Saturday, March 12, 2016

Former Bank of England Governor Calls on IMF to Step up to the Plate

Readers here know that there are two big questions we follow here that relate to potential major monetary system change:

1) Will we get another major financial crisis worse than 2008?
2) If we do, will the SDR used at the IMF take on a more prominent role in the monetary system and replace the US dollar as global reserve currency? 

In this article we will feature yet another former high ranking monetary official who warns that the present system is failing and calls for major change. In this case its former BOE Governor Mervyn King. Below are some quotes from the UK Telegraph article reviewing an extract from his book "The End of Alchemy."

"For centuries, alchemy has been the basis of our system of money and banking. Governments pretended that paper money could be turned into gold even when there was more of the former than the latter. Banks pretended that short-term riskless deposits could be used to finance long-term risky investments. In both cases, the alchemy is the apparent transformation of risk into safety.

For much of the time the alchemy seemed to work. From time to time, however, people realised that the Emperor had far fewer clothes than the Masters of the Universe wanted us to believe.  The pretence that the illiquid real assets of an economy – the factories, capital equipment, houses and offices – can suddenly be converted into money or liquidity is the essence of the alchemy of the present system.
Banks and other financial intermediaries will always try to finance illiquid assets by issuing liquid liabilities because they make profits by paying less on the latter than they earn on the former. The problem is that the liquidity promised to investors or depositors can be supplied only if at each moment a small number of people wish to convert their claim on the bank into cash. Liquidity simply disappears if everyone wishes to convert their claim into money at the same time. What may be possible for a small number of people is self-evidently impossible for the community as a whole. And the problem is made worse by the fact that if a depositor believes that others are likely to try to take their money out, it is rational for him or her to do the same and get to the front of the queue as soon as possible – a bank run."   
. . . . . . .
"The aim should be fourfold: to reinvigorate the IMF and reinforce its legitimacy by reforms to its voting system, including an end to a veto by any one country; to put in place a permanent system of swap agreements among central banks, under which they can quickly lend to each other in whichever currencies are needed to meet short-term shortages of liquidity; to accept floating exchange rates; and to agree on a timetable for rebalancing of major economies, and a return to normal real interest rates, with the IMF as the custodian of the process.
The leadership of the IMF must raise its game. The two main threats to the world economy today are the continuing disequilibrium between spending and saving, both within and between major economies, and a return to a multi-polar world with similarities to the unstable position before the First World War.
Whether the next crisis will be another collapse of our economic and financial system, or whether it will take the form of political or even military conflict, is impossible to say. Neither is inevitable. But only a new world order could prevent such an outcome. We must hope that the pressure of events will drive statesmen."
Extracted from The End of Alchemy (Little, Brown £25) © Mervyn King 2016. To order your copy for £19.99 with free p&p call 0844 871 1514 or visit

My added comments: Please note that at the end of this extract Mervyn King is calling on the IMF to take a leading role in the future. This is consistent with Jim Rickards forecast about the IMF. Whether or not the public would go along with this is an unknown in a complex system. Right now, the political winds suggest that the public greatly distrusts those in charge of things now and that likely includes central banks and perhaps the IMF. How the public would react to another crisis is an unknown in a complex system.

No comments:

Post a Comment