The following is an excellent excerpt from the book “THE DEATH OF MONEY: The Coming Collapse of the International Monetary System” by James Rickards from Chapter 8 “Central Bank of the World” on page 190 and I quote: “
“The optimum currency area is the world.”
Robert A. Mundell
Recipient, Nobel Prize in Economics
“I haven’t read the Governor’s proposal. . . . but as I understand. . . . it’s a proposal designed to increase the use of the IMF’s special drawing rights. . . . ah. . . and. . . ah. . . we’re actually quite open to that.”
U.S. Treasury secretary
in reply to a reporter’s question about a Chinese government proposal
March 25, 2009
“The IMF has refined, repurposed, and restocked its toolkit.”
IMF managing director
September 19, 2013
“One world – To meet Dr. Min Zhu is to see the future of global finance. He stands out in a crowd, his six-foot-four-inch frame reminding financiers of the late twentieth century’s most powerful bankers, Paul Volcker and Walter Wriston, who dominated a room not just with intellect but with physical presence. Min Zhu belongs not to the twentieth century but to the twenty-first, and it is difficult to name anyone who better personifies the conflicting forces—east versus west, gold versus paper, state versus markets—coursing through the world today.
Min Zhu is the IMF’s deputy managing director, among the most senior positions in the IMF, reporting directly to the managing director, Christine Lagarde. The IMF is one of the key institutions established at the 1944 Bretton Woods Conference, which created the framework for the international monetary system in the aftermath of the Great Depression as the Second World War drew to a close. Since its founding, the IMF has been the great enigma of global finance.
The IMF is quite public about its operations and objectives. At the same time, it is little understood even by experts, in part because of the unique role it performs and the highly technical jargon it uses in doing so. Specialized university training at institutions like the School of Advanced International Studies in Washington, D.C., is a typical admission ticket to a position at the IMF. This combination of openness and opaqueness is disarming; the IMF is transparently nontransparent.
The IMF’s mission has repeatedly morphed over the decades since Bretton Woods. In the 1950s and 1960s, it was the caretaker of the mixed-exchange-rate gold standard and a swing lender to countries experiencing balance-of-payments difficulties. In the 1970s, it was a forum for the transition from the gold standard to floating exchange rates, engaging in massive sales of gold at U.S insistence to help suppress the price. In the 1980s and 1990s, the IMF was like a doctor who made house calls, dispensing bad medicine in the form of incompetent advice to emerging economies. This role ended abruptly with blood in the streets of Jakarta and Seoul and scores killed as a result of the IMF’s mishandling of the 1997-98 global financial crisis. The early 2000s were a period of drift, during which the IMF’s mandate was unclear and experts suggested that the institution had outlived its usefulness. The IMF reemerged in 2008 as the de facto secretariat and operating arm of the G20, coordinating policy responses to the financial panic that year. Today the IMF has capitalized on its new found role as global lender of last resort: it has become the central bank of the world.
Min Zhu holds the highest-ranking position ever held by a Chinese citizen at the IMF, the World Bank, or the Bank for International Settlements, the international monetary system’s three multilateral pillars. His career personifies China’s financial rise in nuce. He graduated in 1982 from Fudan University in Shanghai, among the most prestigious schools in China. He obtained a Ph.D. in economics in the United States, before moving through various jobs at the World Bank and the international division of the Bank of China. In 2009 he became China’s central bank deputy governor. In May 2010 he was handpicked by Dominique Strauss-Kahn, then IMF chief, to be his special adviser. Finally in 2011 Strauss-Kahn’s successor, Christine Lagarde, selected him to be the IMF’s deputy managing director.
Zhu has a relaxed demeanor and good sense of humor, but when pressed hard on a policy he feels strongly about, he can suddenly turn strident, as if he were lecturing students rather than engaging in debate. His slightly accented English is excellent, but his soft-spoken style is difficult to hear at times. His background is unique: he has operated at the highest levels at a central bank under Chinese Communist Party control and at the highest levels of the IMF, an institution ostensibly committed to free markets and open capital accounts.
Zhu travels continually on official IMF business, for university lectures, and to attend prestigious international conferences such as the Davos World Economic Forum. Private bankers and government officials eagerly seek his advice at the IMF’s Washington, D.C., headquarters and on the sidelines of G20 summits, while Communist Party Central Politburo members do the same on his periodic trips to Beijing. From East to West, from communism to capitalism, Min Zhu straddles the contending forces in world finance today, with a foot in both camps.
