Sunday, March 30, 2014

Christine Lagarde's speech to Chinese University Students

China is big key to whatever happens with monetary system change as we go forward. In recent years China has been carrying a lot of the load for global GDP growth. Recently IMF Director Christine Largarde was in China and delivered a speech to college students there. We can look at a few parts of this speech and make some observations related to monetary system change.

We will select a few quotes from her speech and make some comments in bold type below each quote. Then we will make a few concluding remarks.

"1. The New 21st Century World 
Two defining features of today's new global economy are the rise of Asia and the power of interconnections.
Less than fifty years ago, the emerging markets and developing countries accounted for less than a quarter of global GDP. Today, it is half and rising rapidly—very likely to two-thirds of global GDP within the next decade."
Here we see why China and the BRIC nations want more influence and voting power at the IMF. When the IMF was setup China (and Asia) were only contributing 25% or less of  global GDP. The IMF quota system is supposed to be based on how much various nations contribute to the global economy. Over time the Asian share has risen to 50% and is expected to climb to 65% within 10 years according to Lagarde. This is why the BRIC's (led by China) are unhappy with the current IMF quotas (voting power and borrowing power).  In their view, if they are carrying this much of the load, they should be getting more say at the IMF. 

"Just as this new global economy will continue to expand, it will also continue to draw closer together. Countries today are interconnected in ways that would have been unimaginable to your mothers and fathers when they were your age."
This is a constant theme for all supporters of global financial institutions. In their view the fact that countries are interconnected through trade and financial oblibations (they hold each others debt for example) is why they see a need for things like the IMF. A place where nations can meet to discuss differences rather than fight with each other.
"3.  The Importance of Global Citizenship
Which brings me to my third and last point—the importance of citizenship, especially global citizenship. In our fast-paced, interconnected world, success will depend, more than ever before, on recognizing our common challenges and our common hopes."
"Global Citizenship" ties in directly to the point made just above. Supporters of global institutions prefer to see the world as a "global community" rather than as a collection of individual sovereign nation states. They promote "global solutions" to "global problems".  This is where the IMF could become much more significant in the future if there is a new "global financial crisis". Jim Rickards points out that because the US FED is over extended now, there is no one left standing to try and deal with the next global crisis except the IMF. They have the only "clean balance sheet" left as he puts it. He thinks another crisis is coming (see his new book "The Death of Money") and that the IMF will step forward as the entity to deal with the crisis. This is what we keep an eye on here.

"I have called for a stronger form of international cooperation—a "new multilateralism" for the 21st century—to help us all adapt to this new world that is more interconnected, yet more dispersed in terms of power and decision-making. Increasingly, again as I have argued, a country’s own success will depend on how effectively it cooperates with others.

Christine Lagarde makes an appeal for global cooperation in most of her public speeches. This one is not an exception. Again, if the 2010 IMF reforms are not passed by the US Congress, the entire capacity of the IMF to function in a new global crisis is threatened. This is why it is so important to them and why they will not give up on it.
What we are watching to see is how long the BRIC nations will keep waiting on the reforms. At what point do they just move forward to create a regional financial system that just ignores the US dollar completely? Remember, they are projected to be 2/3's of global GDP in 10 years. That will dethrone the US dollar as sole reserve currency even if it does not happen at the IMF through a new global reserve currency.

Concluding remarks: 
It seems we are on somewhat of a collision course between a future as envisioned by the IMF (a world viewed as a "global community") versus a future where global cooperation breaks down and nation-states go their own way. 
In the IMF future, it becomes the new global "lender of last resort". It institutes a new global reserve currency modeled around its SDR when the next crisis arises. It may very well use a cryptocurrency that will circulate alongside national currencies to tie the "internal SDR" to an "external currency" that can be used by the general public and Central Banks alike.
On the other hand, if the nations do not cooperate, all this might never happen. Instead things could break down to where there are major regional power blocs led by China/Asia, Russia/EU, and the US/Western Hemisphere. In this world they would compete with each other for global financial and political power. Currencies would also compete.
In either future, the US dollar loses its position as sole global reserve currency and the US has a lower economic status in the world than it has had in the last century. We would expect major monetary system change under either of the above scenarios.
The wild card is if something suddenly causes a systemic global financial collapse that is unplanned and uncontrolled. In that case, chaos would rule for a time while things got sorted out.
The next key event in this process we are watching is the G20 meetings in April in Washington DC. Here we will get our next hint as to whether the IMF vision of the future is going to move forward or not. What will the BRIC's do if there is not progress on the 2010 IMF reforms?

