Thursday, February 23, 2017

Bloomberg: Trump Scorns IMF Globalism - Gets to Vote on It Now

Here is a very relevant and interesting article on Bloomberg about how Trump and the IMF might work together (or not) going forward. This article touches on some very key questions we have raised here on this blog. For example, how would someone like President Trump who was elected on a campaign platform that appears to conflict with the IMF get along with that organization? 

Below are some key excerpts from the article. I added bold type here and there for what I thought were some important points. Following that are a few added comments.

In the added notes section further below, please see some excellent expert comments I received permission to publish in reaction to this article.

. . . . . .

"Trump took office raging against the loss of American manufacturing jobs and wealth, pinning the blame on trade, and questioning the purpose of post-war institutions from Nato to the European Union. He’s not the only Western leader winning votes by trashing elites and their global projects. Meanwhile China, the world’s rising economic power, is building its own system for extending influence through credit. Where does that leave the IMF?"

Right where it’s always been, according to Lagarde. “We need to stick to our knitting and deliver on what was our mission,” she said in an interview en route to Uganda’s presidential palace last month. She attributes the slowdown in world trade to economic weakness -- “when you have less growth, you tend to be a little bit more protective of your turf” -- and says both may prove temporary.

Lagarde dismisses the idea that the IMF may find itself at cross-purposes with the new administration. “We are an agent of financial stability in any country where we operate,” she said. “A leading power like the United States has a vested interest in economic prosperity, stability and peace.”

. . . . . 

“The extreme manifestation of Trumpism is diametrically opposed to the founding principles of the IMF,” said James Boughton, the IMF’s official historian for two decades until 2012. The Fund is “going to have to play a very delicate game.”
To be sure, it’s not clear how much of Trump’s campaign rhetoric will survive into government. And the dealmaker-president might discover that the Fund has its uses, said Benn Steil, the author of “The Battle of Bretton Woods,” a history of the IMF’s founding conference. “I could paint a scenario in which he effectively looks like a multilateralist, because he finds a way to do deals that are in America’s interests,” Steil said."
. . . . . 
"There’s a case to be made that the U.S. gets good value out of the Fund. Each dollar it commits only adds 2 cents to America’s budget, because defaults rarely happen, according to the Congressional Budget Office. In return for its contribution, which currently stands at approximately $164 billion, America has the biggest say on the Fund’s board. It can’t veto individual loans, but when U.S. interests are aligned with the EU’s -- which they mostly were, before Trump -- they tend to prevail.
Bordo says he’s not worried about the Fund becoming redundant. “They’re always thinking of how they’re going to fit in,” he said."
. . . . 
"That was the role assigned at Bretton Woods in 1944, when the IMF and World Bank were set up. Forty-five nations attended the summit, but two men dominated it: John Maynard Keynes and America’s Harry Dexter White. From the back of her car in Uganda, Lagarde calls them the “founding fathers.”
Their goal was to avoid a repeat of the 1930s, when competitive devaluations and tariff wars led to the collapse of world trade. Keynes wanted the IMF to act as a central bank of central banks, denominating their accounts in a new global currency. It would let members devalue or borrow with relative ease. Both creditors and debtors would pay interest on their holdings, discouraging large trade surpluses as well as deficits."
. . . . .
"Money courses around that system on a scale that would have been unimaginable at Bretton Woods. Massive trade imbalances built up. The dollar remains central. The risks were laid bare in 2008, when a collapsed U.S. housing bubble led to world recession."
Since then, some financial leaders -- among them the governor of the People’s Bank of China, Zhou Xiaochuan, and his U.K. counterpart Mark Carney -- have gently hinted that something more like Keynes’s plan might be in order, to reduce the world’s dollar dependency.
Lagarde doesn’t see that happening on her watch. “It didn’t happen in 1944, when the world had destroyed itself,” she said. “I’m not a dreamer.”
. . . . .
My added comments: This Bloomberg article is absolutely full of important and relevant information in regards to what we try to cover here on this blog. I encourage all readers to read the full article. Some very key bullet points for me:
- Like this blog, people everywhere are watching to see how Trump and the IMF get along (see link below in 3rd bullet point)
- Both the IMF and the Trump Administration seem to be carefully engaging each other
- Christine Lagarde chooses to make positive comments (see this link also)
- the article lays out a brief history of the past roles of the IMF and monetary system change
- it raises the question of whether Trump will actually be more inclined to work with IMF than his campaign rhetoric might suggest
- it mentions the original idea of Keynes for a global currency (the bancor) that we have mentioned here on this blog 
- it asks Ms. Lagarde if anything like that kind of new global currency might become a reality in the future. She says she does not see that happening during her term of office (which extends for several more years)
This is beyond interesting information. Please look at these comments in light of the prediction Jim Rickards has made repeatedly that when we do get the next major global financial crisis that the IMF will step forward to promote the SDR as the new global reserve currency to replace the US dollar. Clearly, Christine Lagarde states she does not see that happening during her term in this Bloomberg article. She adds that she "is not a dreamer."
Does this mean that Jim's prediction concerning the SDR as a new global reserve currency is off base?
I think we cannot really know the true answer to that question until and unless we get the major new financial crisis he predicts. My own research here has indicated to me that, without such a crisis, there is not much chance that the US dollar would be replaced with something new any time soon. Other high credibility sources I have had input from also convince me that is the case. Here, Christine Lagarde seems to add more evidence to support that. He comments are very much in line with those I have heard from some very good sources.
However, we can assume that her comments about a future replacement for the US dollar are based on the assumption that no new major crisis will take place during her term of office. Neither she or the IMF has suggested that they see such a crisis on the horizon even though they do mention various systemic risks from time to time (which we have documented here). If such a new major crisis did arise, I believe the present monetary system is absolutely at risk and that some kind of major changes might have to be made to go forward. Perhaps the one Jim Rickards suggests concerning the SDR. Perhaps there will also be some who would prefer a return to a monetary system based on gold or another "hard anchor" of some kind. I have seen a variety of ideas on this. We can assume that the IMF view would likely change under true systemic crisis conditions and that they would promote some kind of solution.
This is what we continue to watch for here. We have covered a number of potential major solutions/changes that might be put forward at that time including the SDR replacing the US dollar. Recently Jim Rickards issued a cryptic tweet stating that Tim Geithner had told him about another possible solution he had not considered. I find it interesting that Tim Geithner discussed the topic of how to deal with a major systemic crisis at all. All we can do here is monitor events and see what actually does happen.

