Thursday, March 29, 2012

BRICS advance plans to replace dollar

For years these countries made vague plans about economic cooperation. Recent events have spurred their efforts, which are nearing completion. This spells bad news for the average resident of the U.S. These were all countries that were happily abiding by the structures of the U.S.-led international economy, with its privileged position for the U.S. dollar.

Though they are called the BRICS countries now, interestingly, they have a history of common interests and alliances dating back to the Cold War Era: Brazil, Russia, India, China, South Africa. There is no J in the name, but I would add Japan to the list, as they have also been part of numerous currency and bilateral trade deals with China and others recently.

Their new economic union portends a sea-change in the economic affairs of the world, though these events are gaining barely a mention in the U.S. press. They are establishing trade relationships using their own currencies and central banks, dispensing with the U.S. dollar and the Anglo-American banking establishment, embodied in such institutions as the IMF and the World Bank.

They are spinning these moves as a form of risk management, which is true to a degree, but the main point of the moves is financial and economic independence from the rapidly sinking U.S. economic order, and freedom from the dictates of U.S. foreign policy.

--The biggest event to get their ball rolling was the ongoing banking bailouts begun in 2008, which have had the effect of exporting a massive amount of inflation to the rest of the world.

--Ballooning debt levels, which no one can reasonably believe will ever be paid off, have done their part to undermine foreign faith in the US dollar.

--Iranian sanctions this year are the acute problem which has led to so much recent frenzied alternative economic-planning activity.The rest of the world doesn't particularly want to go along with U.S. policy on Iran, but they are forced to by their subservience to the Western financial system, such as the SWIFT payment clearing house.

Nor does the rest of the world want to subsidize our continued war-mongering, but they are forced to by their need to reinvest their US-dollar trade surplus into government debt. Basically, everyone knows the US dollar is going down, and earnestly wants to see it do so, but because everyone is holding a massive surplus of dollars, they are all treading lightly, trying not to completely destroy the value of their dollar investments.

For U.S. residents, the process of dollar replacement most directly involves massive inflationary pressures. The international demand for dollars is shrinking, meaning the domestic supply is rising. The cost of everything will continue to rise, not only because of a swelling of the dollar supply, but also because the US will be deprived of its position as "buyer of last resort". In practical terms, that means that foreigners will no longer be dumping their goods cheaply on the U.S. market. The costs of everything will rise for that constriction of supply.

There are some positives to this development, however. For one, the high dollar acts as an impetus to immigration. As the dollar falls, people will no longer want to move here to work or live. Another benefit of the falling dollar is that American produced things will become more competitive, thus allowing the rebuilding of our productive economy and the expansion of our employment base. The transition period will be the killer, though.

Right now, the U.S. economy is totally dependent upon government expenditures. If the federal government had to balance its budget tomorrow, the U.S. economy would collapse the day following. Restoring domestic production, employment, and prosperity will be a painful process. The longer we drag out the adjustment through the distorting effects of government debt spending, and the more we disrupt international trade (especially in oil) with our war mongering, the worse it will be.

source news articles:

Wednesday, March 21, 2012

What is Sound Money?

Money has one basic function: to enable trade in a community. Because money allows you to acquire things in a community, money then also gets a second function: it gets hoarded as a store of value. Those are the two common roles of money: to enable trade and to store value for future trade.

What is "Sound Money"

The ideal money would be perfect at both roles. Unfortunately, money that is good at one function is bad at the other. Consider the characteristics of dollars versus gold.

Dollars are excellent at enabling trade. The Fed Reserve releases a bunch of them at the drop of a hat to stimulate the economy or to bail out a member bank. Trade and consumption are constantly stimulated by flooding the economy with dollars.

However, this makes the dollar an extremely poor store of value. Inflation is a regular and desired part of the system, a feature not a bug! Under the Fed Reserve system, value has to be stored elsewhere, usually in stocks or bonds. Storing money in dollars means you are quickly losing purchasing power, because of the inherent inflation built into the system.

The function of banks in this system is to create more money, and distribute it to the consumer economy on easy terms. This is known as fractional reserve banking, as banks create new money through loans, backstopped by the Fed Reserve, which will make sure they never run out of money.

Gold is often called "the only sound money" because it is such an excellent store of value. Gold itself never rusts or corrodes, it can't go bankrupt or be overthrown like companies or governments, it strongly resists counterfeit, and it has a relatively strict limit on supply.

However, it is very poor at facilitating trade. Indeed, precisely because it is such a good store of value, people tend to hoard it. Under the gold regime, anytime people save money, monetary deflation is unleashed on the economy, stifling trade.

Under this system, the function of banks was to get money out of savings and back into circulation. Other people's savings became the basis of new loans, as banks could not, themselves, create new money.

Historically, because of its limitations, gold money was never used as a primary means of exchange, that was left to more common metals like copper or silver, or paper certificates, bills of exchange, and cheques.

