Tuesday, May 31, 2016

Broader Distribution for Some Articles

I was offered the opportunity to post some selected blog articles on a site called Talk Markets. This site allows authors of articles to post them so that they may get a broader distribution. There are a number of well known writers that contribute their articles to Talk Markets.

Here is some info about the site I received in an email from the CEO Boaz Berkowitz:

"A little bit more about us:

TalkMarkets is a new financial media site launched by former executives from Seeking Alpha, Bloomberg, Reuters, and Yahoo Finance.  It is a smart site which covers the entire breadth of the financial industry but with content customized to users’ interests, preferences and level of investment sophistication. This provides users with a unique experience which is quick, easy and personally relevant.    . . . 

Already we feature content from hundreds of contributors, including many of the top names in the industry. So happy you want to join us."

I appreciate this opportunity as this will increase the views for articles including articles that I have already written and are archived here on the blog. Of course, all the articles here will stay archived here as well. Talk Markets will just be another site that some articles will be published on. Here is where they will list the articles:

As time goes by I will probably add more articles published here on that site and will probably publish some new articles on both sites. The recent decision to end daily articles here will mean I will have fewer articles going forward, but there are a number of articles archived here that I may submit for publication over there. It just increases the potential number of total readers for the article.

Monday, May 30, 2016

Five Ways This Blog Can Be Useful to You

Recently, I made a decision to end daily articles here on this blog. I explained that because I have come to the conclusion that we will not see much major monetary system change happen quickly unless we get another major financial crisis, it does really make sense to write daily articles. This means that the most important function here is to maintain a watch for signs that another crisis might might be headed our way. Meanwhile, I continue to write articles now and then when I see a significant event that truly relates to potential monetary system change (like a major speech or article from an official at IMF or BIS for example).  If I see significant new information from someone like Jim Rickards I might have an article on that as well.

A legitimate question for readers may be:

If you are writing fewer articles and don't expect much to change unless there is another major crisis, how is this blog useful to me? Below I will list five ways I believe this blog can be useful to you and then offer some added comments.


1) This blog will maintain what I am calling a "Crisis Watch" monthly. I gave this a lot of thought and decided this is the best way to deal with this topic. A problem I see with constantly discussing a potential financial crisis is that the timing of any such event is a complete unknown. The conditions exist for one to happen at any time, but it could also be a long time before we see one as well. My solution was to simply provide a "Crisis Watch" that I can update on the first day of each month. It provides a summary of views on when or if we will see another major crisis from a wide variety of sources many people see as credible. This can be helpful to you both in staying updated on what various sources are saying and in comparing sources over time to see who tends to be more accurate. Here is the most recent "Crisis Watch" update to give you a feel for how it works. If something major happens in between updates that indicates a crisis is unfolding I will try to jump in at that time with an article. Otherwise, I think a monthly update works fine to be useful to you. The new update coming 6-1-16 will have some quotes from some of the sources listed. Some other sources reviewed my comments and approved them.

2) This blog has an archive of warnings issued from both the IMF and BIS over the past couple of years related to the stability of the global financial and monetary system. This is a great resource that will stay here archived and will continue to be updated over time. I don't think you will find a list like this all in one place anywhere else that I am aware of. Here is the link to the warnings list here. This list is another way that this blog can be useful to you.

3) This blog has an archive of articles on the potential for the SDR to someday replace the US dollar as global reserve currency. This is a topic that is gaining more and more attention as time goes by. Jim Rickards first pointed me towards this issue as an important one to follow over time. He believes we will see this happen and has written and spoken extensively about it. His views motivated me to try and explore this further on my own to see if I could get some independent research that supports that this is something that could really happen in the future. That led me to Dr. Warren Coats who is one of the leading experts in the world without question on SDRs. Dr. Coats was formerly the head of the SDR Division at the IMF and has decades of experience with both the SDR and monetary systems. I had the good fortune to connect with him by email and he then offered to help my research. He pointed me towards his own proposal to someday have the SDR replace the US dollar as global reserve currency. He also agreed to do a Q&A style interview on his proposal and has been willing to give me direct quotes for use in several articles published here. I believe that these direct comments he gave me to use on the blog adds to the information base on this subject in a meaningful way. It is very hard to get current IMF or BIS officials to discuss this topic and offer direct comments. Dr. Coats willingness to do that is a significant way this blog can be useful to anyone wanting to learn more about this topic. (If it starts to actually happen, I believe this will be a lot of people)

