Wednesday, June 29, 2016

Monetary System Reform - Various Ideas Exist

This blog is dedicated to following events that might eventually lead to major change in the present global financial and monetary system. My research on this topic indicates that there is much widespread agreement that the present system is at risk from a stability and sustainability point of view. As time goes by I see more and more highly respected economists and monetary system officials (present and former) discuss the risks to the stability of the current system. Also, highly regarded fund managers and investors are speaking out.

We have documented the many warnings along these lines that have been issued by officials at the IMF and the BIS (Bank for International Settlements) over the past 2 plus years. We have discovered that many very high credibility experts including William White, Robert Pringle, Warren Coats, Mervyn King and others have concerns about stresses on the current system including stress caused by the US dollar being the world's primary reserve currency. We have long covered the forecasts by Jim Rickards and Willem Middelkoop that a reset of the present system will be needed under "new rules of the game."

All of this suggests that it is reasonable to suspect that at some point in the future the stress on the current system may lead to reforms/changes to some kind of new system. The whole point of this blog is to watch for that kind of change. 

Another interesting aspect of the research I have done on this topic is that there are a variety of ideas on how to reform the current system should that be needed in the future. Below I will do a bullet point list with examples of some of the various ideas I have seen along with links to where you can find more information if you like.


- Dr. Warren Coats (former IMF) - Real SDR Proposal - Dr. Coats proposes that the SDR used at the IMF might be able to serve as a global reserve currency if it were issued by a Currency Board and with what he calls a "hard anchor". He proposes that a basket of goods be used for the anchor. (see the links for more information and this Q&A interview we did earlier this year with Dr. Coats)

- Robert Pringle - (former Director at The Group of 30) - Mr. Pringle has written an interesting book (The Money Trap) and has a blog also titled The Money Trap. On his blog he talks about an idea for a new global reserve currency (the IKON) based upon the work of the German economist Wolfram Engels. The IKON would be anchored to the global equities market as I understand this proposal. Mr. Pringle also has a fascinating article (read it here) comparing a variety of ideas that have been proposed for a stable monetary system well worth reading. He looks at the pros and cons of several ideas. (note: Robert Pringle advised me by email that he is more concerned that monetary policy makers realize reforms need to take place than anything else. He says he could easily support Dr. Coats SDR proposal if it would lead to some momentum towards reforms. He is concerned that right now there is not much momentum for change in Washington D.C. or in the EU. He has a new blog article out on this today)

- Yanis Varoufakis (former Greek Minister) - proposes a new global currency he calls the Kosmos. We covered his idea here earlier this year. Dr. Warren Coats offered us some comments on this idea in our blog article (click here)

- A return of gold to the monetary system - This idea takes various forms ranging from a return to an actual gold standard (where currency can be directly exchanged for a fixed amount of gold) to more modern ideas for using gold as a type of "hard anchor" in one way or another. Here is an article that provides one example of this concept by F. William Engdahl. Some holding this view see Russia and/or China being proponents of a return to gold in the monetary system (note: Hugo Salinas Price recently made this presentation in Russia at the invitation of the Russian Deputy Prime Minister) 

My added comments: What strikes me in researching this topic is how many high credibility experts see a need to think about future changes to the present monetary system. Clearly, no one idea for reform has yet achieved a consensus of opinion. That has become clear to me from reading the comments of current officials and based on the ongoing discussion we see about various proposals with no indication that any consensus for major change exists right now. Along these lines, in a recent speech to the Bretton Woods Committee IMF Deputy Director David Lipton says:

Let me end by observing that the new normal in global economics has a parallel in global politics. Ian Bremmer of the Eurasia Group has dubbed this a “G-zero”, a world characterized by a “vacuum of global governance”.

It could be that impetus for global change may come from China and Russia. In a recent email I received from OMFIF Advisory Board member Willem Middelkoop, he told me this (and gave permission to publish):

"Russia and Chinese leaders met twice during last week and called (again) for an end to the current (dollar) system. From my contacts with Chinese insiders I know they really understand our problems well and are clearly preparing for The Next Phase (a monetary and geopolitical reset)"

All of this suggests to me that those of us who do not have a background in macro economics, monetary systems, etc. need to learn all we can. If events do some day lead to major changes, we need to understand the various proposals being suggested for reform. The goal of this blog is to provide the average person with the best information we can find from the best sources we can find on this important subject. 

