WASHINGTON, Dec. 7, 2015 – When politics is mixed with economics, the results are interesting indeed. Take the recent statements concerning the inclusion of the yuan (also known as the renminbi [RMB]) in the makeup of the IMF’s Special Drawing Rights. From the IMF’s website:
Ms. Christine Lagarde, Managing Director of the IMF stated: “The Executive Board’s decision to include the RMB in the SDR [Special Drawing Rights] basket is an important milestone in the integration of the Chinese economy into the global financial system.
“It is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems.”
It is immediately apparent from this statement that Lagarde is involved in a bit of IMF face-saving. In the first sentence, she claims that the IMF itself is conferring the integration of the RMB into the global financial system. But what that statement amounts to is an admission that the IMF is tacitly recognizing that the RMB has already gained significant ground without any need for the IMF to “confer” or permit the currency’s integration into the global financial system.
In reality, China and its trading allies, such as Russia and India, have been fighting fiercely and relentlessly to reduce the use of the U.S. dollar and the euro in trade between the countries. Nobody knows how long it will be before trade between China and Russia will be dominated in rubles and yuan, with the yuan likely taking on the bulk of this trade.
It is more likely that the IMF could see what was truly happening on the ground rather than longing for those halcyon days near the end of the Second World War when the Bretton Woods (1944) vision of the world took shape due largely to the political and economic dominance of the U.S. dollar at the time. Times have radically changed in recent years, as a number of major trading partners are more inclined towards China and its currency than to the U.S.A. and the dollar.
Lagarde reminds us in a way of Batman’s nemesis, the Riddler. Her second sentence is all smoke and mirrors, as she actually attempts to make the world believe that adding the Chinese currency to the accepted basket of international currencies is a reward to that country for engineering currency improvements the IMF wanted to see.
In other words, the IMF is attempting to say that China has become more monetarist and is thus welcome into the club linked to similar currencies as represented by Washington and Brussels. In so stating, however, Lagarde glides past the simple truth that monetary policy is government policy and is thus a political action. That will always be the case as long as a given currency is controlled by and printed by the government.
Reality again says something different from the IMF. The Asian Infrastructure Investment Bank, created formally in June 2015, was created with the backing of China specifically to be a counterweight to the Washington-dominated World Bank and Asian Development Bank. It all comes down to money.
The trick is, when the World Bank or the Asian Development Bank approves a loan—likely a large one involving infrastructure finance—it’s more likely that the consultants are Western and the contractors fulfilling the contracts are Western.
Earlier on, the Chinese came along and strongly suggested that these contracts should be more open and transparent. The World Bank and Asian Development Bank insisted that the corrupt existing system was already open enough. This soured the relationship on the Chinese side, with the result that the Chinese came up with their own initiative, the Asian Infrastructure Investment Bank (AIIB). At that point, America realized that nearly the whole world is fed up with the corruption underpinning many governments, so the unsurprising result of the Chinese initiative was a thunderous welcome for the the AIIB.
This is the long version of what the IMF is trying to avoid saying with its fancy but falsely gracious statement.
Yet surprisingly, it is not the U.S. dollar that is the big loser. The dollar still more or less dominates the makeup of the SDR. The big losers are the other major currencies that also participate in the SDR, namely the euro primarily, but also the yen and the British pound.
In the estimation of the powers that be (TPTB), Europe has been damaged the most as this tug-of-war has played out, primarily due to its ongoing problems related to the last financial crisis but also due to the rise of China.
The IMF is an institution that was created to serve a specific purpose, usually smoothing balance of payments issues, allowing countries to pay off urgent debts before a default occurred. The likes of Keynes had anticipated these kinds of problems as inherent in their models, yet still imposedheir solutions on the world, which, among other things, proved a welcome and long-lasting feast for international bankers.
In reality, the IMF is no more than an international insurance company backed by America as a way of ensuring that the bankers involved in large, international deals get paid. Ultimately, this is economic fascism on a grand scale. But the world seems much smaller now, so we could call this situation, with equal accuracy, economic fascism on a global scale. Ironically, to keep this fantasy on track, China must be included in the game, something that Keynes could never have predicted.
The IMF is can be reformed to support any currency, even an honest currency. The organization could still prove useful in a world of honest money. The dollar is the problem in the current equation. It has been riddled through with the influence of greedy international bankers, and the corruption of the currency reason is why the AIIB was widely welcomed.
Initially, all currencies are corrupt. But why is America’s currency allowed to be more corrupt than other currencies? Is it a matter of equality among thieves?
The yuan is ugly because it is in many ways a cheap imitation of the bad. But believing that a currency must be corrupted and debased like the U.S. dollar, the Chinese seem to forget their own history during which many Chinese emperors routinely over-printed their currency. China, interesting to note, was the first country to actually use paper money. The currency could simply be printed and used in transactions based solely on the promises of the emperor.
Keynes refused to acknowledge similar weaknesses in his models, compensating for their inherent flaws by substituting monetary lunacy, adding too many variables to explain too much, and ultimately, wanting his system to be all things to all man.
Contrary to Keynes, it is not complexity but freedom and honest money instead that will finally end the daunting and seemingly endless balance of payment problems that plague international trade today.