Monday, June 26, 2017

John Taylor - Making the Rules and Breaking the Mold (Allan Meltzer)

Robert Pringle alerted me to this tribute article by John Taylor written about economist Allan Meltzer. It is clear that Mr. Meltzer was a widely respected contributor to economic thought despite also being a sometimes vocal critic of the Federal Reserve. Below are a few excerpts from the John Taylor article appearing in followed by some additional comments. Further below Robert Pringle recalls the first time he met Allan Meltzer.
John Taylor writes about the extraordinary life of a pioneering economist whose lifelong work defied traditional rules – but one who strongly advocated them for central banks

"Allan Meltzer, who died in May at the age of 89, had a long and productive career fundamentally affecting the fields of economics, central banking and economic policy, more broadly. An extraordinary scholar, he immersed himself in the practical world of policy making in many ways. He had a unique ability to understand, explain and improve the interface between the fields of economics and economic policy.

For Meltzer, it was not enough to develop a novel theory of the economic impact of monetary policy, which he did in his research on the financial system, starting with Swiss economist Karl Brunner. He also examined the institutions responsible for policy through his landmark books A History of the Federal Reserve, Volumes 1 and 2 and the Carnegie-Rochester Conference Series on Public Policy, which he co-founded with Brunner.

For Meltzer, it was not sufficient to show empirically that policy mistakes caused poor economic performance. He also researched why the mistakes were made, including by developing theories of political economy and decision-making with Scott Richard and Alex Cukierman. It was also not enough for him to conduct research and teach at Carnegie Mellon University, where he was a professor.

He also threw his hat into the ring of real world policy making, serving on the US president’s Council of Economic Advisers (CEA), chairing the Meltzer Commission on international monetary reform, writing reports for Congress, and often testifying in congressional committees on monetary policy.

And it was not even enough for him to have had a profound impact on central banking – he also delved into the operations of the whole market system, asking the key question in the title of his book Why Capitalism? and answering that it is “the only system that the world has ever known that produces both growth and freedom”.

. . . . .

"In sum, Meltzer concluded that the Great Depression was mainly due to bad economics: mistaken beliefs about interest rates and bank borrowings; the Great Inflation was a combination of both factors, with political pressures dominating near the end as beliefs changed but policies did not; the Disinflation avoided big mistakes of either type as the Fed regained independence and restored basic monetary fundamentals, which continued into the Great Moderation, a period of more rules-based policy; the Global Financial Crisis and its aftermath was a return to a combination of both kinds of errors. Meltzer’s research thus led him to a clear policy conclusion, as he wrote in the second volume of his History, published in 2010: “Discretionary policy failed in 1929–33, in 1965–80 and now.” And equally clear and convincing is that “the lesson should be less discretion and more rule-like behaviour”. This considered assessment, based on years of research and study, is perhaps his most fundamental contribution to central banking."

My added comments: When Mr. Meltzer passed away, Robert Pringle mentioned to me at that time that they had been friends for many years and he had enjoyed exchanging ideas with Allan Meltzer. Later, he pointed me to this interesting exchange of emails he had with Mr. Meltzer in 2014 posted on his blog site.

This is a good example of the very kinds of discussions I have seen doing research for this blog. I think it well illustrates how the topic of reform for the existing global monetary system is debated and discussed around the world. No consensus has been achieved, but it is clear that various ideas on what should be done if we do get another major financial crisis are out there and that the possibility is taken seriously. Here are the links to the two part article featuring their email exchanges on The Money Trap blog:

Debate with Allan Meltzer - Part I - their first email exchange just below:

Thinking further about the international monetary system, I now find it difficult to conceive monetary stability being established in one country alone – even if that country is the US. This is to me the main lesson of the crisis and why I have changed my mind. I would welcome your view.
Allan replied:
Yes, international stability would be a big improvement.  But it isn’t possible without better domestic policy–limits on budget deficits and money growth.  If forced to choose, I would choose limits on deficits.
Notice, please, that Germany chugs along year after year without world currency stability.And Japan has for decades gone its own way, remaining stable while growing very slowly.

