supremacy Is Dead

If we take a step back and zoom out, the Big Picture is clear.

We are likely on the cusp of a historic shift… and what’s coming next could change everything.

* * *

The economic trajectory is troubling. Unfortunately, there’s little any individual can practically do to change the course of these trends in motion. The best you can and should do is to stay informed so that you can protect yourself in the best way possible, and even profit from the situation. That’s precisely why bestselling author Doug Casey and his colleagues just released an urgent new PDF report that explains what could come next and what you can do about it. Click here to download it now.511

April 19, 2022August 20, 2023

Robobank: We Won’t Get Bretton Woods 3…

Rabobank: We Won’t Get Bretton Woods 3 But What We Do Get Won’t Be Peaceful Or Painless

by Tyler DurdenMonday, Apr 18, 2022 – 07:25 PM

By Michael Every of Rabobank

Bancor, Rancor, and Rancour

MD: Having a total and universal misunderstanding of what money is, we get myriad articles telling how money is being manipulated…or should be manipulated. From the title we expect this is just such an instance. We’ll look…and annotate in place.

What lies beneath

As usual, just over two weeks into the new quarter, and well in advance of the developed economies, GDP-giant China told us exactly what happened there in Q1. When I say ‘exactly’, I mean to the usual degree of decimal-place detail, but the same lack of any useful breakdown: and despite lockdowns so hard that China’s Weibo is allegedly censoring the first line of the Chinese national anthem (“Stand up! Those who refuse to be slaves”) after it was used to vent frustrations.

MD: What a bazaar opening salvo!

Somehow, the expectation was for a 0.7% q/q GDP print, 4.2% y/y, up from 4.0% in Q42021: we got a far stronger print to show Covid, and Chinese data, don’t matter – GDP rose 1.3% q/q and 4.8% y/y.

Does one celebrate the resilience of the economy?

MD: How can one separate the economy from the manipulation of its money?
Does one ask how that was possible when March data saw retail sales -3.5% y/y, below consensus of -3.0%, down from 1.7%… and yet higher than expected at 3.3% y/y year-to-date (YTD) vs. a 6.7% print in February that already did not match what *any* retailer is seeing? When fixed asset investment, albeit above consensus, slowed to 9.3% from 12.2% y/y even as property investment was weaker than seen at just 0.7% from 3.7% y/y? And industrial production rose to 5.0% from 4.3% y/y – which must have been via net exports… despite port closures!

MD: Does anyone ask why behavior of an economy should be sensitive to a calendar?
Does one ask why monetary policy was eased last week anyway, with the reserve requirement ratio cut 0.25% again? (That’s a move which will be as ineffectual for the real economy as all the previous cuts were: the only thing it perks up is enthusiasm from analysts who don’t understand how the real economy works.)
MD: Does anyone ask why there should be such a thing as a “monetary policy”? Does anyone ask why anyone…or any small group…should have such a knob to manipulate?
Does one ask why China just announced details-free economic stimulus measures? (e.g., “Reform will be deepened to remove consumption constraints. Sound and steady development of consumption platforms will be advanced.” How so, when rumours are that we are soon to see bank deposit rates cuts to make room for lower lending rates, which follows the same financial-repression/demand-destruction path seen in the ‘new normal’ elsewhere?) Probably not.
MD: When it is provable that everyone acts in their own self interest, why does not everyone’s self interest have equal weight? Why do we have banks screwing with lending rates when we know it is “traders”, not banks or the governments they institute, that create and destroy money?
Does one ask how local-government debt to build more infrastructure is ‘consumption’? (e.g., “consumption-related infrastructure development may be funded by local government special-purpose bonds, to leverage the catalytic role of investment in expanding consumption.”)
MD: Why do we allow something claiming to be government…why do we allow it to control something like infrastructure development…but not manufacturing development? We shouldn’t even have government. What’s it good for?
Does one note an easily achievable stimulus floated is a de facto export subsidy? (e.g., “Export rebates will be better utilized as an inclusive and equitable policy tool that is consistent with international rules, and the business environment for foreign trade will be improved on multiple fronts.”) Yet if China thinks it can grow its way out of a structural crisis by flooding the world with more goods *again*, then it is in for a real shock.
MD: Do traders need stimulus? What’s keeping traders from naturally making trades they can see clear to deliver on? Why do people allow a money-changer creation like government to even exist?

