Will Any Significant Change to the Present Monetary System Take Place in 2021?

Since we are about to head into a new year, it seems appropriate to try and provide some kind of update on the primary question this blog was created to follow  -- Will Any Significant Change to our Present Monetary System Take Place in 2021?

The answer we have offered here for some time is that while conditions that could lead to major changes do exist, so far we have not seen it. All the information sources I follow and get direct input from still do not tell me they see any indications of major changes are coming soon. Most of these sources agree it is always possible, but there is no indication that those in charge of the present system have any desire to rush forward with major changes unless events outside their control force them to do so. That is still the best information we can provide at this time looking at dozens of sources I do follow and hear from.

So, what are the key events to follow in 2021 that could change things and disrupt the present system so much that some kind of major change does happen? I have three to talk about at this time:

1- The 2020 US election results and the related controversy/skepticism surrounding the election. By now, I suspect most readers know that the 2020 election has done nothing but further ramp up the huge political division that has existed in the US for years now. Currently, most expect that VP Biden will take office in January. We are still waiting to see who will control the Congress as two Senate seats in Georgia are still undecided until January 5, 2021. There are two aspects to the election results to follow that could cause some level of disruption to the present system:

a) If the Democrats win the two open Senate seats and then control The White House and the House of Representatives and the Senate, it opens the door to some more radical changes to the system than we have seen in some time, especially fiscal policy. There has also been talk of potentially "packing the Supreme Court" to alter its makeup and adding additional states to the US. This would virtually cement Democratic Party control of the US far into the future since these states would elect Democratic Senators. Major fiscal policy changes then become more likely that could eventually impact the present system. However, my best guess at this time is that even if all the above does happen, it is not likely to cause major changes to our present monetary system any time soon. I would just advise readers to follow this and watch for any signs of major change.

b) It is now crystal clear that millions of supporters of President Trump believe so much fraud took place in the recent election that it was actually stolen. Nothing is going to change this no matter what happens in the coming weeks and months. VP Biden will enter office as possibly the weakest President in history given that at least half the country will not view him as a legitimate President. This is somewhat the same as has been the case for President Trump over the last four years. While this huge political divide has not so far triggered such disruption to the present system that it implodes, at some point it may. So I would advise readers to keep a careful eye on this as well going forward in 2021.

2- The Long Term Health and Economic Impacts of the COVID Pandemic and the Response to It. In my view, this problem has more potential to eventually so disrupt the present system that changes have to made than number 1 above (the election results). We have already seen enormous negative impacts from this on both the health front and the economic front globally. Jim Rickards will have a new book out that takes a deep dive into this whole situation (The New Great Depression). All of Jim's books are worth reading for the average person, but this one may be the most important one people need to read. I have an advance copy of the new book and will post some comments on it early in January 2021 before the book is released for public sale on 1-12-2012. Jim explains in detail the risks this virus and the response to it bring to all of us and how this will not go away quickly. In my view, everyone needs to learn as much as possible on this topic because this is far from over and if things go south from here with this virus, it can certainly become a threat to the sustainability of our present system and force major changes to happen. Jim explains why even a vaccine does not mean we are out of the woods.

3- The continuing breakdown of trust by the general public in all our major institutions including government, media, and the educational system. As noted in number 1 above, the recent US election has done nothing but further erode public trust in our institutions for millions of people. Of course most people already know Trump supporters feel the system is corrupt and rigged against "the average person" which is why he has the support he has. But now item number 2 above is also eroding public trust and not just by Trump supporters. 

Below I am linking to two examples of this coming from the other side of the political spectrum. The first link is a recent video done by Robert F. Kennedy Jr. questioning all kinds of things about the COVID virus and the government response to it. He also calls out Big Tech and other major corporations as part of the problem and not the solution. The second link below is to a new article about Democratic Congresswoman Tulsi Gabbard (D-HI) calling out some of the same people as Robert F. Kennedy Jr. does in his video. On top of that, she proposes a 95% excess profits tax on some specific major corporations she says have unfairly profited from the COVID lockdowns. She says small businesses have been forced to close and millions lost their only means of making a living and should get help from her proposed tax. The point to understand here is that it is not just Trump supporters who believe something is wrong and our present system is very corrupt and rigged against the average person.

These two links below illustrate this view is not confined to one side of the political spectrum. In the future, it will be interesting to follow this and see if these two very large groups (Trump supporters and Benie type supporters for example) start to join together in a populist movement unified by their distrust of the present system more than they are divided by their political views. I would advise readers to follow this as well in 2021. If enough people lose trust in our system, we could reach a tipping point that could force major changes to happen despite the reluctance of those running the system to make such changes.

1- RFK Jr. on COVID and the response to it

2- Tulsi Gabbard Proposal to Tax Some Major Corporations to Help Small Ones

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Added comments: I do plan to post an article on Jim Rickards new book in early January. Depending on what ends up happening with the election results, I may post something on that if it seems relevant to the main topic here. Beyond that, I do not have any further articles planned for the blog and may not post articles again for some time (or at all) unless something new happens to suggest something may change. Otherwise, there is just not much to report.

News Note: G7 Says Currency Monopoly Must Remain in the Hands of Nations

Once again the G7 affirms their dedication to preservation of the status quo in this Reuters article. Recently we posted this article about three important things learned from doing this blog over the years.  The third item was -- It is much harder to get consensus for major change to a system than many people realize. 

This article is yet another example of that. Basically, the G7 is quite content with how currencies work now and not interested in any changes outside the control of the present system. Below is an extract from the Reuters article.

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"German Finance Minister Olaf Scholz issued a sharply worded statement after the meeting, underscoring his concerns about authorizing the launch of Facebook’s Libra cryptocurrency - newly renamed Diem - in Germany and Europe.