Debate with Allan Meltzer - Part II - a key excerpt from Robert Pringle just below:

"But suppose that the next crisis brings unemployment to 20%, further financial chaos, leading to nationalisation of the finance industry, extreme controls on personal freedom, state-directed investment, restrictions on travel and capital flows. And imagine that there is a plan to jump to a world money where we could have freedom in all these respects and restore capitalism  IF governments accepted limitations of national sovereignty –  and if there is a good plan ready – we would have a chance of selling it to a desperate world. And I think there WILL BE another worse crisis!"  

- Robert Pringle (3-15-2014)

. . . . .

Allan Meltzer’s closing statement (20 March 2014):
Robert Pringle and I have discussed the problem of achieving greater international financial stability.  Although we started from very different origins we converged to a small number of principles.  We agreed that the current non-system reduces growth and productive opportunities and that no international system can last without a major change everywhere but especially in the United States to less expansive, and less variable budget policies accompanied by more stable monetary policies.  We agreed also that countries should seek a voluntary system that, like the old gold standard, depends on market enforcement. 
A remaining disagreement is over the ability of a single country, particularly a large country like the United States to achieve stability acting alone.   In his very good book, The Money Trap, Robert makes a strong case for his system.  I agree that a multi-national system has great merit.  I differ by believing that Germany, Japan and some others have achieved stability by following relatively independent policies. I hope our exchange will stimulate others to discuss the requisites of much greater financial stability.
Allan Meltzer

(note: bold and underline emphasis above is mine)

Robert Pringle also gave me permission to share these thoughts on Allan Meltzer he expressed by email:

"I first met Allan when he was looking for people with a wide range of interests to invite to a seminar series that he was setting up with Karl Brunner. It was called officially the Interlaken Seminar on Analysis and Ideology that met annually from 1974 to the late 1980s. The aim of the Seminar ( as he put it in his own tribute to Brunner ) was to extend economic analysis into many areas of social policy. As he described it, the conference organization was as unusual as the topics discussed: "We met only in the morning. Afternoons were given over to hiking in the Swiss Alps, or for a few playing golf. The idea was to have informal discussions while hiking. We reassembled for dinner."

You can imagine how much I, as a young financial writer with an interest in economic history and sociology , leapt at the chance of participating. It was a top rate group with future nobel laureates such as Jim Buchanan and others participating - only about 25 of us in all.  I was privileged to attend for several years - every year in fact until  I joined the G30 in New York in 1980.

We have remained in touch ever since. He was a tremendous supporter of Central Banking and a founding member of our editorial advisory board from 1990. 

By the way, he wanted John Taylor to be the next Fed chair."           

All best,

Added note: A thank you to Willem Middelkoop for a nice Twitter comment on this article.

Thursday, June 22, 2017

Dr. Lawrence White - Experts and The Gold Standard

Dr. Lawrence White has just written an excellent article  that asks why most mainstream economists oppose the gold standard. First, let me make it clear that I am not Dr. Lawrence White and (as far as I know) we are not related. We just happen to have the same name. 

When I saw this article I felt it would be an excellent article to feature here in contrast to the other proposals on monetary system reform that have been featured here. As Dr. White points out in his new article, most mainstream economists do not favor a gold standard so it has been hard for me to find an actual proposal for how to return to a gold standard. 

There are a variety of ideas on how gold might return to the monetary system, but until I learned of this information from Dr. White I had not run across a formal proposal for how to transition back to an actual gold standard. As Dr. White pointed out to me, it may just be that I had not searched in the right places so I am grateful that he pointed me towards his work in this area.

In this new article Dr. White makes his case for why the classical gold standard should be part of any modern day discussion for monetary system reform. Below are a few excerpts from his article and then a few added comments.


