Friday, September 29, 2017

Claudio Borio (BIS) Speech at OMFIF in London

Recently Claudio Borio of the BIS gave this speech in London questioning if central banks may need to rethink their approach to monetary policy going forward. The speech was at an OMFIF city lecture meeting. Below is the concluding paragraph of the speech.



"To conclude, today I have put forward two hypotheses and drawn one implication. First, we may be underestimating the influence that real factors have on inflation, even over long horizons. Here I highlighted the role of globalisation, but noted that technology may well play a bigger one in the future. Second, we may be underestimating the influence of monetary policy on real (inflation-adjusted) interest rates over similar horizons. Here I highlighted the limitations of current empirical approaches that support the prevailing view and have provided some new evidence. Third, if so, we may need to adjust monetary policy frameworks accordingly. Here I highlighted the desirability of greater tolerance for deviations of inflation from point targets while putting more weight on financial stability.

I am fully aware that one can read the empirical evidence in many ways. My remarks have been intentionally provocative. But I do believe that, while the answers we may give can be very different, the future of central banking, and monetary policy more specifically, depends on them."

Click here for the full text of the speech

Added note: Larry Kudlow issues this Twitter comment on a new report from the Cato Institute that calls into question the validity of the Phillips curve used by central banks to guide them in monetary policy decisions. Claudio Boris also discusses the Phillips curve in this speech. Jim Rickards has also said the Phillips curve is an example of a flawed model used by central banks that misleads them into making bad policy decisions.

Wednesday, September 27, 2017

China - Joint Press Release on Global Economic Issues

Recently, China issued this press release which is a summary of some recommendations on "promoting an open, invigorated, and inclusive World Economy". Below are a few key excerpts from the release.

"China's Premier Li Keqiang, together with World Bank Group (WBG) President Jim Yong Kim, International Monetary Fund (IMF) Managing Director Christine Lagarde, World Trade Organization (WTO) Director-General Roberto Azevedo, International Labor Organization (ILO) Director-General Guy Ryder, Organization for Economic Cooperation and Development (OECD) Secretary-General Angel Gurria and Financial Stability Board (FSB) Chairman Mark Carney held the "1+6" Roundtable Meeting under the theme of "Promoting an Open, Invigorated and Inclusive World Economy" in Beijing, September 12th 2017."

. . . . 

Economic Globalization

"Globalization has provided a strong momentum to world economic growth, promoted capital and commodity flows, advanced development of technology and civilization, and built a closer tie between people worldwide. Facing both challenges and opportunities, we need to guide the direction of economic globalization and make it more invigorated, inclusive, and sustainable. In order to release greater positive effects of economic globalization, all economies need to proactively advance economic reforms, innovate the growth model, and focus on inclusiveness of development, at the mean time, to strengthen international cooperation, avoid inward-looking policies, and fight against all kinds of protectionism, so as to promote an open world economy."

. . . . 

Trade and Investment

"Trade and investment are important engines for global economic growth. Promoting further liberalization and facilitation of trade and investment globally will help respond to the development challenges faced by all, and will contribute to achieving balanced and sustainable development. The rules-based multilateral trading system represented by WTO is an integral part of global economic governance, providing an institutional framework within which its members formulate multilateral trade rules, monitor trade policy implementation and resolve trade disputes. The multilateral trading system serves as the main channel for liberalization and facilitation of global trade and investment. Regional, bilateral and plurilateral trade agreements should complement rather than substitute the multilateral trading system. Efforts should be made to ensure that such agreements are open, transparent and inclusive."

. . . . 

Global Economic Governance

"We reiterate our commitment to a strong, quota-based, and adequately resourced IMF to preserve its role at the center of the Global Financial Safety Net. We support the work of the IMF to strengthen its cooperation with regional financing arrangements, and its ongoing work to further enhance the effectiveness of its lending toolkit. We look forward to the completion of the 15th General Review of IMF Quotas, including a new quota formula, by the Spring Meetings 2019 and no later than the Annual Meetings 2019. We welcome the establishment of the Joint China-IMF Capacity Development Center, and look forward to further cooperation in this area. We support the continued examination of the broader use of the SDR as a way to enhance the resilience of the international monetary system. We support the IMF's ongoing work on improving the analysis and monitoring of capital flows and the management of related risks, including the role of macro-prudential policy.

