Monday, November 30, 2015

IMF Adds the Yuan - Announces New Weighting for SDR Basket

As expected the IMF today announced that they will add the Chinese Yuan to the SDR currency basket. This Bloomberg article also says the new weighting for each currency in the basket has also been decided. The Euro takes a big hit downward while the US dollar stays about the same at the top. Below are some quotes from the Bloomberg article.


"The IMF will add the yuan to its basket of reserve currencies, an international stamp of approval of the progress China has made integrating into a global economic system dominated for decades by the U.S., Europe and Japan.
The International Monetary Fund’s executive board, which represents the fund’s 188 member nations, decided the yuan meets the standard of being “freely usable” and will join the dollar, euro, pound and yen in its Special Drawing Rights basket, the organization said Monday in a statement. Approval was expected after IMF Managing Director Christine Lagarde announced Nov. 13 that her staff recommended inclusion, a position she supported.
The addition will take effect Oct. 1, 2016, the IMF said. The fund said the yuan would have a 10.92 percent weighting in the basket. Weightings will be 41.73 percent for the dollar, 30.93 percent for the euro, 8.33 percent for the yen and 8.09 percent for the British pound."
My added comments: The new ratio for the SDR basket came in pretty close to what this earlier Reuters article had projected. The yuan comes in at the lower end of expectations but, still above the Yen and the Pound. The Euro takes a big hit downward while the US dollar kept virtually the same ratio and took no hit at all. The Pound actually took the biggest % hit downward falling 28% while the Euro fell 17% in the ratio.
The possible political messages I see from this:
- Win-Win for China and the US (China gets in above 10% as third highest and the US sends the message that the dollar still rules the roost).
- Euro/UK area takes a prestige hit as the Euro drops the largest in absolute terms and the Pound drops the most in % terms. 
- the Yen and the Pound drop below the Yuan indicating that rewarding China was a high priority for the IMF. It may be because the IMF has failed to get the 2010 reforms (giving China more voting power) approved.

- Reasonable question to ask: Has the recent strong move up by the US dollar vs. the Euro been in anticipation of this ratio change in the SDR basket?

Other article links:
Q&A from IMF web site
Asia Times
Wall Street Journal

Bloomberg: Drama Over Makeup of new SDR Currency Basket Continues

It seems the latest drama in the SDR basket remake is just how much weight will be given to the yuan once it is added. We recently ran this interesting article which speculated the yuan might be given less weight than previously thought and that the US dollar share might actually go up. Bloomber runs this article which adds to the intrigue. Below are some quotes.


"The yuan fell toward a three-month low amid concern China will win a smaller weighting in the IMF’s Special Drawing Rights than some analysts predict.
While International Monetary Fund staff estimate a weighting of 14 to 16 percent, the market consensus is for 10 percent because of the currency’s limited usability, according to Mizuho Bank Ltd. Anything less than that will spark a decline, said Ken Cheung, a Hong Kong-based strategist at the Japanese lender. Many observers are still going by the IMF projection, said Sue Trinh, head of Asia foreign-exchange strategy at Royal Bank of Canada.
We could see knee-jerk selling if a weight of 10 percent is announced,” said Hong Kong-based Trinh. “I wouldn’t be surprised if the offshore yuan broke beyond 6.45 a dollar and proceeded to test 6.50 immediately following the SDR announcement, or in one to two weeks. The onshore yuan is entirely dependent on the daily fixing, but it will probably test the weaker end of the trading band.”

Sunday, November 29, 2015

Bloomberg: Russia Pushes IMF for Response on Ukraine Debt

Bloomberg runs this article explaining that the IMF and Russia are somewhat at odds over how to resolve a large debt that the Ukraine owes to Russia. This bears watching to see how it turns out. Below are some quotes from the article.

