The Difficult Balancing Act this Blog is Trying to Do

This blog post will be a little different. I mostly try to find relevant worthwhile articles for readers to consider and then add a comment or two to try and add some clarity to the issue discussed. In this blog post I will try to explain what I find to be most difficult chore in doing this blog. 

We are living in unprecedented financial system conditions that has an uncertain outcome. The difficult chore is to try and alert readers to the very real risks that exist to financial system stability without going overboard or projecting fear. The truth is that no one (least of all myself) can possibly be sure how all this is going to turn out over time. This post attempts to explain the balancing act I try to do on this blog in covering this topic.

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If you are a new reader here, thank you for taking time to read the blog. The issues covered here can be somewhat complex at times. If you are a regular reader, you probably already understand what I mean. Let's try to look at the background to where we are today first.

In 2007-2008 the world was rocked by a massive financial crisis that shook both the US and (by extension) the global financial system to the core. It seems like a long time ago now and things seem fairly stable today in comparison. But we now know that the entire global financial system was on the verge of a severe crisis. It may have started with sub prime mortgages, but it was much more than that. Because of the massive leveraged derivative products that now exist around the world and because the global financial system is so interconnected, it was very possible the whole crisis could have spun out of control. Those who were in the middle of it at the time admitted this after the fact.

This crisis started up a whole series of "unconventional" monetary policies by central banks and the US Fed was the global leader. We have now had near zero interest rates for years and also several "loose money" programs (QE1,QE2,QE3, etc) in what has clearly been a nearly desperate effort to stave off a severe deflation or depression event. These policies have managed to put off a total collapse of the system and to project at least an air of stability, even though it is obvious they have not restored the system to the norms that existed before the crisis. 

All these unconventional policies have created their own set of problems that are still unresolved even now. Many feel the US Fed is trapped into a corner and cannot really raise interest rates without sending the stock market and perhaps the bond markets sharply lower. The Fed wants very badly to try and raise rates at least a little to try and convince the markets that things are starting to get back to normal. However, so far they are afraid to really do much except talk about it. Meanwhile deflation is rearing its ugly head all around the world (even as massive inflation hits some countries like Russia and Brazil). Japan, the EU, and China are all trying to duplicate the US Fed easy money policies even as the Fed says it wants to try and reverse course. This has sent the US dollar shooting higher causing more problems for the US Fed and the rest of the world that has large debt denominated in US dollars. A stronger dollar makes that debt much harder to pay.

The evidence that all these problems exist and are real risks to the stability of the present financial system comes directly from both the IMF and the BIS (Bank for International Settlements). Both have issued warning after warning about these risks. We have documented these warnings here on the blog over the past year. In addition, the problems that helped create the 2007-2008 crisis still exist today (highly leveraged derivatives and a highly interconnected system). If anything, all the numbers are just bigger now, even though attempts have been made to try and force banks to increase reserve capital to deal with systemic stress if it happens. So, the risks are very real and not to report them to readers would be irresponsible if we are interested in the truth.

On the other hand, so far all these risks have been managed well enough to avoid a systemic crisis. Many felt we would have another one a long time ago, but we haven't. Even worse, some predict a crisis by a certain date only to see that date pass with no crisis. This has the effect of causing people to lower their guard and stop paying attention.

Those who run the present system have managed to stave off another systemic crisis. The question that has an unknown answer is: How much longer can they continue to stave it off?

This is where the balancing act gets very tricky. No one on earth that I know of can answer this question. If things go well and the risks are all identified and managed, perhaps another crisis can be avoided. Or, perhaps it can be put off for several more years if it cannot be avoided. The problem is that if something unexpected happens that cannot be managed, the system is so highly leveraged and interconnected that it can spiral into a crisis very rapidly. Everyone involved pretty much knows and admits this is true. Then there are some who think that a crisis is actually planned in order to force major changes to the global monetary system. To say all this is complex is probably an understatement.

So, how do we report this kind of world responsibly here on the blog? What we try to do is to cover the important news events that illustrate what the risks are to readers. We encourage readers to have some kind of backup plan in mind in case we do get another crisis. The idea is that the more people who make some kind of plan, the better the whole society can deal with a crisis if we get one. The flip side of this is that it is not healthy to live every day in fear that the world is coming to an end. If nothing much changes for years, it makes for a lot of wasted fear and anxiety about something we cannot even control if it does happen.

Our view here is that the right balance is to be willing to stay informed as much as possible and learn what the real risks are. After assessing those risks, make some kind of plan to deal with a crisis if we do get one that fits your situation (some savings, some emergency supplies, etc). Having done those things, do not spend time worrying or living in fear. There are those in the world who "sell fear." That will not happen on this blog. Once a person has done what they can to prepare for a worst case scenario, they should just move on with life and not worry constantly. In the case of our family, we have a strong faith and caring church to rely on if times are hard. Our goal is to try and help out if possible if times get hard.

It's possible another systemic crisis won't happen in our lifetime. If one does happen, it's possible it can be managed so that the world can move forward with a new start (debt defaults, restructuring, etc). Whatever happens, all anyone can do is to prepare the best they can in their situation. The balance to seek is to be informed enough to understand the situation, make a reasonable plan, and then move forward with the hope you won't have to use that plan. It's a difficult balance to achieve for sure, but it is possible to do. We will do our best here to try to help readers stay informed and understand what the risks are they need to consider.

The US Fed: Divided, Confused, or Just Crafty?

The workings of the US Federal Reserve have reached a point of drama that is somewhat over the top. The supposedly largest free market capitalist nation in the world has been reduced to waiting to see what wording will appear in the latest Fed pronouncement to decide how its capital will be deployed. Meanwhile, the Fed itself presents a picture to the public that makes it appear to be divided or confused. Is this really the case? Let's take a look at.

