Bretton Woods 2.0

[fccool]

President Bush has given an impressive speech today defending the free market capitalism. Ironically, we did not have free market capitalism arguably since 1913. Nevertheless, this weekend we will see the big wigs of the world coming together to figure out what went wrong. I can't help but to drop my 2cents into the pool of speculation of the possible "solutions" that will be proposed following this conference.

So, what's it going to be. To really see what's going on, we need to go back in time and look for precedents. The obvious one would be the post WWII meeting in Bretton Woods meeting that established the modern world financial system as we know it.

What exactly happened in Bretton Woods? After the WWII devastation, the financial world laid in ruins. The leaders of the world came together and proposed an agreement that US will lead the world economy, with dollar being the reserve currency of the world. The dollar will be pegged to the amount of gold, and the rest of the world currencies will float (or be valued) against the price of dollar.

US has abandoned the agreement since then by taking the dollar off the gold standard, yet the world still excepted the dollar as though it did not. By that time, the world got used to the convenient idea of the reserve currency, and it did not really matter.

This is really when US realized that exporting currency is much easier than exporting goods. And so it did. The more dollars it created by means of fractional reserve lending, the more the value of the dollar devalued... until today we are left with less than 5% of the original. Possibly even less with the recent injections into the credit supply.

Essentially, this is the big picture behind the financial crisis we have today. Things like subprime landing, and derivative crises are just trees in the forest of debt, that resulted from export of currency abroad... or as Bush put it today, foreign investment influx. Soon enough, the world followed the US in it's practices of fractional reserve credit creation, until the currencies became nearly impossible to maintain.

So, based on the above, what solutions do you think will be proposed this coming weekend? Well, it's fairly simple IMO. The banks of the world had driven the financial world closer to the edge by lowering interest rates to near 0. Past that point, there're no more "instruments" that they will have to prop up the markets. They are facing with massive inflation looming, and there's a need to keep monetizing the debt and do so in a way that will not completely destroy world currencies. The solution is fairly simple IMO, and I think it will be at least suggested, if not implemented. The world will see a new currency come about as a result of this meeting. I really don't see any other way they can hide the inflationary policies they are unleashing on the world.

Another reason why I think this will be done... it to bring about another vehicle for further debt monetization, and devalue all of the world currencies at the same time to artificially reduce the amount of current debt held by the nations. Paulson has been touring the world begging them not to devalue their currency. I don't think he will have to beg anymore.

I know it may sound like a fringe lunatic rant, but it has been done before.

http://en.wikipedia.org/wiki/Executive_Order_6102

In 1933 FDR ordered the citizens to sell the gold for $20 per ounze. Upon the gold confiscation, the price of gold was raised to $35 per ounze, thus it was intentional devaluation of currency.

Today, in tandem leaders don't have to confiscate the gold. All they have to do is to peg the world currencies on something else and simply value that something else more. I suspect we will see a new world paper (fiat) money denomination to be born this weekend. But, don't bet your livelihood on it. I've been wrong before.

[Taylor]

Ok, lets say you are right, if they do create a "world paper fiat money" ...would this mean that our money in the bank in the USA would be "worthless"?

[fccool]

That's the idea. Consider what happened to the foreign gold debt in 1930. To protect the domestic gold reserves, FDR bought the gold for $20 and shortly after set the price to $35. The US debt to the world was thus cut by 44%. Not bad, eh? That's what short sellers on the Wall street do . They borrow a stock with hopes for the stock to go down. Then they sell it immediately, once the stocks bottom they buy the stocks... return these to the owners and keep the change. Similar scheme ... different game.

This essentially would be a similar scheme... only on global level. It will also grant IMF the powers they've dream of for a long time. I suspect that the new currency would be implemented from IMF down, if it would be done at all.

[Bravus]

Tylor - no, there would be an established exchange rate: say US$1.00 = Beasto$0.20 or whatever

[fccool]

There would be an exchange rate... but I think it would be the other way around... Beasto0.20=$1US

[Taylor]

But then the 20 cents of Beasto would be 20 cents worth or would it be worth the same dollar value?

The reason I am asking is the following: Last year, we ended up owing taxes which we paid promptly. (It's a long story as to why this happens and continues to happen but because of our income and how it is calculated it will continue this year as well.). So we have saved up money to pay that tax bill in April. What should we do? Should we pay it off "early" (I am not even sure how that is done) so that our money has the same value it does now...and it can cover our tax bil that we would have when we file in April, or should we hold onto that money till we file in April?

[Bravus]

To fccool: *cough*that's the same thing*cough*

To Taylor: You wouldn't get any advantage or disadvantage either way, and money earning even a small bit of interest for you is better than money held by the IRS - I'd hang onto it

[fccool]

Taylor... from inflationary perspective, as a consumer you will be on the loosing end either way, unless your salary goes up to keep up with inflation. The people who benefit from inflation are those who borrow large amount from central banks and spend it before the inflationary cycle kicks in (that would be US government and it's contractors). The inflation will be evident to you in rising prices of goods. So, don't worry about paying off the debts.

I would still hold on to that money though if you are not charged interest by IRS. You never know what happens between now and April.

[fccool]

To fccool: *cough*that's the same thing*cough*

To Taylor: You wouldn't get any advantage or disadvantage either way, and money earning even a small bit of interest for you is better than money held by the IRS - I'd hang onto it

Hahahaha... but you know what I mean ... the other left...

[Taylor]

Ok Bravus and Fccool thanks for your perspective.

[fccool]

Ok, it looks like the purpose of the G20 meeting is to have another G20 meeting. On the other hand, the less things they are "fixing" the better we off are.