Willem Middelkoop - Financial Times (China) - China Pushes US Towards Financial Reshuffle

Dutch author Willem Middelkoop wrote this Op-Ed article for the Chinese version of the Financial Times. You may have to use the translate function to read it in English. Below is Mr. Middelkoop's twitter comment on the article. Below that are some selected quotes. 

The article basically is a summary of where things stand in the global move towards 'The Big Reset' that Mr. Middelkoop has written about. He sees the SDR at the IMF and gold as both playing important roles in the reset he expects. He sees China as a key player. 
-------------------------------------------------------------------------------------------------------

willem middelkoop ‏@wmiddelkoop  4h4 hours ago

In Financial Times China my op-ed 'China pushing US towards a monetary reset' #thebigreset http://m.ftchinese.com/story/001065920#ccode=iosaction …

"Two years ago Xinhua published a commentary declaring that the time had come to 'de-Americanize' the world. It called for a ‘new global financial system’, not dependent on the U.S. For insiders this was no surprise, as the PBoC had been calling for an end of the dollar-era since the start of the credit crisis. In 2009 Governor Xiaochuan proposed to create ‘an international reserve currency disconnected from individual nations and able to remain stable in the long run’. By adding the renminbi to the currency basket of the IMF’s Special Drawing Rights, the SDRs could be used as a true supranational currency to replace the dollar, was his logic.

It was a reaction to the bail out of Wall Street after the collapse of Lehman Brothers. The U.S. created trillions of new dollars, all out of thin air, to support the American economy. China, which had been accumulating over a trillion of US Treasuries since 2000, immediately felt trapped. To hedge its dollar-risk China’s decided to accumulate ‘the largest gold reserves in the shortest possible time’, being aware of the old geopolitical fact; ‘He who has the gold makes the rules’."

. . . . . .

"But, to the surprise of many, some secret negotiations have been held about the next phase of world’s monetary system. It consisted of a series of meetings to discuss China’s role in ‘a new global financial order’. At the 2014 edition of the Chinese International Finance Forum (IFF), the most prestigious economic yearly conference in China Mr. Trichet, former president of the European Central Bank (ECB), told the audience; ‘New rules have been discussed not only inside the advanced economies, but with all emerging economies, like China’. ‘New rules for the game’ is central bankers talk about a monetary reset."

Click here for the full article - use the translate to english button

--------------------------------------------------------------------------------------------------------------

Additional note from Willem Middelkoop on this on his twitter feed:

willem middelkoop ‏@wmiddelkoop  4h4 hours ago

Special thanks and kuddo's to Monica Kops-Zhang for the great translation (as usual). She has been a great help to spread the word in China.

--------------------------------------------------------------------------------------------------------------
My added comments: In this article Willem Middelkoop references the 2009 call for adoption of the SDR as a global reserve currency by Zhou Xiaochuan. Readers can relate this to the recent article by Dr. Warren Coats calling on China to use its influence at the AIIB (Asian Infrastructure Investment Bank) to issue its loans in SDRs that we covered here on the blog. If we do see SDR bonds issued for use outside the IMF, it would be another step towards broader adoption of the SDR as a global reserve currency that we noted in our blog article about roadblocks to broader SDR adoption.

Cashless Society - Not So Fast my Friend

If you follow college football on ESPN you are familiar with Lee Corso uttering the phrase "not so fast my friend" when arguing with his pals on Game Day about predictions for the games. Perhaps we can apply that phrase to those who seem sure that we are headed towards a "cashless" society. While the trend towards digital forms of money will certainly continue, cash is by no means near extinction as we can see from this article on Marketupdate. This article focuses on Euros but there are still plenty of cash US dollars out there as well. Below are some quotes.

----------------------------------------------------------------------------------------------------------------

"Each year we use less cash in daily transactions, but at the same time the amount of banknotes in circulation inside the Eurozone is increasing at a rapid rate. Last year, the total value of all banknotes in circulation reached €1,08 trillion, an increase of 6,5% compared to the year before. The total value of all banknotes in circulation in fact doubled in ten years, an increase that could only partially be explained by inflation and the entrance of new member states to the Eurozone.

What explains the increasing demand for banknotes? It could be the result of a growing black market economy, in which goods and services are paid for in cash and cannot be traced afterwards. But in recent years, distrust towards banks and the extremely low interest rate could also explain the flight to cash. Persistent rumors of a possible tax on savings, the new ‘bail-in’ scheme for European banks and the fact that you earn almost no interest on bank deposits make it more attractive to keep savings in the form of cash. We can also imagine people wanting to get out of the financial system by holding cash and buying gold."              . . . . . . . . 