Experts and the Gold Standard

"Many mainstream economists, perhaps a majority of those who have an opinion, are opposed to tying a central bank’s hands with any explicit monetary rule. A clear majority oppose the gold standard, at least according to an often-cited survey. Why is that?"

. . . . .

"Why isn’t the gold standard more popular with current-day economists? Milton Friedman once hypothesized that monetary economists are loath to criticize central banks because central banks are by far their largest employer. Providing some evidence for the hypothesis, I have elsewhere suggested that career incentives give monetary economists a status-quo bias. Most understandably focus their expertise on serving the current regime and disregard alternative regimes that would dispense with their services. They face negative payoffs to considering whether the current regime is the best monetary regime.

Here I want to propose an alternative hypothesis, which complements rather than replaces the employment-incentive hypothesis . . . . . "

My added comments: In this article, Dr. White makes his case as to why modern economists dismiss the gold standard and also why they should not do that. This is one of the better articles I have found defending the idea of the classical gold standard by a highly respected economist. Dr. Judy Shelton (an adviser to the Trump campaign in 2016) has hinted at a way to move towards a return of gold to the system which we covered here. She has also proposed the idea of governments issuing bonds convertible into gold as a kind of first step back towards using gold in the system.

I reached out to Dr. White by email about featuring his new article and he kindly replied and referred me to links for articles he has written on the gold standard as follows:

"I'd of course be happy for you to discuss my recent piece, about why most economists don't like the gold standard, on your blog. More directly on the merits of re-instituting a gold standard, and on how best to make the transition, you could refer to these two older pieces of mine:"

Readers can use this new article by Dr. White and the links he provided to compare the classical gold standard to some other major monetary system reform proposals we have featured on the blog. Below are the links to two such alternative proposals:

1- Dr. Warren Coats Real SDR Proposal

Dr. Warren Coats (former IMF) proposes to use the SDR to replace the US dollar as the global reserve currency. He wants to see it issued based on public demand by a Currency Board and would anchor it to a basket of goods. Dr. Coats agrees that issuance of such a currency should not be left up to a central bank or the IMF, but should be issued under Currency Board rule. We covered his proposal in these articles here:

2- Robert Pringle - The Ikon - The Best World Money

Robert Pringle (former Group of 30 Director) proposes an idea in some ways similar to Dr. Coats Real SDR that could also be issued by a Currency Board and would be anchored to a basket of global equities. Mr. Pringle also believes that issuance of a global reserve currency should not be left up to the arbitrary discretion of a central bank.

Some Additional Comments: What I find interesting is that even though the proposals above are somewhat different, all of the respected experts cited above tend to agree that the present monetary system is not working well. They also tend to agree that leaving the supply of currency issued up to the discretion of monetary authorities with no restrictions is not a good idea. 

They may approach how to reform and improve the current system differently, but they all seem to believe that currency should be stable, sound, and anchored to the real economy unlike the present US dollar based system we have today. The US dollar is subject to the whims of the US central bank and is anchored to nothing in the real economy today. It is entrenched as the status quo however until something forces change.

Our goal here is to encourage the average person to understand that how the monetary system operates is important to them. We also hope to make readers aware of the systemic risks to the present system and to be aware of various credible proposals to reform the present system that exist.

Here, in this one article, readers can compare the various ideas from these three highly respected and credible experts. They offer real and serious proposals that could actually be considered in the event that something prompts change to the existing monetary system. I believe readers can benefit from learning about these proposals and I appreciate these experts taking time to share what they know with us.

Added note: A thank you to Dr. Judy Shelton for a nice Twitter reference to this article & Dr. White's article.