Added notes: Former Group of 30 Executive Director Robert Pringle provided the comments below with permission to publish here after a review of this blog article:

"I agree with the gist of your article.  If the Trump administration faces an international monetary crisis, it may find the Fund useful as the Reagan administration did in the debt crisis of the early 1980s, when it discarded its earlier rhetoric. In such circumstances the IMF may be able to moderate some of the administration's more extremist/protectionist impulses.  If David Malpass is confirmed as Under Secretary for Monetary Affairs, he will have a major role in setting US policy on international monetary issues where he will doubtless steer the Fund towards a more conservative, free market approach. He has been a loud critic of central bank polices such as QE. Another key issue will be its response if the US should accuse governments such as China or central banks such as the ECB and Bank of Japan of currency manipulation.  Broader issues of reform of the reserve currency system and so on would come "into play" politically if the US decides to  withdraw from or redefine its global monetary leadership and role. With Trump, anything is possible!

Indeed, according to reports today the President has indeed resumed his attack on Chinese monetary policy: 

 “I think they’re grand champions at manipulation of currency. So I haven’t held back. We’ll see what happens,” Trump said.

The president’s comments were reported just hours after the incoming treasury secretary, Steven Mnuchin, made apparently contradictory remarks signalling that the White House had no immediate plans to label China a currency manipulator – something Trump had pledged to do on his first day in office.

The IMF will not have a quiet life under Trump." -- Robert Pringle 

Wednesday, February 22, 2017

Trump Adviser Judy Shelton: Fair Free Trade Depends on Sound Monetary System

Dr. Judy Shelton has been an adviser to the Trump team on economic matters and some even suggest she should get appointed to the Board of Governors at the US Fed. In this interview with the Wall Street Journal, she says to have truly fair free trade, you need sound money. She has also spoken favorably about the gold standard.


