Friday, March 31, 2017

Eliminating the Political "Noise"

Since the US has become politicized at a somewhat extreme level now, we will try to avoid getting sucked into the seemingly endless "political noise" we see every day now. Political noise here means politicians and media proclaiming various positions simply to score political points. This has always gone on of course, but now it seems to be the dominant theme in the daily news cycles.

To give an example, let's take all the uproar over investigating the Trump Administration for ties to Russia vs. claims that Trump made that he was improperly place under surveillance during the recent campaign. All I see here is a lot of noise with both sides making all kinds of allegations, but providing no substantial evidence to the public supporting the allegations. This is beyond worthless to the public and the average person. Until someone is actually charged with a crime (and beyond that actually convicted) this is meaningless noise that has no impact of substance on the daily life of the average person. It is just politics as usual with the goal being to gain political advantage rather than to shed any useful truthful light on the situation. It is more of a diversion form real issues of substance than anything else.

In covering the potential for real and substantial monetary system change, we will try to avoid that kind of useless information and meaningless political noise. It's pretty much a waste of time and provides no information that can actually be used to make personal decisions. When we see evidence that a change of real substance that could actually impact the daily life of the average person is on the table (like the replacement of the US dollar by the SDR or a return to some kind of hard anchor like gold to the monetary system), that will get our attention here. The rest is just noise in our view here. We will continue to watch for such real potential change that might really impact people. So far, there is nothing that indicates it is on the near horizon even though the conditions for such potential change do exist.

Wednesday, March 29, 2017

Why Does the Federal Reserve Dislike $1 Coins?

Since this blog is focused on the topic of potential monetary system change, I thought it might be interesting to offer some information about the money we all use every day. A significant per cent of the public probably does not really think much about the money they use every day. But it can an interesting topic.

First, for those who want to learn more about how the actual cash we use gets into the hands of the public, try this link. Below I picked out a couple of interesting questions and answers as examples. Here is thought question to get you started. What (if any) is the difference between a US $1 bill (Federal Reserve Note) and a $1 coin minted at the US mint? Most people would say nothing since both are commonly accepted at equal value wherever cash is accepted for payment. But who profits from the production of each of these forms of cash? We'll look at that further below.

First here are a few selected questions and answers from the Federal Reserve Bank Services Q&A page:

Q: What is the role of the Federal Reserve with respect to banknotes and coins?
A: Currency
Within the Federal Reserve System, there are three entities responsible for the management and distribution of currency.
The Board of Governors of the Federal Reserve System is the issuing authority for Federal Reserve notes, the currency of the United States. The Board has a wide range of responsibilities related to Federal Reserve notes, from ensuring an adequate supply to protecting and maintaining confidence in U.S. currency.
Working very closely with the Board, the Federal Reserve System’s Cash Product Office (CPO) is responsible for strategic leadership to Reserve Bank cash departments by formulating policies, operational guidance, and technology strategies for U.S. currency and coin services provided nationally and internationally. The CPO’s primary mission and responsibility is to maintain public confidence in U.S. currency.
The 12 regional Federal Reserve Banks and their branches distribute Federal Reserve notes to the public through depository institutions. Reserve Banks process notes on high-speed sorting machines that check to ensure they are genuine and fit for commerce. If the notes are deemed suspect counterfeits, Reserve Banks forward them to the local U.S. Secret Service office. If they are genuine and still in good condition, the notes are sent to depository institutions to fill orders for currency. An individual note continues moving through this cycle until it is deemed unfit, or too worn, to be kept in circulation. Unfit notes are destroyed on-site at Reserve Banks in order to maintain the quality of currency in circulation.
Unlike currency, the United States Mint is the issuing authority for coins. Reserve Banks distribute new and circulated coin to depository institutions to meet the public's demand, and take as deposits coin that exceeds the public's needs.
Q: How much does it cost to produce currency?
A: Each year, the Federal Reserve Board projects the need for new currency, which it acquires from the Department of the Treasury's Bureau of Engraving and Printing at the cost of production. The new currency budget (Off-site Link)for 2015 is $717.9 million, and reflects the following costs per denomination:
  • $1 and $2 notes -- 4.9 cents per note
  • $5 -- 10.9 cents per note
  • $10 notes -- 10.3 cents per note
  • $20 and $50 notes --10.5 cents per note
  • $100 note -- 12.3 cents per note
Q: How much does it cost to produce coin?
A: The United States Mint determines annual coin production. The Federal Reserve’s Cash Product Office influences this process by providing the Mint with monthly coin orders and a twelve-month, rolling coin-order forecast. Reserve Banks purchase coin at face value from the Mint. Further details on coins can be found on the Mint's website 

Well, there is some interesting informatiion right there. The Federal Reserve notes issued by the Federal Reserve only cost them 12 cents or less to produce. So, a $100 bill only costs the Fed twelve cents. Pretty good deal.

