Global Monetary Architecture
The quarterly Incrementum Advisory Board meeting was held last week (the full transcript is available for download below). Our regulars Dr. Frank Shostak and Jim Rickards were unable to attend this time, but we were joined by special guest Luke Gromen of research house “Forest for the Trees” (FFTT; readers will find free samples of the FFTT newsletter at the site and in case you want to find the link again later, we have recently added it to our blog roll). Below we add a few remarks on a topic Luke Gromen is paying a great deal of attention to.
Special guest Luke Gromen of FFTT.
For readers not familiar with FFTT, Luke has a very special ”big picture” focus, namely the current global monetary architecture and the ways in which it might change. The US dollar has been the world’s senior currency for many decades, but history suggests that this mantle will eventually be passed on. Accumulation of dollar reserves by foreign central banks has soared since the turn of the millennium, and the most conspicuous increase has taken place in China, which has long surpassed former top reserve holder Japan.
It is no secret that many foreign governments look askance (and perhaps with a bit of envy) at the “extraordinary privilege”, as Charles de Gaulle once put it, which the dollar’s reserve currency status bestows on the US. Presumably they have all the more reason to do so nowadays. Prior to Nixon’s unilateral suspension of the Bretton Woods gold exchange standard, it could at least be argued that the “privilege” was limited to some extent by the size of US gold reserves.
In addition to the economic advantage the dollar’s reserve currency status is deemed to convey, there is also a geopolitical dimension to the currency’s role. China and Russia in particular are not entirely happy with the current “unipolar” dispensation – despite the fact that they are largely tolerant of the so-called Pax Americana, and even seem to welcome it to some extent. Still, the governments of both countries clearly want to control their own spheres of geopolitical influence, and often state that they would prefer a “multi-polar” world.
China’s forex reserves (most of which are denominated in USD) have grown relentlessly for decades, but it appears as though a significant peak was reached in 2014 – click to enlarge.
In 2014 the trend in global reserve accumulation began to turn down, as exemplified by China’s reserves in particular (see above). Given that the lion’s share of global trade is invoiced in USD, the governments of countries like China and Russia probably feel as though they are funding their most powerful potential adversary, but they have had little choice in the matter so far – their central banks buy whatever currencies their export sectors earn.
Central banks then “recycle” these forex purchases and occasionally diversify them a bit, but then they are faced with the fact that the USD and the US treasury market …read more
Source:: Acting Man
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