This is What Happens When More People Start Losing Confidence in the System

The coronavirus related economic crisis is now in full swing and by now most everyone realizes this not just your average garden variety recession. We are seeing events all the time now in various markets that are described as historic in nature and some described as "never seen before in history". It is now very clear that the foundations of the monetary and financial system we have known for a long time are being shaken to the core and no one really knows how this is going to end or what direction things will eventually take. In an environment like this, all kinds of ideas and predictions emerge for the future that only a short time ago would have been viewed as far fetched and extreme. 

Below I am documenting just a couple of articles to illustrate this point. I have no idea if the prediction for gold made in one of these in these articles will pan out or if the extreme proposal (universal income for all paid for by just printing money at the central bank) described in one of the articles will ever be seriously considered.  But I do know that things like this will be looked at by a lot more people now and taken more seriously be a larger portion of the public as the general public perception grows that our present system and institutions are failing.

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From Kitco, Bank of America predicts Gold Will Go to $3,000 Per Ounce

"Bank of America commodity analysts just keep getting more bullish on gold as the weeks go by.

The bank said in a report last week that gold ’s technical momentum could drive prices to an all-time high this year; in a new report published Tuesday, analysts have officially increased their bullish outlook, saying that gold prices could hit $3,000 within 18 months, a 50% increase from its previous forecast."

. . . . .

"Economists at Bank of America have warned that the Federal Reserve’s balance sheet as a percentage of GDP could rise 20% to 40% this year. According to reports last week, the Federal Reserve’s balance sheet hit a record high of $6.42 trillion, up more than 50% from levels reported during the first week of March.

The analysts noted that the Federal Reserve: “Can’t print gold.”

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From World of Debt (Ellen Brown) - A Universal Basic Income is Essential and Will Work

"According to an April 6 article on CNBC.com, Spain is slated to become the first country in Europe to introduce a universal basic income (UBI) on a long-term basis. Spain’s Minister for Economic Affairs has announced plans to roll out a UBI “as soon as possible,” with the goal of providing a nationwide basic wage that supports citizens “forever.” Guy Standing, a research professor at the University of London, told CNBC that there was no prospect of a global economic revival without a universal basic income. “It’s almost a no-brainer,” he said. “We are going to have some sort of basic income system sooner or later ….”

“Where will the government find the money?” is no longer a valid objection to providing an economic safety net for the people. The government can find the money in the same place it just found more than $5 trillion for Wall Street and Corporate America: the central bank can print it."

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My added comments: I underlined the last sentences of both articles above to illustrate an interesting irony. Both of the these articles are suggesting ideas or events related to a failure of our existing system. They both perhaps indicate that what we have now is failing. 

However, as we know, the ideas on how to deal with a failure of our present system and what proposals should be adopted to "fix things" are often as if people come from different planets. These two articles do a decent job of illustrating that reality so I am posting them here for readers to compare and contrast. As far as I know, there is really no comprehensive consensus on any plan to reform or reset our present monetary system at this time that anyone thinks could actually be agreed to and implemented. Also, as most everyone knows, virtually every proposal offered in the United States is immediately politicized and everyone gears up for battle to try and obtain political advantage with no hope of any kind for compromise that leads to agreement on major reforms. Just the two articles above illustrate ideas (using gold as a solution vs. endless central bank money creation passed out to the public) that would lead to never ending partisan political fighting if anyone tried to get either passed into law. That's just the the reality of where we are these days. 

Added note: If you think this new gold price forecast from Bank of America (hardly known far and wide as big gold advocates) sounds pretty high, you will really be surprised by forecasts by some others such as Jim Rickards. In one recent interview Jim says gold will be $5,000 per ounce by next year and eventually ten times the current price over time. None of this suggests much confidence that our present system is going to make it through this time unscathed. In the next 2-3 months, it will become clearer and clearer just how badly shaken our present system really is. Anyone who has not taken any steps to prepare for a worst case scenario by now may have waited too long. However, as always, time will give us the answer. But this time we may not have to wait years for that answer. 

IMF Director Georgieva Says US Stimulus Package Helped Boost IMF Lending to $1 Trillion

Recently, we posted this article where Jim Rickards explained how the IMF might be able to get the US to agree to substantial increases in the amount of SDR's (the currency unit used by IMF members). This is a long standing prediction Jim has made that we have followed here over time since it would amount to major monetary system change if it were to eventually mean the SDR replaced the US dollar as the global reserve currency. 

