If you're struggling to keep up with your expenses or wondering why your assets seem to be increasing in value, it's time to delve into the global monetary system.
This article will give you a solid starting point for understanding how the global monetary system works and how it's affecting your income. Being informed and prepared is crucial, so take a seat, relax, and read on.
Introduction to the Global Monetary System
The global monetary system is a complex web of policies, institutions, and currencies that govern the flow of money and trade between nations.
At its core, it is a system of exchange rates that determines the value of one country's currency relative to another.
It also includes international institutions like the International Monetary Fund (IMF), the World Bank, and the World Trade Organization (WTO), which help regulate global trade and provide financial assistance to needy countries.
The history of the global monetary system dates back to the early days of international trade when merchants would use gold or other precious metals as a medium of exchange.
Over time, nations began to issue their own currencies, and the value of each currency became tied to the value of the underlying assets held by that nation.
A system of floating exchange rates
Today, most countries have adopted a system of floating exchange rates, which means that the value of a currency is determined by market forces rather than being fixed to a specific commodity.
The global monetary system is subject to a wide range of economic, political, and social forces that can impact exchange rates and trade flows.
For example, changes in interest rates, inflation, or government policies can all affect the value of a currency and impact the cost of imports and exports.
Similarly, geopolitical events like wars or natural disasters can disrupt global trade and lead to significant shifts in exchange rates.
Overview of the Global Monetary System
The global monetary system refers to the framework of institutions, policies, and practices that govern the exchange of money and financial assets across borders.
The system is complex and constantly evolving, reflecting the needs and priorities of individual countries and the global economy.
One key feature of the global monetary system is the role of currencies as a medium of exchange.
In this system, each country has its own currency, which is used to facilitate trade and investment within its borders.
However, in order to engage in international trade and finance, countries need to exchange their currencies with those of other nations.
This is typically done through the foreign exchange market, where currencies are bought and sold based on their relative values and supply and demand.
Another important aspect of the global monetary system is the role of central banks. These institutions are responsible for setting monetary policy and regulating the money supply within their respective countries.
They play a critical role in maintaining the financial system's stability and managing economic growth and inflation.
In addition to individual countries and central banks, a number of international institutions play a role in the global monetary system.
These include the International Monetary Fund (IMF), the World Bank, and regional development banks.
These organizations provide financial support and technical assistance to member countries and work to promote economic development and stability on a global scale.
The global monetary system is a complex and dynamic framework that plays a critical role in shaping the global economy.
Understanding the various components and actors involved is essential for anyone seeking to navigate the world of international finance and investment.
The Gold Standard and Exchange Standards
The gold standard and exchange standards are two different systems used in the global monetary system to determine the value of a currency.
The gold standard was used from the late 19th century until the 1970s. Under the gold standard, a currency's value was tied to gold's value.
Central banks could exchange their paper currency for gold at a fixed rate, which provided stability in international trade and investments.
However, this system had limitations and was ultimately abandoned due to the fixed exchange rate and limited gold reserves.
After the gold standard, the exchange standard emerged. This system allowed for the exchange of currency between countries at floating exchange rates.
In this system, the value of a currency is determined by the supply and demand of that currency in the global market.
This system is more flexible than the gold standard, allowing for more fluidity in international trade and investments.
Today, the global monetary system is primarily based on the exchange standard, with countries using floating exchange rates to determine the value of their currency.
However, some countries still use fixed exchange rates, or a combination of fixed and floating exchange rates, to stabilize their currency value.
The choice of exchange rate system can have significant implications for a country's economy, including its trade competitiveness, inflation rate, and monetary policy.
Understanding the differences between gold and exchange standards can help individuals and businesses navigate the global monetary system and make informed decisions about international trade and investments.
Constant Fluctuation in the Global Monetary System
The global monetary system is constantly fluctuating due to a variety of factors, including changes in economic policies, geopolitical events, and technological advances. The value of currencies can rise and fall rapidly, making it difficult to predict the direction of the market.
One major factor that affects the global monetary system is inflation. When the rate of inflation is high, the value of a currency decreases, and it becomes more expensive to buy goods and services.
Governments and central banks can take steps to control inflation, such as raising interest rates, but these policies can have other economic consequences, such as slowing down growth.
Another factor affecting the global monetary system is the trade balance between countries. When one country exports more goods than it imports, it accumulates a trade surplus, and its currency tends to appreciate in value.
Conversely, when a country imports more goods than it exports, it accumulates a trade deficit, and its currency tends to depreciate.
Changes in technology also have a significant impact on the global monetary system.
