Sunday, November 18, 2018

2019/2020 - Will the Blame Game Ramp Up?

Things have been pretty calm in terms of overall market activity despite some occasional bouts of volatility. Despite hundreds of forecasts across the spectrum of economic views that we are about to see a huge new major crisis, that has yet to emerge. The 2018 elections are over now and will results in predictable gridlock which markets don't normally find too bothersome.

Lately though, a few indications that we might be about to see some kind of rollover in the economy have begun to show up. The stock market is now struggling and more and more view as overpriced. The housing market is showing some signs of a slow down with mortgage rates creeping higher. Same with auto sales. So we continue to monitor things to see if these are just minor pullbacks or the start of something more significant.
Unfortunately, it is impossible to try and analyze the potential for future economic conditions without taking into account the political ramifications. So what follows below is an attempt to try and project what we might see in 2019/2020 given the current political landscape.

From 2016-2018, the Republican Party controlled The White House, the Senate, and the House of Representatives. While its true that the slim majority held in the Senate did place some limits on what Republicans could get passed into legislation, for political perception purposes, the public would view whatever happened economically during 2016-2018 as being owned by Republicans. I think this view is not entirely proper because there are many longer term factors that impact the economy (good and bad) unrelated to whatever the political party in power does. But in general, the public probably does not view things that way which is what matters in terms of political fallout.

For the most part, the general perception is that the economy did well during 2016-2018 which probably allowed the Republican Party to limit its losses in Congress in the recent mid term election. It is also probably true that if we had seen the new major financial crisis many are still expecting to arrive during 2016-2018, President Trump would have taken most of the blame for it just as he claimed most of the credit for what most viewed as a good economy. With total control of The White House and Congress, it would have been pretty hard to shift blame elsewhere in the public perception.

So what happens now in 2019-2020?

Now the political perception situation has been altered. The Democrats will now control the House of Representatives. We can be pretty sure they will use this new found power both to impose gridlock on any new legislation President Trump would want and to harass him with various investigations for the next two years. Without control of the Senate, this will mostly be just noise, but will certainly insure that no further major agenda items for President Trump will go anywhere (the possible exception being some kind of infrastructure bill).

How will this impact markets and the economy?

It is too early to say right now. We will consider two alternatives in this analysis:

1) Gridlock along with continuing rising interest rates slows down the economy and cause some correction in the stock market, but not a severe decline.

We will call this the minor impact alternative. If this is what happens, we can expect that not all that much is going to change in the next two years and that nothing terrible will happen requiring someone to be "blamed for causing the problem". In politics, perception is pretty much everything. With a divided government where nothing major happens good or bad, it is pretty hard for either side to successfully blame the other side. Further stalemate seems the most likely outcome.

2) The economy rolls on over from here into a severe decline and the stock market takes a severe drop. The possible signs of a topping out and rollover we see now pick up momentum and turn into the major crisis so many have expected now for years. The entire financial system comes under risk once again (worse than the 2008 crisis).

Here is where it gets interesting. If we really do get into a major economic decline of the kind people like Jim Rickards have been predicting for a long time, someone is going to have to be blamed in an effort to push the political fallout their way.

We don't even have to guess what President Trump will do under this scenario. He has made it clear. He has already tagged the Fed for blame due to tighter money policies. And he has already made it crystal clear he will blame Democrats for a falling stock market.
So the President already has two convenient scapegoats lined up in case things really do go south significantly the next two years.

We can expect that Democrats along with all others opposed to President Trump will do everything they can to lay the blame on President Trump. Perhaps they will argue that the last two years were just a carry over effect from years of low interest rates and easy money policies that President Trump rode to its crest. Whatever they feel will resonate best with voters is probably what they will go with. But we can be pretty sure they will blame President Trump.

In the second scenario, the Blame Game likely ramps way up in 2019-2020. An already divided nation will probably see even more intensity on both sides as the political stakes for who the public blames for the crisis would be enormous. That may be hard to imagine given what we have already seen, but in any crisis things become even more intense. Also, under severe crisis conditions, the door tends to open wider for what are normally considered more extreme views to gain momentum. This could range from the socialist agenda coming from the left to the "end the Fed" agenda on the right. If a majority of the public views the present system as failing, they tend to be more interested in listening ideas for radical change.

It is this second scenario we should watch for and monitor carefully the next two years. If we get the first scenario. nothing major is likely to change in terms of our financial system or monetary system. But under the second scenario, the potential for some kind of major change increases and what that change looked like probably would depend on who the majority of the public blamed for the crisis (an unknown in a complex system).

I offer no predictions here. I just attempt to monitor events and offer the best analysis I can based on what actually happens. If I had to guess right now, I would guess scenario #1 above is more likely than scenario #2. But who really knows? The conventional wisdom has been wrong as often as it has been right in recent years.

