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JC Collins: An Incremental Return to Gold-Backed National Currencies

Source: Philosophy of Metrics | by 

AN INCREMENTAL RETURN TO GOLD-BACKED NATIONAL CURRENCIES


And Why a Supra-Sovereign SDR Reserve Asset Just May Make That Work

JANUARY 30, 2017

By JC Collins

This article is from the Republican Party of Canada site and can be re-posted with proper credit given to either source.

Before the passage of the Federal Reserve Act in 1913 many nations had maintained a stable gold standard for decades. Both America and Canada established gold standards in the mid-1800’s which functioned until 1913. It was only after the Federal Reserve became the central bank of the United States that the dollars of both nations, and others around the world, began not to operate as originally structured.

One of the biggest and most widely used arguments against a gold standard is that such a system doesn’t factor in the highs and lows of regular business cycles. As such, economic growth could be stifled and liquidity would become scarce.

This was problematic with the emerging central bank mandates which would need to fine tune and tweak monetary policy through the use of interest rates and money velocity. The Consumer Price Index (CPI) and GDP deflators were the tools by which the central banks measured the performance of the economy and could expand or contract the money supply without the burden of gold standard restrictions.

Under a gold standard system the amount of gold mined would determine the long-run inflation rate as opposed to the manipulation of the monetary policy makers at the Federal Reserve and Bank of Canada. Though there are supportive arguments either way, rampant inflation would suggest that the fiat currency and central bank methodology has pushed monetary policy too far the other way and has created excess liquidity in the system which has been forced into areas designed to funnel heavy credit onto a mass consumer base that was not educated or informed on the reasons and risks.

This has expanded both personal debt and public governmental debt to the point where today most western nations have personal and sovereign debts which are becoming unmanageable. Our education systems do little to inform us of this reality and have in fact keep the populations of the western nations ignorant of alternatives which could be used to transition both financial systems and monetary systems back to a balanced and functional state.

There would need to be a concerted effort between trading nations on such a far-reaching strategy and mandate. Due to the inherent liquidity restrictions in a gold standard monetary system all nations which have entered into trade with one another would have to reach alignment on the framework of gold backed domestic currencies.

There are other options which could also be used to reach monetary balance and maintain inflation within an acceptable range.

The long-running plan of the International Monetary Fund (IMF) and other international institutions, along with The People’s Bank of China, to use the supra-sovereign Special Drawing Right (SDR) reserve asset in place of the USD in the global monetary system is one such option.

There has been endless debate and speculation on the future of the SDR as an international reserve asset in place of the dollar. Quota amounts and governance reforms have taken place to build the initial framework of such a system. These changes to the IMF have brought the realities of an emerging world into focus and discussion. The core fear and reluctance for some regarding the SDR is that nations would have to submit to a loss of sovereignty and ownership of resources. Though this is somewhat factual and merits concern, a broader use of the SDR could be implemented without such losses and could in fact contribute to the implementation of domestic gold standards for the nations which choose to use the SDR as a method of balancing trade amongst themselves.

How would this look?

A full gold standard would have too many restrictions but if a nation included other resources and population demographics in the valuation and composition of its domestic currency the use of the SDR would serve the sovereign needs of each nation as opposed to reducing sovereignty. Even GDP could be added to the currency composition as a means of encouraging economic growth and sustainability.

It is important to differentiate that these factors and indicators would be added into the composition of the domestic currencies as opposed to directly into the SDR composition. This is the difference between maintaining national sovereignty and relinquishing sovereignty to an international authority such as the IMF.

The SDR quota amount only of each nation would be based on the economic output, resources, and other indicators which would be controlled by the domestic monetary policies of the government and the effectiveness of private industry in managing the business cycles. This would allow each nation to capitalize on the benefits of an SDR supra-sovereign asset without relinquishing any autonomy and sovereignty as they would retain control over resources and the domestic economic policy making.

Another opportunity which such a framework would provide is the ability to reform the central banks of the respective nations, dependent upon the effectiveness of their domestic monetary and financial policies. The Federal Reserve and Bank of Canada could be restructured to meet the needs and objectives of a gold and resource backed domestic currency.

Here in Canada this would look like the BoC acting as the intermediary between the provinces on balancing the other economic indicators which serve to complete the valuation composition of the Canadian dollar, such as population demographics, getting resources to market, and the lowering of public and private debt.

It would serve as a creditor between provinces as each work towards the attainment of their own respective and unique economic indicators.

Nations which are not resource rich could barter amongst other nations within the framework of the SDR quota system. This could look like one nation trading oil reserves for other raw product or labor with the SDR quota framework caring the burden so that the domestic currencies of each nations are protected from the international imbalances which have been inherent in the USD based unipolar reserve system since 1913.

These changes could not take place overnight and would require years of monetary and fiscal adjustments as an incremental approach was taken to altering the currency composition of each nation. With each increase of gold, resources, and other indicators, the fiat percentage of the currency composition could be reduced and the transformation of the central banks could take place.

Under such a system the need for the excessive taxation through the Internal Revenue Agency in America and Revenue Canada in the North to manage ever-growing sovereign debts would be reduced and the overall tax burden on the people would be lifted. Such fundamental changes to how our economies, industries, and banking function would set the stage for further government reduction and empowerment of the people. – JC

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