Tuesday, June 30, 2015

News Note: Update on Greece

This is still a fluid situation so we really don't know how this will turn out. So below is just a quick bullet point list of what we know at this point and also the seemingly strange twists that this is taking.


- Greek PM Tsipras called for a referendum of the Greek people to decide if they want to accept or reject the deal being offered by the creditors. This caught everyone by surprise.

- Strangely, the referendum was scheduled several days AFTER the deal on the table would no longer be legally available, so we have to wonder what the thinking was there

- Greece requested an time extension on their debt payment until after the vote. The IMF and the other creditors refused the request.

-Greece also made one last ditch new offer which was also rejected.

- The payment due the IMF was officially declared to be "in arrears" by the IMF. The IMF uses strange terms in order to avoid calling a default a default for whatever reasons. It may be to avoid problems with derivatives.

- Angela Merkel states that no further negotiations will take place until after the vote in Greece on July 5th. This is also strange since the Euro group has already said that by the time the vote takes place, the deal will have expired. So I am not sure what negotiations she means.

- Despite all this, we are told the Euro group plans to meet again in the morning as if it might be possible for further talks to take place before the vote.

-Strangest of all. If the Greeks vote "yes" to the deal, they are voting yes to a deal that the Euro group says won't exist by that time. Also, the current Greek government is hinting they will just walk away and resign if the vote is yes. If you think all this cannot get stranger, you would be wrong if all that happens. The Euro group would be left trying to "negotiate" a deal they say would no longer exist with no one on the other side to talk to. What could go wrong?

My added comments:

I will just confess that I have no idea what is going on here. Both parties are acting strangely to me. At times it seems like they both do not want to make an agreement for some reason. All you can do is just guess at what each side is really thinking or trying to do.

Whatever they are trying to do, I believe one thing will stick in the minds of all the people directly involved and the general public watching this around the world. We clearly have a significant failure on the part of the officials the public has trusted to prevent these kinds of things from happening. If this situation goes south and millions of people get hurt, no one is going to care about the finger pointing done by both sides to try and blame the other side.

The bottom line will be they failed the people. The system will have failed the people. Many people are already very suspicious of those in charge of the present system. I see that all the time in doing research for this blog. If this mess in Greece ends up a monumental failure, many more people will be joining that list all over the world. 

Many people in Greece blindly trusted that the leaders involved here on both sides would not allow a situation to unfold where they have to stand in line and hope they can get enough money to buy food next week. You can be sure the rest of the world is watching this and taking mental note. And they should be.

Jim Rickards points out that in a complex system one event can cause a "tipping point" where a herd mentality takes over and people lose confidence in the system in mass. He uses a simple example. He says imagine you are in a movie theater with a hundred other people. At first, a couple of people get up and walk out for some reason. The rest don't really pay much attention to that. But then several more get up and leave more quickly for some reason. Now there is an uneasiness is in the theater. When several more jump up and quickly head for the exit, a "tipping point" is created and a mass panic move to the exits ensues. Everyone wants out at the same time. Most of the people don't even know why they are trying to get out. They just see everyone else leaving and assume something is very wrong.

Right now, Greece may be just a couple of people leaving the theater. But the rest of the people in the theater are watching. If they see people in Greece suffer from being cut off from money they thought was safe in the bank (or even worse have their money confiscated in a bail in to save the bank), more money is going to start exiting the system all over the world. This is what is at stake for those in charge. I hope they realize that if they lose the confidence of too many people a tipping point can be reached. Once too many people lose confidence, sometimes it cannot be regained until the entire system is rebooted with different people in charge. The idea it cannot happen is very foolish if you study history at all.

While we can always find some humor in a tough situation (like the crowdfunding campaign to save Greece that made the news today), this is a serious situation. Real people are being impacted and the potential for significant loss of confidence in the system is in play. Hopefully, those in charge "get it". If they are playing a game of bluff or chicken, they are gambling with a lot more than just Greece. Admitting to the public they have failed would be better than the public thinking both sides have been involved in some kind of ego gambling match with people's financial lives at stake. Finger pointing after the fact will only make it worse in terms of public perception. 

Let's hope this gets resolved in a calm way as soon as possible. In that regard perhaps Greece has it right. If they can't ever pay off this debt anyway, they might as well default now and move on. Either way it's going to be very tough on the Greek people for awhile. 

Final Blog Update on Bo Polny's Gold Price Forecast

We have followed the bold forcast by Bo Polny for gold for nearly a year now. Here is our recent earlier post that gives a summary on it. At this point we are at the end of June and gold has failed to make the sharp significant move higher that Bo predicted.

While he could always be right (but just off on timing), we have to make a call on this one because Bo first predicted a move to $2000 gold by the end of 2014. When that did not happen, he said he had miscounted in his cycle analysis and moved the new target date to June 21st of 2015. We gave him an extra few days until the end of June. However, we still have no sharp, significant up move in gold.

