DIGG THIS

In the midst of the imploding US and European financial systems and the resultant bankruptcies, nationalizations and bailouts the People's Daily, China's official newspaper, called for a new global currency to replace the US dollar. Writing in the People's Daily edition of 17 September 2008 Professor Shi Jianxun of Shanghai's Tongji University said that "[t]he world urgently needs to create a diversified currency and financial system and fair and just financial order that is not dependent on the United States."

This was later followed by a Friday 26 September address by Prime Minister Gordon Brown before the United Nations in which he called for a new "global financial order." It is to be based on "transparency, not opacity, rewarding success not excess, responsibility, not impunity, and …is [to be] global not national.” Brown went on to say “We must clearly state that the age of irresponsibility must be [at an] end.” As the G20 nations prepare to meet in Washington this week Mr. Brown has again called for a new global financial order, a Bretton Woods II. Mr. Brown wants the Middle East oil producers and China to assist in contributing to the bailouts taking place in the United States and Europe. In calling for such contributions Mr. Brown is effectively admitting the United States and Europe are broke and have exhausted their government (and central bank) resources in an effort to cure this massive market correction (frequently called a recession, deep recession or even depression) which has been underway since August 2007. China has announced its own stimulus program but it is unclear whether included in the 4 trillion Yuan amount are new programs or existing ones or a combination of both (my Chinese friends who are cynical about China's government leaders laughingly tell me it probably includes the infrastructure projects for China's 2008 Olympics as well).

Professor Jianxun is right to express concern about the financial leadership of the United States and the United States dollar in light of the events taking place in Washington and in the capitals of Europe. Estimates by financial analysts of the various bailouts of US financial institutions, the US automobile industry and god knows who all are at $2.7 trillion dollars with more bailouts likely to come. In Australia in addition to bailing out the automotive industry the government is assisting in the rescue of childcare operator ABC Learning Centres with a A$22 million dollar injection to keep the company afloat until the end of the year. The administrator appointed to oversee the company has estimated that 40% of the company's childcare centres are unprofitable. Another example of the management of a company assuming inflation by central banks would continue forever without there being any correction.

Any sane person would have to wonder how the United States taxpayer (as well as the taxpayers of other countries) will pay for all of this while at the same time trying to recover and grow the US economy and strengthen the US dollar. The national debt of the United States is likely to go well above $11 trillion when totaling up all the financial risks proposing to be addressed by the US Treasury and the US Federal Reserve (we can be sure that $700 billion is not the final cost of the bill for the bailout; already AIG has been refinanced with $150 billion). For example the total derivative risk covered by CDS (credit default swaps, private contractual financial instruments insuring against default of debt) which is what finally sunk Bear Stearns and AIG is estimated to be $62 trillion and the exposure by US banks and financial institutions for all derivative products is estimated to be $180 trillion. The US House of Representatives recently agreed to bail out the US automotive industry and is in the process of considering providing additional money for the industry. With this bailout the line outside the corporate soup kitchen is likely to become very long as the corporate jets start flying into Washington to get a free meal and a free ride at the expense of the American taxpayer

In 1999 the US debt was "only" $3.6 trillion; the government was running a surplus and projecting to pay off the debt by 2015. What a difference years of large government intervention have made — expenditures for wars in Iraq and Afghanistan and other large government expenditures to be paid through inflation by the Federal Reserve with the resultant malinvestments. It is not surprising then that questions arise about US financial management and the US dollar. It is time to adopt a global currency for a global economy — a private asset-based currency rather than a fiat currency which is subject to political whim, manipulation and wild swings in value resulting in massive malinvestments and destruction of savings. It is time to return to gold as the global private currency for our global economy. Eliminate fiat currency, eliminate fractional reserve banking, eliminate central banks and their government sponsored banking cartel which has brought about this massive destruction of wealth.

