United Nations Proposes New "Global Currency"

By Declan McCullagh
CBS News
Wednesday, September 9, 2009

http://www.cbsnews.com/blogs/2009/09/09/taking_liberties/entry5298305.shtml

The United Nations would like the dollar, euro, yen, and other national currencies to be succeeded by a new "global currency."

That recommendation appears in a U.N. report released this week, which suggests the dollar's outsize role in international finance has ended -- and says that it's time to invent a successor currency that would be managed by a "Global Reserve Bank."

Countries could "agree to exchange their own currencies for the new currency, so that the global currency would be backed by a basket of currencies of all the members," says the 218-page report from the U.N. Conference on Trade and Development.

Keep in mind that this is a U.N. report written by bureaucrats without any actual legal ability to create the global equivalent of the Federal Reserve. Anyone who remembers how a U.N. agency once called for a global e-mail tax of one cent per 100 e-mail messages -- but didn't exactly get it -- can attest to that.

The U.N. report grew out of the financial problems that swept the world in the last year or two, which it diagnoses as arising from too much speculation in commodity markets, a bubble in stock markets and housing markets, and trade imbalances between countries like China and the United States. Its prescription? "More stringent financial regulation" and "diversification away from dollars" as part of a new system of constant exchange rates. (Supachai Panitchpakdi, UNCTAD's secretary-general, also wants "vigorous" global actions, including "managing" energy prices through taxes, to dramatically cut greenhouse gas emissions.)

The diversification-away-from-dollars idea is a close cousin to what the Chinese government has been saying recently. China, of course, can now claim the dubious honor of being the largest foreign holder of U.S. Treasurys worth a total of $776.4 billion as of June 2009. According to a U.S. government report from 2007, China was the top foreign owner of Freddie and Fannie bonds too.

One aspect of the U.N. report that stands out is that, in all of its 218 pages of analysis and charts, it doesn't seriously contemplate a new currency that's based on something other than paper money, which can be devalued as fast as governments can run their printing presses or add zeros to their banknotes. The two classic options are gold and silver -- which are resistant to governmental inflationary urges -- though I prefer economist David Friedman's suggestion of a bundle of commodities. Then again, returning to money that's backed by something tangible may not require the ongoing services of an entire U.N. bureaucracy.

Declan McCullagh is a correspondent for CBSNews.com and the author of the CBSNews Taking Liberties Blog.

For further reading:
"US Dollar As Reserve Currency Not Working Very Well", Kris Sayce, September 10, 2009
"Monetary Madness", Mark W. Hendrickson, September 10, 2009
"Dollar is Funny Money in Push for World Currency", Kevin Hassett, August 31, 2009
"How to Create a New World Reserve Currency", Gary North, July 11, 2009
"An International Monetary Fund Currency to Rival the Dollar? Why Special Drawing Rights Can't Play That Role", Swaminathan S. Anklesaria Aiyar, Cato Institute's Center for Global Liberty and Prosperity Development Policy Analysis, no. 10, July 7, 2009
"Dollar Slams Up Against A (Great) Wall", Robert Lenzner, March 27, 2009

Gold Money versus the Monetary Ambitions of Governments

By Steve Saville
Excerpt from Commentary at www.speculative-investor.com
Thursday, September 8, 2009

http://www.gold-eagle.com/editorials_08/saville090809.html

China's government follows a mercantilist trade policy, meaning that it attempts to manipulate international trade -- via tariffs, subsidies, regulations and exchange rates -- in order to maximise the amount of money that flows into the country. This policy is unlikely to change anytime soon. Also, China's government exerts very direct and stringent control over its banking system, as evidenced by the rapid expansion of bank credit during the first half of this year at the behest of the government, and the subsequent slowing in the rate of credit expansion, again at the behest of the government. Thanks to its domination of the banks, China's government has a level of control over money supply that central-planners in the US and Europe can only dream about.

Chinese policymakers will not willingly relinquish the influence they now enjoy over the internal Yuan supply and the value of the Yuan relative to other currencies. For this reason, the increasingly popular notion that China plans to back the Yuan with gold, or link the Yuan's value to gold in some way, makes no sense at all.

The probability that there will be some sort of official link between China's currency and gold anytime soon is very close to zero, and the same can be said about every other national currency. Unfortunately, the current major trend is for increasing, not decreasing, government control over banking and money.

