Foreclosures Dictating New Global Monetary Standards

April 17th, 2009 | Tags: Foreclosure

The foreclosure crisis in USA is dictating policies pointing towards new global monetary standards that will undermine the bite of the dollar.

Credit had expanded in an uncontrolled manner causing America to become a nil-saving economy. The reality was that foreign funds financed most of the governmental operations, business move and individual spending in USA. The credit balloon burst in 2008 and it soon became exposed that the loan packages were worth far less than what was shown in the account books.

The USA economy went for a free fall with job cuts and shutdowns. The message was loud and clear – the economy had to cut its coat according to its cloth – live life within its resources and increase the piggybank savings culture.

Across the globe the confidence of the people in the all mighty dollar was mightily shaken. The world parked their savings in the dollar reserve. No less a person than Tim Geithner the treasury secretary had to admit that the dollar was no longer the king emperor although it will continue to be the dominating currency. As yet there is no other currency that even remotely approaches the dollar taking into account the jumbo economy and common use that backs it. The euro is inching forward but even now many European countries do not accept it.

The next best solution is the use of SDR – a mechanism that had been created by the IMF as early as 1969. The SDR can be termed as usable currencies available to the member countries of IMF. It has to be kept in mind that the IMF is not a bank and SDR is not a currency. Keynes referred to it as “paper gold”. Some countries fix their currency value against SDR’s or use these as international financial tools. The total number of SDR’s cannot be inflated at will. The IMF declares daily the exchange value of SDR. Thus it reflects the values of the three important currencies in the world – US dollar (44%), Japanese Yen (11%) and pound sterling (11%). The practice has become redundant because the Chinese currency (renminbi) is not represented although China is the holder of the largest foreign exchange reserves in the world – nearly double that of Japan.

In all respects the SDR cannot replace the dollar even if IMF becomes a bank and the SDR a currency. If the dollar fails to be replaced by another currency then commodities like oil will push in to take its place. Without a proper reserve currency the countries will start accumulating this commodity as ‘hard assets’ and further push up prices.