We reiterate our commitment to a strong WBG, adequately resourced to pursue its mission to eliminate extreme poverty and boost shared prosperity in partnership with others. In this context, we support the implementation of the WBG's shareholding review and look forward to its timely conclusion. Building on the strong shareholder confidence expressed via the record IDA18 replenishment, we also support capital increase at IBRD and IFC, aiming to enhance the financial capacities of the WBG's public and private sector arms. This will allow the WBG to better assist countries achieve their development goals, including by helping them to maximize development resources in a responsible way, and to promote global growth, stability and security.

We agreed that this meeting was productive and sends a positive signal of jointly addressing challenges, developing a more inclusive and mutually-beneficial economic globalization, and promoting an open world economy. We look forward to holding the next round table meeting at an appropriate time and place next year."
My added comments:

We constantly see articles (like this one) that imply that China desires to replace the US dollar as the global reserve currency with the Yuan. However, whenever China releases an official statement like the one above, we don't see anything like that mentioned. Instead we always see these key points:

- support for the IMF and its role as a lender of last resort and global safety new
- support for a broader role for the SDR (not the Yuan) 
- support for resources for the World Bank and its programs

We know China is adding enormous amounts of gold to its reserves and also does want to see broader use of the Yuan as well globally. But, at least in public statements like this, China always points to the SDR as its preference as a potential US dollar replacement. Also, in this press release it is very clear that no plan to actually use the SDR to replace the US dollar exists right now as it talks about the IMF study in progress on the SDR going on for quite some time into the future. This is consistent with what we have reported here over and over and in line with what experts we view as high credibility sources have told us. 

Added notes: Here are a couple of related articles that talk about the possible Yuan-gold-oil linkage:

Thursday, September 21, 2017

Jim Rickards: War With North Korea is the Likely Scenario

This may be one of the most important articles ever published on this blog. As always, time will tell us the answer. Jim Rickards has now gone on record in a public interview with a forecast suggesting not only that war with North Korea is the most likely scenario ahead of us, but also that this event may well be the "snowflake that triggers the avalanche" Jim has talked about for many years now. 

Jim has been very kind to reply to email questions that I may ask him. In this case, because this prediction (and its possible ramifications) is so serious, I reached out to him for some direct input. Jim has given permission to publish his email comments here. Below I have pasted in our email exchanges over time so you can get a feel of how Jim responds to events and how he will also update and modify his analysis over time as new information becomes available. After that I will add a few comments.
First email exchange on 8-8-17 on North Korea:

my email on 8-8-17:

1- your best guess at the % chance the US goes to war with N. Korea (up to and including the use of tactical nuclear weapons)

2- your best guess as to the timing if you think the odds are high in regards to question #1 - before year end 2017?

Asking this just for personal info if you have time.

thank you,


Jim's reply on 8-8-17:

"90% chance of war.
Time frame: November 2017 to February 2018"

James Rickards

Later, Jim did this interview with the Daily Mail while in England and also posted this important note in his Twitter feed stating this was the first time in 10 years that he had put forward an actual event and time frame that may well lead to the major crisis he has been predicting for some time. Jim later posted this on his Twitter feed and then a little later posted this.

Because this analysis and forecast is so sobering, I held off featuring it here until I could reach out to Jim one more time to get his latest take. I did that very recently and, as always, Jim kindly replied and provided his best updated analysis along with permission to publish it here. Here are those email comments:

Jim on 9-20-17:

"My analysis on North Korea hasn't changed since I gave the Daily Mail interview, and Trump's UN speech Tuesday confirms my view."

All the best,

and later on 9-20-17 he provided this updated analysis when I asked permission to publish his earlier comments made in August posted above:

"The odds apply to the entire time frame, not any particular month.

I'd probably lower the odds to 85% (still high, but off slightly) due to complications arising from South Korea. We need them to help us go to war, but they are more in an appeasement camp right now. That may take time to work out either in the sense of bringing them around or going ahead without them. And I'd move the timeline out one month. November seems early from where we sit."