Here is a link to her Wall Street Journal article that they mention in the video above on this issue and below are a couple of excerpts.

. . . . .

"When governments manipulate exchange rates to affect currency markets, they undermine the honest efforts of countries that wish to compete fairly in the global marketplace. Supply and demand are distorted by artificial prices conveyed through contrived exchange rates. Businesses fail as legitimately earned profits become currency losses."

. . . . . 

"Mr. Trump is taking the right first step to address this issue by questioning why there aren’t adequate rules in place to keep countries from manipulating their exchange rates.
The next step is to establish a universal set of rules based on monetary sovereignty and discipline that would allow nations to voluntarily participate in a trade agreement that did not permit them to undermine true competition by manipulating exchange rates."
. . . . . 

Click here to read the full article

Added news notes: Secretary of Treasury tells IMF to "provide frank analysis" of currency exchange rates of its member nations. Also, I saw a link to a very interesting new article on Bloomberg on Dr. Shelton's twitter feed which I will feature here on Friday.

Friday, February 17, 2017

Forbes: Shrinking FX Reserves: Will China Defend The RMB?

As we continue to monitor events related to China and the US, Forbes runs this article once again noting the Catch 22 situation China finds itself in with regards to defending its currency and it reserves. Below are a couple of excerpts and then some added comments. See Jim Rickards email comment to me about this issue further below.


"The monthly China debt watch is over and the verdict is in. China's FX Reserves have officially broken through their $3 trillion floor, returning to levels not seen since 2010. The prediction was that this would have to wait until February, but these reserves have been falling relentlessly for seven months straight, and no end yet in sight."

. . . . . .

"So the question becomes how much of their remaining reserves China can afford to sell in the hope of propping up the yuan? And is this anywhere near the amount needed to change market expectations of mid to long-term currency depreciation? Because if market expectations don't change, China will simply watch its currency depreciate anyway, while its much heralded FX reserves drain further.
Yet if China doesn't prop up the yuan, merely allowing the currency to fall will only reinforce capital flight, drive up import costs and inflation and exacerbate China's long term export dependency, not to mention antagonise trade partners already complaining about a persistently undervalued currency."
. . . . .
"All of which leaves the impression that China is facing an invidious choice; either defend the currency, or defend the reserves. They cannot realistically attempt both, and must accept serious consequences either way."
(added bold emphasis is mine)


My added comments: It is clear that this situation China finds itself in is one we need to continue to monitor. Especially in light of the pressure Donald Trump has attempted to put on China in regards to its currency and trade imbalance. 

The potential for this to turn into a serious problem and conflict is obvious. On the other hand, President Trump seems to have backed down somewhat from earlier harsh rhetoric on China. I have to wonder if he has become more aware of the problem China has to deal with here and now wants to try and figure out how to work with them rather to put pressure on them (at least in regards to how the deal with their currency situation).

The US dollar continues to show relative strength and this is really becoming a problem for the US, China and the rest of the world that is up to its ears in US dollar denominated debt. Recently both Trump and other Administration officials went so far as to actually try and talk down the dollar. 

A too strong dollar will make it much harder for Trump to get results from his proposed economic policies and also will put pressure on nations trying to pay off dollar denominated debt. Ironically, a weaker dollar may be what Trump actually prefers and yet so far the dollar continues to show relative strength.

All this makes me wonder if we might see the following unfold this year in an effort to try and get the US dollar to weaken:

- Trump and Congress look the other way and don't really make much effort to cut US government spending (they get on board with a big "stimulus" program and don't really mind if it runs up the US deficit even more). My guess is the GOP Congress will raise the debt ceiling this time without any complaints if this scenario does unfold. None of the usual political posturing about considering shutting down the government to prevent the debt ceiling from being raised.

- US Fed eventually moves to adopt so called "helicopter money" to fund all this ramped up stimulus spending if need be. Fed just buys any new US debt the market does not have an appetite for and further expands its balance sheet if it has to.

