Wikinvest Wire

A very flawed world monetary order

Wednesday, January 21, 2009

Surely, at some point in time, some group of wise men somewhere will finally get together and realize that, during an era of excessive speculation, a monetary order where half the world's money floats freely and a good portion of the rest is rigidly fixed to the U.S. dollar is not an optimal system.

News comes today that the British pound, a high flier not more than six months ago, has hit a seven-and-a-half year low against the greenback as the U.K. government ratchets up its government rescue plans for the nation's banking system.

Bank of England Governor Mervyn King noted yesterday that monetary policy alone will not cure the present economic ills (translation: borrow and/or print more money) and speculation is increasing that, with unemployment rising sharply and home prices falling at an even faster pace, data to be released later in the week will indicate that the economy is undergoing its sharpest contraction in 30 years - maybe longer.

Naturally, currency traders have seen fit to sell the British currency and buy something else, the Japanese yen and the U.S. dollar, where economic ills are nearly as bad, being the least offensive alternatives.

In chart form, the last six months look like this, the five currency ETFs shown below representing (from top to bottom in the legend to the left) the euro, the pound, the yen, the Canadian dollar, and the Chinese Renminbi versus the U.S. dollar (for a complete list of currency ETFs, see this item at Stock-Encyclopedia.com).
IMAGE The other massive problems of the global economy notwithstanding, how could those in the business of doing international business possibly develop a reasonable business plan when they're not sure if one currency or another is going to be up or down 20 or 30 percent over the next half-year.

It makes currency pegs, like the one seen above for the Chinese, seem a quite reasonable response to the condition where there are no "anchors" to the global monetary system other than the U.S. Dollar, which has its own share of problems, but, today, is apparently perceived as less flawed than most others.

Of course, that may change tomorrow.

At the moment, there are real and growing fears that the decline in the British currency has become too "disorderly", Ambrose Evans-Pritchard of the Telegraph noting yesterday that "the latest dive has a very malign feel."

The fear is that currency "traders", who apparently serve some sort of a useful purpose in the world by rewarding currencies of more deserving nations and punishing those where the economy and/or financial system are struggling, may be set to punish the pound a bit more.

Maybe a lot more.

Meanwhile, once high flying currencies in tiny countries such as Iceland and New Zealand remain basket cases and there are rumblings that Spain, Italy, Greece, along with Ireland may not last much longer within the harsh confines of the Euro where monetary policy is formulated by stern Germans and French.

The source of all the recent problems has to do with debt - too much of it.

And much of this debt was accumulated due to the very nature of the current world monetary order - financed by money from massive trade surpluses in Asia and the Middle East where currency pegs are the norm, some nations in the West developed even more massive credit and housing bubbles that have now burst.

With a better global monetary system, many of the world's current problems would not have been possible.

2 comments:

Reginald said...

Precious metals are the best forms of money known today. No government in the world will ever give up the ability to turn paper into money and finance whatever it pleases. Even Zimbabwe is still forcing people to use its fiat money.

Anonymous said...

This parallel with what Zimbabwe has done, was brought to my attention the other day. By just printing money without an intrinsic value, the US is making the situation worse.

It reminds me that the Dutch Prime Minister (Colijn) in the early 1930's refused to have the Netherlands leave the gold standard, because he said that it was "theft". 18 months later, the country had become impoverished and had to follow the rest of the world.....

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