Friday, July 26, 2019

Jim Rickards On - Will There be a Global Monetary Conference at Mar a Lago?

There are a number of  advertisements out on the internet that talk of the possibility of there some day being a new Bretton Woods style monetary conference perhaps being held at Mar a Lago. It is sometimes called a proposed "Mar a Lago Accord". Obviously, if such a thing did take place, it would have the full attention of this blog since watching for monetary system reform is the primary purpose here.

But is there evidence that such a meeting is being seriously considered or even already planned? This is where things get a bit murky. On the one hand, we can (and do below) cite some highly credible sources who have hinted at such a meeting taking place. On the other hand, no one in the Trump Administration has stated that a meeting like this is under consideration much less actually planned. 

So, where does this idea come from? Below I have listed some links to credible sources where the possibility of some kind of monetary conference at Mar a Lago has been mentioned. However, please note that it is hard to tell if these references are talking about something actually seriously under consideration or just something that seems desirable given the problems and issues that exist in the present monetary system. 

Further below the links, I have pasted in a very recent interview with Jim Rickards where he talks directly about this topic with his latest views on it based on what he has written about it in his new book Aftermath (starts around the 32 minute mark). I will just post the information and let readers draw their own conclusions on this question.


Dr. Judy Shelton (from Wikipedia referencing her interview in the Financial Times 5-31-2019)

"In 2019, she said that she hoped for a new Bretton Woods-style conference where countries would agree to return to the gold standard, saying, "If it takes place at Mar-a-Lago that would be great." Mar-a-Lago is a club run by President Trump."

"Her big dream is a new Bretton Woods-style conference -- "if it takes place at Mar a Lago that would be great" -- to reset the international monetary system . . . "

Dr. Judy Shelton - Fortune August 2016:

"I’m not opposed to a new Bretton Woods conference, and if it takes place at Mar-a-Lago, I’m fine with that. But anything the U.S. does because we print the international reserve currency, unilateral action would almost instantly be accommodated by other countries."

Dr. Judy Shelton - GSI Exchange article May 2019 (quoting her in a previous Forbes article):

"When asked in a Forbes interview whether a new gold standard can be achieved unilaterally or if nations must convene to the standard, Shelton says “I’m not opposed to a new Bretton Woods conference, and if it takes place at Mar-a-Lago, I’m fine with that.”

Jim Rickards (Mar a Lago comments start at about 32 min mark)

From the interview just above, my take is that Jim sees it as less likely that the present system will be reformed in an orderly way at something like a "Mar a Lago Accord" and more likely we will see a disorderly failure of the present system, perhaps making such a global monetary conference mandatory under more crisis like conditions. His comments on a Mar a Lago monetary conference start just around the 32 minute mark of the interview. These comments are consistent with what Jim has said in other interviews and also to me by email. In addition, I let Jim preview a draft of this article before posting it.

So you see why this question about a potential new monetary conference has arisen and why many people are watching for any signs of it (perhaps in the second term of a Trump Administration if he is re elected). It is interesting to note that most people (including Jim) now feel the odds of a major financial disruption before the 2020 elections are pretty low and that the Fed will do what Trump needs to try and stave off a recession. On the other hand, Democratic candidate Elizabeth Warren is saying she sees a good chance for a new crisis before the next election. Looking at her comments, it is clear now that if a new crisis emerges, Democrats will blame President Trump's tariffs and sanctions for the crisis. Meanwhile, President Trump will blame the Fed as we have mentioned here for some time. Who each side will blame for any economic problems is perhaps one of the easiest forecasts to make.

We will just continue to monitor events as usual here and report what actually happens.

Added notes: Here is an example of another article where you see this whole idea speculated about. This one appears in NewsMax (Nov 2018) by gold advocate Adam Baratta. This is pretty clearly just speculation (wishful thinking?) by the author. Here is the last paragraph of this article:

"All of this leaves us to ponder the ultimate big idea for Donald Trump. With the G-20 meetings upcoming, and the world’s leaders all set to meet in early 2019 in the United States, what better time for Trump to propose resetting the entire global monetary system with gold? Can you say Mar-a-Lago Accord?"

If you want to see what Jim Rickards is saying on a broad spectrum of current issues, you can take an hour to watch this even more in depth recent interview

Wednesday, July 24, 2019

Willem Middelkoop - Towards a New "De Facto Gold" Standard

Author Willem Middelkoop has long offered commentary on the prospects for major monetary system reform including his book on the subject, "The Big Reset". In this recent article published on the OMFIF web site, he says we may be seeing a new unofficial gold standard being adopted even though no nations are moving towards adopting an official gold standard. 