Added note: Unless some significant news event arises to cover, this may be the last article on the blog for the next month or so.

Wednesday, November 14, 2018

Christine Lagarde and the IMF - Are They Proposing a New Global Digital Currency?

The short answer is no. At least not any time soon. The IMF releases this new study on the prospects for central bank digital currencies (CBDC's) and Managing Director Christine Lagarde offered her thoughts on the subject in this recent speech. Below are a few excerpts from each and then a few added comments.


From the speech by Managing Director Lagarde:

In this context, I would like to do three things this morning:
  • First, frame the issue in terms of the changing nature of money and the fintech revolution.
  • Second, evaluate the role for central banks in this new financial landscape—especially in providing digital currency.
  • Third, look at some downsides, and consider how they can be minimized.

. . . . . .

Let me conclude. I have tried to evaluate the case this morning for digital currency.
The case is based on new and evolving requirements for money, as well as essential public policy objectives. My message is that while the case for digital currency is not universal, we should investigate it further, seriously, carefully, and creatively.
More fundamentally, the case is about change—being open to change, embracing change, shaping change.
Technology will change, and so must we. Lest we remain the last leaf on a dead branch, the others having decided to fly with the wind.
From the newly released IMF study on Central Bank Digital Currencies:
-  CBDC could be the next milestone in the evolution of money. The history of money suggests that, while the basic functions of money might not change, the form does evolve in response to user needs. Digitalization of many aspects of economic activity is prompting central banks to seriously consider the introduction of CBDC.
-  CBDC is a digital form of existing fiat money, issued by the central bank and intended as legal tender. It would potentially be available for all types of payments and could be implemented with a variety of technologies. 
- Overall, the note finds no universal case for CBDC adoption as yet. From the perspective of end user needs, it finds that demand for CBDC will depend on the attractiveness of alternative forms of money. In advanced economies, there may be scope for the adoption of CBDC as a potential replacement for cash for small-value, pseudo-anonymous transactions. But in countries with limited banking sector penetration and inefficient settlement technology, demand for CBDC may well be greater.
- From a central bank perspective, the case for CBDC is likely to differ from country to country. CBDC may reduce the costs to society that are associated with the use of cash. Moreover, CBDC may improve financial inclusion in cases of unsuccessful private sector solutions and policy efforts. It could also help central banks bolster the security of, and trust in, the payment system and protect consumers where regulation does not adequately contain private monopolies. But regulation and, where possible, novel payment solutions could offer compelling alternatives to a CBDC.
For countries that decide to introduce CBDC, appropriate design and policies should help mitigate ensuing risks. Monetary policy transmission is unlikely to be significantly affected and may even benefit from greater financial inclusion. Moreover, though it will not eliminate illicit activity, CBDC may in some situations enhance financial integrity. However, it also entails risks for financial integrity if badly designed. In addition, although CBDC could increase the cost of funding for deposit-taking institutions and intensify run risk in some jurisdictions, design choices and policies can help ease such concerns. Nevertheless, operational and reputational risks arising from malfunctions of the digital infrastructure or cyberattacks are likely to remain as challenges.
Looking ahead, the cross-border implications of CBDC raise a multitude of new questions that merit investigation. For instance, from a practical standpoint, how would tourists be able to make payments in a foreign country that has adopted CBDC? Should foreigners have access to CBDC? To what extent would this complicate know-your-customer and AML/CFT compliance, and could standardized information be requested across countries? Would access to CBDC in a reserve currency (such as e-dollars) facilitate currency substitution in countries that have weak institutions? And to what extent might safe-haven flows be encouraged, potentially draining resources from countries that face banking, sovereign, or currency crises? Finally, if CBDC were used for cross-border transactions, how might central banks be required to cooperate? Would they absorb some of the functions of correspondent banks and thus take on additional liquidity, credit, and foreign exchange rate risk—or might tokens be created for cross-border payments among particular central banks, commercial banks, or firms? Research on CBDC should proceed resolutely given that the questions to be explored are deep and difficult and have far-reaching implications.
My added comments: At first glance, if you have not followed this topic for any length of time, it may appear that we have a bold new initiative from the IMF endorsing the use of central bank digital currencies within nations at first and later perhaps a new digital global reserve currency. Director Lagarde sounds somewhat like an enthusiastic supporter of the concept in her speech.
However, this is a topic we have covered here almost absurdly in depth. We even tossed out the idea of some kind of new digital global reserve currency that everyone might use from their cell phone a long time ago on this blog. Even before that we explored the idea of using the SDR for something like that. So this is not new ground here.
Digging into the conclusion section of the actual IMF study, I listed most of the key conclusions above and added bold type and underlines to some points I wanted to emphasize. Looking at these key points, it is clear that the IMF is not proposing a new global central bank currency like we have talked about here for some time any time soon. Rather this study focused on individual national central banks potentially issuing a digital version of their own national currencies and listed some pros and cons. This has been done over and over again around the world by individual central banks such as the BOE as well. 
The concept clearly gets a lot of attention and study, but nothing in these studies ever suggests that any major central bank is close to moving forward with actually implementing the idea. And it seems pretty clear from this new study that the IMF sees that as having to take place first before any kind of new global digital currency (like an e-SDR for example) might be considered. The study does go on to relist a number of problems and challenges to the idea that still have to be overcome as well.
None of this suggests to me that we are on the verge of anything like this happening soon. Clearly, the idea exists and has not been abandoned. But nothing in this new report suggests any further progress toward actual implementation has been made. 
The final words of the conclusion are: "Research on CBDC should proceed resolutely given that the questions to be explored are deep and difficult and have far-reaching implications."