4) This blog attempts to fill what I felt was a void in this space. By this I mean the whole subject of some kind of major event that causes a sea change in the entire global monetary system. This is not a topic that the average person is naturally drawn to. For most people the topic is either too academic to interest them or too extreme for them to take seriously. Having followed this now for many years I see great information available from people like Jim Rickards and Willem Middelkoop. They both are able to relate to the average person very well, but their books and presentations are more geared to people who have some wealth and are investors. At the other end of the spectrum, there are some great alternative media sites that attempt to convince the average person that a big crisis is coming and they need to prepare for it. However, what I see happen on many of these sites is that there are virtually constant daily predictions that a crisis is about to happen any minute. This appeals to those who already believe a big crisis is coming, but not so much to the average person who has not given the concept much thought or would view the whole idea as too extreme. 

If you know people in that category, this blog can be helpful to you by introducing them to these issues by using more mainstream sources that they would view as more credible. This is why I only use IMF and BIS warnings in the systemic risk articles listed here mentioned in point #2 above. It is unreasonable to expect someone new to all these issues to just blindly accept sources they have never heard of or who constantly predict a daily crisis that does not take place. The goal of this blog is to try and offer credible, verifiable information on these topics without any agenda. In this way, the blog can be a good resource base of information for anyone new to these issues that you may know.

5) Some articles on this blog offer information and commentary based on direct input I have gotten from well known experts on monetary systems. In some cases they prefer to remain off the record. In other cases they have given me permission to quote them in articles. But readers can assume that I go to great lengths to get many articles that cite experts mentioned here reviewed before I publish them. This is an effort to improve the accuracy and content quality of the article. Here is an example of a recent article that was reviewed in this way by Dr. Warren Coats and others: Claudio Speech Followup Article

Of course these experts don't necessarily endorse any opinions I offer on my own (which I try to minimize) , but I do have them review some articles before publication to insure accurate quotes and offer any input on overall content they may wish to give me. This review of some articles by experts is another way this blog can be useful to you by insuring that the quality of the information is improved.
My added commentary:

Summary - this blog attempts to provide a free public data base of information on what I believe is an important topic. If we do get another major financial crisis and it leads to major changes in the global monetary system, most people who have not viewed this as an important topic will start looking to learn more about it because it will impact them in their daily lives. If someday we really do see a proposal for the SDR to replace the US dollar for example, people will need good information on this topic and it's actually not easy to find.

The goal here is to provide quality information designed to cater to those who are looking for information for the first time without much background in these issues and to maintain an archive of easy to find articles that will stay available here. The articles are designed to continue to be useful for anyone needing some basic background information.

This blog can help people by providing this information without promoting any kind of agenda. I believe it can fill a void that exists on this topic and can be useful to you in the five ways listed above.

OT: Memorial Day

Last night I watched the National Memorial Day Concert held in Washington D.C. The show was extremely moving and for someone like me (now 60 years old) it brought back a lot of memories. You can watch it just below.

The first thing to say is that war is a horrible event. The destruction of human lives, human potential, and property is always enormous and very sad. Those of us who never had to face the prospect of being directly involved in war will never truly understand the horror of it.

As an American, all I can do is simply offer gratitude for the millions of fellow citizens who made the ultimate sacrifice trying to do what they could to serve their country. This concert this year featured a number of outstanding performances including the modern version of the Beach Boys. If you are my age you simply cannot listen to them without recalling the decade of the 1960's and all the turmoil related to the war in Viet Nam that badly divided the United States at that time.

But the most vivid memories that came back watching this concert were the stories my Dad would tell me about his friend Robert Lowell Hite and the stories my uncle would tell me about his service overseas in WWII (my uncle received a purple heart for being wounded in Germany near the end of war).

Dad has passed on now, but I still recall him telling me about his best friend (Robert Lowell Hite) that he grew up with back on the farm in West Texas in the 1930's. Below is some information on Lt. Col. Hite who was a part of the famous Doolittle raid from an article that ran in the Wasington Post when he passed away in 2015.

"Robert L. Hite, an Army Air Forces aviator who was captured by the Japanese and imprisoned for 40 months after flying in the Doolittle raid of 1942, the now­celebrated mission that invigorated American morale early in World War II, died March  29 at a nursing facility in Nashville. He was 95."

. . . . . 