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First let's look at just a couple of recent news articles quoting Fed officials that illustrate what we mean by appearing to be divided or confused.


St. Louis Fed President (Jim Bullard) Calls for Rate Hikes Soon

"Jim Bullard, president of the FederalReserve Bank of St. Louis, continued his push for the Fed to raise short-term interest rates in a speech Thursday in Germany.

The Fed rate has been near zero for six years, and Bullard said, “A risk of remaining at the zero lower bound too long is that a significant asset market bubble will develop.”

Fed's Evans Says Delaying Rate Hikes is Optimal

"The Federal Reserve expects both labor markets and inflation to improve, but those projections are so uncertain that the U.S. central bank should err on the side of looser, not tighter, policy, a top Fed official said on Thursday.

"In this paper, we demonstrate that the zero lower bound on nominal interest rates implies that the central bank should adopt a looser policy when there is uncertainty," Chicago Fed President Charles Evans said in a draft of a paper for a Brookings Institution conference on Thursday and Friday. "In the current context this result implies that a delayed liftoff is optimal." Evans is one of just two Fed officials who believe the bank should delay any increase in rates until 2016."

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My added comments:

We could easily find many more such conflicting quotes that make it appear that the Fed is deeply divided or even confused. For example, we have Chairwoman Yellen constantly saying the Fed is likely to raise rates sometime this year unless they don't. Since this basically says nothing, why say it at all? But let's ask ourselves a question. Do we really think that Fed officials are unaware that these conflicting statements impact the public and leave the impression the Fed is divided or confused? Of course not. No Fed official gives a public quote unless it has a purpose. In reality, when the Fed actually votes they are quite united for the most part with only one dissenting vote now and then. The current Fed Board is very dovish regardless of what quotes come out from time to time. One thing we can be sure of is that they are going to stay accomodative for a long time. They have said so.

A more plausible explanation is that the Fed wants to keep the markets from "front running" them. When the Fed adopted its new policy of being more transparent and providing "guidance" to try and help keep markets more stable, they knew that market participants would start to make capital investment decisions based on knowing for sure what the Fed was going to do. So, I suspect that all these conflicting statements are just an effort to roll back on the "guidance" and keep markets guessing. It's a way to say you are being transparent and providing guidance without really doing that. Of course, as we have seen, the markets are also a lot more volatile now with Fed officials constantly issuing conflicting public statements. So it may be that the FED is getting what it really wants (market uncertainty so long as it stays in a reasonable range). Perhaps they are more crafty than it appears on the surface.

Added note: Meanwhile, in a new article, Jim Rickards lists what he says are six flaws in the Fed's economic model.

Christine Lagarde: Monetary Policy in the New Normal

On her recent visit to China IMF Chief Christine Lagarde gave some remarks to the China Development Forum Panel Discussion. In these remarks she makes a few comments worth mentioning below. After that, my added comments.

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"The world has yet to achieve full economic recovery. Global growth continues to be weighed down by high debt, high unemployment, and lackluster investment. The IMF recently cut its global growth forecasts for both 2015 and 2016 (to 3.5% and 3.7%) – despite the boost from cheaper oil and stronger U.S. growth.

The recovery remains fragile because of significant risks. One such risk emanates from the expected tightening, or normalization, of U.S. monetary policy at a time when many other countries are easing monetary conditions. This “asynchronous” monetary policy may trigger excessive volatility in global financial markets.

The divergence of monetary policy paths has already led to a significant strengthening of the U.S. dollar. Emerging markets could be vulnerable, because many of their banks and companies have sharply increased their borrowing in dollars over the past five years."

. . . . 

"Unconventional monetary policies have also led to negative spillover effects on emerging markets through a build-up of financial stability risk. These policies triggered huge capital inflows into emerging financial markets. Between 2009 and the end of 2012, emerging markets received US$ 4½ trillion of gross capital inflows, representing about half of global capital flows during that period.

This led to a significant increase in bond and equity prices and to a strengthening of emerging market currencies. IMF studies suggest that these effects were larger than the ones that had been caused by conventional policies in the past.

These spillovers pose a risk to financial stability in emerging markets, because policy changes could easily lead to a sudden reversal of capital flows.

We already saw a preview of this scenario during the so-called “taper tantrum” in the summer of 2013. Merely the first hint of a change in U.S. monetary policy was enough to trigger a surge in financial market and capital flow volatility.

Could this happen again? Despite the efforts of the U.S. Federal Reserve to clearly communicate its policy intentions, financial markets may still be surprised by the timing of the U.S. interest rate lift-off and by the pace of subsequent rate increases."   . . . . 

.  .  .  " if market volatility materializes, central banks need to be ready to act. Temporary –but aggressive – domestic liquidity support to some sectors or markets may be necessary. In certain conditions, foreign exchange interventions could also be used to dampen exchange rate volatility. These interventions should not be used as a substitute for needed macroeconomic adjustment. Moreover, foreign currency swap lines across countries have proven helpful in providing access to foreign exchange liquidity in times of market stress.

International coordination and safety nets can also play a crucial role. For example, central banks and financial supervisors may want to share their policy thinking and contingency plans. Closer cooperation between the IMF and Regional Financing Agreements – such as the BRICS Contingency Reserve Arrangement – would also be helpful.