Saturday, March 29, 2014

China, Germany to build yuan center

China continues working on Plan B to bypass the US dollar while we wait to see what happens at the IMF. Germany and China announce the opening of an offshore yuan trading center to "allow the clearing and settlement of yuan trades in Frankfurt."

We have mentioned here that we think the BRIC nations (led by China) will continue to work on a Plan B they can implement in case the reforms at the IMF bog down. There is really no reason for them not to proceed setting up institutions and trade deals that bypass the US dollar. Whether they gain more power within the IMF or not, they can set themselves up to operate independently of the US dollar going forward. They gain leverage to pressure IMF reforms as well as they prove they can operate outside the US dollar dominated system.

If the IMF reforms are approved, the yuan will probably be a part of whatever basket of currencies may be included in a new global reserve currency (that replaces the dollar). If the IMF reforms are not approved, they just move forward on their own. That might slow down the process of the US dollar losing sole reserve status, but they are patient.

Either way, the balance of economic power continues to shift over time which we think will lead to a loss of sole global reserve status for the US dollar as more and more global trade takes place without using the dollar. Especially as the energy trade increasingly bypasses the dollar. We think all this is part of a process that will lead to major monetary system change.

Here are a few quotes from the article:

"Beijing and Berlin agreed to launch an offshore yuan trading center on Friday as President XiJinping visited Germany on the third leg of his European tour.
The central banks from both countries (the Bundesbank and the People's Bank of China) signed a Memorrandum of Understanding in Berlin to allow the clearing and settlement of yuan trades in Frankfurt.
It forms part of a series of deals the two countries signed on Fridaywhich sources say could be worth billions of euros. China will also set up a consulate in Duesseldorf.
The trading center will be a "great facilitator for both China-Germany trade and China-EU trade",said Meng Hongan expert on Germany at Renmin University of China."

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.

Wednesday, March 26, 2014

Senate Reverses Course - Drops IMF Reforms from Ukraine Aid Bill

In the latest news on this topic, the US Senate is going to drop the IMF reforms out of its bill to provide loan assistance to the Ukraine. The US House apparently was not going to budge on this issue. Below are a couple of links to articles on this latest news. Once a final bill is passed, we will review how this may impact what we are watching here (anything that could trigger major monetary system change).

Below is a quote from the first article linked above:

"The tussle in Congress over reforming the IMF has threatened the unified message officials in Washington had hoped to send to Russian President Vladimir Putin and those responsible for the invasion of Ukraine. And the administration did not hide its disappointment Tuesday afternoon over the removal of the IMF language. “We are deeply disappointed by the news that Republican opposition has forced the Senate to remove the [IMF] reforms from the Ukraine assistance package,” said Treasury Department spokeswoman Holly Shulman."

my added comment: This confirms what we noted in an earlier blog post. The failure to get the IMF reforms approved is a major disappointment for IMF supporters. It also is likely a setback in terms of perception for the IMF. It indicates a lack of confidence in the IMF by the US House. 

Since this is an election year in the US, it seems doubtful the House will change its stance on this unless some kind of major financial crisis arises. We will comment more on this once a final bill is passed by Congress.


for a more detailed look at how the IMF is organized and how the proposed reforms would change the IMF,
go here.

Tuesday, March 25, 2014

IRS issues rules on tax treatment for Bitcoin

This Bloomberg article covers the new IRS ruling on tax treatment for Bitcoin. For most people Bitcoin would be taxed similar to someone buying or selling stock. Bitcoin dealers have to report Bitcoins earned at their value on the date earned though as income. Retailers also have to report Bitcoins as income at their value on the date a customer makes a purchase.

Here a a few quotes from the article, then my added comments.

"The U.S. government will treat Bitcoin as property for tax purposes, applying rules it uses to govern stocks and barter transactions, the Internal Revenue Service said in its first substantive ruling on the issue.

Today’s IRS guidance will provide certainty for investors, along with potential income-tax liability. Under the ruling, purchasing a $2 cup of coffee with Bitcoins bought for $1 would trigger $1 in capital gains for the coffee drinker and $2 of income for the coffee shop."

