Monetary System, World Order We’ve Had Since 1940’s Is Collapsing

Richard Maybury has been predicting ‘black swan’ events in his newsletter Early Warning Report for the last two decades.

In a recent conversation, he put his finger on something happening around the world. He sees a growing anxiety about global events – “everybody knows there’s something seriously wrong but they don’t know what is really happening,” he said.

A reckoning with policies that have been in place since the 1940’s is taking place, according to Richard. The fallout, he says, has implications for currencies, the military hegemony of the US, and political stability around the world.

US Hegemony Since the 1940’s

“The United Nations, NATO, the Bretton Woods monetary system, the World Bank, and the International Monetary Fund were all created in the 1940s according to blueprints that were approved in Washington,” Richard explains.

And this ‘world order’ may be coming to an end, he believes: “It’s the collapse of that structure that was built in the 1940s that is behind all of these problems that are popping up in financial markets and economies around the world” (we published a report recently on why many indicators undermine the ‘recovery’ thesis. Download here).

Geopolitical Fallout

Everyone knows that tensions between the US and the Middle East are at all-time highs but Richard also believes the US is facing an untenable situation in its attitude to China. The US has the same approach of policing East Asia, in particular the Sea of China, as it did during the 1940’s, but things have changed, and the US is no longer  the overwhelming power that it used to be, when most of Asia was under-developed relative to the West.

The Sea of China could be one area where the global order, with the US on top, begins to break down, says Richard:

“The fact of the matter is that China already owns the South China Sea and the East China Sea and Washington doesn’t like that.

“Washington is planning to do something about that? Come on, that’s ridiculous. And yet that’s the direction we’re moving in.”

Not Much to Show for Strong Dollar

Why hasn’t the US Dollar, the lynchpin of the global monetary system, lost its appeal? Richard says the US remains the most powerful country, and that’s why people have stuck with the Dollar for now:

“People are scared out of their minds and they’re looking for safety and the position that Federal officials created for themselves in the 1940’s still largely exists.

“So when you’re scared, you want to go with the guy who’s strongest and that’s what they’re doing.”

Even with a strong Dollar, Richard remarks that the goods and services you can buy in the US aren’t getting much better or cheaper:

“I look around at goods and services that I used to buy and they’re not available anymore. The quality of the stuff I do buy is going downhill. You know the old saying, ‘They don’t make it like they used to.’ Well, that has become literally true in a lot of cases.”

Swiss Move to Protect Franc Is a Warning

One of the most important consequences of this fallout is the impact on the global currency system. Richard points to Switzerland’s recent move to abandon its peg to the Euro, saying the Swiss are disavowing the current monetary system.

“The Swiss announced that they essentially weren’t going to go along with this floating exchange rate mess anymore. They were going to break the Franc loose from the Euro and be independent. That was the Swiss telling the whole world, ‘Look out. These other governments are all going nuts devaluing their currencies and we will not go along with it.’”

Switzerland’s move is a slap to the group of powerful political elites from various countries that gather to set international policy, known as the ‘G20.’ In their most recent get-together, they issued a statement supporting the European Central Bank’s new initiative to buy back 1.1 trillion Euro worth of bonds (US$1.2 trillion).

The policy is inspired by the US Fed’s own measures to bolster the economy through Quantitative Easing (a bond-buying program that was ended in 2014) and a policy of supplying loans at low interest rates.

The Swiss departure from the Euro peg should thus come as a warning, according to Richard. “The Swiss are the centerpiece of this huge catastrophe that is developing because these governments are accepting as legitimate economic policy the devaluation of their currencies. The Swiss are saying ‘Look out. All hell is going to break loose.’”

Nervous

Did the Swiss’ decision to de-peg their currency from the Euro shake the faith of the ECB? Nope.

The most recent announcement from the G20 meetings in Istanbul supports an activist monetary policy in Europe, saying1:

“Consistent with central banks’ mandates, current economic conditions require accommodative monetary policies in some economies. 

“We welcome that central banks take appropriate monetary policy action. The recent policy decision by the ECB will further support the recovery in the Euro area.”

Richard concludes that he’s wary of owning any currencies now:

“Who knows what’s coming. I don’t. I just know that if you have a whole lot of cash of any kind, in any currency, you ought to be really nervous about it and you ought to be into raw materials and precious metals, at least to some extent.”

P.S.: Rick Rule recently joined Richard Maybury as part of a discussion on macroeconomics and geopolitics, hosted by The Power & Market Report. Click here to listen.

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1 http://www.bloomberg.com/news/articles/2015-02-10/g-20-communique-following-feb-9-10-meetings-in-istanbul-text-

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