This followup article at the OMFIF delves into the implications of China working hard to implement its version of a central bank digital currency at the PBOC. The article suggests one key objective would be to disrupt the current US dollar based monetary system and reduce the ability of the US to use "soft power" at SWIFT. Below are a couple of excerpts.
"Just as the US Treasury was mailing out physical stimulus cheques, the People’s Bank of China began its beta testing of a national digital currency in four cities. Future economists will look back on these counterpoints as the start of the digital currency era.
Discussions about alternatives to fiat currency were speculative, until last August. At the 2019 Jackson Hole Symposium, Bank of England Governor Mark Carney stated that a new form of global digital currency could be ‘the answer to the destabilising dominance of the dollar in today’s global monetary system’."
. . . . .
"As Robert Kaplan, president and chief executive officer of the Federal Reserve Bank of Dallas said last year, "The dollar may not be the world’s reserve currency forever, and if that changes, and you tack on 100 basis points to $20tn, [that is] $200bn a year and all of a sudden we’ve got a tremendous problem."
. . . .
. . . . . "The dollar’s ‘destabilising dominance’ gives the US the ability to use the international payments system as an arm of its foreign policy. The real and serious implication of replacing the existing payments systems with the new infrastructure based on digital currency is that no clearing and settlement means no transactions going through the international banking system. . . . "
Added comment: In an earlier blog article we noted that relations between the US and China are clearly strained heading into the US elections. One of the bullet points we listed talked about the desire of China to set up an alternative payments system to bypass SWIFT and reduce dependence on the US dollar around the world.
Reader note: In October I will post one article that takes a deeper look into what happens in the US if no one is able to claim enough electoral votes to be declared a winner on November 3rd. There is an actual Constitutional set of rules that could come into play. Also, I plan to offer an article titled - The Three Most Important Things I Have Learned Doing This Blog some time in October. Unless there is some kind of relevant news that needs to be covered, that may be all the articles to post here until after the November elections.
Below are some featured pieces from the monthly OMFIF update on central bank activities related to studying the implementation of central bank digital currencies. I have pasted in video discussion that focuses on efforts underway in Asia for those interested in this topic.
Video: Central bank digital currencies and blockchain
Following technology breakthroughs by private cryptocurrencies, central banks are considering the use of distributed ledger technology and blockchain to develop their own digital currency. However, there remains much debate over the ideal technological infrastructure to operate CBDCs. This discussion addresses how blockchain could benefit CBDC. In cashless Sweden, for example, concerns about the marginalisation of cash are the main driver for exploring the potential of an e-krona.
OMFIF is pleased to welcome Algorand, a technology company dedicated to removing the friction from financial exchange, as the latest member of the Digital Monetary Institute.
Algorand joins other leading financial institutions and technology companies to help inform a range of discussions and research on the adoption of digital currencies by central banks
Added note: If you want to explore this topic in depth, you may want to visit the Digital Monetary Institute section of the OMFIF web sitehere. So far most central banks still are just in the evaluation process rather than any implementation process with the possible exception of China which is discussed in the video just above. Coming up in a couple of days will be an article that looks deeper into the effort by China to reduce dependence on the US dollar and bypass the SWIFT network.
Earlier this year, we did a fascinating interview with Robert Pringle who had just released his new book The Power of Money. Robert has decades of experience working with central bankers from around the world. At one time he was the Director for the Group of 30. He was also the head of The World Gold Council's public policy unit. Robert can talk about events and decision makers from direct first-hand experience which makes his observations extremely valuable. Anyone who has followed the monetary system issues we cover here, which includes the impact of gold over time on that system, will obviously be interested in what Robert has to say.
With that in mind, we will feature a recent article appearing here in The Telegraph (UK). The article talks about how recent events and central bank monetary policies are causing gold to once again attract attention around the world. We all know gold just recently reached an all time high price in US dollars. This article in The Telegraph makes some interesting statements and we encourage readers to read the full article. Below are a couple of selected excerpts and a few bullet point observations from the article. I sent this article to Robert Pringle and he kindly offered to provide some interesting historical perspective on one of the events mentioned in the article since he was there as a first hand observer.
