Saturday, December 29, 2018

News Note: US Dollar Share of Global Currency Reserves Falls Slightly

For some time, many have been predicting that the US dollar will lose its place as the worlds global reserve currency. Also, for many years now, Russia and China have clearly been working to try and find ways to bypass use of the US dollar. Recently, sanctions imposed by the US has added some incentive for other nations to continue to pursue this goal.

This new end of 2018 Reuters article notes that despite all of the above, the US dollar remains firmly positioned as the world's global reserve currency despite falling slightly in its allocated share against the Euro and the Yen. The Yuan has made virtually no progress in its allocated share of global reserves. Below are a couple of excerpts and then a few added comments.


"Reserves held in U.S. dollars rose to $6.63 trillion, or 61.94 percent of allocated reserves, in the third quarter, from $6.56 trillion, or 62.4 percent, in the second quarter. The share of allocated U.S. dollar reserves declined to its smallest since the 61.27 percent in the fourth quarter of 2013, IMF data showed."

. . . . .

"Ranked second behind the greenback, the euro’s share of global reserves climbed to 20.48 percent, its biggest since the fourth quarter of 2014. It was 20.25 percent in the quarter before."

. . . . 

"The share of allocated currency reserves held in yuan, also known as renminbi, slipped to 1.80 percent in the third quarter from 1.84 percent in the prior quarter."

My added comments: The headline on this article states the share of US dollar as global reserves is near a five year low, so the dollar is gradually losing a bit of global share. However, the year to year changes are still very small overall and the share of US dollar reserves is actually a bit higher now than at the end of 2013 five years ago. 

This is why we have said here that we expect very gradual changes to take place without some kind of new major global crisis. The status quo is very entrenched and it appears that only something that completely disrupts the existing monetary system would speed up the pace of change. We watch for such events and will report them if they do emerge.

Monday, December 24, 2018

News Note: Treasury Secretary Calls Major Banks

This bit of news is attracting some attention since this is the kind of activity that sometimes goes along with a fear of liquidity problems in the system. Too early to tell if this is significant or just routine. Markets are clearly in bear mode and oil is crashing so its appropriate to watch things closely now heading into next year.

Below I have linked to Jim Rickards Twitter feed comments on it for reference.


Jim Rickards Twitter Feed Comments:

Comment #1

Comment #2

Tuesday, December 18, 2018

Jim Rickards - Russia, China Creating a Bypass System to the US Dollar?

In his latest interview with Alex Stanczyk, Jim Rickards describes ongoing efforts by Russia and China to create a bypass system to the US dollar. You can hear Jim detail how this might function starting at around the 23 minute mark of the video through the 30:20 minute mark.

Below I have embedded the video and pasted in the list of topics discussed. Below that are a few added comments.


Topics Include:
*Implications of the USMCA between the US, Canada, and Mexico *The importance of Robert Lighthizer’s role in US trade negotiations *Update on tensions between Russia and Ukraine *Russia’s “buffer states” of outlying countries *How Russia’s gas pipelines running through Ukraine are critical infrastructure
*Why Russia purchasing close to 30 tons of gold per month is a strategic move (23 minute mark)
*How a decentralized permissioned ledger cryptocurrency sponsored by Russia and or China and settled in physical gold could be the next system used by sovereigns to settle net trade balances without using the US dollar
*Why Switzerland could be an ideal location to settle net payments in gold *Update on Saudi Arabia stability, succession, and world relations *Thoughts on the G20 upcoming meetings and trade negotiations *Update on Fed monetary policy and interest rates

My added comments: This information from Jim Rickards is interesting and fits in somewhat with we understand here. It does not appear that any major western central banks or the IMF are close to implementing any kind of blockchain based "digital currency" or central bank digital currency (CBDC) unless you view the possible attempt by Sweden in 2019 as an effort by a major central bank. Of course that would just be for their own national currency.

With this in mind, we also know that Russia, China, and the other BRICS nations have been working on ways to try and bypass using the US dollar for a variety of reasons despite somewhat limited success thus far. So, the system Jim describes here does make sense. If the IMF is not ready to try and go forward with a "e-SDR" as a possible substitute for the US dollar any time soon, we would certainly expect that these nations would move forward on their own to try and figure out ways around the US dollar and SWIFT based system.

This is a legitimate potential disruption to the present monetary system to keep an eye on in our view here. Another different one is the Kinesis project that will attempt to launch in the spring of 2019 and will be based on stable coins tied directly to physical gold and silver. That project continues to move forward slowly but surely, but won't attempt to go live until May of 2019 according to their current timeline.

We'll continue to monitor events and watch for any potential disruptive events to the present monetary system even as we have nothing to report right now that anything is on the near term horizon. (note: Jim does suggest that the system he describes in the video might be able to function within the next twelve months).

Sunday, December 9, 2018

Agustin Carstens (BIS) -- Money and Payment Systems in the Digital Age

This recent speech by Agustin Carstens of the Bank for International Settlements (BIS) is further confirmation of what we have been reporting here for some time. He talks about money and payment systems and looks forward to what we might see in the future in terms of "digital money". Please note that he does not see any immediate future for either cryptocurrencies or Blockchain/DLT technology implementation at central banks. Below are a few excerpts from the speech. (I added some bold type and underline for emphasis)


Regarding the use of  Blockchain/BLT technology in central banks:

"One interesting development in the central banking community is ongoing experimentation with distributed ledger technology (DLT) as a means to enhance operational robustness. People often use DLT and Bitcoin interchangeably, but they are not the same! It is important to emphasise that DLT is the underlying technology for Bitcoin, which is just one use case. DLT is simply a set of processes and technologies that enable multiple computers to maintain collectively a common database. DLT does not mean mining of coins, public ledgers and open networks. And no central bank that I’m aware of is contemplating these properties in its DLT experimentation.

