Sunday, April 30, 2017

BIS Study on Global Liquidity

A thank you to a reader here who alerted me to this new speech on the BIS website. The BIS spokesman says that "in devising policy for financial stability, a tight focus on underlying causes rather than on the symptoms" is more likely to be effective. Below is a summary of the speech.


Exchange rates affect the economy through a financial channel, as well as the trade channel. The financial channel works in the opposite direction to the trade channel. In emerging market economies especially, a weakening of the domestic currency against the dollar saps both cross-border bank lending and investment. Such effects flow through the dense interconnections of dollar lending in the global financial system. In devising policy for financial stability, a tight focus on underlying causes (excess leverage and funding risk) rather than on the symptoms (capital flows) stands a better chance of being more effective in addressing the vulnerabilities as they emerge.

Speech by Mr Hyun Song Shin, Economic Adviser and Head of Research of the BIS, at the IMF-IBRN Joint Conference "Transmission of macroprudential and monetary policies across borders", Washington DC, 19 April 2017.

Friday, April 28, 2017

How Would the Trump Tax Plan Impact the Average Family?

This is a bit off topic. However, I think this is important information for people to understand since a major tax change like this will most certainly impact the average person. It's far too early to tell how the proposed new tax plan would impact individuals. I will use a pretty typical example of an average US family of four (two kids) to illustrate why I say this.

Let's take a family of four where the parents generate an average gross income of $75,000 per year. We will be generous and assume this family uses the standard deduction of $12,700 and takes four personal exemptions which total $16,200 (4 x $4050). The parents are employees and have no special other tax deductions like business expenses, etc. How does the proposed Trump tax plan impact this family? Let's look at it.

Under current tax rules:

The family would start out with gross income of $75,000. From this they would deduct the $12,700 standard deduction PLUS the $16,200 worth of personal exemptions (a total of $28,900 in total income reductions). This would leave a taxable income of $75,000 less $28,900 or $46,100.

The current tax rates on $46,100 would work like this for this family filing as "Married Filing Jointly". The first $18,650 would be taxed at 10% ($1865 in tax). The income above $18,650 up to $46,100 would be taxed at a 15% rate (46,100-18,650=27,450 x .15=$4118 in tax). The total income tax due would be $1,865 + $4,118=$5,983.

So how does this change under the Trump tax proposal? This is where it gets impossible to project. The plan released for individuals simply does not provide enough information to make any kind of real projection. This is because we don't know if the personal exemptions will be kept or at what income levels the 10%, 25%, and 35% tax rates will be applied.

We will use two different assumptions to show how different the results could be depending on the answers to these unknowns.

Case 1 - Personal exemptions are retained and the 10% tax rate is used up to taxable income of $70,000 before you move to the %25 rate. 

Under this assumption, the family would get a big tax reduction as follows:

Gross income of $75,000 would be reduced by BOTH the new higher standard deduction of $25,400 AND four personal exemptions that total $16,200. This would reduce taxable income to $33,400 (75000-25400-16200=$33,400). The tax rate of 10% would result in a total tax due of $3340. This is $2,643 less than the family would owe under current tax rules. Most everyone would call that a big tax reduction as the plan is being touted.

Case 2 - Personal exemptions are NOT retained and the 10% tax rate is used up to taxable income of $40,000 before you move to the %25 rate (keep in mind that now the tax rate jumps to 25% instead of %15).

Gross income of $75,000 would be reduced by ONLY the new higher standard deduction of $25,400.This would reduce taxable income to $49,600 (75,000-25,400=$49,600). Please note that if the personal exemptions are no longer permitted, this family actually has MORE taxable income now, not less

The tax rate of 10% would apply to the first $40,000 in taxable income for a total of $4000 tax due on that part of their income. The taxable income above $40,000 of $9,600 would be taxed at a new much higher rate of 25% now for a tax due of $2400 on that part of their income. The new total tax due would be $6,400 ($4,000 + $2,400). This is actually $417 MORE in taxes due than they would owe under the current tax rules. Most everyone would feel deceived at calling the new tax plan a "large middle class tax cut" under this assumption. 

So which assumption above is more likely? We simply don't know. The plan released left most all of the key details out. It's up to Congress to decide. As you can see, depending on what Congress decides, the family above could see their taxes change by a range of just over $3000 a year. They could even see their taxes go up. 

