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.

Tuesday, March 15, 2016

Note to Readers - Ending Daily Blog Articles Here

Monday I announced a decision to end daily articles here on the blog. If something important happens, I will cover it of course. A big thank you to all readers and especially the experts who helped me along the way here the past two years!

If you should want to contact me by email to ask a question or comment on anything on the blog please feel free to contact me at:      lonestarwhitehouse@gmail.com

Some fun facts about the blog:

There are now over 1,000 articles posted on the blog since it began in January 2014. My best guess is that represents around 700-800 hours of time writing the articles and perhaps 7,000 to 8,000 hours of research time to sort through articles and videos etc. to select for presentation. Time really does fly and it's actually been fun!

The blog has had nearly 250,000 page views with visitors coming from over 65 countries around the world. The articles that someone new to the topics covered here might find useful are found on the pages linked on the upper hand side of the blog and just below:

List of systemic risk warnings from IMF and BIS

List of articles on SDR's used at the IMF

Two part article on Bitcoin/Blockchain

Experts who have helped me by email include Dr. Warren Coats (former IMF), authors Jim Rickards and Willem Middelkoop, gold expert Jim Sinclair, one of the leading payment systems experts in the world and some others who asked me to keep their comments and names off the record (one would really surprise you, it certainly did me). A number of readers also sent me article links and helped me be aware of news I would otherwise have missed. Other sites carried articles posted here which helped those articles get tens of thousands of additional readers. All of that improved the quality and reach of the articles published here and I greatly appreciated the help!

Going forward I will produce an article if something I think is truly significant is happening such as a major crisis event or news that indicates real major monetary system change could be in the works. I am not talking about a recession or some interest rate tinkering by a central bank. Most people could not care less if the Fed raises or lowers interest rates by a quarter point or not. I am talking about real significant change that people would feel impact from in their daily lives. If nothing happens for weeks or months that fits that description, does it really make sense to produce an article every day just to have one posted? I decided it really does not.

I understand most readers here will probably lose interest when there is not regular new content available and the blog currently has its highest number of regular readers in its history. That's the downside to this decision. However, when I learned based on input from the sources I trust the most (very high credibility sources) that the truth is that we really are not likely to see much significant change in the monetary system any time soon without another major financial crisis, I felt an obligation to report that to readers. The truth (as best I can determine it) is what really matters, even if it is somewhat boring news that doesn't attract reader interest. 

I will add that there is a tremendous amount of hype and misinformation everywhere in media all the time which is what I tried to sort though for readers here as best I could. Please don't just accept everything you read no matter who the source is and test the accuracy of sources over time. Also consider if the source is trying to sell you something or has financial interests that might influence what they say, write or publish.

I would only encourage readers to stay informed and think about having a backup plan in mind in case we do some day get the major financial crisis many have predicted. It could happen next week or not for years for all I know. If it's years from now, we would both get tired of me posting an article every day just to fill the time :)

It's time for Bean to take a break. He did his best to keep a watch on things for us :)                                                       
                                                        Best wishes to all!

Added note 3-19-16: I have been asked why I now believe major monetary system change is unlikely to happen any time soon after writing about it for over two years. It's basically because over time I have discovered more and more evidence from a variety of very good sources to support that conclusion. To have integrity, I have to report what the evidence shows. I kind of investigated myself out of a purpose for my blog :)

I will publish an article around the end of this month (March 2016) that explains things in more detail. This is really what I have been writing now for quite some time anyway. Recently I got even more solid evidence which is why I made the decision to end daily coverage. It does not change what I have written here for awhile now that major change is unlikely to take place without a major crisis to create momentum for such change. It just makes it less urgent to produce some kind of daily article unless events change and a real major crisis does take place.

UK Telegraph: Central Banks beat Bitcoin with Rival Supercurrency

When I first saw this article in the UK Telegraph, I thought perhaps it might be significant in terms of what we cover here on this blog. The article talks about a new "super currency" to be used by the Bank of England. It describes a new technology called RSCoin as though this might leading to a big change in the monetary system. 