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My added comments: Just a couple of points to note here. One is that we can consider this yet another IMF warning that the financial system is still weak and unstable. Ms. Lagarde says that spillover effects from unconventional monetary policy (i.e. the US Fed QE program) "pose a risk to financial stability in emerging markets, because policy changes could easily lead to a sudden reversal of capital flows." As we know, we live in a highly interconnected financial world now so financial instability anywhere can quickly lead to instability everywhere. 

The other point is to note how Ms. Lagarde used this speech to promote the idea of the new BRICS reserve fund and the IMF working together (not fighting with each other). The IMF itself and most member nations do not view the new BRICS Bank and Reserve Fund as rivals. Instead, they view these as stepping stones to a multi-polar world where the US dollar is no longer the sole global reserve currency. Some factions in the US don't like the idea of this happening, but some factions are on board with it. We'll see how it turns out.

Nomi Prins: Presidents, Bankers, the Neo Cold War and the World Bank

Nomi Prins has a new blog article out that digs back into history to trace the connection between the influence of the big international banks and US foreign policy. Nomi does a great job of providing some historical background to show why things are happening the way they are today. Below are the introductory paragraphs of the article. Just click here to read the full article.

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"At first glance, the neo-Cold War between the US and its post WWII European Allies vs. Russia over the Ukraine, and the stonewalling of Greece by the Troika might appear to have little in common. Yet both are manifestations of a political-military-financial power play that began during the first Cold War. Behind the bravado of today’s sanctions and austerity measures lies the decision-making alliance that private bankers enjoy in conjunction with government and multinational entries like NATO and the World Bank.

It is President Obama’s foreign policy to back the Ukraine against Russia; in 1958, it was the Eisenhower Doctrine that protected Lebanon from a Soviet threat. For President Truman, the Marshall Plan arose partly to guard Greece (and other US allies) from Communism, but it also had lasting economic implications. The alignment of political leaders and key bankers was more personal back then, but the implications were similar to the present day. US military might protected its major trading partners, which in turn, did business with US banks. One power reinforced the other. Today, the ECB’s QE program funds swanky Frankfurt headquarters and prioritizes Germany's super-bank, Deutschebank and its bond investors above Greece’s future.

These actions, then and now, have roots in the American ideology of melding military, political and financial power that flourished in the haze of World War II."  . . . . .   click here to read the rest 

Added note: Nomi also has a new interview out with Max Keiser which you can view here. The interview starts at the 12:50 minute mark and they discuss the information in this new blog article.

BRICSPOST: China Vows Reforms to Help Yuan be Worlds 5th Reserve Currency

Just in case you missed yesterday's blog article, here is a followup from the BRICSPOST. As the year unfolds, this issues is starting to get more media attention. Below some quotes from this article and then a comment.
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"Chinese Premier Li Keqiang on Monday asked the International Monetary Fund (IMF) to include the Chinese currency in the special drawing rights (SDR) basket, endorse the yuan as a global reserve currency alongside the dollar and euro.

Li met IMF Managing Director Christine Lagarde in Beijing on Monday.

State news agency Xinhua quoted Li as saying “China will speed up the basic convertibility of yuan on the capital account and provide more facility for domestic individual cross-border investment and foreign institutional investment in China’s capital market”.

Including the yuan in the SDR system would allow the IMF to recognize the ascent of the world’s second-biggest economy while aiding China’s attempts to diminish the dollar’s dominance in global trade and finance."

. . . . .

"China would need to satisfy the Washington-based lender’s economic benchmarks and get the support of most of the other 187 member countries."

. . . . .

"Li told Lagarde, “China will push forward financial reform for the real economy and prevention of risk. China will develop private, small and medium banks to provide better support for small businesses”.

“China hoped to, through the SDR, play an active role in the international cooperation to maintain financial stability and promote the further opening of China’s capital market and financial area,” he added."

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My added comments:

By now it should be obvious that China's goal is to get its currency recognized "through the SDR". People need to understand that the SDR used at the IMF is the vehicle intended for implementing major monetary system change. There are many possible variations on how that might happen (including the possibility adding some gold component to the SDR basket sometime in the future). But there is no solid evidence that points to China planning a future of going it alone to back the Yuan with gold outside the IMF to replace the US dollar as the global reserve currency. If that changes, we will cover it here.

Added note from Jim Rickards Twitter:  China's application to join SDR club

China Daily: China Working Hard to Meet IMF Requirements for the Renminbi

We continue to follow this story about China working hard to get the IMF to accept the Yuan/Renminbi into the SDR currency basket later this year. There is popular view that China is planning to usurp the IMF and that the recent news that the UK and other US allies are joining the Chinese led development bank means they intend to abandon the IMF and the World Bank.


However, this is a misreading of the situation in our view here. China continues to make it clear that they badly want IMF approval to add the Yuan/Renminbi into the SDR basket as this China Daily article explains. In addition, the IMF has repeatedly said they endorse the new Chinese bank and don't view it as a threat to the IMF in the future. So what is going on? Let's look at.

I think the key to understanding what is really going on between China and the IMF is to realize that there is no agreed upon "US" position regarding the IMF reforms. While the US Administration made some mild protests about its allies joining the new Chinese bank, the real battle is between the US Congress (under GOP control) and just about everybody else involved with the IMF.

The Obama Administration, the IMF, and the BRICS nations all agree that they want to see the US influence reduced and the BRICS influence increased at the IMF. For that matter, most of the other nations at the IMF have approved the IMF reforms granting more influence to the BRICS nations and especially China.

It's really only the US Congress who refuses to go along with the idea. The recent visit by Christine Lagarde to China illustrates that they are getting along just fine and mostly want the same things. In the China Daily article you notice that China views itself as having to get the approval of the IMF for its currency to be included into the SDR basket. As they have said for years, they are working hard to meet the requirements to do that. There is certainly no suggestion at all they plan on leaving the IMF to go it alone as some seem to believe.