If markets see the above unfold, they might actually finally decide the US dollar is too strong given further expanding US debt and even more easy money policy from the Fed to cover that new debt expansion. All this along with tax cuts might also get the velocity of money moving up and get inflation ramped up more sharply (which means the dollar is losing purchasing power). The combination of all this might get the dollar moving downward where everyone seems to want it to go, but can't figure out how to get it done..

The problem with the above (if it does happen) is that its hard to fine tune this kind of thing. Once you get inflation moving up more sharply and the dollar weakening, the momentum might just carry far beyond any intended targets. Watch gold and silver. If they start moving strongly higher it suggests this scenario is in play.

This currency situation is already delicate before you add in the Trump factor which may tend to add even more volatility if he does not move very carefully. China appears to have its hands full already without added pressure from Trump, so we need to continue to watch that dynamic to see if Trump realizes that.

I think this is most likely the key event we need to watch this year that relates to what we try to follow here on this blog. Sharp currency movements that could spin out of control could certainly lead to the kind if monetary system problems we look for here and eventually even lead to monetary system change we also watch for here. The movement of the US dollar this year along with the yuan appears to be a key to keep an eye on.

Important added note: I had a brief email exchange with Jim Rickards on this issue and he offered this comment with permission to publish it here (underline is my addition):

"The China reserve and currency story is one of the biggest stories in the world, but it's a subset and a symptom of an even bigger story, which is the global dollar shortage. That not only affects China, but all emerging markets and the European banking system. Liquidity is drying up all over the world, but it's happening slowly so there's no sense of panic right now. That will come soon enough." --- Jim Rickards

Jim was on this topic early. Now I see lots of articles coming out discussing the problem China is faced with in relation to defending the yuan with its reserves. Jim identified that issue earlier this year (and we covered it here). Jim donates his time (in email exchanges) and shares his thoughts in an effort to help provide the best information possible for readers and I greatly appreciate it.

Added news note 2-21-17: I got this email alert from the BIS today:

BIS Alert - Press Releases 
21 February 2017
Press release on the postponement of Agustín Carstens' appointment as BIS General Manager until 1 December 2017 (21 February 2017)

Thursday, February 16, 2017

William White & Mohamed El-Erian

Here are a couple of articles readers may find of interest. One is by William White (former BIS) and the other by Mohamed A. El-Erian. Below are links to these articles with a brief excerpt from each. The first link was suggested to me by a reader.


William White - Ultra Easy Money - Digging the Hole Deeper?

(from the concluding paragraph)

"We should be under no illusions as to how hard it will be politically for governments to carry out the policies suggested here, even if the G20 provides an organizing framework for coordinated action. That is why they have come to rely so heavily on central bank stimulus in the first place. As suggested above, absent these government policies that could work, central banks are destined to ‘‘just keep digging.’’ Moreover, as the hole deepens, still broader risks arise. Future economic setbacks tied to ultra-easy money could threaten social and political stability, particularly given the many signs of strain already evident worldwide. In short, the policy stakes are now very high."

Mohamed A. El-Erian - An Unstable Economic Order (Project Syndicate)

. . . . 

"Whether by choice or necessity, the vast majority of the world’s economies are part of a multilateral system that gives their counterparts in the advanced world – especially the United States and Europe – enormous privileges. Three stand out.

First, because they issue the world’s main reserve currencies, the advanced economies get to exchange bits of paper that they printed for goods and services produced by others."   . . . . . . . . .

"The Bretton Woods organizations, instituted after World War II to maintain stability, risk losing their influence, and the countries with the clout to bolster them seem unwilling at this stage to press ahead boldly with the needed reforms."  . . . . .

Added note: Tomorrows blog article will include an email quote from Jim Rickards about the China currency situation. He tells me that issue is a subset of an even bigger issue that people need to keep an eye on.

Monday, February 13, 2017

Jaime Caruana (BIS) Speech - International Financial Crises - New Understandings

Here is a link to a new recent speech from BIS General Manager Jaime Caruana. In this speech he once again expresses concern that systemic risk to the global financial system is being underestimated. Below I have pasted in the Conclusion section of the speech. I added bold type to what I thought were some key points of interest. I'll add this post and speech to our list of systemic risk warnings page.


