What are the BRICS up to lately?

It's been somewhat quiet on the BRICS front since their summit meeting in July. But on Thursday of this past week they met in New York as described in this BRICSPost article.  Some quotes from the article below and then a brief comment.

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"The Foreign ministers of BRICS countries fueling global economic growth have discussed strengthening ties within the bloc and rallying emerging economies to play a greater role in world affairs, economic and political. The five Foreign Ministers have met on the sidelines of the UN General Assembly on Thursday."

"The BRICS Bank is hailed by experts as the first step towards reshaping the Western-dominated international financial system."

"The meet also “reaffirmed BRICS members’ commitment to safeguarding a just and fair international order”.

"Brazilian President Dilma Rousseff, in her opening address at the UNGA, earlier this week, criticized the UN Security Council for its failure to implement reforms."

"Russia will host the 7^th BRICS Summit in 2015 in the city of Ufa."

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My added comment: There is not anything new from the BRICS in this article. What we see is continued urging for reforms at the UN (and also the IMF though not mentioned in this article). So far no reforms are taking place at either one. 

It will be interesting to see how the US mid term elections turn out and then how the BRICS react to that. With just a little over a month to go, most polls show the Republicans will easily retain control of the House and may gain control of the US Senate (or a 50-50 split is possible too). Regardless of exactly how the Senate ends up, the election will likely favor the Republicans. The Tea Party faction of that party is in no way favorable towards the IMF or the UN. They would strongly resist the reforms that the BRICS are calling for. So the odds right now are that reforms are not likely to happen any time soon.

If that is the case, how do the BRICS react to that? Do they just reset their deadlines yet again off into the future for reforms to happen? Do they get frustrated and move forward on their own more forcefully? Just another drama to play out in the next few months that impacts what we are following here.

Another Prestigious Organization Voices Concern Over Global Debt

We have linked to many articles here where global institutions such as the IMF, the BIS, the World Bank and others have expressed concern over whether the conditions for another financial crisis might be building up. Concerns have ranged from possible asset bubbles forming to the threat of deflation to the overall global debt to GDP ratio. We can add another voice to that today based on this article in the Financial Times.

This time it is the International Centre for Monetary and Banking Sudies annual "Geneva Report" that expresses the concern.

The first couple paragraphs summarize things:

"A "poisonous combination" of record debt and slowing growth suggest the global economy could heading for another crisis, a hard hitting report will warn on Monday.


The article says the authors (including 3 former Central Bankers) of the report predict "interest rates across the world will have to stay low for a very, very, long time to enable households, companies and governments to service their debts and avoid another crash."

 

Add to this a statement this morning by Chicago Fed Chief Charles Evans that he thinks interest rates will have to stay low a long time. Here is the lead paragraph from this article:

"The Federal Reserve should be "exceptionally patient" in removing monetary policy accommodation, delaying interest-rate hikes until it is confident the U.S. economy can withstand them and only raising rates slowly once it starts, a top Fed official said on Monday."
 

 

It is very clear that there is very real concern about deflation and another financial crisis despite constant news articles saying the US is in strong recovery. If the US were in strong recovery, you would not see all these statements that they cannot afford to raise interest rates for a long time "until the US economy can withstand them". And you would not have all these continued warnings of the potential for another financial crisis.

 

 

Perhaps by spring of 2015, we will find out if there is any actual recovery or not. By then the Fed will either be saying that interest rates will be raised (and the economy can withstand that) or will have to admit they still cannot raise them. Some are even predicting they will have to go back to their bond buying program. That would amount to a disaster for the Fed in terms of credibility. All we can do is watch and see what actually happens.

CNBC: While ECB Struggles. Fed Sees Recovery in US

This CNBC article pretty well sums up the consensus mainstream view right now. That view being that the US is seeing a pickup in its economy and a recovery that is gaining strength. Meanwhile, the Eurozone is fighting to stave off deflation. Below are a few quotes from the article and then a comment.

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"On one side of the Atlantic they're trying to refill the punchbowl. On the other they're getting ready to take it away. This week, investors may get a clearer idea why."

"The European Central Bank will spell out on Thursday its latest attempt to steer the euro zone away from the prospect of damaging deflation, following the latest snapshot of consumer price pressures on Tuesday."

"The contrast between the U.S. and euro zone economies has grown increasingly stark, adding to the pressure on the ECB and European leaders to revive growth in their corner of the world."

"The risk of the euro zone sliding into deflation and deeper stagnation is adding to the drag on the global economy from a slowdown in China, where authorities are trying to rein in lending, and concerns about conflict in the Middle East."

"The U.S. economy looks to be on course for growth of about 2 or 2.5 percent this year, and the Federal Reserve intends to halt its bond-buying programme in October."

"As well as the jobs data, figures on consumer spending, manufacturing and trade are likely to show the U.S. recovery firmly on track."

"Even so, earnings have failed to respond much to the pick-up in jobs growth, something pointed out by Fed Chair Janet Yellen and which could delay a first rate hike."

"Goldman Sachs says that its number-crunching shows that growth in wages is becoming an increasingly reliable indicator of how much slack there is in the economy."

"Noting how earnings growth lagged behind inflation in the United States, the euro zone, Britain and Japan in the second quarter, the investment bank predicted central banks would take their time to start raising record-low interest rates with the Fed only doing so in the third quarter of next year."

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My added comment: According to this article the US recovery is gaining strength and economic reports coming out soon will confirm that. If true, that will contradict Jim Rickards and others view that there is no recovery in progress and the Fed will have to concede this by early next year.

We should note that even this article expects only 2 to 2.5 per cent GDP which is not a strong number. Critics (like John Williams of Shadowstats.com) believe the US GDP number is overstated. This article also points out how low wage growth in the US will cause the Fed to put off any attempt to raise interest rates until late in 2015. All of that hardly indicates that the US is in a strong recovery. 

Adding to that, it is clear from this article that global GDP is falling everywhere else and the concern remains more about deflation. The sanctions against Russia will continue to negatively impact GDP and the Eurozone will take a lot of that hit. The US cannot sustain whatever recovery it does have by itself because of the interconnected nature of the global economy. Also, rising interest rates could kill off any recovery very quickly.

So, we will have to wait until early next year at least to see if any real sustainable recovery is happening in the US. 

Added note: In response to this blog post a reader sent us a link to this Reuters article:

http://uk.reuters.com/article/2014/09/29/uk-hongkong-china-idUKKCN0HN04020140929

The reader also added this comment:  "And protests in Hong Kong are rattling the Chinese markets.  Could this be the beginning of a black swan?"

As always, we appreciate it when readers provide links to relevant articles. 

New York Sun: Audit the Fed Bill to Gain Support in the Senate?

This New York Sun article raises the question of whether Senator Rand Paul and Senator Elizabeth Warren might join forces to try and get the Senate to pass the audit the Fed bill.

Below are a few quotes. We will see if this goes anywhere in the Senate.

"Could a political marriage of Rand Paul and Elizabeth Warren finally open up the question of the Federal Reserve? We ask because of the call this week by Senator Elizabeth Warren for hearings into the allegations aired on National Public Radio that the New York Fed has been treating the banks it supervises with kid gloves. Those allegations were the result of an investigation that NPR reported in league with another liberal news service, Propublica. It happens that Mrs. Warren’s call came but ten days after the House passed the Federal Transparency Act."

"Yet Reuters reports that the legislation “is expected to meet a fate similar to its predecessor’s: death in the Democratic-controlled Senate.” Could that be turned around? The entry of Mrs. Warren into this fray makes us wonder whether there might be some hope that — as happened in the House, where the measure originally had tough sledding — Democrats and Republicans could come together. Particularly since a logical partner on this measure would be Ron Paul’s son, Senator Rand Paul, who has had a companion measure to the House bill before the Senate for some time."

"No less a figure than the greatest of the modern Fed chairmen, Paul Volcker, has called for a New Bretton Woods. The chairman of the Joint Economic Committee of the Congress has called for a centennial review of where the Fed stands at the start of its second century. An audit of the Fed would be just the place to start, beginning with an audit of the New York Fed."

FED Comes Under Fire - Accused of Favoring Big Banks

I am not sure how much legs this story will have but it did get a lot of media attention yesterday and is also circulating on many alternative news sites and blogs. The NY Post ran this story titled "Tapes Showing Meek Oversight of Goldman are about to rock Wall Street".

The gist of the story can be found in the first two paragraphs of this article:

"Wall Street is about to be rocked by secretly recorded audio tapes that purport to show a too-cozy relationship between the New York Federal Reserve Bank and the financial institutions it is supposed to regulate."

"The 45 hours of tapes, made by Carmen Segarra, a former NY Fed worker, capture former co-workers, whose job was to keep banks like Goldman Sachs in line, instead deferring to the banks, being unwilling to take action and being extremely passive, according to public radio’s “This American Life,” andProPublica which obtained the tapes and is scheduled to air a program about the matter Friday night."

Obviously the FED is denying the accusations as seen in many media articles like this one. However, there is a lot of buzz over the story as Bloomberg runs this article by Micheal Lewis. And the Wall Street Journal runs this article. 

In addition to all the above, Senator Elizabeth Warren is calling for an investigation into the actions of the Fed related to this matter. Her call was supported by Sen. Sherrod Brown of Ohio.

Here an a quote from this article about these two senators calling for the investigation:

“These allegations deserve a full and thorough investigation, and American taxpayers deserve regulators who will fight each day on their behalf,” he (Sen. Brown) said in a statement."

"The Fed is already under fire from lawmakers who have called for it to be more closely audited. The central bank has aroused public anger over its involvement in the rescue of Wall Street banks during the financial crisis."

And all this comes right after the House of Representatives just voted overwhelmingly to audit the Fed (something long sought by former Congressman Ron Paul and now by his son Rand Paul). Harry Reid is about to decide if the audit the Fed bill will be voted on in the Senate. Some speculate that all this news will put pressure on him to allow the vote.

Obviously if an investigation does happen and the Fed is revealed to be favoring big banks it will be yet another credibility hit for the Fed. And that does impact what we follow here on this blog.

Again, it is hard to tell how far this story will go. It has certainly gotten a lot of attention for now. We will follow it here to see what comes of it.

Two Polar Opposite Views of the Future (Sort Of)

On this blog we are attempting to follow all news that is relevant to what we think is a coming change in the international monetary system. Trying to cover this topic is not easy because there are very strong opposing views about how and when this change might take place. And there is a lot of confusing and contradictary information related to this topic. What we will do here is try to provide readers with as much good information as we can so they can stay on top of this topic and be able to evaluate all the conflicting information in a (hopefully) logical way. First let's look at the two major conflicting views.

The first thing to say is that surprisingly, there is not all that much disagreement that major change will take place. Having read hundreds of articles on this topic from all sides of the spectrum, I think I can say that there is a general consensus that change will eventually happen. By change, we mean that the present monetary system based on the US dollar as sole global reserve currency ends and is replaced by a new monetary system where the US dollar is not the sole global reserve currency. 

The IMF and other global institutions have predicted this change is coming. The BRICS leaders have predicted this change is coming. World leaders from all over the globe have predicted this change is coming including US officials. Critics of these global institutions have predicted this change is coming. Credible insiders like Jim Rickards have predicted this change is coming. Hard asset advocates (like Eric Sprott, James Turk, Jim Sinclair, Egon Von Greyerz, David Morgan, Mike Maloney, William Kaye, Peter Schiff, Micheal Pento, and many other respected analysts) have predicted this change is coming.

The difference I see in studying this topic for years now is how and when the change may arrive. I see two polar opposite views on how change may happen which I will try to describe below:

1- Mainstream view (IMF, Central Banks, BIS,  BRICS, etc) - I believe this group generally believes that the change will come slowly and steadily over time in a controlled fashion. They recognize there are problems and risks in the current system, but think these are manageable. They believe that the sovereign debt problem can be spread out over years by the use of a controlled inflation rate (goal is 2-3% per year) that slowly makes paying the debt off less burdensome (using cheaper dollars). If any sovereign debt becomes unsustainable, that can be written off with the debt holders taking the loss or the debt extended to a longer term. They believe that even though there are massive derivative products out there in the system, that they are hedged in such a way that they can be contained from taking down the whole system. 

I think this group believes that over the next 10-20 years the US dollar will lose its sole reserve status and be supplemented by other major currencies (euro, yen, yuan, and maybe the ruble). They see a possible new role for the SDR currency unit now used between nations at the IMF if need be to stabilize things. Maybe even a way to extend a version of the SDR for individuals to use. If all else fails, I think they believe they can use the existing gold reserves at these institutions as collateral backing at much higher gold prices to bring about stability. So they see things as basically under control with several contingency plans available to them if another crisis does emerge But they think it won't and that change can evolve slowly over time in a controlled way.

2- Those who see the above institutions as failing. Some in this group view them as sincere in their efforts to run a sound financial system, but just doing a poor job at it (like Jim Rickards for example). Others view these institutions as intentionally creating conditions for the present system to fail as an excuse to institute a new global system to enhance their own power. But both of these sub groups believe that the change will happen as the result of a new global financial crisis that will happen fairly soon (anywhere from this year to at least by 2018). This group believes that eventually when the crisis happens, all "paper" assets (like bonds, stocks, pensions, annuities, etc) will take a gigantic loss in value versus hard assets like gold, silver, oil, and other tangible assets. 

This group believes that when the US dollar loses reserve status it will suffer a very large devaluation versus gold and silver; so naturally they encourage people to own some as insurance to protect themselves against this future event.

So what do we think here on this blog? 

We don't know. There are credible voices on both sides of the discussion. They all agree on a lot of things. They agree that debt is a problem. They agree that there are risks right now that bubbles are forming in things like stocks and bonds. They agree that the US dollar will lose its sole reserve currency status at some point. We have proven this without any doubt if you go and read all the many articles linked in this blog all during this year. We are following predictions from both sides over time to see who gets things right more often. And we watch for key signs of change (us dollar value, gold prices, deflation, trouble in China, Central Bank policy, etc). Staying alert and informed is the first step for sure.

If we don't know the answers, how do we prepare for the future?

That part seems easier to us. We have established from credible voices on BOTH sides of this discussion that the current system has risks and problems. We don't know if those risks  will be managed successfully or not, but we know they exist. Since they exist, the potential exists that some unforseen event (or some planned event if you prefer the conspiratorial view) could trigger another major global financial crisis. 

This is much like the typical homeowner. You have a house. There is some unknown risk that the house will suffer a loss in the future. It is impossible to know for sure if the house will suffer the loss in your lifetime or when it might happen. What does any reasonable person do? They buy homeowner's insurance. In fact, if they owe money on the home they will be forced to carry insurance because everyone recognizes this is the prudent thing to do. A lender does not want to share the risk of your home suffering loss with no insurance on it. This concept is simple and easy for most people to understand.

Why would it be any different when considering the risk of another financial crisis that could lead to a major loss of value in the US dollar and various forms of "paper" assets valued in US dollars? The sensible thing for anyone to do (that can afford it) is to buy some insurance. Insurance in this case would be hard assets as a hedge against loss of paper assets.

When we buy insurance, we hope we never use it. We feel more peace of mind because we have it though. We are even willing to pay a premium that will lose its entire value if we never use the insurance. So buying some hard assets as insurance against another crisis is actually more reasonable than the normal insurance we buy. The cost of hard asset insurance will never be completely lost. In fact, we may even make a gain on it even if no crisis ever does happen. For example, silver might go higher in the future just based on its supply and demand fundamentals as an industrial product. 

So in our view, we can prepare even if we don't know the future. We don't have to hope for bad things to happen. We don't have to do anything radical or extreme. Just set aside some insurance as we can afford it over time. It seems strange to us that is concept is so ignored by most people who see regular insurance as mainstream essential for daily life.

Our suggestion to consider: Stay informed and alert. Buy whatever insurance you can afford as a hedge. Upon doing this, enjoy life and don't spend every day in fear that something bad is about to happen knowing you have done what you can to prepare. And do what you can to help your neighbor think about doing the same. The more people who are prepared, the better chance to withstand a crisis if it does happen. If it doesn't happen, be thankful.

Economic Signals Remain Mixed

The latest economic signals continue to reflect a mixed bag. While jobless claims were a little better than forecast, durable goods orders plunged to their biggest drop since 1992 as noted in this CNBC article. Below are some quotes from this article and then a few comments.

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'The number of Americans filing new claims for unemployment benefits rose less than expected last week, suggesting an acceleration in job growth in September."

"Initial claims for state unemployment benefits increased 12,000 to a seasonally adjusted 293,000 for the week ended Sept. 20, the Labor Department said on Thursday. Claims for the prior week were revised to show 1,000 more applications received than previously reported. Economists polled by Reuters had forecast claims rising to 300,000 last week."

"The jobless claims report showed the number of people still receiving benefits after an initial week of aid edged up 7,000 to 2.44 million in the week ended Sept. 13."

"Orders for long-lasting U.S. manufactured goods in August posted their biggest drop on record as the prior boost from aircraft unwound, but a rebound in business spending plans pointed to underlying strength in the manufacturing sector."
 
"The Commerce Department said durable goods orders, items ranging from toasters to aircraft that are meant to last three years or more, dropped 18.2 percent, the largest decline since the series started in 1992. That partially reversed July's aircraft-driven 22.5 percent surge."

" Boeing reported on its website that it had received 107 orders last month, a third of July's outsized gains. Orders for automobiles fell 6.4 percent after rising 10.0 percent the prior month. The underlying trend in new orders, however, is up and further gains are likely in the months ahead."
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My added comments: 

The above indicates we are still just kind of wandering along in the economy with no clear future direction showing up yet. We have been in a very slow growth mode for quite awhile now. We have noted in several recent articles that signs of possible deflation are still showing up and are a big concern to financial officials. They are concerned because GDP growth has been too sluggish despite the massive stimulus programs that have been employed to try and move it higher.

All this suggests we are still in waiting mode to see if the next move in the economy is a more robust recovery or downward into a deflationary environment. It's kind of like a giant tug of war with neither side really gaining an advantage, but the deflation side perhaps slightly ahead. This creates the illusion of stability as the two forces keep offsetting each other and the rope doesn't move much.

But we can expect that by early next year one side or the other will start winning more decisively. We are tracking a number of forecasts and predictions here leading into 2015. As time passes, it will become clearer which forecasts are proving correct.

Fed More Dovish Next Year?

No one will accuse the Fed of being very hawkish after exanding its balance sheet by $4 Trillion and keeping 0% interest rates for years with no end in sight. But there are two members who vote this year that are viewed as more likely to raise rates. This Dallas Morning News article notes that Dallas Fed Chief Richard Fisher and Philly Chief Charles Plosser will soon retire and their voting term ends this year. 

Some quotes from the article:

"The Federal Reserve Bank of Dallas has hired a search firm to help find a replacement for President Richard W. Fisher, who has said he plans to retire next year."

"Fisher will be one of two Fed hawks to retire next year, which could reduce pressure on the central bank to speed up its plan to raise interest rates. On Monday, Philadelphia Fed President Charles Plosser, 66, said he plans to retire in March."

"Both Fisher and Plosser have criticized the Fed’s loose monetary policy and want the central bank to start raising interest rates sooner than the estimated time frame of mid-2015 as the economy continues to improve. In Fisher’s 10-year tenure at the Fed, he has dissented from policy decisions eight times — including at the central bank’s last meeting earlier this month. Plosser has dissented six times in his eight years at the Fed, including at the last two meetings."

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My added comment: While not much will probably change at the Fed, it is likely that the voting block at the Fed next year will have an even more dovish bias. So speculation that interest rates will be rising may be premature.

Bo Polny: Gold ready for Spike Upwards

With gold prices having fallen quite a bit lately and MarketWatch declaring that "Gold is Tarnished For Good", one might wonder if Bo Polny has changed his view of gold in the short term? Again, the answer would be no. Mr. Polny writes this update today and restates his conviction that gold will soon start a big move up.


Today provides us a great opporutunity to contrast two polar oppositve views on gold side by side (see the two links above). We will follow these contrasting views and forecasts to see who ends up being right more often. It's hard for most people to keep track of this over time so we try to do that here for readers.

Mr. Polny has also done two recent online radio interviews with Al Korelin where he answers questions about cycles and again restates his conviction gold will soon make a sharp move up. Here are those two links for those interested:

Online interview - Segment #1

Online interview - Segment #2

MarketWatch: Gold Tarnished for Good

On this blog we devote a lot of coverage to those who believe that the current monetary system is in trouble and will be replaced with a new one. This is understandable since the whole premise of this blog is that change is coming. But we also try to make sure we present the mainstream view as well. Here is a MarketWatch article that says the US dollar looks strong, the economy is in recovery, and all that will make gold a bad investment (at least for awhile).

It doesn't bother us that the mainstream view tends to dismiss the idea that change is coming (at least any time soon) or that it views gold in a negative light. Frankly, we hope the article is right. Why would anyone want to see another global financial crisis like Jim Rickards is forecasting? And it is true that if gold is trading at mutiples of its current price, some bad things have probably happened.

Also, we have pointed out here on this blog that some feedback we have gotten from readers here within the system suggests that there is a widespread feeling within the system that even with the large sovereign debt problems out there, things can be managed over time. Christine Lagarde said much the same thing this weekend as we noted in this article.

You won't find us pulling for a crisis or anything else that would lead to widespread suffering and potential social unrest or disorder. If no new crisis unfolds, we think that would be great news.

With all that said, we still believe that the scenario presented by Jim Rickards and others should not be dismissed or ignored. Those who take that approach are acting foolishly in our view here. There is a lot of evidence and sound logic supporting the idea that another crisis is possible. We have presented a lot of it here on this blog. The information is still on here archived in articles listed on the right hand side of the blog. For example, we have linked to many articles where the IMF, the World Bank, and the BIS have all issued warnings that another crisis is possible. If they think its possible, why should we dismiss the idea? The G20 just warned again this weekend that there might be "excessive risk in the financial markets." 

The idea of preparing for a possible crisis sometime in the future is not radical or extreme. It is really just common sense. It is the same concept that supports the entire insurance industry that no one views as radical or extreme. No one gets up in the morning expecting their house to burn down. They don't think, today my car is going to be involved in an accident. But most people think it is reasonable and wise to carry insurance just in case because reality tells us some houses will burn down and some cars will be involved in accidents. And there is some level of risk it will be our house or car.

There is nothing different about trying to insure (or hedge if you like that word better) against another financial crisis. Everyone who is in a position do to do that should do that. It's not radical. It's not extreme. It's just being wise. Insurance is something you hope you never need, but don't want to be without. Those who think it can never happen and don't do anything to prepare are the foolish people in our view here. They are the same people who would probably shake their head at people who don't carry insurance on their home or their car. But they see no problem in taking the risk that another financial crisis can't happen. We can hope they are right, but we think it is wise to have some insurance; just in case.

Update 9-23-14: Bo Polny just did an update re confirming his forecast that gold will spike up by the end of this year. So here in one day we can offer two polar opposite views on the price of gold for readers to consider. If Mr. Polny is right, it will mean that his forecast about a big stock market drop next year gains credibility. If the MarketWatch article is correct, it likely means the FED is moving towards increasing interest rates and the economy is doing better.

Christine LaGarde Confident G20 will meet Growth Targets

With another G20 meeting coming up in November, there has been much discussion about ways to increase global growth by 2%. In this CNBC article, Christine Lagarde predicts the target will be met and also suggests things are doing just fine in the global economy.

When you read this article you will see the sharp contrast between the outlook projected by those running the present monetary system (like Ms. Lagarde) and those who say the present monetary system is on its last legs (like Jim Rickards).

Below are a few quotes from this CNBC article and then a few comments.

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"Christine Lagarde, managing director of the International Monetary Fund (IMF), is confident that the Group of 20 will achieve their target of boosting global growth by 2 percentage points in time for the November summit in Brisbane, she told CNBC on Sunday."

"While the G-20 communiqué from the summit in Cairns said that "growth in the global economy is uneven and remains below the pace required to adequately generate much needed jobs" and "the global economy still faces persistent weakness in demand, and supply-side constraints hamper growth", Lagarde believes leaders capable of tackling these issues."

"Amid calls that some member countries need to do more to support growth, Germany in particular, Lagarde said that every country has to do its part."

"What we're learning is that each and every country is in a position of its own. Long gone are the days where you could say '2 percent stimulus across the board,' or 'you should all consolidate,'" she said. "Each and every country is a specific case, has a specific story and narrative." 

"We'll likely see a mixed bag of reforms and policy that will be more neutral for some countries and more accommodating for others, she said. "But it's going to be on the per-country basis, not across the board."

"Despite concerns about the economy, Lagarde expects China to achieve the 7.5 percent growth target set at the annual meeting of the legislature in Beijing in March." 

"When the Chinese authorities set objectives, they generally make sure they deliver," she said. 

"Regarding Australia's reliance on China - it's largest trading partner - to support growth, Lagarde doesn't see cause for concern."

"I trust the Australian business community to be smart enough to see where the wind is going, and there are clearly in this part of the world, countries that will develop and generate growth, probably at a stronger pace than they have recently," she said. 

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My added comment: 

This article illustrates very well the almost polar opposite view of those running the current system and their critics. The message from Ms. Lagarde is very clear. In her view, while there are problems in the global economy, the problems are manageable. She sees no reason that things won't get better from here. She also talks about how solutions will come from the individual nations (and not a global solution like Jim Rickards predicts). On top of all that she directly contradicts those who are forecasting a dropoff in Chinese growth by stating they will meet their growth target. Australia? They will be just fine. Short version of her view; problems, yes; but no worries, be happy.

So virtually every point she makes in this article directly contradicts forecasts made by Jim Rickards and others who see failing policies leading to a new global financial crisis resolved by instituting global solutions at the IMF.

Somebody has to be wrong and we will follow it here to she who ends up getting it right.
Added note:  Here is a 20 minute video of her speech after the G20 meeting.

The Death of Money - A Summary Review Part II

In Part I of this review we looked at how Part I of The Death of Money lays the groundwork for the forecasts and suggestions that come latter in the book. In Part II of our review we will briefly take a look at Parts II and III of The Death of  Money with emphasis on Part III. Part III is where the forecast scenarios and suggestions to deal with them are found.

Part II of The Death of Money (covering Chapters 3-6) builds on the groundwork laid out in Part I. It is kind of a tour around the globe touching on all the major economic powers in the current monetary system. Readers will find a lot of interesting historical background information on China, the Eurozone, the rise of the BRICS, and even other catchy acronyms like the BELLS and GIIPS. A key takeaway from this is that we live in a complex and interconnected global financial system. A saying we like to use here on this blog is trouble anywhere can lead to trouble everywhere. As an example, Part II explains how trouble in China can lead to trouble around the globe. But the same can be said for Europe.

Part II is interesting, but we won't dwell on it here. Part III is where the rubber meets the road. In Part III, all the evidence compiled in the book leads up to the forecasts about where Jim thinks we are headed. To be clear, the book contains this statement:

"Although the scenarios described in this book are dire, they are not necessarily tomorrow's headlines. Much depends on governments and central banks, and those institutions have enormous staying power even while pursuing utimately ruinous policies."

So, while Jim makes bold forecasts and backs them up with subtantial factual data, he realizes no one can know the future with certainty.

We might add that much also depends on the willingness of the public to continue to trust these institutions. A factor Jim really does not mention much in the book. The book spends much time being critical of these institutions as being the cause of the problem, but then seems to assume that the public will just accept the same institutions as the solution to the problem.

With those disclaimers in place, what are the scenarios mentioned and how do people prepare for them? We won't go into detail, but we can summarize much as Jim does when he does interviews in the media.

Let's quote from page 292 to get the big picture scenarios:

"The dollar's demise will take one of three paths, The first is world money, the SDR; the second is a gold standard; and the third is social disorder. Each of these outcomes can be foreseen, and each presents an asset allocation strategy best able to preserve wealth."

Anyone who has listened to Jim Rickards interviews knows he forecasts that the Fed will not be able to handle the next major financial crisis. He forecasts that the IMF will step in as global lender of last resort (become a global central bank). He forecasts the SDR currency unit now used in the IMF will become a form of global currency. He forecasts that eventually this currency will require gold backing of some kind to restore public confidence. All those forecasts are well known and oft repeated in his media interviews. 

Lesser known is his comment on the possibility of social disorder. By social disorder he means "riots, strikes, sabotage, and other dysfunctions". He notes that social disorder is an unpredictable variable arising out of a complex system. He does not say it is inevitable, but allows for it as a possible consequence from another financial crisis. If it does arise, he believes the government will use brute force to counter it. 

Let's all hope we don't go the social disorder route. That is very difficult to plan for. In that world the average person probably is working overtime just to secure the basic essentials of life and some secure place to live. Not that it should be ignored. People can do some level of preparation. But it is much harder to deal with and will vary from place to place. And the pain and suffering would likely be huge. People might question whether a world like that is worth surviving in.

We will focus on his world money (SDR) and gold standard forecasts. Basically the bottom line of this forecast is that new "rules of the game" will be written to reset the system at some point. And somewhere in that process gold will again come into play to restore stability and confidence. We have covered this many times here on this blog.

If we do see this kind of major monetary system change in the future, how does the average person prepare for it? Jim provides several specific ideas. We won't detail those here, but we will focus on his #1 suggestion. People who can afford to should acquire some actual physical gold held in their possession (not any form of paper gold like options, futures, unallocated gold, etc). If not gold, at least some silver.

A reader may ask, But Jim Rickards says we don't know if we will have a major deflation event, a major inflation event, or both at some point in the process. What happens to my gold if we get a major deflation event? 

Jim answers that question in detail in the book. Basically he explains how historically gold has held up in both times of inflation AND deflation. He provides a detailed explanation of why this is the case and how that works.

Jim does also provide a suggested asset allocation which people can read in the book. But we can say it really is nothing radical. It is basically a variation of the very mainstream concept of diversity and hedging your assets. It just includes a physical gold component which mainstream financial planners ignore. Jim explains why the average person should not ignore the gold part of the overall portfolio.

Concluding Comments: The Death of Money is a book we can easily recommend. It is not expensive and contains a ton of useful information. It covers the very important topics we try to cover here on this blog in great detail. Much moreso than can be done in a blog format. 

If you read the book, you will see why we cite Jim Rickard so often on this blog. There are very few people with experience inside the system who will discuss these issues. Jim does this in a way the average person (like me) can understand. He has the resume and credibility that people new to all this will find appealing. He lays out a detailed array of facts to support his conclusions and forecasts so that readers can verify them on their own.

All of these things make him somewhat rare as a source which is why we cite him here so much. There are certainly many other solid information sources as well and we search for them daily here for readers. But if you only have time to read one book, this is the one we would recommend to get up to speed.

The Death of Money - A Summary Review Part I

The Death of Money is the latest book written by Jim Rickards. Jim has extensive experience working with the US intelligence community to assess potential financial threats the country could face. He draws on that experience in the Death of Money to outline a variety of possible threats to the US that fall under the umbrella of financial warfare. 

Part I of his book lays this out for readers to consider. Here we will briefly review Part I of The Death of Money. Readers are encouraged to get a copy of The Death of Money and read it. The book is almost must reading for anyone who cares about the issues we discuss on this blog. It's available at book stores and places like Amazon.com.

The Death of Money is a very detailed look at the current state of the present monetary system. The first part of the book lays the groundwork for the forecasts that follow in the latter part of the book. Anyone who has listened to Jim Rickards in interviews knows by now that the book forecasts that the current US dollar based monetary system will eventually come to an end and be replaced. Jim lays out the case for why he thinks the most likely replacement will be the SDR now used only at the IMF. The book is all about us being in a period of transition between the end of one era and the start of a new era.

In Part II of our review here, we will give a summary of his forecasts and his suggestions on how the average person can prepare ahead of time. But in this article we will talk briefly about Part I of his book. 

There is plenty of interesting and compelling reading in Part I of the book, but I am going to focus on the part that I found a little surprising. Part I basically provides a history of Jim's background in working with the US intelligence community after 9/11 to try and forecast possible threats to the US that might come from financial warfare (by terrorists or hostile nations). Jim details a number of different ways the US financial system could be vulnerable to attack. He talks about actual war gaming done to try and anticipate how these attacks might be carried out. It's all very interesting and includes everything from currency wars to hacker attacks on the markets. You cannot read this material without realizing that the US is clearly vulnerable to a variety of potential threats that are real.

I won't go into detail on all that here. The book covers it very well. What caught my attention was the concluding paragraphs of Part I. Below I will quote from page 64 so that I can explain what surprised me.

" . . .a financial war would present a different kind of crisis, with little or no physical damage. No officials should be dead or missing, and the chain of command should remain intact. Absent collateral infrastructure attacks, communications would flow normally."

"Yet the nation would be traumatized just as surely as if an earthquake had leveled a major city, because trillions of dollars of wealth would be lost. Banks and exchanges would close their doors and liquidity in markets would evaporate. Trust would be gone. The Federal Reserve, having used up its dry powder printing over $3 trillion of new money since 2008, would have no capacity or credibility to do more."

"Andy Marshall and other futurists in the national security community are taking such threats seriously. They receive little or no support from the Treasury or Federal Reserve; both are captive to mirror imaging."

Jim then outlines some steps the US could take to mitigate the threats described in the book. Unfortunately, Part I ends with this sad and disappointing statement:

"None of these remedial steps is under serious consideration by Congress or the White House. For now, the United States is only dimly aware of the threat and nowhere near a solution."

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My comments:

Of all the information in The Death of Money I find the paragraph underlined in bold above the most surprising and troubling. We try here on this blog to convince readers that this whole topic is serious and they should view it as such. You simply cannot read Part I of The Death of Money  without realizing just how serious it is. 

It is obvious that there are all kinds of legitimate threats to the existing financial system. After 9/11 our government pulled together people like Jim Rickards to help assess the threats and propose ways to forecast problems and address them. A logical conclusion would be that we would be implementing those ideas and be all over this problem, given the risks and real threats out there.

But amazingly, we find Jim Rickards stating those who take the threats seriously receive "little or no support from the Treasury or Federal Reserve". And then he ends Part I by saying "For now, the United States is only dimly aware of the threat and nowhere near a solution." I find this the most surprising statement in a book full of surprising statements.

All this illustrates why we emphasize on this blog how important these issues are. Anything that leads to major monetary system change (and especially change forced to happen under crisis conditions like Jim outlines in the book) is very important to all of us. No one is going to be able to ignore the changes. They will impact people's daily lives. 

If you take nothing else from The Death of Money, you should take that to heart. It's why hours are spent working on the articles for this blog. It's why we hope as many people as possible will become informed on this topic and do whatever they can to prepare for whatever changes are coming. 

If no crisis ever comes, that will be great. But assuming it can't happen and making no plan at all to deal with one if it does come is beyond foolish in our view here. It is no different than owning a beach front home in the Gulf of Mexico and carrying no home owner's insurance under the assumption a hurricane will never happen. That would be foolish, right?

Now that we understand that we need to think about these issues, we will look at the rest of The Death of Money (Parts Two and Three) in Part II of our review of the book. This is where possible future scenarios are forecasted and suggestions on how to prepare for them are given. Interestingly, the scenarios mentioned in the book line up quite well with scenarios we have mentioned on this blog before having read The Death of Money.

The Scotand Vote - What Does It Imply?

This NY Times article suggests it is about more than just one local vote for  independence. While results now indicate that Scotland will not vote to leave the UK, the desire for a vote at all (and the ability to get 46% of the voters to vote for independence) suggests a continuation of a global trend away from centralization of power. 

Recently, UK Independence Party got its largest vote ever. The vote was widely interpreted as UK voters unhappiness with the EU and its leaders. Spain is struggling with areas within its borders that would like a shot at an independence vote. Nearly 25% of Americans are in favor of thier state seceding from the United States.

In the US, the rise of the tea party reflected a desire to speak out against a more powerful centralized government. It changed the makeup of the Congress. It appears as though it may change even more this November in that direction. This Congress is far less supportive of things like the IMF 2010 reforms which would increase funding to the IMF and increase voting power to some BRICS nations. 

All of this indicates, as the NY Times article suggests, there is a growing trend of disatisfaction with the handling of things by the elites who run the centralized institutions of finance and government.  Here are some quotes from the article:

"When you get past the details of the Scottish independence referendum Thursday, there is a broader story underway, one that is also playing out in other advanced nations."

"It is a crisis of the elites. Scotland’s push for independence is driven by a conviction — one not ungrounded in reality — that the British ruling class has blundered through the last couple of decades. The same discontent applies to varying degrees in the United States and, especially, the eurozone. It is, in many ways, a defining feature of our time."

"The rise of Catalan would-be secessionists in Spain, the rise of parties of the far right in European countries as diverse as Greece and Sweden, and the Tea Party in the United States are all rooted in a sense that, having been granted vast control over the levers of power, the political elite across the advanced world have made a mess of things."

"What distinguishes the current moment is that discontent with the way things have been going is so high as to test many people's tolerance for the governing institutions as they currently exist."

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My added comment: 

So what does this have to do with the future of the monetary system?

Maybe a lot. One thing that is clear from the articles we have covered on this blog since it began is that the powers that be who run the current system do have a plan for the future. That plan certainly does not include a break up of the current system into a hodge podge of decentralized entities. Notice how fearful they were that Scotland might vote yes.

While the assumption by most people is that the current global institutions will remain powerful and probably only increase in power in the future, this is by no means a certainty. All these trends noted in the NY Times article are clear evidence the people can become so frustrated and disillusioned that they just reject centralized institutions in general. At some point after decades of poor growth, exploding debt, and high unemployment, people get fed up and simply don't trust their leaders any more.

All of this comes into play when trying to make some kind of projection for the future, including the future of the monetary system. Let's take 3 different scenarios:

1- Things stay pretty much on the current path where a slow and steady transition from the monetary system we have had for decades now morphs into a new more global one over time. The US dollar based system gives way over time to a more balanced array of currencies. The Yuan and the Euro become more influential. Eventually, a globally used currency (the SDR for example) takes over. Perhaps the SDR is even connected to the Klickex GSD for use by individuals some day. All of this assumes the existing centralized institutions (Central Banks, the IMF, the BIS, etc) retain their positions of control and influence and the confidence of most people. The process unfolds over anywhere from 5 to 20 years slowly and steadily.

2- A sudden new global financial crisis arises. The existing centralized financial institutions (the IMF, BIS, World Bank, Central Banks, etc) spring into rapid response mode. They do this in order to maintain the system, but are forced to meet to change "the rules of the game" in a very short time frame. They manage to preserve the system and their role in it, but only after making significant major changes in a relatively short time frame. Perhaps they move to a global central bank (the IMF) and a global currency (the SDR, maybe gold backed to restore confidence) as Jim Rickards suggests. 

3- A sudden new global financial crisis arises. The existing centralized financial institutions try to mobilze quickly to deal with it. But because the public has turned against "centralized solutions" and institutions (they see them as the cause of the mess), they are unable to muster the political support to deal with the crisis. Instead of an increased centralization of the system, it breaks down into decentralized factions with no one centralized authority. These institutions suffer a massive loss of credibility and influence. The existing monetary system disintegrates into an unknown future.

All of these 3 are very possible scenarios. And the last one becomes more probable if the trend noted in this NY Times article keeps growing. There is a lot at stake for all concerned if a new global financial crisis does happen (as Jim Rickards and others predict). Will the people willingly accept a centralized solution from the current global institutions or will they blame them for the mess? Does that lead to a breakup of the current power structure into decentralized regions and zones or a new global bank and currency? 

If Scenario #1 is what happens, it is likely that most people will be content to allow the current institutions to handle things. People don't react that much to slow change where their lives are not disrupted in a noticeable way. But if we get two major global financial crisis within a decade, these movements for independence suggests people may just decide they have had enough. It's a very big unknown and just another piece of the puzzle to consider. In a complex system, it is impossible to predict future results with certainty.

The Global Battle Against Deflation Continues

Despite years of easy money policy by Central Banks all over the world, the evidence seems to indicate that the battle to stave off deflation is still in full force. Deflation is a worst case scenario for Central Banks. With sovereign debt at record levels around the world and memories of the global financial crisis of 2008 still fresh, neither governments nor Central Banks can afford to let deflation take hold. But can they stop it? In this Bloomberg article , we get more evidence that China is ramping up the fight.

Let's review the most recent news events to see if a trend is emerging:

- the ECB announces a new asset buying plan to "stave off deflation"

- IMF issues a statement warning of the risk that "markets could quickly deflate"

- the lastest US labor reports indicate new weakness

- the lastest US housing reports indicate new weakness

- the price of oil and gold has been falling

- Foreign Affairs runs an article calling on Central Banks to give out free cash to people

- Japan continues in the midst of a massive stimulus program to fight deflation

- latest news from China suggests the economy may be starting to weaken there

- the sanctions against Russia are hurting global GDP and may compound economic      problems in Europe especically

-  the FED announces interest rates will stay low a long time due to ongoing concerns about the labor market and also says inflation is running below the FED target rate

- the G20 announces they will discuss "lagging global growth" soon in Australia

- David Stockman warns trouble brewing in China

There are plenty of additional similar articles if you just do a simple google search on "global deflation". This is a situation we must watch very carefully. Keep in mind that Central Bankers are expected to exhibit confidence at all times. They realize that anything they say that spooks markets can start an unintended reaction. So for them to talk this openly about about deflation suggests this is a very real concern.

I am finishing up Jim Rickards book The Death of Money right now (and I will be doing a review of it soon here on the blog). There is an entire chapter in the book devoted to potential problems in China. Jim lists a crisis in China as one of the key signposts to watch for that could lead to an end to the current "rules of the game" in the present monetary system. 

He also explains why Central Bankers fear deflation more than anything else on earth. Not only do they lose tax revenue in a deflating economy, it makes the sovereign debt problem even worse as paying off the debt becomes impossible. Bond markets would realize that fact at some point. Simply put, they cannot allow deflation to win without suffering a major crisis in a financial system that is debt based and totally dependent on perpetual inflation to sustain itself.

If deflation is coming, we can expect that Central Banks will do everything in their power to fight it. This situation could lead to a lot of volatility as markets try to guess whether deflation will win or efforts to stave it off might lead to very large inflation instead. If you see Central banks start adopting policies to try and force money into circulation (negative interest rates for example) or other radical proposals, it likely means there is very deep concern.

So far the Central Banks have managed to keep things reasonably calm even if growth has been very weak. Perhaps that will continue. But it is clear they are concerned about deflation. If they are, we need to watch it as well.