Another consideration is that it would be practically impossible for any single country, with the exception of the US, to link its currency to gold, because if all the other currencies remained free-floating/sinking then the exchange rate of the gold-linked currency would experience wild swings in response to changes in the US$ gold price. For example, a doubling of the US$ gold price over 12 months followed by a one-third decline over the ensuing 12 months would effectively cause the international prices of the gold-linked country's exports to double and then plunge over a 2-year period. That is, international trade could become extremely unstable for the lone country with the gold-linked currency. The US is the exception because a large chunk of international trade is conducted in US dollars. As a result, if the US were to link its currency to gold then the rest of the world would be forced to follow suit. This means that the US would have to be the first country to establish a gold link.

Many years into the future there will come a time when our present monetary system is so ravaged by inflation that a complete system change will be unavoidable. At this future time the reintroduction of an official monetary role for gold could become a realistic possibility.

Rather than having a Gold Standard or some other official (government-mandated/controlled) link between the currency and gold, the optimum solution would be for the government to get out of the money business altogether and let the market use whatever money it chooses to use. The trouble is, the optimum solution is so far outside the realm of mainstream thinking that it won't even find its way to the discussion table until after there is a total monetary collapse.

Steve Saville is the founder of The Speculative Investor and currently resides in Shanghai.

The Monetary Economics of E.C. Riegel

By Jon Matonis

Edwin Clarence Riegel (1879-1953), generally known as E.C. Riegel, was an independent scholar, author and consumer advocate who campaigned against restrictions on free markets that harmed consumers and promoted an alternative monetary theory and an early private enterprise currency alternative.

The above photograph shows American mutualist Laurence Labadie with the libertarian monetary theorist, E.C. Riegel, outside the latter's New York City home at 226 East 26th Street, November 14, 1948. Photo is courtesy of Labadie's niece, Carlotta Anderson.

Riegel's primary published works on monetary theory include Private Enterprise Money: A Non-Political Money System (1944), The New Approach to Freedom (1949), and Flight from Inflation: The Monetary Alternative (1978). As the publisher responsible for reviving many of his writings, Spencer MacCallum also prepared a detailed summary of Riegel's thoughts on money.

The entire individualist anti-statist position from Pierre-Joseph Proudhon, Josiah Warren, Benjamin Tucker, and William B. Greene to the modern money theorists, Hugo Bilgram and E.C. Riegel, is inextricably linked to the insistence of competing money systems and the evolution of marketplace control over money, credit, and interest rates. Riegel anticipated Austrian economist Friedrich Hayek's thinking that the separation of money and State also entailed the separation of the standard unit of value and the State. The non-Hayekian 'libertarians' persist in a dogged devotion to the gold standard, which Riegel believed was essentially a formula for a different brand of State-controlled money, run in collusion between ambitious State finance ministers and the major holders of gold, thereby tying currency to a gold price fixed by political agreement and made immune to the market adjustment process of a free market in gold trading.

With echoes of the late 19th-century standards battle between New York gold interests and the agrarian Free Silver Movement, Riegel's valun system describes a voluntary banking association of private abstract standards based on goods and services (or labor) that they are being exchanged for, similar to a mutual credit system. Essentially, a greater number of choices in monetary standards will increase the dignity of the common man and the overall prosperity of the people. In extrapolating this mutual participatory banking system, I doubt Riegel would have advocated that the valun currency unit assume the new monopoly privilege barring other free enterprise entrants. Therefore, other private currency units would evolve naturally and they would be competing directly against the valun. This is where it gets interesting.

Although Hayek departed from some of his Austrian peers in turning towards a totally free market monetary system that may end up not being based on a 100% gold-backed monetary unit, his insistence on free banking and market-determined standards was unwavering. In the worldwide evolution of standards left free to develop unhindered, I maintain that a metals based monetary unit will tend to dominate in the race for nonpolitical digital currency adoption.

We can observe this today in the many digital currency companies jockeying for adoption and circulation. The digital gold currency issuers, as opposed to the digital fiat currency issuers, appear to have a distinct advantage in trust when the elements of jurisdiction and political risk are removed. Otherwise, why would e-gold have achieved such market dominance before being challenged legally by the U.S. authorities? The evidence to date is that online, cross-border digital currency users will gyrate toward objectively-measured value, such as gold, rather than abstract subjective value.

