Currency: the global money meltdown
Momtaz Ahmed
November 11, 2008
United States of America is disliked around the world not only because of two wars, but the current credit crisis is the result of a loose monetary policy and excessive capital flows. Large Corporation with substantial degree of monopoly power took the advantage of the US deregulation bill that allowed banks to take risks with America´s future. A liquidity crunch deriving from the faulty US housing market already affected the world markets and started the impeding global economic growth.
President-elect Obama inherits huge challenges that are much greater that what his predecessors had to face. Economists and US officials project Obama would need to borrow extra $368 billion in the first quarter of 2009. Tax revenue is falling sharply and the impact on the budget deficits grow as the economy goes into recession. The index of US manufacturing activity fell sharply in October to its lowest level in 26 years. Most of the Asian export driven countries will be forcing the new president first to fix the US economy. European Union will push for major reforms on world financial system.
Where were the brilliant economists on staff at the US Federal Reserve Board? Now banks, financial institutions and others are not capable of protecting their shareholders and their equity in the firms for the self-interests of organizations. If workers are not held accountable for their performance, then they will not do quality work. The financial collapse is due to sub-prime loan. The entire political hack avoided to tell long overdue truth. Today the world is fearful of the great changes that will begin shortly. Perhaps, the demise of rely on power and wealth.
The situation, forces and trends are very dominant to halt the present financial collapse. European government began pumping billions of dollars into their banking system. In the US, the Feds and Treasury are providing bailout money to each new problem without knowing the consequences seemingly making it looks like the institutions were being rewarded for their greedy errors in judgment. Have there any chance for a currency collapse?
Present economic problem is not the result of some scarcity in oil; it is the result of a dysfunctional monetary system. Let´s look back where the crisis originated. We all relied on monetary systems, where currency is used in trade was either composed of a physical commodity or exchangeable for predetermined amount of physical commodity. To foster global monetary cooperation, secure financial stability, facilitate international trade, sustainable economic growth and oversees the international monetary system, International Monetary Fund (IMF) was created at the Bretton Woods conference in 1944.
IMF is a fully negotiated monetary order designed to manage monetary relations among independent countries. In Bretton Woods system, each country had a par value of its currency expressed in terms of gold or in terms of the US dollar using the weight of gold in effect on July 1, 1944. Again it was an obligation for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value [±1%] in terms of gold and the ability of the IMF to bridge temporary imbalances of payments.
After World War II, the brisk expansion of production and international trade needed a constantly rising supply of gold as primary reserve asset to increase total liquidity. However, gold didn´t meet this demand. A shortage of gold in 1960s guided many countries to supplement their gold reserves with monetary reserves. The U.S. dollar ($) and to some extent British pound (£) were used as reserve assets. By mid 1960s most of the total market economy reserves was held in US dollar and British pounds, and the reminder in gold. Then the US ran a deficit balance of payments by spending more money in other countries. The extra dollars are held the different countries central banks. In the late 1960s and early 1970s, the IMF set up of fixed exchange rates system to oversee began to break down.
On August 15, 1971, US president Nixon announced in a Sunday evening televised address to the nation that the US was removing the gold backing from the dollar. Then onwards, the US dollar has been a global monetary mechanism, and only the United States of America can produce by fiat. So, the present international finance architecture is based on the US dollar as the dominant reserve currency. Since then, there has been no official connection between US dollar and a set price for gold or other precious metal held by US government. The real value of the dollar today depends only on the amount of goods and services a dollar can purchase.
A new kind of political geography now dominates the global political economic landscape. Those who have power and money may not agree to radical change in economics. No one practically knows the exact route of this financial crisis or when will it ends. Sovereign wealth funds from China, Middle East, Russia, India and others move markets as much as the US Fed does. Right now European Union is serious to figure out what actually happened in the financial sector, and fix things so it can´t happen again.
US President Woodrow Wilson was created the Federal Reserve on December 23, 1913, with the signing of the Federal Reserve Act. Main purpose was to provide a safer, more flexible banking and monetary system. The Federal Reserve System is not a government agency. The Fed is composed of a Board of Governors in Washington and twelve regional banks in major cities throughout the US. However, the Federal Reserve is subject to oversight by US Congress, which periodically reviews its activities and can alter its responsibilities by ruling.
The present international finance structure is based on the US dollar as the central reserve currency. In a free market, banks could hold gold reserves equal to their checking deposits. The Federal Reserve further made it possible for banks to operate with irredeemable fiat money reserves of less than 2%. This additional money entered in the loan market is basically conjured capital, which doesn´t represent additional capital goods in the economic system. Perhaps present housing mortgages crisis is the firm example of this. A financial system needs both deposit insurance and a central bank with regulatory authority.