For example, the rise of cryptocurrencies like Bitcoin has disrupted traditional financial systems, offering an alternative to government-issued currencies.
However, the use of cryptocurrencies also presents new challenges, such as concerns about security and regulation.
In conclusion, the global monetary system is complex and constantly changing.
Understanding the factors that influence currency values can be challenging, but it is essential for investors and businesses to navigate this ever-evolving landscape.
Keeping abreast of economic policies, geopolitical events, and technological developments can help investors stay ahead of the curve and make informed decisions.
Understanding The Petrodollar’s Role In The Global Monetary System
*This article is based on Lyn Alden's blog post on the petrodollar System*
In 1974, the petrodollar system kicked off and led to a significant impact on the global monetary system.
Shockingly, a chart comparing major annual expenses for a family of four against the median male income from 1985 to 2015 is displayed below.
The graph shows the income and expenses for a family of four. The blue line represents the median male income, while the red represents expenses like college, housing, health insurance, and vehicles.
In 1985, one-income families were mostly male, so combining female and male incomes would have skewed the data.
In 1985, income was higher than expenses.
However, over time, expenses increased much faster than income. In 2013, income and expenses crossed.
It is impossible for the average household out there to exist on just one income, without going underwater and taking on more debt every single year, which eventually leads to bankruptcy.
It's hard for families nowadays to survive on one income because of the petrodollar system we adopted in 1974.
This system made oil transactions priced in dollars, which caused a worldwide demand for it.
This led to most trade being done in dollars, creating a cycle that increased the need for dollars.
The petrodollar system also caused inflation.
How The Current Global Monetary System Affects Everyday Americans
The Average Joe benefits from lower interest rates, higher asset prices, and cheaper goods at popular retailers. This raises the standard of living for Americans who don't solely rely on hard work.
The petrodollar global monetary system made the US dollar the world's reserve currency, which led to trade deficits and global economic power.
Since oil is an in-demand resource and is priced in dollars, the USA's currency becomes dominant.
Saudi Arabia 1974
The deal between the US and Saudi Arabia, commonly known as the petrodollar system, has been a critical part of the global monetary system for more than four decades.
The agreement has allowed the US to maintain its global economic dominance, as it requires all countries to hold dollar reserves to purchase oil from Saudi Arabia.
This has created a strong demand for the US currency, making it the most widely used currency for international trade and finance.
In addition, the petrodollar system has helped to support the value of the dollar and allowed the US to finance its trade deficits without facing significant economic repercussions.
However, some experts argue that the reliance on the petrodollar system has also created vulnerabilities in the global monetary system, as any shifts in oil prices or changes in geopolitical relations could potentially disrupt the stability of the system.
Furthermore, some countries have been exploring alternatives to the petrodollar system, such as establishing their own oil trading mechanisms or using other currencies like the euro or yuan to purchase oil.
These developments could potentially undermine the dominance of the US dollar in global trade and finance and reshape the structure of the global monetary system in the coming years.
For instance, a Mexican company selling t-shirts needs dollars to buy oil right now, so they sell their t-shirts to Saudi Arabia for dollars.
This applies to all countries. The Mexican company might also take out dollar loans from a bank in the Cayman Islands due to the euro/dollar system.
The Mexican corporation does this for a couple of reasons:
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To buy supplies, they require dollars because most global trade (60%) is in dollars because of the petrodollar system.
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Because the dollar is commonly used, prices stay steady and the dollar is less likely to crash. This leads to lower interest rates.
So the Mexican corporation can borrow in Mexican pesos at 15% interest or in dollars at 5%, a no-brainer.
Again, a positive feedback loop creates more demand for United States dollars.
As a result, interest rates in the United States are a lot lower than they otherwise would be, and asset prices go up.
In my example, there's a character named Average Joe from 1874.
After 40 years of the petrodollar system, his house and 401(k) have increased in value by $500,000 each. He now has an extra $1 million to spend without working more.
His standard of living improved, and society didn't produce more stuff.
Where do we get goods we don't make?
China produces most of the stuff we consume in the US. They like taking our dollars because of the petrodollar system.
We don't make the stuff ourselves, so China uses its resources to make it for us.
The XL version of the average Joe consumes it. China then takes those dollars and buys US assets like treasuries, stocks, and real estate.
If we continue to outsource all of our production of stuff to other countries, at some point, those other countries will own all the assets in the United States.
Right about now, your friend and family member Fred is saying, “Well who cares? Why don't we all just sit back on the couch, relax, and never work a day in our lives if all these foreigners are willing to produce all this stuff, and all we have to do is give them green pieces of paper? Who cares if they own all the assets?”