------------------------------------------------------------------------------------------------------------------------ From the Telegraph article:
. . . . "It is now relatively commonplace among the super-rich to have at least some small part of their wealth diversified into gold. Call it an insurance policy against “when money dies”, the title of Adam Fergusson’s brilliant history of the Weimar hyperinflation. Few serious economists would think a repeat of this monetary meltdown remotely possible in today’s advanced economies, all of which have strong institutional frameworks to keep inflation in check. But more or less everywhere, currency debasement is now rife to help pay for the burgeoning costs of the Covid-19 crisis and that’s set alarm bells ringing." . . . . . "Nor is it just the wealthy who are using gold as a means of hedging themselves against a devalued dollar. The Chinese authorities have been steadily increasing their gold reserves for some years now, resulting in a massive transfer of the metal from West to East." . . . . . "Whatever; the fact is that gold tends to sustain its value over time. National currencies, eroded by inflation and political manipulation, do not." . . . . . "As I say, a rising gold price reflects, above all other things, a loss of trust in the value of fiat currencies, for which there is good reason right now." This article, as shown above, states that gold has held up over time in terms of holding its purchasing power better than national fiat currencies in general. It also says: - the UK sold off a large amount of its gold reserves at much lower prices years ago (see Robert Pringle's recollection of that event below) - current central bank policies in response to COVID-19 are debasing currencies - the least painful way of dealing with debt overhang is to "inflate it away" -"gold bugs" may end up being right about future inflation despite the present threat of deflation that central banks are currently fighting Robert Pringle reviewed this Telegraph article and offered these observations based on his own personal experiences:
"I was quite deeply involved in orchestrating the public opposition to these sales (1999 UK gold sales) with the slogan “Hands off our gold!” The World Gold Council took a whole page advertisement in leading popular newspapers to protest. This intensely annoyed ministers. Then I was called into Her MAJESTY’S TREASURY for a personal reprimand by Gus O’Donnell, senior adviser to Brown and later head of the British Civil Service and top adviser to three prime ministers. He was intensely irritated. He told me: “This is not the way to influence Ministers”!
We also ran a call centre campaign. On day one the call centre, which had 20 agents answering calls, crashed in the first 20 minutes. We also sailed a barge up the Thames and parked it outside the House of Commons. It had a banner on it saying ‘Gordon Brown & Co: Scrap Metal Merchant’ with pots and pans painted in gold colour. Pictures that appeared were on the front page of leading national newspapers the next morning.
The sale was a personal decision by Gordon Brown on the advice of the Treasury mandarins who thought it would make him look “modern” and of course it all came unstuck. It would plague him for the rest of his career and remains one of the great blots on his reputation.
I also played a role in persuading central banks to to do something about the collapse of the gold price when they put a floor under the market later that year - but that’s a story for another day (for those who can’t wait it is told in my book The Power of Money -page 189)." --- Robert Pringle
------------------------------------------------------------------------------------------------------------------------ Added note: A thank you to Robert for sharing these recollections for readers here. These kinds of observations coming from someone directly involved with the event are hard to find and much appreciated here. Perhaps he will share more on the central bank agreement done in 1999 to limit gold sales. He talks about it in his book for those who recall that agreement and want to learn more about it. One thing I have learned from Robert over the years is that events like this are understood with better insight if you have input from those directly involved at the time. Here is a BBC article from 2019 that provides some additional historical background for the UK gold sale. It also references the 1999 central bank agreement to limit gold sales that Robert talks about above from personal recollection.
The COVID-19 pandemic has led to economic hardship all over the world, not just in the US or other western nations. One of the issues that has been raised around the world is whether or not the IMF should consider doing some kind of SDR allocation to increase SDRs to member nations. This happened before in the last financial crisis with the IMF itself noting that a main goal was to offer help to low income countries, per this statement in the official IMF release:
"About $110 billion of the combined allocations will go to emerging market and developing countries, including over $20 billion to low-income countries. Many of these countries currently face difficult spending decisions as they decide how to address the fallout from the global crisis. For them, the SDR allocation means potential access to unconditional financial resources that could limit the need for adjustment through contractionary policies and allow greater scope for countercyclical policies in the face of recession and rising unemployment."