Willem is an OMFIF (Official Monetary and Financial Institutions Forum) Adviser (see Industry and Investment section). Below are some excerpts from his article.

Willem Middelkoop
(author - The Big Reset)


"Last year, 22 central banks, situated largely to the east of Germany, bought the largest amount of gold since 1967, the year the London Gold Pool collapsed. The gold repatriations by many European countries of the last few years are another sign that we are reaching the end of four decades of monetary calm. This could bring about the largest monetary changes since the closing of the gold window by US President Richard Nixon in 1971.

The US wants its fiat dollar system to prevail for as long as possible. It has every interest in preventing a 'rush out of dollars towards gold', as happened in the 1970s. Since then, bankers have been trying to exercise control over the precious metal's price. This war on gold has been ongoing for almost 100 years, but gained traction in the 1960s with the forming of the London Gold Pool – whose members included the US, UK, Netherlands, Germany, France, Italy, Belgium and Switzerland."

. . . . 

Clearly gold is making a remarkable comeback to the world financial system. A new gold standard is being born without any formal decision . . . . ."      click here to read the full article

Added note: Willem posted this news about France calling for a monetary system reset on his Twitter page

Expert reaction:

I had a brief email exchange with Willem related to his new article. Many readers (and myself) have noticed the recent sharp move up in gold allowing it to break above key resistance price points that have been in place for several years. I asked Willem if this may be a signal that another bigger up leg in the price of gold is coming? He offered  this comment on that question:

"Wouldn’t surprise me at all"

So we will keep an eye on the gold market over the coming months to see if a new major uptrend has begun and also if that indicates other changes may be coming our way in the overall monetary system. As always, time will tell us the answer. 

Keep in mind that both Jim Sinclair and Ray Dalio have also recently said they see a "reset" or paradigm shift coming including much higher prices for gold which we noted in this recent article.

Friday, July 19, 2019

Comparing Bitcoin/Cryptos to Credit Cards for Making Payments

Over the last decade we have seen the rise of Bitcoin and other cryptocurrencies. There are probably many reasons why this has happened, but one big reason seems to be a reaction to the 2008 financial crisis where the integrity of the existing financial system and the US dollar came into question. 

In this article, we will make a comparison between using a standard credit card for making routine payments and using Bitcoin or other similar cryptocurrencies that hope to attract users away from the existing payment alternatives like credit cards. Below I have listed the features of two credit cards people use to make routine payments and further below I will compare some of those features to using Bitcoin or another similar cryptocurrency instead. After that are some added comments.


For many people, credit cards are a very convenient way to make routine payments for purchases while at the same time taking advantage of incentives offered by the cards to use them. I'll list two examples below. After that we will compare some of the features offered by these two credit cards to using Bitcoin or a cryptocurrency instead.

Chase Freedom Card

- no annual fee

0% Intro APR for 15 months from account opening on purchases

- 3% cash back on all purchases in your first year up to $20,000 spent. After that, earn 1.5% cash back on all purchases

Cash Back rewards do not expire as long as your account is open
- free unlimited access to your credit score 

Zero Liability Protection means you won't be held responsible for unauthorized charges made with your card

Purchase Protection covers your new purchases for 120 days against damage or theft up to $500 per claim

-  Extended Warranty extends the time period of the U.S. manufacturer’s warranty by an additional year ,on eligible warranties of three years or less.

Capital One QuickSilver Card

- no annual fee 

0% Intro APR for 15 months on purchases

Earn unlimited 1.5% cash back on every purchase, every day

Earn a one-time $150 cash bonus once you spend $500 on purchases within 3 months from account opening

This card also comes with limited liability protection and no foreign purchase transaction fees along with other features. My daughter used this card during her semester abroad in her senior year in college and the no foreign transaction fee was very helpful in that situation.

Please note the extensive incentives these card issuers offer to attract the use of their card for purchase payments. They charge no fee to maintain your account, they offer the flexibility to pay off purchases made over the first 15 months at 0% interest, and they actually pay the user cash back on purchases that can certainly add up to a substantial amount over time. (if the cards are used to pay normal monthly expenses as an example)

Users who continue to pay off the full balance of the card monthly after the initial 15 month 0% rate period can continue to accrue cash back while paying no interest and having the convenience of being able to pay everyday payments with the cards which are widely accepted where most people live and spend money on a daily basis.

What about using Bitcoin and Cryptos for routine payments?

