I know it sounds impossible, but the world is being forced to a point of having to implement a one world currency. Or at least a one world currency among the major economies - maybe Tunisia might escape.
Started with the USD
Why do I say that? Well, if you follow the evolution of the USD since roughly the end of WW2, it gradually became the world reserve currency, and that was intended. It started with the Breton woods agreement, and also during WW2 when the European allies currencies were collapsing as Hitler was conquering Europe.
The US at the time was by far the world's biggest industrial power, and was wealthy enough to backstop Europe's currencies as well as rebuilding the West after WW2. Not only backstopping the currencies, but things like the Marshall plan which put out a ton of money to rebuild the war ravaged economies.
Ok, so there was a good reason for the US to backstop the West's currencies during WW2 and after. - AND of course, like any power of that magnitude, it got taken advantage of - as today the US is running horrendous fiscal deficits and is abusing this world reserve currency, the USD.
But, our trade partners have no easy way out of this structure. If they dump the USD because of the US fiscal deficits, they will cause so much damage to their own economies that they just cannot even think of doing that.
But, ultimately, since the world economies are all linked now, none can stand alone whatsoever, so then the idea of individual currencies is fading. In fact, all individual currencies do now is cause trade and currency frictions, like the US complaining the Chinese are using a cheap Yuan to manipulate their trade to their advantage, and the Chinese are complaining the US is running ruinous deficits and devaluing the USD.
Too low interest rates push away capital
And there is more, for example, Fekete has a very interesting article just out about how the US Fed and Treasury are pushing interest rates down, which makes it less desirable to invest capital, which is deflationary. And, if you notice, the only real lenders out there right now are the world central banks lending public money in a last attempt to keep the credit markets alive, a feat that will fail - but I am broad brushing here.
Right now, if you look at various markets, there are lots of conflicting trends. This represents the change from a booming finance driven world economy after WW2, with the USD becoming a de facto world currency, to what is now a deconstruction of that whole system, and deflationary effects are emerging.
In fact, one reason I have been absent from the public dialog for several months is because we have been diligently analyzing these changes and know lots of change is afoot, and are just thinking a lot about this.
But, one thing that we stated several months ago was the oil and commodity bull of 09 was fading and due to fade into summer 09. And that is happening. Look at Copper, poised for a big fall, and oil, already falling from its highs.
And yes, these declines are related to speculators realizing the latest jig is up and inventories are so high for oil and copper that that latest party is ending for the moment.
And yes that is due to deflation, where the world economy is poised this year for a roughly 2% decline overall, unheard of since WW2, with some key sectors in the major economies having contractions of 25% roughly for everything from various exports and imports to rail traffic. Get this: a drastically slowing world economy is afoot.
So, why do we talk about an inevitable one world currency here?
What is happening is that primarily through the US Fed, interest rates worldwide are being pushed down to zero. Japan did this ahead of everyone else starting around 1992 roughly, fighting their simultaneous stock and real estate bubbles that collapsed. We are following along nicely, the US that is, and now the two largest economies in the world, the US and Japan, are heading to zero interest rates fighting their ever deleveraging ever shrinking bubbles of the last two decades.
What are the effects? Ultimately, since the USD is now headed toward Japanese esque zero interest rates, the whole world will be pulled down to zero rates to compete with the stimulus, and ultimately, the public treasuries of the world will be the only lenders left out there. The rest of the real money out will move to the sidelines. Less capital means less investment, leaving only the public left to lend money.
Ultimately, synchronizing world interest rates to zero effectively creates a one world currency regime (interest rates are what determine currency values fundamentally), and the USD will be the facilitator of this process, even if itself is replaced in the end.
Deflation will remain with us, it will cause relentless simulative monetary policy, there will be ever lower rates worldwide, private capital will flee, and the only lenders left will be the public purses, and ultimately competitive currency devaluations and probably trade wars.
Ultimately, that will lead to so many trade pressures and monetary strains that some new financial crisis will emerge, and some one-world currency will be moved in to fix the controversies.
And it won't be the Yuan either. China is caught in their own banking bubble, and an irreconcilable wealth disparity in their economic build out. They will fail and they will see domestic chaos. The Yuan will not be the solution to the world's problems.
Now, I am not going to say that gold will the the ultimate solution. But it will figure largely during the transition, that I am sure of. In fact, if you look at any market over the last two years, there are only two real ones that held up or improved consistently over the last two years and take a guess which two - one begins with a G and one begins with a US in its name. Gold and US treasuries.
Gold benefits because of the abusive monetary policies being incurred, not only in the US but world wide, the Chinese figure large here, they are printing the hell out of the Yuan, either growing their own money supply by hundreds of percent, or by making cheap money available in their own horrific home grown Asian credit bubble that is perhaps two years behind the US in its evolution.
In any case, the effects are deflation ultimately, according to Fekete, who states that making interest rates too cheap is driving real savings out of the money markets, and thus is driving real capital out of the world economies, leaving the only lenders out there to be the public treasuries. Like the US Fed monetizing (excuse me that was quantitative easing) of any troubled markets, or collateral or bonds. And so is the EU to a lesser extent and so is China, and so has Japan who is ahead of all of us on this mass monetization effort by about 15 years.
In any case, we have been closely monitoring these events for subscribers in our weekly PrudentSquirrel newsletter and with mid week alerts, and have warned them roughly two months ahead of the latest general commodity bubble that its due to break, which it is beginning to do again, similar to Summer 08, and which we warned subscribers of two months in advance of too, last year. We also alerted subscribers of gold's turn upward in late November 08. Frankly, we have caught many of the largest trends out there in the markets we cover for the last two years, months in advance, for gold, oil, general commodities, and even the USD.
We invite you to stop by and have a look.