"Russia, which has previously refused to negotiate with Ukraine over restructuring its $3 billion Eurobond, is waiting for the International Monetary Fund to respond to its proposal to change the terms on the debt and expects the cash-strapped country to initiate new talks if it’s unable to pay in full on Dec. 20.

The impasse can only be resolved “in the framework” of the IMF-led program of assistance for Ukraine because the nation lacks the financial means to pay, Russian Finance Minister Anton Siluanov’s aide, Svetlana Nikitina, told reporters in Moscow Friday. “Until a conceptual solution to the problem is found, we still expect the debt to be repaid,” she said."


Friday, November 27, 2015

CBS 60 Minutes - The Future of Money

Readers of this blog will recall articles we have written about new technology that companies like KlickEx have been developing for quite some time. Mobile money using an ordinary cell phone is not a future world technology. CBC 60 Minutes ran this segment last Sunday talking about it as "the future of money." Below I have embedded the 60 Minutes video and further below are some added comments. 


My added comments: The 60 Minutes segment did a great job of showing how this technology can be disruptive in improving lives, especially for those without any kind of banking arrangement like an account or debit/credit card.

KlickEx has taken this kind of technology even further by making it possible to do real time foreign currency exchange for very low fees. This makes is possible for migrants and others who need to send funds to family members in other countries to do so without having to pay exorbitant fees or even have a bank account. This is a topic we have also covered here on the blog.

Interestingly, the 60 Minutes segment points out that not everyone in the current banking system is in love with this idea and the technology can be viewed as disruptive to the existing business model by some banks. Below is the transcript of the discussion about this from the 60 Minutes segment. I will just add that this technology allows for global real time funds transfers across all currencies in the future so that is something to watch for some day.

"For decades, development advocates implored banks to open branches in remote places, but it made little business sense: nearly half of Kenyans live on just $2 a day or less. Their financial transactions were just too small.
Bob Collymore: People don't buy a packet of cigarettes. They'll buy a cigarette. And so we need to be operating at that level. People don't buy a tube of toothpaste. If you go into the slums, you will see people buy a squeeze of toothpaste. And so you have to operate at that micro level.
Lesley Stahl: Now, how can that be viable for you as a company? It's like they have no money.
Bob Collymore: Because we believe that if we have now 19 million people transacting small amounts, making small amounts, it will add up. For each transaction, there is a small fee.
Lesley Stahl: How much money annually does Safaricom make from M-PESA in Kenya?
Bob Collymore: A quarter of a billion dollars.
Lesley Stahl: A quarter of a billion dollars?
Bob Collymore: Yeah. You don't have to be greedy to be successful.
And you can be successful if you don't have to build thousands of branches, and pay thousands of tellers. Actually, when M-PESA started, Kenya's commercial banks implored the government to impose regulations to impede its development, but the government decided to take a hands-off approach, which is pretty unusual.
Bob Collymore: The most effective barrier for the success of mobile money around the world is the banking lobby. The banking lobby in most parts of the world is a very strong lobby. And banks have looked at what's happened in Kenya and have decided that they don't want to see that happening in their own countries.
Lesley Stahl: "Not in my backyard,"
Bob Collymore: Exactly. The banking regulators have been persuaded that this is a threat to the banking industry.
Lesley Stahl: And it is, isn't it?
Bob Collymore: Well, you know, it's-- we live in a disruptive world. Uber came along and completely disrupted a number of things. Not just the taxi industry. Airbnb has come along and has disrupted. And so we are in a disruptive world. And we just need to--
Lesley Stahl: This is another one like that.
Bob Collymore: Yes, it is.
Lesley Stahl: It is."
Added note: A Thank You to Jim Rickards for a mention of this article on his twitter feed.

Thursday, November 26, 2015

Happy ThanksGiving Day!

For those who want to dig into all kinds of information about Thanksgiving, the History Channel provides you the opportunity. Just click here.

