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Brazil, China and the New Asian Currency

Basically, the International Monetary System that we have had for a few decades that revolves around the US dollar has finally reached the end of the line

The current international monetary crisis was the last straw necessary for the world to realize that it needs a new redesigned international monetary system that would be compatible with the new realities of the 21st Century.

It has been over ten years now, since December of 1998, that I have been advocating and writing many articles saying that Brazil should adopt a new mega currency. First, I suggested in my articles the euro as Brazil’s new currency. But about four years ago I changed my mind regarding Brazil adopting the euro as its new currency, because the entire ball game has changed from the Brazilian perspective in the last few years, and ASAP, Brazil should adopt instead the “New Asian Currency”; a new currency similar to the euro in a major effort to adapt to the new global economic realities of today and the coming decades.

In March 2007 “Brazzil” magazine published my article: Here Is Why Brazil Should Adopt the New Asian Currency. Quoting from that article: “Here we are at a very exciting time – a turning point in world history – and the global economy is changing as never seen before, at the speed of light; and innovation and major advances in technology are helping in rearranging the entire global economy.

…The global economy is slowly splitting the countries around the world into four major powerful blocks of countries – Europe, United States, Middle East, and Asia – and each country around the world will have to evaluate its economic self-interests regarding its economic future and will have to decide in the near future which group is the best for your particular country to establish very close economic ties with.

This article shows why, when we take into consideration the direction that the Brazilian economy should take today in relation to its economic prospects for the future, it becomes crystal clear that the best group for Brazil to integrate its economy with is the Asian group under the leadership of China.

…The global economy is in the process of being rearranged, and these changes are the result of globalization combined with the development of state-of-the-art new technologies such as a world that is connected by fiber optics, the constant increases in computer power, a growing global Internet system that is connecting everybody, and the astronomical developments in global communications that have been making it easier to communicate and send information via satellites, Internet, email or telephony.”

In that article I described in detail the reasons why Brazil should adopt the new Asian currency and in 2009, based on the comments of many Chinese officials, China is finally realizing that it is time to reorganize the international monetary system and create a new system that is in sync with the new international monetary order for the new Millennium.

Common sense tells me that by 2010 the world is finally ready to move forward and the timing is right to finally adopt a new international monetary system designed to meet the needs of the 21st Century when we take into consideration all the major international financial events that transpired in 2008. What the world has witnessed in 2008 was not only the demise of the free market capitalist system in the United States, but for all practical purposes we also have witnessed the end of the line for an international monetary system based on the US dollar.

There are many reasons for the decline of the value of the US dollar

First, we have reached the end of the line for the US dollar currency supremacy, and that has to do among other things with the economic and geopolitical changes that we have had in the world since 1945.

The US dollar served its purpose since the end of WW II and became the major foreign exchange reserve currency for the system that emerged after the war. The days of the US dollar playing that special role that created an international monetary system that revolved around the US dollar as its main currency has reached the end of the line, since today that system is very sick and it is dying a slow death.

Very soon the world will need to put that patient out of its misery, and after we go through the major collapse of the US dollar creating the biggest international monetary crisis the world have ever seen – a massive US dollar global meltdown – from the ashes of the old system will emerge the new international monetary system that will be more useful for the first century of the new millennium.

The US government and Americans in general lost sight of the role that the US dollar has been playing in the world international monetary system since 1945 when the US dollar started becoming an important part of the foreign exchange reserves of many countries.

When a currency achieves that status of a major reserve currency the world expects at a minimum that the currency would be managed in a way to protect its intrinsic value over time. That is not what has been happening to the US dollar for a long time.

The value of the 1947 US$ 1.00 has declined consistently since the US dollar became the major foreign exchange reserve currency, and in April 2009 that same US$ 1.00 dollar is worth only $ .08 cents; that is how much of the value of the US dollar has evaporated because of inflation. During the Reagan and Clinton administrations, the method of calculating rising prices was altered in ways that lowered the official US inflation rate, and if we adjust the current value of the 1947 US$ 1.00 to be consistent with the pre-1983 method of calculating inflation, then the current value of that same US$ 1.00 dollar would be worth about $ .01 cent.

