Reserve Currency

UK Prime Minister David Cameron came out swinging this morning; not only at ISIS but in calling for European leaders to block Russia from the SWIFT banking transaction system. European leaders have already (via unnamed sources) denied any actual new sanctions will take place (though they will be discussing them at the NATO Summit) but - as we have noted previously - this is yet another unintended consequence-driven nail in the coffin of USD hegemony...

"We find ourselves with the same anti-free market interventionist types who set up the Federal Reserve, the US Treasury and the US government running foreign policy in America and then go and intervene in the affairs of Libya, Syria, Egypt, Iraq or Afghanistan. And as can be expected, they mess up just about everything. I think the whole region will blow up and financial markets are not paying sufficient attention to this."

According to Russia's RIA Novosti, citing business daily Kommersant, Gazprom Neft has agreed to export 80,000 tons of oil from Novoportovskoye field in the Arctic; it will accept payment in rubles, and will also deliver oil via the Eastern Siberia-Pacific Ocean pipeline (ESPO), accepting payment in Chinese yuan for the transfers. Meaning Russia will export energy to either Europe or China, and receive payment in either Rubles or Yuan, in effect making the two currencies equivalent as far as the Eurasian axis is conerned, but most importantly, transact completely away from the US dollar thus, finally putin'(sic) in action the move for a Petrodollar-free world.

"Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly.... Central banks, including the U.S. Federal Reserve, have taken aggressive action, consistently lowering interest rates such that today they hover near zero. They have also pumped trillions of dollars’ worth of new money into the financial system. Yet such policies have only fed a damaging cycle of booms and busts, warping incentives and distorting asset prices, and now economic growth is stagnating while inequality gets worse. It’s well past time, then, for U.S. policymakers -- as well as their counterparts in other developed countries -- to consider a version of Friedman’s helicopter drops. In the short term, such cash transfers could jump-start the economy...  The transfers wouldn’t cause damaging inflation, and few doubt that they would work. The only real question is why no government has tried them"...

Mark Spitznagel: "Mises will ultimately be right yet again about the inevitable final collapse of the current asset boom brought about by credit expansion. The term “black swan” (the surprising, unforeseen event) used for bursting financial bubbles has been and will remain a misnomer - we can and, indeed, should expect such tumults to occur at some point as a consequence of massive central bank intervention and economic distortion."

Ron Paul: "As to the unwinding of this mess, I’m convinced that when the current expansion ends it will be abrupt, gigantic, and worldwide. The 43-year expansion of Fed credit and debt, delivered to us by a fiat dollar standard, and held together artificially by an undeserved trust will end badly."

With Europe and the US on one side, and Russia and China on the other, the saying, "The enemy of my enemy is my friend" could best describe the current geopolitical situation

A few days ago when we commented, somewhat in jest, on the seemingly impressive strategic planning behind the Islamic State Jihadists becoming a "commodities trading powerhouse" (when it was revealed that ISIS had sold the grain it had stolen from the Itaqi government back to the government), we described just how well-versed in the ways of the modern world ISIS was. Now, thanks to Bloomberg we can quantify this particular strategy, and put top-line numbers with the ISIS faces, so to speak: "The Islamic State, which now controls an area of Iraq and Syria larger than the U.K., may be raising more than $2 million dollars a day in revenue from oil sales, extortion, taxes and smuggling, according to U.S. intelligence officials and anti-terrorism finance experts."

"Cynical disregard for the fate of civilians and 'couldn't care less' attitude toward the international humanitarian law when it comes to geopolitical interests, becomes the core of the policy of the United States and its  European satellites regarding Ukrainian. More and more questions are being raised about the ability of the current US administration to participate in the development of realistic and pragmatic approaches to international problems, to adequately assess the situation in the various regions of the world." - Russia Foreign Ministry.

When we last met Sergei Glazyev, Vladimir Putin's chief 'integration' adviser (who has been regularly featured on these pages in the past (see Putin Adviser Threatens With Dumping US Treasurys, Abandoning Dollar If US Proceeds With Sanctions and Putin Adviser Proposes "Anti-Dollar Alliance" To Halt US Aggression Abroad for two examples) he explained "how the U.S. military and oligarchs are trying to maintain leadership in the global competition with China." Arguably the best informed main in Russia, his perspective seems important to grasp as he considers "The world today is going through a year of overlapping cyclical crises. This is a period when the global economy is changing as the structure that has driven economic growth for 30 years has exhausted itself. The world needs to transition to a new system and transition has always come about through war..."

When a tin-foil-hat-wearing blog full of digital dickweeds suggest the dollar's reserve currency status is at best diminishing, it is fobbed off as yet another conspiracy theory (yet to be proved conspiracy fact) too horrible to imagine for the status quo huggers. But when the VP of Research at the New York Fed asks "Could the dollar lose its status as the key international currency for international trade and international financial transactions," and further is unable to say why not, it is perhaps worth considering the principal contributing factors she warns of.

Enter the Golden Dragon ... China is moving closer to positioning itself as the physical gold trading hub of the world and the world’s gold price discovery centre. It is a natural progression for the largest economy in the world and for the world’s largest gold buyer, importer and indeed producer. The Shanghai Gold Exchange (SGE) is launching its yuan denominated international bullion trading exchange next month.

Looking at the past 100 years of the US dollar's history, one theme becomes abundantly clear: in times of crisis, the US government has no issue with changing its own rules or breaking its own laws. And those "temporary" emergency measures have a nasty habit of quickly becoming permanent. As we see the US money supply exponentially accelerating since the 1970s, and the Federal Reserve more than tripling its balance sheet since 2008, it's only prudent to ask the question: Without constraints, are we in danger of destroying the purchasing power of our currency by making too much of it?

Greece, Slovakia, Czech Republic, Germany... the chorus of voices demanding an end to Russian sanctions is starting to drown out the neocon warmongering efforts of the west...

Suppresses true money velocity concealing real inflation risk to the economy

Global crises wreak havoc on all levels of existence, not to the mention the great cost to human lives. If we are to learn from history, however, it seems as though we might have to nevertheless brace ourselves for yet another one in the near future, as it marks the end of one saeculum and the start of a new economic paradigm aligned more positively with proper balances of trade, debt, and policies. The US is trying to postpone the crisis by printing money, however this is creating currency wars with nearly all major central banks in the world. As history has shown us time and again, causing this delay through money printing will only aggravate the problem, not only not preventing the inevitable, but indeed making the transition more painful and costly.