Monday, January 28, 2019

Some News Notes from the IMF, The Fed, Etc

Below are links to some recent news that may be of interest related to various things that can impact the financial and monetary system. Overall, the consensus seems to be that the global economy is starting to slow down and central banks may be preparing to try and adjust to that situation once again.

The Telegraph UK: IMF fears political rage will block Federal Reserve's rescue efforts when the next crisis hits

"The International Monetary Fund has warned the system of global cooperation that saved world finance in the 2008 crisis may break down if there is another major shock or a deep recession.

David Lipton, the IMF’s second-highest official, said it is unclear whether the US Federal Reserve would again be able to extend $1 trillion of dollar "swap lines" to fellow central banks - the critical measure that halted a dangerous chain-reaction after the collapse of Lehman Brothers and AIG.   . . . "

Wall Street Journal: Fed Officials Weigh Earlier-Than-Expected End to Bond Portfolio Runoff

"Federal Reserve officials are close to deciding they will maintain a larger portfolio of Treasury securities than they'd expected when they began shrinking those holdings two years ago, putting an end to the central bank's portfolio wind-down closer into sight.

Officials are still resolving details of their strategy and how to communicate it to the public, according to their recent public comments and interviews. With interest rate increases on hold for now, planning for the bond portfolio could take center stage at a two-day policy meeting of the central bank's Federal Open Market Committee next week.   ..."

RT (Russia Today): Let's Replace US dollar with Russian gold, Moscow Exchange chief suggests

Let’s offer an alternative to the US dollar in the form of Russian gold, which we produce… investment gold,” CEO Alexander Afanasiev suggested, speaking in the Lower House of Russia’s parliament on Monday.   . . ."

IMF Blog: A Weakening Global Expansion Amid Growing Risks

"While global growth in 2018 remained close to postcrisis highs, the global expansion is weakening and at a rate that is somewhat faster than expected. This update of the World Economic Outlook (WEO) projects global growth at 3.5 percent in 2019 and 3.6 percent in 2020, 0.2 and 0.1 percentage point below last October’s projections.  . . ."

Bank for Internaional Settlements (BIS): Risk Exposure at the lender/investor of last resort

"We address to what extent a central bank can de-risk its balance sheet through unconventional monetary policy operations. To that end, we propose a novel risk measurement framework to empirically study the time variation in central bank portfolio credit risks associated with such operations.  . . ."
Added note: Here is a link to an alternative media take on the situation that argues that the Federal Reserve may be leading the US back into a new recession with its QT policy. It is a pretty in depth look at that point of view for anyone interested:

The Great Recession Blog: How the Federal Reserve's Unwind is Unwinding the Recovery

"The Fed is also tightening as global trade is tightening and as tariffs are going up, making things more expensive to consumers. It’s also doing something that makes a lot of people feel unsettled, rather than something that makes them feel happier. No one is likely to enjoy unwinding as much as they enjoyed economic stimulus. The Fed is unwinding in an unforgiving environment that might be more reactive to withdrawal than a stifled economy is to stimulus."

Monday, January 21, 2019

Claudio Borio (BIS) - On Money, Debt, Trust, and Central Banking

Following his recent speech which we noted here, Claudio Borio of the Bank for International Settlements releases this new working paper. The conclusion section of this new paper (shown just below) sounds very much like the conclusion of his recent speech. (I added the underlines for emphasis)



"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 others that have been tried from time to time”.

My added comments: These remarks illustrate the very cautious nature of central bankers and why change tends to take place very gradually over time. Unless there is some external force that creates the incentive for a rapid response by central banks, they tend to stick with the status quo with occasional tweaks to the system.

So, are there any challengers to the existing system that might emerge to offer an alternative? Right now, the answer would seem to be no. So long as the overall global financial system is perceived as being orderly and reasonably stable, the overwhelming majority of the general public is not actively looking for alternatives. We see some offered in the cryptocurrency venue, but with nowhere near widespread public adoption.We see some new and creative ideas emerging (like SAGA and Kinesis that we have noted here) but those are still in their infancy.

The big question will arise if and when we get a new global financial crisis so large that the stability of the present system is truly shaken. In that event, the public will be awakened. Two major factors will be important in such a crisis scenario:

1) Who does the public blame for the crisis disrupting their daily lives?