Since the US dollar became the center of the international monetary system starting with the Marshall Plan in 1947 – an unusual place for the currency of any one country to stay for a long period of time – the world has changed in drastic ways during all these decades resulting in a system that is completely broken today and ready to be replaced by a new system that represents the new global circumstances that have evolved since that time.

Today we have too many US dollars flying around the world; an over supply of US dollars that can be considered more as a massive bubble than a currency that can be justified by the prospects of the economic performance of the United States in the coming years. (Today over 70 percent of the US dollar currency ever created is flying around the world outside the circle of influence of the US Federal Reserve and the US government.)

Today, the United States is no longer master even of its own currency, since the accumulation of US dollars as foreign currency reserves by other countries around the world has placed the future economic and financial policy options of the United States in real jeopardy.

Global currency reserves

Currency composition of official foreign exchange reserves

Currency 1999 2008

US dollar 71 % 64 %

Euro 18 % 27 %

Pound Sterling 3 % 4 %

Japanese Yen 6 % 3 %

Other 2 % 2 %

Source: IMF

In July 1999 “The Brasilians” published an article by Ricardo C. Amaral – How can currency stability be achieved for the Brazilian economy?

Quoting from that article: “…Most people should not be surprised if in ten years the breakdown of official reserves of the countries around the world will be as follows:

U.S. Dollar = 35 percent of market

Euro Group = 35 percent of market

New Asian Group = 25 percent of market

Other = 5 percent of market”

Regarding my prediction of 10 years ago, I am surprised that England and some Scandinavian countries still have not adopted the euro as its currency as of 2009.

I am also surprised that in 2009 China has not created a major Asian currency as yet; and made a reality a new Asian currency similar to the euro.

If you have been reading many of my articles since 1999 regarding the subject of currency, then you know that I have been saying that the world in a few years would have 4 or 5 major global currencies such as the US dollar, the euro, the new Asian currency (equivalent to the euro), a Middle East currency (Gulf currency), and even some other currency that has not shown on the radar as yet.

Americans still think in terms of old economic structures of last century, and they are having a hard time accepting the new world order of the first century of the new millennium.

We are moving from a system dominated by one world superpower and its dominant currency, the US dollar, to a world of 4 or 5 major block of countries and its currencies – these are the members of the new world economic order – the United States Union, the European Union, the Asian Union, the Arab Middle East Union (Gulf currency), maybe the new Russian Union block, or it is possible that eventually we have even some other economic Union block that we can’t see at this time.

Here are my recommendations for a new international monetary system

1) Regarding China

It is time for China to create immediately and implement a plan for the creation of a new Asian currency similar to the euro.

In my opinion, it would be a mistake for China to try to establish the yuan as the new Asian currency to compete with the US dollar and the euro as one of the main global reserve currencies.

A new Asian currency would be a better choice in the long run not only for China, but also for the other countries that decide to adopt the new Asian currency including Japan and Brazil.

The US dollar has had a unique run as a global foreign reserve currency in the last 60 years, because of geopolitical developments such as WW II, a communist world that was isolated from global financial markets and so on.

An international monetary system based on the US dollar has had its advantages over the years for the US, but eventually it has placed the United States in a situation that the US government is no longer a master of its own destiny, since a few select countries are holding a massive amount of US government debt. A system like that is unsustainable in the long run and eventually becomes a major liability, as is the case today of the United States and its creditors.

I suggest that Brazil adopt the new Asian currency right from its inception since that strategy would help integrate the Brazilian and the Chinese economies in the years to come.

Here is why a new Asian currency similar to the euro is a better choice than the yuan for the new international monetary system.

