Sunday, July 31, 2016

News Note: Keeping an eye on Italian Bank Rescue Plan

This is a news note related to an article appearing this evening about the rescue plan put in place Friday to stave off a potential bankruptcy for a major Italian bank. This news is important because as I understand it this Italian bank is a significant counterparty to Deutsche Bank. Obviously, the last thing DB needs is for a major counterparty to fail and be unable to meet obligations. I believe this is likely why such a massive and apparently risky rescue plan was put together. 

As we have pointed out here many times, because of the interconnected nature of the banking system, we must always keep an eye on things like this if we know about them. Below are some excerpts from this news article that explains the rescue plan and also notes the potential problems with it.


Italian bank's rescue plan faces hurdles

"With the ink barely dry on its bailout plan, Italian bank Monte dei Paschi di Siena faces a Herculean task convincing investors to back a third recapitalisation in as many years and avert a banking crisis that would send shockwaves across Europe.
To stave off the risk of being wound down, the world's oldest bank has hastily unveiled the private sector-backed rescue blueprint late on Friday. It came just hours before the lender emerged as the worst performer in European stress tests that showed its capital would be entirely wiped out in a severe economic downturn."
. . . . 
"Global investment banks have made a preliminary agreement to underwrite the rights issue by Italy's third biggest bank.
But this is subject to conditions, including that the second prong of the bank's plan is successful: the sale of 9.2 billion euros of bad loans via a mammoth securitisation, whose sheer size is unprecedented in Italy.
As the bank's shares - which have lost nearly 80 per cent of their value this year - brace for Monday's market reaction to the bailout scheme, senior bankers and fund managers are already questioning the chances of the plan's success.
"Both legs of the plan are potentially fragile," said Filippo Alloatti, credit analyst at asset manager Hermes Investments.
"It will be difficult to complete such a big capital increase given their track record with past cash calls, and the securitisation is a monster operation, a puzzle full of moving pieces that need to fall into place. The execution risk is significant."

Added notes: Here is an old Bloomberg article that illustrates this bank and DB have a history with derivatives.

The monthly Crisis Watch Update article is now published here. It has some updated links and quotes from a wide variety of sources I read to try and stay informed. 

On 8-4-16 will publish an article featuring Central Bank expert Robert Pringle who says current monetary policies are immoral and explains why he feels that way.

Saturday, July 30, 2016

News Note: IMF Gets Tough Report from its Independent Evaluator (IEO)

The UK Telegraph runs this article detailing the news that a review of the IMF by its Independent Evaluator turned up a number of problems. Below are a few excerpts from the article and then a bullet point list of the issues/problems cited in the report.


"The International Monetary Fund’s top staff misled their own board, made a series of calamitous misjudgments in Greece, became euphoric cheerleaders for the euro project, ignored warning signs of impending crisis, and collectively failed to grasp an elemental concept of currency theory. 

This is the lacerating verdict of the IMF’s top watchdog on the Fund’s tangled political role in the eurozone debt crisis, the most damaging episode in the history of the Bretton Woods institutions. 

It describes a “culture of complacency”, prone to “superficial and mechanistic” analysis,  and traces a shocking break-down in the governance of the IMF, leaving it unclear who is ultimately in charge of this extremely powerful organisation. 

The report by the IMF’s Independent Evaluation Office (IEO) goes above the head of the managing director, Christine Lagarde. It answers solely to the board of executive directors, and those from Asia and Latin America are clearly incensed at the way EU insiders used the Fund to rescue their own rich currency union and banking system."

. . . . .

"In an astonishing admission, the report said its own investigators were unable to obtain key records or penetrate the activities of secretive "ad-hoc task forces". Mrs Lagarde herself is not accused of obstruction.

“Many documents were prepared outside the regular established channels; written documentation on some sensitive matters could not be located. The IEO in some instances has not been able to determine who made certain decisions or what information was available, nor has it been able to assess the relative roles of management and staff," it said."
Here is bullet point list of some of the issues raised in this report:

- lack of institutional control 
- failure to see a crisis coming 
- failure to see balance of payments problems within the EU
- failure to understand the problems related to a single regional currency unit but government policy still determined nationally
- inability to access date from "secret ad hoc groups" within IMF
- hanging Greece out to dry to save the EU 

Obviously this is not going to improve the image of the IMF with the general public (at least that part of the general public who pays attention to things like this). One view might be that in order to get needed reforms, you must first admit problems exist. Perhaps that is what this will lead to as the full report lists a number of "lessons learned" in its concluding section (start on page 51).

