Russia Becomes First Major Country To Call for a Return to a Gold Backed Currency Ahead of the G20 Meeting

By: Curtis Ophoven

4/1/2009 - 7 Comments

Here is part of an article explaining Russia’s remarks; “Arkady Dvorkevich, the Kremlin's chief economic adviser, said Russia would favour the inclusion of gold bullion in the basket-weighting of a new world currency.."

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".. based on Special Drawing Rights issued by the International Monetary Fund.

Chinese and Russian leaders both plan to open debate on an SDR-based reserve currency as an alternative to the US dollar at the G20 summit in London this week, although the world may not yet be ready for such a radical proposal.”

“The Gold Standard was the anchor of world finance in the 19th Century but began breaking down during the First World War as governments engaged in unprecedented spending”

“It was revived as part of fixed dollar system until US inflation caused by the Vietnam War and "Great Society" social spending forced President Richard Nixon to close the gold window in 1971.

The world's fiat paper currencies have lacked any external anchor ever since. It is widely argued that the financial excesses and extreme debt leverage of the last quarter century would have been impossible - or less likely - under the discipline of gold. “

Today the Dolalr is the World's Reserve Currency. Meaning that all major currencies are based off the dollar. But, the dollar it’s backed by anything (since 1971), which means that the US Treasure can increase the currency supply by printing dollars and effectively cheating the entire world out of wealth. This has not been a problem until the recent decisions by the US Treasure to print and borrow money by the trillions of dollars.

The very idea of returning the world to a basket of currencies that are backed by Gold means that world leaders not longer like the idea of the US Treasure in control of their financial future or of being cheated out of their wealth.

China and Russia are asking for a new global monetary authority, including a global central bank with a global currency - backed by gold.

If several nations were to conspire together and move to a gold based currency basket, it would take away the power of any one single nation to be able to increase the money supply (without mining more gold, which costs as much to mine as the gold produced).

The following is taken from an article I wrote last year:

The only way for a global monetary authority to be powerful enough to manage the global financial system is if sovereign nations gave them the power to limit their control over their own financial system and therefore forcing nations and corporations to follow the policies and regulations of the global monetary authority – which will be the final coffin in free market capitalism.

The establishment of a global monetary authority will need at least the following authorities to oversee and global financial system.

Become the global regulatory authority over all national authorities – so that all banks have to follow the same regulations.
Become the global rating agency to rate the risk of assets sold throughout the world – so that one nations rating agency does not lie about the risks of assets within its nation as happen with the US mortgage meltdown.
Become the global interest rate regulators over all national authorities – so that one nation cannot rob the world by increasing the availability of their currency.
Become the global authority of currency supply management over all national authorities – so that one nation cannot rob the world by increasing their supply of money printing more of it.

Of course, no sovereign nation would want to give up the power to manage their financial banking system without a fight. But, as the global financial crisis unfolds over the next few years, many nations may find themselves in a very difficult situation which may lead them to agree to the terms of a global monetary authority – in exchange for a pegged currency or some other provision to stabilize their financial crisis and save them from national bankruptcy.

The US better take this as a serious threat. Perhaps more serious than terrorism. America needs to drop the Obama budget, cut spending, cut borrowing and stop printing money before the world takes away our financial influence and forces us to pay our debts and live within our means.

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Reader Comments

Comment 1
Pete Murphy Says: on Wednesday, April 01, 2009 7:49:46 AM

Our enormous trade deficit is rightly of growing concern to Americans. Since leading the global drive toward trade liberalization by signing the Global Agreement on Tariffs and Trade in 1947, America has been transformed from the wealthiest nation on earth - its preeminent industrial power - into a skid row bum, literally begging the rest of the world for cash to keep us afloat. It's a disgusting spectacle. Our cumulative trade deficit since 1976, financed by a sell-off of American assets, exceeds $9.1 trillion. What will happen when those assets are depleted? Today's recession is the answer.

Why? The American work force is the most productive on earth. Our product quality, though it may have fallen short at one time, is now on a par with the Japanese. Our workers have labored tirelessly to improve our competitiveness. Yet our deficit continues to grow. Our median wages and net worth have declined for decades. Our debt has soared.

Clearly, there is something amiss with "free trade." The concept of free trade is rooted in Ricardo's principle of comparative advantage. In 1817 Ricardo hypothesized that every nation benefits when it trades what it makes best for products made best by other nations. On the surface, it seems to make sense. But is it possible that this theory is flawed in some way? Is there something that Ricardo didn't consider?

At this point, I should introduce myself. I am author of a book titled "Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America." My theory is that, as population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.

This theory has huge ramifications for U.S. policy toward population management (especially immigration policy) and trade. The implications for population policy may be obvious, but why trade? It's because these effects of an excessive population density - rising unemployment and poverty - are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.

One need look no further than the U.S.'s trade data for proof of this effect. Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!

Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable - nineteenth on the list. Our per capita deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. My point is not that our deficit with China isn't a problem, but rather that it's exactly what we should have expected when we suddenly applied a trade policy that was a proven failure around the world to a country with one fifth of the world's population.