"Under the IRS ruling, Bitcoin investors would be treated like stock investors. Bitcoins held for more than a year and then sold would pay the lower tax rates applicable to capital gains -- a maximum of 23.8 percent compared with the 43.4 percent top rate on property sold within a year of purchase.

For investors with losses, U.S. tax law allows taxpayers to subtract capital losses from any capital gains. They can also subtract up to $3,000 of capital losses a year from ordinary income.

As with stocks, Bitcoin dealers would be subject to different rules that wouldn’t allow for capital gains treatment.

Bitcoin miners would have to report their earnings as taxable income with a value equal to the worth on the day it was mined. If they mine as part of a business, they would have to pay payroll taxes as well."

"The IRS will require information reporting similar to how the tax agency receives notification of stock transactions and payments to independent contractors."

my added comments:

There is nothing surprising to me in this IRS ruling. I would have expected them to treat Bitcoin like other property bought and sold for a gain or loss. It does mean that retailers who accept Bitcoin will bear risk immediately for a drop in the price of Bitcoin from a tax standpoint. In the example used above, a coffee shop that sells a cup of coffee for $2 in Bitcoins owes taxes on $2 income even if the Bitcoin received drops in value the next day.

This makes Bitcoin very different from a currency. If the coffee shop sells a cup of coffee for $2 in US dollars, the dollars will have essentially the same value for at least some period of time. Inflation impacts the dollars, but at a less volatile pace than could happen with Bitcoin.

In addition, those who are attracted to Bitcoin with the idea that they will not disclose transactions to the government will clearly be violating tax law now. Every Bitcoin acquired or used (bought or sold) is required to be reported. Records for the price on the date of acquisition and the date used would have to be maintained (like you would for buying and selling stock).

This also makes it awkward for trying to use it like a currency. Imagine the reporting burden if Bitcoins were actually used like dollars. It would be like having to keep track of the date you acquired and used every dollar you spend each month.

Monday, March 24, 2014

Senate Passes the Ukraine aid bill with IMF reforms included

The US Senate just passed its version of the Ukraine aid bill. This version includes approval for the 2010 IMF reforms we have discussed on this blog many times. Since we have already covered that pretty well, below are a list of links to all the latest news articles on this topic. For us, this continues to be the key item to watch related to the Ukraine situation. 

In summary we think that approval of IMF reforms and additional funding will lead to a larger global role for the IMF when the next financial crisis arises. This can open the door for introducing a new global reserve currency and also a possible reset for world currencies (what we watch here). This would take some time, but we think it is the most important thing to watch regarding the Ukraine.

Here are the article links:

Notice how this IMF reform package is right in the middle of all this. There has to be a reason why it is so important. We think the reason is that it will be perceived as enlarging the role of the IMF going foward and really has not much to do with the current situation in the Ukraine. 

The US FED has pretty much tapped out its ability to deal with another financial crisis if it arises. The IMF could become the last resort instead. But it needs a larger pool of reserves and the perception it is a problem solver. If the IMF reforms fail here and the IMF looks weak, it would probably be viewed as a major disappointment by IMF supporters. So look for a relentless effort to get these reforms approved.

Saturday, March 22, 2014

This article link sent to us by a reader

Here is a link to an interesting article that was sent to us by a blog reader here.

The link comes from Bullion Baron. 

This article talks directly about the concept of a reset and also offers a more hopeful outlook than you sometimes see related to this topic. We like the article because it encourages people to be aware of potential change that may be coming, but not to fear it. Instead, by being as informed as possible, develope a personal "Plan B" to use if ever needed. 

Here is a key section of the article:

"The results of their experiments show that some of the very clear trends which exist today– unsustainable resource consumption, and economic stratification that favors the elite– can very easily result in collapse.In fact, they write that “collapse is very difficult to avoid and requires major policy changes.”
This isn’t exactly good news.
But here’s the thing– between massive debts, deficits, money printing, war, resource depletion, etc., our modern society seems riddled with these risks.And history certainly shows that dominant powers are always changing. Empires rise and fall. The global monetary system is always changing. The prevailing social contract is always changing.
But there is one FAR greater trend across history that supercedes all of the rest… and that trend is the RISE of humanity.
Human beings are fundamentally tool creators. We take problems and turn them into opportunities. We find solutions. We adapt and overcome.
The world is not coming to an end. It’s going to reset. There’s a huge difference between the two."

my added comments: 
This article dovetails very well with what Jim Rickards talks about. When the word "collapse" is used, there is a natural tendency for that concept to cause fear. However, when you understand what is meant by "collapse" (an end to a current system that leads to a new system) it is easier to deal with and work on how to adapt to change. As this article notes, humans are usually pretty good at this. The more informed we are, the better we can prepare to adapt as need be. All very good ideas in our view. Get an idea of what the worst case scenario could be and have a plan to deal with that. Then hope you never have to use it.  We will try to watch for things here that could lead to the kind of major changes talked about in this article and by Jim Rickards and others. Reader tips to relevant articles like this are always appreciated.