With the other US allies joining the new Chinese led bank, it sends a message to the US Congress. Several media articles on this news have repeated that message. The message is that the rest of the world is moving forward with or without approval of the US Congress. So they suggestion is that they might as well give up their resistance and approve the IMF reforms so that the US will retain its status and veto power at the IMF.

How all this plays out will surely be interesting to follow. I don't know if the US Congress will back down, but I do think the Yuan/Renminbi will get added to the SDR basket regardless. We'll follow it and see what actually happens. 

Is Greece Bluffing? Ready to Play the Russian Card?

This Marketwatch article says that Greek Prime Minister Alexis Tsipras has moved up his visit to Russia by one month. The article goes on to suggest that this could mean Greece is ready to "play the Russian Card." Would Greece really abandon the EU and look to Russia for financial support? Below a few quotes from the article.
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"Greece is ready to play the Russian card, bringing a new geostrategic dimension to the euro crisis.

Greek Prime Minister Alexis Tsipras moved up his planned visit to talk to Russian President Vladimir Putin in Moscow to early next month instead of in May.

Faced with intransigence by the European Union and its other creditors in rolling back austerity and alleviating its debt burden, the Greek government is quietly dangling the prospect of turning to Russia for aid."

. . . . 

"Syriza leaders are not shy about reminding people that Tsipras and other members of his Coalition of the Radical Left have their political roots in Marxism and the Greek Communist Party. Moreover, there are strong ties and sympathy between Russia and Greece because of their bond through the Orthodox Church.

Those who like to think that Putin is on the ropes and that Russia has enough problems of its own to spare any thought for poor little Greece are underestimating the un-blinkered strategic vision of the Russian leader."

. . . . 

"Berlin has tried to cow the Greeks by playing as if it holds all the aces. It turns out, however, that Tsipras has an ace in the hole and may be ready to use it."
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My added comment:

This Marketwatch article clearly promotes the idea that Greece might seriously turn to Russia for help. But most observers assume this is a bluff. We'll see how it turns out.

Added note: Not surprisingly, the Russian based Sputnik News thinks Greece leaving the EU would probably be a better plan for Greece. They note that most of the money Greece owes is due to the IMF, the ECB, and individual EU governments so they see no big deal if Greece defaults to them. I'm pretty sure the IMF and ECB disagree.

Also, Soros gives a Grexit a 50-50 chance.

Vanuatu Hit by Cyclone Pam - People There Need Some Help

A blog reader who lives in New Zealand made me aware of a huge disaster that has befallen the island of Vanuatu in the South Pacific. A massive cyclone with winds at 270 kilometers per hour hit the island leaving 65,000 people homeless and in need of basics like food and fresh water. This article in Stuff.co from New Zealand gives you an idea of the devastation.

I know we have many readers here from the South Pacific area and there might be other readers here who would be interested in helping these folks out. If so, here is a link to the web page setup by the Red Cross for disaster relief for Vanuatu. Any donation will surely be appreciated I am sure.

Click here to visit Red Cross relief site

We never know when we might find ourselves hit by something like this. Here in Texas, we live in "Tornado Alley" so we realize how these things can come out of nowhere and disrupt people's lives. If you have a heart for helping out, I know the Red Cross is a solid place you can donate to that will do their part to lend a hand.

UK Telegraph: Putin Calls for Eurasia Currency Union

One topic we have covered here some that gets little media attention is the ongoing movement around the world to form "regional monetary unions." These regional unions are long term ventures expected to unfold over many years. In many cases, a stated goal for these unions is to have a regional currency at some point. Mr. Putin has been pushing for a regional Eurasian monetary union and currency which is covered in this UK Telegraph article. Below some quotes from this Telegraph article and then a comment.

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"Vladimir Putin proposed on Friday creating a regional currency union with Belarusand Kazakhstan, Russia's partners in a political and economic union made up of former Soviet republics.

Mr Putin made his proposal at a meeting with the Belarussian and Kazakh presidents which highlighted the challenges facing the Russian-led Eurasian Economic Union following the fall in global oil prices and the decline of the Russian rouble.

"The time has come to start thinking about forming a currency union," Mr Putin said after the talks in the Kazakh capital Astana with Belarussian President Alexander Lukashenko and Kazakh President Nursultan Nazarbayev."

. . . . .

"Kazakhstan, the second-largest post-Soviet oil producer and economy after Russia, has traditionally been lukewarm to the idea of introducing a common currency, saying that first the three nations should synchronise their monetary policies.

Grigory Marchenko, a key Kazakh reformer and former central bank head, has estimated that it would take 10 to 12 years before such a currency is launched."

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My added comment: 

When you find articles about these regional monetary unions, they usually mention a fairly long term time frame before implementing an actual regional currency. What this shows us is that these monetary changes do not happen quickly. This is why we think that only a major global financial crisis would provide an impetus to move towards a new global currency very quickly. Absent a crisis, things like this tend to move slowly and steadily over longer time frames. We always have to allow for the risk of another major crisis, because the risk is real. However, if another major crisis is avoided, it is more likely that the major monetary system changes we think are coming will unfold more gradually in a controlled manner. We need to be prepared to deal with either scenario as best we can. That's harder to do, but it's the world we live in.

A reasonable plan is flexible enough to have some emergency fund reserves (in case of a crisis) while not going overboard. It's a balancing act. The only realistic way most people can prepare is to have an emergency fund and then just monitor events and stay informed over time. This is really just common sense. If you monitor events, it will likely be clear if we are heading into another financial crisis situation or not. We try to help here in monitoring events and pointing readers to sources that are more likely to help identify signs of a crisis ahead of time if possible. It is important not to assume either outcome (crisis or non crisis) is a certainty because no one can really know for sure.