Making that point, Bloomberg warns: ‘Global Investors Flee China Fearing That Risks Eclipse Rewards’. All the more reason for a 1.3 % q/q print then(?) The article notes, “Russian sanctions raise concerns the same could happen to China… a growing list of risks is turning China into a potential quagmire for global investors. The central question is what could happen in a country willing to go to great lengths to achieve its leader’s goals.” This is hardly news to those who wanted to see it: but a South China Morning Post politics podcast this weekend in which one of their correspondents stated he had heard directly from an EU source that in recent discussions over Russian sanctions, US officials stated they are already gaming-out the same measures for China – and using language such as “when we sanction China”, not “if”.
MD: Sanctions are a siege tactic. And siege is an act of war. Who is conducting this warring aggression…and why? Why does an entity capable of mounting such an attack even exist? Who needs it?

Imperialism and realism: Bancor and Rancor

Meanwhile, in Ukraine, hopes of peace talks appear forlorn: Mariupol appears close to falling, as the city of 400,000 stands in ruins; and despite talking of risks of a Russian tactical nuke, President Zelenskiy defiantly states his country won’t give up the Donbas and can keep fighting for 10 years, if needed. If supported by the West, perhaps it can – and the EU’s Von der Leyen is pushing for Europe to accelerate arms shipments to Kyiv, talking about an oil boycott, again, and sanctioning Russia’s largest bank, Sberbank. Markets were thinking 10 days and none of the above when this all started.
MD: Why doesn’t this paragraph state it was Zelenskiy whose artillery caused the ruin of Mariupol?

On another front, as Finland and Sweden race towards NATO membership, Russia is moving forces towards the Baltic. Is this a bluff, as some felt it was over Ukraine? Or is Moscow going to engage in some form of limited confrontation with either or both Scandinavian states to ensure that if they enter NATO they do so already in a conflict with Russia?
MD: Why do these countries want NATO membership? What’s in it for them? What do they lose by ostracizing NATO? What if Russia’s movements are totally defensive…or protective of the innocent…which of course they are?

Taking things to a more meta level, last week I argued ‘Bretton Woods 3’ (BW3) — a new global FX and financial architecture– is a fancy name for militarized mercantilism; that the West used to be good at it; that it will be again, even if it means lots of neoliberal norms have to go; and anyone who thinks a BW3 emerges painlessly hasn’t read any history. Usefully, one of the key proponents of ‘anti-American imperialism’ just made the point for me in depth.
MD: If you argued for any kind of “global FX and financial architecture” you are stupid beyond belief. At the very least, you are clueless about what money is…where it comes from…and where it goes. Mercantilism is government imposed monopoly. Eliminating government is the solution.

(NB For these thinkers, American imperialism is the only imperialism: everything else is ‘realism’. That was underlined by humanist and coffee-table intellectual’s intellectual —and long-time believer that the auto-genocidal Khmer Rouge get a bad press— Noam Chomsky, who explained this weekend that Ukraine should surrender, because that’s ‘just the way the world is’.)
MD: There should be a vaccine against morons like Chomsky.

In an interview, Russian politician Sergey Glazyev talks about “the imminent disintegration of the USD-based global economic system, which provided the foundation of the US global dominance… the new economic system [unites] various strata of their societies around the goal of increasing common well-being in a way that is substantially stronger than the Anglo-Saxon and European alternatives. This is the main reason why Washington will not be able to win the global hybrid war that it started. This is also the main reason why the current dollar-centric global financial system will be superseded by a new one, based on a consensus of the countries who join the new world economic order.”
MD: The fact that such a thing as “the USD-based global economic system” even exists or should be tolerated is admission of zero understanding of money. They can change the money system all they want. Until they understand what money is…where it comes from…and where it goes, they’ll keep getting the same result. And of course they want that result. This leopard doesn’t change its spots.

