Saturday, September 15, 2018

Why Hasn't Debt Collapsed the System? -- Some Experts Offer Some Thoughts

In 2008 the world was rocked by what is now called the Great Financial Crisis (GFC). The crisis brought down some banking institutions, prompted emergency action by the US government, and triggered an unprecedented reaction from central banks around the world led by the US Federal Reserve. New and never before tried monetary policies were implemented and literally trillons of units of various fiat currencies were created in a global effort to keep the system from imploding due to contagion.

Now, its 2018. So far a systemic collapse has been avoided and most people have slowly released concerns about the stability of the system from their minds. Despite this, there is a nagging problem that most everyone acknowledges; and yet nothing serious is done about it. We are talking the huge debt burden that overhangs both the US and the world. The National Debt clock is still documenting the ever expanding US debt burden (now over 21 Trillion and don't even ask about unfunded liabilities).

As noted above, virtually everyone describes this growing debt as a true systemic risk. Not only for the US, but for the world as well. Just this year both the IMF and the BIS repeated warnings on debt as a systemic risk for the world in general. A chart from the World Ecnomic Forum captures the total global debt picture as of early 2018.

For years and years now, these kinds of warnings have been issued not only by the IMF and the BIS, but also policy makers, politicians, think tanks, and various organizations concerned about the issue (here is one example and here is another). In the US, politicians from both major political parties speak in dire terms about how awful the debt problem is, especially when the other political party is in power. All this, and yet no serious efforts are undertaken to actually do anything about the problem.

It's not hard to understand why. The policy decisions required to contain debt (raising taxes or cutting spending or both) are essentially political suicide at this point. People have a sense of entitlement now that says no one will ever have to make any sacrifices. Central banks stepping in to create all the money needed to prevent widespread economic contraction after the last crisis has simply re enforced that sense of entitlement.

None of this is ground breaking news. Most people kind of know instinctively that the above is basically true and just don't think about it much since the system still rocks along and their daily lives are not disrupted.

This situation creates a couple of key questions in my mind:

1) Given the above situation - how has the US (and by extension the world) been able to avoid a systemic crisis resulting from the overhang of outstanding sovereign debt?

2) How long can the US (and by extension the world) avoid a debt related systemic crisis?

a) less than two more years?
b) two to ten years?
c) more than ten years?
d) a new international system (a reset if you will) will emerge on its own before we get a major systemic crisis (debt related or otherwise)
e) none of the above or a different answer

These are the key questions to consider in my view. If no new major systemic crisis is coming for years and years, not much is likely to change very quickly. If a new major systemic crisis arrives in the not too distant future, all kinds of potential for highly disruptive change (good and bad) will exist. The latter impacts everyone in their daily lives, the former probably goes mostly unnoticed.

I decided to put these two questions to some experts to see what their thoughts are on it. Below are the unedited comments they sent me.

From a reader who works in this arena who prefers to be unattributed:

To respond to your question (#1) ...

"Over the past decade, many boundaries of sound monetary management have been crossed, with favourable marketing (of the lipstick-on-a-pig variety) working its charm to drown out the protests of those who would have respected the rules.

Many monetary system-level changes since 2007 have been clever 'back room' sophisticated survival methods that are typically rather difficult to describe. 

An interesting paper by Philip Bougen and Joni Young called "Fair value accounting: Simulacra and simulation" explains: "Values are being assigned to financial instruments which do not reflect some external accounting reality that is ‘out there’ merely awaiting discovery. Rather this reality is being imagined and might be reimagined in a multiplicity of ways at the intersection of different calculations and different assumptions. ... ... it is precisely because of their application in an accounting context categorized as fair value accounting, one with a market focus, yet one with an absent market reality, that the use of simulacra need to be highlighted. Reference to an absent market as an authoritative basis for simulation, invests the market (albeit absent) and the associated simulacra with a reality they do not possess. Indeed, many of these instruments have never actually been traded on an organized secondary exchange. ...  ... the construction of a reality of various clearly delineated levels of inputs and a stylized market focus for valuation purposes evaporated as quickly as it was formulated, as ‘anomalous’ circumstances and considerations intervened, requiring connections between the various levels of inputs. Given the brokered transaction basis of OTC derivatives we suggest that the anomalies associated with ‘market prices’ might in the future prove more common than previously considered." (pg 399)

Here also is a good explanation of one of the methods, called a "Currency Swap Line":

