A single clause in Point 19 of the communiqué issued by the G20 leaders amounts to revolution in the global financial order. "We have agreed to support a general SDR allocation which will inject $250bn (£170bn) into the world economy and increase global liquidity," it said. SDRs are Special Drawing Rights, a synthetic paper currency issued by the International Monetary Fund that has lain dormant for half a century. In effect, the G20 leaders have activated the IMF's power to create money and begin global "quantitative easing". In doing so, they are putting a de facto world currency into play. It is outside the control of any sovereign body. Conspiracy theorists will love it. It has been a good summit for the IMF. Its fighting fund for crises is to be tripled overnight to $750bn. This is real money. Dominique Strauss-Kahn, the managing director, said in February that the world was "already in Depression" and risked a slide into social disorder and military conflict unless political leaders resorted to massive stimulus. He has not won everything he wanted. The spending plan was fudged. While Gordon Brown talked of $5 trillion in global stimulus by 2010, this is mostly made up of packages already under way. But Mr Strauss-Kahn at least has resources fit for his own task. He will need them. The IMF is already bailing out Pakistan, Iceland, Latvia, Hungary, Ukraine, Belarus, Serbia, Bosnia and Romania. This week Mexico became the first G20 state to ask for help. It has secured a precautionary credit line of $47bn. Gordon Brown said it took 15 years for the world to grasp the nettle after Great Crash in 1929. "This time I think people will agree that it has been different," he said. President Barack Obama was less dramatic. "I think we did OK," he said. Bretton Woods in 1944 was a simpler affair. "Just Roosevelt and Churchill sitting in a room with a brandy, that's an easy negotiation, but that's not the world we live in." There will be $250bn in trade finance to kick-start shipping after lenders cut back on Letters of Credit after September's heart attack in the banking system. Global trade volumes fell at annual rate of 41pc from November to January, according to Holland's CPB institute – the steepest peacetime fall on record. Euphoria swept emerging markets yesterday as the first reports of the IMF boost circulated. Investors now know that countries like Mexico can arrange a credit facility able to cope with major shocks – and do so on supportive terms, rather than the hair-shirt deflation policies of the old IMF. Fear is receding again. The Russians had hoped their idea to develop SDRs as a full reserve currency to challenge the dollar would make its way on to the agenda, but at least they got a foot in the door. There is now a world currency in waiting. In time, SDRs are likely evolve into a parking place for the foreign holdings of central banks, led by the People's Bank of China. Beijing's moves this week to offer $95bn in yuan currency swaps to developing economies show how fast China aims to break dollar dependence. French President Nicolas Sarkozy said the summit had achieved more than he ever thought possible, and praised Gordon Brown for pursuing the collective interest as host rather than defending "Anglo-Saxon" interests. This has a double-edged ring, for it suggests that Mr Brown may have traded pockets of the British financial industry to satisfy Franco-German demands. The creation of a Financial Stability Board looks like the first step towards a global financial regulator. The devil is in the details. Hedge funds deemed "systemically important" will come under draconian restraints. How this is enforced will determine whether Mayfair's hedge-fund industry – 80pc of all European funds are there – will continue to flourish. It seems that hedge funds have been designated for ritual sacrifice, even though they played no more than a cameo role in the genesis of this crisis. It was not they who took on extreme debt leverage: it was the banks – up to 30 times in the US and nearer 60 times for some in Europe that used off-books "conduits" to increase their bets. The market process itself is sorting this out in any case – brutally – forcing banks to wind down their leverage. The problem right now is that this is happening too fast. But to the extent that this G20 accord makes it impossible for the "shadow banking" to resurrect itself in the next inevitable cycle of risk appetite, it may prevent another disaster of this kind. The key phrase is "new rules aimed at avoiding excessive leverage and forcing banks to put more money aside during good times." This is more or less what the authorities agreed after the Depression. Complacency chipped away at the rules as the decades passed. It is the human condition, and we can't change that.The G20 moves the world a step closer to a global currency
The world is a step closer to a global currency, backed by a global central bank, running monetary policy for all humanity.
Saturday, 4 April 2009
Posts
Global currency, in some form - yes probably a good idea because it will hopefully avoid the issues regarding the latest crisis � where the reckless Anglo Saxon axis has plunged the world into financial crisis.
A global currency that is truly global, and takes into account the views of all countries has to be a more moderate and balanced system than the current one, that has just failed in a spectacular fashion.
Using SDRs as a long-term option for a global currency? Hmm, not sure whether this is just more financial chicanery that is fine in the current state of emergency but which is not suitable for the longer term. The article states that these �have lain dormant for half a century�, and why is that the case?
As an aside � global financial control � I suspect that this is not a good idea, because if a global authority, sometime in the future, makes a really bad decision (like the freeing of credit and spending like tomorrow that we have seen recently) then the whole world will be plunged into an even worse mess than we are in now. (Please do not say a major catastrophic financial crisis like this could never happen again� who on earth would have predicted the current crisis 10 years ago � major and very bad decisions can happen and will continue to happen because of human nature)
On many levels, the concept of �globalisation�, be it in trade, knowledge, or expertise, is a �good thing� but dynamic systems (such as the world finance system) also need resilience and we need to look at Darwin�s concept of the survival of the fittest to understand why any single global structure may not actually be a good idea.
In this scenario, the components of a dynamic system compete against each other, and those that are not the fittest now may well be those that survive in the future, because they are resilient to failures in the current paradigm. Major shifts in dynamic systems need diversity for resilience.