Wednesday, November 25, 2015

A Step Forward for Sovereign Debt

In this recent article on Project Syndicate by Joseph Stiglitz and Martin Guzman (Columbia University), we see that the problem of sovereign debt is still out there. This article argues that the rules should be implemented that would make it easier for nations with unsustainable debt to default. Below are some quotes from the article.

"Every advanced country has a bankruptcy law, but there is no equivalent framework for sovereign borrowers. That legal vacuum matters, because, as we now see in Greece and Puerto Rico, it can suck the life out of economies."

"In September, the United Nations took a big step toward filling the void, approving a set of principles for sovereign-debt restructuring. The nine precepts – namely, a sovereign’s right to initiate a debt restructuring, sovereign immunity, equitable treatment of creditors, (super) majority restructuring, transparency, impartiality, legitimacy, sustainability, and good faith in negotiations – form the rudiments of an effective international rule of law."

"The overwhelming support for these principles, with 136 UN members voting in favor and only six against (led by the United States), shows the extent of global consensus on the need to resolve debt crises in a timely manner. But the next step – an international treaty establishing a global bankruptcy regime to which all countries are bound – may prove more difficult."

. . . . . 

"The irony is that countries like the US object to an international legal framework because it interferes with their national sovereignty. Yet the most important principle to which the international community has given its assent is respect for sovereign immunity: There are limits beyond which markets – and governments – cannot go."

Tuesday, November 24, 2015

Rueters: Yuan May Enter SDR Basket with Lower Share than First Thought

This is a fascinating article from Reuters that says the IMF is changing the formula used to weight the various currencies in the SDR basket. The change would result in less emphasis on exports and more on financial transactions. Incredibly, the article says that ING calculates that the US Dollar would actually INCREASE its share of the basket despite the Yuan coming in and the Euro would take a big drop. Below are quotes from the article.


"China's yuan may enter the International Monetary Fund's benchmark currency basket at a lower weighting than previously estimated as the IMF considers rejigging the basket to better reflect financial flows, people briefed on the Fund's discussions told Reuters.
IMF policymakers are expected to add the Chinese currency to the Special Drawing Rights basket later this month, after a campaign by Beijing for the yuan, or renminbi, to have equal billing with the dollar, euro, pound sterling and yen.
Adding the yuan to the SDR basket would mark the biggest change since 1980, when the number of currencies in the basket was cut from 16.
Two people familiar with IMF deliberations said policymakers were considering changing the way the weights of currencies in the basket are calculated to make export volumes less important and financial flows more important.
China, the world's largest exporter, lags other countries in financial transactions and such a change would give China's yuan, also known as the renminbi, a lower share in the basket than under the current formula."
. . . . . .
"ING economists reworked the formula to include measures of financial flows in July and came up with a yuan share of 9.2 percent, noting that a smaller share would be less disruptive to markets.
"It's a win-win, the CNY gets added to the basket but at a more measured pace," ING foreign exchange strategist Viraj Patel said.
The ING calculations put the yuan ahead of sterling's 7.9 percent and the yen's 7.0 percent. The euro's share would fall to 32.0 percent under the revised formula and the dollar's would rise to 43.9 percent."
My added comments: If the US dollar share of the SDR basket actually goes up as ING suggests when the yuan enters that will surprise a lot of analysts. I have not seen anyone forecasting the dollar share to go up until this article.

Monday, November 23, 2015

As Yuan Gets Ready to Enter the SDR Basket Some are Still Opposed

With it all but certain now that the IMF will be adding the Chinese yuan into the SDR currency basket Benjamin Cohen is still arguing that adding it is a mistake in this recent article. He says the change is all symbolic and the risks outweigh any potential benefits. Below are some quotes from his article.


"The Chinese government’s campaign to have its currency, the renminbi, included in the International Monetary Fund’s reserve asset appears to be on the brink of success. Last week, IMF staff formally recommended adding the renminbi to the basket of currencies that determines the value of its so-called Special Drawing Rights (SDRs).

