As we kickoff trading in the month of September, the world is hurtling toward a new gold standard and it will be led by Russia.
The World Is Hurtling Toward A New Gold Standard
August 31 (King World News) – Alasdair Macleod: As evidence mounts that the major Western economies are heading into a banking and monetary crisis due to contracting credit, we face the consequences of unsound money. The era of fiat is drawing to a close and its death will be painful for the highly indebted advanced economies in North America, Europe, and Japan. History and legal precedent tell us that fiat will die and gold will return to provide an anchor to credit system values.
As always, there are lessons to be learned from monetary history, particularly in the context of credit-dependent post-feudal economies, when a gold standard was expected to support mountains of credit in the forms of bank notes and commercial bank deposits.
The debate over the return of gold backing for credit is becoming urgent, not just because the fiat currency system has run its course, but because it is increasingly in the developing world’s interests to embrace it. And unless Russia moves urgently towards backing its rouble with gold, her economy will almost certainly suffer from increasing instability, which explains why she is so keen to do so…
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Against their reserves of the new gold substitute currency, national central banks can act as lenders of credit denominated in it to the commercial banks in their own networks. This is a secondary pool of credit, only linked to the gold substitute currency by the creditworthiness of the national central bank. In practice, for commercial banks which maintain accounts with a participating central bank, there would be no difference in value between their pool of circulating credit denominated in the new gold substitute and the gold substitute itself.
This credit derivative constitutes the wholesale credit pool, equipped with an interbank money market in which central banks can also deal. Note that the credit created by commercial banks takes its value from the new BRICS gold substitute, but only central banks actually have access to the substitute. And it will be the commercial banks which provide trade finance and settlement for cross-border transactions, putting it in the hands of merchants, businesses and the wider public. This constitutes a third pool, to which the public has access.
The Great Resistance
This is possibly where the greatest resistance to the Russian proposal lies. While we cannot be sure that Sergei Glazyev, who almost certainly has had a hand in the design of the intended BRICS trade settlement currency, will follow the design outlined herein, it would be the preference ordinary people will have for hoarding the new currency and disposing of government fiat that is sure to concern the BRICS governments considering the scheme. A further concern will be the discipline forced upon the political class to ensure balanced budgets and therefore to maintain a balance of trade, taking into consideration their national propensities to save.
But maintaining fiscal discipline should not be too difficult for the BRICS nations, which are not burdened by extensive welfare commitments. And with infrastructural improvements planned in partnership with China, they have enormous economic potential to unleash. Unlike the welfare-driven advanced nations, emerging nations have a ssimilar economic potential which Britain and America had in the early nineteenth century. And importantly, politicians in Africa, South America, and Asia now suspect it, understanding that the days of development aid ending up in politician’s back pockets are an impediment to progress. And there will be no better driver towards the reintroduction of gold into their monetary systems than the developing crises in the highly indebted major western economies.
Russian Gold Standard
Russia should also embrace a gold standard for the rouble, as argued by Sergei Glazyev, Putin’s chief economic adviser in his 27 December article for Vedomosti, the Moscow based business paper…
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The rouble has weakened considerably in recent months, M0 money supply has increased by about 21% in a year, and the 10-year government bond now yields 12%. This is the stuff of crisis. In other respects, the Russian economy enjoys low income taxes, and would benefit hugely from normalised interest rates, which would come with a credible gold standard. Furthermore, if the rouble was put on a gold standard, capital flight can be expected to reverse, supporting the rouble, and driving down price inflation.
From Glazyev’s statements, he appears to believe that the Russian Central Bank has been infected with western central banking groupthink, and it is reasonable to assume that this view is shared by Putin. Putin is also in military and economic conflict with American-led NATO, and it is in his interests to undermine US finances. A plan to stabilise the rouble and protect it from monetary and economic attack, while undermining the US dollar’s credibility makes enormous sense. These objectives could be quickly achieved by putting the rouble on a credible gold standard.
Putin’s problem is his partnership with China, and their joint plans to wean emerging nations and others away from the western alliance. Precipitative action to undermine the dollar and the fiat euro goes against China’s trade interests at a time when she is managing her own crisis in residential property development, which threatens to widen into other areas. Furthermore, India in particular has come under considerable pressure from America to not continue its trade with Russian oil and is treading carefully.
But Saudi Arabia is perhaps more prepared to accept a new gold substitute for trade settlement. And in Iran, it has a new ally in this respect. The BRICS trade settlement currency scheme is far from dead. And anyway, there will come a point when the collapse of the dollar-based western currency system forces China to accept that it must protect its currency, its partnership with Russia, and its hegemonic ambitions by accepting gold as the basis of its own currency values.
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