Tuesday, May 21, 2019

News Notes on a Variety of Topics -- John Stossel Reviews "In Money We Trust" PBS Documentary

While we don't see anything on the near term horizon that might trigger major monetary system change, below are some links to some recent news articles on a variety of topics that might be of interest are related to things that could eventually impact monetary system or monetary policy change.


This article appearing in Fortune asks if Federal Reserve policies have contributed to the income inequality that is fueling debate heading into the next election cycle. Here is a quote from the article:

"Income inequality in America has worsened in recent decades. Many on the left, buttressed by a not-insignificant number of those on the right, have argued for an increasingly progressive income tax code to tackle this problem.

But they’re focusing on the wrong solution—instead, the target ought to be the Federal Reserve."  . . . .  click here for the full article

Recently, we featured a speech by Agustin Carstens (BIS) that provided an update on the status of central bank efforts to look at blockchain and central bank digital currencies. He stated that process is ongoing, but that most central banks are not moving forward with digital currencies or blockchain so far. This article in Bloomberg does mention some testing going on between Canada and Singapore related to blockchain (see joint statement here). This still appears to be early stage type testing, but is some movement that was recently in the news.

In the latest BIS newsletter, Agustin Carstens is again featured talking about financial innovation as it may relate to financial inclusion. You can read that speech by clicking here.

"Financial inclusion is the gateway to increased prosperity. Central banks play a key role simply by fulfilling their price and financial stability objectives. At the same time, innovation and technology are needed too."  -- Agustin Carstens

My added comments: In April and May we have tried to provide a variety of good educational material for anyone interested in the topics covered here. Please skim back over April and May if you have not seen all the articles. There is a lot of good information from a variety of credible sources. 

Related to that, John Stossel produced this article on Reason and the video below summarizing the PBS documentary "In Money We Trust" that we featured here in April.

Other news headlines to keep en eye on that could impact markets: 

- possible release of classified documents related to the investigation of President Trump
- ongoing trade war between the US and China with G20 meeting coming up in June
- US dispute with Iran seems to be ramping up
- any further nominations to the Federal Reserve (Judy Shelton and Derek Kan have been mentioned in recent news articles). In this new interview on CNBC Judy Shelton provides some insight on how she might try to impact thinking at the Fed if nominated and confirmed.

On the above list, the first three are more likely to possibly impact markets than the last one. It seems like no matter what happens, markets just plug along and show no indications that any kind of serious disruption to the existing order is even possible. But we still have to stay alert and monitor events that have the potential to rattle markets.  

Monday, May 20, 2019

BIS Monthly Newsletter

Below I have pasted in the monthly email newsletter from the Bank for International Settlements (BIS). One article featured this month is another recent speech by General Manager Agustin Carstens on financial innovation as it may relate to financial inclusion. (click here for text of speech)


May 2019

Partners in financial inclusion 

Central banks and innovators are vital partners in the quest to further financial inclusion, says Agustín Carstens, delivering the C D Deshmukh Memorial Lecture at the Reserve Bank of India.

Exchange rates and global imbalances 

Hyun Song Shin explains why a stronger dollar can result in weaker lending, and be a drag on manufacturing and trade.

The euro: down but not out

Claudio Borio says the euro’s heft has increased in three significant but underappreciated respects.

New Consolidated Basel Framework

The Basel Committee’s global standards for bank regulation and supervision have been consolidated into a single consistent format.

Big tech and the changing structure of financial intermediation

New research uses detailed data from two big tech lenders to examine the forces behind big technology firms’ entry into finance and to test their information advantage.
More BIS publications 

Survey: BIS statistical tools
Do you use BIS statistics? Help us design the next generation of statistical tools by providing your feedback in a short online survey.

Statistics: Growth in US dollar credit slows
Growth in dollar credit to non-bank borrowers outside the US has slowed further, to a decade low, with the deceleration particularly marked in debt securities.

Working paper: Does informality facilitate inflation stability?
Many emerging markets have a large informal sector. Informality can mitigate inflationary pressures but reduces the effectiveness of monetary policy.

Sunday, May 12, 2019

Jim Rickards Discusses His New Book - "Aftermath"

Readers here know that I have followed Jim Rickards for many years because of his extensive understanding of the issues we cover here and because he has talked about the potential for major monetary system change. That is what this blog was created to watch for.

Jim has written a series of best selling books on these issues and in July 2019 will be releasing the latest one titled "Aftermath".  Jim kindly agreed to do a brief Q&A on the upcoming book which is just below. After that a brief summary will follow.


Q: Should readers read your earlier books (Currency Wars, Death of Money, The New Case for Gold, and The Road to Ruin) before they read the new book "Aftermath"?

A: I'm grateful to all of the readers of my books, but there's no need to read them in any particular order. The books are a chronicle of the post-2009 period. There's a lot of economic and monetary history, but they track developments through Bernanke, Yellen and now Jay Powell. There's a cumulative element so reading Aftermath will incorporate many of the points touched upon in the earlier volumes, albeit in shorter form. Hopefully, someone reading Aftermath first will be encouraged to read the earlier books and complete the entire quartet.