The addition of the renminbi to the basket, which currently includes the US dollar, the euro, the British pound, and the Japanese yen, would provide China with a boost to its prestige. More important, it would advance the government’s efforts to internationalize the renminbi. But it would also be a mistake. The decision to recommend the renminbi’s inclusion, far from having been made on sound economic grounds, can only be understood as political. As such, the long-term consequences are likely to be regrettable."

. . . . . .

"Many would argue that this is a positive development. Certainly, it mollifies China’s leaders, offering them a stronger incentive to continue to work within the existing international monetary regime. Recent Chinese initiatives, especially the creation of the Asian Infrastructure Investment Bank, have given rise to fears that the country intends to build a new set of international institutions to compete with Western-dominated organizations like the IMF. The decision to add the renminbi to the SDR basket may have put that danger into remission."

On the other hand, the move sets a worrying precedent, injecting politics into a policy area that had been governed by objective economic considerations.           . . . . . . . 

Sunday, November 22, 2015

Shared National Credit Review - Banks Still Carrying a Lot of Risk

Every year the US Fed, the FDIC and some other regulators issue a review on the status of risky credit being held by US banks. The latest review notes some progress but also highlighted "continuing gaps between industry practices and the expectations for safe and sound banking. Below is a recent article in The National Law Review discussing this report.


Agencies Find Weaknesses in Shared National Credits

"Credit risk in the Shared National Credit (SNC) portfolio remained at a high level, according to an annual review of large shared credits released November 5 by federal banking agencies. The SNC review has been conducted since 1977 by the Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency to assess risk in the largest and most complex credits shared by multiple financial institutions. Leveraged lending, which accounts for approximately one quarter of the SNC portfolio, remained a focus of the agencies. This year’s review found that banks “are making progress in aligning their underwriting practices with the leveraged lending guidance issued by regulators in 2013. However, the review highlighted continuing gaps between industry practices and the expectations for safe and sound banking. Leveraged transactions originated within the past year continued to exhibit structures that were cited as weak by examiners. The persistent structural deficiencies found in loan underwriting by the agencies warrant continued attention. The review also noted an increase in weakness among credits related to oil and gas exploration, production, and energy services following the decline in energy prices since mid-2014. Aggressive acquisition and exploration strategies from 2010 through 2014 led to increases in leverage, making many borrowers more susceptible to a protracted decline in commodity prices."

Saturday, November 21, 2015

Jim Rickards Most Recent Webinar

Jim Rickards conducts a free monthly webinar (sponsored by The Physical Gold Fund) and takes questions from listeners. You can listen to the latest one here. Below is a bullet point list of the topics covered. You can read a transcript of the interview here.


Jim Rickards, The Gold Chronicles November 2015:
*This is the weakest US recovery on record
*Given length of current economic expansion, US may already be in a recession and data has not caught up yet
*The Fed cannot pull the trigger on a rate hike because the data does not support it
*Detailed discussion of feedbackloops affecting the Federal reserve and zero interest rate
*United States is now a magnet for global deflation
*Fed still unlikely to raise rates in December
*Detailed discussion of IMF Special Drawing Right (SDR) and China’s position
*Sooner or later oil will eventually be denominated / traded in SDR’s
*SDR is backed by nothing, instead value is derived from a peg to a basket of currencies
*Chinese Yuan addition to the SDR basket expected in Sept. 2016
*London is now positioning itself as China friendly
*Indian gold monetization scheme is not likely to succeed
*Indian gold monetization scheme will allow Indian government to lease gold into the market
*Emerging market Central Banks are adding gold to reserves led by China and Russia
*China has lost $500B in reserves in 6 months supporting the Yuan
*During the next financial crisis markets and market makers will be non-liquid and if you do not have alternate forms of liquidity your wealth is at risk
*Jim’s best definition of a financial panic is “everyone wants their money back”.
*Most likely Fed will ease in 2016, and use forward guidance and currency wars as tools

Friday, November 20, 2015

CNBC: Why Isn't the Yuan Rising?