“A wolf in sheep’s clothing is still a wolf,” he said. “It is clear to me that Germany and Europe cannot and will not accept its entry into the market while the regulatory risks are not adequately addressed.”

He added: “We must do everything possible to make sure the currency monopoly remains in the hands of states.”

Read the full Reuters article here

Jim Rickards Latest Interview

While we continue to wait and see what implications (if any) the recent US elections may have on the present monetary system. below I have pasted in the latest video interview done by Jim Rickards. Lots of readers here follow Jim and like to keep up with his latest comments. They discuss his upcoming new book to be released in January 2021 - The New Great Depression.

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Added comment: I have had numerous email exchanges with Jim Rickards regarding the status of the US elections. His comments are interesting to say the least and we are both following events to see if anything significant results from all the rumors and confusion now circulating in all kinds of media. So far, it is still too early to draw any final conclusions. It will likely be January 2021 at the earliest before things get clearer.

John H. Cochrane - Debt Still Matters

Since it will some time before we know how the US political situation will pan out, here is an article by John H. Cochrane that may be of interest while we wait to find out if we end up with a divided government again or not. 

At this point, that is the one outcome from the elections that could have some impact on what we follow here. Right now, there is nothing to suggest any kind of major monetary system reform is on the near term horizon as a result of the US elections.

Below are some selected excerpts from the article and the and few added comments.

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"In 2021, the United States is projected to pass a milestone: US federal debt is forecast to exceed 100 percent of GDP. In fact, according to an October estimate from the nonpartisan Committee for a Responsible Federal Budget, the debt has already eclipsed that mark. But does all this debt matter, or is worrying about debt passé?

This debate has been going on among economists for a while. Modern monetary theory has gotten a lot of attention for its arguments that debt has few consequences, but one need not go to the extremes of MMT to find support for such a view. Some in the mainstream of economics have argued that since the interest rate on US government debt may be lower than the growth rate of the economy, the US can roll over debt forever. Others have advocated that additional debt-financed spending may have so strong a multiplier as to pay for itself, a super-Keynesian version of the Laffer curve."

. . . . . 

"Everyone recognizes that there is a debt-to-GDP ratio limit out there somewhere. It is not a hard and fast limit. Bondholder patience combines government debt, other opportunities, and bondholders’ view of the government’s political stability and willingness to pay back debt. What is clear is that finding the limit will be unpleasant, involving essentially a sovereign debt crisis, a sharp inflation, devaluation, and financial catastrophe."

. . . . . .

"Still, what should we be afraid of? The vision of grandchildren saddled with taxes, or even just unable to borrow more while the economy sits at its limit of, say, 200 percent debt to GDP, is indeed not a salient brake to spending.

That is not the danger. The danger the US faces, the danger we should repeat and keep in mind, is a debt crisis. We print our own money, so the result may be a sharp inflation that wipes away the value of debt rather than an even more disruptive default, but the consequences will be almost as dire."

. . . . . .

'We cannot tell when the conflagration will come. But we can remove the kindling and gasoline lying around.  . . . . . ."

Please click here to read the full article on Chicago Booth

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My added comments: This article is in line with what we have reported here for some time. Most economists seem to agree our present situation is not sustainable over time. However, no one seems to know just how much more "over time" we are talking about. 

Are we on the verge of some kind of implosion in the year just ahead? Or can we muddle along yet another 5-10 years with ultra low interest rates and a gradually increasing Debt/GDP ratio like this article talks about? This article says what we have said here. No one really knows the answer. The article notes that as long as we have "bondholder patience" and a well functioning printing press, the present system can just keep going. 

The purpose of this blog has been and is to watch for indications that the present monetary system cannot continue to muddle along and to watch for some kind of major reform or reset of the system. We'll continue to do that, but until something changes the status quo substantially, there may not be much to report. Meanwhile we will watch for news notes or educational type articles that may be worthwhile for readers. If it appears the final election results may impact potential change, we will do some kind of post election analysis in January 2021 after the remaining Senate races are concluded. Obviously, if we have continued divided government, that is likely to just support the status quo of the present system.

Central Bank Gold Reserves Survey with Added Comments from Robert Pringle

Centralbanking.com is out with a new survey of gold reserves at central banks around the world. Robert Pringle is a co author of this article along with Nick Carver. Mr. Pringle advises me that they have done surveys of central bank reserve management including gold  for many years. 

Below I have pasted in the Executive Summary and further below Mr. Pringle kindly agreed to answer a couple of questions related to central bank gold reserves. I see these questions asked quite often and I know many readers have interest in them.

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Executive summary  

- The Covid‑19 pandemic has not, in the main, changed the view of central banks on gold, although almost one-quarter of respondents said they view gold as a more attractive asset. 

- Central bankers typically expect central bank gold holdings to increase over the next 12 months; no respondent expected a decrease. 

- When determining a central bank’s gold holding, the benefits of diversification stand out as the most relevant factor for reserve managers. 

- One in three central banks said they maintain a target allocation for gold: this rose to 39% of respondents when only those holding gold were considered. 

- Purchases in the global market are by far the most popular means of buying and selling gold, with derivatives second. 

- Overseas storage at a central bank is the preferred way to store gold: more than 80% of respondents said they did this. 

- Central banks are positively disposed to gold exchange-traded funds (ETFs), but active interest in investing is the preserve of a minority. 

- A combination of gold’s quality as a hedge against the US dollar and ETFs’ cost-effectiveness are the main benefits for holding ETFs. 

- Liquidity risk is the chief concern associated with holding gold ETFs, although larger holders say safety regarding physical gold is more of an issue.

Please go here to read the full survey on Centralbanking.com

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Robert Pringle

Many readers here have interest in gold and also how central banks view gold. In addition, there are many who wonder if any central banks or the IMF have any plans to back their currencies (or the SDR) with their gold reserves. I asked Robert Pringle if he would be willing to give his thoughts on these questions and he agreed to offer them for readers here.