We encourage readers to learn as much as possible and dig deeper into the various ideas. The more we understand, the better the chance that decisions on reform can be made that will improve the system for more people. More and more experts seem to think that will become necessary at some point even if that point in time is still unknown and no clear momentum for major change exists right now.

Added notes: A thank you to Willem Middlekoop and Dan Popescu for a re-tweet link to this article on their twitter feeds. Also, a thank you to Robert Pringle for a link back to our page here listing our articles on SDR's

Tuesday, June 28, 2016

Warren Coats and Robert Pringle Offer Thoughts on the Brexit Vote

We have featured articles and ideas from both Dr. Warren Coats (former IMF) and Robert Pringle (former Director - Group of 30) here on this blog. Both of these experts provide us a window into the thinking of some who have worked inside the monetary system for many years. This kind of experience is invaluable to hear from because we know we are getting their unfiltered thoughts which may not always be the case with those currently employed within the system who must consider how their public statements may impact markets, etc. 

In this article we feature the thoughts and reaction from these two experts on the recent Brexit vote. Dr. Coats provided a comment for us to include with this article so we will start with that. 

Direct comment from Dr. Coats on the Brexit vote:

"I think that the success of Brexit was a setback for the reforms I think the EU needs to remain the strong force for a peaceful and prosperous Europe that it has been even with all of its problems. But hopefully I am wrong and it will shock the rest of the EU into strengthening the European Economic Area (the single market) that was the free trade foundation of the EU. 

UK participation in the European common market would require the very labor mobility (immigration) the drove some Brits to vote to leave. No one knows where all of this will go.  I am sorry that Britain’s (classically) liberal voice will no long influence EU decisions. I opposed the withdrawal of Scotland from Great Britain but now assume that it is inevitable and probably a good thing as England continues to shrink in importance in the world. 

More broadly, I fear that we are seeing a retrenchment from the liberal international order we have all benefited so much from. I elaborate that point in the following note:"

Now some selected quotes from the blog article linked above written by Dr. Coats:

"My concern in this note is whether the underlying public sentiments that pushed Brexit over the finish line—the fear of job losses and cultural dilution as a result of excessive immigration—herald a retreat from the globalization that has dramatically raised standards of living and reduced poverty around the world in the last several decades."

. . . . .

"Trade across national borders could not exist without international laws and understandings about the nature of contracts and their enforcement, the description and measure of content and statements of value (unit of account), etc. Leaving the EU does not free the UK from the need to conform to such standards if they wish to continue trading with the rest of the world."

. . . . .

"The European Union itself was always much more than an economic (free trade) project. Following WWII after centuries of devastating wars, the European project was always more about establishing the mechanisms of political cooperation that would avoid another European war. It has been stunningly successful in this endeavor, but still struggles to find the right balance in the devolution of authority and the best formulation of European wide governments for preserving peace and promoting economic well-being. An excellent discussion of these issues can be found in Dalibor Rohac’s Toward an Imperfect Union: A Conservatives Case for the EU."

Robert Pringle wrote an interesting article on his blog (The Money Trap) in reaction to the Brexit vote (as a side note, we appreciate the link back to this blog in the last paragraph of this article on The Money Trap blog). Below are some selected quotes from the article titled 'Brexit Shows Need for New Rules on Money' :

"The vote for Brexit is about much more than the UK and Europe. It shows that new rules to guide the process of globalization are needed.
The policies followed since the financial crisis have two major errors.
First there is a failure to diagnose the true causes of the crisis. Second, governments have failed to ensure  that all sections of society paid their fair share of the cost.
Governments and central banks saw the problem as one of lax regulation and inadequate bank capital. They tightened regulation and raised capital requirements. In other words, the system was patched up. It was all basically “business as usual”.
Governments attempted to deal with the recessions by stimulating demand through easy money.  Again,  business as usual. That is what they had always done.
Preventing a widening of economic inequality was not one of the aims of these programmes. On the contrary. Central banks quantitative easing and other non-conventional monetary policies relied on boosting asset prices for their effectiveness, thus benefitting sections of society that already possessed significant financial or real estate assets. They made inequality worse.
Another highly damaging effect of these monetary policies was to cause wide swings in nominal and real exchange rates among major economies, amounting to competitive depreciation and currency wars.
All this helped to create the conditions for protests, culminating in BREXIT.
But as I argue in The Money Trap, the diagnosis used to justified these policies was always faulty. The policies have not cured the underlying liability to further crises.
They are not only insufficiently radical. They are just plain wrong.
Ordinary people sense this. They see that authorities do not have a real grip on banking and finance. They sense that baanking systems have not been reformed. Ordinary people pay through their taxes for bank recapitalization and continuing subsidies to the finance sector. This is grossly unfair. Banks are still not supporting the real economy and small businesses aas they should.
Economic recovery has been slow precisely because neither business leaders nor consumers feel the underlying problems have been addressed.
Meanwhile, Brussels, London and Washington have all become honeypots for corporate lobbyists securing special deals and favourable regulation for the interests they represent.