With reports now circulating that the IMF is ready to add the yuan into the SDR currency basket, some are wondering why there is no significant market reaction. This CNBC article explains why. We have noted here that while this change is important to the global monetary system, it was not likely to create any sudden impact as the change is planned to take place gradually. Below are some quotes from the CNBC article.


"The renminbi's status as a global reserve currency may be effectively guaranteed following formal backing by International Monetary Fund (IMF) staff, according to economists, but traders have yet to be convinced.
The yuan fell to an intra-day low of 6.379 per dollar on Monday, weaker than the central bank's midpoint rate of 6.375 and the previous session's closing quote of 6.374, as Friday's news failed to spark buying, surprising several analysts who expected short-term bullishness.
Last week, IMF staff members issued a paper to the Executive Board stating that the renminbi, also known as the yuan, met requirements to be a "freely usable" currency, proposing it should be included in the organization's Special Drawing Rights (SDR) basket as a fifth currency, alongside the U.S. dollareuroBritish pound and Japanese yen.
Chinese authorities have addressed all remaining operational issues identified in an initial analysis in July, said IMF director Christine Lagarde in a statement. The organization's final decision on the issue is expected on November 30.
Friday's positive remarks makes yuan inclusion more than an 80 percent likely, according to United Overseas Bank. Other banks issued equally bullish remarks, with TD Securities calling SDR acceptance "a done deal."
So, why aren't markets cheering?"

Thursday, November 19, 2015

Raghuram Rajan of India Appointed Vice Chairman at the BIS

This is a reasonably significant event in terms of the BRICS nations gaining more influence within the existing global financial institutions. Mr. Rajan is the current head of the Indian Central Bank and highly respected around the world. His appointment as Vice Chairman at the Bank for International Settlements will probably be well received in the BRICS nations. Below are some quotes from this news article on the announcement.


Mumbai: Reserve Bank of India Governor Raghuram Rajan, a vocal advocate of increased emerging market participation in global policy debate, was appointed as vice chairman of the Bank for International Settlements (BIS) on Tuesday.

Dr Rajan was appointed to a three-year term, India's central bank said in a statement. He first joined the BIS board of directors in December 2013.

He will work with BIS Chairman Jens Weidmann, who is also president of Germany's Bundesbank.

Last month, Dr Rajan called on emerging markets to have a greater voice in global debates.

He has also called on the International Monetary Fund (IMF) to play an active role in questioning the monetary stimulus policies of developed economies that significantly impact the global economy.

Wednesday, November 18, 2015

A Crisis Can Change Things Very Quickly

One of the ideas we have discussed here on the blog is that a crisis can cause change to take place more rapidly. An example of this happening in real time is the response to the recent attacks that have taken place in Paris. For the past several years, the US, Russia, the UK, and the EU have been at odds. Cooperation on anything has been very difficult. But suddenly, the crisis event in Paris has changed the narrative. This BRICSPOST article describes how UK Prime Minister Cameron now wants to find a way to compromise and work with Russia. Below are some quotes.