James Rickards
My added comments: I struggled internally as to whether to publish this article or not. Obviously, the topic is very serious and will become even more serious if Jim's current analysis does play out like he expects. I have had enough contact with Jim to believe that he as much as anyone hopes this forecast will not pan out and war can be avoided. But I believe he sincerely feels this is the most accurate analysis he can give based on the information available at this time. 

Readers should understand that Jim has a strong track record of accurate predictions on major events. He correctly predicted the Brexit vote, the Trump election result, and also provided me an incredibly accurate forecast on what the US dollar would do this year back in March which I did publish here to put on the record. In addition, Jim has very solid and credible contacts which just add to his ability to forecast these kinds of events. When I added it all up, I felt I must publish this information as a kind of reader alert since the goal of this blog is to watch for events that can lead to major monetary system change. Jim says this could be such an event and I respect his judgement in that regard. 

I feel sure Jim hopes he will miss this one and I certainly do as well. But not to alert readers on something this important when the information is available would be a failure on my part to do what I have told readers here I would do. Namely, to watch for anything that could lead to major changes in the present system that could impact our daily lives. This is clearly such an event. I hope readers will follow the news on this closely and think about what to do if the worst case scenario (a war involving the use of nuclear weapons) did happen to unfold.

Added notes: In this recent interview Jim goes into some more detail on the comments posted above, but does not change his overall analysis. His comments in the interview both confirm the above and provide a bit more detail.

This news breaks tonight  (9-21-17) on North Korea and CNBC runs this on 9-22-17.

9-23-17 - Trump issues direct threat  - war of words continues to escalate

9-25-17 - North Korea says US "declared war" on NK

9-26-17 - Janet Yellen confirms Jims prediction that the Fed was tightening into weakness 

In this recent interview (skip to the 14 minute mark to the start of the interview), Jim covers some interesing history related to the so called petro dollar system that shows the kind of contacts he hasworked with over the years and also near the end talks a bit about why he thinks the US will deal with North Korea in a different way this time.

Wednesday, September 20, 2017

BIS - Central Bank Cryptocurrencies

This BIS has issued a new report on possible uses for cryptocurrencies by central banks. This is really where the focus is at this time in terms of something that could impact the current monetary system. Below are a few excerpts from the BIS report and then some added comments.
"In less than a decade, bitcoin has gone from being an obscure curiosity to a household name. Its value has risen - with ups and downs - from a few cents per coin to over $4,000. In the meantime, hundreds of other cryptocurrencies - equalling bitcoin in market value - have emerged (Graph 1, left-hand panel). While it seems unlikely that bitcoin or its sisters will displace sovereign currencies, they have demonstrated the viability of the underlying blockchain or distributed ledger technology (DLT). Venture capitalists and financial institutions are investing heavily in DLT projects that seek to provide new financial services as well as deliver old ones more efficiently. Bloggers, central bankers and academics are predicting transformative or disruptive implications for payments, banks and the financial system at large.

Lately, central banks have entered the fray, with several announcing that they are exploring or experimenting with DLT, and the prospect of central bank crypto- or digital currencies is attracting considerable attention. But making sense of all this is difficult. There is confusion over what these new currencies are, and discussions often occur without a common understanding of what is actually being proposed. This feature seeks to provide some clarity by answering a deceptively simple question: what are central bank cryptocurrencies (CBCCs)?

To that end, we present a taxonomy of money that is based on four key properties: issuer (central bank or other); form (electronic or physical); accessibility (universal or limited); and transfer mechanism (centralised or decentralised). The taxonomy defines a CBCC as an electronic form of central bank money that can be exchanged in a decentralised manner known as peer-to-peer, meaning that transactions occur directly between the payer and the payee without the need for a central intermediary.3 This distinguishes CBCCs from other existing forms of electronic central bank money, such as reserves, which are exchanged in a centralised fashion across accounts at the central bank. Moreover, the taxonomy distinguishes between two possible forms of CBCC: a widely available, consumer-facing payment instrument targeted at retail transactions; and a restricted-access, digital settlement token for wholesale payment applications."

