Friday, February 28, 2014

Some Surprising Insider Goldbugs Part II

In the previous post (Part I) we looked at the Management Team for GBI (Gold Bullion International).  Here is what GBI says they do:

"GBI is a leading precious metals provider to Individual Investors and the Wealth Management Industry. Precious Metals are acquired from dealers that well London Market recognized brands and store them on behalf of clients in protected and insured vaults in New York, Salt Lake City, London, Zurich, Singapore and Australia. GBI is the safest and most reliable option for precious metals owners."

On their web site they go on to emphasize that only allocated gold is purchased. This means gold held in the clients name by actual item number that is inventoried and audited. No paper precious metals here. No derivative products of any kind. Only the real stuff.

If you think there management team was interesting, 

Eric Schwartz, Chairman of the Advisory Board - former Nikko Assets (Japan) and Goldman Sachs

Arthur Levitt, Advisory Board - the 25th Chairman of the US Securities and Exchange Commission (SEC)

Sallie L. Krawcheck, Advisory Board - former Bank of America and Citibank, Member of the Bretton Woods Committee, on the Board of Carnegie Hall, on the Board of FINRA

General Wesley K. Clark, Advisory Board - yes, that Wesley Clark, retired 4 star General

John Hathaway, Advisory Board - manages the Tocqueville Gold Fund

Dan Tapiero, Co-Founder/Advisory Board - former fund manager, Business Execs for National Security

Edward J. Mathias, Advisory Board - Managing Director and Partner of The Carlyle Group

Now there is a list of highly connected mainsream insiders if there ever was one. It includes the former head of the SEC and a Partner in The Carlyle Group. The Carlyle Group is the cream of the cream of US political and financial insiders. Did you know General Wesley Clark was on the Advisory Board for a site advocating buying physical gold?

So we can add the impressive list above to Jim Rickards (consultant to US Intelligence Services) and just recently Andrew Huszar. (who stated in a King World News interview that he owns gold because of "dangers to the US dollar as reserve currency") . Huszar managed the first QE program for the US FED and setup a trading room for them.

Isn't it fair to ask,

If gold is meaningless as most mainstream US financial media suggest, why are all these people buying it and selling it to high net worth investors? And why did they post this article on their web site about how Americans do not own much gold compared to even people in Viet Nam or Thailand. Here is the concluding paragraph of the article:

" These ASEAN countries are smart in the sense that they know inflation can change lives. They have seen the damages caused by profligate governments on a micro-scale, which is relevant on a macro-scale today. Americans, arguably for no fault of their own, just don’t understand gold and probably won’t until it’s too late."

Look who is saying "Americans just don't understand gold and probably won't until it's too late."

I guess it's "no fault of their own" because when they turn on their financial news media, they are told gold is meaningless and "earns no interest". But clearly, it has generated a lot of interest from these highly connected US insiders.

Some Surprising Insider "Goldbugs" Part I

Gold is one of the things we keep an eye on because it is one of the key indicators that major monetary system change might be coming. If the US dollar loses significant value it will do so as compared to the price of gold. A much higher gold price indicates the existing US dollar (Petrodollar) system may be on the way out. 

If lots of high net worth investors are buying physical gold, that is something that indicates they may be attempting to hedge against a possible coming dollar drop (currency reset?)

The mainstream financial press in the US mostly ignores gold or suggests it is of no importance in a modern monetary system. Brokers mostly steer clients away from gold because it is not a product that generates commissions. Gold held in actual physical form is usually just a long term store of wealth for those who hold it. They don't trade it much so there are no sales commissions. The mainstream view is "gold doesn't earn interest".

The pro gold community of course see great value in gold as a hedge instrument against the loss of purchasing power of any fiat currency over time. They point out for example that since the inception of the US FED in 1913, the US dollar has lost a lot of its purchasing power versus gold. 

For example, $1000 in cash in 1913 is still $1000 cash today. In 1913 at $20 per ounce, $1000 cash would buy 50 ounces of gold. Today 50 ounces of gold is worth $65,000 in cash.
So if you owned $1000 cash in 1913 and $1000 in gold in 1913, your gold would be worth 65 times more than your cash today. This happens slowly over time so people don't realize it.

This is the basic idea about gold preserving wealth over the long term. Of course, in any country where the currency suffers a sudden sharp devaluation, gold is one of the few ways the people can protect themselves. Extreme examples are overnight devaluations of currency.

