Wednesday, May 5, 2021

IMF - US Dollar Share of Global Foreign Exchange Reserves Drops to 25-Year Low

This new report from the IMF confirms a long term trend of gradual movement away from the US dollar continues. At the same time, the report also confirms what has been reported here for many years in that monetary system changes tend to move slowly unless something unexpected forces more rapid change. Below are some excerpts from the report.

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"The share of US dollar reserves held by central banks fell to 59 percent—its lowest level in 25 years—during the fourth quarter of 2020, according to the IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER) survey. Some analysts say this partly reflects the declining role of the US dollar in the global economy, in the face of competition from other currencies used by central banks for international transactions. If the shifts in central bank reserves are large enough, they can affect currency and bond markets."

. . . . 

"Turning to this past year, once we account for the impact of exchange rate movements (orange line), we see that the US dollar’s share in reserves held broadly steady. However, taking a longer view, the fact that the value of the US dollar has been broadly unchanged, while the US dollar’s share of global reserves has declined, indicates that central banks have indeed been shifting gradually away from the US dollar."

. . . . 

"Despite major structural shifts in the international monetary system over the past six decades, the US dollar remains the dominant international reserve currency. As our Chart of the Week shows, any changes to the US dollar’s status are likely to emerge in the long run."

 


Wednesday, April 7, 2021

Former IMF Dr. Warren Coats on the New Proposed Allocation of SDR's

The IMF is considering a proposal to issue as much as $650 Billion (US) in a new allocation of the SDR. We have covered the SDR extensively here over the years since many have predicted the SDR could some day be a key part of a global monetary reset. One thing that becomes clear if you research the SDR is that there are a lot of misconceptions about the SDR the rules that govern them at the IMF. Here, our approach was to simply find one of the leading experts in the world on the SDR to explain the SDR and how it actually works. 





Dr. Warren Coats was the head of the SDR Division at the IMF and there is no better expert on things SDR related. Dr. Coats recently posted this article on his blog to both explain the new SDR allocation proposal and offer his take on it. Below are a couple of excerpts from the article.

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"The IMF’s Articles of Agreement require a long-term global need for additional reserves to justify an allocation. Thus, the Managing Directors call for a new allocation is “based on an assessment of IMF member countries’ long-term global reserve needs, and consistent with the Articles of Agreement and the IMF’s mandate.”  “IMF Executive Directors discuss new SDR allocation”  While I think an allocation is justified and useful at this time, the underlying motivation of aiding IMF members to fight the economic impact of the Covid-19 pandemic is unfortunate."

The aid motivation is revealed in a Wall Street Journal editorial on March 24, 2021, which unfortunately misrepresents important features of the SDR. “Special dollars for dictators”

Setting aside for a minute that I have long proposed replacing the SDR allocation system described in this article with issuing SDR under currency board rules (i.e., only and to the extent demanded by the market and purchased by the market at market prices), there are a lot of mistakes in this article."

. . . . .

"The IMF Articles of Agreement in which SDRs and the rules for using them are established are not the legislative product of the U.S. Congress (though the U.S. is needed to support the adoption of these Articles) and thus these rules cannot be changed by the U.S. Congress as suggested by the WSJ."

Please Click Here to Read the Full Article by Dr. Coats

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My added comment: If you you want to have an understanding of how the SDR and the rules governing it actually work, the best source available is Dr. Coats.




Wednesday, March 31, 2021

Kenneth Rogoff - The Dollar's Fragile Hegemony

In this article appearing on Project Syndicate, Kenneth Rogoff (Harvard) revisits a question that has been raised for many years. Will another currency (in this case the Chinese Renminbi) eventually dethrone the US dollar from its role as the major global reserve currency? Professor Rogoff notes that "it seems to be an article of faith among US policymakers and many economists that the world's appetite for dollar debt is virtually insatiable."