Tuesday, June 20, 2017

Jim Rickards - "It's Now Tantamount to a Civil War"

Before the recent testimony by James Comey to the Senate, I emailed Jim Rickards to get his thoughts on the situation. As usual, Jim quickly replied and gave his best assessment based on what was known at the time. Because this situation continues to ramp up in potential intensity, I am re posting his comments just below. After that are some updated thoughts on this situation and what we need to focus on here on this blog in regards to it. Below is my email exchange.

My questions are (if you have any thoughts on this):

1- Is the Coats/Comey testimony this week going to put Trump in a potentially serious legal situation (potential obstruction of justice?)

2- If Trump really launches a direct attack on Twitter on Comey during testimony will this add fuel to an already potentially explosive situation? It sounds like he is going to ignore his own lawyers advice on that.

3-If the news out tonight that a former contractor is suing the FBI for spying illegally on 20 million Americans turns out to be correct, does this inflame things even more?  Will the public start to lose confidence at what seems like open warfare within our own intelligence services between pro Trump and anti Trump factions?

I am trying to figure out if the combination of all this could actually turn into a genuine crisis of confidence situation that could then spill over into the markets? If so, I feel I should alert readers to watch all this carefully in that regard.

On the other hand, if all this is just more political theater and nothing truly significant is going to come of it, then of course I should just ignore it.

Jim's reply:

1. Trump's problems are more political than legal, but in Washington that amounts to the same thing.

2. Yes, this will continue and will get worse. The dysfunction will kill the Trump agenda. It's now tantamount to a civil war.

3. Meanwhile international crises from North Korea, China, Syria, Venezuela, and Iran will begin to intrude. This could be Trump's political salvation because the Commander-in-Chief has complete freedom of action in these realms and Mattis, Tillerson and McMaster are driving the bus. This could push the domestic agenda off the headlines, but it could also result in something that starts to look like World War III.      -----    James Rickards

My added updated comments: As this whole situation continues to unfold, I am particularly struck by the comment by Jim Rickards that "It's now tantamount to a civil war."

I follow all this because of the potential for it to ramp up to the point where it actually spills over into the markets and even impact systemic stability. While it is clear that there is a huge amount of political theater taking place which sadly is somewhat normal for Washington DC these days, the sheer intensity of the animosity (hatred?) behind some of the factions fighting in this battle are a real potential cause for concern. As we have just seen, this can lead to actual physical attacks on perceived political opponents.

We clearly have very powerful people involved on both sides of this "civil war". It also appears that we have people working in our intelligence services who have picked sides and are willing to go so far as to risk being prosecuted for illegal leaking of information to try and win this battle. Then we have very powerful and influential media lining up against each other as well that also benefit in ratings from conflict and hyperbole. The fact that it has become clear that people are willing to destroy other people's lives and careers illustrates to me how serious this power struggle has the potential to become.

Of course, at some point it may all blow over as usually happens with political noise. However, in this case it does seem like an enormous power struggle is in place with both sides willing to use more extreme tactics than we usually see. If this continues to ramp up, at some point it actually may spill over into what I will call the "real world" outside the beltway and impact stability and trust in the entire system. So far it has not and the markets are making that clear.

We need to watch and see if market behavior changes to reflect genuine concern over all this political infighting. My take on this is that so long as the US stock market holds up fairly well, the US dollar holds up fairly well, and gold remains in a normal trading range, confidence in President Trump and the current system as a whole is holding up OK even if all kinds of unusual events are happening on an almost daily basis.

I will think that President Trump may be in some kind of genuine trouble if we see the markets mentioned above start telling us a different story. A sharp drop in the US stock market (say more than 15% fairly quickly), a sharp move down in the US dollar, and a gold price moving sharply higher would indicate to me that something serious is going on and we need to pay very close attention. If the markets don't give those signals, I will assume that all we are seeing is the usual political noise and no one outside the beltway is overly concerned. It would indicate to me that Trump is not in serious trouble even if his agenda may be stalled.

