Rickards and Rogoff on Emerging Market Debt

Recently, Jim Rickards and Kenneth Rogoff have both written articles warning about US dollar debt building up in emerging markets. When we have two very different analysts both talking about the same potential problem, it is probably worth a mention. In my recent mid year review I mentioned that global debt remains a potential systemic risk even though I have no information suggesting a crisis related to that is on the near term horizon.

Jim Rickards appears to disagree with me in his new article (he says a new global debt crisis has begun). You can read it and decide for yourself. 

One interesting note. Both Jim Rickards and Kenneth Rogoff talk about the IMF stepping in as a lender of last resort in their articles on emerging market debt, but Jim is more negative about the outcome than Kenneth Rogoff. Below is an excerpt from each article on that issue. (I added the underline for emphasis).

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Kenneth Rogoff on the IMF:


"The International Monetary Fund, moreover, has sufficient resources to handle a first wave of crises, even if it includes, say, Brazil. The main concern is not that the IMF will fail to deliver funds, but that it will make the same mistake it did in Greece, by not imposing a realistic deal on debtors and creditors."

. . . . .

"Even if the best bet is that any emerging-market bond meltdown would remain contained, today’s jitters ought to be a wake-up call, even for advanced economies. After all, no country, however rich, should bet its future on the prospect that today’s ultra-benign interest-rate environment will last forever."

Please click here for the full article by Kenneth Rogoff on Project Syndicate

Jim Rickards on the IMF:

"A full-blown EM debt crisis is coming soon. It is likely to start in Turkey, Argentina or Venezuela, but it won’t end there.

The panic will quickly affect Ukraine, Chile, Poland, South Africa and the other weak links in the chain.

The IMF will soon run out of lending resources and will have to pass the hat among the richer members. But the Europeans will have their own problems, and the U.S. under President Trump is likely to reply, “America First,” and decline to participate in bailing out the EMs with U.S. taxpayer funds.

At that point, the IMF may have to resort to printing trillions of dollars in special drawing rights (SDRs) to reliquify a panicked world. . . . . ."

Please click here for the full article by Jim Rickards on Daily Reckoning

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Added note: Normally I would try to reach out to Jim Rickards for any further comment on this kind of article, but he is currently part of an expedition that is climbing Mt. Denali until the end of June. My guess is that this is an article Jim actually wrote before leaving on the expedition that he dated to be posted on 6-21-18 while he is gone on the expedition.

2018 Mid Year Review - Little Significant Monetary System Change So Far

Mid year of 2018 means this blog has now been online for about 4 1/2 years now. The blog started out attempting to watch for any signs that the monetary system we have had for some time now based on the US dollar as global reserve currency might be headed for major change or even a full monetary system reset. 

Literally thousands of hours of time have been spent here reading relevant news articles from both mainstream and alternative media sources. Official publications from organizations like the IMF, BIS and major central banks have been reviewed and monitored for signs of potential major change. In addition, extensive effort was made to document a list of systemic risk warnings that have been issued during these past few years by various credible sources (see that list here). 

On top of all that, efforts were made to reach out to highly qualified global experts with expertise on global payments systems and monetary systems. These efforts led to another page documenting a variety of serious proposals for possible significant monetary change for the future (see that list here).

I have been extremely blessed to get direct input from a wide variety of experts coming from a wide range of views on these issues. A group of expert economists who routinely discuss ideas for potential monetary system change sometimes copy me on email discussions which provides me with great insight into how these issues are discussed and debated. 

With all that background, I have concluded that at this time significant monetary system change is unlikely to happen soon unless some kind of new very big global financial crisis arises to disrupt the present system to the extent it cannot continue to function. Many systemic risks that could lead to such a disruption have been identified and discussed here in great detail. Some of these risks have subsided while others remain. The list of risks changes from time to time with new events popping up while others drop off the list. 

Below I will use a Q&A style format to provide a 2018 mid year update and explain why I have decided to further reduce blog articles and move into monitoring mode sometime this fall. Basically, it is because I cannot identify any systemic risk at this time likely to so disrupt the present system as to force significant changes to it.

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Q: What systemic risks exist right now that could lead to disruption of current monetary system and force major systemic changes?

A: Events related to the ongoing "slow motion civil war" in US politics and some of the global geopolitical events (North Korea, Middle East, etc) are the ones I can identify at this time. Some also suggest that a major trade war could become a systemic risk. However, none of those appear to be an imminent threat to the stability of the monetary system as of the date of this update.  (Added note 6-19-18: Trump ups the ante in Trade Battle)

Q: What about Russia and China and their obvious ongoing efforts to undermine the US dollar as the global reserve currency?