But it's fair for the public to ask the question:

Why should we trust organizations like this to be the problem solver in the next big crisis given the list of issues cited above by their own evaluator? It's up to those who would ask the public to grant them the power to make these big decisions that impact their lives to demonstrate that they are worthy of that kind of trust. This report won't help in that regard.

I do think it may lend support to those who are calling for reforms like Robert Pringle, Warren Coats, and others. They are concerned that policy makers are not motivated to make reforms and are satisfied with the status quo. This report seems to confirm their concerns in that area and mentions monetary system issues (balance of payments and currency issues) as part of the problem. Perhaps this will lead to a change in mindset about the need for reforms?
Added notes: There is extensive media coverage on this news. Below is a list of just some of the articles on this that show up if you do a google search on "IMF news"

Despite all this, Christine Lagarde gave this public statement (from The Guardian article above):

Christine Lagarde, the fund’s managing director, said: “Overall, the conclusion I draw is that the fund’s involvement in the euro area crisis has been a qualified success.”

. . . . . 

“In summary, the crisis in the euro area was extraordinary,” Lagarde said. “It posed unprecedented challenges that, with the global financial crisis providing tinder, could have rapidly spread through Europe and beyond. The fund, in conjunction with our membership, our partners in Europe, and the wider global community, took steps that averted what could have been a much more severe European and even global crisis.”

Tuesday, July 26, 2016

Bank of England Studying a Central Bank Digital Currency (CBDC) Anyone Can Own?

The Bank of England (BOE) has been busy this year looking into an idea that we have actually written about here on this blog. A little over a year ago we published this article that talked about the idea of a new (possibly digital) global reserve currency that anyone could own and use. Even before that we talked about a company involved in a pilot project in the South Pacific that had developed a potential asset backed cryptocurrency that could be used by central banks and/or the IMF some day.

Now we have direct evidence that this idea is really being studied at the Bank of England. Earlier this year BOE Deputy Governor Ben Broadbent made a speech talking about the very kind of digital currency concept we had in mind. This month the BOE released a new research paper on the pros and cons of actually implementing a Central Bank Digital Currency. Both the speech and the research paper talk about it being possible to issue such a currency that you and I could own and not just banking entities. Below are some excerpts from the speech and paper on this followed by some added comments. 

from the March 2016 speech by Ben Broadbent:

"Acting as a trusted third party is precisely what a central bank does.  It performs that role only for one particular asset, central bank money (i.e. reserve deposits held largely by commercial banks at the central bank).  But the function goes right to the heart of what central banks do and how they came about.  And if a private-sector digital currency uses the technology to substitute for a third-party clearer, the central bank counterpart would do the opposite.  The aim would be to widen access to the central bank’s balance sheet, beyond commercial banks.  There’s no rigid correspondence here:  in principle, one could introduce the technology and preserve the current arrangements, under which it is commercial banks that hold central bank deposits;  it’s also possible to increase the number of counterparties without it.  But the distributed ledger would probably make it easier to do so.  That might mean adding only a narrow set of counterparties – perhaps a wide range of non-bank financial companies, say.  It might mean something more dramatic:  in the limiting case, everyone – including individuals – would be able to hold such balances."

. . . . 

. . . "However, things do not end there.  The point about the new technology is not just that it might make exchanging assets more efficient, to a greater or lesser extent.  In principle, it also makes it easier to widen the access to those assets, perhaps dramatically so.  If you create a platform on which the existing participants can more easily exchange central bank money, why not extend the right to others
As I said in the introduction, this certainly isn’t impossible under the current settlement system, known as RTGS (for Real Time Gross Settlement). There are already some non-bank institutions that have access to the Bank of England’s regular facilities8. As my fellow Deputy Governor Minouche Shafik recently explained, the Bank is currently undertaking a review of RTGS and the question of access will be one of the issues involved (Shafik (2016)). 
But it seems likely that a distributed ledger would make that process easier, opening up the balance sheet to a wider variety of financial firms. One might go further, giving access to non-financial firms, or perhaps even individual households. In the limit, a distributed ledger might mean that we could all of us hold such balances.
If so, our accounts would no longer be a claim on commercial banks but, like banknotes (Federal Reserve notes in the US), the liability of the central bank."