. . . . .

Retail central bank cryptocurrencies

"Retail CBCCs do not exist anywhere. However, the concept of a retail CBCC has been widely discussed by bloggers, central bankers and academics. Perhaps the most frequently discussed proposal is Fedcoin (Koning (2014, 2016), Motamedi (2014)).11 As discussed in Box B, the idea is for the Federal Reserve to create a cryptocurrency that is similar to bitcoin. However, unlike with bitcoin, only the Federal Reserve would be able to create Fedcoins and there would be one-for-one convertibility with cash and reserves. Fedcoins would only be created (destroyed) if an equivalent amount of cash or reserves were destroyed (created) at the same time. Like cash, Fedcoin would be decentralised in transaction and centralised in supply. Sveriges Riksbank, with its eKrona project, appears to have gone furthest in thinking about the potential issuance of a retail CBCC (Box C).
A retail CBCC along the lines of Fedcoin would eliminate the high price volatility that is common to cryptocurrencies (Graph 1, centre panel).12Moreover, as Koning (2014) notes, Fedcoin has the potential to relieve the zero lower bound constraint on monetary policy. As with other electronic forms of central bank money, it is technically possible to pay interest on a DLT-based CBCC. If a retail CBCC were to completely replace cash, it would no longer be possible for depositors to avoid negative interest rates and still hold central bank money.
Any decision to implement a retail CBCC would have to balance potential benefits against potential risks. Bank runs might occur more quickly if the public were able to easily convert commercial bank money into risk-free central bank liabilities (Tolle (2016)). There could also be risks to the business models of commercial banks. Banks might be disintermediated, and hence less able to perform essential economic functions, such as monitoring borrowers, if consumers decided to forgo commercial bank deposits in favour of retail CBCCs."
My added comments: If you are wanting to learn more about all this, you may find this report pretty informative. It does a good job of explaining what can be a somewhat complex topic. We have pretty much covered the basics of what is talked about in this report here for some time. A long time ago we were talking about the concept of being able to access money on a mobile phone in real time and send funds around the world at very low cost, etc. We have talked about individual central banks looking at new technology for some time as well. So the section of this report that talks about that idea is nothing surprising here. 
At this point the big issues going into the future will more likely be just what various central banks actually decide to do first of all. The decisions they make will then provoke some kind of public reaction (favorable or unfavorable) depending on what they decide to do. Since so many variables are still possible I view it as premature to try and speculate what most central banks will end up doing.
Here are a few key points I think I can make with confidence based on direct input I get from very high credibility sources:
- all this will take some time to develop and most likely will come along in stages unless some kind of new major financial crisis creates a sense of urgency to move faster that does not appear to exist today. Global consensus and political will is very low at this time.
- I think the most likely thing we would see first are a few central banks issuing electronic forms of their existing currency using what they will call "blockchain" technology as the ledger system to record transactions. I think Singapore is a good place to watch for something like that to show up.
- there is no indication at this time that either the IMF or the BIS is close to using any kind of blockchain based new version of the SDR (at least not the official SDR). I might expect instead to see the IMF looking closely at promoting the use of the private SDR more by the middle of next year after reviewing a study along those lines. The private SDR would not be backed by anything. It would simply be valued based on the existing basket of five currencies used now to value the official SDR. I look at the private SDR as just simply holding a combination of the five currencies that make up the basket in the ratio used for that basket and not really much more than that. More like using the name SDR to describe how the instrument owned is denominated and certainly not owning any actual official SDRs. I don't view that as anything that is a major change to existing monetary system. 
- I do not think any final decisions have been made as to whether to even use central bank digital currencies at many central banks at this time. When the first few roll out the concept (perhaps by early next year), I would expect others to watch closely how well that is received by the public and how well it works in the real world. I do not expect "digital currencies" to eliminate the use of physical cash any time soon in most parts of the world including the US.
- I do not believe there are any plans to restrict ownership of gold or silver coins (of any kind) by central banks, the IMF, or the BIS at this time. If something happened to send the price of gold and silver sky rocketing higher, it would not shock me to seem them impose some kind of "windfall profits" tax on unusually high gains in some countries. But I don't know that any plans to do even that exist currently.
- I do not think we are close to ANY kind of new global reserve currency that would replace the US dollar very soon. The only thing I can see that might speed up that process would be a crisis or war significant enough to disrupt the existing monetary system. I should add that Jim Rickards is now on the record with a public interview predicting that war with North Korea will be such an event and will happen within the next 8 months (more details on this coming Friday).
Summary: Based on the best information I have at this time, readers should follow the situation with North Korea closely. That seems like the most likely trigger event to bring about a potential crisis that could then lead to some bigger changes in the monetary system.
If no crisis does emerge, the most likely scenario that I am aware of is for some central banks to slowly but surely stick their toes into the central bank digital currency waters, perhaps starting in Singapore working with some major private partners. If a dozen or more other central banks follow along, we can expect that central banks around the world, the IMF, and the BIS will watch closely to see how things work out for them (sort of like trial runs). I would be surprised if these first steps are completed before at least the middle to the end of next year based on current information. We might see the process start up this fall. The public reaction to these steps will probably depend on exactly what individual central banks decide to do in various countries. The major issues will probably be what happens to cash and whether the ability to maintain privacy in monetary transactions is preserved. 