On the other hand, did you catch that the Federal Reserve has to purchase $1 coins "at face value from the Mint". So they have to pay a full $1 for a $1 coin (which costs the US Mint around 10 cents to produce based on estimates you see out there). A decent deal for the Mint, but not nearly as attractive (for the Fed) as those Federal Reserve notes they get for 5 to 12 cents each depending on the face value as shown above.

Here's another interesting question. 

Is this situation the real reason the US does not replace $1 bills with $1 coins? After all, the Fed has quite a vested interest in people using Federal Reserve notes rather than US Mint $1 coins. It seems like former US Mint Director Phillip Diehl thought so when he testified before Congress trying to get the dollar coin to replace the dollar bill a few years ago. Here is what he had to say about it on page three in the link above:


"For many years the dollar coin has faced another significant obstacle: the FRB's (Federal Reserve Board's) preference for the dollar note. I discovered this for myself when the Mint launched the Sacagawea dollar in 2000. The FRB is the sole channel through which the US Mint distributes coins to banks and ultimately to businesses and consumers. If the FRB doesn't order a coin, it doesn't get into the hands of the public."

Mr. Diehl goes on to say that the FRB actually placed all kinds of obstacles in the way of the US Mint in trying to get the one dollar coins into circulation. They eventually bypassed the Fed and sent the coins straight to Walmart. While the conventional wisdom has been that people wanted bills and not coins, the actual initial public demand was huge according to Mr. Diehl. So, Mr. Diehl goes on to say this in his testimony:

"This debunked another piece of conventional wisdom that Americans are opposed to eliminating the dollar note. When readily available to the public, coins are readily accepted."

Mr. Diehl did not stop there. Later on he adds these comments:

"As GAO has noted, both coins and notes make a profit termed "seigniorage", but they are accounted for differently . . . .  The Federal Reserve Board buys coins from the Mint at full face value. The Mint then records all coin seigniorage, or profit, on its books and ultimately deposits profits into the general Treasury's general fund. In contrast, the FRB buys notes from the Bureau of Engraving and Printing at cost, with the FRB reporting all note profit on its books. In 2011, the FRB's note profit was estimated at $200 billion and the FRB returned $77 billion to Treasury. I am not an expert on the Federal Reserve's finances, but the math here is pretty simple: eliminating the dollar note denies the FRB a significant source of its profits."

Is this the real reason the dollar coin never seems to "catch on" with the public? 

Many other countries have eliminated their paper bills and only have coins for their equivalent of one US dollar (see Canada for example). The US could do the same and save a lot of money (an estimated $4.4 billion over 30 years) because the coins last a lot longer than the bills do in circulation. 

But the Fed would clearly lose a huge source of profit on the $1 notes which eventually flows into the US Treasury. Perhaps this is why Congress never passed the bill to do away with the one dollar bill and replace them with one dollar coins despite the obvious cost savings over time? It clearly makes the Fed look better and show more profit returned to Treasury (at the expense of the US Mint).

Sunday, March 26, 2017

IMF - Strengthening the International Monetary System

IMF Deputy Managing Director Mitsuhiro Furusawa delivers this speech recently in Tokyo. He repeats calls for a number of actions to "strengthen the international monetary system" that the IMF has made for many years. Below are some excerpts from the speech.

 "In the time I have this morning, I would like to provide an overview to some of the key issues related to the International Monetary System (IMS) that we will examine. I will focus on three in particular—all of which are of central importance to Asian policymakers:
  • the reduction of
    global imbalances;
  • the strengthening of the global financial safety net; and
  • the internationalization of currencies.
Let’s begin with some basic facts. A well-functioning international monetary system is a public good that is essential for economic and financial stability. The IMS has helped support unprecedented economic growth and trade expansion over the past few decades. But the global economy is evolving rapidly, and the IMS needs to adapt to the new reality."

. . . . 