Now here are some excerpts from the BOE research paper (July 2016)

page 7

For example, in its original implementation, and still at the time of writing, Bitcoin is limited to between 7 and 10 transactions per second, or roughly 3,500 transactions per hour, perhaps sufficient to provide electronic payment services to a medium-sized town. Despite this, the real resource cost of maintaining the Bitcoin network is on the scale of entire national economies. O’Dwyer and Malone (2014) estimate that the total electricity consumption of the Bitcoin network in early 2014 was comparable to that of Ireland (roughly 5GW). Deetman (2016) further estimates that, at current growth rates in computing efficiency and popular uptake, the Bitcoin network could potentially consume as much as 15GW by 2020, similar to the consumption rate of Denmark in 2014.

On this basis alone, we believe that in order for a digital currency system to be socially beneficial over the long run, an alternative method of addressing the cheap talk problem in transaction verifications needs to be developed and adopted.

page 65

Both central banks and private financial institutions are paying increasing attention to the emergence of digital currencies and the distributed ledgers on which they are based, as this technology may present an opportunity to improve the efficiency, resiliency and accessibility of systems that facilitate monetary and financial transactions. There are, however, serious problems with existing private versions of such currencies. These problems are not associated with the viability of distributed ledgers in general, but rather with their prohibitively high costs of transaction verification. Alternative implementations, such as “permissioned” systems, may potentially avoid these costs by stepping away from purely decentralised designs while still retaining many of the benefits. One possible application of such a permissioned system would be the issuance of a central bank digital currency (CBDC) — universal, electronic, 24x7, national-currency-denominated and interest-bearing access to a central bank’s balance sheet.

This BOE paper includes the possibility that private citizens could own this CBDC and is what they mean by "universal" access above.

From page 11:

"From the perspective of households and firms, CBDC would be economically equivalent to the establishment of an online-only, reserve-backed, narrow bank alongside the existing commercial banking system and, as such, would represent an expansion of competition in the market for deposit accounts. This should again lead to a more rapid adoption of innovative technologies and account offerings."

In its conclusion section (p. 66), the report raises several questions for further research:

"Important theoretical questions include the following: What are the welfare properties of alternative CBDC policy rules, including their interaction with traditional monetary policy rules, with macroprudential policy rules, and with fiscal policy rules? Should CBDC policy rules also react to financial variables, rather than simply to inflation as in this paper? What are the advantages and disadvantages of introducing CBDC into the economy through spending (on goods/services and/or transfers), lending (directly or via the banking system), or the purchase of financial assets, including not only government bonds but also other financial assets? Which of these would best safeguard financial stability? How might the issuance of CBDC interact with the unwinding of Quantitative Easing? What could be the impact of CBDC on international liquidity and exchange rate dynamics? How might the introduction of CBDC affect the likelihood of a bank run when bank deposits carry default risk, or the dynamics of a run if one were to occur?"

My added comments: We can clearly see that this idea is still in the early research phase. However, this information directly confirms ideas we have been reporting here on this blog for some time including:

- the potential for a future central bank (or IMF) issued digital currency is quite real

- this could even include a central bank (or IMF) reserve currency that individual citizens could own. In the case of the IMF, it could even be a modernized version of the SDR (this would require changes at IMF that would need approval). The Real SDR proposal of Dr. Warren Coats could be implemented quicker and easier which is why he feels it is a more realistic approach

- a private citizen might acquire the central bank digital currency in exchange for an approved asset like a government bond and the currency might also pay interest to the owner per the BOE report

- the idea presented in the BOE report assumes a central bank digital currency would exist "alongside" the other money already in existence now and would not replace it (the BOE paper even assumes cash bank notes would still be used)

- there is no chance that Bitcoin would be adopted by central banks for this purpose because the social cost of running it is too high (as explained by our expert here in a two part blog article last year) and Bitcoin cannot handle enough transactions for use as a payments system on a mass scale

- the blockchain (so called distributed ledger) behind Bitcoin is not likely to be adopted by central banks either in its current form for the same reasons Bitcoin won't be adopted (high social costs and transactions limits)

A "modified distributed ledger" where access is limited to fewer parties is looked at in this BOE research paper, but not the distributed ledger Bitcoin uses (access to everyone). I sent this new research paper to the expert who wrote the Bitcoin/Blockchain article for this blog. He gave a positive reaction to this idea as being feasible, but does not believe that a modified distributed ledger is needed to achieve the benefits sought by the BOE. The technology to do what they are looking at already exists now without using a distributed ledger (or a modified distributed ledger). Low cost real time money transfers, payments, and even cross currency transactions can already be done now. 