Q: What were some main themes you wanted to cover in "Aftermath"?

A: Many of the trends identified in my earlier books have moved much closer to a critical threshold (point of collapse) and so deserved deeper analysis. These include passive investing, robo-investing, Chinese debt, gold accumulation by Russia and China and the role of crypto-currencies in a global monetary reset. Other new themes are the rise of Trump (not covered in the earlier books) and the exact dimensions of life in the aftermath of a new crisis. Currency Wars and The Death of Money warned that a crisis was coming. The Road to Ruin put you in the middle of a crisis and showed the official response function, (which I called "Ice Nine"). Aftermath takes you to the post-crisis environment as a way to show you what you can do now to survive it.

Q: For many years you have consistently forecast that we will some day another major crisis worse than the 2008-2009 crisis and that this could lead to major changes in the global monetary system. While working on "Aftermath", have you seen anything that would cause you to change that forecast?

A: No. All of the trends not only confirm a coming crisis, but suggest it may be worse than I expected. Reaction functions not only include closed banks and exchanges and frozen accounts, but also social unrest possibly requiring martial law. There are also serious infrastructure threats that could involve a collapsed power grid or internet. On top of that, cyber threats are real and cyber wars have already begun. We cover all of these developments in Aftermath.

Q: Do you plan any more books to follow "Aftermath" or will this one complete the series?

A: I expect to write more books, but there's nothing underway right now. After writing five books in eight years, I may just step back and develop new themes or topics. The international monetary quartet (Currency WarsThe Death of MoneyThe Road to Ruin and Aftermath) is done and stands on its own. I'm not sure how much more there is to say on the topic. It's all there in the books.

Q: Modern Monetary Theory is something new that has gotten a lot of attention lately. Do you discuss that theory in this new book? Do you think MMT will have a significant impact on our monetary future?

A: I have a full chapter on Modern Monetary Theory in Aftermath. It's called Free Money (Chapter 5). The best way to understand Modern Monetary Theory is to quote Gertrude Stein: "There's no there there."

Q: Is there anything else you would like readers to know about "Aftermath" or any other topic we discuss here from time to time?

A: Aftermath took longer to write than I expected when I started. That was partly due to other obligations and partly due to an injury I suffered in the summer of 2018 that required some time off for recovery. That said, I'm actually pleased with the publication date, July 23, 2019. That happens to be the exact 75th anniversary of Bretton Woods (July 23, 1944), which is appropriate because the book discusses the need for a new Bretton Woods. Also, it will come out in the middle of the 2020 election season. The book is not overtly political but it does discuss many subjects that will be a big part of the election debate including Modern Monetary Theory, debt and deficits, economic growth and the role of the Fed. Anyone interested in the presidential election cycle will be better informed if they read Aftermath.

Thank you for taking time from a busy schedule to offer these comments as we await the launch of "Aftermath" this coming July. It follows a line of best sellers and I have no doubt that will continue with "Aftermath".


Summary: Jim Rickards has the ability to delve into complex topics in a way that most of us without an academic background in macro economics can easily understand. In the interview above Jim provides us with some interesting tidbits. His new book will include a full chapter on Modern Monetary Theory which is timely since that will surely be debated in the upcoming election cycle. Also, Jim just provided us with an update to his long standing forecast that changes that will impact our present monetary system are coming. Jim often says that forecasts can change over time as new data is received. In this case, he not only says his forecast for a new crisis leading to major change is still in play, he adds that the latest trends suggest to him that the crisis he predicts may be worse than he expected.

Anyone who has read any of Jim's books I think would confirm that they cover a lot ground and that you will learn some fascinating history. I have no doubt that the same will be true for "Aftermath". Readers can find "Aftermath" here.

Added note 5-13-19: With the US-China trade dispute flaring back up, readers may find this recent article by Jim of interest. --  "The Trade War is Back"

Saturday, May 11, 2019

News Note: Dr. Judy Shelton Under Considertion to Fill One Vacant Position at the Fed

This news article from Bloomberg and distributed on Yahoo News states that Dr. Judy Shelton is currently under consideration to fill one of the vacant positions on the Federal Reserve Board of Governors. 

We have featured Dr. Shelton here on this blog including a brief interview concerning her thoughts on the potential for monetary system reform. 

from the Bloomberg article as featured on Yahoo News:

"The White House is considering conservative economist Judy Shelton to fill one of the two vacancies on the Federal Reserve Board of Governors that President Donald Trump has struggled to fill.

Shelton has been contacted by the White House regarding the position, according to two people familiar with the matter who described the outreach on condition of anonymity."

Wednesday, May 1, 2019

Dr. Warren Coats Proposes Currency Board Rules for the Federal Reserve - Includes Q&A

Readers may recall that we have previously featured the Real SDR Proposal of Dr. Warren Coats here on the blog. Dr. Coats is retired from the IMF and is widely recognized as an expert on both monetary policy and the SDR used by the IMF.

