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The Financial Crisis Will Quicken the Expansion of the Global Financial System

By: Steve Johnson

9/29/2008 - 55 Comments

The global spread of capitalism and free trade expansion since WWII has led to the global economy of today, yet global financial governance has not kept up.  

In a previous article, The Rise of the Global Economy, I talked about the rise of the global economy since WWII.
 
In this article, I want to expand that discussion and explain how the current financial crisis will likely push world leaders to create a global financial system. 

Lending Risk was Trusted Around the World

In 2000-2006, the global economy continued to grow, but during the process, major financial institutions around the world lowered their standards for evaluating risk when evaluating loans from other nations that they trusted because of decades of free trade agreements. 

When a loan was sold several times across several nations, the financial institutions no longer had any reference to determining the risk of the loan. All they had was a security institution from another nation rating the risk of the loan.  If the rating was wrong, the loan may not be worth its value – and as it turns out, a lot of ratings were wrong.  

The risk of bad loans were spread too all major financial institutions of the world, creating the ‘house of cards’ that is now collapsing.  The advancements of technology and the global expansion of capitalism, also played a large part in current global economy that competes for recourses and investments.

In an attempt at social engineering to give more money to the less fortunate by lowering the standards to qualify for home ownership, the US government intervened in the mortgage market with two large organizations, Freddie Mac and Fannie Mae.  These organizations alone with large financial institutions, leveraged by the effects of globalization that allowed foreign nations to borrow money to Americans by purchasing mortgage related assets from large financial firms.

The result was the largest housing bubble in history and the largest financial crisis in the world. Because of the global economy expansion of international investing, the financial crisis is world wide.

Too Little, Too Late

The loss of money will be felt throughout the world, but it is not likely that economic globalization will stop or reverse.  A more likely scenario is the that losses will be taken primarily by America, which will get the attention of other financial leaders around the world to realize that they need a better handle on the global financial system and can no longer trust America to protect the global economy.

They will soon realize that they need to create new regulatory system that can be trusted around the world. They will likely try to centralize the power of all national central banks to reduce each nations ability to inflate it's currency and cheat the world with inflated money that is not backed by gold or anything else.

They may conclude that the only way to control national central banks is to centralize their power in a global financial governance.  Of course, America will never give up this power - unless we become desperate because of a currency crisis.

Perhaps by increase the power of the existing world organizations like the World Bank and International Monetary Fund (IMF). In a global economy, these organizations will need to take on more responsibility to ensure stable prices and control currency fluctuations.

Nations that have suffered during the learning curve of the expansion of the global economy will need to eat their loses and create new policies to strengthen their currency, strengthen their education and ultimately strengthen their production. America will probably suffer the most, as its standard of living and currency is reduced to its level of productivity.

America will be devastated if the world completely pulls out of the dollar, bringing very high inflation and a deep recession. The dollar will likely lose its place as the world reserve currency and America will be forced to return to its days of high exports, as the weak dollar will help rebuild the manufacturing sector.

A New Reserve Currency

The financial leaders of the world will may soon realize that the dollar can no longer be used as the Reserve currency of the world because of the massive destruction of value it suffers from the financial meltdown of the largest mortgage collapse in history.

The new reserve currency will perhaps follow the structure and implementation of the Euro.

In an effort to recover from the global financial meltdown, it will be very tempting to try to reduce the number of currencies in the world because reducing the number of currencies will provide several critical benefits to the markets.

  1. Eliminate the cost of foreign exchange transcations, which are estimated to at an annual cost of $400 billion. Reducing the number of currencies could immediately free this money.
  2. Eliminate the need to maintain foreign exchange reserves. Many national have trillions of dollars parked in reserve, just in case the have a currency crisis and need to buy up their own currency to stabilize the markets.
  3. Eliminate the risk of currency fluctuations, which threaten large international businesses and put millions of jobs at risk.

Currency fluctuation will be a major problem as investors panic they will move large amounts of money between currencies - which will cause many problems for many of the large international organizations that need to sell their products and purchase their supplies at predictable prices to produce a profit. 

Without predictable prices, international organizations will be at risk.  These large international organizations have also become the largest employers in the world.  Increasing there risk will increase the risk of millions of jobs. Once the government leaders realize the risks involved in currency fluctuations, they will vote for ways to stop them.

Financial leaders will likely vote for new monetary unions, pegging several currencies together or combinations of the two, which will lead to the introduction of a new global currency.

The trillions of dollars gained by reducing the number of currencies will be too hard to resist. And the reduced risk in currency fluctuations will protect the many businesses that have moved into international markets. Every nation will have a vested interest in protecting its businesses from currency fluctuations that could destroy their market and sacred jobs. 

The leaders are already starting to call for meetings to discuss the changes to the global financial sytem. Here are a few examples;

  • A few months ago Russia's President starting calling for special meetings with all international businesses.
    Now Russia, the largest combined oil and gas energy exporter in the world, is talking about using its record financial reserves to create a gold ruble. The dollar has not been backed by gold since President Franklin D. Roosevelt was forced to effectively devalue it by taking it off the gold standard in 1933.
  • French President Nicolas Sarkozy has called for a summit of global leaders to overhaul the world financial system in the wake of the financial crisis that has shaken markets. The United States has taken no public position on the proposal.
  • Several months ago, Treasure Secretary Henry Paulson has introduced a blueprint for an entire new regulatory system.

These events will continue to play out over the next several years and who know what path they will take as global politics shifts with the new global economic power grab.

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