Presenting this method in a formal respectable article from the ECB (etc) makes it seem entirely coherent. Well, it is. But one can also readily imagine a Monty Python skit called "Currency Swap Line" which would equally reveal it for what it is: a system-level hack. Perhaps one should rewrite the words of "I'm my own grandpa" into a song about this method of monetary system management. For some detail on how things have come about, see this paper from the Federal Reserve Bank of Cleveland -- and the references therein. Some choice phrases are...
  • "Increasingly controversial, the Exchange Stabilization Fund is used to influence the international value of the U.S. dollar.
  • "This impedes an informed public discussion of ESF operations.
  • "...explicitly authorized it to operate without congressional oversight and accountability.
  • "...the Fed warehousing arrangement allows the ESF to take a leveraged position in foreign assets that is not reflected on the ESF’s balance sheet.
Swaps are not new, nor are they 'bad'. Back in 1990 the World Bank funded development of  methods for the valuation of "Debt-for-Nature Swaps". That was a clever (fully transparent and within-rules) bankruptcy-management arrangement for massively indebted governments, led by some bright people at the World Wildlife Fund and the Natural Resources Defence Council. They thought up a way to adapt the currency swap method. Bad debt title in USD was sold to environmental organizations at hugely discounted rates, and payment of the remainder was carried out in local currencies to fund large-scale ecological protection through counterpart organizations in those countries." 

In response to Question #2

A little like (d) but rephrased as (e): a new international system is continually emerging by fits and starts through a combination of hasty patch-ups and thoughtful novel designs, as we lurch along from crisis to crisis, with a bright idea here and a bright idea there. Economies as a whole (like ecosystems as a whole) don't really die; they just rot. See Joseph Schumpter's work on creative destruction.

"My comments on your two questions are that I don’t think the U.S. will ever be driven to default on its debt for three reasons.  First, our financial markets are so deep and broad that they will take a lot of stress. Think of Japan with a much higher debt burden than we now have. Second, we have no foreign currency debt as we are able to borrow in our own currency. Third, we almost always wake up and fix problems before they destroy us. On the other hand we have also gotten used to big deficits and don’t take them as seriously as we should so we might stay asleep too long. If we reach the tipping point, the rapid evaporation of confidence would be almost impossible to stop or reverse.

If the U.S. federal government ever defaults (not likely as I argued earlier), it will most likely take the form of inflation. While inflation is a tax, unlike other taxes it reduces the real value of existing debt public and private. Other forms of default and the resulting  financial restructuring would reduce the real value of specific, targeted debt such as federal bonds etc."

From Robert Pringle (former Director - Group of 30)

"I just keep on thinking of what Adam Smith said when somebody came to tell him that the American colonists had defeated the British army and that this would be the ruin of our nation:  “Young man,” said Adam Smith, “there is a great deal of ruin in a nation.” The US of A ain’t ruined yet. "

From Joseph Potvin (Executive Director -  Xalgorithms Foundation)

"You never can tell what types of events might conspire to become the change, or when these might occur. System-level transformation can go unrecognized even by attentive participants within, until it's effectively the norm. The following is from a paper I did a quarter century ago on investment appraisal criteria (extending a list by systems design engineer Dr. James Kay, U Waterloo):

"Complex systems are: 

  • Unique - Each evolves through distinctive physical and historical circumstances;
  • Nonlinear - Several controlling variables interact through multiple feedback loops;
  • Discontinuous - Catastrophes and irreversible bifurcations can be internally generated;
  • Not Predictable - Pivotal phenomena may not always be statistically significant;
  • Pluralistic - At any moment several succesional configurations coexist;
  • Fickle - From any state there are innumerable alternative developmental pathways; and,
  • Self-Organizing -  An open system enduring a persistent but moderate disturbance can, under some conditions, respond by establishing new stable structures to accommodate it."

From Dr. Leanne Ussher (Affiliate Scholar -  Institute for Advanced Sustainability Studies)

"I actually don't agree with your premise.

 I believe it is extremely important that there to be a clear distinction between US Federal government debt, and private debt (especially emerging market debt, which could be both private and sovereign). The fact that the federal government is NOT going to default on its debt (banning a political hijacking from the tea party) means that its debt excesses do not have the same impact as private debt. (Even US state debt and government sponsored enterprise debt could be easily taken over by the Federal Government in an emergency – e.g. the bailout  of Fannie Mae).   US Federal debt is quite different than private debt, since ultimately they can monetize their debt.

Federal government debt if used correctly can even save a financial crisis from escalating. It is true that this may cause moral hazard, or inflation, but this is something quite different from what you are inferring in your blog: excess US sovereign debt and a portending financial crises.

Conflating private debt with Federal Debt is a common mistake – and I believe it is common due primarily to ideological reasons.  The famous ‘debt clock’ that you cite, only concerns itself with government debt, and was switched off when the national debt was decreasing in the Clinton years. Highlighting its ideological motivations. 

The rising debt I’m concerned about is the rise in emerging market corporate debt, emerging market US dollar carry trades being reversed, and potentially private student debt, corporate debt, and financial corporation procyclical capital  requirements.

The US is still currently the issuer of the world's reserve currency. What was of concern in the 2008/09 crisis was US private debt of financial firms, household mortgage owners, and a few non-financial firms. Too big to fail among private financial institutions (which to bail out -- not GSEs which were always going to be bailed out), and contagion across the national and international financial community.

