Thursday, April 30, 2015

China Daily: PBOC Poised to Pull QE Trigger as Economy Stalls

Reports that China is looking at starting its own version of QE due to a stalling economy are showing up. This China Daily article explains it in some detail. Jim Rickards posted this tweet regarding why China is doing this. Below are quotes from the China Daily article.


Central bank may buy local government bonds as a way to get more money into the marketsreports Zheng Yangpeng.
Financial markets on the Chinese mainland are abuzz with speculation that the central bank will inject more liquidity into the economy by unconventional means that could amount to version of "quantitative easing".
The People's Bank of China may adopt new policies that could include direct purchases of  local government bonds from the marketa report by Market News International said on  MondayThe Wall Street Journal also reported that the government may let banks use the  notes as collateral for loans from the central bank.

News note: Jim Rickards Dallas Speech - Live Coverage

Just got back from hearing Jim Rickards speak here in Dallas this morning. This was my first time to meet him in person and it was a pleasure as you would expect. I plan on covering this speech on two levels in the next couple of days. On one level I will give a basic summary of Jim's speech and the Q&A session that followed. Most readers here will have heard a lot of what Jim had to say, but he did add a few interesting tidbits that were new.

On a different level, I want to cover what seeing Jim speak in person was like. Most of us only see him on TV or in online videos. What was interesting to me is how this talk had a very academic feel to it. Much like if you had a favorite professor back in college who was able to get you to "think out of the box" and consider new ideas. It was clear to me that Jim has a deep passion for his topic and wants people to understand the academic basis for his alternative views on how markets work. He sees his work as the start of a new way of thinking that challenges the existing paradigm. I will cover that aspect in a second article.

The talk was sponsored by the National Center for Policy Analysis (which has a local headquarters based in Dallas). This speech by Jim Rickards was the start of a new initiative this organization has which they call their "Financial Crisis Initiative". They hope to bring awareness of the issues Jim Rickards talks about (coming monetary system changes) to the masses and will be producing online videos in that regard. 

I am advised by NCPA Vice President Eileen Resnik that a video of this Jim Rickards speech will appear on the NCPA website in the future. Since this blog is pretty much dedicated to the same goal (increasing awareness of potential monetary system change and its impact on the average person), I will certainly follow this new initiative over time as information is made available on their web site.

Look for my summary of this speech here on the blog tomorrow and then the second article this weekend.

                                        Jim, his cousin, and former Congressman Allen West in Dallas

Tired of Taxes? You Can Always Move to Liberland

Every now then we run across an interesting off the beaten path news item. Here is one for those with a Libertarian point of view. There is a new country on the block in Europe. It's called Liberland. In Liberland, taxes are voluntary. The national motto is "Live and Let Live." The country even appears to have its own Facebook page.

Below are some quotes from this Business Insider article about the newest tax haven on earth.


"The world’s newest microcountry wants to become its foremost tax haven.
Liberland, which sits on 2.7 square-miles of land along the Danube River between Serbia and Croatia, was founded earlier this month and plans to have only voluntary taxes.
"We don’t want the state to take money from the people," Vít Jedlička, a native of Prague and Liberland's new president, told Business Insider in a phone interview. "We want to have voluntary taxes."
Elected into office by a three-person committee, Jedlička says he started Liberland to “turn the concept of a state upside down.”
. . . . .

"Residents and visitors of the new country will be allowed to use any money of their choice, including crypto currencies like Bitcoin, to buy and sell goods and complete other transactions within Liberland.
"People will not be bound to any currency," Jedlička told us."
. . . . 
"The microcountry will thrive even if none of its residents volunteer to pay taxes because of the investments that are coming in from "all over the world, everywhere," according to Jedlička.
"We will have so much money that we will not know how to spend it," he added.
More than 260,000 people have already applied for citizenship in the fledgling republic, Jedlička said. The initial wave of citizens will be selected based on how they can help build the country.
There is no cap to how many people can "live and let live," the country's motto, within its borders. He is not concerned about a lack of space.
"I don’t think there is any reasonable limit. It depends on how much money there is," he said. "We can just build taller buildings. Look at Hong Kong."
Here is an artist redendering of what Liberland might look like someday


My added comment: 

I plan on staying in Texas, but it will be interesting to see what happens in Liberland in the future. The artists rendering above kind of has a theme park feel to it like something at Walt Disney World.