. . . . "Our world is becoming more and more multi polar. While greater interconnectedness allows economies to benefit from a globalized economy, it also presents new weaknesses. We face the risk of new sources of spillovers and spill backs, as we saw in 2015 with China’s financial market difficulties. All of this complicates macroeconomic management.

Global imbalances are an important part of this picture. We have witnessed sustained periods of imbalances. While they have narrowed since the crisis, they remain above desirable levels. In the absence of formal adjustment mechanisms, adjustment has largely achieved through demand compression in deficit countries.
The concentration of imbalances among a few large countries presents a risk to the global economy. It increases vulnerabilities—and even raises the risk of market disruptions."
. . . . . 
"The IMF has led the reform effort to strengthen the (global) safety net. Thanks to the support of our membership, our lending capacity was boosted to $1 trillion. We overhauled our lending framework to offer more insurance and financing instruments. We are now exploring the possibility of a new short-term liquidity facility and a non-financial policy instrument. These would provide monitoring and signaling of member countries’ policies."
. . . . .
"We are also exploring whether the SDR, in its various forms can play a greater systemic role in strengthening the IMS. This could include the official SDR, SDR-denominated assets, or the SDR as a unit of account. The IMF reached a milestone last year when the renminbi was included in the SDR basket. That enhanced the SDR as a reserve asset. Also, in the last year large SDR-denominated bonds were successfully placed in China."
. . . . 
My added comments: This is the first mention of the IMF study on potential broader adoption for the SDR I have seen since they announced the formation of an Advisory Group on the subject. As far as I know the Advisory Group has not issued any public statement or report so far.

Added unrelated note 3-27-17: It appears the US dollar index may once again be sitting right on a key support level at 99 (see this chart). The last time this happened the dollar index held and rallied so the next few days/weeks may be important to watch for this index. Note that the 99 level has acted as both a support level and resistance level in the past and that the index has already dropped below its 20 day and 50 day moving averages. It sits just above the 200 day average of 98.44. If support were to fail here, the index might see a sharper drop pick up steam. Just something to keep an eye on.

I will add that one high credibility source I hear from now and then tells me they think the US dollar will likely hold here for now, but then likely fall later this year around the June or July time frame. So, we need to monitor this for sure and see how the dollar index does. The movement of the US dollar impacts a lot of markets and can impact systemic stability if it becomes too volatile.

Thursday, March 23, 2017

Politico - What Trump Could Do To The Federal Reserve

Here is the best summary I have found so far on how President Trump may deal with the issues we cover here that relate to monetary system change. This Politico article offers 4 alternative ways Trump may shape the Federal Reserve. Number Three is the one they suggest is most likely which agrees with what we said here earlier in this blog article. Below are some excerpts.


"What happens when President Donald Trump gets his hands on the Fed?

It’s the question gripping the economic world these days. Though not as big a headline as immigration policy or his cabinet picks, Trump has a chance to appoint a new person to nearly every top Fed job over the next two years—a power not afforded most presidents, and with very high stakes. The Fed’s decisions can ripple through the economy, making mortgages more expensive, causing mining companies to reduce investment in new machinery and preventing retail stores from hiring new workers.

Given the president’s tendency to take advice from a very close circle, experts have started casting a wary eye on just who’s in Trump’s immediate orbit—and what they think about the Federal Reserve. What they’re seeing suggests that Trump has the potential to bring more dramatic changes to the Fed than any president since at least Ronald Reagan."

. . . . .

"So, what will Fed policy look like under the Trump administration? As on so many other issues, Trump’s own views are nearly impossible to determine. 

. . . . .

Here are four possibilities:"

. . . . .  (skip to #3)

3. A rules-based approach to monetary policy.

"The most likely reform for the central bank goes by the technical term “rules-based.” This means that instead of the Fed setting its benchmark interest rate on the judgment of its policy-making committee, it would do so according to a specific rule. The most famous proposed rule comes from Stanford economist John Taylor­—it’s known as the Taylor Rule—and incorporates changes to inflation, growth and other economic indicators. "

My added comments: The full article talks about those around Trump who favor a gold based monetary system and takes the idea seriously. It goes on to suggest that the most likely change at the Fed would be to move to a rule based system which is consistent with what we said in our earlier blog article here. Time will tell.

Added notes: Dr. Judy Shelton offers a Twitter comment on the Politico article here and Jim Rickards offers his own Twitter comment here. Dr. Shelton also offers comments on Fed monetary policy here on Bloomberg and this interesting tweet suggesting we should "consider a modern gold standard". Jim Rickards writes his own article on how Trump can control the Fed and Dr. Shelton comments on that here.