Conclusion: some current challenges

Let me sum up. As Lamfalussy recognised, the challenge of all such data has been and remains their comprehensive analysis. For instance, my BIS colleagues have tried to operationalise the notion of global liquidity. One approach has been to integrate the banking data with securities data[22] to provide a holistic view of international credit in order to track global trends in dollar credit to non-US residents. Such data form a part of the larger set of global liquidity indicators of the BIS.[23] A further challenge is to assess how much larger dollar credit to non-US residents might be if one takes into account cross-currency swaps.[24]
Stepping back, better statistics alone do not make international finance safe. We also need to struggle to escape the popular models that prevent us from recognising the build-up of vulnerabilities. Getting all the right dots in front of you does not really help if you do not connect the dots.
Right now, I worry that even though we have data on aggregate debt, we are not properly connecting the dots and we are underestimating the risks, particularly when the high levels of debt are aggravated by weak productivity growth in many countries. And the standard of evidence for precautionary action has to be the preponderance of evidence, not evidence beyond a shadow of doubt. Waiting for fully compelling evidence is to act too late.
Total debt in the global economy, including public debt, has increased significantly since the end of 2007. True, banks have delevered and private debt has been reduced in some countries, namely Ireland, Spain, the United Kingdom, the United States and others. However, public debt has increased significantly in advanced economies, and private debt has increased in emerging market economies and some advanced economies less affected by the 2007-09 financial crisis. Over the last 16 years, debt of governments, households and non-financial firms has risen by 63% in the United States, the euro area, Japan, the United Kingdom, Canada and Australia, 52% in the G20 and 85% in emerging economies. Heavy debt can only leave less room for manoeuvre in responding to future challenges.
To conclude, financial crises give us an opportunity to improve the data that can indicate vulnerabilities. As Lamfalussy keenly recognised, these data can only play their part in macroprudential policy if we use them creatively to analyse systemic risk as it evolves.

Please click here to read the full speech text


 Added note: Forbes covers this speech in this article and says the BIS is issuing a new warning on global debt. Here is an excerpt:

"The next financial crisis is likely to revolve around how this debt burden is managed," warns Neil MacKinnon, an economist with VTB Capital in London.

Saturday, February 11, 2017

How Will the New Political Environment Impact Things?

Now that Donald Trump has taken office it's fair to ask the question: How will his Administration impact what we follow here? There is no question the political landscape has changed and that there will be policy changes in many areas. But what about the potential for monetary system change during his term? Actually, things are probably simpler to project now. I see two basic scenarios.

Trump Succeeds in Boosting Economic Growth and Job Creation

If the policies Trump puts in place are successful in stimulating significant real economic growth that leads to the creation of good jobs, he will likely stay popular enough to control the agenda for quite some time. I take him to be serious when he says he plans to put "America First" and that we can safely assume that he will not be interested in globally oriented policies that would mean a lessening of American sovereignty. I doubt he will have much interest in many of the global initiatives that some from organizations like the UN, World Bank and the IMF unless he thinks they will serve American interests. If he is successful, it is unlikely that a new major financial crisis will unfold during his term and so he won't have any reason to think about any plan that would replace the US dollar as global reserve currency. 

A New Major Financial Crisis Does Unfold Sometime During Trump's Term

If a new major crisis (along the lines Jim Rickards is predicting) does unfold during Trump's term for any reason, the situation will become less predictable. It does not really matter if Trump's policies cause the crisis or if forces already in place simply rise to the surface and overwhelm the system during his term. If we get this kind of severe crisis, Trump will have to decide how to deal with it. He may just decide to stay with his "America First" plan and just ride out the storm. Alternatively, he may be presented with the option of replacing the current monetary system based on the US dollar with something new. If this happens, we can expect that there will be powerful interests promoting various ideas to replace the existing system. Some will push for a return to a precious metals backed monetary system. Some will push for a new global reserve currency along the lines of the SDR used at the IMF. There may be other competing ideas put forward. Your guess is as good as mine as to which path Trump would choose in this scenario.