Click here to read the full article and see the graphs showing huge increase in cash Euros

-------------------------------------------------------------------------------------------------------------------

My added comments: A couple of points. First, we have encouraged everyone who can to build up an emergency fund as a way to prepare for an uncertain future. It looks people in Europe agree as they are clearly piling up some cash savings. How do we know? Look at the graph in the linked article that shows the upward explosion in 500 Euro denomination notes. Those cash notes cannot be used at retail outlets for the most part, so people are holding them in savings.

Secondly, one of the experts we have contact with here pointed out to me last summer that cash is actually increasing in both England and Europe when I asked about all the furor over society going "cashless". He also told me that despite hype you see in media, there is no global movement within the system to eliminate cash entirely even though some nations are virtually cashless already. In fact, I am told the overwhelming consensus is that cash will continue to play an important role far into the future in most countries despite the trends towards more and more use of digital/electronic forms of money. 

I have also gotten no indication of any kind that there is any desire to confiscate precious metals. It would be almost pointless in the west where such a tiny % of the population owns any significant amount of precious metals. Many Eastern nations actually encourage their citizens to own precious metals.

Jim Rickards: Fed Will Raise Rates Based on Incorrect Models

In this article appearing on Kitco, Jim Rickards repeats his prediction that the US Fed will continue to raise rates awhile longer. He says they will do so in the face of a declining economy because they are using outdated and incorrect economic models. Below are some quotes from the article.

--------------------------------------------------------------------------------------------------------

"Despite recent market volatility, the Fed is still on track to raise interest rates says bestselling author Jim Rickards.

That said, the central bank is tightening based on incorrect models and will eventually be forced to start easing again, the author of Currency Wars suggested in this latest blog post.

“Investors should expect near recessionary conditions, and continued declines in stock prices for the next 6 to 8 months,” warned Rickards."

. . . . .

Why is Rickards so convinced the Fed will need to ease again?

"The longtime financial commentator said the economic models, used by the Fed to make monetary policy decisions, are inadequate. The economic models – like the Phillips Curve, the Federal Reserve Board US macroeconomic model (FRB/US), and the non-accelerating inflation rate of unemployment (NAIRU) – are not properly reflecting inflation and employment conditions in the country, he explained.

“[I]nflation today is nowhere in sight and deflation is the greater risk. Only Yellen and a few like-minded Fed officials see inflation as a risk because they’re looking at models, not the real world,” he said."

Click here to read the full article on Kitco

--------------------------------------------------------------------------------------------------------

My added comments: This Kitco article is basically a summary of a longer article Jim wrote for email subscribers to his weekly commentary. These comments are basically the same as he has made in several recent media interviews so they are not new information if you follow Jim. What I take from this is that Jim really is not expecting the kind of major crisis (worse than 2008) he has predicted to take place this year. Instead, it appears he just sees the economy moving into recession and the US Fed finally caving in to admit that by mid 2016. Even then he only expects minor adjustments from the Fed, not what you would expect to see if a huge major crisis were underway. He says the Fed will avoid high profile actions heading into the 2016 elections.

What readers can watch for: This blog is purposefully non political, but we can make observations about the political process as it relates to the economy and possible monetary system change. If we do see the kind of major crisis (worse than 2008) this year it will most likely impact the elections (as happened in 2008). Such a crisis would probably benefit the Republican candidate in the same way the 2008 crisis was helpful to President Obama. Otherwise, a relatively stable economic environment is likely to be helpful to the Democratic candidate or a least a neutral factor in the elections.

An interesting question that will not be asked during the campaign is how each candidate would react to a major crisis if we got one. Who would they blame and who would they point to for a solution to such a crisis? If no crisis unfolds in 2016, voters will have no idea how their next leader would answer this important question. if we get do get the kind of crisis Jim Rickards is predicting after this year (a crisis worse than 2008 with bank closures etc), this will be by far the most important issue the next President and Congress would have to deal with, yet no one who will vote has any idea how they would handle it.

News Note: Christine Lagarde to Run for Second Term at IMF

IMF Chief Christine Lagarde has announced that she is seeking another term as head of the organization. Although she has been told to stand trial for an incident that preceded her term at the IMF, most observers do not expect that to prevent her from serving a second term. 