Sunday, March 19, 2017

Debt Ceiling Deadline Passes Uneventfully

The March 15th Debt Ceiling Deadline passed quietly with very little media attention or comment from either the Trump Administration or Congress. This Bloomberg article suggests the reason is that everyone is happy to put it off for several months and that no one sees it as a coming crisis. If that is correct, David Stockman missed completely on his forecast that this would lead to a major crisis by summer. Time will tell. Here are a couple of excerpts.


. . . .
"Republican leaders, who control both chambers of Congress and the White House, are insisting there won’t be a repeat of the brinkmanship of recent years, where conservatives have flirted with defaulting.
Senate Majority Leader Mitch McConnell told reporters last week that “of course” the limit will get a boost. “The government is not going to default,” he told reporters.
Even the chairman of the conservative House Freedom Caucus, which led recent standoffs over the debt limit, downplays the risk.
"I don’t see a showdown," said Representative Mark Meadows, a North Carolina Republican. "I think that all us believe that a debt ceiling increase with the appropriate amount of real balanced-budget directives is accomplishable under this president and a unified government."
. . . .
"For now, Wall Street traders and firms that rate U.S. debt don’t expect the types of fireworks that occurred in 2011, when debt-limit showdowns nearly resulted in default on obligations to bondholders. In a report released Monday morning, Moody’s Investors Service said it sees no near-term credit risks after the U.S. debt limit -- suspended after yet another budget battle -- is reinstated.

We expect Congress to agree to raising the debt ceiling, though this legislative process is likely to take months,” the report said.
. . . . .
"The Bipartisan Policy Center, a Washington-based think tank, estimated in early March that Treasury will run out of extraordinary steps to stay under the limit in October or November.
Lawmakers in both parties say that’s just fine with them.
“We haven’t finished the 2017 budget yet, and we’re awaiting the 2018 budget,” said Senator Jack Reed, a Rhode Island Democrat. “They’ve got Affordable Care Act repeal and replace issues. At some point we anticipate some tax reform proposal. All of that makes for so many different variables. This is just one part of a much-bigger picture. When we get more clarity, we’ll be in a better position to think about the complications of the debt ceiling.”


Added note: Here is a video by Mike Maloney that has an interesting look at the history of the US debt and debt ceiling. It's worth the time to look at. Note how all discipline in government spending seems like it was virtually abandoned after 1971 when Nixon ended the link between the US dollar and gold.This is why many people want something to control the ability to create money and government spending. 

HIstory shows us what politicians do without any real controls in place. You end up like this with every taxpayer obligated for more than $165,000 in US debt and future obligations calculated at over $875,000 per taxpayer. Please note that the cash savings per US family is less than $10,000 ( a four person family currently owes over $244,000 in US debt already accumulated -- 4 x $61,000 per citizen).

Thursday, March 16, 2017

Dr. Warren Coats on the Beginnings of the 2008 Financial Crisis

We have featured Dr. Warren Coats (former IMF) quite a bit here on this blog. He has detailed expert knowledge on the main topic we cover here, is willing to share his thoughts and comments from time to time, and is also just a genuinely nice person. Whenever he posts a new article on his blog site that is relevant to our topic here, I try to feature it. 

Here is a recent article that provides some interesting perspective on the 2008 financial crisis that eventually led into the topic we cover here (the potential for major monetary system changes). Below are a few excerpts from this interesting article.


"The evening of September 16, 2008, I met Randy Kroszner for dinner at Et Voila in the Palisades just outside of Georgetown. He arrived late explaining that the Fed’s monthly monetary policy meeting had lasted longer than expected. Randy is a Governor on the Board of Governors of the Federal Reserve. The attempt to rescue Lehman Brothers over the weekend had failed and it had declared bankruptcy the day before, so we had a lot of interesting things to talk about. Randy didn’t mention that the Fed had just agreed to lend up to $85 billion to AIG to cover its expected loses on its mortgage related Credit Default Swaps, thus giving the U.S. government a 79.9% equity stake in the insurer in the form of warrants called equity participation notes. When news of the AIG bailout was posted on my phone around 9:00pm during our meal, I asked Randy what in the world was going on." . . .  

