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.

Robert Pringle Comments on The Telegraph Article -- "When Money Dies, Gold Comes into its Own"

Earlier this year, we did a fascinating interview with Robert Pringle who had just released his new book The Power of Money. Robert has decades of experience working with central bankers from around the world. At one time he was the Director for the Group of 30. He was also the head of The World Gold Council's public policy unit. Robert can talk about events and decision makers from direct first-hand experience which makes his observations extremely valuable. Anyone who has followed the monetary system issues we cover here, which includes the impact of gold over time on that system, will obviously be interested in what Robert has to say. 

With that in mind, we will feature a recent article appearing here in The Telegraph (UK). The article talks about how recent events and central bank monetary policies are causing gold to once again attract attention around the world. We all know gold just recently reached an all time high price in US dollars. This article in The Telegraph makes some interesting statements and we encourage readers to read the full article. Below are a couple of selected excerpts and a few bullet point observations from the article. I sent this article to Robert Pringle and he kindly offered to provide some interesting historical perspective on one of the events mentioned in the article since he was there as a first hand observer. 

Robert Pringle

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From the Telegraph article:

. . . . "It is now relatively commonplace among the super-rich to have at least some small part of their wealth diversified into gold. Call it an insurance policy against “when money dies”, the title of Adam Fergusson’s brilliant history of the Weimar hyperinflation. Few serious economists would think a repeat of this monetary meltdown remotely possible in today’s advanced economies, all of which have strong institutional frameworks to keep inflation in check. But more or less everywhere, currency debasement is now rife to help pay for the burgeoning costs of the Covid-19 crisis and that’s set alarm bells ringing."
. . . . .
"Nor is it just the wealthy who are using gold as a means of hedging themselves against a devalued dollar. The Chinese authorities have been steadily increasing their gold reserves for some years now, resulting in a massive transfer of the metal from West to East."
. . . . .
"Whatever; the fact is that gold tends to sustain its value over time. National currencies, eroded by inflation and political manipulation, do not."
. . . . .
"As I say, a rising gold price reflects, above all other things, a loss of trust in the value of fiat currencies, for which there is good reason right now."

This article, as shown above, states that gold has held up over time in terms of holding its purchasing power better than national fiat currencies in general. It also says:

- the UK sold off a large amount of its gold reserves at much lower prices years ago (see Robert Pringle's recollection of that event below)
- current central bank policies in response to COVID-19 are debasing currencies
- the least painful way of dealing with debt overhang is to "inflate it away"
-"gold bugs" may end up being right about future inflation despite the present threat of deflation that central banks are currently fighting

Robert Pringle reviewed this Telegraph article and offered these observations based on his own personal experiences:

"I was quite deeply involved in orchestrating the public opposition to these sales (1999 UK gold sales) with the slogan “Hands off our gold!” The World Gold Council took a whole page advertisement in leading popular newspapers to protest. This intensely annoyed ministers. Then I was called into Her MAJESTY’S TREASURY  for a personal reprimand by Gus O’Donnell, senior adviser to Brown and later head of the British Civil Service and top adviser to three prime ministers. He was intensely irritated. He told me: “This is not the way to influence Ministers”!

We also ran a call centre campaign. On day one the call centre, which had 20 agents answering calls, crashed in the first 20 minutes.  We also sailed a barge up the Thames and parked it outside the House of Commons. It had a banner on it saying ‘Gordon Brown & Co: Scrap Metal Merchant’ with pots and pans painted in gold colour. Pictures that appeared were on the front page of  leading national newspapers the next morning.

The sale was a personal decision by Gordon Brown on the advice of the Treasury mandarins who thought it would make him look “modern” and of course it all came unstuck. It would plague him for the rest of his career and remains one of the great blots on his reputation.