Jim Rickards interview on The Death of Money

Here is an excellent Jim Rickards interview where he outlines the main points of his new book "The Death of Money".  The interview starts off with Jim providing some background on his resume. It establishes why he is in a somewhat unique position to write and talk about this topic.

Here is basic outline of the interview:

You’ll hear about:

  • Why a collapse of the international monetary system is coming
  • Why it will be bigger than last time, and bigger than central banks
  • Why he thinks the Fed can’t print their way out of the next crisis
may added comments:

Jim also mentions some interesting things he knows from his personal contacts such as a member of the US FED admitting to him that if the FED had to mark its assets to true market value it would already be insolvent today. Of course he adds that they do not have to mark these assets to market, but the admission is still interesting.

This interview speaks directly to the topic we follow here so we recommend listenting to it.


Here is another similar interview  that adds a few points that Rickards just did with Mike Maloney. If you listen to both you will get a pretty good overview. Rickards will be doing a lot of interviews now to promote his new book "The Death of Money" so we will keep track of them to see if he adds any new information. 

Wednesday, March 19, 2014

The Ukraine: It's Still Complicated

Readers of this blog know that we are following the Ukraine situation from a little different angle than most news media. They will cover whatever happens in the war of words, war of sanctions, or even war with bullets, if it comes to that. 

Here we are watching to see if this situation blows up into a serious crisis that sees the IMF enter the picture as the problem solver. It appears this could be the start of a series of important events. If possible, please read this whole post and the linked articles.

As things have unfolded we have become more informed and we feel like we know what is important to focus on. That doesn't mean things are simple by any means. Our first post on this was titled "The Ukraine: It's Complicated". And it still is to us. We still don't claim to have all the answers as to what all is involved here. But we do think what role the IMF (and perhaps the UN) plays is important to follow. 

With that in mind here are three articles illustrating how complex all this is and how difficult it could be to get a united approach to a solution. The links to the articles are posted below with brief summary by us below each link. We hope you can take time to read all the articles as they show how there are many different interests involved here with different possible agendas.

First is this one:  

We have already said that Putin and Russia seem to want the IMF to step into to help resolve things. Here China seems to be pointing in that direction as well. Here is a key quote from this article:

"China has put forward its own proposal to address the Ukrainian crisis last Saturday, calling for the establishment of an international coordinating mechanism joined by all parties concerned as soon as possible to explore political possibilities."

Next we have this article from the Heritage Foundation:

Remember that we are watching closely the battle in Congress to get a Ukraine loan package passed. The Obama Administration used what Jim Rickards calls "the shock doctrine" to attach an IMF reform package to the bill. Rickards defines the shock doctrine as when someone uses a crisis to advance a separate item in their agenda (not necessarily related to the actual crisis). Keep this point in mind also when we post the third article below. In this article the Heritage Foundation makes their case as to why Congress should not approve the IMF reform package just to get a loan to the Ukraine. We will let you read their article to see what their view is. This is probably why House Republicans are not ready to vote for the IMF reform package.

Now we have  perhaps the most interesting article  that is from the editorial board of the Washington Post. 

Recall that we have shown that this IMF reform package is something that the IMF, Russia, China, and the Obama Administration all want (we can add the US Senate now which is looking to pass the loan bill with this IMF reform attached). We noted that it seemed like a battle was in progress where the US House would be isolated and made to look like the obstructionists preventing the loan from getting to the Ukraine. And all that has happened. Harry Reid has already said that very thing.

But here we have the Washington Post essentially siding with the House Republicans. Not something you would expect. They point out that the loan bill needs to pass quickly, but has gotten bogged down in "partisan politics".  You would expect them to follow that up by piling on the Republican House as being the problem. But here is what they say in the article:

"The IMF reforms are important; they would fulfill a promise Mr. Obama made at the 2010 Group of 20 meeting to help the fund boost its lending capacity while shifting some of its financial burden to emerging economies — and giving those countries correspondingly greater power over IMF decisions. But there is only a vague policy connection between that and pending IMF aid to Ukraine, which is well within the fund’s current capabilities. Furthermore, House Republican opposition to the IMF reform plan was perfectly foreseeable, and, in light of current events, not entirely unreasonable."

