US, China must act to avoid monetary breakdown

Inflation fears show currency reset needed – but it may all end in failure

With the rise of quantitative easing after the 2008 financial crisis, intensified by the Covid-19 pandemic, central banks are exerting ever-greater control over financial markets. This is part of an era of debt-fuelled state capitalism that is looking increasingly vulnerable. The system needs a reset. Joe Biden has an opportunity to strengthen the international monetary framework after he takes over the US presidency on 20 January – an immense challenge that will be nowhere near the top of his priorities.

One thing is clear. Anything the Biden administration undertakes in this field will fail unless the US involves China in a meaningful and constructive way. There is a strong probability it will all end in failure. Whatever happens, more investment funds will flow into safe havens, including gold.

We have been here before. Marco Polo, the legendary 13th century traveller, described how Mongol Emperor Kublai Khan had made himself the richest man on earth by creating ‘paper’ money as valuable as gold and silver. The system eventually broke down. Empires and republics rise and fall with the stability of fiat money.

The instrument of destruction is nearly always governmental misuse of the printing press. Over the past 100 years dozens of currencies, from the Weimar Republic mark in 1923 to the Zimbabwean dollar in 2008, were printed into oblivion. In his 2019 speech at the annual US Jackson Hole symposium Mark Carney, then governor of the Bank of England, underlined the vulnerability of the international monetary financial system. ‘Even a passing acquaintance with monetary history suggests that this centre won’t hold.’

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