Tuesday, September 19, 2017

BIS Quaterly Review

The latest BIS email alert is on their new quarterly review (summary pasted in below). A blog reader here pointed out the following to me:

"under Special Features;  Central Bank Cryptocurrencies, a 17 page paper,  too long for me to read in full, but with a very good breakdown of the many possible types, uses,  and issues with each."

September 2017 BIS Quarterly Review: Strong outlook with low inflation spurs risk-taking

17 September 2017

Press release

Low inflation despite a stronger economic outlook helped push markets up in recent months and reduced the expected pace of tightening of monetary policy in major economies. Signs of increased risk-taking have become apparent in a number of areas, including narrow credit spreads, increased carry trade activity and looser bond covenants.
"All this puts a premium on understanding the 'missing inflation', because inflation is the lodestar for central banks," said Claudio Borio, Head of the Monetary and Economic Department.
The September 2017 issue of the Quarterly Review:
  • Shows a pickup in the growth of international debt securities in the first half of 2017, when total stocks rose to $22.7 trillion. The outstanding stock of securities issued by banks grew at its fastest pace in six years.
  • Calculates that credit-to-GDP ratios remained well above trend levels for a number of jurisdictions, often coinciding with wide property price gaps. Demand from projects financed by property developers may play a role.
  • Reviews the doubling in outstanding government debt of emerging market economies since 2007, to $11.7 trillion at end-2016. Government debt rose from 41% to 51% of GDP over the same period. Emerging market government borrowing is mostly at longer maturities, at fixed rates and in local currencies, and its pattern increasingly resembles that of advanced economies.
  • Reports on new data initiatives aimed at assessing the exposure of economies to foreign currency risk. From now on, the BIS will regularly publish a currency breakdown of cross-border loans and deposits. Bank loans can be added to debt securities to estimate the build-up of total foreign currency debt. Country-level estimates of total US dollar, euro and yen credit provide a better gauge of foreign currency indebtedness of borrowers in a given country and its vulnerability to currency fluctuations. The BIS is also releasing new data series on monetary policy rates and exchange rates.  
Special features look at topical issues in global markets and economics:
  • Claudio Borio, Robert McCauley and Patrick McGuire (BIS)* analyse the amount of debt incurred by borrowing through FX swaps and forwards, a missing element in assessments of financial stability risk. The authors estimate the size, distribution and use of this missing debt, and assess its implications for financial stability. The off-balance sheet dollars owed by non-banks outside the United States may exceed their $10.7 trillion of on-balance sheet dollar debt (as of Q1 2017). The missing debt is secured with foreign currency, is mostly short-term and is likely to generally serve as a hedge for FX exposures in cash flows and on balance sheets. But rolling over short-term hedges of long-term assets can still spark or amplify funding and liquidity problems during periods of stress.