"Last month, Ms Lagarde was ordered to stand trial in France for alleged negligence over a compensation payment to a top businessman, Bernard Tapie. She approved the payment in 2008 when she was French finance minister."   . . . . . .    "Despite this controversy, commentators say she has no obvious challengers for the job."

She definitely has one fan. Ian Bremmer writes this article on Project Syndicate titled 'The IMF Needs More Lagarde'. Below are some excerpts. 

-----------------------------------------------------------------------------------------

"Christine Lagarde has said she is open to serving another five-year term as Managing Director of the International Monetary Fund. She should get it. The IMF has never had better leadership, and its board of directors should give her the chance to finish the work she has begun."

. . . . . 

"The world badly needs a leader dedicated to making the world a safer and more prosperous place. Lagarde has shown that she is such a leader, committed to making the IMF fit for the twenty-first century. She deserves the chance to finish what she started."

Click here to read the full article at Project Syndicate

-----------------------------------------------------------------------------------------------------------

Added note: In other IMF news, the organization announced that the long awaited 2010 governance reforms have now become effective.

Jim Rickards - Connectivity Wars and a New Book Coming in April

Jim Rickards is featured regularly here on the blog because he is highly credible source of information who supports his analysis and opinions with hard data that people can verify on their own. 

Jim has contributed (along with other authors) to a new book called 'Connectivity Wars'  (pp. 63-66) and will also have a new book coming out in April titled 'The New Case for Gold'. I have no doubt the new book will be a best seller like his previous ones. Below are links to each with a blurb of explanation just below each link.

------------------------------------------------------------------------------------------------------

Jim Rickards ‏@JamesGRickards  33m33 minutes ago

Free download of new book with contributions by me, @IanBremmer, @JCZarate1, & others, here: http://bit.ly/1ZEhrlQ 

=================================================

The New Case for Gold Hardcover – April 5, 2016

by James Rickards (Author)

From the bestselling author of CURRENCY WARS and THE DEATH OF MONEY comes a short, provocative argument for the enduring value of gold.

James Rickards is the most visible, vocal, and intelligent proponent for the gold standard today, and his unwavering stance on gold's value has drawn him hordes of lifelong fans. In THE NEW CASE FOR GOLD Rickards explains why gold is one of the safest assets for investors in times of political instability and market volatility, and how every investor should look to add gold to his or her portfolio. He draws on historical case studies, monetary theory, and personal experience as an investor to argue that gold should be a part of any prudent investor's portfolio. And he provides tools and mental models for how investors can make the case for gold to the skeptics in their lives.

OMFIF Looks Ahead for 2016

The OMFIF (Official Monetary and Financial Institutions Forum)  has published their January 2016 review which includes a look ahead for the year. They list a number of key issues for this year and offer some predictions as well. Below are a few selected issues from the review. Click here to read the full review.

----------------------------------------------------------------------------------------------------

What is the greatest source of macroeconomic instability in 2016?

"The scope for China's structural slowdown to create macroeconomic instability is large"  . . . . . . . . .


What is the Greatest danger facing financial markets?

"During the prolonged period of zero interest rates I had frequent premonitions that another portfolio crisis is the real danger"   . . . . 


Which risks are least recognized by the financial markets?

"Higher than expectected inflation in Japan is an under-recognized risk."  . . . . .


There are over 20 such questions and answers on the list. Read the full article here.

--------------------------------------------------------------------------------------------

Did IMF Just Issure a Crisis Watch in Davos?

We mentioned this article in the UK Telegraph earlier, but it deserves a more in depth review. Given the source (a Deputy Director at IMF) and the substance of his comments, it is fair to ask if the IMF has given us a Crisis Watch. We have stated many times here on this blog that even though we have not had another major crisis, the conditions for one do exist. 

We have documented the many systemic risk warnings from both BIS and IMF. We have covered Jim Rickards prediction on this and many other respected analysts. We have even heard from a former IMF official (Dr. Warren Coats) who has written that if the US does not address its debt problem, a crisis is possible. Dr. Coats actually refers to Jim Rickards crisis forecast in his writings to make his point. With all that background, let's look at this UK Telegraph article. 

Below are some important quotes. I will add some comments after that. It should be noted that after his initial interview in the UK Telegraph, Zhu Min seems to walk back his comments in this interview to assure listeners he does not see a "meltdown" coming. This is typical of what you see from IMF officials at times - almost apocalyptic phrases along with re-assurance that they really don't think it will be that bad. 