Q: Are you aware of any central bank in the world (including the PBOC in China) that is considering backing its currency with its gold reserves?

A: No, Under IMF rules countries are not permitted to fix their currencies to gold. 

Q: Are you aware of anything that would suggest the IMF is considering backing the SDR with gold reserves or any other asset based anchor?

A: It would make sense to me but is not on the cards at the moment.

Q: In your opinion, how do you think central banks view gold and why do they hold gold reserves?

A: Well, our survey that you have kindly sumarised gives a variety of reasons - and this reflects the views and policies of the central banks themselves.

My own personal view is that despite the long campaigns against gold, the official efforts aiming to fully “demonetise” it in all respects, gold still represents for many people the ultimate reserve asset. 

It will always remain in the wings, waiting patiently to be called on in case of need.  Also, in current conditions of currency competition, gold could be yet another weapon or instrument available to nations aiming to gain a competitive advantage.

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My added comments: Robert Pringle is a highly credible expert and well qualified to offer his comments on these questions that I know many readers have. You see his extensive background here.  Robert was a founding Director of the Group of 30 Institute on monetary affairs. In 1990, he founded Central Bank Publications and is also the the author of The Power of Money. 

On a personal note, he has been very kind to offer me his insights on monetary system issues based on his decades of experience working alongside central bankers around the world. He and others continue to hold interest in monetary system reforms. He has specifically proposed using a global market index as a potential anchor for currencies. He explained his idea on that to us here in an earlier blog post.

Reader Note: Central Bank Gold Reserves Article Coming Soon

Many readers here have interest in both gold and also the gold reserves held by central banks around the world. Upcoming is an article that will feature a new global survey of central bank reserves. The co author of that survey, Robert Pringle, has kindly offered to give us his thoughts on three questions I see quite often on various media platforms. He answers these three questions for readers here:

1- Are you aware of any central bank in the world (including the PBOC in China) that is considering backing its currency with its gold reserves?

2- Are you aware of anything that would suggest the IMF is considering backing the SDR with gold reserves or any other asset based anchor?

3- In your opinion, how do you think central banks view gold and why do they hold gold reserves?

I think anyone who has interest in gold will have interest in Robert Pringle's answers to these questions. It is hard to get a lot of information on how central banks view gold and their gold reserves, so this survey and Robert Pringle's added comments can help shed some additional light on this topic.

OMFIF - Making Way for Digital Cash

 OMFIF releases this podcast which discusses the potential future for Digital Cash. You can find the podcast here. A brief summary of it is just below.

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Making way for digital cash

28 October 2020

Tim Jones, executive director of the Tata Group, joins Philip Middleton, chairman of the Digital Monetary Institute, to discuss the future of digital cash. They talk about the benefits and uses of a properly designed central bank digital currency, and the privacy issues that come with digital money. They also explore how digital cash could complement physical cash, and the importance of the relationship between central banks and consumers.

Nikkei Asia - China's Yuan Nowhere Near Cracking US Dollar Hegemony

This article in Nikkei Asia is an update on the ongoing efforts by China to disrupt the current monetary system dominated by the US dollar. Basically it just continues to confirm what we have reported here on this blog for some time. Below are a couple of excerpts from the article. 

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"Yet for all Beijing's ambitions of cracking the hegemony of the U.S. dollar in the face of Trump administration sanctions, the yuan still has a long way to go. While this week's meeting of the Communist Party Central Committee looks likely to take up the cause of yuan internationalization, the currency will not be taking the greenback's place on the world scene any time soon."

. . . . . . 

"Far more must be done for the yuan to really displace the dollar. A fully open capital account remains a key prerequisite. These days, 2030 seems to be China's new target for achieving that, with the previous goal of 2020 fading from memory."

News Note: Post Election Update

The US election is now officially completed with no official winner. Since we are clearly potentially headed into uncharted waters, I wanted to provide an update here for readers in an effort to provide a public service. I have no doubt there is going to be massive public confusion now, so it is important to get as much accurate information as possible to try and understand how this situation will eventually get resolved.

First, we have several states viewed as too close to call and no one very near getting the necessary 270 electoral votes to win. In particular, Michigan, Wisconsin, Arizona and Nevada are all so close that we can easily predict they will be contested, probably in the courts. There is no way to predict how long it would take to resolve such legal battles or the eventual outcome. I will try to offer a couple of possible outcomes. I would add that other outcomes than these are possible as we could be entering a situation with no historical precedent to use as a guide.

The Contingent Election Outcome

I laid out this scenario in a previous blog post you can find here. Scenario #5 is the one to look at. In Scenario#5 I explained how a Contingent election is resolved under the US Constitution. I also described how the US House and Senate might look since they decide the new President and VP. Everything I said earlier is still valid and right now the Republicans would control a majority of state delegations in the new House based on the races that have been called at this time. They are also likely to still control the Senate based on the numbers out there right now. It possible all that could also be challenged in the courts as well. If we go there, we are truly in a world of uncertainty with no historical precedent.

The "Some Electoral Votes are Thrown Out" Scenario

I asked a well known expert that understands this situation very well what other possible scenario could happen. I got this reply by email when I asked: Are we headed into the Contingent Election Outcome Scenario?

"Not necessarily. If a state cannot certify electors, then those electors simply do not count, so the 270 threshold is lowered. This is why there will be expedited court hearings."

So we have at least two possible resolutions. I am sure there could be more possibilities as events unfold.  I am already seeing claims of potential vote fraud coming out. If actual voter fraud is alleged in any of these states, that could complicate any kind of expedited resolution in the courts and lead to some other unknown outcome other than the two listed above. It's impossible to predict how that would turn out.