I have no idea which scenario above is more likely to unfold. Trump is going to try and make some major policy changes in regards to taxes, regulations, and trade. If his policies work it could create higher growth, reduce the US deficit, and stave off the kind of crisis that might lead to major monetary system change. If his policies do not work or are too late to stave off a crisis from systemic risks already built into the system we have documented, then the crisis may come. There is simply no way to know at this point in time. If there is some kind of plan to try and blame Trump for a crisis as some have suggested, that would not make sense until he has been in office for some time as the public probably would not tie him to the crisis early in his term.

If the first scenario does unfold, eventually this blog not have a reason to continue with new articles. If the second scenario unfolds, the blog will have a purpose in continuing to monitor events and offer information as to what kinds of solutions are put forward to deal with the crisis. We will continue to keep an eye on things here until early 2018 and then assess if there is any reason to continue with new articles and information. Meanwhile, we will just produce a few articles per month based on relevant news that pops up. The information compiled here that documents the systemic risks that exist and some of the potential proposed monetary system changes (such as replacing the US dollar with the SDR) will remain here permanently as an available resource to anyone who can use it.

Added note: Jeffrey D. Sachs (Columbia University) predicts that millennials will reject Donald Trump in this article in Project Syndicate. In my view, whether he will be right or wrong depends on whether or not Trump delivers an improved job market for that generation. If he does, I think he will get their support. If he does not, he probably won't. People in general care more about having a good job than most other issues (including millennials). If the perception is that he improved the job market, he will enhance his support. If the perception is that he failed to improve the job market, he will lose support. I think it really is that simple.

As for all the uproar over whatever Trump does everyday, my reaction is to yawn. Wake me when something of true significance actually happens. Most of what we have seen so far appears to be mostly theater on both sides by professional politicos who are more about obtaining and holding political power than anything else. 

Those kinds of professional political supporters will spin everything he does as positive, professional political haters will spin everything he does as negative. Most people see through all those theatrics and focus on what is most important in their lives, like getting a decent job (no real need for polls to prove this, but here is a full page of them anyway). That's not likely to change unless a new real crisis comes along and Trump gets tagged with it in the public perception. That is what I will be watching for here.

Wednesday, February 8, 2017 - China Facing a Catch 22?

There are a lot of reasons to keep an eye on China. Trump is likely to have some confronations with China on a variety of fronts. Jim Rickards has predicted a significant currency event (possible steep yuan devaluation) will take place this year related to China. Here is another issue to keep an eye on in this recent article in Below are a couple of excerpts from the article.


"A subsidiary of the Industrial and Commercial Bank of China (ICBC), the world’s largest bank, has recently reached deals with seven Chinese state-owned enterprises to convert about 60 billion yuan ($8.7 billion) of unpaid loans into equity shares.

. . . . . . 

"The news about debt-for-equity swaps and China’s claims to be over the worst of its corporate debt problems all sound good until one remembers this.
In October 2016, the Bank for International Settlements (BIS) reported that China’s corporate debt was 121 trillion yuan, roughly 169 percent of China’s GDP.
The IMF also noted the problem wasn’t simply a high rate of growth in Chinese corporate debt since the 2008 financial crisis. It’s the fact that corporate profits have steadily declined since 2009, while the leverage ratio has increased.
One of the obvious side effects of such unrestrained credit growth is a rise in non-performing loans (NPLs). China currently reports NPLs at 1.7 percent of total loans. But we have always taken Chinese statistics with a grain of salt.
We think the true figure was somewhere between 3 and 7 percent.
But the IMF report suggests the number of loans at risk of default is much higher. It estimates that non-performing and special-mention loans have risen above 5 percent. Meanwhile, loans potentially at risk account for 15.5 percent of all commercial bank loans to the corporate sector."
. . . . .

Added note: When I forwarded a link to this article to Jim Rickards he replied to let me know he had seen another similar article and sent me this link and said to continue to keep an eye on China:

2-9-17 addtional note: This article appearing on CNBC suggests that Trump and China are still in the early stages of trying to figure out how to work with each other. It appears Trump may be dialing back from some of his earlier strong rhetoric on China. The article says Trump has held off on some of the actions that might have led to early conflict so far that some were expecting him to do.

