Guest Post by Martin Armstrong
The only benefit of Bitcoin is that it is neutral. But it is insufficient for world commerce because it cannot be used for lending or credit, or you end up in the same situation where it is just leveraged – the very complaints about fractional banking. You deposit $100 in a bank, and they lend out $92, and then two accounts show the same cash. The money supply can be multiplied many times through credit. The nonsense that Bitcoin would replace the dollar as the reserve currency only shows that those people do not understand the world financial system. To accomplish that, you will destroy everything – mortgages can no longer be made, and the entire world is plunged into a truly monumental depression, sending us back to the Dark Ages.
The primary argument against the dollar is that the Neocons have turned it into a political weapon by sanctioning Russia and removing it from SWIFT. That woke up many countries, who then realized that the dollar had become a weapon and no longer an impartial currency in world commerce.
The de-dollarization is NOT economic-based but POLITICAL. Wake up! This is not the standard fiat money nonsense. This is about political power to force countries to do the bidding of American Neocons or else!
The more practical neutral element would be gold. But there cannot be a “GOLD STANDARD” whereby you fix the price. With time, such a system will collapse, as did Bretton Woods. A monetary system MUST float, as does the economy and everything else. During a depression or recession, people sell assets and run to cash. In inflationary booms, you buy assets and get rid of the cash. LOOK – I am NOT an academic! I advise on trillions of dollars and have watched how capital responds for about 50 years. It is always self-interest – not theories of equality.
400 oz Central Bank Gold Reserves
I have been called in by central banks worldwide BECAUSE we have been the largest institutional adviser since we have focused on capital flows and currency markets. I can tell you that central banks are NOT buying gold because they think it will go up. That has absolutely NOTHING to do with such decisions. They are buying gold because it is NEUTRAL, and you can no longer trust the dollar, British pound, or the Euro, no less the Yen, etc. All Western currencies are now subject to political intervention as we enter the mere risk of war and Neocon intervention.
The only way to create a neutral, NON-POLITICAL world currency would be one where international transactions are carried out in gold – BUT on a FLOATING RATE – not fixed. During the 14th century, even Florence had a two-tier system where gold was used for international transactions and silver for domestic transactions. The more practical monetary system would be for each country to maintain its own currency for domestic use, and the international settlements would be in NON-POLITICAL gold.
This is the problem with the Euro. They eliminated the currencies to end the fluctuations between the member states. Still, the refusal to consolidate the debts meant that the volatility that once existed in the currencies was merely shifted to the bond market where each member’s debt trades according to their credit rating, as is the case among the 50 states in the USA.
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People use “reserve currency” at present in a very loose manner. In the context of this question, it had a very specific meaning. Currencies were pegged, ultimately to gold. Currencies that had inadequate gold reserves used “strong” gold-backed currencies as extra backing for their pegs. Hence, the strong currencies were used as reserves.
Britain lost almost all of its gold reserves in World War II, in order to finance the war effort. (The process started earlier, with large losses in World War I.) Without adequate gold reserves of its own, the pound was not a credible backing for another country’s gold peg. Hence, it lost reserve status.
The Bretton Woods agreement enshrined the financial reality of the post-war system: the U.S. has accumulated almost all of the official gold reserves as a result of supplying the warring countries. The system was set so that the US dollar was gold-backed, and other currencies were backed by the USD. – stackexchange
Now that the $ is no longer backed by gold, now what?
Are we believing that it ever was? I didn’t get the memo.
So dollars in circulation are directly backed by government debt, However, it is important to realize that physical currency is only a tiny portion of the total money supply.
This is because most money is created by commercial banks, not the Federal Reserve.
The US government ensures the value of Treasuries (and thereby the dollar) by ensuring that foreign and domestic economic participants trust that the United States will always pay back its debts. Indeed, investors often consider Treasuries to be “risk-free” because US creditworthiness is so strong.
Full Faith and Credit Clause, or in other words, smoke and mirrors!
it has been half a century since the dollar was backed by gold, even in the limited sense that it was after 1933. Since then, the dollar has been backed by lead and uranium.
It’s becoming clear to more folks that the us govt has been swimming naked even on _that_ backing recently.
But store up for yourselves treasures [life experiences, developed skillsets] in heaven [your mind and body] where moths and vermin do not destroy, and where thieves do not break in and steal.
Anyone defining heaven as “all in your head” needs their Heaven examined!
_ _ _ ver by ha_ _
[Shhh, stop sharing the truth with dustmops]
While I grant that Martin can be a mild abrasive at times and would greatly benefit from a bit more modesty and an editor, he is nobody’s fool when it comes to finance and has the courage of his convictions. His observations here are very much on point.
Anyone heard from Clif High lately?
Apples and oranges.
Here’s your new economy under BRICS…
So, a large part of the world won’t accept dollars for foreign aid?
No problem.
So, in an international transaction you must buy gold with your domestic currency.
If your currency is getting stronger vs gold, It will cost you less for imports.
If your currency is weakening vs gold , it will cost you more for imports.
A country who is weakening its currency at a faster rate will result in capital moving outside the country. Which should be a powerful incentive not to. The only question remains ? What type of system prohibits governments from being dumb?