Tuesday, May 30, 2017
Sunday, May 28, 2017
Memorial Day
Watching the National Memorial Day Concert I was overwhelmed by the powerful segment on Captain Luis Avila. Capt. Avila had his humvee cut in half by an IED killing three of his men and sending him into a coma. He also lost a leg. He spent years recovering from the coma and all his injuries. Music therapy helped him recover and he talked about how singing every day was a big help to him.
After presenting his story Captain Avila was brought on stage to sing God Bless America. Here is brief bit of that moment:
Seeing the whole presentation was very powerful. One thing I know, we are not worthy of people who sacrifice like this and allow us to enjoy the freedoms and blessings we have. On this day our thanks go out to all those who have given so much and to their families.
Friday, May 26, 2017
IMF - 50 Years After - SDR's Role in the Monetary System - Followup
Earlier we ran this article which recapped the recent IMF panel discussion on the potential for an expanded role for the SDR in the future. Now Craig Wilson follows up with his article which is a summary of what he saw as the key points discussed. Below are a few excerpts from his article published on Daily Reckoning.
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"Less than a month ago a handful of the world’s policy makers gathered in Washington at the International Monetary Fund (IMF), no surprising headlines were run — but an obscure meeting and a discreet report launched exclusive signals for the next global economic crisis.
The panel, which included five of the most elite global bankers, was held during the IMF’s spring meetings to discuss the special drawing rights (SDR) 50th anniversary. On the surface the panel was a snoozefest, but reading beyond the jargon offers critical takeaways."
. . . . .
"World money was praised for its ability to be a catalyst for international loans during the IMF spring panel discussion.
The panel discussion was moderated by Maurice Obstfeld, an established academic who serves as a Director of Research at the IMF. Obstfeld is connected, knows the right people, and can see the macroeconomic implications of SDRs."
. . . . .
"In his opening remarks Obstfeld identified, “There has been increasing debate over the role of the SDR since the global financial crisis. We in the Fund have been looking more intensively at the issue over whether an enhanced role for the SDR could improve the functioning of the international monetary system.”
“The official SDR is something we are familiar with but is there a role for the SDR in the market or a market SDR? What is the SDR’s role for the unit of account?”
Here’s the five most important signals from the world money panel, what they could mean for the international monetary system and the future of the dollar."
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My added comments: I recommend this article because is provides a nice summary of the panel discussion which runs for an hour or so. If you don't have time to listen to the full discussion, you can use this summary to get the main ideas discussed.
I continue to believe that the SDR is one option that could be considered should we have another major global financial crisis so it is worth your time to learn as much as possible about it. Here, we have featured the "Real SDR" proposal from Dr. Warren Coats (former IMF) because it is an actual detailed proposal that would use the SDR as global reserve currency. It even includes a provision for making it available to the general public rather than just official entities such as the IMF and Central Banks. His detailed proposal already exists now which is something to keep in mind.
If you want a deep dive into this topic, just go to our list of articles we have compiled here on the SDR that I think has very good information for anyone wanting to learn more. Dr. Coats directly contributed to some of the content in some of the articles and has kindly answered many questions I had on his propoasal by email. Dr. Coats headed up the SDR Department at the IMF at one time so you simply will not find a better expert on this topic anywhere in my opinion.
I continue to believe that any move towards using the SDR like this will be a very slow process unless we do get another major financial crisis sometime in the near future. That could change the pace of change for sure. My take on this new IMF panel discussion is that while they are clearly studying how to expand the use of the SDR and debating that, no plan of action to actually do that is on the near term horizon right now.
Another wild card is the election of President Trump. It is just impossible to know how he would feel about doing anything like this (replacing the US dollar as global reserve currency). Until something happens that would force him to consider an alternative to the current US dollar based system, my assumption is that he prefers the US dollar as reserve currency. Interestingly, Dr. Judy Shelton has hinted at a possible new common currency linked to gold and silver that I assume would not be the SDR, but would be something other than the US dollar. Only time will tell us what will actually happen.