An asset backed cryptocurrency could easily be integrated into such a system as well to be used as a store of value for anyone who wanted to own it to exist alongside existing national currencies. You could call this new cryptocurrency a bancor, an Ikon, an SDR, a Real SDR, an e-Euro, an e-dollar, or whatever else any central bank that adopted it wished to call it. This cryptocurrency could be officially backed (insured to some level of bank account deposit), anchored to an asset based index, and exchangeable into any other currency in real time using a mobile phone if desired. All that technology exists now without needing any kind of distributed or modified distributed ledger to facilitate the means of payment or record the transaction and still meet existing banking regulations.

While the sources I talk with do not think that anything like this (a central bank digital currency) is on the near term horizon, it is interesting to me to see that we now have official BOE sanction to take a look at this idea

When I first wrote on this topic, I could find very little official public information on it and relied on sources involved in working with this type of technology behind the scenes.

The PBOC in China is also looking into a central bank digital yuan currency as well, so innovation in the private sector may be forcing central banks to move towards this idea even if the pace is somewhat slow. We will just continue to watch and see what actually happens. Perhaps we will get some interesting news at G20 this September.

Added notes 8-6-16: Zerohedge runs this article reviewing a Wall Street Journal article on central banks looking at digital currencies. The Zerohedge article questions whether such new central bank digital currencies would be abused by central banks to invade privacy and remove the option for people to own cash not controlled by a monitoring system. This will be a point of debate and contention for sure if this moves forward at central banks. Again, Governor Carney at BoE said in his June speech he did not see central bank digital currencies replacing cash any time soon and it's all still in the early study phase at BoE.

Jim Rickards: September 4, 2016 an Important Day for the Petrodollar?

This is a brief news note. It looks like Jim Rickards has provided us a new date to keep an eye on. In his Strategic Intelligence newsletter, he says that the upcoming G20 meeting in September will start the beginning of the end for the petrodollar. 

The Strategic Intelligence newsletter is a paid subscription service, but the twitter comments pasted in below give us an idea what Jim thinks on this and show that he believes that China will be making some interesting moves at the G20 meeting to be held there this fall. 

I also got an email recently from Willem Middelkoop to let me know he is in China right now and will soon have out a new essay on SDR substitution at the IMF. Looks like some interesting news may be coming up soon and we will watch for it here.

Here are the twitter comments about Jim Rickards newsletter headline.


... will come to a head on September 4, in Hangzhou, China at the G20 Summit' - end by

Hmmm. Wonder why that day. RMB inclusion into SDR is in October. Something else?

. G20. Xi is President of G20 this year. Meeting in Hangzhou. It's China's coming out party.

Intruiging statement by - 'September 4, 2016 will be the day the dollar died.'

Supports my tweets about coming changes to our monetary system during G20 leaders summit in September 4, in Hangzhou China

Rickards: 'IMF support for SDRs, Russian and Chinese support for gold, and Saudi Arabia’s search for a new benchmark for oil ..' -1

Added note: Here is a new blog article that looks at the new proposal from the Bank of England (BOE) to study a Central Bank Digital Currency (CBDC). 

I will add that while it appears we may get some interesting news at the G20 related to the SDR, all the information I have right now suggests that we are still in the early stages of study by the IMF, BOE, etc. on all this. If we were to get another major global financial crisis, it might motivate policy makers to have more urgency for change. For now, it appears that they are just taking their time studying a variety of ways they could implement a new currency regime including a potential digital central bank currency that anyone could own as I have written about here in the past.

Nothing right now indicates we are close to any kind of major change like this in the monetary system actually being implemented. We will watch G20 closely this fall based on this input from Jim Rickards and Willem Middelkoop to see what news may come out of it that could signal we are beginning the process of possible changes.