A: That process is ongoing, but moves very slowly. At the pace that these changes take place it could take several more years or even a decade before the US dollar is seriously threatened as the global reserve currency. As we have stated many times, a new major global crisis could alter the timetable, but at this time there is no indication of that on the near term horizon. One expert I hear from by email sent me a link to this article on the dollar which pretty well sums of what I see quite a bit lately. Lots of people have incentive to bypass the US dollar, but no viable alternative seems ready to do that right now.

Q: What about the massive US debt problem, the global debt problem, global derivatives, interconnected financial institutions, and so called "Shadow Banking"?

A: Those are all potential systemic risks we have documented and discussed in detail. They remain out there as risks, but have been risks for years. They could simply continue to lurk in the background as risks or something could arise suddenly to trigger them. But there is simply no way to know ahead of time when such a sudden event might arise. That is what I will continue to monitor when I move into "monitor mode" this fall. But there is no point writing endless articles about these issues that have already been covered until something actually happens. 

Q: What about central bank digital currencies? Aren't we on the verge of major historic change by central banks in this regard that could lead to major monetary system changes eventually?

A: Perhaps. There is certainly no shortage of position papers, panel discussions, and in depth studies by central banks, the IMF and the BIS on this topic. It is possible that a few smaller central banks might adopt CBDC's experimentally in the next year or so. But every indication I have from published information and also direct input from experts suggests that momentum for this has stalled quite a bit. I don't see any indications that major central banks like the Bank of England or the US Fed are close to moving in this direction at all. Also, I have no indication from any source that the IMF is in the process of moving towards a digital SDR on some kind of blockchain platform. 


Q: What about Bitcoin, cryptos, and commodity backed currencies in the private sector? Are they about to supplant the existing monetary system or at least force it into major changes?

A: This is an area that I have explored in depth and attempted to follow quite a bit. There are certainly a wide variety of would be alternative monetary systems out there now that would aspire to disrupt the official monetary system and/or force it to make some major changes. However, I do not see any that are anywhere close to having that kind of impact at this time. Bitcoin is the most well known crypto, but it is still miniscule in terms of public adoption. There are several gold backed currencies (and one full scale gold based alternative monetary system) out there in the startup phase. But again, the public adoption so far is tiny compared to the official monetary and banking system we have now. This is an area worth following over time, but progress seems very slow and all of these alternatives have the enormous hurdle to overcome of not being legal tender currencies. Also, as more than one of my experts told me recently, the US is still the most powerful force in the world in defending the US dollar as global reserve currency and forcefully resists any kind of major change to the present system. I don't see that changing soon unless some kind of new major global crisis forces the US to accept major changes. Another expert reports that momentum for using blockchain for payments systems and digital currencies within the current banking system has stalled as the limitations and long term costs of public distributed ledgers have become more apparent.

Q: When should we expect to see a new major global crisis that you keep talking about as the primary catalyst for major change?

A: This is the key question for this entire topic. It is simply impossible to answer. This blog is proof that hundreds of dire predictions for systemic disruption or collapse can come and go for years without it happening. It could go on for many more years or some unexpected trigger (or snowflake that causes the avalanche as Jim Rickards puts it) could arise within the next month. Anyone who tells you they can predict the timing of the next major financial crisis is misleading the public in my opinion based on all the research I have done here on this topic. Almost everyone agrees the present system is not sustainable over the long term, but no one can pin down when it might falter.

Q: What impact has the election of Donald Trump had on this situation?

A: In some ways the election of Donald Trump has probably had some impact. However, so far the overall impact does not appear to be all that significant. Trump campaigned on a platform of putting US interests first so we can assume he is not interested in proposals coming from institutions like the IMF and The World Bank for major changes. Especially if they involve displacing the US dollar as global reserve currency. But the US has really had this same position all along for the most part for a long time. Trump talked a bit about the idea of a gold standard, but that has gotten no visible traction in his Administration that I am aware of so far. 

The ongoing "slow motion civil war" between the pro Trump forces and the anti Trump forces inside the beltway in Washington could potentially cause disruption in the markets and even threaten systemic stability, but so far the key markets (stocks, US dollar, gold) have yawned about all that and pretty much dismissed it as political noise. At this point, the civil war seems more like a stalemate with neither side gaining any substantial political advantage and markets are indicating they do not seem to think this is likely to change. So while the Trump era is good for TV ratings and lots of "drama" back and forth from both sides on the news networks for him and against him, the public has pretty much now dismissed it all as politics as usual (recent polls say 70% of the public is tired of hearing about it) and moved on with life At this time, this does not seem like a potential trigger for major changes. 