I also played a role in persuading central banks to to do something about the collapse of the gold price when they put a floor under the market later that year - but that’s a story for another day (for those who can’t wait it is told in my book The Power of Money -page 189)."   ---  Robert Pringle

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Added note: A thank you to Robert for sharing these recollections for readers here. These kinds of observations coming from someone directly involved with the event are hard to find and much appreciated here. Perhaps he will share more on the central bank agreement done in 1999 to limit gold sales. He talks about it in his book for those who recall that agreement and want to learn more about it. One thing I have learned from Robert over the years is that events like this are understood with better insight if you have input from those directly involved at the time. 

Here is a BBC article from 2019 that provides some additional historical background for the UK gold sale. It also references the 1999 central bank agreement to limit gold sales that Robert talks about above from personal recollection.

Followup from Q&A Interview with Robert Pringle

Recently, we published a Q&A style interview with Robert Pringle which you can view here. I wanted to select a couple of the questions and answers from the interview for additional emphasis for readers here. I have pasted them in below with a few additional comments I wanted to offer on these.

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Q: Central banks have played a huge role in guiding the present monetary system for many years now. Can you discuss some of the pros and cons you have seen over time of the role central banks have played?

A: "The central bankers I have known have been decent, honourable and conscientious. Events thrust their institutions into positions of high authority and status. Even the smallest central bank makes decisions of crucial importance for its country and people. Their elevated position exposes them to high risks and what they often call ‘headwinds’. This is an understatement. 

If central banking were classed as an Olympic event, it would join such sports as surfing, skateboarding, karate, and rock climbing, at the extreme end of the sporting spectrum. 

Central banks served as midwives of our current monetary and economic regime. They helped to shape its present form.

Now they service and maintain critical financial networks that span the globe. Far from being detached bystanders, they have facilitated revolutionary changes - changes that affect the life chances of men and women everywhere. We are all inter-connected through this intricate and ever-expanding monetary spider-web. 

They have managed multiple crises as agents of governments. The costs have been high, but not catastrophic - not yet.

What central bankers evidently do not know is how to prevent crises from happening in the first place. They claim to have learnt from experience, but the public is rightly skeptical. To what extent their policies are actually responsible for social ills such as rising inequality, stagnant real living standards in many countries, sluggish investment, growing monopoly power (notably of Big Tech) rising popular anger and disrespect for elites and ‘experts’ is arguable. I suspect they have been a significant factor. President Trump plays a “Punch and Judy” show with Fed chair Powell  but that’s what it is - a show. Sound money is as far away as ever."
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My added comments: A couple of points to make here for me. First, please note that these comments come from someone who has worked directly alongside many of the well known central bankers from around the world over the past several decades. So they have very high credibility for me.

The second point is to note that even those who work inside the system acknowledge that no one can control all the factors that can impact the stability of any monetary or financial system. This is why we have repeatedly stated here that readers should desire to stay informed and alert to events that can potentially impact systemic stability. Change comes eventually with the biggest question being what prompts the change and how quickly does it take place. In our view here, those are key unknowns to everyone including those who run the present system.
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Q: Central bank critics say that the "easy money" policies used in the last few years have not solved our ongoing systemic problems. What are your thoughts on that?

A: "I agree with such criticisms. It has been business as usual - in the sense that the overall design of the policy response to the crisis follows an established pattern: bail outs, large-scale monetary and fiscal stimulus, more detailed and extensive regulation, interference in market determination of interest rates, long as well as short, resulting in the suspension of market signals normally deemed essential to the functioning of capitalism. This leads to more political pressure on the state to move in and undertake investments. The ultra low interest rates have in effect replaced inflation as a tax on the public - a tax that governments have taken full advantage of. The inevitably sluggish response of the economy then is used to justify further state borrowing - because it is thought to be “free” money. This crowds out the private sector.

This is more than a debt trap; it is, as I argued in my book of 2012, a ‘money trap’. The nature of our money is at the root of the problem. 

At a time when everybody expects another crisis, it is absurd to suggest policies have solved your systemic problem."

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My added comments: Again, please note that Mr. Pringle agrees with critics who question whether central bank policies are really working to solve long term systemic problems. If he feels this way, we certainly need to take these issues seriously and realize that we need all the best information we can get to stay alert to any events that might impact the stability of our present system. 

