Unwinding the Euro Experiment and the Ascension of SDR
An interesting experiment was done with the euro.
The workings of the international monetary system and its capital flows in relation to trade balances are not as complex as one is lead to believe. There are complex methods of measuring and tracking the data which is produced, but the actual mechanisms which function under the surface are fundamentally simplistic.
A nation with a positive capital flow will experience a trade surplus. This surplus develops because the capital investments coming into the country exceed those of the capital investments leaving the country. When exports (positive capital investment) grow and surpass imports (negative capital investment), a nation will have a trade surplus.
This trade surplus accumulates as reserves in the foreign exchange reserve account of the nations central bank, who, for the most part, serve the purpose as creditor nations to the debtor nations.
Nations like America, which have a large trade deficit, import more than export. This negative capital investment expands sovereign debt. In the case of the United States, the negative capital investment, or large capital outflows, take the form of USD denominated reserve accumulation in the foreign exchange reserve accounts of those nations who trade with America.
The USD has been used as the dominant reserve currency since the end of the last world war. The accumulation of USD around the world as caused a massive imbalance in the system. This imbalance grows further as the dollar is continued to be used in the capacity of primary reserve currency.
This isn’t new information for most readers, but is worth revisiting before we consider the experimental role of the euro currency.
Monetary engineers considered that maybe the imbalances between debtor and creditor nations could be minimized and eliminated if all nations used a common currency both domestically and internationally. The euro was born from the European Currency Unit (ECU), which was a basket of currencies, much like the Special Drawing Right (SDR) of the International Monetary Fund is a basket of currencies today.
The weighting of each European nations domestic currency in the ECU was measured and locked-down at a pre-determined time to create the euro. EU nations who signed on to use the euro did so both domestically and internationally. This means the citizens of each nation carried euro in their wallets and collected them in their bank accounts. The euro was also used to balance trade amongst the member nations, with the euro becoming one of the core reserve currencies used in the SDR composition.
But an interesting thing happened.
The imbalances which developed and grew with the larger and macro dollar based system started to happen within the euro based system. The hope of eliminating or reducing imbalances and reserve accumulations through the dual use of the euro, being the domestic and international trade use, were not being realized.
The imbalances which had developed between the debtor (trade deficit) nations and the creditor (trade surplus) nations began to replicate within the EU framework. It began to dawn on the monetary engineers that using a supra-sovereign currency, like the euro, in a dual domestic and international role was not the ultimate solution which would balance the international monetary system and contribute to the reduction of reserve accumulations, which is the required objective to remove the imbalances.
Everything was connected and flowed in and out of itself.
Having nations accumulate and use the domestic currency of one nation, such as the USD, was not the answer. Nor was creating a supra-sovereign currency, like the euro, and having nations use it both domestically and internationally.
Something different would be required to reduce and eliminate reserve accumulation while re-balancing the system itself.
The obvious next thing to experiment with is the SDR. The SDR does not belong to any one nation, and will not be used domestically. It will not be used for commerce by the citizens of nations.
It will be used to balance trade between nations, but not at the central bank level. International trade clearing will be completed at the supra-sovereign level, through the IMF itself, or some alternative institution, like the Bank for International Settlements. Its name in fact provides evidence of its true nature.
It is somewhat predictable at this time to expect that each nation will re-allocate a pre-determined amount of its foreign exchange reserves into SDR. This amount will be determined by level of sovereign debt and trade balance, correlated with optimum capital flows. Each nation will hold a certain amount of their own domestic currency within their foreign exchange reserve account. This amount will be determined by the allocation of SDR.
Gold reserves are also likely to be placed on deposit with the IMF for allocations of SDR. This would follow a similar legal framework to that of the dollar, and how nations placed their gold on deposit with the Federal Reserve when the dollar was placed at the apex of the international monetary system in 1944.
Though such a system is fraught with the dangers of socioeconomic totalitarianism, the emerging nationalism which is beginning to sweep the world, and the spread of the self-regulation of rent-seeking, provides some glimmer of hope that the forces of good and right-mindedness in this world can hijack the very systems designed by the Crown Beast for the betterment of humanity.
The international institutions, such as the United Nations, World Bank, IMF, and Bank for International Settlements, among others, will need to be “re-organized” and “re-mandated” with promoting the sovereignty of nations and removing the agents of human weakness from within their ranks. Such has been accomplished in times past, and such can be accomplished now. – JC
This article is copyrighted by POM Media©2017. As Premium content permission is not given to be copied and re-posted.
JC Collins can be contacted at firstname.lastname@example.org