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."
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."
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."
What requires 70% vs 85%
ReplyDeleteNot sure. But a large increase in sdr's would need 85%.
ReplyDelete