Summary: We did advise readers here that all this was possible and to prepare for this kind of uncertainty. Obviously, that is still our advice. Watch markets carefully to see how they react, especially if the outcome looks to be extended out into the future -- beyond just a few days. This election did clearly show us once again the US is a completely divided nation with whoever ends up being elected having to deal with that as a reality. Right now another divided government where no party controls both The White House and Congress is the most likely outcome based on the current election results. Today the stock market is cheering that potential outcome. That outcome also suggests we don't see radical changes to our current system unless something external forces it.

Added note 11-6-2020: With more results now posted in the election, the odds favor that VP Biden will become President and that control of the US Senate may not be determined until January 2021 as it appears two runoff Senate races in Georgia may take place with control of the Senate determined by those races. The only change I can see to possible impact on major change to the system would be if the Democrats do control the Senate and can then move forward with an agenda. Since we won't know that for some time most likely, it is time to move on from the election. Not much more to analyze now.

OT - Final Pre Election Observations

Since it is obvious that the outcome of the US election will have some kind of impact on markets and also the longer term fiscal policies of the US, it is important to at least take the election results into account for personal financial decision making. Just for my own information, I have done a fairly deep dive analysis into the early voting numbers for this election and will share that today for anyone interested.

The first observation I would make is that I still believe that all five possible outcome scenarios I listed in this earlier election outcome analysis are still possible after looking at the early voting numbers. Below I will recap a possible path to victory for each side based on the nearly 90 million votes that have already been cast. For anyone who wants to see how those votes split up by party affiliation, you can easily do that on this site (even down to individual counties). If you do that, these are some things you will see:

- 5.4 million more people who identify as Democrats have voted early compared to Republicans

- 9 million people (10%) have voted who don't want to say they identify with either party have voted early

- early voting trends suggest at least 150 million people may vote up to as high as 155 million

- most of the 5.4 million vote lead for Democrat identified voters comes from about 15 states that are heavily Democratic. Everywhere else the vote is either close or Republican identified voters lead. This is the same dynamic we saw in the 2016 election, so no surprises there. 

-in all the key swing states that should determine who wins the electoral vote, either side can still win

A "conventional wisdom" observation;

- More of the Democratic ID voters will vote early than Republican ID voters who are more likely to turnout heavier than  Democrats on election day

Using the above information, below is how each side can look at the early voting data and make a credible case to win the electoral college vote:

The Democratic Path

Democrats would look at their lead in the early voting (including some of the key swing states in the US Rust Belt) and say that that lead combined with a larger than normal number of Republican ID voters voting against President Trump will be enough to get the 270 votes needed. They would point to several suburban counties around major cities and say they see Trump under performing this time in those areas which will negate the expected election day turnout advantage Republicans are counting on to win. Of course they also point to most mainstream polls showing they will win the election. 

The Republican Path

Republicans would say they feel good because in most key swing states, they are doing better in the early voting than they did in 2016 (they are either slightly ahead, even, or slightly behind). The conventional wisdom was that Democrats would have a larger lead after early voting than they do. They then expect to get the usual election day turnout advantage to pull ahead and win the 270 votes they need based on that turnout. They agree that Trump is doing a little worse in the suburbs this time, but they say he will outperform his share of votes from the African American and Hispanic demographics this time and more than offset his drop off in the suburban vote. 

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I have dug very deep into all the early voting numbers and I can say that both of these are credible takes on the numbers. It's really not possible to say who will turn out to be right at this point because all we know is what the early voters say is their party identification (not everyone will vote their party ID). Also, in some key states (like Michigan, Wisconsin, and Minnesota) there is a large % of voters who don't say they identify with either party. I do see indications that Trump is not performing as well in some suburban areas (not all though). I do see some indications Trump is probably going to improve his share of the African American and Hispanic vote. Some polls show him possibly adding 5-10% in those voting demographics. So it is reasonable to say this happening. How many votes are moving in each direction is clearly important, but impossible to determine just looking at the early vote data.

Conclusion:

So who do I predict will win? I cannot make a prediction. If I thought there was an overwhelming case to interpret the information we have now to make a clear prediction, I would do that. But there are too many millions of votes this time that could be going either way for me to try and predict how those people will vote. This year there are also millions of new voters and millions new first time voters who have no history that you can use to assess their voting patterns. You credibly can say Trump will win if he does get a majority turnout on election day looking at these numbers, but that has not happened yet.

One prediction I can offer is that it is likely that we will not have a clear winner that is agreed upon on election day and perhaps not for several days after the election (possibly even several weeks). This is because 3 key states (Nevada, Pennsylvania, and North Carolina) will still be accepting votes up to as much as 10 days after the election. So no final vote counts will be available in those states and it is very possible no one will be able to claim those 41 electoral votes until at least several days after the election. It is also possible other vote totals in key swing states could be very close and legally contested by either side or both sides. If that happens, even more electoral votes could be held up for some time. 

Readers should expect that the outcome of this election is likely to be delayed for some period of time and that this will create significant uncertainty in markets. So don't be surprised if that does happen. 

I will attempt to analyze the election outcome in terms of any impact it may have on the monetary system once a final outcome is determined. That could be in a few days or a few weeks. Right now, I don't think the outcome will have any major impact on things in the short term (less than one year) unless some kind of major market crash is triggered for some reason.

Three Important Things I Have Learned Doing This Blog

#1 - Gotta Have This

Longtime readers here know that this blog was started years ago in an effort to offer a free resource to the public for anyone interested in issues that relate to the long term sustainability of our present financial and monetary system. I write this blog from the perspective of the average person who must try to sort through reams of often conflicting and confusing information about the state of our economy and monetary system while trying to make the best personal financial decisions for themselves and their families 

After doing this now for years and having an opportunity to get input and information both from mainstream and alternative media sources along with some excellent direct input from leading experts on these issues from around the world, I certainly have learned some things along the way. 

