NYT: Paul Volcker and Peter Peterson - Ignoring the Debt Problem

In this NY Times article, Paul Volcker and Peter Peterson explain why raising interest rates from here on out will be very difficult to do. It's the impact on the national debt as many have pointed out for some time. Below are a few excerpts.

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"Together, the two of us have 179 years of life experience and 13 grandchildren. We have served presidents of both parties. We have seen more campaign seasons than we care to count — but none as strange as this one.

Insults, invective and pandering have been poor substitutes for serious debate about the direction in which this country is going — or should be going. And a sound and sustainable fiscal structure is a key ingredient of any viable economic policy.

Yes, this country can handle the nearly $600 billion federal deficit estimated for 2016. But the deficit has grown sharply this year, and will keep the national debt at about 75 percent of the gross domestic product, a ratio not seen since 1950, after the budget ballooned during World War II.

Long-term, that continued growth, driven by our tax and spending policies, will create the most significant fiscal challenge facing our country. The widely respected Congressional Budget Office has estimated that by midcentury our debt will rise to 140 percent of G.D.P., far above that in any previous era, even in times of war."

. . . .

"Our current debt may be manageable at a time of unprecedentedly low interest rates. But if we let our debt grow, and interest rates normalize, the interest burden alone would choke our budget and squeeze out other essential spending. There would be no room for the infrastructure programs and the defense rebuilding that today have wide support.

It’s not just federal spending that would be squeezed. The projected rise in federal deficits would compete for funds in our capital markets and far outrun the private sector’s capacity to save, to finance industry and home purchases, and to invest abroad."

Click here to read the full NY Times Article

Robert Pringle on Brexit & The Future of the EU

Robert Pringle alerted me to this new article on his blog which laments the Brexit vote and suggests that British citizens were mislead leading up to the vote. Also, Mr. Pringle pointed me to this article in his Central Banking journal by Otmar Issing which calls into question the sustainability of the EU itself (picked up by the UK Telegraph here). Below are some excerpts from each article and then a few added comments.

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From the concluding section of the Brexit article:

"So why did they (we) do it (vote for Brexit)?

What led the British to vote against their own interests?

Powerful anti-European interests include the popular media and sections of the main political parties representing traditional political elites – the conservative right as well as Labour interventionists.  Libertarians of the Institute of Economic Affairs school and economists committed to floating exchange rates, as well as those who favoured activist fiscal and monetary policies, provided intellectual ammunition. They feared that membership might spell the end of their influence on British policy. Britain’s governing classes feared loss of control.

That is why they played up the theme that the EU was evolving into a “superstate”. There is in fact no possibility of European political union.  The British elites understand that. But it suited their case to lie. They knew the British masses would never tolerate  being run by a European superstate.

For generations British children have been brought up to glorify the UK’s role in two world wars. Anti-German feelings have deep roots. As past German ambassadors to London have commented, the popular media’s views of Germany bear no relation to the modern country. As Germany’s weight in the EU has grown, so it became easier to arouse British fears.

Meanwhile, it has been common for British governments and, sadly, governors of the central bank (not the present one) to cite the poor economic performance of the eurozone as contributing to Britain’s difficulties.

Successive British governments opened the doors wide to EU  immigrants when it suited them for political or economic reasons  without thought of the difficulties they might cause in the longer term. Thus during the referendum campaign anti-EU spokesmen could play on fears of millions of “Turkish immigrants” being let loose on the UK, swamping its fragile national health service.

The British have never been able properly to monitor immigrants because they do not have and will never tolerate a national identity card system.

When confronted with mass resentment at the failure of British economic policy  – failure to apportion the costs of the financial crisis fairly, resort to policies that made inequality worse,  failure to reform banking – these traditional elites were able to deflect popular anger from the British to the European level.  The mass media were complicit

The answer: the British have been betrayed by their governing classes.

To save their skin, the British elites used Europe as the scapegoat.

The masses followed. They were tricked. Now they will pay a heavy price.

What will they do when they find out the truth?"

Please click here to read the full article

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Otmar Issing article in Central Banking (from UK Telegraph review):

"The European Central Bank is becoming dangerously over-extended and the whole euro project is unworkable in its current form, the founding architect of the monetary union has warned.

"One day, the house of cards will collapse,” said Professor Otmar Issing, the ECB's first chief economist and a towering figure in the construction of the single currency."

. . . .

“Realistically, it will be a case of muddling through, struggling from one crisis to the next. It is difficult to forecast how long this will continue for, but it cannot go on endlessly," he told the journal Central Banking in a remarkable deconstruction of the project."

