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Fiat currency is nothing more than a “promise” to repay a debt obligation. A hard asset-backed currency ensures that repayment will take place.
Nixon’s severing of the last thread connecting currency to gold is regarded as Bretton Woods II. Pozsar argues that Bretton Woods III represents a return to a monetary system in which currency is backed by commodities rather than a sovereign issuer’s “full faith and credit.”
Commodities are collateral, and collateral is money, and the current crisis is about the increasing allure of outside money over inside money.
The term “inside money” refers to the interbank repo/lending mechanism that gives rise to the fractional bank reserve monetary system. Pozsar differentiates between “inside money” and “outside money.”
The Central Bank/inter-bank lending mechanism generates “inside money” by magically converting one dollar of reserve capital into nine dollars of “credit” capital. And the one dollar of reserve capital is backed by nothing tangible – only the issuing entity’s “full faith and credit.”
In the “inside money” banking system, trade settlement is simply a matter of accounting ledger adjustments at the respective Central Banks; in this trade settlement arrangement, a country purchasing oil or gas from Russia in exchange for gold would need to 1) demonstrate that the gold being used for trade payment exists and 2) transfer ownership rights to Russia. Russia would almost certainly demand the gold’s repatriation in the end. The US/G7 made it abundantly clear that possession of assets is entirely legal.
Under bankruptcy law, “full faith and credit” would be considered an unsecured loan at best. Get in line and hope that there is enough money left over to distribute to the unsecureds.
Pozsar, on the other hand, refers to Bretton Woods III as the “rising allure of outside money over inside money,” where “outside money” is “commodities collateral,” meaning unmistakable resources with definite worth, rather than the sovereign guarantee of “full confidence and credit.”
Banks are reluctant to take an interest in “within game” during banking emergencies since they have zero faith in the government issued money guarantee on which the partial hold banking framework is based, and in this way are reluctant to loan cash to their financial friends. Every time this happens, central banks are forced to print more money in order to “lubricate” the system enough for it to function. This, in turn, devalues the “inside money” on which the system is built.
Recall that government issued money is just the responsible substance’s debt without collateral instrument.
Putin was probably aware that the western response to Russia’s invasion of Ukraine would be to freeze Russian currency reserves held at western Central Bank.
Any country that keeps currency reserves at foreign Central Banks for trade settlement purposes, specifically the Federal Reserve and the ECB, risks having those reserves confiscated, rendering them worthless.
Recall that government issued money is just the responsible substance’s debt without collateral instrument.
The western reaction, drove by the United States and its control of the worldwide save money, more likely than not brought about a worldwide financial framework reset.
It appears for the time being that Russia has initiated a global monetary system reset, most likely with China’s tacit approval. Countries that supply the world with goods that have price inelasticity of demand – such as oil, natural gas, and food commodities – will have the power to enforce trade settlement in hard currencies – such as gold or other hard assets – rather than fiat currency Central Bank accounting ledger adjustments under the new system. This is the nature of the recently triggered monetary system reset.
“Money is the yardstick by which a society’s virtue is measured.”