The View From Our Whitehouse - Monetary System Reform Watchdog

Tuesday, December 3, 2019

Off Topic Update

Earlier this year I reported that my brother was going to need a liver transplant for long term survival. I am happy to now report that this past week he did receive a liver transplant which went well and his new prognosis is very good.

When you go through things like this, you learn a lot. My brother was very fortunate to have one of the best transplant teams in the country available. This team was the DFW Baylor Hospital system transplant team that works out of Baylor Hospital in Dallas and Baylor All Saints Hospital in Fort Worth. Here is the transplant surgeon who performed this one for my brother.

I cannot say enough good things about the quality of this team in every respect. A huge thank you to them.

In addition, whenever a someone is given a new hope for long term life there is a donor involved. One thing that really strikes you in this situation is how grateful you are to the donor and their family. They have suffered a huge loss and yet had a heart to make something good come out of the experience by offering someone else new hope.

These donors and their families deserve a special place of honor in our society and represent the very best of what we can be. An eternal thank you to them will always be present in our family.

Added note: I will be assisting my brother with his recovery efforts for awhile this month so new articles here will probably be postponed until he is back home and things are back to normal.

Wednesday, November 20, 2019

Reuters -- Russia Says BRICS Nations Favor Common Payment System

Russia and other BRICS nations have long been talking about various ways to bypass the US dollar based global payments system. While nothing major has happened there yet, here is yet another article appearing in Reuters quoting Russian officials on this topic. Below is a brief excerpt.


"Brazil, Russia, India, China and South Africa, a group of major emerging economies known as BRICS, back the idea of developing a common payment system, a Russian official said on Thursday.

Russia and its BRICS peers have been looking for ways to decrease their dependence on the U.S. dollar and have advocated using their national currencies in mutual trade."

This article in the South China Morning Post says China is encouraging Chinese corporations to "diversify away for US dollar debt". In this case Euro based debt is promoted by the Chinese government.

Added comment: The article also says the BRICS nations has "discussed" the idea of using a "common cryptocurrency for mutual payments". However, it also goes on to point out that in the past Russian officials have spoken out against cryptocurrencies. So far, this all seems to be an area where a lot of study and discussion takes place, but no actual payments system based on any kind of cryptocurrency has emerged out of it.

Additional added note: The ongoing major repo operation at the US Fed continues to generate a lot of speculation. As the "temporary" program seems to expand further out into the future, more and more skeptics are raising questions as to what is going on here. 

Some suggest the Fed is trying to cover up some kind of problem inside the banking system. Meanwhile, the Fed continues to insist nothing unusual is going on with Chairman Powell directly stating that in this recent written testimony to Congress as follows:

"In response to the funding pressures in money markets that emerged in mid-September, we decided to maintain a level of reserves at or above the level that prevailed in early September. To achieve this level of reserves, we announced in mid-October that we would purchase Treasury bills at least into the second quarter of next year and would continue temporary open market operations at least through January. These actions are purely technical measures to support the effective implementation of monetary policy as we continue to learn about the appropriate level of reserves. They do not represent a change in the stance of monetary policy."

This article appearing in non mainstream Wall Street on Parade is an example of the kind of skeptical analysis of these unsual Fed actions. It points out that two congressmen from Texas raised questions to Chairman Powell about all this. It quotes Chairman Powell responding to these questions at one point in this way (I added underline for emphasis):

"Powell: “We’re doing a lot of forensic work to understand why. Some of that may be reserves – the level of reserves needs to be higher than we thought, which means our balance sheet a little bigger. There may also be aspects of our supervisory and regulatory practice that we can look at that would allow the liquidity that we have, that we think is the appropriate level, to flow more freely in the system. Without, though, undermining safety and soundness.”

This recent article in Zero Hedge points out that the "little bigger balance sheet" has already jumped up to over $4 Trillion once again and represents a very rapid reversal of all the hard fought efforts to reduce their balance sheet with its QT (Quantitative Tightening) program. So it is not surprising we see articles like the one in Zero hedge questioning all this. 

We have stated here that readers should follow this closely over time to see if "there is nothing to see here" or if something troubling is going on inside the banking system that the Fed prefers not to make public. It is worth pointing out that the last major financial crisis in 2008 supposedly "caught everyone by surprise" and that the Fed obviously would not want to create public panic by announcing some kind of major problem even if they are working on some kind of problem behind the scenes. As always, time will give us the answer.

Friday, November 15, 2019

Input from Readers

With not much new to report here, I did get some reader emails suggesting various articles that might be of interest to readers here. So below I have pasted in the links to those articles with a brief excerpt from each just below the link.


The Guardian - How Big Tech is Dragging Us Towards the Next Crash

"In every major economic downturn in US history, the ‘villains’ have been the ‘heroes’ during the preceding boom,” said the late, great management guru Peter Drucker. I cannot help but wonder if that might be the case over the next few years, as the United States (and possibly the world) heads toward its next big slowdown. Downturns historically come about once every decade, and it has been more than that since the 2008 financial crisis. Back then, banks were the “too-big-to-fail” institutions responsible for our falling stock portfolios, home prices and salaries. Technology companies, by contrast, have led the market upswing over the past decade. But this time around, it is the big tech firms that could play the spoiler role."