"Mr. Hite, who retired as an Air Force lieutenant colonel, was a 22-year-old second lieutenant when he departed for what would be one of the most dramatic early offensives of the second world war.
The date was April 18, 1942, not yet five months after Japan’s attack on Pearl Harbor. The United States had waged battle with the Japanese throughout the Pacific but had not yet launched a strike on the enemy’s home islands.
Tapped to lead that mission was then-Lt. Col. James H. Doolittle, a gutsy test pilot who would receive the Medal of Honor for his valor in the raid now known by his name. He was joined by 79 volunteers. Among them was Mr. Hite."
. . . . .

"Mr. Hite was a co-pilot on the B-25 dubbed “Bat Out of Hell,” the last bomber to take off from the carrier. After completing their missions, the bombers were scheduled to land in a safe section of China — a plan that was upended when they encountered foul weather and darkness.

All 16 planes were lost in the course of the mission. Mr. Hite and other aviators were forced to bail out over enemy-occupied China. Eight men, including Mr. Hite, were captured by the Japanese. Three were executed; the other five received life sentences after what was described as a sham court-martial. For more than three years in POW camps in China, they endured interrogation, beatings, disease and starvation."

One prisoner died in captivity. Mr. Hite was reduced to 88 pounds, according to Scott’s book.
“We had just come out of a full American life with all kinds of goodies,” Mr. Hite said in the oral history, “good food, good life, and suddenly we were in a solitary cell and were being harassed, slapped and kicked. Our rations were meager, and we just wondered if the world was going to hold together.”  . . . . .
Whenever my Dad spoke of his friend he talked with deep respect. Both of them were just normal kids growing up on cotton farms in West Texas when they were called into service for WWII. Dad was fortunate in that he did not have to deploy overseas, but his best friend did and you can read above what a horror story the war turned into for him. I always thought about how it could just as easily have been my Dad who had to endure that and how difficult it would be to see your best friend go through all that. I cannot possibly even imagine how much we owe to those who made sacrifices like this for their country. 
The hope for the future is that somehow war will end and no one will have to endure things like this. Most of those who actually fight the wars are probably just trying to serve their country and don't really want to be faced with having to kill other human beings or likely be killed themselves. I can't even imagine having to make that choice.
On this Memorial Day, as we remember all those who sacrificed so much, I hope those who come behind my generation will do all they can to prevent war and uphold basic human rights for all people. 

Wednesday, May 25, 2016

Sputnik News Article on the "Petro-Yuan"

One aspect of the topic we cover here is the status of the US dollar as the world's leading reserve currency. This is because if the US dollar were to lose that status it would indicate that major monetary system change is underway and that is what we watch for here. In a new article appearing in Sputnik News (Russian publication), we get evidence that there is an effort being made by Russia and China to move away from a monetary system dominated by the US dollar. Below are some quotes from the article and then a few added comments.


"After the West imposed economic sanctions against Moscow, Russia and Beijing established a powerful energy alliance which changed the global oil market. In addition to increasing trade operations with oil and gas, the two countries are set to challenge dominance of the US dollar in setting prices for crude.

Petro-yuan is a strategic payment tool which would facilitate switching to a multipolar monetary systematic which would include various currencies and reflect the global balance of power, Mexican economist Ariel Noyola Rodriguez wrote in an article for the foreign affairs analysis website Voltaire Network (hit translate to read the linked article in english)."

. . . . .

"But, this strategic energy alliance has one long-term goal. Moscow and Beijing turned oil supplies into the channel to switch to a multipolar monetary systemWestern sanctions are pushing Russia to exclude dollar and euro transactions from their trade operations, for safety.

As a result, China has been paying for Russian oil and gas in yuan since mid-2015. This fact has been confirmed by Gazprom Neft, the oil-producing subsidiary of Gazprom."

. . . . .

"Many geo-economic powers understand that in order to build a stable monetary system de-dollarization is needed," Rodriguez assumed."

My added comments: Now and then it's good to look at publications in Russia and China to get a feel for how they see the global monetary system. When you follow this topic it becomes clear that they would prefer to see a new system where the US dollar is not the leading global reserve currency. What will be interesting to follow is whether or not Russia and China eventually get behind a move for the SDR to replace the US dollar or if they simply promote making the yuan more important. This process tends to move slowly so expect changes to be gradual unless another major global financial crisis speeds things up.