Wednesday, May 24, 2017
Reader Response - The Achilles' Heel of Capitalism
Recently we featured this article in The Wall Street Journal that quoted Johns Hopkins professor Steve Hanke as saying that financial volatility in currency exchange rates is "the Achilles' heel of capitalism."
A blog reader here had a different take on that and provided me the input posted below by email. This reader prefers to remain anonymous, but gave permission to publish his comments.
--------------------------------------------------------------------------------------------------------------"I have a comment on Professor’s Hanke’s observation re: financial volatility ( as the Achilles heel of capitalism )
Using rough figures, global annual GDP is around $70 trillion, of which international trade comprises around 15%,
call it $10 trillion. Using 250 financial trading days per year, that trade per trading day amounts to $40 billion per
day of real flows of trade in goods and services.
Meanwhile, daily FX trading volume is currently about $5.2 TRILLION per day (note: see here), with the dollar accounting for as much as 80% of one side of all forex trades. That is A 130 MULTIPLE of the “trade flows” that, presumably, forex trades are entered into for the purpose of “hedging” currency risk. Clearly, something else is going on.
In the late 70’s, when hard pegs, crawling pegs, and all the other attempts at currency stability failed, the “free
float” was introduced, for lack of an alternative. As Paul Volcker remarked later, the largest money center banks
found that this need to hedge volatility produced all sorts of means to profit, both as providers of currency insurance as well as trading for their own account, as they were "closest to the source” of the hedging needs of their large muli-national corporate customers. These banks will be, until the next crisis, the loudest opponents of any change that would impair this source of profit.
So, we have “industrial capitalism” and “financial capitalism” but they don’t necessarily always correspond. Further,
as the BIS’s Hyun Song Shin has repeatedly pointed out recently, in a series of papers, international financial flows dwarf trade flows, and have perverse spill over effects both on the way in, and the way out. Convertibility between currencies, combined with the desired “liquidity” (large trades possible with small price movements) while at the same time hoping for “stability” are an impossible trilemma.
Getting back to Professor Hanke’s observation, permit me to disagree. The Achilles heel of (financial) capitalism
is the growth of DEBT, both public AND private, where the debt fails to produce a corresponding increase in the
net stock of real capital, bet it tangible ( goods and enabling infrastructure ) or intangible (education, scientific
progress). Any system which lacks a brake on this non productive debt will eventually default on it, when the
holders of it desert, and leave only the central bank as the buyer of last resort."
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My added comment: We always appreciate reader emails and comments such as this one. It turns out that this article by George Gilder appeared in The Dallas Morning News made somewhat the same point about "currency choas" as our reader did in his comments above. The reader forwarded me the link to that article and pointed me to the paragraph below in particular:
"According to the Bank of International Settlements, this market (currency trading) has swelled to some $5.1 trillion a day, 25 times global GDP and 73 times all trade in goods and services. Yet all the vast shuffle of money fails to achieve the crucial function of money and markets: to yield a reliable guide for international transactions."
Monday, May 22, 2017
CNBC - Feds "New Normal" Balance Sheet Could be Huge
CNBC runs this article which explains that the Federal Reserve may just let its balance sheet stay bloated in coming years for a variety of reasons. The article has a couple of points of interest since many have long argued that the enormous size of the Fed balance contributes to instability in the financial system and will lead to the Fed being unable to respond to any new crisis. Below are a few excerpts from the article and then a few added comments.
----------------------------------------------------------------------------------------------------------------"While Federal Reserve officials have said they plan to begin a process to normalize their balance sheet, the end result is likely to be a balance sheet that is anything but normal.
Interviews with Fed officials, and public statements they've made suggest the Fed's new normalized balance sheet could end up being three times as large as it was before the financial crisis. And it could be bigger than that."
. . . . .
"In an effort to stimulate the economy in the aftermath of the Great Recession, the Fed cut its benchmark interest rate to zero and began buying up government and mortgage-backed securities to drive down interest rates further. The Fed stopped adding to its balance sheet in 2014 and it now stands at more than $4.4 trillion, compared with around $850 billion before the crisis."
. . . . .
