The View From Our Whitehouse - Monetary System Reform Watchdog

Monday, June 1, 2020

Ray Dalio on Monetary History and Where We Are Now

Recently we featured an article by hedge fund manager Ray Dalio that took a deep dive into how the purchasing power of fiat currencies compares over time versus goods and services, stocks, debt, and gold. I got quite a bit of positive feedback that his information was helpful. This article by Ray Dalio was the most recent article in a series that takes an even deeper dive into history and looks at the rise and fall of nations, monetary systems and currencies. It also talks in depth about how history tends to move in both short term and long term cycles. 



Ray Dalio says he feels we are near the end of a long term debt cycle and also possibly the monetary system we have known for most our lives. Since that is exactly what we watch for here on this blog, below I have linked to the entire series of three articles with an excerpt from each article to provide a feel for the issues discussed. I will add this post to our market place of ideas for monetary system reform. While Mr. Dalio does not offer a specific proposal for reform or for a new monetary system, he does discuss many of the factors that historically have led to this kind of major change. Given his career and resume, I felt his articles deserve to be added to the marketplace so that readers can easily find them there if desired in the future. Any underlines below I added for emphasis.

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The Changing World Order - Chapter 1 - The Big Picture in a Tiny Nutshell

Where We Are Now

"As previously explained, the last major period of destroying and restructuring happened in 1930-45, which led to the new period of building and the new world order that began in 1945 with the creation a new global monetary system (built in 1944 in Bretton Woods, New Hampshire)and a new American-dominated system of world governance (located the United Nations in New York and the World Bank and the International Monetary Fund in Washington, DC).  The new American world order was the natural consequence of the US being the richest country (it then had 80% of the world’s gold stock and gold was then money), the dominant economic power (it then accounted for about half of world production), and the strongest military power (it then had a monopoly on nuclear weapons and the strongest conventional forces).


It is now 75 years later, and we are classically near the end of a long-term debt cycle when there are large debts and classic monetary policies don’t work well for the world’s reserve currency central banks.  This is happening as we are simultaneously in a deep economic and debt contraction that is producing income and balance sheet holes for people, companies, nonprofit organizations, and governments, while politically fragmented central governments are trying to fill in these holes by giving out a lot of money that they are borrowing.  Central banks are helping them do that by monetizing government debt.  All this is happening at the same time that there are big wealth and values gaps and there is a rising world power that is competing with the leading world power in trade, technology development, capital markets, and geopolitics.  And on top of all this, we have a pandemic to contend with.


At the same time, we have great human capital and thinking technologies that can help us see how to best deal with these challenges and do the inevitable restructurings well.  If we can all deal with each other well, we will  . . . ."




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The Changing World Order - Chapter 2 - Money, Credit, Debt, and Economic Activity

"Because what most people and their countries want the most is wealth and power, and because money and credit are the biggest single influence on how wealth and power rise and decline, if you don’t understand how money and credit work, you can’t understand the biggest driver of politics within and between countries so you can’t understand how the world order works.  And if you don’t understand how the world order works, you can’t understand what’s coming at you

For example, if you don’t understand how the Roaring ’20s led to a debt bubble and a big wealth gap, and how the bursting of that debt bubble led to the 1930-33 depression, and how the depression and wealth gap led to conflicts over wealth all around the world, you can’t understand the forces that led to Franklin D. Roosevelt being elected president. You also wouldn’t understand why, soon after his inauguration in 1933, he announced a new plan in which the central government and the Federal Reserve would together provide a lot of money and credit, a change that was similar to things happening in other countries at the same time and similar to what is happening now.  Without understanding money and credit, you wouldn’t understand why these things changed the world order nor would you understand what happened next (i.e., the war, how it was won and lost, and why the new world order was created as it was in 1945), and you won’t be able to understand what is happening now or imagine the future.  However, by seeing many of these cases and understanding the mechanics behind them, you will be able to better understand what is happening now and what is likely to happen in the future."



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Finally, here is the link to our previous article featuring his article comparing the purchasing power of fiat currencies versus debt, stocks, goods and services, and gold over time.



"As previously explained, there is a real economy and there is a financial economy, which are intertwined but different.  The real economy and the financial economy each has its own supply and demand dynamics.  In this section we will focus more on the supply and demand dynamics of the financial economy to explore what determines the value of money."

