2016 has started off with a lot of turbulence and market volatility. When this starts happening its natural to wonder if we seeing the start of something significant or not (like the 2008 financial crisis).
Because I read a lot information doing research for this blog, one thing I do see is a variety of views on questions like this. In this post I will try to provide readers an update on things using a Q&A format. My answers are based on the combined information from all the sources I read plus email input I get from very good sources (some very well connected).
------------------------------------------------------------------------------------------------------------------Q: Is this market volatility the start of the major financial crisis many are predicting to be worse than 2008?
A: I don't know. I don't think we will be able to tell that at the early stages. Here are some comments I have seen doing research for blog articles:
Jim Rickards - Jim is on record predicting that we will get another major crisis worse than 2008. His book 'The Death of Money' details his prediction. Recently though, he did an interview in which he stated that what we are seeing right now is not the start of the crisis he predicts. He said that crisis is still years away. On the other hand, Jim has always said in previous interviews that even he will not be able to provide the timing for the crisis (no one knows which snowflake will trigger an avalanche). So he acknowledges that he could be surprised himself at the timing.
Willem Middelkoop - He predicts we will see 'The Big Reset' bringing in major monetary system change after a crisis. Very similar to Jim Rickards view. Has a best selling book on this topic. I have seen no specific prediction so far from him that this is start of a major crisis, but he will not be surprised when we get one.
Nomi Prins - Nomi is very much like Jim Rickards. She sees a major crisis coming, but has not indicated whether what we are seeing now is the start of one. Like Jim, she does not rule out the possibility of one at virtually any time. Nomi is also joining Jim Rickards as a writer at Strategic Intelligence. Just out, a new interview with Greg Hunter on this question.
Credible Sources Inside the System - these sources prefer to remain anonymous which I always honor. I have gotten nothing from these sources indicating they feel that a major crisis event is imminent. In a recent contact with one of these sources, I got no indication that there is a feeling that a major crisis is imminent.
Jim Sinclair/Bill Holter - Jim and Bill are both on record as saying they do expect a major crisis to unfold very soon. They believe that there are already problems behind the scenes with derivatives etc. that will surface soon. They both advise people to prepare for crisis conditions now. Jim added a followup article on preparedness here.
IMF and BIS - Both these organizations have issued multiple warnings over the past couple of years about the potential for crisis conditions. However, neither organization is stating in public that they believe the current market volatility is the start of such a crisis. The IMF for example, is just lowering growth forecasts, not warning of a major crisis. Of course, it's their job to not panic the public so it's unlikely they would announce a crisis ahead of time even if they knew one was starting up. Former IMF Peter Doyle has told us not to expect an early warning. Former BIS William White says a debt storm is coming. Current IMF Zhu Min says "we may have to act fast". These last two linked articles appeared after I wrote the above paragraph, so maybe they are alerting us this time? Zhu Min seems to walk back his comments here in this interview (no meltdown).That's how dynamic and fluid things are right now.
Various Analysts and Precious Metals Advocates Featured on Alternative Media - Here we are talking about people like James Turk, Egon Von Greyerz, Bill Fleckenstein, Peter Schiff, Michael Pento, Andrew Maguire, etc. (some of these also appear on mainstream financial media) - This group is in agreement that a major crisis is coming and are inclined to think it will be sooner rather than later like Jim Sinclair and Bill Holter. All of this group encourages people to acquire an emergency fund that includes precious metals. Precious metals advocates will probably be interested in this new book coming in April from Jim Rickards.
Mainstream Financial Media - No mainstream financial media I have seen are saying this is the start of a major crisis worse than 2008 at this point. They are mostly just focused on covering the day to day market volatility. It is unlikely mainstream media would issue an early alert on a crisis since they tend to work with the financial institutions to keep the public calm. I cannot ever recall in my lifetime a mainstream media warning taking place before an actual crisis arose so it's unlikely the next time will be different. I did see this on CNBC raising the issue of a possible "crack in the system" due to the rising US dollar (and falling currencies elsehere) that we covered here in recent articles from Jim Rickards and OMFIF.
Dr. Warren Coats (former IMF) - I have seen no specific prediction by Dr. Coats on this, but he does reference the prediction of a major crisis worse than 2008 made by Jim Rickards in his Real SDR proposal article. He says it could be a trigger that leads to a major reform of the global monetary system. In an interview for this blog, Dr. Coats said if the US does not address it's debt problems, it will lead to loss of status for the US dollar as global reserve currency at some point in the future. He did not specify a time frame for this to happen however. Dr. Coats believes that both the US and the rest of the world could benefit from a new global reserve currency and works towards that goal as he stated in the interview here on the blog.
Q: If we get another major crisis, will that lead to a new monetary system or a major "reset" of the existing monetary system?
A: My opinion (for what its worth) is that it is likely we will see major monetary system changes if we get another crisis worse than 2008. Virtually everyone listed above (except perhaps the mainstream financial media who never talks about this issue) seems to agree on this. The IMF and the BIS don't comment on this in public, but my belief based on what I feel is solid information is that they do have the tools in place to move forward with major monetary system change (see below). I don't think they would spend time and effort working on the tools unless they were prepared to use them if need be.
You can just take Jim Rickards and Dr. Warren Coats public writings on this topic to get a reasonable idea of how the powers that be might want to change the system. The precious metals advocates and central bank skeptics want to see a new monetary system where gold comes back into the system one way or another. While that is not what I would expect to see as the first choice of those in power, I do think they would keep that tool in their back pocket and use it if they had to in order to restore public confidence in the system. Where China would come down on this issue is an interesting and open question. China seems supportive of the SDR as a global reserve currency, but also is piling up gold and some think tanks in China do discuss using gold in a global currency system. A debate rages as to whether China (and Russia) wants a gold backed currency in the future or not. Both countries are adding significant gold reserves.