And there is more:

"The White House and Senate Democrats are more to blame for picking this fight than is the House GOP for waging it. The House has passed a bill that authorizes the Ukraine loan guarantee, and it would have been simple to get Senate approval for a similar, “clean” measure. Notably, a senior House Democrat, Nita Lowey (N.Y.), said Friday that she was “surprised and disappointed” that the Senate linked Ukraine aid to IMF reform. We know it’s an election year, but vital U.S. interests in Europe are at stake. Perhaps even the United States’ partisan politicians can stay focused on addressing the Ukraine crisis instead of exploiting it."

Can this get more complicated? 

There is controversy over who started this whole thing. There is controversy and confusion over what Putin wants out of it. There is confusion over who is really in control of the Ukraine now. Everyone seems to want the IMF/UN to step in and try to get a diplomatic solution. But even that has gotten complicated as a simple bill to extend an emergency loan is now bogged down in the Congress over the IMF reform package attached to it. And it could lead to a big debate over the proper role of the IMF as well if it stays part of the bill.

By now it should be clear how important the IMF role is in all this. How this is decided will probably decide if the IMF is going to become a bigger player on the global stage. That could impact future monetary system change including any currency reset or other changes like a new global reserve currency. And how the US dollar fares in all this is huge. 

If the dollar starts into a nose dive for any reason (war breaks out, Russia and China dump US bonds, the US loses prestige, etc. etc), the global financial crisis some are predicting might arrive sooner than expected. And who will step up to address it? The IMF?  ----  The US FED? (doubtful they can pull it off this time) ----  China? (they want the IMF/UN to handle it)

This is why we are following the Ukraine from this angle. It's very complicated. Major competing interests are key players. How it is resolved may greatly impact the future of the monetary system. It's everything we are here to try and keep an eye on. So far, not that much has really happened. But that could easily change.

Christine Lagarde (IMF) Questioned in French Corruption Case

This story may or may not have signifigance. If Ms. Lagarde is forced to step down as head of the IMF, it will have signifigance. If she remains just a material witness, it probably won't have signifigance. Since it involves the head of the IMF, we will note the article here. Here are some quotes from the article.

"IMF chief Christine Lagarde was Wednesday questioned for the third time by French prosecutors in a high-profile corruption case that has become a thorn in the side of one of the world's most powerful women.

Lagarde faces questions over her handling of a 400 million euro ($557 million) state payout to disgraced French tycoon Bernard Tapie in 2008 when she was finance minister.

She will be questioned by prosecutors working for the Court of Justice of the Republic, a special court that probes cases of ministerial misconduct, amid suspicions that Tapie received favourable treatment in return for supporting ex-president Nicolas Sarkozy in the 2007 election."

"Prosecutors have suggested that Lagarde was partly responsible for "numerous anomalies and irregularities" that could lead to charges for complicity in fraud and misappropriation of public funds."

"Lagarde herself avoided being formally charged last year. If she had been charged, she would likely have had to quit as head of the International Monetary Fund.

Instead, she was placed under a special witness status that forces her to come back for questioning when asked by the court -- and leaves the door open for charges at a later date.

The IMF has always backed her in the case. Lagarde was again questioned at the end of January this year."

Tuesday, March 18, 2014

China and New Zealand announce deal to bypass the US Dollar in Trade

Here is the article.

"China and New Zealand announced a landmark deal on Tuesday that allows the direct trading of the two countries currencies."

"The deal, which takes effect on Wednesday, ends the need for companies and currency traders to convert Chinese yuan or New Zealand dollars into a third currency (usually US dollars) when making or receiving payments."

"New Zealand's currency is the sixth to be granted direct-trade status, after the US dollar, Japanese yen, Australian dollar, Russian rouble, and Malaysian ringett."

"It makes sense for this country to follow in Austrlia's footsteps and notch a convertibility deal'" Fran O'Sullivan (a columnist at the New Zealand Herald) said in a recent article.

my comments: This article illustrates how China steadily moves towards bypassing the US dollar around the world. Russia recently threatened to discontinue using the dollar if harsh sanctions are imposed. All these seemingly separate events are actually part of a pattern if you follow the news. War today is not fought so much with military weapons. Moreso with financial weapons. 