The Federal Reserve was and will be rescuing private markets in the next crises (or overseas governments and their central banks extending USD swap lines). The Fed was not rescuing federal US debt markets, which is where everyone was running to, and they will run there again. Not until there is an alternative will the US suffer from its exhorbitant debt privilege, and even then it will be a slow burn (like Japan).

The US Federal government (like any federal government that issues debt in its own currency) can readily monetize and deflate its debt. This may cause inflation, and I’m not arguing for inflation. But inflation is a tax like any other. It is often levied on the poorest in a society, those holding assets or wages that are not indexed to inflation, and not  debtors. But it is across the board.

I think, if you really want to blame Federal Debt for our next financial crisis, you would need to build a much more systemically related story of twin deficits, but even then I don't think I would be there.

US Federal debt and inflation is not going to be the next financial crisis. Rather, the debt deleveraging spiral that brings down private entities and their counter parties, across international borders, especially in the emerging markets, and here at home, will be a problem, but they will be running into US Treasuries when the crash occurs, not out of it."

Added note: Recently, former Bear Stearns Director  Nomi Prins wrote this article in which she attributes what she calls "dark money" from the Fed and other central banks as helping to prop up the system and avert collapse. Here is the concluding statement from her article:

"Dark money rules the world, and it could keep the bull market running longer than most people expect, even though the eventual turnaround could be ugly."

It appears that our panel of experts mostly agree that central banks can and do use the tools available to them to keep the system afloat and can do this much longer than many people would expect. The first comment in the list above provides some specific examples of some of the tools available. Dr. Ussher makes a distinction between privately held debt and sovereign debt and feels the former is where the most risk lies in the financial system. 

If the consensus of the views above is correct, it seems that what we should watch for is if the transition from the system we have today into whatever evolves in the future can be managed in an incremental way to avoid the sudden collapse so many watch for and expect at some point in the future (whether from sovereign debt or from private sector debt). Of course, only time will provide the answer as to what actually happens.

Monday, September 10, 2018

News Note: Turkey Issues Gold Backed Bonds

Dr. Judy Shelton points to this article on her Twitter page informing us that Turkey plans to issue gold backed bonds. This is something worth noting. Below is an excerpt from the article.



"The investors will be paid Turkish lira denominated 1.20 percent semi-annual (2.40 percent per annum) returns indexed to gold price."
The ministry noted that the new securities will be issued with a two-year maturity.
"On maturity, investors may request the principal payment as one kilogram of gold bar (produced by refineries) or 'Republic Gold Quarter Coins' printed by Turkish State Mint," it added."
editors note: One kilogram is about 35 ounces
Added notes: This news ties in with efforts by Keith Weiner in the US to get the state of Nevada to issue gold backed bonds which we covered here. In some additional news on gold, a Congressman from West Virginia (Alex Mooney) has introduced a bill that would eliminate all federeal income taxation of gold and silver coins and bullion.
Here is an excerpt from the article in
"The battle to end taxation of constitutional money has reached the federal level as U.S. Representative Alex Mooney (R-WV) today introduced sound money legislation to remove all federal income taxation from gold and silver coins and bullion.

The Monetary Metals Tax Neutrality Act – backed by the Sound Money Defense League, Money Metals Exchange, and free-market activists – would clarify that the sale or exchange of precious metals bullion and coins are not to be included in capital gains, losses, or any other type of federal income calculation."

Sunday, September 2, 2018

Hidden Gems from Experts on Monetary Policy and System Reform

Over the past few years this blog has endeavored to explore the potential for monetary system change that could impact the daily lives of all us. This whole topic arose due to the last great financial crisis of 2008. That crisis took most of the mainstream experts by surprise and resulted in a mad scramble by central banks (with some assistance from the IMF) to stabilize the current monetary system.

Now we are a decade removed from 2008. There is still much debate about whether or not the unprecedented and experimental monetary policies employed by central banks around the world have been successful or not.

On the one hand, they did manage to prevent the system from imploding and the world from falling into complete chaos economically. Some view that as success. On the other hand, skeptics and critics say that the policies adopted only delayed the crisis and the asset bubbles that have arisen from those policies insure that when the next crisis does arrive, it will be much bigger than 2008 and likely will take out the present monetary system during the fallout.

All of this is why this blog was launched. The average person who is simply working hard to make a living and provide for a family does not have the time and the expertise to try and keep up with all the various views on the stability of the present system or the odds for a new major crisis. Beyond that, it takes time to try and understand the ideas and proposals out there to fix the mess if we do get "the big one" that so many people from all across the spectrum of views still think is coming some day.

This blog was started in an effort to better understand these issues and to try and assess what the risks to the present system are and to learn what ideas and proposals exist to "fix the mess" if and when we do get the mess. Along the way, an opportunity arose to get direct input from some of the leading experts in the world on this whole situation. That input has been documented here over the last few years, but time has passed. The articles are now what I would call "hidden gems" of information that most people probably won't know about, but I think would find interesting.