"The biggest reason why there's no going back to the old balance sheet is currency. For a variety of reasons, the amount of currency in circulation has grown 7 percent a year on average over the past five years, or 3 percentage points faster than in the five years before the crisis. People are simply expressing a desire to hold more cash — ironic in a financial world that is growing more digital — and the central bank's job is to simply meet that desire for cash passively.
About $1.5 trillion of cash is currently in circulation and, if current growth rates continue, that level will be north of $2 trillion in the next five years, providing a floor for just how small the balance sheet can get."
. . . . .
Former Fed Chairman Ben Bernanke wrote in a recent blog post: "There are reasonable arguments for keeping the Fed's balance sheet large indefinitely, including improving the transmission of monetary policy to money markets, increasing the supply of safe short-term assets available to market participants, and improving the central bank's ability to provide liquidity during a crisis."
Bernanke added, "It's not unreasonable to argue that the optimal size of the Fed's balance is currently greater than $2.5 trillion and may reach $4 trillion or more over the next decade."
Opponents of a large balance sheet say the Fed should reduce it as much as possible so it doesn't become a victim of politics, where Congress or the executive branch could mandate that the balance sheet be used to buy certain types of securities to solve fiscal problems. They also worry that such a large balance sheet is potentially inflationary."
My added comments: This article lays out the Fed view that the 2008 crisis is past and has been successfully handled to avoid a major deflation event. They clearly are wanting to convey the idea that now that the crisis is past the changes in the world that have taken place mean the Fed should now keep a much larger balance sheet in place. This conveniently provides an excuse to simply do virtually nothing in the next few years and just let the bonds the Fed holds be redeemed. By doing this, the Fed does not have to worry about trying to sell (dump) trillions of US bonds. This would certainly spike interest rates.
The other note of interest in this article is that the public is holding much more cash and that the Fed expects cash in circulation to increase by $500 billion or more in the next five years. If that is true, what happens to all those headlines we see telling us a "cashless society" is just around the corner? We see headlines and articles about that all the time even as cash in circulation continues to rise.
Fed skeptics will of course not believe any of this is going to happen. They believe the Fed has placed itself between a rock and hard place and is trapped. They do not believe the Fed will be able to simply sit by passively and let its balance sheet slowly shrink over time or that they intend to allow cash in circulation to continue to increase over the next five years.
So far though, the Fed skeptics predictions of massive inflation have not panned out. Most of the huge amount of money created by the Fed never really got into the real economy and boosted the velocity of money. Instead it appears to have boosted stock markets and housing prices again. Now Fed skeptics are predicting that a new recession coming soon will not allow the Fed to just slowly and passively shrink its balance sheet. They see the rising stock markets and house prices as new bubbles that will soon burst forcing the Fed to scramble once again with more massive money creation. So they view the Fed plan detailed in this CNBC article as fantasy.
Who will be right about all this? Only time will tell us.
What we should watch for is any indication that the Fed is having to reverse course from this plan and start expanding its balance sheet again rather than to gradually shrink it. That is the kind of thing that could shake market confidence and lead to a new major financial crisis. If the Fed succeeds, it means a crisis is likely not on the immediate horizon.
It will also be interesting to see if cash in circulation does increase by over $500 billion in the next five years. That would hardly be an indication of a "cashless society". What matters is what actually happens, not what the Fed says or what Fed skeptics say will happen.
Added note 5-24-17: Fed will let the balance sheet shrink gradually and keep it much higher per this CNBC article.
Friday, May 19, 2017
Robert Pringle - "We Remain Stuck in the Money Trap - Do We Not?"
Former Group of 30 Executive Director Robert Pringle has two new articles posted on this blog, The Money Trap. Mr. Pringle is also the author a book by the same name which analyzed the problems that led up to the major financial crisis of 2008 and offered ideas on how to deal with the problems going forward. Mr. Pringle has also kindly provided input for blog articles here sharing his decades of insight and experience into central banking.
In his two new blog articles, he makes the case that the problems which led up to the last major financial crisis have really not been solved in any permanent way. Below are links to the articles and a couple of excerpts from each.