It turns out based on input I received from experts I trust that this is probably not the case. Below are some quotes from the article and then a few added comments.


"Computer scientists have devised a digital crypto-currency in league with the Bank of England that could pose a devastating threat to large tranches of the financial industry, and profoundly change the management of monetary policy.

The proto-currency known as RSCoin has vastly greater scope than Bitcoin, used for peer-to-peer transactions by libertarians across the world, and beyond the control of any political authority.

The purpose would be turned upside down. RSCoin would be a tool of state control, allowing the central bank to keep a tight grip on the money supply and respond to crises. It would erode the exorbitant privilege of commercial banks of creating money out of thin air under a fractional reserve financial system. "

. . . . . .

"Mr Broadbent said such a currency could greatly widen the balance sheet of a central bank, hinting that the system could be designed in such a way that ordinary people could by-pass the commercial banks and hold balances directly with the Bank of England - a staggering concept. "It's likely you'd see money moving out of existing deposits," he said."

. . . . . 

"RSCoin may be irresistible for central banks. Dr Danezis said it is allows them to turn the money tap on and off with calibrated precision, and lets them track the sort of counterparty liabilities that nearly blew up the financial system during the Lehman crisis. "There would be instant visibility. They could react very quickly in an emergency, " he said."

My added comments: Again, at first reading I had thought this article might be talking about something that could lead to the kind of major monetary system change we have speculated upon in earlier writings here on the blog. Fortunately, I have some great experts who provided me feedback on this article suggesting that this technology is most likely NOT anything that would lead to the kind of major change we watch for here.

At this point, the research I have done on all this leads me to conclude that a major change like we watch for here such as a version of the SDR becoming a true global currency that everyday citizens could own is unlikely to happen any time soon. Perhaps not even in my lifetime (I'm 60 years old). Momentum for major change like that does not appear to exist within the system and I see no evidence that there is any kind of consensus on moving forward with such change. It's becoming clear to me that unless we do get a another major crisis such as Jim Rickards has predicted that any kind of major monetary system change that we would notice in our daily lives is not likely on the near horizon.

This means we really only have one thing left to monitor here on this blog. That being if we do get another major crisis or not. Because of this situation, I have decided that it no longer makes sense to produce daily articles here on the blog. Since a major crisis is impossible to predict from a timing standpoint, I will just produce a summary update type article now and then unless there are indications that a major crisis has actually begun. 

I want to thank the experts who have helped me along on the journey here. I started out with many questions and no real inside sources of information to help get answers. Over time I was fortunate to meet some experts who have given me some better insight into the realistic prospects for the major monetary system we watch for here on the blog. Since it is now pretty clear that no such major change is on the horizon, it's time to change the direction of the blog here. My best estimate at this point is that unless we do see a major crisis of the kind Jim Rickards has predicted, major systemic change is likely to take many years to decades if it happens at all. I will now be surprised if I see it in my lifetime unless a crisis changes things.

I will continue to monitor events and will certainly produce an article if I do see something that warrants it. I appreciate all the readers here who have forwarded me both comments and article links. I appreciate people like Jim Rickards and Willem Middelkoop who mentioned a number of articles here on their twitter feeds. It was greatly appreciated and very helpful. I will leave all the research done here up on the right hand side of the blog here and here to be available for anyone who can use it. Best wishes to all! 

Added note: One of the best articles we ever published here was the two part article on the limitations of Bitcoin/Blockchain technology. As time goes by, the problems listed in that article by our expert here who wrote that article have become more and more apparent. Here is another Bitcoin developer who now concedes the issues raised by our expert here were very real.

