Thursday, February 23, 2017

Bloomberg: Trump Scorns IMF Globalism - Gets to Vote on It Now

Here is a very relevant and interesting article on Bloomberg about how Trump and the IMF might work together (or not) going forward. This article touches on some very key questions we have raised here on this blog. For example, how would someone like President Trump who was elected on a campaign platform that appears to conflict with the IMF get along with that organization? 

Below are some key excerpts from the article. I added bold type here and there for what I thought were some important points. Following that are a few added comments.

In the added notes section further below, please see some excellent expert comments I received permission to publish in reaction to this article.

. . . . . .

"Trump took office raging against the loss of American manufacturing jobs and wealth, pinning the blame on trade, and questioning the purpose of post-war institutions from Nato to the European Union. He’s not the only Western leader winning votes by trashing elites and their global projects. Meanwhile China, the world’s rising economic power, is building its own system for extending influence through credit. Where does that leave the IMF?"

Right where it’s always been, according to Lagarde. “We need to stick to our knitting and deliver on what was our mission,” she said in an interview en route to Uganda’s presidential palace last month. She attributes the slowdown in world trade to economic weakness -- “when you have less growth, you tend to be a little bit more protective of your turf” -- and says both may prove temporary.

Lagarde dismisses the idea that the IMF may find itself at cross-purposes with the new administration. “We are an agent of financial stability in any country where we operate,” she said. “A leading power like the United States has a vested interest in economic prosperity, stability and peace.”

. . . . . 