"Tunisia has announced the launch of its digital currency, the ‘E-dinar.’ With this, the tiny North African country claims to be the first country to launch a central bank digital currency (CBDC)."

"China's President Xi Jinping said on Thursday that the country's communist party should regard blockchain as a core technology for important innovative breakthroughs and should commit to accelerating the development of the technology, according to a report from"


"Banks' shadow, or money creation by banks beyond traditional loans, plays an important role in China's money-creation process, posing a number of challenges to monetary policy operations and financial risk management. This paper analyzes the money-creation mechanisms of China's shadow banking sector in detail, provides accurate measurements, investigates its effects on financial risk, and surveys recent regulation. To strengthen supervision, China's regulators should closely track the evolution of various shadow banking channels, both on- and off-balance sheet. Specific macroprudential regulation tools, such as asset reserves and risk reserves, should be applied separately to banks' shadow and traditional shadow banking."

My added comments: A thank you to readers for their input and forwarding the links to these articles. Always appreciate the help.

Added note: I like to include these kinds of stories when I see people doing good things to help out a neighbor. This one happened to take place right nearby us, but got some national attention. Enjoy:

Wednesday, November 6, 2019

Pre Holiday Update

As we head into the Holiday Season, I expect that there is not likely to be much new information to report here related to any kind of major monetary system reform. This post will attempt to serve as an update on things based on the information available at this time. Below is a Q&A style format to discuss the status of the issues as they appear at this time.

Q: Do you see any indications that some kind of major change in the monetary system is likely?

A: Not right now. We have been reporting here for some time that we do not see any signs of major change unless some kind of new major financial crisis were to emerge that basically forced the system to make major changes or even be fully reset. That is still what we would report for now. This analysis is based on following news reports and from direct input I get from a number of experts around the world that I view as highly credible.

Q: So what could trigger the kind of major crisis that might prompt major change?

A: There are a number of potential triggers that are always out there that we have covered here extensively. Global debt (private and public) is at all time highs. We still have trillions in derivatives contracts in an interconnected global banking system. Geo political negative surprises are always possible at any time (trade wars, currency wars, etc.) So far the powers that be (mostly central banks) have managed to keep the system functioning in a way that most people don't sense an imminent crisis is coming. Perhaps the most noticed event recently is the ongoing efforts by the US Fed to support overnight lending markets with liquidity and an apparent resumption in their policy to expand their balance sheet. The Fed says there is nothing worrisome to see here, while Fed critics and skeptics are suspicious that the Fed may be trying to hide something going seriously wrong behind the scenes. It is certainly worth following to see what happens. As always, time will tell us the answer.

Q: How does the ongoing political war in the US impact the chances for some kind of financial system or monetary system disruption?

A: That has been an interesting irony so far. Despite three years of intense political fighting virtually daily and constant news stories that well known officials may be indicted for crimes, the markets have almost completely ignored it all. We have told readers here that perhaps the best thing to do is just monitor market reactions. They are more likely to let you know if anything truly disruptive to the present system is really going on. So far the stock market has been strong, the US dollar has been strong, and gold and silver prices have been trading in a range with upward, bias but are not indicating any kind of major crisis is at hand yet. If you see gold move sharply up to or above all time highs around $2000, that would be a possible signal. The same for a move in silver above the $25-$26 level or even back up to all time highs around $50. Until you see things like that, the markets are not indicating they are too concerned with all the political maneuvering we see virtually daily now. It's always possible something truly significant could arise. However, the sources I hear from do not expect the impeachment process to result in a removal of President Trump from office and the markets also seem to view things that way. While rumors have persisted for years now that some former high officials in the Obama Administration could be charged with crimes related to efforts to remove President Trump, nothing has happened yet on that front either. So far, everything seems to be more related to political strategies to try and gain an advantage in the 2020 elections If anything major does emerge from this, it will be obvious to us all. For now, the markets are not the least bit concerned about it. One prediction that seems pretty safe is that we will see the political war continue and even escalate into the elections and that will probably suck all the oxygen out of the room until the 2020 elections are over. If President Trump is re elected, not much is likely to change unless a crisis forces change. If a Democrat is elected, change is more likely and the US will likely move more sharply towards socialism. That is pretty easy to predict.

Q: What will this blog do if nothing much changes any time soon?

A: Just continue as we are now. Try to watch for any major signs of trouble. Post a few articles when we can find something relevant to our mission here. Report any change in the situation if we hear of that from any of the experts that provide input from time time. We try to report things (like input from some experts we hear from) you are not likely to see reported in mainstream news since those stories are already widely reported. We do also monitor several alternative media sites in case something of note appears there. We will pass along anything we see that we think might be useful information.
Added note: If all the political fighting has you thinking we are a nation with no hope for the future, take a look at this short video and perhaps you will change your mind:

Added note 11-14-2019: After the first impeachment hearings in the US Congress, we are still seeing no market reaction that would suggest anything disruptive is going on or that markets think the President will be removed from office. So no change from the analysis posted above for now.

