Changing the Architecture of the Financial World
By JC Collins
Over the last few years an urban myth of sorts has been slowly building which speaks of an imminent reset of all the worlds currencies. It is expected that in one fell swoop the exchange rates of currencies will be adjusted with huge potential windfalls from specific currencies.
These currencies, namely the Iraqi dinar, Vietnamese dong, and a handful of other devalued currencies will reset at extreme exchange rate swings leading to riches for all who hold the currencies.
In fact, whole online communities have been built up around this myth. These communities feed on the hopes and dreams of those who believe such things can happen. Reading these sites is like a trip down despair road where the shoulders are littered with the downtrodden and ignorant who can do nothing but dream and risk all in their pursuit of unimaginable riches.
Many times I have attempted to hint or insinuate where the source of this myth can be found. In the SDR and New Bretton Woods series we explored the advancement of the multilateral financial system structured around the SDR of the International Monetary Fund, including the broad level of support from all countries and international institutions in the implementation of such a system.
In Part Three of that series, sub-titled The Real Global Currency Reset, we explained how the sovereign debt crisis and growing social unrest in countries around the world will be used as a part of a Hegelian Dialectic to guide and condition the masses to accept the rise of such a financial regime.
The post titled The New Exchange Rate System explored the structure of the currency component surrounding the emergence of such a multilateral system.
Every week I receive messages from readers asking about this reset and what the new exchange rates will be. It can be assumed that many of these questions are coming from the same mindset as those who wander the wasted plains of dinar and dong land.
In fact, some of these sites faithfully reblog the articles which I post here and many of the commenters on those sites are able to see through much of the fantasy surrounding this supposed “event”. Yet still, for everyone which can see the unreality of get rich quick scenarios, there are thousands who do not.
But all myths have their origins based on some real world fact or situation, and the global currency reset is no different.
Throughout the history of the world financial systems have been reset, rebuilt, restructured, and redesigned untold times. Empires and their currencies rise and fall with the crashing waves of predictable patterns, as can be seen in the mass migration of people from regions of the world as they chase the ever moving wealth of humanity.
During periods of empire transition it is likely that many different financial scenarios can play out. The world is now well into such a period of transition. But like geological movements the process is slow and builds towards an inescapable moment when a jarring motion takes place which forever alters the landscape.
To fully understand what such a jarring motion could look like we must first have a working knowledge on how the pressure has built up.
It will be the readers responsibility to ensure they understand what is meant by fiat currencies and fractional banking, as well as Keynesian Economics and the process of debt creation as a method of expanding the money supply.
Since money creation is realized by unregulated debt expansion, what is referred to as the global currency reset, or emerging multilateral financial system, is in fact the changing of the international financial architecture surrounding the restructuring of debt, both public and private.
Many reason that debt is not money itself but only a charge against future money. This debt or future money can be spent for todays benefit. But this is not as simple as it first appears.
Based on the debt expansion model of money creation it is acceptable to state that all money in circulation has been created through the debt expansion process. So our simple explanation above also works in reverse – today’s money is yesterdays debt.
Since debt abounds we can reason that there is a debt problem for which there is no other solution but default or restructuring. For where will the money come from to pay the debt if not from more money which has been created through the debt expansion model.
So the two solutions are default or restructure. Default, or debt treatment, is something sovereign debt managers are extremely motivated to avoid. The goal is to maintain debt growth at the same rate as economic growth. So if the economy grows by 2% a year than the money supply should also grow by 2%.
Unregulated debt expansion has so skewed this economic balance that the whole world is on the verge of a sovereign, being public, and private debt crisis the likes of which the world has never seen. Debt has been allowed to grow faster than the economy by multitudes over the debt terms and as the debt becomes more and more due the problem becomes increasingly more and more dangerous.
When we say debt, it is meant to include all debt, public and private. This means the governmental debt, which is called sovereign, and the private debt, which consists of credit cards, car loans, mortgages, etc..
Consider the sovereign debt the macro and the private debt the micro. On an individual level debt has expanded at a faster rate than the income and money supply of the individual. Same model as the sovereign macro.
So when the money supply is not growing as fast as the debt repayment demand there are only two options which make any sense, default or restructuring.
A third option is to keep increasing the money supply, which is inflation, but this only compounds the problem, as we have seen happen since the crisis of 2008.
Considering the reluctance to default on debts or continue printing more money, we are left with the option of restructuring. Now when it comes to debt restructuring there are two methods of restructuring.
One is a rescheduling of debt. This applies to workable debt only.
Two is debt stock reduction. This applies to unsustainable debt.
Before moving on we must fully understand what is meant by the terms inflation and deflation.
Inflation is when the money supply expands and the value of money decreases.
Deflation is when the money supply contracts and the value of money increases.
We know what happens in periods of inflation because we are living it today. But what happens in periods of deflation? With deflation we will see goods and services become less expensive. This is what happened in the depression of the 1930’s.
Think of it like this, deflation is the contracting of the money supply, and since money is debt it can be reasoned that deflation is the contraction of the credit markets. Which means its harder to get credit cards, loans, and mortgages. Goods and services are cheaper but there is less money in circulation to pay for those goods and services. Production decreases and incomes soon follow.