Conclusion: This is why it is too early to say what the real impact of this plan might actually be on most average US families. We would assume that Congress would not use Case #2 that would actually INCREASE taxes on most average families after this plan being touted as a big tax reduction for the middle class. 

But who really knows? Until the key details are filled in, it is simply wrong to promote this plan as a big tax reduction for the average middle class US family. It might be or it might not be. Why tell the public it WILL be when you really don't know for sure since most of the key details are left up to Congress?

Wednesday, April 26, 2017

The Kemp Foundation Forum on US Dollar and Exchange Rates - Overall Review

The Kemp Foundation has released a full set of videos of the entire forum on Exchange Rates and the US Dollar. You can view those here. Paul Ryan offers his support for the forum discussion here

Below is the introduction to the forum by the son of former Congressman Jack Kemp. He explains why the forum was held and what they hope to achieve from it. After that are a few key points for me from the event.


My Added Comments:

In the video just above Jimmy Kemp says that a goal for this forum was to discuss how to improve the monetary system in clear language that the average person can understand. This is what we are all about here so I applaud this effort. 

A few key points for me after watching were:

- there is widespread consensus that the current monetary system is flawed and needs changes

-a floating exchange rate system is vulnerable to currency manipulation by governments and central banks who are vulnerable to political pressure

- the elusive goal is to provide a "sound currency" for everyone to use. This means that people have confidence that the currency they use will hold its value over time 

-the current floating rate system leads to volatile exchange rate fluctuations at times that make it harder to do business for everyone . The 2008 crisis is the most recent example of extreme volatility

- It's hard to get consensus on how to change the system, but it is important to keep trying (note Paul Volcker confirms what we have said here - getting global consensus is extremely hard to do and is why it usually takes a major crisis to get much significant change in the monetary system) 

- the alternative to a floating rate system is some kind of fixed exchange rate system

- their are a variety of ideas on how to move back towards a fixed exchange system

I would note that the only proposal that addressed a major overhaul to the existing monetary system covered in this forum was the proposal by Dr. Warren Coats. The other presentations were mostly about what is wrong with the system now or some lesser tweaks to the present system rather than any kind of major change. This is why we have covered the proposal by Dr. Coats so extensively here. 

When push comes to shove, if we do get a new major global financial crisis that forces policy makers to take some kind of action more quickly, they are more likely to look at a proposal that has already been put on the table and is based on real world experience like Dr. Coats has had building a currency system.

My overall impression from this forum is that if we do get major monetary system change in the future, it will likely be to return to some kind of fixed exchange rate system they might include gold or some other hard anchor. Other ideas might be tried first, but eventually to restore public confidence there would have to be a system that can truly provide a stable currency and sound money. All of the distinguished contributors to the forum seem to agree that a stable and sound currency is critical to a long term sustainable system.

Added note: I got this email about the forum from a reader:

"I just finished watching the Ben Steill presentation.  I think it was by far the best one I’ve seen.  I read his book a few years ago, (the battle of Bretton Woods ) "

Monday, April 24, 2017

Kemp Foundation Forum on Exchange Rates - Dr. Warren Coats Video

This is the second in a series of three articles covering the Kemp Foundation forum on Exchange Rates and the US Dollar. In the first article, we featured the presentation by Dr. Judy Shelton. Her presentation stressed the need for change to the existing floating exchange rate monetary system and offered an idea on how US Treasury Bonds convertible into gold upon redemption might be a good step in the right direction. 

Later in the forum, Dr. Warren Coats (former IMF) made his presentation about his proposal to use the SDR to replace the US dollar as the global reserve currency. He would change the way the SDR works now so that it would be issued under Currency Board rules and tie it to a "hard anchor". He explains how this would work in the video below (see his full paper on this here). After that is a bullet point summary of his presentation and a few added comments.


Bullet Point Summary:

- Dr. Coats agrees the current floating exchange rate system needs help

- He proposes using the SDR to replace the US Dollar, but under different rules 

- He wants to use Currency Board rules to issue the SDR's based on market demand and not the current IMF allocation quota system 

- He wants to tie this new SDR to a hard anchor and not the basket of currencies used now

- His believes his SDR proposal would be an improvement to the SDR as allocated now by the IMF which he described as "clever but terribly flawed" 

My added comments: This is an important video for readers here to view. We have covered Dr. Coats proposal here before, but in this presentation he very clearly explains in detail how issuance of the SDR under Currency Board rules would work and why he feels it would be much better than how it works now at the IMF. 