"Russian President Vladimir Putin on Monday held talks with British Prime Minister David Cameron in Turkey on  the sidelines of the G20 Summit where the bloc’s economic agenda has been overshadowed by discussions on fighting the Islamic State, the militant group that has taken responsibility for the deadly Paris attacks last week.
With recent events in Syria making Kremlin’s potential to help broker a political settlement to the crisis increasingly clear, Cameron on Monday said he is willing to make compromises” with the Russian leader.
“The disagreement has been that we think Assad should go at once and Russia obviously has taken a different view and we have to find a settlement where Assad leaves and there is a government that brings the country together. But we must not allow the gap there is between us to be the altar on which the country of Syria is slaughtered. That is the challenge. That is going to take compromises,” Cameron told British broadcaster BBC.
On September 30, Russia launched a campaign of air strikes against Islamic State and other militants in Syria.
In his meeting with Cameron in Turkey, Putin said the Paris attacks prove that Russia and the West “should have started uniting our efforts long ago”.
“We are very pleased that Britain has joined the Vienna group’s work. The latest tragic events, especially what happened in France, show that we simply have no choice but to join forces in fighting this evil, terrorism, and should have started uniting our efforts long ago,” a Kremlin statement quoted Putin as saying."
My added comments: Here we see how quickly attitudes can change when a crisis event takes place. This is a mini example of how we could see much more rapid changes in the global monetary system if there were an atmosphere of financial crisis. Some cynics believe that such events are actually planned in order to create an atmosphere in which the public is more willing to accept change. Others believe that crisis events unfold in a patterned way (in cycles) over time. Whatever causes a crisis, what we can say is that people are more likely to agree to compromise and change under crisis conditions than they are otherwise. Here we have a perfect real time example.

"The assault was just the latest sign that the strained and at times hostile relationship between the U.S. and Russia might now be thawing as antagonism gives way to common interests. And it's not just on the battlefield that the change seems apparent -- Obama and Russian President Vladimir Putin had a markedly warmer exchange at the G20 in Turkey this week than in other recent encounters, and both sides indicated a willingness to do more to work together."

Tuesday, November 17, 2015

$10 Trillion in Risky Derivatives?

We have fully covered the warnings that have been issued by those both inside and outside the system with regard to risky derivatives that still reside on balance sheets around the world. So how much risk is out there? According to Senator Elizabeth Warren in this Bloomberg article, the number is $10 Trillion. Below are some quotes from the article.


"Two of Congress’s leading Wall Street critics have tried to put a price tag on one of the finance industry’s biggest wins in Washington in recent years, claiming that the 2014 rollback of a controversial swaps measure has allowed banks to keep $10 trillion of risky trades on their books.
Senator Elizabeth Warren and Representative Elijah Cummings based their calculation on letters from financial regulators that detailed the impact of the revision to the Dodd-Frank Act. While the two Democratic lawmakers failed to keep the change out of must-pass spending legislation at the end of 2014, they’re using their estimate to try to prevent the Republican-led Congress from giving banks similar relief this year.
In letters to the Securities and Exchange Commission and the Commodity Futures Trading Commission Warren and Cummings called on the agencies to counteract the legislative rollbacks as they complete rulemaking under Dodd-Frank, the law passed five years ago in response to the 2008 financial crisis. In a separate letter, they called on the Government Accountability Office to investigate the impact of last year’s reversal of a provision requiring banks to separate swaps trading from deposit-taking units."

. . . . . . .

"Banks have argued that those notional derivatives numbers, which represent the face value of transactions, overstate the actual risk to lenders. In a letter this year to Warren, Bank of America said the number “fails to account for how credit risk is managed and mitigated."

My added comments:  Whenever you have politicians involved you never know if they numbers they throw out are realistic or done for political impact. In this case we know there are huge amounts of derivatives out there in the system. The argument is over how risky they really are. The banks say the risk is overstated. Critics say the risk is real. What we do know is that if an entity fails that is a counterparty to large derivatives contracts, the full value of the derivatives come into play. So the real question is how likely is it that a big entity holding large derivative contracts will fail?

Monday, November 16, 2015

Nomi Prins - The Present System will Come to an End - But When?

In this new interview with King World News Nomi Prins says that despite the fact that the present financial system continues to hold together, she thinks it is coming to an end. She gives a time frame for when she sees things unraveling. King World News does not allow quotes from their site so below a a bullet point summary of the interview.


