Is the World Heading Towards Another Bretton Woods Moment?
In 1944, when the death machine of World War II was still very much in motion, delegates from 45 nations came to New Hampshire at the Bretton Woods Conference to work out rules that would govern the international monetary system in the post-war era. Fast forward to 2020 and another turbulent global event have led the IMF to call for "a new moment for Bretton Woods". This is worrying on many levels.
Bretton Woods Conference, July 1944.
Image source: UN photo
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The Importance of Bretton Woods 1.0
First, a short history lesson. Bretton Woods anchored the US dollar as the world's de facto international settlement currency, with the dollar convertible to gold at $ 35 an ounce. Overnight, the dollar became synonymous with world trade, replacing the gold standard and asserting America's power on the international stage.
Since the United States was the only country that could physically print dollars, and each country had agreed to redeem its currency for US dollars instead of precious metals, the US government - the Federal Reserve, to be precise - became the kingmaker of the world's monetary system . The International Monetary Fund was tasked with enforcing the agreement, ensuring exchange rate stability, and managing a fixed currency pool that member states could use to borrow.
Less than three decades after the deal, and in the face of soaring inflation, President Nixon suspended the convertibility of the USD to gold while he started up the printing presses to finance the Vietnam War. By 1973 the fixed exchange rate system was transformed into a variable exchange rate system in which the value of national currencies fluctuated from day to day. In short, Nixon paved the way for the Federal Reserve's expansionary monetary policy. Speaking of which, the Fed's penchant for anti-deflationary quantitative easing has caused its balance sheet to explode in 2020, growing by over $ 3 trillion since February. It's easy to see a settlement coming down the street.
What does Bretton Woods look like in 2020?
What exactly is the IMF implying in proposing that the time is ripe for a "new Bretton Woods moment"? The article, written by IMF chief executive Kristalina Georgieva in mid-October, referred to a pandemic that “has made the world economy 4.4% smaller this year and an estimated production of $ 11 trillion by next year will graze ".
Although Georgieva did not mention the US dollar, she stressed the need to "take steps to prevent the build-up of financial risk in the medium term" and concluded the article with "This is our moment!"
An interpretation of the use of the moment could end the dominance of the dollar and be replaced by a more stable international reserve currency. Maybe the IMF's Special Drawing Rights (SDRs). The value of the SDR was created and originally tied to gold in 1969, just two years before Nixon abandoned the gold standard, before being decoupled and derived from a basket of the world's leading global fiat currencies. Currently these are the dollar, the euro, the Chinese renminbi, the Japanese yen and the British pound sterling.
The SDR was developed to increase the official reserves of the member states. It is considered "additional international reserve assets" and is the most obvious candidate to replace the USD on the world stage. While the IMF is unable to create money from scratch like the Federal Reserve, it may not always do so. If the SDR were to deposit the USD, the IMF would essentially become the world's central bank. Given its new horst, it wouldn't be surprising if IMF brass like Georgieva talked about the protection that basket-backed currency offers, especially given the volatility inherent in currency markets.
The idea of Bretton Woods 2.0 doesn't inspire much trust, however. For decades, the Federal Reserve pursued a debt- and inflation-driven policy, gave impetus, gave rescue funds at its own discretion and brutally devalued the dollar. Incredibly, US debt is projected to hit $ 28.7 trillion by 20209. An IMF central bank would almost certainly continue to pump magic money into the economy, with a very small and influential cabal making tax decisions that affect billions of people.
The revolution is being decentralized
There are better ways. One of them is Bitcoin, a decentralized, deflationary cryptocurrency with a fixed, predictable supply that cannot be manipulated by any central authority. Another example is Sögur (SGR), a blockchain-based digital equivalent to the IMF's Special Drawing Rights.
Sögurs Digital SDR was set up by a team of technology and financial experts and supported by an advisory board made up of renowned economists such as Dr. Jacob A. Frenkel, chairman of JPMorgan Chase International, and Leo Melamed, former chairman of the CME, belong to a superior version of the IMF's basket-based currency. Mainly because it is completely decentralized due to its governance mechanism: not ruled by a small and ideologically biased group, but rather by token holders themselves.
Using smart contracts, Sögur automatically increases the SGR price when the market capitalization increases. In addition, the funds received when a new SGR is issued will be held in a reserve and used to ensure the token is always redeemable - just like the USD was before Nixon cleared it of gold. Incidentally, SGR is not a unique asset-backed cryptocurrency. There are others that are backed by gold or tied to the US dollar or the euro.
What makes SGR unique is the overall package: democratic governance, a stable currency model, redeemability of Fiat, a well-founded and committed team as well as the transparency and immutability of blockchain technology. Sögur's parent company, Sogur Monetary Technologies Ltd (SMTL) operates on a non-profit basis, with no shares or shareholders, and all parties are required to implement the protocol and advance the interests of SGR token holders.
The IMF is right about one thing - a turning point like Bretton Wood is long overdue. However, if the USD is finally replaced as the world's reserve currency, its replacement should not be built on a mountain of debt. In all respects, a democratically ruled digital currency is better equipped to fill the void than any other fiat reserve tightly controlled by Keynesian apparatchiks.
Disclosure: This Op-Ed was written by Reuben Jackson. The Insider Monkey News division is not involved in the production of this article.
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