A New World Financial Order

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In
the midst of the imploding US and European financial systems and
the resultant bankruptcies, nationalizations and bailouts the People's
Daily, China's official newspaper, called for a new global currency
to replace the US dollar. Writing in the People's Daily edition
of 17 September 2008 Professor Shi Jianxun of Shanghai's Tongji
University said that "[t]he world urgently needs to create
a diversified currency and financial system and fair and just financial
order that is not dependent on the United States."

This
was later followed by a Friday 26 September address by Prime Minister
Gordon Brown before the United Nations in which he called for a
new "global financial order." It is to be based on "transparency,
not opacity, rewarding success not excess, responsibility, not impunity,
and …is [to be] global not national.” Brown went on to say “We must
clearly state that the age of irresponsibility must be [at an] end.”
As the G20 nations prepare to meet in Washington this week Mr. Brown
has again called for a new global financial order, a Bretton Woods
II. Mr. Brown wants the Middle East oil producers and China to assist
in contributing to the bailouts taking place in the United States
and Europe. In calling for such contributions Mr. Brown is effectively
admitting the United States and Europe are broke and have exhausted
their government (and central bank) resources in an effort to cure
this massive market correction (frequently called a recession, deep
recession or even depression) which has been underway since August
2007. China has announced its own stimulus program but it is unclear
whether included in the 4 trillion Yuan amount are new programs
or existing ones or a combination of both (my Chinese friends who
are cynical about China's government leaders laughingly tell me
it probably includes the infrastructure projects for China's 2008
Olympics as well).

Professor Jianxun is right to express concern about the financial
leadership of the United States and the United States dollar in
light of the events taking place in Washington and in the capitals
of Europe. Estimates by financial analysts of the various bailouts
of US financial institutions, the US automobile industry and god
knows who all are at $2.7 trillion dollars with more bailouts likely
to come. In Australia in addition to bailing out the automotive
industry the government is assisting in the rescue of childcare
operator ABC Learning Centres with a A$22 million dollar injection
to keep the company afloat until the end of the year. The administrator
appointed to oversee the company has estimated that 40% of the company's
childcare centres are unprofitable. Another example of the management
of a company assuming inflation by central banks would continue
forever without there being any correction.

Any
sane person would have to wonder how the United States taxpayer
(as well as the taxpayers of other countries) will pay for all of
this while at the same time trying to recover and grow
the US economy
and strengthen the US dollar.
The national debt of the United States is likely to go well above
$11 trillion when totaling up all the financial risks proposing
to be addressed by the US Treasury and the US Federal Reserve (we
can be sure that $700 billion is not the final cost of the bill
for the bailout; already AIG has been refinanced with $150 billion).
For example the total derivative risk covered by CDS (credit default
swaps, private contractual financial instruments insuring against
default of debt) which is what finally sunk Bear Stearns and AIG
is estimated to be $62 trillion and the exposure by US banks and
financial institutions for all derivative products is estimated
to be $180 trillion. The US House of Representatives recently agreed
to bail out the US automotive industry and is in the process of
considering providing additional money for the industry. With this
bailout the line outside the corporate soup kitchen is likely to
become very long as the corporate jets start flying into Washington
to get a free meal and a free ride at the expense of the American
taxpayer

In 1999 the
US debt was "only" $3.6 trillion; the government was running
a surplus and projecting to pay off the debt by 2015. What a difference
years of large government intervention have made — expenditures
for wars in Iraq and Afghanistan and other large government expenditures
to be paid through inflation by the Federal Reserve with the resultant
malinvestments. It is not surprising then that questions arise about
US financial management and the US dollar. It is time to adopt a
global currency for a global economy — a private asset-based currency
rather than a fiat currency which is subject to political whim,
manipulation and wild swings in value resulting in massive malinvestments
and destruction of savings. It is time to return to gold as the
global private currency for our global economy. Eliminate fiat currency,
eliminate fractional reserve banking, eliminate central banks and
their government sponsored banking cartel which has brought about
this massive destruction of wealth.