Friday, November 1, 2019

New Report on Central Bank Digital Currencies from OMFIF and IBM

I am alerting readers to a new report jointly issued by the OMFIF (Official Monetary and Financial Institutions Forum) on the status of future prospects for a retail version of a Central Bank Digital Currency.

We have covered this topic for some time. This new report is in line with what we have reported here. It suggests that we may see some central banks try out a retail version of a central bank digital currency sometime in the next 3-5 years. The report does note that due to emergence of such things as Project Libra from Facebook, there has been a shift in focus at some central banks from the concept of a "wholesale" digital currency (used just by financial institutions) to a "retail" version (used by the general public).

Below I have pasted in the conclusion section of the report to give readers a summary view of it. You can access the full report by going here and providing email information. (I added bold below for additional emphasis)

Advent of a retail CBDC expected within five years

"IN THIS report we have set out – with help from the global policy-makers who participated in our survey, to whom we owe a debt of gratitude – current central bank perceptions of the advent of disruptive financial technologies and the possible introduction of central bank-issued digital currencies. Policymakers’ assessments are many and varied, and depend much on their economies’ size and monetary policy objectives. But one thing is certain: regulators will not sit idly by as new systems pose potentially severe threats to existing structures. Policy-makers dare not risk being left behind as the technology continues to advance. 

The principal conclusion is that we are likely to witness the introduction of a central bank – that is fiat – retail digital currency within the next five years, either as a complement to or as a substitute for notes and coins. It is improbable that the first such issuance will come from a G20 central bank; it is considerably more likely to be launched in a smaller and less complex economy in response to a specific policy objective and use case. 

This may relate to improving the overall effectiveness and resilience of a national payments system by reducing the prevalence of cash. Alternatively, it could be associated with extending financial inclusion; reducing the size of the dark economy; countering financial crime; or for a specific purpose, such as transforming the cross-border transmission of migrant worker remittances. 

In most instances, the development is most likely to be nationally driven, but increasing co-operation and collaboration between monetary authorities are likely to become the norm. There will be no ‘one size fits all’ solution, and we expect to see the emergence of several different models, use cases and approaches, some perhaps even in direct intellectual competition with one another.

Although the primary drivers of these initiatives will be central banks and associated national authorities, we anticipate extensive private-public sector partnerships wherein the private sector provides or indeed runs technology, infrastructure and operations on an outsourced or more deeply collaborative basis. We believe there will be a growing number of studies, use cases and pilot programmes as both sectors explore, design and test the art of the possible and desirable. We note, however, that these initiatives will be driven by policy and not technology. 

It remains unclear whether blockchain technology or its analogues are the best route forward for digital currency implementation, and central banks by and large are technology agnostic. Ideally, they will settle on their precise policy objectives and then find the most appropriate technological solution, rather than be wedded to a specific technology beforehand.

We do not envisage privately-issued digital currencies gaining significant traction or acceptance in a universal context, although there may be closed private networks in which they operate. The determination of national governments to protect the monopoly enjoyed by fiat currency, and the commitment of regulators to financial stability, will in our view raise insuperable hurdles to the establishment of a private digital currency as a significant means of exchange, however gilt-edged its asset backing. Pure, unbacked cryptocurrencies such as bitcoin will remain the minority pursuit of speculators and denizens of the dark web.

Our hope is that this report will serve policy-makers, industry specialists, economic commentators, scholars and the general reader as a useful companion to the impending and all-but certain changes to retail payments systems. We at OMFIF and IBM welcome comments, affirming or otherwise, and look forward to charting the future of central bank digital currencies in further studies and through our continuing dialogue with policy-makers the world over."
My added comments: Please note that this summary conclusion is very much in line with what we have been reporting here for some time. Change is more likely to evolve gradually over time without some kind of new major crisis to prompt sudden change.

We have made all the following points noted above here on this blog for some time:

- There is no current new "universal global digital currency" ready to deploy at the global level at this time waiting in the background behind the scenes at the IMF or anywhere else

- Blockchain is mostly just a buzz word so far and by no means has been adopted by central banks or the IMF as a preferred future technology

- Central Banks (and national governments) will do whatever they have to do in order to protect the monopoly status of their fiat currencies. Some may partner with private enterprises, but it will on terms dictated by the Central Banks.

- While the concept of "global cooperation" is always mentioned, the reality is that these potential initiatives by central banks are going to start off at the national level and will more likely compete with each other instead of introducing some new universal global central bank digital currency. Here is how the summary above puts it:

"In most instances, the development is most likely to be nationally driven, but increasing co-operation and collaboration between monetary authorities are likely to become the norm. There will be no ‘one size fits all’ solution, and we expect to see the emergence of several different models, use cases and approaches, some perhaps even in direct intellectual competition with one another."