Click here to read the full UK Telegraph article

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My added comments: Regarding the first article on Brexit, Robert Pringle adds this PS at the end of the article:

"PS Note to readers: You may wonder why this post belongs in The Money Trap website. My reason is that the Brexit decision reflected the consequences of the failure of governments, regulators and central bankers to lead the UK out of the financial crisis in a way acceptable to public opinion. The institutions and policies that led to the crisis remain in place. The lack of reform, the failure to hold anybody accountable, has stoked popular anger."  -- Robert Pringle

I had a chance to offer some comments to Mr. Pringle and I told him I thought his PS note to readers was right on target. 

In regards to the second article, Mr. Pringle told me Mr. Issing is a highly respected voice concerning the EU and the Euro and we would be wise to listen to his concerns and take them seriously.

All of this further illustrates why these issues are important and why we need to stay alert and informed. For most people, it is hard to see how these kinds of issues might impact their daily lives. But anything that adds to instability in the basic monetary system people are using to conduct business most certainly can impact them directly whether they realize it or not. Waiting until a system fully destabilizes into a full blown crisis to become informed is not a wise choice and why this blog encourages people to learn as much as they can.

William Hague (UK Telegraph) - Central Banks Must Raise Interest Rates

In this article in the UK Telegraph, William Hague argues that Central Banks are on the verge of losing credibility in regards to their low interest rate policies. The article lists 10 problems with the current policies. The first five are shown below.

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"There are at least 10 serious drawbacks to this – all of which can be accepted for a short period but become either politically explosive or economically unwise if continued indefinitely."

1. 1- Savers find it impossible to earn a worthwhile return, which drives them into riskier assets thus causing the price of houses and shares to be inflated ever higher. 
2. 2- Higher asset prices make people who own them much richer, while leaving out many others, seriously exacerbating social and political divides and fuelling the anger behind “populist” campaigns. 
3. 3- Pension funds have poor returns and therefore suffer huge deficits, causing businesses to have to put more money into them rather than use it for expansion. 
4. 4- Banks find it harder to run a viable business, contributing to the banking crisis now visibly widespread in Italy and Germany in particular. 
5. 5- Those people who are able to save more do so, because they need a bigger pot of savings to get an equivalent return, so low interest rates cause those people to spend less, not more. 
6. Click here to read the full article in the UK Telegraph

Added note: The Guardian runs this article in which the BOE argues against the position presented by Willam Hague above.

Could the US and Russia Trigger a Crisis?

Readers here know that we have reached the conclusion that there are basically two key things we watch for here on this blog. One is another major financial crisis along the lines Jim Rickards is predicting. The other is what the response is to the crisis if we get one.


Lately, the news is filled with headlines suggesting that relations between the US and Russia are the worst since The Cold War. Even mainstream media are promoting the idea that various forms of increased conflict could happen such as a cyber attack by either nation on the other. Obviously, any kind of serious conflict between the US and Russia (cyber war or real war) could trigger the kind of crisis we watch for here. So, what are we to make of all these headlines?
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Unfortunately, there is no easy answer to this question for those of us not inside the system. There is no doubt that a real and serious conflict between the US and Russia of any kind could ramp up instability even more in the global financial system. But how do we know if what we see in news headlines is real or just disinformation promoted by intelligence agencies from either nation (or both)? The answer to that is simple. We don't and can't know. Intelligence agencies are masters at creating public confusion and will certainly use the major media sources to promote whatever they want to be promoted to the general public. What are the possible options for us to consider? Here is my bullet point list:

- US and Russian relations really are very poor now and this could lead to a ramp up of conflict between the two in the coming weeks and months (anything from cyber war to real war). In other words, it's not just a big show and the potential for a conflict is real.

- US and Russian relations are not good, but not as bad as media reports suggest. Both sides are using the media to wage more of a PR war than a real war (at least for now).

- the media reports of worsening relations are being purposely overblown by either or both sides for some reason (to accomplish unknown agendas they do not wish to make public). For example, perhaps to influence the upcoming US election.

- the reports of conflict are intended to prepare the general public for a coming crisis (perhaps a financial crisis). One side or both sides view it as in their interest for the public to blame the conflict for the crisis for whatever reason.

By no means do I have any idea what the true situation is here. Like everyone on the outside of the system, all I can do is observe what happens and what is reported and then try to form an opinion on what the true situation is and how to react to it.

I can say that I recently ran this issue by sources I view as credible. The input I received was that they take this situation (danger) seriously, but believe the prospects for a real conflict are more tied to one side or the other making a mistake (like a miscalculation) than either side intending to ramp things up into a serious conflict. 

What this does do is just confirm once again is that we live in times where it is critical to stay alert and informed and have some kind of a backup plan in mind in case some kind of worst case scenario were to unfold. Russia is basically mandating that their public prepare for a worst case scenario. The US seems more focused on trying to influence US public opinion against Russia than to suggest US citizens should expect a serious conflict. In these times, it is just wise to have some kind of plan in mind even if you never need to use it.

