30 March, 2014

THE BANK OF INTERNATIONAL SETTLEMENTS


According to Reuters’s 29th March article titled “Dollar reserve role secure but set to shrink: BIS:

The dollar's share of central bank reserves may fall by as much as 10-15 percentage points in coming years without threatening its role as the world's main reserve currency, a senior official from the Bank of International Settlements said on Saturday.

Always fascinating to find out the machinations and webs of finance. These institutions that regulate currency, drive its prices up and down, buy and sell currency, enrich and bankrupt countries are always so obscure so its always a curiosity when you find out about one.

According to Wikipedia, the “Bank of International Settlements” is:
The Bank for International Settlements (BIS) (in French,Banque des règlements internationaux (BRI)) is aninternational organization of central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks".[2]
The BIS carries out its work through subcommittees, the secretariats it hosts and through an annual general meeting of all member banks. It also provides banking services, but only to central banks and other international organizations. It is based in Basel, Switzerland, with representative offices inHong Kong and Mexico City.

According to BIS’s website:
The BIS offers a wide range of financial services specifically designed to assist central banks and other official monetary institutions in the management of their foreign exchange reserves. Some 140 customers, including various international financial institutions, currently make use of these services and on average, over the last few years, some 4% of global foreign exchange reserves have been invested by central banks with the BIS. BIS financial services are provided out of two linked trading rooms: one at its Basel head office and one at its office in Hong Kong SAR.

 Incidentally, I was present when Dr. Mahathir, former Prime Minister of Malaysia, gave a delightful and thoughtful speech at the Kathmandu Hyatt hotel last Sunday. And one thing he mentioned is that he doesn’t approve of the sale and speculation of foreign currency. “Currency is just currency, pushing up the prices, bringing it down just to make a profit is not good,” he said (I am paraphrasing here, his exact words may have been different.)

So what are foreign exchange reserves? According to Wikipedia, my favourite source of unbiased information:
Foreign-exchange reserves (also called forex reserves or FX reserves) are assets held by central banks and monetary authorities, usually in different reserve currencies, mostly the United States dollar, and to a lesser extent the Euro, the Pound sterling, and the Japanese yen, and used to back its liabilities, e.g., the local currency issued, and the various bank reserves deposited with the central bank, by the government or financial institutions.

So basically countries are holding on to dollars because it is seen as the “world’s main reserve currency.” Now why is that—considering the fact the US economy is in major doldrums, and their debt runs in the trillions?

Now lets forget that for a moment to go to a cybercafé in Nepal, where I am typing this article. About ten minutes ago, I happened to be sitting next to an Italian commodities trader, and an Indian options trader. The Italian couldn’t print his Excel sheet-the Indian offered to help. Soon they were in a riproaring conversation about stocks and gold and commodities. The Italian said his gold was down but he was going to hold on to it, since he would recover its value even if it took 20 years. The Indian said gold wasn’t good-India didn’t produce its own gold, it was made in China, so therefore gold become an import which became a net liability on the balance sheet. While all of this was going on, it occurred to me that large swathes of the world’s population now survives in this manner—by trading on commodities, stocks and options with very little interaction with the people who actually produce these commodities.

How did such a state of affairs come about? How did large populations of Asia and Africa who actually dig this stuff out of the ground become irrelevant, while those who buy and sell these virtually became millionaires? Clearly a big hand lies in these institutions like BIS which set the tone for currency trading, which has now replaced the trading of real goods in the world market.

An interesting historical tidbid about BIS, also from Wiki:
Between 1933 and 1945 the BIS board of directors included Walther Funk, a prominent Nazi official, and Emil Puhl, who were both convicted of war crimes at the Nuremberg trials after World War II, as well as Hermann Schmitz, the director of IG Farben, and Baron von Schroeder, the owner of the J.H.Stein Bank, which held the deposits of the Gestapo. There were allegations that the BIS had helped the Germans loot assets from occupied countries during World War II.
As a result of these allegations, at the Bretton Woods Conference held in July 1944, Norway proposed the "liquidation of the Bank for International Settlements at the earliest possible moment". 
Clearly an interesting history. As the linkages between international companies and bonded labor and slavery in the contemporary moment become clearer, it is clear that institutions like the BIS either have to do some “international settlements” against present day workers who have seen the most egregious labor violations by TNCs. BIS is, indeed, not yet in the clear regarding crimes against humanity.

Is it really necessary for the world to hold on to its dollar as “reserve currency”—or do we merely think we need to do this because BIS tells us so?

I have no answer to this. Perhaps time will tell if it is necessary.



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