New Warning from BIS: Low Rates May Trigger Public Backlash

One of the interesting things you see when doing research for the topics that we cover here on the blog is that some of the strongest warnings about problems in the present monetary system come from within they system. In this case, we have yet another warning from the Bank for International Settlements (BIS). This time its about interest rates staying too low for too long. They warn this could lead to a "backlash from ordinary people". Of course, that would be us. The UK Telegraph even talks about "civil unrest" in its headline for this story and includes a map titled "How central banks lost control of the world."

It's funny because people expect things like this to come from "doom and gloom" preppers waiting for the world to collapse and civil unrest to explode. But this warning is coming from the BIS and covered by the mainstream UK Telegraph. Below are some quotes from this UK Telegraph article covering the new BIS warning.

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"Low inflation, bond yields and interest rates around the world will push the boundaries of economic and political stability to breaking point if they continue on their downward trajectory, the Bank for International Settlements has warned.

The Swiss-based "bank of central banks" said the "sinking trend" of global rates would push countries further into uncharted territory.

It highlighted that $2.4 trillion (£1.6 trillion) of long-term global sovereign debt was now trading at negative yields, with an increasing number of investors willing to pay governments for the privilege of lending to them.

"As bond markets show us day after day, the boundaries of the unthinkable are exceptionally elastic," said Claudio Borio, head of the Monetary and Economic department at the BIS.

"The consequences should be watched closely, as the repercussions are bound to be significant.

The BIS warned that the low rate environment, which has already led to gaping pension deficits and lower bank profits, could risk a backlash from ordinary people whose savings were being eroded away."

. . . . . 

"In such a world, easing begets easing," he said. "If this unprecedented journey continues, technical, economic, legal and even political boundaries may well be tested."

. . . .

"Minouche Shafik, the Bank's (Bank of England) deputy governor for banking and markets, outlined the risks of moving rates into negative territory in its most recent Inflation Report, and said that policymakers were watching developments in other countries closely.

She said there was a risk that people and businesses could "revert to cash. [There is] also the worry about what happens to money markets when rates are negative," she said.

Martin Weale, an external member of the Bank's Monetary Policy Committee that sets interest rates, said the bank contemplated using negative rates at the height of the eurozone debt crisis but decided against such a move because it would have signalled "a change in the nature of money as we know it". He said companies may have decided to hold money in secure warehouses instead of at the bank if rates had been cut to below zero."

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My added comments:

We can add this new warning to the long list of IMF and BIS warnings we have documented here on the blog. If you explore the archive links to the right you can find them. I actually try to maintain a balance on this blog. I try not to overdue negative articles and give the benefit of the doubt to the idea that the present system might be in some kind of recovery where possible. But what I consistently find are warnings from the BIS and IMF about all the problems out there. This bullet point list is just some of the things I can recall they have warned about in the past year:

- Central Bank QE policies leading to asset bubbles in stocks and bonds

- "Shadow Banking" where there are unknown derivatives risks (even to the IMF and BIS)

- The US dollar getting too strong 

- Deflation overtaking the system

- lack of policy coordination between central banks (every man for himself mentality)

- credit risk management around the world (and threat of contagion)

- and now this new BIS warning on low interest rates

In the old days you had to scour the internet for fringe alternative media sources to find all these kinds of warnings. The kind of sources the mainstream media rolls their eyes at and talks about being "doom and gloomers". 

These days it's much easier to find these warnings. Now we have the UK Telegraph producing a map explaining "how central banks lost control of the world." Just do a Google search on IMF and BIS warnings and you can find all you want. Despite all that, former IMF Peter Doyle says don't expect the IMF to give us any early warning for a new global financial crisis if we do get one. He says they issue warnings about risks, but never suggest these risks will spiral out of control into a full blown crisis. Hopefully they won't. All we can do here is report what we find, try to recap and analyze it, and let you make up your own mind.

In early April I will try to do an updated listing of all the IMF and BIS warnings we have documented here on the blog in the past year. It's a pretty long list.

Texas Tests New Water Supply Technology

This is a little off topic, but every now and then I like to try and present some positive things going on in the world since we have to cover so many problems. Since I hail from Texas, this story naturally caught me eye. 

This could be some good news not only for us here in Texas where water resources are precious, but perhaps around the world as well. It's great to see this new technology being tested out here. I hope it works as advertised to help meet future water needs around the globe. 

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"Texas is famous the world over for two things on a massive scale: oil and droughts. Now the slick but dry state is becoming famous for water: that precious element that both resolves the drought problem and also makes it possible to pump more oil out of the ground.

Not only does Texas have the Permian Basin and the Eagle Ford shale, but it also has the Gulf of Mexico and its massive oil deposits and endless gallons of seawater that are now economically treatable thanks to next generation water processing technology.

As NASA predicts a decades-long 'mega drought' later this century, next generation water processing technology coming from within the oil industry promises not only to help solve Texas' drought problem by accessing and desalinating brackish and slightly salty water sources deep under the dry Texan surface, but to go one step further by desalinating ocean water and turning dirty water into potable water.

While conventional desalination technologies only recover about 35% of fresh water from a gallon of seawater, new Dutch technology brought to Texas by a local company recovers approximately 97% of the fresh water at an economical cost. At the same time, the new technology uses no chemicals, rendering it quite possibly the 'greenest' water processing technology in operation today.

