The mother of all financial collapses, and a new beginning


A dysfunctional debt-based monetary system, massive imbalances in the markets, immunity from prosecution for those responsible for the 2007-2009 crash, and inadequate responses on the part of Western central banks and governments have created gigantic, global commodity derivatives bubbles that will most likely burst by year’s end, causing a global financial collapse (Our Dysfunctional Monetary System, Forbes, 6 Feb 2016; Analyst: Here Comes the Biggest Stock Market Crash in a Generation, Fortune, 13 Jan 2016).

In such a scenario, banks would be bailed-in and this would produce huge layoffs. The US would hit the debt ceiling earlier than foreseen and would be forced to issue debt-free money (The Trillion-Dollar Platinum Coin Is Back, Bloomberg, 13 Mar 2015) to fund job-creating government spending.

This would, in turn, cause a worldwide flight from US$, a dramatic loss of confidence in the Federal Reserve, hyperinflation in the States, and an egregious overvaluation of the € currency and precious metals.

In order to ride out the storm and break free of the unilateral “Bretton Woods” system, BRICS countries would announce a new gold-backed, electronic currency for international trade settlements, presumably issued by their New Development Bank (In uncertain times, Germany takes more gold home, Reuters, 27 Jan 2016). It would be a common counting unit calculated on the composite exchange rates of a basket of major currencies available only to the Central Banks of the participating countries (Zhou Xiaochuan, Governor of the People’s Bank of China, Reform the international monetary system, BIS, 23 Mar 2009; RMB rate to depend more on basket of currencies: PBOC economist, China Daily, 12 Jan 2016). Eurozone countries would promptly apply for membership, as they did when the AIIB was launched (AIIB will “significantly” bring together Europe, Asia: Luxembourg minister , Xinhua 5 Nov 2015).

The new currency would likely prove a stabilizing novelty in world finance and politics. By contrast, the US$ would lose its privileged reserve status and the United States would no longer be able to export debt and inflation. New rules for a new architecture for the world economy and finance (Merkel and Sarkozy call for global ‘economic security’ council, EUObserver, 9 Jan 2009), as well as new methods of risk evaluation and investment (e.g. global project bonds to recycle surpluses as investments for infrastructures and research projects), would be introduced.

Rentier capitalism vs. productivist capitalism


There is a wealth of stunning proof (like the chart above) that the biggest risk is asset concentration at four banks, along with insane levels of derivatives concentration. The OCC reported that as of the first quarter of 2015, JPMorgan Chase, Bank of America, Goldman Sachs (yes, it owns an insured bank) and the bailed out Citigroup hold 91.3 percent of all derivatives on the books of all 6,419 insured banks. The total amount of derivatives is a stunning $203.1 trillion, meaning that just these four banks, seven years after the greatest financial collapse since the Great Depression, are still holding $185 trillion in derivatives.

The head of Russia’s Central Bank is determined to increase the country’s gold reserves from $360.5 billion up to $500 billion.

China now knows that America will always be fundamentally uncooperative and that she must plan accordingly. This is why, with Russia’s support, she is ditching the dollar. She has been discouraged by America’s attitude into establishing a parallel financial and monetary system. In doing so, she needs to offer something better than the US dollar as a currency medium, because for her Pan-Asian development plans she will need to attract long-term funds from Western capital markets.

This is where the new BRICS bank comes in. Its priority will be to de-risk Asian currencies which are less credible in international markets than the dollar, yen, euro or sterling (the constituents of the IMF’s SDR). The obvious way to do this would be to incorporate something all Asians understand as money, and that is gold, which could be why most SCO member countries have been adding to their reserves. This would solve all cross-border currency issues within the SCO. While the West may not be initially impressed by such a development, a move by the BRICS bank to include gold in its own version of the SDR will in time highlight the relative weaknesses of a dollar-reserve system, particularly when Asia dumps its dollar reserves in favour of a BRICS super-currency.

This could mark the end of the era of pure fiat currencies, which started with the Nixon shock in 1971 when the Bretton Woods agreement died. Competition from gold-backed currencies from Asia would be the most serious threat yet faced by American hegemony.