Tectonic Shift

Every earthquake has an epicenter and a deeper hypocenter. Hypocenter is where the tectonic shift takes place. This below is a tectonic shift in the global monetary system.

Financial Times: “China and Argentina in Currency Swap.” China, which is pushing to end the dominance of the dollar as a worldwide reserve, has agreed to a renminbi 70 billion dollar swap with Argentina that will allow it to receive renminbi instead of dollars for its exports to the Latin American Countries.”

We anticipated this here on FEB 1st:
There are four potential scenarios to emerge in the global monetary system:
1. Patch the Bretton Woods dollar centric system. (That is what the powers to be hope to be able to master.)
2. Create a new universal currency backed by the G8 or G20. (A dream for some, but the fear of many.)
3. Create a new equilibrium of three or four regional currencies – Euro, North America, Asia. (Russia and Latin America could constitute a fourth and a fifth currency if they do not feel accommodated in this framework.)
4. Fragmentation with each nation operating on its own, backing its currencies by its precious assets and commodities.
The major effort underway now is to find a path to scenario one. Politicians always try to preserve an existing paradigm. What would likely be the result?
No one knows. It will be difficult to preserve Scenario (1). Scenario (2) is highly unlikely right now and scenario (3) is unlikely too. Unfortunately, there will have to be much more pain for such arrangements to take place. Bretton Woods took place following two decades of tremendous global strife and pain. Let’s hope we do not have to go through so much strife again.

The next three to five years may be a transitional period – a battle royale between scenario (4) the growing fragmentation of the global monetary system, fueled by protectionism, nationalism and patriotic demagoguery, and the opposing forces trying to hold on to a unified global system of scenario (1).

There will be those who will push to scenario (2), but it is highly unlikely they will prevail. A new paradigm of scenario (3) may emerge in three to five years (2012-2014).
© Aviv Shahar