GLOBALIA

Issue 08 |August 2010

COVER STORY

The question naturally arises as to what drivesthe trend towards alternative currencies. Theanswer is simple: the recent financial crisis (whichis certainly not over as the media like us tobelieve) has brought the world closer to a post-globalisation era which will be marked byuncontrollable sovereign debt and, as a conse-quence, a reversal of policy, away from globali-sation towards regionalisation.

A GLOBAL TREND

THE WORLD MOVES TO ALTERNATIVE CURRENCIES

The trend towards alternative currencies,originally started on a ‘community’ level haveincreasingly turned into local,state-spon-sored,payment systems gaining broad globalappeal and acceptance.The oldest and best known of these is the“WIR”payment system,established inSwitzerland in 1934 in response to the severemonetary shortages during the GreatDepression.A Wikipedia entry states:“The WIR Bank,formerly known as the SwissEconomic Circle or WIR,is an independent,complementary currency system in Switzer-land that serves small and medium-sizedbusinesses.It exists only as a bookkeepingsystem to facilitate transactions.WIR wasfounded in 1934 by the businessmen WernerZimmermann and Paul Enz as a result of currency shortages after the stock marketcrash of 1929.Both Zimmermann and Enzhad been influenced by German libertarianeconomist Silvio Gesell.‘WIR’ is both anabbreviation of

Wirtschaftsring

and the wordfor ‘we’ in German,reminding participantsthat the economic circle is also a community.According to the cooperative’s statutes,‘Itspurpose is to encourage participatingmembers to put their buying power at eachother’s disposal and keep it circulatingwithin their ranks,thereby providing memberswith additional sales volume.Although WIRstarted with only 16 members,today it hasgrown to include 62,000 – among whom istraded approximately 1.65 billion Swiss francsannually (as of 2004).The WIR bank isanot-for-profit bank.It serves the interest of the clients,not the bank itself.It is a verystable system,not prone to failure as thecurrent banking system is.It remains fullyoperational even in times of general economiccrisis.In this sense,WIR may have contributedto the remarkable stability of the Swisseconomy,as it dampens downturns in thebusiness cycle.”While the WIR complementary currencysystem in Switzerland and other more recentcommunity-based payment systems such asthe

Chiemgauer

in Southern Germany remainpurely paper systems,we observe a growingtrend towards bi-metallic currency systems.With our two companies e-dinar FZ LLC inDubai and Emirates Gold Europe GmbH inSwitzerland we are directly involved in theproduction and coinage for some of the bestknown of these complementary bi-metalliccurrency systems:namely the

Kelantan Dinar

and

Dirham

and the

Ilmtaler Silber Thaler

COVER STORY

The state of Kelantan (Malaysia) hasbeenin the national and international pressfor their efforts to distribute the golddinar through their state-owned pawn-brokers.Since 2007,when they first starteddistribution,they have sold some 10,000gold dinars to the public.During the last one and a half years,we haveworked closely with the government of Kelantan to issue a new bi-metallic series of the

Kelantan gold dinar

and

silver dirham

with the state emblem on the face of the newmedallions.We were finally been awardedthat contract in March 2010 and received thefunds for the first batch which went intoproduction during April 2010.This new series of the dinar and dirham willbe broader in denominations and willcomprise both silver and gold piecesrather than just gold pieces as in the past:

Kelantan dinar denominations

1/2,1,2,4,5,8,10 (one dinar = 4.25grams of 22 ct gold)

Kelantan dirham denominations

1,5,10,20 (one dirham = 3 grams of .999 silver)

Kelantan’s past efforts were exclusivelyfocused on the gold dinar.As we knowhowever from history,silver coins have playeda more significant role in everyday life thangold coins for the simple fact that goldcoins tend to be too valuable for everydaypurchases such as bread or groceries.Having understood this,the state govern-ment of Kelantan has now decided to issuea bi-metallic series comprising both the golddinar and the silver dirham in a wide rangeof denominations.The new Kelantan series is already beingwidely advertised;when leaving or enteringKelantan airport,one cannot miss the largebillboards advertising the new medallionswith the state emblem on their face.Thepurpose and aim of the Kelantan coins is topay

zakat

(the Islamic wealth tax) in hardassets which have intrinsic value and not,asis done today,in promissory notes which,according to Islamic Law,are unlawful meansof

zakat

payment.in February 2010,we were approached by aGerman group who were planning to issuean alternative community currency purelybased on silver medallions – the

Ilmtaler

series.Face motives include historic figuresfrom the German renaissance,particularlyfrom the area of Erfurt andWeimar(

Ilmtaler

denominations:1/10,1/4,1/2 and 1ounce silver pieces – .999 silver)A related group had previously issued one of the better-known paper-based alternativecurrencies in Germany – the

Rheingold

.Overthe years,they came to realize that soundmoney (i.e.gold and silver) is far superiorto paper receipts.It was for this reason thatthey wanted to issue an alternative silver‘currency’ in denominations comparable to thesilver dirham.In early 2010,we submitted a competitiveoffer for the production of the coins includingthe artwork,die production and coinage.InApril 2010,we were awarded the contract andare now in the stage of die production.Theirfirst order comprised of more than 40,000silver medallions and we anticipate similarsized orders every three to four months.If however a single large country such asMexico coverted its paper pesos into silverpesos,the current total of silver in storagewould not be sufficient to satisfy demand(Mexico in fact has a long-standing projectto do just that).It is important to note thatin the not too distant past – actually only 30years ago – the coins of several currencies,includingthe Swiss franc were still made outof silver.Only in 1980,when the Huntbrothers drove silver to 50+ USD an ounceand the silver content of these coins beganto exceed their nominal value,was the Swissgovernment forced to replace its silver coinswith cheap nickel alternatives.Should silver coinage become popularagain,the world would quickly use up itsdepleted silver storage and run out of available metal.Inevitably,this would pushthe price of silver bullion sky high.The question naturally arises as to what drivesthe trend towards alternative currencies.Theanswer is simple:the recent financial crisis(which is certainly not over as the media wouldlike us to believe) has brought the world closerto a post-globalisation era which will bemarked by uncontrollable sovereign debt and,as a consequence,a reversal of policy,awayfrom globalisation towards regionalisation.Why is the financial crisis not over? Becausegovernments have tried to treat the symptomsby injecting massive amounts of paper moneyinto a structurally flawed financial system;failing to address the root cause of the crisiswhich is the parallel market of out-of-controlderivative products,amounting to no lessthan 15 times the world GDP or roughly 600trillion USD.It was a tiny fraction of thisparallel market (i.e.derivatives based onsubprime mortgages) which caused thefinancial collapse in the first place.Yet policymakers continue to close their eyes to the

GLOBALIA

Issue 08 | August 2010

ECONOMY

real problem hoping that somehow every-thing will magically turn around.A danger-ous illusion since the next crisis is just belowthe surface and waiting to erupt;the differ-ence being that next time around,the worldwill have run out of options.Modern economies could not survive anotherfinancial meltdown of the kind we have justfaced for the simple fact that our govern-ments have run out of options to buy moretime.The next financial crisis will result inmassive sovereign defaults,social unrest andrevolts leading to the eventual collapse of democratic governance.For the people,theoutcome could at its worst become compa-rable to the German situation at theendof World War II.The signs for the advent of a new post-globalisation era are visible all around us.First,the massively increased sovereign debtlevels which are quickly separating the badfrom the good and,secondly,the increasingformation of regional power centers.Let us first talk about debt.Governments allover the world have tried to buy their wayout of the financial crisis,incurring debt of alar-ming proportions.While economic conditionsin developed countries have not reallyimproved since the start of the crisis,the sizeof government debt has increased drama-tically.Before the crisis sovereign debt wasalready staggering,today it is beyond repair.Everyone is concerned about the debt crisisin the PIGS countries (Portugal,Ireland,Greeceand Spain),but few dare to even think whatmight happen if the US (where governmentdebt will soon be reaching 100 per cent of GDP) or Japan (which has the highestsovereign debt to GDP ratio worldwide)default.While a sovereign default of thePIGS countries would certainly be traumaticfor their citizens,Europe and the rest of theworld could survive such an event.If the UShowever defaults on its sovereign debt,whichis definitely in the cards (a downgrade of USsovereign debt is today openly discussed),the economic world as we know it todaywould cease to exist.Why? Because the USdollar would in the event be devalued to closeto zero,thereby destroying more than half of all monetary value in existence.The BRIC countries on the other hand,although they also have increased their debtceilings to combat the financial crisis,haveformidable foreign reserves and sovereignwealth funds which insulate them to a signi-ficant extend from the risk of sovereigndefault.Let us now turn to the issue of regionali-sation.The disproportionate rate of sover-eign debt levels and foreign currency reserveshas increased the rift between the well-to-docountries in Asia,the Subcontinent and SouthAmerica (“the good”) and the not so well-to-do countries in Europe and the US (“thebad”).This is a fundamental shift of poweraway from the developed countries to a neweconomic power axis extending from Chinathrough India,the Middle East,Africa andSouth America - the so-called BRIC countries.The results of this shift in economic power areincreased regionalisation and a reversal of economic focus away from export at all coststowards internal development and consump-1tion (we can observe this new trend mostclearly in China and India).What brought this shift in economic powerabout? The answer is obvious:it has to dowith the ratio of sovereign debt to foreignreserves and savings.While the BRIC countrieshave accumulated high levels of foreignreserves due to their singular focus on ‘exportat all costs’ and have managed their debtfairly well,the developed countries continueto spend beyond their means,amass un-manageable debt levels while at the sametime facing decreasing levels of savings andsovereign reserves.In short,developed countries have for too longlived too far beyond their means.As every-one of us knows from experience,such asituation will inevitably end in disaster.One of the signs of regionalisation is thewidespread adoption of barter and alternativecurrency systems in Europe,Asia and the US.People feel increasingly betrayed by theirgovernments,have lost their faith in thebanking system and the financial elite and seetheir only saving grace in resorting to theirown initiatives.Alternative currency systemsflourish in Germany,Asia and the US,whilebarter systems grow like mushrooms inEastern Europe.While these initiatives areadmirable (and certainly on the right track),while wishing them success,I would like tocaution that the only true and lasting alter-native to paper-based banking is gold andsilver – the ultimate currency.Such a world currency will have to be andmust be based on hard assets,namely goldand silver.Gold and silver have serveduswell since the beginning of civilisationand will certainly serve us well untiltheend of civilisation.The author is CEO of e-dinar FZ LLC andEmirates Gold Europe GmbH.

Text

By Dr. Zeno Dahinden