 Also, what role gold might play in all this is a hot topic of conversation lately and I will do a new article on that coming up in June.

Friday, May 20, 2016

Jim Rickards: Two Part Article on What He Sees Coming (Global Inflation and Gold Revaluation)

In a recent blog article we noted a comment Jim Rickards made about the fact that lately there have been some elite economists who have written about the idea of a major upward revaluation for gold as part of an effort to get to the desired inflation targets of the central banks. In a new two part article Jim explores this topic in depth. Below are the links to each article and a few selected quotes.


Link to Part I 

Link to Part II

Selected quotes from Part I
"As you may know, the “Shanghai Accord” is a secret plan created by the G-4 (China, the U.S., the eurozone and Japan) on the sidelines of the G-20 meeting in Shanghai, China, on Feb. 26.
The plan is to strengthen the euro and the yen and ease the dollar. With the Chinese yuan pegged to the dollar, this combination gives China financial ease and a competitive advantage over its trading partners.
The Shanghai Accord will be an operative reality in global currency markets for the next several years."
. . . . .
"Below, I show you the one way to produce inflation that doesn’t require the Shanghai Accord or destructive currency wars. And the elites are finally starting to talk about it publicly. What’s their next plan? Read on…"
. . . . 
"So there are three ways out of debt. One is default, which is not a good option. One is growth, but it’s not happening. The third way is inflation. The government has to have inflation. If it doesn’t, there’s going to be a crack-up in the national debt.
But we’re not getting inflation from monetary policy. There’s another option, however. The idea’s been around for a long time, but now it’s being spoken about publicly by elites. That’s to have central banks, whether the Fed or the emerging markets, bid up the price of gold.
A higher gold price will also drive prices in the overall economy higher."
Selected quotes from Part II

"The global monetary elites had a conference in Zurich, Switzerland, last week. Among the speakers were William Dudley, president of the Federal Reserve Bank of New York, and Claudio Borio, chief economist of the Bank for International Settlements.
The topic of the conference was the prospect of multiple reserve currencies in the international monetary system. The speakers generally agreed that a system with more reserve currencies (such as the Australian dollar, Canadian dollar and possibly certain emerging markets’ currencies in addition to the Chinese yuan) would be a desirable one.
There’s only one problem…
It’s a zero-sum game. All of the reserve currencies in the world add up to 100% of the reserve currencies. If new currencies have a larger share, then the U.S. dollar must have a smaller share. It’s just basic math.
That means a long-term process of selling dollars and buying the new reserve currencies. That selling lowers the value of the dollar and imports inflation into the U.S.
It also means a higher dollar price for gold. The elites won’t tell you that, but it’s true."              
. . . . . .
"The key takeaway is that a higher dollar price for gold is just a lower value for the dollar. And that’s what the elite’s want.
It’s part of their global inflation plan…"
My added comments: There is without question a belief by many that gold is going to play some kind of key role in the future in the monetary system. Jim goes into his view on a possible revaluation for gold in a lot of detail in these two articles. In April, he released his new book "The New Case for Gold."
Officially, I cannot find anyone who is saying that there is a plan in progress to return to a gold standard where a major currency or currencies would again be exchangeable for gold at a fixed price. However, gold is obviously important in the system as a key reserve asset. We have seen very large additions to gold reserves by a number of central banks with two of the biggest being in Russia and China. 
Also, as Jim Rickards points out, for whatever reason some very highly respected economists have written about the idea of gold being revalued higher as one way to deal with the battle against deflation and global debt problems. Here is the comment Jim made earlier on this that we noted in a recent blog article:
"This is the third elite economist to say the same thing after the PIMCO paper (Rumplestilskin) and Ken Rogoffs piece. The power elites are now speaking openly about revaluing gold, which is just a form of currency devaluation."
This idea has been discussed for a good while (for example as we noted in this blog article) by some outside the system. The fact that more mainstream economists are writing about it is an interesting new development. In addition, I have gotten emails from people like Willem Middelkoop saying that he sees this idea being written about more and more in respected investment newsletters, etc. He wrote this article on his blog in early May and this new one on JP Morgan endorsing gold
I am not sure yet where all this is heading, but we will just continue to follow events and see what happens. It's clear that gold is attracting a lot of attention.

Added notes: Here is Jim Rickards latest online webinar and a big thank you to Willem Middelkoop for these kinds words on his twitter feed. Both Jim and Willem help me out from time to time in pointing me towards information I try to cover here.