I believe this is important to understand because I think most people don't realize that Dr. Coats is NOT proposing to use the SDR in the way it is used now at the IMF. He wants the amount of SDR's issued to be determined by a Currency Board rule based on market demand for the currency rather than the allocation quota system now used at the IMF.

By using a Currency Board rule and using a hard anchor as a fixed exchange for the currency, Dr. Coats believes we can address the flaws in the current system in a way somewhat like the old gold standard was used in the past. He does not object to using gold as the hard anchor if that is what most desire. But he thinks using a broader basket of goods would likely be a more stable anchor than just gold by itself. He views the Currency Board rules as being more important than whatever is chosen as the hard anchor for the currency.

The key point is to understand is that Dr. Coats proposal does not give the IMF the right to issue the SDRs at its own will and does not allow for unlimited currency issuance. He makes that completely clear in his presentation. The currency would be issued based on market demand under Currency Board rule. I would also note that Dr. Coats proposal was the only one at the forum offered as a comprehensive overhaul of the existing monetary system.

Added notes: 

I asked Dr. Coats to review this article for accuracy which he did and offered this kind reply:

"See my corrections below.  Many thanks for the wonderful service you provide"

(Dr. Coats pointed out a couple of changes to improve accuracy such as adding the word rule after Currency Board in the paragraphs just above)

Below is a quote from the Conclusion of Dr. Coats presentation paper for this forum:

"If the IMF’s SDR replaced its currency valuation basket with a basket of globally traded goods, its use for establishing values in contracts and for pricing globally traded goods and services is very likely to spread widely. If the IMF issued such real SDRs according to currency board rules, central banks are likely to increasingly replace the US dollar and other national currencies in their foreign exchange reserves with real SDRs.

If all or most countries pegged their currencies to the real SDR or used the real SDR directly (“dollarized”), the world would have returned to a gold standard like system of, in effect, a one world currency. The reduction in exchange rate risk and the cost of hedging such risks would make a material contribution to world trade and economic well-being.

The tighter monetary and fiscal discipline of such a global monetary system would significantly enhance the likelihood that the international monetary system and domestic monetary systems fixed to it would adhere to the rules of the game."

Sunday, April 23, 2017

Kemp Foundation Forum on Exchange Rates - Dr. Judy Shelton Video

On April 20th, the Kemp Foundation held a forum on Exchange Rates and the US Dollar at the National Press Club in Washington, DC. The forum featured a very distinguished list of speakers and contributors. Dr. Judy Shelton, who we have featured here recently, was one of the speakers. Dr. Shelton worked as an adviser to the Trump economic transition team.


Below is the video of her presentation followed by a brief bullet point summary of her key ideas. After that are a few added comments.



Bullet Point Summary:

- many (including Dr. Shelton) agree that existing floating exchange rate system is flawed

- the current system needs to be changed to restore a fixed exchange rate system

- currency manipulation by governments or central banks is a problem in the existing system

- US should provide global leadership regarding monetary system integrity

- Dr. Shelton proposes the idea of a gold convertible US Treasury bond

- she provides a detailed example of how such a bond might work in the real world

- she asks: if the US were to do this how might it impact other countries?

My added comments: The convertible gold bond is is an idea Dr. Shelton has talked about for some time. My take on it is that she views it as kind of a first experimental step towards a fixed exchange rate system based on gold or some kind of hard anchor. She uses gold in her example because central banks already own gold in their existing reserves and gold has a history in the world monetary system.

Her proposal would not be an immediate major overhaul of the existing monetary system as I understand it. It would be sort of a test to see how it would work out. If it performed well, it might encourage the US and other nations to move back towards a fixed exchange rate system based on a hard anchor like gold.

I am presenting Dr. Shelton's video first here on the blog because in a way it seemed like it kind of lays the foundation for a broader monetary system overhaul proposal made by Dr. Warren Coats later that day in the forum. Dr. Coats proposes using the SDR at the IMF to replace the US dollar as global reserve currency, but in a much different way than the SDR is currently used. He wants it issued based on market demand by a Currency Board rule and tied to a hard anchor. He does not oppose using gold as the anchor if that is what is desired, but thinks that a broader basket of goods would likely be a more stable anchor than gold by itself. We have covered Dr. Coats proposal here, but in his presentation he covers how a Currency Board would work in more detail. I think both Dr. Shelton and Dr. Coats are both strong advocates of a sound currency unit which was a major theme of this forum. 