This article reviews some of those "hidden gems" so that new readers will know about them and because the input given is still quite relevant today. Below is a summary of some of these gems and bit of background about the experts who offered them.


Jim Rickards - Jim is probably the most well known expert who has managed to reach the largest audience of people on these issues. Jim has maintained for years that when the next big financial crisis arrives (and he believes it will arrive), that it is likely that a proposal to replace the US dollar with the SDR issued by the IMF will be put forward to "fix the crisis". This thesis is what started the effort here to learn as much as possible about the SDR and any proposals on the table to use it as the new global reserve currency. Here are some articles from this blog where Jim offered direct input for readers here:

Dr. Warren Coats (former IMF - Head of the SDR Division) - There has been lots of discussion in recent years about the prospects for the SDR to eventually become the new global reserve currency. As noted above, Jim Rickards has really brought this issue into public view. But what is the SDR? How could it replace the US dollar? My thinking was that if you want to understand the SDR and how it functions, why not just ask one of the leading experts in the world about it? So, that is what we did here. Below are articles featuring Dr. Coats explaining both the SDR and his "Real SDR" proposal to use as a global reserve currency. You simply are not going to find a better expert on the SDR than Dr. Coats. Here are some articles with his direct input for readers here:

Robert Pringle  - (former Director for the Group of 30) - Robert Pringle is to central banking as Dr. Warren Coats is to the IMF and the SDR. One of the leading experts in the world without question. As Founder of Central Banking publications, he knows and has known central bankers from around the world and written extensively on the subject. After the 2008 crisis Robert, like many, had concerns about policies being implemented to deal with the crisis. He published his book The Money Trap to express his thoughts on the problem and his ideas for solutions. He has been kind to share his wealth of experience and knowledge here from time to time. Here are some articles with his direct input for readers here:

Robert Pringle and Allan Meltzer debate monetary system reform - Part I  --- Part II

Dr. Lawrence White - We happen to share the same name, but Dr. White is the expert on economics and monetary policy. He is a Senior Fellow at the Cato Institute and Professor of Economics are George Mason University. He is also widely respected as a student of the classical gold standard. Here is an article where he pointed me to his work on the gold standard:

John D. Mueller - a blog reader connected me to John D. Mueller. Mr. Mueller is the Lehrman Institute Fellow in Economics at the Ethics and Public Policy Center in Washington DC. He offered some direct input for readers on the gold standard and on Lewis Lehrman:

Dr. Judy Shelton - Dr. Shelton is currently US Director for European Bank for Reconstruction and Development (EBRD) having accepted that appointment from President Trump. She has long been an advocate for monetary system reform and also has spoken favorably towards the classical gold standard. She recently offered her thoughts on the potential for monetary system reform to readers here in the article linked just below and recently called on President Trump to work towards a new international monetary system:

Keith Weiner - CEO of Monetary Metals - Keith has proposed a new kind of gold standard that he calls an "Unadulterated Gold Standard". We covered it here and he added some additional thoughts for readers on why he thinks it is realistic that we might see something like this emerge in the future. Keith is also working with the State of Nevada on the idea of issuing gold backed bonds payable in actual gold.

Robert Bell, Founder and CEO of KlickEx - Robert Bell is a widely respected expert on Fintech innovation as it relates to both central banking and the potential to use technology to reform the monetary system. In the fall of 2017, he announced that he was partnering with IBM and Stellar to implement what he called the first institutional scale blockchain based payments system in the South Pacific. Robert has provided ongoing input and acted somewhat as a mentor over the past few years. He has shared his knowledge and experience picked up directly on the front lines of what his happening currently with regards to Fintech. Here is a recent interview he did for readers here with thoughts on the both the current monetary system and what its future may look like:

My added comments: There you have it. Direct input from experts on the monetary system we have and ideas on how it could be reformed or even replaced eventually. I will add that I have also gotten of lot of direct input and feedback by email from these experts not intended for use in a public article, but very valuable to me in helping to understand these issues. Hopefully, it has helped me improve the quality of the information presented here.

There are truly some hidden gems of wisdom and information in these articles from some of the leading experts in the world on the topic of monetary policy and the potential for monetary system reform. I would challenge readers to try and find a better collection of experts on these issues anywhere. I don't think it exists and it is my hope that as many people as possible will find this information and share it with anyone interested. 

Readers who want to explore these idea further should go to our market place of ideas for monetary system reform page. It contains all the articles linked above along with some articles with input from some additional experts. There are articles that take a deeper dive into some of these issues there as well.

Added note - 9-4-18: Today CNBC runs this article saying the the "top quant" at J.P. Morgan (Marko Kalonovic) is warning that in the next financial crisis we will see:

"Sudden, severe stock sell-offs sparked by lightning-fast machines. Unprecedented actions by central banks to shore up asset prices. Social unrest not seen in the U.S. in half a century." 

Mr. Kolanvic is quoted in this article as saying the chances of such a crisis happening are "low until at least the second half of 2019."