We must conclude that the cycle analysis Bo uses was not able to accurately forecast the timing of a sharp move up in gold this time. If gold makes a sharp move up later this year, we might revisit his site to see what he says about it at that time. But this forecast clearly did not pan out and what actually happens is what we track here.

If you want to follow him on his web site, you can do that here.

Added note 7-2-15: Bo admits he missed his June call but sticks to his prediction

Monday, June 29, 2015

Ken Hoffman of Bloomberg Research Talks About China and Gold

In this recent interview with Kitco, Ken Hoffman of Bloomberg research talks about whether or not China might really try to back the Yuan in some way with gold. Below is the text summary of the interview with the YouTube video of the interview inserted after that.

Published on Jun 25, 2015
Could gold, the world's longest running currency be used to create a new order in global currencies? The Chinese central bank is said to be considering backing its yuan with the yellow metal. This move, says Ken Hoffman, Global Head of Metals and Mining Research for Bloomberg Intelligence, would be a "game changer." Why would China consider such a move? Hoffman explains that Chinese policy makers are already trying to establish the yuan as a reserve currency, and backing it with gold would help attract foreign capital inflows. China is expected to receive approval from its central bank for a yuan-denominated gold fix, with a potential for an announcement as early as next week. Hoffman explains that a gold standard would not necessarily create a big constraint to the Chinese central bank, as many believe. “It could be at any price they fix. There’s a lot of things that they can do to make this work,” he says. 

Hoffman estimates that to create an exchange rate of one ounce of gold for every $64,000, the country would need about 10,000 metric tons of the metal. "That’s nine times the nation’s official holdings and about 6 percent of all the bullion ever mined globally," Hoffman says. Moving to a gold standard may also be a question of power for China. Hoffman says that when the U.S. adopted a gold standard after World War II, it emerged as the main power in the International Monetary Fund. In 1971, the U.S. ended the use of the gold standard and rendered the dollar a fiat currency. If China decides to go into some form of a gold standard, Hoffman says it would make the rest of the world view the metal as a currency again. “If they go for it, we’d be talking about fireworks,” he says. Kitco News, June 25, 2015. 

Sunday, June 28, 2015

Crisis Forecasters are Pointing Towards this Fall

In doing research for this blog I read hundreds of news articles from a wide variety of sources. Everything from the mainstream media sources to the most alternative of news sites out there. I mostly stay with well known sources here because I know many readers of this blog are new to the issues covered and will not recognize many of the alternative news sites and analysts out there. Also, some of these sites/analysts have questionable credibility for a variety of reasons.

In this post I have the opportunity to let readers see the array of alternative news sites that are predicting that a huge financial crisis is coming this fall. It is clear if you follow the internet that a consensus has developed around this view on many of these sites.

In this case we can use just one article about this to provide a window into the thinking that exists. This article on The Economic Collapse Blog not only issues a "red alert" to its readers for the rest of 2015, it has a long list of links to a variety of other sources all expecting a crisis sometime this fall. You can use this one article to get the picture of what is out there. I will add that these sites combined have a substantial following of readers, so they do impact public opinion.


I present this article not because I know a major crisis is coming this fall. I have stated many times here that I do not know if or when another major crisis might happen

Instead, the purpose here is to show readers that there are a lot of people out there who do think a major crisis is coming soon. Of course we know that credible experts like Jim Rickards and others are also predicting another major crisis (although not necessarily this fall). I heard Jim warn a group of influential investors in Dallas in person. He does this same presentation all over the world to influential groups of investors. There is a lot of interest and concern about this topic out there.

In addition, we have documented here on the blog numerous warnings from both the IMF and the Bank for International Settlements about systemic risks that do exist. The IMF and the BIS are not crazy fringe groups, but even they are issuing warnings about the systemic risks that do exist (while also believing the risks will be managed).

All of this means we cannot just ignore the idea that another crisis could be coming.There are a lot of people expecting one at some point in the future coming from a wide variety of view points. Even the IMF and BIS say it is possible.

The other side of this coin is that I do think (based on input from very credible sources) that there is a belief inside the system that these systemic risks can be managed to either avoid another crisis or contain one it if does arise. I feel sure there are more tools available that we are not aware of that could be used if need be. The problem is that the public is not aware these tools exist, so they don't have that information available to consider. 

The key to all this will be public trust and confidence. It's really that simple. When the next event emerges that tests the system (maybe Greece will be such an event, who knows), the public response will determine how severe any new crisis will be. The public response in a complex system is something no one can predict. We can actually use the reaction of the markets and of the Greek people to their current crisis as potential guide in this regard. 

If Greece melts down and there is widespread chaos and civil disobedience, that will tell you something important about how people reacted to this crisis. If we get severe market reactions, that will also tell you something.