So far, so gold-bug, crypto-nite, Chomskyite, Russian/Chinese nationalist, US billionaire hedge-fund manager, or general Down With This Sort of Thing. But we get details:
MD: Such nonsense!

“In the first phase of the transition, these countries fall back on using their national currencies and clearing mechanisms, backed by bilateral currency swaps. At this point, price formation is still mostly driven by prices at various exchanges, denominated in dollars.”
MD: Open admission of money manipulation. A “real money process” cannot be manipulated in any fashion whatever.

That’s what I have been flagging: things remain priced in USD and, for a few, at the margin, and inefficiently, USD are netted out via bilateral, geopolitical barter. However, “This phase is almost over.” That seems ambitious: it isn’t even a month old! Regardless, next comes “a shift to national currencies and gold,” and then:
MD: A problem that does not…and cannot exist with a “real money process”.

“The second stage of the transition will involve new pricing mechanisms that do not reference the USD. Price formation in national currencies involves substantial overheads, however, it will still be more attractive than pricing in ‘un-anchored’ and treacherous currencies like USD, GBP, EUR, and JPY. The only remaining global currency candidate –CNY– won’t be taking their place due to its inconvertibility and the restricted external access to the Chinese capital markets. The use of gold as the price reference is constrained by the inconvenience of its use for payments.”
MD: A “real money process” cares nothing about pricing mechanism. That’s up to supply/demand balance of objects being traded. All the “real money process” is concerned with is guaranteeing perpetual perfect supply/demand balance of the money itself.

So, as I pointed out, nothing really works; which, alongside final consumption being in the West, and lots of aircraft carriers, is a strong argument for the USD status quo, imperialist or not. But not to worry if you disagree, because after that:
MD: When “it’s broke”, it a good time to “fix it”. You don’t fix something by changing it’s name. This will get fixed when a “real money process” is available for traders to choose. Once that is done, all these broken processes will wilt on the vine. No trader in his right mind would ever use one.

“The third and the final stage on the new economic order transition will involve a creation of a new digital payment currency founded through an international agreement based on principles of transparency, fairness, goodwill, and efficiency.” Which the international community is of course famous for. “A currency like this can be issued by a pool of currency reserves of BRICS countries, which all interested countries will be able to join.”
MD: This is like religion…constantly trying to deal with knowledge that encroaches on its myths. They just create new myths…and change the wording of the old myths. It’s pretty disgusting.

Except India is questionable, and even Brazil might be shaky given where it sits geographically, near the source of all those aircraft carriers. And so we have Russia, China, and South Africa. That doesn’t even make a good acronym, let alone bloc.

“The weight of each currency in the basket could be proportional to the GDP of each country (based on purchasing power parity, for example), its share in international trade, as well as the population and territory size of participating countries.” So, it will be dominated by China; and so India is definitely out. “In addition, the basket could contain an index of prices of main exchange-traded commodities: gold and other precious metals, key industrial metals, hydrocarbons, grains, sugar, as well as water and other natural resources. To provide backing… relevant international resource reserves can be created in due course. This new currency would be used exclusively for cross-border payments and issued to the participating countries based on a pre-defined formula. Participating countries would instead use their national currencies for credit creation, in order to finance national investments and industry, as well as for sovereign wealth reserves. Capital account cross-border flows would remain governed by national currency regulations.”
MD: If the currencies in the basket were using a “real money process”, their weight would not be relevant. The exchange rate would be constant…and one to one…at all times. This is a problem created by, and moved around by, money changers and the governments they institute. If you turn back the history of these governments you always find “one individual” who got control of a military and directed it to his own ends…and then took charge of the territory it acquired. This typically spans no more than 10 or 20 years in the first instance. And if he’s successful in creating a religion in that period, that religion passes to his heirs…until the people being dominated pull back the curtain and expose the scam. In the case of Britain, the people are so stupid it spans a period going back beyond useful records. That, folks, is perfect stupidity.