Saturday, July 23, 2016

Blast from the Past -- Notes from former BIS President Dr. Jelle Zijlstra

I have noted that I get some great emails from readers here pointing me to interesting articles and information. In this article I would like to feature an example. A reader here sent me this link which leads to some fascinating historical reading from the notes of a former President of the Bank for International Settlements. Here are the lead paragraphs from this blog article which provide some background on Dr. Jelle Zijlstra:

"On this webpage you can read a selection of translated and English writings of the late Dutch central banker, President of the Bank for International Settlements, renowned Dutch economic scholar, former minister of Economic Affairs, minister of Finance, Prime Minister, and last but not least, member of the European Advisory Board on Economic and Monetary Integration (since August 1991), Dr. Jelle Zijlstra (1918-2001). Also a minister of State after his active career, Jelle Zijlstra was one of the Netherlands’ finest Statesmen.

What Jelle Zijlstra shares in his analyses will be (entirely) new for some, while for others it underlines what they have explained years ago, and that others do nowadays. Either way, Zijlstra’s unique and lucid clarification of the monetary events as they occurred during his time in office is one of which I think, we can be in awe of."

Below is an  excerpt from one of the articles. As stated in the paragraphs above, these notes from a former President of the BIS provide an interesting glimpse into the past looking at events from his perspective. I selected just one tidbit from a 1992 article. I encourage readers to take a look at the entire set of articles from Dr. Zijlstra. They are truly fascinating given the source. Keep in mind these notes were written many years ago, but they give us a window into the past from a very unique perspective.


"When I [stepped down from BIS] at year end 1981 in Amsterdam as well as in Basle I realized that I would miss the latter city most. Of my farewell, I like to share an anecdote. Back then I was already somewhat critical about that new international money, created out of thin air, the SDR. I thought the American love for that was suspicious. I suspected that they wanted to push gold away, only to later have this new toy abandoned [as a museum piece[9]]. Paul Volcker, who had succeeded Burns as chairman of the Board (Federal Reserve) in Washington, presented me with a specimen of the SDR, that is, a fictitious specimen, because in concreto, the SDR never existed as a real bank note. His gift became a lasting memory of the feelings on both sides: It will never be something, respectively; it may never be something with the SDR."

"I spoke about the IMF several times, that most important institution, once destined to supervise the effective functioning of the international monetary framework, and to put forward rules for the monetary behavior of member states; possibly the beginning of a global central bank. It ultimately did not come this far. In our world of free, market driven exchange rates, the IMF is only a ghost of what it once was. The annual meetings, once of utmost importance, captivating and often rewarding, have subsided into almost folkloristic meetings. My first annual meeting was in 1959 in Vienna just before I became minister of Finance. Dr. Holtrop was still President of the Dutch central bank. He gave there one of his renowned speeches. The number of member states of the IMF then was still limited; we were able to really discuss matters. My memories on the many annual meetings of the IMF that I witnessed as Bank-president increasingly narrow down to the enormous Sheraton Park Hotel in Washington; a conference room with several thousands representatives and special guests, listening to countless speeches, or partially listening since the texts were provided simultaneously. 

After the first speakers on the first day (the big nations) nobody was [interested any longer]. People were visibly longing for lunch and in the afternoon it was a dead-alive business. In the late afternoon, gigantic limousines came on and off for the joys of the meeting: the cocktail-party’s, [and] consequently, dinners. Of the expenditures of such a meeting it would be possible to soothe a significant part of the destitution of a poor country. In so far formal decisions had to be taken they were largely hatched upfront. Communiqu├ęs were, except for points and commas, arranged beforehand. The IMF has ended up in a situation of slumber from which it can only awaken if there is chance for restoring the international monetary order. This view is however not unfair, then yet incomplete. The International Monetary Fund has since the two oil-crises in an increasing degree taken upon it a very important task, namely as relief worker for poor countries, among other by taking supervision over attempts to find solutions for the often sky-high debts of these countries. The ‘state of slumber’ relates to original role of the IMF as global monetary institution."  (excerpt from an article written in 1992, underlines are mine)

My added comments: If you want to see how things look from the perspective of someone at the pinnacle of the monetary system these articles will interest you. Later in the article featured above, Mr. Zijlstra talks about events that would eventually lead up to the formation of the Euro. Notice how long many of the issues we talk about here (monetary system change) have been talked about and how long it takes for anything major to change.

Monday, July 18, 2016

IMF to Study SDR Denominated Assets that Could be "Held by any Parties"

Recently, the IMF released this Report of the Managing Director (Christine Lagarde) to the IMF Board of Governors. The report is done by the Managing Director to make a recommendation "relating to a general allocation or cancellation of Special Drawing Rights (SDRs).