The recent release of the IG report just further confirms nothing significant in terms of legal action is likely to happen to anyone significant involved in all the TV drama live from Washington DC. It simply admitted a lot of corruption and sleaziness inside the government which most people already know is embedded in government agencies here and there. It seems like business as usual and the markets are confirming that.  


Q: Can you provide anything new to talk about that relates to major monetary system change?

A: Not in terms of something likely to trigger it any time soon. I have enjoyed the process of hearing about and learning about a lot of different interesting proposals that are out there for monetary system change and even complete monetary system reform. There are a lot of very intelligent and creative minds that do think about how to improve things or what we might need as a replacement system if the one we have does eventually go under. Just a few interesting ideas I have seen discussed by experts I hear from are:

- using a new version of the SDR (with a hard anchor) issued under Currency Board rules for the global reserve currency. IMF or BIS could issue it. (see details here)

- using a new global reserve currency that is anchored to a stable global equity index 

- a new "Commodity Reserve Currency" concept 

- a new global currency backed either fully or partially by gold. The latest versions of this now also include running this on blockchain based platforms. There seems to be more interest in this possibility in the eastern part of the world right now

There are also other projects being worked on by experts I hear from attempting to make cross border payments easier and less expensive and to establish an "Internet of Rules" to make it easier for businesses engaged in global commerce to apply various rules and regulations related to their line of business and to better hedge foreign currency transactions against volatile exchange rates. 

The goal of these proposals and the related discussions around them is to try and find a monetary system that is stable, fair and best supports the global economy. Some of these proposals are relatively new while others have been around for some time. What I have learned from my own journey on this is that it is good to keep an open mind and try to learn as much as possible about serious potential monetary system change proposals that are out there.

What will matter to most people who will live under whatever monetary system emerges is what actually happens and how that will impact their personal financial decisions. Whatever system is used must have the public trust and confidence or it will not be sustainable. In the event of a major crisis that leads to major change, I believe who the public blames for the crisis will be the key factor in determining who they will listen to for proposed system changes. If no crisis emerges any time soon, the status quo with the US dollar as global reserve currency is firmly entrenched at this time.

It will continue to be interesting to me to follow this and see what happens over time even if the process drags out over many years rather slowly. But I have reached the point in time where producing regular articles on an event that has not happened for 4 1/2 years (major monetary system change) does not seem necessary or of any substantial benefit to readers.

It makes more sense to just monitor things and cover something significant if and when it happens or feature something educational if it seems particularly valuable for readers. If an expert points me to something I usually try to feature that. But I also try to feature anything that any reader feels may be of interest that is relevant to the main topic. The blog will continue to remain online and all archived information will be available to anyone who can use it. Relevant questions or comments are always welcome.


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Added notes: Below are some links to some recent articles and discussions from alternative media that may be of interest. I am just passing along the info links without comment for anyone interested:

Article that proposes that China is slowly working towards a gold backed system
(suggests China is covertly moving towards returning gold to their system)

Jim Rickards monthly interview with Alex Stanczyk (he refers to his recent discussion with former IMF John Lipsky)

Interview with former Dallas Fed Adviser Danielle Di Martino Booth (talks about the prospects for another major financial crisis impacting the current system)

Kinesis Money CEO explains the goals for the Kinesis monetary system in webinar
(this is an example of a proposed alternative monetary system based on gold running on blockchain that intends to launch this fall)

These will give you a feel for some things being talked about in alternative media and not covered in mainstream media that could impact the present monetary system. However, I do not have any information at this time that suggests any of the things discussed just above are likely to impact the present system any time soon.

BIS: Market Value of OTC Derivatives at 10 Year Low

The Bank for International Settlements (BIS) produces a monthly email update. Below is the most recent issue that features an article on how over the counter derivatives have now fallen to a ten year low. 