What Riegel did not foresee as possible in the 1940s was technology's ability to permit competing non-State currency providers to issue online and beyond political boundaries. This is a paramount change to the money issuing landscape, not least of which allows for immediate convertibility, partial or full. Riegel's market process for nonpolitical money is correct; however, the conclusions that he reaches regarding the separation of standard unit of value and the State are not realistic. The challenge for the community currency crowd is to demonstrate in practice how a valun or a local time-labor note will prevail over a metals-based currency unit in the digital world.

For further reading:
"The Legacy of E.C. Riegel", Thomas Greco, September 7, 2009
"Monetary Theory of E.C. Riegel", Christopher Quigley, March 6, 2007
The Money Changers: Currency Reform from Aristotle to e-cash, David Boyle, 2003
"Anarchy and Money", Jon Matonis, December 15, 1984
Men Against the State, James J. Martin, 1953
Individual Liberty, Benjamin R. Tucker, 1926
Proudhon and His "Bank of the People", Charles A. Dana, 1896
Hard Cash, Ezra Heywood, 1875
True Civilization, Josiah Warren, 1863
Our Mechanical Industry, As Affected By Our Present Currency System: An Argument for the Author's New System of Paper Currency, Lysander Spooner, 1862
Equitable Commerce, Josiah Warren, 1852
Mutual Banking, William B. Greene, 1850

China Buys First IMF Bonds, Moves away from US Dollar Reserves

Business Intelligence Middle East
Friday, September 4, 2009

http://www.bi-me.com/main.php?id=40013&t=1&c=33&cg=4&mset=

DUBAI -- China has agreed to buy the first International Monetary Fund bonds for about US$50 billion, the IMF said.

IMF managing director Dominique Strauss-Kahn and the deputy governor of the People's Bank of China, Yi Gang, signed the agreement Wednesday at IMF headquarters in Washington, the multilateral institution said.

Under the agreement, the Chinese central bank "would purchase up to SDR 32 billion (around US$50 billion) in IMF notes," it said.

SDRs are defined in terms of a basket of major currencies used in international trade and finance. The currencies in the basket are 44% US dollars, 34% euros, 11% Japanese yens and 11% pounds sterling.

SDRs are used as a unit of account by the IMF and other international organizations, that is calculated daily and which members can convert into other currencies.

"The note purchase agreement is the first in the history of the fund," the 186-nation institution said.

The IMF executive board approved the plan to issue notes to governments on 1 July.

China will use yuan, not dollars, to buy the IMF-issued bonds, it was revealed on Friday.The expectation had been that China would use dollars to buy the bonds.

The purchase price of each IMF bond should be paid "by transfer of the SDR equivalent amount of Chinese Renminbi to the account of the Fund", the agreement, which was signed earlier this week, stipulated.

A Chinese central bank official, speaking on condition of anonymity, said it was not clear how the bond purchase would be implemented in practice. One possibility is that the use of yuan is purely a question of accounting convenience.

The IMF might sell the yuan directly back to the Chinese central bank for dollars, hence allowing Beijing to diversify its foreign exchange reserves, said Zhang Bin, an analyst at the Chinese Academy of Social Sciences, a key government think-tank.

The issuance of bonds is an unprecedented step to boost IMF resources as the institution struggles to provide financing to help member nations cope with the global financial and economic crises.

"The agreement offers China a safe investment instrument. It will also boost the fund's capacity to help its membership -- particularly the developing and emerging market countries -- weather the global financial crisis, and facilitate an early recovery of the global economy," the IMF said.

The global economy is beginning to pull out of the worst recession since World War II, according to the institution, but recovery is expected to be sluggish and financial systems remain fragile.

China, whose dynamic economy is expected to lead the global economy out of recession, has been seeking greater representation at the IMF to reflect its rising economic might.

The IMF currently has to raise money by issuing bonds. It has a shortfall of funds due to the financial crisis, yet has to financially support some countries, said Zeng Gang, director of the Department of the Banking Industry of the China Institute of Finance and Banking.

He added that China's holdings of the IMF bond would help give it greater saying and influence in the IMF.

Besides this, holding the bond provides a relatively secure investment, given the risk of depreciation in holding the US dollar.

Since the US dollar holds a smaller proportion than the combination of the other three currencies, holding the IMF bond is safer than US dollar assets.

However, the bond is unlikely to act as the main investment product for China's huge foreign exchange reserves, because the total issue of the bond is only one-tenth of the T-bonds issued by America, and the bond buyer has to bear some exchange risk and interest rate risk, according to market analysts.