Only time will tell us as the situation is certainly not resolved by any means. Democrats are still quite determined to try and do anything possible to prevent the Trump Administration from getting anything done on its agenda and now we are starting to see some push back on that. Now there are starting to be news stories from Trump friendly media sources suggesting that the former Attorney General should be investigated for possible obstruction of justice and demands to reopen the Hillary Clinton email investigation. If things like that actually start to happen, I think Jim Rickards comment about a civil war are likely to become even more on target.

Summary: Right now it is hard to tell where all this is going. Will this just be the usual political noise that ends up going nowhere and die out?


Will the intensity of the conflict continue to ramp up with one side going all out to take down the President and his forces firing back to try and take out his enemies in the same way (someone loses big)?

Normally, I would not think the latter was likley at all. However, this situation may be different and we have to follow it due to the potential for the collateral damage from such a "civil war" to spill over into the markets and impact our lives. All we can do is continue to monitor events.

Added note: A blog reader pointed me to this new article  by British historian Richard Evans (Cambridge) appearing in the publication Foreign Policy. It tends to support the idea Jim Rickards suggested in his reply above that we may be in real civil war. Here are some quotes from the Foreign Policy article - The Madness of King Donald :

"What would happen if a monarch does not cooperate with political elites who consider him deranged? In that case, removal by force becomes an option ,though sometimes it can only be effected through the intervention of a foreign power."

. . . . 

"But that still leaves other options. If Trump rules through what is in effect the modern American equivalent of a royal court, then perhaps it is the courtiers, as in so many examples from history, together with his family, who might have to get together and remove him, or at the very least, neutralize him."

. . . . 

"If Americans prove incapable of deposing their debilitated president, they may soon earn the mild relief of one, or more, informally appointed American regents."

Added note: 9:40pm CST:

With the results of the two congressional special elections tonight now in, the Democrats failed in every attempt to take any of the seats up for grabs across the country in special elections. These were Republican districts so that part is not overly surprising. What it does though is provide more confirmation that there is no major revolt going on across the country against President Trump in the minds of voters. This further convinces me that if we do not see a sharp stock market selloff, a big drop in the US dollar, and a surge in gold prices, it indicates that President Trump is not in any real trouble despite the media hype to the contrary we see daily. If things change, we will try to report that here.

Friday, June 16, 2017

Robert Pringle - The Ikon: The Best World Money

We have featured articles by Robert Pringle (former Group of 30 Director) for some time here on the blog. He has a new article out on his blog (The Money Trap) where he outlines his idea for a new global reserve currency that could be used to replace the US dollar some day. His proposed global currency (the Ikon) would be anchored to a basket of world equities. You can read the full article here. Below are a few excerpts. Further below, see his additional comments to me on how the Ikon would work.


"States cannot create good money. They are interested parties. A good monetary system should discipline states – i.e. hold them to account. A state-run money cannot do that. That is the flaw in proposals such as those made by Positive Money and The International Movement for Monetary Reform."

. . . . .

"A good money must also be the global standard – a standard that individual countries will voluntarily join. Only then can money’s chief benefits be obtained. Only then can the huge economies of scale be achieved.

In The Money Trap I argue that the best numeraire would be a new currency standard that I have called the “Ikon”. This refers to a basket of world equities. Everybody holding money would then have a personal stake in the future prosperity of the world and be induced, as if by an invisible hand, to work towards it."

"In all other respects, money tied to global equities would behave exactly as in the gold standard. . . . ."

. . . . .

"Monetary policies based on nation states, independent central banks, and floating exchange rates have reached their last stage of development. The doctrine of inflation targeting by independent central banks is a recipe for general financial instability. It will not survive another crisis. Nor will the current banking system. All these structures are propped up by governments/taxpayers’ money."

Added note: I reached out to Mr. Pringle with an additional question about his proposal for the Ikon. Below is our email exchange on it. A thank you to Robert Pringle for such a detailed reply and explanation for how his idea would work. 