We  are used to long time "Goldbugs" touting this benefit for gold. We are not surprised when people like Eric Sprott, James Turk, or Jim Sinclair advocate gold to protect wealth. Some people may not even be surprised when people like George Soros, John Paulson, Carlos Slim, and Donald Trump invest in gold. Those names might be surprising to people who do not follow the gold market, but most who do follow it know about their investments in gold.

What might surprise most people though (I know this surprised me) are some very high level connected insiders who are associated with a web site that helps high net worth investors invest in physical gold. These are not names I would have associated with gold in any way. Not only are these names endorsing gold on this web site, they say ONLY physical gold purchases should be done by these investors. This is pretty far from a mainstream view of gold you would expect from these people.

So what is this web site? Here is the link to the home page:

Now lets explore this site a little bit. Who is their management team?

Management Team bios     Lets list them:

Steven Feldman, Chief Executive Officer/Co-Founder - former partner at Goldman Sachs

Savneet Singh, President/Co-Founder - former Investment Banker at Morgan Stanley

Peter Custer, Chief Technology Officer  - former Wells Fargo, Lloyds of London, Bill Gates Foundation

Marc C. Scher, Chief Operating Officer - 18 years at Merrill Lynch

Brian Schappert, Head of Business Development - former NYMEX

That's quite a list of banking insiders I wouldn't expect to be selling physical gold.
In Part II of this article we will take a look at the Advisory Board for GBI for some even more surprising names. And we will look at how they promote gold to high net worth investors. It's nothing like we hear on CNBC for sure.

Thursday, February 27, 2014

Breaking Today on Bloomberg: Gold Study Shows Signs of Decade of Manipulation.

Gold is something we keep an eye on because it directly relates to the value of the US dollar. It also is a competitor to fiat currencies around the world so Central Banks prefer that gold not become too popular. They don't mind gold trading in range, but sharp moves up can be a troubling signal to investors that something is wrong. 

Given all this, a breaking article on Bloomberg this evening will get the attention of many people. Paticularly of interest will be this segment in the article:

All Down

Abrantes-Metz and Metz screened intraday trading in the spot gold market from 2001 to 2013 for sudden, unexplained moves that may indicate illegal behavior. From 2004, they observed frequent spikes in spot gold prices during the afternoon call. The moves weren’t replicated during the morning call and hadn’t happened before 2004, they found.
Large price moves during the afternoon call were also overwhelmingly in the same direction: down. On days when the authors identified large price moves during the fix, they were downwards at least two-thirds of the time in six different years between 2004 and 2013. In 2010, large moves during the fix were negative 92 percent of the time, the authors found.
There’s no obvious explanation as to why the patterns began in 2004, why they were more prevalent in the afternoon fixing, and why price moves tended to be downwards, Abrantes-Metz said in a telephone interview this week.
“This is a first attempt to uncover potentially manipulative behavior and the results are concerning,” she said. “It’s down to regulators to establish why there are such striking patterns but banks have the means, motive and opportunity to manipulate the fixing. The results are consistent with the possibility of collusion.”
My added comments: Of course gold advocates will not be surprised at this report. Many have claimed for years that big banks were engaged in efforts to contain or suppress gold prices on behalf of Central Banks who as noted above prefer gold not to become too popular. 
Jim Rickards and others say the FED (or big banks on their behalf) will enter the gold market at times to contain the price (heavily sell short). Not because they care what the price of gold is. He says its because they do not want a sharply rising gold price to upset the markets and investors confidence in their policies. They are OK with a steadily rising price over time as they need controlled inflation and a steadily declining dollar to reduce the overall debt to GDP ratio. (Inflation allows debt to be paid back with cheaper devalued dollars over time).
A sharply rising gold price causes people to question if something is wrong and especially during this time when massive QE programs are being implemented. It is easy to understand why Central Banks would not want a sharply rising gold price as markets could interpret that as coming high inflation. It also might be viewed as QE policies not working properly. So here is another story we will keep an eye on over time.

Addendum: For a look at some Surprising Insider Goldbugs go here.

Man who managed QE for the US FED sees "real dangers to the US currency as a reserve currency"

This is a significant post related to possible coming major monetary system change.  Andrew Huszar  is the man who apologized for managing the initial QE program for the US FED. In this recent interview with King World News he says QE is failing, he fears a possible 30% drop in the stock market,  and he owns gold because he sees "real dangers to the US currency as a reserve currency". (King World News is an alternative news site that does interviews with a number of respected mainstream sources such as Art Cashin (CNBC), Paul Craig Roberts, Rick Santelli (CNBC) and former OMB Director David Stockman as a few examples)

So we can now add another significant key US insider to the list of those who see a future where the US dollar may not be able to maintain its position as world reserve currency. This interview is interesting for many reasons. One of which is that someone who recently worked for the FED now owns gold and will discuss publicly why he does. First, here are the links to the interview (which is in two parts at King World News). 

