Loose Money and a Need in Universal Currency

Today, we happen to live in a world, where about 85% of world trade is paid for with the US dollar, a fiat currency. It is not like it does not have an intrinsic value — it does, but this value is basically provided by goods produced outside of the US. Even from the time of the Bretton-Woods agreement in 1944, when, to all appearances, the US dollar had a fixed gold content and was valued at $35 per troy ounce, in fact, it worked as the Eurodollar, backed by the entire volume of the European trade. Obviously enough, the relatively puny gold reserves in the US banks wouldn’t cover the value of all the printed dollars, if they were called back all at once. This became apparent, when the US had to back out of the Bretton-Woods agreement in 1968, since it could not cover its obligations with gold, when the faith in its economy started to falter.

After some uneasy recession-tinged time, the reaganomics managed to fix the problem of the insufficient content of the fiat US currency by hitching it to oil, which served as the next gold. From the 1980s, the gold content of the Eurodollar was changed to the oil content of the Petrodollar, backed by the compact with the Saudis. However, even the Saudi oil also was soon dwarfed by the increasing volume of the international trade within the rapidly globalizing world. Today, in fact, the fiat dollar is being backed by the production of the entire dollar-trading world. However, even though this production was indeed monetized in this rather unusual way, by separating production and consumption, there was no institutional foundation under this arrangement, which could be compared with the Bretton-Woods or even the agreement with the Saudis.

Thus, the immense amount of the US dollars, which was performing in fact an increasingly valuable and necessary service of monetizing the entire global production, had to find a domestic foundation as its de-facto collateral. Which it did, by creating a series of bubbles. as a collateral for the fiat dollar as the de-facto universal currency were used highly illiquid US assets, starting from the Internet-based companies during the Internet bubble of the 2000s and ending with the US mortgages, ranging from half-built McMansions to ordinary houses, which in no way had any value as collateral on the international market.

This shows that the current problem cannot be solved by the vaunted bailout, inasmuch dramatic its sum and circumstances. In the best case, it will end by printing more money or US treasuries, which would then have to find some real value for their international buyers to hold themselves upright.

The root of the problem is much bigger than just monetary difficulties, which can be sorted out by a clever design without changing the foundation of the current world order. One country, however large, cannot serve as the source of 85% of the  currency covering the international exchange trade. In its day, at the start of the 20th century, this, at considerable pain, was found out by Britain. The British Empire controlled most of the global trade of the time, including such necessities as rubber and nitrates. However, even before World War I, which taxed its resources heavily, and as early as in 1913, the British banks held less gold  than, for example, the banks in Germany. Gradually, in the course of two world wars, the British empire was dwarfed by the rising US, which pushed it aside as the world dominant in 1944 with the signing of the Bretton-Woods agreement.

Today, there is no single country able and willing to assume both the burden and the perks of dominating the huge globalizing world. Apparently, the US itself is also too overstretched, just as it was the case with the British empire in the first half of the 20th century. Perhaps, the time has come to think of new global mechanisms, able to support the trade flow in the globalizing world by helping to monetize its production.

A good starting point would be to consider the ideas of J. Stiglitz on introducing a universal currency and creating mechanisms of sovereign bankruptcy. We should always keep in mind the turbulent start of the 20th century and try to avoid its repetition amplified by about an order of magnitude. The globalizing world at the start of the 20th century had population in hundreds of millions. Now, we are speaking billions.
my contact e-mail is badalien00@gmail.com

the current financial crisis and its meaning in the context of globalization

I think that, in order to understand the ramifications of the current financial crisis,  we should look at a much larger picture: liquidity, credit etc and their current functions. this broader outlook might also explain, why the US system didnt collapse as yet and what might happen in our future.

right now, we have tremendous global trade, at least 80% of which is in the dollar zone. this means that the currency of a single country was used to pay for most of the global trade. however, the latter is much bigger than the former, which creates such insane numbers as  $60 trillion etc, supported in fact by the 80+% of goods produced in the world, which are totally out of the US control. for a time, the dollar worked in the quality of the Petrodollar, created by an agreement between Reagan and the Saudis. then, the need in collateral was covered by the so called Internet bubble. When it, in its turn, also exploded, the need in collateral had to be covered by something else. Since nothing on this scale could be found in the US, that meant the need in creating “smoke and mirrors”, with collateral, which amplified itself after going through middlemen, the more the merrier. welcome, the housing bubble and the related SIVs, CDOs, credit swaps etc, which built $60 trillion of “value” on basically such a shaky foundation as the US housing market. this shows the systemic vulnerability of the globalization, based on unequal exchange between the sides.

however, i wouldn’t be looking for an evil intent. even though greed indeed run high as it often does, this seems to be a systemic feature experienced at this time of the lifecycle by many of the earlier globalizing empires. for example, Britain used to control most of the world trade, not allowing, for example, sales of goods with defense potential (including rubber) to such countries as the US or Germany. in 1913 however its bank assets were dwarfed by what was contained in banks of Germany. it would take three decades between two world wars and including the Great depression to get from the end of coal era, dominated by Britain, anf the start of the oil era, which would, in the future, be dominated by the US. Britain, of course, would be totally dwarfed in comparison to the US, while the shift also changed practically every facet of life.

In my works, I show that a technological, social, financial etc shift of even greater magnitude may be waiting in our future, as the US-style, oil-based economy fails in fulfilling the needs of the rapidly globalizing world, which is already much greater than it can be reasonably controlled from the US.

if you want to learn more e-mail me at 4112lucy@gmail.com.