The technological and financial revolution which has resulted in a globalized economy and more open markets among nations has dramatically broken down trade and other national barriers among countries of the world. While far from perfectly efficient (due to the vast array of national protectionist laws and regulations) we have a global economy in spite of the attempts by governments to preserve the past with various national barriers. The least-developed nations can participate in the globalized economy as well as can their larger developed neighbors. So why do we still have over 150 national currencies in the world today rather than one global currency? Why is this nationalistic barrier to trade still standing? The currency and monetary system to be used in a modern globalized system of trade and development is simply too important to be left to the numerous central bank bureaucrats and power brokering politicians who have various agendas of a political nature rather than the facilitation of free trade, free markets, economic development and prosperity for the people of the world. A global currency should be in private hands and not under political control as it is presently.

The establishment of the developed countries must have sensed the train wreck and thus began to question whether or not a private system makes more sense then the current system particularly in light of the financial crisis which began in August 2007 and continues to worsen almost daily. In an article published in the Financial Post November 8, 2007 Benn Steil, Director of International Economics for the Council on Foreign Relations, says that private money is a real possibility if the United States does not "return to long-term fiscal discipline" (raise your hand if you think the United States government will return to long-term fiscal discipline).

"As for the United States, it needs to perpetuate the sound money policies of former Federal Reserve chairmen Paul Volcker and Alan Greenspan and return to long-term fiscal discipline. This is the only sure way to keep the United States’ foreign creditors, with their massive and growing holdings of dollar debt, feeling wealthy and secure. It is the market that made the dollar into global money — and what the market giveth, the market can taketh away. If…the dollar fails, the market may privatize money on its own."

Mr. Steil goes to on to say

"…private gold banks already exist, allowing account holders to make international payments in the form of shares in actual gold bars. Although clearly a niche business at present, gold banking has grown dramatically in recent years, in tandem with the U.S. dollar’s decline. A new gold-based international monetary system surely sounds far-fetched. But so, in 1900, did a monetary system without gold. Modern technology makes a revival of gold money, through private gold banks, possible even without government support."

While it is arguable (among non-Austrian economists) whether or not the monetary policies of Messrs. Volcker and Greenspan were sound (many, if not most, point the finger of blame at Greenspan for today's financial problems), it is wishful thinking to believe for one second that governments and the government's financier, their central banks, will maintain long-term (or even short-term) discipline in spending and creating money. Their track record to date is not good and is becoming worse by the day. The events since August 2007 and particularly the response by central banks and governments to the meltdown which began during the week of 15 September 2008 and thereafter clearly indicates that the prospects for a "return to long-term fiscal discipline" is poor. The appetite of politicians, bureaucrats and governments for expansion of power and spending is too great to resist and the bureaucrats at central banks are all too eager to accommodate the demands of the government and the power broker politicians. It is the reason the world's economy has been on a course toward economic disaster since the flood gates of fiat currency (initially paper money and now electronically created money) were opened in 1913 with the passage of the Federal Reserve Act in the United States.

Gordon Brown's call for more global regulation and hence more government intervention is not the answer. The creation of money and management of the monetary system should be returned to a free (free from government intervention) private marketplace in the United States, Europe and other countries. As recent events clearly show our property, our wealth and our lives should not be entrusted to government bureaucrats and power-brokering politicians who bow and bend to special political interests rather than satisfy private consumers' demands as does the private marketplace. Let the private free market determine and provide what consumers want, what will be money and how the monetary system will function as the private market does with other products and services provided in the private marketplace. We would not think of the government providing our groceries (scarcity and long lines are the rule from such a system as we saw in the old Soviet Union and as we see in Zimbabwe today) so why do we allow the government to provide and manage something as important as our monetary system?

It is time for a new world financial order of private money and a private monetary system. Close down government-sponsored central banks in the United States and other countries and end the government monopoly of creating money and managing the monetary system which has brought the world financial system to near collapse. It is time to return to a private global gold standard for a global economy.

November 13, 2008

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