While China has tried to stay publicly neutral on the situation in the Ukraine, they are clearly aligned with the BRIC nations when it comes to monetary system change. They want the US dollar to lose sole reserve status. They want the IMF restructured to gain more influence. They have openly called for a new global reserve currency. They are also buying gold by the hundreds of tons per month (Russia has been a huge buyer as well). All these events tie together if you follow them. We are seeing a contest for the future of the monetary system in our view. We need to watch all this and how the IMF evolves in reaction to all this.

Monday, March 17, 2014

The IMF and the Ukraine - Follow the money

As we keep watch on the Ukraine situation we will continue to follow the role that the IMF plays in this situation. Here we have an update that indicates the IMF is working quietly in the background to get money to the newly installed government. While $15 Billion has been mentioned, this article indicates the true amount needed is much more. 

A few quotes from this article and then a comment.

"Ukrainian bond prices are holding up better than expected in the stand-off with Russia because investors think the International Monetary Fund might not impose tough conditions in an expected aid program due to Kiev's political importance to the West."

"Rather like Pakistan in 2001, which was seen as key in the fight against al Qaeda, some in markets say the IMF, from which Ukraine is seeking financial support, could hand it the money it needs to avoid a default without many of the usual strings."

"The IMF declined to comment on its talks with Ukraine but its head, Christine Lagarde, said last week it should finish its fact-finding mission there by Friday.
Kiev has asked for at least $15 billion, but officials at the Fund and places like the European Bank for Reconstruction and Development, acknowledge it will need to be quite a lot more."

"But ultimately bond market experts say it is likely to come down to a political decision - whether or not the West and the IMF dangle the easy-money carrot."
"We are seeing East against West, which makes it more difficult for the IMF," said Zsolt Papp, who helps oversee $2.6 billion of emerging-market debt at Union Bancaire Privee in Zurich. "Ukraine is just the pawn here."

my comment:
Initial western media reporting on this painted a picture that the Ukraine was a spontaneous revolt of the people. But now this article says "Ukraine is just the pawn here." We suspect this article is more accurate. We believe it is very important to Western leaders that the IMF be seen as the problem solver here. In the past we would be seeing the US take the lead, but here we see the IMF being positioned to step forward. To be the hero so to speak.
We will continue to follow this story from this angle. That being that this is where the IMF emerges to be viewed as a "global problem solver". Expect a continued push to get the US House to approve the increased IMF funding and voting reforms as part of this story. 
Eventually, we think we will see the IMF emerge as the the new global "go to" entity for crisis solving. If this fails to happen and IMF members divide over all this instead of becoming united under the new funding and voting reforms, it will be viewed as a huge disappointment in our view by Western leaders who support the IMF. 
It will make it more difficult for the IMF to implement any kind of new currency reset or global reserve currency in the event of a new financial crisis. So this is what we will watch as this situation unfolds. The sanctions look like just a big show with no substance so far.

Sunday, March 16, 2014

Article from a Reader - China lets the Yuan float

A blog reader sent a link to this article about China allowing the Yuan to float more freely. Below are the added comments from our reader (in bold type) along with some quotes they provided from the article. We welcome all readers to send us articles and comments at any time that are related to our topic here. We are happy to post them.

But here are some interesting quotes from the article:
"To dismiss worries over risks of large-scale money outflow, Lu noted that China has a massive four-trillion-dollar foreign exchange reserve and a 20-percent reserve requirement ratio (RRR). If there is a money crunch in the interbank market, the central bank has a lot of room to inject liquidity, including cutting the RRR, according to Lu."

"Whether the yuan rises or falls, analysts believe further band widening is highly possible as China has put financial reform on its priority agenda."

"In addition to discussions about how a more flexible yuan will influence the Chinese economy, Lu advised China to reconsider ways to set the daily central parity rate."

"As an intermediate step toward a market-based regime, China could peg the yuan to a basket of currencies weighed by the importance of its trading partners, he said."

"Reform toward a real managed float requires a group of more confident and pragmatic political leaders who are truly believers in markets, Lu said."

"The current Chinese leaders are market-oriented," he said.

It certainly sounds like there is some global reform about to happen most likely involving a new global reserve currency, and China is part of it.