From the burial of Soviet Union a new Union has emerged. European governments have already committed $2.8 trillion to bank rescues to avert a financial meltdown. The Euro will become the rival currency of choice around the world if US macroeconomic policy lost the confidence in the value of the dollar, in the manner of depreciation and inflation. The Euro-zone has a bigger share of world trade than the US and is the Middle Eastern main trading partner.
Money is a directional flow, either creating costs, or canceling them. It does not circulate round and round. All money is created as a debt that needs to be repaid. Every loan creates a deposit, and every repayment of a loan wipe out a deposit. World leaders need to track down the bubble crises, how much of it was based on real economic growth and how much on mere speculation.
Canada is the largest trading partner of United States of America. Till August 2008 the import and export amounted 416.02 billion dollar between the two countries. Canada has different banking system. Even though Canada´s manufacturing sector endured as the cad$ soared against US$ over the past years. It hurts export based industries in particular the auto sector and lumber. The Canadian dollar is considered a commodity currency. The decline in the price of crude oil, minerals and metals are the prime factor in the loonie´s drop. Again weak Canadian dollar is the index of poor global economic growth.
IMF and World Bank may not ensure more inclusiveness of developing countries decision-making process, but the G-20 nations need to establish a paradigm by synthesizing the free-market and socially and environmentally responsible monetary system. How feeble it is as developed capitalist countries of the world we are looking to communist China to come for rescue. China is the holder of the worlds largest foreign currency reserves can play a prominent role in helping the present global financial crisis. Though this global economic slow down is more different that of China faced successfully in 1997-98 caused by the Asian currency crisis.
At present the corporate and personal debt in the US is so high, that a quick increase in interest rates may bring about an economic collapse. The developing countries are facing enormous pressure due to high food and energy costs. To determine the poverty is not always the imperfection of the individual alone; moreover, the factors are a combination of personal, regional, national and significantly international influences.
Money is created not printed. When the US economy is officially shrinking and the consumer confidence is nose-diving. Most of the world citizens hope to see America´s new commander-in-chief would omen a less confrontational America. In 2008 presidential election campaign cash wasn´t a problem, but to tackle two wars, the worst economic conditions since the Great Depression, even perhaps a long lasting recession and promises of change keep no room in the budget. The challenges are high to cope and thrive in the current monetary crisis environment. Will the change put the people back to work and respond with creed: Yes, we can?
President-elect Obama inherits huge challenges that are much greater that what his predecessors had to face. Economists and US officials project Obama would need to borrow extra $368 billion in the first quarter of 2009. Tax revenue is falling sharply and the impact on the budget deficits grow as the economy goes into recession. The index of US manufacturing activity fell sharply in October to its lowest level in 26 years. Most of the Asian export driven countries will be forcing the new president first to fix the US economy. European Union will push for major reforms on world financial system.
Where were the brilliant economists on staff at the US Federal Reserve Board? Now banks, financial institutions and others are not capable of protecting their shareholders and their equity in the firms for the self-interests of organizations. If workers are not held accountable for their performance, then they will not do quality work. The financial collapse is due to sub-prime loan. The entire political hack avoided to tell long overdue truth. Today the world is fearful of the great changes that will begin shortly. Perhaps, the demise of rely on power and wealth.
The situation, forces and trends are very dominant to halt the present financial collapse. European government began pumping billions of dollars into their banking system. In the US, the Feds and Treasury are providing bailout money to each new problem without knowing the consequences seemingly making it looks like the institutions were being rewarded for their greedy errors in judgment. Have there any chance for a currency collapse?
Present economic problem is not the result of some scarcity in oil; it is the result of a dysfunctional monetary system. Let´s look back where the crisis originated. We all relied on monetary systems, where currency is used in trade was either composed of a physical commodity or exchangeable for predetermined amount of physical commodity. To foster global monetary cooperation, secure financial stability, facilitate international trade, sustainable economic growth and oversees the international monetary system, International Monetary Fund (IMF) was created at the Bretton Woods conference in 1944.
IMF is a fully negotiated monetary order designed to manage monetary relations among independent countries. In Bretton Woods system, each country had a par value of its currency expressed in terms of gold or in terms of the US dollar using the weight of gold in effect on July 1, 1944. Again it was an obligation for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value [±1%] in terms of gold and the ability of the IMF to bridge temporary imbalances of payments.