Monday, March 14, 2016

Major Monetary System Change Looks Unlikely Any Time Soon

Based on all the information sources I follow including the experts who help me out here I have come to the conclusion that we are not likely to see any major monetary system change any time soon unless we do get another major financial crisis. By major crisis I am talking about something worse than 2008 that would so disrupt the present system that change had to take place.

While the conditions for such a crisis do exist and it's possible to have one at any time, it's also possible we will not see one soon as well. Because of this situation, I have concluded that it does not make sense to continue to produce daily articles here on the blog so tomorrow will be the last daily article here.

I will continue to monitor events to watch for signs of another crisis. If one does arise I will certainly cover that. I may write a summary update type of article every now and then if there are enough meaningful events to warrant that.

This has been an interesting journey for me. I started out with a  lot of questions and a feeling that we were on the cusp of some major changes in the monetary system. I had no inside sources of information to help with answers. Over time that changed and I did get more and more input from what I believe are highly reliable sources in a position to know the situation. I am now satisfied that I have the answers I was searching for. 

I have been writing for some time now that there were two main questions to follow:

1) Will we get another major financial crisis worse than 2008?

2) If so, will that lead to a more prominent role in the SDR used at IMF replacing the US dollar as global reserve currency?

I still believe those are the key questions, but as I have learned more I now feel that we are not likely to see any kind of major monetary system change such as the SDR replacing the US dollar any time soon unless we do get a major crisis. Beyond that, if we do get such a crisis I am now not sure at all that we would see SDR be accepted as a replacement for the dollar. It's possible, but by no means a certainty.

This means there is really only one important question left to follow here and that is whether or not we get another crisis. Since that is an unknown and the timing would be impossible to predict, it just did not make sense to me to continue producing daily articles. I encourage readers to continue to stay alert and monitor events.

I want to thank the readers here and the experts who have helped me out. All the information provided has been extremely helpful and improved the articles that were written here. I will of course leave all the research done here up on the right hand side of the blog here, here and here to be available to anyone who can use it. Best wishes to all!

Sunday, March 13, 2016

OT: Wounded Marine Veteran Speaks to Donald Trump

Readers here know that this blog does not promote any kind of political agenda so please do not take this off topic (OT) post as any kind of political statement or endorsement of Mr. Trump or any other political candidate running for office.

When I saw this recently on TV, I decided to post it here because it illustrates very powerfully what we were trying to say in this recent blog post. Below is a video clip where wounded US Marine veteran Tony Porta was given the opportunity to talk directly with candidate Donald Trump. First watch the video below, especially the last 30 seconds or so and listen carefully to what Mr. Porta says. Let me add my thanks to Mr. Porta for his service and sacrifice to the country.

Here is what Mr. Porta said at the end of the video:

During a special hour-long "Hannity" event, a wounded U.S. marine took Sean's seat so that he could deliver a special message to Donald Trump.
USMC Cpl. Tony Porta was wounded by an IED that killed two of his squad mates, and now he is the spokesperson for Veterans for Trump. His message to Mr. Trump:
"When you become president, I don't want you to work for those guys who are giving tons of money to a lot of people. I want you to work for us," Porta said.
This powerful sentiment is what is driving the massive voter discontent this year in the US. A lot of regular people simply think the system is being gamed by a small % of very wealthy people to their advantage. At this point, it really does not matter if that is a fair and accurate perception or not. It has become reality to millions of people. This is why we said in this recent blog article that if we get another major crisis like Jim Rickards and others are predicting we could see an explosive reaction by the public, especially if it were to come during an election year. Even more dangerous is the fact that many currently in charge seem to be in denial about the extent of the anger being expressed by those feeling left out. That needs to change very quickly.

Hopefully, we don't get another such crisis. But if we do, it's very questionable at this point as to whether the public will accept any kind of solution put forward by those running the system now. Millions simply do not trust them and this explains why Donald Trump (and Bernie Sanders) are resonating so well with voters. This recent CNN article also explains it well. Their supporters (along with many supporters of other candidates like Ted Cruz) don't agree on solutions, but do have similar feelings of distrust towards those running the system now.