------------------------------------------------------------------------------------------------------------

Rising Fed interest rates means "liquidity could drop dramatically, and that scares everyone", warns IMF deputy

"The International Monetary Fund is increasingly alarmed by signs that market liquidity is drying up and may trigger an even more violent global sell-off if investors rush for the exits at the same time.

Zhu Min, the IMF's deputy director, said the stock market rout of the last three weeks is just a foretaste of what may happen as the US Federal Reserve continues to raise interest rates this year, pushing up borrowing costs across the planet.

. . . . .

"The key issue is that liquidity could drop dramatically, and that scares everyone," he told a panel at the World Economic Forum in Davos.

"If everybody is moving together we don't have any liquidity at all. We have to be ready to act very fast," he said."

"Zhu Min said the worry is that policy-makers still do not understand the complex interactions in the global financial system, where vast sums of money can move across borders at lightning speed."

"What the IMF has observed is that market correlations are near an historic peak, with aligned positions in the US equity markets four times higher than the average since 1932. This is a recipe for trouble when the Fed is tightening.

"When rates go up, market valuations have to adjust," he said."

Click here to read the full UK Telegraph article

---------------------------------------------------------------------------------------------------------

My added comments  in bullet point form below:

- please note the article headline pointing the finger of blame at the US Fed

- note the terms - "market liquidity is drying up" and "violent global sell-off" - very strong language given the IMF has only said they just expect some lower growth

- stock market drop is just a hint of what may happen due to Fed raising rates

- a liquidity drop that "scares everyone" - more very serious language

- "we have to be ready to act very fast"  -  why?  see next point

- policy makers do not understand complex interactions and the speed of global money transactions (Fed not mentioned by name, but they are policy makers)

- Fed raising rates into overvalued markets is "recipe for trouble" - in other statements from BIS and IMF the Fed has been accused of creating the overvalued markets as well with easy monetary policy - even former Dallas Fed President Richard Fisher recently pointed a finger at the Fed for creating a market bubble (while pointing out he voted against it). CNBC's Art Cashin piles on the Fed here.

Readers need to watch this closely. If we do get another major crisis (much worse than 2008 as many predict) watch the IMF and BIS to see who they blame (along with the mainstream financial media and US political leaders).

Added note: Mohamed El-Erian issues a warning, but gives a three year time period for it play out.

Additional added note to readers: When we see comments like this from an IMF official, many ask if this means the "crisis worse than 2008" Jim Rickards expects is underway. Related to that question, here is a recent twitter exchange between Jim and a follower:

Richard Fee ‏@RichardFee2  10h10 hours ago

@JamesGRickards, if Zhu Min stating not enough liquidity, can IMF and print enough SDR to prop central banks and forego loss in confidence.

Here is Jim's reply tweet:

Jim Rickards‏@JamesGRickards

.@RichardFee2 Yes, but only in more extreme circumstances than we are seeing. See, my private conversation with Zhu Min in #TheDeathOfMoney.

Former Chief Economist (BIS) Talks about Coming Debt Problems - Also New IMF Warning

We have noted here on the blog that global debt is an ongoing and unresovled problem. It appears a former BIS Chief economist agrees. The Telegraph (UK) runs this article that quotes former BIS Chief Economist William White as saying that in the next recession "many of these debts will never  be serviced or repaid and this will be uncomfortable for a lot of people who think they own assets that are worth something." 

Pretty powerful stuff. Below are some quotes from the Telegraph article and then some added comments. Also please see the twitter exchange between Jim Rickards and one of his twitter followers at the end of this article.

--------------------------------------------------------------------------------------------------------

"The global financial system has become dangerously unstable and faces an avalanche of bankruptcies that will test social and political stability, a leading monetary theorist has warned.

"The situation is worse than it was in 2007. Our macroeconomic ammunition to fight downturns is essentially all used up," said William White, the Swiss-based chairman of the OECD's review committee and former chief economist of the Bank for International Settlements (BIS)."

. . . . 

"It will become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something," he told The Telegraph on the eve of the World Economic Forum in Davos.

"The only question is whether we are able to look reality in the eye and face what is coming in an orderly fashion, or whether it will be disorderly. Debt jubilees have been going on for 5,000 years, as far back as the Sumerians."

"The next task awaiting the global authorities is how to manage debt write-offs - and therefore a massive reordering of winners and losers in society - without setting off a political storm."