This forum is a great example of why it is important to get several experts like this together to exchange thoughts and ideas. I noticed how well Dr. Shelton and Dr. Coats presented very clearly what they are proposing in a short summary version all of us can understand. That is what this blog is all about. Trying to help the average person like myself get some understanding about these complex issues. These types of brief summary presentations laid out by highly credible experts in clear language is just what is needed to help us. I commend the Kemp Foundation and all participants for holding the forum and exchanging ideas. Well done!

Added notes: A thank you to Dr. Shelton for a retweet on this article.

This is the first of three articles on the Kemp Forum. Here is the article on Dr. Warren Coats presentation. On Wednesday there will be a review of the overall forum. 

Saturday, April 22, 2017

Sean Rushton on the Dollar - Kemp Foundation

The Kemp Foundation recently held its forum on how best to reduce volatile currency exchange rates, especially in regard to the US dollar. Soon we will feature that forum and the information discussed and presented. But we can get an idea what the thinking is on this at the Kemp Foundation from this recent article in The Wall Street Journal by Sean Rushton. Mr. Rushton is the Director of the Kemp Foundation Project on Exchange Rates and the US Dollar. 

Below are a few excerpts from his article.

"As the U.S. economy slowly recovers from its low-growth hangover following the 2008 financial crisis, the Federal Reserve is gradually tightening monetary policy. Meanwhile, President-elect Trump and the Republican Congress plan to spur growth through deregulation and cuts in corporate and personal income taxes. Yet the Reagan years proved policy makers should watch out for another threat to the improving economy: a soaring dollar.
In the early 1980s, the Fed’s tight monetary policy along with the Reagan administration’s tax cuts caused the dollar to rise dramatically relative to other major currencies, appreciating more than 50% from 1980-85. As the exchange rate soared, inflation plummeted from 13% in 1980 to below 4% in 1983, and stayed low—a stunning and welcome disinflation.
After the 1970s era of dollar depreciation and inflation, the rising dollar was a boon to consumers, and the supply-side policy mix associated with economists Robert Mundell and Arthur Laffer made the economy boom. In 1984 real GDP rose 7.3%.
Once inflation was down, however, the future Nobel winner Mundell and his ally New York Rep. Jack Kemp highlighted a new hazard: the skyrocketing dollar. The exchange rate’s sharp appreciation—necessary to get inflation down—meant falling profits for U.S. multinational companies, reduced competitiveness for domestic manufacturers of products such as autos and electronics, and steep declines in output prices for commodities such as oil, farm products and steel."
. . . . .
"Now—with the Fed saying it will raise its target interest rate repeatedly in 2017, continued monetary easing in other large economies, and a new president promising big tax cuts in 2017—there’s a risk that the dollar will soar to dangerous heights. Since Election Day, the dollar is up more than 5%.
If the already-high dollar does rise significantly, how will it influence an economy with low inflation and low velocity of money, and still recovering from a deflationary financial crash? How will it affect U.S. exports, manufactures, commodities, and blue-collar jobs? How many global debt defaults will it generate, and how will they affect banks? Could a trade war erupt if China devalues by a large percentage in response? Will the soaring dollar offset the positive impact of supply-side fiscal policy, such as the Trump tax cuts? Or will markets tank in advance and force the Fed to retreat from normalizing interest rates?'
. . . . .
"Removing the prospect of big dollar swings would be an enormous benefit to the long-term productive economy. Less volatility among the large currencies, perhaps assisted with a common external target or shared monetary rule, would be a major step toward stabilizing our crisis-prone system, restoring normal interest rates, lowering trade frictions, and returning to broad-based economic growth."
My added comments: This article pretty well lays out the theme for the recent forum sponsored by the Kemp Foundation in Washington, DC. Dr. Warren Coats and Dr. Judy Shelton were both featured speakers at the event. It is pretty clear that most feel the current floating exchange rate system is flawed and needs to be changed. This is exactly what we cover here on this blog, the potential for major monetary system change in the future.

I am working on a series of articles to cover the overall forum, the presentation by Dr. Judy Shelton, and the presentation by Dr. Warren Coats. I have seen the presentations and they are very well done. 

