A New Currency Based On A Sick Currency

Whilst this world's commerce still rotates on the unsteady axis of paper currencies, we will be subjected to a great deal of volatility and uncertainty. Without doubt, the US dollar has been the lynchpin of post World War II trade and finance but has started to falter as it begins to reflect crumbling internal finances. On the other hand, increasingly vocal voices are heard from nations such as China, Russia and Brazil who see themselves as the emerging economic powerhouses as well as the victims of US dollar "fraud" which has enabled the United States to siphon a disproportionate amount of the world's savings and resources by printing paper currency.

Despite decaying finances at home, the US under President Obama has decided to print even more and spend even more in the hope that it will reverse its slide to either oblivion or painful readjustment. The major holders of US dollars, treasuries and agency debt however, are howling at the loss of value in their holdings as the dollar continues its slide.

The dollar will not die an easy death as there is plainly a Mexican standoff of mammoth and historic proportions. The standoff arises due to a confluence of factors that largely keep the two factions treading warily. The major holders of US debt are not only concerned with a loss of value in their holdings, but also with the loss of their major customer if the US was to significantly reduce its consumption. Compared to their populations, the gutted US consumer is still wealthier, still consumes more and still provides the best margin on sales. So the Chinese can try and sell as much as possible internally but this will not build international reserves nor will it give their local manufacturers the best price.

The US on the other hand knows that its currency still runs international commerce and that there is still no other currency that has the traction in terms of international infrastructure and respect. It fears however a major loss of value or position as this may damage its ability to buy amongst other things the lifeblood of an economy which is still largely oil. At the same time no one in their right mind would at the present time seek to store value in the currencies of China, Russia or Brazil given the semi-chaotic performance of their own political and economic systems. The US however does welcome a controlled slide in the dollar so as to give its manufacturers a competitive edge as well as to breathe some inflation into a system that is threatened with deflationary forces.

Just remember the US is preoccupied more so with the loss of position rather than the loss of value in its dollar.

Noises are being heard that a number of nations have been meeting in an attempt to give birth to a new international currency. There are ardent denials that these meetings are happening but I would find it almost impossible to believe that major economies would be sitting at home knitting and simply watching the TV for CNN to tell them about the latest movement in the dollar.

Every economy is waiting, planning, manoeuvring and preparing for an inevitable shift in the world's payment system not only because it determines the flow of income and resources but also because it is a major store of value.

In my opinion, there is perhaps a half way house that can be adopted by the unhappy holders of US dollars and dollar denominated bonds etc. Simply put, the major holders of such dollar holdings would pool these holdings into one institution which I will call Chimera Fund. Let us assume that China has $1000, Japan $700, Russia $400 and Brazil $200. This Chimera Fund would have a total of $2300 US dollars. The next step would be for the Chimera Fund to issue these nations a new international currency called the Chimera totalling 2300 units as well.

This currency would present a break from the dollar but at the same time have the advantage of being backed both by the US dollar assets in the Fund as well as the backing of the nations that have given birth to it.

Any nation that deals with China, Japan, Russia or Brazil can have the choice of receiving the Chimera or it can roll up to the Fund and have their Chimeras converted into US dollars.

Needless to say, these nations must start to put a ceiling on any new dollar type acquisitions if they are to constrain the unchecked money printing antics of the USA. This is already happening with agency debt showing clear signs of stress.

It is my belief, that the adoption of the above proposal would give the US and the rest of the world the means and time for the US to adjust without destroying its currency altogether as well as the opportunity for the other nations to bring both their economies, political systems and currencies up to world standards. Needless to say, during this transition China and friends can continue to use their own currencies in international trade if they can get other nations to accept their currencies.

The next step would be to support this new currency with increasing levels of gold and silver backing for further issuances of Chimeras. This is essential if we are to avoid the repeat of another international currency following the path of all fiat currencies to date.

The reality is dear readers that the modern world has found common denominators when it comes to numbers, communication systems, units of measure etc but to date fails to come up with a common measure of value. This is astounding given that the ancient world had solved this issue through the use of gold and silver. The intervening period in human history unfortunately has been littered with counterfeiters that have robbed the world of much wealth and opportunity and simply given it wars and poverty in return.

Paper currency cannot store value in the long run any more than a paper bag can hold water. The present illusion of convertibility of paper currencies into goods and services is largely blinding everyone to the massive loss of value through inflation and currency manipulation. Whilst central banks can manipulate the price of gold and silver in the short run, their ability to manipulate value is always doomed in the longer run.