Click here to read the full UK Telegraph article

Added note:  Is this a crisis watch from IMF?    Need to add this to our list as well.

Some quotes from this article:

"The International Monetary Fund is increasingly alarmed by signs that market liquidity is drying up and may trigger an even more violent global sell-off if investors rush for the exits at the same time.

Zhu Min, the IMF's deputy director, said the stock market rout of the last three weeks is just a foretaste of what may happen as the US Federal Reserve continues to raise interest rates this year, pushing up borrowing costs across the planet.

"The key issue is that liquidity could drop dramatically, and that scares everyone," he told a panel at the World Economic Forum in Davos.

"If everybody is moving together we don't have any liquidity at all. We have to be ready to act very fast," he said.

------------------------------------------------------------------------------------------------------

My added comments: While Mr. White is not currently with the BIS (Bank for International Settlements) I am going to add his warnings to our blog page 'List of BIS and IMF Warnings' given the source of these comments. 

Please note his reference to "debt jubilees." Those who have any background in the OT regulations in the Bible will recognize this term. Under this arrangement, every 50 years slaves were freed and debts were forgiven. Lands were returned to families forced to sell them during the 50 year time period. I have seem this term a lot used by many outside the system doing research for the blog. This is the first time I have seen someone like a former chief economist at the BIS use such a term.

What could a modern day "jubilee" include? Perhaps some kind of global conference to deal with unsustainable debts. It might be just sovereign debt or could also include private debt. Unsustainable debt might be written often and sustainable debt might be restructured (given more time and easier payment terms). It could very well include bail-ins for private debt as well since provisions for this have been enacted around the world. (see what tools exist to deal with a crisis in this recent blog article)

All of this would certainly be part of the major monetary system change we watch for here. If it did happen, we could see a major "modern jubilee" conference that combines with a new global reserve currency setup as we have talked about here on the blog. 

A word of caution to consider. Mr. White also makes this comment in the article linked above:

"The only question is whether we are able to look reality in the eye and face what is coming in an orderly fashion, or whether it will be disorderly." (see what if tools to deal with crisis don't work in this article)

In the IMF article, the language used by Deputy Director Min Zhu is more serious than I normally see. A "violent global sell-off" that would force the IMF to "act very fast" has to be noted. The also says that money moves very quickly around the world which just further emphasizes that it is important to stay alert and informed on a daily basis.

We live in interesting times for sure.

Added note 2-11-16: See followup articles on William White here and here.

Added note related to IMF Deputy Director Min Zhu: Jim Rickards posts the tweet just below on his twitter feed in answer to this tweet from a follower:

Richard Fee ‏@RichardFee2  10h10 hours ago

@JamesGRickards, if Zhu Min stating not enough liquidity, can IMF and print enough SDR to prop central banks and forego loss in confidence.

Here is Jim's reply tweet:

Jim Rickards‏@JamesGRickards

.@RichardFee2 Yes, but only in more extreme circumstances than we are seeing. See, my private conversation with Zhu Min in #TheDeathOfMoney.

Dr. Warren Coats (former IMF) Calls on AIIB to Use the SDR for "All its Loans"

Recently we did a blog article featuring Dr. Warren Coats 'Real SDR' proposal. Dr. Coats is a former head of the SDR Division at the IMF so obviously we won't find a better source on information related to this topic. Dr. Coats is happy to share his ideas and in a recent email he advised me of a brand new article he has just co-authored with Dongsheng Di (Renmin University of China, Beijing) that readers here will find interesting. 

In the article the authors call on the new Asian Infrastructure Investment Bank (AIIB) to "make all of its loans in SDR's" to help the currency gain broader adoption. Below I have pasted in some selected quotes. I have put some points I felt were significant in bold type, so the emphasis there is mine and not the authors. I strongly encourage all readers to click here to read the full article.

--------------------------------------------------------------------------------------------------------

 The Asian Infrastructure Investment Bank and the SDR

By Warren Coats and Dongsheng Di

Jin Liqun, President of the new Asian Infrastructure Investment Bank (AIIB) announced on January 17, 2016 that all of its loans would be in U.S. dollars, “signaling that Beijing will not use the development bank as a platform to promote renminbi internationalization.” In this note we argue that the AIIB should make all of its loans in SDRs. Doing so would make a major contribution to promoting the replacement/supplementation of the U.S. dollar for international payments that was called for by People’s Bank of China’s Governor, Zhou Xiaochuan in 2009. As the SDR valuation basket will include the Chinese renminbi after October 1, 2016 it will also contribute, but more modestly, to the international use of the renmimbi.

