News & Analysis
Putin: We Must End Monopoly in World Finance
The Russian Prime Minister, Vladimir Putin, has called for a complete overhaul of the world's financial system in order to guarantee stability and ensure progress. He was speaking in Astana in Kazakhstan, where the Shanghai Cooperation Organisation is meeting to discuss the global financial crisis. The organisation, which comprises Russia, Kazakhstan, Kyrgyzstan, China, Tajikistan and Uzbekistan, is widely seen as a counter-weight to NATO's influence in Eurasia. It is primarily concerned with security issues. This time, however, the sides are discussing how to develop social and economic cooperation. At the beginning of his speech at the SCO Council of Prime Ministers, Vladimir Putin stressed the role the SCO countries should play in the changing world political and economic landscape. – Russia Today
Dominant Social Theme: Not sure. Depends on how serious Putin is.
Free-Market Analysis: Putin joins Chinese leaders in demanding a change in the international financial scene. But it is not clear what he means by this. The Chinese, perhaps, are slightly clearer, having called for more regulation and a decreased role for the dollar. Putin apparently would like the dollar to play a lesser role, as well. It is quite possible that the French would also like to see a currency alternative to the dollar as the world's main monetary peg.
What would such a world look like exactly? Without the dollar as a reserve currency, it is difficult to believe that another currency could stand in. Were that the case – that the dollar were significantly weakened without a reserve replacement – then there would certainly be more volatility in the currency and less predictability.
It might be hard to plan well in advance for various kinds of global purchases and expansions because one could never be sure of the stability of an individual currency. Values would rise and fall treacherously, necessitating ever more complex hedges.
For this reason, economists often stress the advantages of having a reserve currency such as the dollar. The trouble comes when the country offering this currency is so profligate and engaged in so many wars and has piled up so much national debt that the currency itself weakens. This is what has happened to the dollar, and it is one of the main reasons for the current financial crisis – which has never been a so-called subprime crisis.
Of course free-market thinkers would hasten to point out that in a fiat-money economy, sooner or later the reserve currency diminishes and ceases to function. That is the way of fiat money currencies. Now it is possible that another reserve currency might take the place of the dollar, but this is highly unlikely as the dollar's pre-eminence stems from the Second World War and has as much to do with the military and political might of America as it does from any desire of the world to utilize the dollar as its keystone.
Yet at the same time, it's certainly not clear how the current financial crisis will resolve itself. The dollar may remain the reserve currency, but in a weakened state. France may get some of the additional international regulation its leaders seek, but probably more in name than spirit. The International Monetary Fund and other internationalist financial organizations may see increased power, despite their various bumblings. But it does seem obvious that both Russia and China will gain economic clout in a non uni-polar world. China by virtue of her size and industrialization and Russia by virtue of raw materials and the sheer vastness of the country.
Conclusion: In a situation which seems to be fragmenting as much as the main players try to resolve it, there are some evident truths. Gold and silver, in such an environment, must eventually make a strong comeback. That they have not yet is evidence either of genuine confusion amongst the world investment community or a determined, if unworkable, price suppression. (Those who read the Daily Bell know where we come down.) After the election, watch for the dollar to decrease in strength. And if we are correct, metals will firm considerably.