A New Exchange Rate Regime and Refinancing America’s Debt
By JC Collins
There is little doubt that the world now stands on the eve of fundamental change. Everything we have been discussing for the last three years regarding the building of the multilateral monetary framework and its machinations will soon emerge on the world stage in response to the policy mandates of the Trump administration and its negotiations with the rest of the world.
This all started back in 2010 when the United Nations and China both began calling for the wider implementation of the Special Drawing Right (SDR) in an international reserve asset capacity. Such an expanded role for the SDR would facilitate a reduction of the imbalances which have developed over the last seven decades with the use of the US dollar in this international role.
But shifting the gears of the whole world doesn’t happen overnight and contrary to what some online speculators would have us believe, no one nation or group of nations is willing to overturn the apple cart and destroy their own domestic economies just to spite the US and the dollar. Such suggestions are an absurdity and should not be taken serious.
What has been happening is the slow behind the scenes framework building which is meant to provide the gates and channels for the wealth to travel when it begins to shift. When the door is unlocked and the flow begins things will progress with a steady pace. The pre-planned and designed mechanisms of SDR substitution accounts and sovereign debt restructuring mechanisms will provide the main routes of escape from the threats of the systemic imbalances.
The broader use of the Chinese renminbi in international bond issuance and the first issuance of SDR denominated bonds which took place last year are the first indicators that this shift is taking place. The delayed implementation of the 2010 Quota and Governance Reforms within the IMF and the inclusion of the RMB in the SDR composition were the foreshadowing events which revealed the path forward.
Though Trump has not mentioned the SDR directly do not doubt for one second that these preplanned mechanisms will not be used to “renegotiate” America’s sovereign debt, as Trump has suggested he would do. That one statement by Trump was the dead giveaway that this multilateral alignment was indeed taking place through the rise of a new modern nationalism which we have discussed.
In the quest to “Make America Great Again” the concept of “discounting” or “refinancing” US Treasuries which have already been issued would be sold as what is best for the American people. The strengthening dollar is putting so much strain on the world’s monetary system and the economies of emerging nations, most of whom hold a large percentage of America’s debt, such as China, that it puts the United States and the Trump administration in a great negotiating position regarding debt.
Remember, the goal is in fact to reduce and eliminate the accumulation of USD denominated assets in the foreign exchange reserve accounts of the central banks around the world as the movement towards the SDR system takes place. This is the debt Trump is talking about. The Federal Reserve is the largest domestic holder of debt while China is the largest foreign holder of US debt. Between these two entities the mechanisms discussed above, such as substitution accounts and sovereign debt restructuring mechanisms, can be used to achieve a “refinancing” or “discounting” of America’s debt.
This is not conspiracy or make believe. These strategies exist and will be used in the coming months and years.
But the other aspects of any negotiations will include the exchange rate arrangements which are currently maintained between other nations and the US dollar. Trump has already suggested that he will name China a “currency manipulator” and is pre-positioning other bargaining pieces in preparation for the forthcoming negotiations. Events around Taiwan and the South China Sea should be considered preparation from both sides on these negotiations. Trump has been poking China already with the telephone conversation with the President of Taiwan and suggesting that he may not accept the one China policy.
Take nothing for granted and make no assumptions is the Trump starting point. Don’t assume anything is off the table before we sit down and start negotiating. That is the message he is sending to the Chinese and others around the world.
The strength of the dollar right now only enhances that position.
The full hand has not yet been seen or played. Far from it. Those who have suggested that the dollar was dead and the world economy would collapse under a mountain of debt have not considered the multilateral machinations which we have been reviewing for three years. The quickness which some of the above happens will leave many stunned and confused about their long held beliefs regarding sound monetary principles.
Those who have suggested the SDR was an invalid and unworkable monetary concept have not considered that the USD was the secondary piece leading up to the Bretton Woods Conference in 1944. The world currency suggest by John Maynard Keynes called the bancor was the key which was meant to move the world forward towards monetary consolidation. That was usurped by the dollar and the true world currency was delayed. The USD served its purpose in the international capacity but it is now time for something else to take its place as reserve asset. The SDR will provide the bridge from the dollar to the bancor.
This will be sold and packaged to the American people and the world as Trump’s new modern nationalism. A strong USD is no longer beneficial to America or the rest of the world. Consider that. No one wants a strong dollar. It caused imbalances and slows American exports (reduced jobs) and causes imports to flow into the country (increases personal debt and consumerism) while putting deep strains on nations holding large amounts of US debt.
This strain on other nations comes predominately from the pressure exerted on the domestic currency of those nations as they attempt to maintain an exchange rate arrangement with the dollar by depreciating their own. This is not sustainable and will be a major aspect of any debt and monetary negotiations which will take place.
The USD will be devalued against these other currencies through multiple means. But such a devaluation should not cause fear or concern. It will benefit Americans and the rest of the world in the long run. Both global growth and American growth has been stagnant for many years because of these imbalances. This will be corrected soon. – JC