Inflation is the expansion of the credit markets and easy credit was had by all. This has been our problem.
Returning to the options on the table, rescheduling of debt and debt stock reduction, its time to discuss the SDRM, or Sovereign Debt Restructuring Mechanism.
The SDRM will act as a form of creditor bail-in and help regulate debt. But when it was first introduced by the IMF shortly after the events of 9/11 the SDRM was tantamount to default, which we know is not market friendly and is to be avoided.
Today the SDRM is considered a method of debt treatment. Its not called default but all the measures of a default are included in the fine print, such as term out the loans, stop paying back existing creditors, and restructure or repackage the loans as SDR bonds.
Through the SDRM all workable debt will be restructured and packaged as SDR bonds. The unsustainable debt will be dealt with by a method of debt stock reduction.
What does this mean?
Debt stock reduction is when a predetermined portion of the debt is written off or cleared from the books by some form of accounting trick. In 2008 Ecuador utilized such an accounting trick when it used its own cash, M1 money supply, to buy up its own debt at a discounted rate.
For the SDRM to be formally brought into play the Executive Board of the International Monetary Fund must agree. Considering the United States has veto power over the board the SDRM has been locked in limbo since its inception.
As a part of the 2010 IMF Code of Reforms, which we have well covered here, the Executive Board can be restructured and the SDRM passed.
The IMF and G20 have given the United States until the end of the year to pass the required legislation to enact the reforms. Russia and China, for its part, are living up to the threat of using aggressive measures to begin bypassing the United States and pushing change in the global scene as the year progresses.
Whether the United States agrees to the IMF reforms or not doesn’t matter at this point. The Executive Board will be restructured and the SDRM will be amended and put into play.
Defaulting on sovereign debt is out of the question and the only path forward is debt restructuring. This means using the SDRM and the International Monetary Fund. If not, then why have all countries, including Russia and China, demanded that the 2010 reforms be implemented immediately?
The astute reader will recognize that we are coming out of an inflationary period and heading into a deflationary period. One usually overlaps the other for a period of time.
It can also be reasoned that inflation and deflation are one and the same, like a 24 hour period, only divided by the night and day.
What is being referred to as the global currency reset is the process of restructuring the sovereign debt of the world through the SDRM. The workable debt will be repackaged as SDR bonds and the unsustainable debt will be cleared from the books by a method of debt stock reduction.
The currencies and commodities of the world will unpeg from the primary reserve currency of the world, the US dollar, and peg to the SDR, with the Chinese renminbi and possibly the Russian ruble, Canadian and Australian dollars, and a few others added to the SDR basket of currencies.
Other currencies will see their exchange rates change as they are anchored to the SDR as opposed to the US dollar. What these rates will be are not known outside of a small handful of people. How could it be otherwise?
With restrictions on cross border capital flows and other methods of control, holders of dinar and dong may not make as much as they were originally expecting. Though the possibility of making some is very real.
In the post Why the Vietnamese Dong Will Reset I made a very strong case for the stability and growth of the Vietnamese economy. The dong is a traded currency and has the potential to be maintained as the working currency for the Vietnamese people. The money supply of the dong is extremely large and would have to be reduced by a method of debt stock reduction like in Ecuador, use cash, money supply, to pay down the debt at a discounted rate and balance the books.
This method of money supply reduction could decrease the amount of dong in circulation and allow the remaining dong to be anchored to the SDR at a reasonable rate based on the countries economic indicators and growth.
Its interesting to note that it appears the United States, or the banking interests represented by the dollar, are now abandoning Vietnam to forces outside of the dollars control. See The American Dollar is Dumping Vietnam.
Other analysts and commentators are beginning to suggest that the dollar is also in the process of abandoning its traditional allies in Europe as Germany moves closer to a currency agreement with China, as does Canada, Australia, and other countries.
The pattern and process which we have been explain and describing here since January is unfolding as expected. All events fit within the parameters of the Hegelian Dialectic which is moving the world to accept the multilateral financial system structured around the SDR.
There is no true west versus east battle playing out. It is scripted.
And all the conspiracy stories about goods guys overthrowing bad guys is just foolish and childlike in its parable structure and actualization through storytelling.
Those who proclaim everyday that the dinar or dong are about to reset and make everyone rich are selling fables of the highest order. Understanding history and the fundamentals of how the architecture of the financial system is going to be restructured is the only way to fully comprehend the so-called global currency reset.
It is wise to remember that unearned wealth is very destructive. If we are moving from a debt based financial system to a production based financial system is it reasonable to expect unearned wealth from a small dinar and dong investment?
Maybe that will happen for some, but be careful what nightmares you externalize from within yourself because you will likely have the ability to realize them all.
Stock debt reduction and debt rescheduling can help us understand this reset in terms of Keynesian Economics. But what if Keynesian Economics is going to be discarded? What if the architecture of the financial system is going to be so drastically changed that faulty Keynesian Economics becomes something akin to bartering with sticks and rocks? Time will tell. – JC