. . . . . .

"The case for creating “private” SDRs to disburse to AIIB loan recipients rests on the contribution it would make toward developing the SDR issued by the IMF into a global reserve asset to supplement or replace the U.S. dollar, Euro and other national currencies in countries foreign exchange reserves.

The development and use of private SDRs, SDR denominated bank liabilities, is described in detail in an article one of us wrote over thirty four years ago in the IMF Staff Papers."

. . . . .

"Thus these central banks would need, in addition to their SDR accounts with the IMF, to establish (private) SDR accounts for their governments and commercial banks."  If the loan recipient is able to spend these SDRs (pay its contractors and suppliers) directly it would do so, but most often it would need to exchange them for the currency wanted by the ultimate recipients. This exchange would most likely be executed by its bank providing the SDR deposit."

. . . . . 

"China and the AIIB are in a strong position, working through the IMF or bilateral discussions, to urge central banks to open private SDR accounts for their governments and their commercial banks toward the fulfillment of their obligation under the IMF’s Articles of Agreement to make the SDR “the principal reserve asset in the international monetary system” (IMF Article XXII)."

.  .  .  .

"as private SDRs and supporting clearing and settlement arrangements proliferated, holding and using SDRs for international transactions would become more convenient and would potentially grow rapidly. This is an opportunity that should not be missed."

Click here to read the full article

--------------------------------------------------------------------------------------

My added comments: This article is chock full of important concepts that we have discussed here on the blog. I used bold type above to emphasize that the article is calling for all loans at the AIIB to be issued in SDRs and to emphasize the distinction in the article for "private SDRs".  If private citizens are ever to have the ability to own SDRs, this would be an important first step in that direction. If China and the AIIB did follow the recommendations in this article, we would certainly be seeing some major monetary system change taking place which is what we watch for here. Jim Rickards has said to watch for issuance of SDR bonds in the future, so this is in line with his comments on that. We also noted the lack of SDR bond issuance as a roadblock to broader SDR adoption in this blog article last summer (see point #4). In a brand new Op-ed article in the Chinese edition of The Financial Times, author Willem Middelkoop talks about China and the SDR as well. To read the article in english, hit the translate button.

Dr. Warren Coats (former IMF) *** Q&A Interview *** More on The Real SDR Proposal

Recently we ran this blog article where Dr. Warren Coats explained his proposal for a global reserve currency he calls a 'Real SDR'. Dr. Coats kindly responded to a question about the potential for a global reserve currency in the future that could be used by everyone, perhaps even using modern mobile payments technology. The article was a big hit here on the blog as there is a lot of interest around the world on this topic. Dr. Coats is a former chief of the Operations Division for SDRs at the IMF.

I asked Dr. Coats if he would be willing to do a short Q&A style interview for blog readers here based on questions I get from readers and see out on the internet while doing research for the blog. He graciously agreed. Below are some questions I selected. They are based on questions I get and see asked when this topic comes up. After the Q&A section I will add a few comments based on my observations of Dr. Coats' answers.
-------------------------------------------------------------------------------------------

Q: Can you give us a brief history of your 'Real SDR' proposal including when you first thought of the concept and how

it has evolved over time?

A: Economists have long been and remain at odds over the issue of fixed vs floating exchange rates.  Because I favor clear policy rules and question the ability of even the most developed and sophisticated central banks to manage the money supply successfully without an exchange rate anchor, I have generally favored fixed exchange rate policy regimes.  The gold standard era, which finally collapsed with the closing of the gold window by Richard Nixon in the early 1970, provided an outstanding example of a fixed exchange rate global monetary system.  However, I have always been uncomfortable anchoring money’s value to a single commodity.  Earlier proposals for a commodity basket anchor suffered from the high cost of its operation (transactions and storage costs on the assumption that the currency was bought and redeems with all of the items in the basket).  In 1989 I presented a paper at the Western Economic Association meeting in which I proposed a valuation basket of consumption goods and indirect redeemability (buying and redeeming the currency with assets of comparable market value rather than the goods in the basket).  At the time I was Chief of the Operations Division for SDRs at the IMF and naturally saw the already established SDR as the logical vehicle to replace gold as a hard currency anchor.  Over time I have expanded on how such a system might be implemented.  See for example: http://works.bepress.com/warren_coats/30/  

Q: In the proposal you call for a 'Real SDR' that could replace the US dollar in the event the dollar suffered a collapse

in a new major financial crisis. Do you think we will see such a crisis any time soon?