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June 2018 Central banking: trending and cycling  Speaking at Sveriges Riksbank’s 350th anniversary, Agustín Carstens outlines trends and cycles in central banking. Reducing the risk of wholesale payments fraud  Central banks urge wide take-up of a strategy to improve wholesale payments security. Capital treatment for short-term securitisations The Basel Committee finalises the capital treatment for qualifying securitisations, including asset-backed commercial paper. Market value of over-the-counter derivatives at 10-year low The gross market value of outstanding OTC derivatives fell to $11 trillion at end-2017, mainly as interest rate contracts declined. Challenges for monetary policy from global financial cycles At a Swiss National Bank-International Monetary Fund conference, Agustín Carstens highlights the role of movements of major funding currencies’ exchange rates for global financial conditions. (0:49:00 - 1:00:00) More BIS publications  Publication: Implementation monitoring of PFMI: follow-up Level 3 assessment of CCPs' recovery planning, coverage of financial resources and liquidity stress testing Most central counterparties have made progress in meeting international standards on financial risk management, liquidity and recovery, but some still lag. Working Paper: The enduring link between demography and inflation High shares of young and old push up inflation, while a high share of working age population lowers inflation. Working Paper: The cross-border credit channel and lending standards surveys Central banks’ quantitative easing policies bolstered attitudes towards bank lending, but a negative signalling effect undermined their effectiveness and sapped demand for loans.

News Note: North Korea - What Just Happened?

By now the world knows that something just happened in Singapore between North Korea and the United States that may impact world events. Exactly what has happened is yet to be determined. Based on the early news reports and comments from President Trump and Chairman Kim, it appears the two nations have at least been willing to start a process to try and end the tense standoff that has existed for decades on the Korean peninsula. Below are a few comments on how this impacts what we watch for here.

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At this point in time, much remains unclear as to exactly what North Korea and the US have agreed to. Both leaders are saying that the agreement signed will result in "major change" in the future and imply that major change will be a gradual ramp down of tension and the transition of North Korea into a country that seeks to work with the world rather than against it. One news report even stated the US presented a video to the North Korean delegation on the virtues of using their beaches for condos and hotels rather than weapons testing (view it here).

Only time will tell of course what actually does happen. However, there appears to be enough goodwill on both sides to eliminate the further ramping up of tensions that we had seen up until a few months ago. I doubt North Korea will be doing further nuclear and missile tests. The US has agreed to end war game exercises. These would be concrete first steps to show sincere good faith if they are carried out. 

For our purposes here, I believe these events will remove a lot of geopolitical instability in the world now that could have created systemic risk to the existing global financial system. Removing that risk would be a huge plus for the world and also mean that once again a major change from the existing system based on the US dollar as global reserve is not likely any time soon. We still have remaining potential systemic risks for sure, but taking a big one like this off the table is certainly a good thing. Let's hope it is real and that it lasts.

Added note: CNBC reports on the four points agreed to in the signed document

How is the Petro Yuan Contract Doing?

Not long ago, the so called petro yuan contracts began trading for oil. This allowed traders to buy and sell oil contracts based on yuan rather than US dollars. Many observers are interested to see if this event begins to impact the US dollar in its role as the global reserve currency. 

This article on Oilprice.com provides an update on how well yuan based contracts are doing in their startup phase. It looks like that so far the trading volume is still far below the US dollar based contracts, but is picking up some steam as time goes by. Below are a couple of excerpts.

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"China’s new oil futures contract is gaining some momentum as a fixture on the global oil market, although hurdles remain before it can become a key benchmark for Asia.

China launched its yuan-denominated oil benchmark in March to much fanfare, after years of planning and delays. The logic of starting up an oil futures contract in China is obvious. China is the largest crude oil importer in the world, and its growing appetite for crude has increased the urgency to establish a contract based on local supply and demand conditions. Importing such heavy volumes at dollar-denominated prices exposes Chinese refiners and consumers to currency risk. A yuan contract mitigates some of that risk.

Beyond those concerns, the yuan contract also augments the global status of the Chinese currency. China is the world’s second largest economy and shifting more global trade into yuan advances Chinese influence.

However, the new contract on the Shanghai International Exchange still has to overcome some hurdles before . . . . . . ."

Please click here to read the full article on Oilprice.com

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Added comments: We have noted that there are ongoing efforts by many nations led by China and Russia to reduce the role of the US dollar as the global reserve currency. The process continues all time in slow incremental steps. As we can see from this article on Xinhuanet.com, China is always looking for ways to increase the use of the yuan around the world. Here is a quote from the article illustrating that fact:

"The Chinese yuan comes under the spotlight Tuesday and Wednesday when 17 top central bank and government officials from 14 countries in eastern and southern Africa meet in Harare to discuss its possible use as a reserve currency for the region."

Lately, many are predicting ramping up of sanctions against Iran may force Iran to look for ways to conduct oil trading outside the US dollar which could speed up the process of yuan based oil contracts increasing their share of use in global trade.