Battle over IMF Reforms and Funding goes on

Here is the latest on this important issue which has now become tied to the Ukraine. The full Senate will not vote on this bill until after their Spring recess. This battle is shaping up to be the US House Republicans versus everyone else. Expect continued pressure on them to pass it. Will they hold out or concede on this?

Here are some quotes from the article:

"The White House defended its decision to attach an IMF reform bid to a $1 billion aid bill for Ukraine, which has angered some Republicans and slowed the measure's passage in Congress.

The bill has cleared a Senate committee but will not come up in the Senate until after next week's recess, and its prospects in the House of Representatives remain uncertain."
"Some Republicans have accused the White House of using the wide support for aiding Ukraine as a way of forcing through the reforms to the IMF on which there is less of a consensus."
"Republican House Speaker John Boehner said on Thursday that the IMF quota reform was a separate issue from aid to Ukraine and could cause problems for the legislation in his chamber."
"This IMF money isn't necessary for dealing with this Ukraine crisis that we see today," Boehner said.
"The United States is by far the IMF's largest stakeholder and its refusal to approve the reforms have essentially blocked them."
"The measure would dramatically boost the US quota by shifting $63 billion from an existing credit line."
"Some Republicans however argue that the changes to the organization of the IMF would do little to address what they see as a surfeit of European members on the fund's board."

my comments: 
We have noted that these IMF reforms have already been approved by the other memeber nations. The IMF and Putin and the Obama Administration all want them passed. Putin has said he will work with the IMF to resolve the Ukraine and Russia has urged the IMF to move ahead with the reforms if the US refuses to approve them. 
We continue to believe that the Ukraine may turn out to be more about this reform package than anything else longer term. The big increase in IMF funding along with the voting reforms will make it easier for the IMF to move towards becoming a global lender of last resort and support the introduction of a new global currency if the need arises due to another global financial crisis. This is what we will keep an eye on here.
Let's see if the Ukraine builds into a bigger and bigger crisis with the IMF seen as the entity to negotiate a settlement. Will the US House of Reps hold out against the reform package if the perception is that refusal will lead to major conflict in the Ukraine? If they do hold out, will the IMF move to pass the reforms without US approval? Finally, why are the IMF reforms viewed as so important? There has to be some reason.

Thursday, March 13, 2014

US Dollar Update - Something to watch this weekend

We have noted that what happens to the US dollar is the most important thing we can keep an eye on here. If there is going to be major monetary system change, it will most likely involve a change of status for the US Dollar from its lofty position as global reserve currency. We added the US dollar index quote on the upper right side of this blog as a handy way to see the current market price. With the tension in the Ukraine coming this weekend, this dollar index bears watching to see how it reacts.

Jim Sinclair ran this fairly lengthy but good article on the dollar which provides some more information on why it is important. The article is written by Bill Holder of Miles Franklin. The bottom line to all this is that if you want two things to watch to let you know if we are getting closer to possible major changes, they are the price of gold and the US dollar index. 

In general, if the US dollar is falling in value, gold tends to go higher. In reality what is happening is that the dollar is simply losing purchasing power versus gold. If this trend continues over a long period of time and the dollar falls below key support levels, it is a strong indication that there are serious problems somewhere in the monetary system. This is why Central Banks (including the US FED) do not want to see a sharply rising gold price or sharply falling dollar.

If that does happen, investors will become more worried and will tend to just "pile on" and speed up the process of exchanging dollars for hard assets. If confidence in the dollar gets too low, people will simply start trying to trade dollar investments for whatever they think will maintain purchasing power. Historically that has been gold (and probably silver as well).  Other hard assets as well, but gold and silver are usually the first choice. 

On the flip side, if you see the US dollar strengthen, it means investors are still confident in dollar related investments. It is not troubling to Central Banks for these prices to fluctuate in normal trading ranges. It is troubling if they start moving too much too fast. This is what we have to watch for carefully at all times given all the global debt today. 

In addition, we still have too big to fail banks holding huge derivative positions. It is an unknown what the true market value of all these derivatives really are. If one or two big financial institutions fails, it could lead to a chain reaction in these derivative holdings across the system. Such an event would likely trigger a free fall in the US dollar and shake confidence in the current monetary system to the core. 