In comparing the use of Bitcoin or similar cryptos for regular payments, the first thing to note is that they are not nearly as widely accepted for payments by merchants. While there are merchants (more often online merchants) who accept them for payments, they are a small fraction of the merchants who accept regular credit cards in most locations. In my local area as an example, every gas station, grocery store, restaurant, Walmart, Target, major retail outlet, etc. accepts credit cards for payment. As far as I know, not a single one of these accepts Bitcoin for payment in our local area. So that is one major hurdle for trying to use cryptos for routine payments.

Next, we need to ask: What happens if someone hacks into your wallet and steals your cryptos? As far as I know, you are probably out of luck. In comparison, if someone steals your credit card and uses it improperly, your liability is limited to either a very small amount or in many cases nothing at all. This issues was raised this past week in the Congressional hearings held about Project Libra from Facebook (see the unanswered questions segment of this TechCrunch article)

Extended Warranties and Purchase Protection? Many credit cards offer these features at no cost on all or most purchases. Cryptos don't offer anything like that as far as I know unless some individual merchants who accept them for payment offer it. 

Finally, what incentives does Bitcoin or other cryptos offer to attract users? Here, we might say that the prospect of appreciation of the Bitcoin or crypto held in the wallet may attract some users. Using the US as an example, if you use a credit card you are simply using them as a method of payment to spend US dollars. So there is no balance on hand to appreciate in value and you will not see any gains from the currency itself (US dollars in this example). The cash back offer is what you can expect to receive from cards that offer that incentive (usually 1-3% of purchase amounts on various card offers).

But the prospect for appreciation of Bitcoin or a similar crypto is really more a reason why people buy and hold these cryptocurrencies rather than a compelling reason to use them make routine payments. Of course significant price volatility in anything involves downside risks as well as potential upside gains. Over its life span, Bitcoin holders have experienced significant volatility up and down in the price of the coins. For credit cards, there is little or no downside risk and limited gains for cards that offer cash back or points incentives.


I believe the comparison above is one explanation for why Bitcoin and other cryptocurrencies have not achieved broad adoption by the general public for making routine payments. They don't compete well for most people in terms of offering incentives to use them for routine payments. That does not mean they have no role to play. Even though they have not achieved broad public adoption, the number of wallet holders continues to steadily increase over time as does the overall market cap of the cryptocurrency space. For people who want an alternative place to hold funds outside the normal banking system for any reason, they may help fill that demand in the marketplace. For those who see them as an investment vehicle for speculation, they may fill that demand in the marketplace. At the current level and pace of adoption they won't significantly impact the overall global monetary system, but they can find a healthy niche of users who feel they meet their personal needs. It will be interesting to see if the Facebook Project Libra gets off the ground and what incentives if any it may offer users to attract them to use the Libra.

Perhaps one way to look at this is that payment alternatives like credit cards offer some strong advantages for use in just making normal monthly purchases and payments. Things like cryptos and precious metals may offer some alternative long term store of value advantages for a portion of the funds people hold as savings. The same person might well use all three of these as part of their overall personal financial planning. So there is plenty of room in the marketplace for a variety of alternatives for different uses and demands. 
Added note: For full disclosure, the links I provided above (and below) for the two credit cards mentioned will take you to a page that explains the features offered by those cards. They also offer me an incentive referral fee for the first five people that decide they want to apply for the card and are accepted. So, if you have any interest in having either credit card, feel free to use the link provided above. I'll get a referral fee and you will get a card with a lot of nice features and incentives if you apply and are accepted. These kinds of credit cards work particularly well for people who simply use them to pay normal monthly expenses and then pay off the account balance each month. If you are inclined to build up debt on credit cards and do not pay off the balance, be advised these cards carry very high interest rates after the initial 0% incentive rate period expires. Personally, I prefer not to use credit cards that way.

Added note on the precious metals markets:

We are clearly seeing higher than normal moves up in the precious metals and related mining stocks over the last few weeks. Precious metals investor Eric Sprott provides on update on how he views this move in this recent interview. More articles related to this are upcoming in the next couple of weeks.

Monday, July 15, 2019

Reset Watch Note: Jim Sinclair and Bill Holter Believe a "Reset" Has Now Begun

Anyone who has followed the issues that we do here on this blog for a long time knows the name Jim Sinclair. Jim is well known for his ability to do amazingly accurate long term price forecasting in the gold market. He famously called the top of the first huge bull market in gold back in the early 1980's. More recently (in this century) he incredibly made a long term gold price forecast of $1,650/oz way back when the price of gold was trading well below $500/oz. in the early 2000's. Gold hit that and more within his time frame.