Some analysts argue that this bond is more close to debt, as private investors cannot participate and the bond cannot not be traded on a secondary market, which means the investors have to face some liquidity risks.

Brazil, Russia and India -- the other three countries that make up what is known collectively as the BRIC countries -- are seen as potential buyers of IMF bonds and are also in the vanguard of developing countries' drive for greater representation in international bodies.

A deal for Russia to buy up to US$10 billion of IMF should be concluded by September, a senior Russian government official said in early July.

Brazil is also in the market for US$10 billion worth of new IMF bonds.

Any bid by China to expand its formal influence at the IMF is likely to encounter resistance, especially from Europe, which has traditionally provided the fund's managing director.

Chinese think-tank economists said the purchase symbolised the country's "very first step" toward increasing its say in reshaping global financial institutions amid the financial crisis.

The bonds also allow China to diversify its massive holdings of foreign reserves, giving it an alternative to purchasing US State bonds. And it will give the IMF the resources it needs to help other countries battle through the global crisis.

China holds US$2.13 trillion in foreign exchange reserves, the world's largest stockpile, and economists reckon that about two-thirds are invested in dollar-denominated assets.

For further reading:
"China to use yuan, not dollars, for IMF bond buy", Reuters, September 4, 2009
"China to buy $50 billion of first IMF bonds", Associated Press, September 3, 2009

Gold Market Now Enjoys the 'Beijing Put'

By Ambrose Evans-Pritchard
The Telegraph, London
Monday, September 7, 2009

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100000821/china-bernanke-and-the-price-of-gold/

LAKE COMO, ITALY -- China has issued what amounts to the "Beijing put" on gold. You can make a lot of money but you really can't lose.

I happened to see quite a bit of Cheng Siwei at the Ambrosetti Workshop, a gathering of politicians and global strategists at Lake Como, including a dinner at Villa d'Este last night at which he listened very attentively as a number of American guests tore President Obama's economic and health policies to shreds.

Mr Cheng was until recently vice chairman of the Communist Party's Standing Committee and is now a sort of economic ambassador for China around the world -- a charming man, by the way, who left Hong Kong for mainland China in 1950 at the age of 16 as young idealist eager to serve the revolution. Sixty years later, he calls himself simply "a survivior."

What he said about US monetary policy and gold -- this bit on the record -- would appear to validate the long-held belief of gold bugs that China has fundamentally lost confidence in the US dollar and is going to shift to a partial gold standard through reserve accumulation.

He played down other metals such as copper, saying that they could not double as a proxy currency or store of wealth.

"Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not stimulate the market," he said.

In other words, China is buying the dips, and will continue to do so as a systematic policy. His comment captures exactly what observation of gold price action suggests is happening. Every time it looks as if the bullion market is going to buckle, some big force steps in from the unknown.

Investors long-suspected that it was China. We later discovered that Beijing had in fact doubled its gold reserves to 1054 tonnes. Fait accompli first. Announcement long after.

Standing back, you can see that the steady rise in gold over the last eight years to $994 an ounce last week -- outperforming US equities fourfold, even with reinvested dividends -- has roughly tracked the emergence of China as a superpower in foreign reserve holdings (now $2 trillion).

As I have written in today's paper, Mr Cheng (and Beijing) takes a dim view of Ben Bernanke's monetary experiments at the Federal Reserve.

"If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies," he said.

This line of argument is by now well-known. Less understood is how much trouble the Fed's "quantitative easing" policies are causing in China itself, where they have vicariously set off a speculative boom on the Shanghai exchange and in property. Mr Cheng said mid-level house prices are now 10 times incomes.

"If we raise interest rates, we will be flooded with hot money. We have to wait for them. If they raise, we raise."

"Credit in China is too loose. We have a bubble in the housing market and in stocks so we have to be very careful, because this could fall down."

Of course China cold end this problem by letting the yuan rise to its proper value, but China too is trapped. Wafer-thin profit margins on exports mean that vast chunks of Chinese industry would go bust if the yuan rose enough to close the trade surplus. China's exports were down 23 percent in July from a year before even at the current exchange rate, and exports make up 40 percent of GDP. "We have lost 20 million jobs in this crisis," he said.

China's mercantilist export strategy has led the country into a cul-de-sac. China must continue to run its trade surplus. It must accumulate hundreds of billions more in reserves. Ergo, it must buy a great deal more gold.

Where is the gold going to come from?