So, he is talking about a new ‘gold standard’ based on everything from precious metals to base metals, to water, to one of the key ingredients for cakes, to the GDP of China, questionable data and all. Somehow these back a new global reserve currency which somebody will manage, and provide emergency liquidity in, despite *ALMOST EVERYONE IN THE NEW BLOC RUNNING TRADE SURPLUSES* – and most so with the West, who are not going to join. As such, this is not so much a proposed Bancor, as Keynes floated at the original Bretton Woods before the US insisted on the global role of the USD; nor a monstrous Rancor to devour Wall Street; it’s just plain rancour (“bitterness or resentfulness, especially when long standing”). Indeed, here is the coup de grace:
MD: Anyone talking about a standard that changes value with time, is talking nonsense. And gold is anything but constant in value. We can now create new gold at a fraction of earlier costs…except where a new discovery is found … and then you can just pick up nuggets off the ground creating fictitious wealth. Changes like that…or large quantities going down with a sinking ship…create great disruptions. And such disruptions are totally unnecessary…actually impossible…if a “real money process” is in effect.

“Transition to the new world economic order will likely be accompanied by systematic refusal to honor obligations in USD, EUR, GBP, and JPY. In this respect, it will be no different from the example set by the countries issuing these currencies who thought it appropriate to steal foreign exchange reserves of Iraq, Iran, Venezuela, Afghanistan, and Russia to the tune of trillions of USD…. Even if they were to default on their obligations in those currencies, this would have no bearing on their credit rating in the new financial system. Nationalization of extraction industry, likewise, would not cause a disruption.”
MD: An open admission to traders that they are…and will continue to be…dictated to by the money-changers. How is it that the real producers in the world (i.e. the traders) can be so totally dominated by the absolute non-producing slugs of the world (i.e. the money changers)?

In other words, adopt the new world order and you get to default on all your FX debt and nationalise all your foreign-owned businesses! That is precisely what I also argued: bet on the new and bet on the default of the old. That is not going to be peaceful or painless – and it will be vigorously resisted.
MD: This “new world order” thing is just the new “war monger”. The latest weapons of these war mongers is immigration and virus creation and spread…and they are essentially the same thing.

You want to ensure that even vampire-squid on Wall Street and global-not-local US billionaire hedge-fund managers agree to dump neoliberalism for Western mercantilism and a bifurcated Cold War world of tariffs, capital controls, and naval blockades? Keep talking about mass nationalisations and organised debt defaults in the Eurodollar markets.52,222109
MD: These articles just continue to be less and less interesting…more and more stupidity revealing. Such is life…and then you die.

Category: History

The “Barbarous Relic” Helped Enable a World More Civilized than Today’s

The “Barbarous Relic” Helped Enable a World More Civilized than Today’s

Preparing for War Means Preparing for Inflation

Conclusion

Five Warning Signs The End Of Dollar Hegemony Is Near… Here’s What Happens Next

Five Warning Signs The End Of Dollar Hegemony Is Near… Here’s What Happens Next

Warning Sign #1: Russia Sanctions Prove Dollar Reserves “Aren’t Really Money”

Warning Sign #2: Rubles, Gold, and Bitcoin for Gas, Oil, and Other Commodities

Warning Sign #3: The Petrodollar System Flirts With Collapse

Warning Sign #4: Out of Control Money Printing and Record Price Increases

Warning Sign #5: Fed Chair Admits Dollar Supremacy Is Dead

Conclusion

Robobank: We Won’t Get Bretton Woods 3…

Rabobank: We Won’t Get Bretton Woods 3 But What We Do Get Won’t Be Peaceful Or Painless