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"Central bankers, who were by and large not responsible for supervision pre-crisis , immediately sought to pin the blame for it on regulators, diverting attention from monetary policies – stoking the credit boom, failing to sound the alarm for what they were responsible for, which often included a duty to monitor the system."
. . . . .
"Given the diagnosis, the official effort since 2008 has gone into strengthening capital, regulation etc etc with adverse implications for growth but little effort to recast monetary policies. Basically they have had to resort to increasing debt further because they had no alternative, partly for political reasons; but there was also an intellectual vacuum, plus encouraging borrowing and debt by negative rates which risk undermining the entire capitalist system."
. . . . .
"Is there really more confidence in the system, in money itself? Central bankers say there is, but how do they know? People like Professor Kevin Dowd have raised serious doubts about their so-called tough stress tests. Trust has not recovered. Without trust, money can’t work its magic. The quality of money declines as the central banks resort to desperate measures to maintain its quantity."
. . . . .
"European and North American economies may be doing a bit better, after 10 years of painful effort post crisis. But that is despite, not because of, the banks and financial sector.
---------------------------------------------------------------------------------------------------------------------
"When did the culture of ‘money mania’ start? When did people first set out to grab as much money as possible at whatever cost? When did the momentum for credit creation —paper money calling for more money — become unstoppable?"
Let us contrast the past 30 years with the years 1880-1910. Under the classical gold standard gold was money and money was gold, the mark of a civilised society. Thus when people say that going back to gold was a mistake in the 1920s, they are correct but unhistorical: almost everybody believed it had to be tried, even Keynes’s disagreement was practical, to do with the price rather than the principle (he wanted a somewhat lower exchange rate).
It was seen as the key to restoring stability.
That went also with a certain set of attitudes and ethics towards money. Our problem is, when society rejected gold (or, as some would have it, grew out of it) it also lost the sense of what nasty things money, let loose, can do."
. . . . .
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My added comment: These new articles are an important reminder that despite the general feeling that the 2008 crisis is behind us and the US stock market reaching new highs, we need to keep in mind that we are by no means out of the woods yet in terms of the problems that led up to that crisis. Global debt is much higher now, derivatives remain at record high levels, and monetary policies that may have staved off a severe global deflation have not been successfully unwound yet. We still don't know what the final results will be from all this.
When we see experts like Robert Pringle reminding us of this, we need to pay attention. People like Robert Pringle, Dr. Warren Coats, Jim Rickards and others have decades of experience dealing with these issues and also the wisdom acquired from that experience. We will continue to feature that wisdom and experience here as we monitor future events and see how things unfold in regards to the monetary system.
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Added note: Here is a clickable link from the reader comment just below:
Added note: Here is a clickable link from the reader comment just below:
Wednesday, May 17, 2017
Alasdair Macleod - Chinas Plan to Subvert the Global Dollar Standard
ZeroHedge runs this article by Alasdair Macleod which appears originally here at Mises.org. I am featuring this article not because I know whether or not China has a plan to overthrow the US dollar by using its gold reserves. I don't and Chinese officials never talk about such a plan in public. However, this is one of the most prevalent speculations you see if you spend any time at all researching the topics covered here on this blog.
An article like this by necessity has to include a fair amount of speculation by the author since we can safely assume that Chinese officials are going to keep any plans they may have along these lines close to the vest. This article is one of the better ones I have read in terms of laying out a plausible theory as to why China might want to move away from the US dollar or even use their gold reserves if they had to do that some day. It is worth your time to read regardless and allows you to at least get an overview of this view regarding China and its desire to move the world away from the US dollar over time. Below are a couple of excerpts from the article.
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. . . . .
"Already, China dominates world trade. Her own economy is already significantly larger than that of the US on the purchasing power parity (PPP) estimates. While being the largest consumer of raw materials, China also exports more finished goods by value than any other country. As the Asian powerhouse, she has lifted the economies of all the countries on the western side of the Pacific Ocean, which including her own between them have a GDP of $50 trillion. Her exports into Asia now exceed her exports to the US. Yet despite this dominance, most of China’s trade is conducted in US dollars, something China is bound to change, if she is to contain external economic risk and replace America as the dominant global empire. Both objectives can only be achieved by China replacing the dollar as a medium of exchange."