Warren Coats Interview - China, Gold, SDR, and More

Here is an interview I can easily recommend to readers here. Rory Hall of The Daily Coin interviewed Dr. Warren Coats who we have featured here on the blog a number of times. The interview covers a broad array of issues. Good questions are asked and Dr. Coats is allowed to give detailed answers to explain his ideas. This is the kind of respectful discussion I wish we had more of these days. You can listen to the interview here or below.

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My added comments:

Dr. Coats in this interview repeated what he has told me many times by email. He agrees that the current monetary system is flawed and would prefer to see a global reserve currency (in this case the SDR) tied to what he calls a "hard anchor". By this he means he advocates changing the IMF rules so that the SDR would be valued using a basket of goods rather than using a basket of fiat currencies as is used currently. He thinks a basket of goods would provide more stability than using one such as gold by itself.

When I read comments on all this on various internet forums I can see that there is lot of confusion and misunderstanding that exists on these issues. Here is my bullet point list of a few of them:

- the IMF can magically back the SDR with gold at any time as some people are suggesting is about to happen. In fact, as Dr. Coats explains, under current IMF rules they cannot do this at all. They cannot even implement Dr. Coats own proposal to use a basket of goods under the current rules. It would require a change to IMF rules agreed to by the member nations to do this as Dr. Coats explained (note: the US still has veto power on this at the IMF under the current voting quotas).

- there is a secret plan by China to either back the Yuan directly with gold or insist that the SDR at the IMF be backed by gold. Dr. Coats stated that he knows of no such plan at this time and I can find no evidence in any public documentation that supports this is the case. However, I don't rule out that China may have interest in promoting gold in some way as part of the monetary system in the future. It's just an unknown for now and all we really have is a lot of people speculating about it without providing any verifiable official source that could support that China plans to do this. If anyone can point me to an official source (see added note below) confirming China plans to back the yuan with gold, I would happily publish it here. The fact that China is buying lots of gold is circumstantial evidence, but far from conclusive hard evidence. Jim Rickards says they are doing this so as to be ready for a global currency reset conference when the new crisis he predicts unfolds. Time will tell.

- there is an "elite plan" waiting in the wings to implement a new global currency using the SDR which will unfold very soon that has already been agreed to globally. I can find no evidence at all that this true. Instead, what I find is a lack of urgency by current global policy makers to make ANY major changes to the current monetary system at all. And beyond that, a lot of disagreement within the "global community" on how to change the system if it were to happen. I do find that there is a lot of consensus around using the SDR as the global reserve currency, but still no broad consensus on how to actually implement that in the real world. The "Real SDR" proposal Dr. Coats has made is the ONLY such proposal in the world that I am aware of at this time. Dr. Coats said in this interview and has told me directly many times that without a major crisis to trigger such change, he does not think the political will to make these kinds of changes exists currently. Other similar sources such as former Group of 30 Director Robert Pringle have told me the same thing. For some reason this is upsetting to many people who seem to prefer to believe all kinds of wild speculation about what might happen without any kind of credible official source to support their belief. 

I can't rule out that some kind of agreed secret plan is ready to be implemented very soon since it would be secret and therefore I obviously wouldn't know about it. What I can say is that I find no evidence that this is the case from the information that is publicly available and from the direct input I have had from sources like Dr. Coats and Robert Pringle (and some others who prefer to remain anonymous). 

Jim Rickards does tell me he believes that a plan would quickly be agreed upon to use the SDR to replace the dollar, but he agrees that it will take the crisis he predicts to trigger that. (his new book will discuss this I am sure) He also adds that he does not know the potential timing for any such crisis which is why it is important to stay alert.

Again, if the world were to fall into the kind of major new crisis Jim Rickards predicts, perhaps things would quickly change. Until that happens though, I believe it is misleading to suggest that some kind of plan for major change like this is about to rapidly unfold without the trigger of a new major crisis to create the sense of urgency required to get consensus for such change.

Added note: Ronan Manly reports on his twitter feed that he was told at the recent LBMA Conference in Singapore by Yang Qing of Bank of China that he feels in the future the Renminbi should have some gold backing. Yang Qing is not an official of the PBOC, but is an official of Bank of China. It's not an official endorsement by China for gold backing, but is a noteworthy statement that does add circumstantial evidence and should be reported here.

Willem Middelkoop Interview - China, SDR, Gold, Silver

Recently, Willem Middelkoop did an interview with Rory Hall of The Daily Coin. They covered a variety of topics that relate to what is discussed here. You can listen to the interview here or view it below.

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Here is a recap of the interview from Rory Hall:

"I sat down with author of The Big Reset and a great many other books,Willem Middelkoop. Mr. Middelkoop, a highly respected voice on the SDR topic, gold and the global monetary system, explained how the changes that have taken place will not impact the current status quo for quiet some time. This sentiment is shared among the people that write the policies, institute the changes and determine the fate of our global monetary policy. 