If the situation remains fairly calm and some kind of agreement is made to at least kick the can down the road for awhile longer in Greece, it will indicate the public is still willing to go along with those currently in charge of the present system. 

Also, watch to see if there is a giant bank run by the Greek people to get their money out of the banking system. If you see that, it is an indicator they have lost confidence in their banking system. The lines outside Greek banks are already forming, but that can change quickly if a deal is reached soon. EU and Greek officials have assured everyone that they had this situation under control for months. Now we will find out if they really do or not and if they can maintain public confidence. We sort of have a real live beta test running in Greece right now. The world is watching to see how it gets resolved.

The most important thing to do is to stay alert and informed. Keep an open mind to a variety of points of view and watch to see which views pan out and which ones don't as events take place. We can't know the future so it is wise to stay informed and have a plan in mind in case we do get another crisis at some point. 

People in Greece today who have some emergency funds outside the system are better off right now than those who don't. That is just a fact. Those that ignore facts are unwise in my view. So here is direct proof from a real live situation in progress that it is wise to have some kind of backup plan in mind beyond standing in a line hoping you can get some money if you need it

Added note: Article from the Guardian  - here is a key quote regarding confidence:

"If the experiment has been a disaster for Greece, it is also a colossal failure for Europe, with the result that at the very apex of leadership the EU nowadays resembles an unhappy assembly of squabbling politicians locked in what could not be called an “ever closer union”.

. . . .

Three days, three crises, and a collective performance that inspires little hope or confidence in their crisis management."

Added note 6-30-15: At the end of this year we will revisit this post to see if these crisis forecasts turned out to be right or wrong. What matters is what actually happens.

Taking the BRICS Seriously

It seems that the world is trying to figure out exactly how to view the emerging BRICS partnership. On the one hand, there is a tendency to dismiss them by many in the West. On the other hand, it is clear that they will not wait forever for more influence in the existing system. 

This article by Shashi Tharoor on Project Syndicate explores this issue, but concludes by saying "it's anyone's guess" how all this will turn out. Here are a few quotes from the Project Syndicate article.

BEIJING – "Sailing down the Moscow River on a cool evening earlier this month, I found myself in intense conversation with the chair of the Foreign Affairs Committee of the Chinese National People’s Congress (NPC). Meanwhile, South African and Brazilian parliamentarians were swaying to Russian music and a guide pointed out the sights. The first parliamentary forum of the BRICS countries – Brazil, Russia, India, China, and South Africa – had come to a convivial conclusion.

Before the meeting opened, many wondered whether the five parliaments could possibly find common ground. What on earth could India’s fractious and rumbustious Lok Sabha, with its impassioned debates and disruptions, have in common with China’s decorous NPC, a rigorously controlled echo chamber for Communist Party decisions? Membership in the new BRICS grouping, many believed, did not provide a strong enough basis for cooperation.

Such skepticism has been leveled at the BRICS grouping itself from its inception, with some dismissing it as the only international organization invented by an investment bank. 

Specifically, the term BRIC was coined more than a decade ago by then-Goldman Sachs analyst Jim O’Neill, who did not initially count South Africa among the ranks of the major emerging economies.

But Russian President Vladimir Putin liked the idea from the start, and suggested in 2006 that the four countries should meet regularly. The grouping was soon formalized, with annual summits planned. South Africa joined in 2011, solidifying the BRICS’ presence across the global South, with only Russia in the North."

. . . . .

"The continual deepening of the BRICS enterprise has caught many international observers by surprise. In addition to their annual summits – which have produced joint declarations covering every major global issue, from questions of peace and security to United Nations reform – the BRICS have conducted foreign ministers’ meetings and engaged in think-tank consultations. Moreover, the BRICS have created the New Development Bank, headquartered in Shanghai and headed by one of India’s most respected private-sector bankers.

Seen against this background, the recent parliamentary forum is just the newest in an expanding array of institutions and mechanisms that are establishing the BRICS as an international grouping that cannot be ignored."

Saturday, June 27, 2015

Jim Rickards Most Recent Webinar 6-17-2015

Jim does a free monthly webinar that usually covers a variety of current issues and also has a Q&A period from listeners. You can access that latest one here. Below I have pasted in the summary of topics covered this month. Here is transcript of the webinar if you prefer to read that.