Huszar fears stocks may drop 30%

Huszar owns gold 

Here a few segments from this compelling interview:

Eric King:  “Andrew, what made you come out publicly and say that QE was a failure and apologize to everybody?  What made you come out and do that?”

Huszar:  “I left the Fed in 2011. ... I maintain great respect for a lot of the people inside (the Fed), and so I struggled for a long time to come out and speak publicly about it.  But in the end I spoke out because I believe that QE, while initially well-intentioned, has really allowed the US to kick the can down the road with respect to major structural reform that has to do with its economy."

Eric King:  “Let’s come back to the fact that the Fed has this large trading room.  We basically have academics, and I’m summarizing, but we have academics now running the largest hedge fund in the world, and to me that sounds like a recipe for disaster.”

Huszard:  “Yes.  It’s one of the big unintended consequences of QE ... You have the Fed now driving markets.  You have the Fed now buying 90% of the new issuances in the mortgage market.  So there is a real question as to what happens when the Fed steps away.

Eric King:  “Andrew, both of us have a position in gold.  I’m just curious why you have a position in gold.  Why the investment in gold?

Huszar:  “I look at what the Fed has done basically since the beginning of the millennium, and I see a central bank that’s effectively been pumping cash into the market in different ways.  I think on some level that initially helped feed the run-up in gold." 

"But today why I am in gold is as a hedge against what I believe is going to be significant volatility down the line.  I think over the long term gold is going to be a very valuable thing to hold as part of a portfolio. ... We could see some significant shifts in the way money flows in the U.S. and some real dangers to the US currency as a reserve currency.  Obviously gold is a wonderful hedge for that possibility.”

"Ironically, one of the big risks of quantitative easing is that it was supposed to stimulate credit, and it really hasn’t.  The irony is:  If and when it actually succeeds and banks actually start lending again in large sums, that could take some time because the underlying credit picture is not fantastic in the US economy to this day, but to the extent that those reserves are out there long term, we do have this reality that the Fed could actually cause too much of a good thing. 

And banks suddenly deploying all those reserves out into the economy, and the Fed doesn’t necessarily have the tools to pull back on all of those reserves, and so there is this risk of heightened inflation going forward.  Whether it’s runaway or whether it creeps up, again, I think that’s a real question, but I think if you look at the picture right now with the U.S. economy with the money supply where it is, you cannot argue that there aren’t pretty substantial risks of inflation.”

My added comments: Here we have yet another key US insider saying what Jim Rickards, Paul Craig Roberts, David Stockman, and several other highly credible insiders are saying about the US dollar. This is why people need to take this topic seriously, stay informed, and keep a watchful eye on things.

Tomorrow we will have a post on some people who endorse gold that may surprise you. While US media sources mostly dismiss gold and do not take a sharp dollar drop seriously, some people who are promoting gold (key US insiders) may surprise you. We'll look at it tomorrow.

Udate: Here is the Surprising Insider Goldbugs article.

Wednesday, February 26, 2014

The New Proposed Tax Reform Plan Issued Today

Today the House Ways and Means Committee issued a proposed Income Tax Reform Plan (the Camp Plan). You can find several news articles on the plan,  but here is the actual plan itself.

You can skip to pages 14-21 to see the outline of the plan. The rest is just other background material. If you don't have time to read it, here are a few key elements of the plan.

1) The Tax Reform Act of 2014 reduces and collapses today’s brackets into two brackets of 
10 percent and 25 percent for virtually all taxable income, ensuring that over 99 percent 
of all taxpayers face maximum rates of 25 percent or less. The new 10% rate covers income that used to be taxed at the 10% and 15% rates. All taxable income above that is taxed at 25%. There is a 10% surtax for very high incomes.

2) Raises the standard deduction to $11,000 for singles, $22,000 for married couples. Eliminates the individual tax exemptions. For most people this is basically a wash with no major impact. Just simplifies the return.

3) Expands the child tax credit to $1500.

4) Simplifies the Earned Income Credit for low income earners. Pays it to them directly as a reduction of payroll taxes instead of having to file a tax return to collect it.

5) Preserves most of the most popular current tax credits/deductions for college expenses.

6) Keeps IRA/401k the same for most people, reduces the deduction for high earners that contribute more than $8700 per year.