2-10-17: More evidence Trump is walking back some of his earlier sharp rhetoric on China in this article

As time goes by we are perhaps learning more about how Trump works. He may be learning that some things in geopolitics cannot be used like bargaining chips as he is used to in business dealings. So far he has avoided some things Jim Rickards pointed out could lead to sharp conflict with China that some had thought he was ready to move forward with. For example, he has not yet formally called China a currency manipulator and now he has backed off on his comment that he might not accept the One China policy.

2-13-17: Chinese are happy to see Trump soften his stance on China- China Daily

Saturday, February 4, 2017

Dr. Warren Coats - My Political Platform for 2017

Readers here know that we have featured articles by former IMF Chief of Operations (SDR) Dr. Warren Coats. Dr. Coats has decades of experience related to the issues we cover here and has also been kind to donate some of his time to help add information to this blog (like this interview he did here last year). 

Right now there are no major events taking place leading to the kind of major monetary system change we watch for here. I do want to try and continue to produce a few articles for the readers who continue to visit here regularly while we wait to see how things unfold.

Here we have a recent blog article by Dr. Coats where he lays out his vision for a political platform for 2017. I thought it had a lot of interesting ideas and his section on monetary policy of course directly ties in to what we cover here. Below I have excerpted his section on monetary policy (bold emphasis is mine). Below that are a few added comments.


 . . . . .

Monetary and Financial Policies

Government policies that affect business should be as rule based and transparent as possible. Monetary policy stands out as a particularly important area in which clearer rules are needed. A currency with stable real value (purchasing power) is an important part of the foundation of efficient free markets. At the very minimum the Federal Reserve’s mandate should be tightened as provided in the very pragmatic Federal Reserve Accountability and Transparency Act of 2014. This act would require the Fed to chose an operational rule, from which it could depart only with an explanation to Congress of its reasons. A deeper review of options is proposed by the Centennial Monetary Commission Act of 2015. I have proposed a more radical reform in the spirit of the gold standard but with tighter rules and an anchor of a large number of goods rather than just gold. The supply of this currency, which ideally would become the global currency, would be regulated by the market using currency board rules and “indirect redeemability.” A hard anchor for the dollar.
The banking and financial sector are currently smothered with detailed regulations the compliance cost of which are driving smaller banks out of business. Under the Dodd Frank law adopted after the financial crisis of 2008, the largest five American banks have grown even larger (in absolute terms and as a share of the banking sector) than they were in 2008. Regulators, despite (or because of) their detailed banking regulations have failed to make banks safer and have slowed the competitive process of producing better and cheaper services. Bank owners and market preferences should regulate risk taking by banks.
Bank regulation by the government should focus on broad principles with strong owner accountability. Bank capital requirements should be raised and the no bail out rules strengthened. Bank owners and investors should absorb any bank losses. The payment services of banks should be isolated from the rest of its lending and investing business by adopting the Chicago Plan of one hundred percent reserve requirements against current account deposits, and virtually all other regulations (other than accounting and reporting standards) should be dropped. Larger banks will develop their own risk weighted capital requirements for their internal use, but the government’s capital requirements should state the minimum required leverage ratio (ratio of core capital to total assets) and set it at a high level. Changing direction on bank regulation, Cayman Financial Review April 2015. A bill now in congress moves in this direction: The Financial Choice Act          
 . . . . .
My added comments: If you take time to read over the full platform I think you will find it worth your time. As with anything, I am sure various readers will probably agree with some of the proposals and disagree with some. But there are a lot of interesting ideas presented on a wide variety of issues. The basic theme I see in the platform is to try and strike the right balance for the role of government. Enough to have an orderly society based on the rule of law, but not too much so that freedom is restricted too much. We have struggled with this balance as a nation our entire history. Dr. Coats offers his thoughts on it in his blog article on how to strike the balance.

Added note: Dr. Coats furnished me this link to another thought provoking article he had written earlier which is now published at the Cayman Financial Review.

