Thursday, February 20, 2014

JC Collins: The New Exchange Rate System

M1 Money Supply and Inflation
By JC Collins

Dong to Dollar

Purchasing Power Parity and Arbitrage are two terms that everyone should make themselves aware off as the world’s economy moves closer toward a centralized SDR trade system through the International Monetary Fund with accounts balanced by the Bank for International Settlements.
Purchasing Power Parity is the balance between exchange rates when there is also balance in the domestic purchasing power of the currencies.

Arbitrage is taking advantage of the price imbalances between markets and profiting from the market differentials.

Arbitrage cannot exist alongside Purchasing Power Parity.

M1 money supply refers to physical currency as well as checking account deposits.
For your reference, M2 money is M1 money plus savings accounts and money market accounts.
And M3 money is M2 money plus large deposits and other long term large deposits, such as larger liquid assets as well as short term repurchase agreements.

Keep these terms in mind as we further define the structure and mechanisms of the emerging multilateral system.

As an extension to the SDR’s and the New Bretton Woods series, let us discuss a much talked about and confusing aspect of the system.  When the currencies of the world are released from their peg to the dollar and pegged to the SDR supra-sovereign currency which we have been reviewing, there will in fact be a new exchange rate structure.

What this structure will be has not yet been made available to the general population.  All the talk of specific exchange rates and timing of release of the rates are not founded in facts or accurate information.

And on the flip side of that there are those who are stating that a Global Currency Reset is a conspiracy theory.  To these people those that proclaim such a future “event” apparently do not understand the micro and macro of economic fundamentals or how exchange rates and money supply truly work.

Their argument appears very logical on the surface.  As a country increases its money supply through debt creation and currency printing, the value of that currency decreases.  More money in circulation means more devaluation of that currency, basic supply and demand principles.  So how can a currency revalue upward when there is so much of it in circulation?  Makes sense right?  Wrong.
If the key performance indicators (KPI) of any countries M1 money supply were that elementary, then we would live in a much simpler world.  We can make many examples of why this isn’t the case but none is more obvious than that of the U.S. dollar itself.

If more money in circulation meant a decrease in the value of that currency on the exchange rate market, then the dollar would be almost worthless today, much like the dong and other currencies.  More U.S. debt (money creation) has been added in the last 6 years than the entire history of the U.S. itself, from George Washington to George W. Bush.  Yet the dollar’s exchange rate has maintained itself within a small range of fluctuation.  The reason that the dollar has maintained this exchange rate over the years tells us that there are other KPI’s which need to be factored into the equation when measuring a countries exchange rate and inflation level, outside of direct manipulation of course.
Some of these indirect KPI’s are imports and exports.   And there is no direct relationship between M1 money supply increases and inflation.


Since 1944 the U.S. dollar has been the reserve currency which means that international trade imbalances have been settled in dollars.  This forced other countries of the world to hold dollars which allowed the U.S. to export the majority of its inflation.

As the U.S. printed more money, expanding its M1 money supply, the inflation which should have settled domestically was in fact exported to the very same markets that were forced to hold a reserve of U.S. dollars in order to balance their trade accounts.

As we reviewed in “Why the Vietnamese Dong Will Reset”, the State Bank of Vietnam was indirectly forced into devaluing their currency in order to attract trade and also be a dumping ground for U.S. inflation as the Vietnamese people used the dollar instead of the dong in their everyday lives.
As the new centralized system of SDR allocation emerges between now and 2018 we will see less U.S. dollars in the foreign reserves of other countries.  As an example, in the last 5 years Vietnam has decreased their dollar holdings by almost 50% and at the same time have increased their gold holdings dramatically.  Interestingly enough, their SDR holdings also increased by a factor of more than 400%.

The question of what Vietnam will do with the trillions of dong that are now in circulation is a legitimate question.  When the exchange rate of the dong adjusts to reflect the economic reality within the country, these trillions of dong cannot be in circulation, as it would create an M1 money supply that is disproportionate to the actual economic weights used for the SDR composition.
Therein lays the solution to the problem.

Keeping with our pattern theme of transitions from micro to macro states, we start with the process of the dollar, the world’s reserve currency, being printed and exported to the central banks of the world to facilitate trade.  The inflation and exchange rate decreases that would be logically associated with this increase in the M1 money supply is hidden or sunk into the markets of the emerging economies.
As the world shifts towards the SDR system we will see a similar process unfold.  In essence, Vietnam will export their inflation (current M1 money supply) into the SDR bond system just like the United States has been exporting its inflation into emerging markets and countries like Vietnam through trade imbalances.  What we will see is Vietnam slowly begin to buy back the dong in circulation and re-capitalize it through the SDR bonds.

Once a predetermined level has been achieved the rest of the dong M1 money supply will remain in circulation and be pegged to the multilateral SDR and not the U.S. dollar.  In fact we are beginning to see this process unfold already in the numbers we presented above.  This slow trickle will eventually become a stampede out of dollars and into SDR’s.  It will be the same for every country.

The U.S. debt will also be rolled into SDR’s and factor into the overall economic weight of that country’s SDR composition.  This is where the substitution account we referenced in Part 6 of the SDR series becomes invaluable.  This substitution account will act as a transition market for dollars to SDR’s to ensure that current holders of U.S. debt do not see that asset value decrease dramatically as the system shifts.  China will utilize this substitution account just as much as the United States Treasury and Federal Reserve.

China will not be dumping dollars.  They will transition the dollar debt which they hold into SDR’s through this substitution account.  The one aspect that is holding the process up right now in the American Congress (2010 Code of Reforms) is how this dollar to SDR transition will factor into China’s overall SDR composition for the renminbi.

This is one of the hardest aspects of this new system to understand, which is why it is still being negotiated.  It would do us well to spend more time in the future exploring the different angles involved in the Great Consolidation aspect of the Global Currency Reset.  One cannot exist without the other.  It has been intentionally designed this way.

Most don’t know this, but the Syrian pound is already pegged to the SDR, and has been for about 5 years.  One can only speculate if this has something to do with the civil war in the country.
What some analysts don’t factor into their equations is how much the economic system of the world will change, and is changing, as we move towards the multilateral monetary system with all the currencies of the world pegged to the SDR.  For those who doubt the reality of this new system, the volume of information that has been available and is coming available would seem to prove its existence.

The new system will create Purchasing Power Parity and at the same time eliminate Arbitrage.  Arbitrage is one of the economic weapons that the small rent seeking elite use to transfer wealth from the larger disorganized masses.  The M1 money supply will most likely also be redesigned to more accurately measure the weights of the new SDR system.     – JC Collins