31 March 2009

Taken for the Ride of Our Life

by Doug Wakefield and Ben Hill, Best Minds, Inc. | March 30, 2009

In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said the goal would be to create a reserve currency ‘that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies.

Analysts said the proposal was an indication of Beijing’s fears that actions being taken to save the domestic US economy would have a negative impact on China.

Although Mr. Zhou did not mention the US dollar, the essay gave a pointed critique of the current dollar-dominated monetary system.

‘The outbreak of the [current] crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system,’ Mr. Zhou wrote.


To replace the current system, Mr. Zhou suggested expanding the role of Special Drawing Rights, which were introduced by the IMF in 1969 to support the Bretton Woods fixed exchange rate regime but became less relevant once that collapsed in the 1970s.

Mr. Zhou said the proposal would require, ‘extraordinary political vision and courage’ and acknowledged a debt to John Maynard Keynes, who made a similar suggestion in the 1940s.”

And, perhaps this is the direction that was intended all along. If you’re unfamiliar with the idea that John Maynard Keynes proposed in the 1940s, let me take you back to that era, when the world was still reeling from another world crisis and currencies were far off the radar screen of most individuals. On page 481 of, A History of Money and Banking in the United States, Dr. Murray Rothbard notes:

“While the [US] White Plan envisioned a substantial amount of inflation to provide greater currency liquidity, the British responded with a Keynes Plan that was far more inflationary. By this time, Lord Keynes had abandoned economic and monetary nationalism for Britain under severe American pressure, and his aim was to salvage as much domestic inflation and cheap money for Britain as he could possibly induce America to accept. The Keynes Plan envisioned an International Clearing Union (ICU), which, in return for agreeing to stable exchange rates between currencies and the abandonment of exchange control, provided a huge loan to its members of $26 billion. The Keynes Plan, moreover, called for a new international monetary unit, the ‘bancor,’ which could be issued by the ICU in such large amounts as to provide almost unchecked room for inflation, even in a country with a large deficit in its balance of payments.”

And, Geithner is open to China’s suggestion. On March 26th 2009, a Chinese news source, the People’s Daily Online, noted:

“Meanwhile, Timothy Geithner, speaking at the Council on Foreign Relations in Washington on Wednesday, said that the U.S. is ‘open’ to China's proposal.”

‘I haven't read the governor's proposal. He's a very thoughtful, very careful distinguished central banker. I generally find him sensible on every issue,’ Geithner said, saying that however his interpretation of the proposal was to increase the use of International Monetary Fund's special drawing rights (SDRs) – shares in the body held by its members – while not creating a new currency in the literal sense.

‘We're actually quite open to that suggestion – you should see it as rather evolutionary rather building on the current architecture rather than moving us to global monetary union,’ he said.

‘The only thing concrete I saw was expanding the use of the (SDRs),’ Geithner said. ‘Anything he's thinking about deserves some consideration.’

The continued use of the dollar as a reserve currency, Geithner added, ‘depends on how effective we are in the United States...at getting our fiscal system back to the point where people judge it as sustainable over time.’”

Though we discuss the behind the scenes aspects of these maneuvers in more detail in the closing pages of our November 2008 issue of The Investor’s Mind, “The Power of…the Few,” we will briefly touch on SDRs in the IMF’s own words:

“The Special Drawing Right (SDR) was created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system.

After the collapse of the Bretton Woods system in 1973, the SDR was redefined as a basket of currencies, today consisting of the euro, Japanese yen, pound sterling, and U.S. dollar. The U.S. dollar-value of the SDR is posted daily on the IMF's website.”

As we read the IMF’s website further, we learn that the IMF has been trying to expand the amount of SDRs in circulation for years. The only thing the IMF needs to do so is a “yes” vote from the US on an IMF amendment. In the same issue of The Investor’s Mind, we quote George Soros’ October 28th 2008 article in the Financial Times, where Soros states, “The financial crisis is spinning out of control. It is time to start thinking about creating special drawing rights or some other form of international reserves on a large scale, but that is subject to American veto.”

On April 2nd 2009, the G20 will meet in London to discuss the largest expansion of lending powers of the IMF in world history. Both Japan and the United States have indicated that they will loan the IMF up to $100 billion, while the EU has stated that they will loan the IMF €75 billion.

While the UK has not agreed to an amount to loan to the IMF, as of this release, their financial stress indicates that they are having severe problems of their own right now. On March 25th 2009, a Bloomberg article titled, UK Bond Auction Fails for the First Time since 2002, reports:

“The UK failed to find enough buyers for 1.75 billion pounds ($US 2.55 billion) of bonds for the first time in almost seven years as debt investors repudiated Prime Minister Gordon Brown’s plan to stem the worst economic crisis in three decades.”

While most individuals refuse to believe that we have arrived at this juncture, any good contrarian looks to history to get their bearings. An expansion of a central currency will shift power away from independent countries and towards the global powers that be. And though, in light of the US’s profligacy, this may sound like a good idea to many, there is ample evidence to suggest that we were led to this point for a reason. Joan Veon, founder of the Women’s International Media Group, shows us that the “Public-Private Partnership” has been around since at least 1996 and talks about the history of such arrangements.

“I first heard the term Public-Private Partnership (PPP) when I attended the June 1996 United Nations Habitat II conference in Istanbul Turkey. The first time I read the conference’s Programme of Action, I missed it completely. After I returned from Istanbul, I went back over the document and was shocked at its prominence. I spent six months trying to figure out what it was and I even conducted several interviews with people at the U.N. and other agencies.

A Public-Private Partnership is exactly what it says it is. First, it is a partnership that is business arrangement, and it is for profit…Historically, such deals were considered glaring conflicts of interest, and as such, not in the best interest of the people…When you marry government and business, all existing rules of law and government change as the checks and balances of our Constitution no longer pertain…The door is open for anything – politically, socially, and economically. Plunder is tyranny.” (The United Nations Global Straightjacket (1999) Joan Veon, pp83-86)

So if you have recently been swept into euphoria of this explosive rally of the last few weeks, and haven’t spent a great deal of time studying the history of money and politics, now is the time to start asking a great many skeptical questions. History suggests that the second quarter of 2009 could be among the most important periods in financial history.

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