All of this is in agreement with the input we have received here from experts on this topic that we have mentioned many times. This report once again confirms the accuracy of the input provided us and what we have been reporting here on this blog. This what we just reported in October from KlickEx CEO Robert Bell:

"As far as real systemic change... There's nothing on the cards for the monetary system. The digital services spoken of (in the Bloomberg article) will not change anything fundamental, and the IMF and BIS are even further behind where most central banks are. 

The central banks will implement real time slowly, and banks will reduce cross border prices slowly. 

Swift and their GPI project is already doing this work, but banks are taking a long time to reduce prices, that's all. 

Open Banking, is speeding things up a bit, but not much."    ---- Robert Bell (KlickEx)

As you can see, this process is more likely to unfold over many years rather than something we would see imminently and no universal digital currency or the technology to implement such a thing has been chosen thus far.
Added note: China's President wants to China to take a leading role in the future of blockchain technology. This will be yet another competing effort rather than some kind of universal global effort. It is clear from the context of the speech that China wants to be in control of the technology used rather than any institution outside of China. We might call this a "China First" initiative on their part.

Friday, October 25, 2019

While They Were Fighting . . .

This just goes to show how the ongoing political warfare in the US has sucked all the oxygen out of the room. The IMF has a new Managing Director and I didn't even notice it until just recently. Below is the statement by new IMF Director Kristalina Georgieva.


"Ms. Kristalina Georgieva issued the following statement today after the Executive Board of the International Monetary Fund (IMF) selected her as the IMF’s next Managing Director—the 12th since the Fund’s inception in 1944—for a five-year term, starting on October 1:
“I am deeply honored to have been selected as Managing Director of the IMF and grateful for the trust that the Fund’s global membership and the Executive Board have placed in me. I want to pay tribute to my predecessor, Christine Lagarde, a great leader and a dear friend, whose vision and tireless work have contributed so much to the continued success of the Fund.
“The IMF is a unique institution with a great history and a world-class staff. I come as a firm believer in its mandate to help ensure the stability of the global economic and financial system through international cooperation. Indeed, in my view, the Fund’s role has never been more important.
“It is a huge responsibility to be at the helm of the IMF at a time when global economic growth continues to disappoint, trade tensions persist, and debt is at historically high levels. As I noted in my statement to the Executive Board, our immediate priority is to help countries minimize the risk of crises and be ready to cope with downturns. Yet, we should not lose sight of our long-term objective – to support sound monetary, fiscal and structural policies to build stronger economies and improve people’s lives. This means also dealing with issues like inequalities, climate risks and rapid technological change.
“For our readiness to act, safeguarding the Fund’s financial strength is essential, and so are enhancing its surveillance and capacity development efforts. Working with my team, my goal is to further strengthen the Fund by making it even more forward-looking and attentive to the needs of our members.
“I look forward to working with all our 189-member countries, the Executive Board and staff, and with all our partners in the years ahead.”

My added comments: My first take looking at the background and statements from the new IMF Director is that it does not seem like things will change too much at the IMF from the Chrisitine Lagarde days. For now there is nothing coming out of the IMF that suggests major monetary system change is imminent.

Saturday, October 19, 2019

"Digital Currencies" Innovation - Is Anything Significant Really Happening?

This blog has covered this topic extensively over the years and has monitored events related the potential for so called "digital currencies" (either privately issued or issued by central banks) to make some kind of significant impact on the current monetary system. 

Now Bloomberg has published this article "Fed Drags Feet as Digital Money Challenges Central Banks" that implies that the IMF is concerned that central banks are falling behind the innovation curve and that "it is just a matter of time before we see massive disruption" according to Tobias Adrian of the IMF. 

Readers here know that we have been reporting for some time that the reality is that there is no indication that any kind of significant new "digital money" innovation that could shake up the existing monetary system is on the near term horizon. Instead, we have steadfastly reported that any changes we do see are more likely to be very gradual and incremental over long periods of time unless some kind of new major financial crisis disrupts the present monetary system.

The first thing to note here is that the money we have now issued by the Fed and other central banks is already "digital money" for the most part. So the term "digital currency" being used to imply something new and innovative is arriving can be misleading. Usually, it is actually the ledger system used to record and track the transactions of the money that is really being talked about which is where things like "blockchain" enter the picture. But even there, there is no indication at this time that central banks are ready to suddenly plunge into using a blockchain ledger system on any kind of major scale. Honestly, what we see is a lot of use of buzz words and some hype, but not very much actual innovation or major changes so far to our present system. 

However, I encourage readers not to just take my word for this analysis. I have often mentioned that I do get input from leading experts on these kinds of issues and that my analysis is mostly based on the credible information I get from these sources. 

Robert Bell (CEO of KlickEx), is one example of these kinds of high credibility sources. Robert does not have to speculate on these kinds of issues because he lives it every day and is one of the leading experts in the world on payment systems and the related technologies used to operate them. Robert has worked with many central banks and met with institutions like the IMF and BIS to discuss these kinds of issues over the years. He was kind to do an interview for this blog and has provided very valuable input here over the years based on his real world experiences. When Robert tells me what is really going on around the world, I simply know that I can trust his analysis to be accurate and up to date.