7) Leaves the home mortgage deduction in place for most people and the deduction for employer paid health insurance.

8) Revamps business taxes by lowering overall rates but closing some loopholes.

There are more details, but the overall bottom line is lower tax rates in exchange for eliminating a number of existing deductions and credits. The major increase in the standard deduction would offset most or all of the loss of specific deductions for most people. High income earners would pay more taxes.

You would think a major tax reform bill might be something that could lead to monetary system change, but not in this case. Any bill like this is just a tweaking of the present system. Most taxpayers would not see a major change in tax paid, but it would simplify filing the return. None of this would lead to a major monetary system change even if it were passed.  Regarding that, both political parties have already said no plan would pass until 2015 at the earliest. For sure any plan passed would be different than this one after haggling and compromises. Special interests will fight over it.

The plan claims it would stimulate real GDP growth and jobs. If true, it could reduce the annual Federal deficit and stall off major monetary system changes. As with most things like this, it is really not possible to know if the benefits claimed would actually be realized.

Tracking Predictions Over Time - A "Yellen Pause" this Summer?

One thing we will do here is try to track some important predictions made by people like Jim Rickards over time. Doing this shows how much confidence to place in their forecasts going forward. Since Jim is predicting "The Death of Money" and a "Collapse of the International Monetary System" we care about his predictions. He has a very good track record so far. If he is right about his big prediction we will certainly have major monetary system change that will impact the status of the US dollar.

Recently Jim predicted that the US economy would slow down and head back into recession mode by this summer. He said this would lead to a "Yellen Pause" as he calls it. In other words, the FED would announce they were not going to continue the QE tapering due to worsening economic conditions. Obviously this is a pretty significant prediction to follow and will let us know if Jim is on the right track.

Here are some headlines today that tend to support his forecast at least right now:

CNBC - JP Morgan to cut 1000's more jobs. - Richmond FED: Manufacturing Activity Withers in February.

Star Tribune -  US Consumer Confidence Dips in February.

CNBC - Morgage Applications at Lowest Level in Two Decades.

ABC News - Walmart Offers Weak Outlook on Sales.

Charlotte Observer - Bank of American lays off more workers.

Telegraph (this one is in the UK) - RBS to slash 20,000 jobs.

Offsetting the above is a report today that January new home sales were up over 9%.

However, with all these banks laying off people in their mortgage divisions it is pretty clear they expect the January numbers not to hold up. Most media accounts are blaming severe winter weather for the slow down.

So right now, things are trending towards Rickard's forecast being correct. He expects a "Yellen Pause" this summer. If that happens, we can expect precious metals to continue to rebound this year.

Tuesday, February 25, 2014

China continues to steadily diversify

We have noted that China is looking for ways to diversify out of its overdependence on the US dollar and US bonds. There are many news articles about this but here is one that illustrates that they continue to do at a steady pace.

Some quotes:

"Industrial and Commercial Bank of China Ltd announced on Jan 29 it had reached an agreement with Standard  Bank Group Ltd on acquiring a 60 percent share in Standard Bank Plca
London based entity that trades currencies, commodities, stocks and bonds, for about $750 million."

"ICBCalso the world's most profitable lender and largest bank by assetsis not alone in 
extending its reach to the African continentwhich has become a hot investment destination 
for Chinese businesses."

"In the futureChina will not only expand trade with Africa but also increase investment in
 the continent," said Li Wentaoaresearcher at the Institute of African Studies at the   China Institutes of Contemporary International Relations.
"Chinese businesses will co-develop with locals and set their roots locally."
In the US we tend to think everything revolves around the US economy. But that has changed over time and there is expanding trade and commerce around the world. More and more trading deals are bypassing the US dollar as well. 

Bitcoin Magazine publishes "A World Currency - Not a New Idea"

Bitcoin Magazine asked if we could do an article adapting our post on the January 1988 Economist article predicting a future World Currency for their readers which they published yesterday.

With the problems coming out yesterday about the Mt. Gox Bitcoin exchange they are having some tough times in the Bitcoin community. We appreciate the folks at Bitcoin Magazine being willing to publish our articles even though they do not promote the use of Bitcoin.

They deserve credit for being willing to expose their readers to various points of view. That is what a good media source does. Provide a variety of views and information in an effort to educate readers. As the situation at Mt. Gox shows, the more information people have, the better. Forbes Magazine wrote this article about a small silver lining for those who may have lost money at Mt. Gox. The losses are at least tax deductible according to this article.