I forwarded this article to one expert to see what he thought about this article. He agreed with the magnitude of the crisis talked about in this article, but felt that no one could predict timing and also that the crisis will be too big for the Fed and other central banks to control. He said there is no reason to assume we are "safe" until the second half of 2019.

Saturday, September 1, 2018

News Note: De-dollarization is a Hot Topic Right Now

De-dollarization (the process of various nations attempting to bypass using the USD) has been a gradual ongoing process for some time that we have covered here quite a bit. However, lately it has become a hot topic for both mainstream and alternative media. 

Below are a few links to articles (sent to me by readers) that represent what it is out there on this topic right now from a variety of points of view. I'll list them below as news notes without commentary.


Reuters - US Isolationism Casts Doubt Over Dollar's Reserve Currency Dominance

Forbes - Steve Hanke suggests Russia, Iran, and Turkey should try a gold backed currency board to get around the USD

Added note: This is not about de-dollarization, but Dr. Judy Shelton (who recently did a brief interview here) did discuss US trade policy and the US dollar on CNBC this week. You see the interview here.

Wednesday, August 29, 2018

News Note: US - China Dispute a Threat to Stability?

It is now obvious that the US and China are in a full fledged dispute over a number of issues with tariffs and trade making the biggest headlines. When President Trump first mentioned the possible use of tariffs against China, the idea conveyed was that he hoped that it would lead to discussions to actually remove tariffs and that we would never get into a world where both sides were engaged in real live trade war. 

Clearly, those hopes were not realized. The dispute seems to be only ramping up with both sides digging in. Critics of the President will say they knew this was coming and view it as very bad. Supporters will say that the US has to be taken seriously by China to obtain a fair end result. It is not our objective here to take sides on political issues so we won't on this situation. It is our job here to try and identify situations that might be a systemic risk to the present financial and monetary system. Now we have to view this situation as at least having that potential. 

I do see some signals that the US is getting more serious about taking on China over these issues and seems to view the situation as a matter of national security. Below I have pasted in some links and information to support my conclusion on this. 

When I see these kinds of things start showing up, it suggests to me that US intelligence agencies are gearing up to try and prepare the public that the US is ready to take actions that may result in adverse reactions (like from China for example). So, we have to monitor this situation as a potential risk to system stability (although likely minimal risk). Again, I watch the key markets for signals (stock markets, US dollar, gold).


Jim Rickards announces on Twitter that he will make a classified presentation on the subject of "Financial Warfare with China" August 15, 2018 at Norfolk Naval base. This announcement follows two new articles on China that Jim releases. Both articles suggest that things between the US and China are not improving and that China can expect to pay a significant price domestically during the dispute with the US:

Here is one quote extracted from the first article:

"Will China be able to pull off this Goldilocks approach to a potential credit crisis? Of course not. Nobody’s that good or that lucky. Still, the Communists will try and may be able to keep the greatest Ponzi scheme in history afloat in China for another year or so.

The endgame is still a financial crisis that the Chinese won’t see coming. In that case, China’s only solutions are to close the capital account, devalue the currency, nationalize the financial sector and put the malefactors in jail.

This story is getting worse because of the escalating trade war that shows no signs of letting up. On top of it we now must add an emerging-markets crisis as the crisis in Turkey threatens a spillover."

Note the emphasis on how much trouble all this is going to cause for China.

Next, recently TV host Mark Levin invited long time expert on China Michael Pillsbury on his program to discuss China. Please note this from the bio information on Mr. Pillsbury:

"Major academic advisers to Pillsbury at Columbia were Zbigniew Brzezinski and Michel Oksenberg, who later played key roles in the Jimmy Carter administration on policy toward both China and Afghanistan. Pillsbury studied the art and practice of bureaucratic politics with Roger Hilsman, President John Kennedy's intelligence director at the State Department and the author of Politics Of Policy Making In Defense and Foreign Affairs. At Stanford, Pillsbury's academic mentor was Mark Mancall, author of two books on the influence of ancient traditions on Chinese foreign policy."

. . . .

"During the Reagan administration, Dr. Pillsbury was the Assistant Under Secretary of Defense for Policy Planning and responsible for implementation of the program of covert aid known as the Reagan Doctrine. In 1975-76, while an analyst at the RAND Corporation, Michael Pillsbury published articles in Foreign Policy and International Security recommending that the United States establish intelligence and military ties with China. "

The ties with US past policy on China and (most likely) US Defense and Intelligence agencies that study how the US should deal with China seem pretty evident from Mr. Pillsbury's past. Please note he has worked with people on both sides of the political aisle for many years.

Below I have embedded the full TV interview with Mark Levin where they talk in depth about the current relations between the US and China. In this interview, I was struck by the tone taken by Mr. Pillsbury. He talked about how he and others in the past had encouraged the US to adopt a policy of cooperation and trust building with China in the belief that China was opening up its society and would move towards more democracy and free markets, etc.