I showed the Bloomberg article linked above to Robert and he was kind to reply with his thoughts on it as a kind of update on things for readers here. Robert was in Washington DC at the time attending the IMF and World Bank fall meetings.

Here is what he said in his email reply in regards to anything significant happening any time soon related to "digital money"

"As far as real systemic change... There's nothing on the cards for the monetary system. The digital services spoken of (in the Bloomberg article) will not change anything fundamental, and the IMF and BIS are even further behind where most central banks are. 

The central banks will implement real time slowly, and banks will reduce cross border prices slowly. 

Swift and their GPI project is already doing this work, but banks are taking a long time to reduce prices, that's all. 

Open Banking, is speeding things up a bit, but not much."    ---- Robert Bell (KlickEx)

My added comments: Readers sometimes wonder how I am able to offer analysis on these issues with my having no personal background in banking or macro economics. The answer is simple. I get input from highly credible sources who are experts in their field like Robert Bell. Usually, their input and insights are right on target. I see that borne out over time over and over again. 

Many times they prefer I do not directly attribute quotes in their names which I honor. In that case, I try my best to summarize the information for readers without attributing it to any specific expert. But I do want to clearly credit them for helping to greatly improve the analysis offered here and the reason why we have been able to correctly predict that despite constant articles that some kind of major change is about to happen to disrupt the current US dollar based monetary system; the reality has been slow and gradual change as we have been reporting here for some time.

If I do hear anything to change that analysis, I will certainly let readers know. However, it is more likely that if something does quickly arise to disrupt the present system, none of us will really know much ahead of time as Jim Rickards has said for many years. There are always potential risks to the current system and we have documented many of them here, but those running the system are not looking to make sudden major changes. They prefer stability and for any changes to be gradual over time. The US Fed in particular, moves very slowly and cautiously.

Wednesday, October 16, 2019

BIS Paper on the Impact of Central Bank Stimulus Policies

The Bank for International Settlements publishes many research reports and also posts articles on its web site by central bankers from around the world. In this case, the BIS has posted a paper written by Phillip Lowe (Reserve Bank of Australia) and Jacqueline Loh (Monetary Authority of Singapore). Looking back over the last ten years they discuss the impact of central bank stimulus programs on the financial markets. 

Below is the first part of the Executive Summary from this paper. I added some bolding in spots for additional emphasis. You can find the full text of the paper here.


Executive summary

"Central banks expanded their balance sheets on an unprecedented scale in response to the global financial crisis (GFC) and its aftermath. To address financial market dislocations and the limitations of interest rate policy as rates approached their effective lower bound, many central banks introduced special lending programmes, often followed by large-scale asset purchase programmes.

The scale of these programmes has naturally given rise to concerns about their impact on market functioning, prompting central banks to take steps to mitigate potential adverse consequences. This report prepared by a Markets Committee (MC) study group reviews the accumulated experiences and associated policy implications. It examines how the design and execution of balance sheet expansion affected market functioning, in particular, the ability of market participants to adjust positions efficiently, and whether asset prices have promptly and reliably responded to information.

The report adds to the literature by providing a systematic cross-country perspective on the effects on market functioning and related policy options. It draws on a central bank survey, analysis conducted by the study group, and a review of the available academic and policy literature. The report complements a parallel CGFS study, which reviews more broadly the effectiveness of, and lessons from, central banks’ use of unconventional policy tools.

The study group found that central bank balance sheet expansion, especially in early phases, had predominantly positive effects on market functioning. In particular, during periods of heightened illiquidity, emergency lending programmes helped ease severe funding market strains, while purchases of bonds with outsized risk premia tended to improve their underlying liquidity. Negative effects sometimes arose, but rarely tightened financial conditions materially, in part because of mitigating actions taken by policymakers. While adverse effects have often been transitory, they can have an enduring impact when policies are in place for a prolonged period.

Negative effects on market functioning have tended to be associated with elevated asset scarcity, in particular when central bank purchases or securities holdings were particularly large in relation to issuance or outstanding amounts. Scarcity at times has led to deterioration in bond liquidity metrics and increased repo specialness, although these effects were often short-lived. Declines in market making and reduced investor participation were reported in some markets, in particular where policies were in place for an extended period of time. Hence, the consequences for market functioning may not be fully evident until balance sheets normalise.

The expansion of central bank balance sheets produced sharp increases in bank reserves, contributing to a significant decline in interbank reserves trading activity. However, activity in wholesale money markets has remained robust, and central banks have kept a sufficient degree of control over short-term interest rates. 

The report documents that central banks were able to avert or attenuate side effects from balance sheet expansion on market functioning by adopting a range of mitigation strategies. These strategies were often embedded in the design of the programmes themselves, such as purchase protocols to exclude securities temporarily in high demand or to cap central bank ownership shares of individual bonds. Transparency and clear communication limited asymmetric information and supported predictability, while maintaining margins of flexibility to allow central banks to adjust the pace, timing or volume of purchases in response to changes in prevailing market conditions. Finally, central banks adopted measures to alleviate scarcity effects, such as securities lending programmes.

