Monday, January 16, 2017

New Articles Suggest Various Threats to US Dollar Global Reserve Status

The current monetary system is based on the US dollar as the global reserve currency. No one really disputes this although many believe there are a variety of threats out there to the US dollar maintaining this status.

Below are excerpts from recent articles that talk about some of these potential threats to the US dollar. We care about this because if the US dollar did lose its status as global reserve currency, it would be the kind of major sea change we watch for here and something else would (of course) have to take over that role. 


Hugo Salinas Price - Argues Trump's Proposed Policies Could Trigger End for the US Dollar

"The president elect of the US, Mr. Trump, does not know what he is doing when he proposes protectionist measures to encourage the reindustrialization of the US and bring home again, the American industry that emigrated to foreign lands.
The US lost their industry as a result of the Bretton Woods Agreements, which were signed (under pressure) by representatives of the allied countries and of the countries conquered by the US in World War II. Those Agreements established the world's monetary system for the post-war world, after the victory of the Allies, which was already in sight in 1944."
. . . . .
"In 1960, the economist Robert Triffin detected the central problem residing in the Bretton Woods Agreements. I detected the same problem without having any knowledge of "Triffin's Paradox", as it has come to be known. Many years ago, sitting in my office smoking my cigar and contemplating the world's financial situation, I came to the same conclusion as Triffin.
In a few words, it turns out that in order for the international monetary system established at BrettonWoods to function, the US is forced to run a permanent trade deficit with the rest of the world. Year after year, the US must purchase more from the rest of the world, than what the US sells to the rest of the world, thus creating a permanent flow of dollars to the rest of the world. This flow makes possible the creation of Monetary Reserves in the Central Banks of the rest of the world.
Without this constant flow of dollars from the US to the International Reserves of the Central Banks of the world, the currencies issued by those Central Banks would cease to exist. If Banco de México, the Mexican Central Bank, does not have dollars in its Reserves, then Mexicans do not have money: without dollar Reserves, the Mexican peso would not be worth peanuts - at least, in international terms."
. . . . 
"If Mr. Trump should attempt to eliminate or reduce the US trade deficit and protect and encourage US reindustrialization by means of tariffs on imports, what he would achieve would be to choke the economies of the rest of the world with a scarcity of dollars obtained - how else? - by exports to the US.
Choking on dollar scarcity, because exports to the US decline or are eliminated, the world will not remain in paralysis. Another alternative to the dollar as the world's currency will be sought, simply because finding an alternative becomes a matter of life or death.
What can take the place of the dollar? . . . . "

"Now is the time to keep your eyes on the monetary endgame. Not the daily mark-to-market in paper gold. This endgame is an all-out attack on the status of the US dollar as the benchmark global reserve currency. Numerous players have an interest in ending the dollar’s role for reasons ranging from climate change (global problems require global money solutions) to geopolitics (Russia and China both have regional hegemonic ambitions in Eastern Europe and East Asia respectively)."
. . . . .
"Currently US dollar-denominated instruments and transactions constitute about 60% of global reserves, and 80% of global payments respectively. The US monopoly of power over dollar payment channels gives the US unrivaled dominance over the international monetary system and the economic well-being of every nation on earth. Adversaries naturally chafe at this immense power especially in light of US imposed sanctions that are considered overbearing and unjustified by the targets. Those adversaries do not issue currencies that are potential alternatives to the dollar because of inadequate rule-of-law, immature bond markets, primitive capital markets infrastructure, or all three. The only feasible alternatives to dollar dominance are special drawing rights (SDRs) issued by the IMF, and gold."
. . . . .
"Indicators all point in the same direction — Treasuries are being dumped, and gold is being acquired by the largest investors in the world. This is being done not as a ‘day trade’, but as a strategic geopolitical move.
This means these trends will continue until the aims of the ‘Axis of Gold’ (China, Russia, Iran, Turkey) have been achieved. Those aims include the overthrow of the US dollar as the benchmark global reserve currency."

My added comments: Just in these two articles we see a number threats to the US dollar as global reserve currency put forward. Proposed Trump policies, Chinese gradual dumping of US Treasuries, US adversaries weary of the current US dollar status working to undermine it, etc. 
One reader here sent me the thoughts below in an email suggesting another potential threat to the US dollar:

"I read your ( unlucky?? ) Friday the 13th post today re: Larry Summers, re: laying blame for the next crisis, perhaps on Trump.  I don’t know if you have followed the history of the “petrodollar” in any detail, but in the event you have not, this article is well worth the few minutes it will take to read it.

The petrodollar was not an arrangement that “evolved”, but rather, one that was dictated by a U.S. Government “perceived necessity” in the aftermath of the closure of the gold window, and the first oil crisis.  One of the connections that perhaps few people make between that shift  (from SETTLING imbalances with gold), versus “dollars needed to purchase oil” (which are then recycled into treasury securities ) is that the switch “enabled” both expanding INTERNAL budget deficits, and external TRADE deficits, which after the early 1980’s grew into large
“labor arbitrage” related deficits, as corporations moved manufacturing  capacity outside the U.S.  That transfer ultimately helped create the Trump presidency.