"The government actions in 2008 can be broadly stated as: a) providing all of the liquidity the financial sector needed following the Lehman Brothers collapse and financial panic; b) bailing out large banks and other financial institutions that might have been insolvent whether they were or not; and c) leaving underwater homeowners to drown. The first of these—providing liquidity—is universally accepted as a proper function of a central bank and one that the Fed executed well. The other two—bailing out banks but not homeowners—are the subjects of this note. I will review them from both an economic and a political perspective."

. . . . . 

"From economists’ perspective, bailing out anyone creates a moral hazard. If market players profit from risky bets when successful but expect that the government will pick up the tab when they are unsuccessful, they will take greater (excessive) risks."

. . . . . 

"The political optics of bailing out mortgage lenders but not homeowners is not good. Why did politicians choose to support one but not the other? Moral hazard is a problem with both. The reality is that Washington politicians were (are) much closer to Wall Street than to Main Street and are thus more sensitive to Wall Street’s concerns. Growing recognition of this fact adds some understanding to the hostile attitudes toward Washington expressed by Trump supporters.
By far the better policy would have been, and in the future is, to stick by the existing rules for bearing losses (our bankruptcy and default laws), i.e. no government bailouts." . . . . . .
"Our government has increasingly attempted to micromanage the private sector, especially the financial sector. This is a mistake."      . . . . . 

Tuesday, March 14, 2017

US National Debt Clock As We Approach the End of the Debt Ceiling Holiday

Wednesday (3-15-17) the debt ceiling holiday ends. We have become so numb to the enormous US debt figure now that most of us just don't even think about it anymore. But just to check in on reality every now and then I have added a link to the National Debt Clock web page to the list of information links on the right hand side of this blog. 

How this problem will ever be resolved in a non disruptive way is quite the mystery. So far, the US can still borrow all the money it wants. If no one else wants US treasury bonds the Federal Reserve can just create money out of thin air and buy them as they have done by the trillions already. When something like this goes on and on for years with no apparent consequences, it eventually seems like it can go on forever. You actually ask yourself questions like:

Why can't the Fed just create the money to endlessly buy US debt forever whenever we need it if no one else will buy it?

No one seems to care how much of that they do and the US dollar seems to do continue to be just fine no matter how many dollars are conjured up out of thin air that no one did any actual work to earn. It truly is somewhat like having an officially sanctioned counterfeiting operation that no one ever questions (because they all know doing so would raise the systemic risk through the roof and everyone using the US dollar would likely lose).

But somewhere down deep inside, we know this will not continue forever. As I write this article (3-2-17) every US taxpayer already has an obligation for over $166,000 of US debt (per the debt clock stats). If we add in future unfunded entitlement liabilities that obligation jumps to over $878,000 per taxpayer. There are just barely enough "total national assets" per the debt clock to cover all that obligation. And all it will take is one good stock market correction or economic recession to drop "total national assets" below the total current and future debt obligations. Not to mention that rising interest rates will make the problem even worse (will add to the interest payable on the debt).

It is obvious by now that no one knows how much longer this will go on. It has already gone on longer than many experts and analysts ever imagined possible. President Trump says he will grow his way out of the problem, but that is far from a certainty even if his policies work as planned (and if Congress actually implements them first). Also, it is pretty clear he plans on piling up plenty more debt for as far as we can see into the future right now since even his growth projection takes time to kick in.

As we noted above, so long as no one cares if we just create whatever money we need at the Fed to buy US bonds if no else will, things can just keep right on trucking along. What fun it is to have the world reserve currency that everyone needs and has to use until and unless something changes things.

Unfortunately, when the day does arrive where that won't work any longer, we will very likely have to live through the kind of dollar crisis that Jim Rickards and others have long predicted. Will that happen this year, in ten years, or even in my remaining expected lifetime (age 61)? I don't know, but it will eventually happen. And we will very likely see major monetary system changes at that time. Whether I will be here to cover it is another question.

Added note: Want a visual aid that illustrates how much global debt is out there? Try this. Also of interest is the US dollar to gold and US dollar to silver ratios in the lower right hand corner of the debt clock web page. Note the comparison to 1913. How does the US debt to GDP ratio compare to other major nations? Go here.

Added note 3-16-17: As expected, nothing of importance happened as the debt ceiling expired. David Stockman says it will be early summer, but most observers don't expect anything different this time after some usual drama.