My question is:

What entity would issue the Ikon and administer it over time? The IMF? Some new entity?
As a comparison, Dr. Coats Real SDR would be issued and administered by a Currency Board.

Reply from Robert Pringle:

The Ikon can be issued by a currency board also, or by the IMF or BIS. I think there is an advantage in having a distinctive asset  as the anchor - and also one for which there is a demand independent of its role as money. 

Here are some more background details for your interest. 

Basically it is a system for doing away with central banks and currency manipulation by officials or the government. The real value of money would rise with increases in productivity, as prices fell in terms of the money, Ikon. When the system is fully developed, there would be no exchange rates. People would see that the value of their money depended on the efforts and creativity of the entire world, everybody could see  and feel the inter-dependence of all people in the global money space, without the veil of money. There would be no easy pickings for the people who make money merely on speculating on monetary policies, exchange rates, debt, etc.

The general level of share prices would be held constant in terms of money. By offering to sell or buy a representative basket of stocks at a fixed price, the currency board would regulate the quantity of money automatically as currency boards like Hong Kong do now. No discretion.

There are various ways of putting this idea into effect. I would prefer to have money backed 100% by actual holdings of stocks; these stocks wold be chosen to represent all the stocks on the world’s regulated equity markets (there would need to be supervision of the integrity of such markets). When the price of the index rose above the fixed rate, the Ikon currency board would be obliged to sell stocks from its portfolio, reducing money in the hands of the public and causing deflation. If prices of stocks in the basket fell below the fixed rate, the Board would buy stocks from the public, increasing the money supply, until the price came back to the fixed rate. In practice, markets would soon expect this to happen and there might be, little need for intervention.

Of course, prices of individual stocks would continue to be volatile, as they would move in response to news about their future earnings.

Through this process, the prices of assets in general would be controlled to a much greater extent. Borrowing would be expensive as the value of money to be paid back would in real terms often be higher than the amount borrowed. Financing would take place mainly through equity markets, as under the gold standard. Thus speculation on the future prices of assets would also be expensive.

Hope this helps.

All best wishes and thanks again for your interest,


Mr. Pringle expands on how the Ikon would fit into a reformed global monetary system in this new article on his blog. These articles illustrate that there is ongoing discussion and debate around the world on how best to reform the present monetary system and that there are a variety of creative ideas out there. Mr. Pringle also advises me that he thinks events may be shaping up that would allow for ideas like the Ikon to be considered.

Wednesday, June 14, 2017

Bretton Woods Committee: The Future of Globalism and Multilateralism

As we have noted here, the election of President Trump has created somewhat of a "wild card" situation in regards to US policies for global institutions such as The World Bank and the IMF. Trump ran a campaign based on "America First" which most assumed meant that he is not a big fan of these kinds of global institutions. However, since taking office, Trump has shown that he can change his views very quickly and that trying to assume we know exactly what those positions will be can be tricky. 

In April, a conference was held to discuss the future prospects for globalism and multilateralism taking the new Trump Administration into account. Some think the future is somewhat dim under Trump while others see it differently thinking that the US will not pull away from these institutions, but will seek to reform them instead. Time will tell. Below are some excerpts from two relevant articles posted on the Bretton Woods Committee web site.


The Future of Globalism and Multilateralism

"On April 19, 2017, over 175 Committee members and friends – including leaders from both public and private sectors as well as academia and civil society – gathered at the International Monetary Fund headquarters in Washington, D.C. for the 2017 Bretton Woods Committee Annual Meeting. This year’s theme, The Future of Globalism and Multilateralism, focused on the future of the Bretton Woods system in a changing geopolitical landscape.
. . . . .