While there have been several voices stating the contrary, at this time, I tend to agree with Willem’s analysis. Until the masses, around the world, unite and demand change the system will continue to plod along unless Deutsche Bank or one of the other too big to jail banks causes a major upheaval in the “markets”.

IMF 2016 Financial Stability Report Warns Banks to Adapt to "New Era"

Alongside their October annual meeting, the IMF has released its 2016 Global Financial Stability Report. This year the report includes a number of warnings and is somewhat pessimistic that global growth will improve any time soon. Below are some excerpts from the IMF press conference on this. I used bold type to indicate some key points.
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"MR. DATTELS (MMF): Thank you everybody for being here this morning. Today, we find ourselves in a low-growth, low-rate, era characterized by increased political and policy uncertainty. This is creating many challenges for banks, policymakers, and corporates, in all parts of the world. Failure to adapt to this new era could undermine the health of financial institutions and add to the pressures of financial and economic stagnation. This report analyzes these challenges and offers solutions to foster stability in this new era.

First, some good news. Short‑term risks have declined."            . . . . .

"But medium‑term risks are building, because we're entering a new era of challenges. Low, uneven, and unequal growth is opening the door to more populist and inward looking policies, leading to a loss of political cohesion and a rise in policy uncertainty in some countries. This could increase volatility and undermine growth.

A striking outcome of this weak economic environment and heavy reliance on unconventional monetary policies is that markets expect negative policy rates in the euro area and Japan to last through the end of this decade. The weak outlook has pushed hopes for normalizing monetary policies well into the future. As a result, almost 40 percent of advanced economy government bonds carry negative yields. This is unprecedented! Financial stability now depends on how well financial institutions adapt to this new era."

. . . .

"Markets have serious concerns about the ability of many banks to remain viable and healthy. Equity valuations are well below the book values of many banks as the focus of investors has shifted from the level of capital to the business models that banks need to maintain that capital through profits. This is the fundamental reason why some banks have come under pressure this year.

The question that we raise in this report is whether an economic recovery is sufficient to restore sustainable profitability. Or, are the problems more deep‑rooted and structural?"

To answer this question, we conducted a detailed bottom‑up analysis of some 280 banks, covering about 70 percent of U.S. and the EU banking systems. We found that a cyclical recovery helps, but is not enough. . . . "

. . . .

"First, European banks need to resolve the legacy of nonperforming loans. This requires supportive policy action to strengthen insolvency and recovery regimes to reduce foreclosure times. If this were to be achieved, it would turn the capital cost of removing nonperforming loans from balance sheets of some 80 billion euros to a benefit of capital of about 60 billion euros. Progress has been made, more is needed.

Second, European banks need to become more efficient. There are simply too many branches with too few deposits and too many banks with funding costs well above their peers. Addressing these business model challenges is vital to ensure sustainable profitability.

Third, weak banks will have to exit and some banking systems will have to shrink. This will ensure a vibrant banking system that supports economic recovery.

Fourth, policymakers will have to complete regulatory reforms to reduce uncertainty without an across‑the‑board increase in capital requirements. Procyclical outcomes must be avoided.. . . . "

. . . . .

"Can emerging markets achieve a smooth deleveraging? In a new era of weak global growth, commodity prices and reduced global trade, substantial debt reduction will take a long time. Under our baseline scenario, indebtedness declines only gradually, returning to 2014 levels only by 2021."


"Let me conclude. Action is needed now to ensure that the financial system adapts to this new era and remains healthy. These measures are also necessary to avoid sliding into financial and economic stagnation. They form part of the Fund's three‑pronged strategy of structural, fiscal, and monetary policies within and across countries and over time, and sustained growth and financial stability.

Thank you very much. We will happily take your questions."



QUESTIONER: In this report you talk about markets having questions over the viability of some banks, but you don't name any names here. I wonder if you could talk a little bit about Deutsche Bank, which has come under questions in the market over its financial strength after the request for fines against it. Is Deutsche Bank viable? Will it need a bailout?


MR. DATTELS: As we focus on in the report, many banks need to adapt to this new era of low growth and low rates, as well as a changing regulatory and market environment. We have one third of the banks struggling to show sustainable profitability. So let me break that down a little bit, which I think is helpful.

We can break it down ultimately into three groups. Banks with legacy challenges owing to high nonperforming loans; banks that have been restructured, taken over by the government and recapitalized, but still struggling to find their footing; and third, investment banks that are in transition away from dated business models that relied heavily on large scale balance sheets.

Deutsche Bank, we can say, is in the midst of this latter challenge. It is in that third bucket of banks that need to continue to adjust to convince investors that its business model is viable going forward, that it has addressed the issues of operational risk arising from litigation and so on. I think that is the new environment that we are in, and I'm sure that those challenges will be met.