  • "This research is the first to put a number on the amount of dollar debt missing from balance sheets and fills in a gap in our understanding of liquidity risk posed by financial firms operating across different currencies," said Hyun Song Shin, Economic Adviser and Head of Research.
  • Morten Bech (BIS) and Rodney Garratt (UCSB)* outline how central banks might create and use blockchain-based digital currencies. They identify two types of such potential central bank cryptocurrencies, one for consumers and the other for large-value payments, and compare them with existing payment options.
  • Codruta Boar, Leonardo Gambacorta, Giovanni Lombardo and Luiz Pereira da Silva (BIS)* find that countries which frequently use macroprudential tools have tended to have higher and more stable economic growth rates. On the other hand, ad hoc interventions could hurt growth.
  • Torsten Ehlers and Frank Packer (BIS)* argue that more consistent standards for green bonds could help develop the market for instruments to finance investments with environmental or climate-related benefits. Although there is some evidence that investors have paid a premium on average at issuance for certified green bonds, the bonds have not generally under performed conventional ones in the secondary market.

Sunday, September 17, 2017

Another Crisis? Fed's Dudley Does Not See One Coming

New York Fed CEO William C. Dudley gave a speech recently in New York outlining how he sees things going in the US economy. Notably absent is any mention of concern that the US might see any kind of new major crisis any time soon or that markets are in an overvalued bubble condition. 

In fact, Mr. Dudley says he thinks things are going pretty well and that the Fed should be able to stay on course to shrink its balance sheet in the months ahead. He adds that he does not think the shrinking of the balance sheet is likely to have much impact. Below are excerpts from the introduction and the concluding remarks sections of the speech.  

"Good evening.  It is a pleasure to have the opportunity to speak at this Money Marketeers event.  In my remarks, I will focus on two topics:  1) The economic outlook and the implications for monetary policy, and 2) the Fed's balance sheet normalization process, which is likely to begin relatively soon.  As always, what I have to say reflects my own views and not necessarily those of the Federal Open Market Committee (FOMC) or the Federal Reserve System.
Overall, the economy remains on a trajectory of slightly above-trend growth, which is gradually tightening the U.S. labor market.  Over time, this should support a rise in wage growth.  When combined with a firmer import price trend-partly reflecting recent depreciation of the dollar-and the fading of effects from a number of temporary, idiosyncratic factors, that causes me to expect inflation will rise and stabilize around the FOMC's 2 percent objective over the medium term.  In response, the Fed will likely continue to remove monetary policy accommodation gradually.  But, the upward trajectory of the policy rate path should continue to be shallow, in part because the level of short-term interest rates consistent with keeping the economy on a sustainable long-run growth path is likely to be considerably lower than it was in prior business cycles. 
The process of balance sheet normalization-in which an increasing proportion of maturing Treasuries and agency mortgage-backed securities (MBS) repayments are allowed to run off the Fed's balance sheet-should also exert some monetary policy restraint over time.  But, I believe this impact will be quite modest.  Not only is this shift in policy now widely anticipated, but we have also seen that the impact on the level of long-term interest rates has been small as expectations have adjusted."

. . . . 

"To sum up, I expect that the U.S. economy will continue to perform quite well, with slightly above-trend growth leading to further gradual tightening of the U.S. labor market.  As this occurs, I would anticipate that wage growth will firm and that price inflation will gradually rise.  In response, I expect that we will continue to gradually remove monetary policy accommodation.  Balance sheet normalization will likely be part of this process.  But, we expect this to have only a mild impact and to run passively in the background.  Short-term interest rates will remain the primary tool of monetary policy."

Friday, September 15, 2017

Jim Rickards on Trump and the Fed

In this new article, Jim Rickards suggests that Trump will have an historic opportunity to shape the Federal Reserve since there so many vacant seats to fill, probably including Janet Yellen. Below are a couple of excerpts from the article.

"Donald Trump has the opportunity to appoint a higher percentage of the Board of Governors of the Federal Reserve system at one time than any president since Woodrow Wilson.

President Wilson signed the Federal Reserve Act during the creation of the Fed in 1913 when they had a vacant board. At that time, the law said the secretary of the Treasury and the comptroller of the currency were automatically on the Fed’s board of governors. But besides that, President Wilson selected all five of the other participating members.