Regular readers here understand what SDRs are, but if you are new to this blog you may want to look over this page of articles on the subject of the SDR. In this report, I want to focus on just one item (#27) on page 15 of the report. Below I have pasted in this item (#27) and further below I have added some comments.


27. A forthcoming Board paper will look into the evolution of the SDR and its potential future role in addressing some of the IMS’s vulnerabilities. In particular, the paper will analyze if greater use of the SDR—including SDR-denominated assets, which could be both issued and held by any parties—could help reduce global imbalances and mitigate the impact of financial market volatility. The outcome of this discussion could result in proposals to modify the existing framework set forth in the Fund’s Articles of Agreement for general SDR allocations or cancellations. The paper will also review whether there is scope for the SDR to strengthen the capacity of the GFSN (Global Financial Safety Net), complementing other work streams, including on the Fund’s lending facilities. 

(I added the underlines for emphasis)


My added comments: Item #27 above caught my attention for a couple of reasons. First, we watch for any signs here that any kind of expanded role for the SDR is in progress. Secondly, we are interested in anything that may suggest that it is possible for the SDR to become a global reserve currency that regular citizens can own and not just banking entities and governments.

The paragraph above clearly indicates that the IMF is ready to begin doing research on how the role for the SDR might be expanded "including SDR-denominated assets, which could be both issued and held by any parties." We have already covered the fact that China has interest in expanding the role of the SDR including possibly issuing SDR denominated bonds. Now we have confirmation directly from the IMF that they are interested in looking at an expanded role for the SDR as well. 

A question that arises for me is: Who are the "any parties" they mention that might be able to hold SDR denominated assets? 

Are they only talking about banking and governmental entities that Jim Rickards talks about in this twitter conversation we had recently? 

Or could this mean that the IMF would consider allowing "any parties" (like you and I) to some day hold SDRs? 

I asked Dr. Warren Coats (former Chief of the SDR Operations Division at IMF) for this thoughts on this question and he clarified it for us perfectly. Here are his direct comments on it provided to me by email (underlines were added by me):

"The Managing Director’s reference to “SDR-denominated assets, which could be both issued and held by any parties” clearly refer to private SDRs, that is SDR denominated assets and liabilities created in the private sector.  These would be attractive to cross border transactors wanting to invest in or borrow instruments with more stable exchange value and to those trading commodities such as oil internationally, especially if those commodities are priced in SDRs. The IMF would not be directly involved and would have no control over private SDRs, but their development and proliferation would promote and facilitate the demand for and use of the IMF’s own SDR reserve asset. Thus the IMF is hopefully interested in encouraging the development of private SDRs."

Adding some intrigue to all this are some recent comments by Willem Middelkoop on his twitter feed here and here and here where he says he has been made aware of a plan to expand the role of the SDR "on China's request." These comments were made on his twitter feed shortly after he gave me this quote by email to use here for an earlier blog article:

"On a side note; 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) "

Jim Rickards told me by email he will be watching the G20 meeting this fall in China to see what they may propose for ways to expand the role of the SDR.  We covered that in a recent blog article here.

We do also know that the BIS (Bank for International Settlements) uses the SDR for its unit of account already (since 2003) as we noted in this blog article

Clearly, something is going on related to some kind of expanded role for the SDR. It's hard to tell from all this if anything is likely to surface any time soon though or not. The IMF report implies that the IMF is just now starting a research paper on the idea which we assume would take some time to complete. We now know from Dr. Coats explanation above that IMF may be pursuing the idea of encouraging "private SDRs" (which are different from the reserve SDRs used within the IMF). 

We have a number of very high credibility sources who are telling us that a bigger future role for the SDR may be coming. However, one of my most reliable sources recently told me to expect change to "move at a snail's pace" due to a lack of political will for major changes. Until we get more information, all we can do is report what we find (as we have here) and continue to follow events to see what actually does happen.