QUESTIONER: Just to follow‑up on that, Pete. I know it wasn't your division, but a few months ago the IMF came out and said Deutsche Bank posed a systemic risk to the global markets, that was before a lot of what we have talked about today really came into focus. So I would like to press you a little bit on Deutsche Bank in particular. In light of what you just said, do you think that it poses systemic risk to the financial markets?

MR. DATTELS: What you are referring to is the Germany’s Financial Sector Assessment Program from June, and that report highlighted that Deutsche Bank is a large and interconnected bank and is therefore systemically important, domestically and globally. In that context, we are confident the German and European authorities are monitoring the situation and working to ensure that the financial system remains resilient.

. . . .


"QUESTIONER: Firstly, in your previous report, the one in April you gave a figure for nonperforming loans, I think it was around 900 billion euros and you also broke down that figure a lit. You said 350 of that was Italy. I wonder if you could give us an update on some of those figures? . . .


MR. DATTELS: As for nonperforming loans, we have updated some of the numbers in the text. We are seeing a gradual reduction, with the ECB having put in targets for the banks that are under its direction for a sharper reduction in nonperforming loans, and that is certainly the case in a number of countries. But, the actual level, the overall level remains high and much more progress needs to be made.

QUESTIONER: Is the EUR 900 billion figure still relevant?

MR. DATTELS: That is still broadly correct. I can circle back and provide you with that."

Click here to read the full text of the IMF press conference

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My added comments: This IMF report strikes me as an admission that while the monetary policies employed in recent years around the world may have staved off a global depression, the big problems are still out there. The IMF suggests here that we should not expect these problems to be resolved any time soon and warns banks that they need to expect the current low growth, low interest rate environment to last many more years. They warn we should expect many banks to go under along the way.

If this report's forecast turns out to be correct, it implies a long and continued dis-inflationary period of time where policy makers simply try to hang on and prevent some kind of sudden deflationary event. It sounds like years of ongoing bank failures and debt restructuring rather than one big and rapid event to clear out the rot in the system very quickly.

The question is whether or not policy makers will really get that much time to work on these problems or not without a new crisis intervening. That is a big unknown question hanging over the system until the excess debt is finally written off one way or another. 

Also, many people are expecting that in an effort to fight off deflation, central banks will eventually ramp up new massive monetary expansion policies (see Jim Rickards here). This is the reasoning behind some very high forecasts for future gold prices. However, if the policy makers were to follow the path suggested here in this IMF report, it is more likely that we would see continuing deflation/deleveraging in the system for many years negating efforts to get more inflation. 

This would probably lead to lower prices for everything including gold since the IMF does not lay out a plan to deal with these problems that includes more expansionary monetary policies (in fact they say time is running out for those kinds of policies). So, will gold help someone ride all this out or not if we get deflation rather than inflation?

I think owning some gold (or silver) is a good idea no matter how this plays out. If central banks do react with panic and ramp up expansionary policies anyway, that is obviously good for gold. If they don't and we do see ongoing dis-inflation for years to come, gold may drop in nominal price, but still go up in relative purchasing power to other alternatives such as stocks for example. Jim Rickards put it this way recently on his Twitter feed.

"If gold goes from $1270 to $800 and the Dow Jones goes from 18,000 to 4,000, which do you prefer to own?"      

Claudio Borio (BIS) - Talks about the "Debt Trap"

Recently BIS Economist Claudio Borio participated in a panel discussion in which he laid out his thoughts on problems in the current monetary system. Below I a made bullet point list of some of this key comments. You can watch here. At around the 1:08 minute mark, he has some interesting comments about the classical gold standard.

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Bullet Points in this presentation:

- interest rates have been low so long because of monetary policies that have unintended consequences

- our economic models rely on assumptions and variables that cannot always be observed

- central banks should passively follow true natural interest rates

- financial booms and busts may be attributable to monetary policies

- policies that just react to busts leads to more problems later and a "debt trap"

- dis-inflationary environment is making expansionary monetary policies only temporary in impact

- asset prices can be mis aligned for long periods of time, the same thing can happen with interest rates

- during the gold standard, interest rates never hit the zero bound or got as low as they are today

- persistent low interest rates raise the risks to global financial stability

- persistent low rates weaken the profitability and stability of the banking system (they are a slow death for banks)

- it will take higher inflation to get interest rates higher (as they need to be)

- a snap back to higher inflation is possible, but it may take some time to reverse deflationary headwinds

Bretton Woods Old and New - An Interview with Richard N. Cooper

Readers here know that this blog attempts to cover the prospects for major monetary system change at some point in the future. It's interesting to see so many different points of view on the likelihood of such monetary system change coming to pass. 

Jim Rickards is on record stating that he is completely convinced such change will happen when another major crisis (worse than 2008) comes along. We have covered his thoughts on this extensively here. Potential monetary reformers such as Dr. Warren Coats and Robert Pringle believe that major monetary system change is needed but find that real support for actual proposals to do this is somewhat lacking within the present system. 

