Modeling the China System and How Best to End the Jamaican International Monetary System
By JC Collins
Most consider Bretton Woods to be the monetary system which is in use today, or at least a corrupt version of that system. But in fact the Bretton Woods system of fixed exchange rates ended in 1971 when Nixon closed the convertibility of gold. What took its place was called the Jamaican International Monetary System.
This little known name has its origins in monetary negotiations which happened in Jamaica in 1976. Attempts had been made since 1971 to re-arrange and renegotiate the framework of the international monetary system. A loose agreement built around the US dollar once again emerged and the global imbalances continued to compound and expand.
The forthcoming use of the SDR as a means of international payment will act as the catalyst which finally re-organizes and transforms the international monetary framework and begins to correct the massive imbalances which have developed since 1944. These imbalances have accelerated since 1971 and 1976 respectfully.
The use of the SDR is paramount and central to the changes that have already begun. But there is a broader fluctuation and allowance for changes and adjustments on other levels. Being the SDR acting as the core tenant and centralized unit of account, domestic currency and associated exchange rates could experience random and varying alterations.
China has experimented with numerous monetary models over the decades and has seemed to have settled on the onshore and offshore model to control and influence capital flows. It is always expected that the China model is inferior to the American dollar model, but this may not be the case.
Both the International Monetary Fund and the Bank for International Settlements, foundations of the international banking interests, have been heavily involved in the construction of Chinese monetary policies. The onshore and offshore model could very well act as the safety net between the macro international system and the micro domestic system and associated financial markets.
The use of SDR substitution accounts to reduce the accumulation of USD in the foreign exchange reserve accounts around the world is only one tool. The exchange of USD debt for SDR quotas will serve to minimize reserve accumulation imbalances but cannot fully address the investment losses which will take place when the USD depreciates on lower demand.
There have been some schemes discussed surrounding using the SDR interest rate to offset some loses but the underwriting will have to be the main burden of the IMF itself.
Perhaps a method of replicating the China onshore and offshore model could play a role in minimizing these losses.
The US Treasury could, with the support of the IMF and BIS, fragment the dollar into an international version and a domestic version. The international dollar could depreciate at a lower rate than the domestic dollar, or the reverse could take place. Perhaps one could even appreciate while the other depreciates.
The fact of the matter is that such an arrangement would allow for a broader set of tools to deal with international imbalances and debt, as well as domestic financial market instability. The ongoing credit market challenges in China, and the subsequent responses from the People’s Bank of China, could very well be testing the dynamics of such alterations and real-time adjustments.
Such an arrangement would also give America more room for re-negotiating their sovereign debt, which is something Donald Trump has suggested during the presidential campaign. This would factor directly into the foreign exchange reserve accumulations and the reduction of those reserves.
A large amount of damage has been done under the Jamaican system since 1976. Undoing and reversing these imbalances and systemic risks will take profound changes and real time responses to the effects of those changes.
With the election of Trump we are already experiencing the transformation of the international monetary system and the related geopolitical ramifications of those changes. These changes have been thoroughly discussed here on POM and should not be surprising to most readers. Each year this multilateral monetary transformation becomes more interesting with 2017 now set up to give us the biggest changes yet. – JC