So far the system is still holding together. No one can know for sure how long that will be the case. It could change at any time or it could stay stable for quite a while longer. Just use your two simple guides as your first warning signs. The price of gold and the US dollar index.

added note: One thing to keep in mind if a worst case scenario did happen. There is a lot of gold held by the IMF and Central Banks. In a bind they can always use that gold to restore confidence and stability. It's not their preference to have to do that because that means things are in bad shape, but they can use gold and in my opinion would use gold if it became necessary. I think there is a lot of misunderstanding about how Central Banks really view gold.

Gold will be at a much higher price in that scenario unless they lose the battle against deflation. But if that happens, gold will likely still gain in purchasing power versus everything else (lets say your house drops 50% in value, but gold only drops maybe 20% in price for example). You can be sure that the Central Banks fully understand this in my opinion. Also, the FED will do everything it can to fight deflation because deflation hurts debtors. The US is the biggest debtor out there. Falling asset values would almost surely led to US debt default at some point sooner than later.

update 3-14-2014: the dollar index has now fallen below a key level at 80 and is having difficulty getting back above that number. The Ukraine situation remains volatile. The big key now is the 79 level. If the dollar cannot hold 79 it is likely to start into a sharper decline. Next week will be important in terms of seeing how this index reacts.

Wednesday, March 12, 2014

Rickards on Dutch TV - Talks about a future possible gold backed SDR

Here is another Rickards TV interview done by a Dutch TV network. This was released today and is one of the better interviews I have seen with Jim Rickards. The interviewer does a great job of challenging Jim with some tough direct questions. The interview begins in English around the 30 second mark.  

Jim is asked if he is a "prophet of doom" and why other collapse forecasts have not happened yet. He is asked to explain why his forecast is different and why he will be proven right over time. He takes on those questions with direct answers. Something you do not always get in these kinds of interviews. 

Jim explains that his projection of collapse of the current monetary system is not as dramatic as it sounds. What he means is the current system is stressed and will reach a point where it cannot be sustained. At that time, the financial authorities will get together and propose a new system where the "rules of the game" are different. A "reset" if you prefer that term.

This interview touches on several important issues and is one I highly recommend for readers here. Near the end of the interview the discussion turns to what a new monetary system might look like after the current one ends. Rickards talks about the fact that when the next big global financial crisis comes, it will be too big for the US FED to handle. He then explains that the IMF will be the only entity left with a clean balance sheet to deal with the crisis. He further mentions that this could lead to a new global reserve currency using the SDR. He even adds that this could be backed in some way by gold.

All of this relates directly to what we are watching here. Because Jim Rickards is highly connected and has extensive experience in these issues, what he says carries an extra level of credibility with many people. In addition, his forecasting over the past several years has been very good. This adds to his credibility. It's why we post most every interview he does on this blog. We don't think there is a better, more credible source for people interested in learning about these issues that is willing to talk publicly.

There is something we can add here though. Some research we are doing indicates the IMF may very well become a major player like Jim Rickards talks about in the next few years. But it may not be exactly like Jim is describing it right now. There is no doubt that the IMF has interest in expanding its reserves and taking on more of a "lender of last resort" role. IMF discussion papers talk about this. They also discuss the idea of using the SDR as a global currency. This is not a new idea as we have posted on this blog. 

What is new though is that there are new technologies today that may come into play. The IMF discussion papers admit that using the SDR itself as a new global currency has logistical problems. The SDR is an "internal currency unit" that is only used at the IMF between member nations. 

They have always known that connecting that "internal currency" to something "external" that can be used like national currencies in the real world has challenges. These challenges are discussed in their discussion paper mentioned above. The paper also discusses a possible alternative.

This is where our research has turned up some new possibilities. There has always been another possible alternative to the SDR. It involves using a new "external currency" that could circulate alongside existing national currencies. This currency could be made global eventually and also asset backed so that it has AAA backing. Remember that the IMF and Central Banks own lots of gold. It is possible to add in other assets as well to the backing.

Today the technology exists to make this a global digital currency as well. Something that could be used in transactions around the world virtually instantly at very low cost. Something that could be used by a farmer in the field who has no bank account on his mobile phone. It could be used by a Central Bank as well. And approved by the current banking system.

Impossible you say? 

We don't think so. Our research indicates something along these lines could show up as early as this year on a pilot project basis. Perhaps by this fall. We'll have more on this later this year. 

For now watch the Jim Rickards interview above and open your mind to the idea that something like we describe here (a new digital "outside" currency) could be out there. We'll continue to keep an eye on it.

addendum: If you questions on this article, please email them here: