China steadily Plugs Away in Effort to Increase Global Influence

China is known for having a lot of patience and moving forward in a slow but steady way. It seems they will continue that approach in working towards gaining more influence globally. The BRICS bank is one way to gain influence, but is moving at a controlled pace. Establishing the Yuan as a global currency is another way to gain influence, but that is also moving along at a slow and steady pace.

Below are a couple of BRICSPOST articles that update us on both these fronts. Slowly but surely China is moving towards becoming the primary alternative to the US in the global economy. 

China allows direct trading between the Yuan and Singapore dollar

As this article notes, this is just another step similar to what China has already been doing in establishing the Yuan as direct trade currency with other nations. In each case the US dollar is being bypassed for use in trade. It does not however setup the Yuan as an alternative reserve currency. It appears to still be early in the game for that. That could be a process that takes a few years to unfold. Steps are being taken in that direction, but not at a rapid pace.

China led new Bank challenges Japanese, US Influence

This article starts out by trying to present this new bank as a direct challenge and threat to the IMF and the World Bank. It notes the frustration of the BRICS nations with stalled IMF reforms and implies this is their response to the situation. However, as you read through the article, it becomes clear that the bank will start out in 2015 with relatively small capital. By the end of the article, it is talking about how this bank will just be a challenge to the World Bank to perform better. Certainly there is no indication that replacing the IMF or the World Bank is even on the radar. Also, China is struggling to get other major nations to become members of the bank.

Having followed this now for some time, I think we are seeing a trend emerge here. While every now and then, there are threats and tough talk that if IMF reforms are not passed the BRICS nations will pull out and go their own way, the reality is that they never get serious about following through on that. They admit that in reality they are still years away from being in a position to seriously challenge the existing global financial structure. They set deadlines, but when those deadlines pass they just extend the deadlines and talk about how they hope the reforms will pass someday. They don't seem in any hurry to force things.

At this point it does not seem like they really are interested in breaking away from the IMF and World Bank, even if the reforms don't pass any time soon. They seem content to just start the process of setting up alternatives and then slowly and surely move forward over time. The whole process looks more like a 5-10 year or more project as things stand today.

If the Republicans do gain control of both the US House and Senate, passage of IMF reforms will probably be a very low priority or completely off the table for two more years. Supposedly there is another "deadline" of year end 2014 from the BRICS nations for the reforms to pass. But it doesn't look like anything significant will happen if the deadline passes yet again. Expect the deadline to just get moved again.

Russia Behind Cyber Attacks?

This NY Times article suggests the US government believes they are. The recent attacks on White House computer systems is the focus of this article. However, we should keep in mind that Jim Rickards said that the August 2013 Nasdaq market disruption was never explained. He feels Russia was likely behind that as well. So here is another area where Rickards warnings may be proving correct.

And then today there was another similar market disruption for awhile at the New York Stock Exchange. In fact, this CNBC article references the August 2013 attack. 

This is just one more area we have to keep an eye on that can obviously impact the system. If foreign governments are able to disrupt (or even shut down) US markets for a period of time, that would clearly be a significant event. One that could trigger a market reaction. 

The list of things that go wrong is lengthy and it is no wonder that the IMF and BIS are constantly issuing warnings. Here are just some we have covered here:

- the above mentioned potential for cyber attacks on markets or banks

-a default on sovereign debt by a major nation (Argentina is in the middle of one now)

-a rollover in the stock market and/or housing market due to the ending of the QE program

-a debt implosion in China due to malinvestment over there that causes a selloff in their US holdings (stocks or bonds)

-weak bank balance sheets in the Eurozone (25 failed the recent stress test)

-the enormous amount of derivative products around the world and the non public disclosure of a large dollar amount of them

-geo political turmoil hurting global GDP - Ukraine, Middle East etc.

-possible signs of deflation taking hold despite massive central bank efforts to reflate

The list goes on and on.

But we have to point out that despite all the above, so far things have been relatively calm and stable. We see volatility flare up for sure in markets, but it has been contained so far. In 2015 we will see if the US economy can stand on its own feet with the high level of Fed stimulus that has been required since 2008. We will see if geo political hot spots get hotter or cool off. We will see if the Fed has gotten it right or badly miscalculated. 

Meanwhile, we apparently have Russia and probably China too out there testing to see if they can disrupt things in the US with cyber attacks. We will have our hands full following it all.

Fed Announces End to QE - No Surprises

There were no surprises as the FED did what was expected and announced they are ending their QE program for now. They will continue to replace bonds as they mature so they will still be buying large amounts of bonds going forward. And they will not raise interest rates any time soon.

The reaction from the markets was pretty mild overall. What everyone will watch now is to see if the markets react over time the news. In an interview with King World News, former FED official Andrew Huszar said he thinks that the markets will drop again to test the FED in the coming weeks. 

Both Huszar and Jim Rickards had a similar comment. Both said that since QE did not really do anything to help the actual economy, ending it should not really hurt the real economy.  Rickards says that QE only inflated stocks and real estate so those assets might fall back. Rickards also said that since we are in a structural depression, QE makes no difference either way on things like business expansion and wages. He still thinks it will return sometime next year and has not changed his view on that.

Basically there was no real change in the situation from what was widely expected.

Update for GDP:  GDP was announced at higher than expected this morning for the 3rd quarter. So far nothing surprising is happening and markets will likely just continue to watch the FED to see if anything much changes there. There is nothing right now that would indicate any thing major will happen before this year end. After the elections we will see how markets react to that.

Update: IMF Warns End of QE Creates Risks for Emerging Markets

Update: Greenspan comments on Fed QE Policy, Advises buying gold

Putin Calls for New Rules in a Fragmented World

One of the ongoing stories we follow here is what the BRICS nations are going to do in the future. We have covered the fact that they are unhappy with the balance of power at the IMF and have taken initial steps to setup their own financial institutions. On the one hand they threaten to go their own way if IMF reforms are not adopted by year end 2014. On the other hand they always tamp down those threats by saying they do not see themselves competing with the IMF or World Bank. 

Russian President Putin once again calls for global reform in this BRICSPOST article. Once again it seems like 2015 is shaping up to be an important year to see how all this gets resolved. At some point the BRICS nations will have to either make good on their threats (regarding IMF reforms not passing) or lose credibility that their threats have any meaning. Below are some quotes and then a comment.

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"As the United Nations celebrates its 69th anniversary, Russian President Vladimir Putin is calling for a reconstruction of a system of global checks and balances that help maintain peace and security."

"Addressing the plenary meeting of the Valdai International Discussion Club’s 11th Session in Sochi, Russia, Putin said that any global system of governance must adapt to the new realities in international relations."

“Unfortunately, there is no guarantee that the existing system of global and regional security can protect us from disruption. The system is seriously weakened, shattered and deformed,” Putin told the 108 experts, historians and political analysts from 25 countries attending the session."

“International and regional institutions of political, economic and cultural cooperation are going through a very difficult period,” he added.

The session’s theme – The World Order: New Rules or a Game without Rules – examines how a global mechanism of conflict resolution and equitable economics can exist in the midst of persistent efforts to fragment the world, draw new dividing lines, and create coalitions of war targeting a polity or leader.

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My added comment: Mr. Putin does not really try to hide his criticism of the US as being the reason for "efforts to fragment the world, draw new dividing lines, and create coalitions of war targeting a polity or leader".

Later he adds these comments:

Agendas of blocs of nations, usually acting as satellites to a singular world power, were often disguised under the guise of international will and therefore skewed the process of global decision-making.

“This group has in fact become so ambitious that its solutions are now passed off as decisions made by the entire global community,” the Russian president said.

However, unipolar dominance of the world is unsustainable, which is why a number of nations are trying to create what Putin called a “quasi bi-polar world”.

“Essentially, the unipolar world is simply a means of justifying dictatorship over people and countries. The unipolar world turned out too uncomfortable, heavy and unmanageable a burden even for the self-proclaimed leader,” Putin said.

All this will continue to be interesting to follow. And the November elections in the US will probably also come into play here. Right now polling indicates the Republican Party in the US may gain control of the US Senate and will most certainly retain control of the US House. President Obama is suffering from low approval ratings. If this polling holds up, it casts a lot of doubt on whether the IMF reforms will have any chance of approval any time soon. And the US Congress will also probably take a more combative approach to Russia and other BRICS efforts to offset US global leadership.

For now, the trend is away from global cooperation and more towards de centralization and regional power struggles. Events can change quickly so we will continue to follow them here.

Swiss Referendum on Gold Coming Up in November

On November 30th, the people of Switzerland will vote on a referendum (the Swiss Gold Initiative) to rebuild official gold reserves of the country and prevent the future sale of gold reserves. The first poll out on this indicated that the referendum would be supported by a margin of 44% For and 39% Against (17% Undecided). We will follow this to see how it turns out.

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This vote is attracting a lot of attention around the internet, especially on sites that are advocates of hard assets like gold. According to supporters like Egon Von Greyerz, the initiative would do these three things:

- demand that the Swiss gold held abroad in the UK and Canada be physically returned to Switzerland (an estimated 300 tons of gold)

-require the Swiss National Bank to hold 20% of its balance sheet in physical gold (an estimated 1600+ tons of gold that could be purchased over a five year time period)

-restrict any future sales of gold reserves

Not surprisingly, the banking establishment in Switzerland is opposed to the referendum. The early poll indicating support for the referendum is therefore somewhat of a surprise and it is expected this will be a strongly contested vote. 

In this interview with King World News, well known CNBC analyst Rick Santelli predicts the referendum will pass despite the opposition from the international banking community. Advocates of the referendum believe that passage will have an immediate impact on gold prices. Santelli says to watch the gold price two weeks ahead of the vote to get an inidication of whether or not it will pass.

The Wall Street Journal says the vote is "too close to call" while Reuters runs an article emphasizing that the initial poll fell short of the 50% needed to pass. Both these articles suggest the measure will probably fail. So you can see how various media spin these things depending on what outcome they prefer to see.

This Forbes article points out that even if the referendum does pass the national vote, it still has to be passed in a majority of 26 Swiss Cantons. Something the Forbes article says will be very difficult.

So, we will follow it to see if it passes and if it does impact the gold market. If it is likely to pass we should see some signs of that by mid November in the market price for gold.

Update 10-30-14: Here is an article from TheStreet.com on the upcoming vote.

Why So Much Official Planning for Another Crisis?

We have already noted the numerous warnings issued recently by both the IMF and the BIS (Bank of International Settlements. A review of the links on the right hand side of this blog will lead you to several of these warnings in the past 2-3 months. Here are a couple of recent examples. First, this one from the IMF and then this one from the BIS.

We have also seen a lot of official planning and stress testing in regards to how the system can handle another major financial crisis. In this post we will look at two articles related to that. Below we will paste some quotes from each article and then add some comments further below that.

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Banks Rewrite Derivatives rules to Cope with Future Crisis - (from the Financial Times)

(note: because the Finacial Times requires you to register to read their article directly (its free), we have linked to a reprint version. Here is a direct link to the FT article). We encourage readers to read the entire article on Financial Times if possible.

Here are a few quotes:

"The world's biggest banks have agreed to tear up the rulebook on derivatives to make it easier to resolve a future failing institution like Lehman Brothers."

"People familiar with the matter said 18 bank "dealers," ranging from Credit Suisse to Goldman Sachs, have agreed to give up the right to pull the plug on derivatives contracts with a crisis-stricken institution."

"Several months of complex talks involved regulators and asset managers but were led by dealers under the umbrella of the International Swaps and Derivatives Association (ISDA)."

"US regulators, who have previously condemned the industry's crisis planning as inadequate, had demanded banks come up with a plan to stop their counterparties terminating derivatives contracts in the event of a crisis. The banks portrayed the success of the talks as a rare positive example of industry collaboration."

"ISDA is due to announce the agreement to change its "protocols," which govern the $700 trillion market, in the next few days. They will take effect from January 1, 2015."

"The current thinking among regulators is that the core of a failing institution should be preserved. Although shareholders would be likely to be wiped out, the operating company would be recapitalised or sold to mitigate the shock to the broader financial system."

"You have the financial sector absorb the losses but you have the company stay in business," said another industry negotiator. "Assuming it gets signed up, it's a very important step in ending 'too big to fail.'"

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Next we have this Bloomberg Article - Would Your Bonds Survive a Trading Freeze?

Here are a few quotes from this article (we encourage readers to read the whole article)

"Surging market volatility is making regulators increasingly concerned that bond funds have loaded up on hard-to-sell assets."

"The U.S. Securities and Exchange Commission has stepped up exams of money managers, while pushing mutual funds to test whether they could satisfy customer redemptions during periods of financial stress, said people with knowledge of the plans. Federal Reserve officials have reached out to the biggest investment firms to quiz them on markets after price swings for stocks, currencies and commodities hit a 13-month high last week, said a person briefed on the discussions."

"Concern is mounting that as the U.S. central bank exits from almost six years of easy-money policies, debt that’s benefited most from the stimulus will lose value and investors as yields rise."

"A big concern is that some firms are investing in infrequently-traded leveraged loans and high-yield corporate bonds, while adhering to a mutual-fund requirement that clients be able to pull their cash daily."

"IMF analysts have called on regulators to bridge the gap between mutual-fund shares that trade daily and underlying assets that may take weeks to sell. An option that should be considered is making it harder for investors to flee certain funds all at once, the analysts wrote in a report this month."

"The idea is radical, because federal rules are based on the premise that retail investors shouldn’t find themselves trapped in funds they can’t pull money from. At the same time, the popularity of mutual funds has been fueled, in part, by the ease at which clients can take cash out."

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My added comments: The warnings and crisis planning just keeps on coming. A fair question to ask at this point is: Why so many warnings and so much crisis planning?

The answer to that question is very clear if you just read the articles we have linked here. Without any doubt, officials are concerned about how the markets are going to react with the US Fed ending its QE program and talk continuing that interest rates may start rising in 2015. Almost every warning article we have linked here has noted the official concern about that.

We have noted here that since the last financial crisis in 2008, the economy and the markets have not shown any credible evidence they can stand on their own feet without all the continued monetary stimulus from Central Banks with the US Fed being the leader of course.

It is very clear that the whole world is watching and waiting to see how this experiment is going to turn out if they seriously curtail the monetary stimulus. Officials are so concerned they are flooding us with warnings and working overtime doing stress testing and crisis planning. 

This is one of those good news/bad news situations. On the one hand it is good that they are concerned and are warning the public and doing what they can to stress test the system. On the other hand, it shows they really do not know what is going to happen and they want to be covered if things go south. It continues to look more and more like 2015 is going to be a critical year for finding out if things go south or not.

Given all this official concern and uncertainty, what are we to do in this kind of environment? The premise on this blog is that it is vital for people to stay alert and informed first of all. This blog is devoted to trying to help with that. It is also important for people to think about various potential future outcomes (scenarios) and have some kind of plan in mind in case things do go south. Monetary officials have warned us of the potential so there is no real excuse to just ignore everything and pretend there is nothing to prepare for.

How can we prepare? Staying informed is the first priority. After that, we recommend following the suggestions Jim Rickards makes in his books and interviews. Dedicate some reasonable portion of your savings to hard assets as a form of insurance. If you never need this insurance that will be great (it will still have value). If you ever DO need this insurance, you will be very thankful you have it. Trying to cope with another major financial crisis with no insurance at all is the most foolish course of action possible in our view here.

If you ever get a change to see these guys live (Straight No Chaser)

take it!  Vocals and harmonies live are incredible. They sound great on CD's or when you see them on TV. They sound amazing when you hear them live (first time for me). Fantastic performance here in Dallas tonight by Straight No Chaser.

Here is the song that made them famous as performed on this current tour.

Bo Polny - October 17th Audio Interview/Update

We are following the forecast of Bo Polny who has predicted a sharp move up for gold by year end 2014 (and at least $2000 gold by summer 2015). Time is running out for his year end move. Mr. Polny did a new audio interview with the Korelin Economics Report on 10-17-14 which you can hear by clicking here.

In this interview Mr. Polny stated that the pullback for gold was over and that gold would start a sharp move up immediately now. He said gold would move up strongly this past week (Oct 20 - Oct 24), but that did not happen as predicted.

We will follow his big picture forecast well into 2015 to see what happens. If he hits his gold forecast, he has also predicted a very sharp drop in the stock market next year. For all this to happen, some significant events will have to take place pretty soon. This would imply that major monetary system change might happen sooner rather than later.

On the other hand, if by summer of 2015 things are pretty much the same as they are now, it will tend to negate the forecasts calling for significant market disruption in the short term. It would also imply that the Central Banks have managed to control things pretty well. In that case, we would expect that the changes we see coming are more likely to evolve more slowly over time in a controlled manner. 

Whatever happens, we will cover it here.

IMF Fights Negative Interest Rates (on SDR's)

It seems that the idea of having interest rates go negative on its SDR currency is not appealing to the IMF. With some of the component currencies (the euro and yen) now yielding below zero rates, the SDR itself could actually have a negative yield. With deflation the worry of the day, the IMF decided to make sure that doesn't happen. Below a few quotes and a comment.

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"The IMF said that from Monday it would maintain a floor rate of 0.05 per cent, or five basis points, on its special drawing rights or SDR currency, which represents a basket of the currencies of its largest members."

"With short-term rates for key SDR components the euro and the yen now running below zero, and the dollar and pound rates barely above zero, that risked pulling the SDR rate down to a negative level as well, a senior fund official explained."

"Under the current rule there is nothing to stop the SDR rate from going negative," he said. "Financially, it would be a somewhat perverse situation because our creditor members would be paying for providing us resources."

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My comment: You have to chuckle a little at that last underlined statement. When governments want to issue bonds with virtually no return or even negative returns that is OK. But when governments are on the receiving end of that situation, that just won't do. In fact it is a "somewhat perverse situation" :)

David Stockman asks - What Deflation?

We have been running several articles here talking about monetary officials concern about potential deflation. We have pointed out that we need to watch to see if we are starting to head into a deflationary spiral and if so, how would officials react? Not everyone buys into the idea that deflation is here. 

Former Reagan Budget Director David Stockman writes this article on his blog pointing out that nowhere in the world is there any deflation yet in the reported statistics. So why all the concern? Let's look at it. First a few quotes from the article, then a few comments. As always, readers should read the entire article to get full context.

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"The Fed’s public relations firm of Hilsenrath & Blackstone was out this morning with the official line on the market’s tremors of recent days. It seems that $10 trillion in freshly minted digital money at the world’s major central banks over the last eight years—-that is, a tripling of their balance sheets to $16 trillion—- is not enough. Not only is 2% inflation still MIA, but it now threatening to enter the dark side:

Behind the spate of market turmoil lurks a worry that top policy makers thought they had beaten back a few years ago: the specter of deflation."

"Never mind that there is nothing close to a sustained run of negative consumer price indices anywhere in the world. The recent modest abatement of what has been 45 years of relentless consumer price inflation throughout the DM economies can be readily explained by short-term oil and commodity price movements and exchange rate fluctuations. Indeed, the money printers are always gumming about inflation-ex food and energy— so here it is."

"During the most recent twelve months, the CPI-ex food and energy is up 1.7%, and that compares to 1.8% in the prior year and 1.9% in each of the two years before that. Indeed, since the turn of the century the CPI less food and energy has risen by an average of 1.9% annually. So now that it has tumbled all the way down to 1.7%——a fractional emission of pure statistical noise from the government data machine—-we are suddenly drifting into a deflationary crisis?"

"And, no, the data is no different for Europe. There is no sudden lurch into a sustained downward price spiral. Instead, European consumers are enjoying a period of only marginal erosion of their purchasing power. Thus ,during the most recent twelve months, core inflation in the euro area has risen by 0.7% and that is virtually the same rate as the prior year. Going back to the pre-crisis peak in September 2007, the average core inflation rate has been 1.1% for seven years running. Again, there is no step-wide plunge in the consumer inflation trend—-just a reasonable approximation of price stability."

"In fact, what possible explanation do the Keynesian money printers have for what they imply to be an economic disease that could be called SODS (sudden onset deflation syndrome). That notion is empirically false as shown above, but by their lights where did it come from all of a sudden?"

"All of this is empirical nonsense, of course. In fact, its a blatant con game. The only reason that there is an appearance of a troublesome “inflation shortfall” is that recent rates have been below the arbitrary 2% “policy” target that has been set by Keynesian central bankers all around the world."

"Moreover, when this 2% target is taken with such literalistic rigor as to rival creationist doctrine regarding the scriptures, it can make trivial differences appear profound; and to cry out for new forms of policy action—which is what the monetary central planners are actually all about."

"In fact, there is no proof anywhere that 2% inflation on the CPI enables extra GDP growth. It’s just a flat-out invention of the monetary scholastics who have seized control of the world’s financial system."

"So here’s the real reason the nonsense of 2% inflation targeting and the specter of deflation is being fed to the compliant financial press by the policy apparatchiks running the central banks, IMF and the major nation treasury departments. In a word, governments have buried themselves in debt, and are desperate for an excuse to inflate away the real burden."

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My added comments: This is a pretty long article and readers should read the entire article because I am going to skip over many of the points in the article. To summarize, Mr. Stockman is pointing out that despite all the media and Central Bank talk about worry over deflation, none exists right now according to officially reported data. So why all the fuss over deflation he asks? He answers his own question by arguing that officials want the public to fear deflation so they can continue monetary stimulus. He says the real agenda is to get inflation up so that they can pay off the enormous existing sovereign debt burdens with cheaper dollars. The underlined and boldened paragraph above is the key paragraph in his article in my view.

I understand what Mr. Stockman is saying and agree that an unstated goal for financial authorities is to deal with the debt problem by devaluing the dollar over time. In fact, this is the very point Jim Rickards has made many times and we have covered here extensively. But I do think that their fear of potential deflation is real and not just a PR ploy as Mr. Stockman suggests. We have to keep in mind that the Central Banks have access to a lot of data that we don't. They see the trends. Also, while no actual deflation has been reported, the very low inflation rates are probably troubling to the Central Banks because they have flooded the system with so much stimulus ( a point Mr. Stockman does make in his article). I suspect there is very real concern that despite the enormous amount of monetary stimulus, the economy is still very weak. And of course as he notes, they need much higher inflation to reduce the debt to GDP ratios around the world due to the overhang of huge sovereign debt (Jim Rickards says their real unstated inflation goal is more like 4-5% per year). If this is true, you can see why only 1.7% inflation would be worrisome to them.

The reason we are watching for signs of deflation here is that we do believe it is a real threat and that the IMF, BIS, and Central Banks see that too. We think they are sincere in the many warnings they are issuing about all this lately. Just because no official deflation is showing up yet does not mean that we aren't possibly headed for some. And the warnings being issued by the IMF, BIS and others about the potential for another sudden crisis due to over valued financial assets indicate this is a real possibility. If debt starts to overwhelm the system (or a sudden rise in interest rates), it can pick up speed very quickly making recent historical data meaningless in real time.

Mr. Stockman's article wants to point a finger of blame at these same officials for creating this condition with their monetary stimulus policies. While that may be true, it does not help any of us deal with the consequences if a major deflation event does unfold. Most of us will just be trying to get by and figure out how to deal with the situation. The Central Banks will probably be in full panic response if this happens. No one should hope this happens of course. Being able to blame the Central Banks won't put any food on the table.

For now, things are still relatively stable despite the recent stock market volatility. All we can do is continue to stay alert and watch things. Low inflation, falling oil prices, stock market volatility, and bond market volatility are all signs of a possible coming deflation event. The financial authorities are clearly worried about it and are issuing warnings right and left. What we have to do is continue to follow events and watch how the authorities respond if deflation does gain momentum. Do they reverse course and ramp up another huge monetary stimulus program for example? If they do, does inflation start to rise quickly? Does another crisis unfold and lead to monetary system change sooner rather than later?

Because there is a gigantic debt overhang on the present system and the system is highly globally interconnected, big changes can happen quickly. A problem anywhere can lead to a problem everywhere. Jim Rickards says an avalanche is building up (the system is unstable) and any new snowflake can trigger it. The first step to being as prepared as possible for whatever happens is to stay informed. That is what we are trying to do here and encourage readers to do.

Bloomberg: Currency Wars Still Around - Now in an Effort to Fight Deflation

Just more evidence that global financial authorities are very concerned about the threat of deflation and disinflation. This Bloomberg article says that Currency Wars are still around but now they are used to try and export deflation to someone else. A few quotes from the article below. Readers should read the full article linked above to get full context.

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"Currency wars are back, though this time the goal is to steal inflation, not growth.
Brazil Finance Minister Guido Mantega popularized the term“currency war” in 2010 (and Jim Rickards wrote his book called Currency Wars) to describe policies employed at the time by major central banks to boost the competitiveness of their economies through weaker currencies. Now, many see lower exchange rates as a way to avoid crippling deflation."

"Weak price growth is stifling economies from the euro region to Isreal and Japan. Eight of the 10 currencies with the biggest forecasted declines through 2015 are from nations that are either in deflation or pursuing policies that weaken their exchange rates, data compiled by Bloomberg show."

“This beggar-thy-neighbor policy is not about rebalancing, not about growth,” David Bloom, the global head of currencystrategy at London-based HSBC Holdings Plc, which does business in 74 countries and territories, said in an Oct. 17 interview.“This is about deflation, exporting your deflationary problems to someone else.”

"At 0.3 percent in September, annual inflation in the 18-nation bloc remains a fraction of the ECB’s target of just under 2 percent. Gross-domestic-product growth flat-lined in the second quarter, while Germany, Europe’s biggest economy, reduced its 2014 expansion forecast this month to 1.2 percent from 1.8 percent."

"Disinflationary pressures in the euro area are starting to spread to its neighbors and biggest trading partners. The currencies of Switzerland, Hungary, Denmark, the Czech Republic and Sweden are forecast to fall from 4 percent to more than 6 percent by the end of next year, estimates compiled by Bloomberg show, partly due to policy makers’ actions to stoke prices."

“Deflation is spilling over to central and eastern Europe,” Simon Quijano-Evans, the London-based head of emerging-markets research at Commerzbank AG, said yesterday by phone. “Weaker exchange rates will help” them tackle the issue, he said."

"Hungary and Switzerland entered deflation in the past two months, while Swedish central-bank Deputy Governor Per Jansson last week blamed his country’s falling prices partly on rate cuts the ECB used to boost its own inflation. A policy response may be necessary, he warned."

“Deflation is such a major part of the story that dealing with that, by whatever means necessary, is key,” Simor Derrick, the London-based chief currency strategist at Bank of New York Mellon Corp., said Oct. 17 by phone. “If that involves getting the currency lower, then so be it. You have to deal with it.”

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My added comments: By now it should be pretty clear that deflation is the worry of the day. And yet we are also getting warnings from the IMF and BIS that some financial assets are over valued and over inflated. All this tells us that officials are very concerned that a deflationary spiral could happen that could move faster than they can react.

So we watch and wait to see if that does happen or if the financial authorities do react by ramping back up more stimulus and QE. Right now the US Fed is sending mixed signals and US financial media is still pushing the view that the US is OK and does not need to worry about the deflation spreading around the globe.

But we know this is the most connected global financial system ever. Does it really make sense that the world could go into a deflation event while the US remains above it all?

We will continue to follow it all here to see how it unfolds.

Jim Rickards: A Dystopian View of the Year 2024

Jim Rickards has written an article titled "In the Year 2024". Jim introduces the article by calling it a "fictional dysptopia in the spirit of Brave New World or 1984". I suspect some readers will react quite strongly to this article since it describes a somewhat bleak future where government has trampled on individual freedom. 

However, readers should keep in mind that Mr. Rickards states this article is not a forecast or prediction of the future. Rather, it is more an attempt to alert people to the trends that are taking hold in society and challenge us to think about how we can avoid a future like this as I read the article. 

Below are some quotes. Readers should read the entire article for full context. Then a few comments.

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"As I awoke this morning, Sunday, Oct. 13, 2024, from restless dreams, I found the insect-sized sensor implanted in my arm was already awake. We call it a “bug.” U.S. citizens have been required to have them since 2022 to access government health care."

"Images of world leaders were on the screen. They were issuing proclamations about the fine health of their economies and the advent of world peace. Citizens, they explained, needed to work in accordance with the New World Order Growth Plan to maximize wealth for all. I knew this was propaganda, but I couldn’t ignore it."

"Today, trust in markets is completely gone. All investors want is their money back. Authorities started printing money after the Panic of 2008, but that solution stopped working by 2018. Probably because so much had been printed in 2017 under QE7. When the panic hit, money was viewed as worthless. So markets were simply closed."

"Between 2018–20, the Group of 20 major powers, the G-20, abolished all currencies except for the dollar, the euro and the ruasia."

"There is also new world money called special drawing rights, or SDRs for short. They’re used only for settlements between countries, however. Everyday citizens use the dollar, euro or ruasia for daily transactions. The SDR is also used to set energy prices and as a benchmark for the value of the three local currencies. The World Central Bank, formerly the IMF, administers the SDR system under the direction of the G-20. As a result of the fixed exchange rates, there’s no currency trading."

"All of the gold in the world was confiscated in 2020 and placed in a nuclear bomb-proof vault dug into the Swiss Alps."

"The purpose of the Swiss vault was not to have gold backing for currencies, but rather to remove gold from the financial system entirely so it could never be used as money again. Thus, gold trading ceased because its production, use and possession were banned."

"Some lucky ones had purchased gold in 2014 and sold it when it reached $40,000 per ounce in 2019. By then, inflation was out of control and the power elites knew that all confidence in paper currencies had been lost."

"The only way to preserve wealth through the Panic of 2018 was to have gold, land and fine art. But investors not only needed to have the foresight to buy it… they also had to be nimble enough to sell the gold before the confiscation in 2020, and then buy more land and art and hang onto it. For that reason, many lost everything."

"Land and personal property were not confiscated, because much of it was needed for living arrangements and agriculture."

"Stock and bond trading were halted when the markets closed. During the panic selling after the crash of 2018, stocks were wiped out. Too, the value of all bonds were wiped out in the hyperinflation of 2019."

"Wiped-out savers broke out in money riots soon after but were quickly suppressed by militarized police who used drones, night vision technology, body armor and electronic surveillance."

"To facilitate the gradual freezing of markets, confiscation of wealth and creation of Social Units, world governments coordinated the elimination of cash in 2016. The “cashless society” was sold to citizens as a convenience. No more dirty, grubby coins and bills to carry around!"

"Instead, you could pay with smart cards and mobile phones and could transfer funds online."

"By last year, 2023, free markets, private property and entrepreneurship were things of the past. All that remains of wealth is land, fine art and some (illegal) gold. The only other valuable assets are individual talents, provided you can deploy them outside the system of state-approved jobs."

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My added comments:

The first thing to say is that I don't think that Jim Rickards is trying to say ALL the things in this article will happen by 2024. I think he is just challenging readers to think about the future and realize that current trends are leading towards an end to the monetary system we have known. Also, that major change is likely coming. It just so happens that is the theme of this blog so, naturally we find this article of interest.

While the article talks about an end to free markets and a global centralized power structure, that certainly does not have to be how things change. None of us can know the future with certainty and I feel like Jim Rickards would agree with that. But I think he does want people to understand that in history governments have tended to react to crisis by using power to maintain order. Hopefully that kind of world will be avoided, but more centralized power cannot be ruled out as a response if there is another huge global financial crisis.

However, what I would like to focus on in this article are the parts I underlined  in bold above. In the world of 2024, Jim describes a global central bank (he says the former IMF) as using the SDR currency for transactions between countries. He notes that everday citizens are still using the three system approved currencies (the dollar, the Euro, and an Asian currency he calls the RuAsia). Later he says citizens can make payments with smart cards and mobile phones and make fund transfers online. 

This interests me because I have covered on this very blog the GSD currency being developed by Klickex. We have noted here that the GSD technology could someday potentially become a currency that could allow the "inside the system SDR" to link to an "outside the system" currency for use by everyday citizens. Klickex has already developed the technology that allows for real time foreign currency transactions in the South Pacific. They have stated that the purpose of the GSD is to stabilize foreign currency transactions to reduce or eliminate risk in those transactions. They have stated they are working with the global banking system on this.

Currently, Klickex technology makes it possible to transfer funds online in real time across national boundaries using only a mobile phone (and do foreign currency exchange in real time as well). So that  part of Jim's 2024 world is already here in the South Pacific with plans to grow globally. We should make it clear that Klickex in no way envisions its technology to be used as a control mechanism like Jim Rickards talks about in his fictional article. But what he talks about in regards to money transfer technology already exists today. This part of his article caught our attention since we have covered it here extensively.

Lastly, note that Jim describes a future world where gold has been confiscated. This is a topic of much debate these days. Again, none of us know what will really happen in the future. I did think it would be interesting to ask Jim if he had any thoughts about how silver would be viewed in his fictional 2024 world so I asked him about that by email.

Readers may find it interesting that Jim replied and said that this article was not really a forecast (more of a thought piece) and he had not really given silver much consideraton. But he added that because silver is more plentiful than gold and has many industrial uses, he did not think any future governments would be interested in trying to confiscate silver. Many readers will find that comment interesting.

While I don't take this Jim Rickards article for more than it was intended (just an article to challenge people to think), I do think it should cause people to do what we propose here. Stay informed, take the idea of potential monetary system change seriously, watch for signs of change, and make some reasonable preparations for potential change. The more people that do that, the better off we will all be in 2024.

Added Update: Jim Rickards notes on his twitter page this article that says Denmark is already ending its own printing of new currency (they will farm it out) because of the expanding use of  credit cards and smart phones. Also Klickex advised us today that its technology proceeds on steady path forward.

IMF Direct Article asks: What Could Make $3.8 Trillion in global bonds go up in smoke?

In what now seems like an almost daily event, the IMF posts this article warning that $3.8 Trillion in global bonds could "go up in smoke" when the Fed starts raising interest rates. The solution? Make it harder for investors to get at their money invested in the bonds. Below is pasted the Twitter page from IMF Direct asking the question. Below that are some quotes from the article. Readers should read the entire article linked above for full context.

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From IMF Direct Twitter page:

IMF@IMFNews · Oct 15

What could make $3.8 trillion in global bonds go up in smoke? http://ow.ly/COyWa pic.twitter.com/tkdbFLMKgT

Some quotes from the article:

"Low interest rates and other central bank policies in the United States have sent investors looking for higher returns on their investments. Money is pouring into mutual funds and exchange-traded funds, which is fueling a mispricing of credit and a build-up of risks to liquidity in the markets—the ability to trade in assets of any size, at any time, and to find a ready buyer."