In this interview, he says he and others were duped by China and clearly takes a completely different view. He says the US now needs to view China as a potential enemy and take a different approach to assert a stronger US position with China.

Again, the point here is NOT to take a political position in regards to this situation (for or against US policy). The point here on this blog is to demonstrate that there are some signals showing up in public media that suggest the US is now serious about taking on China in ways that could disrupt the current financial and monetary system, so we need to watch these events and stay informed as they unfold to see what actually happens.

Here is the summary of this interview posted on YouTube:

Mark Levin sits down with Author Michael Pillsbury on Life Liberty & Levin on Fox News Sunday to discuss his book "The Hundred Year Marathon", as well as China stealing American technology over the past 40 years and more.
Added note: With the news that the US and Mexico have agreed to a new trade deal and prospects for Canada to join in, some are suggesting this means the trade dispute with China will eventually fade away with some kind of new deal there as well. That may be, but as of this writing no deal has been made and attempts to restart talks were not successful. So, the above information should still be relevant and events should be monitored.

Friday, August 24, 2018

The Most Important Question Heading into this Fall for My Blog, The US, and the World

Is the Trump Economic Boom a Mirage? 

This is the lead question in a recent article by Jim Rickards that looks at whether or not current Fed policy might lead the US into a new recession. I cannot think of a more important question to consider at this time. The answer to that question will determine if regular blog articles continue here, if the US economy remains strong, what happens to the US dollar, and then even what will the impact be on the entire global economy. 

Below are some excerpts from the article by Jim Rickards and a few added comments. It is hard to overestimate how important the answer to this question really is. If the US economy is as strong as it is reported to be and is able to sustain a higher level of GDP, the political landscape tilts towards President Trump and against any substantial major changes in our present monetary system. This would mean that this blog would likely have little news to report or cover leading to no need for regular articles. Most voters will probably be happy enough to keep things pretty much as they are. The status quo remains likely to stay in place.

On the other hand, if the US economy is not as strong as it is reported be or cannot sustain a high enough level of GDP, the door opens for all kinds of disruption and change. The political environment likely changes. The markets and US dollar are likely less stable. We have to go on alert to watch for signals that another deep recession (or even a new crisis) could emerge. So the the stakes are very high in regards to the answer to this question. Below are some excerpts and then a few added comments.

from Jim Rickards article - The Fed is on a Collision Course

"Is the Trump economic boom a mirage? The data say yes, but the Fed models say no. The Fed has a long track record of sticking to its model-based approach and missing major turns in the U.S. economy.

Current Fed policy will push the U.S. economy to the brink of recession later this year. When that happens, the Fed will have to reverse course and ease monetary policy. This will send the dollar crashing while gold and the euro soar."

. . . . 

"As for the Trump bump, growth in the first quarter of 2018 was 2.0%, slightly below the average since June 2009. Growth for all of 2017, Trump’s first year in office, was 2.6%, slightly above the 2.14% average in this recovery but not close to the 3.5% growth proclaimed by Trump’s supporters.

In short, growth under Trump looks a lot like growth under Obama, with no reason to expect that to change anytime soon. In fact, the head winds caused by the strong dollar, the trade wars and out-of-control deficit spending may slow the economy and bring future growth down below the average of the Obama years.

Into this mix of weak growth comes the Federal Reserve, which is tightening monetary policy, reducing the base money supply and supporting a strong dollar. All of these policies are associated with slower growth ahead, an inverted yield curve and a high probability of recession."

. . . . 

"Simultaneously, the Fed is reducing its balance sheet (destroying base money) at an annual tempo that will reach $600 billion per year by end of 2018. This policy is completely unprecedented in the 105-year history of the Fed, so its economic effects are unknown.

My estimate, and that of others, is that this balance sheet reduction policy is equivalent to four 0.25% rate hikes per year on top of the four already planned. The combined effect is the same as the Fed raising rates 2% per year off a near-zero rate base as recently as December 2015.

Bearing in mind that monetary policy works with a 12–18-month lag, this extraordinary tightening policy in a weak economy is almost certainly a recipe for a recession.

Why is the Fed tightening if the economy is fundamentally weak and the probability of a recession is so high?"

. . . . . 

My added comments: This article lays out very well a situation I have been monitoring in terms of what to do about regular blog articles here. If the US economy holds up and really does sustain a strong level of GDP, not much is likely to change very soon. Most people will be happy (or at least satisfied) and the present system is unlikely to be at major risk for a game changing crisis. As I have mentioned here, there is no reason to continue to try and cover an event that is not happening (major monetary system change) just for the sake of trying to produce regular blog articles.

On the other hand, if the situation goes the other way, things could change a lot and then the door to major monetary system change could also open up. Just imagine if things do go south with the US economy. Political opponents of President Trump will seize upon the situation to disrupt his agenda and undercut his political power base. I think it is reasonable to guess that President Trump will point a finger directly at the Fed as the cause of the problem (too tight monetary policy). This would be a very messy situation with all kinds of potential for disruptive changes with the huge political divide that exists today in the US and the country essentially split in half. 