In this article, Kenneth Rogoff suggests that China may take some actions that could eventually disrupt the present US dollar based monetary system. Below are some bullet points from the article:

  • the US Dollar currently continues to reign supreme in global markets
  • the dollar's dominance could be more fragile than it appears
  • Chinese authorities could shift to an inflation targeting regime 
  • They may allow the exchange rate against the US dollar to more freely fluctuate
  • The US relies on the "exorbitant privilege" from the dollar to fund massive borrowing
  • Chinese authorities face obstacles to making these changes, but are making gradual changes
  • The US dollar eventually eclipsed the British Pound
  • The Renminbi won't become the global currency overnight
  • It took decades for the Dollar to replace the Pound
  • First we may see three major currencies - Dollar, Euro, Renminbi
  • US public and private borrowing rates would be impacted


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My added comments: There is not much new here. Speculation about the dollar being replaced has been going on for a long time. This article talks about how it could happen, but once again describes the process as gradual and perhaps taking decades to unfold. So, no near term horizon major change is predicted in this article. This is in line with what we have reported here now for years. The conditions for potential rapid monetary system change exist all the time if public confidence in the present system wanes for any reason. However, the global monetary authorities and the Federal Reserve in the US have shown no inclination to make any major rapid changes to the present monetary system unless they are forced to do so by events out of their control.


Thursday, March 18, 2021

FT - Time for a Great Reset of the Financial System

The Financial Times publishes this article calling for a great reset of the present monetary system. Just about every issue raised in this article has been covered here for years, so there is nothing new or surprising in the article for readers here. Below is a brief summary of bullet points from the article and then an added comment.

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  • On average monetary systems last 35-40 years before a new system is required
  • The Bretton Woods system based on the gold standard broke down in the 1970's
  • The replacement system based on an unanchored US dollar has "reached the end of its usefulness"
  • The current system is plagued by a 30-year debt super cycle and "unending liquidity created by commercial and central banks"
  • The massive increase in mortgage debt has driven up housing prices and contributed to income inequality
  • Now is a good time to devise a new monetary system to replace the current one
  • Included should be "widespread debt cancellation" and perhaps even a "debt jubilee"
  • Policymakers should negotiate some form of "anchor" to the currency or currencies
  • The easy money policies of the present system have created asset bubbles that are not sustainable
  • Growth should become less reliant on debt creation and more on productivity and innovation
  • A new monetary system with an anchor and not based on ever expanding debt can restore fairness
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My added comment: I am pretty sure that on this page and this page of this blog we have tried to cover just about every issue in the bullet point list above for many years. I would wonder if those running the present system agree with the premise of this article in the FT that their policies are the big reasons why the present system "has reached the end of it's usefulness" and now must be replaced with a new system. 

If they do agree, it's fair to ask why they have allowed this to go on and on for years all the while assuring the public these kinds of problems are not really problems we need to be concerned about and everything is under control. If they do not agree with this premise, why should the author of this article expect any of his proposals to go anywhere as everything is fine and those in charge have done a great job, right?

Here is another question for all of us to ponder. If those running the present system have implemented such poor policies that we must admit defeat and replace the current "unfair" and "unsustainable" system as described in this article, why should we just blindly trust those whose policies created the mess to fix it? Maybe someone else should get a chance to offer up some new ideas. Just a thought.

Thursday, February 25, 2021

Jim Rickards on The Great Reset

Jim Rickards has a new article out talking about The Great Reset. This is the type of monetary system change this blog watches for. Right now Jim is saying some of the initial steps for the SDR to eventually replace the US dollar are in progress. Below are a couple of excerpts and then an added comment.

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"For years, commentators (myself included) have discussed the next global monetary realignment, which is sometimes called The Big Reset or The Great Reset.

Now, it looks like the long-expected Great Reset is finally here.

Details vary depending on the source, but the basic idea is that the current global monetary system centered around the dollar is inherently unstable and needs to be reformed."

. . . . .