"In our latest Global Financial Stability Report, we analyze this trend, which can create an illusion of liquidity. It turns out what we face is really a liquidity mismatch because investors can sell their mutual funds or exchange-traded fund investments almost anytime, but these funds have in turn invested their money in instruments that don’t trade quite as often, such as high-yield bonds."

"While this is not a problem in good times, markets can turn volatile when the U.S. Fed starts to raise interest rates, particularly if this happens in an unexpected way. If that were the case, there is a risk that many investors would want to start selling all their holdings at once, causing asset prices to drop, which would then lead to further selling by investors, which may in turn create a vicious circle of further losses and more selling."

. . . . . . .  .


$3.8 trillion up in smoke

"The result of a rapid switch to highly volatile markets would drive a faster rise in term premiums, and widening credit spreads would spill over to global markets. For example, we estimate that an unexpected market adjustment (in interest rates) that causes term premia in bond markets to revert to historic norms (a 100 basis points increase) and credit risk premia to normalize (a repricing of 100 basis points) could rapidly push up bond yields (Chart 3), reducing the market value of global bond portfolios by over 8 percent—that’s $3.8 trillion."

"These risks to exit mean officials need to address the existing liquidity mismatches. They can do this through prudential policy measures such as removing incentives of asset owners to run—by aligning redemption terms of funds with the underlying liquidity in the assets invested."

Update 10-22-14: Bloomberg runs an article on this problem and cites IMF study.

Added note 8-6-15: A full list of systemic risk warnings can be found on this blog page 

Inflation vs. Deflation

Lately we have been watching to see if signs of deflation were taking hold despite efforts by the Fed and other Central Banks to ward it off. In the interest of being fair and balanced we will present two views of inflation and deflation in this post.

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Peter Schiff of EuroPacific Capital - Governments Need Inflation, Economies Don't

"In an article in the UK's Telegraph on October 10, veteran economic correspondent Ambrose Evans-Pritchard laid bare the essential truth of the nearly universal current embrace of inflation as an economic panacea. While politicians, CEOs and economists talk about demand stimulus and the avoidance of a deflationary trap, Evans-Pritchard reminds us that inflation is all, and always, about debt management.

Every year the levels of government debt as a percentage of GDP, for both emerging market and developed economies, continue to go higher and higher. As the ratios push out into uncharted territories, particularly in Europe's southern tier, the ability to "inflate away" debt through monetization remains the only means available to postpone default. Evans-Pritchard quotes a Bank of America analyst as saying that even "low inflation" (not to mention actual deflation) is the "biggest threat to the dynamics of public debt." IMF Managing Director Christine Lagarde ramped up the rhetoric further when she recently told the Washington Press Club that "deflation is the ogre that must be fought decisively." In other words, governments need inflation to remain viable. It's the drug they just can't do without.

But as this simple truth is just too embarrassing to admit, politicians and central bankers (and their academic, journalistic, and financial apologists) have concocted a variety of tortured theories as to why inflation is not just good for overly indebted governments, but an essential economic good for all. In a propaganda victory that even Goebbels would envy, it is now widely accepted that purchasing power must decrease for an economy to grow."

Click link above to read the full article.

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Rick Newman - Yahoo Finance - Why Deflation is so scary

"If the price of a car or an iPhone drops, that’s usually good news for consumers. So it might be puzzling that investors and economists suddenly seem freaked out about the possibility of deflation, or a sustained drop in the level of all prices, on average.

Deflation was a concern back in 2010 and it’s a fresh worry now as oil prices plunge, the stock market wavers and consumers put spending plans on hold.

The paradox of deflation is that falling prices on a few items can generally be good for consumers, leaving more money in their pockets for other things. But falling prices on too many things can have ruinous effects on the economy that are hard to reverse. Japan suffered nearly two decades of deflation starting in the early 1990s, and deflation helped prolong the Great Depression in the 1930s.

When all prices fall, consumers have a strong incentive to put off purchases -- after all, everything will probably be cheaper tomorrow. Some purchases are hard to delay—food, medical care, gasoline to get to work. But a lot of the things we buy can wait, which is why sales of cars, clothing, and appliances drop sharply when times get tough."

Click link above to read the full article.
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My added comment:

Both articles cover many of the same points, but the authors obviously draw different conclusions. One thing they both agree on is that governments and Central Banks will fight deflation to the death because only inflation allows them to continue to run an ever increasing debt based monetary system. This is why most everyone thinks that the final end game to the current monetary system will involve a major inflation event. It's because if deflation does take hold (as it may be now) it is assumed the Central Banks will react with even more massive stimulus.

Of course the Central Banks assume they will not lose control of the situation (either in a depression style deflationary implosion or in runaway inflation at some point). Their crticis assume they will lose control at some point which will end the present monetary system. The critics argue over whether this will be a planned or unplanned event. Time will tell us who gets it right.