So again we say thanks for allowing us to post an occasional article there as a guest writer.

We express sympathy for those who may have lost money at Mt. Gox. It does show why anything used as a money or currency has risks. Trust is everything for any currency, even the US dollar.

We will continue to cover Bitcoin here to see how it proceeds from here.

Monday, February 24, 2014

War: One thing that can cause major change more quickly

Here we try to keep an eye out for anything that can impact change in the monetary system. History has shown that war can be one thing that causes change. A war involving major powers creates crisis like conditions. Crisis like conditions can lead to change. Right now the situation in the Ukraine will bear watching.

The conflict in the Ukraine seems far away to most people in the West, especially the US. I doubt most people here are even aware anything is going on. In Russia things are quite different. They see this as a direct threat to Russian security. They are issuing statements that the US is behind the revolt that has now thrown the country into turmoil. Here is one article reflecting the Russian viewpoint. There is talk the country may split into two parts.

The western news media is mostly projecting the story that the revolt is a victory for the people in overthrowing a corrupt government that will lead to closer ties with the EU. The background to all this seems to be a below the surface battle that has been going on between the EU (and US quietly) and Russia over influence in the Ukraine. There are important gas lines that move through the Ukraine and into Europe for one thing.

Interestingly, former Asst. US Treasurer Paul Craig Roberts has written a very provocative article on this situation. Since he is an insider with significant contacts, we always have to pay attention to his comments. This article clearly illustrates how he is not afraid to ruffle feathers. He attacks the US position here with some scathing comments towards the Obama Adminstration handling of the situation.

This is consistent with his long held views that the "neo conservatives" in Washington are a problem rather than a solution (he says National Security Adviser Susan Rice is a neo conservative).He held this same view during the G.W. Bush Administration in oppostion to the war in Iraq. The point is that he is not partisan in his views on this topic. He criticizes both sides with equal force. This article is very intense and suggests the possibility it could escalate into nuclear war. This seems extreme to us, but because of the source we cannot just ignore the warning completely. His article does clearly illustrate how both sides are taking this conflict seriously.

my comments: We won't take a position on this topic here because we lack information to discuss the topic intelligently. It does matter though how both sides of this perceive the situation. This is a small regional conflict right now. But with major (nuclear) super powers involved and Russia feeling threatened, it could escalate. If it were to escalate it could lead to crisis conditions. Crisis conditions can lead to changes. So we will keep an eye on this to see if it escalates into something big enough to impact the global economic situation. If major war erupts, that may be the least of our concerns.

G20 "Deeply Regrets" IMF Reforms not approved yet

It is clear that another push will be made to attempt to pressure the US Congress to approve the 2010 proposed IMF reforms we have mentioned here several times. In this article, the rhetoric gets ramped up some. Here are some quotes:

SYDNEY — G20 finance ministers and central bank governors on Sunday said they "deeply regret" IMF reforms have stalled with the United States yet to ratify them.

"Our highest priority remains ratifying the 2010 reforms, and we urge the US to do so before our next meeting in April," they said in a final communique after a meeting in Sydney.

"These reforms are critical to ensure that the IMF represents its entire constituency," Hockey told reporters, adding that it had moved beyond the procedural realm to become a "structural issue for the global economy".

"We urge the US to ratify the current reforms and we will review progress in April. The importance of a strong IMF is very relevant as we speak," he added, referring to ongoing unrest in the Ukraine.

He said individual finance ministers had been monitoring developments and "it is clear that there may be economic consequences to these developments".
Emerging-market economies, including China and Brazil, have complained for years that their relatively small voting rights in the institution insufficiently reflect their real power in the world economy.

The failure of the United States, the largest stakeholder in the IMF, to approve the reforms has been the major stumbling block for developing countries to achieve a greater say in the Washington-based institution.

my comments: Here we see stronger wording with comment like this is becoming a "structural issue for the global ecnomy"  and "it is clear there may be economic consequences" if the IMF is unable to respond to a crisis such as in the Ukraine right now.

We watch this isssue closely because it could very well open the door to the start of major systemic change going forward. The nations who want more voting power do not like the current US dollar dominated global system and the resulting power it gives the US FED. If the FED pumps in or sucks out money, it immediately impacts the global system as we have clearly seen lately. That is why this issue is important. It could lead to major changes that dethrone the US dollar as world reserve currency.