I cannot stress enough that those in charge (or who want to be in charge) need to demonstrate clearly with both words and deeds that they care about the plight of the average person and will listen and take seriously their concerns. The public is in no mood to be further ignored or dismissed. If too many believe its happening yet again, the systemic risk to the whole system will go much higher and everyone will lose.

Added note: After writing this article the news of the violence at a Trump rally scheduled for Chicago broke. All this just continues to illustrate how much tension there is now just beneath the surface in the US. The point we are trying to make here is not who to be for or against in the elections. The point we are making here is that if we were to get another major financial crisis the potential for an unpredictable reaction from the public is very high and that could lead to some kind of major change in the monetary system which could also be very unpredictable. Let's hope any such crisis is avoided and that any change that might happen in the future improves things rather than makes them worse. This latest news also illustrates why people need to have a backup plan in mind in the event we do get another crisis in the future.

Added note 3-14-16: At the risk of over repeating the message, here is another article that says what we have tried to say here on the disconnect present in society. Here is a quote:

"When most Americans look at the federal government, all they see are years of failed policies that have made life harder for them and their families, and a political class that is well connected and uninterested in giving them a say in how to right the ship."

While this article focused on the political arena, I can add that this exact same intense feeling exists for many people in regards to those running the monetary system (central banks, the US Fed, IMF, etc). It may not be a fair situation, but it absolutely exists and the feeling is growing, not subsiding. I don't where all this is going, but I have seen it for some time while doing research for articles here. It's just now surfacing because it's an election year in the US I would assume.

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 books.telegraph.co.uk

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.

Friday, March 11, 2016

Some Input from Readers

I have already mentioned how much I appreciate the great readers here for sending me article links and also offering me their comments by email. All of it is helpful and the input has been very kind and offered in an effort to help me do a better job for blog readers. I'm thankful for it.

Below are some links I got from some readers recently. I will just place the links below and let readers select any they want to explore. Below that I will add a few comments on where things seem to stand as best I can tell right now overall.


Some prior writing/speeches by Claudio Borio (BIS) in which he mentions the gold standard but does not take a position on it pro or con:

My added comments: The above are just examples of articles that readers sent me that I otherwise would miss. They along with helpful comments make it easier for me to produce better quality blog articles.

A Quick Take on where things seem to stand right now:

Really, not much change from the recent article I wrote in Q&A style here in an attempt to answer the most commonly asked questions I see. All the people who believe we are seeing the start of another major crisis now still feel that way. Those who think this is not "The Big One" (as Jim Rickards put it recently) still seem to feel that way.

Input I see and get from sources who are knowledgeable and connected from within the present system still does not indicate that there is any feeling right now that a major crisis is imminent. I do see some higher levels of concern that growth is not doing as well as many had hoped, but not that another major crisis is coming soon. Of course, we rarely get any advance warning when a crisis does emerge.

This election cycle in the US is really creating a wild card dynamic along these lines. Obviously, it would not be in the interest of the Obama Administration in the US (or the US Fed) for a major crisis to erupt during this election year. The intense anger showing up in voters across the political spectrum suggests that whoever would get blamed for such a crisis would lose credibility with the general public for a long time (Donald Trump would likely win easily for example if he is the nominee). We can expect that a full fledged revolt (politically speaking) would probably take hold in the US if we get a big crisis during this year before the election is held. We already nearly have one now without a major crisis. I would not want to be any kind of monetary official if a major crisis broke out this year.

This means that we can expect that the politicians and monetary officials will probably literally do anything to avoid that happening during this year. But there are signs of stress everywhere and, as BIS economist Claudio Borio noted recently, confidence in central banks has perhaps started to falter. I cannot even imagine what would happen this year in the US if we were to get another major crisis such as Jim Rickards has predicted.