"On January 7, 2011, the IMF issued a master plan for replacing the dollar with SDRs."

. . . . .

"In July 2016, the IMF issued a paper calling for the creation of a private SDR bond market. These bonds are called “M-SDRs” (for market SDRs), in contrast to “O-SDRs” (for official SDRs).

In August 2016, the World Bank announced that it would issue SDR-denominated bonds to private purchasers. Industrial and Commercial Bank of China (ICBC), the largest bank in China, will be the lead underwriter on the deal.

In September 2016, the IMF included the Chinese yuan in the SDR basket, giving China a seat at the monetary table.

So, the framework has been created to expand the SDR’s scope."

. . . . .

"Now all of the pieces of the global elite plan are converging.

The IMF SDR issuance will reliquify global central banks that cannot print dollars. Then CBDCs (Central Bank Digital Currencies) will be used to eliminate cash."

Please click here to read the full article

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My added comment: Jim has talked about this for a long time and lately there has been some renewed interest in issuing a new allocation of SDR's at the IMF. The Biden Administration looks to be more inclined to support this than the previous Administrations have been in recent years. For now, this is still just in the discussion phase, but it certainly bears monitoring.

Jim does point out in this article that all this may unfold over a period of several years, so it is something to watch over time to see if it leads to the kind of major monetary system change we watch for here. Any change where the US dollar is replaced as the global reserve currency would qualify as major systemic change in our view here that would impact all of us directly in our daily lives. 

Friday, February 12, 2021

Update Note - New Blog Created

There is nothing new to cover related to major potential monetary system change at this time. Bitcoin has made some news with its rise in price, but there is nothing to suggest that it will cause a major monetary system change. Monetary authorities are still mostly negative about Bitcoin and it's still not widely used for daily business transactions. There is some discussion of the IMF possibly issuing some new allocations of SDR''s, so we will see if that emerges over time and how big the allocation might be.

The recent news in the silver market caused me to create a new blog that is focused on tools and information for people who may be new to the gold and silver markets. It emphasizes silver since that metal could be a key to the future in terms of expanded silver use in green energy. This new blog is a bit more commercial since it covers gold and silver in terms of their role as investments as well. I have followed those markets now for years doing research for this blog, so I have a lot of resources and tools for analysis of gold and silver that I use myself. I just collected them all in one place on the new blog to make it easier for someone new wanting to learn about gold and silver. There has definitely been an upswing in interest in those markets recently. If you have interest in those markets, you can find the new blog at this link and this is a link to one of the first articles posted there.


Tuesday, January 5, 2021

Jim Rickards - The New Great Depression

I was privileged to get an advance copy of Jim Rickards new book  - The New Great Depression. Followers of Jim Rickards won't be surprised that this new book has the same high quality of in depth analysis that is a hallmark of Jim's previous books. As the title suggests, Jim takes a deep dive into the potential long term impact of the Coronavirus pandemic on the economy. 


Jim takes on this topic with no partisan political agenda which is what makes his analysis valuable to me. A search for the best information without regard to any political agenda is what is needed and Jim delivers that in this book in my view.


While the book delves into the economic impact of both the pandemic and the response to the pandemic, readers may be surprised at the amount of time Jim devotes to the virus itself. Like most people who have followed this pandemic since it showed up on the radar in early 2020, I have seen lots of "experts" offering a wide variety of information and recommendations on how we should deal with this virus. Along with that has come some contradictions and confusion as we discovered the "experts" don't always agree.


This book has the best collection of both pure information on the actual virus as well as a summary of the various "expert" theories about it I have seen so far. Putting all this information together in one book is a valuable service to anyone who wants to understand this virus and the related pandemic. Since it is possible that your life could be at stake some day during this pandemic, knowing as much as possible about the actual virus is a goal everyone should have.


Below I have listed the six Chapter Titles in the book and the Conclusion. For each chapter I listed some of the key questions Jim answers with the best information he had at the time of the writing of this book. This should give you a feel for what is covered and how it might be beneficial to your own understanding of this virus and all the related impacts we will see from it in the years to come, both medical and economic.


