Tuesday, March 29, 2016

Here is Why I Believe Significant Monetary System Change is Not Likely Any Time Soon

The recent decision to end daily articles here was based on my conclusion that the main story I have been following on this blog is likely to drag out over years (and maybe even decades). I have always made an exception for another major global financial crisis, but timing on that is impossible to predict. Readers may wonder why I came to this conclusion after spending over two years here following the story on pretty much a daily basis.

This paper by Raghuram Rajan (Governor - Reserve Bank of India) is a perfect example of what led me to my conclusion. Below I will post the Conclusion section of this paper with some key points in bold type (my emphasis). Then I will add some comments below that to explain fully why I think major monetary system change is not likely any time soon (unless we do get another major crisis).


 Conclusion  - Article Title: Towards Rules of the Monetary Game

Given the importance of spillovers from monetary policies, especially in the face of globally low inflation, it is important we start building a global consensus on how to get better outcomes for the world. Nevertheless, with economic analysis of these issues at an early stage, it is unlikely we will get strong policy prescriptions soon, let alone international agreement on them, especially given that a number of country authorities like central banks have explicit domestic mandates.
This paper therefore suggests a period of focused discussion, first outside international meetings, then within international meetings. Such a discussion need not take place in an environment of finger pointing and defensiveness, but as an attempt to understand what can be reasonable, and not overly intrusive, rules of conduct.
As consensus builds on the rules of conduct, we can contemplate the next step of whether to codify them through international agreement, see how the Articles of multilateral watchdogs like the IMF will have to be altered, and how country authorities will interpret or alter domestic mandates to incorporate international responsibilities.
The international community has a choice. We can pretend all is well with the global financial non-system and hope that nothing goes spectacularly wrong. Or we can start building a system for the integrated world of the twenty first century. I do hope we can consider some initial steps. Thank you.
My added comments: This paper shows you very clearly where things stand in terms of progress towards any kind of meaningful international agreement on major change to the international monetary system. Please notice that Mr. Rajan is virtually pleading for the global community to at least start some kind of process that could lead to new "rules of the game" for the system. In other words, right now there is no global set of rules that the various central banks are interested in following. Why? Because each one has a mandate within its own country it must follow. This means many decisions are based first (and perhaps only in many cases) on how it will impact that country. Spillover impacts on the global system are a distant second place and there is enormous political pressure on these central banks to keep it that way. 

Beyond that, Claudio Boris at BIS has already told us that a global central bank is "out of the question" as we reported last fall in this article. Willem Middelkoop has said China thinks very long term and thinks in terms of gradual change over decades. That is why Mr. Rajan is pleading just for some kind of effort to get started on some far less dramatic changes than any kind of grand global plan. There is no grand global plan for major change in progress that I know of based on all the input I have gotten and information I have read.
Just look at the process Mr. Rajan describes to change things in his paper. It would clearly take years to accomplish it and that assumes you can ever get all these global factions to come to agreement in the first place. All this at a time when the world is clearly headed in the opposite direction politically. For example, if Donald Trump becomes President of the US, how interested do you think he will be in worrying at all about the impact of US monetary policy on the rest of the world?  His whole campaign is based on just the opposite premise and he is drawing a gigantic following despite efforts by the existing establishment in the US to discredit him (which is only increasing his popularity with millions who distrust the current system). Similar nationalistic movements are showing up in many places around the world. Does it seem like to you we are all ready to come together and put global concerns above national concerns as Mr. Rajan is pleading for? I see no movement in that direction whatsoever at this time. All the evidence I have suggest just the opposite.
On top of what you can easily see from articles like this one by Mr. Rajan, I have also been fortunate to be able to get direct input from very high credibility (and high integrity) sources that are in a position to know how things stand within the global system. While they have explained to me some very interesting and innovative ideas as to how the global monetary system could be improved and changed in ways that would impact all of us, the reality is that none of these ideas have any momentum at this time within the system to move forward as far as I know. I suspect that that politics, complacency, bureaucracy that tends towards the status quo, and the enormous difficulty of getting consensus on any kind of real major change are just too powerful to overcome. It took five years just to get a relatively minor change in IMF governance rules approved for example. I can't even imagine what kind of fight might take place over a proposal to change the world's global reserve currency to either the yuan or a version of the SDR.
This combined input from direct sources I view as highly credible along with articles like the one posted above has convinced me that major change is very unlikely to take place soon unless a major crisis literally forced change to take place more rapidly. And we are talking about a major crisis worse than 2008, not just another recession. Do you think we will see that during an election year in the US? It's always possible, but the odds are against it because the public mood right now is very unlikely to accept solutions put forward by the same people the public greatly distrusts right now. The political energy building behind someone like Donald Trump would probably explode higher if we get a major crisis before this election takes place. It's very likely he would point a finger of blame directly at the US Fed, China, and global institutions like the IMF, UN, etc. He would probably have lots of company from politicians in both political parties trying to deflect blame and survive a public revolt. 
If things change for some reason or I hear from credible sources that there is reason to believe otherwise, I will report that here on the blog. Otherwise, it really only makes sense to just keep an eye out for another major crisis event. That could happen soon, not for a long time, or not in my lifetime for all I know. Jim Rickards said in an interview earlier this year it could still be years away. In this very recent interview he says he sees no momentum to reform the system until another major crisis unfolds. In the video we posted here recently about the prospects for the SDR to gain broader adoption, both SDR experts Dr. Thomas Kruger and Dr. Warren Coats say the political will to make this happen does not exist right now. Dr. Coats gave us a direct quote for our article suggesting it may take another major crisis for that to change.I have other direct input from very good sources that suggests to me that there is no push inside the system for any kind of major change right now including any kind of "currency reset" that many people have talked about on many alternative media sites.

This is the basis for my conclusion based on the best information I can find at this time even though I realize it's not exactly riveting news :)

Added note: One reader asked if I would just post article links I find. I may try do something like that every couple of weeks in the future if I can find articles of enough significance. I usually have to read 10 articles to find one worth presenting and it depends a lot on what is happening at the time. I won't be asking the experts that have helped me here for more quotes because they have to take valuable time to reply to my questions. They donate that time and it's not really fair of me to continue to impose on them in that way if nothing major is really going on. They have been great and never complain, but I have to be fair to them. Also, at this point I don't know of much new they could add to what has already been published here and available on the pages at the upper right hand side of the blog and the links just below.

Systemic risk warnings page

Articles on SDRs

Bitcoin/Blockchain article

If I find some articles worth mentioning I will post some links around mid April. If something truly significant happens in regards to events that could lead to major change, I will do an article on it at the time it happens.

Added note 3-30-16: This Bloomberg article confirms that G20 nations are only just now even starting to talk about reforms to the global monetary system to prepare for another major crisis. As you can see from this article, there is no sense of urgency and no proposal for any kind of major global currency reset. Just some talk about increasing some swap lines between central banks. IMF expert Edwin Truman says even just doing that would probably face strong political opposition as we noted above. This is not any kind of major monetary system change that everyone would see impacting their daily lives. Again, just more evidence of why we do not see major change happening soon.

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