Without “settlement via debt instrument”, you simply cannot maintain giant trade deficits with the rest of the world. It was the global “necessity of oil”, coupled with U.S. induced GCC “insistence” that it be paid for in dollars, which allowed the system which has continued until now.

So, when looking for a candidate to trigger the next,  larger financial crisis, one good candidate could turn out to be the loss of dollar status in “oil settlement”, particularly as Russia plus Iraq plus Iran become serious rivals to GCC in determining just “what” will be accepted in payment for oil.

Just a thought"

Recently, articles are appearing in mainstream media suggesting that Trump's policies will create a surge in the US dollar and then potentially trigger a new major global crisis as a result later on. (see examples here and here).
Here on this blog, we don't claim to know if this major change in the status of the US dollar as global reserve currency will happen any time soon or not or what might trigger that. What we do believe is that if any of the above potential triggers do take down the US dollar as global reserve currency, something has to eventually replace it. Hugo Salinas Price wants some kind of precious metals backed currency. Jim Rickards proposes that the SDR will be put forward as the replacement (and adds that gold might be involved in the process). Whatever is done if this happens will most certainly have a big impact on all of us, which is why we follow it here.
If this major sea change does take place during Trump's term, we are really flying blind as to how he would deal with it. It was never discussed during the campaign. Trump has some advisers who are known to be strong gold advocates and others who seem to be part of the existing financial establishment. If faced with a huge global crisis where the US dollar lost its status as global reserve currency, I have no idea how Trump would respond. One highly credible source offered me this observation in an email (partial quote):

"Elites might decide to allow a crisis  . . . . .  Where it gets interesting is if Trump acquiesces (as Bush 43 did when Paulson and Bernanke walked into the Oval Office and demanded a bail-out) or whether Trump pushes back with an "America First" reply, in which case the whole thing will be worse than the Great Depression. I'm calling that outcome the Stone Age."

Added note: If this major change never happens, the information on this blog is not really vital to know about. However, if this change does happen, there is a lot of information on the blog that would be important to understand. If the SDR were put forward as a replacement for the US dollar, you can find very good information on that here. There could be other proposals which we mentioned in an earlier blog article here. This information will remain here for anyone who can use it and will continue to be relevant for the most part if we ever do see the major monetary system change we watch for here. The articles in these links contain direct input from some of the leading sources in the world on the topic of potential monetary system change.
Added note 1-17-17: I guess we can add Donald Trump's inclination to offer market commentary to the list of items that can impact the dollar. One comment that the dollar is too high sent the dollar sharply lower and gold sharply higher. Also interesting that Trump offers these comments just as articles are appearing that his policies may cause the dollar to surge higher and trigger a crisis.

Friday, January 13, 2017

Bloomberg: Summers Warns of Financial Crisis Risk from Trump Economic Plans

Bloomberg runs this article quoting Larry Summers as suggesting that if we do get another major financial crisis, Donald Trump may be to blame. This bears watching because one theory we have followed here is that some believe that Trump is setup to be blamed for any upcoming crisis ahead. This article is supportive of the idea that this could really happen. Below are the introductory paragraphs.

"Former U.S. Treasury Secretary Lawrence Summers attacked the policy proposals of Donald Trump on several fronts, saying the president-elect’s plans for deregulation were setting the stage for the next financial crisis.
“The deregulation in some areas like finance is hugely dangerous,” Summers said Sunday in an interview on Fox News Channel. “Who wants to go back to the era of predatory lending? Who wants to go back to the era of vastly over-levered banks?”
. . . . . .
"Trump’s plans to reduce corporate taxation, Summers said, would “hugely increase inequality” and could also help strengthen the dollar, further hurting U.S. exporters and the people who work for them."

My added comments: Comments like these coming from a source like this gets my attention. It suggests to me that there is still real concern that another major financial crisis could unfold during the Trump term of office. Clearly, if that were to happen, who the public blamed for the crisis would be important in terms of who the public would trust to try and deal with the crisis. Lots of what ifs and unanswered questions here. Only time will reveal what actually happens which is what concerns us here.
Just a few questions we could raise:
- Will we get a new major financial crisis during Trump's term?
- If we do, who will be blamed for it by the majority of the public?
- What solutions will be  proposed to deal with the new major crisis?
- Will a solution involving the IMF as global lender of last resort and the SDR as global reserve currency be put forward? If so, how would Trump respond to a plan like that?
- Are people like Larry Summers trying to "get ahead" of a potential new crisis and point a finger of blame now to try and prepare the public to think in those terms later?
Again, we have the answers to none of these questions. But when we see articles like this, we can reasonably assume that the idea of a new major crisis in the future is still very much in play and that who gets blamed is also of concern. Why make a statement like this otherwise?

