"Our World Is Forever Changed": Bretton Woods Is Now On A Ventilator

by Tyler Durden, Thu, 04/09/2020 - 14:50

Submitted by Guy Haselmann, founder of FETIgroup.com

https://www.zerohedge.com/markets/our-world-forever-changed-bretton-woods-now-ventilator

This is a long read written by a discouraged globalist, but I encourage you to slog through it as everyone begins to try to understand what has happened in the last 2 months (or less) and what it all means going forward. Be informed, form your own opinion, and engage with those around you.

The US dollar became a "fiat currency" o/a 1971 after Nixon's decisions (see Bretton Woods Academics in 2/2). For the past 50 years, the US has sustained the US dollar as the world's reserve currency based on the size and strength of the US economy (invention/ manufacturing/ efficiency/ quality) compared to the rest of the world.

This is a little long but worth considering: doing research in the 90s, I focused on the threat posed by the prospect of Russia-Japan rapprochement over the Kuril Islands, centered on Russia being very good at applied science, but they could not capitalize it (they could not manufacture it), and Japan having no national applied science or invention capability (cultural artifact) but was nonetheless a world-class manufacturing base. If they combined their respective strengths, it posed a real threat to US economic strength. The US was then, and is more so now, self-sufficient: constant innovation and invention, and world class manufacturing. And currently, we are energy self-sufficient.

Now look at China. Their "One-belt One road" strategy was designed to secure their supply lines (one road from central Asia) and secure export markets (one belt. . . their "9 line" map encircling regional consumers). They must import most of what they need (material. . . but including ideas, which they steal if need be), and export their products because the domestic demand is not there (can't afford it or simply don't want/ need it). In TRUTH, and they've admitted it, for the past 50-60 years, their ENTIRE economy depended on export to US markets.

Now, look at their currency: China is not one to play by the rules when it comes to currency and so while most countries are happy with one currency, China has two. Both are referred to as the yuan or renminbi and both have the same bank notes but, crucially, they are not worth the same. As China grew in the late 90s and 2000s, more and more money was flowing into the country from the west. The government needed to create a way that banks could make deposits from foreign companies in Chinese yuan (now trading CNH) but without affecting the carefully controlled environment of the domestic Chinese economy (internally trading the CNY). The main differences between the two currencies are the regulations and restrictions imposed upon them and their use. In essence; transactions in CNY are restricted while there are none on CNH. The local value of CNY is still dictated by the People’s Bank of China, the CNH is freely tradeable like most other currencies.

But they are for China BOTH fiat currencies.

Also consider their 50-60 year enduring "1 child" policy, which has (1) created a massive imbalance between eligible men and child-eligible women (because male offspring have been culturally preferred), and (2) totally disrupted their cultural "social security" program wherein younger generations would care for their elderly parents.

Given all this, China is now in an economic and cultural death spiral. And it is 100% a result of POTUS Trump policies, begun as soon as he took office. The January POTUS phase 1 tariff agreement was a lethal torpedo to their economy. China is, I believe literally, in its death throes. Over the past few decades, China has insinuated itself into key facets of the US government and media to steer public opinion regarding policies it sees as anathema to its interests (trade, monetary policy, information/ media, etc), and has similarly done so in Europe. Meanwhile, the US dollar remains the World's reserve currency. The second best is Europe's Euro. Both of these are currently fiat currencies. NOW. . . . what if the US re-anchors its currency to the value of gold, and becomes intrinsically valuable?

China's currency becomes a Basket of LEAVES, and the Euro depends on trade with the US.

Remember the DIME (Diplomacy, Influence, Military, Economy) paradigm as a lens through which to view international relations? Without reviewing all of the POTUS exploitation of those 4 levers, I will say China's overuse of the I (influence/ information) is being crushed with the POTUS E hammer.

>>8742589

2/2

SOME ACADEMICS (4 para)

https://www.thebalance.com/bretton-woods-system-and-1944-agreement-3306133

https://en.wikipedia.org/wiki/Bretton_Woods_system

The Bretton Woods system of monetary management established the rules for commercial and financial relations among the United States, Canada, Western European countries, Australia, and Japan after the 1944 Bretton Woods Agreement. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent states. The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained its external exchange rates within 1 percent by tying its currency to gold and the ability of the IMF to bridge temporary imbalances of payments. Also, there was a need to address the lack of cooperation among other countries and to prevent competitive devaluation of the currencies as well.

The Bretton Woods Agreement

The Bretton Woods agreement was created in a 1944 conference of all of the World War II Allied nations. It took place in Bretton Woods, New Hampshire. Under the agreement, countries promised that their central banks would maintain fixed exchange rates between their currencies and the dollar. If a country's currency value became too weak relative to the dollar, the bank would buy up its currency in foreign exchange markets.

Replacing the Gold Standard

Before Bretton Woods, most countries followed the gold standard. That meant each country guaranteed that it would redeem its currency for its value in gold. After Bretton Woods, each member agreed to redeem its currency for U.S. dollars, not gold. Why dollars? The United States held three-fourths of the world's supply of gold. No other currency had enough gold to back it as a replacement. The dollar's value was 1/35 of an ounce of gold. Bretton Woods allowed the world to slowly transition from a gold standard to a U.S. dollar standard.

The Collapse of the Bretton Woods System

In 1971, the United States was suffering from massive stagflation—a combination of inflation and recession, which causes unemployment and low economic growth. In response to a dangerous dip in value caused by too much currency in circulation, President Nixon started to deflate the dollar's value in gold. Nixon revalued the dollar to 1/38 of an ounce of gold, then 1/42 of an ounce. The devaluation plan backfired. It created a run on the U.S. gold reserves at Fort Knox as people redeemed their quickly devaluing dollars for gold. In 1971, Nixon unhooked the value of the dollar from gold altogether. Without price controls, gold quickly shot up to $120 per ounce in the free market, ending the Bretton Woods system.

>>8742623

I am not re-stating the article. I provide comment based on past research.

>>8742674

I put the archived link in my local draft and I'll re-post it tomorrow. Thank you.