Heading Towards a Multi-Reserve Currency System

Heading Towards a Multi-Reserve Currency System by Jan Nieuwenhuijs for VOIMA Gold

An interview with Pentti Pikkarainen—former Head of Banking Operations at the central bank of Finland—on the future of the international monetary system.

When it comes to the development of the price of gold, it’s important to know in what direction the international monetary system is evolving. For example, if gold is assigned a greater role in a forthcoming arrangement, not only will the price of gold rise while approaching that arrangement, the price increase will be sustained during that arrangement.


According to my analysis the world is heading towards a new monetary system that incorporates gold, although I do not know how that system will be structured. To get a better perspective I decided to interview Pentti Pikkarainen, former Head of Banking Operations at the central bank of Finland, member of the Voima Gold Advisory Board, and Professor of Practice at the University of Oulu in Finland. Pikkarainen thinks we are moving towards a multi-reserve currency system. My interpretation of Pikkarainen’s view is that the dollar will lose its primacy status, and gold, the dollar, euro, yen, pound, renminbi, etc., will be competing each other.

When I thought about this system, I remembered an article I published last January: “Hitting Zero: 700 Years of Declining Global Real Interest Rates.” The article is about an academic study by Paul Schmelzing, who has shown that global real interest rates have been declining for eight centuries, and the trend line was nearly hitting zero in 2018. (Real interest rates are nominal interest rates minus inflation.) The data of the study is displayed in the chart below.

Noteworthy is that since 2018 nominal interest rates in advanced economies have declined, and the Federal Reserve—the most important central bank in the world—disclosed on August 27, 2020, that it will target higher inflation (above 2%). Other central banks will likely follow this policy.

Because of the massive debt overhang, it’s impossible for central banks to raise nominal interest rates. Real interest rates will thus continue to plummet, as the chart above suggests.

A huge factor that drives the gold price is real interest rates. See the chart below. U.S. real rates on 10-year government bonds are shown on the left axis (inversely), and the gold price on the right axis. The lower real rates, the higher the gold price.

Schmelzing was correct in predicting global real rates will continue to fall. He also wrote that real rates “could soon enter permanently negative territory.” In such a scenario gold will be an essential store of value for citizens, and a very popular reserve asset for central banks. Possibly, gold will be sun in a new monetary cosmos.

Having said that, let’s turn to the interview with Pikkarainen.

Heading Towards A Multi-Reserve Currency System

(JN is Jan Nieuwenhuijs, PP is Pentti Pikkarainen.)

JN: Do you think it was a mistake for Europe to launch the euro? 

PP: It was a big mistake to start the euro area with a large number of countries. Moreover, the convergence criteria were not strictly applied. The euro was an experiment, and we should have been much more careful. We should have started with a small set of countries, like Germany, France, Austria, Belgium, the Netherlands and Luxembourg. The door should have been closed for other countries for at least 20 years. If the results of the experiment turned out positive, the door could have been opened slowly for new countries. That is, if strict criteria would allow it. The convergence criteria should also include more variables like GDP per capita.

Continue Reading / VOIMA Gold >>>


Sharing is caring!