For many years we were led to believe there were two economic models: capitalism and communism. It has been widely accepted that communism died when the Soviet Union collapsed, although China still practices a form of communism. Capitalist markets were free markets, while communist markets were not. They were centrally controlled by the political masters of the day. Capital markets were left to supply and demand to set prices and dictate market direction. The notion today that capitalist markets are free markets is of course a fairy tale. They are not free at all.
At the core of markets today is the world’s only reserve currency, the United States dollar (USD). The price movement of the USD is the basis for the price of everything else. All other currencies are benchmarked against it, and it is the reference point for commodity and agricultural prices. So how do we set the price of the USD? It must be some extremely complicated algorithm based on a set of equally complicated data sets collected by unbelievably intelligent economists. Since the USD sets the price of everything, and therefore dictates how wealthy, or poor as the case may be, each one of us is, the market mechanism employed to set the value of the USD must be based on a clear set of metrics.
As far as I can tell, the single biggest influence on the “value” of the USD is the utterances of Ben Bernanke, the Chairman of the Federal Reserve. The Federal Reserve is a privately owned institution controlled by a few large investment banks and has the sole right to print debt instruments called Federal Reserve Notes, which we know as the USD. This is all done on behalf of the U.S. Government. The Federal Reserve has been doing this for almost 100 years, largely in secret. When the chairman of the Federal Reserve speaks, markets react, and the price or value of the dollar is set. It is actually one enormous charade, a guessing game. Despite the myriad of economic data available under the guise of free markets, bankers and money managers are trying to guess what the Federal Reserve chairman is thinking. More simply, is he thinking of increasing the money supply, decreasing it or leaving it the same? So in actual fact, as far as I can tell, we do not actually measure the value of the USD, we guess what it is.
It could be argued then that this is the ultimate free market. We all just guess against each other and you have a 50/50 chance of getting it right. Your bet is either the value of the USD will go up or down. This would be true if it was not for the fact that the people or institutions you are betting with are the banks which control the Federal Reserve which prints the USD. On this basis you are no longer in a 50/50 situation. You are guaranteed to lose. Since markets do not control the metrics of the USD, and the USD sets the price of everything else by virtue of the fact it is the world’s only reserve currency, we can assume that in actual fact markets have absolutely no control over setting prices, or of anything.
What about if we return to the gold standard, which sets the price of the USD against gold? How will this make money metrics any different? Gold will still be mined, always under government supervision; it will be released into the monetary system as gold-backed currency and will set the price of everything, right? It seems a little short on logic. Would that not then spark a colonial style race for gold resources, setting us back another couple of hundred years? The gold standard is not the answer for setting the price of money.
What if we had a paradigm shift in the way we think, the way we actually do business with each other, between nations. Balanced global trade can only occur if we have transparent, accessible, efficient markets, with standardized contracts and on a standardized platform of global exchange. And this only makes sense if the denomination for payment remains constant, unlike today with our current currency markets, where the value of the USD is constantly changing. In fact what we need is a system of credits, more specifically trade credits. Fixed price currencies would then be valued in terms of trade credits, pretty much like air miles.
We have the technology in today’s world to affect such a change. Markets are not yet linked and, therefore, not yet global. A trade credit system with fixed value currency might however be just the kind of system to tip the world towards integrated global markets. We would no longer be looking at the value of the USD and waiting with bated breath to try and guess what Ben Bernanke is thinking in order for us to value everything. It is global trade we need to price, not the USD.
Global Markets are anything but integrated. What if we had a paradigm shift in the way we think, the way we actually do business with each other, between nations. Balanced global trade can only occur if we have transparent, accessible, efficient markets, with standardized contracts and on a standardized platform of global exchange. We are on the cusp of achieving this, although most people cannot see it. Sam’s Exchange aims to give its readers a clearer view and a platform for discussion. Markets, trade and economics are in fact nothing more than the result of our thoughts and actions expressed in numbers, not the reverse.
Sam Barden is CEO of SBI Markets General Trading LLC, a Dubai-registered trading and advisory company. Barden, 39, has worked in the global financial markets for more than 17 years in Europe, Russia and the Middle East. He has advised and executed strategic transactions for both the government and private sector, in particular in energy and commodity markets, advising various energy producing nations on their strategic market developments and interaction. He holds a degree in economics and finance from Victoria University, Melbourne, Australia.