“The Brasilians,” published in November 1999 my article “How can currency stability be achieved for the Brazilian economy?” Quoting from that article I said:

“Why the euro will provide macroeconomic stability for its members?

The members of the Executive Board of the European Central Bank (ECB) are not there to represent their countries of origin. They are there to provide stability to the euro and they look at Euroland as a whole when making their policy. The euro is a monetary arrangement, and its monetary policy will be adopted independent from political control from its members.

This way of operating keeps the politicians out of the decision process and reduces the risk of them playing their political games with the country’s monetary and currency systems. I am a firm believer that if the economic policies adopted by the (ECB) are good enough for such a diversified group of countries as France, Belgium, Germany, Netherlands, and Italy, then such policies also will be good for Brazil. The Brazilian economy will be better off under the euro system than under the fragile and weak Brazilian currency.”

That same type of logic also applies today regarding China. It will be better for China and the other countries that decide to adopt this new Asian currency; to create this new Asian currency and have a similar arrangement as the euro in Euroland. I am sure that this type of monetary arrangement will be beneficial in the long run even to the economies of countries such as Japan when Japan decides to adopt this new Asian currency.

I don’t understand why China is giving any consideration regarding the International Monetary Fund’s Special Drawing Right (SDR) and even suggesting that the IMF turn the SDR’s into a widely traded new reserve currency. That does not make sense to me, since for all practical purposes that system is still just a basket of few currencies representing the world of yesterday, and the US dollar is still at the center of that arrangement.

2) Regarding Russia

A few years ago I thought Russia might create the new Russian Union block based on the countries that comprised the old Soviet Union.

Today I believe that there is a better economic solution for Russia regarding the future of its economy, I came to that conclusion based on the actual economic realities of the last few years. Instead of keeping the Russian Ruble or trying to create a new currency for a new Russian Union block, the best option for Russia today is to adopt immediately the euro as its new currency.

By adopting the euro as it’s new currency that would give long-term currency stability for Russia, and at the same time it would open the door to new German foreign investments in Russia, and in the process it would speed up Russia’s industrial development with German outstanding technological know-how.

Russia is already a very important customer for German goods and services, and when Russia adopts the euro then a major obstacle, the currency risk, is removed providing a new fertile ground where investment and trading can flourish between the European Union and Russia. That would also help to bring more financial stability to the Russian stock and financial market.

It is a mistake to base the future of the Russian economy on the production of oil and gas and other commodities; by adopting the euro ASAP that would eliminate the currency risk and would open the door to European long-term investments in Russia and that process would be mutually beneficial for both parties.

As I mentioned above, each country around the world will have to evaluate its economic self-interests regarding its economic future, and they will have to decide in the near future which mega currency to adopt – in my opinion, in the case of Russia the immediate adoption of the euro make sense to me.

The Russian government also needs to disconnect itself from any ties that they have today with the Russian mafia, and honor private property rights and the rule of law; otherwise, foreigners will not make new investments in that country.

3) Regarding the Gulf Currency

The new currency will initially be limited to members of the Gulf Cooperation Council, which includes some of the wealthiest nations on earth. The GCC Gulf comprises Saudi Arabia – the world’s most important source of oil, as well as Bahrain, Kuwait, Oman, Qatar, and United Arab Emirates.

The process of creating the new Gulf single currency is moving along, and in May 2009 one more step was taken when the members of this new currency group decided to locate the new regional central bank in Saudi Arabia.

4) Regarding the United States

The decline in the purchasing power of the US dollar over the years reminds me of similar situations in Brazil; I remember the Brazilian currency being changed many times over the years from “Cruzeiro”, to “New Cruzeiro”, then from “Cruzado”, to “New Cruzado”, and finally the “Real’.