Jim Rickards, Gold Chronicles june 17th, 2015
*FOMC Meeting Analysis – No rate increase in 2015
*Dangerously low liquidity in bond market
*Back in the 80’s-90’s liquidity in the bond market was a given, virtually any amount could get filled – this is no longer the case
*Today large orders in the bond markets can take days or weeks to fill
*Lack of liquidity combined with High Frequency Trading (HFT) and selling volume is an environment where flash crashes are likely
*Warnings are coming from BIS, IMF, Federal Reserve governors regarding lack of liquidity
*When crashes occur there is always collateral damage – there are no circuit breakers in the bond markets so if there is an extreme panic we may see market closures
*Panics can spill over into other markets – we could see a bond market crash with a rising gold price
*Contagion and spillovers to other markets are typical behavior in a crisis
*Examples of hard assets: Land, Art, Physical Gold Fund
*State Backed hacking of US Government Employee Files
*Compromise of employee files does represent a national security threat
*Any portfolio reliant on all digital related assets is vulnerable to being completely wiped out
*South China Sea – China is claiming the entire South China Sea by creating artificial reefs and islands
*The US is bound by treaty and is obligated to act in the event of China war with the Philippines
*IMF SDR’s versus sovereign fiat currency
*Thoughts on gold confiscation happening in USA, EU, and Switzerland
*Why Switzerland is the best jurisdiction in the world to store precious metals

Added notes: A thank you to a reader who sent me this link to a presentation Jim Rickards did last year (in May 2014) at Johns Hopkins University.

Here is a recent interview on Kitco.com

Here is a recent interview on RT (Russia Today -starts at 3:15 mark)

Link to an article on the SDR as World Money that Jim talks about

Friday, June 26, 2015

Head of Reserve Bank of India Again Calls for New "Rules of the Game"

We ran an article earlier here on the blog where Raghuram Rajan said that new "rules of the game" are needed for the international monetary system. In this new article he repeats that and adds a little more detail. Below are some quotes from the article related to his comments on rules of the game.


. . . . . 

"Their (Central banks) zero lower-bound interest rates are distorting markets and countries are turning protectionist, which may require the IMF to take up the role of an international regulator."

"We need rules of the game in order to effect a better solution," the Press Trust of India cited him (Rajan) as saying. "I think it is time to start debating what should the global rules of the game be on what is allowed in terms of central bank action. I am not going to venture a guess as to how we establish new rules of the game. It has to be international discussion, international consensus built over time after much research and action." 

. . . . .

"Rajan has in the past has been vocal about the need for IMF intervention. "The bottom line is that multilateral institutions like the IMF should re-examine the 'rules of the game' for responsible policy, and develop a consensus around new ones," Rajan told an audience in New York on May 19. "No matter what a central bank's domestic mandate, international responsibilities should not be ignored." 

My added comments:

In this article Mr. Rajan also offers some comments on the easy money policies that have been in use by Central banks and talks about his concern that "currency wars" are in progress. He compares the situation to events that led up to the Great Depression in the US in the 1930's.

The key to take from his comments is his call for the IMF to step in at the global level. First, India is a BRICS nation so this again shows the intent to stay engaged with the IMF. Next, please note that Mr. Rajan is calling for more authority for the IMF and not less.

Update 6-30-2015: Central Bank of India clarifies the comments made by Mr. Rajan in the article quoted above. From this new article:

In a statement, Reserve Bank of India general manager Alpana Killawala said the press "mis-characterized" Rajan's remarks:
"The Great Depression was a period of great turmoil, caused by many factors and not just beggar-thy-neighbour policies. Governor Rajan did not imply or suggest that there was any risk of the world economy, which is in steady recovery notwithstanding uncertainties like those in the Euro area, slipping into a new Great Depression."

Greece: News Note - Greece Calls for National Referendum on July 5th

Here is the latest news on Greece from the WSJ.

This shows clearly what we said here in a recent blog post. Deadlines are not really deadlines. We have heard all month that June 30th was the absolute final deadline. So Greece schedules a national referendum on July 5, 2015 (five days after the "final deadline") for the voters to have their say.

The only deadline that really exists are the markets. If they decide that the situation in Greece is too uncertain and react sharply, things will start happening pretty quickly. If not, these guys can drag this out for quite awhile longer until they once again agree to kick the can down the road.

Added note 6-27-15: CNBC Update on the Situation

(Below a picture from the CNBC story of people lining up at the bank)

People wait outside a closed branch of Piraeus Bank in Athens, Greece June 27, 2015. The specific branch opens at 10:30 AM local time on Saturdays but it remained closed while dozens of people lined outside to withdraw cash.

Thank You Brian Wilson for Adding Some Music to our Day - Off Topic

Earlier this month I mentioned in another off topic post that Love and Mercy is a movie you might want to see this summer. Having seen the movie now, I can fully recommend it. Some great performances and it will likely put the music of Brian Wilson in another light for you whether you are a long time fan or just someone who has heard one of his many songs over the years.