Also, it is not as though no one is urging the President to be more proactive on the concept of monetary reform. The Wall Street Journal recently called on him to use the current environment to educate the public on why reform is needed and start the process. Dr. Judy Shelton has said this might be the right time to think about monetary system reform. The New York Sun has gone a step further in this article and suggested that if the President does not become more proactive in educating the public on this issue and seizing the opportunity, he may find himself in some political trouble if the economy does take a downturn.

This is why I originally decided to see how things go until this fall in terms of future regular blog articles. By the time the November 2018 elections take place, we should have a decent idea where things are headed. The 2018 mid term elections probably either keep the Trump Administration economic agenda in place or severely disrupt it if the Democrats take control of the US House of Representatives. If the Trump economic boom shows signs of being a mirage before the elections, the prospects for change go up. If the economy seems to be doing fine, the prospects for major change go down.

It's a gigantic question and the answer has worldwide implications. We won't try to make any predictions here. All we can do is just observe what actually happens and report it. 

Added news notes 8-27-18:

Another article calling for monetary system reform - this one says events in Turkey provide another example as to why it's needed. Here's a quote from the article:

"The lesson to learn from the Turkish crisis does not only concern Turkey. It is one more crisis which calls for a reform of the international monetary system."

CNBC - US - Mexico reach trade agreement and new NAFTA deal anticipated

CNBC - Markets not worried about Trump because of the "Pence Put"

Sunday, August 19, 2018

US House Financial Services Committee on "The Future of Money - Digital Currency"

It seems that the US House of Representatives has now started to look into issues we have been presenting here for some time. On July 18, 2018, the Financial Services Committtee of the House of Representatives held a hearing entitled:  The Future of Money - Digital Currency.

CoinTelegraph covered the hearing a bit in this recent article. Since we have covered this pretty extensively here and have been able to get direct input from one of the leading experts in the world on this topic, we will delve into this hearing to demonstrate why we do not think we will be seeing central bank digital currencies any time soon from major central banks such as the Federal Reserve. Below are excerpts from the testimony of the experts who appeared at this hearing and then some added comments and observations. I added some underlines for emphasis.


Dr. Rodney J. Garratt - (UC Santa Barbara)  - Conclusion Section of Testimony:

"In conclusion, I believe that the Federal Reserve will, at some point in the future, need to respond to the disappearance of cash and I have given some reasons why it might consider offering some form of retail-oriented central bank cryptocurrency. 

There are, however, many issues related to the viability and security of this technology that need to be fully resolved before adoption. Moreover, a much deeper understanding of the monetary policy and financial stability issues is needed. On the wholesale side, the DDR (Digital Depository Receipt) concept allows financial market infrastructures to build clearing and settlement features onto distributed ledger platforms by leveraging conventional central bank accounts without introducing a new category of central bank money."

Dr. Michel J. Norbert  - (Heritage Foundation)  - Conclusion Section of Testimony:


"Globally, there has been a steady shift away from paper-based payments during the past few decades, but cash remains a widely preferred option. This shift has occurred as technology changed, thus making it easier to facilitate consumer exchanges electronically. If the federal government would simply allow these changes to take place, there would be no particularly unique problem—the trends toward a less-cash society would likely continue, and consumers would likely use various forms of money, including cash and cryptocurrencies. Criminals may find it more expedient to transfer money anonymously via the Internet, but they have surely found it easier to commit crimes with the advent of better automobiles, computers, and communication devices. None of these items should be criminalized.

The U.S. government should treat all forms of currency, even cryptocurrencies, in a neutral manner. It should remove legal barriers to using alternative forms of money, and it should avoid providing any single form of money with a legal advantage, thus allowing competitive market forces to expose weaknesses and inefficiencies in existing alternatives. The competitive process is the optimal approach to discovering what people view as the best means of payment, and allowing people to access such alternative means of payment is the best way to provide a powerful check on the government’s ability to diminish the quality of money. The same concept—allowing competitive processes to work—applies equally to new applications of blockchain technologies: The federal government should not impose regulations that unduly hinder the development of these applications. Congress should work diligently to eliminate tax and other legal impediments to the development of alternative currencies as well as new applications for blockchain technologies.

The federal government currently has a partial monopoly on the production of money, and this monopoly necessarily limits the extent to which competitive processes can strengthen money. It also exposes the means of payment for all goods and services to the mistakes of a single government entity. Congress should ensure that this monopoly is not extended via the use of federally mandated digital money, especially via retail digital accounts at the Federal Reserve (including a central-bankbacked cryptocurrency). Implementing any such policy would effectively nationalize private credit markets because no private company (or individual) would be able to compete with the federal government. Because people are so vulnerable to the abuse of money (including modern monetary policy errors), Congress should not interfere with citizens’ ability to opt out of official currency."

