There are two things that should be understood about the global financial markets as the world faces what is being called the Great Reset, or Bretton Woods 2.
The first is that the US dollar rules the world (as distinct from the US nation).
The second is that the system is insane.
Sure, it may look rational with all those numbers, charts, ratios, algorithms and impressive-sounding technical terms. But collectively the whole thing is mad. As the great British writer GK Chesterton said:
The madman is not the man who has lost his reason. The madman is the man who has lost everything except his reason.
That nicely describes the global capital markets and it does not bode well either for an effective reset or the survival of the monetary system itself.
The US dollar has dominated the global financial markets since 1945, when Franklin D Roosevelt did a deal with King Abdulaziz of Saudi Arabia to denominate oil trade in the American currency, leading to the creation of the ‘petrodollar’ which then became the world’s reserve currency.
The petrodollar has long since faded; more oil is actually denominated in Chinese yuan now than American dollars (although the yuan is fixed to the US dollar so it is not really separate). But the bulk of international trade and asset buying is still denominated in US dollars out of habit and the US dollar has been further entrenched because of the emergence of the global derivatives market. Derivatives are transactions derived from, or rather are gambles on, conventional financial assets such as currencies, interest rates and shares.
The ‘value’ (whatever that means exactly) of these derivatives is $US500-1000 trillion, give or take the odd $US100 trillion.
This intense financial activity, most of which occurs in microseconds, is like having a massive roulette wheel spinning above the earth. According to the Bank for International Settlements, the daily cross border trades with the US dollar on one side equates with almost $US6 trillion.
To give some idea of how big that notional ‘money’ is, the entire US Federal debt, built up over decades, is about $US27 trillion, or the equivalent of less than five days trading. It has entrenched the US dollar as the world’s reserve currency and allows America to do whatever it likes on its Federal budget, its military spending or whatever other financial excesses it can devise, such as a $US21 trillion hole in the defence budget.
Whatever debt the US issues is swallowed up by the massive demand for dollars in the foreign exchange markets. No other country has that freedom.
It has recently become popular to criticise so-called ‘fiat money’, money that is determined by government edict. The contention is that when President Richard Nixon took America off the gold standard in 1971, because the nation could not pay for the Vietnam War, it ushered in an era of government-created money whose value has been progressively degraded.