To prevent another Brexit, address the real causes

The unacknowledged causes of the financial crisis lay in bad national banking and international monetary systems. They remain unreformed."
. . . . . 

 My added comments: I know from reading articles from both of these experts that they have concerns about the future stability of the current financial and monetary system and both have interesting ideas on how to potentially reform it. In this case I wanted to see what they were thinking about the Brexit vote since it is a significant event. Below is a short bullet point list of what I think I see from their comments on it.

- Dr. Coats seems to be concerned that the Brexit vote may lead to headwinds for global monetary system reforms if nations take a more nationalistic view and turn away from a more global economic view. 

- Robert Pringle seems to view the vote as a signal that the present system policies are not working for the average person and need to be reformed. He seems to view it more as a call to action.

- Dr. Coats tends to emphasize the benefits he believes the existing EU system has provided over the past decades and suggests many Brexit voters may not have been aware of them.

- Robert Pringle tends to focus more on what he sees as the failures of the monetary polices used in recent years that he believes contributed to the Brexit vote.

Our interest here is to follow events like this to see if they result in some kind of major changes to the existing financial and monetary system. So far, my investigation suggests that there are a variety of ideas on how to reform the system and that major reform is more likely to take place under some kind of crisis condition because of the tendency for change to take place gradually without some kind of trigger like a crisis. Feedback I get from experts like Warren Coats and Robert Pringle also suggests to me that it may take some kind of crisis to generate interest from policy makers for serious reforms.
Both Robert Pringle and Warren Coats have ideas on how the system should be reformed. We will look at those ideas (along with some others) in a new article tomorrow. Whether the Brexit vote will lead to any kind of significant crisis situation is an unknown factor right now since the impact is likely to spread out over time.

Added notes: A thank you to a reader who alerted me to this document circulating in Europe that calls on the EU to respond to the Brexit by stronger integration rather than further decentralization. This article in the Express described the plan as a "European Superstate". With anti EU sentiment rising at the same time, expect all this to increase uncertainty and instability as the rift between those wanting less centralization and those wanting more seems to be ramping up. And this issue is also on stage in the US as well.

It's after the fact now, but here is the webinar Jim Rickards recorded on the day of the Brexit vote that turned out to be prescient. 

Monday, June 27, 2016

News Note: Alan Greenspan Says Return to the Pre-1913 Gold Standard "Would be a Great Thing"

This is going to cause a stir for sure. The reports that in a radio interview Alan Greenspan endorsed the idea of a return to the full gold standard as used pre 1913. He made the comments during an interview about the recent Brexit vote. Here is the key quote in this article:


"Mr Greenspan said in the interview that while he wouldn’t critique the current policies of the Fed, he said a return to how monetary policy was done more than a century ago — fixing the value of the dollar to a given amount of gold — would be a great thing.
“If we went back on the gold standard and adhered to the actual structure of the gold standard” as it was before 1913 “we’d be fine,” he said. “I’m known as a gold bug and everyone laughs at me,” he said. Mr Greenspan asked “why do central banks continue to own gold” if it isn’t important?
Mr Greenspan acknowledged that inflation has been low throughout the developed world, but he expects that to change. Citing what he sees as a steady and large increase in US money supply, he said “this type of economic environment ends with inflation.”

Note: Sorry that the link above leads to a pay wall, but I did see the actual article to extract the quote above. 

Here is an article on Zero hedge on this as well for those who don't want to pay to read the article on the site.