Today there are so many US dollars flying around the world that it might be a good idea for the United States government to replace its current completely devalued US dollar with the “New US Dollar” – and the conversion rate to be used to convert the old US dollar to the new currency the “New US dollar” should be for each old $ 100 US dollar would be converted into $ 1 New US dollar. – Just like they usually do in many countries when their currency starts becoming worthless when it loses most of its original value.

Here is a simple example to show the declining value of the US dollar: A house that was bought in a good area such as in Ridgewood, New Jersey in 1947 for about US$ 4,000 dollars, by 1972 that same house was in the market for $ 42,000 – and that same old house is worth today in the range of US$ 400,000 to US$ 500,000. When we take other economic information regarding the United States economy we come to a similar conclusion – The exchange rate of $100 “Old US dollars” to $1 “New US Dollar” would be just about right.

The adoption of a “New US Dollar” as I mentioned above would give, at least for a while, the illusion that something is being done about the value of the US dollar.

5) Regarding Brazil

Brazil has never been in such great financial shape as in 2009 – not only most of Brazil’s foreign debt has been paid, but Brazil has about $ 200 billion dollars in foreign exchange reserves on hand, and for the first time in its history, in 2008 Brazil has become a credit nation – Brazil has gone from a borrowing country to a lending and investing country.

In that article published in July 1999 on “The Brasilians” – How can currency stability be achieved for the Brazilian economy? – I also said:

“Today the amount of hot money which the international speculators have under their management is becoming mind boggling. The amount of daily currency transactions in the global markets is over $ 1.5 trillion dollars.

Countries are losing their capability of defending their weak currencies from the foreign attack of these international money speculators.

It is getting easier and easier for these international speculators to destroy the entire economy of countries such as Russia, Indonesia, Malaysia, Thailand, Korea, and Brazil, all they have to do is destroy their currency and these economies have a complete collapse. It is a form of modern economic warfare. These countries don’t have the economic reserves necessary to defend their currencies from foreign speculative attacks.”

Since July 1999 when I wrote about the hot money of international speculators that is always flying around the world looking for a short-term opportunities to make a quick buck, many countries such as Brazil adopted very conservative economic policies to build a sound economy; they got their government finances under control and they paid most of their foreign debt, and were able to save a lot of money in foreign currency reserves to be able to protect the value of its currency in time of international financial crisis.

Even though the Brazilian government had been managing the Brazilian economy in a conservative and sound way and the Brazilian economy was in very good shape, in May 18, 2008 the Bovespa stock market index in Brazil closed at 73,439.00 level, and only five months later in October 27, 2008 Bovespa closed at 29,435.00; a decline in that index of 60 percent. A similar situation happened in stock markets from China to Russia and so on…these stock markets lost a massive amount of value almost overnight mostly because of the panic in the US financial markets, and that is another solid example of how the “hot money” flowing around the world can devastate the stock market, the financial system, and the economy of these countries in a very short period of time.

To reduce the risk of this kind of devastating event to repeating in the future in Brazil, the Brazilian government should adopt a new set of rules with heavy penalties to keep the global hot money away from the Brazilian economy. The tax on these foreign investments should be designed in such way as to discourage short-term gains with the heavy exit tax of around 80 percent for moneys leaving the country up to one year from date of investment; after two years the exit tax should be around 50 percent, after three years 25 percent, and so on…and the system should be designed to encourage mostly long-term foreign investment of at least 5 years.

The Brazilian government should find a way and develop a system to penalize with very heavy taxes the foreign “hot money.” They should build a system to discourage the international “hot money” from investing in Brazil.

Brazil has to build a system to avoid in the future the “hot money” that rushed in and out of emerging markets during 2008 and caused a market crash in these countries – hot money that came from irresponsible banks, hedge funds, insurance companies and many other types of speculative capital that flows regularly between financial markets in search of the highest short-term interest rates possible, and other short-term investment opportunities.

