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The following article was published in our article directory on October 18, 2010.
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What is the Root of the Crisis Monetary System

Article Category: Business Management

Author Name: xia zihui

Currently, the global subprime crisis in 2008 triggered the causes of the financial crisis, did not form the same answer, but the microscopic origin of the crisis has accumulated a consensus, the global focus on promoting regulatory reform at the micro level.

But we have to see if the international monetary system does not change, do not change the mechanism of money creation, money creation can not be bound to further expansion of the virtual economy can not be constrained, it can not prevent the pursuit of profit over the financial capital of the impulse, it is still can not be prevented and controlled by a financial crisis.

Currently, the Fed is pushing for a new round of quantitative easing policy, will only accelerate the arrival of the next round of financial crisis more quickly.

Profound reflection of the current monetary system is not intrinsic defects

What is the origin of the crisis in the end?

Current market crisis, a consensus has accumulated micro-causes: such as the subprime mortgage repayment ability of the applicant ignored the sub-prime derivatives of opacity on high-risk leveraged financial institutions, lack of supervision, etc.; the mechanism of transmission of the crisis some consensus: If the financial institutions held in the trading account of the common risk exposure (MBS, CDS, CDO, etc.), resulting in the rapid transfer risk, and to face the liquidity crisis.

However, because the nature of the financial crisis, the market did not have a deep reflection and consensus. We have to see this because the nature of the financial crisis is that the current international monetary system, the inherent defects. "Bretton Woods" system (dual link) after the abolition of the international monetary system into the era of complete notes, the currency is no longer the "anchor" to bind. Showed the following three characteristics:

First, the number of national currency by the respective governments and central banks completely subjective judgments. From a practical operational point of view, most countries in the light of the inflation rate as the basis for the amount of currency. However, the currency created after the price index does not necessarily correspond with the current period, a considerable part of the settle down temporarily from the capital investment - consumption cycle, if the monetary authorities are not Super-currency, currency in circulation may lead to insufficient production the illusion of deflation. But in fact, these deposits did not disappear down the currency, real purchasing power may be formed at any time, when the sediment reaches a certain magnitude, the once outside the right incentives, the inevitable financial crisis.

Second, with the development of economic globalization, countries are both involved in the creation of a global currency. U.S. because of their special position as a de facto global (paper money) currency, countries have become the last U.S. exports accumulation of so-called U.S. dollar foreign exchange reserves. Thus, the U.S. currency bound to become the world's money supply is out of control of the party. Alas, the United States precisely because the biggest beneficiaries of such a monetary system, the dollar regardless of the issue is not only the real needs of the world (U.S. dollars to buy his country merchandise issued for consumption of their own people, why not), even without too much consider the level of inflation the U.S. itself (a large number of foreign holders of dollars deposited on the hands, do not immediately impact on U.S. consumer market), its currency is the moral constraints be ranked after their own interests, which led to creation of dollar currency rapidly.

Third, free floating exchange rate and foreign exchange trading system, making the first two terms of money creation and circulation derived. Created a national currency, after too much (such as super-fat part of the Japanese yen), through the foreign exchange market can be freely convertible into dollars (or other freely convertible currency, such as the euro), the formation of dollars (or euros), over-running, and vice versa . In this international monetary system, currency overlay accumulation, the formation of excess supply is a necessity. This is why the rapid expansion of the virtual economy in the world today, far more than the real economy, real demand for money, but still in the self-accelerating, because the nature of self-creation.

After the excess money created, it is necessary fame and fortune. Provided the real economy for the residual value of the virtual economic distribution and relatively limited, the result would be self-created virtual economy trading products and trading mechanisms, self-virtual value creation.

Today, we reflect on a global scale, havoc as mortgage-backed securities mess (MBS), collateralised debt obligations (CDO), credit default swaps (CDS) such as how they came? We still put them down to the greed of financiers, regulators lack of trading high leverage, opaque and other trading mechanisms. However, few people think, so vast amounts of money supply, if not to initiate and participate in virtual financial transactions, they will go?

These funds are sub-prime product sales of repeat buyers package is repeatedly sub-prime products packaged processed into new products, innovators, they are happy to be the right-hand man at each stroke of the game, this way, but destined to wallow in addiction, unable to extricate themselves . Until one day, a crisis, they have a collective escape, get away with defectors who will immediately find the next battle, and prepare the next self-dealing game.

For the financial crisis, the world had a profound reflection, and to promote a series of institutional innovations, such as the New Basel Capital Accord, the United States Dodd - Frank bill, IMF and World Bank reform, voting rights, the bank tax, reverse cycle provision and so on, but all these are micro-finance institutions around the constraints, regulatory, financial risk micro-generation, transmission expansion, it is assumed the main financial constraint can be rational and can be, and are assumed to be neutral and the regulator can be detached power over the capital.

While we must acknowledge that these efforts are very valuable, for there will be help ease the financial crisis, but we must also see that if the international monetary system does not change, do not change the mechanism of money creation, money creation can not be constrained can not be constrained further expansion of the virtual economy, can not stop the urge to fame and fortune over financial capital, it still can not prevent and control the next financial crisis.

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