2) If the public blames the existing power structure (the central banks and the associated regulatory apparatus mentioned in the paper above), will the public then seek out radical new alternatives?

If we live in a complex system as Jim Rickards describes, the answers to the above two questions seem unknown. But one thing that we can observe is that absent a major crisis, the status quo tends to prevail and radical changes don't seem likely.


Tuesday, January 15, 2019

The Case for The Fed and Central Banks Creating Market Bubbles

There has been much ongoing debate over the past 10 years about whether or not central bank monetary policies (led by the US Fed) have really solved problems in the long term or not. Most everyone agrees that without the central bank intervention that took place, the world was probably facing some very hard times and even a deep depression.

The debate that has endured is about whether or not the policies used to stave off a potential deep depression and even possible collapse of the entire system have really solved anything going forward from here. The question hanging over markets all these years since the QE and low interest rate policies were implemented is: What happens when the monetary stimulus ends?

This is still hotly debated and we are all still watching closely to see how that question will be answered. In this recent article on MarketWatch, Sven Henrich lays out his case for the argument that all the central bank stimulus has just propped up markets and created the false impression of growth rather than real GDP growth. Now that world markets are showing signs of fatigue, this argument will likely pick up momentum if things keep going south during 2019. Below are a few excerpts from the article.


"For years critics of U.S. central-bank policy have been dismissed as Negative Nellies, but the ugly truth is staring us in the face: Stock-market advances remain a game of artificial liquidity and central-bank jawboning, not organic growth. And now the jig is up.

As I’ve been saying for a long time: There is zero evidence that markets can make or sustain new highs without some sort of intervention on the side of central banks. None. Zero. Zilch.

And don’t think this is hyperbole on my part. I will, of course, present evidence.

. . . . .

My added comments: It is important to watch this situation closely because markets have moved into bear market status recently. If this trend continues and we start to see signs of more severe problems in both markets and the actual main street economy as well, the huge blame game is likely to ramp up and who the public blames for the problem will be very important in terms of how the problem is addressed. Of course there will be huge political ramifications as to who is blamed as well.

If all we are seeing is normal market corrections off of all time highs, perhaps this issue goes away at least for awhile longer. But if the storm gets worse, we must pay close attention to it. 

Monday, January 14, 2019

News Note: Newmont Mining Buys Goldcorp

Today we get this news on CNBC that major gold miner Newmont will be buying out Goldcorp creating "the world's biggest gold producer by output". Below are a couple of excerpts and then some added comments.


"Newmont Mining said on Monday that it would buy smaller rival Goldcorp in a deal valued at $10 billion, creating the world’s biggest gold producer by output.

The deal is the second high-profile merger in the mining industry since Barrick Gold agreed to buy Randgold Resources Ltd in September last year to cut costs."

. . . . . .

My added comment: Having worked in the oil and gas industry for many years at a company that buys oil and gas reserves from other companies, I can observe that these large mergers/buyouts in the gold industry suggest that the executives for those companies think that gold is near a bottom for it's price cycle and likely to start into a longer term move higher (start a new upleg cycle). If you believe that, you would be very aggressive in trying to buy up as many reserves as possible before prices go somewhat higher. So I would tend to interpret this news in that way.

Tuesday, January 8, 2019

BIS Survey on Central Bank Digital Currencies

One area of potential change for the existing monetary system relates to the possibility of central banks moving towards the creation of so called central bank digital currencies (CBDC's) for their national currencies. We have watched this space because if central banks were to move in that direction it might indicate that a new global digital currency using the SDR at the IMF could arise as competition for the US dollar. The SDR is a logical choice for such a currency since it already is sanctioned for use globally by IMF member nations.

In addition to the above, there have been a lot of articles in various media written suggesting that a new digital global currency based on the SDR is near at hand from the IMF. We have worked hard here to follow that story as best we can. We have reported that although the IMF has talked about and studied this idea, we find no evidence that something like this is near at hand. Also, very credible sources have told us that while all kinds of studies about the potential use of a blockchain based global currency have been done, there is no movement so far towards this by the major central banks or the IMF at this time. 

