China and Greenspan on a New Gold Standard

Economics, Premium POM

Could a Surprise Move Add the Precious Metal to the SDR this October?

By JC Collins

It is being reported today that former Federal Reserve Chairman Alan Greenspan has called for a new gold standard.  Greenspan, who contributed his fair share to some of the monetary challenges which the world now faces, first planted this seed last year.  In an interview with Bloomberg today the former chairman stated the following:

“If we went back on the gold standard and we adhered to the actual structure of the gold standard as it existed prior to 1913, we’d be fine.  Remember that the period 1870 to 1913 was one of the most aggressive periods economically that we’ve had in the United States, and that was a golden period of the gold standard.  I’m known as a gold bug and everyone laughs at me, but why do central banks own gold now?”

The above comment from Greenspan aligns with other comments made recently.  As I reported in the post The Golden SDR Agenda an article published by F. William Engdahl suggested that China is quietly preparing for a gold alternative to the USD dominated monetary system:

“Yet the Chinese alternative to the domination of the US dollar is about far more than paper SDR currency basket promotion. China is clearly aiming at the re-establishment of an international gold standard, presumably one not based on the bankrupt Bretton Woods Dollar-Gold exchange that President Richard Nixon unilaterally ended in August, 1971 when he told the world they would have to swallow paper dollars in the future and could no longer redeem them for gold. At that point global inflation, measured in dollar terms, began to soar in what future economic historians will no doubt dub The Greatest Inflation.”

This comment aligns with Greenspan’s in that they both reference a time period before the US dollar based system became the dominant economic force.  With the volatility from the BREXIT referendum causing a potential liquidity problem, it is foreseeable that additional adjustments could be made to the SDR basket composition with a gold weighting added.

In the Golden SDR Agenda post I said:

 “A liquidity crisis could very well call into question the existing path forward and force all parties, including the US, to shift timeframes and make concessions where concessions were previously not considered.  At some point gold will have to be added to the SDR.  That has never been contested here.  But let’s see what happens in the coming months and how that may affect timelines for the reform of the international monetary framework.”

It is common knowledge and accepted fact that China, along with the G20 and other institutions, are developing an SDR component to the multilateral monetary framework.  Adding gold to the SDR is a very practical method of injecting the SDR with some extra stability.

In May of 2015 I suggested that China could put gold on deposit with the International Monetary Fund to support such a move. This was preceded by the original article here on POM which discussed a gold-backed SDR.  This article, titled The Coming SDR Gold Standard, was published in September of 2014, and included the following statements:

“Sometimes what at first appears to be conflicting information is anything but, and what was originally considered to be opposing forces, or ideals, can quickly become unified for the greater good.”

“There has been much discussion and division over whether the world was moving towards a multilateral super-sovereign reserve currency by way of the Special Drawing Right of the International Monetary Fund, or towards a new gold standard by which all currencies would be valued once again on gold.”

“Positions have taken up defense on both sides and all waited to see which side was going to be right.  Were the BRICS countries going to overthrow the western banking cabal?  Was the US dollar going to inflate into oblivion?  Was the SDR going to become the new reserve currency?  Was a new gold standard going to be implemented instead?”

“I have contested all along that the SDR was going to become the super-sovereign reserve currency of the emerging multilateral financial system.  The supporters of a new gold standard have found this idea unworkable because gold is considered to be the only method of creating stability within the larger architecture of the global financial system.”

“But what if everyone is right?  Or more correctly, what if all the obvious points and leverage of each potential system can be utilized to create the larger macro stability from which the multilateral will inevitably emerge?”

The fact China is building a capability based on gold, and bankers like Greenspan are calling for a new gold standard, should give us some clear signs of what to expect next.  It is equally accepted that the SDR will have an expanded role in the new monetary framework.  The combination of both would be the biggest story in a generation.  – JC