In this article, I wanted to share what to me are the three most important things I feel I have learned working on this blog for all these years. I will add that every effort has been made here to avoid any political agenda and instead try to focus on just reporting what I understand to be factual information and then let readers use the information to form their conclusions and opinions. Of course I have my own opinions, but the truth is that they don't really matter in terms of impacting anything that will actually happen (this is a main theme of the three most important things I have learned below)

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1 - If something wants to be viewed as money, it MUST have the trust and confidence of the overwhelming majority of the general public.  

This probably seems obvious and yet I constantly see articles and opinions all across the broad spectrum of views that imply that many people don't fully understand this basic principle. Just during the lifetime of this blog, I have read literally hundreds (perhaps even thousands) of articles and opinions explaining how our present system couldn't last more than just a few more years, or months, or in some cases weeks. The common theme seems to be that with all the enormous debt overhang and explosion of created money (including the US as a prime example of course) that there is simply no way the US dollar can continue to hold on to its position as the global reserve currency very much longer. They say people simply won't accept it as they see all the exploding debt and enormous amounts of created US dollars by the Federal Reserve and the US Treasury. Interestingly, most of those who take this position also scratch their heads and say they can't believe the public has not already rejected the dollar and that the system has not already collapsed. They express confusion as to why it has not already happened.

First, if you follow these issues, all these concerns are perfectly valid and no one can seriously say with a straight face that we have not seen debt explode higher and hugely expansive monetary policy at the Fed (both before and even more after the COVID pandemic). So why hasn't both the US dollar and the present system collapsed so far?

I believe it is because for whatever reasons, the overwhelming majority of people still do have trust and confidence in the US dollar and gladly accept it in payment for goods and services. Until something causes a much larger % of the general public to actually lose confidence in US dollars (and therefore not only not want to accept them, but start trying to exchange them for something else), the US dollar continues to get public trust and confidence (despite its flaws). So far, a desire to abandon the dollar by most of the public simply has not happened. Despite all kind of efforts to get people to move away from US dollars (Bitcoin, precious metals, cryptocurrencies, alternative currencies, etc), only a very small % of the general public prefers those alternatives to US dollars. That is just a fact. Even people who are sure the US dollar is or soon will be worthless still accept them and use them. It's perfectly reasonable to raise questions as to how long this will continue, but it is also important to understand that until there is a big change in what most of the general public trusts, we should not be surprised that the US dollar has not yet collapsed. That leads us directly to observation #2.

2- What Matters is What Actually Happens

This may be the hardest truth for most people to accept, but it is a mantra I have repeated here many times on the blog and something I have learned that is beyond question for me. It's human nature to believe that how we want things to be or how we are sure things must be is how they actually are. This can lead to some great frustration when over time it becomes clear that somehow things are not happening "the way they should be happening" based on my own understanding, which of course has to be right. When it comes to making personal financial decisions, this mentality can be destructive. If there is any point I would emphasize to anyone interested in these issues, it is to not get locked in to one viewpoint of how things have to unfold and especially any kind of defined time frame for events to unfold. I would encourage readers not to get so married to one "source" that they are sure can predict a future timeline that they close their minds to other points of view; and for sure don't close your mind to observable facts that contradict what you are sure "has to happen". 

I am prepared to make the following statement after years of reading thousands of articles on these issues and hearing from leading experts all over the world directly.  --- No one on this earth knows for sure how future events are going to play out in terms of when our monetary system may see major changes and when the public might lose confidence and trust in the US dollar. It is reasonable to examine facts, look at trends, and draw conclusions that our present system is not sustainable at some point in the future. But no one can tell you when it might actually change. I recall the late 1970's. At that time, concerns over the sustainability of the system were probably as high as they are today. Inflation was off the charts into double digits. I recall my father telling me that he could see no way the US could avoid bankruptcy in the next 10 years or less because of the way the national debt was getting out of control. Fast forward to 2020. The US still has not defaulted and the US dollar still holds its position as global reserve currency. The point is that my father was sure "it had to happen the way he saw it happening", but he passed away before anything like he expected actually happened. Does this mean it can't happen or won't happen? Certainly not. As we have documented here for years, there are all kinds of systemic risks out there that can lead to major monetary system changes at any time. My main point is that no one knows for sure when "any time" may be. The wisest plan in our view here is to have a plan in mind for a further extended period of time where the present system continues in place and a backup plan in mind in case it fails anywhere along the way. Because, no matter how much I believe something is going to happen or how much I might want something to happen -- when it comes to making a financial plan -- what matters is what actually happens. Here we will always try to focus on reporting what is actually happening as best we can determine it.

3- It is much harder to get consensus for any kind of major change to a system than many people realize

Without a doubt this is one of the three most important things I have learned over the years working on this blog. I see article after article assuring me that "blockchain is the next revolution in the financial system" or that "the IMF has a master plan to issue a global digital currency next year" or "China will replace the US dollar with a gold backed yuan" or "China will replace the US dollar with something else" or "the COVID crisis was created to provided cover to implement a new global monetary system"  etc. etc.  Let me be clear, there are valid reasons why people talk about these kinds of changes and many very intelligent people believe one or the other of them are about to happen. I can also report that there is absolutely legitimate concern about the sustainability of our present monetary system I have gotten directly by email from experts around the world. I have tried to discover and understand all kinds of ideas on how to reform and/or replace our present monetary system if the day comes when that has to happen (some are documented here). 

These concerns comes from every direction. People who think we need to return to gold standard are concerned. People who think we need move towards some kind of cryptocurrency based system (gold backed or otherwise) are concerned, people who like Bitcoin are concerned. People who have worked inside the present system for decades and are leading experts in the world on these issues have concerns. Today, even many people in the general public who don't normally pay much attention to these issues are also concerned. They see the US debt exploding higher and the Federal Reserve expanding its balance sheet to over $7 Trillion. We can easily agree that lots of people are concerned.