If we don't get that crisis, by no means can we relax and say all the problems are solved. The systemic risks which IMF and BIS have pointed out over and over still exist and continue to grow in some cases. Whoever is elected President in the US will probably face the most daunting challenge in our lifetime trying to avoid another major crisis. If one happens during their term, we have no idea how they would handle it as the topic has not even been raised in all the many debates. 

All of this is why we have boiled this down to two major questions we follow here over time:

1) Will we get another major crisis worse than 2008 as many predict?

2) If we do, will the SDR used at the IMF take on a more prominent role in replacing the US dollar as global reserve currency? (as Jim Rickards predicts and Dr. Warren Coats (former IMF) proposes)

We think these two questions are the keys to any potential major monetary system changes that we might see in our lifetime (I am 60 years old now). If we get a yes answer to #1, some kind of major change is coming for sure. If we then get a yes answer to #2, we will have some idea what solution will be offered by current monetary officials as we have covered that fully here on the blog. We still won't know if the public will accept the solution offered by current officials or not because we cannot know if the public will still trust those officials if they get blindsided by another major crisis. That is another wild card in a complex system.

What we can assume is that a yes answer to either or both questions above will mean we will see some kind of major monetary system change that would impact our daily lives in a real way. Again, this is why we focus on these two questions here. 

Since no one can know the future we cannot predict with surety the answer to any of the questions above. We just know the potential for major change does exist and so we have to stay alert and informed and try to formulate a backup plan in case "The Big One" ever does arrive. In our view here, most of the political issues debated in the US are minor in comparison to the answers to these two questions in terms of the potential to have a direct impact on the life of the average person. Unfortunately, these two questions are not even on the radar for either major political party or anyone running for President. We will follow it here hoping we do not get a crisis, but encouraging readers to have a plan in mind for one just in case we do.

Nouriel Roubini - 2008 Revisited?

In this article published on Project Syndicate Nouriel Roubini asks if we are about to revisit 2008 (the financial crisis) again? He says no, but we still are likely headed for a rocky year in 2016. He lists seven risks we are facing now. Below are some quotes from his article.

The question I am asked most often nowadays is this: Are we back to 2008 and another global financial crisis and recession?

My answer is a straightforward no, but that the recent episode of global financial market turmoil is likely to be more serious than any period of volatility and risk-off behavior since 2009. This is because there are now at least seven sources of global tail risk, as opposed to the single factors – the eurozone crisis, the Federal Reserve “taper tantrum,” a possible Greek exit from the eurozone, and a hard economic landing in China – that have fueled volatility in recent years.

. . . . . .

"Two dismal months for financial markets may give way in March to a relief rally for assets such as global equities, as some key central banks (the People’s Bank of China, the European Central Bank, and the Bank of Japan) ease more, while others (the Fed and the Bank of England) will remain on hold for longer. But repeated eruptions from some of the seven sources of global tail risk will make the rest of this year – unlike the previous seven – a bad one for risky assets and anemic for global growth."

Thursday, March 10, 2016

Willem Middelkoop Interview in Epoch Times - Chinese Gold Strategy

Dutch author Willem Middelkoop (The Big Reset) is known as an expert on China with many contacts inside that country. In this new interview in Epoch Times, he explains in detail what he thinks the Chinese strategy is for gold for the future. Below are some selected Q&A's from the interview.


Gold expert Willem Middelkoop explains how much gold China really controls and what it intends to do with it

