Ever heard of the international monetary system?
Insofar that it denotes a centralized organization designed to shape monetary policy for the global collective, I haven’t.
So I Googled it.
As I suspected, it’s not an organization concocted from the dreams of new world order-ists like — say — the International Monetary Fund, for example.
Rather, it’s simply the terminology covering rules, agreements and participating institutions by which international trade and cross-border investment happen — Bretton Woods, for example.
Former U.S. Federal Reserve Chairman Ben Bernanke is recently on record saying the international monetary system needs to be reformed.
Any idea what that means?
It means recalibrating the International Monetary Fund (IMF) in order to provide proportional voting rights to participating member economies.
Any idea what that means?
It means throwing China a bone.
China is a large and powerful economy. And they want some more say on international economic matters.
The U.S. Congress — essentially the veto power of the IMF — isn’t too keen on increasing China’s influence at the IMF.
The IMF has what’s called Special Drawing Rights. They serve as a sort of global reserve currency to facilitate international transactions.
Essentially, they are merely a claim on the currencies in a basket to which SDRs are tied: U.S. dollar, euros, British pounds and Japanese yen.
China wants the renminbi added to that basket.
Why Does China Want in?
Don’t they know the IMF is just a big kumbaya between powerful Western interests and hopeful “everyone elses”?
I mean, Greece is now the first developed economy to go into arrears on its IMF SDR borrowings.
All the while, the Eurogroup is fighting to keep Greece around.
That’s interesting, since Greece’s economy is not large enough to generate contagion risk. If Greece defaults on its bonds, that could spread some pain around to creditors. But even from that perspective, a Greek exit from the euro zone could most likely be contained.
It’s said that Greece departing from the zone would set a precedent for other euro-zone members who aren’t exactly happy with how the common currency system has tipped them into indebtedness and deficits.
But there’s more to this battle to keep Greece in play.
The country is a pawn in a geopolitical chess game that reaches all the way to China.
Many say Greece should have never been admitted into the euro zone. Basically, the numbers didn’t add up.
But they were granted permission anyway.
Why? To win the hearts and minds of the Greek people, especially their politicians.
During the Cold War, Greece very much preferred playing a neutral role — not siding with Western Europe or Soviet Russia. In fact, though part of NATO, Greece’s social and political system matched up better with Russia than with Europe.
So why did Europe want to keep Greece close?
Simply to keep Russia out.
For Moscow and its sphere of influence, Greece offers easy access to the Mediterranean Sea.
Click the image for a larger view.
That was particularly true in the Cold War era. Now the threat is that Russia sees the Greek crisis as an opportunity to do some nation-building.
That’s the opposite of what Europe wants to see happen.
Greece is leverage — leverage for Europe to sit down at the negotiating table and make amends with Russia. Europe’s economic system will struggle with Russia isolates itself from the West and strengthens economic ties with its neighbors.
Russia is working over Ukraine. If they get influence in Greece, then Europe loses bargaining power.
Losing Greece and Russia would mean losing to China.
China’s been trying to grow its strategic clout around the world. I mentioned this a few weeks ago:
The problem is that — although they want to mingle with the big boys and pull strings — they struggle to earn any pull at the IMF and the World Bank.
Bottom line: China is making all kinds of symbolic moves to bring institutions like the Asian Infrastructure Investment Bank and the New Development Bank to fruition.
Fine, China can play those games.
But that’s not what China needs in order to establish itself among the most-influential world powers.
It needs a deep, liquid bond market and a political system that lets it develop a flexible economy that can handle a global renminbi.
If China can get a front-row seat at the IMF, and inclusion into the special drawing rights, then it would be a step closer to getting taken seriously.
Its other efforts to be taken seriously are somewhat more direct.
China is investing in the Silk Road.
Click the image for a larger view.
Foreign Affairs says:
Chinese President Xi Jinping launched two ambitious initiatives designed to restructure the Eurasian economy: the so-called Silk Road Economic Belt, a program of infrastructure and trade investments that will stretch from Bangkok to Budapest,
and the Twenty-First-Century Maritime Silk Road, a similar program focused on the waterways between the South China Sea and the Mediterranean.
Now I know you caught that last word: Mediterranean.
Yeah, that 21st Century Maritime Silk Road Economic Belt passes right through Greece, where Europe and the U.S. like to run interference and containment on Mediterranean cargo and naval traffic.
The West won’t let Greece go to the wolves — they can’t.
China certainly won’t stop making friends with Southeast and Central Asia and the Middle East. They’ll continue using their infrastructure and investment ambitions along the Silk Road Economic Belt to grow their influence and broaden their natural resource suppliers.
But this will be a slow road with deferred benefits.
So too will be the road to growing their clout at the IMF and on the big stage. Washington won’t be quick to cede ground while its allies in Europe fumble around with Greece and Russia.
I wouldn’t expect unwinding financial market contagion for whatever happens with Greece. Because whatever happens in Greece is probably going to involve a lot of can-kicking, thumb-sucking and extended access to someone else’s money so there are no temper tantrums.
So don’t let the latest turmoil scare you away.
But don’t let international monetary system reform commotion push you too quickly to betting on China.
P.S. The world is drowning in debt and economic stagnation, and that means exchange rates are being “manipulated.” Discover how I’m helping my subscribers to get on the right side of the trade for when the floodgates burst. Click here to learn more >>