By JC Collins
With so much happening on the economic front over the last few weeks its important to ground ourselves and take stock of just what is actually taking place. The continued depreciation of oil and the beginnings of depreciation of the stock markets are the result of the end of Quantitative Easing and the beginnings of the deflationary correction which will build the case for the economic transition from the unipolar USD Bretton Woods based system to the multilateral SDR based system.
There is much talk in the media, both mainstream and alternative, that the return of QE is imminent and the Federal Reserve will not be able to raise interest rates. These proclamations are not considering the reality that deflation and depreciation is exactly what is being engineered, and has been since 2008.
Due to the level of USD in the foreign reserve accounts around the world there is not one single government or central bank that is willing to allow the dollar to collapse. Nor is there any one country that is willing to submit their domestic currency to the pressure inherent in the status of global reserve currency. Anyone who suggests otherwise simply does not understand the fundamentals of macroeconomic frameworks and the Triffin Paradox, which has been proven factual by 70 years of USD historical data.
The Triffin Paradox, or dilemma, is defined by the pressure exerted upon a domestic currency when it is used as the global reserve currency. As the currency accumulates in the foreign reserve accounts of central banks around the world, it creates depreciation pressure on the home economy. The United States has exported this depreciation though exchange rate imbalances.
The preliminary framework of the multilateral system has been carefully constructed over the last few years with only IMF reform left on the table. The overt political tension which will soon surround these reforms and the deflation which is now taking place will soon merge into one socioeconomic paradigm which will push the international monetary system in the direction of the multilateral.
As stated in previous posts, 2015 will be a year of transition and implementation. While alternative analysts have been weaving tales of economic collapse and war, we have been studying and reviewing the actual mechanics of the multilateral framework.
The obvious conclusion that fits the actual metrics and situation which is unfolding is that the original Bretton Woods Accord is being reversed in preparation for the SDR based system, a supra-sovereign unit of account that will not be burdened with the challenges as presented in the Triffin Paradox.
The movement and repatriation of gold which has been much lauded as signs of dollar collapse have in fact been the reversal of the Bretton Woods framework which placed allied gold in the reserve account of the Federal Reserve to support the USD system which was agreed back in 1944.
The dollar has been appreciating while the currencies of the emerging economies have been depreciating because that is the imbalance in the exchange rate system which is inherent in the USD Bretton Woods system. In addition, the appreciation of the dollar supports the exchange of USD liquidity for SDR liquidity through the substitution accounts which are designed to facilitate a decrease in dollars in the foreign reserve accounts of central banks around the world without depreciating those assets in the process.
Those who promote the idea that China will dump the dollars they hold are spreading misleading information and likely have ulterior motives. The USD which China holds is an investment which they have made and it is more probable that they will attempt to exchange that investment for an alternate investment as opposed to intentionally depreciating their own assets.
It would be like any of us purchasing shares of a specific company and then implementing a process to devalue those shares. It would make no sense.
The volatility which is now building in the Euro zone also fits with the mandates of the multilateral framework. The probability of a fracturing of the Euro is building and I would suspect that the currency basket itself will be fragmented leaving the European Monetary Union itself intact. Each country in the European Monetary Union will revert to its own domestic currency with Germany and perhaps the Russian ruble representing the two European seats on the IMF Executive Board and in the SDR basket.
When viewed through the lens of the multilateral framework and SDR basket adjustments which are coming this year, the fragmentation of the Euro currency makes sense as a basket of currencies in a basket of currencies situation is unworkable and adds deeper layers of dysfunction.
There is no doubt that this year will be explosive with dramatic changes and devaluation across the macroeconomic spectrum. Which means its all the more important that we remain grounded and continue to build our understanding of the transition which is taking place.
The amount of USD in the foreign reserve accounts around the world has given the United States leverage on how the transition progresses, but progress it will and the USD will become one of many currencies in the SDR basket, and the SDR will become the global reserve unit of account, minus the problems as presented by the Triffin Paradox.
I’m working hard on getting the first installment of The Economic Transition Papers completed. The first installment, titled Reengineering the Dollar, will explore the issues discussed here in more detail. – JC