Additional added note: This article was also published at TalkMarkets.com here

Bloomberg: Fed Plan Targets Derivatives Contracts

Here we have an interesting new article on Bloomberg that covers a plan by the US Federal Reserve to deal with potential contagion from derivatives contracts. This is a topic we have covered here somewhat because a failure at a "too big to fail" financial institution could lead to risk for the entire global financial system. Below are some quotes from this Bloomberg article and then some added comments.


"Hedge funds, insurers and other companies that do business with Wall Street megabanks are poised to pay a price for regulators’ efforts to make sure any future collapse of a giant lender doesn’t tank the entire financial system.

The Federal Reserve proposed that so-called stays be included in contracts for derivatives and other financial instruments to prevent counterparties from immediately pulling collateral from a failed bank. The plan released Tuesday is meant to give authorities ample time to unwind a firm, hopefully heading off the frantic contagion that spread through markets in 2008 when Lehman Brothers Holdings Inc. toppled and its trading partners demanded instant payment on terminated contracts."

. . . . . 

"Fed Governor Daniel Tarullo said the rule is “another step forward in our efforts to make financial firms resolvable without either injecting public capital or endangering the overall stability of the financial system.”

. . . . . . 

"Before they can finalize the rule, which comes with a one-year implementation period, U.S. regulators must seek public comment on the proposal. The Fed will accept feedback until Aug. 5."

My added comments: Readers here know that we have covered the many warnings issued by the IMF and the BIS about risks that exist to the global financial system. This derivatives issue is a key one because of the interconnected nature of the global financial system. There are some who downplay the derivatives risk by saying that since financial institutions hedge derivative positions, the risk is much lower than it may appear when looking at the size of the full contract value of a derivative. The idea is that the institution will own a hedge position on the derivative that offsets (reduces) the risk.

However, this argument fails if a major institution goes under and cannot meet its obligations as a counterparty on its derivatives contracts. It's obvious this is a legitimate concern since the Federal Reserve itself wants to basically "freeze" derivative contract obligations for 48 hours if a big bank does go under as this Bloomberg article explains. The article quotes Fed Governor Daniel Tarullo as saying the plan is another step to "make financial firms resolvable without either injecting public capital (taxpayer dollars) or endangering the overall stability of the financial system." So its clear these derivative contracts can pose a systemic risk to the overall financial system despite the willingness of some to ignore that risk. Certainly, a big derivatives contract failure could trigger the kind of new major financial crisis that Jim Rickards and others are expecting at some point in the future.

On the other hand, I note that there does not appear to be any sense of urgency by the Fed to get this plan implemented. They will take public comments until August 5th of this year and then there is a one year time frame to implement the plan. So it could be the fall of 2017 or later before this plan is actually implemented. This suggests that the Fed does not see any kind of imminent crisis related to derivatives on the near term horizon and certainly not prior to the US elections in November. Since issues like this are not even addressed by the Presidential candidates, we have no idea how whoever is elected in November would feel about this proposed plan or how they would deal with a major systemic crisis if one did unfold.

Monday, May 16, 2016

Claudio Borio (BIS) Speech - Followup Article

The recent speech by Claudio Borio of the Bank for International Settlements that we covered here contains some comments about a hypothetical possible role in the future for the SDR. Since we have covered that topic here in depth, I wanted to feature the remarks in this speech by Mr. Borio below and then add a few additional comments of my own. Please note the comment from Dr. Warren Coats (former IMF) offered for readers here in the added comments section below.

from page 6 of the speech under the subtitle:  Possible Solutions:

"First, it is not clear to me that more pluralism is the answer to the main problem. True, it may impose greater discipline on the dominant country. Greater choice must surely help.(15) But more pluralism, per se, does not address the root problem, ie the absence of a global anchor. Could there not be a race to the bottom rather than to the top? And even if the SDR was placed at the system’s centre, what would anchor the SDR? (16) 

Short of creating a supranational central bank that operated in SDRs, this would require an explicit link to national monetary policies; otherwise, the SDR would simply remain an additional instrument with but a limited impact on global financial conditions, at least in tranquil times. For instance, the ECU acted as a common reference for exchange rate adjustments in the European Monetary System (EMS), although even then the system was far from symmetrical, with the DM playing the main anchor role. (17)"

15) See Zhou (2009) and Coeuré (2015); for a view that the discipline is not working, see Mishra and Rajan (2016).