Now we have direct confirmation of what we have been reporting here from a new survey done by the Bank for International Settlements. The survey clearly shows that what we have reported here has been accurate and that our sources were well informed on the current status of this issue. Below I have pasted in the Conclusion section of the BIS survey article followed by a few comments. (I added the underlines below for emphasis)



"Most central banks are conducting research into CBDC. Many are progressing from conceptual work into experimentation and proofs-of-concept, including in cooperation with other central banks. Nonetheless, motivations for issuing a CBDC are largely idiosyncratic (eg falling availability of cash in a jurisdiction). This has meant that only a limited number of central banks are proceeding to the pilot stage with CBDCs, and even fewer see issuance of a CBDC as likely in the short or medium term.

At this stage, most central banks appear to have clarified the challenges of launching a CBDC but they are not yet convinced that the benefits will outweigh the costs. Those that do see clear benefits are predominantly from EME jurisdictions. From survey responses, this seems to be because financial inclusion projects create a clear mandate for central bank action, and a lack of current infrastructure limits the disruption a CBDC could create while simultaneously encouraging the use of new technology.

The trends identified in the survey are likely to continue. Different central banks will continue to move at different speeds. This creates a potential risk for spillover effects across borders (CPMI-MC (2018)). However, the evidence from this survey is that central banks are proceeding cautiously, and also that they are collaborating and  sharing the results of their work. Caution and collaboration will reduce the likelihood of unintended consequences.

To meet the payment needs of the future, physical cash is unlikely to be the main answer. Yet, most people will have to wait to use a CBDC. However, central banks are working hard to make sure the wait is worth it."

My added comments: Please note the underlined portions of the Conclusion quoted above. This new BIS survey confirms that what has been reported here is accurate. We have said here that unless we get a new major financial crisis (perhaps worse than the 2008 crisis), we should expect changes to the existing monetary system to move along gradually. 

The most logical path towards some kind of new global reserve currency to replace the US dollar within the existing system would be for the major central banks to implement digital currencies for their own national currencies first. This would allow for the real world testing of new technology on a case by case basis. After the technology has been tested and proven to work, perhaps the IMF could then move towards using it for the SDR later on. (note: one expert told me he thinks there may actually a stronger case for a digital SDR than for central bank digital currencies).

However, at this time, global demand for use of the SDR to replace the US dollar is very limited. China and Russia have talked about this, but no serious movement towards that has taken place so far. I believe that a project to try and promote increased demand for using the private SDR as a unit of account and for invoicing in global trade would be a logical first step towards tying to increase global demand for using the concept of the SDR more broadly in the private sector. But this would still be outside the IMF and would not directly involve the use of the official SDR used at the IMF. 

The BIS does mention that eventually we may see reduced demand for the use of physical cash and in fact in some nations this is already happening (Sweden is an example). However, this NYT article notes that even in Sweden officials are not sure this is the best path to take and that some are trying to slow the process down to keep cash in circulation.

Critics of the existing monetary system as run by the central banks view the removal of cash  as a negative development for personal privacy in business transactions and most central bank studies on central bank digital currencies list this as one of the challenges for implementing a CBDC. The US Fed has shown no urgency in moving towards the removal of cash in the US. 

There is no indication at this time that we are close to the so called "cashless society" we see discussed and debated, but we are slowly moving in that direction naturally as more and more people just use debit and credit cards to make payments. 

What could speed up potential for change? It would probably take a severe crisis that challenged the stability of the existing monetary system. Otherwise, as the BIS survey reports, central banks do not feel any urgency to move rapidly towards change. We can expect that they will simply move forward gradually along they path they are on now in terms of looking at CBDC's unrelated to any new crisis.

Tuesday, January 1, 2019

What to Watch for in 2019

As we move into 2019, we still do not have anything significant to report here in terms of major monetary system reform or even some kind of new global monetary system. We have attempted to cover this issue as in-depth as possible based on whatever we could find on the topic.

What we have learned over the last few years is changing from the status quo is something much talked about, but very much harder to actually do. It's not that there is any shortage of ideas for reform. We have covered many such ideas here. Also, the financial crisis of 2008 clearly ramped up discussion of the idea of monetary reform more than anything I can recall in my lifetime (I am now 63). There is an ongoing debate about whether the measures taken to recover from that crisis have actually worked or not and that debate will no doubt continue on. Organizations like the IMF and the BIS have issued multiple systemic risk warnings since 2008 and even today still don't rule out another major global crisis. People like Jim Rickards continue to predict that the next crisis will dwarf the 2008 crisis and that major monetary system change will be essential at that time.