Sunday, February 23, 2014

Major Global Currency Reset/Change - Not Exactly a New Idea

We are dedicated here to keeping an eye out for possible global monetary system change. The type of change that would include the US dollar losing its reserve status. Perhaps the introduction of some kind of new global currency and even a new global central bank? These may seem like new ideas and concepts, but they are not.

Lets take a look at the cover of a January 1988 Economist Magazine. That is over 25 years ago now.

Below the picture of the magazine cover I have pasted is the article itself (the article is not available directly online at the Economist). Here is a link to their site since we are borrowing their old article. We have underlined some interesting sections in the article. As you read it, try substituting SDR or GSD where you see the word Phoenix. Notice the Phoenix in the article arrives in 2018.

1988 The Economist
COVER: "GET READY FOR A WORLD CURRENCY" Title of article: Get Ready for the Phoenix 
Economist ; 01/9/88, Vol. 306, pp 9-10 

"THIRTY years from now, Americans, Japanese, Europeans, and people in many other rich countries, and some relatively poor ones will probably be paying for their shopping with the same currency. Prices will be quoted not in dollars, yen or D-marks but in, let's say, the phoenix. The phoenix will be favoured by companies and shoppers because it will be more convenient than today's national currencies, which by then will seem a quaint cause of much disruption to economic life in the last twentieth century.

At the beginning of 1988 this appears an outlandish prediction. Proposals for eventual monetary union proliferated five and ten years ago, but they hardly envisaged the setbacks of 1987. The governments of the big economies tried to move an inch or two towards a more managed system of exchange rates - a logical preliminary, it might seem, to radical monetary reform. For lack of co-operation in their underlying economic policies they bungled it horribly, and provoked the rise in interest rates that brought on the stock market crash of October. These events have chastened exchange-rate reformers. The market crash taught them that the pretence of policy co-operation can be worse than nothing, and that until real co-operation is feasible (i.e., until governments surrender some economic sovereignty) further attempts to peg currencies will flounder.

But in spite of all the trouble governments have in reaching and (harder still) sticking to international agreements about macroeconomic policy, the conviction is growing that exchange rates cannot be left to themselves. Remember that the Louvre accord and its predecessor, the Plaza agreement of September 1985, were emergency measures to deal with a crisis of currency instability. Between 1983 and 1985 the dollar rose by 34% against the currencies of America's trading partners; since then it has fallen by 42%. Such changes have skewed the pattern of international comparative advantage more drastically in four years than underlying economic forces might do in a whole generation.

In the past few days the world's main central banks, fearing another dollar collapse, have again jointly intervened in the currency markets (see page 62). Market-loving ministers such as Britain's Mr. Nigel Lawson have been converted to the cause of exchange-rate stability. Japanese officials take seriously he idea of EMS-like schemes for the main industrial economies. Regardless of the Louvre's embarrassing failure, the conviction remains that something must be done about exchange rates.

Something will be, almost certainly in the course of 1988. And not long after the next currency agreement is signed it will go the same way as the last one. It will collapse. Governments are far from ready to subordinate their domestic objectives to the goal of international stability. Several more big exchange-rate upsets, a few more stockmarket crashes and probably a slump or two will be needed before politicians are willing to face squarely up to that choice. This points to a muddled sequence of emergency followed by a patch-up followed by emergency, stretching out far beyond 2018 - except for two things. As time passes, the damage caused by currency instability is gradually going to mount; and the very trends that will make it mount are making the utopia of monetary union feasible.

The new world economy

The biggest change in the world economy since the early 1970's is that flows of money have replaced trade in goods as the force that drives exchange rates. as a result of the relentless integration of the world's financial markets, differences in national economic policies can disturb interest rates (or expectations of future interest rates) only slightly, yet still call forth huge transfers of financial assets from one country to another. These transfers swamp the flow of trade revenues in their effect on the demand and supply for different currencies, and hence in their effect on exchange rates. As telecommunications technology continues to advance, these transactions will be cheaper and faster still. With unco-ordinated economic policies, currencies can get only more volatile.

Alongside that trend is another - of ever-expanding opportunities for international trade. This too is the gift of advancing technology. Falling transport costs will make it easier for countries thousands of miles apart to compete in each others' markets. The law of one price (that a good should cost the same everywhere, once prices are converted into a single currency) will increasingly assert itself. Politicians permitting, national economies will follow their financial markets - becoming ever more open to the outside world. This will apply to labour as much as to goods, partly thorough migration but also through technology's ability to separate the worker from the point at which he delivers his labour. Indian computer operators will be processing New Yorkers' paychecks.