Having just read his new book (The Power of Money), Robert Pringle goes far beyond the comment above. In the book, he calls on new thinking to emerge that could lead to a "reset" for our money so that in the future money becomes the servant of mankind rather than its master as it has so often been over time. 

He traces this history of money and its impact on society over the last 200 years. He talks about many hot topics of the day including the future of cash (he says it is not going away any time soon) and why gold has been and continues to be trusted the world over as a long term store of value (and why central banks own it but don't like the gold market as a commentary on their policy actions). He explains why credible and viable private sector alternatives to state sponsored money should be encouraged rather than suppressed. He says in the end, a society gets the money it deserves which is why we all need to learn as much as we can about these issues.

We all hope that future crisis will be avoided. But just assuming we won't get one and sticking our heads in the sand is a naive approach to say the least. In the book, perhaps the main theme was that money and monetary systems are never permanent and will eventually change over time and what we have now will also change at some point in the future. No one can really know what exactly will prompt the change or when it may happen, but history tells us it will happen as Robert Pringle shows clearly in the book.

This blog was created to encourage people to study these issues and take them seriously. Hopefully, as many people as possible will do that. This blog has archived many ideas related to these issues here on this page of the blog for anyone interested in learning more. There is a lot of information on that page you will not likely find on most media sources including some direct input from experts like Robert Pringle and others who want to see our money and our monetary system serve the people in the best way possible using what we can learn from history as a guide.

Summary of Some Key Messages from The Power of Money by Robert Pringle

As we mentioned in this earlier article, Robert Pringle has released a new book (The Power of Money) that takes an in depth look at the past, present, and potential future impact of money on our society. Mr. Pringle sent me an email with a list of some key points he wanted to emphasize that he gave permission to share here. These points listed below are taken directly from his email.

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. . . "here are some of the key messages (they may not all be expressed in these words in the book itself):"

1. The 20th century saw the rise of the Anglo-Saxon idea of money and the monetary economy to global ascendancy; for this to occur, rival outlooks and cultures had to be defeated and discredited  chief among them those of Germany and Japan.

2. Money is fertile ground for dangerous myth-making: among these is the belief that somewhere out there is an ideal money, one of universal applicability and good for all time and all circumstances; the search for this can be highly damaging. So is the belief that money is “just” a social technology - it is that, but is is much more than that.

3. A society's money must reflect and embody or project its shared values - as shown in the book these are subject to change - often rapid and unexpected change.

4. The true “backing” of a money consists in the values, beliefs and outlook of the society using it, its constitution and governance, not any specific metal and not the ‘fiat’ of the state or an agency such as a central bank. When people hold dollars, they share in American values and spirit.

5. Since the fall of neoliberalism our money lacks such backing, so people do not know what it is for - what social purposes it serves. That is why it needs to adapt to the growing consensus on an outlook giving priority to controlling climate change and the Green agenda.

6. It is in the nature of money to have damaging side-effects and temptations, as amply illustrated in the book; yet societies can learn to control these adequately for money to work its magic. How? That has been a concern of all religions and philosophers. Now we wonder why we are plagued by monetary diseases, like the 10 plagues of Egypt, we attribute them to forces, we try rationally to control them but they constantly escape our methods of control. We are much vexed.

7. The power of money and the monetary outlook has been at work behind many of the changes of our society, including some liberal causes such as feminism as well as adverse effects including the destruction or corruption of social bonds, family life, ancient civilisations and religious faiths. Not to deny that the benefts may well outweigh the costs.

8. The search for an ideal money that will be good for all times and places is vain. A good money is one that works well for its society.  On the whole, we get the money we deserve. It acts as a mirror for society’s faults as well as its virtues.

9. I do not at all dismiss the contribution of economists but society at large has to set the direction of travel.

10. I invite economists and central bankers to engage in a discourse about these wider aspects of the topics they study and the policies they advocate.