Meanwhile, despite all of the above, the status quo has managed to survive and the US dollar based global monetary system just rolls along even as various efforts to move away from the US dollar continue. Efforts to challenge the central bank based system have also arisen with the "blockchain technology" buzz first surfacing around Bitcoin and then speading out to all kinds of blockchain based alternative ideas (SAGA and Kinesis are a couple of newer examples). Despite the blockchain buzz, the information we have here suggests that major central banks and the IMF are not on the verge of implementing blockchain based technology for either national currencies or the SDR at this time. They do issue a lot of studies on the topic which mostly just continue to point out the pros and cons and then conclude by saying they still see a lot a major issues and challenges for using blockchain.

Below is my best guess at some things to watch for in 2019. I won't publish many articles until there is evidence that something truly significant impacting the present monetary system is actually happening. Until that happens, we can expect the status quo to continue to prevail.

1) Will we get a new major financial crisis? (perhaps worse than 2008) - this would be the most likely event to prompt some kind of monetary system change which is why we must watch for it. Lately, we see global stock markets possibly rolling over into bear markets and rising interest rates could add more problems for consumers and real estate (while helping out retirees with savings earning interest). Oil and other commodity prices have crashed heading into late 2018. Are these signs that the economy is rolling over? Will these problems pick up momentum or are we just seeing normal market corrections? Is the so called "everything bubble" that some say central bank easy money policies have created starting to pop? All these are questions worth asking for 2019.

2) Will the Blame Game Ramp Up in 2019-2020 heading into the next US Presidential election? We wrote an article on this in November 2018 and don't see anything that changes what we wrote in that article (in fact everything we see happening further confirms that analysis). If we get a new major financial crisis under President Trump, expect the efforts to assign the blame to him by his opponents and by him to assign the blame on the US Fed to go through the roof. Who the public does blame will be a huge factor in what happens next. I offer no predictions on that.

3) Will one of the new blockchain based initiatives (like SAGA or Kinesis noted above) emerge in 2019? I don't know, but they are worth monitoring to see what happens. Again, a new major crisis will no doubt create public doubt in the current system (central banks, etc) and this might trigger a more massive search for alternatives. Or at a minimum, there may be calls for major reform within the central banking system.

4) Will any major central banks adopt a central bank digital currency (CBDC) with or without using any kind of blockchain technology? Sources I view as credible report that the adoption of blockchain technology at major central banks or IMF is unlikely any time soon. If that should change, we will report that here. Sweden may attempt a try at a central bank digital currency during 2019, so watch for that.

5) What happens with various trade war issues (sanctions and tariffs)? I have tended to assume these are just temporary tools intended just to gain leverage in negotiations, but if they continue to drag on (or even intensify), they could certainly add to overall systemic risk and increase the incentive for other nations to try and bypass the US dollar. I appreciate the input from some experts who called this potential problem to my attention as another issue to keep an eye on in 2019.


As always, the most likely trigger for some kind of major monetary system change would be a new major global financial crisis (which plenty of people are still predicting will happen). Without such a crisis, very slow and gradual change to the status quo appears most likely. In such a crisis, who the public blames for the crisis will be hugely important. Now there are some emerging proposed alternatives to the current central bank run monetary system that could become truly competitive if the public loses trust in these institutions in a new crisis. 

Also, the political ramifications of who gets blamed would play a role as well. We can expect that the solutions to a new major crisis would vary greatly across the political spectrum ranging from calls to disband the Fed to full implementation of a more socialist style economy (such as proposed by Bernie Sanders).  What President Trump might propose to deal with a new major crisis is a complete unknown.

We make no predictions here, but these are the major issues we can think of to watch for in 2019 that we will keep an eye on here. 

Added note: I had a number of experts from around the world review this update and the general consensus was that it seems to be a fair analysis of the issues to keep an eye on in 2019. They also called my attention to item #5 as one to add to the list which I had overlooked in my original draft.