In all these ways national economic boundaries are slowly dissolving. As the trend continues, the appeal of a currency union across at least the main industrial countries will seem irresistible to everybody except foreign-exchange traders and governments. In the phoenix zone, economic adjustment to shifts in relative prices would happen smoothly and automatically, rather as it does today between different regions within large economies (a brief on pages 74-75 explains how.) The absence of all currency risk would spur trade, investment and employment.

The phoenix zone would impose tight constraints on national governments. There would be no such thing, for instance, as a national monetary policy. The world phoenix supply would be fixed by a new central bank, descended perhaps from the IMF. The world inflation rate - and hence, within narrow margins, each national inflation rate- would be in its charge. Each country could use taxes and public spending to offset temporary falls in demand, but it would have to borrow rather than print money to finance its budget deficit. With no recourse to the inflation tax, governments and their creditors would be forced to judge their borrowing and lending plans more carefully than they do today. This means a big loss of economic sovereignty, but the trends that make the phoenix so appealing are taking that sovereignty away in any case. Even in a world of more-or-less floating exchange rates, individual governments have seen their policy independence checked by an unfriendly outside world.

As the next century approaches, the natural forces that are pushing the world towards economic integration will offer governments a broad choice. They can go with the flow, or they can build barricades. Preparing the way for the phoenix will mean fewer pretended agreements on policy and more real ones. It will mean allowing and then actively promoting the private-sector use of an international money alongside existing national monies. That would let people vote with their wallets for the eventual move to full currency union. The phoenix would probably start as a cocktail of national currencies, just as the Special Drawing Right is today. In time, though, its value against national currencies would cease to matter, because people would choose it for its convenience and the stability of its purchasing power.

The alternative - to preserve policymaking autonomy- would involve a new proliferation of truly draconian controls on trade and capital flows. This course offers governments a splendid time. They could manage exchange-rate movements, deploy monetary and fiscal policy without inhibition, and tackle the resulting bursts of inflation with prices and incomes polices. It is a growth-crippling prospect. Pencil in the phoenix for around 2018, and welcome it when it comes."

My comments:  Not bad forecasting for over 25 years ago I would say.

G20 Wrap Up - Lots of talk about Growth

The G20 leaders are excited because they were able to get everyone to agree to talk about a growth rate target instead of austerity. There were just a few items on the agenda and none of them indicate that any kind of major change to the monetary system is imminent (which is what we watch for here).

There was one item though that might actually impact the real world someday. They agreed to "
 a new system in place by the end of 2015 to automatically exchange tax data between countries."  

It seems there is a lot of concern amongst the G20 nations that too many big companies (and maybe individuals?) are using their various international locations to avoid paying taxes. The headline in this article mentions Apple and Google.  However, as with anything pronounced by these global entities, the devil will be in the details. A question that comes to mind is whether or not this tax exchange plan will really only involve large global corporations or might actually include anyone who may have a bank account in more than one country. Again as usual, there are no details on implementation.

Other than the tax issue, nothing of major signifigance to this blog's theme came out of the meeting. Certainly nothing that would indicate any kind of major systemic change is coming soon. Even the tax exchange plan is just a tweaking around the current system two years from now.

It seems like the goal of this meeting was to be able to have headlines saying "G20 Targets 2% Additional Growth Rate". This attempts to send a message to markets that we are past the crisis and moving forward to better days. There are no specifics on how this will be done, however. In fact, they won't even explain any plans on how they will try to get it done until November. Who knows how the global economy will be doing by November?  

To be honest, this strikes me as just PR to try and calm markets. Until actual detailed plans are implemented by passing real legislation in actual countries, it is all just talk for now. And we see how well their 2010 plan to reform the IMF voting quotas has done. It's 2014 and not yet implemented. It's off the table until January 2015. Keep that in mind when you hear about grand generic comments about boosting growth by 2%. The tax exchange plan may be more real.

Saturday, February 22, 2014

Jim Rickards on China - Major Change there could Lead to Major Change Everywhere

As usual Jim Rickards brings a perspective you won't find in the mainstream media. This time its an article on why the growth story in China is overstated and how that will lead to a financial crisis/panic in China similar to what the US experienced in 2007-2008. Here is the article link. Below are some quotes including why he thinks this will actually boost gold buying in China even more.