Recent calls for another similar new SDR allocation were met with resistance from the US and India, with the US stating that most of the SDR allocation would end up going to nations that don't need it rather than the nations who might need it the most. In the previous IMF allocation linked above, they made this comment about that issue:
“The general SDR allocation is a key part of our response to the global crisis, demonstrating the value of a cooperative multilateral approach,” IMF External Relations Director Caroline Atkinson said. “The Fund’s low-income members will benefit significantly,” she added. Despite a smaller number of SDRs going to the IMF’s low-income members, the allocation will result—in most cases—in a proportionately bigger increase in reserves for them than it will for the advanced economies, which already have a substantial cushion of reserves." With this backgrond, an article by Louis Namwanja Kizito recently appeared in The Observer (in Uganda) calling upon the IMF to issue new SDRs to lower income nations in need, specifically in Africa. The article notes that it is true that most of such an SDR allocation would go to developed nations such as the US that can use the global reserve status of its own currency in a way other nations cannot to obtain liquidity during a crisis. The article even notes that ever since the US left the gold standard in 1971, it has "gone on a money printing spree without a gold limit". The Observer article also calls for a reform of the SDR allocation system at the IMF and describes it as unfair. The SDR is something we have covered here on this blog for years. Our leading expert on this topic is Dr. Warren Coats who at one time was the head of the SDR Division at the IMF. Dr. Coats has been kind to offer his extensive knowledge of the SDR to readers here over the years including an interview he did here to explain his Real SDR proposal for monetary system reform. I asked Dr. Coats to review this new article in The Observer and offer any thoughts he might have on it. Once again he kindly took time to do just that for readers here. These were his thoughts on the article he sent me by email: "Almost all central bank laws make the stability of the value of its currency the primary mandate of the central bank. This is the best contribution that monetary policy can make to an economy. Giving a central bank the additional fiscal goal of redistributing income to the poor is a very dangerous idea. Rather than taking from the “rich” to give to the poor with traditional taxes, printing money and giving it to the poor takes from those that have to give to those that don’t via inflation. While I disagree with the U.S. opposition to an SDR allocation at this time, Mr. Kizito misunderstands how the SDR system works. The allocation of SDRs to countries is, in effect, the allocation of lines of credit. If a country uses any of its allocated SDRs (spends them), it must pay interest on such uses at the SDR interest rate. The purchaser or acceptor of these SDRs is, in effect, lending dollars to the user, though without the policy conditions that normally accompany IMF loans. The size of allocations are related to the size of the recipient countries economy and thus its capacity to repay." - Warren Coats
---------------------------------------------------------------------------------------------------------------------- My added comments: A thank you to Dr. Coats for taking time to review this article and offer his comments on it. When I read many articles about the SDR, I often find there is quite a bit of misunderstanding about how SDRs actually work at the IMF. Dr. Coats is without question one of the leading experts in the world on the SDR and the SDR allocation process and an excellent source to explain how it works for us.
Added note 9-21-2020: Dr. Coats has announced he has a new book out based on his travels to Afganistan after 9-11. He worked with a team trying to establish a more modern monetary system in Afganistan. You can find the book here.
Massive attention is now focused on the upcoming US elections. Most everyone believes that who wins the election will have a huge impact on their daily lives. Of course both sides feel that if the other side wins, the impact will be very bad and if their side wins, the impact will be very good. We won't try to get involved with any of that here. First, we don't know who the next President will be. Next, we don't know if that person will have a Congress controlled by his own party or not. Finally, if this election turns out to be very close, we don't even know for sure how long it will be before we know who our next President will be or who will be the new members of Congress. All of that is beyond our ability to forecast here.
What we can do is try to look at all the possible outcomes and then try to assess how they might impact our economy and our monetary system which is what we focus on here. We listed three possible scenarios:
1- President Trump wins re election (but what will Congress look like?)
2- Former VP Joe Biden is elected (but what will Congress look like?)
3- We have no clear winner in November and it takes weeks to months to get a winner (both for President and in terms of which party controls the House and Senate)
That's three scenarios, but all the additional possible scenarios depending on who controls the House and Senate create a complicated matrix of possibilities.
How are we to deal with this much complexity and uncertainty in terms of trying to assess the future and make personal financial decisions? Let's look at this a bit differently in terms of how it might impact our economy and our monetary system going forward.
Obviously, which side wins will impact the fiscal policies put forward by the Federal government. Both sides have made it pretty clear what they would do if elected so that is not all that complicated. If one side or the other sweeps the election and controls Congress and The White House, you can assume they will move to implement the taxing and spending policies they have outlined. Complication sets in if neither side is able to gain control of both The White House and Congress. In that scenario, it is reasonable to expect just more of the same we have had for a long time now (deadlock) and the intensity of opposition to whoever is in The White House ramped up even higher -- as hard as that may be to imagine. The US is no longer a nation of a majority being in the middle. It has split into two very divergent camps that have made it clear they will carry on a "resistance" using all means available against the other side if they are not in power. So we should expect all the above no matter who wins this November.
