The recent rush for the $ has exposed a global currency crisis that seems to be gathering momentum.

So far we have seen Iceland bankrupted, South Korea facing a huge run on the Won, Argentina seizing private pensions, Hungary and Denmark raising rates and general deleveraging in emerging markets.

At the same time even the majors have taken a pounding. In the last 3 months against the $ the Euro has fallen 22%, the Pound 22%, the Aussie 38%, the Kiwi 29% and the Canadian 28%. The latter 3 suffering more because of their links to commodity markets which have also collapsed.Against the Yen just add another 10%.

Those falls are enormous.

The major factors here are:

- Credit issues.

- Current Account position.

- Commodities.

- Interest Rates.

If you have a large current account deficit and huge overseas borrowing (like Australia and New Zealand) then you will struggle given the problems with credit availability. At the same time lower currencies provide an opportunity to reduce those deficits. No more cheap imports for the Antipodeans.

This poses real problems for the US. Although the Yen is taking some of the slack with a major appreciation, a strong $ is hardly what the US are looking for at the moment given their huge current account problems. However we are entering into a situation where there are bigger issues at play.

A full scale unwind of the global currency net position would see surplus countries holding the upper hand. China with its vast $ reserves has plenty of options on the table. There is an interesting analysis on Naked Capitalism with some good links.

The most interesting proposal from Brad Setser at the CFR is for China (and other large $ holders) to diversify their $ holdings and buy assets from other deficit countries. Although its hard to see China doing this it makes sense as part of the eventual rebalancing of currencies and capital that must happen if we are not to see a huge race to the bottom in currency land.

This would help out the US in taking the heat over a resurgent $ and it would take the heat out of the impending meltdown of cross border capital flows. It may even help avert a potential meltdown in the Euro which grows closer by the day.

The era of running big deficits thanks to leveraged debt finance and derivative products is over. The November 15th War Council will certainly push to reform and regulate markets though that bolted years ago and the stable has burnt down.

Other suggestions proposed are:

- A return to a gold backed global currency. This is just fiat in a different form. It has some merit as a stable, hard store of value in which supply is reasonably easy to manage but it has already failed several times in recent memory.

- A commodity/energy back currency. The EBCU proposal by Richard Douthwaite still is a favourite of mine because it links natural resources, climate change and money together. It’s real unlike gold as it connects energy to money and energy is what we are concerned with, in terms of transforming it and using it in our daily lives.

Hopefully all of these approaches will be on the table when our financial “wizards” meet shortly.

In the meantime it will be a case of holding one’s breath and hoping for the best with possible intervention ahead.

At worst expect markets to close and capital controls to be applied.