Added note: Because of the excellent information provided above by Dr. Coats for this article I will add this article to our page of articles on SDR's. A thank you to Dr. Coats for taking time to provide his comments on this for us. SDRs are a new concept for most people and the idea of "private SDRs" is even less well known and understood. Please note Dr. Coats explanation of the difference between private SDRs and IMF reserve SDRs above (see pages 168-170 for more on this)

Additional added note: I received the following request from Robert Pringle related to efforts to reform the current monetary system:

"The first and  biggest challenge facing us reformers is to show that the financial /trade crisis of 2008 and the subsequent great recession were caused  by - or can be traced back to - faults in the international monetary system. So it would be tremendously valuable if in the course of your reading and review of papers appearing on the internet you could continue to flag any that related to that issue."

Mr. Pringle went on to tell me that he feels it is important to establish a link between faults in the monetary system and the 2008 financial crisis before trying to propose any specific reforms to the system (SDRs,gold,etc). Policy makers have to believe reforms are needed for any changes to move forward. Right now, all the available evidence I have suggests that Western policy makers do not see any urgent need to reform the present system.

So, if readers here see any credible information that fits the description Mr. Pringle gives above (faults in the monetary system being a cause for the 2008 crisis), just let me know and I will forward it on to him.

Thank you: To Jim Rickards, Willem Middelkoop, and Dan Popescu for a retweet link to this article on their Twitter feeds. Helps a lot with broader distribution.

Added update 7-24-16: IMF announces more details of its study on broader use for the SDR here and here. Also explains the different types of SDRs (as Dr. Coats also explained above). The IMF also recently released a video on basics of the SDR, perhaps in expectation of increased public interest?

Saturday, July 16, 2016

Jose Antonio Ocampo Calls on China to Promote the SDR at the G20 this Fall

In a recent article published on Project Syndicate, Jose Antonio Ocampo says he hopes China will use the upcoming G20 meeting this fall to push forward on an expanded role for the SDR including issuing SDR denominated bonds. We have long noted here that this would be a big step for the SDR. Below are some quotes from the article.


"In the run-up to this September’s G20 summit in Hangzhou, China, there has been much talk about strengthening global macroeconomic cooperation and reforming the international monetary system. While this is far from the first time these topics have come up – in 2011, for example, France pushed for monetary reform, but was waylaid by the eurozone crisis – the time may be ripe for genuine progress.

Today’s global economy is plagued by uncertainty. Inconsistent data have lately raised questions about the strength of the United States’ economy. When it comes to Japan, the data are even more erratic. The European Union faces not only a still-weak recovery, but also the possibility of losing the United Kingdom as a member.

The emerging world, meanwhile, is experiencing a sharp economic slowdown. China, in particular, poses a significant risk, with many fearing that its downturn will be more severe than initially anticipated. This has spurred many to move their capital out of the country, generating strong downward pressure on the renminbi.

This highlights another source of uncertainty today: exchange rates. From the euro’s decline in 2014-2015 to the US dollar’s decline after the Federal Reserve signaled a postponement of its rate increases to the British pound’s recent drop, spurred by uncertainty surrounding the recent referendum on EU membership, major currencies have been all over the map in recent years. Some have even mooted suspicions of competitive devaluation."

. . . . . 

"Macroeconomic cooperation clearly must be made more effective. But, as recent exchange-rate volatility has shown, even that will not be enough to stabilize the global economy. Monetary reform is also needed.

Such reform must include a reconsideration of the US dollar’s outsize role in shaping the international monetary system. In an increasingly multipolar world, would it not be more appropriate to build a multicurrency system and make greater use of the only global currency that has ever been created: the IMF’s Special Drawing Rights (SDRs)?

Establishing the SDR as the leading global reserve currency would have far-reaching benefits. It would allow all countries – not just major economic powers – to enjoy “seigniorage,” or the profits brought by money creation. Moreover, as the IMF economist Jacques Polak suggested long ago, the IMF could finance its programs by creating SDRs, eliminating the cumbersome negotiations required to secure credits or raise member quotas. And SDRs could support development; for example, they could be allocated in a larger proportion to developing countries, which have greater demand for foreign-exchange reserves.

China’s G20 leadership could be the impetus the group needs to initiate this shift. .  .  .  ."

"The G20’s China summit represents an important opportunity to improve macroeconomic cooperation and launch major reforms of the global monetary system. For the sake of balanced growth in developed and developing countries alike, it must not be squandered."

Added note: I will have a followup article next Monday (7-18-16) on this that looks at a recent IMF proposal to study the potential for expanding the role of the SDR. It will include some direct comments given me on this from the former Head of the SDR Division at IMF (Dr. Warren Coats) that I believe readers will find very interesting and informative.