Dr. Eswar S. Prasad  - (Cornell University)  -  from Conclusion Section of Testimony:

"The dominance of the dollar as a vehicle currency, followed by the euro, is related to the depth and liquidity of most currency pairs with the dollar (and the euro), which reduces the associated transaction costs. This dominance is unlikely to persist and could even result in an erosion of the dollar’s role as a unit of account. For instance, the denomination of all oil contracts in dollars could easily give away to denomination and settlement of contracts for oil and other commodities in other currencies, perhaps even emerging market currencies such as the renminbi.

Notwithstanding any such changes, the role of reserve currencies as stores of value are not likely to be affected. Safe financial assets—assets that are perceived as maintaining most of their principal value even in terms of extreme national or global financial stress—have many attributes that cannot be matched by nonofficial cryptocurrencies.

The key technical attributes include liquidity and depth of the relevant financial instruments denominated in these currencies, such as U.S. Treasuries. More importantly, both domestic and foreign investors tend to place their trust in such currencies during times of financial crisis since they are backed by a powerful institutional framework. The elements of such a framework include an institutionalized system of checks and balances, the rule of law, and a trusted central bank. These elements provide a security blanket to investors that the value of those investments will be largely protected and that investors, both domestic and foreign, will be treated fairly.

While reserve currencies might not be challenged as stores of value, digital versions of extant reserve currencies and improved cross-border transaction channels could intensify competition among reserve currencies themselves. In short, the finance-related technological developments that are on the horizon portend important changes to domestic and international financial markets but a revolution in the international monetary system is not quite on the cards for the foreseeable future."

Alex J. Pollock - (R Street Institute)  -  from Conclusion Section of Testimony:

The Future of Money

"There is no doubt that the digitalization of financial transactions, records, access to information, and communication will continue to increase, and that the electronic networks underlying the activity continue to grow more intense and omnipresent. But the fundamental nature of money, it seems to me, will not change. It will either be:

 -- The monopoly issuance of a fiat currency by the central bank as part of the government, backed by the power of the government. That the whole world operates on such currencies is a remarkable—and dangerous—invention of the 20th century.

--  Or if private currencies do again develop, they will, as in the past, have to be based on a credible claim to reliable assets. With Hayek, we could hope (without much hope) that this might bring competition for government fiat money.

It is clear that having a fiat currency is far too precious and profitable for governments for them ever to go back to a government currency backed and convertible into actual assets, whether gold coins or otherwise.

Government fiat currencies will operate in increasingly digitalized forms. Still, paper money will retain its advantages of secure privacy, immediate settlement without intermediaries, and the ability to function when the electricity is shut down. Recently I was amazed to find that my younger son, an up and-coming banking officer, was walking around with the total of one dollar in his wallet, but of course with a well-used debit card. As this generational difference indicates, doubtless our ideas of money will grow ever more dependent on having the electricity on at all times and everywhere.

Attempts at private fiat currencies, with no claim to any underlying assets, in my view have a very low probability of ever achieving widespread acceptance and functioning as money.

An increase of the monopoly power of central banks, which already have too much, should be avoided."

Watch the full hearing just above
Observation and Comments:

The testimony at this hearing as presented selectively above conforms very well to what we have been reporting here for some time and what experts tell have told us. The advent of cryptocurrencies (such as Bitcoin) and the much touted blockchain technology has created a global discussion about what can be money. Also, will central banks respond to private initiatives to create competing currencies by creating their own versions?

What we have discovered here is that while this topic is very popular in terms of academic studies, panel discussions, and even congressional hearings such as this one, the mainstream banking and central banking industry moves very slowly towards any kind of major change. It is clearly easier to talk about than to implement in the real world.

Please notice the portions of the testimony of the experts underlined above. There is no indication from these experts that we are close to any major central bank creating a central bank digital currency (CBDC) running on a blockchain platform (and certainly not the Federal Reserve). We see some smaller central banks playing around with the idea, but no major movement or trend in that direction so far.

A couple of the experts quoted above even argue in their testimony that a central bank digital currency is a bad idea and oppose anything that might tend to give central banks even more monopoly control over money than they have now.

The point here is that it is obvious there is no consensus right now that major central banks should or will move forward with central bank digital currencies at this time. 

The words of KlickEx CEO Robert Bell offered in his recent interview here come to mind:

"The technology for real time payments has existed for a long time. The technology, like military technology, often takes a decade or more to test and prove and deploy - and can be 30 years old before it goes live, unless in wartime."

If major banks and central banks move this slowly towards adopting simple real time payments systems to move money across borders more quickly and less expensively, just imagine how long they will probably be studying and discussing the concept of a central bank digital currency. Even if they can figure out the technology to implement it, the political process of obtaining consensus remains a formidable obstacle to change. 

Without a crisis to speed things up, this industry tends to move towards change in terms of decades. This is exactly what we have reported here for some time now.