"In the second segment, World Bank Group CEO Kristalina Georgieva was joined by moderator Guillermo Ortiz, Chairman of Latin America, BTG Pactual to discuss her role as the inaugural CEO of the World Bank Group as well as the World Bank’s role in a shifting development landscape. Georgieva expressed concern over global uncertainty and what she called, “the mother of all crises, the crisis of confidence,” and its impact on investment, risk perception, and negative interest rates. Referencing the World Bank and regional MDBs’ initiative, “From Billions to Trillions,” Georgieva spoke about the need to catalyze dormant private sector financial resources to flow into developing markets, citing Vietnamese solar infrastructure projects as an example, and spoke on the need for action to address the famines in Yemen, Nigeria, South Sudan and Somalia. Finally, Georgieva expressed her belief that the Trump administration’s “America First” agenda would be better served by closer engagement with the World Bank Group, and added that she has not heard anyone from the administration say that they want to disengage."


Former top Treasury officials cautiously optimistic that Trump will come round to the MDBs (Multilateral Development Banks)

"Two former United States Department of the Treasury under secretaries for international affairs have called for strong continued U.S. support for multilateral development institutions and especially the International Monetary Fund and the World Bank.

The comments come amid fears President Donald Trump’s administration is less supportive of such institutions as it seeks to cut overseas aid and development spending, and prioritize an “America First” foreign policy."

Monday, June 12, 2017

Andrew Maguire Issues Cryptic Prediction on Gold

Andrew Maguire is a London precious metals trader who has access to information about major buy and sell orders placed in the gold and silver markets. From time to time he issues updates on those markets via interviews. In this case he has issued an interesting and somewhat cryptic prediction on gold. In this interview on King World News, he tells listeners to watch for some kind of big event in the gold market exactly 26 days from the date of the interview. By my calculation, that would be in the first week of July right after the US holiday for the 4th of July.

Adding further intrigue to this interview, King World News is reporting that some unknown entity actually hacked into their system and deleted a portion of this audio interview with Andrew Maguire specifically related to his forecast about what will happen in 26 days.

So, we have an event to keep an eye with a specific time frame given. As I understand Andrew Maguire, he is saying that between now and August 2017 something is going to take place in the gold market that will lead to a major reset of the gold price much higher. He first made this claim about the potential for a gold price reset in February of this year. In this interview, he is following up to say he still thinks his timeline range will be correct for this event to happen (he originally said within 3-6 months of February 2017).

Because Mr. Maguire has access to information about large buy and sell orders placed by entities like central banks, his forecasts are widely followed and often times accurate. In this case, while he does not disclose why he is giving such a precise time frame, it appears he believes that some central bank (or group of central banks) will be placing an enormous buy order for gold. He believes the buy order is so large that it would overwhelm any selling orders in place at that time. 

We will follow the events and report what actually happens between now and August to see if this forecast pans out. If it does, it also suggests something significant that might impact the present financial and monetary system could be about to happen as well. Since we watch for that here, we will just follow this to see how it turns out. The fact that someone went to the trouble to delete the part of the audio interview shown below is odd since KWN can obviously still report it as they have, but it does add some intrigue to the situation.

Here is the text of the deleted portion of the audio interview per King World News:

"Eric King:  “This summer surprise that you say is in front of us in the gold market, Andrew, I know you can’t say specifically what that is, but can you give a hint at what is in front of us that’s going to be the shocker in 26 days?”

Andrew Maguire:  “What we are going to see is a massive amount (absolutely enormous tonnage) of physical gold buying coming in and it’s completely unexpected and unanticipated.” 

King World News note:  Again, this portion of the tape was stripped out of Maguire’s KWN audio interview by some unknown entity.  Who would want that question and this portion of the answer deleted and why?  This is the first time anything like this has ever happened.  As mentioned, a KWN staff member was able to transcribe this portion out of a retrieved copy they kept that was unaffected.  What is interesting is that some entity did not want that portion of the audio interview to be heard by the KWN global audience, which includes key government officials from across the globe.     . . . . "

Added note 6-14-17: Maguire does this brief update on KWN in which he says that gold holding at $1260 illustrates his recent prediction that gold would bounce right at that price level. Again, we will monitor his "26 days" prediction to see what happens there.