No one, including central bank governors and Madame Lagarde herself, is more aware than Zhu of the international monetary system’s hidden truths, which makes his global economic and financial views especially significant. He is an adamant globalist, reflecting his position between the worlds of state capitalism and free markets. He does not think of the world in traditional categories of north-south or east-west but rather as country clusters based on economic factors, supply-chain linkages, and historical bonds. These clusters intersect and overlap. For example, Austria belongs to a European manufacturing cluster that includes Germany and Italy, but it is also part of a central European clutch of former Austro-Hungarian empire nations, including Hungary and Slovenia. As that group’s leader, Austria is a “gatekeeper” that gives the Austro-Hungarian group access to the European manufacturing cluster through a nexus of subcontracting, supply chains, and bank lending. These linkages might, for example, facilitate sales by a Slovenian auto parts manufacturer to Fiat in Italy. The Slovenian-Italian link runs through gatekeeper Austria.
This paradigm of clusters, overlaps, and gatekeepers results in unexpected alignments. Zhu places South America in a China-western hemisphere supply-chain cluster, a point also made by Riodan Roett, a leading scholar of Latin American economics. Zhu’s view is that U.S. economic hegemony stops at the Panama Canal, while most of South America is now properly regarded as a Chinese sphere of influence.
Zhu’s cluster paradigm is of more than academic interest because it is beginning to have a direct impact on IMF policy as it relates to surveillance of its 188 member countries. The paradigm provides a basis for the study of national policy “spillover” effects as labeled by the IMF. The IMF treats spillovers in the same way that bank risk managers talk about contagion—the rapid uncontrolled transmission of collapse from one market to another through a dense web of counterparty obligations and collateral pledges, in a blind stampede for liquidity in a financial panic. Spillovers happen within clusters when national economies are tightly linked, and between clusters when gatekeepers are in distress. Min Zhu is helping the IMF to develop a working risk-management model based on complexity, one that is far more advanced than those used by individual central banks or private financial institutions.
Updating Keynes – Zhu is showing traditional Keynesians how their model of policy action, in conjunction with an individual or corporate response, is obsolete. This two-part action-response model must be modified to place financial intermediation between the policy maker and the economic agent. This distinctions is illustrated as follows:
Classic Keynesian Model
Fiscal/Monetary Policy>Individual/Corporate Response
New IMF Model
Fiscal/Monetary Policy>Financial Intermediary>Individual/Corporate Response
While financial institutions in earlier decades had been predictable and passive players in policy transmission to individual economic actors, today’s financial intermediaries are more active and materially mute or amplify policy makers’ wishes. Private banks may use securitization, derivatives, and other forms of leverage to greatly increase the impact of policy easing, and they can tighten lending standards or migrate to safe assets like U.S. Treasury notes to diminish the impact. Banks are also the main transmission channels for spillover effects. Zju make the point that Keynesian analysis fails in part because it has not fully incorporated the role of banks into its functions.
Clustering, spillover, and financial transmission are the three theoretical legs supporting the platform from which the IMF surveys the international monetary system. New concepts of this kind can percolate in university economics departments for decades before they have practical effect. Despite a preponderance of Ph.D.’s in its ranks, the IMF is not a university. It is a powerful institution with the ability either to preserve or condemn regimes through its policy decisions on lending and the conditionality attached. Zhu’s paradigm offers a glimpse of the IMF’s plans: clustering implies that economic linkages are more important than sovereignty. Spillover effects mean top-down control is needed to contain risk. Financial transmission suggests that banks are the key nodes in the exercise of control. In a nutshell, the IMF seeks to control finance, to contain risk, and to condition economic development on a global basis.
This one-world mission requires assistance from the most talented and politically powerful players available. The IMF executive suite is an exquisitely balanced microcosm of the global economy. In addition to Min Zhu and managing director Christine Lagarde, the IMF top management includes David Lipton from the United States, Naoyuki Shinofara from Japan, and Nemat Shafik from Egypt. Group diversity is more than an exercise in multinationalism. Lagarde represents the European interest, Min Zhu the Chinese, Lipton the American, Shinohara the Japanese, and Shafik the developing economies. The top five mangers at the IMF, seated around a conference table, effectively speak for the world.