In collaboration with Bill Holter (also hailing from Texas), they have been very consistent in the view that the present monetary system is unsustainable long term due to the combination of too much overall debt along side too many high risk derivatives that interconnect all through the banking and financial system 

In this very recent interview with Greg Hunter, they repeat the warning they have been issuing now for many years and are going on the record to say they believe that this recent sharp move up in the price of gold is a signal that the first "reset" of the present system they have long predicted is now starting up. Jim Sinclair says the events that he and Bill expect to unfold during this reset process will be completed by 2025. 

Below I have pasted in the video of the interview. 

Bullet points from the interview:

- the present system is unsustainable due to too much debt and risky derivatives
- Democratic candidates for President are basically calling for a debt "jubilee" reset
- central banks are cornered and running out of ammunition to stave off a reset
- the recent sharp move up in gold is an early warning signal
- there will be two resets higher in the price of gold over the next few years
- the events that are part of the reset process will unfold by 2025

Added note 7-17-2019: Ray Dalio describes his own version of a coming reset which he labels a "paradigm shift"

My added comments: The conditions we all live in these days are not easy to get a handle on. Trying to make a prediction about anything happening within a certain time frame is extremely difficult to do. I will say that having followed Jim Sinclair for a long time that he has done a pretty good job of long term forecasting, especially in terms of predicting price levels for gold many years in advance.

Some people who were alert and alarmed when the 2008 financial crisis arose have since gone off alert because the enormous coordinated effort by central banks around the world to stave off a failure of the present system seems to have accomplished at least that much up to now and the system seems stable to them now. A decade has passed since that last major crisis.

In this new interview, Bill and Jim offer a reminder that by no means have the problems and issues that triggered the big 2008 crisis been permanently solved. Instead, they feel that the unusual and unprecedented monetary stimulus actions that were taken have at best simply managed to push a day of reckoning off into some unknown future date. Jim Sinclair thinks that date will come before the year 2025. Readers should watch the video to see why he believes this.

If you want more evidence that even those who were directly in the heat of battle in the 2008 crisis don't feel like all the problems are solved and have some similar concerns, please go back and read our articles (first one here, followup here) from earlier this year that feature Mike Silva. Mr. Silva was the Chief of Staff to Tim Geithner at the NY Fed. Near the end of his article describing how it was to deal directly with the 2008 crisis, Mr. Silva offered this comment:

"Once a financial mob panics, the only thing that will end that panic is for a central bank with a large billy club to show up and announce: "Break it up everyone. Go home. This crisis is over." Unfortunately, the Dodd Frank Act (DFA) has crippled the Fed's ability to play this role. I guarantee that curbing the Fed's emergency authority will come back to haunt us."

Mr. Silva offered this answer to his own question about whether we will see another major financial crisis:

"Absolutely. As long as we have a financial system, we will have financial crises. The only question is how often and how severe. Personally, I think a crisis is likely to happen sooner rather than later because of the large number of possible crisis triggers that are currently being squeezed." (see page 15)

Mr. Silva also stated in his article (see page 14) that the system did come very close to failure during that 2008 crisis and he was right in the middle of it at the NY Fed at that time:

"This was a terrifying moment. Central banks know how to support individual institutions, but no central bank had ever tried to support entire markets. And that was what we had to find a way to do."

My point here is, that while none of us can know if or when the next big crisis may strike, it is beyond foolish to assume it can never happen. It is also foolish to make no effort of any kind to understand these important issues and try to make some basic simple preparations in case another huge crisis does one day emerge. That's just common sense like buying auto insurance. You hope you never need it, but you would not think of not having it. In fact, it is deemed by society as so important for people to have it that it is illegal to drive without having it. Surely, the same prudence should be used in relation to the issues we cover here that might some day actually lead to some kind of major "reset" to a new financial and/or monetary system. 

If a major "reset" to the present system does come, we would hope for a gradual change under controlled conditions. But we can not rule out a disorderly reset resulting from a sudden, unexpected failure of the present system. We have documented numerous system risk warnings from officials at the BIS, IMF, and central banks here over many years. Over time some risks decrease, others increase. But risks never completely go away. The goal here is to monitor events, report what actually happens over time, and document various ideas on how to "reset" the system should that be necessary at some point in the future.

Sunday, July 14, 2019

News Notes: Trump on Facebook, Gold Standard Debate, AOC and the Phillips Curve

There have been some interesting news events related to what we watch for here over the past days. Below are some links to articles that cover President Trump weighing in on Facebook, the ramping up of the debate over the merits of a gold standard related to the nomination of Judy Shelton to the Fed, and the recent exchange between Congresswoman Alexandria Ocasio Cortez (AOC) and Fed Chairman Jerome Powell regarding the Phillips Curve model. Below each link is an excerpt extracted from the article.