Printing and Devaluing Money is the Easiest Way out of a Debt Crisis

"While people tend to think that a currency is pretty much a permanent thing and believe that "cash" is the safe asset to hold, that's not true because all currencies devalue or die and when they do cash and bonds (which are promises to receive currency) are devalued or wiped out. That is because printing a lot of currency and devaluing debt is the most expedient way of reducing or wiping out debt burdens."

. . . . 

"Since 2000, we have seen a more gradual and orderly loss of total return in currencies when measured in gold, consistent with the broad fall in real rates across countries during those decades."

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My added comments: The only comment I can add here is that Ray Dalio in these articles talks about many issues that we have covered here on this blog for years and also emphasizes that understanding these issues is very important for each of us. This is also what we have said here for many years.

Added note: Ray Dalio has followed up the three articles linked above with another one that talks about The Big Cycles Over the Last 500 Years that you can find here.


Saturday, May 30, 2020

Billions, Trillions, Some Perspective

Over the course of my lifetime, we have seen the global money supply and global debt continue to expand endlessly. In the days of old during my youth, people worried that some day the total US debt might reach as high as a Trillion dollars. As you can see from this historical chart, total US debt edged up over time from around 250 Billion starting in the year 1950 to a little over 500 Billion by the year 1975. By this time people my age were about 20 years old and the idea of Billions in total debt seemed normal. As we can see from the chart, total US debt did not hit the Trillion dollar mark until 1982 when people around my age were approaching 30 years old. This seemed like a big deal at that time as we moved in "the Trillions" for the first time.


Of course now we look book back at a one Trillion dollar total debt as mere peanuts. Trillions have become quite acceptable in the public mind and no longer concern most people as we move well over the 20 Trillion mark in total US debt. Trillions for people today seem like Billions did to people when I was growing up. Clearly, the total US debt is headed much higher in coming years and these days no one seems very concerned about that. Every now and then a politician or financial analyst will act concerned about it; but we all know nothing will actually be done to stem the rising tide of debt unless there is no other option available to keep extending the debt. These days, it is even fashionable to promote the idea that debts don't matter at all and that all that matters is that we can pay the interest and roll over the debt. 

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With this background in mind, I though it might interesting to try and offer some perspective on the difference between the numbers one million, one billion, and one trillion. If we look at how long each of these numbers is in terms of seconds of time:

1 million seconds is about equal to 11 and 1/2 days 

1 billion seconds is almost 32 years

1 Trillion seconds is about 31,700 years

As we noted above, despite the exponential nature of the increase as we move from billions into trillions, no one is much concerned about it in terms of how much total debt the US builds up over time. No one offers any serious proposal to deal with the situation since no one is really all that concerned about it. Besides, none of the remedies for dealing with the debt are politically appealing except to just continue creating new money as needed to keep they system afloat which is what we do.

As we prepare this upcoming generation for the future; perhaps the question to ask is what comes after trillions? Don't laugh. When I was a kid no one could even imagine 25 Trillion dollars of debt. So it may not be too early to get familiar with the number one qaudrillion. Beyond that we have one quintillion followed by one sextillion. But why piddle with such small numbers. What dwarfs these as we head into the future?

The answer of course is the Googolplex as explained here. How big is this number? Wikipedia provides this perspective to give you some kind of an idea:

"One googol is presumed to be greater than the number of atoms in the observable universe, which has been estimated to be approximately 1078. Thus, in the physical world, it is difficult to give examples of numbers that compare to the vastly greater googolplex. However, in analyzing quantum states and black holes, physicist Don Page writes that "determining experimentally whether or not information is lost down black holes of solar mass ... would require more than 101076.96 measurements to give a rough determination of the final density matrix after a black hole evaporates" The end of the universe via Big Freeze without proton decay is expected to be around 101075 years into the future."