Here is the link to the Bloomberg interview (see 18:25 mark for gold comments)

Here is the article link as it appears on Google search as well:

Story image for alan greenspan return to gold standard would be a great thing from The Australian

Alan Greenspan laments Brexit vote

The Australian-3 hours ago
Former Federal Reserve Chairman Alan Greenspan said in a radio ... the US would be better off if it were operating on the gold standard again. ... he said a return to how monetary policy was done more than a century ago — fixing the value of the dollar to a given amount of gold — would be a great thing.

Added note: Former Group of 30 Executive Director Robert Pringle says Brexit shows a "need for new rules on money"

Special Mid Month Crisis Watch Update - Reaction to Brexit

I had promised readers here that I would do a monthly "Crisis Watch" reviewing what a wide variety of sources I follow are saying about the potential for another major global financial crisis. I also said if a significant event were to happen in between the updates I would try to provide an article on it.

In this case we have the Brexit vote which clearly is a significant event with the potential to lead into another major financial crisis. So, will that happen? I don't know. It has not happened so far. Stock markets on Friday were sharply lower and safe havens (the US dollar and gold) were sharply higher, but no systemic crisis threat emerged on Friday. Markets and banks were not closed for example, despite some news rumors that could happen. On the other hand, it's very early in this event and if there are large financial entities out there taking big hits from these sharp market moves, we may not find out about that right away. It's simply an unknown for now.

I think the best way I may be able to serve readers here in regards to this Brexit event is to simply list below links to articles from some of the various sources I cover on the monthly Crisis Watch update. This will give you a feel for how a variety of sources are reacting to the news and readers can form their own opinions from there. The only comment I would have is that this event is a clear example of why it is critical to stay alert and informed. We live in a globally interconnected financial system. There are systemic risks present in it all the time as we have thoroughly documented here from high credibility sources. It's not really fun to have to monitor this all the time, but we simply have no other choice given the world we live in today. Below are links to a variety of Brexit reactions I see out there.


Eric Sprott Audio Interview - Brexit Impact on the Gold and Silver Market

CNBC Analyst Art Cashin Interview - Brexit an "economic earthquake"

Harold James (on Project Syndicate) - The Brexit Revolt (vote of no confidence in leaders)

Jim Rickards on Gold & Brexit (taped on BNN Thursday morning during the vote) - (note: in this interview Jim laid out almost perfectly how markets would react to a Brexit vote)

Jeffrey Gundlach (on CNBC) - "we are in a bear market in confidence"

CNBC Interview - Brexit vote puts Fed in a Difficult Position

Robert Pringle Blog - Brexit Shows Need for New Rules on Globalization (note: a thank you to Robert Pringle for a link back to this blog contained in this article)

CNBC Interview - Alan Greenspan - Brexit may be just tip of the iceberg (note: I saw this interview live on CNBC - Greenspan was as somber as I have ever seen him and actually said we are in the worst shape he has ever seen during his time of public service)

Bloomberg article - Brexit Casts Shadow on World Move to Openness

CNBC - Larry Summers - Warns against "complacency" on market risk 

UK Telegraph - Ambrose Evans-Pritchard - The Sky Has not Fallen

David Marsh (OMFIF) - Interview on CNBC

The - Central Bank and IMF Response to Brexit - Christine Lagarde states directly here that Brexit could impact global financial system stability and urges "clarity in the negotiation process in the weeks and months ahead" indicating the impact of this vote will not be just a short term blip on the radar

Update 6-26-16: The BIS has issued its Annual Report alongside new speeches by BIS officials Claudio Borio and Jaime Caruana. The repeat earlier warnings from BIS that the system is too reliant on a debt based growth model and easy monetary policy. Despite the Brexit vote (which will make it even harder to pull back on easy monetary policies) they call for a move away from monetary policy to solve the structural problems and call on countries to implement reforms that would be very hard to enact politically. I will cover all this new information from BIS in a full article soon. For now, the timing couldn't be worse for BIS as Brexit makes it virtually impossible to implement what they are calling for while world markets are unstable and may require further central bank intervention and liquidity.

Keys to watch next week:

- price of gold - will it keep moving higher, stabilize, or pull back? - also, any signs that demand for delivery of actual gold (or silver) at exchanges like the Comex exceeds available metal for physical delivery as supplies are tight and this vote has cause a surge in demand (in other words, watch for a failure to deliver)

- currency exchange rate volatility - remain high or settle down?