Now Trump has the opportunity to fill more seats on the Fed’s Board of Governors than any president since then."

. . . .

"But don’t be surprised if Trump goes with a hard-money board. In fact, that’s what I expect. These will be hard-money, strong-dollar people, contrary to a lot of expectations. Trump advisers include hard-money advocates like Dr. Judy Shelton, David Malpass, Steve Moore and Larry Kudlow. I expect Trump to heed their advice."

My added comments: It's interesting that Jim Rickards expects President Trump to go with a "hard-money board" filling positions with "strong-dollar people" given his forecast for a much weaker dollar. Perhaps he expects the dollar to weaken substantially first and then get some support from the new Fed members later? Time will tell.

Tuesday, September 12, 2017

Canada Explores Central Bank Digital Currency

We have covered the concept of central bank digital currencies here on the blog for some time now. While it is clear that the idea is being looked at by many central banks, we are still waiting for the first central bank digital currency to arrive. 

This article on the OMFIF web site explains how The Bank of Canada is researching the idea. It is clear that research is still in progress, that this project will not replace cash any time soon, and that various ideas on how to actually implement a central bank digital currency are being studied. Below are a few excerpts. 


"Digital currencies aren't new. Most money in advanced economies is already digital: a bank account balance is but a computerised entry in a ledger at a commercial bank. However, the digital money of the future could have very different characteristics from present forms.

. . . . .

It's no wonder that the possibilities of new digital currencies have sparked the interest of the private sector and the central banking community. The questions raised are of fundamental significance to the core functions of central banks because they have implications for monetary policy, financial stability, funds management and currency issuance.

Research-driven decisions: The Bank of Canada is approaching the subject from three angles: research, experimentation and co-operation. The bank has been investigating questions related to private and central bank digital currencies for some years, and is building a set of research papers. It aims to examine the underlying benefits and risks of digital currencies to the functioning of the economy, and for the central bank mandate.

. . . . .

Other research has highlighted the importance of making sure there is a need for the digital currency. If it simply provides another payment mechanism when cash is a viable alternative, there are circumstances under which the wellbeing of people could be reduced by its introduction.

Research on whether a central bank should issue a digital currency is still under way. The Bank of Canada has outlined a framework for analysis that highlights the importance of understanding the types of new economic activity that could be enabled. There are many considerations to be explored, not least who should have direct access to the central bank balance sheet and what this would imply for the transmission of monetary policy and financial stability."

My added comments: This statement in the article above is one I find interesting:

"Other research has highlighted the importance of making sure there is a need for the digital currency. If it simply provides another payment mechanism when cash is a viable alternative, there are circumstances under which the well being of people could be reduced by its introduction."

It points out the fact that central banks already issue "digital currency" for the most part. Unless there is a compelling reason like significant cost savings or some advantage to the public that does not currently exist, it is fair to ask if just issuing a "central bank digital currency" based on "blockchain" is really needed. They go on to say that in some cases where cash is a viable alternative, the well being of the public could be reduced by introducing a central bank digital currency. This does not sound like a ringing endorsement of replacing cash with a blockchain based "central bank digital currency" to me.

Friday, September 8, 2017

US Dollar Watch

Sometimes a very long term chart can provide a perspective that you don't get looking at a much shorter time frame. Now that the US dollar has sunk into the potentially key 90-92 level, perhaps a look at its long term chart would be worthwhile.


Note the very long term downtrend in play. In the last major crisis in 2008 the US dollar sunk to an all time low just above 70 on this index. It appears that the next key area lower to watch is the 85-86 area. Failure to hold there could well indicate we are headed back down 80 fairly quickly. If you see the dollar drop below 70 at any time in the coming months or years, we would then be at new all time lows. Just below is a look at how the dollar has done over the past one year.

It is oversold right now and should bounce in here somewhere soon. If it does not, the 80 level seems likely to arrive fairly quickly. It has only taken about 4 months to drop nearly 10% down to the present level. I will remind readers of this note we published on 8-1-17 about Jim Rickards forecast on the dollar made to me by email back in March of this year.