"Amid weaker U.S. growth and volatility in capital markets, China stands out as a beacon in the minds of many investors. It is widely assumed that China will continue to grow at about 7% without interruption and will, in time, surpass the United States as the largest economic power in the world.
This China growth story is one that investors take for granted. But investors are in for a rude awakening when they realize how much of the China story is false and how quickly it may come unraveled."
"If reported GDP (in China) were adjusted for wasted investment, actual growth in China would be seen to be much lower today. If the costs of massive air pollution and other environmental degradation were also deducted, real growth would be even lower."
"Because of capital controls, Chinese citizens are not able to invest in foreign assets such as U.S. or Canadian stocks and bonds. The only investments available to most Chinese other than low-rate bank deposits are gold, real estate and so-called “wealth management products.” These wealth management products are offered by banks but are not guaranteed by them."
"The banks promise high returns on these products, which resemble the notorious collateralized debt obligations popular in the U.S. before the Panic of 2008. Actual performance on the wealth management products is below the promised returns in many cases. Banks cover this up by selling new products and using the proceeds to pay off the old ones. This is exactly how a Ponzi scheme operates."
 "Eventually some event such as a project failure or admitted fraud will start a panic in which investors demand that the banks redeem their wealth management products all at once."
"A run on the banks will commence that only government intervention and bailouts can contain. The result will be a general collapse in Chinese asset values for real estate, stocks and bonds as investors hoard cash, buy gold and move to the sidelines."

my added comments: China is already importing huge amounts of gold now. Some goes to the public and some to its official reserves (Rickards says later this year China will announce it has more than 4,000 tons now). If Rickards crisis scenario unfolds, gold buying will explode even higher as he explains because of the capital controls in China that limit where people can put savings. This would of course be major change that could lead to major change around the world, which is what we keep an eye on here.

The IMF at the G20

Today we have two items to link to which provide everything you could possibly want to know about what the IMF position is at the G20 conference. One is the IMF briefing book done for the meeting. The other is a one hour Q&A session done by Christine Lagarde on Australian TV in front of a large audience.

Both of these are fairly long so I will try to offer a brief recap. Readers who are really interested should spend more time with them. The TV interview is probably easier to follow.

The overall message I see from the IMF is that they want to say that things are a little better and they can now forecast future global GDP at 3.7%. They say the worst of the financial crisis seems to be over, but warn we are not out of the woods. They issue specific warnings about moving to quickly to taper QE and about lack of communication and cooperation between countries. The say that miscalculations could lead to a return of volatility in world markets and currencies. So that is my overall take on their comments.

I will point out that on the link to the TV interview (on the right side of the page) there is a breakdown of the topics addressed so that you can skip directly to a specific topic if you want to. I would suggest listening to the segment that begins at 47:55 called "IMF Voting System". Here Ms. Lagarde again urges the US to approve the 2010 voting reforms to give the emerging/BRIC nations more power at the IMF.

I will limit my comments as readers can form their own opinions as to whether they agree or disagree with the IMF view and proposals. 

I will say that the comments on the IMF voting system segment illustrate to me the wide gap between what the IMF talks about happening and what really happens. If you listen to many of the questions put to Ms. Lagarde in this Q&A session, you can sense the frustration in other parts of the world that the the US FED is overly represented and has too much say in what goes on. Ms. Lagarde handles the questions pretty skillfully being in a somewhat middle ground position. You can tell she agrees, but does not want to irritate the US and the US FED. 

So, at the end of the day, all she can really do is empathize with the questioners and try to talk hopefully that things will change. But the reality as we posted below is that no substantial change is on the horizon. The US is not likely to approve the reforms anytime soon. As noted below, the nations have already given up on this until at least January 2015 (after the US 2014 elections). And the BRIC/emerging nations are moving forward to setup a system of their own that does not depend on the US FED and US dollar. That is a totally different view of the future than Ms. Lagarde wants to project in terms of "cooperation and communication".

I have to give props to Ms. Lagarde for taking tough questions in an open forum. Many of these global institutional leaders will not do that. And I have to feel a little sorry for her at times. She seems to want to try and bring people together for what she thinks will improve things, but it is obvious that as we noted in an earlier post it is a little like trying to herd a room full of cats. The comments by US FED officials about doing as they please in regards to tapering QE are an example of the reality versus the hopes that the IMF attempts to put forward.

While Ms. Lagarde talks about the need for "cooperation and communication" the US FED officials response is:  We will do what we want; deal with it. And the US Congress continues to say no to the IMF proposed voting reforms. 

Addendum: At the 53:35 mark in the TV program Lagarde is asked about Bitcoin and other digital currencies. She says that her concerns "at this time" are that they are unregulated. I will just note the the GSD the Kickex is working on will be regulated and in full compliance with the current banking system. So that would address her concern "at this time".