David Lipton’s is the single most powerful voice, more powerful than Christine Lagarde’s, because the United States has a veto over all important actions by the IMF. This doesn’t mean Lipton doesn’t play for the team; on many issues the United States and the IMF see eye to eye—including the dollar’s eventual replacement as the global reserve currency. Lipton’s veto power means that changes will take place at a tempo dictated by any quid pro quo that the United States demands.
Lipton is one of numerous Robert Rubin proteges, who include Timothy Geithner, Jack Lew, Michael Froman, Larry Summers, and Gary Gensler. These men have for years controlled U.S. economic strategy in the international arena. Robert Rubin was Treasury secretary from 1995 to 1999, after having worked several years in the Clinton White House as National Economic Council director. Before joining the U.S. government, Rubin was Goldman Sachs co-chairman; he worked at Citigroup in the chairman’s office from 1999 to 2009, and he briefly served as Citigroup chairman at the start of the financial markets collapse in 2007. Lipton, Froman, Geithner, Summers, and Gensler all worked for Rubin at the U.S. Treasury in the late 1990s, Lew at the White House. Lipton, Lew, and Froman later followed Rubin to Citigroup, while Summers later worked as a Citigroup consultant.
After being vetted and groomed in midlevel positions in the 1990s, this bland bureaucratic team was carefully placed and promoted within the White House, Treasury, IMF, and elsewhere in the 2000s, to ensure Rubin’s web of influence and role as the de facto godfather of global finance. Geithner is the former Treasury secretary and former president of the Federal Reserve Bank of New York. Lew currently hold the Treasury secretary position. Froman was a powerful behind-the-scenes figure in the White House National Economic Council and National Security Council from 2009 through 2013 and then the U.S. trade representative. Larry Summers is a former Treasury secretary and chaired President Obama’s National Economic Council. During his White House years, Froman was the U.S. “sherpa” at G20 meetings, sometimes seen whispering in the president’s ear just as a key policy dispute was about to be ironed out with Chinese president Hu Jintao or another world leader. From 2009 through 2013, Gensler was chairman of the Commodity Futures Trading Commission, the agency that regulated Treasury bond and gold futures trading.
The members of the Rubin clique are extraordinary in the incompetence they displayed during their years in public and private service, and in the financial devastation they left in their wake. Rubin and his subordinate and successor, Larry Summers, promoted the two most financially destructive legislative changes in the past century: Glass-Steagall repeal in 1999, which allowed banks to operate like hedge funds; and derivatives regulation repeal in 2000, which opened the door to massive hidden leverage by banks. Geithner, while at the New York Fed from 2003 to 2008, was oblivious to the unsafe and unsound banking practices under his direct supervision, which led to the subprime mortgage collapse in 2007 and the Panic of 2008. Froman, Lipton, and Lew were all at Citigroup along with Rubin and contributed to catastrophic failures in risk management that led to the once-proud bank’s collapse and its takeover by the U.S. government in 2008, with over fifty thousand jobs lost at Citigroup alone. Gensler was instrumental in the 2002 passage of Sarbanes-Oxley legislation, which has done much to stifle capital formation and job creation in the years since. He was also on watch at the Commodity Futures Trading Commission in 2012 during the catastrophic collapse of MF Global, a bond and gold broker. Recently Gensler has shown better sense, calling for tougher derivatives regulation.
The lost wealth and personal hardship resulting from the Rubin clique’s policies are incalculable, yet their economic influence continues unabated. Today Rubin still minds the global store from his seat as co-chairman of the nonprofit Council on Foreign Relations. David Lipton, the Rubin protege par excellence, with the lowest public profile of the group, is now powerfully placed in the IMF executive suite, at a critical juncture in the international financial system’s evolution.
The Rubin web of influence is not a conspiracy. True conspiracies rarely involve more than a few individuals because they continually run the risk of betrayal, disclosure, or blunders. A large group like the Rubin clique actually welcomes conspiracy claims because they are easy to rebut, allowing insiders to get back to work in the quiet, quasi-anonymous way they prefer. The Rubin web is more a fuzzy network of like-minded individuals with a shared belief in the superiority of elite thought and with faith in their coterie’s capacity to act in the world’s best interests. They exercise global control not in the blunt, violent manner of Hitler, Stalin, or Mao but in the penumbra of institutions like the IMF, behind a veneer of bland names and benign mission statements. In fact, the IMF’s ability to topple a regime by withholding finance in a crisis is no less real than the power of Stalin’s KGB or Mao’s Red Guards.