Reader comment on this article:

Here is a great reader comment I got on this article. The reader prefers to remain anonymous:

Hi Larry;

"Just read you most recent post, after I had finished a Robert Shiller article.  He mentioned something I hadn’t known about the 17th Century tulip mania in the Netherlands, when a rare tulip was worth as much ( albeit briefly ) as a house.  What made that well known fact even more surprising was the concurrent phenomenon of a renewed outbreak of the Plague in Holland, as well as continental Europe, so that the “demand for houses” or for that matter anything else except tombstones, was about to fall dramatically, what we would today call demand based deflation.

I think that second event makes the tulip mania seem even more strange in retrospect.  With respect to the dollar and US debt, ( a dollar is, after all, a zero coupon perpetual bond ) what matters is WHO accepts it in settlement of trade, whether for goods and services, or for financial assets.  It is my personal opinion that  we are in a transition phase in the history of dollar “backing”.  The first was the gold exchange standard, which ended officially in 1971, but which was not “replaced” until late 1974, when Treasury Secretary William Simon obtained agreement from King Faisal that all oil would be settled in dollars ( the petrodollar standard ).  Today, less and less oil is being settled in dollars, as the U.S. becomes a smaller import market, while China and Europe import more oil ( and especially nat gas ). 

As we move away from the “petro dollar standard", what replacement candidate is there for dollar backing?  I would suggest that it is the financial securities markets of the US themselves which are now carrying that load.  States accumulate wealth via “reserves” of their central banks, and via their sovereign wealth funds (SWF's).  Both of these invest in debt securities, but both also invest in stocks, though the stocks proportion is greater for the SWF’s than for the CB’s generally.  A strong dollar flatters these investments, as does a rising securities market, while at the same time, reserve currency status “generally” leads to reserve currency strength.  Taken all together, this looks like a one way street, except that it relies on “price remaining no object” , just as on the 17th century.  Just exactly WHAT event will trigger the moment when “the price seems just too dear” is one which I reserve for my paid subscription clients only ( ha ha )

Meanwhile, watchful waiting is the order of the day."

Friday, March 10, 2017

A Return to Gold Based Monetary System Under Trump?

This is a question you now see being raised more often since President Trump has made favorable comments about a gold standard in the past. A recent article in Forbes which we covered here directly called on Trump to move towards a gold based monetary system and to pack the Federal Reserve Board with pro gold advocates. But is it realistic to think Trump would go this direction?

This recent twitter comment by Dr. Judy Shelton leads me to believe that the reality is that moving to a gold based monetary system is probably not in the cards under President Trump. Dr. Shelton is frequently mentioned as a potential nominee for the Fed Board. At the very least she was an adviser to the Trump transition team. So we can assume she has a good feel for what Trump might actually consider. This is the article Dr. Shelton links to in her tweet. Here are some excerpts and then a few comments.


. . . . .  

"As readers of this column will be aware, there is a lively debate within international macroeconomics and finance on how serious are the distorting effects on the global economy of our current non-system of inflation-targeting national central banks tied together through flexible exchange rates. There is a related debate on whether classical inflation targeting, and, even more so, UMPs (unconventional monetary policies), represent sound policy. As I have argued myself in these pages, UMPs, which have brought interest rates down to zero and have hugely increased the balance sheets of advanced economy central banks, may well be a cure worse than the disease they intended to cure, and, what is more, a policy stance from which there is no credible exit.

All that is likely to change under President Trump. With a unique opportunity to appoint five or more members of the Fed board, including replacing the chair, Janet Yellen, and vice-chair for monetary policy, Stanley Fischer, when their terms expire, the new president has an historic opportunity to set his stamp on American monetary policy.
Some libertarian and conservative supporters and advisers of Trump have previously advocated a return to a commodity-backed currency, such as the gold standard which prevailed before the World War I and which, in modified form, was the basis for the global monetary order under Bretton Woods.
This may be a bridge too far from the current regime of a fiat currency whose quantity is determined endogenously by setting the policy rate to achieve a predetermined inflation target.
What may be within reach, instead, is the abandonment of discretion and the tying of monetary policy to a fixed rule: some version of a Taylor rule, for instance, which, in its simplest form, sets the policy rate as a linear function of the gap between the inflation rate and its target and also the gap between the actual level of output and its potential level, controlling for the real interest rate and, possibly, other variables."
. . . . .
"Economist Judy Shelton, who worked on Trump’s transition, has recently advocated, writing in The Wall Street Journal, the inclusion in trade agreements of provisions to prevent members from using currency manipulation to distort the pattern of comparative advantage. As Shelton writes, “The distortions induced by government intervention in the foreign-exchange market affect both trade and capital flows.”
Now, if he tackles this issue, President Trump may be right on the money."
My added comments: I encourage readers to read the full article. The excerpts above suggest that Dr. Shelton and others like the author of this article are not likely to push for Trump to adopt a gold based monetary system. Please note this article says "that may be a bridge too far from the current regime of a fiat currency." The article then goes on to suggest what "may be within reach, instead."
This gives us the clues we need. It is pretty clear that even gold friendly advisers to Trump think that moving to a gold based monetary system is unlikely and are probably going to push for a rule based system that uses something like the Taylor rule to set monetary policy. The article cites comments by Dr. Shelton where she calls for trade agreements to include provisions to "prevent members from using currency manipulation." Again, this suggests the present US dollar fiat currency system would still be in place.
Therefore, my conclusion is that the available evidence right now suggests that President Trump is unlikely to push for a return to a gold based monetary system. But we will follow events and see what actually does happen.