President Trump Suddenly Weighs in on the Facebook Libra Project

"Facebook May Need a Banking Charter for Libra"  (CNBC article)

"U.S. President Donald Trump on Thursday said he’s “not a fan” of cryptocurrencies, and suggested that Facebook may need a banking charter if the company wants to launch the digital token Libra."

Trump on Facebook Libra - CNET

"In June, Facebook announced its next attempt at expanding outside social media platforms: the Libra cryptocurrency. It'll be like Bitcoin, except its value will be pegged to a basket of assets, like government securities, to make it more stable. The world is unsure of how successful or disruptive Libra will be, and on Thursday the cryptocurrency got perhaps its biggest detractor yet: the president of the United States."


Nomination of Dr. Judy Shelton Triggers Renewal of Debate Over the Gold Standard

Articles written in support of Dr. Shelton and those opposing her confirmation to the Fed have tended to focus somewhat on her views on the gold standard. That has prompted the authors of the articles to weigh in with their own views of a gold standard. Below are links to some articles that have popped up recently:

NY Sun - Debate Over the Fed Begins

"The thing to mark here is that the criticism being levied against Ms. Shelton for hewing to the principle of a gold standard today is from the newspaper that was saved from bankruptcy by a man who gave up the chairmanship of the Fed over not only a point of principle but over the principle of a gold standard."

Judy Shelton is a Dangerous Pick for the Fed Board (Salt Lake City Tribune - from Washington Post article)

"Her radical vision involves replacing the Fed's mandate of stable prices and maximum employment with a gold standard. The gold standard is roundly rejected by economists and was abandoned ages ago, worldwide, for good reason."

The Fed Could Use a Golden Rule - Wall Street Journal

"Though money can’t talk, people can’t stop talking about it. With the nomination of Judy Shelton to the Federal Reserve Board, the discussion has tilted to gold.    

Gold is money, or a legacy form of money, Ms. Shelton contends, and the gold standard is a reputable, even superior, form of monetary organization. The economists can hardly believe their ears. The central bankers roll their eyes. How can this obviously intelligent woman be so ignorant? Let us see about that."

Trump Fed Pick Wants to Revive the Gold Standard - CBS News

"Shelton is raising eyebrows among mainstream economists for her views, which include slashing the Fed's benchmark rate to zero and pegging the value of the dollar to gold prices. She's not the first Trump pick for the Fed to advocate a return to the gold standard, with his two previous failed Fed choices -- Stephen Moore and Herman Cain -- also advocating for a revival of the policy."

Alexandria Ocasio-Cortez & Jerome Powell Discuss the Phillips Curve

Trump Adviser Larry Kudlow Praises AOC - Bloomberg

"The New York congresswoman, a rising star in the progressive wing of the Democratic Party, asked the Fed boss about the Phillips Curve, a theory used as a guide by monetary policy makers for decades. It suggests there’s a trade-off between low unemployment and stable prices.

But Ocasio-Cortez said many economists are concerned that the formula “is no longer describing what is happening in today’s economy” -- and Powell largely agreed.

“She got it right,” Kudlow told reporters at the White House later on Thursday. “He confirmed that the Phillips Curve is dead. The Fed is going to lower interest rates.”

Phillips Curve Takes a Hammering - Australian Financial Review

"The Democrat from New York quizzed Federal Reserve chairman Jerome Powell on the Phillips curve, a theory that says low unemployment will inevitably bring higher inflation, at a congressional hearing Wednesday.     

A day earlier, Trump's top economic adviser Larry Kudlow also criticised the idea that there's a trade-off between low unemployment and stable prices.

Powell agreed the relationship was becoming less relevant, and said the evidence now suggests that the economy can sustain much lower rates of unemployment than previously thought."
My added comments: When people start talking about money and monetary systems, it is sometimes surprising where they may agree and disagree. Looking at the news articles above, we can make a few interesting observations:

- President Trump aligns himself on the side of the central banks when it comes to Facebook Libra. Many would probably expect him to favor a private corporate enterprise offering a new competing product into the marketplace. But when it comes to money, the US government has been very consistent in its efforts to keep the US dollar as the global reserve currency. President Trump seemed to make it very clear he is on board with that concept in this Twitter comment.