Monday, January 9, 2017

Early 2017 Q&A on Status of Monetary Change

With the world clearly heading in a new direction as the Trump Administration takes office in 2017, I thought this might be a good time to do a brief Q&A style update for readers as to where things seem to stand. Reader questions, input, and article links are always welcome.


Q: Does Trump taking office change the picture in a significant way?

A: In some ways yes and in other ways no. It does not change what this blog follows in any way. Here we simply are watching for any indication that significant monetary system changes are in progress that would truly impact our lives in a meaningful way. We will continue to watch for that no matter how the political environment might change. Of course Trump will likely make different policy decisions and take some different paths than Hillary Clinton would have. However, it is hard to say whether those differences would have that much impact long term on what we follow here. The conditions that might lead to significant monetary system change (systemic risks, etc) have been building up for many years during both Republican and Democratic periods of political control (and also during gridlock which has been in play quite a bit of the time as well). They are not likely to be solved very quickly by anyone. All we can do here is wait and watch.

Q: Have the big issues for this blog changed in any way?

A: No. The two big issues here remain:

1- Will we get another major financial crisis much bigger than any we have seen before as predicted by Jim Rickards and many other analysts? (note: we feature Jim here quite a bit because he is well known, widely respected, does many free media interviews, and has a clear prediction of a major crisis we can follow over time)

2- If we get the big crisis, what solution will be put forward to try and fix the problem?

We can probably add this sub question (2a if you wll): Would Trump deal with such a crisis much differently than anyone else would? 

We don't know the answers to #1 and #2 yet. And now we can add #2a. It is very possible that this kind of crisis/situation would be dealt with the same way no matter who was President of the US. Time will tell.

What we do know is that such a crisis is possible and therefore we must continue to monitor events as we really have no other choice. Sticking a head in the sand is not a wise option.

Q: What are your best information sources saying now?

A: First, let me say that I have been very fortunate to get direct input from some incredibly well informed and high credibility sources. I try not to bother them much unless something important is happening. but they all have been extremely kind and generous to provide me direct honest answers to questions when I do have them. This has allowed me to present better information to readers than I can just reading and searching news articles on my own.

Interestingly, all of my best sources are pretty similar in their view as best I can tell. They don't know the answers to the above questions either and are watching and waiting just like we are to see what actually happens. Trump is somewhat of a puzzle for everyone. He is not a hard core idealogue on many issues. He has issued many what seem to be contradictory statements over the years. He seems to seek input from a broad variety of people across the spectrum including some viewed as "establishment elites" and some viewed as challengers of the establishment. He is a deal maker at heart and seems to value what he thinks are results above all else on many issues. 

All of my sources including those like Jim Rickards are not really sure what Trump will actually do if he is presented with the major crisis we watch for here during his term. Some of my sources have concerns with various aspects of Trump's public policy views, but still really don't know for sure what he will actually do. All of them hope whatever he does is successful, but view him as somewhat of a wild card with no way to accurately predict his actions. They hope he does not create an atmosphere that inhibits free trade with the current system as fragile as it is right now, but they understand that trade needs to be both free and fair so we have to just see what Trump means when he talks about this.

Q: What do you think Trump will do if presented with The Big Crisis during his term?

A: All I can do is guess of course. My sources would be far more likely to know that I would and they really don't know as I mentioned above. My best guess is that if a major crisis as bad as Jim Rickards is predicting were to actually arise during his term, Trump would eventually agree to whatever the experts he trusts most advise him to do. I don't think Trump has envisioned something like this as happening so he would likely be caught somewhat off guard. He might literally have no other choice than to accept the IMF as global lender of last resort that Jim Rickards forecasts. The alternative might be a complete meltdown of the system (we might go back to the Stone Age as one of my sources said to me in an email). If that were the case, I would expect him to turn into a salesman for this proposed solution despite his attacks on globalism as a candidate. Of course, that does not mean that solution would actually work either. It's all just a giant unknown. 

He might surprise everyone and simply go directly to the public and level with them as to what caused the situation and what the realistic options are to deal with it. I don't know and hope we don't have to find out. The atmosphere would probably be filled with political poison and mass confusion could easily result as various special interests tried to take advantage of the situation/crisis. All this is why we have no choice but to stay alert and informed ourselves and keep some kind of backup plan in mind that we hope is never used.

Q: What if nothing major happens during the next four years?

A: That's possible too. If I had time I could list hundreds of failed systemic crisis forecasts I have read over the past 10 years doing research for this blog. While there is always a nagging feeling in the air that at some point the system will go over the edge, it has not happened yet. I don't know of anyone on earth who could possibly know for sure of the timing of an event like that. I plan to continue to monitor events here until at least early to mid 2018. If there is still no indication of a major crisis like we are talking about here, I will likely discontinue regular blog articles. If I do that, I will leave all existing content and articles here and would add new articles if a major event ever unfolded. But I have published most of the most important information I can find here already in the list of systemic risks and the articles on the potential for the SDR to eventually replace the US dollar as global reserve currency. The input from people like Jim Rickards, Dr. Warren Coats, Claudio Borio, William White and Robert Pringle in those articles is as good as you will find on this topic in my view and won't really change much over time. If events unfold such that this information is needed, it will be here for anyone who can use it. If they don't, it will still be here for anyone just interested in learning more about it.

