Guest Post: A Look Ahead To 2018 from James Gibson
With all the recent talk of the death of the petrodollar, and the rise of the petroyuan, with the possibility of the Chinese yuan eventually assuming the mantle of the world’s premier reserve currency, I thought that Turdites might be interested in an extract from my book: FROM WEST TO EAST: The Greatest Transfer of Power and Wealth in the History of Mankind
This particular subject matter is covered in greater detail in the book, particularly the pros and cons, but it should give Turdites a flavour of what might lie further down the road, as the global dominance of financial and economic power gradually passes from the USA to China.
I have thought about producing a second edition of my book, updating it by incorporating recent developments, but decided against it, because predictions made in the book are now increasingly beginning to unfold, and I wish the contents of the book to stand, and going forward, recognized as being prescient.
For those Turdites that have not yet purchased the book, I believe it is a worthwhile purchase, as it becomes more relevant by the month, and ties together many apparently diverse and seemingly unconnected events, which are shown to very much linked, and part of a very carefully prepared, long term plan to create a One World Currency, and a One World Government. But a world which none of us would willingly choose to adopt.
The Chinese-Russian bloc have regularly lobbied the G20 since 2008, to have them agree to, and draw up, the basis for sweeping reforms to the current international financial system. Such reforms should not only address the symptoms, but also the root causes of the current, challenging, financial and economic problems being faced by the world, which includes the acceptance of a multipolar world, rather than the current USA dominated unipolar world. The USA obviously strenuously seeks to maintain and defend the current status quo.
In my opinion, it is not worth worrying about events over which one has no control. However, the book should provide food for thought as to how one might minimise any negative impacts, and perhaps enable people to come out ahead, particularly if one is prepared to keep an open mind, and think globally. The relevant extract from the book now follows:
The Expansion of the Special Drawing Rights’ Role Appears Convenient to Both West and East
The Chinese have all the necessary building blocks in place to support a new international financial system independent of the US dollar. They have worked extremely hard, and since 2008 with increased intensity, to reach their current position.
The Chinese focus is now on promoting the internationalisation of the yuan, establishing an oil futures exchange priced in yuan, and refining their various financial systems and institutions so as to be in a position to provide a seamless international financial platform across the full spectrum.
All things considered, it is highly likely that the Chinese preference would be to have more time to refine and bed in their financial systems in an orderly manner. However, bearing in mind the current fragile state of the international financial system, and the increasing Second Cold War tensions, circumstances might well overtake them, necessitating a baptism by fire.
At this point in time, there are two types of SDR: the O-SDR (“O” stands for Official and is only traded between national central banks), and the recently reintroduced M-SDR (“M” stands for Market, for trading on the open financial markets). The M-SDR has recently been reintroduced for use as an investment vehicle in the form of bonds initially available in the Chinese market. These bonds will be purchased with yuan, and upon maturity, they will be settled in yuan.
China’s renminbi/yuan officially became a component of the basket of currencies that are used to value the SDR on 1 October 2016. The SDR currency weightings are now as follows:
• The US dollar has a 41.73 percent weighting.
• The euro has a 30.93 percent weighting.
• The Chinese renminbi/yuan has a 10.92 percent weighting.
• The Japanese yen has an 8.33 percent weighting.
• The pound sterling has an 8.09 percent weighting.
It is important for the reader to realise that the SDR is just another fiat currency. It has no backing whatsoever other than the faith and confidence in the financial standing of the IMF. The involvement and weighting of the five currencies mentioned above is solely to provide a mechanism for the calculation of the SDR’s value in the foreign exchange markets. Just like any other fiat currency, it is created out of thin air.
A 2009 article written by Zhou Xiaochuan, governor of the PBOC (Peoples Bank of China) , was posted on the official PBOC website, in both Chinese and English, in which he called for a sweeping overhaul of the global monetary system. In that article he stated:
The price is becoming increasingly high, not only for the users, but also for the issuers of the reserve currencies. Although crisis may not necessarily be an intended result of the issuing authorities, it is an inevitable outcome of the institutional flaws.
Special consideration should be given to giving the SDR a greater role. The SDR has the features and potential to act as a super sovereign reserve currency.
This indicates to the writer that China has no aspirations to see the yuan replace the US dollar in the role of the world’s premier reserve currency, because the “price is becoming increasingly high,” and suggests that in China’s opinion, the SDR is best suited to the role of the world’s premier reserve currency, because the IMF has no trade deficit or surplus.
SDR policies and strategy would be driven solely by its role as a reserve currency, whereas the US Fed is continually conflicted as to its US dollar strategy, as it impacts both domestic and international markets. What is good for the US domestic market can be detrimental to the international market and vice versa. Using the SDR would eliminate any such conflict and seems a pragmatic solution, but there are cons as well as pros, as will be highlighted shortly.
In his article Zhou went into some detail as to how the O-SDR could become a reserve currency, which included:
using the O-SDR for the settlement of global trade and financial transactions and
promoting the O-SDR in the pricing of commodities, trade, and investments.
Zhou also wrote:
The basket of currencies forming the basis for SDR valuation should be expanded to include currencies of all major economies, and the GDP may also be included as a weight. The allocation of the SDR can be shifted from a purely calculation-based system to a system backed by real assets, such as a reserve pool, to further boost market confidence in its value.
With the O-SDR now actively being considered for an expanded role, it would make sense to include all the G20 currencies in the SDR basket. It would also make sense that the O-SDR have some tangible backing, as suggested by Zhou. Gold would be the obvious choice.
It is very likely that the O-SDR is viewed by the Chinese as a way to sidestep the yuan being looked upon as a potential future successor to the US dollar as the world’s primary reserve currency, as they view the downside of that role as being a route to possible continuous trade deficits, something that they seek to avoid.
The pricing of commodities, including energy, in O-SDRs would certainly assist China in its stated policy to reduce reliance on the US dollar. It would also be the death knell of the petrodollar.
The Puppeteers and TPTB may well be supportive of an expansion of the O-SDR’s role, as they would probably view that as a stepping-stone to the creation of a One World Currency, even at the expense of the death of the petrodollar. Remember, the Puppeteers and TPTB do not think in terms of individual nationhood per se; they only look at the global picture and how they can make something work in their favour within the context of achieving their ultimate goals.
So, for very different reasons, both the West and the East appear to be in favour of expanding the role of the O-SDR into that of the world’s premier reserve currency.