I believe that we are seeing a current shift of power from the West to the East. (China is a very good example). I suspect that any concept of global currency will give way to the natural dominance of whatever national or continental power currently holds sway and that at the moment China looks like the most likely contender.
Hard to believe the US will agree to a world currency and lose the dollar's power as a reserve currency. Sounds like they had to agree to this now to get through this next period. Then, when things calm down, they'll just never agree to the next step. Love the Americans, love Obama, it's just not in their self interest to go this far. Not yet anyways.
As I understand it China is soon to buy the Australian bonds issued to fund Kevin Rudds needless deficits,and with the yuan currency swaps in our region, plus our new best mates propensity for buying up the quarry as fast as they can unload their excess US dollars on us = major influence. Over time the yuan will become the primary currency of trade in East Asia and the Pacific. China is our second largest trading partner and will eventually become our first. Methinks that there will be three major currencies of trade in the world before too long, the yuan, US dollar and euro, not sure how they will interact with SDR yet, but clearly the financial infrasture is being established.
The markets are rallying on the effective abolition of mark-to-market by the FASB, not the hot air coming out of the G-20. What the G-20 or IMF does is entirely irrelevant to economic recovery. It is free market forces that will once again lift us up, but it will be the statists who try to take credit for it--even though they caused the crisis. Same old story, different recession.
For Richard Harris {3:03pm April 3] and any other interested readers: If you google "BIS 2007 derivatives" you will be led to the BIS Triennial Bank Survey - Foreign Exchange and Derivatives Market Activity in 2007. (Ah, the power of googling!) The table on page 21 of the report tabulates the notional amounts outstanding in global OTC derivatives markets at the end of June 2007. That figures is US$516,411 billion (1000 billion is a US trillion). The report also notes that the compound growth rate over the triennium was 33%. Financial Armegeddon a possibility??
New World Order.
Says it all.
It's a Conspiracy Theory! Maybe, but it will happen. Those who would once fight against european union will be begging for the NWO.
My comment is directed to Dr.Gary.L.Glum who posted at 12.45pm. I am intrigued by this $516 trillion in global derivatives. I understand the nature of some of them but not all. Perhaps Dr. Glum would be good enough as to explain their exact nature or put me on to a (some) websites that might bring me up to speed. If this figure truly is in danger of vapourising then this would surely signal armageddon.
"It seems that hedge funds have been designated for ritual sacrifice, even though they played no more than a cameo role in the genesis of this crisis"
Get away.
A "free market" just cannot exist - that is to say, it is not free - as long as those asset-stripping, rip-off hedge funds are permitted to carry on their shark-like manipulations.
45%-plus 'profits' cannot be extracted without catastrophic results elsewhere in the market.
Oil, for instance, did not go through the roof because of genuine demand; it did so because of rabid speculation and mindless, reckless manipulation of prices. No one was immune from the pain caused.
I'd happily pull the trigger myself.
Ambrose old chap, I get the feeling that you are being a bit selective these days. As Dr Glum points out you are ignoring derivatives which are now estimated at between $640 and 800 Trillion v a world GDP of near $50trl!
You then talk about a new reserve currency. The USA will not want this as the only way they can pay their debts, Medicare and Social Security is by pumping out Dollars and inflating it away. They have unfunded debts of over $47trl and growing. A new reserve currency is not in their interest.
Maybe the IMF can put a band on the economic wound, but to be as optimistic as you are I think is a misjudgement. We will have to wait and see and we will not have to wait long.
"Complacency chipped away at the rules as the decades passed. It is the human condition, and we can't change that."
Well Said.
Human nature is at the root of all of this and human nature is here to stay.
Ambrose, your like a woman plowing through a pile of old papers in search of a sorely needed document.
These figures, should reveal the CRUX of your struggle: BIS 2007 valuation of WORLD'S derivatives, estimated at 516 trillion...WORLD'S GDP'S for all nations, approximately 50 trillion...total value of WORLD'S stock and bond markets, approximately 100 trillion...
Are you moving your head from side to side, eyes fixed. Do you feel a sudden and visible tremor running through your body?
Same as usual nothing happen just talk,this time is trillion we moved up from billions,it's all fiction money anyway.
SDRs are not money. So SDR creation is not money creation (QE). It is just a mutual commitment of IMF members to come to each other's financial rescue for a limited dedicated amount.
Those "evil" hedge funds, that were already ruined by the ever-changing rules of the game (think short sell bans), will finally be tamed. So much for market stability, market liquidity and price discovery!
The Wall Street banks got what they wanted once again.
you keep on ignoring facts; Does anybody know how far are investment banks leveraged?, hedge funds are not guilty, give me a break. Incredible
Hey Ambrose, you seem to be slipping? No speculation woven in predicting the early demise of the Euro?
A global currency, the IMF effectively being given the ability to create money out of thin air, a global clamp down on bonuses, a redistribution of wealth to the poor, and a global clampdown on those nasty hedge funds together with a global regulator overseeing the world of risk, telling us when ever it looks like a trader might have too big a position or the wrong position (short stocks?), or maybe he just made too much money last year, the controlling classes must be doing cartwheels, the lefties as well , and certainly the ignorant and ill informed will be. Me thinks, when the last USD, YEN, GBP or SDR has been created out of thin air, gloabl growth will still be close to zero, unemployment sky high and taxes thru the roof. The only place jobs will be growing is in the public sector. The new era of global socialism has arrived,there is no place to hide, the individual is dead.
Looks like "London" will be moving to Dubai then.
GB is the master of hiding the real damage in the unmentioned small print. Will you report on this Ambrose?