Sunday, June 11, 2017

Benjamin Cohen: Should China be Ejected from the SDR?

Benjamin Cohen writes this new article published on Project Syndicate. Clearly, he is not a big fan of the Chinese handling of its currency. He says he doubts if the Yuan should have been added into the SDR currency basket last year and also thinks the IMF should consider taking it out. Below are a couple of excerpts and then a few added comments.


Should China Be Ejected from the SDR?

"Last week, the Chinese government tightened its grip on the renminbi’s exchange rate. China has now effectively reneged on a promise it made 18 months ago, when it lobbied its way into the basket of currencies that determines the value of the International Monetary Fund’s synthetic reserve asset, the Special Drawing Right (SDR).

China’s latest move will hardly strengthen confidence in its currency. As some of us warned at the time, the renminbi’s admission to the SDR basket was a highly political decision that could have adverse long-term consequences."

. . . . .

"It is not difficult to understand why China has reneged on its promises. Over the past two years, newly affluent Chinese citizens have been seeking ways to move their wealth abroad. This has increased downward pressure on the renminbi, and has forced the PBOC to spend more than $1 trillion in foreign-exchange reserves to prop up the exchange rate. And yet that still wasn’t enough to prevent Moody’s Investors Service from downgrading China’s credit rating earlier this month, leaving policymakers on the defensive."

. . . . .

"Looking to the future, there is only one solution. The renminbi should be removed from the SDR, unless China can make credible commitments to pursue serious and permanent financial liberalization."

My added comments: This is an interesting article in regards to what we cover here for a couple of reasons. 

1) I constantly read articles proclaiming that the Chinese Yuan is on a path to replace the US dollar as global reserve currency. However, just a little research indicates that the Yuan is nowhere near doing anything like that even though it did add prestige by being included in the SDR basket last year. Even Chinese officials do not talk in terms of the Yuan replacing the US dollar. Instead, some Chinese officials have called for the SDR to replace the US dollar. Clearly, it was very important to China to get the Yuan added into the SDR basket as a means to improve the global image for the Yuan. Can you imagine how they might react to having it taken back out of the basket? That would be an enormous slap in the face. At least for now, it appears that being "accepted" at the IMF club is more important to Chinese officials than any ideas for trying to use the Yuan to replace the US dollar outside the SDR.

2) This article illustrates how that there is not nearly as much global consensus as many may think among those we would normally view as "elites". Here Benjamin Cohen voices his view that the Yuan probably should never have been added to the SDR basket and thinks taking it back out should be viewed as an option at the IMF. These kinds of internal battles go on all the time inside these organizations and as best I can tell there is far from any real "global consensus" for now on any plan to replace the US dollar as global reserve currency. I still believe that is unlikely to change until and unless a new major global financial crisis forces a move towards more consensus. Without that, it's more like trying to herd a group of cats. You can take a nice picture of a group of cats, but after the picture is taken, they tend to each head off in different directions.
Added note: In this interview with Kind World News, Dr. Stephen Leeb expresses the view that China will eventually replace the US dollar with the Renminbi and also that they will back it with gold. As I mentioned above, I see this idea quite a bit and there are some Chinese who have talked in terms of the idea of a gold backed currency. But so far, China has not made any public move to indicate such a thing is on the near term horizon and they have worked hard to gain acceptance in the SDR currency basket. 

Jim Rickards believes China is building up gold reserves to hedge their large US dollar position and to have a seat at the table with the other nations who hold large gold reserves whenever the next global monetary conference takes place (this would be a reset like we watch for here). The available evidence for now seems to suggest China is more interested in promoting the SDR as a reserve currency to replace the US dollar rather than the Renminbi as best I can tell. But I remain open to all possibilities and will follow it over time like everything else related to potential monetary system change.