16) For discussions of the role of the SDR, see eg Mateos y Lago et al (2009), Zhou (2009), Padoa-Schioppa (2010) Camdessus et al (2011) and IMF (2011). 

17) Moreover, if the SDR was used widely to denominate international assets and liabilities but remained an amalgam of national currencies, it is not clear that this would help support financial stability in a crisis. Runs on international banks with SDR denominated liabilities instead of dollar-denominated liabilities, as experienced in 2008, would have required cooperation in funding operations by all of the central banks whose currencies were included in the SDR. Arguably, this may have complicated the response (BIS (2010, p 55)). 

My added comments: I want to be careful here not to read in something in these comments that is not there. First, let's just try to summarize what I think are some key bullet points from this section of the speech by Mr. Borio.

- he is not sure if moving to plural currency regime (where the US dollar is less dominant) will make the system more stable or not

- he says that will not address "the root of the problem" which he then says is "the absence of a global anchor"

- he asks a hypothetical question: "even if the SDR were placed at the system's centre, what would anchor the SDR?"

-he goes on to say that trying to use the SDR without a supranational central bank that operated in SDRs would require "an explicit link to national monetary policies"

Now I will attempt to offer some observations about these comments that are strictly my own ideas and not anything that the BIS or any BIS official has said. Also, the comments below about Dr. Coats Real SDR Currency Board proposal are my own as well (except for the direct quote Dr. Coats sent me below). Neither Dr. Coats or anyone at BIS has suggested to me that a proposal to use the SDR at the center of the global financial system is currently under consideration.

These comments by Mr. Borio are fascinating to me because of the research I have done on the "Real SDR Currency Board" proposal by the former head of the SDR Division at the IMF (Dr. Warren Coats). Dr. Coats not only has proposed making the SDR (the "Real SDR" under his proposal) the center of the system, he has also written a paper on why he feels the world needs a global reserve currency "with a hard anchor." 

It's hard for me to ignore the similarity in the use of the term hard anchor by Dr. Coats and the question raised by Mr. Borio as to "what would anchor the SDR?" As I read Dr. Coats proposal, it seems to me that it may attempt to address the questions raised by Mr. Borio about how to anchor the global financial system to make it more stable. 

Perhaps the best thing to do here is to simply refer readers to the proposal by Dr. Coats for their own study to see if you think they are talking about the same idea and if Dr. Coats proposal would address the issues raised by Mr. Borio.

Here is the link to Dr. Coats Real SDR Currency Board Proposal:

Here is the link to Dr. Coats paper on why the world needs a global currency with a hard anchor:

https://works.bepress.com/warren_coats/34/  -  Blog article on this 

I asked Dr. Coats what he thought about the remarks by Mr. Borio on the SDR and he offered these comments:

"The reason Mr. Borio does not consider the SDR a sufficient anchor is that its value depends on other currencies, whose value is determined by the monetary policies of the countries that issue them, which are not “anchored” in any clear way. While I have argued that expanding the use of the SDR would be helpful, my Real SDR would, of course, replace the currency valuation basket with a goods valuation basket. Issuing these Real SDRs under currency board rules would remove the need for a “supranational central bank” that decided how many to issue." (I added the underline for emphasis)

I would like to add that Dr. Coats has gone above and beyond in donating his time to help me better understand his proposal and really the entire idea of the SDR as a potential global currency. He has done this purely because he wants to make his knowledge and experience available to those of us without a background in these complex topics. We owe him a debt of gratitude for taking time to offer readers here his time, knowledge and experience. It is very hard to find people with his level of knowledge of the system who will take time to share it. I know because I look for them constantly in trying to get the best information I can for readers here.

My take on all this based on these highly credible information sources is that there are always ongoing discussions and ideas within the global community about how to reform the system and make it more stable in the future. It appears to me that no one proposal has been adopted and that some big questions still remain to be resolved. It appears that study, discussion, and exchange of ideas will continue over time. If another major crisis were to erupt, it would probably speed up any process that involved major systemic change. That is my own belief and not anything I have been told by any financial official. It just makes sense to me.

One question I get quite often is if any of these proposals include the concept of using gold as the "hard anchor" for any potential future global currency. My best understanding of the situation is that using gold alone as a anchor (or backing if you prefer that term) has not been part of any official proposal that I know of.