Ricardo's principle of comparative advantage is overly simplistic and flawed because it does not take into consideration this population density effect and what happens when two nations grossly disparate in population density attempt to trade freely in manufactured goods. While free trade in natural resources and free trade in manufactured goods between nations of roughly equal population density is indeed beneficial, just as Ricardo predicts, it’s a sure-fire loser when attempting to trade freely in manufactured goods with a nation with an excessive population density.

If you‘re interested in learning more about this important new economic theory, then I invite you to visit either of my web sites at OpenWindowPublishingCo.com or PeteMurphy.wordpress.com where you can read the preface, join in the blog discussion and, of course, buy the book if you like. (It's also available at Amazon.com.)

Please forgive me for the somewhat spammish nature of the previous paragraph, but I don't know how else to inject this new theory into the debate about trade without drawing attention to the book that explains the theory.

Pete Murphy
Author, "Five Short Blasts"

Comment 2
j Says: on Wednesday, April 01, 2009 8:08:01 PM

Mr. Murphy says his "theory is that, as population density rises beyond some optimum level, per capita consumption begins to decline."

Pete needs to take a roadtrip out of the beltway, out of the East coast entirely. Driving around or even flying over any of the Western States he will see first hand the population is sparse and nowhere close to being over-populated.

I will check out his book at the library to see if his above statement is an oversimplification of his theory and that I am missing a major peice of the puzzle.

Comment 3
Emmanuel Okwunwa Says: on Sunday, April 19, 2009 3:34:15 PM

Re: j Say's comment about population density as referred to by Pete Murphy.

I believe that what j Says is missing is the following connection between trade and population - a sort of imported population through the economy-combining effect of trade - that does not depend on high density of population in the US, as long as the trading partner has a higher population density:

"The implications for population policy may be obvious, but why trade? It's because these effects of an excessive population density - rising unemployment and poverty - are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force."

I agree with Mr. Murphy's take on this issue, and see his theory as quite viable (never mind my qualifications for the moment, as it is the rigour of the logic that I am more interested in).

In even more elaborate terms, one can see that if a country can produce for much lower prices because of high population density, and the production of certain goods is moved to such a country from a second country that has a lower population density (and a higher income level - usually complementary situations); then as long as the lost jobs in that second country (the US in this case) are not gainfully replaced by equal or higher paying, equivalent labour-hours employment; and as long as the same goods are expected to be bought by the same individuals who lost those manufacturing jobs; there will be either reduced buying power, or assisted buying power through credit.

This assisted buying power through credit may well explain the continued trade on vastly unequally advantageous terms - and may be a clue to the dynamic causes of the current economic crisis, as manifested through people buying homes they could not afford. (Again, could not afford because the productive jobs were transferred to the more highly densely populated country with lower wage rates.)

The issues of efficiency and fairness invoked by this situation may be mediated by a serious consideration of the question of sustainability that is so clearly raised. It may be efficient for the multinationals who mostly benefit from this form of globalization, but is not fair for workers in either economy involved - note that the low-income workers in the high density country tend to make only their opportunity cost, rather than any real economic profit [Parkins and Bade, Economics, Canada in the Global Environment, 2006, pp 406-407].

So the only justification for the present situation is the short term profit of the multinationals, whereas un-sustainability and unfairness on both shores indicate that this is a flawed policy - as Pete Murphy is pointing out (albeit for differently evaluated macro-economic reasons than mine which dip into the micro-economic implications in order to attempt to explain my macro-economic conclusions.

In the end, it may be seen that sustainability is the common issue that must determine the effectiveness, true efficiency, or desirability of any given macro-economic policy.

Emmanuel Okwunwa

Comment 4
j Says: on Monday, April 20, 2009 8:31:22 AM

Re: Emmanuel Okwunwa

I agree with your understanding of the problem & the end game - that the loss of high paying jobs (because we have outsourced our manufacturing sector to second world countries) leading to the over reliance on credit will lead to the standard of living in the USA to decline, but I disagree with your premise that population density has anything to do with it or that countries with higher population densities can automatically produce goods at lower prices than countries with lower population densities. India's population may be denser than the USA's but does Mexico & China have a higher population density than
the USA?

My free trader friends at the Libertarian Cato Institute, Forbes, and obviously the multi-nationals will disagree with me but the solution seems obvious to me - eliminate free trade & raise import tariffs thereby raising Federal (external) Revenue in order to decrease the Federal payroll (internal) taxes allowing citizens to keep more of their money each week to save or spend which will stimulate the economy pulling us out of this
Recession.

Misters Murphy & Okwunwa seem to understand most of the problem but do not offer any solutions...

Comment 7
N Says: on Wednesday, December 02, 2009 9:09:22 AM

I do agree with Murphy. Population density do contribute to our crisis today. And yes j countries with higher population densities can produce goods at lower prices than countries with lower population densities. It all takes you back to basics. Supply and demand. If a country has a higher population density, then the demand for jobs may be higher. Therefore the cost of production may be lower eg. lower salaries and visa versa. I have no experience in this field, i am just trying to educate myself about the falling and rising of the economy. However logically murphy and okwunwa are one target.

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Russia Becomes First Major Country To Call for a Return to a Gold Backed Currency Ahead of the G20 Meeting

By: Curtis Ophoven

4/1/2009 - 7 Comments

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