By JC Collins
Back in May I published a piece titled China Gold Deposits to the IMF – The Lima Accord and Gold Valuations. In that post we reviewed how the gold repatriation which has been taking place is in fact a reversal of the gold which was deposited with the Federal Reserve during the establishment of the USD structured system at Bretton Woods in 1944.
With the arrival of a new monetary framework, countries will need to transfer their gold deposits from within the dollar based system, to the multilateral based system. This system is being structured around the International Monetary Fund and the SDR asset. And like during Bretton Woods, gold deposits are about to be consolidated once again, this time within the multilateral framework of the IMF itself.
In recent days international institutions have been expressing their concern with the upcoming interest rate increase by the Fed. This will be the first such increase since June, 2006. The effects of this one increase will reverberate around the financial world and cause considerable volatility and sudden movements in all markets.
The Bank for International Settlements, the IMF, the World Bank, China, and a host of other central banks and banking personal, have stated that the Fed should not raise rates this week. The inevitability of this increase is now sinking in on many. Whether it’s on Thursday, in October, or in December, it is coming.
Next month there is the annual meeting of the World Bank and IMF in Lima, Peru, followed by the G20 Summit in Turkey, in December. It is my analysis that interest rates will rise this week for the first time in nearly a decade. Other central banks will eventually follow in this normalization of monetary policy. This will establish the next phase of the international monetary crisis as the rest of the world is given the justification it requires to begin shifting the monetary framework to reflect the realities of the emerging markets and balance of payments deficits.
The latest deadline for the 2010 IMF Quota and Governance Reforms is set for tomorrow, Sept 15th, just before the announcement by the Fed of the interest rate increase. This is not a coincidence. The US has delayed implementing these agreed upon reforms for the last 5 years, and the G20, IMF, World Bank, China, and even the BIS, are all now prepared to move forward on reforming the international monetary system without the support of the United States.
This unfortunate situation has been built with great care and strategy since the financial crisis. There have been many theories, analytical conclusions, and endless propaganda surrounding the international monetary system. This week, and the ones that follow, will finally separate the absurd from the factual, the unrealistic from the realistic, and the improbable from the probable.
Those who stated that monetary policy could never be normalized will soon find out if they were correct in their analysis. Those who said that interest rates could never rise will be proven wrong in the face of the realization that they just were.
But what everyone seems to agree on is that there will be volatility following the first of many incremental interest rate increases. Wealth will shift. Stocks will lose. Stocks will gain. Exchange rate arrangements will be stressed, and some will break.
And from it all the international monetary framework will begin to be reformed, with the United States providing the catalyst for a change that should have happened years ago. The refusal of the US Congress to support the 2010 IMF reforms will be registered as one of the greatest monetary missteps by any administration. Not since Nixon went on television in 1971 to announce the end of the dollar gold standard has the world been ripe for dramatic monetary change.
Following the interest rate increase, and ensuing volatility, the World Bank and IMF will begin to implement the necessary reforms to the international monetary system. These reforms and developments could very well be announced during the annual meeting in Peru next month. It will the Lima Accord which will establish the beginnings of a new multilateral framework.
With so much happening within the monetary and geopolitical realms, it is challenging not to succumb to excitement and passion when attempting to present a factual and detailed analysis of the transition. But in these times, we are witnessing a once in a life time event. Not since the Bretton Woods Accord of 1944, has the world been primed for massive monetary and financial change. – JC
Recommended POM reading to further understand the scale and scope of this monetary transition:
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