The Commodity Problem Facing Money

A fundamental problem facing any money supply is also brought about because money itself quickly takes on the traits of a commodity. Money in too great or too lean a supply can wreak havoc upon the productive economy. There is also the problem that economic activity is wasted when it is concerned with the supply of money itself, since manipulating the money supply itself is not a productive activity.

Thus, the ideal type of money would have three traits: excellent at trade facilitation, excellent at value storage, and not treated as a commodity. A created-on-demand, credit-based, electronic monetary supply appears to be able to meet these conditions, and represents the next major advance in monetary development.

In my next essay, I will detail how this money supply can come into existence and be used to build up the economic health of a community.

Monday, March 19, 2012

Modern Barter System at work in Greece

This is a very instructive article, dated from November, but I just discovered it. It describes how the modern barter system works in a town in Greece, like the Jubilee Network is designed to work here.

Turns out, a functioning economy doesn't need money, it just needs an accounting system. The system in Greece uses some special device to attach to cell phones. The JubileeNet doesn't need a special device, you can just enter the transactions directly on your internet-connected phone.

Just like in my JubileeNet, in Greece, the same system also functions as a store-front and help-wanted page. It both advertises its own market and tracks balances of the market participants.

If you have not yet signed up for a JubileeNet listing, you can do so here:

See the article on the Greek system here:

Friday, March 9, 2012

China lending in yuan with Brazil, Russia, India, and South Africa

China's efforts at dollar replacement are getting quite serious, in the final phase of internationalization at this point: providing loans in their own national currency.

Of course this whole thing is prompted by the U.S.'s heavy-handed use of forcing everyone who uses dollars to participate in the U.S. economic boycott on countries like Iran. Rather than have their foreign policy highjacked by U.S. decision-makers, these countries are sensibly setting up their own alternative trade arrangements, which will be immune to U.S. bullying.

Forcing other countries out of the U.S. dollar is like shooting our own feet, i.e., totally self-defeating. We will continue to see powerful inflationary effects as more and more dollars are displaced from international trade. The dollar becomes worth less and less, and everything we import becomes more and more expensive. Our cost of borrowing goes up as well, and eventually we will have to balance our government budget. This is not going to end well.

The article:

China is reportedly to begin extending loans in yuan to BRICS countries in another step towards internationalizing the national currency and diversifying from the US dollar.
­The Chinese Development Bank wants to sign a memorandum of understanding with the country's partners from BRICS group of developing countries on increasing yuan-denominated loans, while partners increase loans in their national currencies, The Financial Times reports, citing people familiar with the talks.
The move aims to increase trade volumes between the five nations and diversify from using the US dollar.
Brazil and South Africa were quick to react to the proposal, saying they expect the lending pledge to be included into a master agreement to be signed in New Delhi on March 29.
“We will discuss the creation of structures and mechanisms for lending in local currencies in order to maximize economic and financial transactions between the countries that are members of the accord,” Brazil’s development bank BNDES said.
China, with 54 per cent of its foreign reserves in US dollars, has been trying to diversify from the currency it believes will weaken soon and for a protracted period.
China agreed to use national currencies with Russia, Belarus and Japan for bilateral trade. The country also decreased its foreign reserves in dollars recently in favor of the Australian and Canadian currencies.

more details about the participants:

LONDON, March 7 (Reuters) - China is planning to extend renminbi loans to other major emerging BRIC countries, in another step toward the expansion of the yuan's role in foreign exchange, the Financial Times reported on Wednesday.

The China Development Bank (CDB) will sign a memorandum of understanding at a meeting with its BRICs counterparts - Russia, South Africa, Brazil and India - in New Delhi on March 29, the newspaper reported, citing people familiar with the talks.

Under the agreement CDB, which lends mainly in dollars overseas, will make renminbi loans available, while the other BRICs nations' development banks will also extend loans denominated in their respective currencies, the FT said in an article published on its website.

The renminbi is the official currency of China and its primary unit is the yuan. Of the six largest economies in the world, China is the only one whose currency does not have reserve status.

The initiative aims to boost trade between the five BRICs nations and promote use of the renminbi, rather than the U.S. dollar, for international trade and cross-border lending, the FT said.

In the past few years Chinese authorities have begun to gradually internationalise the currency before fully liberalising China's capital account. Much of China's banking system, however, remains regulated, and lending is largely controlled.

BNDES, Brazil's development bank, and South Africa's Finance Ministry were cited by the FT as saying they expected an agreement to be signed at the New Delhi meeting, which would include the lending pledge, with details to be ironed out during a summit.

"We will discuss the creation of structures and mechanisms for lending in local currencies in order to maximise economic and financial transactions between the countries that are members of the accord," BNDES was quoted as saying.

Other signatories would include Russia's Vnesheconombank, the Export-Import Bank of India and the Development Bank of Southern Africa, according to the article.