- Even though my reading of what Dr. Judy Shelton has proposed regarding a return of gold to the monetary system does not suggest she expects to see the US return to the gold standard any time soon, that topic seems to have become a focal point of articles opposing her confirmation to the Fed. In return, supporters of her nomination have jumped in to defend the classical gold standard. Readers who want to see what she has actually proposed in terms of using gold in the system should watch her presentation here from April 2017 at the Kemp Foundation Forum. She proposed a gold convertible US bond as an experimental first step to see how markets would react. Pretty far from a return to a full gold standard as I understand her proposal. In recent interviews, she seems to indicate that she favors gradual changes in policy to allow markets to adjust to any changes rather than any sudden dramatic changes that might take markets by surprise.

- When it comes to money and monetary policy, you never know when people might agree on that you would never expect. In this case, Congresswoman Ocasio-Cortez suggests that the Phillips Curve model used for a long time by economists is no longer valid and Fed Chairman Powell tends to agree. Then top Trump economic adviser Larry Kudlow seizes on that exchange to say that AOC is correct on that point because the Trump Administration wants the Fed to ease up again on monetary policy. I suspect that Congresswoman Ocasio-Cortez was interested in this point because she has spoken favorably about Modern Monetary Theory policy which suggests that we should not worry about easy monetary policies and any related buildup of debt when thinking about how much money the government should spend to boost the economy. So, as I see this, they agree on one level but have very different ideas on whether the government or the private sector should be in charge of allocating any boost in the overall money supply.  

Thursday, July 11, 2019

MIT TradeCoin Currency Proposal

One of our goals here is to look for various ideas and proposals that offer alternatives to our present monetary system. A panel of experts that I hear from on these kinds of issues will sometimes point me to new ideas or proposals that I would otherwise miss.

In this case, one expert pointed me to this proposal from MIT Labs covered in The Scientific American for a blockchain based currency they call "TradeCoin". The web site for MIT TradeCoin describes summarizes the proposal this way (I added underlines for emphasis):

The Brave New World of Blockchains and Distributed Ledgers
The modern financial system has become dangerously complex. Increasing transparency would reduce risk, but that requires modeling the monetary circuit at a level of detail beyond the capacity of current technology.
New technologies such as digital currencies are now making it possible to simulate every trade and transaction. These tools could build more efficient financial networks and decentralize the control of money. People could exchange directly with one another instead of relying on banks.
The potential for sweeping change is real, but there are many uncertainties. These digital networks will only promote equity and accountability if they are properly built and responsibly used. They could just as easily lead to extreme levels of centralized control.
Towards a More Stable Financial System.
It is clear that the invention of blockchain and distributed ledgers won’t eradicate problems like financial crashes and unhealthy inflation—at least not in the short term. But it does enable the creation of legitimate alternatives to the big, powerful players. Technology now makes it possible to form specialized global currency systems that previously would not have had sufficient scale, trust or political stability to compete. That is why a natural next step is for the little guys—such as emerging economies or large numbers of individual citizens—to band together to form alternatives to central banks.
With that possibility in mind, our lab at the Massachusetts Institute of Technology is working on creating a digital currency suitable for large-scale transactional purposes. Called Tradecoin, it will be indelibly logged on a blockchain and anchored at all times to a basket of real-world assets such as crops, energy or minerals. Doing so will help stabilize its value and make it easier for the public to trust it. The core idea is that a broadly useful currency needs both human trust and efficient trade systems.
A digital Tradecoin built on a distributed ledger can allow alliances of small nations, businesses, commercial traders, credit unions or even farmers to put together enough assets to back a large, liquid currency that would potentially be as trustworthy and at least as efficient as the national currencies used by the World Bank and the International Monetary Fund.
By design, the principles behind currencies such as Tradecoin are fundamentally different from cryptocurrencies like Bitcoin, which are not backed by real-world assets and do not involve alliances. Tradecoin can also avoid the energy-intensive process of mining.

My added comments: While this project is not on the verge of going live soon, it does illustrate very well the kinds of ideas and proposals that are out there being discussed by experts and economists. Please note how the underlined portions above emphasize that the creators of this concept see it as a needed "alternative to central banks" and as a "legitimate alternative to the big, powerful players".

They go on to say that a digital Tradecoin would allow small alliances to "put together enough assets to back a large, liquid currency that would potentially be as trustworthy" as the national currencies used by the World Bank and the IMF. This description almost seems to suggest a set of "local currencies" rather than one global reserve currency that we see touted so often.

Some might argue that a currency truly backed by "real-world assets" might end up being more trustworthy than those national currencies should they lost the public trust at some point in the future. That continues to be an ongoing topic of debate.

On this blog, we like to see various ideas and proposals put forward for discussion and debate. When anything becomes monopolized, there is a risk that innovation will stagnate and customer service will suffer. The panel of experts I hear from are constantly talking about the need for future innovation and progress with regard to the concept of money and monetary systems.