Added notes: It appears that new Treasury Secretary Steve Mnuchin is getting in touch with all the regular key players in the existing monetary system. Nothing here suggests a radical departure from the past in terms of the new Administration and the existing institutions. Of course these are probably just courtesy meetings to introduce himself. Nothing much to see here.

Meets with Lagarde/IMF

Meets with Mark Carney (BOE)

Meets with Incoming General Manager for the BIS - Agustin Carstens

Also, looks like the new Treasury Secretary will have his own Twitter account as well

Debt Ceiling Drama Begins - Treasury formally asks Congress to Raise It - No response so far. David Stockman repeats on Fox News that he believes a major crisis over the debt ceiling will arrive by early summer. He says there is "no path for a majority to raise the debt ceiling in Congress." I guess we will see. So far, no one seems concerned about it.

3-13-17: Still no hint of any concern over the debt ceiling. CBO says it won't create problem until fall which contradicts the David Stockman prediction that a crisis will arrive by early summer. Someone has to be wrong. It is clear that most everyone views this as a non event for now.

Tuesday, March 7, 2017

Forbes: "President Trump Should Replace the US Dollar with Gold as The Global Currency"

It looks like the topic we have been laboring to cover here on this blog for some time now is entering a more mainstream media publication for discussion. This article in Forbes calls on President Trump to alter the existing monetary system by replacing the US dollar as the global reserve currency with gold in some form.

This is not a new argument, but this Forbes article frames the discussion more like we have framed it here. It lays out three alternatives for Trump to consider as he tries to implement his economic program. Below I have excerpted those three alternatives which are exactly like what we have talked about here for some time. After that are a few added comments.

"Inside President Trump’s otherwise “standard Trump stump speech” at CPAC was nestled what might be a most intriguing observation:
Global cooperation, dealing with other countries, getting along with other countries is good, it’s very important. But there is no such thing as a global anthem, a global currency or a global flag. This is the United States of America that I’m representing." -- Donald Trump
There's a keen insight in there that could, just maybe, transform our lives, America, and the world. No "global currency?" 

As it happens, there is a global currency.
It’s called the "U.S. dollar.”
. . . . . 
In other words, if President Trump wishes to address America’s merchandise trade deficit (balanced to perfection, of course, by a capital accounts surplus) he will find that allowing the dollar to be used as the global currency is the real snake in the economic woodpile.  The dollar’s burden as the international reserve currency, not currency manipulation by our trading partners or bad treaties, is the true villain in the ongoing melodrama of crummy job creation.

Mueller’s Wall Street Journal column enumerates the three options open to President Trump:
First, muddle along under the current “dollar standard,” a position supported by resigned foreigners and some nostalgic Americans—among them Bryan Riley and William Wilson at the Heritage Foundation, and James Pethokoukis at the American Enterprise Institute.

Second, turn the International Monetary Fund into a world central bank issuing paper (e.g., special drawing rights) reserves—as proposed in 1943 by Keynes, since the 1960s by Robert A. Mundell, and in 2009 by Zhou Xiaochuan, governor of the People’s Bank of China.   . . . . 