Why Gold Is Central to China’s Future Trade-Settlement Policy
"China’s challenge is the yuan as a purely fiat currency will take decades to replace the dollar, possibly never. And that assumes that China follows more stable monetary policies than the US. This has not been the case since the Lehman crisis, with China’s M2 broad money quantity expanding rapidly, accounting for much of the world’s monetary growth in recent years. The rate of monetary expansion is criticized as a dangerous credit bubble by western analysts, who are quick to condone monetary expansion in their own developed nations, but turn into hard-core monetarist critics over China. No, China will never replace the dollar with her own currency without a golden guarantee.
Therefore, China needs to deploy gold to displace the dollar. This might be done in one of two ways, one encouraging markets to evolve away from dollars toward gold, or alternatively by the state forcing the pace."
. . . . .
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Added note: Below is a reader comment that contains links that are not live links. I have added them below to make them clickable links for readers who may want to look at them:
http://finance.sina.com.cn/money/future/indu/2017-05-16/doc-ifyfecvz1498891.shtml
http://zhengshangcanyue.baijia.baidu.com/article/848371
http://24k99.fx168.com/1705/2263528.shtml
Monday, May 15, 2017
IMF - 50 Years After - SDRs Role in the Monetary System
At the recent spring meetings of the IMF, a discussion panel looked at what role the SDR has 50 years after its creation in 1967. The panel included some well known names including Catherine Schenk who did an analysis in 2011 on the potential for backing the SDR with gold. Also on the panel was Mohamed El-Erian who wrote this article on the SDR recently published at Project Syndicate. Below is the overview summary of the discussion and then some added comments.
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OVERVIEW
In 1967, the IMF membership reached agreement on creating the special drawing right (SDR), the official reserve asset allocated and administered by the IMF. While to date the SDR has played a minor role in the international monetary system, the global financial crisis and its aftermath have spurred renewed debate over its role. This role includes not only its original function as an international reserve asset, but also other functions, such as the SDR as a vehicle for financing the provision of conditional liquidity, a denomination for financial instruments, and a unit of account. This seminar will examine how a greater role for the SDR in these areas would impact the functioning of the international monetary system, in today’s increasingly multipolar and financially interconnected global economy.
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My added comments: If you listen to the panel discussion, it is pretty clear that while a possible expanded role for the SDR is being looked at and debated, there is no indication that a broadly expanded role is on the near term horizon. Having followed this for some time now the process moves very slowly. There are many reasons why this is the case. The tendency to maintain the status quo in any system is very powerful. Until the US dollar based monetary system is clearly demonstrated to have failed to the general public, it will be hard to change. Over time various small steps away from a US dollar based system may well take place such as the BRICS nations efforts to reduce use of the US dollar for trade and as a reserve asset. SDR denominated bonds may also be issued from time to time. But the process moves very slowly. Think in terms of years and even decades. The IMF announced several months ago they would setup an Advisory Group to study this. So far that group has released no public information that I am aware of. This new panel discussion is the first mention of an expanded role for the SDR I have seen since the Advisory Group was formed last fall.
What could alter the pace of monetary system change? The only thing I can see that might speed up any major changes would be another major global financial crisis in which the current US dollar based system is clearly perceived to have failed. That is possible, but has not happened so far and the timing for any such event is obviously unpredictable. Recently Jim Rickards did indicate to me that President Trump is somewhat unpredictable and might move forward with a review of the current monetary system without having to have a crisis prompt him to do so.
If a new crisis does arise, it is reasonable to think that proposals to use the SDR that are already on the table might be looked at first. Under crisis conditions, politicians and policy makers tend to fall back on accepted experts and potential plans that have already been thought out and put forward. This is why we have featured the Real SDR proposal from Dr. Warren Coats here quite a bit. It is simply more likely that his plan or something like it might be looked at first if any major change involving the SDR taking over from the US dollar were seriously considered. In this recent article, we talk about how ANY plan put forward has to have thought through a lot of detailed issues and questions that will arise. Since Dr. Coats has already done some of that in his proposal, it kind of gives it a "head start" on other ideas or proposals that involve using the SDR.
