Currency Blocs and Forced Dollarization
By JC Collins
In this grave we seeded each other,
Petted, played, and frolicked and prayed.
While we rode underneath the devils udder,
Into the place where we stayed forever.
Thump, thump, thump. Can you hear? Do you see the ever watchful eye?
In many of the previous posts we have mentioned that the United States has dumped its inflation into the emerging markets. In this post we will attempt to explain this in further detail which will also give us a broader understanding of what will happen when this process is reversed.
Comprehension of the old system is relevant to the new multilateral system in that the relationship of micro to macro is never more obvious or exposed than in the moment of ultimate transition or fulcrum. A balance point where the old system is completely replaced by the new system will only be visible to the mind tuned specifically to watch for the tell-tale signs of the rhythm to its beating heart.
What happens when the same people that control a countries currency board also control the central bank of that country? Or better yet, what happens when the central bank of a more dominant country controls the currency board of a subservient country? These are questions which are of vital importance for us to understand as we observe the world’s financial system make its shift to the multilateral system. Only by fully understanding the crimes of the past can we hope to influence and prevent the crimes of the future.
So let us review a few definitions first before we get too far ahead of ourselves.
First, when we refer to a currency board what we are saying is that there is a process within a government and/or centralized banking system which allows its currency to be “freely convertible” at a fixed exchange rate. This convertibility is into a foreign reserve currency, usually the US dollar. The country will have to hold a balanced amount of the foreign currency to equal the amount of its own currency in circulation. This balance is defined by the fixed exchange rate.
Second, it is openly determined that the policy practises of a currency board and central bank are at odds with each other. As an example, a currency board will have the fixed exchange rate structure while a central bank will use the floating exchange rate system. A currency board will have full convertibility and a central bank will have limited convertibility. Currency boards cannot create inflation while central banks can.
As I’ve proposed before, the space between the differences of things are illusionary with the two opposing constructs only acting as if in opposition to each other. We are told that currency boards do not determine the amount of money in circulation. But can we honestly accept that the M1 money supply of any particular country is determined solely by market demands?
Here are three exchange rate structures:
Hard Exchange Rate (Fixed) – legal mandate to use the currency of another country, known as full dollarization. This structure of exchange fits perfectly with the currency board arrangement as defined above.
Soft Exchange Rate Peg (Fixed) – holds a stable exchange rate against an anchor currency, such as the dollar, or a compositions (basket or bloc) of currencies. This peg can be set to fluctuate within a predetermined margin with the anchor currency.
Floating Exchange Rate System – fluctuating exchange rate which is determined by market forces with no interference by central banks or currency boards.
It is said that countries with central banks and floating exchange rate systems can keep both separate from each other in a form of independent monetary policy. The reality of the world we live in would suggest this is not the case.
It could be argued that because the US dollar has held the primary reserve currency status of the world that it is in fact a type of de-facto hard exchange rate system which is worked within a currency board structure that is hidden within the bureaucracy of the central bank system.
That is a load of processing but think of it as the “forced dollarization” of the world and now the world will witness the reverse of this by way of “forced de-dollarization”.
Every strategy will have multiple angles and fronts. The “forced dollarization” of the world has taken place through such a process, where a unification of currency board structure and central bank bureaucracy along with varied exchange rate methodologies has driven the values and weights of the world’s currencies and commodities into a bizarre twilight zone of unrealistic valuation.
Whether by design or necessity, the world has created a wall of defense against the continued abuse of the dollars reserve status. The emerging markets, represented by the BRICS countries, are willingly promoting the usage of the International Monetary Fund structure as the method of transition to a multilateral system.
All of the items and events we have been covering here over the last few weeks will inevitably lead to the ultimate moment of transition or fulcrum referenced above. This fulcrum will be the tipping point where we begin to see the momentum of the “forced de-dollarization” of the world.
Let’s use a real world example to explain this process. Most of my readers will notice that I use the country of Vietnam in many of my example of currency valuations and economic growth indicators. For those who haven’t read the previous posts, I would suggest reading “Why the Vietnamese Dong Will Reset” for a further explanation of these growth indicators.
Vietnam has been a dumping ground for dollar inflation by way of a de-facto currency board system orchestrated through the State Bank of Vietnam by way of the Federal Reserve. The dongs exchange rate has been a “hard” one where it is fixed at a specific rate to the dollar. The lower this rate was set the more dong the SBV had to print in order to maintain the 100% ratio of dollar to dong required under the legal framework of the currency board structure and hard exchange rate system. The more dollars dumped into the Vietnamese economy the more they had to devalue their own currency.
As explained in the post “Why the Vietnamese Dong Will Reset”, the SBV and government of Vietnam went along with this process as its only means of moving forward on a path of modernization and economic growth. The fact that they have been able to realize the level of modernization and growth which they have under the oppression of the US dollar is a testament to the people of Vietnam.
In the post “The New Exchange Rate System” we explored how countries like Vietnam and others have and will continue to move away from the dollar by decreasing their foreign reserves of dollars and increasing their reserves of SDR’s and commodities.
As a part of the debt restructuring component of the emerging multilateral system the IMF will allow the M1 money supply of a countries debt to be segmented into consolidation portions and market demand portions. The dong, as an example, through a method of SDR composition exchange rate, will revalue to more accurately reflect the economic growth indicators of the country.
This SDR composition exchange rate structure will most likely be a blended system of hard and soft fixed rates and floating market demand rates. As an example, the gold or other precious metal component of the system will most likely be a hard fixed one while something as market oriented like oil or rice will be floating.
Within this exchange rate consortium we will see the natural extension of the multiple trade agreements emerging around the economic zones of the world. These economic zones can also be thought of as currency blocs. As we stated in previous posts, the Asian economic zone will use the Chinese renminbi as the primary SDR composition with the other currencies of the region making up the backbone of the currency bloc or regional composition.
Many clues and answers to how this process will unfold can be seen forthcoming in the actions of the Shanghai Gold Exchange. The multiple levels to the emerging system will contain both micro and macro components which will have to blend seamlessly for the overall process to take root.
The vulture eye is ever watchful but sees very little. The pattern unfolding over the years is hard to deny as is the forthcoming cause and effect of such a pattern. We will need to be observant of these patterns as the world is forced into de-dollarization. All outcomes of world events will be about further centralization and debt consolidation as well as de-dollarization. The pattern is becoming more visible in the dark. The charade and stage act taking place in Eastern Europe could very well be the fulcrum or tipping point for the transition to the new multilateral system.
Thump, thump, thump, comes the beating of its heart from beneath all the things that were. – JC Collins