This recent article appearing on Bullionstar.com is interesting. It talks about how gold was used to bypass the sanctions against Iran in the past. It even shows a hand drawn diagram on how to do it.

Article on the Impact of Falling Mortgage Refinance Market

Since we do watch for any kind of potential "trigger" that could impact systemic stability, this article seems worth noting. It points out how rising interest rates are now starting to have a real impact on the mortgage refinance market. Below are a couple of excerpts and then a few added comments.

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Back in the 1990s we did our first cash-out refi. And it was amazing. The bank lowered our monthly mortgage payment AND wrote us a check for $16,000. I told that story to everyone I met for months afterward, and they were, without exception, astounded.

That, in a nutshell, is the refi paradise in which homeowners have been living ever since. By continuously lowering interest rates, the Fed has in effect been cutting our taxes, enabling us to buy furniture, cars, vacations, you name it. Easy money, funneled through the housing ATM, was an amazingly efficient stimulus program.

But now it’s over  . . . . . 

"If being able to refinance your mortgage every few years is like getting a tax cut, no longer being able to refinance – while your property taxes and maintenance expenses are rising – is the opposite. Suddenly, owning a house is an expensive proposition rather than a source of free cash. The result won’t be pretty."   . . . . . .

Please click here to read the full article on Dollar Collapse.com

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My added comments: This article is very easy for most people to understand and see how this can impact their life directly. Rising interest rates make everything purchased with a loan more expensive of course. But this situation in the housing and refinance market is especially important to keep an eye on. 

As this article points out, rising mortgage rates not only reduce demand for new housing and first time home buyers, they also directly impact the refinance market that millions of people have been using to access additional spendable funds for years now. So not only does the refi market itself take a hit (this article shows this is now happening), the overall economy takes a hit as people have less money available to spend in general. This along with the potential for trade wars may somewhat offset the boost the US economy has seen from lower taxes and regulation. 

The refinance market is such a large market that I won't be surprised if we see this directly hit GDP fairly substantially eventually. It's just another systemic risk we need to keep an eye on. 

Also, if this does start to play out and the Fed reacts back to monetary easing to try and stave off the problem, we would expect markets to react to that as well. The US dollar could take a pretty big hit under that scenario.

"Slow Motion Civil War" Continues to Ramp Up - Markets Yawn

Earlier I attempted to assess the ongoing political divide in the US with this blog article. In it I tried to make the case that this "slow motion civil war" as some have called it must move to the top of the list of potential threats to systemic stability. Since then, events have only continued to convince that nothing in that earlier article needs to be changed.

The battlefronts in this war are now so numerous and confusing that I doubt any average citizen can keep up with it all and most likely don't even try. At this point I think the best approach is to try and keep things a simple as possible so I'll try to do that below.

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This is my take on this situation in terms of trying to assess the impact on systemic stability and then of course on everyday people. We are seeing all kinds of information pouring out from both sides of the civil war and the intensity only seems to ramp up. Clearly, those directly involved in this conflict who have the most to lose are engaged in intense fighting that does not appear to be coming to an end any time soon.

With all this going on, here is what I focus on. I just watch these three signals:

1- US and global stock markets

2- the US dollar index 

3- the price of gold (and silver)

Even with all kinds of breaking news potentially implicating powerful US officials or former officials on almost a daily basis, so far these markets just observe the proceedings and yawn. We see no indications at all that markets are concerned that systemic stability is at risk for now.

Until I see at least one and more probably all three of these markets signal some kind of distress, I will assume that they don't see the "civil war" threatening systemic stability or that the current President is in any real legal trouble.

If we see a sharp and deep drop in stock markets, a sharp and deep decline in the US dollar, and/or a sharp rise in the price of gold (and silver), then I think we need to pay close attention to systemic stability. As long as these markets seem unfazed, I will assume either the "civil war" is ultimately not going to result in any significant changes or that it is locked in a stalemate that neither side can win any time soon.

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Update to readers on the status of blog articles here:

If nothing arises to suggest major change is on the horizon any time soon, I will proceed with my plan to cut way back on blog articles. I may cut back to just one a week or less starting in June or July and then even less after that. At some point in the fall if nothing is changing, I will probably just go into "monitor" mode and only produce an article if I see something truly important in terms of systemic stability or of such worthwhile educational value to readers that I feel I should add it to the blog. 

If readers send article links or other information, I would likely feature that type of information since I know there is reader interest enough for someone to send me the information.