As experience with expiring lending programmes and shrinking balance sheets has been more limited, conclusions regarding the impact on market functioning are more tentative. However, preliminary evidence suggests that steps can be taken to mitigate any negative side effects from the expiry of lending programmes (such as bank fragility), and cutbacks in securities holdings (such as diminished trading and inventory capacity among securities dealers), including by adhering to the general principles of gradualism and predictability."

Added note: The Financial Times published this article quoting the BIS as saying that the central bank stimulus programs have produced "negative side effects". The FT titled their article:

The introductory paragraph to the FT article says that "the unprecedented growth in central banks' balance sheets since the financial crisis has had a negative impact on the way in which financial markets function, according to a new report from the Bank for International Settlements."

Saturday, October 12, 2019

News Note: Federal Reserve to Scrub the System with SOAP

At the end of September the Federal Reserve started new operations with Repos in response to an apparent liquidity shortage. At that time, these operations were described as "temporary" and we ran this news note about it here.

Dr. Judy Shelton has tracked the progression of this situation on her Twitter feed by noting new announcements about the extension of this policy further and further. As these new operations expanded and the time frame was extended, people began describing this as a new QE (Quantitative Easing) policy emerging from the Fed. It seems that Fed Chairman Jerome Powell did not like that kind of talk so he made it clear that in no way should we view these new operations as a new QE program. Jim Rickards posted this on his Twitter feed indicating that despite his protest to the contrary, the Fed is engaging in QE in his view. 

Now we have this latest article by Jeff Cox appearing on CNBC to describe how this new Fed policy to "expand its balance sheet" will work. Since the Fed does not want anyone calling this new policy QE, the article quotes George Selgin of the Cato Institute as coining a new term for it. He is calling this new policy "Supplementary Organic Asset Purchases" or SOAP for short. So please keep in mind, the Fed is absolutely not implementing QE, but will instead be using "SOAP" to clean things up in the messy overnight lending markets. Below is an excerpt from the CNBC article. 


"Ultimately, what the operation is called will matter less than how it is executed and communicated.

“In some sense it doesn’t matter why they’re doing it or what they call it. What matters is that they are creating base money and expanding their balance sheet, and those repercussions aren’t going to depend on what they call it,” George Selgin, senior fellow and director of Cato’s Center for Monetary and Financial Alternatives, said in an interview.

“There is an important issue of public perception here,” he continued. “I suppose calling it QE would give people the impression that the Fed is fighting a recession again, or thinks it is fighting a recession again, and trying to create a positive stimulus for the economy. Neither of these things is true. Their concern is trying to avoid the cash shortages that are causing rates to rise above their target.”

. . . . 

"Selgin, in fact, coined his own term for what is ahead: “Supplementary Organic Asset Purchases,” or SOAP. Fed officials have stressed the “organic” nature of balance sheet growth as opposed to QE."

. . . .

“The Fed is learning that it’s not so easy as they thought to keep the banking system as a whole flush with reserves,” Selgin said. “We may end up seeing SOAP 1, SOAP 2 or SOAP 3.”

Friday, October 11, 2019

News Note Update on Political Turmoil

Just a brief note on this as so far nothing has really changed much from the previous news note posted here on this as far as I know. Markets are still basically ignoring the situation and are not providing any kind of signal that anything significant that could impact markets or the financial system is taking place.

I have had some email exchanges with Jim Rickards to get some of this thinking on the situation and he has provided some brief comments that I am not at liberty to post here. 

However, Jim did let me know for anyone who wants to follow his analysis on this situation, he has one article written about it on his subscriber newsletter. Here is how Jim put it:

"I just wrote a 5,000 word article on impeachment for my newsletter Strategic Intelligence. You can refer readers to this link: New subscribers get access of the archives, which includes the October 2019 edition with the impeachment article."

Since that article is for his subscribers, it would inappropriate to comment on it other than to say that I feel sure he will continue to monitor this ongoing situation and will have ongoing analysis of it as things unfold over time.

The reason we have to keep an eye on this is because of the potential for something significant to arise unexpectedly very quickly that could rattle markets and even impact overall system stability. We do try to watch for that here as best we can. I can say that Jim made it very clear that he views this as a serious situation to monitor and that he will not be surprised if some significant events do eventually arise from it in the coming months ahead. So that just further confirms we do need to follow it on some level knowing the kind of sources Jim has available to him. 

I wish I could offer some kind of sage advice as to how to deal with anything that might arise from this, but it is virtually impossible to predict what kind of market reaction might happen or if the market will react at all. But since we already know the Fed is using unusual procedures to continue to insure liquidity is available, we need to keep an eye out for anything that might add any stress to the system.

I could try to analyze all the possible scenarios that could emerge, but I think that would be wasted energy at this point in time. In my view, everything so far is just political maneuvering to try and gain some kind of perceived advantage heading into the 2020 elections. If we see actual criminal indictments issued against high profile officials (former or current), then we need to take notice that things have probably moved beyond just the political positioning phase.

Hopefully, nothing significantly negative emerges to create havoc in markets or the banking system in general. Most sources seem to suggest that by the end of this year we may know better if that is a possibility.