Dr. Coats explains in his writings that he prefers to use a basket of goods. He feels that would bring stability to the currency along with using a Currency Board operating under a rules based system. No one at the IMF or the BIS has ever suggested to me that using gold for currency backing is under consideration at this time. There have been some serious papers written on the idea (see examples here and here), but again, no official proposal that I know of. There have also been some highly respected economists who have recently talked about a "revaluation" for gold against currencies. We mentioned that in this recent blog article.

However, everyone who follows this topic understands that gold is an important reserve asset for central banks and the IMF. Even the BIS owns some gold reserves (2015 WGC report shows BIS holding 111 tons of gold reserves). So, I believe that whether or not gold is ever used again in any official way to back a major currency, it is viewed as an important reserve asset to be held by the nations involved in any future discussions about "global rules of the game". I think this is why both Russia and China have been steadily adding to their gold reserves in recent years.

Friday, May 13, 2016

Claudio Borio (BIS) - More Pluralism, More Stability?

We have covered a number of presentations by BIS Official Claudio Borio here on this blog such as this one we looked at earlier this year. Mr. Borio often discusses topics that relate directly to what we cover here regarding potential change to the international monetary system. In a new speech, Mr. Borio looks at the question of whether a more pluralistic system (where the US dollar is not as dominant) will actually result in a more stable system. Below I have pasted in the three "takeaways" from his presentation and the conclusion section. After that are some added comments.


"There are three takeaways from my presentation. 

First, there is no doubt that the dominance of one currency creates challenges for the IMFS (International Monetary and Financial System). Fundamentally, the domestic interests of the country of issue need not coincide with those of the system as a whole. 

Second, it is less clear, though, whether a more pluralist system, even if it was achieved, could help address the IMFS’s main weakness. To my mind, that weakness is its inability to prevent the build-up and unwinding of hugely damaging financial imbalances, or outsize financial cycles, thereby amplifying weaknesses in national arrangements (Borio (2014a)). This is what, with a colleague, Piti Disyatat, we have termed its “excess (financial) elasticity” (Borio and Disyatat (2011)). Think of an elastic band that you can stretch out further and further but that, as a result, snaps back more violently. 

Third, addressing this weakness would require stronger anchors at national and international level. Some progress has been made, especially at national level. But much more needs to be done."

. . . . . . .


"I have argued that the Achilles heel of the IMFS is that it amplifies the key weakness of domestic monetary and financial regimes, ie their inability to prevent the build-up and unwinding of hugely damaging financial imbalances (outsize financial cycles) – or “excess (financial) elasticity”. If so, the main problem is the lack of an effective anchor for the system as a whole. It is not clear to me that more pluralism is the answer. Rather, the answer would be to establish stronger anchors at national and international level. This means not just putting one’s house in order, but also putting our global village in order. Some progress has been made, especially at national level. But much more needs to be done, especially in monetary regimes and internationally."

My added comments: I was interested in the call by Mr. Borio for "stronger anchors" for the monetary system in light of what we have covered here on this blog. (note: Mr. Borio talks some about the SDR on page 6 in this presentation, so please read the full speech to see what he says - see followup blog article here).

In this presentation, Mr. Borio explains what he means by stronger anchors as follows:

". . . . the solution requires stronger anchors for domestic regimes and their interaction. To be sure, there is scope to improve international crisis management arrangements (BIS(201)). But, as they say, one ounce of prevention is worth a pount of cure. And, while putting one's house in order is essential, it is not enough (Padoa-Schioppa (2008)): there is also a need to put the global village in order. 

Domestically, as discussed in greater detail elsewhere, this means more systematically tackling financial booms and busts through a combination of monetary, prudential as well as fiscal policies, strongly supported by structural policies (BIS(2015b)). The key is to have policies that are more symmetrical over booms and busts so as to mitigate them without the risk of running out of policy room for manoeuvre over time.

Internationally, this means better internalising the possible spillovers and spillbacks of national policies. Three possibilities can be envisaged, ranked on a scale of increasing ambition (Caruana (2015), BIS (2015a)). At a minimum, enlightened self-interest, based on a thorough exchange of information, should be feasible. This would mean that, when setting domestic policies, countries would individually seek to take spillovers and spillbacks more systematically into account. Large jurisdictions that are home to international currencies have a special responsibility. Going one step further, cooperation could extend to occasional joint decisions, on both interest rates and foreign exchange intervention, beyond the well honed responses seen during the crises. The third, most ambitious, possibility would be to develop and implement new global rules of the game that would help instil greater discipline in national policies (egRajan (2016)).