My email to Jim dated 3-27-17:

"I am not a technical analysis expert by any means. However, this chart indicates to me that the USD has once again reached an important support level here around 99. It appears to me that if that fails, 95-97 would show up pretty quickly. After that, an even sharper drop looks possible. 

If you look back in time the 99 level seems pretty pivotal and the 200 day average sits just below right now at 98.44. The last time this happened the dollar held and rallied. So the next few days/weeks are probably important for direction if I read this chart correctly."

Jim's email reply dated 3-27-17:

"I expect the dollar will hold, and gold will pause to catch its breath, but only temporarily.

By late June or early July, I expect the dollar to come down a lot and gold to rally. We're just not there yet.
We'll need one more Fed rate hike in June to drive a spike in the economy. Then the Fed will flip-flop to ease again, and we're off to the races."  ------    James Rickards
Added note: Venezuela, which has suffered a horrific devaluation of its own currency lately, will now try to get away from the US dollar if possible.

Paola Subacchi - Saving the International Order

This article by Paola Subacchi appearing on Project Syndicate makes some of the same points we have made here for some time in regards to the prospects for global consensus on changes to the existing monetary system. While I constantly see articles that seem to suggest that some kind of new global monetary system will be imposed by the IMF, the reality that I find over and over again is that the consensus that would be needed for that kind of change simply does not appear to exist at this time. Below are a few excerpts from the article.


"This autumn, the International Monetary Fund and the World Bank will once again hold their annual conference in Washington, DC. At a time when the liberal world order that these institutions underpin is under threat, they cannot afford to stick with business as usual. Instead, they must consider deep reforms – and that will require abandoning the paternalistic, even hostile, tone that has often dominated discussion of the topic."

Since the election of Donald Trump as US president last November – the culmination of an upsurge in nationalist-populist sentiment across the Western world – the weaknesses of existing multilateral frameworks have come increasingly to the fore. But the current crisis of the liberal world order has been a long time in the making.

In fact, it has been apparent since before the turn of the century that the post-World War II governance structures were untenable, because the assumptions that formed their foundation were beginning to crumble. In particular, with emerging economies, especially China, on the rise, the division between the West and the “rest” was narrowing fast.

Yet the global economy’s institutional underpinnings – the IMF and the World Bank – have remained largely unchanged. Indeed, the multilateral institutions on which global governance rests do not look all that different today than they did in 1944, when Britain’s John Maynard Keynes and America’s Harry Dexter White convened representatives from 44 countries in in Bretton Woods, New Hampshire, to design the post-WWII international order."

. . . .

"To be sure, since the 2008 financial crisis, there has been much debate about globalization, governance, international cooperation, and the tension between open markets and domestic politics. Well-rehearsed discussions of issues like financial surveillance, coordination, moral hazard, international lenders of last resort, a debt-resolution regime, and sustainability in development finance will surely inform the work of the eminent persons group.

But discussion does not imply consensus, and I am not convinced that agreement on any of these topics is strong enough to produce concrete policy action. The question of how to pursue governance and quota reform in the Bretton Woods institutions – critical to these bodies’ survival – is nowhere near answered. And Trump’s US, which is engaged in its own rethinking of its role in world affairs, remains a wild card."

My added comments: I put the last paragraph above in bold italics because it basically says almost exactly what we have been saying here for some time. When I see articles saying that the IMF will do this or will do that I have to ask this question:

How will the IMF do anything significant to change the existing monetary system without the global consensus of the major powers that are its members (not to mention all the other nations that are members).?

No such consensus appears anywhere on the near horizon at this time as best I can tell. Readers here are probably tired of hearing this, but this is why I am convinced that the world will have to see a major global financial crisis of the kind Jim Rickards and others are predicting before we are likely to see any kind of movement towards consensus on these huge issues. All of the individual governments and central banks at the IMF have to work on behalf of the interests of their own nations first and foremost. Those interests simply do not line up too many times to get much consensus on the big issues. 

Things can always change and if they do we would certainly report that here. But it is important to report things accurately based on the information that is available. At this time, the best information I know of suggests no such major monetary system change is on the near term horizon at either the IMF or the BIS.