“The extreme manifestation of Trumpism is diametrically opposed to the founding principles of the IMF,” said James Boughton, the IMF’s official historian for two decades until 2012. The Fund is “going to have to play a very delicate game.”
To be sure, it’s not clear how much of Trump’s campaign rhetoric will survive into government. And the dealmaker-president might discover that the Fund has its uses, said Benn Steil, the author of “The Battle of Bretton Woods,” a history of the IMF’s founding conference. “I could paint a scenario in which he effectively looks like a multilateralist, because he finds a way to do deals that are in America’s interests,” Steil said."
. . . . . 
"There’s a case to be made that the U.S. gets good value out of the Fund. Each dollar it commits only adds 2 cents to America’s budget, because defaults rarely happen, according to the Congressional Budget Office. In return for its contribution, which currently stands at approximately $164 billion, America has the biggest say on the Fund’s board. It can’t veto individual loans, but when U.S. interests are aligned with the EU’s -- which they mostly were, before Trump -- they tend to prevail.
Bordo says he’s not worried about the Fund becoming redundant. “They’re always thinking of how they’re going to fit in,” he said."
. . . . 
"That was the role assigned at Bretton Woods in 1944, when the IMF and World Bank were set up. Forty-five nations attended the summit, but two men dominated it: John Maynard Keynes and America’s Harry Dexter White. From the back of her car in Uganda, Lagarde calls them the “founding fathers.”
Their goal was to avoid a repeat of the 1930s, when competitive devaluations and tariff wars led to the collapse of world trade. Keynes wanted the IMF to act as a central bank of central banks, denominating their accounts in a new global currency. It would let members devalue or borrow with relative ease. Both creditors and debtors would pay interest on their holdings, discouraging large trade surpluses as well as deficits."
. . . . .
"Money courses around that system on a scale that would have been unimaginable at Bretton Woods. Massive trade imbalances built up. The dollar remains central. The risks were laid bare in 2008, when a collapsed U.S. housing bubble led to world recession."
Since then, some financial leaders -- among them the governor of the People’s Bank of China, Zhou Xiaochuan, and his U.K. counterpart Mark Carney -- have gently hinted that something more like Keynes’s plan might be in order, to reduce the world’s dollar dependency.
Lagarde doesn’t see that happening on her watch. “It didn’t happen in 1944, when the world had destroyed itself,” she said. “I’m not a dreamer.”
. . . . .
My added comments: This Bloomberg article is absolutely full of important and relevant information in regards to what we try to cover here on this blog. I encourage all readers to read the full article. Some very key bullet points for me:
- Like this blog, people everywhere are watching to see how Trump and the IMF get along (see link below in 3rd bullet point)
- Both the IMF and the Trump Administration seem to be carefully engaging each other
- Christine Lagarde chooses to make positive comments (see this link also)
- the article lays out a brief history of the past roles of the IMF and monetary system change
- it raises the question of whether Trump will actually be more inclined to work with IMF than his campaign rhetoric might suggest
- it mentions the original idea of Keynes for a global currency (the bancor) that we have mentioned here on this blog 
- it asks Ms. Lagarde if anything like that kind of new global currency might become a reality in the future. She says she does not see that happening during her term of office (which extends for several more years)
This is beyond interesting information. Please look at these comments in light of the prediction Jim Rickards has made repeatedly that when we do get the next major global financial crisis that the IMF will step forward to promote the SDR as the new global reserve currency to replace the US dollar. Clearly, Christine Lagarde states she does not see that happening during her term in this Bloomberg article. She adds that she "is not a dreamer."
Does this mean that Jim's prediction concerning the SDR as a new global reserve currency is off base?
I think we cannot really know the true answer to that question until and unless we get the major new financial crisis he predicts. My own research here has indicated to me that, without such a crisis, there is not much chance that the US dollar would be replaced with something new any time soon. Other high credibility sources I have had input from also convince me that is the case. Here, Christine Lagarde seems to add more evidence to support that. He comments are very much in line with those I have heard from some very good sources.
However, we can assume that her comments about a future replacement for the US dollar are based on the assumption that no new major crisis will take place during her term of office. Neither she or the IMF has suggested that they see such a crisis on the horizon even though they do mention various systemic risks from time to time (which we have documented here). If such a new major crisis did arise, I believe the present monetary system is absolutely at risk and that some kind of major changes might have to be made to go forward. Perhaps the one Jim Rickards suggests concerning the SDR. Perhaps there will also be some who would prefer a return to a monetary system based on gold or another "hard anchor" of some kind. I have seen a variety of ideas on this. We can assume that the IMF view would likely change under true systemic crisis conditions and that they would promote some kind of solution.
This is what we continue to watch for here. We have covered a number of potential major solutions/changes that might be put forward at that time including the SDR replacing the US dollar. Recently Jim Rickards issued a cryptic tweet stating that Tim Geithner had told him about another possible solution he had not considered. I find it interesting that Tim Geithner discussed the topic of how to deal with a major systemic crisis at all. All we can do here is monitor events and see what actually does happen.

Added notes: Former Group of 30 Executive Director Robert Pringle provided the comments below with permission to publish here after a review of this blog article:

"I agree with the gist of your article.  If the Trump administration faces an international monetary crisis, it may find the Fund useful as the Reagan administration did in the debt crisis of the early 1980s, when it discarded its earlier rhetoric. In such circumstances the IMF may be able to moderate some of the administration's more extremist/protectionist impulses.  If David Malpass is confirmed as Under Secretary for Monetary Affairs, he will have a major role in setting US policy on international monetary issues where he will doubtless steer the Fund towards a more conservative, free market approach. He has been a loud critic of central bank polices such as QE. Another key issue will be its response if the US should accuse governments such as China or central banks such as the ECB and Bank of Japan of currency manipulation.  Broader issues of reform of the reserve currency system and so on would come "into play" politically if the US decides to  withdraw from or redefine its global monetary leadership and role. With Trump, anything is possible!

Indeed, according to reports today the President has indeed resumed his attack on Chinese monetary policy: 

 “I think they’re grand champions at manipulation of currency. So I haven’t held back. We’ll see what happens,” Trump said.

The president’s comments were reported just hours after the incoming treasury secretary, Steven Mnuchin, made apparently contradictory remarks signalling that the White House had no immediate plans to label China a currency manipulator – something Trump had pledged to do on his first day in office.

The IMF will not have a quiet life under Trump." -- Robert Pringle 

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