In our previous blog, The Origin of Money and Today's Mackarel and Animal Farm Currencies, we pointed out how people responded to government’s action of banning money (such as prison community) or for society to lose confidence on the government decreed money (Zimbabwe).
We observed that when people lose confidence on the money government decrees on them or when they are barred from having to use “standard” money, people find alternative ways to select a media of exchange (Mackarel Money for California’s Prison or Barter for Zimbabwe).
And when we see governments similarly begin to use unorthodox means of transaction, we construe such action as emerging signs of diminishing faith in the present monetary standard.
This from yesterday’s news (courtesy of the Financial Times),
``Thailand on Monday said it planned to barter rice for oil with Iran in the clearest example to date of how the triple financial, fuel and food crisis is reshaping global trade as countries struggle with high commodity prices and a lack of credit.
``The United Nations’ Food and Agriculture Organisation said such government-to-government bartering – a system of trade not used for decades – was likely to become more common as the private sector was finding it hard to access credit for food imports.
``“Government-to-government deals will increase in number,” said Concepción Calpe, a senior economist at the FAO in Rome. “The lack of credit for trade could lead also to a resurgence of barter deals between countries,” she added.
``Officials and traders noted, however, that Iran was not typical because the US-led sanctions against its banks meant the country was facing difficulties financing agricultural trade even before the financial crisis…
``With some developing countries’ official currency reserves facing serious depletion, particularly in Africa and Asia, agricultural officials said countries could barter more to avoid exacerbating their current account difficulties."
Our observation:
True, while Iran’s conditions have been stymied by US sanctions, the fact that both governments CAN yet TRADE with each other with their homegrown resources can be construed as Paper money failing to deliver its role as medium of exchange.
The banking system as key conduit for the present framework seems being bypassed for barter (which accounts for hard currency trading outside the US dollar standard system).
So what we apparently have here is another instance where “full faith in credit” in the present global financial architecture seems being eroded.
Is this an isolated incident? We think not.
Just last September, Brazil and Argentina came across a system which aims to trade goods without using the US dollar.
According to the International Herald Tribune,
``Brazil and Argentina are ready to stop using U.S. dollars to trade goods between them.
``Brazil's president tells the Buenos Aires-based Clarin newspaper that exports and imports between the two nations will be bought and sold in local currency — reals and pesos.
``President Luiz Inacio Lula da Silva did not say when the measure would take effect.
``Silva says the move will boost bilateral trade, which reached $US17.6 billion so far this year through July.”
If you think this is a joke, you can check out this speech by Mr Henrique Meirelles, Governor of the Central Bank of Brazil on the Inauguration of the Brazil-Argentina Local Currency System last Oct 2nd published at the Bank of International Settlements, where I quote (highlight mine),
``With elimination of a third currency in direct transactions among companies, exporters will set their prices in the currency of their own countries. Thus, they will be better able to calculate their margins precisely, since they will no longer be exposed to exchange rate risk.’
Does the concerns over exchange rate risk end here?
Nope, just today we got this news that China and Russia are contemplating a similar medium for payment or settlement.
From Russia Today (Hat Tip: Craig McCarty),
``The growing trade turnover offers both nations the chance to move trade away from dollars and utilising national currencies. In his address to the 3rd Russia-China forum in Moscow, Vladimir Putin stressed that the dollar based financial system was in a state of shock - and said the counterparties should consider using their own currencies.
``Aleksandr Razuvaev, Chief Analyst at Sobinbank says that the major product being traded - oil - can be denominated in Rubles from next year.
``“There is less trust in the dollar and there is an idea to build up regional currencies. It will be the Ruble in the CIS region, and the Yuan in the South Asian region. So there will be demand for Russian currency due to oil exports and for the Yuan due to imports from China. So there will be enough liquidity in both currencies.”
So from a “MICRO” level of Mackarel Prison economy to an “Animal Farm” national Zimbabwean economy, the unconventional means of transactions seems to be growing MACRO, involving more bilateral exchanges using national currencies or by barter.
It seems that we could be witnessing escalating signs of cracks from the present monetary order.
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