This ushers in the ability to add new water sources to our current ecological system by desalinating brackish and ocean water that previously was not considered in the amount of fresh water available for human consumption.   . . . . . 

The answer to Texas' drought, concerns about future supplies of potable water, and oil industry fears of fracking drying up, is next generation technology that hits out at the water dilemma on three fronts simultaneously"    . . . . .  Read all about the new technology in the full article here

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Quiet Bail In Takes Place in Austria

This story did not make many headlines, but very quietly it appears that a bail in will be needed in Austria as a big bank there fails. This UK Telegraph article does cover it and calls it a "mini Greece." Below some quotes from the article and then a comment.

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"Ah Austria, land of schnitzel, lederhosen, Mozart, alpine meadows and beer drinking. Less widely appreciated is its special place in the history of catastrophic banking crises.

It was the failure of Creditanstalt, a Viennese bank founded in 1855 byAnselm von Rothschild, that arguably sparked the Great Depression, setting off an unstoppable chain reaction of bankruptcies throughout Europe and America.

No-one would think that what happened last week at Austria’s failed Hypo Alpe-Adria Bank International falls into quite the same category; we are meant to be in the recovery phase of the latest global banking crisis, so this is more about re-setting the system than again bringing it to its knees, right?

Well, make up your own mind. I suspect neither financial markets nor policymakers have yet caught onto the full significance of the latest turn of events.

In a nutshell, the Austrian government has had enough of funding the bank’s losses, and announced plans to “bail-in” external creditors to the tune of €7.6bn instead." . . . .    read full story here

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My added comment:

It looks like this bank failure in Austria may provide a hint of how these failures will be handled going forward. Also, the article mentions there is a risk of contagion further into Europe:

"In Hypo’s case, the bail-in also threatens knock-on consequences for public bodies elsewhere, including Bayern Landesbank, a big holder of Hypo bonds which is owned by the German state of Bavaria, and the Munich based FMSW, which is again publicly underwritten.

All this is just the tip of the iceberg; Europe is awash with interlinked banking and public liabilities, many of which will never be repaid and basically need to be written off.

Massive creditor losses are in prospect. The European authorities had us all half convinced that Europe’s debt crisis was over. In truth, it may have barely begun."

CNBC's Jim Cramer Says What We Have Said Here

For some reason, the subject of owning gold becomes an emotional discussion for many people. Some people buy gold and then wait hoping for something horrible to happen so their gold will go up. Even worse, some people actually hope something horrible will happen so their gold will go up. Other people roll their eyes and act as if only a crazy person would ever buy gold. Our view here is that gold is simply a solid insurance policy to be used in a portfolio as a hedge. Silver can serve the same purpose for those who cannot afford to own any gold. 

There really is no reason for this to become an emotional topic based on extreme views. CNBC's Jim Cramer appears to agree as he recommends gold as part of a portfolio in this article. Below are a few quotes and then a followup comment.

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. . . . .

"Cramer recommends gold because it tends to go up when everything else is going down. It is the investors' insurance against geopolitical events, uncertainty and inflation.

Granted, this may sound like a terrible idea since gold has not done anything spectacular in a few years. However just as you wouldn't own a home or car without insurance, you shouldn't have a portfolio without gold.

Do you get upset when your insurance doesn't go up in value? No. So, don't ridicule gold.

Owning gold is not about upside potential. It is about minimizing risk to the downside."

. . . . . 

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My added comment:

Here Jim Cramer says basically the same thing we have said here on the blog. There is just no reason to turn owning gold into some kind of emotional battle. Gold has served a useful purpose as a reliable store of value for 1000's of years (silver too). Central Banks all over the world hold tons and tons of it in their official reserves as does the IMF. China is buying enormous amounts to increase its share of world gold reserves.

It's kind of silly to to act like people who own some gold or silver are somehow abnormal. This reaction probably stems from the caricature of people who like gold as all being doom and gloom "preppers" waiting for the world as we know it to come to an end. While those people do exist, they are not the majority of people who own gold by any means. As noted above, the leading financial institutions in the world all own lots of gold as do many high net worth investors all around the world. Not that long ago, both gold and silver coins were used as money in the US.

Gold and silver are simply forms of financial insurance just like Jim Cramer talks about above. It's good to have some in case you need it. You hope you never need it, but are glad to have some if you do. No one thinks its crazy to buy car insurance or insurance on their home. In most cases, the money spent on that insurance is never seen again. At least with gold and silver insurance, it always has some future intrinsic value. 

It's past time to stop acting like owning gold or silver is some strange behavior that only crazy people would consider. It's just a hedge or different form of insurance for most people who own it. People like Jim Rickards suggest that having 10% of a portfolio in gold makes sense for most people. Both gold and silver should be viewed as very long term holdings for most people, not short term trades. Much like an emergency cash fund you hold on to as a last resort.

And really, those who don't own any at all should think about buying some insurance themselves. We are living in a very unstable financial system. If you read this blog you know this is an easily verifiable fact that we have documented over and over here. The IMF and BIS have both warned repeatedly of the risks present in the existing financial system. People who ignore that reality are the ones not behaving rationally in our view here. If you never need it, that will be great. But if you do need it, you will wish you had some. 

ps - we feel like silver may work best for the average person as we wrote in this earlier blog article. In addition, silver can hold its value into the future whether there are financial system problems or not. There is no need to buy silver and then hope for something bad to happen.

Plan B to Pressure US Congress on IMF Reforms is Underway

The 2010 IMF reforms that would increase the quota of SDR's and increase influence for China and the BRICS nations remain stalled in the US Congress. The IMF and BRICS nations issued a number of "deadlines" that were basically ignored. Earlier this year the IMF announced that this summer an effort would be made to come up with a Plan B to implement the reforms.