          The New Great Depression

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Chapter One - A New Virus From China to a Town Near You

What is the Coronavirus? 

What do we actually know about it? 

What is still unknown about it?

How did the Coronavirus actually get started? 

What responsibility does China bear related to this global pandemic?

Chapter Two - One Hundred Days - Chronicle of a Lockdown

The lockdown response to the virus:

The correct response?    or

One of the greatest blunders in economic history?

Chapter Three - The New Great Depression

What is a depression?

Did the pandemic and lockdown response start a new depression?

If so, how long might it last?

Chapter Four - Debt and Deflation Derail Recovery

Is the biggest challenge for the Fed going forward inflation or deflation?

Does the Fed prefer inflation or deflation?

Is money printing stimulus?

Is MMT (Modern Monetary Theory) already the unofficial US monetary policy?

Chapter Five - Civilization's Thin Veneer

What are the psychological impacts on society from a global pandemic and the related economic fallout?

What are two kinds of mental health damage potentially caused by COVID-19?

How long can an orderly society be maintained during periods of prolonged severe distress?

Chapter Six - Investing in a Post Pandemic World

How can the average person outperform the markets?

What portfolio is best right now to hedge against both deflation and inflation?

What asset offers the most flexibility in this uncertain pandemic and post pandemic environment?

Conclusion

Which two Presidents attempted to use gold to deal with economic problems?

Which of the two used gold more successfully?

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Added comments: In this book, Jim lays out three possible paths forward the virus might take based on similar pandemic events from the past. It is important to understand the worst case scenario in case that one does unfold (for both medical and economic reasons). We all hope we do not get the worst case scenario and that vaccines will reduce the impact of this virus as much as possible. But even a vaccine that is effective against the current version of the virus does not mean we are out of the woods. This is why I feel it is important for everyone to learn as much about this virus as possible. We are all impacted in one way or another and will have to make important decisions going forward on how to deal with it.

Note to readers: Unless something very dramatic happens that could actually change the present monetary system in a significant way, I do not have any further posts planned for the blog going forward at this time since I do not foresee any such events on the near term horizon.

Added note 1-20-2021; Now that a new Administration is in office, a question may arise as to whether we will see any significant change in our monetary system as a result? At this time my answer would be no -- so there is no need for further analysis or articles at this time. Only if something truly significant arose that would impact everyone directly in their daily lives would I see any reason to cover it here. At this time, I see nothing along those lines on the near term horizon. The most likely scenario is simply a continuation of the same system we have now unless it cannot continue to function, as we have said here many times. The most intense part of the US political drama has past now and nothing about all that suggests any major changes in the system are coming soon.

Friday, January 1, 2021

South China Morning Post - How China's Digital Currency Will Thwart the US Dollar Trap

The South China Morning Post runs this interesting new article that argues that China will use its lead in "blockchain technology" to implement a new "digital" renminbi. The article goes on to further say that China will use this new system to avoid US sanctions and bypass the SWIFT system. It also predicts that by 2028 China will surpass the US economically and this new digital currency system will be a key part of that. 

I sent this article to a leading global expert on Fintech who knows where things stand around the world in terms of the potential use of blockchain technology for digital currencies by central banks. He has worked in this arena every day for years with banks, central banks, and private companies exploring the potential use of blockchain technology. I view him as without question one of the leading experts in the world on this topic. 

Below are three key points I felt were stated in the SCMP article and then the response to those three key points by this global expert. He offered these comments exclusively for readers here, but prefers them to be unattributed.

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1-China is by far the global leader in "blockchain technology" which will support the new "digital" Renminbi system China is building.