Recently, Dr. Coats wrote a new article published on the Adam Smith Institute blog proposing that the US Federal Reserve should move towards the adoption of Currency Board rules in an effort to reform the present monetary system. Below are some excerpts from this new article. The concept of a Currency Board may be new to many readers so Dr. Coats kindly agreed to do a brief Q&A for readers here on some basics for how Currency Board rules would work. You can find that Q&A interview further below the excerpts quoted from his new article.


"After years of discretionary management of monetary policy by the Federal Reserve, there is a strong case for re-fixing our fiat currency system to a hard anchor. Though the dollar was far more stable under the gold and gold exchange standard era than after it’s delinking from gold in 1971, those systems came with significant weaknesses that contributed to their ultimate abandonment. To avoid these, three key elements of the Fed’s operation should be modified. These are: 1. The monetary policy rules determining how currency fixed to a hard anchor is issued and redeemed; 2. The monetary anchor itself; and 3. What the currency is issued or redeemed for."

. . . . .

"A reformed monetary system should require the Fed to adhere strictly to currency board rules. Such rules oblige a central bank to buy and sell its currency at a set price in response to public demand. Under the Gold Standard, the price of the currency was set as an amount of gold (a gold anchor). For existing currency boards, the price is typically an amount of another currency or basket of currencies. The Fed would provide the amount of dollars demanded by the market by passively buying and selling them at the dollar’s officially fixed price for its anchor. All traditional open market operations by the Fed in the forms of active purchases and sales of T-bills or other assets or lending to banks would be forbidden."

. . . . .

"The United States could adopt the hard anchor currency board system described above on its own and others might follow by fixing their currencies to the dollar as in the past. The amendments to the historic gold standard system proposed above would significantly tighten the rules under which it would operate and strengthen the prospects of its survival."

(note: I added underlines above for additional emphasis)
Followup Q&A Session with Dr. Coats:

I offered Dr. Coats the opportunity to expand a bit on his thoughts on Currency Board rules based on the questions listed below with the goal of providing some additional insight on how his proposal would work if implemented by the Federal Reserve.

Q: Where does a Currency Board get the money that it supplies based on market demand?      

A: "It creates it like any other central bank."

Q: Who does a Currency Board typically supply money to? 
A: "Currency Boards deal with the same customers as regular central banks—generally just depository institutions—banks, credit unions"

Q: What assets would a Currency Board normally accept in exchange for the money it provides?  

A: "It (a Currency Board) creates money like any other central bank, but it only issues it when purchased with the equivalent value of its anchor (The Bosnia currency is fixed to Euro and thus must be purchased with Euros)."

Q: Does a Currency Board ever loan money to either the Federal government or private banks and charge them interest?

A: "That depends on its law. Generally no. However, the Central Bank of Bosnia and Herzegovina may lend to banks (lender of last resort) to the extent that it has more than the 100% asset cover for its monetary liabilities (base money)."

Q: What impact (if any) would using Currency Board rules have on market interest rates?

A: "It would remove any central bank influence on market rates."

Q: What impact (if any) would using Currency Board rules have on US fiscal policy and/or budget deficits?

A: "Existing currency board central banks’ governments have lower public debt than most others because they cannot borrow from the central bank and thus are more disciplined."

Even though Currency Board rules are designed to bring discipline to the supply of money and provide a stable value to money over time, there are still many people who prefer to hedge against the potential abuse of any system by holding gold as a form of insurance. 

Q: If the US did adopt Currency Board rules, would you support the removal of capital gains taxes on gold and silver so that anyone who wanted to hedge themselves that way could do so without being subject to a tax penalty for holding some savings in gold or silver as a form of insurance in the event the money did lose value in relation to gold for whatever reason?

A: "People can and should be free to hedge (save) in any way they want—owning real estate, gold, GM or what ever. Gold should not be subsidized and should be treated like any other way of holding wealth. Actually I favor abolishing capital gains taxation whatever its source."

I would like to extend a thank you to Dr. Coats for taking time to respond to these questions for the benefit of readers here. Dr. Coats provided this additional comment related to the value of money:

"The value (price) of money, like everything else, is determined by its supply and demand. Fixing its price to gold, for which it can be redeemed, is a way of regulating its supply. Fixing it to anything else (such as SDR) with currency board rules does the same. Bitcoin’s supply is determined by a formula, but there is little real demand— just speculators."  -- Warren Coats

My added comments: One thing that occurs to me is that if the US were to adopt this proposal by Dr. Coats and also do away with capital gains taxes as he said, this system might appeal to those who favor a return to an actual gold standard.

If followed as proposed by Dr. Coats, there would be rules inside the system to try and enforce monetary discipline and then people would also be free to hold any other form of savings (gold or whatever) as an insurance hedge without being penalized with capital gains taxes. This would make the individual free to assume any price volatility associated with their personal savings choices with no tax implications. Also, the government/central bank would have an additional incentive to maintain monetary discipline because people could easily choose to move savings to other forms of wealth if they believed that the monetary system rules were being abused.

Note: This article will be added to our permanent page of ideas for monetary system reform that can be found here.