It is becoming clearer that in the leadup to whatever Plan B might be, pressure will be ramped up on the US Congress. It is also becoming clearer that the recent news that the UK and several other EU nations will join a new Chinese led development bank is part of an effort to send a message to the US Congress. We noted that in this earlier blog article. 

More and more articles are appearing in support of the idea that the US needs to approve the IMF reforms because otherwise the US will lose status around the world within the IMF and other global institutions. Here is another article to use as an example. It is authored by former Goldman Sachs Jim O'Neill and titled "Making Space for China."  Below are some quotes and then a comment. Please click the link above to read the full article.

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"When the United Kingdom announced earlier this month that it had agreed to become a founding member of the China-led Asian Infrastructure Investment Bank (AIIB), most of the headlines focused not on the news itself, but on the friction the decision had caused between the UK and the United States."

. . . . .

"The US Congress has yet to ratify a 2010 agreement providing China and other large emerging economies greater voting power in the World Bank and the International Monetary Fund. In the meantime, the agreement has become obsolete; China's economy has nearly doubled in size since the deal was struck.

America's reluctance – and that of France, Germany, and Italy – to give the emerging powers an appropriate voice in the established international financial institutions is counterproductive. It drives the creation of new parallel institutions such as the AIIB and the New Development Bank, founded in 2014 by the BRICS countries (Brazil, Russia, India, China, and South Africa)."

. . . . 

"Later this year, the IMF will recalibrate the weights in its unit of account, the so-called Special Drawing Rights, which comprises a basket of currencies that currently includes the US dollar, the euro, the British pound, and the Japanese yen. According to almost every economic and financial criterion, the SDR basket should now include China's renminbi. The US would be wise to not oppose such a move. Otherwise, it would risk accelerating the decline of the established international financial institutions.

Similarly, the US Congress should ratify the agreed changes to the governance of the IMF and the World Bank. By founding the AIIB and the New Development Bank, China and other emerging powers have signaled that they will not wait for their voices to be better heard. And decisions like that of the UK – and France, Germany, and Italy – show that they are not alone."

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My added comments:

As time goes by things do become clearer. This latest development where we see the UK and other EU nations joining the new Chinese led bank is a clear signal that an attempt will be made to make the US Congress look isolated in its opposition to the IMF reforms. Australia and Japan have also indicated they may join the new bank as well. 

So far, the US Congress is yawning and indicating that it is not interested in changing its position on the IMF reforms any time soon. Here is quote from this Economic Times article that illustrates this:

"Kay Granger, chairwoman of the House State and Foreign Operations Appropriations Subcommittee, where Lew testified, said she did not believe Congress would pass the IMF reforms when the Congressional Budget Office estimated they would cost $3.1 billion. "In the past, there has not been sufficient congressional support for the IMF proposal, and frankly, I do not expect much to change this year," she said. . . . . 

US delays on the reforms have prompted the IMF's board to consider other options, including a proposal under which Washington would lose its veto power at the global lender."

We can expect that efforts to increase pressure on the US Congress will continue as move towards the new summer "deadline" the IMF has set. So far, they don't appear to be having much impact on Congress. We'll continue to follow it here.

So When Do We See Significant Monetary System Change?

This blog was started in January 2014 with the intention of tracking significant changes that we felt were coming to the international monetary system. At that time, there was a lot of speculation that major change was imminent. Respected analysts from both mainstream and alternative media sources were expecting a sharp drop in the US dollar at any time. This dollar crisis was expected to lead to some major changes in the monetary system. Now we are midway through March 2015. There has been no dollar crisis and no real significant changes to the monetary system that the average person would notice. Does this mean major change is not coming? Let's look at it.

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First let's review what has actually happened because as we say here all the time, the only thing that matters is what actually happens. This is what impacts our daily lives, not whatever our favorite guru believes is going to happen. That is an important point we will try to stay true to here. Let's use a Q&A format to look at what actually happened and then see if our main premise for the future (that major monetary system change is coming) has been negated.

Q: Why didn't the enormous QE program carried out by the US Fed crater the US dollar like so many were expecting?

A: The answer is probably fairly simple. Even though the Fed did massively increase its own balance sheet by buying up US bonds using newly created money, the velocity of money never really picked up enough for money to get into the real economy. Money flowed into US stocks and bonds possibly creating new asset bubbles there (still undetermined). The Fed managed to prevent the major banks from going under, but did not achieve its goal of getting 2% inflation into the real economy (lowering the value of the dollar). Meanwhile, a lot of newly created money did find its way overseas as emerging nations took on a lot of debt in US dollar investments. As other parts of the world have struggled with disinflation or deflation, they have implemented easy money policies. This caused the US dollar to look better than everything else for now. Since it was already the world reserve currency, the dollar staged a big rally. For now, the US dollar has moved up sharply instead of cratering. This is what has actually happened.

Q: How long will the US dollar continue to rally?

A: This is much more difficult question to answer. If the US Fed really does start into a prolonged program to raise interest rates, we can expect the dollar to continue to be strong. Money will just keep flowing into US dollar investments as other currencies lose value. On the other hand, the strong US dollar rally is now starting to concern the Fed and other central banks around the world. When you see anything move up in a parabolic manner (just look at a US dollar index chart), you know it is reaching an unsustainable pace. It can continue for longer than people expect, but at some point it will peak out and the correction/pullback off of that will probably be pretty dramatic. A guess might be that if the Fed does not raise interest rates, the dollar could start to fade pretty quickly. If they do raise rates, it might peak out later this year or early next year. No one has a crystal ball to know for sure.