Perhaps another way to look at this is to ask: Will there really be a major disruption in our economic system and our monetary system in the next four years or not? Regardless of who our next President may be?
This, we think this is the more important question to consider because if we don't see all that much major change (just tweaking of tax rates and which special interests benefit the most from government spending as usual), we can make one set of personal financial decisions based on that scenario relatively easily.
On the other hand, what if next year in 2021 (or even earlier), we really do start to see major disruption in our present system? Either from radical changes in fiscal policies, major declines ramping up in the stock and bond markets, or from lingering effects from the economic fallout from the global pandemic. This is the scenario predicted by Michael Oliver in the interview just below. We recommend readers listen to the full interview to get his perspective on what to expect. Further below we will offer a summary of his view and some added thoughts on what that means for each of us trying to make personal financial decisions
Michael Oliver is an investment adviser who has had a very solid track record forecasting future long term market trends over time. He is now laying out a long term forecast that is in line with what others we have noted here are saying (like Jim Rickards and Ray Dalio for example). They are predicting we will start seeing events that will finally lead to disruption of our existing economic and monetary system. All of them are advising people to take a defensive position and acquire hard assets as insurance against an uncertain future. Lately, we see even Berkshire taking a more defensive position in it's portfolio.
In the interview above, Michael Oliver sees a US stock market peaking out soon (perhaps in September) and starting into a long term slow decline (not a crash, a long term slow decline). He sees the bond market following that later on next year as the Fed loses its ability to control longer term interest rates. He says the downturns in the stock and bond markets will lead to more money flowing into commodities of all kinds including gold and silver in the coming years. He says that these changes are due to decades long trends that cannot be reversed no matter who wins the elections this fall. Analyzing these kinds of long term trends is his area of expertise.
In our view here, this is what readers need to consider for personal financial decisions. Not so much who wins the upcoming elections, but what will actually happen next year regardless of who has won. If nothing much changes in the basic system, then readers can use one set of assumptions in making personal financial decisions. If Michael Oliver and others are right, readers would likely use a different set of assumptions in making personal decisions because markets that have worked for a long time may not continue to work while others take over and move into long term up trends.
The view here is that having a plan in mind for either outcome (not much change or the major changes Michael Oliver predicts) is a good idea. We are living in possibly the most uncertain time in my lifetime in terms of projecting where things are going in the next four years after this election. This is the time to think more broadly about how to plan for that rather than more narrowly. I say this in terms of being ready for several more years of just minor tweaks to the system or being ready for big market shifts out of stocks and bonds and into hard assets. There is a growing list of credible mainstream market analysts predicting the latter. As an example, the Telegraph (UK) runs this article. (See note below for more on this article in The Telegraph)
------------------------------------------------------------------------------------------------------------------------ Note to readers: Coming up on the blog over the next week are two articles with direct input from experts. First, Dr. Warren Coats comments on a recent article calling for a new allocation of SDRs at the IMF in response to COVID-19. Dr. Coats is the former head of the SDR Division at the IMF. Next, Robert Pringle comments on an article appearing in the The Telegraph (UK) that talks about gold's recent rise versus fiat currencies. Robert offers some insight based on his personal involvement with one of the events mentioned in this Telegraph article (the UK sale of some of its gold reserves). These are two upcoming articles I encourage readers not to miss.
Readers here know that we try hard not to push any kind of political agenda here. The goal here is to just try to provide the best solid information we can find. However, with the electric election atmosphere we have coming up over the next couple of months in the US, it would be almost irresponsible not to try and alert readers to keep an eye out for just about any kind of wild series of events over the next two months.
Below we will try make a bullet point list of just some of the major potential trigger points for all kinds of wild market activity between now and the election.