Response:

"It is an interesting claim to fame: there is not much to be had in the leadership of blockchain technology - it is a relatively simple technology, with a lot of complicated moving parts that don't particularly add a lot of value in the real world. As such, there are not a vast array of levels of competence possible in the field - you either know what it is, or you don't - and you either use a distributed system, or you do not. My comments would be on this topic, that even if leadership in blockchain was such that it could be distinctive, and thereafter, emphatic - it is still by all accounts, at this time, inconsequential to hold leadership in this expertise. If China believes it has something of an accolade in proclaiming this - it is an odd misunderstanding of technical capacity, or of prowess."


2-This system will allow China to bypass SWIFT and US sanctions and eventually dethrone the US dollar a global reserve currency in years to come.

Response:

"Any system can bypass SWIFT or the US Sanctions if it is independent of SWIFT or the USD. Obvious examples to date are Ant, WeChat, and any other payment platform not used by an institution that also uses USD. Just like the Brazilian local payment system is independent of the Chinese political sanctions lists. It is again - a very poorly developed claim and the SCMP should know a lot better - as should whoever called for this article's existence. 

There's no real link to the claim that distributed ledgers can cause or catalyze any form of technical incentive against Dollar superiority - Dollar superiority is legislative and economic. The US is an innovative, rule of law, consumer protection, and thought leading superpower. China is a constantly moving bureaucracy of personal political connections. As we've seen with Jack Ma, say the wrong things at the wrong time, and your business evaporates. 

As a place to park your money.... I don't see China's brand, or economic stability, being sufficient to challenge even the GBP or the Yen, as a reserve currency yet. Chinese "banking assets" are still around the USD 2 trillion mark - the US is almost 10 times this (according to the Central Bank of each nation).  The US is a reserve currency because it is large, very predictable, and most of the time (more than most) very rational. And that's not the nature of the Chinese system yet".


3-China is in the process of surpassing the US and will do so by 2028 using this new system as a key part of that accomplishment.

Response:

"The link made here is not a logical statement. The simple rebuttal to this claim is -- what if the US got a similar new system, tomorrow? Nothing would change in the US, nor the rest of the world really - in terms of US dollar sovereignty. The US has had one of the world's worst payment systems for 30-40 years - and still does. Blockchain does not automatically bring any additional technical capacity to an economic system - and there are better systems out there than blockchain platforms for this purpose (from Mexico's SPEI, to Tonga's NPS) - so the premise of the understanding conveyed in this article is not factual. 

What blockchain does do - and may do - depending on the exhaustive list of well known options available to the any blockchain program (Chinese or otherwise) is give limited or unlimited access to review every single payment, partial payment, and balance, of anybody - and any party who has ever received or sent payment to any other affiliated party. 

Do you want to make a political donation? The system operator will immediately know. Your friend from school who you once gave Y50 to cover a pizza order at university, who then went on to be a radical dissident - or agitator - 30 years later? Guess who's on their way to your house?

Until this is desirable - it would stand to reason that China would decrease its standing of its chances to offer the world a unified, suitable means of exchange, if the authoritarian government was to announce any form of financial surveillance platform, like the one they claim this might be." 


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Added comments: This expert also offered this general editorial comment:

"Without wanting to be too harsh on the Chinese - I guess that from their perspective - blockchain holds a certain amount of logic, to a mid-level, technology-promoting party official. Like communism itself, blockchain appears to be an ideal or simplistic system to run or use for certain purposes. In reality it becomes incredibly complex and burdensome to manage at scale, or beyond theory. 

The claims here are very similar to a claim that China has found a new economic system that is more useful and better than the simplistic systems used in the West, and in adopting this new concept of self verifying (but ultimately unstable) record keeping software, it will enable China to out perform the West (specifically the US) economically. 

Claiming that their blockchain leadership is an asset, is again, so similar to claiming that their newest version of communism is far superior to everyone else's communism, that they will rise to the top of the economic food stack because of it. I have a lot of respect for parts of China's miracle - but I don't see their next wave of advancement being linked to the claims of this article, in any way. Although we do wish them luck with their research!"