Alongside of this, we have a number of analysts and proponents for change who believe that some kind of major monetary system change is imminent. Some believe that China, Russia, and the BRICS are planning to stage what amounts to a coup and overthrow the US dollar in the near future. Others believe that elites running the present system are actually pushing the world towards another major crisis so that they can propose a global currency (along with a global government) as the solution to the crisis.

In a recent interview (Center for Financial Stability), Harvard economist Richard N. Cooper offers some comments on what he sees in terms of the status for major monetary system changes any time soon. Below are a few excerpts from his interview where he talks about prospects for change and then a few added comments.

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(excerpts pick up in mid interview)

. . . . . 


Q: In 2014 you gave a presentation, "Bretton Woods @ 70: Regaining Control of the International Monetary System" at the [Austrian] Federal Ministry of Finance. Following this Bretton Woods “collapse,” what were some of the initial reactions? Some believed that the gold window would be reopened in the future (at a new peg). Was this ever a plausible belief? 

Rickard Cooper: "No. When I said gold convertibility was suspended, it was expected to be temporary. But given the subsequent circumstances, the fact that the agreed depreciation was too little, and then the general floating, it never became an issue (practically speaking, of reopening the gold window). And we actually had a big, big global effort to reform the international monetary system in ‘72 to ‘74, [which] focused on the International Monetary Fund. John Williamson has written a book on that, [which] came out in late ‘70s. The bottom line was that it was a basically a failure. Robert Solomon has also written on that. So the principals, the finance ministers of the world, with agreement of their bosses, formally amended the articles of agreement for a second time now. 

The first amendment was for the SDR in ‘67. This is the Second Amendment [to the IMF Articles of Agreement] of ‘78, which essentially changed the rules of the Bretton Woods system and acknowledged in effect [how] the gold role greatly diminished. It didn’t disappear altogether, but was greatly diminished, and the fixed exchange rate regime was over. Countries were free, subject to some general rules, to choose what exchange rate regime they wanted. So that was finally all done in ‘78. And then of course, the negotiations took place earlier and finally went into effect by ‘78. So that is the new Bretton Woods system, which we still have today.

It doesn’t work perfectly, but works reasonably well. I think there’s still an issue, which the Chinese actually raised seven years [ago] in March of 2009, about whether the system should rely on any national currency. The U.S. dollar was and is the most important, with the euro also becoming an important international currency. That issue is still under discussion, but without any real fire behind it. [Nicolas] Sarkozy when he was president of France and chairman of the G20, he said he was going to move reform of the monetary system to the top international G20 agenda. I was again involved in advising the French minister of finance, who had the operational responsibility [and] made a proposal, but [it] essentially got pushed out by other considerations. And I think it’s fair to say there’s not much enthusiasm for it anywhere. The Chinese talk about it, some French talk about it. It’s hard to find Americans besides me and few others who talk about it. John Williamson is still interested."

. . . . .

Q: Could you describe your proposal to change the current world [monetary] system?  

Richard Cooper: "Sarkozy called for a new Bretton Woods conference; I reacted very negatively to that. My view was, don’t call for a conference, make a proposal. And if you have a better way to do things, let’s discuss it. You know, [at] the official level, if it seems to pass muster with officials, then roll it out and have a big public discussion, and so forth. So, the French never came up with the proposal and so I made a proposal. First I made it to the Deputies of the G20 and I made it on several occasions. It’s been published in a journal called Central Banking, I’m thinking in 2011, which was the year of the G20. So I made a proposal and sometime later, the International Monetary Fund had a conference, maybe a year and a half ago, which I spoke [at] and talked about my proposal there, and I explained that I am not wildly enthusiastic about my proposal. I’m not a big advocate of it. It’s just the best I can think of under the circumstances, and it was really designed to get something on the table and get people thinking about it and if they don’t like it, you know what (is your) alternative? 

And my bottom line is griping does not represent a policy, and there’s been a lot of griping in recent years. If you have a proposal to make, make it. You can start with my proposal and modify it however much or you can start with something completely different. And if you don’t have a proposal, stop griping. And that’s my basic view; I do not like particularly official griping."  . . . .


 Q: Why have many leaders, like Sarkozy, not put this to the front of the agenda?

Richard Cooper: "Well, Sarkozy did try it. First he called [for] that at the World Economic Forum.11 He called for a new Bretton Woods conference, and that’s when I had the negative reaction: don’t call for a conference, make a proposal, then we’ll see if a conference is worthwhile, but make a proposal. But the French did not make a proposal. 