My plan is to run these articles here over the next week and then re post them all in the first week of May so that they will stay visible to blog visitors for all of May. This forum was a great way to get experts who can clearly present their ideas all together in one place. That is a big help to those of us trying to learn about and understand these sometimes complex issues. I think readers here will benefit from the excellent presentations. I encourage readers to try and get others to read these coming articles because there is a lot of opportunity to learn quite a bit from these video presentations for the average person who would like to do so.

Friday, April 21, 2017

IMF Raises Outlook for Global Growth

Despite a variety of geopolitical issues, the IMF is raising its global GDP projection. This article in MarketWatch talks about it. Critics like Jim Rickards are not impressed as you can see in his Twitter comment here. Below are a couple of excerpts from the MarketWatch article.

"The global economy is on course for its best performance in several years despite trade tensions and looming geopolitical threats, the International Monetary Fund said ahead of a meeting of world finance chiefs in Washington this week.
Investors are skittish over a potential U.S. standoff with North Korea, France's elections and Washington's fresh use of force in the Middle East and Afghanistan. But global investment, manufacturing and consumer confidence are signaling strength. U.S. growth is projected to accelerate. Europe and Japan are finally showing signs of recovery."
. . . . .
"While the IMF kept its forecast pickup for U.S. growth at 2.3% for the year -- up from 1.6% last year -- it notched higher outlooks for all five of Europe's largest economies. The U.K.'s bump-up was the biggest, a 0.5 percentage point increase to 2% for the year.
In Asia, another dose of government stimulus has pushed China's growth forecast up a tenth of a percentage point to 6.6%, and the fund lifted Japan's outlook by 0.4 percentage point to 1.2%."

My added comments: One thing about how people perceive economic conditions is that they can vary a lot depending on how things are doing in the area where they live. If you live in areas where the local economy is struggling, you probably tend to think it's the same everywhere. If you live in an area where the economy is doing relatively well, you probably tend to think things are that way everywhere. 
As an example, in this area (the Dallas/Ft. Worth area and Texas in general) the economy is holding up pretty well. People are pouring into this area by the thousands from other areas where jobs are less plentiful than they are here. People in this area are seeing gigantic billion dollar plus projects recently completed or in progress such as these:
These are just a few examples. There are many more large projects underway all around this area. The oil company I work for is located in a twin 14 story office building. A few years ago, we are almost the only tenant in the building right after the 2008 crisis. All the building amenities like a gym, restaurant, etc. were closed. The parking garage was nearly empty. 
Now, the building is completely full. The parking garage is jammed and a new restaurant has opened. Traffic all over the area is way up, etc. Our company is on track to have a very good year even with oil at $50-$55 because costs of acquisition and production have fallen quite a bit.
In this area, if you tried to convince most people that we are on the verge of some kind of major economic crisis they would think you are crazy because they don't see any signs of that in this part of the world where they live.
What we have tried to do here is to factually document the genuine systemic risks that have been identified by organizations like the IMF and the BIS and other credible experts. The risks do exist and should be taken into account by anyone trying to make personal financial decisions. But so far, these risks have not resulted in the kind of major crisis that could lead to the kind of major monetary system changes we watch for here. 
What we will do here is continue to do what we have been doing. Monitor events, document legitimate systemic risks when we find them, and see what actually happens rather than try to predict what will happen (we have seen a lot of predictions fail over the past 3 years). We will also try to review any proposals for major change to the existing monetary system that are made that may have some realistic chance of being tried in the future if a major global crisis ever does unfold.
As we have said for some time now, if we do not get a major crisis any major changes to the existing monetary system are likely to take place gradually over an extended period of time. Under crisis conditions, the changes are likely to speed up considerably. At this time, it is hard to tell what impact (if any) the new Trump Administration may have on monetary system change.

Wednesday, April 19, 2017

Robert Rubin NYT - Don't Politicize the Fed

I was alerted to this NY Times article by a high credibility source who advises that this is an important article to read and consider. Obviously, President Trump will have an opportunity to have a huge impact on the Fed with all the vacancies to fill. Who he picks will be closely watched for sure. It could also impact the potential for major monetary system changes.

Below are a couple of excerpts.


. . . . .

"That’s how it has been for decades: Federal Reserve chairmen and governors have been selected based on their ability to serve the country. President Barack Obama reappointed George W. Bush’s nominee, Ben Bernanke, as chairman. President Reagan reappointed Jimmy Carter’s nominee, Paul Volcker."

. . . . .