The technological
and financial revolution which has resulted in a globalized economy
and more open markets among nations has dramatically broken down
trade and other national barriers among countries of the world.
While far from perfectly efficient (due to the vast array of national
protectionist laws and regulations) we have a global economy in
spite of the attempts by governments to preserve the past with various
national barriers. The least-developed nations can participate in
the globalized economy as well as can their larger developed neighbors.
So why do we still have over 150 national currencies in the world
today rather than one global currency? Why is this nationalistic
barrier to trade still standing? The currency and monetary system
to be used in a modern globalized system of trade and development
is simply too important to be left to the numerous central bank
bureaucrats and power brokering politicians who have various agendas
of a political nature rather than the facilitation of free trade,
free markets, economic development and prosperity for the people
of the world. A global currency should be in private hands and not
under political control as it is presently.

The
establishment of the developed countries must have sensed the train
wreck and thus began to question whether or not a private system
makes more sense then the current system particularly in light of
the financial crisis which began in August 2007 and continues to
worsen almost daily. In an article published in the Financial Post
November 8, 2007 Benn
Steil
, Director of International Economics
for the Council on Foreign Relations, says that private money is
a real possibility if the United States does not "return to
long-term fiscal discipline" (raise your hand if you think
the United States government will return to long-term fiscal discipline).

"As
for the United States, it needs to perpetuate the sound money policies
of former Federal Reserve chairmen Paul Volcker and Alan Greenspan
and return to long-term fiscal discipline. This is the only sure
way to keep the United States’ foreign creditors, with their massive
and growing holdings of dollar debt, feeling wealthy and secure.
It is the market that made the dollar into global money — and what
the market giveth, the market can taketh away. If…the dollar fails,
the market may privatize money on its own."

Mr.
Steil goes to on to say

"…private
gold banks already exist, allowing account holders to make international
payments in the form of shares in actual gold bars. Although clearly
a niche business at present, gold banking has grown dramatically
in recent years, in tandem with the U.S. dollar’s decline. A new
gold-based international monetary system surely sounds far-fetched.
But so, in 1900, did a monetary system without gold. Modern technology
makes a revival of gold money, through private gold banks, possible
even without government support."

While it is
arguable (among non-Austrian economists) whether or not the monetary
policies of Messrs. Volcker and Greenspan were sound (many, if not
most, point the finger of blame at Greenspan for today's financial
problems), it is wishful thinking to believe for one second that
governments and the government's financier, their central banks,
will maintain long-term (or even short-term) discipline in spending
and creating money. Their track record to date is not good and is
becoming worse by the day. The events since August 2007 and particularly
the response by central banks and governments to the meltdown which
began during the week of 15 September 2008 and thereafter clearly
indicates that the prospects for a "return to long-term fiscal
discipline" is poor. The appetite of politicians, bureaucrats
and governments for expansion of power and spending is too great
to resist and the bureaucrats at central banks are all too eager
to accommodate the demands of the government and the power broker
politicians. It is the reason the world's economy has been on a
course toward economic disaster since the flood gates of fiat currency
(initially paper money and now electronically created money) were
opened in 1913 with the passage of the Federal Reserve Act in the
United States.

Gordon Brown's
call for more global regulation and hence more government intervention
is not the answer. The creation of money and management of the monetary
system should be returned to a free (free from government intervention)
private marketplace in the United States, Europe and other countries.
As recent events clearly show our property, our wealth and our lives
should not be entrusted to government bureaucrats and power-brokering
politicians who bow and bend to special political interests rather
than satisfy private consumers' demands as does the private marketplace.
Let the private free market determine and provide what consumers
want, what will be money and how the monetary system will function
as the private market does with other products and services provided
in the private marketplace. We would not think of the government
providing our groceries (scarcity and long lines are the rule from
such a system as we saw in the old Soviet Union and as we see in
Zimbabwe today) so why do we allow the government to provide and
manage something as important as our monetary system?

It is time
for a new world financial order of private money and a private monetary
system. Close down government-sponsored central banks in the United
States and other countries and end the government monopoly of creating
money and managing the monetary system which has brought the world
financial system to near collapse. It is time to return to a private
global gold standard for a global economy.

November
13, 2008

Jacob
Steelman [send
him mail
], an American ex-pat, is President of International
Ventures Group a global investment, finance and development company
located in Sydney, Australia.

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