Q: What can the average person do in an environment like this?

A: Every situation is unique of course and people are in different situations. I have always felt that just simple common sense provides a few simple things most everyone can do:

1- try to stay alert and informed and watch for signs of systemic instability

2- try to reduce debt as much as possible

3- try to build up an emergency fund (include a precious metals component if possible)

4- keep some emergency supplies on hand as best you can (some extra food, water, etc)

5- develop a network of trusted friends, relatives, etc to deal with stressful circumstances

None of the above are overly difficult to do and can be done by most people. They are really just common sense and should be done whether we ever get a huge financial crisis or not. Number 1 seems obvious, but I find that most people I know do not make much effort to do it despite how obvious it seems. Perhaps they have a hard time finding good information with all the various misinformation and disinformation that is out there. This blog attempts to help with that as best we can. 

Q: What should I expect on the blog in the short term?

A: Not much change. Probably just  a few articles here and there unless something major happens any time soon. Right now I have no indication that I should expect that, so I will try to just put out an article every now and then, but with no regular schedule. Just based on what news I see out there. The whole world is kind of just waiting to see what Trump is going to do.

Saturday, January 7, 2017

The Debate Over IMF Director Christine Lagarde

With the news in December that IMF Director Lagarde was found guilty of negligence but would not receive any actual punishment, the IMF Board quickly issued a statement of support for Ms. Lagarde. This was mostly viewed favorably around the world, however there are some dissenters. 

Below are a couple of articles (one pro Lagarde and one con) that illustrate the debate over how effective she can now be at the IMF. This could be an important issue if another global financial crisis were to erupt and the IMF role in that crisis moved to center stage.


"As managing director for the past five years, Lagarde has been a ubiquitous presence on the world stage. Her aura of confidence and competence has provided a reassuring calm amidst global crises and economic uncertainty."

. . . .   

"Lagarde has inspired the confidence and trust of countries around the world and for good reason. Her continuing leadership will benefit everyone."

"What exactly do you need to do to get fired as managing director of the International Monetary Fund?

Turn the Greek economy into a wasteland? Nope. Dangerously politicize the body by taking sides in a referendum? Nope, not that either. A conviction for financial negligence? That seems to be just fine.
Short of sexual assault, there seems to be just about nothing that will get you removed from office at the IMF.
This week, IMF Managing Director Christine Lagarde was found guilty of negligence during her time as finance minister of France under then-President Nicolas Sarkozy. The result? Absolutely nothing. The court chose not to punish her, and the board of the IMF decided that she could remain in office.
And yet that is surely a decision the Fund will come to regret."      . . . .

Wednesday, January 4, 2017

Robert Skidelsky: Economists versus the Economy

Here is an interesting article on Project Syndicate by Professor Robert Skidelsky. Is he saying that markets are a complex system (see Jim Rickards comment below) and that economists tend to try and over simplify things with standard economic models (which may be why they miss seeing a major crisis coming)? I'll let readers decide for themselves what message he conveys in this article. Below are a few selected excerpts.


"Let’s be honest: no one knows what is happening in the world economy today. Recovery from the collapse of 2008 has been unexpectedly slow. Are we on the road to full health or mired in “secular stagnation”? Is globalization coming or going?

Policymakers don’t know what to do. They press the usual (and unusual) levers and nothing happens. Quantitative easing was supposed to bring inflation “back to target.” It didn’t. Fiscal contraction was supposed to restore confidence. It didn’t. Earlier this month, Mark Carney, Governor of the Bank of England, delivered a speech called “The Specter of Monetarism.” Of course, monetarism was supposed to save us from the specter of Keynesianism!

"This takes us back to John Stuart Mill, the great nineteenth-century economist and philosopher, who believed that nobody can be a good economist if he or she is just an economist. To be sure, most academic disciplines have become highly specialized since Mill’s day; and, since the collapse of theology, no field of study has aimed to understand the human condition as a whole. But no branch of human inquiry has cut itself off from the whole – and from the other social sciences – more than economics."

"If you believe that economies are like machines, you are likely to view economic problems as essentially mathematical problems. The efficient state of the economy, general equilibrium, is a solution to a system of simultaneous equations. Deviations from equilibrium are “frictions,” mere “bumps in the road”; barring them, outcomes are pre-determined and optimal. Unfortunately, the frictions that disrupt the machine’s smooth operation are human beings. One can understand why economists trained in this way were seduced by financial models that implied that banks had virtually eliminated risk.

Good economists have always understood that this method has severe limitations. They use their discipline as a kind of mental hygiene to protect against the grossest errors in thinking. John Maynard Keynes warned his students against trying to “precise everything away.” There is no formal model in his great book The General Theory of Employment, Interest, and Money. He chose to leave the mathematical formalization to others, because he wanted his readers (fellow economists, not the general public) to catch the “intuition” of what he was saying."

