Money Matters

Is a monetary reset imminent?

Money Matters
By Aman Aziz Siddiqui
Mon, 08, 20

A stimulus of $7 trillion has been doled out to the economies of the major Organisation for Economic Co-operation and Development (OECD) countries in response to COVID-related economic collapse. The US FED cannot print its way out of the economic collapse. While the markets may have recovered in price, they have not redeemed the loss in value.

A stimulus of $7 trillion has been doled out to the economies of the major Organisation for Economic Co-operation and Development (OECD) countries in response to COVID-related economic collapse. The US FED cannot print its way out of the economic collapse. While the markets may have recovered in price, they have not redeemed the loss in value.

This time around the FED will lose to the market forces. The meteoric rise in the prices of precious metals is no coincidence. Gold has already achieved a new record of $2,063 an ounce. It is to be noted that the printing of money has happened despite having no fiscal capacity to do so. OECD countries were still reeling from the quantitative easing since the recession of 2008.

Pre-COVID the economic gains were squandered by the Trump administration by slashing taxes instead of paying down the debt. This will weigh heavily on the US economy. This rigged game of printing money by the G6 countries having a convertible currency regime, is an economic disaster for the rest of the world. The negative interest given by the US, Switzerland, Japan and the Eurozone is actually a huge interest rate subsidy to their economies and cannot be justified for market correction. The forex reserves of countries such as Pakistan are subsidizing the US economy by accepting a lower than real interest rate, all in the name of dollar stability which is about to lose ground.

The US has a negative trade balance of over $750 billion but the dollar remains strong. This is an anomaly and its correction is inevitable. The saviour of the US dollar is the reserve currency status that ensures that 70-80 percent of global trade is based in US dollars, including the trillions of dollar of oil trade.

By accepting to trade in the G6 currency pairs we have effectively handed over the reins of our economies to the issuers of G6 currencies. The owners and producers of the goods and services should be selling their goods in their own currency or in exchange of gold or some other valuable commodity.

The inequity in currency exchange rates is even worse than a debt trap, as they are not getting fair value for their raw materials and produce. We need to be guarded against this new form of poverty trap, not yet recognised or accepted by the economic wizards. No country can compete against a currency printing press, which ensures no value loss to their currency through unethical practices such as sanctions and now through this introduction of Financial Action Task Force (FATF) regime.

The grand theft by OECD may very well be already taking place by buying gold through printed currency; forcing privatisation through printed FDI and taking control of key top performing listed companies, producing real goods. Next they may start buying our farmland and mineral reserves. In effect they would be bartering their real assets for printed paper. Design thinking needs to be put in place to address and protect our assets instead of pushing through FATF regulation. For starters, State Bank of Pakistan is advised to put the reserves in gold.

We have already lost 25 percent of the value of our reserves by relying on the unreliable dollar. This unreliability is soon to be tested. Let the hoarders of dollar beware.

So how did we get here? How did the US dollar become the reserve currency of the world? Well, it all started in 1971, when Charles de Gaulle, the French president asked US treasury for gold in lieu of the US dollars, as the US treasury stood guarantor to honour their currency for an equivalent of $35 per ounce of gold. There was however not enough gold at Fort KNOX. The US therefore defaulted on their commitment to make the payment good in gold.

The economic hit men of the US scrambled and played a master stroke of making an arrangement with OPEC countries that they will only sell the oil invoiced in US dollars in lieu of a security protection offered to the Gulf exporting countries, primarily Saudi Arabia.

An offer that Gulf countries led by KSA could not refuse, thereby enabling the US to abandon the gold standard on August 15, 1971. Since that time the US dollar has gradually strengthened to become the reserve currency of the world, on the back of the petro dollars.

At current production rates of 100,000 barrels per day, oil at $ 45-50 per barrel represents an economy of around $2 trillion ie roughly 10 percent of US economy. This arrangement is at the heart of how the US dollar became the reserve currency of the world. This hegemony of the developed countries over the monetary system lends itself to being a rigged and an unfair system. It is imperative for the third world to reflect on how to escape this currency trap before they go the way of Libya, Iran and Venezuela.

An option for OPEC countries would be to issue an energy backed currency; producers of precious metals can issue a Precious Metals currency (PMEC). It is ironic that Zimbabwe having he largest platinum reserves has its own currency in tatters. Can one even comprehend the injustice of the financial system? They can also consider creating their own trading block based on a weighted average basket of the mineral wealth and production by the respective countries and allow free movement of capital, goods, services and skilled people within the block. It does not have to be a geographical block rather a block with common economic interests and issues, and develop their independent financial settlement systems which can also effectively compete and transact with the G6 currencies.

The developed world is faced with a colossal challenge to sustain the asset bubble. The COVID linked recessions are likely to push them in a long period of stagflation, similar to Japan. While wealth contraction in the rich countries has been massive, it has actually reduced the prosperity gap with the underdeveloped world; The stimulus of up to $7 trillion by G6 has increased their overall debt and at the same time they have faced an economic contraction of up to 30 percent or more which will leave their debt to GDP ratios looking like Greece over the next few months. While the asset prices have corrected somewhat, the value loss has not.

This will become clearer as the second and third quarter results come in. The present stimulus seems like a rain in the desert with no visible signs of green shoots. The fear has gripped the markets. Life is not likely to come back to normal any time soon even if the lockdown is gradually eased. By the time a new vaccine is rolled out, which is at least 18 months away, the economic and physical toll is likely to be staggering. While the west will discover a new normal, the league tables would have changed drastically with China at the head of the table.

Our China Pakistan Economic Corridor (CPEC) related economic partnership with China could not have come at a better time for Pakistan. The US and IMF sponsored economists who criticise the debt taken on by Pakistan to build the infrastructure, is nothing but sour grapes. If the US is so concerned with Pakistan becoming a debtor to China, why does it not print another $100 billion and lend it to us at near zero rates. The real issue is not the high leverage which is being used for investment, but the repayment in foreign currency.

The country should only agree to pay in the currency it can print, let the lenders assume the exchange risk on the loans. Desperation for FDI should never lead to compromising on the negotiations albeit that China is our best friend. That goes for all FDI, unless the investment is generating multiples in exports, we should quietly deny such FDI let alone offer tax incentives to such investment.

The writer is Chairman and CEO Amaan Capital