Update: Fox News runs this new article on Liberland. Below are some interesting quotes from this new article. It looks like not everyone is happy with the idea.

"More than 300,000 people from around the world have applied for citizenship in Liberland, according to Jedlička. They have been approved, even though most will never live - or likely set foot in – Liberland."

“We believe we can set up the last state on the planet,” Jedlička in April. “We are taking the best parts of the American Revolution and the U.S. Constitution and applying it here.”

"While Jedlička maintains that he and his people are well within the law, whether or not Liberland can become an actual independent state remains to be seen.

We do not consider them to be a nation. We consider them to be virtual trespassers and we do not take their claims very seriously,” an official for the Croatian Embassy in New York City told"

Wednesday, April 29, 2015

News Notes: US GDP Comes in Weak, Fed Holds Rates Down

Today we learn that even anemic 1% GDP forecasts for the first quarter were too high (GDP was .2%) and that the US Fed has no plans to raise interest rates anytime soon. Market reaction so far is a yawn with no big moves in any direction. It just appears the US is mired in very anemic growth and that Fed policy is unlikely to change any time soon. Below are links to various news articles.

CNBC - Consumers Holding on to Wallets

"The first-quarter gross domestic product report put several dents in popular Wall Street economic narratives, none of which bode well for growth ahead.
Worst among current economic fallacies was the notion that consumers, buoyed by big savings at the gas pump, would propel U.S. GDP to higher levels. Rather than spend the savings at the pump, which saw the average price for a gallon of unleaded gas sink below $2 in several states as 2014 drew to a close, consumers saved that money and actually pulled back on their spending pace."
"Following through on indications in March, the Federal Open Market Committee on Wednesday offered no changes to its zero interest rate policy.
Not only did it not hike rates, it also removed all hints for what may lie ahead. Calendar references were deleted completely from the post-meeting statement.
The FOMC indicated after its March meeting that a rate hike in April was unlikely. The U.S. central bank has kept its key funds rate anchored near zero since late 2008, amid the financial crisis.
Officials have indicated a desire to raise rates at some point this year, with the market now anticipating a September increase."

Economic Times: US Should Pass IMF Reforms

We can add Obama Adminstration official Susan Rice to the chorus of those seeking to ramp up pressure on the US Congress to pass the 2010 IMF reforms. In this article in the Indian based publication Economic Times, she ties the passage of the reforms to the idea that it will help integrate emerging nations like India. Below are some quotes from the article.


"The US Congress should pass "quota reform" of the International Monetary Fund (IMF) to better integrate the rising powers like India, the National Security Advisor, Susan Rice has said. 

"Proposed quota and governance reforms for the IMF would better integrate rising powers like China, India, Indonesia, and Brazil, while preserving American leadership and our veto power," Rice said during her addressal to the annual conference of the US Export-Import Bank here yesterday."

"Congress should pass IMF reform so that we can join our G-20 partners to strengthen this bulwark of economic security," Rice said referring to the fact that the Republican-controlled Congress has not passed the much needed IMF quota reform, in the absence of which US has not been able to ratify the changes in the voting structure of the top world financial body
My added comments:

Note the shot taken at the "Republican-controlled Congress" in the article. This is consistent with what we have suggested here on the blog before. We can expect that if we do get another major financial crisis, the US Congress will be blamed for holding up these reforms and impeding the IMF from stepping in to be a "lender of last resort." The last time this happened, Congress quickly caved in and gave authority to setup the TARP program to deal with the last crisis. 

Jim Rickards says the next crisis will be too big for the US to handle alone and the IMF will be called upon to solve things. So, it's not unreasonable to think that if that does happen, the US Congress will get massive pressure to approve the IMF reforms and will probably do that very quickly.  

Added note: Speaking of Jim Rickards, he will be here in Dallas tomorrow (April 30th) and I will be able to attend and provide a summary of his speech here on the blog. The title of the speech is "2015- The Year of Living Dangerously." Among other things it will cover the possible role of SDR's and gold in a future international monetary system.