For the few still worried about the rapidly rising tide of total US debt (and our future entitlements obligations), this number should provide great comfort. Recently, Fed Chairman Powell said there are really no limits on the Fed's ability to create monetary liquidity

It's good to know that we won't be limited by running out of numbers to use to record the total debt. We have a number far in excess of the total number of atoms in the entire observable universe available. One can't help but notice the ominous discussion of black holes just above, but it appears that is far, far into the future and certainly beyond the next election cycle -- which is all that really matters. 
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Note: If it is not obvious, this article is intended to be a humorous look at the US debt situation. I don't really expect us to get to a total debt of one googolplex any time soon. And if we do, I'm sure we can come up with a perceived googolplex of assets to offset the debt. It's all just a matter of perspective, right? :-)

Added note 6-2-2020: If this kind of issue interests you, Ray Dalio has put out a series of new articles exploring things like this in great detail which I have featured here.

Sunday, May 24, 2020

Signals from the Gold and Silver Markets?

One of the sign posts we keep an eye on here is the precious metals markets. These markets historically can provide signals that something unusual is going on in the financial system. There are a couple of things that come to mind in this regard.  



One is that sharp rises in gold (and sometimes silver prices) often indicate sagging public confidence in the status quo of either the present financial system or at times anxiety that the some kind of disturbance in the normal social order is a concern. For example. a feeling that some kind of major geo political event may rattle the existing status quo. Gold is often viewed as a kind of refuge of last resort insurance policy in times like that. 



Secondly, whenever public confidence in an existing national currency diminishes, people often move into gold (and also silver in some cases) as a kind of currency hedge. Again, as an example, if there is a public perception that all the massive liquidity creation by the government and the central banks in response to the virus related financial crisis might weaken their national currency, some will move at least a portion of their savings into gold (and silver). This is true for the US dollar as well as any national currency. The more public confidence falters, the more demand for gold (and silver) resulting in strong bull markets for those metals. 



This year, we have already seen gold perform very well in response to the unfolding crisis and lately silver is starting to show signs of life as well. Since these markets can offer important signals as discussed above, we should watch them closely in the coming months. Below is a bullet point list for some of the things we can observe going on right now in these markets that may be worth your time to review.

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- in 2020, gold is at or near all time highs in many currencies and may be targeting an all time high is the US dollar price of gold later this year. If gold makes a new all time high in the US dollar price in 2020, we need to pay attention to that signal

- many technical analysts are saying that long term historical charts for gold and silver are indicating the potential for much higher prices ahead in the coming months and years. Here is one example of that kind of technical analysis.

- both gold and silver have had unusual price variations between the prices as set in the futures exchanges (such as the Comex exchange) and the actual prices to purchase real physical metal rather than a paper futures contract. In late March (on the 24th) I watched a real time example of weird gold price variation take place. That day, I checked the gold price as shown by Kitco, a leading precious metals web site that shows the gold price continuously as the market trades. At the exact same time I looked at the gold price showing on CNBC on TV. The gold price on CNBC was nearly $100 per ounce higher than the Kitco price. This is extremely unusual behavior. Normally, any variations are fairly minor. In fact, I have never seen this happen before in over 20 years of watching this market. (see this Reuters article related to this activity)

- as I write this article, Kitco shows the closing gold price for 5-22-2020 as $1732.70 while CNBC shows a gold price at close on 5-22-2020 of $1,734.70. This is more like normal. The same kind of wide variance I watched in late March has popped up several times over the past few weeks since then. This kind of unusual pricing variance can be an indicator that there is more demand for physical gold than supply and that gold futures contracts may be under unusual duress. If the situation persists, it can also indicate there is a stress in the futures paper markets that is a systemic risk to futures contract trading. So, it bears watching in the months ahead.

- this same unusual pricing activity is also happening with silver. Below I will illustrate this by pulling some silver prices from various sources at the market close for 5-22-2020. The retail market for actual physical silver is really acting in an unusual way. All you have to do is search the internet and see if you can buy a one ounce silver eagle coin anywhere for less than $25 (@ 5-23-2020) while the paper futures markets say silver is $17.29 per Kitco. It is normal for silver eagles to carry a premium to the price of silver ($2.75 to $3 per ounce), but the premiums out there right now of anywhere from $7 to $9 per ounce above the $17.29 price shown on Kitco indicates a very tight retail market for actual physical silver. Below I am pasting in an example from one typical dealer to illustrate this situation. Notice that this dealer will actually buy silver eagles from you for $4 per ounce ($21.37) over the futures market price of silver and wants $8 per ounce ($26.76) from you if you want to buy one from them. This is very typical of what is gong on right now in this market. Just search the internet if you want to observe it for yourself.