Added note 10-15-2019: CNBC runs this article which is more confirmation that markets are completely ignoring the current political food fight. Stock market, dollar and gold are all ignoring it. If this changes, we'll try to note that here.

Wednesday, October 9, 2019

Bloomberg: Facebook Libra Payments Partners Waver on Cryptocurrency

This recent article in Bloomberg seems to confirm something we speculated on here. We said that it seemed like that the Project Libra currency proposed by Facebook  had managed to get the attention of potential regulators and that our guess was that whatever needed to be done to prevent this project from becoming any kind of serious threat to the present system would likely be done. Below is a key part of the Bloomberg article linked above which tends to confirm this analysis.


"Four payments companies that have joined Facebook Inc. as founding members of the Libra Association are wavering over whether to officially sign on to the cryptocurrency project, according to people familiar with the matter.
Executives at the payments companies believe Facebook oversold the extent to which regulators were comfortable with the project and are concerned about the perception the social network hasn’t behaved responsibly in other areas -- such as how it has handled user data and privacy, the people said."
. . . . 
"Even as Facebook has publicly drawn fire, the Libra organization’s members have worked in the background to hash out details of a chartering document to formally establish the non-profit so that the group’s work to stand up the payments system can move forward.
The work has proven contentious due to continued uncertainty about the regulatory implications of the project, according to two of the people."
Please click here to read the full article in Bloomberg

Added notes: This story is getting a lot of interest in various news outlets. Below are a few other article links on it. Further below, is a link to a letter signed by two US Congressmen to the Federal Reserve that may be of interest as well. A thank you to Dr. Judy Shelton for posting the link to this letter on her Twitter feed.

Ariticle links: 

Bi Partisan Letter to the Federal Reserve from two US Congressmen

Selected quotes from the letter linked just above:

"We are concerned that the primacy of the US Dollar could be in long term jeopardy from wide adoption of digital fiat currencies"

. . . . 

"The Facebook/Libra proposal, if implemented, could remove important aspects of financial governance outside of US jurisdiction."

The letter goes on to ask the Federal Reserve if it is exploring the development of a "US dollar digital currency". The letter is signed by Republican Congressman French Hill of Arkansas and Democratic Congressman Bill Foster of Illinois. It's rare when people on opposite sides of the political aisle agree on anything these days, but clearly these two agree on this.

Wednesday, October 2, 2019

Q&A with Joseph Potvin on His Earth Reserve Assurance Framework Proposal - Part I

Earlier we introduced readers to a new proposal for monetary system reform (Earth Reserve Assurance or ERA) authored by economist Joseph Potvin. Joseph is part of a group of economists from whom I seek input occasionally about what might be done to try and improve our present monetary system in the future. Since that is the one of main premises for this blog, naturally I follow their discussions with keen interest. In the past I have featured various proposals from this group here and included those on our page of ideas for monetary system reform.

Joseph kindly agreed to take time from a very busy schedule to do an in depth Q&A interview on his new proposal and how he got started on this project which now covers many years of research and work. The interview will be presented two parts. The first part below introduces you to the author and provides the historical background for his interest in this project. Part II delves into the proposal in detail. I will add a few brief concluding comments at the end of Part II. 


Q: What prompted you to work on the Earth Reserve Assurance (ERA) proposal?

A: I'll have to explain this trajectory in a few steps:

1) I first put together the Earth Reserve monetary concept in 2006 while working as a senior economist at Canada's Treasury Board Secretariat. I could sense that the monetary and financial system based on market sentiment alone would go 'poof' at some point, and when it did, there had better be something else designed, researched and capable of prompt implementation. Few others seemed concerned, so on my own time I researched and wrote what I figured may be the essentials of a workable system. Several earlier influences are summarized below, but by mid-2007 I had completed a 30-page design summary entitled "GREEN Money, RED Tax" (GREEN is "Global Resource and Ecosystem Exchange Norm"; and RED is for "Resource and Ecosystem Degradation"). I started sharing this around. However I was reframing so many premises of economics 101 that few others could make sense of my starting points.