I would remind your friend and family member Fred what wealth is.
Is a society wealthy just because it has a lot of green pieces of paper?
Nope. Society's wealth comes from being good at making things and doing stuff quickly. If China can make everything and own everything, who's rich and who's poor?
How The Petrodollar Global Monetary System Is Crushing The Middle Class
To sum up: The US can import a lot of goods and services because of the high demand for dollars, even though we don't produce enough. Other countries like China, Mexico, and Europe make what we consume.
The dollar stays strong because it's the world's reserve currency in the global monetary system. If we didn't have this status and kept importing more than we exported, the dollar's value would drop unless we started making and selling more stuff.
This outsourcing lets us avoid manufacturing everything ourselves.
Outsourcing: Should we work hard or hire another country?
We just need to give them our dollars, right? They'll buy treasuries, lower interest rates, and increase our asset prices. Americans owning those assets will feel richer.
Realize that the petrodollar system outsourced high-paying jobs for lower-paying ones, decreasing wages and making expenses grow faster than incomes.
The US had a strong manufacturing base before this system. We produced a lot of things used in and out of the country. But we started sending stuff away instead of making it ourselves.
Low-Wage Services-Driven Economy
After the petrodollar system was put in place, and 40+ years later, instead of seeing lots of manufacturing, we see things like Uber, Top Golf or DoorDash, a lot of restaurants and bars, lawyers, and accountants.
This is an economy that revolves around domestic services, but the goods consumed inside it are produced outside of the domestic economy, leaving us with huge trade deficits, where we're importing most of the goods we consume.
To comprehend how much the petrodollar system has destroyed the middle class in the United States, and, I would argue, our entire economy from a fundamental standpoint, I reviewed Lyn Alden‘s blog post to put things into perspective.
Lyn's report highlights the US balance of trade, specifically the trade deficit or surplus.
Since 1974, the trade deficit has increased to $70 billion per month, meaning we import $70 billion more than we export.
This indicates we consume more than we produce.
The chart below shows that those producing goods are using the dollars they earn to buy US assets.
In Lyn Alden’s words:
The US is now the biggest debtor country instead of the biggest creditor country.
The net international investment position shows how much a country owns in foreign assets compared to how much foreigners own in their assets.
The US owns 29 trillion in foreign assets but foreigners own more US assets which includes government bonds, corporate bonds, stocks and real estate, totaling 42 trillion.
This is a result of an accumulated trade deficit that puts the US in one of the weakest positions in the world in terms of this metric.
The United States is -52% and Spain and Mexico are the only countries in a worse situation.
The next graphic shows how the United States has become a country of haves and have-nots and how this petrodollar system has destroyed the middle class.
In the US, the top 1% owns more wealth than in any other developed country. Some people think higher taxes caused this, but that's not true.
It happened because of the petrodollar system, outsourcing manufacturing, and inflated asset prices. This made the owners of those assets very rich.
The chart above shows that the net worth of the bottom 90% has decreased substantially, while the net worth of the top 1% has increased since 2000.
Another graphic proving to us the effect of the petrodollar system on the middle class is the increase in the gap between productivity and the typical worker's compensation since 1979.
Productivity increased by 252%, while hourly compensation stopped and just went sideways since the end of Bretton Woods and the start of the petrodollar system.
The United States isn't actually the wealthiest country, despite what we may think.
A Credit Suisse wealth report from 2019 shows that while the US is rich per person, most of that wealth is held by a small group.
This means that the average American's net worth is lower than in other developed countries.
Furthermore, wages no longer cover family expenses for a year, as shown in a chart I looked at.
America's middle class is facing a financial crisis
It's no secret that America's middle class is facing a financial crisis, and it's not just due to the rising cost of living. One of the main culprits is the petrodollar, which has transformed our economy into a domestic services-based one.
This means that instead of producing goods, we now rely heavily on foreign countries to produce the goods we consume. This puts us in a precarious position, as we are now vulnerable to fluctuations in the global market and exchange rates.
Additionally, our trade deficits have ballooned, which means that we are importing more than we are exporting. This has a negative impact on our GDP and can lead to further economic instability.
It's important for us to recognize the petrodollar's role in our current economic situation and take steps to diversify our economy and reduce our reliance on foreign imports.
Is the Middle-Class Dying in the American Economy?
The petrodollar is beginning to lose its role as the dominant reserve currency in the global monetary system because fewer people want to fall under central banks' weaponization of the dollar. De-dollarization won’t happen suddenly, but it will over time.
In about 15 to 20 years, the dollar might not be the main currency used around the world. Different countries may use different currencies, like Bitcoin or gold.