"What unites the great economists, and many other good ones, is a broad education and outlook. This gives them access to many different ways of understanding the economy. The giants of earlier generations knew a lot of things besides economics."

Please click here to read this full article on Project Syndicate

(bold emphasis above is mine)

Added note: I mentioned this article to Jim Rickards to get his thoughts on it. He offered this reply:

"He's not going so far as to say markets are a complex system, but he is saying existing mathematical models are obsolete. He seems to be arguing for non-mathematical approaches including psychology, history and law. I agree with that completely, but there is room for math as long as the model accurately corresponds to the real world."  ---- Jim Rickards

Sunday, January 1, 2017

Crisis Watch As We Head Into 2017

As we head into 2017 I would highly recommend readers watch the debate below between Jim Rickards and Ann Pettitfor held in London recently. You can watch it below. Below I have some added comments about this debate/discussion and why it relates to our Crisis Watch here.

My added comments: This debate/discussion is fascinating not because of the points of disagreement between Jim Rickards and Ann Pettitfor. Instead, it is the many key points on which they AGREE that we need to pay attention to in terms of our Crisis Watch.

In this debate we have two very intelligent and respected individuals who come from very different points of view on many issues. But in this debate, they clearly both agree that the present monetary and financial system is headed towards a major crisis at some point. Neither tries to predict timing but both clearly see a crisis coming. This is why we must continue to stay alert and watch as events unfold. 

There are simply too many very smart and highly respected sources who are concerned about the potential for a future major crisis to ignore it. They may not agree on how the world authorities should deal with a crisis or when it may happen, but they do see one coming eventually. Hopefully, it does not happen, but we are forced to keep a watch out for one and will do that here as best we can. Always keep in mind that it could happen very quickly and without much warning due to the systemic risks that do exist all the time.

We should add that in December, the BIS (Claudio Borio) said that markets seems to be handling things better right now, but investors should stay alert for sudden bursts of volatility. He added that we may get another "flash crash" event at some point, but that he did not expect that to impact the stability of the system in general.

Added note: Jim Rickards goes on record in this article with a prediction that we will see the kind of major crisis he predicts sometime during the Trump term of office and repeats his forecast in this newer article.

Major questions on the minds of many as we head into 2017 (see a few more here): Is Donald Trump setup to head into a situation where a crisis overwhelms him no matter what policies he tries to put in place? If it does happen, would he accept a solution initiated from the IMF where the SDR replaced the US dollar as the global reserve currency? Perhaps two of the most important questions we face going forward that were not discussed in any way during the US election campaign. At this point, I have no idea as to the answer to either question. Trump seems to listen to input from a variety of sources so who knows for sure which view will prevail during a time of major financial crisis?

Tuesday, December 27, 2016

A Few Questions to Ponder as we Head Into 2017

2016 was perhaps one of the most eventful years in history in terms of political events with the Brexit vote and the US Presidential election result. Despite these being potential shocks to the system, we still did not get the major financial crisis that people like Jim Rickards and many others have said they believe is coming some day. Even with all the various systemic risks that have been mentioned by both the IMF and the BIS, none of these have resulted in a new major crisis so big that the entire monetary system has to be "reset". This is what we watch for here no matter what happens in the political arena. 

The election of Donald Trump has clearly changed the status quo in politics for better or worse and only time will tell how that will turn out. While it is true that politics can impact what public policies are put forward economically and we will clearly see some major changes in some areas, this is not really what we watch for here. If all that happens is that Trump simply tweaks the existing system (changes taxes, regulations, trade policies, etc) that may or may not contribute to the kind of major crisis we watch for here. It is likely his policies alone would not. Some are concerned over his ideas on trade, but it is really too early to tell what he will actually do in that area (major overhaul or just tweak things) and how much impact he will have.

The things that are more likely to matter in terms of what we watch for here are:

- the level of public and private debt vs. the GDP of the economy

- failure of one or more "too big to fail" entities that triggers a global derivatives chain reaction (resulting in trillions in contract defaults very quickly)

- monetary and interest rate policies at central banks around the world

- sharp movements in US dollar exchange rates 

- a major cyber attack against the financial/banking system of the US or other major powers

- any geo political event that places too much stress on the global financial system (a war involving major powers for example)

- a major crash in US and/or global stock markets (a major bubble bursting type event)

- a major crash in bond markets (a major bubble bursting type event) 

While Donald Trump's policies might have some impact on some of the above items, some of these items are likely completely out his control and if they were to unfold could overwhelm him no matter what policies he tries to put in place (good or bad).

As Donald Trump takes office all of the following possible triggers for a major crisis were already in place before he is sworn in:

- hundreds of trillions in global derivatives contracts around the world

- nearly 20 trillion in US government debt (plus many tens of trillion more unfunded future obligations like Medicare, Social Security, etc)

- a US stock market at all time highs and interest rates at all time lows (what happens if these markets reverse in a volatile way?)