"The administration’s relationship to the Fed, and its appointment of governors, must be based not on politics but on the same question every president ought to ask: Who and what will best serve our country?"

Click here to read the full NY Times article

Added news note: The Kemp Foundation forum on the Dollar Exchange Rate will be held tomorrow (4-20-17) in Washington D.C. I got the email reply below indicating the forum will be available on video later so I will certainly feature it here.

"The event is being taped and will be on the web afterwards, but it's not streaming live unless C-SPAN shows up unexpectedly. I'll send you the link when it's available."

Sunday, April 16, 2017

Jim Rickards Comments on Recent Geo-Political Events

Jim does a monthly interview/webcast with Alex Stanczyk. Here is the latest that talks a lot about recent geo-political events. Below is a bullet point list of the topics covered.

Topics Include:
*Commentary and analysis of military action in Syria in response to what appears to be nerve gas attacks on civilian population
*US President Trump authorized release of 59 Tomahawk Land Attack Missiles targeting Shayrat airbase
*Discussion of the USS Carl Vinson carrier group deployment towards the north west pacific in the vicinity of North Korea
*What triggers cause countries to go to war in history
*Are current events a series of unfortunate mis-calculations
*Discussion of North Korea’s nuclear weapons capability
*When analyzing potential threat, there are two factors: Capability, and Intentions
*How US policy regarding nuclear weapons programs has possibly sent the wrong message to Kim Jong-Un
*The intersection of kinetic, cyber, and financial warfare, and role of fiat payment transfer systems as opposed to gold
*Why the US will never allow North Korea to achieve inter-continental ballistic missile technology
*Why the level of intensity of military action that may be used versus North Korea could be substantial
*How the US could target specific Chinese banks for removal from the USD global payments system if China fails to cooperate on North Korea
*Sources indicate that China has moved the Peoples Liberation Army to the border between China and North Korea along the Yalu river
*Commentary on upcoming FOMC rate hikes, and the formula Jim uses to predict a change of course for the Fed
My added comments: Under the Trump Administration, events tend to unfold quickly and President Trump clearly can completely change his position on an issue very rapidly as well. For example, everyone was certain that he would officially label China as a currency manipulator soon after taking office. Not only did that not happen, he now says he will not do that. Not long ago he said NATO was obsolete. Now he says it is not. There are other similar examples.
It is becoming clearer as time goes by that President Trump will do whatever he thinks gets the result he wants and virtually every interaction is a potential negotiation. So we should not be surprised when he makes what may seem like a somewhat extreme statement upfront that he later backs away from or reverses completely. It is pretty obvious that he views things like that as bargaining chips to be used in deal making

One respected expert described him to me as "situational, mercurial, and nimble." He values flexibility and unpredictability; so it will be pretty hard for everyone to know for sure what his final position will be on any particular issue as we are seeing. I am also advised that he is now influenced somewhat by Gary Cohn (confirmed by this article) who I was told is "more predictable" than Trump.

As always, all we can do here is follow actual events to see what actually happens.

Saturday, April 15, 2017

Wall Street Journal - Cash is Dead -- Long Live Cash

The Wall Street Journal runs this article pointing out something we have said here for some time (see added comments section of this old article). Despite the constant barrage of articles about a "cashless society", it does not appear we are anywhere near such a thing any time soon. 

There surely are efforts to head in that direction, but they are not nearly as far along as some people believe. One big reason is because so many low income people have no access to digital forms of money or a bank account. They could not function without cash. That's not likely to change very quickly (absent a major global crisis that forces change quickly). Below are a couple of excerpts.


"As credit card use and digital payment systems like Venmo and Android Pay spread, Americans use less and less cash to buy things. Yet the amount of bills and coins in circulation continues to grow: Hard currency as a percentage of U.S. gross domestic product is now at 8.6%, the highest level since the early 1950s, an era long before the widespread use of plastic and smartphones. Europe, Japan, and Australia have similar trends."

. . . . .

"One reason it’s a non-starter in the U.S.: About 8% of people don’t have a checking or savings account, making it all-but-impossible for them to participate in a cashless economy.

Banning cash “would bring the economy and many people to their knees if enforced,” said Hoover Institution economist John Cochrane."

Click here to read the full article in The Wall Street Journal


Added note: Dr. Judy Shelton refers to this article on her Twitter feed here.