- we are seeing small "unravelings" around the world even now

- the US is in denial about the true state of its economy

- the ECB is committed to even more QE going forward

- all the stimulus by central banks is creating the increasing market volatility

- despite central banks efforts the core of the system is not stable

- volatility will continue and increase as we move towards instability

- if things were really stable, the US Fed would have raised rates a long time ago

Finally, Nomi provides a time frame for when she thinks "all this will come to an end"

Sunday, November 15, 2015

IMF Appears to Give the Yuan the Green Light

It's looking more and more certain that the IMF will formally approve including the Chinese yuan in the SDR currency basket soon. Reuters reports that IMF officials are saying the currency now meets the guidelines and formal approval by the Board seems near certain. Below are some quotes from the article.

"China's yuan moved closer to joining other top global currencies in the International Monetary Fund's benchmark foreign exchange basket on Friday after Fund staff and IMF chief Christine Lagarde gave the move the thumbs up.
The recommendation paves the way for the Fund's executive board, which has the final say, to place the yuan CNY=CFXS CNY= on a par with the U.S. dollar .DXY, Japanese yen JPY=, British pound GBP= and euro EUR= at a meeting scheduled for Nov. 30.
Joining the Special Drawing Rights (SDR) basket would be a victory for Beijing, which has campaigned hard for the move, and could increase demand for the yuan among reserve managers as well as marking a symbolic coming of age for the world's second-largest economy.
Staff had found the yuan, also known as the renminbi (RMB), met the criteria of being “freely usable,” or widely used for international transactions and widely traded in major foreign exchange markets, Lagarde said.
“I support the staff’s findings," she said in a statement immediately welcomed by China's central bank, which said it hoped the international community would also back the yuan's inclusion.
Staff also gave the green light to Beijing's efforts to address operational issues identified in a report in July, Lagarde said."

Saturday, November 14, 2015

Project Syndicate Article: Is it Time for Global Money?

The idea of a global currency administered by a global central bank has always sort of floated out there in the background. We have talked about the SDR used at the IMF and its potential to someday function somewhat like a global currency. Jim Rickards has talked about the SDR as a kind of global money and also projected a more prominent role in the future for it. 

So this new article on Project Syndicate naturally caught my attention. It once again raises the idea of a global currency and a global central bank. The article even talks about all the reasons it might make sense to have a global currency. But the main point of this article is to explain all the reasons why we will NOT see a global currency any time soon (or a global central bank). 

All of this of course relates directly to what we cover here on the blog. Therefore, I have pasted in a few quotes from this article by Larry Hatheway and Alexander Friedman just below. It's an interesting article and I encourage readers to read the full article. It also supports what we have written here on the blog about how any change like this is likely to come in a very gradual process over many years if it comes at all unless a new major global financial crisis were to speed up the process.

"Today’s world is more economically and financially integrated than at any time since the latter half of the nineteenth century. But policymaking – particularly central banking – remains anachronistically national and parochial. Isn’t it time to re-think the global monetary (non)system? In particular, wouldn’t a single global central bank and a world currency make more sense than our confusing, inefficient, and outdated assemblage of national monetary policies and currencies?"

Technology is now reaching the point where a common digital currency, enabled by near-universal mobile phone adoption, certainly makes this possible. And however farfetched a global currency may sound, recall that before World War I, ditching the gold standard seemed equally implausible.
The current system is both risky and inefficient. Different monies are not only a nuisance for tourists who arrive home with pockets full of unspendable foreign coins. Global firms waste time and resources on largely futile efforts to hedge currency risk (benefiting only the banks that act as middlemen)."
. . . . . 

"In short, the current state of affairs is the by-product of the superseded era of the nation-state. Globalization has shrunk the dimensions of the world economy, and the time for a world central bank has arrived."

"Dream on. A single world currency is in fact neither likely nor desirable."

My added comments:

I got a surreal feeling reading this article. Everything mentioned in the first part of this article are ideas that have been mentioned here on this blog. And the authors of this article are certainly highly knowledgeable insiders who would know about ideas like this being discussed inside the system. Alexander Friedman was CFO of the Bill Gates Foundation for example.