Unfortunately, based on what I have seen here studying this for years, that is pretty much where the agreement ends. How to change the system, how to actually implement some kind of new system, how to have a system that promotes fairness and justice, and any kind of actual detailed plan to really implement a new working system are all areas of huge disagreement everywhere I look. 

First, let's understand that nothing changes in a system without the political will and power to make it happen. So how is that going in the US for example? We have the most divided population ever. Trust in all kinds of institutions is at all time lows. Trust for most politicians is based mostly on whether they agree with your views or not and even if they do, trust is still very low. I cannot imagine any kind of consensus in the US coming together for any kind of major changes to our present monetary system without massive opposition from one group or the other (up to and including possible civil unrest). Let's move on to the global community. Let's look at the IMF since so many people feel they will be implementing some kind of new global monetary system any day now. The IMF has (if I recall correctly) 190 member nations.  The US has a 16% vote at the IMF which requires 86% total voting approval for any major rule to be adopted or changed. So the US essentially has veto power. On the flip side, the combined voting power of the BRICS nations can also total up to a veto power. This is a perfect combination for the same kind of deadlock we see in the US political arena. While the IMF does manage to get approval from time to time on various proposals, any kind of major changes are likely to involve nations lining up to protect their own national interests first. Just recently, we noted in a blog article here that the US and India were opposed to the IMF doing a new allocation of SDRs in response to the COVID pandemic. This US has historically been determined to protect the interests of the US dollar at the IMF and everywhere else it can, and there is nothing to suggest that will change. Does all of this suggest to you that we can expect some kind of grand plan to remake the global monetary system to emerge any time soon that will have the consensus required to succeed? If so, I would refer you to point #2 above for a reality check.

Conclusions

The three points listed above are what have led me to report here for a long time on this blog that:

1- Changes in the system tend to be gradual and incremental rather than fast and major

2- Unless we get a huge global financial crisis so large that the present system simply cannot be preserved, the tendency will be to try and preserve the present system for as long as possible despite all the systemic risks that clearly exist to it

3-Obtaining consensus on some kind of new monetary system is almost impossible under the current US and global political atmosphere. Not in the US or globally. Nothing suggests this will change soon.

I believe the biggest reason the above three conclusions are valid is that the risk of trying to change from the present monetary system to something new with no ability to obtain the kind of general public consensus needed is simply too great. Until something changes that equation, I believe authorities are unlikely to take that kind of risk. Not only do you have to have the public buying in to point #1 above (overwhelming majority of people trust it), you have to actually have some kind of new system/currency that can actually be implemented and the technology ready to go to make it happen. None of that exists in any kind of real world tested environment. I am quite sure on that point. There are all kinds of ideas, proposals, and studies on technology changes, but they are nowhere near ready to be implemented in an actual real world situation even if you could get some kind of major consensus on which one to implement (which does not exist now). All this tends to promote stasis (not much change) as the only realistic option left for those in power until something happens out of their control that forces major change away from the US dollar .

I offer this article with the goal of trying to help people like myself sort through an enormous amount of information and disinformation that exists on this important topic. It's prudent and right to raise concerns about the sustainability of the system we have now. A problem can arise however, if you get married to one idea of how this will all play out and make personal financial decisions on the assumption that it has to play out the way you believe it will. I can say that if the leading experts in the world are not sure where all this is going, we can't be either, and we need to keep open minds and be flexible in financial decision making. It's foolish not to try and insure against this kind of uncertainty in any way you can. 

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Added note: A long time friend and blog reader reviewed this article and sent the comment below. I thought it was an excellent summary:

"This is what I think you are saying (in my own words):

Why is the US dollar still the global reserve currency today? Because there is not any better alternative today. Why has the astronomical US debt and huge FED balance sheet not caused any financial instability so far? Because all nations around the world have dramatically increased their national debt and Central Bank balance sheets in a very coordinated fashion since 2008. In theory, they can continue to do this and leave interests rate at zero forever. In practically, they cannot do it forever. Run away inflation may be beyond the Central Banks’ ability to continue financial control. The next major crisis may cause the problem. The most recent crisis COVID has not done it (so far). I am confident that the status quo will not last indefinitely, but I don’t pretend to know the timing on the inevitable change."

News Note - Federeal Reserve Officials Concerned About Potential Asset Bubbles

This is something we have long covered here. Several news articles are referencing a recent article in the Financial Times that offers quotes from two Federal Reserve officials. Below is a one of the quotes from this Reuters article. Further below is an added comment. It should be noted that the original article in the Financial Times quotes other Fed officials as being less concerned.

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Minnesota Federal Reserve President Neel Kashkari:

"I don't know what the best policy solution is, but I know we can't just keep doing what we've been doing," he told the newspaper.

"As soon as there's a risk that hits, everybody flees and the Federal Reserve has to step in and bail out that market, and that's crazy. And we need to take a hard look at that," he said."

Please click here for the full Reuters article

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My added comments: I had not planned to post but one more article before the upcoming US elections since those are dominating all news right now. But these quotes in this article seem potentially significant so I wanted to make sure I alerted readers to them. It is interesting to see quotes like this coming from some Fed officials just a couple of weeks ahead of the elections. 

Since this is a news note, I'll try to pass on other bits of news I see out there in bullet point form below:

- Both sides in the upcoming US election seem sure they will win. At this time my earlier election analysis article still seems appropriate with any of the five scenarios listed still possible as best I can tell.  I have seen a number of pieces of information across the political spectrum indicating the election is much closer than most polls have been indicating, so scenario #5 is still not out of the question.

-There is significant concern across a broad variety of analysts that the potential for civil unrest after the upcoming election exists. All this could impact markets at any time although so far the markets have been calm. Since the grass roots on both sides feel sure they will win, one side is going to be very disappointed which may add to an already divisive atmosphere.