Q: What other factors are there that would cause major monetary system changes?

A: Here we need to continue to watch the IMF. Any major changes to the international monetary system are most likely going to come through the IMF until proven otherwise. It's true that the BRICS nations are increasing their influence on the world stage and that they are starting up financial institutions (BRICS Bank, Reserve fund, etc) that could potentially compete with the IMF in the future. But those institutions are not even going to be operational on a serious basis until next year. The action this year is all at the IMF. Later this year the IMF will do its next review to determine if the basket of currencies for its SDR will be changed to include the Chines Yuan (and perhaps some other currencies as well). If the Yuan comes into the SDR basket, that will qualify as a significant monetary system change even if it may not immediately impact most people in ways they would recognize in their daily lives. We will follow it here to see what actually does happen.

Q: What about IMF reforms? What happened to those?

A: A funny thing happened on the way to the 2010 IMF reform package getting approved. The US Congress refused to go along. Despite a massive campaign to pressure the Congress to accept these reforms (and vastly increase the total quota of SDR's at the IMF), they just said no. Since the US essentially has veto power at the IMF (17% vote where 85% total vote is needed to pass the reforms), the reforms are stalled. This has frustrated the IMF and the BRICS greatly, but they have not given up on getting the reforms implemented one way or another. They will try again later this year to come up with a way that might involve bypassing the US Congress. This situation has mostly certainly delayed the IMF from moving forward towards some of the major monetary system changes we expected to happen. But for now, they are just delayed, not ended. We will continue to cover it here to see what actually happens.

Q: Will there be a sudden crisis event that causes major changes?

A: This possibility is always on the table. No matter how calm things may seem, under the surface in the global financial system there are always risks sitting there that can surface at any time. We live in a globally interconnected world now filled with highly leveraged derivatives investments. All the major banks still have them. There is a "shadow banking system" out there as well where the risks are virtually completely unknown (even to the IMF and the BIS). We have covered all these risks here pretty fully (use the archive links to the right on the blog to research them if you like). No one can possibly know all the risks or when they might explode in a way that is not containable in the present system. It could happen next week or might not happen for years. I don't think there is anyone who can predict the timing of an event like this at all. So, what we have to do is understand it is a real risk we have to account for in our own personal planning, but not be surprised if it does not happen as soon as some might be forecasting. We even need to realize it might not happen at all if the risks are well managed in the system.

Q: How will change happen if there is no sudden major crisis to prompt change?

A: This is actually an easy question to answer. Change will just continue to happen more slowly and surely over time in a more controlled manner. I have no doubt that major monetary system changes are coming. If they don't happen suddenly, they will still happen. I feel very sure that 10 years from now we will look back and see that a lot of major monetary system change has taken place. However, if we are fortunate to avoid another major crisis, the changes will be phased in over time.They will be less likely to immediately impact the average person on a daily basis. Think of it this way, look how change has taken place in the technology world in just the last 10 years. For example, no one had an i-phone then.

Q: If change comes more slowly, what can we expect to see?

A: Again, no one has a crystal ball. But I can offer some ideas on how things might change based on what I feel are solid sources and some individual research. Unless the BRICS nations really do abandon the IMF (something I don't expect but will follow), I believe we will continue to see the world move towards the use of the SDR more like a global reserve currency (more like the US dollar has been used). I think the SDR basket will be expanded to reflect the more current realities of the global economy (China will get a bigger seat at the global table). As this is happening at the global level, I believe that new digital currency technology will continue to be tested and roll out on a regional basis around the world. We will see regions form monetary unions that move towards a common currency. I think we may eventually see an effort to tie the SDR (used only internally at the IMF right now) to an outside digital currency that can be used and owned by anyone along with their own national currency. 

Q: What role will gold have in the monetary system in the future?

A: I believe gold will continue to have an important role no matter if it is used to officially back any future currency or not. The facts that I see are that all the major nations own substantial gold reserves (or at least the public believes they own them which is what matters). There appears to be a "re-balancing" of those gold reserves in progress so that China and other nations that have held less gold reserves will own more. If we get another sudden major global crisis, this would set the stage for a global monetary "reset" conference like Jim Rickards has suggested. Gold would probably underpin the new system one way or another, whether it was used to officially back currency or not. If conditions were such that the financial institutions like the IMF and Central Banks had lost the trust and confidence of the public, they would probably officially bring gold back into the system in some way to help restore public confidence. They would not have to use a fully convertible gold standard to do this. Partial backing along with other assets might work just as well or better. It all boils down to confidence. No monetary system will work unless the vast majority of people believe in it and will use it. So long as the existing financial  institutions (IMF and Central Banks) maintain public confidence, we can expect they will carry out their agenda over time in a controlled manner. If they lose public trust and confidence, all bets are off and we move into a completely new world of unknowns. We will follow it here to see what actually happens.

Q: How can one prepare for such uncertainty?

A: I think keeping it simple is a good idea. First, stay informed (we try to help with that here). Next, understand the real risks out there and have as flexible a plan as possible to deal with the risks. Once you have a plan, don't waste time worrying about what might happen. Worrying is pointless. Instead, focus on staying informed and enjoying life.

Final comments: 

As things are unfolding, the article I wrote on January 1st 2015 "Monetary System Change for Dummies" still looks valid to me. In that I listed four possible future scenarios and a few simple common sense ways the average person can plan for whatever scenario actually does unfold. Nothing I see happening now causes me to think things have changed. As time passes, it will become clearer which scenario is unfolding. I think all four are still possible for now.  I think that article will work fine for quite awhile into the future, so I will continue to re-post it on the first day of each month here for new readers to find more easily.