So here on this blog, we view it as a good thing for the consumer (in this case the public that uses money to transact daily business activities) for some legitimate competition or even just potential competition to arise and challenge the thinking of the status quo from time to time.

We include these various ideas and proposals on our Marketplace of Ideas for Monetary System Reform page so that anyone wanting to research various ideas and proposals can find them documented with links for further research included in the articles all on one page. As far as I know, this is the best and most comprehensive collection of such ideas gathered on one page on the internet.
Expert Reaction: After previewing the article above, one expert I hear from offered this comment to me:

"The only thing I would add is an explanation as to why any country would rather use a different unit of account than the USD. And I think you can simply say, because it is stable in real goods, which is what many countries with balance of payment constraints would like to have. Because of the volatility of exchange rates, many countries do barter with each other when making trades. I'm still not entirely sure that the small bufferstocks that a trade coin is proposing are big enough, and it might easily turn speculative. They would have to lay claim to changing the index, just as FB (Facebook) lays claim to."

Added note: Speaking of new monetary system proposals, some readers here may wonder if we plan to further cover the Kinesis (gold and silver backed) alternative monetary system proposal expected to launch sometime this year. We do once that system fully launches assuming the launch is successful. We were advised of this recent news release that states that Kinesis plans to partner with the Post Office in Indonesia to offer its currency across the region in that area of the world. We'll continue to monitor their progress and report on it as results from the launch are available. Here are some notable quotes from their recent press release:

"In accordance with the new regulation, Kinesis, OZL and the Indonesian Government Postal Service (PT POS) are planning to develop, build and operate an international standard vaulting facility in Jakarta.

Additional stakeholders in the project include, Jakarta Futures Exchange (JFX), government clearinghouse Kliring Berjangka Indonesia (KBI) and religious organisation – Nahdlatul Ulama (NU) who have 100+ million members."

. . . .

"POS Indonesia have indicated they will facilitate and contribute significant resources and support for the project, including the contribution of land; licenses for Free Zone/Bonded Warehouse designation, and duty-free imports; permits for expedited building, construction and utilities; as well as significant post-launch marketing and logistical support.

PT POS Indonesia is the state-owned postal service in Indonesia and third largest postal service in the world, in terms of number of offices and sales outlets (over 58,000). In addition to delivering postal services, they are also the largest non-bank financial institution in Indonesia, providing payments, cross border remittances, micro-loans and other financial services."

Saturday, July 6, 2019

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

One of our goals here is to try and provide links to information and resources that discuss the concept of money and monetary systems. On the one hand, most people probably don't think much about a discussion about "What is Money" or "What Monetary System Works Best". In the US for example, most people just think of the US dollar as their money and the monetary system is based on the US dollar and run by banks and the Federal Reserve. On the other hand, a growing number of people are interested in learning more about these kinds of issues.

In this recent article appearing in the Cato Journal by Claudio Borio, he takes a deeper dive into this topic. The article is a bit technical in spots, but also includes some time honored core principles that are critical to anything that wants to viewed as money; and monetary systems that attempt to administer the issuance and exchange of money to conduct business activity. Below are a few excerpts followed by the Conclusion Section of the article. I added the underlines below for additional emphasis.

(Claudio Borio - Head of the Monetary and Economic Department - BIS)

"My focus will be on the monetary system, defined technically as money plus the transfer mechanisms to execute payments. Logically, it makes little sense to talk about one without the other."

. . . . 

"First, two properties underpin a well-functioning monetary system. One, rather technical, is the coincidence of the means of payment with the unit of account. The other, more intangible and fundamental, is trust. In fact, a precondition for the system to work at all is trust that the object functioning as money will be generally accepted and that payments will be executed. But a well-functioning system also requires trust that it will deliver price and financial stability."

. . . . 

"Society needs an institutional infrastructure to ensure that money is widely accepted, transactions take place, contracts are fulfilled and, above all, agents can count on that happening. Even the most primitive communities require generally agreed on, if informal, norms and forms of enforcement. Putting in place the corresponding supporting institutions — or institutional technology — in a way that ensures trust is a major challenge. And the challenge naturally becomes more complex as societies develop."

. . . .

"At the very least, a well-functioning monetary system has two properties. 

First, technically, it will exploit the benefits of unifying the means of payment with the unit of account. The main benefit of a means of payment is that it allows any economy to function at all. "

. . . .