Added note: Got a request from a reader to include his comment below on this article: 

"The disbursement of cash costs nothing for the user, and in terms of time cost for the receiver, it takes more time to process a credit card than to receive and make change for cash. ( have you ever observed this, standing in a supermarket check-out line? )

The use of credit is NOT cost-free to either the customer or the vendor - it’s just hidden.  ( Have you ever noticed, especially at gas stations, a 5 cent or greater DISCOUNT for cash?  No need to wonder why - it’s not their charitable impulse at work ) Too bad they don’t do it at the supermarket."

Wednesday, April 12, 2017

Jack Kemp Foundation Event - Forum on Exchange Rates and the Dollar

Dr. Warren Coats alerted me by email that he will be participating in a forum held by the Jack Kemp Foundation in Wasington D.C. on April 20th. The forum is on Exchange Rates and the US Dollar. This should be a very interesting discussion with Dr. Coats presenting a paper on his ideas for a role for the SDR. Dr. Judy Shelton will also be featured at this event and she may talk some about a role for gold. I feel sure she will be in favor of a stable currency environment as is Dr. Coats. 

Below is the text of the email from Dr. Coats about this event and a graphic providing more details on it that he included in the email. I'm looking forward to hearing more about this discussion by this distinguished panel. Hopefully, The Kemp Foundation will video the forum and provide a public link to it afterwards.

Update note 4-12-17 (afternoon): I have heard from Dr. Coats that he will provide a copy of the paper he will present at the forum so at the very least we will be able to feature that here even if no public video is available from the forum.

Dear friends,

If you have time during the busy Spring Meetings at the IMF/WB, I hope you will join me at the National Press club for what I am sure will be an interesting series of discussions of the international monetary system, including my own discussion of the role of the SDR (see the link below). If you are interested, but unable to attend I would be happy to send you the paper I will present (once I have written it). 

Best wishes,


Mr. James Kemp, President, Jack Kemp Foundation
Dr. Steve Hanke, Professor, Johns Hopkins University 
invite you to

A Kemp Forum on Exchange Rates
and the Dollar


Dr. Warren Coats, IMF Economist, retired
Dr. Brian Domitrovic, Professor, Sam Houston State University
Mr. John Mueller, Fellow, Ethics and Public Policy Center
Dr. Judy Shelton, Senior Fellow, Atlas Network
Dr. Benn Steil, Senior Fellow, Council on Foreign Relations
Dr. Songzuo Xiang, Chief Economist, Agricultural Bank of China

Video Participants

Hon. James Baker, former Secretary, U.S. Treasury
Mr. Lewis Lehrman, Chairman, The Lehrman Institute
Speaker Paul Ryan, U.S. House of Representatives
Hon. Paul Volcker, former Chairman, U.S. Federal Reserve


April 20, 2017

10:30 am - 4:00 pm
Reception to follow
4:00 pm - 5:00 pm

National Press Club
Washington, DC


For more information and to register,
please click here:

During the last decade, the world has been wracked by large exchange rate swings between the U.S. dollar and the euro, the two largest world currencies. China is now considering breaking its currency link to the dollar and devaluing. This exchange rate instability is bad for business, creating asset bubbles, unstable capital flows, price swings, and general uncertainty that weakens trade and undermines economic growth.

The conference’s purpose, ahead of the IMF spring meeting, is to focus national and international attention on the need for a more coordinated and stable exchange rate regime among the Big Three currencies.

Our model is the series of summits in the 1980s sponsored by the late-Congressman Jack Kemp, economist Robert Mundell, and Sen. Bill Bradley, which helped pave the way for the Plaza Accord.

Sponsorships available, please contact Sean Rushton at

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Monday, April 10, 2017

Stratfor Analysis: Not Much Stands in the Dollar's Way

STRATFOR issues this analysis suggesting that while there is a lot of talk about something replacing the US dollar as global reserve currency, right now there does not appear to be a viable candidate for the job. This is further evidence for what we have said here for some time. Without a new major global financial crisis that involves shaken confidence in the US dollar, the pace for change is likely to be very slow. Below are a couple of excerpts from the analysis.