Hong Kong Pulling Gold Reserves from London

By Chris Oliver
MarketWatch
Thursday, September 3, 2009

http://www.marketwatch.com/story/hong-kong-recalls-gold-reserves-from-london-2009-09-03

HONG KONG -- Hong Kong is pulling all its physical gold holdings from depositories in London, transferring them to a high-security depository newly built at the city's airport, in a move that won praise from local traders Thursday.

The facility, industry professionals said, would support Hong Kong's emergence as a Swiss-style trading hub for bullion and would lessen London's status as a key settlement-and-storage center.

"Having a central government-sponsored vault would create a situation where you could conceivably look at Hong Kong as being a hub, where metal could be traded for the region," said Sunil Kashyap, managing director at Scotia Capital in Hong Kong, adding that the facility was the first with official government backing in the region.

The Hong Kong Monetary Authority, which functions as the territory's unofficial central bank, will transfer its gold reserves stored in other vaults to the depository later this year, the Hong Kong government said in an earlier statement.

The monetary authority reported $63 million in physical gold reserves as of July 31, according to its International Reserves and Foreign Currency Liquidity statement. The authority wouldn't disclose where the reserves are held, but local media reports cited gold traders as saying that London's the most likely location.

Traders said the new depository facility could also foster new financial products, such as exchange-traded funds based on precious metals.

The 3,660-square-foot depository, located at the city's main Chek Lap Kok Airport, will serve as a "storage facility for local and overseas government institutions," according to the government statement.

Martin Hennecke, a financial advisor with the Hong Kong-based Tyche Group Ltd., said that could be appealing to regional central banks unnerved after watching the global financial system teeter on verge of implosion last year.

"Central banks are increasingly aware of the importance of having gold reserves at time of financial crisis and having it easily available at their own disposal," he said.

Meanwhile, local newspaper reports said the Hong Kong Mercantile Exchange had signed an agreement to use the depository for its physical settlement and storage needs.

Marketing efforts will be launched to convince Asian central banks to transfer their gold reserves to the Hong Kong facility, according to reports citing Raymond Lai, finance director with the Hong Kong Airport Authority.

Efforts will also be made to reach out to commodity exchanges, banks, precious-metals refiners and ETF providers, the reports said.

Management firm Value Partners planned to launch an ETF gold fund that will use Hong Kong instead of London as a repository for the gold backing the fund, local reports said Thursday.

Chris Oliver is MarketWatch's Asia bureau chief, based in Hong Kong.

Issuer Market Update - September 2009

By Jon Matonis

The Issuer Market Update is a periodic snapshot of active digital gold currency issuers. Only those issuers and currencies that have precious metals backing are included in the analysis, although some issuers may also offer non-metal digital currencies.

Additionally, I have included each issuer's date of founding and the legal jurisdictions for administrative, operational, and guarantor entities, if applicable. Certain companies below will be the focus of issuer highlight studies in the future. Please bear in mind that not all issuers are forthcoming about the full details of their legal and control structure -- a fact that I believe puts them at a relative disadvantage.

1. c-gold (2007) - Seychelles, Malaysia
   
2. e-dinar (2000) - Dubai, Malaysia
3. e-gold (1996) - Nevis, USA
4. EuroGoldCash (2008) - Panama
5. GoldExchange (2006) - Costa Rica
   
6. GoldMoney (2001) - British Channel Islands
7. GoldNowBanc (1999) - unknown jurisdiction
8. Gold-Pay (2008) - Panama, Costa Rica
9. iGolder (2009) - Belize
10. Liberty Reserve (2005) - Costa Rica
11. Pecunix (2001) - Panama, Vanuatu
12. Perfect Money (2007) - Panama
13. WebMoney (1998) - Belize, Lithuania, Russia, Dubai

Interviews with Issuers:
"Interview with c-gold", DGC Magazine, June 19, 2009
"Interview with iGolder", DGC Magazine, April 16, 2009
"Interview with e-gold", DGC Magazine, March 20, 2009
"Interview with Gold-Pay", DGC Magazine, March 20, 2009
"Interview with Perfect Money", Ecommerce Journal, January 23, 2009
"Interview with e-dinar", DGC Magazine, October 22, 2008
"Interview with WebMoney", DGC Magazine, October 22, 2008
"Interview with GoldMoney", DGC Magazine, October 22, 2008
"Interview with Liberty Reserve", Planetgold.com, May 20, 2002