- global stock markets - continue in a free fall or stabilize?

- any signs that one (or more) so called "too big to fail" has had a derivatives related failure (this could take days or weeks to show up) - here is one now reported (6-27-16)

- I suggest following Jim Rickards on his twitter feed in real time if possible next week (otherwise check in daily at some point in the day or evening). Willem Middelkoop as well (see example here). Either might have real time information at any time during a day on their twitter feed

- signs of central bank intervention in markets, liquidity injections, emergency meetings, etc. & public statements from IMF & BIS if any are issued (official statement issued 6-25-16) - see note above on new information just released from the BIS.

Sunday, June 26, 2016

What Can We Learn from Brexit?

Now that we know that a solid majority of citizens in the UK voted to leave the EU, it's time to reflect a bit and see if we can learn from this event. So far all we have seen is some normal repricing in the markets, but it's early yet.

Below are some bullet points I think we can take away from this.


- this vote clearly illustrates how divided people are and that at any time a small majority can be formed and rise up that can radically alter events (this majority can be very fluid and unstable). I believe that years of leaders focusing on simply winning and gaining power has resulted in the "losing group" feeling completely left out of the decision making process. The leaders of the present system have attempted to pretend that they can just ignore dissenting voices with no consequences. This vote shows just how naive that approach is in the environment that exists today. Unless things change and sincere efforts are made to listen to other points of view (on both sides), whoever is in charge will continue to run into this same problem in my view. This suggests to me that instability is more likely than stability in the system.

- mainstream media sources (and public officials) mostly all got this completely wrong. Even after the voting was completed these sources were reporting that the polls indicated that the remain vote would win. Even the leader of the Brexit movement got it wrong. This was all based on polls that also got it completely wrong. Keep that in mind.

- the markets mostly all got this completely wrong. All day during the voting global markets traded as if the remain vote would win. Also, we were told that hedge funds paid for expensive private exit polling so they would know the outcome ahead of time. All of these people and the markets got it completely wrong (they misread the people). Keep that in mind.

- going forward, it will be important to see how market fallout from this is contained. We can assume the same people who got all this completely wrong will assure us that the fallout will be minimal and contained. Hopefully, they will be right, but keep in mind they got all this completely wrong. Larry Summers agrees that the people getting things wrong need more humility in this article. Here is an excellent point from his article:

"After Brexit, Trump, Sanders and the misforecast British and Canadian general elections, it should be clear that the term political science is an oxymoron. Political events cannot be reliably predicted by pollsters, pundits or punters. All three groups should have humility going forward."

- watch for signs of contagion. market corrections are one thing. the problem can come when too many markets move too fast. Keep in mind there are trillions and trillions of derivative contracts hidden out there all over the world tied to these markets. If unexpected market moves trigger derivatives defaults in too many places, we will have a more serious situation that just simple market corrections. Don't count on the people who got all this wrong to give you a heads up. They were clueless about the Brexit vote and likely will be clueless again about any possible contagion impact. 

- watch for unusual or emergency reaction by the major central banks. They will certainly be standing ready to intervene anywhere they think they need to in all kinds of markets which may cause even more surprises and disruption.

- watch for further indications that public confidence in the present system and its leaders (politicians, finance leaders, etc) is further eroding. The whole system depends completely on public trust and confidence. The Brexit vote is another big signal that confidence in the current system (and its leaders) is eroding all over the world. Once it's gone it is very hard to recover as "leaders" tend to just start finger pointing and try to deflect blame off themselves when something goes wrong. People see this and lose even more confidence in them and the system. I see this everyday all around me even though our leaders wish to ignore it or dismiss it.

- If you were not already convinced that it might be a good idea to have some kind of plan in mind in case unexpected events were to trigger a systemic crisis, this should be your wake up call. If and when that day comes, you will either have made a plan and some preparations or not. As you can see, you cannot rely on mainstream sources to alert you ahead of time about any such event (see Larry Summers quote above). They got this completely wrong and its reasonable to assume they may get it completely wrong again because they tend to dismiss views they don't see as "mainstream". I think this is one of the biggest problems we face which is why this blog supports listening to a variety of viewpoints on these important issues.

