2nd Quarter 2019 Wrap Up – The State of Our Currencies
"Everyone should be aware that inflation may rise in the future—and that it may do so unexpectedly strongly. But the long-term picture is that we are living in a disinflationary world, not in an inflationary one." ~ Mr. Claudio Borio, Head of the Monetary and Economic Department, Bank of International Settlements (BIS)
By Catherine Austin Fitts
The United States became the world's largest economy in the 1870s, but it took another five decades for the U.S. dollar to make serious inroads to compete with the pound sterling as the world's reserve currency. From World War I through the creation of the Bretton Woods System in 1944—a year before the end of World War II—the pound sterling and the U.S. dollar shared a reserve currency duopoly. After Bretton Woods, the U.S. dollar emerged as the global reserve currency.
The U.S. dollar has remained the global reserve currency ever since. Although the launch of the euro in 1999 drew some market share from the dollar, the countries in the European Union still depend on the U.S. military and NATO for their defense. The yen has a small market share of global reserves and trade, but Japan also depends on the U.S. for its national security umbrella. The pound sterling continues to function modestly as an international currency.
The financial crisis that began in 2008 strengthened the dollar position, as global investors sought significant amounts of safe-haven securities, and liberal monetary policies provided significant monies to fund dollar-denominated loans and capital. The subsequent euro crisis and European bank losses resulting from sovereign debt issued by the Southern European countries flatlined further growth in the euro share of reserve currency holdings. The dollar remained—as The Economist described it—"dominant and dangerous."
As the world recovered from the shock of the financial crisis, there was a growing push in numerous quarters to find ways of reducing dependency on the dollar as the dominant global reserve currency. This was led by countries smarting from the sting of U.S. financial sanctions, the aggressive extension of U.S. legal and regulatory authority throughout the global financial and banking systems, and competition for offshore haven funds. Several countries continued to resist joining the BIS central banking system.
The BRIC nations (Brazil, Russia, India, and China) as well as the Association of Southeast Asian Nations (ASEAN) went to work on creating swap capacity between central banks. New lending banks were created to reduce dependency on the IMF and dollar-denominated lending. Central banks began developing cryptocurrencies. Gold reserves rose in Russia and in central banks along the Silk Road, often at the expense of the dollar market share. China increased its global arrangements to create liquidity for the renminbi in financial capitals around the world and was finally able to persuade the IMF to include the renminbi in its SDR. Most importantly, China and Russia significantly increased their financial and economic cooperation. The Russian central bank opened its first overseas office in Beijing, creating an institutional capacity to bypass the dollar and to phase in a gold-backed standard of trade.
Then came the Trump election—with efforts to repatriate capital to the U.S., the U.S. cancellation of the Iran agreement, and a U.S. Congress intent on Russophobia. Russia proceeded to launch an alternative to the SWIFT payment system, and Europe created a system to avoid sanctions on trade with Iran while working on an independent credit card system. Meanwhile, Mark Carney, governor of the Bank of England, announced the movement to a multipolar world, and the President of France declared the unipolar empire a failure. Last month, the BRIC nations met to discuss the creation of a joint cryptocurrency, and Putin announced the U.S. dollar was likely to collapse soon.
Will the U.S. dollar maintain its position as the dominant global reserve currency? If it does not, what does that mean for you and me? Or is the important question whether all major currencies will convert to digital currency—further centralizing political and economic control? Indeed, the time has come to take a serious look at The State of Our Currencies.
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