Now we have this new interview last week on Bloomberg TV with IMF Director Kristalina Georgeiva where they discuss the concept of a massive increase in SDR's. Director Georgeiva notes that the recently passed US $2.2 Trillion "stimulus package" included a "component supporting the authority of the IMF to borrow that boosts our resources". 

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According to Director Georgeiva, It appears that the US was supportive of the increased lending capacity sought by the IMF allowing it to boost it up to $1 Trillion. In this interview, the Director also indicates that further substantial increases in the allocation of SDR's may well be needed in her view. 

Followup news notes 4-15-2020: US is OK with boosting IMF lending capacity, but opposes an increased allocation of SDR's at this time (Financial Times) and this from Reuters - US Opposition Seen Stalling Major IMF Liquidity Boost


These articles say the US prefers not to support an increased allocation of SDR's at the IMF and is discussing other support plans with members of the G7 and G20. The Reuters article specifically says the US does not want to see nations such as Iran and China benefit from a pro rata allocation of increased new SDR's at the IMF.

Below I am posting again the response Jim Rickards gave to my question about how the IMF might get the US to agree to events that could end up replacing the US dollar with the SDR.

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Since we do now clearly have a potential trigger event for another major financial crisis and it could very well be a much bigger crisis than the last one in 2008, Jim's long held view that the Fed won't be able to handle this comes into play as something we must consider and watch for over time. When this scenario has been proposed in the past, I get an important and reasonable question from many readers. 

They ask me:

How will the IMF be able to pull this off? Why would the US be willing to go along with a major monetary system reset that gives up the global reserve currency status for the US dollar? Readers point out to me that the US holds a 16% vote at the IMF (see footnote below) and the IMF would require an 85% approval vote to do a massive issuance of SDR's. I am asked why the US would ever give up this veto power vote and just allow the IMF to essentially replace the US dollar with the SDR?

I asked Jim if he would be willing to address this important issue and he kindly replied that he would. Below is the answer he provided to these questions by email:

"This is not something the U.S. would ever desire, but the U.S. may have no choice. If the world turns to the IMF and massive SDR issuance to reliquify capital markets (after central bank efforts fail), they will need approval from China, Russia and other nations that collectively hold 16% veto power. To overcome the veto, they will insist the SDR replace the dollar as the leading reserve currency. The U.S. will have to go along or else face a complete shut-down of the global financial system. That's checkmate."

James Rickards

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Added note related to this topic: A thank you to a reader who forwarded this link to an article by Jan Nieuwenhuijs. In his article he explains why he believes the SDR will not replace the US dollar as global reserve currency. Here is an excerpt from the article:

"It’s always best to look at what central bankers do, not what they say. Across the globe many central banks have been shifting towards gold since 2009, not SDRs."

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What we do here is follow events over time and see what actually happens which, in the end, is what matters the most in trying to make personal financial decisions.

If We Can Help - We Must

Today I was stunned to see the news story in the video below showing thousands of people lining up in San Antonio,Texas just to get food. This crisis is taking an enormous toll on just about every aspect of life, but when we are now seeing children in their cars with their parents in lines for hours just to get food, I feel like I must try to help and I hope anyone who can help will consider it. 

Below I have pasted in the link to the donation page for the National Food Bank at feedingamerica.org. Our family made a donation and I would encourage anyone who can help to think about it. Any donation size matters in times like these. Let's hope and pray this pandemic subsides sooner rather than later and that people out of work can get back to work as soon as safely possible.

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Coronavirus pandemic causing an increase in hungry families | KVUE

Link to the Donation page for the National Food Bank (Feedingamerica.org)

NY Post article on this story

Jim Rickards Explains How the IMF Could Get the US to Agree to Replace the US Dollar with the SDR

Readers here know that for years we have featured Jim Rickards thoughts on how our monetary system might change in the event our present system were to fail. Jim has explained in both his books and his interviews that he believes that eventually a crisis so large would arise that it would be too large for the Federal Reserve to handle. He says logically the next step we would expect from global monetary authorities would be to propose replacing the US dollar as the global reserve currency with the SDR used by the IMF. Jim repeats this analysis in another new interview you can watch here at Hedgeye with Keith McCullough. 

This interview contains a lot of important information and insight I believe anyone interested in these issues should to listen to. While we all hope that somehow this current new financial crisis triggered by the virus pandemic will be short lived and result in what many mainstream financial media are calling a "V shaped recovery", hope is not a plan. 