On Father's Day, my wife surprised me by giving me a ticket to see Brian Wilson perform live here in the Dallas area with his amazing band (and fellow former Beach Boys Al Jardine and Blondie Chaplin). I expected it to be good, but what I got was much more than good. As I sat listening to this incredible band perform and watching Brian have the time of his life even at age 73, this question kept crossing my mind. How in the world did such a rich variety of beautiful music originate in the mind of just one person? (yes, others were involved in many of the songs, but the creative genius of Wilson is unquestioned in creating the harmonies and arrangements)

Brian announced recently that his next tour to Europe (now scheduled for 2016) will be his last tour outside the US. What I sensed watching this live performance is that there won't be that many more opportunities to see him perform live anywhere. The audience seemed to sense that and it seemed like Brian felt it too. It was such a joy to see him completely at ease having a fun time presiding over his great band playing some of his best music.  He was fully engaged with the audience in a way I had not seen from him before. When he asked the crowd if they had seen his new movie, the response was a resounding 'Yes' combined with a thunderous burst of applause. It was clear the audience wanted to let him know how much they appreciated all he has been through and overcome in his life.

The quality of the sound from his band is not really possible to describe. In this case, you really do have to be there hearing it live to get the full impact. Not even high quality recordings can compare to it. The blending of the harmony of the vocals with the instrumentals is an amazing and very unique sound. If you have a chance to see it live, you will feel like you are seeing (and hearing) something very special. 

I tried to think, of all the wonderful songs Brian has written and brought to the world, how could I pick one that embodies his life's work? I think the one just below is the best I could find (Brian sings the lead in this version). In all the ups and downs of his amazing life, one constant has remained. Brian Wilson has always wanted to add some music to your day. Thank you Brian, for adding great music to our day for over 50 years!

Lyrics to Add Some Music to Your Day

The sunday mornin' gospel goes good with the soul
There's blues, folk, and country, and rock like a rollin' stone
The world could come together as one
If everybody under the sun
Add some music to your day
(Add some music add some add some music to your day)
A bob didit a bop didit

You'll hear it while you're walkin' by a neighbor's home
You'll hear it faintly in the distance when you're on the phone
You're sittin' in a dentist's chair
And they've got music for you there
To add some music
(Add some music add some add some music to your)
To your day
A bob didit a bop didit

Add some music music everywhere (add some music)
Add some add some add some add some music (add some music)
Your doctor knows it keeps you calm
Your preacher adds it to his psalms
So add some music
(Add some music add some add some music to your)
To your day

(Add some music add some music)
When you're alone
(Add some music add some music)
Is like a companion
(Add some music add some music)
For your lonely soul
Oo oo oo woo oo woo oo oo oo oooo

When day is over (when day is over)
I close my tired eyes (I close my tired)
Music is in my soul

At a movie you can feel it touching your heart
And on every day of the summertime
You'll hear children chasing ice cream carts
They'll play it on your wedding day
There must be 'bout a million ways
To add some music
(Add some music add some add some music to your)
To your day

Add some music to your day 
Add some music to your day 
. . . . 

Thursday, June 25, 2015

Dr. Warren Coats (former IMF) - A Global Currency for a Global Economy

Readers of this blog know that there are two big questions we are following here on the blog. One is whether or not we will get another major financial crisis that leads to dramatic monetary system changes that happen relatively quickly.

The other major question is whether or not we will see the SDR currency used at the IMF eventually become a true "global currency". This question is separate from the first big question. We could see this unfold in the future whether we get another major financial crisis or not. Readers may wonder where this question comes from since nothing like a global SDR currency for use outside the IMF exists today. Let's take a look at some evidence for why this is valid question.

We have covered Jim Rickards forecast here that the next major financial crisis will be so big that the IMF will be the only balance sheet left in the world to deal with it. Jim talks about the SDR becoming a kind of "world money", but does not go into much detail as to how this might impact the average person. 

Our own research here has turned up significant evidence that it is possible that IMF rules could be changed so that in the future the SDR could be used as a global currency outside the IMF rather than just inside the IMF as is the case today. 

Readers may wonder if we just conjured up this idea using our own imagination? The answer is absolutely not. While all the sources of this idea cannot be discussed here on the blog, we can give you an example of how seriously this idea is discussed from time to time within the system.

Dr. Warren Coats is a former IMF Assistant Director in the Monetary and Financial Systems Department. Having also served as a Visiting Economist at the US Federal Reserve and The World Bank, I think we can qualify him as a credible expert on this topic.

In 2011, Dr. Coats wrote this very interesting article talking about a "real SDR" currency (A Global Currency for a Global Economy). You can view the entire article here or an asbtract version here (note: it appears this slide presentation is no longer on the . If you prefer a slide presentation summary of his ideas, you can view that here (note: it appears the slide presentation link is no longer on the internet as of 12-8-15). Here is another page with a shorter version of the slide presentation Here is a link to the pdf version.