Wednesday, February 1, 2017

Crisis Watch Update

It looks like the latest trend for crisis watching is to suggest that Donald Trump may trigger the next major financial crisis. Below are examples of several recent articles that follow that theme. Is Trump being setup as the scapegoat? We report, you decide.


Larry Summers - Trump Could Trigger Next Crisis

"Former U.S. Treasury Secretary Lawrence Summers attacked the policy proposals of Donald Trump on several fronts, saying the president-elect’s plans for deregulation were setting the stage for the next financial crisis.

Washington Post - How Donald Trump Could Creat a Financial Crisis

"What, then, might be the economic consequences of the president-elect's tax cuts, tariffs and deregulation? Well, as we'll get to in a minute, they sure seem like they would raise the odds of a financial crisis happening overseas, and maybe here too. It's a story about the dollar and housing."

Fortune - Trumps Dismantling of Dodd-Frank will be 2008 All Over Again

"Ending Dodd-Frank would be deeply misguided and likely to recreate the very conditions that led to the 2008 financial crisis, shuttered American businesses, and cost millions of Americans their jobs. The financial sector will get a nice sugar high for a few years, and then crash the economy."

Newsweek - Why Trump's Policy Could Recreate 2008 Crisis

"In particular, he has spoken of dismantling the Dodd-Frank Act, which introduced extensive regulation of the financial industry in the wake of the global financial crisis. This is pleasing the markets, but may lead to the same kind of risk-taking that precipitated the 2008 crisis."

Independent (UK) - Look out for Financial Crisis - Part II

"Boom and bust economic theory suggests that, however we regulate banks, we should expect another financial crisis in the near future. With Goldman Sachs president and COO as the new national economic council director under Donald Trump, that theory might materialise a lot quicker."

The Herald - Trump Protectionist Tendencies Can Cause Another Financial Crisis

"German Chancellor, Angela Merkel warned incoming United States president, Donald Trump to guard against his protectionist tendencies, citing lessons learned in the 2008 global financial crash and stressing the need to “move forward together”.
“My profound conviction is that there are more advantages… to moving forward together than when everyone resolves their problems for themselves. I am truly convinced of this,” she told a press conference at a meeting of her CDU party.
Asked if she believed “protectionist tendencies” by Trump could pose a threat, Merkel recalled the example of the 2008 global financial crisis, which “came from the United States”.

Jim Rickards - Trump Can't Stop the Next Financial Crisis

(note: Jim does not blame Trump for the crisis, but predicts he will not be able to avoid it during his term and suggests he will be blamed for it)

MW: How does the election of Donald Trump play into your scenario of a 2018 crisis? What policies would you recommend that he adopt or push Congress for? How much of a difference can that make?
J.R.: The election of Donald Trump does little to change my analysis. The Trump administration is focusing on macroeconomic policy relating to taxes, spending and regulation. That’s fine, but it does not address the issue of systemic risk, which exists separately from normal business-cycle and credit-cycle considerations (although credit cycles and systemic-risk event may coincide at times).

"Taking these various vectors into account, this is the most accurate assessment: The global economy is poised on a knife-edge between inflation and deflation.
The inflationary vector could dominate quickly, based on a combination of Trump deficits and Fed accommodation. Conversely, the deflationary vector could dominate based on fundamental factors such as a strong dollar, deleveraging, demographics and technology combined with premature Fed tightening.
Waiting in the wings is a systemic crisis, which could result in inflation (due to massive SDR issuance) or deflation (due to lack of a coordinated global response). You should prepare for both."

Deseret News - Peter Morici (U. of Maryland)  - Takes similar view to Rickards

"Donald Trump promises sweeping changes in economic policies to make Americans more prosperous. However, asset and debt bubbles, enabled by easy money policies, could derail his plans and thrust the global economy into another recession."

. . . . .

"Should theses bubbles burst and the yuan collapse, Asian and other developing economies dependent on exports to China could easily become unable to service their dollar-denominated debt. All this is reminiscent of the Asian currency crisis of the 1990s, which left many American lenders holding the bag."