And then we had the G20, and it was his turn to be chairman of the G20 — this is in 2011; the Koreans had been [chairman] in 2010, the Brits had been in 2009, this year [2016] it’s China. Sarkozy said high on his agenda was going to be reform of the international monetary system, and then it was up to French Ministry of Finance to fill that out. The Ministry of Finance is first-rate, I have to say — very, very good guys. But here their boss was saying, “This is on my agenda,” and they didn’t know what to do with it, so they called me. And that’s how I got involved with it, but it didn’t go to any place. 

You get, again, griping by the Chinese. The Chinese had more than gripes. The first statement by Governor Zhou [Xiaochuan], of the People’s Bank of China, was a very thoughtful statement, actually. I could have written it twenty years earlier; the surprise was the source. This senior Chinese official came out with this in March of 2009, a long time ago. It’s actually a very level-headed statement, and it was not a proposal. It simply raised the issue. So it was a sophisticated gripe—again, it was not a proposal. 

And my proposal actually builds on that it. So the SDR plays a central role and then we need an adjustment mechanism too. There was a proposal in Korea in 2010 at the G20 on the adjustment mechanism and the threshold was, any current account surplus or deficit in excess of 4 percent should require adjustment.

The Koreans proposed it, but in consultation with the U.S., and the Americans thought (at least I’ve been told, I’m on the periphery of all this now) that the Chinese were on board. But anyway, when it got to the Seoul summit, both the Germans expectedly and the Chinese [unexpectedly] disagreed with this proposal, so it went no place. The language that came out of the Seoul summit was very general on the need to address global imbalances, but without a hint on how we’re going to address global imbalances.

So there are these two issues: One is what is the source of international liquidity, and that’s what Governor Zhou [Xiaochuan] raised back in 2009; and then [the other is] what’s the adjustment process, that was the topic of the Seoul summit. Sarkozy was supposed to cover both, but didn’t. My proposal covers both [liquidity] and the adjustment process, which I think actually is more difficult."

. . . .

Q: What is the future of international monetary agreements?

Richard Cooper: "There’s no basis at the moment, no consensus within the economic profession on these issues. In fact, there’s a big fundamental disagreement and there’s not enough urgency in the operational system to force the issue. And so the tendency of policymakers under those circumstances is to kick the can down the road, and grumble. So we have a lot of grumblers who don’t like the role the dollar. Tell me the alternative, make a proposal, that’s my refrain, and nobody comes forward with the proposal. [They] just grumble about the role of the dollar."

Please click here and read this full interview with Dr. Richard N. Cooper

(note: underlines in the excerpts above are mine added for emphasis)

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My added comments: These answers by Dr. Cooper are quite consistent with feedback I get from highly credible sources like Dr. Warren Coats and Robert Pringle. Both Dr. Coats and Robert Pringle are strong advocates for monetary system reform, but see no general consensus forming around any actual proposals to make such reforms at this time. Dr. Cooper clearly states this is also his view in the last answer quoted above from his interview.

All of this is why I have been writing here for some time that I believe it will take another major global financial crisis like Jim Rickards predicts to create the "sense of urgency" Dr. Cooper says does not exist right now for any major change.

When you read about all this, please keep in mind the following:

- there is no evidence that any kind of global consensus exists right now on how to reform the monetary system despite numerous calls for those reforms (note our article earlier this year along these same lines)

- for reform to happen, you have to have an actual real proposal that can be debated and voted on at IMF etc. (see our article here). Speculation on what might happen is NOT a real proposal and should be viewed for it is -- speculation.

- Dr. Cooper presents quite a different picture of where things stand in terms of agreement for monetary system change than we see in many headlines on various media today:

"There’s no basis at the moment, no consensus within the economic profession on these issues. In fact, there’s a big fundamental disagreement and there’s not enough urgency in the operational system to force the issue."

What could change things? 

The only thing I can think of is another major global crisis. But as we can see, even under those circumstances there are a lot of competing ideas on what to do. Here we will focus on what actually does happen rather than try to speculate on what might happen. If we truly have a complex system as Jim Rickards says, no one can possibly know for sure what actual proposal would be put forward or accepted by the general public in the event of another huge crisis. 

This is why staying alert and informed is important and why it is a good idea to be  aware of the various actual real proposals that do exist out there. These are more likely to be considered in my view than random ideas that have not been put into the public domain for peer review. But time will tell.

Added notes: Robert Pringle (former Group of 30) offered this comment after reading the article above:

"My only comment is that I think it is just as important (if not more so) for would-be reformers to persuade economists and policy makers that there is a connection between the current international monetary set-up and recent financial/economic currency crises as it is to agree on a specific reform proposal. Looking back to the 1960s many people were persuaded by Robert Triffin’s argument that the then-current system was doomed by its internal contradictions who did not necessarily agree on the solution."  -----  Robert Pringle

This is a comment Robert Pringle has made several times to me by email. He feels perhaps the biggest challenge to reform of the current monetary system is to convince the policy makers who would initiate reforms that the present monetary system imbalances are responsible for the periodic crises we have seen. Again, this is consistent with Richard Cooper's comment above that he sees no urgency for reform of the present system.