Q: What if we do not get another major crisis worse than 2008?
A: I expect the kind of changes that Dr. Coats and Jim Rickards talk about (SDR as the new global reserve currency) to evolve gradually over time, perhaps on a regional basis first (Africa, Asia, etc), then on a global basis. If there is no crisis, the public is not likely to be interested in major radical change, so I would expect the changes to take place slowly so the public really does not notice each individual change that much. It could take several years to several decades to unfold if there is no major crisis.
Q: What role will gold play in all this?
A: Gold will play an important role no matter what happens. Even though we have a fiat based system (or soft peg as Dr. Coats prefers to say) and might still have one after a major crisis, gold will still be the underlying "asset of last resort" held by the central banks, IMF, etc. Whether they use gold in some formal way to back a currency or not, it will still be a key reserve asset. I don't rule out gold returning to the system in some way either. Dr. Coats Real SDR proposal is based on valuing the SDR (valuing it, not backing it) on a basket of commodities and real goods rather than the currency basket used now to value it. Gold could certainly be in that basket. China might push for gold backing of some kind (perhaps in an indirect way).
I will add that none of the sources I talk to inside the system hate gold. They don't believe in a gold standard to back the currency directly, but they do see gold as a key reserve asset. I have no doubt that many working inside the system own some gold themselves. Individuals who can afford it should have some in their portfolio in my opinion. Silver can work for most anyone as an alternative as part of an emergency fund.
Q: What tools exist to move forward with a new monetary system after a crisis?
A: This is an important question. I believe that many of those outside the system do not realize that there are more tools left to deal with a crisis than they think. It is assumed that once the US Fed loses credibility (which many think will happen) the game is over and a collapse will ensue. Based on credible input I have gotten, I believe there are more tools left. Here is my bullet point list of tools I believe do exist and could be used by the existing financial institutions (IMF,BIS, etc):
- transition away from the US dollar system run by the US Fed and Treasury and into a new global reserve currency system based on the SDR with the IMF taking over in the role the US Fed has had as lender of last resort (see Jim Rickards and Dr. Coats for details).
- back this new SDR reserve currency directly or indirectly with an index of real goods (basket of goods/commodities). This could be done if a pure fiat SDR did not restore confidence. By pure fiat I mean backed with no tangible assets and valued using the current fiat currency basket.
-back the new SDR reserve currency with hard real assets (gold, oil, Tier 1 assets, etc) if confidence was still not restored. Technology to do this does exist.
- in conjunction with a new reserve currency, hold a global conference to deal with all the unsustainable sovereign debt in one shot. Write off what cannot be salvaged and restructure sovereign debt that can be salvaged. This could also happen prior to the start of a new global reserve currency. (step 1 - resolve debt, step 2 - setup new currency system). The IMF has studied this (debt resolution) for a long time so we can assume a plan could be put in place if needed. So called "bail-ins" could certainly be used as well. This is basically 'The Big Reset' people talk about.
-utilize modern technology to make the new reserve currency available to everyone (not just IMF and World Bank members and current private SDR holders). Allow the currency to be used for legal tender in daily transactions, currency exchange with national currencies, and as a store of value. Make it available on mobile phones and able to conduct transactions around the world in real time for very low or no fees. This is something that might happen later rather than sooner. It would take some initial less radical steps first and how mobile money might connect into the system is an ongoing discussion (see pp 35-37).
- provide both asset backing and institutional backing (BIS,IMF) to the new reserve currency to establish it as the most stable and secure currency available in the world (do whatever it takes to do this). Example: every SDR account up to $xx,xxx is guaranteed like the FDIC does now in the US for whatever amount is needed to establish confidence.
-allow the new reserve currency to co-exist with national currencies, but back it (see above) such that it is the premier and most stable currency that all other currencies peg to. Don't force people to use it, just make it so desirable they will prefer it over all other currencies (if you build it, they will come approach).
Q: What if all those tools still fail to restore confidence in a new monetary system (don't work) or the tools are not used?
A: This is a legitimate question. The big key to the answer to this question is another question: Who will the public trust if the current system fails?
It is possible that if the current US dollar based fiat system fails that the general public simply will lose all trust in the existing institutions that would be involved in implementing the above list of tools. If that does happen, all bets are off and I have no idea what would happen. The possibilities range from chaos and anarchy to police state/martial law tactics by governments to a return to a more decentralized and regional set of monetary systems around the world (even barter in some places). We could get a combination of all of the above in various places around the world.
At some point a new system would develop to transact business globally of course. What would happen during the transition period is an unknown to me. The most likely guess is that the transition would be disorderly (former BIS William White just used this term recently) and then eventually stabilize one way or another.
Conclusion:
These are the most important questions I know of at this point in time for most people. The answers are based on the best information I have from what I think are highly credible sources. With the future quite uncertain, the best suggestion I can offer for the average person like myself is to stay informed, stay prepared, and don't be shocked at whatever does happen. Have a backup plan in mind in case a worst case scenario unfolds, but don't live every day in fear of a worst case scenario.
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I will have a blog article featuring a brand new article just written by Dr. Warren Coats. He calls for some groundbreaking action by the new AIIB that would certainly impact monetary system change. Click here to see it.
On top of this, we were able to get an exclusive Q&A style interview with Dr. Coats where he answers some questions people have about a global reserve currency system.
Also, I will repost the article above a couple of times in the next two-three weeks and add any updated information I might get. With markets this volatile, things can change very quickly.
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