The executive team at the IMF holds the view, more gimlet-eyed than any central bank’s, that the international monetary system is severely impaired. Because of massive money printing since 2008, a new collapse could emerge at any time, playing out not just with failures of financial institutions or sovereigns but with a loss of confidence in the U.S. dollar itself. Institutional memory reaches back to the dollar crash of October 1978, reversed only with Fed chairman Paul Volcker’s strong-dollar policies beginning in August 1979 and IMF issuance of its world money, the special drawing right or SDR, in stages from 1979 to 1981. The dollar gained strength in the decades that followed, but the IMF learned how fragile confidence in the dollar could be when U.S. policy was negligently managed.
Min Zhu sees these risks as well, even though he was a college student during the last dollar collapse. He knows that if the dollar collapses again, China has by far the most to lose, given its role as the world’s largest external holder of U.S.-dollar-denominated debt. Zhu believes the world is in a true depression, the worst since the 1930s. He is characteristically blunt about the reasons for it; he says the problems in developed economies are not cyclical—they are structural.
Economists publicly disagreed about whether the current economic malaise is cyclical or structural. A cyclical downturn is viewed as temporary, a phase that can be remedied with stimulus spending of the classic Keynesian kind. A structural downturn, by contrast, is embedded and lasts indefinitely unless adjustments in key factors—such as labor costs, labor mobility, taxes, regulatory burdens, and other public policies—are made. In the United States, the Federal Reserve and Congress have acted as if the U.S. output gap, the difference between potential and actual growth, is temporary and cyclical. This reasoning suits most policy makers and politicians because it avoids the need to make hard decisions about public policy.
Zhu cuts through this myopia. “Central bankers like to say the problem is mostly cyclical and partly structural,” he recently said. “I say to them it’s mostly structural and partly cyclical. But actually, it’s structural.” The implication is that a structural problem requires structural, not monetary, solutions.
The IMF is currently confronted with a full plate of contradictions. IMF economists such as Jose Vinals have warned repeatedly about excessive risk taking by banks, but the IMF has no regulatory authority over banks in its member countries. Anemic global growth gives rise to calls for stimulus-style policies, but stimulus will not work in the face of structural impediments to growth. Any stimulus effort requires more government spending, but spending involves more debt at a time when sovereign debt crises are acute. Christine Lagarde calls for short-term stimulus combined with long-term fiscal consolidation. But markets do not trust politicians’ long-term commitments. There is scant appetite for benefit cuts, even by countries on the brink of collapse like Greece. Proposed solutions are all either politically infeasible or economically dubious.
Min Zhu’s new paradigm points the way out of this bind. His clustering and gatekeeper analysis suggests that policies should be global, not national, and his spillover analysis suggests that more direct global bank regulation is needed to contain crises. The specter of the sovereign debt crisis suggests the urgency for new liquidity sources, bigger than those the central banks can provide, the next time a liquidity crisis strikes. The logic leads quickly from one world, to one bank, to one currency for the planet. The combination of Christine Lagarde’s charismatic leadership, Min Zhu’s new paradigm, and David Lipton’s opaque power have positioned the IMF for its greatest role yet.”
(ROBERT RUBIN, WHO IS SUPPOSED TO BE OUT OF GOVERNMENT, IS STILL A CONSULTANT AND HE ORGANIZED A GROUP OF FORMER FINANCIERS AND SOME ARE INVOLVED WITH THE IMF, WHICH HAS MORE POWER IN THE WORLD ECONOMY THAN THE U.S. HAS, PARTICULARLY IN MAKING LOANS TO OTHER NATIONS. SOME OF RUBIN’S PROTEGES ARE IN POSITIONS OF POWER IN THE GOVERNMENT. SO THE QUESTION IS, IT LOOKS LIKE THEY ARE TRYING TO SET UP A ONE-WORLD GOVERNMENT, WHICH WILL BE EXPLAINED FURTHER IN THE NEXT TWO EXCERPTS. THE NEXT ONE IS TITLED “ONE BANK.” AND AFTER READING THE SEGMENT IN THIS CHAPTER, IT WILL TELL YOU THE DIFFICULT POSITION WE ARE GETTING OURSELVES INTO.
LaVern Isely, Progressive, Overtaxed, Independent Middle Class Taxpayer and Public Citizen and AARP Members