Tuesday, October 30, 2018

Election Impact on Monetary System Change?

This is just a brief news note to say that it does not appear that anything related to the US mid term elections is likely to impact major monetary system change. Below I have listed the potential outcomes and how they might impact things.

- Democrats take over both the US House and US Senate

This has been touted as a strong possiblity for some time, but more recent polling suggests this is now unlikely. However, this is the scenario that could have the most potential impact. We can assume that if the Democrats take control of the House, they will at a minimum prevent any further major legislation from being passed. At maximum, they will launch an effort to impeach President Trump. All that could certainly create a lot of market volatility and disruption. It is extremely unlikely that this would lead to President Trump being removed from office because that takes a 2/3 vote of the US Senate. The Democrats will not have anything close to that in the Senate regardless of how this election turns out. Also, removing President Trump simply puts in Vice President Pence and likely little to no change in policy from the Executive branch of the government.

- Democrats take over the House, but not the Senate

This is the more likely scenario as of this writing although more recent polling shows that control of the House is probably very tight and could go either way. For our purposes, nothing changes from the above analysis other than it becomes even less likely that President Trump would be removed from office and the Democrats might not even attempt impeachment since they would not have control of the Senate.

- Republicans hold the House and Senate

This scenario leaves things pretty much unchanged from the current situation. It is very unlikely anything major would change policy wise in this scenario. Also, there would be no effort towards impeachment in the House. Markets would probably not be impacted in any way in this scenario. 

Summary: I do not see anything related to the election that is likely to impact major monetary system change. 

I do see a lot articles in both mainstream and alternative media suggesting that markets may be about to roll over into a major correction and there are always lots of people predicting another major crisis at any given point in time. So nothing new there. The continued strength of the US dollar could create some problems and is probably the result of interest rates going higher along with the QT policy of the Fed.

The conditions for this are always present, but so far have not led to any kind of new major crisis. Should a new crisis emerge, President Trump has already made it clear he will blame the Federal Reserve for it and that would probably create some market disruption. An already badly divided nation would probably become even more intensely divided. Trump allies/supporters will go along with blaming the Fed. Trump opponents will blame it on Trump. That much is pretty predictable.

Added note: Here is Jim Rickards take on the upcoming election (and the potential for market impact) for anyone interested.

Wednesday, October 24, 2018

The Dollar and its Discontents

A thank you to a reader for pointing me to this article by Barry Eichengreen on the Project Syndicate web site. The article is another in a long line that ponders whether or not nations can find sustainable ways to get around using the US dollar. This is a hot topic these days and a lot of people are watching to see how things play out. Below are a couple of excerpts from the article and then a few added comments.


Having unilaterally reimposed sanctions on Iran, US President Donald Trump's administration is threatening to penalize companies doing business with the Islamic Republic by denying them access to US banks. But that could hasten the dollar's demise as the main global currency.

. . . . .

"If the geopolitical shock of Trump’s unilateralism spurs an institutional innovation that makes it easier for European banks and companies to make payments in euros, then the transformation could be swift (as it were). If Iran receives euros rather than dollars for its oil exports, it will use those euros to pay for merchandise imports. With companies elsewhere earning euros rather than dollars, there will be less reason for central banks to hold dollars in order to intervene in the foreign exchange market and stabilize the local currency against the greenback. At this point, there would be no going back.

One motivation for establishing the euro was to free Europe from excessive dependence on the dollar. This is likewise one of China’s motivations for seeking to internationalize the renminbi. So far, the success of both efforts has been mixed, at best. In threatening to punish Europe and China, Trump is, ironically, helping them to achieve their goals."

My added comments: Thus far, while there have been endless articles about how one thing or another will lead to the demise of the US dollar as global reserve currency, that has not happened. Until it does happen, there is no reason to suggest we are on the cusp of major monetary system reform.

