The Winter of Awakening

Economics, Premium POM

By JC Collins

Much of what has been happening throughout the year will continue throughout the winter.  The global institutions and organizations will further progress on the path towards the multilateral financial system.  The patterns have been relatively easy to discern and discover, with a similar pattern continuing into the spring.

It is interesting that all G20 countries except for the United States are facilitating the process of internationalizing the Chinese renminbi.  This process involves increasing currency swap arrangements and trading hubs.  The news over the last year has been full of such stories and one is hard press not to fine dozens of stories with the most basic of searches.

Excluding the reluctance of the US for a moment, it is reasonable to assume that the G20 countries are doing everything they can to help internationalize the Chinese currency for the purpose of preparing it for inclusion into the SDR basket composition when it opens for review next year.  Adding the RMB to the SDR basket is a necessary step to implement the multilateral financial system over the next few years.

The path which has been chosen for internationalizing the RMB is through the expanded use of currency swaps and trading hubs with foreign governments and experimental controls on capital flows as well as offshore financial centers.  The offshore financial centers have been established by way of the RMB denominated gold contracts sold on the Shanghai Gold Exchange which started last month and the implementation of the BRICS Development Bank and Contingency Reserve Arrangement.

The internationalization of the RMB has broader implications for the world by adding diversity and assumed stability.  A more problematic effect of this internationalization will be a direct challenge to the hegemonic status of the US dollar as the worlds primary reserve currency.  This is likely why the US is reluctant to help or facilitate the process of renminbi internationalization.

The People’s Bank of China has made its intentions known in regards to this internationalization, as well as the macro integration of the RMB alongside other international currencies.  Further to the obvious intentions there are other consideration such as China not wanting the status of primary reserve currency.  As such the RMB will never be positioned to replace the dollar on the world stage.

But with that being said the US has made it clear that they no longer wish to have the primary reserve currency of the world because of the systemic faults built into such a system, such as trade deficits and large foreign account  reserves.  So how do we reconcile the differences between the US not participating in the internationalization of the RMB but also not wanting to have the responsibility of reserve currency any longer?

Perhaps the answer is more obvious than it would first appear.  Since China is the largest foreign holder of US debt it is likely that the US is doing its part not to internationalize the RMB, but to facilitate its inclusion into the SDR basket composition once the required level of internationalization has been reached.

A process where China can exchange its dollar reserves for SDR bonds, or liquidity, can be accomplished through substitution accounts, as described in the post The Old Economics of Devonian Water.

Where this process becomes interesting is when consideration is given to the exchange value of the renminbi.  If the Chinese currency remains undervalued it could hurt the SDR valuation once added to the composition.  So it is recommended that the RMB is appreciated before its inclusion into the basket.  China needs to be extremely careful in this area as appreciating the renminbi too fast could cause sudden shifts in its export and import business.

A few scenarios can play out here.  One, the RMB’s exchange rate stays pegged to the US dollar as it is now and it is included into the SDR basket with a valuation that is still determined by its fluctuation within the dollar system.  Two, the renminbi pegs to gold and is included into the SDR composition at a undetermined exchange rate with gold.  Three, the RMB pegs itself to the SDR as do all other currencies and commodities.

The first scenario I find to be extremely unlikely considering the reluctance by America to maintain the reserve status of the dollar.  Additionally, China would not be comfortable leaving its currency pegged to the US dollar as it becomes more internationalized.  It would leave the Chinese economy exposed to outside tampering and manipulation.

The second scenario is also equally unworkable as it would lean the exchange rates of the entire system and create deficiencies where deficiencies need not exist.

The third option is the most probable and likely considering the information.  But there is a process which must be followed closely in order for this happen.  When the renminbi is included into the SDR composition next year we could very well see the other currencies of the world unpeg from the dollar and peg to the SDR itself.  There may be some debate and reluctance by some governments to do this, but the mandates of the central banks will win out in the end and the desired exchange rate system will be implemented. See the post The New Exchange Rate System.

Ancillary to the third option is the likely inclusion of gold into the SDR basket composition as well.  In the post The Coming SDR Gold Standard we reviewed this potential and considered some of the methodologies that would accompany it.

Everywhere we look for evidence of this multilateral financial system we find additional agreements and consolidation amongst the G20 institutions and governments as well as the BRICS institutions and governments.  The expectation that the BRICS countries are going to expose and or overthrow the western banker structure is naïve and ignores the wealth of information available which states categorically that it is the opposite which is happening.

The US dollar is not going to collapse into hyper-inflation and in fact its purchasing power has been adjusting lately in anticipation of its integration in to the larger multilateral system.

Gold will not be skyrocketing into extreme levels of valuation for the simple reason that none of the institutions or central banks want it too.

None of the fiat currencies are going to collapse and cause widespread destruction and depression.  Perhaps one or two may suffer some severe adjustments, but nothing on the scale that is being predicted by the pushers of fear and distortion.

As we journey through the winter and into the spring more and more of what I’ve been saying will be realized by the broader readership who may now believe in the doomsayers.  Gold will continue to go down in nominal value as I have been stating it would, and with each passing day and week that the system doesn’t collapse and gold doesn’t take off to outer space, more and more readers and thinkers will awaken to the obvious pattern that is unfolding.

As I’ve stated before, I have no vested interest in seeing the SDR system materialize successfully.  In some ways I hope it doesn’t.  But that would mean we would see the collapse that so many spreaders of fear are profiting from today.  The best hope moving forward is to allow the consolidated SDR system to be implemented but in the process we design and constructively put into place the rent seeking limitations which can more effectively position the system down the road.

Do any of us want to see massive death and destruction?  I doubt it.  But neither do we want to see our freedoms stripped from us and left with nothing as all our wealth, being our time and labor, is continuously stolen by way of wealth transfers.  Currently the world we live in today is designed so that our time and labor has no choose but to service a never ending cycle of debt.  The best way to change that is from the inside out.  Both figuratively and literarily.  – JC