Global Monetary Reform

The main problem with the current global economy is that excess levels of credit creation (i.e., a credit/derivative bubble) have facilitated the building of supply capacity that is well beyond the requirements of global aggregate demand. As a general rule, a period of deflationary contraction would permit a decline of supply capacity until such time that growth in demand initiates a new expansionary cycle.

Economists, such as Richard Duncan (author of The Dollar Crisis), have argued that excessive growth of global credit and subsequent structural problems of the US dollar may unleash a deflationary contraction of the global economy.50 A depression could occur with a significant devaluation of the dollar, and the downturn will be very long-lasting unless global aggregate demand increases, particularly in the EU and East Asian economies.

Therefore it seems imperative that the US government begins discussions with the G-8 nations (plus China) to reform the global monetary system, ideally, to allow for a controlled expansion of markets in Europe and East Asia. The global economy will be more balanced and better off with three engines of global growth: the US, the EU, and Asia. The great challenge will be to implement a gradual, controlled decrease in the US money supply, while attempting to minimize dislocations in the US and global economy. The first reform should be the euro as the second International Reserve Currency, at parity with the dollar, thereby allowing a dual-OPEC oil transaction currency standard. This should join the US with the EU as two equal "co-hegemons."

While this rebalancing is necessary to create sustainable long-term growth, any broad transition from a dollar to a euro standard or euro/dollar standard with subsequent enormous capital market reorientation will be forcefully opposed by the American elite of the political and business establishment.

Regardless, the ascendance of the euro and ultimately the yuan has likely been fortified given the structural debt, trade, and fiscal imbalances in the US economy. The US consumer cannot go into indefinite debt as the single engine for global growth, nor can the Federal Reserve continue to reinflate bubbles indefinitely.

Both the EU and East Asia will have to recognize that the party is over and they cannot ride the American consumer in perpetuity. Whether or not they wish to confront the challenges of this transition, they will find these imposed by brutal economic realities.

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Financial End Game

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