While central banks play around more with DLT, I think it would be useful to highlight two findings. The first is a Bank of Canada study noting that a DLT-based payment system meeting central bank requirements would be similar to what we have today (ie private ledgers, closed networks and a central operator). The difference is that a network of computers would be used to settle a transaction instead of one computer. The second is an ECB and Bank of Japan study concluding that processing times would be three times longer using DLT versus current systems. This may not seem like much when processing times are measured in seconds, but today’s standard is instant. My take is that current versions of DLT are not any better than what we already have today."

Regarding a Future for Cryptocurrencies in Central Banks:

"As a means of payment, the acceptance of cryptocurrencies has not reached critical mass and is unlikely to do so for a number of reasons. First, the system is highly inefficient and expensive. As highlighted in the BIS’s Annual Economic Report, the energy and computing costs associated with cryptocurrencies amount to an environmental disaster."

. . . 

"All evidence to date points to the conclusion that cryptocurrencies face inherent limits in terms of efficiency and scalability."

. . .

What’s next? 

"Money and payments continue to evolve, and I think the future is promising. I see more robust and resilient systems from central banks offering immediate settlement. I see foundations being laid for new, innovative front-end user interfaces that provide convenience, promote financial inclusion and permit increased economic activity. I see infrastructure being developed that will allow for more efficient and cheaper crossborder payments and remittances. I see central banks continuing to play a critical role in pushing the boundaries of how technology can enhance the payment landscape.

 In doing so, central banks will need to monitor and manage new and different risks arising from the latest technologies. The use of DLT and other technologies, such as artificial intelligence and quantum computing, comes with new challenges. We still need to address questions related to the use of newer technologies, including reliability and security; interoperability between new and existing systems; the legal underpinnings of the processes associated with the technology; and data integrity and privacy. These issues are not easy, and addressing them will probably take some time given their complexity. 

What I struggle to see, however, is cryptocurrencies taking off in any major way. Cryptocurrencies, as a unit of account and payment instrument, simply cannot compete with the value proposition offered by central banks and their systems. It is hard to compete with human intelligence and experience in managing processes and systems. It is hard to beat instantaneous settlement, which many central bank  payment systems provide. It is hard to replicate the enormous network that exists with today’s payment infrastructure."

My added comments: For some time now, we have reported here that despite constant news articles proclaiming the age of blockchain based digital currencies has arrived, central banks and organizations like the IMF and BIS have not endorsed the technology as anything particularly new and innovative for their needs. At least none of the currently available versions. They mention ongoing studies of the technology, but also always include all the challenges and complicated problems associated with it. They include a statement along the the lines of "this will require further study and will take some time" etc.

This has gone on for years now with no indication that anything major is on the near term horizon. We hear that Sweden may attempt to try a central bank digital currency sometime in 2019.

All this is in line with what I hear from highly credible sources who work directly in this field on the front lines on a daily basis. Therefore, we continue to report that we find no evidence that any kind of blockchain based digital currency is on the near term horizon for either any major central bank or the IMF. If we hear new information, or the situation changes, we will of course report it.

Monday, December 3, 2018

Claudio Borio (BIS) - Cato Institute Speech

Recently, Claudio Borio of the Bank for International Settlements (BIS) gave this speech at a Cato Institute Monetary Conference in Washington DC. Below I have pasted in the Conclusion section of the speech and then a few added comments.



Let me conclude. The monetary system is the cornerstone of an economy. Not an outer facade, but its very foundation. The system hinges on trust. It cannot survive without it, just as we cannot survive without the oxygen we breathe. Building trust to ensure the system functions well is a daunting challenge. It requires sound and robust institutions. Lasting price and financial stability are the ultimate prize. The two concepts are inextricably linked, but because the underlying processes differ, in practice price and financial stability have often been more like uncomfortable bedfellows than perfect partners. The history of our monetary system is the history of the quest for that elusive prize. It is a journey with an uncertain destination. It takes time to gain trust, but a mere instant to lose it. The present system has central banks and a regulatory/supervisory apparatus at its core. It is by no means perfect. It can and must be improved. But cryptocurrencies, with their promise of fully decentralised trust, are not the answer

Paraphrasing Churchill’s famous line about democracy, “the current monetary system is the worst, except for all those that have been tried from time to time”.


My added comments: My take on these comments is that Mr. Borio is not calling for any kind of radical change to the existing monetary system. He seems more to indicate it should just stay as is with some continued tweaking at the margins now and then. This is consistent with what we have reported here for some time now.

Please also note that he sees no significant future for cryptocurrencies. 

Added note: I also continue to believe that neither the IMF nor any major central bank is on the verge of trying to implement any kind of cryptocurrency or blockchain based system at this time. I base this on information from sources I view as highly credible. I will have an additional article along these same lines in a week or so based on a new speech from the BIS.