Thursday, March 27, 2014

With IMF Reforms Stalled - Where do we Stand?

It is becoming pretty clear that the Ukraine aid package that Congress will pass will NOT include the IMF reforms we have discussed here in detail. Since we think this reform package is the key to the IMF moving forward with major monetary system change, where do things stand now? 

This is the big question we need to address here since our entire purpose here is to watch for potential major monetary system change which might include a global "reset" of some kind. 

First, let's define what we mean by a "global reset". When we use this term we are talking about a MAJOR event where the currencies of the world are adjusted to better reflect the current economic influence of each nation. We think such a reset will include a major drop in value for the US dollar along with a loss of its status as sole global reserve currency. 

For major change like this to happen, something big is going to have to happen to motivate this change. We watched the Ukraine situation to see if it might be such a trigger event. At this point however, it appears that situation will not be the trigger. While the IMF is coming to the rescue with a $15 Billion loan package and will be promoted in the media as the lead problem solver, this is nothing much more than the IMF has always done. That is not the kind of event that causes a major global restructuring. 

It is still possible the Ukraine could be an initial process that leads into a series of bigger events, but that remains to be seen. Right now, the situation appears pretty stable. Putin got Crimea and probably is content with that. The US/EU sanctions are so trivial they are a joke and will have no lasting effect. Unless things heat back up and an actual shooting war begins, the Ukraine looks to be mostly over.

Next, let's again show that the IMF reform package is the big deal that could lead to major changes. Here is a letter from the Bretton Woods Committee pleading with Congress to pass the reforms. This is a power list of backers for sure. Christine Lagarde and the White House have both issued statements expressing "utter disappointment" that Congress refused to pass the IMF reforms. It became a partisan issue quickly with the White House and Senate Democrats led by Harry Reid attacking House Republicans for not agreeing to pass the reforms. All this shows how badly they wanted these reforms passed. 

Then we have this article explaining how the G20 has given Washington until the next April G20 meeting to get this done. They are getting very frustrated and recently made public statements about bypassing the US to get the reforms done now. Here is an excerpt from this article.

"On Sunday, the G20, which has been a key organiser of the international financial response in recent years, strongly criticised the deadlocked reforms process. It also offered a new deadline for U.S. action.
“We deeply regret that the IMF quota and governance reforms agreed to in 2010 have not yet become effective,” the G20 stated in a  communique on Sunday, following a ministerial meeting in Australia, which is hosting the grouping this year.
Our highest priority remains ratifying the 2010 reforms, and we urge the US to do so before our next meeting in April. In April, we will take stock of progress towards meeting this priority.”

But Christine Lagarde recently said there is nothing more she can do unless the US Congress passes the reforms. Now Congress has refused again to pass it. With elections upcoming this year it is hard to see why House Republicans would change on this. Polling shows the GOP in position to gain power. The fact that the White House and Senate Democrats backed down indicates they are in a weak position right now heading into the elections.

We can see all this is building into a situation where the G20 nations (led by the BRICS) may just decide to forget the IMF and move forward on their own to build a monetary system outside the US dollar dominated system that exists right now. Russia is talking openly about it and is completing a huge energy deal with China which will bypass the US dollar.

The next event to watch is the April G20 meetings in Washington. We will get a clearer idea if the BRICS et al are going to stay patient and keep trying to work within the IMF or start moving ahead on their own (their Plan B). We'll keep an eye on this next.

Additional comment: 

Some readers have asked what we think a new monetary system will look like. For what its worth, we think a new system brought forward within the IMF would involve a rebalancing to shift more power and resources from debt laden nations (like the US) to developing nations with surplus trade account balances (like China). If they really get serious about cleaning up the whole global debt mess, we could see them rolling all the sovereign debt into one big global account. The lenders (like China) might have to take a hit on their debt holdings (an actual write down and/or loss due to dollar devaluation). 

We think this is why gold is moving east now. We think the pre "reset" process is already underway. The US/IMF/EU have plenty of gold reserves (and other assets like natural resources). The eastern bloc needs more gold to take its rightful place in the global structure after such a "reset". An upwardly revalued gold price is also likely in our view.

We could see the IMF presiding over a one time "global reset" where global debt is resolved, currencies are revalued, and things go forward based on the total economic contributions of each nation. For example, if there were an allocation of a new global reserve currency (maybe the SDR, but also maybe a new digital asset backed global reserve currency), it might be done based on a combination of the GDP of each nation plus its assets (natural resources including gold)  less its remaining debt obligations after a one time write down on the debt. If done fairly, it might actually allow the world to move forward past the overwhelming debt problem that exists today without major social disruption. Probably easier said than done though.

The above is our speculation of course. But it is based on reasonable available news articles plus some input we have gotten from some of our more high profile blog readers here that we believe are highly credible.

We should add. No one can predict the future with certainty. Even if a plan like we described above were in progress, it might not get implemented. First of all, there will likely have to be some kind of major global financial crisis to motivate such a big change. Think of something like what happened in the US in 2008 on a much bigger global scale.

Nations could splinter apart and strike out on their own. Political issues might delay or prevent implementation. A sudden unplanned (uncontrolled) systemic collapse could make it impossible for any one entity to resolve the problem.  The world might become more decentralized instead of more centralized. 

We will just keep watching it all and see what happens. And try to keep readers here informed as best we can.

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