Based on this analysis, how far away is the international community from finding adequate solutions? The answer is "still a long way". True, progress has been substantial in the prudential domain. But much more would be needed regarding monetary regimes. Even at the national level, it has proved difficult to incorporate systematically financial stability considerations, which are generally left to prudential policy. And these problems are simply compounded at the international level. The preconditions for progress are consensus on diagnosis, which would put financial imbalances at the heart of the problem, as well as a strong sense of urgency and shared responsibility internationally. At present, neither precondition is met."


My comments: Please note that Mr. Borio says the international community is "still a long way" from finding adequate solutions and so he lists three possible scenarios for improving the situation based on a "scale of increasing ambition." This suggests that Mr. Borio recognizes that achieving global consensus is very difficult to do so he orders his three proposals from the easiest to accomplish to the most difficult. He says developing and implementing "new global rules of the game" would be the most ambitious plan. The BIS has talked about the idea of "new rules for the game" for some time now and we have covered that here.

Clearly, the concept of new rules of the game which could lead to major monetary system change is an ongoing topic of discussion around the world. However, it seems that most of the time these changes are viewed as something not likely to happen in the short term. It appears that some big questions are not yet resolved. This is why we stay on "crisis watch" here. A new major global financial crisis is the event most likely to speed up any proposals for major systemic change that we watch for here.

Wednesday, May 11, 2016

Former BIS Stefan Gerlach - Global Financial System's Weakened Defenses

Former BIS official Stefan Gerlach writes a new article appearing on Project Syndicate here. He notes that the potential for a major crisis still exists in the global financial system and has some interesting comments on gold. Below are some quotes from the article and then some added comments. See Jim Rickards comment on the article below.

"Eighty-five years ago this month, Credit-Anstalt, by far the largest bank in Austria, collapsed. By that July, banks in Egypt, Germany, Hungary, Latvia, Poland, Romania, and Turkey had experienced runs. A banking panic hit the United States in August, though the sources of that panic may have been domestic. In September, banks in the United Kingdom experienced large withdrawals. The parallels to the 2008 collapse of the US investment bank Lehman Brothers are strong – and crucial for understanding today’s financial risks.

For starters, neither the collapse of Credit-Anstalt nor that of Lehman Brothers caused all of the global financial tumult that ensued. Those collapses and the subsequent problems were symptoms of the same disease: a weak banking system.

In Austria in 1931, the problem was rooted in the breakup of the Austro-Hungarian Empire after World War I, hyperinflation in the early 1920s, and banks’ excessive exposure to the industrial sector. By the time Credit-Anstalt collapsed, the world had been in deep recession for two years, banking systems in a number of countries had become fragile, and tensions were easily transmitted across national borders, with the gold standard exacerbating financial vulnerability by constraining central banks’ ability to act."

. . . . . .

"Unable to rule out a new crisis, how well are we equipped to cope with one? The short answer is: not very.

In fact, if a financial crisis were to occur today, its consequences for the real economy might be even more severe than in the past."        . . . . . .

"In the early twentieth century, central banks could all devalue their currencies against gold, thereby raising the price level and escaping debt deflation. And, indeed, nine countries, including the UK, did exactly that in 1931, with another eight countries, including the US, following suit over the next five years. Today, however, currency depreciation is a zero-sum game."

Click here to read the full article on Project Syndicate


My added comments: I passed this article along to Jim Rickards and he offered a very interesting reply as follows:

"Thanks. This is the third elite economist to say the same thing after the PIMCO paper (Rumplestilskin) and Ken Rogoffs piece. The power elites are now speaking openly about revaluing gold, which is just a form of currency devaluation."

He then kindly forwarded me the links for the other two economists he mentioned in his reply here:

I think all this is very intriguing. Jim Rickards just released his new book, "The New Case for Gold" in which he talks about gold back in the 1930's time period Mr. Gerlach mentions. He also says that currencies could be devalued against gold today if financial authorities wanted to use that tool again. Please note that Mr. Gerlach points out that currencies were devalued against gold once before in his article as well (see the quote above). It is interesting to see so many articles on this idea (revaluing gold) surfacing lately. Dutch author Willem Middelkoop also mentioned to me in a recent email that he is seeing the idea of revaluing gold higher mentioned more frequently.