Tuesday, October 28, 2008

Gobal Fiancial Crises and New Global Central Banking

Since the advent of the $700 Billion bailout I've taken a keen interest in the Global Financial Situation. As it turns out, this is nothing new. While reports of a financial crisis is just meeting the media airwaves, knowledge of the global financial problems have been written about for years. Two books have surfaced for me recently portraying the financial world's mounting debt as unsustainable. In the late 80's Christopher Wood wrote Boom and Bust: The Rise and Fall of the World's Financial Markets with a thesis that the over extension of credit would be unsustainable. Currently I'm reading The Crisis of Global Capitalism by George Soros which was published in 1998. While I'm suspicious of Soros as a global centrist banker supporter, he lays out the fact that we definitely have a global financial problem that has yet to fully show itself. If you want even further validation, listen to Princeton's Paul Krugman, a recent Nobel Laureate in economics who also tells us that the sky is falling.

If the Asian financial crisis in 1997 could prompt fears of a world wide economic meltdown, how much truer today do you think that a financial crisis originating in the US could cause a world economic meltdown? The problem lies in a what Soros calls a kind of economic market fundamentalism. For decades our world financial markets have gone without any kind of oversight, allowing for all sorts of extension of unchecked credit. We have creative financial investments such as derivatives, hedge funds and mortgage backed securities. Many investment bankers use the same investment capital as reserve extending out into multiple risks. This says nothing of our fractional reserve banking policy that has been in existence for centuries or marginal trading practices that contributed to the stock market crashes in 1909 and 1929. The basic idea is that the world financial markets and governments have borrowed way beyond their means to repay these loans. The United States national debt is now more than $10 Trillion, which was recently maxed out at its sign in Times Square so that it needed to add another digit. $644 billion is owed to Japan and another $350 Billion to China. Is this something to worry about? Are we headed for a crisis of unprecedented proportions?

To answer that question you might ask what about the future of the US Dollar? We have seen the dollar lose in value over past several months. Since 1944 the Bretton Woods agreement, after World War II, has established the US dollar as the currency of international trade. The US dollar is particularly important in the trade of oil, as it is the only currency that oil producing nations are allowed to sell to oil consuming nations. As the dollar weakens, the price of oil and gasoline goes up. So, it's not just a matter of supply and demand for oil, as basic economics would suggest, but the cost of oil is also a reflection of how much faith the world has in the US dollar. The recent tightening of credit, a factor in the recent decline in gas prices, is in fact an effort to maintain the strength of the dollar as the free availability of credit has reached a point of diminishing the value of the dollar. Credit tightening is helping for now, but how long will it last? The problem is that there still remains a tremendous amount of debt that must be serviced and maintained. Banks then lose there capital reserves (hence the bailout) in an effort to pay interest and service debt. As such, the status of the US Dollar as the worlds currency is in doubt. Prior to the global status of the US Dollar, the British Sterling was the world's global currency. Briton lost its status due to its debt resulting from World War II. Today, the United States is also suffering from not only a war debt, but debt from consumption as well. Unless something can be done about it, we are in the throws of a decline in the status of the US dollar, and the status of the United States as world leader. Most of our political leaders and popular media are reluctant to talk about it.

International bankers are relatively unconcerned with national politics. I perceive the bankers, the very people who got us into this mess, will be the ones to propose the solution to the global crisis. We are already hearing the news reports of global leaders getting together to solve the problem. In my estimation they will advise the rest of the world that what is needed is a stronger world bank. A real effort may be made at this point create a global central banking system. Or I should say to solidify the infrastructure of the already existing global central banking system, such as the IMF, World Bank and Bank of International Settlements (BIS). Some people raise the question: is this crisis an effort of those in power, the already existent central bankers to consolidate their power on a global scale? George Soros argues that not only do we need a global central bank, but also a global central government to handle this crisis.

I don't wish to alienate readers by suggesting that globalization is a completely bad thing. It could perhaps be a good thing if done in the right way. In fact, it may be inevitable. But on the other hand, it could be that there are those hoping to take advantage of this global crisis to fundamentally change the banking structure or governmental structure of our world to the selfish end of only a few very powerful people. We see it happening. Perhaps there needs to be much care and forethought into how it happens.

This is, I hope, is just the beginning of my commentary.

2 comments:

Michael said...

Rick Baker gets my vote for the Chairman of the Federal Reserve!

Keith, RN said...

Rick, your intelligence and insight stretches from the spiritual to the financial. Your mind is rich with ideas and I am so glad you're sharing them with us!