For purposes of this blog article, we will note just some bullet points from the slide presentation and a couple of key quotes from the article. Here are some bullet points taken directly from the slides linked above:

Overview of Presentation 

The need for an international reserve asset • Key elements for expanding use of the SDR • Transformation to a Real SDR – Replace currency valuation basket with large goods basket – Introduce indirect convertibility – Currency Board rules

Increasing the use of SDRs 

Benefits of the SDR – Not a claim on one country (global) – More stable exchange rate – Supply can be increased without BOP deficit – Can supplement or replace dollar • Promoting use of the SDR – Continue large allocations – Encourage pricing and invoicing in SDRs – Encourage development of private SDRs – Develop clearing and settlement of private SDRs

Further measures to enhance use of SDRs 

Substitution account – Have plans ready to save dollar if dumped • A constant real value SDR – Replace currency valuation basket with goods basket – Pay inflation adjusted interest rate • Bancor – An SDR Currency – Not allocated but issued (sold)

• The new gold standard – 

Countries wishing to stabilize their own currency and reduce exchange rate risk would peg to Real SDR.

Now here is a quote from the concluding comments of Dr. Coats article:

"These shortcomings of the gold standard and the high resource cost of storing gold, would be overcome by an international currency issued and redeemed for eligible government debt at the market value of a large basket of internationally traded goods (a Real SDR currency board). Such an international currency would have a number of important benefits.
a) It would relieve the pressure on the United States to supply dollar assets to satisfy the demands by other countries for international reserves. In the extreme and over time it could replace the U.S. dollar as the unit of account, means of payment and store of value (reserve asset) for international transactions.
b) For countries pegging their own currencies to the Real SDR or using it directly, domestic prices would become more predictable both in the short and long term, thus promoting investment and growth.
c) Moreover, international prices would become much more predictable, facilitating the further extension of the gains from trade. A Real SDR could attract a large number of countries to peg the exchange rates of their currencies to the Real SDR, thus reestablishing a truly global currency for global trade.
d) Global liquidity would automatically become countercyclical and thus stabilizing. “This idea [of a commodity standard], which goes back to Keynes’ Treatise on Money, had interesting countercyclical features: world liquidity would automatically increase during global business downswings, which tended to depress commodity prices, and automatically decreased during business upswings, when commodity prices boomed.”
A number of technical issues would need to be addressed, none of which are insurmountable:
Which goods should be put in the valuation basket and in what amounts?
How should their market prices be determined and how frequently?
How frequently should the items in the basket and their weights be adjusted?
Should Real SDRs be issued actively or only passively?"
My added comments:
The above article is just one example that has turned up in researching this topic. While further research indicates to me that this whole concept could be taken further than even this article describes, this article does provide a clear example this is a serious topic of discussion inside the system.
I believe that with the digital technology that exists today, it is not unrealistic to think in terms of someday having a digital global currency (a "real SDR"). This might be a currency for use outside the IMF by the general public as well as by central banks and commercial banks. The currency might have backing based on a mix of commodities or a combination of the highest rated sovereign debt and along with a basket of commodities. There are many possible ways this could be setup and it might be something we don't see until after the existing sovereign debt problems are dealt with (writing off unsustainable debt and restructuring the rest at a global level). Another major financial crisis would likely speed up this process. In other words, we could see this used after a so called "reset" of the system.
If something like this does happen, the goal will be to provide the general public with a currency usable anywhere in the world from a simple mobile phone. A currency with system backing that is viewed as the most stable and reliable currency in the world by most people. It would be the currency all the major national currencies of the world would peg to for example (or at least those willing to participate if the BRICS end up going their own way).
Before all this could really happen, we have to find out if the BRICS are going to be in or out. We should get a clearer picture on this big question in the next few years as we see how the issues with the BRICS at the IMF are resolved. The idea and the technology exist to make this happen. The rest is undetermined right now. It will depend on how things unfold globally in terms of whether we get another major financial crisis and what the BRICS nations decide to do. We will continue to follow things here on both counts.

Wednesday, June 24, 2015

IMF's Vinals Says Central Banks May Have to be Market Makers

This news item on Reuters is quite significant. It quotes senior IMF official Jose Vinals as saying that Central banks "may need to become market makers of last resort if there is not enough liquidity during volatile sell-offs."  The comments were made at a recent speech in London. You can view a video of them from from this page on the IOSCO web site (see video for Panel 4 and start at the 45:58 mark)

We have already covered this liquidity issue here on the blog quite a bit. It is obviously a concern to the IMF and Central bankers. Below are some quotes from this Reuters article and then a few added comments.

"Central banks may need to become "market makers of last resort" if there is not enough liquidity during volatile sell-offs, a senior International Monetary Fund official said on Thursday.

Regulators worry that when interest rates begin rising from their prolonged low levels there will be a stampede for the exits by bond investors and that markets won't have the liquidity or capacity to deal with it smoothly.

The prospect that the Federal Reserve may start raising rates later this year has already prompted "taper tantrums" or severe volatility in global financial markets.

Jose Vinals, director of the IMF's capital markets department, said market liquidity has shrunk as capital requirements on banks have increased but that there was no simple relationship between the two.

