The premise set for the article is :
Should EMs, Asian, African economies opt for an Export led growth with possible fall of Dollar as a reserve currency.
What will happen to dollar?
Should SDR (basket of currency of IMF) or Gold backed Yuan be considered to fill the void of 'the reserve currency'?
There is a need for a new financial system.
"If the currency collapses, everything else goes with it... stocks, bonds, commodities, derivatives and other investments are all priced in a nation's currency. If you destroy the currency, you destroy all markets and the nation" - Jim Rickards, author of currency wars
The Dollar enjoyed world's reserve currency status from 1970s till 2008. This is the period when Asian economies started adopting Export led growth strategy. Asian Economies started trading their commodities, services with U.S in exchange of dollars. These dollars bought Asian economies their Oil & also helped maintain their Forex reserves. Japan started the trend of export led growth for the Asian Economies. However, Dollar was on a strong footing in those periods.
China recently had embarked on similar export led growth and proved very dominant. However, weakening & about to perish 'Dollar' nullifies the need for 'Export led growth strategy' adoption by any Emerging Market Economy. Weakening & Denouncement of Dollar made China realize that boosting Internal Consumption Cycle of its economy becomes imperative. India, though weak on export front has good internal consumption strength. Investment cycle has to be boosted & bank balance sheets need to be strengthened avoiding bailouts. An impetus on Rural economy through recent budget is a good move & would act as protection to see us through the doom period. There is a great need to strengthen Asian, EMs & African economies. Growth for East will come from within its region. Trade treaties between them in a currency which suits 'itself' should initiate, except Dollar. Gold could be an alternative for trade. Most importantly, purchase of oil should happen in home currencies, again avoiding Dollars! Cohesive strengthening of Asian, EMs, Africa is crucial. African economies have to be judiciously, aggressively engaged by BRIC. Opening up domestically is important for India, China, Japan for investments to flow in.
Federal Reserve did not increase rates this time and also decreased projection of four rate hikes to two in 2016. Just another way to rollback the the recent rate hike i guess. A stable dollar may be attached to short-term U.S interests but it is posing threat to global monetary stability. In the longer term, U.S may seek to Devalue dollar and / or default on its debt obligation at worse (why is Greece echoing here). Hence, does it make any sense for India to hold $119 billion & China to hold $1237 billion of U.S securities (Jan 2016 U.S treasury data)? Insurance against the sovereign debt default should reduce the credit risk but will fail to safeguard real dollar denominated securities. Insurance companies covering risks on investment arising due to economic forces are at big risk just like AIG. Asia (excl India, china) + BRIC economies are estimated to hold about $3200 billion (Jan 2016 U.S treasury data) worth U.S securities. If the bubble bursts, why should East, BRICS own up the risk? I hope sanity prevails and Liquidation of these securities initiates along with equity conversion option which is discussed below!
Well, when the Dollar downward spiral gravitates, it may choose to go through the deflationary forces, survive the onslaught of its metamorphosis & accept the weakened avatar. Hyper inflation may infect the economy. Prices will soar & trade deficits will rise tremendously. If Dollar chooses to avoid the devaluation process, it may consider an option to Mutate and convert itself into a New Currency with a New name. Consider a scenario (speculation) where United States of America, Canada & Mexico come together to form a new currency, just like the Europeans. Dilution of boundaries of these 3 countries also seem like a possibility & calling themselves a New Union- A New Country. Fixed income securities are quite vulnerable to any hint on fall of dollar.
Nations having huge exposure to U.S securities should consider negotiating with the U.S Government to convert it to equity in various Assets - Corporations, Infra projects, Premium Land etc. However, a sovereign guarantee would be required along with a Crisis Relief Facility (CRF) as suggested by Yu Qiao, a Chinese economist.