Also, as of market close on 5-22-2020, CNBC is showing a silver price of $17.69 (recall Kitco shows $17.29)Looking at all this, a couple of questions come to mind. What is the true price of silver? What is going in this market to create these kinds of price variances? In coming weeks we should keep an eye on this market for any signals it may send us.



Silver American Eagle - RANDOM Year, BU (Dates our Choice) - (Money Metals Exchange)



Quantity
Premium/Unit
Total Price Each
1 - 39$9.39$26.76
40 - 499$8.79$26.16
500 - 2500$8.29$25.66
2501+
Call for discount
Silver Price:$17.37








Sell to Us Price: $21.37 each.

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Concluding Comments: Anyone who follows the gold and silver markets knows there is unusual activity going on right now. Some attribute this to short term disruptions in supply and demand due to the virus pandemic impact on the supply chains. Others say this unusual activity is sending us important signals that major changes in these markets are coming (leading to much higher gold and silver prices) and if those changes are very large it could indicate the entire current financial system is under stress. It's always important to monitor these markets, but even more so under the present conditions.

Keep in mind, we have had unusual activity in the repo markets from the US Fed since last fall following years of very easy monetary policies. On top of that we have now had a global pandemic leading to a shut down of the global economy. This has created millions of job losses, high volatility in many markets, and very high levels of uncertainty for what happens over the next year. No one really knows for sure what is coming towards us. Given all this, gold and silver could be trying to send us signals for the future and we need to be alert to anything they may have to say.

Added notes: 

Other current retail prices for silver eagles around the internet as of 5-23-2020:

JM Bullion - $26.64

Apmex - $28.36

SD Bullion -$26.82

Pinehurst Coins - $26.35

Provident Metals - $26.64

US Gold Bureau - $25.90

Gainesville Coins - Out of Stock


In normal times, silver eagles retail for anywhere from $2.75 to $3 per ounce over the price of silver and dealers will only pay the spot price of silver to buy them or at most a slight premium to spot price. A shortage of silver eagles may be partially due to the US Mint having to close due to the virus pandemic for a period of time. But it's back open now so everyone is watching to see if this abnormal pricing activity persists. Before closing, the Mint was experiencing a huge surge in demand.

Added note 5-27-2020: Above we illustrate that there is clearly a tight supply situation in the retail market for silver eagles that anyone can easily see. In this new interview, London metals trader Andrew Maquire confirms that the wholesale market for large silver bars is also very tight at this time. Mr. Maguire is in a position to see the supply and demand in the wholesale silver market that is pretty opaque to the general public. All this suggests we should watch and see what silver does over the next few weeks.

Wednesday, May 20, 2020

Monthly BIS Update - Covid-19, The Future of Cash, and Regions at Risk





May 2020

Reflections on regulatory responses to the Covid-19 pandemic 

In the first in a new series, Claudio Borio and Fernando Restoy examine the rationale of regulatory and supervisory responses to Covid-19.

Covid-19 and corporate sector liquidity

Firms face unprecedented declines in revenues, heralding a rise in leverage and possibly in corporate bankruptcies.

The macroeconomic spillover effects of the pandemic on the global economy

The economic impact of the pandemic is significant and likely to multiply over several quarters.

Emerging market external vulnerability

International banking data at end-2019 show emerging markets’ vulnerability to capital outflows on the eve of Covid-19.

Identifying regions at risk

Google data can help identify where Covid-19 threatens employment and support targeted policy responses. 
More BIS publications 

Speech: New perspectives opened up by the crisis
Benoît Cœuré discusses the themes of resilience and technology and how they will shape the post-Covid-19 world.

IFC report: Computing platforms for big data analytics and artificial intelligence
How should public institutions, particularly central banks, organise themselves to benefit the most from the opportunities presented by big data sets and analytics to provide new, complementary information?

CPMI paper: Payment aspects of financial inclusion in the fintech era
Financial technology can spur financial inclusion by facilitating payments, but the opportunities come with challenges. 