It is critical to understand that if and when a true systemic crisis arises, we are pretty much on our own. If no crisis comes you won't be hurt by having a plan in mind and by making some reasonable preparations (emergency fund, etc). If a crisis does come, you will be glad you did something rather than nothing to try and prepare. Clearly, the worst plan is to blindly trust mainstream sources to alert you ahead of time. They do get things wrong as we have just seen and may get it wrong again at the most critical point in time.

Added note:  Robert Pringle (The Money Trap Blog) has a very interesting article out on his blog about the Brexit vote. I plan to feature this article along with some thoughts from Dr. Warren Coats on the Brexit vote in a new blog article in the next couple of weeks.

Here are some quotes from the Robert Pringle article:

"The vote for Brexit is about much more than the UK and Europe. It shows that new rules governing globalization are needed.
The policies followed since the financial crisis have two major errors.
First, there is a failure to diagnose the true causes of the crisis. Second, governments have failed to ensure  that all sections of society paid their fair share of the cost.
Governments and central banks saw the problem as one of lax regulation and inadequate bank capital. They tightened regulation and raised capital requirements. It was all basically “business as usual”.

Governments attempted to deal with the recessions by stimulating demand through easy money.  Again, business as usual."
. . . . . 
"But as I argue in The Money Trap, the diagnosis used to justify these policies was always faulty. The policies have not cured the underlying liability to further crises.
They are not only insufficiently radical. They are just plain wrong.
Ordinary people sense this. They see that authorities do not have a real grip on banking and finance. They sense that banks have not been reined in. Ordinary people pay through their taxes for bank recapitalization and continuing subsidies to the finance sector.This is grossly unfair.
Economic recovery has been slow precisely because neither business leaders nor consumers feel the underlying problems have been addressed.
Meanwhile, Brussels, London and Washington have all become honeypots for corporate lobbyists securing special deals and favourable regulation for the interests they represent."

Thursday, June 23, 2016

Reader Alert: Jim Rickards issues an alert due to Brexit Vote

Today I listened to Jim Rickards monthly webinar which is not yet posted to the internet. Jim pretty much nailed what is happening tonight in regards to the Brexit vote. Jim said today that should the Brexit vote pass it would be important to monitor events very closely.

If global markets start to sell off too much it could trigger a derivatives failure somewhere in the system (contagion- recall Lehman in 2008). The point is that this situation could lead to a deeper crisis of confidence that would force some kind of global response by the central banks etc. I did reach out to one expert source who tells me he is not seeing liquidity concerns so far. It's just important to stay alert to events right now in my view.

Tonight Jim is making even more comments about all this on his Twitter feed. I would recommend readers here follow Jim on his Twitter feed while this situation unfolds. You can do that here.  (see examples below for how serious he is taking this event)

I will keep this post updated today with any significant twitter comments.

At 10AM CST):  while we are seeing market selloffs as expected, we are not seeing the kind of selling or market reaction that would indicate a panic or crisis situation. Unless something changes significantly later today, it does not appear that we will see any market closings or bank closings. Just normal market reaction so far. This does jive with what an expert source told me last night that he did not see any signs of an immediate lack of liquidity.


These two are immediate reaction last night after the vote results:

Lots of talk about bank holidays & closing exchanges in UK. Please don't tell . He says it can't happen

You'll see this sign around the world on Friday. When they closed UK exchanges in 1914, the sign said "House Closed"

This one from 7AM (CST) - 6-24-16:

What we've seen so far is repricing. Next comes momentum. Then contagion from margin calls. Last stage is . Let's see if it gets there

What is the Most Significant Aspect of the Brexit Vote To Watch For?

I have intentionally avoided the topic of the Brexit vote in the UK because most news coverage does not really relate to our topic here. The focus in most media I read is of course on whether or not it will pass or fail. Alongside that are many articles suggesting that a number of very bad things may happen (in the UK and/or EU) if the Brexit vote passes (see list below).

For the purposes of this blog, these are mostly side issues. This blog is attempting to monitor events which could lead to a major change in the global monetary system. Change so significant that all of us will know our lives have been impacted. While some articles come close to suggesting that the Brexit vote could trigger that kind of impact, the focus here is on what the vote might signal about confidence in the present financial and monetary system.