Central banks buying bonds to conduct unprecedented stimulus programmes over the last three years -- most recently the European Central Bank -- have also been blamed for sucking volume out of the market, making it less liquid.
Vinals said it was unclear whether markets were simply more volatile or whether there were systemic consequences, but it would take time to find a solution,
"The time it takes for the global regulatory community and central banking world to find a solution this time may be longer than the time where one episode of big illiquidity happens," Vinals told a meeting of the International Organization of Securities Commission (IOSCO) in London.
"Then the question is what to do. In my view the only thing that can be done at that time is that central banks should become again market makers of last resort."
Ashley Alder, chief executive officer of Hong Kong's Securities and Futures Commission, said central banks acting as market markers of last resort was the "last thing" he wanted to see.
"If you react to that by piling more intervention on intervention, you encourage more untoward risk taking and you end up with even greater amount of mispriced risk," Alder told the conference."
My added comments:
I am seeing this concern over a possible lack of liquidity show up a lot in recent comments by the IMF and other Central bankers. Christine Lagarde mentioned it in her recent blog article summarizing the annual IMF review of the US economy. Both Nouriel Roubini and Jim Rickards had recent articles about it. More mainstream fund managers are expressing concern about the possibility for a "systemic shock" event.
When you combine these warnings with the recent Bank for International Settlements (BIS) Credit Risk Management report, it gets your attention. Here is a quick bullet point list of takeaways from all this:
- Central bank easy money policies (QE and artificially low interest rates) have created risks that must be watched carefully when the effort is made to "normalize" things by raising interest rates (which really means when the efforts to artificially suppress rates stop)
-Central bank buying of bonds has "been blamed for sucking volume out of the market, making it less liquid"
-Central banks are in a very tough spot when they try to unload these bonds which will cause interest rates to start going up (perhaps in an uncontrolled manner depending upon how markets react)
-Just raising short term rates (without even trying to sell off their bonds) may trigger a major move out of bonds creating a very illiquid market (too many sellers, not enough buyers) as the market tries to front run the Central banks
- Jose Vinals says if all this happens "Central banks may need to become market makers of last resort" yet again
-The BIS report says a big potential problem is that during the easy money policies investment capital has flowed into funds that promise investors instant liquidity while the fund is invested in longer term bonds. A "run on the fund" if interest rates start rising is a real concern and could create illiquid markets
When you see this issue talked about this much by the IMF, the BIS, and also leading credible analysts outside the system, you must take this risk seriously. If the bond markets freeze up due to illiquidity (too many people trying to get out at once), it could definitely be the trigger to another big financial crisis like Jim Rickards and others are expecting. Keep in mind that there are also many trillions of derivatives tied to interest rate movements and bond prices.
It goes without saying that if the Central banks have to step in once again as "market makers of last resort" to try and save the system, what remains of public trust in the system is going to be severely tested. If the crisis is too big for the US Fed, the IMF could try to step forward like Jim Rickards has predicted will happen. But it is very unclear how the public would respond to this if they are dealt another big crisis and they blame Central bank policies for causing it. It will all depend on who the public trusts at that point in time.
This is not a forecast that this will happen. But it is an admonition for readers to watch this issue very carefully in the coming weeks and months ahead.

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

Tuesday, June 23, 2015

China Daily: AIIB is a 'Gradual Strategy'

It's a theme we see repeated over and over in regards to China. While there are some alternative media sites on the internet that continue to insist that China will soon usurp the IMF and The World Bank with its new AIIB (Asian Infrastructure Investment Bank), Chinese media and officials continue to emphasize that they do not see the AIIB (or the BRICS Bank) as usurping these organizations. 

While they continue to express frustration and irritation that they have not been given more influence at the IMF or The World Bank, they make it clear they intend to stay engaged in those organizations while using the new banks to move forward. This article in China Daily makes the point once again. Below are some quotes.


"With the signing of the charter slated for the end of June, the AIIB could launch by the end of the year.
Fan said there is a "gradually forming" consensus on the importance of infrastructure investments in Asia.
"But the AIIB is not trying to duplicate the World Bank or the Asian Development Bank," Fan said. "So we should expect trial and error to find what is the best model for this organization."
Sakakibara, who is also a former Japanese vice-minister of finance, said both Chinese and Japanese leaders realize there's a "dire need" for infrastructure investments in China and throughout the Asian region. And "China wants the AIIB to be a genuine international organization," Sakakibara said.
"It's a gradual strategy, and China is still in the very early stages of playing a more active role in global governance. It's a long march and we are just taking the first steps," Fan said." 

Monday, June 22, 2015

BOE Governor: Building Real Markets for the Good of the People

Recently we did a blog article covering the presentation Nomi Prins made at annual conference hosted by the Federal Reserve, IMF, and The World Bank. We noted that events like this were a good sign because it meant those inside the system were willing to listen to credible voices outside the system. This speech recently given by Bank of England Governor Mark Carney is another sign that perhaps some healthy soul searching is taking place inside the system. 