- a sharply higher US dollar causing stress on foreign debt (estimated 9 Trillion) held in US dollars and borrowed at very low interest rates

- very high debt to GDP ratios in many advanced economies around the world and the US

- an interconnected global banking/financial system where a failure at one or more major institution (or sovereign power) could quickly lead to global contagion

- systematic hacking and cyber attacks by foreign governments intelligence agencies


So, these are the big questions for us here heading into 2017:

1- Will one or more of the potential triggers in the list above go off during 2017 or sometime during Trumps first term of office?  (Jim Rickards has predicted this will happen)

2- Is Donald Trump walking into a "setup" (planned or unplanned) for economic failure no matter what policies he puts forward?

3- If a crisis does unfold in 2017 or during his first term, how will Trump deal with it? Would he agree to a "solution" from the IMF that included replacing the US dollar as global reserve currency with the SDR? 

4- If no crisis unfolds during his term, will his economic policies really stimulate true growth, increase better paying jobs, continue to boost markets, etc.? Can he "outgrow" the expanding future US debt obligations? Will most people feel better or worse off financially in four years? If he succeeds, the main purpose of this blog will disappear since major monetary system change would be very unlikely any time soon. (In this new interview on CNBC, Jim Rickards says he thinks Trump will not be able to get the results he is looking for in 2017)

We don't know the answers to the above questions. But we can get some idea from the economic team Trump has selected. 

His early picks suggest he is much more likely to just tweak the present system than to radically reform it unless the kind of major crisis we watch for here hits him during his term. If that happens, his picks for his economic team (very much establishment types) suggest he would likely go along with whatever they tell him has to be done including accepting the IMF as lender of last resort. There is nothing about his economic team that suggests they would resist an IMF plan if they were told it was the only viable option. Of course, it was never discussed during the campaign and Trump simply assumes it will never happen on his watch when he talks about his plans to the public. 

In fact though, he could ironically end up becoming a salesman for such a plan to many of his followers who would be skeptical of such a plan if someone else presented it to them. Trump is much more pragmatic than many people believe and can switch his perceived position at any time if he thinks he needs to (see Art of the Deal).  All of my best sources here are also watching to see how Trump might react to a new major crisis and none tell me they know for sure.

It will be interesting to see what actually happens in 2017 and beyond. We'll keep an eye on it here until at least early 2018 to see if there is any further purpose for this blog. I guess I should hope there isn't.

Added note of interest: I got this interesting bullet point list of questions/comments for 2017 below in an email from a highly respected and well connected blog reader that I view as a highly credible source.

What does 2017 have in store for us?

  • A US stock market crash? 
  • Or further boom?
  • A recession - 
  • or stronger growth?
  • Property market crash
  • China bubble crash
  • A trade war US-EU- China?
  • Collapse of Euro?
  • Brexit-related flight of banks from the City of London?
  • War - where? - Africa, Asia, Mid East, the Balkans, Baltics?
  • If the euro falls apart, that might restart debate on the international monetary system.
  • The dollar has medium-term strength but weak fundamentals…

And then we have the Economist 2017 magazine cover which always prompts massive speculation as to what subliminal messages the magazine may be attempting to convey (or not). This year they use tarot cards and feature Trump prominently. As you can imagine, these cards are prompting all kinds of speculation as to what they are supposed to mean. This has been going on ever since the Economist cover predicted a new "world currency" way back in 1988 supposedly to arrive around 2018 (the date on the golden Phoenix coin below). The cover appears to show the new global currency arsing from the flames (destruction?) of the various world fiat paper currencies.

Thursday, December 22, 2016

Bloomberg: IMF Doubles Down on Lagarde as Trump Aims to Upend World Order

As we noted here recently, IMF Director Christine Lagarde was issued a statement of full support by the IMF Board after her recent quilty verdict in France. Despite the verdict, the court found that she did not deserve any actual consequences in terms of serving time or even ending up with this on her record. It appears the court felt she technically acted in violation of the law, but without bad intentions.

Bloomberg now runs this article which is the first we have seen to raise the same kind of question we have been raising here. How will a Trump Administration view the IMF in the future?  Below are a few excerpts from the article and then a few added comments.

