I have a friend that calls me from time to time to discuss the financial crisis. I should say from the outset that my friend operates on the far end of the curve. That is to say, his views and thoughts are generally ahead of the main stream by at least a couple of years but his predictions freakishly all come to pass. Recently he called me to discuss the Euro and currency in general. He asked me a simple question: Who owns the euro?
Well, surely the European Central bank owns the euro? No! Definitely all the members of the European Union own the Euro? If the Euro is owned by the European Central Bank or by all the members of the European Union then why is there a crisis with the euro? Why is there talk of members leaving the European Union or talk of the Euro collapsing or disappearing? I did some research and here is what I found.
Currency is or I should say was originally backed by something. Usually it was gold or silver. The question is who backs it? Who gold or silver backs currency? Is it governments or is currency privately backed? And where is all the gold and silver that backs or backed currency?
Let’s start with the Worlds reserve currency, the USD. The USD became the world’s reserve currency at the end of the Second World War, replacing the British pound. The Bretton Woods agreement, effectively anointed the USD as the world’s reserve currency because the US economy was by far the strongest in the world with the most industrial output, the most production of oil and coal and of course the most powerful military in the world. Backing the USD was gold, with Fort Knox holding 7,500 tons that secures the USD, or did. You see, there is no public record, oversight, or audit to ensure the gold is actually there. Who gave the United States 7,500 tons of gold in the first place?
There are 33 trillion USD in circulation. When you add all the euros, pounds, yen and other currencies together there are 88 trillion USD equivalents in circulation. Yet when you look at all the derivative positions in the market, then there are 650 trillion in value. There seems to have been some double counting, or worse, duplication. Has someone being duplicating currency?
What about the USD? Who owns the USD? Actually, as we know, printed on the USD are the words Federal Reserve Note. And we know the Federal Reserve is a private institution. The Federal Reserve was created in 1913 by the congress with the Federal Reserve Act. Does the Federal Reserve own the 7,500 tons of gold that backs the USD? Unlikely! Is there an organization within the Federal Reserve that owns the gold? I think not. If we go a little further back in time we get to 1688. This is when William III decreed that printing money was no longer a sovereign right. In 1694, the Bank of England was formed, a private institution, which was granted the power to print money.
It should be noted that for the first 150 years of America’s life, the colonies there fought for the right to issue their own currency, or scrip, which was free of interest and used to settle trade. The current Federal Reserve is the 3rd incarnation of its kind in the United States. Banks and central banks have tried successfully to control the issue and supply of money into a country’s monetary system. This is the practice today. There is no logical reason why sovereigns, each country, cannot print and control the issue of their own currency and issue it without interest.
The problem with currency today is that it has been commoditized. Rather than being used as a tool for the settlement of trade and to facilitate stable money supply, currency itself is being traded. As a result we have hugely volatile markets across almost every asset class and sovereigns are being loaded with unnecessary debt that will never be paid back. None of this provides a stable money supply or the ability to settle trade.
So who owns the euro? I don’t know. What I do know is that whoever it is, they are not handing over more until the financial system is reformed. The commoditization of currency appears to have included duplication. Why do banks have so much money, stock markets have so much value, yet sovereign nations have perpetual debt? Financial system reform is likely to be wholesale and soon. It would be fair to expect that people are arrested for financial fraud and corruption across many countries. The Occupy Wall Street movement is a modern day civil war. The people want control of their money back.
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Current markets are anything but global or integrated. What if we had a paradigm shift in the way we think and transact when doing business with each other? Balanced global trade can only occur if we have transparent, accessible and efficient markets. We are on the cusp of achieving this, although most people cannot see it. Sam’s Exchange aims to give its readers a clearer view and a platform for discussion. Markets, trade and economics are in fact nothing more than the result of our thoughts and actions expressed in numbers, not the reverse.
Sam Barden is founding Partner of SBI Markets DMCC, a Dubai-registered commodities trading and advisory company. Barden has worked in the global financial markets for more than 17 years in Europe, Russia and the Middle East. He has advised and executed strategic transactions for both the government and private sector, in particular in energy and commodity markets, advising various energy producing nations on their strategic market developments and interaction. He holds a degree in economics and finance from Victoria University, Melbourne, Australia.
