The Coming Global Monetary Reset

By: Andrew_McKillop

The Opposite of Emerging is Submerging

Lulled and distracted by the antics of developed country central banks – and emerging economy central banks – to constantly “pump up the jam” and flood the economy with paper chips from either Fort Knox or Mount Gox, the tectonic shift of the global economy since 2008 has been ignored. It is taken as “normal” that deflation or disinflation is operating in the developed economies, but riproaring inflation now operates in the emerging economies. Supposedly, this is Muddle Through but since 2008 the North-South paradigm has dissolved – the developed OECD economies are locked in a death embrace with the Emerging economies. The developed economies export monetary inflation and import cheap industrial goods, services and resources.

Since 2008 the always-promised world shift of the economy from west to east and from north to south has happened, but the net result is a shock. Pretending “we didn't know” is comforting, but stupid.

This is an unstable equilibrium, an interregnum, even a sideshow because the current global economic context and process is the exact opposite of sustainable. Harm to both North and South is now the main impact of the post-2008 process of overreach. Listing the consequences and causes of this overreach is not easy and always open to argument, but possibly the best summary is to suggest that at latest since 2008, Ricardo's comparative advantage paradigm has been inverted. Economic and above all monetary globalization is now the path to ruin and poverty. From win-win to lose-lose.

Another simple way to argue the global economy has overreached is that industrial and economic production capacity in the Emerging economies (EMs), starting with the BRICs is now massively oversized. This means the EMs can and will saturate the postindustrial, deflating North with industrial supply at every stage and opportunity as technology, design and product development throw up a new market opening. Examples like the car and cellphone, fashionwear and call center industries are “classic”. All are already saturated with capacity – but the EMs are adding more. Previous “classic examples” of this process for example included the shipbuilding industry, but the scale paradigm has been woefully ignored.

Since 2008 the process has intensified, creating an increasingly certain outlook for a forced and fiat end to the willingness of the EMs to accept the fiat currency endlessly printed to finance the deflating, de-industrializing DMs (developed economies). This will not necessarily be a politicized process, of the type hinted at by India's central bank governor (see http://finance.fortune.cnn.com/tag/raghuram-rajan/), due to the rapidity and scale of the crisis, but will be the collapse of the current global fiat monetary order dictated by national economic self-defence and survival in the EMs. The economic jumpstart of the Ricardo model, which has run riot for a quarter-century, and went into overdrived from 2008, will be abandoned.

Deflation/Inflation Two Sides of the Same Bitcoin

Ricardo's original model held sunny Portugual as a producer of cork and sherry, while rainy England could produce wine casks from its oak forests and wool from its sheep flocks. The money used in a basically resource-based exchange using then-rapidly growing maritime transport capabilities was held to be stable and gold-linked or based. Later on, low cost labor resources were built into Ricardo's paradigm called “comparative advantage”. The EMs since the 1980s have played the role of resource providers while the DMs were the solvent market suppliers.

While there was a clear limit on cork, wine, oak casks and woolens supply and demand this does not apply to global fiat money and modern industrial technology. These are high gain positive feedback processes which only stop when they hit a brick wall.

The Ricardo comparative advantage model does not apply to post-1980s globalization and giant economies like those of China and India where industrial technology has raced ahead of infrastructure development. Making this a bomb waiting to explode, alongside the industrial capacity growth, the EMs engaged massive growth of credit, mushroom growth urbanization, neglect of the agriculture and food sector, and turned a blind eye to rampant or even “structural” corruption. Inflation was the sure and certain result. 

The results did not stop there. While inflation took off inside the EMs, their economies producing more than they can consume, and exporting to the DMs which consumer more than they produce, they also exported deflation to the developed market economies. At the same time, the emerging market economies mined out their capital bases to maintain their breakneck growth of industrial capacity. On an almost daily base now, the EMs are shifting to current account deficit with the inevitable consequences of national currency devaluation, further inflation, and higher interest rates.

Win-Win to Lose-Lose Global Fiat Currency Crisis

The post-1980s economic globalization paradigm can be called an initial Win-Win model which morphed to Lose-Lose. The industrial nations of the DMs, which formerly benefitted from the resource nations of the EMs, under the previous Ricardo-type model are now mired in debt and deindustrialization, making it impossible for them to “grow their way out of crisis”. The EMs on their present industrial expansion path can only grow themselves into rapidly-deepening crisis.

The money-in-the-middle especially concerns the US dollar and its subsidiary partner euro, both of which are vastly overvalued – but against what? Almost inevitably, this will feature a rebound for gold, playing the “canary in the monetary coal mine”. Conversely, commodities are unlikely to profit on an enduring sustained basis, due to economic restructuring, recentering and contraction being almost sure and certain.

Commenting the IMF's latest report on global capital flows since 1980, Reuters on 30 January said that while the IMF estimates net capital inflows to emerging economies as $7 trillion or more only since 2005, this was a “legacy trend” hinged on the EMs running a much higher GDP growth differential above the DMs than present. The IMF report noted that for 2014, economic growth in the BRICs will go on declining, and for Russia and Brazil will be less even than GDP growth of the US and Britain. While the IMF's economists do not allow themselves to project break-of-series change to the global economy, the process of what Gordon T. Long calls “Global collateral impairment” can easily default as the net result of apparently-unrelated and complex, runaway processes.

This collateral impairment will inevitably trigger national currency protection measures, already clear in Turkey, India, Argentina and other EMs. Sacrificing GDP growth to protect the national money will be inevitable. In turn, this will send a shockwave North, to the DMs which have surfed on the latter day version of the Ricardo paradigm for 30 years, and are now unable to adapt. The basic conclusion is that a global monetary reset is now overdue.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

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