"The International Monetary Fund’s executive board caught a glimpse this week of what life might be like in the wilderness of a rapidly shifting world order. It didn’t take them long to slam the door.
Christine Lagarde’s conviction on Monday of negligence in a French court cast uncertainty over her ability to continue as the IMF’s managing director. Within hours of the judgment, in which she escaped any punishment, the fund’s 24-member executive board put to rest any speculation that she might have to resign, praising her “outstanding leadership” and the “wide respect” she commands around the world.
But the episode raises the question of how the IMF would select a leader at a time when traditional alliances are fraying among developed economies and popular opposition is growing to the lopsided benefits of globalization. One of the biggest wild cards would be how the IMF’s role is viewed by U.S. President-elect Donald Trump, who campaigned on a promise to put America’s economy first and look past traditional U.S. allies in Europe toward warmer relations with Russia.
“It’s anybody’s guess who the next occupant of the White House would pick,” said Martin Edwards, an international relations professor at Seton Hall University in New Jersey. “They could pick someone who wants to downsize the organization.”
. . . . .
My added comments: It's kind of interesting that this Bloomberg article talks quite a bit about what a Trump Adminstration might prefer in a new IMF leader when the current term for Christine Lagarde does not even expire until 2021. Of course we don't even know if Trump would be President in 2021. The IMF has made it pretty clear she will stay in her current position at least until then.
The real question (which the article does touch on some) is how does Trump view the IMF role in the world (and the World Bank)? Does he see them as vital pieces of US influence or does he view them as institutions promoting a "globalism" that he has campaigned against quite forcefully?
And then we still have the nagging question of what happens if we get the kind of major global financial crisis Jim Rickards predicts during Trump's term of office? Would he accept the solution Jim says will be put forward at that time to have the IMF step in as the global lender of last resort and use the SDR to replace the US dollar as global reserve currency? I suspect Jim is watching this just like we are to see what really happens.
Lots of questions, but not much information available yet to give us a hint as to the answers.

Monday, December 19, 2016

Robert Pringle - What Brexit and Trump's Victory Have in Common

Robert Pringle offers his post US election analysis and concurs with many others we have featured here on the blog. He sees public distrust of those in charge of the present system as a prime cause for the election results we have seen around the world (we can now add Italy to the list). Below are a few excerpts from his recent blog article.


"Many facile comparisons have been made between Brexit and the election of Donald Trump today.
They have an important element in common. But the commentators have missed it.
It is said that both represent a backlash against globalisation. Others say it is a revolt of the uneducated, the marginalised, the people who have been left behind.  Others  emphasise the reaction against excessive immigration: “We want our country back”.
Many blame “experts”. The overwhelming majority of US economists sided with Clinton. The majority of the governors of the Federal Reserve  and the entire policy-making establishment in Washington are Democrats.
Nearly 400 economists including several Nobel Prize winners wrote an open letter denouncing Trump.
Have the experts done so startlingly well as to deserve the public trust, the status, the cushy jobs, the limousines and honours that go with it? Has the economy done well under their expert stewardship?
This is where we get nearer to the nub of the issue."
. . . .

They voted against gross unfairness

"They were voting against unfairness. They were signalling their disgust at the disgraceful behaviour of governments and the financial elite, behaviour that any 10-year old should be ashamed of. Against the power of money and greed.
They were voting against cronyism, the revolving doors between the banks, central banks and governments, in short, against a corrupt political system.
And they were voting against technocrats who had promised financial stability and delivered one crisis after another."
. . . .
Added news note (9 am 12-19-16): IMF's Lagarde found guilty - IMF meets to decide her future. I would be surprised if the IMF asked her to step down based on the last sentence below but we should know soon. Here is a bit more from CNN:

"A special court made up of members of parliament and magistrates announced the guilty verdict on Monday in Paris. But it also said Lagarde won't be fined, serve any jail time, or receive a criminal record."

Update 12-20-16: As expected the IMF issues a statement in support of Christine Lagarde and we should expect that her term at IMF will continue. The guilty verdict appears to essentially be a slap on the wrist with no actual consequences.

Friday, December 16, 2016

Q&A Interview With Claudio Borio (BIS) on Monetary Policy

Claudio Borio of the BIS has conducted another Q&A interview covering his thoughts on the limits of the monetary policies being used right now by central banks. Below are a few selected excerpts and here is a link to the full interview published on the BIS web site. 

Mr Borio, the world is facing many problems. What is the root cause? 
"We do not know for sure. The big questions in economics have not quite been solved. But let me start by saying that the rhetoric about the global economy is worse than the reality. In terms of global growth, we are not that far away from historical averages, especially if we adjust for demographics. Moreover, unemployment has been declining, and in several cases is close to historical norms or measures of full employment." 
So everything is fine? 
"It is the medium term that is our concern - what we have called the "risky trilogy". The long-term decline in productivity growth has accelerated since the crisis, so that the prospects for long-term growth are not bright. Debt levels, both private and public, are historically high and have been increasing since the crisis. And, most critically, the room for policy manoeuvre, both monetary and fiscal, is limited."
But can central banks help out? 
"Monetary policy has been stretched to its limits. In inflation-adjusted terms, interest rates have never been negative for so long and they are lower now than in the midst of the financial crisis, which is odd since the situation has improved. If you came from Mars and they told you that policymakers were struggling to reach price stability, you might be surprised, as inflation is not far from measures of stable prices. But since many central banks have inflation targets set at 2%, there is a lot at stake."
Why do we have low inflation? 
"We do not fully understand this. But I think we have underestimated the long-lasting impact of the globalisation of the real economy, notably the entry of China and former communist states into the world trading system. There has been persistent downward pressure on wages and prices, as competition has greatly increased, helped also by technological change. The pricing power of producers and, in particular, the bargaining power of workers have declined, making the wage-price spirals of the past less likely."
. . . . 
The global debt is around $90 trillion, and it is rising. How should one reduce it? 
"How to manage the debt burden is the hardest question. The best way, of course, is to grow out of it, which is why structural reforms are so important. Other forms are more painful."
. . . . .
Do you fear political populism? 
I fear a return to trade and financial protectionism. We are seeing some worrying signs. The open global economy order has been remarkably resilient to the financial crisis; but it might not so easily survive another one. At that point, we could see a historic rupture. That is an endgame we should do all we can to avoid. 
There are academics and politicians advocating the abolition of cash. What do you think of that? 
Negative nominal interest rates, especially if persistent, are already problematic. Quite apart from the problems they generate for the financial system, they can be perceived as a desperate measure, paradoxically undermining confidence. Getting rid of cash would take all this one big step further, as it would signal that there is no limit to how far into negative territory nominal interest rates could be pushed. That would risk undermining the very essence of our monetary economy. It would be playing with fire. Also, it would be quite a challenge for communication, even in simply economic terms. It would be like saying: "We want to abolish cash in order to tax you with lower negative rates in order to - tax you even more in the future." 
Because the reason for doing this would be to raise inflation - which is perceived as an unjust tax on savings. This would require people to have faith in the "model" which policymakers use to steer the economy. Quite a challenge!
Please click here to read the full Interview with Claudio Borio