Epoch Times: How does China view gold?
Willem Middelkoop: The most important thing to understand about China’s gold strategy is that they see gold as a hedge against the financial system and the reserve holdings they have right now.
They still have $3.2 trillion in reserves and they understand the current dollar system is in its end-game. And they have been very vocal in their wish to hedge their dollar positions with gold.
Most of these statements never made it into the Western hemisphere, but if you look at all the articles in China, they say they want to achieve “the highest gold reserve in the shortest possible time.”
They had quite a bit of gold in the 1920s and 1930s but most was taken away by the Japanese, after the invasion a few years before World War II.
After the war, the Kuomintang fled to Taiwan with the rest and China’s vaults were empty until the 1990s. They have a very strong wish to grow their gold reserves now.
. . . . .
Epoch Times: What is China’s end game?
Mr. Middelkoop: I think they have a longer term plan in which gold plays a more prominent role.
They are planning for the next phase of the financial system where gold plays are a more dominant part of the system. I think the Chinese think gold prices will go much higher.
I think the Chinese are working on a plan, this is a theory worked out by James Rickards. He said there is a mutual understanding within the International Monetary Fund that when the United States, the European Union and China have the same gold holdings compared to the size of their economy, they could pool those holdings of around 30,000 tons to make the Special Drawing Rights reserve basket (SDR) gold-linked.
We know the Chinese have asked the Chatham House in London to write a report about the next phase of the monetary system. Gold was added to this study about the next phase for the monetary system, on request of the Chinese.
It’s clear that the Chinese wish to add gold to the International Monetary System, so we could end up using a gold-linked SDR in the future.
I think the Chinese have an agreement with the United States and the IMF that some of the Chinese gold holdings will stay in the United States, so it is stored in a vault which is owned by the Chinese. This is the former JP Morgan building, which is situated across the street, where the New York Fed building holds the largest gold reserves outside Fort Knox.
The Chinese seem to be happy to store part of their gold abroad, but then they want to own the vault.

Wednesday, March 9, 2016

Interview with PBOC (China) Governor Zhou Xiaochuan

Here is an excellent Q&A style interview with the head of the Peoples Bank of China (PBOC) Zhou Xiaochuan. This interview covers a lot of ground including a very interesting exchange on a future digital yuan China is working on. Below are some selected questions and answers from the interview related to a digital yuan concept. 

Click here to read the full interview.


