A Game of Financial Jenga

jengaAn interesting development in international banking is in the works.  This isn’t going to immediately tip over the US economy and financial system.  But it’s definitely another Jenga block being removed from our financial foundation.

First, some background:  The BRICS Nations (Brazil, Russia, India, China, South Africa) have been getting together for the past few years with regards to international trade.  They want to get out from under the limitations and costs imposed upon them by having to use the US dollar when conducting trade between themselves.

They think it’s idiotic.  Because it IS idiotic.

Secondly, the ONLY value the US dollar has is as the world’s reserve currency.  As I’ve noted dozens of times before, since the 1970’s, the dollar is only valuable due to the “full faith and credit” of the US government.  There are no tangible assets backing the dollar.  Just a promise from DC that, “it’s all good”.

[Read about the collapse of the Brenton Woods Agreement, and the deal between Henry Kissinger and the Saudi’s for how the US dollar became the only accepted currency for oil – petrodollars – and how that morphed into it becoming the world’s reserve currency].

If the US dollar were to be replaced in international trade by some other currency – or a “basket” of currencies – the dollar would become just like any other world currency – mostly valuable only to those who use it inside their own borders.  Outside of the US, the dollar would be of no special value, thus it would crash in comparison to other world currencies.  This means that ANYTHING we import into the country would skyrocket in price.

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When Benton Woods (link above) was established, the International Monetary Fund (IMF) was established at the same time.  Basically, it acts as the lender to the world.  The US and Europe pull most of the purse strings, and are thus able to control who gets money and who doesn’t.

They also get to set conditions for receiving the money.  Such as with whom you may trade, how much debt your country is allowed to have, how much money must be raised via taxes and assessments, etc.

They’ve got you – ehm – right where they want you.

Well, the BRICS nations have had enough of it.

The BRICS countries (Brazil, Russia, India, China and South Africa) have made significant progress in setting up structures that would serve as an alternative to the International Monetary Fund and the World Bank, which are dominated by the U.S. and the EU. A currency reserve pool, as a replacement for the IMF, and a BRICS development bank, as a replacement for the World Bank, will begin operating as soon as in 2015, Russian Ambassador at Large Vadim Lukov has said.

So, sometime next year, there will be a new replacement for the US-dominated IMF and World Bank.  No Big Deal, right?

The BRICS countries are setting up a Development Bank as an alternative to the World Bank in order to grant loans for projects that are beneficial not for the U.S. or the EU, but for developing countries.

The purpose of the bank is to primarily finance external rather than internal projects. The founding countries believe that they are quite capable of developing their own projects themselves. For instance, Russia has a National Wealth Fund for this purpose.

“Loans from the Development Bank will be aimed not so much at the BRICS countries as for investment in infrastructure projects in other countries, say, in Africa,” says Ilya Prilepsky, a member of the Economic Expert Group. “For example, it would be in BRICS’ interest to give a loan to an African country for a hydropower development program, where BRICS countries could supply their equipment or act as the main contractor.”

Yeah, it IS a big deal.  Instead of the US and EU being able to call the shots and direct commerce to businesses in their countries, the BRICS countries will direct the biz in their direction.

This structure [of a new reserve currency] should become a worthy alternative to the IMF, which has traditionally provided support to economies that find themselves in a budgetary emergency.

“A large part of the fund goes toward saving the euro and the national currencies of developed countries. Given that governance of the IMF is in the hands of western powers, there is little hope for assistance from the IMF in case of an emergency. That is why the currency reserve pool would come in very handy,” says ambassador Lukov.

In layman’s terms, the BRICS nations are tired of playing second fiddle to US- and EU-friendly countries.  So they’re taking matters into their own hands.

The currency reserve pool will also help the BRICS countries to gradually establish cooperation without the use of the dollar, points out Natalya Samoilova. This, however, will take time.

For the time being, it has been decided to replenish the authorized capital of the Development Bank and the Currency Reserve Pool with U.S. dollars. Thus the U.S. currency system is getting an additional boost. However, it cannot be ruled out that very soon (given the threat of U.S. and EU economic sanctions against Russia) the dollar may be replaced by the ruble and other national currencies of the BRICS counties.

So the US dollar as world reserve currency hasn’t been kicked to the curb.  Just yet.  But the structure is in place to do just that.  No one is yelling, “JENGA!” but they’re pushing out blocks – one at a time – and the tower is getting wobbly…

When this finally happens in earnest – remember the first steps start next year – how soon afterwords does the dollar start to fade?  A year?  A decade?  Somewhere in between?

How do you protect your purchasing power?  With tangible assets.  Real property, precious metals, durable equipment.

If you’ve got real property, get it paid off.  If this comes to fruition, inflation will be obscene, and the various taxing authorities will need to increase their “taking” of your income to pay for their jobs.  If you are out of debt, at least you’ve got a fighting chance of making your increased tax assessments.

But if you falter, you’re going to have your assets seized.

Durable goods and equipment are generally registered with The State – much like real property – so they, too, are at risk of seizure.

Precious metals – especially when bought for cash over-the-counter – allow you to keep much of your wealth from the prying eyes of the tax authorities.  You’re responsible for its safe-keeping, but that’s a small price to pay to ensure you get to retain your assets.

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ALSO REMEMBER that everything I’ve written here may not happen.  The US and BRICS may all get into bed together in a sordid financial orgy.  The dollar might be saved and retain its title as World Reserve Currency well past our lifetimes.

So do your own research before your commit your hard-earned money to a certain path.

Personally, I don’t see the US, Russia and China ever being drinking buddies, but stranger things have happened.  I think all 3 countries want to be Top Dog, and will do whatever is necessary to achieve that goal.

What do YOU think?

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