Wednesday, July 29, 2020

2020 Mid Year and Pre Election Analysis on the Status of Major Monetary System Change

We are now past the mid way point of 2020 and just a few months away from the US elections. Our goal here to monitor events and attempt to identify any trends that may lead to major changes in our present monetary system. So, it's time to offer up a mid year and pre-election analysis to try and assess where things stand. 

The analysis below is based on my best efforts to monitor current events from both mainstream and alternative media and from input from experts that I get from time to time that I view as highly credible. I'll use a Q&A type format.

Q: What are chances we will see any major changes to our present monetary system before the upcoming US elections?

A: I believe the odds are slim that we will see major changes before the elections. Unless some kind of major systemic collapse took place literally forcing major changes to take place urgently, we are unlikely to see much change from what we see right now. We are already in the middle of a major financial and economic disruption due to the earlier shut down of the US and global economy. At this point, it is crystal clear that the same tools that have been used since the 2008 crisis will just continue to be employed in an effort to stave off a major recession or depression event. As we see every day, unlimited monetary liquidity will be used to try and at least get through the upcoming election cycle. There is no reason to think that will change unless some kind of uncontrolled event forces things to change from that path.

Q: Ok, what about after the elections?

A:  Surprisingly, I also don't expect to see major changes to the existing monetary system any time soon after the upcoming elections. This is why. No matter who wins this election, there will be hesitation to move away from the existing US dollar based system as currently administered by the US Treasury and the Federal Reserve. While we may certainly see vastly different fiscal policies and other significant changes depending upon who wins, there is no reason at this time to think that either side is in a hurry to do away with a system based on the US using its exorbitant privilege from the US dollar to maintain global economic power.

Q: What do you base that statement on?

A:  The US is able to wield substantial power globally using the present system. There is no reason at this time to think that the US will want to disrupt that system so long as they can continue to keep it alive. That should be pretty clear by now. The US has now had two golden opportunities (the 2008 GFC and now the current crisis) to pro actively push for a some kind of major change to the monetary system. I believe if that were going to happen, we would have seen it happen by now already. Instead, it appears that it will take some kind of outside force to prompt any major changes. We know that many countries (led by China and Russia) would love to see the present US dollar based system replaced with something else that denies the US its exorbitant privilege. That has been true for a long time and yet we have seen no such change take place. And most analysts continue to say they don't see anything replacing the US dollar any time soon, including those from Russia and China. The best speculation I would offer at this time is that the US will continue to try and preserve the current system as long as they can, or saying it differently, until they can't.

Q: Would there by any difference on this issue if Trump wins or if Biden wins?

A: It's possible that a Biden Administration would be more open to some changes to the monetary system quicker than a Trump Administration would be. However, there was no urgency for any such change during the Obama Administration when Joe Biden was Vice President. It is true that that the support base of the Democratic Party is much more progressively left now and we can expect that a number of progressive economic policies would emerge in a Biden Administration. It is less clear that one of those policies would be a major push to move away from the present US dollar based system. The proponents of Modern Monetary Theory don't suggest anything other than the US dollar would be part of their policy proposals. Basically, they want economic policies similar to what we are seeing right now in response to the virus pandemic to greatly expand and some different priorities for where the money goes. We are already doing that now under the Trump Administration, just  not they same way the progressives would do it. My best guess at this time is that either a Trump or a Biden Administration would try to hold on to the present US dollar based system as long they could. The current trajectory of the US debt along with the current ongoing massive expansion of the balance sheet at the Fed suggest that we are likely to arrive at a point in the future where they simply cannot continue to sustain the present system. The only difference perhaps being the speed at which we arrive at that point in time. It does not appear that anyone in either political party intends to even address this issue at all until forced to do so.

Q: So, what differences would there be if events unfolded that forced the present system to change?

A: That is where we are more likely to see some bigger differences in my view. In a Trump Administration, we can reasonably expect that some kind of 'America First' policy would be implemented. The primary goal would be to protect the specific interests of US citizens and the US interest as a nation in whatever policy was adopted to deal with monetary system change. In a Biden Administration, it is reasonable to expect that a more 'globalist' approach would be taken. A Biden Administration is more likely to reach out to global institutions such as the The World Bank, the IMF, and the UN. I'll try to illustrate the potential difference with an example. If the present system failed and a global monetary conference were held (a new Bretton Woods let's say), we would expect such a conference to by US led and with a priority towards support of US interests in a Trump Administration. Such a conference in a Biden Administration would be more likely to be led and directed by the IMF with the US more just a participant than the leader and more willing to compromise on protecting strictly US interests. We can use the climate change issue as a kind of example. Under the Obama Administration, the US agreed to the Paris Agreement on climate change. President Trump pulled the US out of that agreement believing it was not in the best interests of the US or was unfairly weighted against the US in its implementation procedures. It's reasonable to expect a similar kind of difference in approach if any global monetary conference were held in the future to deal with a failed monetary system.

Q: What is your opinion as to how all this will turn out?

A: My opinion is that it is unlikely we will see any major changes before the US elections as this issue is not on the radar for either side at all. So, they won't even talk about it unless some kind of major crisis collapsed the present system ahead the election and they were forced to deal with it. At some point in the future (timing unknown to me), I believe the present system will fail due to loss of credibility in the markets in the value of the US dollar and US dollar denominated assets. When that day arrives, what happens will depend upon who is in power. Therefore, I view it as impossible to predict what reforms of the system will be promoted or adopted. We can safely assume however, that the US dollar will have suffered a significant loss of purchasing power no matter what the new system looks like. I would add that I am not alone in this view with even highly credible experts like Ray Dalio talking about the same future prospects for the US dollarThis is why it is wise for anyone who can to diversify your assets now and hedge against this possibility. In addition, this blog has attempted to document a number of ideas and proposals for major monetary system reform which can be found here. Many of these are based on direct input from credible experts from around the world. It is possible one or more of these ideas may be looked at and more than one may have to be tried to restore public confidence in money and the monetary system.

Q: When will this happen?

A: I don't believe anyone can answer that question with precision. We are now deep into our second major global economic crisis in the last ten years. Thus far the response by those in power is to just create any amount of money required to prevent some kind of major deflationary collapse. There is no indication that anyone in power now or after the US elections plans to alter this course until they are literally forced to do so. It is clear that they have unlimited faith that public confidence won't be lost no matter what they do

So, really, the question becomes how long will the markets and the general public continue to believe in the present monetary system and the US dollar

The only answer I can offer is that they will continue to believe in it up until they day they don't --- based on future events and confidence in systemic institutions that cannot be predicted with any certainty at this time. I think it is obvious that political division in the US is at an all time high and whoever is elected and holds power will have to contend with that problem. There is no indication whatsoever that one side or the other winning the election will make that problem go away. So again, hedging against a very uncertain future in any way you can is a wise course of action.

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