I cannot stress enough that no one knows how all this unprecedented emergency economic  policy is going to unfold or all the potential consequences. As they discuss in this interview, we are looking at economic disruption not seen since the great depression in the US in the 1930's. To simply hope that the economy will shake all this off and bounce back near normal by the end of the year is naive at best. Again, it always good to have hope and pray for the best possible outcome. However, we must be prepared to accept the potential for a scenario with a much worse case outcome. Jim and Keith discuss that very well in this interview.

Since we do now clearly have a potential trigger event for another major financial crisis and it could very well be a much bigger crisis than the last one in 2008, Jim's long held view that the Fed won't be able to handle this comes into play as something we must consider and watch for over time. When this scenario has been proposed in the past, I get an important and reasonable question from many readers. 

They ask me:

How will the IMF be able to pull this off? Why would the US be willing to go along with a major monetary system reset that gives up the global reserve currency status for the US dollar? Readers point out to me that the US holds a 16% vote at the IMF (see footnote below) and the IMF would require an 85% approval vote to do a massive issuance of SDR's. I am asked why the US would ever give up this veto power vote and just allow the IMF to essentially replace the US dollar with the SDR?

I asked Jim if he would be willing to address this important issue and he kindly replied that he would. Below is the answer he provided to these questions by email:

"This is not something the U.S. would ever desire, but the U.S. may have no choice. If the world turns to the IMF and massive SDR issuance to reliquify capital markets (after central bank efforts fail), they will need approval from China, Russia and other nations that collectively hold 16% veto power. To overcome the veto, they will insist the SDR replace the dollar as the leading reserve currency. The U.S. will have to go along or else face a complete shut-down of the global financial system. That's checkmate."

James Rickards

I will add that in this and other recent interviews, Jim makes it clear that he does not think even this drastic reset of the system will solve the problem and eventually some kind of sound money policy will have to emerge. But he suspects it will be after everything else possible has been tried. He sees the response to a crisis too big for the Fed to fix as happening in this order - 1) Fed and other central banks respond first 2) After they fail, the world turns to the IMF 3) Eventually, only some kind of sound money policy will restore public trust and confidence. This process unfolds over time.

This is extremely important information from Jim. I encourage everyone to listen to the interview linked above, read Jim's books, and learn as much as possible about these issues. 

We now face the real potential going forward that all the theories and scenarios we have talked about for years here on this blog could become very real as this situation unfolds in the months ahead. I am not sure there is anything more important we can do than monitoring events and staying informed. Knowing what is happening may well be more important than anything else we can do other than of course doing what we can to stay healthy and help contain the virus. You cannot make the best personal decisions unless you understand what is happening, so accurate information is critical.

Footnote: This comment on the US vote being a "veto" like power from the Congressional Research Service:

"The executive board or board of governors of the IMF can approve loans, policy decisions, and many other matters by a simple majority vote; however, a supermajority vote is required to approve major IMF decisions. The supermajority may require a 70% or 85% vote, depending on the issue. At 16.52% of total voting power, the United States has unique veto power over major policy decisions."

Added news note 4-6-2020: IMF to ask for increase in SDR's

"The IMF is probing other ways to increase its firepower. It has already asked Group of 20 leaders to support creating a sizable quantity of reserve assets called SDRs, or special drawing rights, as it did in the 2009 global financial crisis."

Update on Precious Metals Markets

I was going to do a Q&A type of post on how things look in the precious metals markets since many readers here do follow those markets in times like these. 

Instead, I found a very good reasoned discussion on those markets on an alternative media platform featuring Rick Rule, the CEO of Sprott Assett Management. I'll just post the video below for anyone interested in this topic since Rick Rule basically says what I would say for the most part and does so better than I would. This is one of the best discussions I have seen on the current state of precious metals and the related mining industry. Very fact based. 

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Summary of the Discussion:

"The virus pandemic is not only ravaging our personal lives, but also impacting business globally, causing many mines to cease operations. At the same time, crisis financial interventions are motivating even “Reluctant Preppers” to seek shelter for their funds in precious metals, resulting in a demand spike which is cleaning out the supply chain of physical gold & silver. Rick Rule, CEO of Sprott Asset Management, returns to Liberty and Finance / Reluctant Preppers to answer viewer's questions at this time of a "Black Swan" event colliding with the top of the credit cycle and unprecedented volatility in the major markets and precious metals."


Important Note to Readers: Tomorrow I will post an update from Jim Rickards. He explains to me how the thinks the IMF could be able to get the US to accept replacing the US dollar with the SDR.