The current global financial and monetary system is dependent upon the confidence of the public to function. I don't know of anyone who would argue that point. So long as the large majority of people have confidence in the system, it can continue to function somewhat normally. If confidence is lost by a majority of the public for any reason, everything changes. This is why we have our monthly Crisis Watch update here on the blog. There really is no more important event we can monitor than whether or not events that could lead to a crisis of confidence by the public are taking place.

The Brexit vote is another marker that tells us the mood of the public. If a majority of the public in the UK votes for a Brexit, it amounts to a vote of no confidence in the EU system. Even if the Brexit vote fails, a close vote still clearly indicates widespread lack of trust in the present system and those who are running it (much as we are seeing in the US this election year). Here is a Bloomberg article that makes the same point.

I believe this is why we are seeing such an intense effort by the major global institutions to persuade the public to vote against a Brexit (see IMF links below). It probably is not so much about any immediate economic impacts on trade, pensions, etc. There may be impacts there of course, but the huge elephant in the room impact would be a clear signal from the public that they are losing confidence in the present system. We noted in a recent blog article here that a number of high profile fund managers and high net worth investors are recently making comments about lack of faith and confidence in the current system.

For our purposes here, this is the most significant aspect of the Brexit vote that we need to keep an eye on (whether it passes or fails). We need to watch to see if a clear signal is sent to the global markets that too many people are losing confidence. That is the very thing that could lead to the kind of crisis we have talked about here for quite some time (the "snowflake that leads to the avalanche"). The kind of crisis that could lead to major monetary system change that could impact us all. This kind of mood change is virtually impossible to predict with any of the economic models used by various institutions and economists. It's why we have no choice but to stay alert to the possibility and follow events carefully.

While the odds say it's unlikely a Brexit vote would triggger an immediate crisis, please keep this concept (that public confidence is critical) in mind while following events in the coming days, weeks, and months. I will try to monitor events as best I can here, but the reality is that events can always unfold more quickly than anyone can stay up with them. It's important to stay alert and informed and have some kind of idea what you would do if a crisis of confidence were to unfold at some point in the future.


It's pretty clear how the IMF feels about the Brexit vote:

Chicago Tribune - IMF Revives Recession Warning for UK economy over Brexit Vote - Uncertainty Clouds the UK's Economic Prospects

If that's not enough evidence for you of IMF concern over this, here is what a google search under the term IMF on Brexit vote turns up (the list of links goes on and on from major publications all over the world). 

News on the vote (2pm CST) - Weather may play a factor. Heavy rains may dampen turnout in some areas. Meanwhile markets traded today as if the Brexit vote will not pass.

Added note: Jim Rickards will debate Barry Ritholtz on gold on Bloomberg TV - (4:40 pm ET)

Some notes on Jim Rickards webinar today since he is talking about Brexit in real time (while voting is in progress).

- still too close to call even at this point in Jim's view
- Jim issued somewhat of an alert in case the Brexit vote does pass - he said to watch markets closely because it could trigger a sharp global selloff leading to contagion and and global liquidity crisis very quickly (he did not predict this, just issued an alert to keep a close watch)
- he bought gold in the last few days in case Brexit wins - he says if it wins gold will move sharply higher quickly - if it fails he still sees gold higher by year end
- on his recent trip to a Swiss gold refiner he confirmed in person that the supply of gold bars for large demand buyers is very tight - he says gold will move higher soon because of this regardless of what happens with Brexit

Sunday, June 19, 2016

Robert Pringle - The Money Trap (Book and Blog)

Recently, I had the good fortune to discover another highly credible information source who writes about the issues we try to cover here (a reader here pointed me to it). Robert Pringle has a long and distinguished career in economics that you can read about here. Here is a selected excerpt:

"After obtaining a Masters degree in economics, sociology and history from King’s College, Cambridge University and post-graduate study at the London School of Economics, Robert joined The Banker, part of the FT group, later being appointed the Editor.
He also served as deputy director of the Committee on Invisible Exports, a body representing a wide range of UK service sectors, which was set up by the Bank of England to study and publicise the contribution made by financial, business, professional and allied services to world trade and the UK economy. He led a study that made the first published estimates of the invisible earnings of UK professions such as law, medicine and accountancy.
From 1979 to 1986  he was the first executive director of the Group of 30, an influential think tank based at the time in the World Trade Centre, New York (it has since moved to Washington, DC). For the G30, Robert co-authored pioneering studies of the foreign exchange and interbank markets, and on IMF borrowing from the private markets, and the emerging profession of official reserve management."