Tuesday, April 28, 2015

EpochTimes: China Uses Gold to Pursue Global Power

It seems like speculation on how much gold China has and how they intend to use it in the future is becoming a topic of mainstream interest more and more as time goes by. In this EpochTimes article, we have yet another publication speculating on where things might be headed. Below are some quotes from this new article.




"Usually the International Monetary Fund only becomes exciting when it tries to prevent Argentina or Greece from defaulting. After five years of hibernation, another, more obscure area of the financial institution might actually shed light on a mystery of global finance: China’s gold reserves.
Given their usual knack for non-transparency, the Chinese haven’t updated their official gold reserve since 2009, when they stood at 1,054 metric tons, far below the United States, the IMF itself, and European nations such as Germany, France, and Italy.
Beijing has been accumulating more gold since 2009, with estimates ranging from 3,000 to as many as 10,000 tons. As a comparison, the United States holds 8,133 tons as monetary reserves."
. . . .  .
"Why are Chinese gold reserves important for international finance and what does the IMF have to do with them? Maybe Beijing believes in the satirical version of the Golden Rule: “Whoever has the gold, makes the rules.”
. . . . . 
“Whoever has the most gold is able to control gold’s valuation. Controlling gold’s valuation, you can control the valuation of all other currencies,” says Chris Powell of the Gold Anti-Trust Action Committee, a non-profit organization monitoring gold markets. 
Henry Kissinger himself believed in that theory when he was Secretary of State in the 1970s. “I am sure the Chinese are well aware of this,” says Powell."
. . . . . 

IMF Revelation

"The public may soon find out how much gold, or power, the Chinese really have.
The IMF is conducting a technical review of its own reserve currency, the so called Special Drawing Right (SDR) this year. So far, only the dollar, the euro, the yen, and the pound were part of the SDR. This year, Beijing has indicated it wants the yuan to be included in the SDR.
“That’s when they are going to have to come clean. If they are trying to get their currency to become part of the SDR, they would have to come out publicly and say how much is going to be held,” says Willie McLucas, of McLucas Family Holdings and veteran of the global gold trade.
Most people think the disclosure of gold reserves is part and parcel of becoming part of the SDRs, however, nothing official has been published on the matter.
The international community, however, is taking China’s endeavor seriously, as there was a meeting by the global central banks in Washington on April 17, 2015, called “Gold, the Renminbi and the Multicurrency Reserve System.We could see official statements coming at an IMF hearing in May or during the formal SDR revision later this fall."
My added comments:
Having followed this story now for quite some time, it seems like a consensus is now finally emerging on what is going on with China and gold. Both mainstream and alternative media sources are now reporting the idea that the Chinese have been using the BRICS development bank and the new AIIB (Asian Infrastructure Investment Bank) to increase pressure on the US Congress to approve reforms at the IMF which would give China more influence. China feels they have earned this because their economy is now probably the 2nd largest in the world while their voting power at the IMF does not reflect that. You can't really blame China for feeling that reform needs to take place to credit them for their increased contribution to global GDP.
The problem from the Chinese point of view is that the US Congress has not been willing to approve the reforms at the IMF or increase the US contribution to the Fund. The IMF seems kind of caught in the middle between trying to please its largest and most influential members (the US and some EU nations) and most of the rest of the members (led by China). 
It looks like this will probably get resolved by the end of this year. If the US Congress approves the reforms and/or approves the inclusion of the Yuan in the SDR currency basket later this year, we can expect that China will be happy with the results and will only seek to use the new development banks to complement the activities of the IMF and the World Bank. This is what they have repeatedly stated many times is their goal.
However, if the US blocks BOTH the IMF reforms and inclusion of the Yuan into the SDR basket, it would make sense for China to move forward more aggressively with their alternative development banks and to promote the Yuan there. Perhaps even by setting up an SDR like currency where a partially gold backed Yuan would be the lead currency for those new development banks. 
Either way, China needs more gold because they had so much less than the US and the EU to start with. China can use their vastly increased gold reserves in a number of different ways depending on how things turn out at the IMF later this year. It gives them more flexibility and options.  
Unless we do get some kind of major financial crisis this year, it looks more and more like what happens at the IMF this fall to the end of the year will be the main events impacting monetary system change for now. We will just continue to follow it here as events unfold.