A: The U.S. has paid a high cost along with some benefits for supplying its currency to the rest of the world for international pricing and payments.  The U.S. balance of payments deficit necessary to supply dollars for international reserves contributed significantly to its off shoring of some of its manufacturing capacity. It has good reasons for wanting to replace its currency with an international issued reserve currency.  Given the size and depth of the U.S. economy and of the financial markets for dollar instruments, the rest of the world is happy to hold and use U.S. dollars as long as it has faith in the stability of the dollars value.  If the huge unfunded liabilities of the U.S. government (Social Security, Medicare and Medicaid etc.) that will be owed in the future are not addressed and reined in, the size of the government’s public debt will become unsustainable. If that happens, at some point foreigners will become unwilling to continue to hold U.S. debt and the dollar. (see: why the world needs a reserve asset with a hard anchor)

Q: In the absence of that kind of crisis, do you see something like your proposed 'Real SDR' evolving more gradually

over time?

A: It is essential for the U.S. to address its debt problem.  But independently it is desirable to replace the dollar and Euro or any other national currency used as international reserves with an internationally issued reserve currency. That is what I am working to achieve.

Q: In the proposal you talk about valuing the 'Real SDR' based on a basket of goods and commodities instead of a

basket of currencies as is done now. Can you elaborate on what kind of goods and commodities might be used?

Would gold possibly be included in the mix of commodities?

A: I have always left to others to determine an appropriate valuation basket.  But the principle is that it should reflect a broadly accepted idea of what stable value for money means.  Thus I think something like the basket defining the consumer price index is appropriate.  This is challenging on a global basis, but the Numbeo index seems to fill the bill: http://www.numbeo.com/cost-of-living/

Q: Would you view your proposed 'Real SDR' currency as still being a fiat currency even though valued using a

basket of goods and commodities?

A: I don’t consider the designation of a currency as fiat (or not) as very useful.  I prefer to classify monetary regimes as those with a hard peg (redeemable for something else for a fixed and known price, as with the SDR valuation basket) or a soft peg (exchangeable at fluctuating market rates, as with a money growth rule or an inflation target).  All legal tender money can be used to pay taxes, the amounts of which are fixed in amounts of such currencies.  This establishes one source of its demand and market value.

Q: Some readers will of course want to see any new global reserve currency backed by gold instead of being

a fiat type currency. What are your thoughts on that view? Do you think China has any preference to see

gold re-enter the monetary system in some way?

A: See my comments to 5 above.  The choice is between fixing the price of the SDR to an amount of gold (as it was initially) or to a broader basket of goods and or commodities.  The price of gold has not been very stable.  I would prefer, and I think most people would prefer, fixing the price of the SDR to a broader basket of goods rather than to just one such as gold.

Q: A question I get from readers is why would the public trust a new version of a fiat currency if the existing

US dollar version were to collapse in a crisis? What could be done to restore public confidence in a new

version of a fiat currency?

A: The Real SDR Currency Board I propose would, like other existing currency boards, be fully backed with assets equal in value to the SDRs issued.  That is also true of the U.S. dollar and most other currencies, but the Federal Reserve is not obligated to redeem its currency at any particular price.

Q: If your  'Real SDR' proposal were adopted globally, how would this impact the average person in the US with $10,000 in a savings account?

A: I think most countries will want to make their currencies part of this system either by fixing the exchange rate of their currency to the SDR or dollarizing in SDRs. Thus, the impact on US savers is that the value of their savings will be locked into the value of the SDR, either because they would be replaced with SDRs or have their exchange rate fixed to and exchangeable for SDRs.

Q: How has your 'Real SDR' proposal been received in official circles (IMF, BIS, etc). Do you get positive

feedback on the proposal?

A: I have had no feedback from the IMF, BIS or any other official body.

addendum: after reviewing a draft of this article for accuracy, Dr. Coats asked if I would include the clarification below regarding his preference for currency board rules:

"One clarification of my preference for currency board rules. While it is true that some central banks have given in to political pressure (to finance a war for example) or overly stimulate the economy, they are hard pressed to get it right even without such pressures. Getting it right means matching changes in the public’s demand for money with the supply that will keep its value constant. Currency boards require no such expertise and work the other way around. The public regulates the sum of money consistent with its demand at constant value."