Third, adopt a modernized international gold standard, as proposed in the 1960s by Rueff and in 1984 by his protégé Lewis E. Lehrman …and then-Rep. Jack Kemp.
. . . . . 
"To turn the IMF into a world central bank would, of course, be anathema to Trump’s economic nationalism. To subordinate the dollar to the IMF’s SDR would be equivalent to lowering Old Glory and replacing the American flag with the flag of the United Nations on every flagpole in America. Unthinkable under a Trump administration."
. . . . .
"Former Fed Chairman Alan Greenspan just provided a barely noticed Big Reveal. In an interview with the World Gold Council’s Gold Investor Chairman Greenspan, stating “I view gold as the primary global currency,” went on to explicitly reveal, for the first time to my knowledge, that “When I was Chair of the Federal Reserve I used to testify before US Congressman Ron Paul, who was a very strong advocate of gold. We had some interesting discussions. I told him that US monetary policy tried to follow signals that a gold standard would have created. [Emphasis supplied.]"
. . . . . 
"How might President Trump go about turning this around? He has a unique opening to forcefully pivot America toward epic prosperity.
As Paul-Martin Foss of the Menger Center astutely points out the Federal Reserve Board currently has three vacancies. If Trump were to fill those vacancies with three sophisticated gold standard advocates from the short list of Lewis E. Lehrman (whose eponymous Institute I formerly served), Dr. Judy Shelton (who served as an advisor on his presidential economic transition team), former presidential candidate Steve Forbes, and John Allison, former CEO of BB&T (preferably as vice chairman for regulation) the president would create a super “beachhead team” at the Fed to seriously restore equitable prosperity."
. . . .
"Mr. President: “No such thing as a global currency?” The dollar is the global currency. Want prosperity? Heed Chairman Greenspan and do not just view but restore "gold as the primary global currency.” President Trump: replace the dollar with gold as the global currency to make America great again. We have the gold."

My added comments: Forbes magazine has run many articles in support of a gold based monetary system and Steve Forbes has also spoken in favor of that quite often. This author (Ralph Benko) is a strong gold advocate. So this article is nothing new in that regard. However, I am featuring it because it does make some key points in it that we have made here and you don't often see in mainstream media articles.

- the article lays out the three main options Trump has to choose from during his term of office. Please note the second option is the one we have covered here extensively and ties directly to the prediction that Jim Rickards has been making for years. That being that the IMF would issue the SDR as global reserve currency to replace the US dollar.

- while this article is encouraging Trump to choose option #3 (gold), we don't know what Trump is really going to do and that is why we continue to monitor all this here. Any major change to the existing US dollar centered system (Option #1 listed above) is likely to have a major impact on all of us even though it has received virtually no mainstream media coverage or discussion. Here we have the potential for major changes laid out clearly in a more mainstream publication.

- the article points out a huge key factor for us to watch for under Trump. Trump is going to get to pick several new governors on the Federal Reserve Board. He may even be able to eventually pack it with a majority he selected. We should pay close attention to who he puts on the Fed Board. If he really did pack it with pro gold advocates as this Forbes article implores, we can assume some kind of a return of gold to the system might actually be on the table for discussion.

Please note that the article talks about a "modernized" gold standard. There are several ideas out there on how to bring gold back to the system without using the old direct convertibility model under the old gold standard. There are even proposals to sort of combine options 2 and 3 using a new kind of SDR with a gold anchor or other hard anchor. (Dr. Warren Coats Real SDR proposal suggests using a new version of the SDR tied to a basket of goods as a hard anchor somewhat in the spirit of the old gold standard, but in a new way with a broader anchor than just gold)
There you have it. One article that sums up much of what we have tried to cover here for years. It tells you clearly what to watch for under Trump. It lays out three possible scenarios for him to choose from. If he were to choose option #2 (IMF/SDR) or option #3 (modernized gold), we will definitely see the kind of major monetary system change we watch for here. Do you really think someone like Trump who prefers dynamic change will choose to "muddle along" with Option #1? Grab your popcorn and stay tuned. It looks like it may be an interesting four years coming up. 

Added news notes 3-8-17:

With one week to go we continue to monitor articles about the end of the debt ceiling holiday set to expire on 3-15-17. Here are two article links:

This CNN article says the government might make it to Oct-Nov once the debt ceiling kicks in if it is not raised.

Earlier this year the new Sec. of the Treasury said he wants the ceiling raised sooner rather than later:

Here, Mike Maloney offers his thoughts on the recent David Stockman interview regarding the debt ceiling. Meanwhile, still no mention of it at all from President Trump or Congress. In fact, everyone is acting as if this will be a complete non event and business as usual so far.