I have written at times that a change in the global reserve currency was likely, but also that it is a normal part of a natural cycle.

The cycle I am referring to is the shift from honest money- aka money with a fixed value, versus fiat money – aka unjust weights and measures. This cycle is longer than a human lifetime and repeats continually through history.

The difference between all of history and the last 38 years, is that at no other time in history has there been a 100% pure fiat global economy. At no point in time has global trade been settled in pure fiat dollars, as it is now, thanks to the Bretton Woods Agreement. This came as a major eye opener to me when I first came to understand it.

From comments I hear all the time, there seems to be some confusion about what this means for the future of this or that currency, be it Euro, Swiss Franc, USD, or Yuan.

The one thing that I DO NOT hear is gold and silver when people are asking which is the best currency moving forward.

The reason this strikes me as interesting is that gold and silver have been money for thousands of years, and its only recently, in fact the last hundred or so years, that people have forgotten this. We have essentially three generations of people who have grown up knowing only fiat currency as money, so people often no longer associate gold or silver with money, and it doesn’t ever enter into their mind as part of the equation when tying to figure out what to do next.

My summary thought on this subject is that if the currency you are interested in has no honest money peg, meaning it is not tied specifically to something of intrinsic value as its measurement, then it is going to devalue versus other currencies (especially honest money) during this economic cycle, because of a nations sovereign requirement to compete in global trade. This is known as ‘competitive devaluation‘.

A chart of the USD Index Versus gold:

My point here is this, if you put money into any currency, if that currency is fiat, will HAVE TO CONTINUE TO DEVALUE in order to remain competitive in global trade  irregardless of which country prints it, or what type of currency system we go to in the future.

Yes, there will be ups and downs, and compared to other currencies every currency will continue to fluctuate in value, but the major underlying trend WILL BE devaluation in real purchasing power.

During this cycle, only gold, silver or other tangibles will maintain (and increase) in buying power.

HSBC bids farewell to dollar supremacy

By Ambrose Evans-Pritchard

The sun is setting on the US dollar as the ultra-loose monetary policy of the US Federal Reserve forces China and the vibrant economies of the emerging world to forge a new global currency order, according to a new report by HSBC.

“The dollar looks awfully like sterling after the First World War,” said David Bloom, the bank’s currency chief.

“The whole picture of risk-reward for emerging market currencies has changed. It is not so much that they have risen to our standards, it is that we have fallen to theirs. It used to be that sovereign risk was mainly an emerging market issue but the events of the last year have shown that this is no longer the case. Look at the UK – debt is racing up to 100pc of GDP,” he said

Crucially, China and rising Asia have reached the point where they can no longer keep holding down their currencies to boost exports because this is causing mayhem to their own economies, stoking asset bubbles. Asia’s “mercantilist mindset” of recent decades is about to be broken by the spectre of an inflation spiral.

The policy headache was already becoming clear in the final phase of the global credit boom but the financial crisis temporarily masked the effect. The pressures will return with a vengeance as these countries roar back to life, leaving the US and other laggards of the old world far behind.

A monetary policy of near zero rates – further juiced by quantitative easing – is completely incompatible with circumstances in most of Asia, the Middle East, Latin America, and Africa. Divorce is inevitable. The US is expected to hold rates near zero through 2010 to tackle its own crisis.

What is occurring is an epochal loss in the relative wealth and economic power of the old G10 bloc of rich countries compared to rising regions of the world. The euro, yen, sterling, Swiss franc and other mature currencies will be relegated along with the dollar in this great process of rebalancing, but the Greenback will bear the brunt.

The Fed’s super-loose policy is turning the dollar into the key funding currency for the next phase of the global “carry trade”, taking over the role of Japan during its period of emergency stimulus.

Mr Bloom said regional currencies would emerge as the anchor for their smaller trading partners, with China, Brazil, or South Africa substituting the role of the US. Australia is already linking its fortunes to China through commodity ties.

Original Article

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