Warren

-------------------------------------------------------------------------------------------------------
My added comments: This blog has provided me the opportunity to meet some amazing people while on my quest to learn more about the global monetary system and possible future changes to it. My goal initially was to try and answer some nagging questions I had that the average person like myself understandably has when people start talking about global currencies and world money, etc.

Because we do not have access to what is discussed inside the system, it's easy to speculate and jump to all kinds of conclusions on a topic like this. Therefore, when someone with this level of expertise who has 35 years experience working inside the system is willing to answer our questions and share his knowledge and opinions, we owe him a big thank you. That is my first and most important comment.

Below is a bullet point list of some observations I have upon seeing these answers from Dr. Coats. I will add that there are some others with connections in the system who have helped me better understand some very complex issues (for the average person like myself without a background in international banking, etc). I can't discuss some things from some sources because they are not intended for the public domain. However, you can assume that my observations below are based on an improved understanding from discussions with credible sources along with the answers Dr. Coats provided in this interview. Dr. Coats advises me that there is nothing from his work at IMF that cannot be made public.

- please note that Dr. Coats has been working on this concept for a long time. This illustrates something we have said here on the blog. Under normal circumstances change takes place gradually over time. It usually takes some kind of crisis for change to take place more rapidly.

-people inside the system do understand the problems and issues that critics often bring forward. They realize that too much debt for too long will cause problems and eventually destabilize a system if not addressed. If you read Dr. Coats papers (see pages 10-14), he makes it clear that there must be strict rules regarding the supply of money that are followed. He suggests a currency board for this purpose bound by strict rules.

-people inside the system understand that central banks do abuse the right to create currency at times. Dr. Coats points this out in his writings. Others I have talked to fully understand that point as well. This is why Dr. Coats argues for a currency board that must follow strict rules for currency creation. He understands that the rules are only as good as the people running the system follow them. He understands that those running the system come under pressure from political leaders to relax the rules at times. He points out they can do this if you use gold too, so people have to follow rules for them to work in any system.

- everyone inside the system does not hate gold. If you read Dr. Coats papers he talks about the history of the gold standard and makes it clear his goal is to create a stable currency as did exist for a time under a gold standard. The people I have talked to inside the system just believe that a modern system can use other means to provide stability to the currency aside from just pegging it strictly to gold. See Dr. Coats comments on that above. From what I have seen this topic is debated within the system with people from various viewpoints. But most inside the system would agree that a gold standard as used in the past is not necessary today. They would view it more as a last resort if all else fails.This will continue to be a topic of debate and gold standard advocates will continue to argue their case. That's a good thing. Open debate and discussion is always a good thing. If the current system does fail, the public will be more open to hearing what gold advocates have to say. Therefore, it behooves those running the system to prevent failure to maintain public trust. A motivation to prevent failure is a good thing, even if that motivation is just to avoid being blamed.

-what I think I have learned is the most important ingredient in any monetary system is that the general public has trust and confidence in the currency and the system. If you have that, stability is much more likely. If those running the system abuse the currency too much for too long, it will eventually fail and public confidence has to be restored one way or another. If gold accomplishes that, then gold might be used. If a basket of goods can accomplish it, then that could work too. At the end of the day, it's all about public confidence and whatever it takes to restore it.I believe people inside the system do understand this.

-please note that at this time Dr. Coats does not have feedback on his proposal from IMF, BIS etc. This does not mean it will not go forward. It does once again illustrate that things tend to move slowly. This is something I have definitely learned. Global institutions simply do not move quickly unless they are forced to by a crisis. I know for sure that the idea of a global reserve currency has been discussed. I know that modern forms of technology (not Bitcoin or Blockchain) that could implement such a currency have been discussed. What this means is that these tools are known to be available inside the system. Whether they are used any time soon is a different question. To get a global reserve currency you have to have a lot of global cooperation from a lot of nations and organizations. The governments and organizations tend to be somewhat bureaucratic and political.This tends to inhibit change. It does not mean change will not happen, it just means the timetable is not predictable.

-I have stated here on the blog that I believe it is possible that in the future we could see a global reserve currency that is based on modern technology that everyone could use. After learning more from Dr. Coats, I remain convinced that this is possible in the future. Another crisis like Jim Rickards is predicting could speed up the process.
------------------------------------------------------------------------------------------------------

note to readers:  a thank you to Willem Middelkoop for a retweet on his twitter feed

Click here to see - Dr. Coats new article with co-author Dongsheng Di (Renmin University of China).