Tuesday, October 16, 2018

John D. Mueller -- To Bring Back U.S. Manufacturing, Get the World to Dump the Dollar

We have featured John D. Mueller here on this blog previously. Now he has written a new opinion article carried by The Wall Street Journal calling on President Trump to work towards replacing the US dollar as the global reserve currency. 

In this new article, Mr. Mueller says that the US dollar acting as the world's global reserve currency is actually a problem rather than an advantage for the United States. Below are a couple of excerpts from his article and then a bullet point summary of some of the key points.
"Donald Trump promised to "make America great again," but he might make America Great Britain. To re-industrialize the U.S. economy, President Trump must avoid the mistake that de-industrialized Britain: Namely, he must end the dollar's role as the world's chief reserve currency."

. . . . . 

"French economist Jacques Rueff described the fatal weakness of foreign-exchange reserves in a 1932 lecture. He explained that when a monetary authority accepts dollar or sterling claims for its official reserves rather than gold, purchasing power "has simply been duplicated," so that, for example, "the American market is in a position to buy in Europe, and in the United States, at the same time." In other words, when a foreign nation accepts repayment in U.S. dollars it increases its money supply without diminishing the U.S. money supply, allowing both countries' central banks to lend in dollars.

This credit "duplication" is not only inflationary in the reserve-currency country and any country whose currency is tied to the reserve currency; it also necessarily causes the average price of goods to rise faster in the reserve-currency country than among its trading partners. This is why Britain's and America's manufacturing industries lost their competitiveness as exporters, resulting in deindustrialization."

. . . . . 

"The Triffin Dilemma can't be solved without a monetary reform that ends the dollar's use as the world's chief reserve currency.

Here's a deal that could place Mr. Trump in Alexander Hamilton's league:"

Summary of Key Points

- President Trump should work towards removing the US dollar as global reserve currency

- Using a national currency as global reserve currency leads to the "Triffen Dilemma"

- This very problem contributed to the "deindustrialization" of Great Britian

- the glut of reserve currency leads to inflation and lack of global competitiveness

- Tariffs cannot restore competitiveness

- The Triffin Dilemma cannot be solved without monetary reform ending the US dollar as the global reserve currency

- President Trump should offer a plan to convert all foreign US dollar reserves to long term government to government debt

- This debt should be paid off in gold over a period of 50 years, similar to a plan used by Alexander Hamilton to pay off American revolutionary war debt

The article concludes as follows:

"Like Mr. Trump, Hamilton's contemporaries originally thought his glaring character flaws far outweighed his virtues. But after the formerly penniless immigrant managed to make a fortune for his adopted country, even those who had been his worst political enemies found it in their interest to carry out his plan for decades. Today, young people whistle the songs not from "Jefferson" but "Hamilton." There will be no whistling of tunes from "Trump" if he makes America Great Britain."

Monday, October 15, 2018

IMF - Lagarde Issues Storm Cloud Warning on Global Economy

We have documented numerous warnings here over the last 4 and 1/2 years from both the IMF and the BIS related to potential systemic risks. None of those warnings has turned into another major financial crisis thus far.

Christine Lagarde (IMF) just issued a new warning on the global economy due to ongoing trade disputes, rising interest rates, and an increasing global debt burden. Below are a couple of excerpts from this article in MarketWatch.


International Monetary Fund chief Christine Lagarde delivered a warning on global growth, saying there are signs major economies such as the U.S. have ”plateaued.”

. . . . . 

"She also warned that some emerging economies will face additional pressure from tighter financial market conditions and a stronger dollar."

. . . . .

Lagarde said growing global debt — in emerging and developed economies — has reached an all-time high of $82 trillion, nearly 60% higher than 2007. 
My added comments: It is easy to sound like a broken record just repeating systemic risk warnings over and over and yet nothing ever actually happens. That's OK. The risks do exist so it is important to report them even if nothing comes of it. By now, it should be obvious that no one can predict the timing of future events, but it is possible for most everyone to make some kind of plan to deal with a crisis if one did arise.