  • Even though potential U.S. policy moves could undermine the dollar, its days as the world's reserve currency are unlikely to end any time soon.
  • There are no strong candidates to supplant the dollar, since other leading national currencies have drawbacks that limit their appeal to investors.
  • Alternative currencies such as the Special Drawing Right or bitcoin face stability issues because their functioning relies on cooperation among parties that might not be sustained. (my added note: this is a point we have made here on the blog)
. . . . . 
"While national currencies have served as global reserve assets until this point, some people have argued that the likeliest successor to the dollar could be an entirely new type of currency. Two developing trends, in particular, have the potential to produce nonnational international currencies: the SDR, and cryptocurrencies such as bitcoin.
The SDR functions as the internal money of the IMF. It derives its value from a basket of five major currencies: the dollar, yuan, euro, yen and pound sterling. Countries have SDR accounts at the IMF, and they can credit and debit one another using the SDR if they wish to. The fund makes decisions around the basket, such as which currencies are included and what measures to use to calculate its value. In recent years, a proposal emerged to develop the SDR into a currency that could be used by individuals and companies (at the moment, only countries can use it). With its multinational underpinning, the argument goes, the SDR could be a solution that would prevent any one country from monopolizing the exorbitant privilege." 
 . . . . .
"The world's financial systems are entering a new period of uncertainty. Some of the truths investors had taken for granted with regard to the dollar may no longer be relied upon, and the currency could become less secure in the future. Nevertheless, a look at the dollar's potential replacements shows that none are close to being ready to assume its mantle as the reserve currency, and in fact many are headed in the wrong direction."

Saturday, April 8, 2017

IMF Releases Report on Foreign Reserves Holdings by Currency

Last year the Chinese Renminbi entered the SDR currency basket with some fanfare. China has been working hard to get its currency more globally accepted both in trade and as reserve holdings. However, so far things are off to a slow start. The IMF released their latest report on reserves by currency and included the  Renminbi. This article in BreakingViews explains why the Renminbi is struggling to gain acceptance so far. Below are some excerpts.

"When Deng Xiaoping set China on the course of market-oriented reform nearly 40 years ago, he called his pragmatic and incremental approach “stepping on stones to cross the river.” The Chinese currency’s much-ballyhooed entry into global finance has landed on a very small stone indeed.
The yuan accounted for just over 1 percent of global foreign-exchange reserves in the fourth quarter of 2016, according to the International Monetary Fund’s first such breakout, released on Friday. The $85 billion worth of renminbi holdings reported by countries who disclose the currencies of their reserves was barely half what they keep even in Canadian dollars, and a tiny fraction of the $1.6 trillion worth of euros and $5.1 trillion of dominant U.S. dollars."
. . . . . . 
"Such shifts happen slowly, of course. However, the tiny impact so far may also reflect how much shine has come off the yuan’s international credentials. Chinese President Xi Jinping’s government has gotten cold feet about liberalization. The authorities’ clumsy effort to halt a stock-market swoon in 2015 worsened the selloff. Their heavy intervention to prop up the renminbi subsequently burnt up about a trillion dollars of reserves. Lately the government has sought to stifle efforts by companies and individuals to move money offshore.
The use of the yuan in global trade has, if anything, gone into reverse. It accounted for 1.7 percent of payments in December, down from 2.3 percent a year earlier, according to payments network SWIFT. That’s consistent with the weak uptake shown in the IMF data."
My added comments: Here we have another example of why we talk about the reduced role of the US dollar around the world as being a slow process. Despite a lot of news about all kinds of things that will replace it, so far the US dollar remains the primary reserve asset by far. Change is taking place, but at a very slow pace. Russia and China are clearly trying to move towards less dependence on the US dollar, but we still think it will take a new major global financial crisis to speed up the pace of change. We'll continue to keep an eye on it here.

Added notes: Here is another article on this on

Also, It looks like China is trying to take more steps to help out the Renminbi by attempting to broaden its bond market.

Added news note: We just ran the article about Jim Rickards explaining why Trump might move toward a VAT. Now we have this article confirming it is under consideration. Here is the key quote from the article:

"One circulating this past week would change the House Republican plan to eliminate much of the payroll tax and cut corporate tax rates. This would require a new dedicated funding source for Social Security.

The change, proposed by a GOP lobbyist with close ties to the Trump administration, would transform Brady's plan on imports into something closer to a value-added tax by also eliminating the deduction of labor expenses. This would bring it in line with WTO rules and generate an additional $1.2 trillion over 10 years, according to budget estimates. Those additional revenues could then enable the end of the 12.4 percent payroll tax, split evenly between employers and employees, that funds Social Security, while keeping the health insurance payroll tax in place."