Friday, May 15, 2020

News note: Ray Dalio Authors Article on Gold and Currencies

Lately, I notice a number of "mainstream analysts" talking more about the idea that the fiat currencies we use now are perhaps on shaky ground and that gold is returning to investor favor. Hedge fund manager Ray Dalio offers this lengthy narrative on devaluation of fiat currencies and the role of gold as a hedge for investors. Below are a few excerpts from the article. Any added underlines are mine for added emphasis.
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The Changing Value of Money - Ray Dalio

"As previously explained, there is a real economy and there is a financial economy, which are intertwined but different.  The real economy and the financial economy each has its own supply and demand dynamics.  In this section we will focus more on the supply and demand dynamics of the financial economy to explore what determines the value of money."

Printing and Devaluing Money Is the Easiest Way out of a Debt Crisis

"While people tend to think that a currency is pretty much a permanent thing and believe that “cash” is the safe asset to hold, that’s not true because all currencies devalue or die and when they do cash and bonds (which are promises to receive currency) are devalued or wiped out.  That is because printing a lot of currency and devaluing debt is the most expedient way of reducing or wiping out debt burdens."

. . . . . 

"In comparison to the others, printing money is the most expedient, least well-understood, and most common big way of restructuring debts.  In fact it seems good rather than bad to most people because it helps to relieve debt squeezes, it’s tough to identify any harmed parties that the wealth was taken away from to provide this financial wealth (though they are the holders of money and debt assets), and in most cases it causes assets to go up in the depreciating currency that people use to measure their wealth in so that it appears that people are getting richer.

You are seeing these things happen now in response to the announcements of the sending out of large amounts of money and credit by central governments and central banks."

. . . . .

"Most people don’t pay enough attention to their currency risks.  Most worry about whether their assets are going up or down in value; they rarely worry about whether their currency is going up or down.  Think about it.  Right now how worried are you about your currency declining relative to how worried you are about how your stocks or your other assets are doing?  If you are like most people, you are not nearly as aware of your currency risk and you need to be."



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Added comments: In this article Ray Dalio goes on to compare the purchasing power of fiat currencies over time versus debt, consumer goods, stocks and versus gold. When it happens, significant devaluation of the currency of a nation historically eventually leads to major monetary system change. This is a very in depth exploration of these issues that readers here would likely find of interest.

Monday, May 11, 2020

IMF Official - There are Coutries (Including the US) Skeptical About Issuing More SDR's

We continue to monitor the topic of the potential for any increase in the allocation of SDR's (Special Drawing Rights) at the IMF. This is an important story to follow for this blog because the entire purpose for the blog is to watch for any major changes to our present monetary system. Years go by with no indication that any major changes may be forthcoming. We have reported here for many years that our sources indicated they did not expect major changes to our system unless a new major economic and financial crisis were to arise. Now we have that major crisis and there have been numerous articles calling for an increase in the allocation of SDR's at the IMF as part of the response to this crisis. Our most recent article reporting that the US was opposed to such an increase can be found here.


Readers may ask why would a seemingly low profile event like an increased allocation of SDR's would be viewed here as something major to follow over time. The reason is that some analysts like Jim Rickards have long predicted that at some point in the future, a crisis would arise so large that it would overwhelm the national central banks ability to respond without doing severe damage to their own national currencies. Jim says that he believes this could well lead to serious proposals for the IMF to step forward with a massive issuance of new SDR's (Jim says in the trillions) as "the only clean balance sheet" left in the world to try and restore liquidity to the system. Obviously, if anything close to this does happen, we have very major monetary system change facing us with major potential consequences to the US dollar as the global reserve currency. Beyond that, if all this were to happen because the credibility of the US dollar was damaged beyond repair due to the efforts of the Federal Reserve attempting to sustain the present US dollar based system, we would have huge issues to consider for every asset on earth currently valued in US dollars. The implications of all this could hardly be more significant or the potential change to the system more dramatic. Essentially, every person on earth would be directly impacted by changes of this magnitude.


Given all the above, whenever we see proposals for significant increases in the allocation of SDR's here, we take notice. This topic tends to arise over and over and the US position on it is very important to follow since the US has what amounts to veto power over such changes at the IMF. 


With all that background, we have a very recent Q&A session now posted on the IMF web site where IMF officials offer their most recent comments on the SDR allocation question. Below we have extracted some relevant excerpts from the Q&A interview to bring readers here as up to date as possible on how the IMF sees this issue. Any underline below is added here for additional emphasis.