Monday, April 27, 2015

Alasdair Macleod: Gold, the SDR, and BRICS

Here is a very good new article from Alasdair Macleod that talks about where things might be headed with the SDR at the IMF and also China's options if the US blocks the Yuan from inclusion in the SDR basket later this year.

All indications right now are that the Yuan will be included. There are also some hints that a small gold component might be added to the SDR basket at some point as well. But if the US holds firm by refusing to approve the 2010 IMF reforms and blocks the Yuan from SDR inclusion, China may be forced to move to Plan B. This is one of the better articles I have seen that talks about all this and also agrees with some comments I got from Jim Rickards by email for the most part. So I think this is an article well worth the time to read. Below are some quotes.


Last Monday there was a meeting in Washington hosted by the Official Monetary and Financial Institutions Forum (OMFIF) to discuss the future relationship, if any, of gold with the Special Drawing Rights1 (SDR).

Also on the agenda was the inclusion of the Chinese renminbi, which seems certain to be included in the SDR basket in this year's revision, assuming that the United States doesn't try to block it.
This is not the first time the subject has come up. OMFIF's chairman, Lord Desai wrote a paper about it after the last Washington meeting on gold and the SDR exactly four years ago. The inclusion of the renminbi in the SDR was rejected in 2010 because of inadequate liquidity and is due to be reconsidered this year.
Desai pointed out in his paper that there are difficulties when it comes to including gold, because (and I think this is what he was trying to say) none of the SDR's paper constituents are convertible into gold, but gold's inclusion in the SDR would make them convertible through the back door. However, Desai seemed keen to re-examine the case for gold.
It should be pointed out that if gold is included in SDRs the arrangement cannot be long-lasting so long as the major central banks insist on printing money as an economic cure-all. However, China's position with respect to gold and her own currency could be a different matter.                  . . . . 

 . . . China on the other hand still has some aces up her sleeve.
One of them is gold, and another is her role in a rival organisation established by the BRICS. The New Development Bank (NDB) is in the final stages of being set up, driven by frustration at America's attempts to protect the dollar's role and to keep the IMF as an exclusive club for advanced nations. Instead, the NDB could easily issue its own version of the SDR with the gold lining Desai referred to in his original paper.

My added comments:
This is a much better analysis of what may happen than most articles I see out there. Notice that Mr. Macleod makes it clear that China's first choice is to stay working within the IMF to get its currency moved up in global status. If that fails, then it makes sense for China to pursue other options. In either case, there is no evidence I can find that China intends to move to on its own to setup the Yuan as a gold backed currency. The available evidence suggests that China wants to stay engaged at the IMF if possible. But even if that fails, they would be more likely to move within the new BRICS Development Bank with other nations and perhaps setup an SDR like currency there (that could very well have some kind of gold backing). 

Recently Jim Rickards suggested in his latest webinar that the new China led AIIB might setup an SDR like currency. Here are those commments:

"Christine Lagarde was in Beijing a couple weeks ago, and we have the IMF spring meeting next week. There could be a lot of significant announcements there probably relating to the commencement of a process to include the Chinese yuan in the special drawing rights (SDRs). They haven’t announced it yet, but it will be very interesting to see how the AIIB keeps its books. It’s a bank, so they’re going to have books, assets and liabilities, loans, and profit and loss statements just like any bank. They have to pick a currency, but it wouldn’t really make sense to do dollars if they’re trying to break away from U.S. dollar hegemony and U.S. dominance of Bretton Woods. Why would they do it in dollars? It’s probably not going to be in yuan because that makes it China-centric. Even though China’s the dominant voice, they’re trying to make this multilateral. It could be euros, but why would they have euros for an Asian bank?
 I don’t know, but it seems likely they’ll keep their books in special drawing rights or SDRs. The IMF already does that, so have a look at IMF financial statements that are available online. They’re all in SDRs. When the IMF makes a loan such as they did to Ukraine recently, those were in SDRs. I talk about SDRs a lot and people laugh at me. They’re like, oh, what are you talking about? It’s just another fiat currency that will never work. My answer is it’s been working since 1969 so there’s nothing new. SDRs work fine; it’s just that no one really understands them. It will be interesting to see if they do keep their books in SDRs which they may very well. A possible scenario is that the AIIB keeps the books in SDRs and the IMF includes the yuan in the SDR, which they may do starting as early as next week (it won’t be official until January 1, 2016, but that process may start next week). It would get formally voted at the IMF annual meeting in Washington in early October (I think the annual meeting might be in Peru). This SDR train has left the station a long time ago."
In a recent email reply I got from Jim Rickards he indicated that everyone is waiting to see if the new China led AIIB will pressure the US to accept the IMF reforms and add the Yuan to the SDR basket. He indicated if the US rejects the IMF, it could lead to what he called parallel systems with the IMF trying to keep a foot in both camps. He added that he felt this would add to systemic instability. 
His comments seem to tie in well to Mr. Macleod's article as I understand it. Both are suggesting that China could end up trying to create an SDR like currency at one of the other new development banks if things don't work out at the IMF. Whether gold comes into play is also very interesting to follow.
The information on this topic seems to be getting better and more in line with the available evidence. I see more and more analysts starting to realize the the ball game right now is at the IMF and what happens to the reforms and SDR basket there. This has been our view here all along. So we have a lot to watch for coming up later this year. 

Sunday, April 26, 2015

News Note: Jim Rickards to Speak in Dallas on April 30th

Jim Rickards will be speaking in Dallas on Thursday April 30th. Here is a link with information for anyone who may have interest. I will be able to attend and provide a summary of his talk for readers here. 

Jim advised me that the following is what he will cover in the talk:

"The presentation is called "2015 - The Year of Living Dangerously"

I will cover the the inflation/deflation conundrum, Fed policy, systemic instability and the possible role of SDRs and gold in a future international monetary system."

Looks like it will be interesting!


Event Details

James Rickards is Chief Global Strategist at the West Shore Funds, Editor of Strategic Intelligence, a monthly newsletter, and Director of The James Rickards Project, an inquiry into the complex dynamics of geopolitics + global capital. He is the author of New York Times best seller, The Death of Money (Penguin, 2014), and national best seller, Currency Wars (Penguin, 2011). He is a portfolio manager, lawyer, and economist, and has held senior positions at Citibank, Long-Term Capital Management, and Caxton Associates. 
In 1998, he was the principal negotiator of the rescue of LTCM sponsored by the Federal Reserve. His clients include institutional investors and government directorates. He is an Op-Ed contributor to the Financial Times, Evening Standard, New York Times and Washington Post, and has been interviewed on BBC, CNN, NPR, CSPAN, CNBC, Bloomberg, Fox, and The Wall Street Journal. 
Mr. Rickards is a visiting lecturer in globalization at the Johns Hopkins University and the School of Advanced International Studies, and has delivered papers on risk at Singularity University, the Applied Physics Laboratory, and the Los Alamos National Laboratory. He is an advisor on capital markets to the U.S. intelligence community and the Office of the Secretary of Defense. Mr. Rickards holds an LL.M. (Taxation) from the NYU School of Law; a J.D. from the University of Pennsylvania Law School; an M.A. in international economics from SAIS, and a B.A. (with honors) from Johns Hopkins.

Saturday, April 25, 2015

The Debt Delemma

These are definitely strange times we live in. On the one hand, everyone realizes that there is way too much debt overhang in the global financial system (both public and private). We hear that discussed all the time. At the same time we are told that despite the risks from the debt, things are going OK and to expect 3% or better GDP. This article appearing on the Project Syndicate properly notes that the debt is a big problem

This very same web site ran an article the other day (which we covered here on the blog) that suggested that we should just quit worrying about the debt because near zero interest rates are here to stay for a long time making the debt sustainable far into the future. I certainly don't know what is going to happen, but the debt is out there and continues to grow. It eventually has to be dealt with one way or another even if rates stay very low.  All we can do is continue to follow events.