Now the question remains who will fill the void of reserve currency & keep the monetary system stabilized. IMF has been very actively coordinating with governments & central banks world wide for Monetary policy & urging fiscal policy measures in a way guiding market operations. In my mind, if Dollar fails, there is a possibility of IMF taking over the world monetary system through its own currency - SDR (special drawing rights). In 2010, IMF had proposed creation of a new currency called 'Bancor' backed by SDRs. Yuan may also step up its act to be the world's next reserve currency. IMF probability seems higher. Unlike world's acceptance of 'Dollar Standard' due to bad economic situation in 1973, Asia being on a dominant economic footing should block IMF from hijacking the monetary system. However, IMF may throw its claim, as it appears to be the only financially capable institution to do so. IMF has solid gold reserves & for every $1 of Capital a $3 of Liability. If dollar weakens and falls it may be dropped from SDR basket slowly & eventually or may be a back door way could be made for a newly mutated dollar to enter the SDR basket later. If USD is continued in the SDR basket it will be in the most beaten form. The currency structure of SDR basket post Dollar loosing it Reserve Status may go through a change. Gold backed Yuan is going to be included on 02 Oct, 2016 in SDR basket. The new SDR composition may be Gold backed Yuan + IMF gold + GBP + USD + Yen. Other currencies may adopt gold backing too. This SDR basket may see inclusion of IMF proposed 'Bancor' in future if it sees the light of day. IMF possible takeover of the world's monetary system seems to be happening with a high probability - an entire world under 'one umbrella of monetary policy'. Governments can have boundaries, Governance transcends them. In case, it happens, the world will allow replacement of one fiat currency ‘Dollar’ by another group of Fiats – ‘SDR’ (if gold backing is kept out). Replacement of one dominant institution ‘Federal Reserve’ by another - ‘IMF’. It’s just a trade-off. No real & fundamental change in the world monetary system. Only this time entire world economies get hooked to one institution, Officially! However, if SDR is backed by precious metals or anything tangible with real value like natural resources, then it may be a good asset to consider.
World monetary system since 1970s has defined itself as a debt creating machine via limitless printing of currency backed by nothing. These currencies are famously known as 'Fiats". Blockchain technology which governs ledger management of Bitcoin transactions offers a ray of hope. Blockchain has numerous applications through out value chains & supply chains. No wonder, all major Banks sought this technology. Hope its integrity & true democratic character remains, if it gets integrated with these big banks.
Does human race need a system which only create unlimited debt, financial crisis, creates huge wealth gap (1% richest own more wealth than the rest 99%, 62 richest billionaires own as much wealth as the poorer half of the world’s population- oxfam report). Political community around the world should gather will to discard policies to support vested interest of these richest 1% . Black money, Tax havens around the world should be targeted and money be redistributed.
Science has replicated Human Genes, Technology has reached new galaxies but Financial system still stays the way it is! The only real innovation financial system has given to people in its modern 140 years of existence is an ‘ATM machine’. Think about it! Both Science & Technology have open, democratic, transparent system (ignoring technology & scientific suppression) which allows it to thrive & take Human Race to newer frontiers. Financial systems are exactly opposite! They want central control & are allergic to transparency. The have funded wars on both sides & have always put Human race into a repetition of recessions, depressions, hyper inflation, wars and more sinister crisis to transfer wealth back to themselves.
There is a desperate need for creation of a financial system which is open, transparent & democratic. Such systems will allow inclusion of human race at all levels and possibly aim to terminate the wealth gap, end control on scientific research, technology & disclosures, end tax regimes & end vested control over energy sources.
A new world monetary system is required urgently for replacing all Fiat currencies of the world which only generate debt and transfer liabilities on humanity. It is only possible when the Dollar collapses and along with the fall, all Fiat currencies of the world will get affected.
A Monetary system reset may be considered and this the opportunity for the world when new Natural Resources / Precious metal / Gold backed Money creation would be possible. It is the only perfect system known to human race and i believe we still have wisdom to adopt it.
Its the biggest of Human race's failure to develop an inclusive financial system as human well being is not a variable, Greed is! Hence, Human race has a Bronze Age Financial system governing a Space Age Era.
Well, I don't exactly know how a new Financial system has to look like to replace the old one, but one thing i know, if today's financial system defines 'line of poverty' then the future financial system should define the 'line of prosperity' (limit the wealth held)!