Added note: In other BIS news, Mexico central bank Chief Agustin Carstens will assume the role of General Manager of the BIS next year, taking over from Jaime Caruana. Again, we have no idea how new President Donald Trump will relate to either the IMF or the BIS.
My added comments: We have cited Claudio Borio many times here on the blog as he has issues a number of warnings in the past about systemic risks to the global financial system which we keep an eye on here. In this interview he repeats that current monetary policies are still a risk and he adds that the global economic order "might not so easily survive" another major financial crisis. He still says its possible we "could see a historic rupture" in the current system even though he also points out that right now things seem pretty stable and there has been some improvement recently. 
These comments just further confirm that the thing we need to watch for here is another huge global financial crisis. This is the event most likely to lead to the kinds of major systemic changes we watch for here and that would certainly impact all of us in ways we could not ignore. 
The problem we face is to remain vigilant when things appear to be normal and there is no indication of such a crisis on the immediate horizon. I could document dozens of major crisis predictions that have come and gone over the past several years with no major crisis like this unfolding. People who follow these issues will naturally tend to become more and more numb to such predictions as they see so many events pass by that we are told will trigger the crisis and yet it does not happen (I made short bullet point list of some examples below to show what I mean). Here, we avoid any kind of predictions and certainly do not try to pinpoint some specific date or event as being a trigger. We just admit that we cannot know the future. We think a better idea is to make some upfront plans to prepare for such a crisis and then stay alert to actual events to see what really happens. Staying alert may be as important as anything else that one can do since Jim Rickards predicts that the kind of crisis we are talking about could easily arise very quickly due to an event no one is anticipating.
Here are is a very partial list of crisis predictions that so far have not panned out:
- world will be engulfed in super inflation/hyperinflation due to central banks QE policies
- stock markets are a bubble that will burst due to central bank policies
- bond market is a bubble that will burst as too low interest rates (and even negative interest rates) normalize back to higher rates
- a major sovereign debt default will trigger a global crisis
- Failure of a major too big to fail entity (like Deutsche Bank for example) that triggers a chain reaction failure in trillions of derivatives contracts across the globe
- Failure of a major gold (or silver) clearinghouse (like the Comex for example) to deliver physical gold (or silver) due to lack of available gold (or silver) to meet the contract with the buyer
- too strong US dollar triggers global defaults from entities who have borrowed US dollars at low interest rates and cannot pay back when the dollar rises too much (there is an estimated 9 Trillion around the world at risk on this issue)
- various specific dates that some believe have cyclical significance or religious significance have come and gone without the associated predicted crisis. (Examples - Shemitah, Year of Jubilee, etc)
- crash in oil prices would lead to major defaults in the oil industry and trigger massive derivative defaults and/or loan defaults 
- Brexit will trigger a crisis in global markets
- election of Donald Trump will trigger a crisis in global markets
The list can go on and on if you do some searching. The interesting thing here is that many of the items in this list are very valid concerns and still exist now even though no major crisis has yet unfolded. 
The point to take from this is that we should be aware of the systemic risks that do exist and have some kind of plan in mind to deal with one if it were to ever happen. At the same time, we should very skeptical when anyone issues some kind of specific date or event crisis prediction. The above list makes it clear that no one can possibly predict the exact timing for a crisis event if we do get one. 
Again, most of us buy insurance so that we will have it if we need it even though we don't know if we will need it or exactly when we might need it. This event should be viewed in the same way. Do whatever you can in your situation to have some kind of insurance in case you need it and then hope you never use it. Try to continue to stay alert and watch events.

Added news note (9 am 12-19-16): IMF's Lagarde found guilty - IMF meets to decide her future