Does that sound like a new digital global reserve currency is just around the corner? 
So I view this new study as just more of the same with no new information of substance provided from what we have already covered here in depth. But you can read through the entire IMF study to see if you agree or disagree with my conclusion on that.
Added note: This CNBC article adds a bit of extra information including the fact that Sweden may test a CBDC sometime in 2019.

Monday, November 12, 2018

Jim Rickards: "The US is Going Broke"

Following up on John Bolton's recent comments that US debt may pose a "threat to society", Jim Rickards explains that the US is continuing to go broke, slowly but surely. Below is an excerpt from his article on this.

"As Grant points out, the national debt has registered compound annual growth of 8.8%, but only 6.3% for GDP. That’s not a sustainable situation. And it’s not at all clear that GDP will close the gap.

Basically, the United States is going broke."
Additional comments: Not to worry though. No one really cares about this and it's pretty clear no one thinks it will ever matter in any meaningful way. The only time anyone expresses "deep concern" over this situation is when their political party is out of power. 

Now both parties have some power so no one has to bother with pretending to be concerned (unless polling indicates there is some political gain to be had). And we can be sure that any concerns that are expressed will blame the "other guys" for the problem if anything bad does actually happen. Markets should be pretty happy as all this is completely predictable and markets love that.

Friday, November 9, 2018

John Bolton - US National Debt a "Threat to Society"

We have heard this said many times, but White House National Security Adviser John Bolton is the latest official to point to the US debt as a systemic threat. His comments were widely reported and you can read them in this article (a couple of excerpts below).


“It is a fact that when your national debt gets to the level that ours is, that it constitutes an existential threat to the society,” Bolton said. “And that kind of threat ultimately has a national security consequence for it.”

While Congress will have the final say, Bolton also affirmed the White House Office of Management and Budget is planning 5 percent cuts across all government agencies for its fiscal 2020 budget proposal expected in February. That plan, which Trump disclosed at a Cabinet meeting on Oct. 17, has prompted “howls of outrage … from various parts of the government,” Bolton said."

My added comments: This is nothing new and we have reported comments similar to this for years. here. Readers who want to look at an in depth article that does a good job  of summarizing the overall situation may want to read this article by James Grant. Below are a couple of excepts from that article which points out that despite massive US debt and deficits, markets so far have not reflected any concerns. The conditions for problems are always out there, but until the stock and bond markets reflect concern, no one is motivated to do anything to change the status quo.

"America’s deteriorating public credit is the cold-button issue of the 2018 midterms. With rare bipartisanship, Democrats and Republicans compete to pretend that the country isn’t going broke. In 1992, the third-party presidential candidate Ross Perot likened the widening gap between federal receipts and federal spending to “the crazy aunt tucked away in the room upstairs nobody talks about.” The old gal’s dottier than ever."

. . . .

"The sophists and economists who contend that we ought to borrow because, at an interest rate only slightly over 2 percent, we can hardly afford not to borrow, have a point of a kind. In 1988, on a debt of $2.6 trillion, the Treasury paid net interest of $152 billion. In the just-ended fiscal year, on $21.5 trillion of debt, the Treasury paid net interest of $371 billion. Thus, over the past 30 years, the debt jumped by 727 percent, the cost of servicing it by just 144 percent. To the casual question, “What’s the harm in the Treasury’s availing itself of the market’s over-generous hospitality?” there is no casual, tweetable answer."

. . . .

"But the 21st-century Treasury is under no pressure to take such actions (to reduce the debt). Its creditors, for now, seem perfectly happy. Though the supply of government securities on offer this fiscal year, from all sources, including the Federal Reserve, is projected to be the greatest, as a percentage of national output, since World War II, interest rates have risen only by enough to rattle President Trump and (at this writing) the stock market; the government is still easily financing its $3.9 billion or so of daily new borrowing needs. The dollar-exchange rate likewise signals complacency. In the worldwide laundromat of fiat money, the dollar is the cleanest dirty shirt."