-Fed Chairman Powell to Speak About Digital Currencies at the IMF - see this CoinDesk article. Fed nominee Judy Shelton puts out this note about this on her Twitter feed.

-Atlanta Fed Now is still projecting GDP to be over 30% for the 3rd quarter. In a recent TV interview, Trump Administration spokesman Larry Kudlow said he would project 4th quarter GDP will push 10% for that quarter.

There are all kinds of cross currents out there even as the US election results will surely dominate the news for the next few weeks. I plan to post one more article before the election titled - 'Three Important Things I Have Learned Doing This Blog'. This blog started in January 2014 in an effort to try and monitor news across a wide variety of news and opinion formats and watch for any signs of major monetary system change. The reason this is important is that all of us have to make personal financial decisions and it is critical to understand what rules we are playing under to make those decisions. It is important to be aware of any potential major changes to the rules so as not to be taken by surprise.

So far, we have not seen that kind of major change. But recent events are certainly more conducive to the potential for change even as I have learned that it is very hard to make major changes to an existing system for a number of reasons. It seems as though it may take an event like Neel Kashkari talks about above ("a risk hits and everybody flees") to create an atmosphere where change is forced to take place. It is unlikely that anyone will enjoy forced change under these conditions which is why I suspect the desire to preserve the present system is still so pervasive. Also, there is no political consensus on what changes to make.

I talk about all that in the next upcoming article. 

Jim Rickards and Lyn Alden Discuss Inflation/Deflation Monetary Polices and More

One question I see over and over again that people ask is why haven't we seen hyperinflation with all the monetary stimulus and money creation in the US and around the world over the last ten years. It's a good question and the answer may be a bit more complex than many might expect. In this recent panel discussion, Lyn Alden and Jim Rickards tackle this question and offer some interesting thoughts on the answer. Below I have pasted in the video an further below a few bullet points on the full discussion which runs over an hour.

Panel Discussion on 10-5-2020

• Inflation/Deflation Discussion
• What causes Inflation - Not Just One Thing
• Why are monetary policies increasingly failing to achieve their objectives?
• Thoughts on the upcoming US elections and their Impact on markets
• Prospects for the Gold Market with all the uncertainty ahead of us

This is a discussion I think readers here can appreciate and learn from, I recommend taking time to listen to the full discussion if possible

Pre Election Analysis - A Deeper Dive

Readers here understand that the purpose of this blog is not to promote any particular political agenda. The view here is that readers are very capable of making their own political decisions and that there are legions of sites already available to them that do focus on trying to influence political views.

Here, the goal is to try and analyze information that may be important and useful to readers in making their own personal financial decisions. What happens with our financial and monetary system is the primary focus, but we cannot ignore what happens in the political arena. So this article will attempt to do a deeper dive into the upcoming US election so that readers are as informed as possible about the various possible outcomes. We will list the various possible outcome scenarios below and attempt to assess their potential impact on the current financial and monetary system.

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Scenario #1 - President Trump is re-elected and joined by a fully Republican Congress

In this scenario, we can expect that President Trump will simply just carry on the same policies he has implemented during his first term and would have a more supportive Congress to do so. Most people already know what his policies are so no need to explain those here. The "Resistance" against President Trump would continue. but would have less political power available to it.

Potential impact on the system - Unless something external happened to force major changes, we would expect very little change to the present system to be proposed by a Trump Administration and a fully Republican Congress. 

Scenario #2 - President Trump is re-elected and faces a Congress fully or partially controlled by the Democrats

This is pretty easy to analyze. Simply more of what we have seen over the last two years with very little consensus on most issues and constant continued fighting between the President and the "Resistance" to the President.

Potential impact on the system - Again, unless some external force arose to provide impetus for major changes, we would expect not much major change to the present system. It is possible the ongoing political warfare might add to systemic risk for stability of the system if markets believed that the US political system was highly dysfunctional.

Scenario #3 - VP Biden is elected and joined by a fully Democratic Congress

In this scenario, we surely will see major fiscal policy changes. Higher wealth and net income individuals along with corporations will no doubt see significant tax increases and the stated national policy would likely shift so that income and wealth redistribution became a national priority backed up by legislation. These are the stated policy objectives from the Democratic Party and there is no reason to think they would not be implemented. A resistance movement similar to that currently faced by President Trump would surely be ramped up, but would have less political power available to it.

Potential impact on the system - Unless some kind of focus on major changes to the present monetary system emerged that is not currently being proposed, it is not likely we would see major changes to the monetary system (a change away from a US dollar based system with the Federal Reserve in charge of all monetary policy). It is more possible that the fiscal policy changes proposed by the Democratic Party could lead to disruption in the financial system and markets. If markets perceive that the government will become more intrusive and involved, they may react with greater volatility. If the reaction were severe, it could impact systemic stability. Anything that increases systemic instability can lead to a situation where major changes come in to play for the system. We would probably know within 6 months if this kind of market reaction was in play or not. It is difficult to project this at this time.

Scenario #4 - VP Biden is elected and faces a Congress fully or partially controlled by the Republicans

This scenario is pretty similar to Scenario #2 above, just in reverse. Continued deadlock likely prevails with a President Biden now facing the ongoing "Resistance" movement currently faced by President Trump. It is likely most issues would die in Congress without legislation to make major changes being passed.

Potential impact on the system - Basically the same as Scenario #2 above. It would take an external force to create conditions leading to major systemic changes. It is not likely to arise from policy initiatives from within the system itself.

Scenario #5 - No one is able to be certified as President by the electoral college because the election results are in question and no clear winner can be declared

This scenario is more likely this year than it has been for a long time. We already have major disputes over mail in ballots and hundreds of lawyers lined up on both sides to challenge election results. Unless one side or the other can establish such a landslide that the challenged votes can't change the outcome, this scenario is actually quite possible.

