Thursday, October 1, 2015

Jim Rickards vs. the BIS - Are they in Conflict on a Global Central Bank?

In September we ran two important blog articles in relation to what we cover here on the blog. This blog is devoted to watching for major monetary system change that would impact the average person in a direct way that they notice in their daily life. A crisis that leads to the IMF using the SDR to replace the US dollar as the global reserve currency would certainly qualify as the type of major change that would impact the average person. Our two recent articles relate directly to this issue.


The first article referenced a recent interview by BIS Chief Economist Claudio Borio. In the interview Mr. Borio states directly that a global central bank is "out of the question." He adds that a global central bank is "neither feasible or desirable." 


The second article reported that Jim Rickards has seemingly issued a hard date to watch for some key events in his "global reset" forecast to come to fruition. As a reminder, Jim has predicted another major financial crisis (worse than 2008) is coming. He has said that this crisis will be too big for the US Fed to handle. He has predicted that all this will lead to the IMF stepping in as a type of global central bank using the SDR to deal with the crisis. He has said this will lead to a devaluation in the US dollar when this happens. He has advised people to prepare for these events.


So, does this prediction by Jim Rickards conflict with the "global central bank is out of the question" statement by Claudio Borio?  Let's take a look at it.

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Before we try to answer our question, let's look in more detail at what each person has actually said on this topic. First we will look at the Claudio Borio interview and focus on a few key statements he makes that relate to this question.


Q: The BIS is always warning of the risk of overburdening central banks. But is there not also a risk that central banks could become overburdened if they also had to safeguard financial stability?
Borio: No, I don't think so. Safeguarding financial stability is a natural central bank task, and it cannot be performed fully successfully by others. Monetary policy has a huge influence on financial markets, and hence on financial stability; it can thus effectively complement macroprudential measures. And this would also bring central banks closer to their origins. What I worry about is something completely different.
Q: That is to say?
Borio: It is the growing perception that central banks can be the answer to all our economic problems. The great danger is that more and more people come to believe that everything can simply be solved with money and that central banks can produce infinite amounts of it. This could cause big problems in the future. This is why we insist that people should demand less from central banks and that structural policies should play a much greater role.
. . . . 
Questioner: The dollar is the world's dominant currency.
Borio: Yes, as such, the US sets the tone for global financial markets. And, more directly, financial conditions there have an impact because many borrowers around the world - in more recent years, especially companies - have heavily borrowed in dollars. For instance, since early 2009, the amount of dollar credit to non-banks in EMEs  has almost doubled.
Q: Because interest rates have been so low for so long in the US?
Borio: Yes, interest rates have been exceptionally low for an exceptionally long time. This is unprecedented. And it has led to aggressive risk-taking in financial markets. Furthermore, many of those who are active in the financial markets now have no first-hand experience of how to respond to rising interest rates: they were not even around the last time it happened. But having said all this, one thing is also clear: the longer the interest rate reversal is delayed, the riskier the situation will become.
. . . .
Q: In its recent Annual Report, the BIS calls for more central bank cooperation, even including joint decisions on interest rates and exchange rate interventions. Do we need a new Bretton Woods?
Borio: No, that's not the point. But a key drawback of the existing international monetary and financial system is that it tends to heighten the risk of financial imbalances. First of all, we call for an enlightened self-interest. Central banks should take better account of the consequences of their decisions on others, especially because these will have repercussions on their own economy ("spillbacks"). This enlightened self-interest is particularly important for countries with an international currency. They have a special responsibility.
Q: But this is not always sufficient from your point of view?
Borio: We should also not exclude the possibility of joint decisions. We have seen this in times of crisis. But it could also make sense for crisis prevention. And then, ideally, once could even go one step further. Policymakers around the world could agree internationally on common rules constraining national policies. This would increase discipline on a national level.     (my added note: here Mr. Borio is talking about new "global rules of the game."
Q: Do you think this is realistic?
Borio:  At the moment, this is not on the cards. But national frameworks do not sufficiently take into account financial booms and busts. If they did, this would remove a major source of negative international spillovers. This would significantly reduce the need for further cooperation, but not eliminate it. To move in this direction, we need greater agreement on diagnosis.
Q: And in the end, would one also need a global central bank?  Some experts have pushed this idea from time to time.
Borio: No, this is out of the question. We know how difficult it is to have a central bank covering a number of very different economies. The euro area is an example of this. It is neither feasible nor desirable to have a world central bank.
Q: A lot of observers say the problems in the euro area are the consequence of the fact that it is a monetary union without a fiscal or a political union. Is a political union a precondition for a successful monetary union?
Borio: To succeed, the euro area needs a high degree of economic integration and a clear political commitment to the project and to common rules. These rules have to be consistent with the agreed level of solidarity. That does not necessarily mean a political union.
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Recap of Mr. Borio's answers: 
From his comments above, I think we can draw the following reasonable conclusions.
- Mr. Borio does not foresee "a new Bretton Woods" any time soon (he says so directly)
- Mr. Borio does see a need for better coordination and cooperation between existing central banks in the future with special responsibility falling on the US since the US dollar is the world reserve currency.
-Mr. Borio repeats something he has talked about before. He says "policymakers around the world could agree internationally on common rules constraining national policies." In this he is referring to potential new "global rules of the game" which he mentions in his recent slide presentation at the bottom of page 23. (you can that see here)
-Mr. Borio states directly that a global central bank is "out of the question" and "neither feasible nor desirable." He then uses the Eurozone as an example of how hard it is to "have a central bank covering a number of very different economies." In a followup question he adds that to succeed the Eurozone needs a "clear political commitment to common rules" and "that does not necessarily mean a political union."
Here is my interpretation of Mr. Borio's comments:
There is not currently a plan in place to have a "new Bretton Woods" where a new global central bank would be setup to issue a new global reserve currency. If such a plan did exist, I think Mr. Borio would know about it. Instead, my take on his comments is that he sees a future where the existing central banks and global financial institutions remain in place pretty much as they are. He suggests that they need to think about working together more in the future to coordinate policy. He goes a step beyond to suggest that should think about "new global rules of the game" in order to "constrain individual national policies" and "increase discipline on a national level." The tone of his remarks suggests to me that he does not see this as something that is about to happen soon. Rather, he seems to just toss it out there as an idea for them to consider in the future. 
If my take on his comments is correct, does this directly conflict with Jim Rickards prediction that the IMF will step in after the next big crisis and serve as a kind of global central bank? Jim adds that the IMF will create "a new version of world money called the special drawing right, or SDR"? (see paragraph two of his article titled, "You Heard it Here First")
At first glance, Mr. Borio's comments appear to directly conflict with what Jim Rickards is predicting. Jim repeats his prediction that SDR's will be used like "world money" by the IMF in the next crisis in his latest article (click here to see it). Here is a relevant quote from the article:

"Is there an alternative to gold? There is one other way out. That’s our old friend, the SDR. The brilliance of the SDR solution is that it solves Triffin’s dilemma.
Recall the paradox is that the reserve currency issuer has to run trade deficits, but if you run deficits long enough, you go broke. But SDRs are issued by the IMF. The IMF is not a country and does not have a trade deficit. In theory, the IMF can print SDRs forever and never go broke. The SDRs just go round and round among the IMF members in a closed circuit."   . . .  . . . .
"This SDR system is so little understood that people won't know where the inflation is coming from. Elected officials will blame the IMF, but the IMF is unaccountable. That's the beauty of SDR's -- Triffin's dilemma is solved, debt problems are inflated away, and no one is accountable. That's the global elite plan in a nutshell."   
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Despite the apparent conflict, there are a couple of additional considerations we have to think about. One is that Mr. Borio is assuming a future where no major financial crisis worse than 2008 is in play. Jim Rickards forecast is based on that assumption. So we don't know what Mr. Borio might say differently if a major financial crisis was in progress. 
The other consideration is that there could be some semantics involved here. While Mr. Borio is clearly ruling out a new global central bank, it's not clear if he is ruling out the idea of the existing IMF acting in a new role as if it were a global central bank

These would be good questions to ask Mr. Borio if it were possible to do so.
If you asked Jim Rickards if he is talking about a new global central bank issuing some kind of new global reserve currency, I would have guessed he would say no. My guess was he would say he is talking about the IMF acting in a new role using the existing SDR in a new way as a result of major crisis conditions that do not exist right now.

While I have no way to contact Mr. Borio for further comment, fortunately I was able to get Jim Rickards to look at this article with my guess underlined above on what he might say. His email reply clarified his view on this and improved my understanding at the same time. Jim replied as follows:

"I would describe my view somewhat differently, I say that the IMF already is the central bank of the world (without the name) and it will step up as a lender of last resort (consistent with its central banking function) in the next crisis. This analysis is detailed in Chapter 8 of The Death of Money."

Without further comment from Mr. Borio, there is no way to tell for sure if his statement and Jim Rickards view as expressed above here are actually in conflict because I don't think Mr. Borio was thinking in terms of the IMF as a global central bank when he made his statement.

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Some added comments:

I can add this much to this discussion. 
The best information I have available right now is that within the present system there is not a feeling that a major crisis is imminent. Because of that, I do not see any indication that any kind of "global reset" conference is planned for this fall or anytime soon which is consistent with the tone of Mr. Borio's comments (and consistent with Jim Rickards recent newsletter article which does not see a reset coming this fall) 

Instead, what I see is the idea that things are stable enough now that changes can take place over a longer time frame in a more gradual way (in steps on a regional basis, with more global cooperation on "rules of the game", etc). 
Obviously, if we do get another major financial crisis, conditions would be different and we could expect that the attitude within the system would change as well (a sense of urgency to respond which could lead to the more rapid "reset" many are predicting). 
We will follow events through that time frame here on the blog to see actually happens.
If there is no major crisis coming, any change that takes place will probably happen so gradually that most people will not notice it in their daily lives.

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