If BRICS agreed to centralize clearing, then they’ve already agreed on their universal settlement medium. That is Gold
Friday in Gold Gets Closer to Centralized Clearing in BRICS Solution to SWIFT we we said this:
This is huge on many levels. We will gleefully break it down best we can in our Weekly post Sunday. It lies directly on the path of “things to do” when building an alternative to SWIFT.
As promised. This podcast unpacks *why* the BRICS agreeing on Centralized Clearing as a solution to counterparty risk necessitates Gold as the medium of exchange in *all* future international trade.
Clearing vs Exchanges
What Clearing is
Trading Culture and Clearing
Liars Poker and Limits of Bilateral Trade:
Liars Poker and Bilateral trade and settlement (Mike, Mary and Jeff)
Current (credit) accounts for Bilateral
Spot and Bilateral limitations
Lack of Trust issue
Centralizing Risk: Bringing in the Boss
Refrigerator as Settlement Medium in bilateral trade
Uniform settlement medium established ( Boss’ dollars)
What happens when you stop trusting the Boss
Mike Mary & Jeff resume bilateral Trade
Settlement medium gold
Blockchain as verifier
Mercantilism, The Current Account, and Gold:
Trade imbalances, current accounting
Universally accepted Gold settles the difference
3 party example
Blockchain Makes Gold the MOE
Centralized clearing risk
Refrigerators, Different currencies and Gold
Long Term Trade.
History of Money:
SOV, MOE, and Unit of Accountancy
Gold as money
US Demonetization of Gold
BRICS Remonetization of Gold
Gold/Blockchain/central clearing as solution to rogue “Boss”
Settlement Mediums Beside Gold:
Refrigerators, Armoirs, Chairs, and Gold
Now you all know why I am so excited about the centralized clearing announcement. They cannot centralize clearing without a previously agreed upon settlement medium.That means they’ve decided on a new medium of exchange.
It means they already have a process in place to settle international trade in something other than dollars. And if it ain’t dollars, it is Gold
Podcast: Some Basic Definitions
CLEARING: To guarantee the risk on both sides of a transaction. In this way, to clear the trade-risk. The settlement on each transaction is also guaranteed by the clearing house.
SETTLEMENT: They make sure all participants agree on how/when/where transactions will be settled. They also police the settlement medium.
SETTLEMENT MEDIUM: aka medium of exchange ( MOE) A portable instrument used as an intermediary to facilitate/close/satisfy deals.
Summary: Centrally Cleared Gold as Solution to Dollar Mistrust
Centralized clearing helps scale trade efficiencies and overcome lack of bilateral counterparty trust. The trade-off is systemic risk in form of everyone trusting the central counterparty’s solvency and objectivity. One may to minimize/ police these risks is by the Central Counterparty being mutually owned by the trade members.
All members, however must agree on terms of trade. Key to this is what they will use as the official settlement medium if not dollars?
Current Bilateral BRICS Trade vs Centralized Clearing and Settlement…
By combining Gold, Blockchain, and centralized clearing a group of trade partners can expand trade without shrinking centralized trust.
Trade Before Centralized Clearing…
A word about Blockchain and Centralized Clearing
In November 2015, clearinghouses from several nations joined forces to create a think tank known as the Post Trade Distributed Ledger Group, which studies how blockchain technology can affect the way in which security trades are cleared, settled, and recorded. The Group, now includes around 80 financial institutions all around the world.
Their Conclusion: In short, Blockchain makes trade cheaper, faster, and more efficient without trustingany individual self-interested entity to maintain market neutrality.
Gold: If blockchain can maintain accounting objectivity, then gold’s monetary neutrality can be used as both SOV and MOE without needing to be shuttled around daily.
Liars Poker and Centrally Cleared Gold…
It is the “Quo” in Quid-pro-Quo .
An MOE must remain stable in value in order for it to work as an intermediary. If becomes (or is perceived to be) unstable, it is no longer trustworthy as an MOE.
famous last words… right?