"Second, and more fundamentally, a well-functioning monetary system will enjoy the solid trust of participants. To be sure, trust that people will accept the corresponding instrument as a means of payment and that the transfer will be effective are absolutely necessary for the system to function at all. But a well-functioning system requires more. It requires trust that the value of the instrument will be stable in terms of goods and services, as fluctuations generate uncertainty, and trust that its value will not change strongly in one direction or the other."

. . . .

"A new and controversial payment scheme — cryptocurrencies — illustrates some of the difficulties in generating trust through a fully decentralized system that does not piggy-back on existing institutional arrangements. This is so quite apart from the issues concerning scalability, finality, and incentives to verify, discussed in detail in this year’s BIS Annual Economic Report (BIS 2018).28 The above analysis points to another problem that can undermine trust, as also mentioned in the report: the lack of elastic supply. Hence the cryptocurrencies’ extreme price volatility: changes in demand are fully reflected in the price. The volatility undermines the cryptocurrency’s role as a unit of account and as a means of payment. Not surprisingly, prices are still quoted and sticky in terms of national currencies."

"The problem cannot easily be solved. A fully unbacked currency in elastic supply will not succeed in gaining the necessary trust. Alternatively, seeking to tie it to the domestic currency would require some agent to arbitrage in possibly unlimited quantities between the two, just as when central banks seek to keep exchange rates stable. And simply backing it with a sovereign asset or means of payment on a demand-determined basis would not do either. Not only would it defeat the purpose of having a cryptocurrency in the first place, as it would explicitly piggy-back on sovereign money. As in the case of any mutual fund unbacked by a supply of liquidity and a lender of last resort, it would also be vulnerable to runs (breaking the buck) — the equivalent of having to break the promise of convertibility. Moreover, in all probability it would not to be profitable without taking on significant risk to pick up yield, which would increase the probability of such a run."

. . . .

"The previous analysis suggests that the concepts of price and financial stability are joined at the hip. They are simply two ways of ensuring trust in the monetary system. Inflation, deflation, and price volatility induce instability in the value of money — and its close cousin, debt — in terms of goods and services, undermining its means-of-payment (and store-of-value). Financial instability effectively undermines it through the threat and materialization of default, which can bring the payments system to a halt when bank deposits are involved. Price and financial instability amount to broken promises."

. . . .

"Finally, studies indicate that financial booms tend to misallocate resources, not least because too many resources go into sectors such as construction, which depresses productivity growth persistently once the boom turns to bust (Borio, Disyatat, and Zabai 2016 and references therein). Furthermore, a large amount of empirical work indicates that the financial busts that follow booms may depress output for a long period, if not permanently. It is hard to imagine that interest rates are simply innocent bystanders. At least for any policy- relevant horizon, if not beyond, these observations suggest that monetary policy neutrality is questionable."

. . . .

"Strong monetary system anchors are crucial. As argued in more detail elsewhere, putting them in place requires action on two fronts. It calls for effective regulation and supervision. This must be so both in relation to banks (and other financial institutions) assessed on a stand-alone basis (the so-called microprudential perspective) and with respect to the system as a whole (the so-called macroprudential perspective). And it calls for monetary policy regimes that secure long-term price stability while taking advantage of any room for maneuvering to respond to financial stability threats."

. . . .


"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 decentralized 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: As you can see from the underlined portions of the text above, it is critical that anything that wants to be viewed as money has the widespread trust of the population in general. Without that, it is doomed to failure eventually. This seems obvious, but examples of projects and monetary systems that failed to obtain this vital trust abound both in history and around us today. 

I encourage readers to read the full article by Claudio Borio. It is an analysis of how the present system values the public trust in the monetary system and the ways it attempts to maintain that trust. It is clear when you read this article that monetary officials understand that if they lose general public trust in money and the monetary system, it is very difficult to get it back as history has shown many times.

Also, another thing I have learned is that if you want to offer up anything as money with hope of achieving wide scale adoption by the general public, you must be able to convince the public it is trustworthy above all else. You can have the greatest theoretical concept for money or a monetary system ever devised by man, but if you cannot convince the public at large to trust it, it won't matter and it will fail eventually.

Added notes: The comments in this article about cryptocurrencies are interesting in light of the announcement by Facebook to launch the Libra. The second paragraph above related to cryptocurrencies seems to me to be directly pointed at something like the Facebook Libra even though the Libra plans to have full fiat currency backing for each coin. As I read it, that paragraph suggests Libra will just be "piggybacking" on existing national currencies and that it could be vulnerable to a bank run under some conditions.

Also, the BIS has just issued a new report that looks at the pros and cons of "Big Tech" like Facebook entering into the financial services industry.