World Currency Systems

The current world currency system is the US dollar.  This means that a) most global goods (including oil) are priced in US dollars, b) most international trades are transacted in US dollars, and c) many (people, banks, nations) save in US dollars. Not surprisingly, the primary beneficiary of this arrangement is the United States, as they get to export "dollars" in exchange for real goods and services.

So, why does the rest of the world put up with such a one-sided system? And, is there a better system?

It seems to me that countries like Australia put up with this system because they need the US for protection.  This essentially amounts to a protection racket being run by the US.  There are many countries in a similar situation to Australia.

Other countries support this system out of pure fear, and rightly so.  To date, the two countries that have tried to side-step the US dollar for international oil trade have been Iraq and Libya, and we know how that ended for them.


Oil producing countries seem to support the US dollar system as is it currently working for them, in that it allows them to get what they really want for their oil, which is gold.  The US dollar allows the oil-for-gold transactions to take place, and as long as it continues to work in the role, there is no requirement for change.  These countries must not like the fact that the US dollar system provides the US with visibility to their transactions, by effectively being their banker.

Other countries support this system because, up until recently, there has been no viable alternative.  This includes most of the European countries.  If the US dollar system collapsed without a viable alternative currency, so would world trade, and that would be good for no one.  That reason however, is now historical, as their are several viable alternatives.

Let's now consider the alternatives to the US dollar system.  Generally, money is considered to perform three primary functions.  These are a) to act a store of wealth, b) to act as a medium of exchange, and c) to act as a pricing unit.

Currency System	Store of Wealth	Medium of Exchange	Pricing Unit	Total
US Dollar / IMF	1	9	7	17
Gold	9	3	9	21
Gold Exchange Standard	3	9	8	20
Euro & Free Market Gold	9	9	9	27
Yuan & Free Market Gold	9	7	8	24

Some rationale for the scores above:

• The US Dollar is clearly a poor store of wealth due to inflationary money creation, which also impacts future dated pricing.
• Gold is a poor transactional currency, but is otherwise good money.
• Gold backed fiat exchange standards encourage transitions to pure fiat.
• Combination of fiat & gold, where gold is used as the savings currency, and where fiat is used as the medium of exchange and pricing unit.  
• The Euro is the better gold/fiat combination, as the Euro fiat is NOT managed by a sovereign nation, and therefore will not need to expand to directly fund government deficit spending.

So, according to my simple analysis above, the best possible world currency system is to use the Euro as the medium of exchange and pricing mechanism, and to use gold for wealth storage. Now, given what happened to Iraq & Libya, preparation for a transition to such a system would need to be very well planned, very subtle, and probably take place over a period of decades.

Symptoms that such a transition was in progress would include:

• Central Banks becoming net buyers of gold
• Central Banks would repatriate their gold held elsewhere.
• The European Central Bank would mark to market their gold each quarter.
• Large countries, such as China, Russia, Japan dumping the US dollar for international trade.
• The price of gold rising each year, against all major currencies.
  

Now, even if you're not convinced, it may be worth hedging your bets, and getting some gold, given the implications for the US Dollar, and hence most of the world's economy, if this transition is indeed taking place.