Despite the fact that we’ve been predicting it for weeks, a chill ran down my spine when I read it.
The IMF has declared ‘a new Bretton Woods moment’.
That comes in the wake of the World Economic Forum’s (WEF) ‘Great Reset’ theme.
What are they referring to? A redesign of the international currency system. Something that happens every few decades on average and which completely upends financial markets and trade. It determines the wealth of nations, you might say. Usually for about a generation.
You see, just as each board game has different rules, different international currency systems do too. And so how you play the game, not to mention who wins, changes fundamentally when those currency systems change.
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A currency reset, like the one the IMF and WEF are referring to, is like swapping which board game is being played by investors, business and governments. It changes the rules by which the game of economics is played.
Of course, as you’ll know from Christmas holidays, when the rules of a board game are changed, there’s a huge drama about it. It’s the same for currency resets. They require representatives to sit down together, usually at a plush hotel, and hash out the new rules.
Bretton Woods was one such currency reset. It ushered in a partial return to the gold standard via the US dollar after the Second World War. This enshrined the US’ dominance into global trade, but kept gold as the anchor of the global financial system.
A series of resets from the ‘70s brought in an era of Monopoly money. The era of exploding debt began.
Because money became an abstract concept under the new rules, the game changed fundamentally. We named money ‘fiat currency’, meaning by decree of the government. Money was what the government decided it was. And it decided how much of it there would be too.
Under such a system, debt explodes for a long list of reasons. Money becomes indistinguishable from debt. The amount of money can be manipulated. And central bankers can cut interest rates to keep the system ticking over with ever more debt.
But an international currency order, which is defined and controlled by governments, is backed by nothing but the rules of the game. And nations’ willingness to play by those rules. Cooperation is required when nothing of objective value backs the system (such as gold).
So the rules had to be changed each time a nation was suffering too much under them. Currencies were revalued under the Plaza Accord, for example.
Eventually, we transitioned to a world of floating exchange rates — a radical idea at the time and a dramatic currency reset. This was brought on because the old rules simply weren’t working.
But the age of currency wars — as Jim Rickards’ book of the same title highlighted — is one open to too much manipulation. Nations can fiddle with the value of their currency to try and gain export advantages. This is known as ‘beggar thy neighbour’ policy.
COVID-19 has upended this by making nations print so much money that the practice has reached absurd levels.
Now, with the world suffering under a pandemic together, the IMF and WEF have decided it’s time to push the rest button once again. CTRL ALT DELETE the financial system.
The rules will be changed. And if you don’t get one step ahead, you’ll either be a victim of the shift, or fail to make the most of the opportunities it presents.
But what exactly have the WEF and IMF said?
Let’s review…
In her speech titled ‘A New Bretton Woods Moment’, which sent the shivers down my spine, Kristalina Georgieva, IMF Managing Director, explained that we were once again at a crossroads, as we were when the Second World War was drawing to a close:
‘Today we face a new Bretton Woods “moment.” A pandemic that has already cost more than a million lives. An economic calamity that will make the world economy 4.4% smaller this year and strip an estimated $11 trillion of output by next year. And untold human desperation in the face of huge disruption and rising poverty for the first time in decades.
‘Once again, we face two massive tasks: to fight the crisis today — and build a better tomorrow.
‘We know what action must be taken right now.
‘[…]
‘We must seize this new Bretton Woods moment.’
This is where we begin to see how the currency reset will take shape:
‘[…] here debt is unsustainable, it should be restructured without delay. We should move towards greater debt transparency and enhanced creditor coordination. I am encouraged by G20 discussions on a Common framework for Sovereign Debt Resolution as well as on our call for improving the architecture for sovereign debt resolution, including private sector participation.’
That ‘private sector participation’ is you, dear reader. Your super fund’s assets, for example, probably include sovereign bonds. Will they be honoured?
Well, I don’t see how debts will be reduced without defaults. But they won’t be called defaults. They’ll be called a currency reset. Changing the rules of the system.
What was owed to you might not be under the new rules.
Over at the WEF, the founder made things even more clear:
‘Every country, from the United States to China, must participate, and every industry, from oil and gas to tech, must be transformed. In short, we need a ‘Great Reset’ of capitalism.’
Klaus Schwab also said that ‘all aspects of our societies and economies’ must be ‘revamped…from education to social contracts and working conditions.’
Now it might seem odd to you that governments can simply change the rules as they see fit. Or perhaps it doesn’t if you’re aware of the history of just that happening…
Either way, you’ve probably realised it’s important to get one step ahead of how the rules will be changed.
Until next time,
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Nickolai Hubble,
Editor, The Daily Reckoning Australia Weekend
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