Finance dictionary gives the definition of the kind of money that I want the Brazilian government to keep away from Brazil with this proposal as follows:

In international finance “hot money” is extremely volatile short-term capital that moves on a short notice to any country providing better returns. Powerful speculators can quickly pump massive sums into a high-yield economy, giving it an artificial aura of success and propriety. But, on a mere suspicion of a downturn or other negative factor, they can (and do) withdraw it almost overnight causing a near collapse of the country’s financial structure.

If you read the articles that I wrote about Brazil and China, and about Brazil adopting the new Asian currency, then you will understand why the future of the Brazilian economy in this new international monetary order is more in tune with the new Asian currency than to any other economic block as discussed in this article.

Conclusion

In this article I made suggestions regarding a new monetary arrangement that will serve as the basis for the new international monetary system; it will be useful at least for the next 50 years – I have no idea what the world is going to look like in 50 years, maybe there are things that we can’t see right now that would rearrange the entire system at one point during the next 50 years.

It is hard to predict the future since there are so many things that could go wrong along the way in the next 50 years that can change our entire future such as major epidemics, major natural catastrophes, major technological breakthroughs, WW III with countries dropping nuclear bombs on each other, and so on…

But, one thing I know for sure is the idea of one or two major superpowers ruling the world is an idea that is dying very fast as we watch the United States economic and political power declining at the speed of light, and in turn a new world economic order is getting ready to replace it.

In the near future we will have for the first time a new world economic order comprised of major blocks of countries sharing the global economic and financial power. For all practical purposes, the United States is no longer that sole surviving economic superpower, since superpowers don’t depend on other countries to keep the superpower financially afloat.

Basically, the International Monetary System that we have had for a few decades that revolves around the US dollar has finally reached the end of the line, and the current international monetary crisis was the last straw necessary for the world to realize that they need a new redesigned international monetary system that would be compatible with the new realities of the 21st Century.

An international monetary system based on the “US dollar” was a solution for the world of yesterday, a world long gone, a world that represents the past, the world of the 20th Century.

The new world order of the 21st Century needs urgently a new international monetary system designed to support the international monetary and economic needs of the 21stCentury.

If you want to have a better understanding of the logic behind my proposal about Brazil adopting the new Asian currency, and want to grasp the essence of what I am trying to say then I suggest that you read also the following articles:

1) Brazzil Magazine – March 02, 2007

“Here Is Why Brazil Should Adopt the New Asian Currency.”

Written by Ricardo C. Amaral

2) Brazzil Magazine – October 2007

“The Smartest Thing China Could Do Right Now: Invest US$ 200 Billion in Brazil” Written by Ricardo C. Amaral

…The final conclusion is: It’s imperative that China move forward in an aggressive fashion and implement with Brazil the plan described in this four-part series of articles. And China should look at it as a matter of national security and future survival.

Monday, 01 October 2007 – Part 1 of 4

Friday, 05 October 2007 – Part 2 of 4

Thursday, 11 October 2007 – Part 3 of 4

Tuesday, 16 October 2007 – Part 4 of 4

3) Brazzil Magazine – September 06, 2006

“While the American Dream Is Outsourced Brazil Drives the World into the Future” Written by Ricardo C. Amaral

4) Brazzil Magazine – June 02, 2005

“While China Rises the US Falls in Brazil and Latin America”

Written by Ricardo C. Amaral

5) Brazzil Magazine – June 2003

Originally published on The Brasilians – from July 1999 to October 2001 – a four part series of articles. (Reprinted on Brazzil Magazine in June 2003)

Should Brazil Adopt a New Currency?

Written by Ricardo C. Amaral

6) Brazzil Magazine – June 2002

“The Euro Now”

Written by Ricardo C. Amaral

7) Brazzil Magazine – February 2005

“It’s 2008. The US Has Dragged the World into a Depression”

Written by Ricardo C. Amaral

8) Brazzil Magazine – Columnist: Ricardo C. Amaral

Ricardo C. Amaral is a writer and economist. He can be reached at

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