The digital yuan
The PBOC held a seminar on digital currency on January 20, saying that the central bank will try to launch its own digital currency as soon as possible. What are the considerations behind this?
The PBOC has studied digital currencies for a long time. History shows that currency has evolved abreast of technological advances and development of economic activities. The evolution from early-stage physical currency and commodity currency to the later credit currency was a result adapting to the development of commercial society. Paper money, as the last generation currency, lacks high-tech support, and it is an irresistible trend that paper money will be replaced by new products and new technologies with greater security and lower costs. With the rapid development of the Internet and the significant changes in the global payment systems, it is necessary to establish the issuance and circulation system of digital currency, which will help build the financial infrastructure and improve the quality and efficiency of the economy.
How can a digital currency replace paper money? There are several ideas. One is to make digital currency anonymous, like paper money which is transacted anonymously, and this anonymity will determine the technology. But paper money is not designed to be anonymous. It is anonymous because no real-name technology can ensure the convenience of a large amount of small-value transactions. Some people assume that it would be better for digital currency to be transacted anonymously in the future because the government may fail to protect people's privacy regarding wealth and the use of wealth, which should definitely be protected.
From the central bank's perspective, a digital currency should be designed in a way that can best protect people's privacy, but we also need to pay attention to social security and social order. We need to keep some necessary investigative instruments readily available to deal with criminal activities. A balance needs to be struck between protecting privacy and cracking down on illegal activities. Different preferences between these two motives will lead to different technological orientations for digital currency.
What is the central bank's thinking on the issuance and management of a digital currency? Will it be different from the digital currency in the market right now?
Many countries around the world acknowledge that the digital or electronic currency issuance framework led by central banks might be different from the current private sector practice.
There are several principles underlying the central bank digital currency issuance framework. The first is convenience and security. Second, as mentioned earlier, a balance needs to be struck between protecting privacy and maintaining social order and cracking down on illegal activities, especially preserving necessary tools to fight money laundering and terrorism financing activities. Third, it should be conducive to the efficient operation and transmission of monetary policies. Fourth, the control over monetary sovereignty should be maintained. Digital currency can be converted freely but its convertibility will also be controlled. We think, therefore, as a legal tender, digital currency must be issued by the central bank. The issuance, circulation and transaction of digital currency will follow the same management principles of traditional currency.
Is there any timetable for the launch of digital currency? Will a digital currency replace paper money?
We do not have a timetable yet. China has the world's largest population and is a huge economy. It will only take several months for a small country to replace an old version of paper money with a new one. But it has taken about 10 years for China to do the same thing. So a digital currency will co-exist with cash for quite a long time before it finally replaces cash. The cost for cash transactions will gradually increase in the later stages. For instance, banks do not charge any fees for counting large amounts of coins now, but in the future they may charge their clients for the service. With the transaction costs of paper money rising, people will be motivated to opt more for digital money. But digital currency and cash will coexist for a long time.
Do we still need monetary policies once we have digital currency? How will monetary policies be implemented against such a background?
We think we still need to adjust the money creation mechanism and money supply. At the current stage, the central bank's major goal of issuing digital currency is to replace the physical cash so as to lower the costs of issuing and circulating traditional paper money and to improve the convenience. The central bank will fully consider the current monetary policy framework, money supply and creation mechanism and monetary policy transmission channels in designing digital currency.
The current practice of cash issuance and withdrawal is based on the "central bank-commercial banks" binary system. The issuance and operation of digital currency should still be based on such a system, but delivery and storage methods will change: money will be delivered electronically instead of physically, and money will be stored in cloud computation space instead of the central bank's treasuries and commercial banks' vaults. The security and efficiency of issuing and withdrawing digital currency will be significantly improved in the end.
What anti-forgery measures will be taken for the digital currency? For example, how to avoid the "51-percent attack" security loophole in bitcoins?
From a practical perspective, we should make the anti-counterfeiting knowledge of paper money easy to understand for the consumers. But fundamentally these key anti-forgery technologies are national secrets. It is the same thing with digital currency issued by the central bank. We will use many information technologies including cryptographic algorithms to make sure that the digital currency cannot be counterfeited. Technologies will be upgraded in the future. We will take that into consideration and bring in the development idea of long-term evolution from the beginning.
As for the hotly debated "51-percent attack," it is more about bitcoins. Bitcoins do not involve a central bank. For a digital currency controlled by the central bank, a combination of technological measures, institutional design as well as laws and regulations will be applied to ensure the security of its operation system. This differs from bitcoins at the very start.
Block chain technology has recently attracted lots of attention. Has the central bank considered using block chain technology for its digital currency?
The technologies of a digital currency can be divided into two types: account-based and non-account-based. These two technologies can coexist by being applied to different layers. Block chain is one option. It is non-account-based and non-counterfeiting, and features distributed ledgers. If a digital currency wants to emphasize privacy protection, block chain technology is a good choice. The PBOC has spent a lot of time and energy researching on the application of block chain technology. But so far block chains have consumed too many resources, including both computation and storage resources, and cannot handle the current transaction volume. We need to wait and see whether this problem can be solved in the future.
Besides block chain technology, the PBOC's digital currency research team has made in-depth studies on digital currency related technologies such as mobile payment, trusted and controllable cloud computation, cryptographic algorithm and secure chip. We will cooperate with the financial industry and science and technology community to continue researches on all kinds of innovative technologies, to improve the technical framework for issuing and circulating digital currency, and to fully predict, timely react to and effectively address risks that may emerge during the application. To that end, the PBOC welcomes the support, participation and contribution from all related parties so that the research can bear fruits.

My added comment:

Please note the statement in bold and underlined above where they state that "so far block chains have consumed too many resources, including both computation and storage resources, and cannot handle the current transaction volume. We need to wait and see whether this problem can be solved."

This is exactly the problem identified by our expert here who wrote this two part article for the blog last summer.