2) I could understand why my own reformulation of money would be inaccessible to other economists. Also it was obvious to me why a global community of eminent economists and investors would not be looking to some mid-level government staff economist or project consultant to rewrite the fundamentals of the domain. What I did have difficulty understanding is why a proposal as obvious and reasonable as Ben Graham's Commodity Reserve monetary system in the 1930s and 40s failed to make any headway either, despite his pinnacle role as the "Dean of Wall Street", and all the supportive contributions from luminaries across the spectrum from Hayek to Kaldor and Tinbergen. Even with the highest level of international and multi-generational persistence, no global multi-currency commodity standard has emerged to anchor the value and quantity of money. In the 1950s Milton Friedman provided the most comprehensive discussion of reasons for its non-adoption. So again, on my own time, I took every criticism of the commodity reserve that I could find, and treated it like "a bug report". In the pragmatic approach to systems development that I had learned from my previous decade and a half working closely with software developers, I set about to try to fix every reported design bug in Graham's commodity reserve monetary proposal. And that's how I came around to the idea of shifting the commodity reserve concept back one stage in the value chain, so that Earth itself would be the warehouse. This paper got noticed by Dr. George Athanassakos, Professor of Finance and the Ben Graham Chair in Value Investing at Ivey Business School, Western University. He invited me to be a keynote speaker at the Second Annual Symposium on Value Investing in Greece, part of the 16th Annual Conference of the Multinational Finance Society. Given the venue, my paper "Beyond Ben Graham's Currency Proposal: Retrospect and Evolution" focused entirely on the economics of Graham's commodity reserve concept and the reasons it has never been adopted. But I included an annex entitled "Brainstorming an Earth­ Reserve Currency Standard". ("Earth Reserve" was a more appropriate name than "GREEN Money".) Perhaps because I was a non-academic economist at an academic conference, the Chair of the Multinational Finance Society wrote me afterwards to inform me that my paper would not even be sent to reviewers for inclusion in the conference proceedings. In light the global monetary and financial collapse of 2007-2009, I found that to be most interesting. Fortunately, Dr. Athanassakos was more accommodating, hosting the paper on the Institute's site at Western University. Later a prominent full professor of economics at one of the top American universities told me not to be surprised. That senior academic also had unconventional economic design papers rejected outright by publishers. 

3) That was all about a decade ago. Really though, to answer what prompted me to come up with the Earth Reserve proposal, permit me to reach back three decades. Each summer throughout the early 1980s I worked on ships, dredges, helicopters and barges in offshore oilfield construction in the Mackenzie River and Beaufort Sea to finance my undergraduate degree in economics at McGill ('83), and my masters degree in economic geography at Cambridge ('86). As a student of economics I noticed that the stricter the penalties associated with environmental protection rules in those ecologically sensitive regions, the lower was the social incentive for on-site personnel to report incidents. I didn't sense a flaw in the people who kept things quiet; I felt there was an underlying flaw in the design of the incentive structure. So I got to thinking about what would align micro-level decisions with the macro-level objectives of protecting the ecosystems that we're in.   

4) In 1989, when I was 30, I wrote an analysis for a small science-based think-tank, about the economic effects in the US national accounts of the Valdez oil spill. I roughly demonstrated that the net effect of the disaster was an ADDITIONAL $1B in US GDP growth, because of all the new wages and profits generated by the clean-up activites and impact studies. What I realized, by logical corollary, was that diminishing the UV-filtering capability of the stratospheric ozone layer would increase sales of hats, sunglasses, sunscreen, and oncology treatments. Similarly, diminishing the depth, fertility and natural irrigation of agricultural topsoil would increase sales of fertilizer and the development of industrial irrigation projects. I wondered what proportion of economic 'growth' was actually based on recreating, fixing or substituting commercially-produced goods, services and infrastructures,  for various non-market primary commodities, functions and configurations that are freely supplied by the Earth but which we are dismantling or undermining? My mind got to reflecting on how economics might be reframed so that accounting for economic production would be net of Earth deconstruction.

5) That paper got me hired onto the core drafting team of Canada's Green Plan, to initiate steps towards the extension of Canada's national accounts to resources and ecosystems, and to design fiscal instruments to incentivize resource conservation and ecosystem protection. Immediately I could see that our Department of Finance, notwithstanding bright and keen individuals there, was constrained to a very narrow fiscal policy menu. Meanwhile at this time I was also invited by the Director of the World Bank's Environment Division to assist on value-for-money methodology when analyzing debt-for-nature swap transactions. And all this led to my being asked to coordinate an initiative for the Minister of Environment on integrated economic-ecological/resource indicators for decision-making. I was able to bring systems ecologist C.S. Holling and economist Herman Daly into that work. Two additional assignments followed as an economist under contract to inter-jurisdictional councils of deputy ministers, one of which led to my 50-page report: "Institutional Options to Apply Ecosystemic Research in Policy".

6) Once those projects were delivered, I felt an internal need to bring far more formal scientific rigor to my work, so I enrolled in a doctoral program in Systems Design Engineering at University of Waterloo. Some elements of my early practical explorations in that direction caught the attention of the Administrator of the new Global Environment Facility, who contracted me to prepare a technical approach, resulting in a report: "Classification and Appraisal Criteria for Conservation Investments: A Proposed General Framework". This was core to my doctoral dissertation, and it's where the detailed design for the Earth Reserve monetary system (aka GREEN Money) started. But the university administration told me that I could not receive consulting fees for my dissertation research. They did not agree with my perspective that this was no different than a research grant or a co-op assignment. I had a young family to support, but my research towards the systems design engineering of a ecologically-sound monetary system fit none of the categories of the research granting bodies.  (Was it economics? Engineering? Or environmental studies?) They left me no option but to leave. Which I did, and carried on my career as an international applied economist working under project-based contracts in multiple countries through various firms and independently. Much more occurred in the following 20 years to shape my design of Earth Reserve Assurance. I'm most pleased to say that it now has a suitable informatics platform for deployment, currently in alpha testing. But my comments above cover its origins.