Monday September 17th, 2012
George Soros, SDR, US Dollar and Gold -- Time for a New Reserve Currency? (Chris Ferreira)
George Soros describes in the following video how we need a “New Financial World Order,” on the pretext that the current system is “broke” and creating huge trade imbalances. Although he is correct about the massive trade imbalances being incurred worldwide, he nevertheless chooses to ignore the reasoning behind the trade imbalance in the first place. The reasoning given for a new global currency is a false illusion and will only further undermine the economy, as I will point out below.

How Did The US Get To This Point?

The US trade deficit began in the early 80′s–coincidentally at the same time of the most recent wave of globalization (late 70′s early 80′s). At this time, private American corporations were being faced with higher regulation and more stringent standards from labour unions; in fact, the peak membership of private sector labour unions in the US was in 1979. In order for US private corporations to maintain their competitive advantage, they began to outsource their production to developing nations where the production was carried out at a fraction of the cost. This was largely facilitated with the help of the World Trade Organization (WTO), which was created by the members of the Breton Woods Agreement; the same members who created the World Bank and the IMF.

Let’s rephrase: the US trade deficit is by design, and it was sustained by the members of the Breton Woods Agreement. It would be practically impossible to maintain a trade deficit of this proportion naturally–and even more impossible with a gold standard, as the gold reserves would have to be sent to foreigners to balance trade deficits. The table below shows the leading foreign holders of US debt, which are China and Japan as the main financiers of the US trade deficit.

Source: Wikipedia

So this begs the question: when George Soros, a member of the Bretton Woods Committee (see here) says the current system is “broke” and needs to be replaced by a new a monetary system, why should we listen to him? It is precisely the system that he and his fellow policy makers devised that has created and sustained this massive trade imbalance in the first place.

Obviously, it is in his interest to promote the Special Drawings Right (SDR) as a new world currency; the IMF controls it. The problem with the SDR currency is that it is just another fiat currency. It does not restrict the controllers of the currency to the limits of economic growth, and hence tested through time, the currency becomes abused. Also, the progress for the SDR has been very slow and has not recieved much acceptance among other nations, and for this reason I do not expect the current model of the SDR to replace the reserve currency. However, note that the US currently controls the IMF by their voting powers (17% nominal interest, and a required of 85% majority for decisions). As more and more people lose confidence in the US Dollar and governments in general due to reckless monetary and fiscal policies, the IMF can instead back the SDR with gold to promote stability and confidence. That is certainly one realistic possibility considering that they reportedly own over 2.8 tonnes of gold.

Source: Wikipedia

As pointed out in a previous article (“Petro Dollar Collapse‘) and by Soros himself, Iran and China, among other nations, are creating bi-lateral trade agreements to by-pass the US dollar. If the US loses its reserve currency status, the US Dollar will most probably collapse as the dollar becomes a currency nobody wants to use anymore. The abundance of dollars chasing fewer goods will set the stage for high inflation in the US. Out of this outcome, perhaps the Chinese Yuan can emerge naturally as a reserve currency, since their products are needed and purchased all over the world. Also worth pointing out, is that the central banks around the world, particularly the Chinese central bank (PBOC) are continuing to increase its gold reserves. As reported by Wikileakes, “China increases its gold reserves in order to kill two birds with one stone. Taken together with recent policy announcements from Chinese banking officials, it may signal moves by China to eventually replace the US dollar as the world’s reserve currency”.

In the end, the US Dollar needs to be devalued to become more competitive in foreign trade and to fix the trade deficit. This will naturally be carried out by the replacement of the reserve currency by the Chinese or by strategic efforts from the G20 and IMF. In other words, if the G20 and IMF don't do anything, expect the Chinese to carry out change. The Chinese can drop the debt bomb on the US and sell a part of their treasury holdings or convince enough nations to accept their currency as payment for goods. Either way, the US Dollar will collapse and will pave the way for the Yuan to be the next reserve currency. However, if the new Yuan or SDR currencies are not backed by gold, it's doubtful that they will have any merit in restoring any confidence following the collapse of the US Dollar. 
Chris Ferreira graduated with a degree in Engineering from Concordia University. His technical background alongside being a student of Austrian Economics has allowed him to understand and educate others concerning today's complex economic and financial issues around the world. He has also successfully forecasted several economic events and continues to have a strong track record. His desire to teach others in his community has lead him to found Economic Reason in late 2011.