Mr. Pringle wrote a book titled "The Money Trap" in which he lays out his thesis that central bank policies since the financial crisis in 2008 have met with limited success. The book argues that governments have been using the wrong policy weapons. On his blog, Mr. Pringle recently wrote this article which summarizes the problems he lays out in his book. Here are a few quotes:

"What is the money trap? How can we get out of it?
Let me try to reformulate the thesis of my book in the light of recent developments.
Since the 1970s we have been in a period of transition to a new paradigm of monetary policy. Governments have tried various approaches to the challenges of managing money: in the 1970s, they put full employment top, and used monetary policies to expand demand, taking risks with inflation; the result was high inflation, high debts, the Third World debt crisis, and, eventually,  high unemployment. The 1980s saw a backlash as popular discontent with high inflation made policy makers give priority to price stability; this led the way to inflation targeting (IT) and central bank independence (CBI). After meeting with apparent success in The Great Moderation, the 2008 crash showed this policy model was also deficient. Since then reforms have focussed on strengthening bank capital but the basic framework of the system – IT + CBI with flexible exchange rates – continues.
This period has culminated in some of the biggest experiments ever – a massive expansion of central bank balance sheets, official interest rates held near zero for several years and in some cases deliberate currency depreciation in an effort to spur growth.
Results have been mixed.  Banks remain under great pressure, lending remains sluggish, real capital investment disappointing while households and businesses pile up cash balances.
To quote William White: (former BIS)"  . . . . . 
. . . . .
"To recap: Governments are evidently imprisoned in a cage from which they can see no way out. Indeed, there is no way out while they remain under the illusion that they can achieve their objectives by fiddling with monetary levers. Whatever form the central bank doctrine takes, whether reinforced by regulatory powers or whatnot, and whatever rules or objectives central banks follow, make no essential difference: they fail to achieve their ends; economies remain unstable, financial systems fragile. Public trust is lacking. Popular discontent and anger rumbles on dangerously."
My added comments: Here we have yet another very high credibility source expressing concern that the current monetary polices being employed are not solving the basic problems in the present global financial system. Mr. Pringle cites concerns from former BIS official William White who we covered in an article here on the blog earlier this year
The list of high credibility sources we are compiling here who are concerned over the stability and sustainability of the present global financial and monetary system keeps growing. We have been documenting warnings and concerns issued in recent years by current IMF and BIS officials all along (see list here). This year we have added new information from some former officials like Dr. Warren Coats, former BIS William White, former Dallas Fed President Richard Fisher and now from Robert Pringle
These are sources that should be listened to because they have years of experience on the front lines within the global financial system. When they express ideas and concerns, it is based on first hand knowledge in dealing directly with all kinds of issues and problems. I am happy to learn of the blog site (The Money Trap blog) that Mr. Pringle produces. I plan to monitor the blog as another high quality information source for readers here. I have told Mr. Pringle by email of my intentions to follow his blog and feature relevant articles there from time to time. He sent a kind and gracious reply.
Those of us who do not have a background in macro economics need all the expert sources we can find to help us learn and stay alert to any potential future change that might impact our lives. Mr. Pringle is another source that can help us with that objective.

Added notes: Readers may find this section on Gold of interest on The Money Trap blog. Here is quote from this section:

"History shows not only that there are alternatives to current ramshackle arrangements, but also that there are cycles in the way society defines and uses money itself.
Amidst spreading uncertainty, one thing is certain: that present arrangements will not endure. They are not compatible with globalised finncial markets. They are already in a state of advanced decay."

Also, I would like to thank Mr. Pringle for taking time from a very busy schedule to look over this article for accuracy (of my comments on his views). Whenever an expert takes time to do that, it helps improve the quality of the information presented here and we owe them our thanks for that. It's incredible how busy these kinds of experts are and yet they still make time to help us out here now and then. It's greatly appreciated.

A thank you to Willem Middelkoop (OMFIF Advisory Board) for a tweet on this article. And a thank you to Dan Popescu for his twitter mention as well. Another thank you to Robert Pringle for link back to this article on his blog in the last paragraph of this article.