In an effort to provide a public service, we will delve into how this is resolved in the US under its Constitution. We will focus on the procedure to declare someone as President. 

A contingent election means no one gets enough electoral college votes to be declared President. Here is what happens in that event:

"A contingent election for the president is decided by a vote of the United States House of Representatives, and the contingent election for the vice president is decided by a vote of the United States Senate."

. . . .

"Pursuant to the 12th Amendment, the House of Representatives is required to go into session immediately after the counting of the electoral votes to vote for president if no candidate for the office receives a majority of the electoral votes. In this event, the House is limited to choosing from among the three candidates who received the most electoral votes. Each state delegation votes en bloc, with each state having a single vote. A candidate is required to receive an absolute majority of state delegation votes (currently 26 votes) in order for that candidate to become the president-elect. The District of Columbia, which is not a state, does not receive a vote. The House continues balloting until it elects a president."

If this situation were to arise, it is logical to ask which political party is likely to control the 26 state votes needed to elect a President (who would have to be either President Trump or VP Joe Biden). I did a fairly deep dive analysis into this to try and answer that question. Here are the facts. 

- Currently, the Republicans control the majority of state delegations in the US House as they have more Congressional seats in 26 states. The Democrats control 23 states and Michigan is tied with 7 seats each.

-The newly elected House of Representatives is the one who chooses the President, so we have to attempt to project the outcome of the November elections to see which party is more likely to control a majority of the states after the election results in November.

-There is a chance that enough Congressional races would be in doubt (due to mail in voting etc) that it also might not be possible to determine which political party controls enough state delegations to have the required majority to elect the President. If this happens, it gets even more complicated and it is even possible that no one can be elected President for some period of time, but we will not go that far into the analysis here. We will assume that enough Congressional races can be called to establish that one party has a majority of the state delegations. I looked at the 25-30 seats most likely to be tightly contested and it appears that most of these seats are in states where the outcome would not matter in determining which party controlled that state's delegation.

With these facts established, I tried to look at what the most likely outcome might be based on the number and state location of the Congressional races that are considered as "in play" or "too close to call". Here is what I discovered doing that analysis:

The Republicans appear to have an advantage even though the Democrats currently have a majority in the House of Representatives and could continue to have that after the November elections. This is because the states where Republicans are in control have almost no Congressional seats viewed as "in play" heading into the election. The one exception is in Florida where the Republicans have a slim one seat advantage (14-13). If the Democrats were to flip one seat in Florida and gain control, they could pick up one state. Since Michigan is currently tied with 7 seats each, the Democrats could reach the needed total of 26 by picking up a seat in Michigan along with Florida. So that is the path forward for the Democrats.

Republicans are seemingly in a little better position There are several states with seats in play that are currently held by Democrats (Iowa, Pennsylvania, and Minnesota are examples) where a change of one or two seats can flip the state from Democratic to Republican control for the purpose of electing a President under these rules. In total, I count at least six states where there is a possibility of a flip from Democrat to Republican control (or a tie). In many of these seats, President Trump won the district by 5% or more in 2016, but the Democrats captured the seats in 2018 when President Trump was not on the ballot. So, there appear to be multiple opportunities for Republicans to flip control of that state compared to just two for the Democrats. If the Republicans simply hold on to the current status quo, they already have 26 states in control. So my overall conclusion is that the Republicans are more likely to emerge with 26 states after the November elections based on the available information I can find at this time. It also makes sense Republicans would want to fill the open seat on the Supreme Court given the above analysis.

Potential impact on the system - I think it probably goes without saying that if we get into Scenario #5, we have great potential for market disruption due to uncertainty which markets hate. We have great potential for high market volatility. We have a higher increased risk for systemic instability, etc. This is pretty easy to project. Until a winner is declared and more certainty returned, we would remain in these conditions.

Overall Observations:

In three of our five listed scenarios above, we see little potential for any kind of major changes to our present monetary system to emerge from legislative changes within the system. Either deadlock or lack of political will to make any major changes is more likely to prevail. In one scenario (#3), there is more potential for some major changes. This is because of the certain major fiscal policy changes that would take place and the unknown impact of those changes on markets and eventually financial stability. Under Scenario #5, we have the greatest potential for significant market disruption which could then lead to systemic instability if uncertainty prevailed for an extended period of time. Under all five scenarios, external forces (overhanging debt, banking system insolvencies, derivatives issues, central bank monetary expansion, loss of public trust in institutions, etc.) remain as ongoing potential risks to systemic stability we have long noted here.

Looking at this overall analysis, I will leave it to readers to decide how best to make their own personal financial decisions in this environment. Personally, I want to have a plan based on continued extension of the present system for some time into the future along with a backup insurance plan in case something goes off the rails along the way. This seems prudent.

Added notes: The recent new vacancy on the Supreme Court just adds more uncertainty. It sets up the potential for a 4-4 tie in the Supreme Court if key legal challenges to the election end up in the Supreme Court. It also ramps up even more the intensity of both sides to win with the future of the Supreme Court more clearly in voters minds as they vote. Nothing happening in the US indicates the country will heal from its enormous political divide any time soon no matter how this election turns out. It does not appear the first debate will have any significant impact on the result and mostly just illustrated how bitterly divided the US is politically.  Also, it appears both sides have figured out this could end up in Scenario #5 above per this recent news article.

Added note update 12-14-20: Republicans did retain control of more state delegations in the 2020 elections, so they would have the opportunity to elect the next President in the event of Scenario #5 (Contingent Election). Republicans actually increased the number of state delegations they control. Also, the Supreme Court vacancy has of course been filled so any rulings should not result in a tie vote now.

Digital Currency and the New Cold War

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.

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"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. . . . "

Please read the full article at OMFIF here

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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.