Also, we have these recent twitter comments by Harald Malmgren that agrees with all of the above. Please note his followup comment in the link to his twitter comments just above where he says even under crisis conditions it would be hard to get policy makers to move forward with changes.

 

Harald Malmgren‏@Halsrethink

Harald Malmgren Retweeted Mike Baker

Politically, neither US Fed/Treasury nor ECB ready to think about, much less discuss SDR's at this time in history.

Yuan Joins the SDR Basket - East vs. West Media Reports

The Chinese Yuan is now part of the SDR currency basket used at the IMF. This event has been anticipated for quite awhile now with all kinds of reactions to it available depending on what media you are looking at. An interesting thing for me is to watch how eastern based media report news like this contrasted with western media. Below are a couple of links to such articles that provide an example. The western media tend to mostly yawn and say there is no real impact while eastern media are inclined to describe it as a significant event. Below are the links an a few quotes.

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Xinhuanet.com - Inclusion of the Yuan to help create more multipolar economic order (eastern media)

"The inclusion of China's renminbi (RMB) in an elite currency basket -- a historic milestone for the country and the international monetary system -- will help create a more multipolar economic order and advance reforms of the international monetary system.

The International Monetary Fund's (IMF) officially adds the RMB to its new Special Drawing Rights (SDR) basket as a fifth currency, along with the dollar, the euro, the Japanese yen, and the British pound.

The decision to include the RMB in the SDR basket, as IMF Managing Director Christine Lagarde put it, is an "important milestone" in the integration of the Chinese economy into the global financial system and reflects the progress made in reforming China's monetary, foreign exchange and financial systems.

On the one hand, the inclusion of the RMB in the IMF's SDR basket will enhance the currency's international credibility, benefiting countries, enterprises and individuals.

On the other hand, the inclusion of the RMB -- the only emerging market currency -- in the "world reserve" will help the flawed international currency system monopolized by the dollar to advance toward a multipolar world, making it more stable, representative and contemporary."

Reuters - Chinese Yuan Joins Elite Club (western media)

"China's yuan joins the International Monetary Fund's basket of reserve currencies on Saturday in a milestone for the government's campaign for recognition as a global economic power."

. . . .

"U.S. Treasury Secretary Jack Lew said on Thursday the yuan was "quite a ways" from true global reserve currency status. The new IMF status recognizes the "enormous" change in China in the last 10 years that had made the yuan more open, but Beijing still had work to do to make its currency and its economy more market-driven, he said. "Being part of the SDR basket at the IMF is quite a ways away from being a global reserve currency," he said.

Capital Economics said inclusion of the currency in the IMF's SDR basket will have minimal impact on foreign demand for yuan assets, so "offers little support" for the currency."

Russia Today - Chinese Yuan becomes IMF reserve currency (eastern media)

"The Chinese yuan has been added to the IMF reserve basket, becoming the first currency to be added to the list since the emergence of the euro in 1999.

. . . . 

The decision means the Chinese yuan will now be used as one of the International Monetary Fund’s lending currencies in times of emergency economic bailouts. This sort of internationalization is in line with China’s wish for increased legitimacy of its currency."

The move is also evidence of China’s growing role as a power to challenge the global economic dominance of the United States."

Barrons Blog - Yuan added to IMF basket, Dollar dominates (western media)

"It’s been a year in coming, but the Chinese yuan will be added Oct. 1 to the International Monetary Fund’s basket of currencies.

. . . . .

Wells Fargo says the investment implications of the yuan in the IMF basket, at least in the near term, are “limited.” Their reasoning “what makes a reserve currency a dominant store of value, like the U.S. dollar, is its usage—along with the institutions that support its use … [and] the size of IMF special drawing rights (SDR) reserve assets relative to total global international reserve assets is small.” 

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My added comments: These are some good examples of the different way various media can present the same event. Please note the lines I put in bold type to see the different slant each side seems to take:

Eastern - Inclusion of the Yuan is an important step away from a monetary system dominated by the US dollar

Western - Inclusion of the Yuan will not have much impact and the dollar will continue to dominate the monetary system

Also, please note the comments by US Treasury Secretary Lew. His comments agree completely with what multiple sources I view as highly credible tell me regularly by email. The US has zero interest right now in moving away from a US dollar based system and towards an SDR based system (as Harald Malmgren said in a recent comment on Twitter).

Again, this is just more evidence that it will probably take another major global crisis to motivate any kind of major changes in the current monetary system despite the fact that both Russia and China seem to want the changes to happen as soon as possible. The West (and especially the US) don't appear interested in any major monetary system changes any time soon. Without a crisis, expect these kinds of change to take years at the least, maybe decades.