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IMF Background Briefing Transcript (May 8,2020)

. . . .

"And then I have another question for you, IMF Official #1, about the kind of behaviors which this tool has adopted. The U.S. administration has made it very clear that they don't want to go down the SDR route, but that would provide a huge shot of liquidity for all countries that need it, including many that, you know, wouldn't be covered by this instrument. What is your thinking about how quickly there could be that change in that policy? I mean, if you think that that is something that could be embraced later on by the administration."


"IMF Official #1 : And to your second point on -- yeah, I think as I tried to frame this from the beginning, the way I tried to thematically look at -- or the way I look at the issues that we face are largely thematic, so we have a problem today of liquidity challenges almost everywhere.
So when you look around countries, looking at, even at the United States, or others, or other developing countries, they have liquidity challenges globally in many areas, whether it's official sector, corporate sector, or households, and so the things that we're trying to -- we're trying to take every idea and tool to bear on that.
And your right, SDRs are a part of that, you know, the SLL (Short-term Liquidity Line) was meant to be part of that for some countries, our emergency instruments are part of that for some countries, and SLL would also be a part of that for some countries. And I think as an institution, as the IMF, we'd still see merit in exploring what can be done in terms of SDRs.
Our membership has had a pretty robust debate about the merits of a new SDR allocation, as you know that there are a few countries, including the United States -- but actually not limited to the United States -- that remain a bit skeptical about this. That skepticism, while it puts an SDR allocation, not in the cards specifically (inaudible) today or for tomorrow, but it's healthy because it fosters a very good dialogue about what we can do), right?
And I think one thing that we do think we have to solve within the membership is to do what we can, and what I think is a lot more with the existing SDR stock in the system. You know, there is some precedence with countries lending their Special Drawing Rights to the IMF concessional finance facilities. In my view there's a lot more that could be done even beyond that."
. . . . 

"QUESTIONER: Can I just follow up really quickly on that, the loaning of SDRs? Do you need to -- does the Institution need to establish a sort of a formal mechanism to be able to facilitate that exchange like the creation of a trust that's been discussed, that would house these SDRs? Or would you, you know, envision using the PRGT (Poverty Reduction and Growth Trust) for that? I mean, has it been done in the past? And how quickly could you come up with a new mechanism that facilitates that exchange of the existing SDR?"


"IMF Official #1: Yes. Good question. So, all this in voluntary trading of SDRs outright is still an option, and those are facilitated that's more dated as we speak. So, countries that have existing SDRs that they want to exchange, the IMF continues the facilitate that. We’ve seen -- increased demands for those transfers at a time like this, so we are willing to do that.
But the issue really is for countries that don't have any more SDRs to trade -- you know, to exchange for countries that have a very large stockpile of SDRs that they don't find much use for. So, you think about developed economies who have the vast majority of the SDRs, if you find, we don't really have any practical use for them. We tried to explore with them, ways where we can mobilize these -- if I can think of the dormant SDRs that's in the system for the benefit of poorer countries.
The established mechanism for doing that, or the precedence for doing that is countries -- a few countries in the past have loaned their SDRs to the PRGT, which they can make, you know, concessional loans available to poor countries. There's clearly a need for us to do that, because the number of countries that have now approached us for emergency financing which are now, I believe exceeds a hundred and the number of programs that we would expect in that pool to then roll into a full-fledged IMF (inaudible), that would need PRGT resources to help them be funded. The PRGT is therefore in need of additional resources. And we were quite fortunate last week to having put out the call for additional resources, that some are materializing quickly for the PRGT, so there's no -- there's no immediate, you know, danger of that, of that running out of funds.
But we are exploring every option to try and resource these instruments well, so that they can have the capacity to meet the demands that we would expect in the coming medium term, if you want to think of it that way. And one of those is getting more countries to loan their SDRs to the PRGT for that purpose.
But as I said, I don't think that has the -- that's kind of -- that's what we've done to date. I think what we're doing right now is trying to see if we can get more countries to do that. But I also think there may be other ways to get at this problem and, you know, I'm not in a position to share specifics on what we would be able to do beyond that.
But nonetheless, as I think I said before, the problem still exists, and so the team here isn't going to just sit idly by with the tools that we have, we're going to push and see what we can do with the membership to try and get what obviously we need to address the problem."