Below are some quotes from this new article, "The Debt Delemma."

"Greece’s divisive negotiations with the EU have placed debt back at the center of debates about economic growth and stability. But Greece is not the only country struggling to repay its existing debt, much less dampen borrowing. Its fraught negotiations with its creditors should spur other countries to take action to address their own debt overhangs.

Since the global financial crisis erupted in 2008, the world’s debt has risen by $57 trillion, exceeding GDP growth. Government debt has increased by $25 trillion, with the advanced economies accounting for $19 trillion – a direct result of severe recession, fiscal-stimulus programs, and bank bailouts. While American households have reduced their debt considerably (mainly through mortgage defaults), household debt in many other countries has continued to grow rapidly. In all major economies, the debt-to-GDP ratio (including both public and private debt) is higher today than it was in 2007."

. . . . .

"To be sure, debt itself is not bad. But excessive reliance on debt creates the risk of financial crises, which undermine growth. Given this, the world needs to find both less credit-intensive routes to growth and ways to eliminate existing debt burdens."

. . . . 

"The global economic crisis laid bare the challenge of debt reduction – and the risks that excessive indebtedness raises. Yet the crisis also intensified government and household dependence on leverage, causing debt levels to continue to rise – a trend that, left unchecked, will lead to more crises in the future."

Friday, April 24, 2015

China Daily: Unprecedented Development Ahead for Renminbi (Yuan)

A couple of China related news items in this blog post. First we have this China Daily article that once again makes it clear that China is on a slow and steady path towards getting the Yuan accepted as an international reserve currency. Then we have this Bloomberg article (carried on Yahoo) that talks about how China may be buying a lot of gold to better position the Yuan for inclusion in the SDR currency basket and to increase its international reserve currency status. 

None of this will be news to readers here as we have covered all this extensively here. Below are quotes from each article and then some added comments.

China Daily Article

The Bank of China's chief economist Cao Yuanzheng feels China's efforts to promote the renminbi (RMB) as an international currency is blazing a new trail in world history.
"I think this is an unprecedented process in economic history," Cao said in an exclusive interview with Xinhua on the sidelines of the "RMB: Going Global. The Bank of China Renminbi Internationalization Forum".
Renminbi development may be unprecedented but carefully mapped out nevertheless. In his remarks during the forum, Cao said the process has its roots back in the 1990s, and the veteran economist said he still believed it would take several more years for the level of international convertibility of the currency.
"I now think we can speak in terms of years and not decades," Cao said. "I cannot predict the time table, but I think we'll get there before 2020."

. . . .

"Yes, there are benefits for China but we believe it is also good for the world," Cao said. "There is deep need for another strong world currency (aside from the dollar and euro, the most used international currencies). For China, I would say there it is more of a challenge than a benefit."
Cao called for reform of the current international monetary and financial order, which dates back to the 1944 Bretton Woods Conference, which divided the world among the lines of developed and developing countries.
Cao noted that that dichotomy is now outdated, as evidenced by the fact that China, with the world's second largest economy, is a developing country. All told, three of the world's 10 largest economies are economies in transition.
"The international governance of the world financial system needs reform," Cao said."

Bloomberg (Yahoo) Article

"China’s push to challenge U.S. dominance in global trade and finance may involve gold -- a lot of gold. While the metal is no longer used to back paper money, it remains a big chunk of central bank reserves in the U.S. and Europe. China became the world’s second-largest economy in 2010 and has stepped up efforts to make the yuan a viable competitor to the dollar. That’s led to speculation the government has stockpiled gold as part of a plan to diversify $3.7 trillion in foreign-exchange reserves.

The People’s Bank of China may have tripled holdings of bullion since it last updated them in April 2009, to 3,510 metric tons, says Bloomberg Intelligence, based on trade data, domestic output and China Gold Association figures. A stockpile that big would be second only to the 8,133.5 tons in the U.S."