If a new crisis does arise, it is reasonable to think that proposals to use the SDR that are already on the table might be looked at first. Under crisis conditions, politicians and policy makers tend to fall back on accepted experts and potential plans that have already been thought out and put forward. This is why we have featured the Real SDR proposal from Dr. Warren Coats here quite a bit. It is simply more likely that his plan or something like it might be looked at first if any major change involving the SDR taking over from the US dollar were seriously considered. In this recent article, we talk about how ANY plan put forward has to have thought through a lot of detailed issues and questions that will arise. Since Dr. Coats has already done some of that in his proposal, it kind of gives it a "head start" on other ideas or proposals that involve using the SDR.
None of us can know if we will even have a major crisis soon that would prompt major change. Also, we cannot possibly know what major changes or plans might be considered for sure. For example. 2016 Trump campaign adviser Dr. Judy Shelton has hinted at the idea of "a new common currency linked to gold and silver" on her Twitter feed.
It just makes sense though, that if an greatly expanded role for the SDR is considered, Dr. Coats proposal is already out there now and ready to be discussed.
It just makes sense though, that if an greatly expanded role for the SDR is considered, Dr. Coats proposal is already out there now and ready to be discussed.
Saturday, May 13, 2017
Wall Street Journal - Volatile Money Hurts Growth & Trade
In a new article published in the Wall Street Journal. James Kemp and Sean Rushton of the Kemp Foundation ask why there is not more concern by policy makers about volatile currency exchange rates. They point to the recent Kemp Foundation forum on this very topic (which we covered here) as evidence that the issue needs more attention. Below are some excerpts from the article and then a few added comments.
-------------------------------------------------------------------------------------------------------------"It’s the most important price in the world: How many U.S. dollars does it take to buy one euro? The exchange rate between the two largest world currencies affects profits and financial conditions around the globe—and it has been dangerously unstable for more than a decade. Since 2007, the dollar-euro rate has swung up or down by about 20% no fewer than eight times. Exchange rates that gyrate this much produce crisis and weak economic growth, while undermining the case for free trade.
Yet virtually no one in Washington—not the big think tanks or the business lobby or the tea party or the International Monetary Fund—is talking about it. That’s crazy. The seesawing dollar-euro rate disrupts trade, reduces investment, and damages the bread-and-butter interests of working people on both sides of the Atlantic."
. . . . .
"A stable dollar-euro rate would provide the world with a strong economic anchor. The end goal should be a unified international currency system that is consistent with the principles of free trade and would facilitate optimal capital flows.
For supporters of limited government, this is essential. Exchange rate swings are an enormous source of financial volatility, which leads to calls for greater regulation, bailouts and bigger government. Steve Hanke, a professor at Johns Hopkins University and co-chairman of the forum, put it well when he called financial volatility “the Achilles’ heel of capitalism.” Mr. Hanke’s research shows that all of the 100 largest American corporations cited volatility in exchange rates as a challenge in their 2016 annual reports."
. . . . .
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My added comments: I understand the statement in the article above "Yet virtually no one in Washington -- is talking about it". When you spend as much time as we do here trying to research these issues and the prospects for major monetary system change, one conclusion jumps out at you over time. It is very hard to get most people to understand why these issues matter to the average person and why we all need to learn more about them. Unfortunately, it seems to take a major crisis to get people to focus on these issues and problems. Sadly, by the time something like that does happen, it is likely too late to become educated on the problems or on ideas to try and solve the problems.
We are doing our best here to try and help encourage people to learn more and to understand that these issues are important and can directly impact their daily lives even if they are somewhat complex for the average person sometimes. We will continue to try and provide the best information we can here from the best sources we can find in an effort to try and assist anyone who is interested in these issues. Reader questions are welcome any time at: lonestarwhitehouse@gmail.com
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