This is a fairly long speech that I think would be good for readers to read in its entirety. Below are some quotes from the concluding paragraphs that show the concern inside the system that public trust has been lost. Mr. Carney sounds somewhat like Nomi Prins in some of his comments.


. . . . 

"We must break the back of these issues, and the Fair and Effective Markets Review shows the way forward.
With its publication today, all the main building blocks are now in place for the real markets we need.
I want to pay tribute to my colleagues Charles Roxburgh, Minouche Shafik and Martin Wheatley, who so ably led the Review. And to salute Elizabeth Corley, who so expertly chaired the Review's independent Market Practitioner panel, canvassing and coalescing views from across the industry.
The importance and complexity of their task is illustrated by the multiple root causes of the misconduct in FICC markets. Specifically, the Review identifies:
- Market structures which presented specific opportunities for abuse, such as poor benchmark design, and which more generally were vulnerable to conflicts of interest, collusion, and thin markets;
- Standards of acceptable market practice that were usually poorly understood, often ignored and always lacked teeth;
- Firms' systems of internal governance and control that were incapable of asserting the interests of firms - let alone the wider market - over those of close-knit trading staff;
- Individual incentives that were skewed, with pay packages stressing short-term returns overlong-term value and good conduct;
- And personal accountability that was lacking, with a culture of impunity developing in parts of the market.
All these factors contributed to an ethical drift. Unethical behaviour went unchecked, proliferated and eventually became the norm. Too many participants neither felt responsible for the system nor recognised the full impact of their actions. For too many, the City stopped at its gates, though its influence extended far beyond. A good start has been made in addressing these deficiencies."
. . . . . . 
"But major gaps remain.
These are evidenced by enforcement actions which continue to appear with depressing frequency. These sanctions, while necessary, aren't the solution, not least since the $150 billion of fines levied on global banks translates into more than $3 trillion of reduced lending capacity to the real economy.    . . . 
In these regards, I welcome the Review's recommendations that:
First, individuals must be held to account. Doing so requires new, common standards, cast in clear language; better training and qualifications for FICC personnel; and mechanisms to ensure that when individuals are fired, their history will be known to those who consider hiring them.
Second, firms must take greater responsibility for the system by improving the quality, clarity and market-wide understanding of FICC trading practices. I welcome the industry's leadership in drawing up plans for a new FICC Market Standards Board. The Board's mandate will be to establish readily understandable standards, keep them up-to-date with market developments, and promote adherence to them. Crucially, the Board will be dynamic, and will monitor and address areas of uncertainty in specific trading practices.   . . . . .
Third, regulators should extend the coverage of market abuse regulation to include every major fixed income and currency market. And criminal sanctions should be updated, with market abuse rules similarly extended and maximum prison terms lengthened.
Finally we need global standards for global markets. I welcome the FICC Markets Standards Board's intent to be as global as possible in its membership and influence."  . . . .


'With the main building blocks of reform in place, now is the time to take stock.
It's vital that we - public authorities and private market participants - work together to reverse the tide of ethical drift. This cannot be a one-off exercise. We need continuous engagement so that market infrastructure keeps pace with market innovation.
That's why the Bank is announcing that it will hold an Open Forum this Autumn which will bring together all stakeholders in FICC markets. Our goal is to discuss the prospects for market functioning, where regulations might overlap or conflict, and whether enough has been done to build the real markets the UK deserves.
To prompt an open discussion, we are publishing a detailed paper which reviews these issues and draws out such questions. 5
Everyone has an interest in the future of financial markets, so I would strongly encourage you to engage with our Open Forum process online and at the conference itself. An Open and Accountable Bank welcomes your input.
Our response to recent failings should be as ambitious as those of our predecessors to the Great Fire: renewed prosperity built on private markets and public market infrastructure.
Let our legacy be the earthly equivalent of Wren's ethereal genius, real markets so that the City can do what it does best: transact and innovate for the good of the people of the United Kingdom and the world.
Thank you."
My added comments:
We all understand that words only go so far and must be followed up with actions to mean anything. But's let give some credit here to Mr. Carney for his very honest assessment of the failings inside the system leading up to the last big crisis and his call to do better. In parts of this speech, he sounds very much like Nomi Prins or Jim Rickards.
Also, any efforts made to improve transparency and access to information for those outside the system should be supported. Hopefully, we are seeing genuine signs that those inside the system want to be true to their calling, which is the role of a public servant. My own research suggests that there may an information gap between those inside the system and those of us on the outside. Any efforts made by those on the inside to bridge that gap should be applauded. Better public access to information should lead to better decisions and more public trust in the system. It sounds like Mr. Carney might agree.