“If you want to set yourself up as a reserve currency, you may want to have assets on your balance sheet other than other fiat currencies,” Bart Melek, head of commodity strategy at TD Securities, said by phone from Toronto. Gold is “certainly viewed as a viable store of value for an up-and-coming global power,” he said.
China may be preparing to update its disclosed holdings because policy makers are pressing to add the yuan to the International Monetary Fund’s currency basket, known as thet Special Drawing Right, which includes the dollar, euro, yen and British pound. The tally may come before the IMF’s meetings on the SDR next month or in October, Nomura Holdings Inc. said in an April 8 report."
My added comments:

These two articles touch on two of the most hotly debated topics we have covered here on the blog. Namely, what are China's plans for the Yuan and then how much gold does China own now and why are they buying so much of it?

Just a couple of observations here. First, every time we see a Chinese official of any kind talk about plans for the future of the Yuan, they always give a fairly long time frame for change to take place. This date of 2020 is actually one of the closer to the present dates I have seen mentioned. Also, when you see China talking about how the "international governance of the world financial system needs reform", you should understand that China prefers this reform to take place inside the IMF. The second article talking about China buying gold again makes it clear that getting the Yuan added to the SDR currency basket at the IMF is the current goal. 

Until there is other solid evidence available, we have to conclude that China is NOT trying to abandon the IMF and setup the Yuan on its own as an international reserve currency. The day might come where they feel they have to do this if the 2010 IMF reforms stay stalled forever. But for now, they clearly intend to continue to try and work within the IMF to increase the reserve status of the Yuan. Whatever China does, it is becoming clearer that gold is playing a role behind the scenes in whatever monetary system changes we may get in the future.

One other note: Jim Rickards did predict in his book The Death of Money that China would release a public update of its gold reserves in 2015 as he points out in this twitter comment.

Thursday, April 23, 2015

How Can the Banking Industry Regain the Moral and Ethical High Ground?

There is no question that the reputation of the banking industry took a big hit during the global financial crisis. It became clear to taxpayers that some banks that took on too much leverage and risk and lost big would get a free pass by being bailed out. It also became clear the rules didn't really apply to those who were "too big to fail."

At the recent Asian Banker Summit in Hong Kong, the Chief Executive of the Hong Kong Monetary Authority (Norman TL Chan) talked openly about what he thinks led to the problems and offered some ideas on how to regain some lost high ground with the public. It's an interesting speech with a lot of good ideas which you can read by clicking here. But, at the end of the day, he sums up what is the most important change that needs to take place. He says bank managers need to "change their mindset from what can we get away with to what is the right thing to do." Below are some quotes from the speech.

. . . .

Moral and ethical high ground: trust and respect

"Returning to the theme of the Summit "regaining the moral and ethical high ground" - what do we really mean here? I think, in a word, "trust". With "trust", comes "respect".
In the past, banking was regarded as a reputable profession and bankers were highly trusted and respected both by their customers and by members of the public more generally. This was not surprising as basically customers entrusted their life savings to their bankers and the preservation and safety of their hard-earned money was in the hands of those bankers. Although nowadays customers still place their life savings with banks, bankers no longer enjoy the same high degree of trust and respect from society, especially after the Global Financial Crisis. What has changed so dramatically to bring the reputation of bankers so low?"
"Well, the modality and governance structure of banking have changed a great deal over the last century. More importantly, these changes have created an incentive system that leads to a misalignment and disconnect between the interests of the owners of banks (i.e. the shareholders), bank management and customers."
. . . .

"Business profiles and activities have also changed over time. Simple deposit-taking and lending businesses have been combined with investment banking, securities and capital markets, and even proprietary-trading activities, to form large, complex organizations, raising clear issues of cultural compatibility across businesses with very different objectives, time horizons and employee profiles. In an environment where near term profits are very highly prized and rewarded, it is all too easy to see how the more aggressive of the approaches introduced into the mix (with the power of traders rising in line with trading profits in buoyant markets) might prevail in shifting a culture from a client focus to one that is overly defined by financial performance.