First. let's try and assess the ongoing tensions between the US and China which could certainly be potential triggers for volatile market behavior. Here are just some I can think of: -the US feels China played a role in the spread of the virus pandemic and this has hurt US-China relations significantly -in response the US has become more aggressive in taking confrontational moves against China including restricting access to US dollars -some have suggested the US could go further and attempt to freeze China outof the SWIFT system (international payments system) and the CHIPS system - Jim Rickards has suggested the US can put a hold on the $1.4 Trillion in US bonds held by China legally without defaulting on the bonds as a claim for reparations from financial damage incurred from the virus -China has been working hard to setup an alternative payments system to bypass the SWIFT system if needed and to reduce dependence globally on the US dollar -numerous articles are appearing in both western and eastern media suggesting the US dollar is being weaponized as part of the buildup of tensions -some articles have appeared suggesting that China could be the entity taking large physical deliveries of gold as part of this ramped up "cold war" with the US and the west (perhaps to try to drive the gold price sharply higher and add further disruption to markets heading into the election?). This is speculation, but we know some large entity or entities have been taking large deliveries of physical gold this year in markets that usually trade mostly paper futures contracts. If we accept news reports that US and Chinese relations have soured and that China might prefer a Biden Administration over another Trump Administration, we then have even more speculations that could increase tensions further. These include suggestions China is trying to influence the US elections. Some reports have China supporting VP Biden and Russia supporting President Trump. Whether these reports are accurate or not, the potential exists for all this to come into play in a negative way if the US election is very close (and perhaps even not quickly decided). Whoever loses the election is more likely to claim they lost because of foreign interference in the election process. No one will be surprised if the losing party refuses to accept the winner as valid (So yes, 2020 could get even worse). I think it goes without saying that another election with no immediate clear winner (like the 2000 election) could be a significant trigger for market volatility. We are already seeing reports that both sides have hired hundreds of lawyers. Allegations of possible voter fraud won't surprise anyone. This could also mean the winner won't be known quickly after the election. If all that is not enough, I suspect that anyone with a pulse thinks that both sides involved in this election will pull out all the stops to win. We should not be surprised at any kind of major unsavory news that surfaces just prior to the election (or any dramatic attention grabbing events). If there was ever an election year to somewhat anticipate an "October surprise", it would have to this one. On top of everything else, we have the US and the world struggling with a once in a century global pandemic and all kinds of disruption to both normal economic activity and just regular social activity. Frustrations from all this continue to be high and we can expect that everyone trying to win this election will be wanting to assist voters in knowing who to blame for all this. We have seen tensions flare up from this situation all year long already. With just 60 days until the election. all the ingredients described above (and others I didn't even think of) create the potential for a very wild ride into early November. How wild could things get? Jim Rickards forwarded me this link to an article that explains it could get wilder than than any of us might imagine. It is possible the wild ride could go well beyond November 3rd; depending upon how the election turns out and how the public accepts the results. I cannot stress strongly enough to readers here that you should be prepared for all kinds of unusual events and possible market volatility under these conditions. You should think carefully about some kind of plan to try and insure against very high levels of uncertainty heading into this election and beyond that into 2021. There is nothing that suggests the deep divisions that exist in the US will disappear after the election no matter who wins. ------------------------------------------------------------------------------------------------------------------------ Added note: Readers here know that this blog is not a commercial venture and that I don't promote any products for sale since the goal here is to be a free information resource to the public. I do not receive any kind of income from anything I mention on the blog such as a book. If I ever did do that, I would make readers aware of it. With that in mind, I do want to let readers know that Jim Rickards does have a new book coming out in October that will provide his latest analysis and recommendations on how to deal with all the uncertainty mentioned above. I can recommend any book Jim writes because he has been very good at projecting possible future economic scenarios and the information he provides often can be helpful to people like myself in trying to decide how to prepare for uncertainty. The goal of this blog is to try and be helpful to people like myself who are not trained in economics. If all goes as planned, I will get an advance copy of his new book and will do a Q&A style interview with Jim sometime in October assuming his schedule will allow time for it. I discussed with him the idea of trying to do some interview questions around the theme of -- What can millennials do to help themselves prepare for whatever may lie ahead? We have tried to do some articles focused on millennials on this blog recently (here, here and here). Of course the information in the book would apply to everyone as well as millennials, but millennials have more future to deal with than people from my generation (Boomers). Hopefully we will be able to do this interview. Jim has been very kind over the years to offer his time and comments for readers here at no personal benefit to himself. I have no problem alerting readers to his new book and I expect they would benefit from the information that will be in it. This is especially the case as we are living in crisis conditions right now much as he has predicted we would see for many years.