But as you read on through the article you see how the authors change direction and explain why "a single world currency is in fact neither likely nor desirable."  This article sort of mirrors my own investigation of this topic here on the blog. When the blog began in January 2014, it seemed as though the world might be on the verge of major changes in the monetary system including a currency "reset" of some kind. All kinds of theories were out there including the idea of a new global currency. The word  reset was used frequently by those inside the system as well as those speculating on the outside. Most assumed that this meant we were about to see some major changes.

But as time passed my own investigation led me to conclude that this kind of major change is probably not likely to happen any time soon (unless a new major global financial crisis ushered in the changes). Instead, what I saw was strong evidence that change is likely to unfold gradually and probably more at a regional level than a global level. What led me to this conclusion? The follow bullet point list:

- some good information from informed readers convinced me that the thinking inside the system is that things are fairly stable for now and major rapid change is not needed. The strength of the US dollar (vs other currencies) allowed the dollar to remain entrenched as the primary global reserve currency

- the ongoing inability of the IMF to get its 2010 governance reforms passed and the continued lack of similar changes at the World Bank has created a more divisive atmosphere making global cooperation for any kind of global currency more difficult

- the response to bullet point #2 above by the BRICS nations has been to become more and more frustrated at the lack of changes at the IMF and World Bank and move forward with their own Plan B (BRICS Bank and AIIB). This is a move away from more global cooperation and not towards it in terms of having one global currency

- The continuing geo-political skirmishes between the US, Russia, and China don't create an atmosphere conducive to one global currency. For now it does not appear these nations trust each other enough to allow something like that because the BRICS will assume the US would control any such process and the US would not be willing to give up that kind of control to either China or Russia (or the BRICS as a group)

So. does all this mean that this will never happen? It could mean that, but there is really no way to predict the future on this. So long as the major powers don't fully trust each other and suspect that that each would want to control any sort of global currency or global central bank, it is highly improbable that we would see that unfold. The one wild card I always mention is another major global financial crisis. If we do ever get one as bad as Jim Rickards and others predict, it is hard to say what might happen. If the entire global financial system collapsed and panic were to set in, who knows what solution might be offered in that atmosphere and who knows if people would accept it? Would they still trust the existing financial institutions or blame them?

What we do know is that the idea of one global currency has been out there for a long time. It has been seriously discussed many times by credible people inside the system as we have written here on this blog. This article on Project Syndicate explains why the odds are still against it becoming a reality. All we can do here is watch events and attempt to cover what actually does happen. So far it seems like we have managed to cover the right issues in terms of what to watch for that could lead to major change.

Friday, November 13, 2015

Bloomberg: Yuan Ticks IMF Reserve Entry Boxes

Bloomberg provides a recap of the many actions China has taken to get the IMF to accept the yuan into the SDR currency basket. This makes it pretty clear that China is willing to do whatever the IMF wants to get this done. Below are some quotes from the article.

"China has ticked most of the boxes set by the International Monetary Fund to grant the yuan reserve-currency status, prompting many banks to predict approval this month.
An outright “yes” is the most probable outcome, Goldman Sachs Group Inc. wrote in an Oct. 29 note. JPMorgan Chase & Co. Chief China economist Zhu Haibin said any terms attached may be technical issues. Jukka Pihlman, head of central banks and sovereign wealth funds at Standard Chartered Plc in Singapore and a former adviser to the IMF, said the agency would seek to avoid the uncertainty of conditional approval.
“It’s basically a done deal, unless something really surprising and unexpected happens,” said Pihlman.
China has been seeking to join the Special Drawing Rights basket as part of a campaign to play a larger role in the postwar global economic order dominated by the U.S. and Europe. Membership of the IMF club would be a crowning achievement after three decades of breakneck growth that saw the Chinese economy take its place as the world’s second-largest after the U.S.
Here’s a look at what the IMF, in an Aug. 3 staff report, asked China to do, and how the nation has fared so far."