It is interesting, when comparing and contrasting cultures within banking, to consider for a moment Glass-Steagall and its separation of commercial and investment banking to prevent commercial banks from trading securities with their customers' deposits.
Passed during the Great Depression, following a number of bank runs which destabilized the US economy, Glass-Steagall's motivation rested on: real or perceived conflicts of interest, in the form of collusion between banks and their affiliates with the affiliates borrowing from the banks to buy securities and then selling securities to repay the banks' debts and worries that banks would engage in risk-taking speculation, trading with customers' deposits rather than lending to promote economic growth. The "firewall" created by Glass-Steagall was gradually weakened over the years and, as you all know, was eventually repealed in 1999. 
Some argue that this repeal contributed to the Global Financial Crisis. Joseph Stiglitz, the Nobel prize winner, summed it up thus: "Commercial banks are not supposed to be high-risk ventures; they are supposed to manage other people's money very conservatively-.. Investment banks, on the other hand, have traditionally managed rich people's money - people who can take bigger risks in order to get bigger returns." 3
When repeal of Glass-Steagall brought investment and commercial banks together, it would appear from the events over the last decade or so that the investment bank culture came out on top. The prevailing business strategy becoming pursuit of the high returns that could be obtained only through increasing leverage and risk-taking."
. . . .

"So where do we go from here? As I mentioned earlier, while bank regulators clearly play an important role in influencing banking operations, it is really up to the industry to decide what it can and should do to regain the trust and respect that banks once enjoyed. We should bear in mind bank regulators are a consequence of the emergence of modern banking. However, as discussed earlier, the modality and incentive system for banking were very different in the old model of banking : there was a high degree of alignment of interest between bank owners, bank management and bank customers, which has over the years been significantly eroded.

Again, don't get me wrong. I am not advocating that we should go back to old-fashioned banking. It is far too difficult, if not impossible, to turn the clock back this far and to do so might mean the loss of some beneficial innovations over the years. However, there is considerable public interest in ensuring that banking, which remains the predominant channel of intermediation between savers and borrowers in our society, functions efficiently and effectively, with a high degree of professionalism and strong ethical standards."

.  .  .  .  .

"For sure, regulators will continue to pursue further changes in banking. This is ongoing and there is still some way to go. In the process, there will be arguments, frustrations and inevitably pushback. No doubt the new standards and regulations will lead to some changes in the behaviour and business models of banks. However, I do not for one moment believe that regulators and regulatory measures alone can possibly redress all of the problems stemming from the misalignment of interest amongst the various stakeholders in banking. Regulators can set standards and provide some external checks and balances. But there is no substitute for internal governance and controls that are designed to achieve the desired behavioural change across the entire firm. In this context, it is crucial that we have buy-in from the owners, directors and management of the banks.

Only when the public sector and the owners, directors and managers of banks share the same goals and objectives can we induce the desired outcomes on a sustainable basis. Only when shareholders cease to put unreasonable pressures on bank management to keep on improving RoEs can regulators feel comfortable that the bank is not incentivised to take the short-term view on business growth and profitability. Only when bank management is not rewarded based on short-term financial performance can we be less concerned that bank managers will take excessive risks for near term bonus or share option value. Only when board directors understand that they are accountable not only to shareholders but also to customers and society more broadly through the regulatory agency can we be confident that effective governance and internal controls will be put in place. In short, banks need to own the common goal and to promote the appropriate culture, values and practices across the firm, which are to put the safety of the bank and the interest of depositors and customers ahead of the banks' own commercial interests, just as the old fashioned bankers did in the past. Only when this happens will bank managers and employees change their mindset from "what can we get away with" to "what is the right thing to do". Only when this happens can the banking industry regain the trust and respect that bankers used to enjoy in the not so distant past."

My added comments:

When I read this speech it reminds me that values do matter. We can pass thousands of laws and hire tens of thousands of regulators. But unless people are willing to go back to some very basic values like the golden rule (Do unto others as you would have them do unto you), we can't expect a lot to change at some banks.

It's also important to point out that it is wrong to paint an entire industry with one brush. There are good bankers who are doing good things in the world. Through this blog I have had the priviledge to meet some. They don't need the public spotlight to go about doing good in the world. They just quietly work behind the scenes to try and make things better. Let's hope they prevail as the future unfolds.