Wednesday, November 7, 2018

Mid Term Election Analysis

As expected, the mid term elections were mostly a non event other than the Democrats taking control of the House. That will certainly ramp up division even more and we can expect a lot of efforts to investigate and/or impeach President Trump. 

This will all mostly be window dressing as with a solidly GOP Senate, impeachment efforts will go nowhere eventually. They might disrupt markets though and we can expect continued volatility there. We are due for a recession now so that might be likely to happen during these next two years. The Democratic take over of the House will provide Trump and Republicans with a scapegoat for that now which did not exist prior to this election. All this is pretty predictable.

I don't see anything from this election at this time that would lead to major monetary system change unless we get the new major crisis many have predicted for a long time now. So nothing has really changed much.


Unless something dramatic does happen to the overall economy and markets, it now seems pretty likely that President Trump will be re-elected to another term. I say this because we did not see a major voter revolt against President Trump in this election as some were expecting. Instead, we saw voters in some areas not happy with President Trump elect enough Democrats to the House to create a check on his ability to move forward much more with his agenda. So, we can expect mostly gridlock for the next two years. 

Gridlock is not likely to hurt his chances for being re-elected because he will just blame the Democrats for being obstructionists and his voters will be fine with that explanation. If Democrats spend the next two years just trying to impeach him, that will actually probably play to his advantage in 2020. In some ways, the result of this election may have actually helped him out.

In addition, with the GOP winning key Senate races and governor races in Ohio, Florida, Georgia, and Iowa, he will have strong state level support in those key states in 2020. Also, the Republican side of Congress is now much more pro Trump, especially in the Senate where Senators who were critical of Trump were replaced with pro Trump Senators.

On top of all this, now if the economy and markets take a nose dive in the next two years, Trump now has the perfect scapegoat available. It will all be because the Democrats took over the House, blocked his agenda, and ruined the economy. We can predict this will be his talking point under that scenario. Again, it is almost a perfect setup to run for re-election in 2020.

Conclusion: As usual, after all the hand wringing and hyperbole, the election was really mostly a non event for a mid term election. The party in power always loses seats and this was a relatively minor loss from a historical standpoint. It will likely create full on grid lock once again, but we as a nation are pretty used to that anyway and many voters seem to actually prefer it.

Nothing from this election seems likely to promote any major changes in our monetary system or anything else for that matter for the next couple of years. Maybe they will pass an infrastructure bill, but it seems unlikely much else will happen. In the Senate, Presidential nominees should make it through quicker and easier now, but that should have little or no impact on the economy or monetary system.

Saturday, November 3, 2018

Off Topic - Search for the Good - Part II

Last month we ran this way off topic post in an effort to demonstrate that despite all the division and problems we see around us daily, there is plenty of good being done in the world if you take just a bit of time to look for it. This month I am happy to offer yet another off topic post along these lines.

My daughter made me aware of this inspiring project. It's about a man who is dedicated to raising private funding for water wells in Liberia where clean fresh water is not available to many people. To focus attention on the problem, this man made a vow to live on a homemade floating barge on a local lake in our area until he had raised his goal of about $2.3 million for water wells in Liberia. The company my daughter works for is helping to sponsor this effort and asked her to write an article on it which you can read by clicking here. Below are a couple of excerpts from the article.

"This fall Todd Phillips, the Founder and Executive Director of the nonprofit organization The Last Well, is bringing “living water” to the country of Liberia by living on the water himself.

. . . . 

Phillips is living on a barge floating in Lake Ray Hubbard indefinitely until The Last Well reaches its fundraising goal of $2,290,000. As of October 26, 2018, Phillips has been living on the barge for 17 days and has raised $1,381,128–60% of total goal.

The concept for The Last Well Fundraiser was designed to call attention to the fact that while we have an abundance of clean drinking water in America, Liberians do not have this basic necessity.

“Most of the drinking water for East Dallas comes from Lake Ray Hubbard,” Phillips said. “We wanted to do something that shows we have water, but they don’t, and that’s not ok.”

                                 Todd Phillips
                                                     Todd Phillips of Last Well
My added comments: While politicians and others around them spend enormous amounts of time and money to try and obtain political power and influence, it is so inspiring to see people give up their own time and money just to try and help others in need. 

When we see this attitude become more prevalent again in our society, maybe we can start to move towards healing some of the divisions at least in a small way. Everyone needs water and I can't imagine anyone not wanting this effort to be successful.

Added note: I do not know Mr. Phillips personally, but I certainly admire the sacrifice he is making to try and raise these funds. Weather in our area has been very harsh at times in recent weeks with rain and thunderstorms while this barge has been floating out on the lake. He provides a nightly Facebook live update for followers here.