This is already happening and can be seen in a chart.
Six years ago, 98% of the export deals from Russia to China were done in dollars. Now? It's only 33%. The majority of the transactions are now done in euros.
India and Russia now mostly trade in rubles. China is spending dollars on projects outside of China instead of buying US assets. This could decrease the demand for dollars and lower its value.
If the value of the dollar based on exports, imports, or trade deficit goes down, the price of imported goods in the US could increase.
Lower Quality of Life For Americans Predicted
If prices of everyday things spike by two, three, or four times, we'll have to rely on what we make. The problem is we don't produce much as our economy is service-based.
Before, we had a lot of cheap imports thanks to the strong demand for the dollar. But now and moving forward, we'll have expensive imports instead. This will lower our quality of life.
People can't afford to buy as much if prices go up and sales go down.
When sales decrease, jobs decrease. Then, there's less money being spent on the economy.
This causes incomes to drop, and foreign buyers purchase fewer US assets.
If the government saw this happening, they would print more money and give it to the economy.
This would make prices go even higher, creating a negative cycle that just gets worse.
What I would say to your friend and family member Fred is…
Can US Regulations Bring Manufacturing Back Home?
I'd like to point out, the regulatory environment in the United States isn't getting any better, it's going to get far worse.
Also, as the dollar goes down in value, slowly loses its reserve currency status, and artificial demand drops, there's going to be a capital flight out of the United States. You're going to want to take out your dollars and not invest here.
You're going to want to invest somewhere else where the risk/reward is a lot better.
Taxes Will Increase
Taxes are hard to predict, but some things can help us guess. The global money situation affects US taxes. COVID-19 messed up the world economy, so some countries may increase taxes to get money. Changes in the US government might also mean higher taxes. President Biden wants to raise taxes for companies and rich people to make more money and reduce inequality.
The World Economic Forum
Finally, the Great Reset agenda of the World Economic Forum has been a topic of discussion for many business owners. While some argue that it is necessary to address the current global monetary system and its flaws, others believe that it is not business-friendly.
The Great Reset agenda proposes changes such as transitioning to a digital currency, implementing universal basic income, and increasing taxes on the wealthy.
While these changes may have potential benefits, they can also have negative impacts on businesses and their profits.
For example, transitioning to a digital currency could lead to increased competition and decreased profits for traditional banks.
However, it could also provide opportunities for fintech companies and startups.
Additionally, implementing universal basic income could stimulate consumer spending, but it could also lead to inflation and higher taxes for businesses.
It is important for business owners to stay informed about these proposed changes and their potential impacts on their industry and finances.
Want to do business in a country with strict rules, high taxes, and tough regulations?
I don't think so. The probability of taxes going up is high, as the probability of manufacturing coming back to the United States is low.
The main takeaway is expenses are most likely going to continue to go up, while the incomes will continue to go down. This is how the petrodollar, the global monetary system, is destroying the middle class.
Conclusion: Key Takeaways on Global Monetary System
The global monetary system is a complex and constantly evolving network of policies, institutions, and currencies that affect every aspect of our lives.
Understanding its intricacies is crucial for anyone who wants to succeed in the world of international finance. From the Bretton Woods system to the rise of digital currencies like Bitcoin, the global monetary system has had many significant milestones and shifts over the past century.
The ongoing debate about the role of central banks, the stability of fiat currencies, and the potential of blockchain technology will continue to shape the future of global finance for years to come.
Despite the challenges and uncertainties that lie ahead, one thing is certain: those who stay informed and adapt to changing conditions will be well-positioned to thrive in this dynamic and fascinating field.
FAQ
What Is Global Monetary System? The Global Monetary System helps with investments and trade between countries. It has rules for exchange rates, managing economics, and balancing payments. They changed the system after the financial crisis of 2008-2009.
How does the global monetary system work? The global monetary system is made up of rules and institutions that control the exchange of money between countries. The value of each currency is determined by supply and demand factors, like trade flows, interest rates, and inflation rates. Central banks and governments can also influence currency values through policies. The International Monetary Fund (IMF) and World Bank are important organizations within this system.
Who controls the monetary system? The global monetary system is a network of institutions, policies, and agreements involving national governments, central banks, financial markets, and investors. The International Monetary Fund (IMF) promotes cooperation among its 190 member countries and offers financial aid and technical support to countries facing economic problems. However, the IMF cannot directly control national monetary policies or the entire global financial system. Central banks like the US Federal Reserve, European Central Bank, and Bank of Japan have significant influence on the global monetary system through their management.
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