Added note: This article appearing in ABC.net.au includes this interesting comment from the IMF regarding the next major crisis:

"The IMF also said action by central banks, notably the US Federal Reserve and the European Central Bank, to bail out institutions and stimulate economies through trillions of dollars of quantitative easing would not be possible in managing any new crisis."

I noted these comments because they agree with what Jim Rickards has said for some time and we have reported his view on this here for some time as well.

Monday, October 1, 2018

Way Off Topic - Search for the Good

This post will be somewhat different and certainly way off the main topic of this blog. In trying to cover the topic of potential monetary system reform, you run across a lot of potentially discouraging news and information. It seems that many believe that any major change we might see to our present monetary system will come from the arrival of some new horrific future major financial crisis. There is nothing fun about trying to learn about the potential for such an event and then trying to provide information to help others learn what to watch for and then what solutions might be available to deal with such a crisis if one does arrive some day. 

On top of that, in order to try and stay informed on the relevant issues, you are pretty much forced to follow all the political news that now pours out on a 24/7 basis across all kinds of media formats. The US is more intensely divided now than at any time I can recall in my lifetime. Seeing the non stop fighting that has only ramped up since the election of Donald Trump is truly discouraging. It seems there is no end in sight for all that.

So, for this post, I would like to put all that aside just for a few minutes. If all we ever do is focus on all that, we might miss the fact that despite all the problems and divisiveness we see around us, there is still plenty of good if we just take time to look for it. Below I am going to post two videos that (at least to me) offer hope that despite our differences, people can come together and be touched to see that we do have some things in common even while we may disagree on some issues. I hope you enjoy this little break from all the noise.

It is once again time for the State Fair of Texas held annually in Dallas. This time of year is always very nostalgic for me as I recall the many years taking my daughter to the Fair and what wonderful memories we have of those times together. When she was very young, one of her favorite shows to see at the State Fair was a dog named Skidboot (he has now passed away). 

Skidboot brought so much joy to so many people that he ended up having a career far beyond the State Fair of Texas appearing on such TV shows as Oprah and The Tonight Show. Near the end of his life, a local TV program called Texas Country Reporter did the feature just below on Skidboot and his owner David Hartwig of Quinlan, Texas. I doubt many can watch this video and not feel something good inside about people (and their best friends), so I present it here. I hope you enjoy it.

This next video arises out of terrible tragedy that happened in Dallas recently. Many may have heard about it. A young man (Botham Jean) was shot and killed by an off duty police officer in what appears to have been a horrible mistake. The officer stated that she mistook his apartment for her own after coming home from a long on duty shift. Thinking a burglar was in her own apartment, she fired twice killing Botham Jean.

This event came close to home for us. Botham recently graduated from the same university that my daughter attended so she did know him, although not as a close friend. Everyone there knew him because he had a beautiful singing voice and would sometimes lead a daily chapel service held at the school. 

The loss of such a wonderful young life is tragic and the grief of his family and friends is very real and deep. The uplifting part of this story is how that family and those friends chose to react to such a terrible tragedy and to honor his life. His funeral service in Texas was attended by hundreds of people whose lives he had touched from around the world (here is a link to that service for anyone interested - service starts around 2 hour mark)

You simply cannot watch the video linked above of his funeral service and the video just below and not be uplifted at how people can come together during very difficult times to offer hope and encouragement to one another. This is when we are at our best in my view. I think if we just take a little time now and then to Search for the Good, we can find it even in these times of great division.


This video is the candlelight vigil held by students at the university where Botham graduated He sometimes led the student body there in singing at their chapel services.


It starts with a solo voice and turns into a chorus.

A large group sings "Love (One Another)" by candlelight at a vigil for Botham Jean at Harding University in Arkansas, where the 26-year-old graduated and was known for his voice.