After World War II, the brisk expansion of production and international trade needed a constantly rising supply of gold as primary reserve asset to increase total liquidity. However, gold didn´t meet this demand. A shortage of gold in 1960s guided many countries to supplement their gold reserves with monetary reserves. The U.S. dollar ($) and to some extent British pound (£) were used as reserve assets. By mid 1960s most of the total market economy reserves was held in US dollar and British pounds, and the reminder in gold. Then the US ran a deficit balance of payments by spending more money in other countries. The extra dollars are held the different countries central banks. In the late 1960s and early 1970s, the IMF set up of fixed exchange rates system to oversee began to break down.
On August 15, 1971, US president Nixon announced in a Sunday evening televised address to the nation that the US was removing the gold backing from the dollar. Then onwards, the US dollar has been a global monetary mechanism, and only the United States of America can produce by fiat. So, the present international finance architecture is based on the US dollar as the dominant reserve currency. Since then, there has been no official connection between US dollar and a set price for gold or other precious metal held by US government. The real value of the dollar today depends only on the amount of goods and services a dollar can purchase.
A new kind of political geography now dominates the global political economic landscape. Those who have power and money may not agree to radical change in economics. No one practically knows the exact route of this financial crisis or when will it ends. Sovereign wealth funds from China, Middle East, Russia, India and others move markets as much as the US Fed does. Right now European Union is serious to figure out what actually happened in the financial sector, and fix things so it can´t happen again.
US President Woodrow Wilson was created the Federal Reserve on December 23, 1913, with the signing of the Federal Reserve Act. Main purpose was to provide a safer, more flexible banking and monetary system. The Federal Reserve System is not a government agency. The Fed is composed of a Board of Governors in Washington and twelve regional banks in major cities throughout the US. However, the Federal Reserve is subject to oversight by US Congress, which periodically reviews its activities and can alter its responsibilities by ruling.
The present international finance structure is based on the US dollar as the central reserve currency. In a free market, banks could hold gold reserves equal to their checking deposits. The Federal Reserve further made it possible for banks to operate with irredeemable fiat money reserves of less than 2%. This additional money entered in the loan market is basically conjured capital, which doesn´t represent additional capital goods in the economic system. Perhaps present housing mortgages crisis is the firm example of this. A financial system needs both deposit insurance and a central bank with regulatory authority.
From the burial of Soviet Union a new Union has emerged. European governments have already committed $2.8 trillion to bank rescues to avert a financial meltdown. The Euro will become the rival currency of choice around the world if US macroeconomic policy lost the confidence in the value of the dollar, in the manner of depreciation and inflation. The Euro-zone has a bigger share of world trade than the US and is the Middle Eastern main trading partner.
Money is a directional flow, either creating costs, or canceling them. It does not circulate round and round. All money is created as a debt that needs to be repaid. Every loan creates a deposit, and every repayment of a loan wipe out a deposit. World leaders need to track down the bubble crises, how much of it was based on real economic growth and how much on mere speculation.
Canada is the largest trading partner of United States of America. Till August 2008 the import and export amounted 416.02 billion dollar between the two countries. Canada has different banking system. Even though Canada´s manufacturing sector endured as the cad$ soared against US$ over the past years. It hurts export based industries in particular the auto sector and lumber. The Canadian dollar is considered a commodity currency. The decline in the price of crude oil, minerals and metals are the prime factor in the loonie´s drop. Again weak Canadian dollar is the index of poor global economic growth.
IMF and World Bank may not ensure more inclusiveness of developing countries decision-making process, but the G-20 nations need to establish a paradigm by synthesizing the free-market and socially and environmentally responsible monetary system. How feeble it is as developed capitalist countries of the world we are looking to communist China to come for rescue. China is the holder of the worlds largest foreign currency reserves can play a prominent role in helping the present global financial crisis. Though this global economic slow down is more different that of China faced successfully in 1997-98 caused by the Asian currency crisis.
At present the corporate and personal debt in the US is so high, that a quick increase in interest rates may bring about an economic collapse. The developing countries are facing enormous pressure due to high food and energy costs. To determine the poverty is not always the imperfection of the individual alone; moreover, the factors are a combination of personal, regional, national and significantly international influences.
Money is created not printed. When the US economy is officially shrinking and the consumer confidence is nose-diving. Most of the world citizens hope to see America´s new commander-in-chief would omen a less confrontational America. In 2008 presidential election campaign cash wasn´t a problem, but to tackle two wars, the worst economic conditions since the Great Depression, even perhaps a long lasting recession and promises of change keep no room in the budget. The challenges are high to cope and thrive in the current monetary crisis environment. Will the change put the people back to work and respond with creed: Yes, we can?
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