Please use and share the above as you see fit - and no offence taken if you think they stray too far from our brief!   (the Q&A interview topics)

All best wishes

Robert
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My added comments: I have now had a chance to read The Power of Money and I can say without reservation that this is a book that anyone interested in the issues covered on this blog will find interesting and worthwhile reading. The book was somewhat different than I expected in that it is not any kind of technical look at monetary polices or even just an historical recap of now our money has evolved over time. 

This book seeks to make the case that how society views money (and how money is used by powerful forces to influence society in various ways) goes far beyond just what people are using for money or what central bank policies may be in place at any given point in time. Those things change over time, but the Power of Money on society remains a constant.

Written from the perspective of a true "insider" of the monetary system, it reminds me of a book written years ago called "Tragedy and Hope" by Carroll Quigley. This book however, is a much easier read and focuses more narrowly on how money and power intertwine and how the "guardians of money" seen as the financial "elite" really operate the system.  It chronicles some of their successes and some of their failures as viewed by the author.  

Some of the fascinating topics explored in the book are:

- How did two world wars shape how the monetary system evolved from the Victorian era?

- The ongoing battle of views about money and its proper role in society swings back and forth over time impacting what kind of economic and monetary system we have

- The Euro Project - How it started - Did it work as Intended?

- What caused the financial crisis in 2007-2008? What did the Fed miss leading up to it?

- Why that crisis has renewed the debate over what money is and how we should use it

- The dangers of too much State control over money

- Where do things stand presently? Why it is hard to change the status quo

- Will we go "cashless"?  (he says not anytime soon)

- What about gold? How does he view it? How do central banks view it?

- Gold always bounces back no matter what is done to discourage its role as a store of value

- Where are we going in the future with our money? (does anyone really know?)

- We need ideas and imagination that challenge the status quo and the future is up to us (we the people can determine what happens with our money and if it is used for good or bad purposes)

This list only scratches the surface of the interesting topics explored in this book. It is filled with information, insights, and some personal anecdotes you will not see in mainstream media. It is written by someone who has observed how things work from the inside. If you have wanted that kind of perspective on how things really work, this is a book you would want to read. I think would find it very interesting and surprising in many regards.

Added news note: 1-16-2020: President Trump formally nominates  Judy Shelton and Christopher Waller to the Board of the Federal Reserve 

Robert Pringle (Centralbanking.com) Talks About Central Banks, Money, and Where We Might Be Going in the Future

Readers here may recall that we have featured some articles by Robert Pringle (The Money Trap Blog) from time to time. Mr. Pringle has had a long and distinguished career working with central bankers from around the world. Here are a couple of  extracts from his background information:

"In 1990 he founded  Central Banking Publications, a financial publisher specialising in public policy and financial markets. Central Banking journal, which he edited for 20 years, has subscribers in 120 countries including the great majority of the world’s central banks."  . . . .

"From 1979 to 1986  he was the first executive director of the Group of 30, an influential think tank based at the time in the World Trade Centre, New York (it has since moved to Washington, DC). For the G30, Robert co-authored pioneering studies of the foreign exchange and interbank markets, and on IMF borrowing from the private markets, and the emerging profession of official reserve management."

Recently, Robert Pringle released a new book that I think many readers here would find interesting. The Power of Money is an in depth look at the past, present, and potential future of money and its impact on society. His observations in the book come from decades of directly observing the impact of money on society from the inside of the monetary system we use today.

Obviously, Mr. Pringle is one of the leading experts in the world on central banking and the issues faced by central banks. In addition, he has kindly shared his experience and knowledge with me from time to time providing input on the kinds of issues I attempt to follow on this blog. 

I asked him if he would like to participate in a Q&A style interview to discuss his thoughts on some of these issues based on his decades of experience inside the system. He agreed, and therefore readers here will get the opportunity to benefit from his knowledge and personal experiences working alongside some of the most well known central bankers from around the world.

Robert Pringle

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Q: What got you started into a career that would take you to the point where you would be working with central bankers from around the world?

A: "Ever since my teens I wanted to do something with international reach. At the same time, I  had an aversion to large organisations, especially governmental organisations such as the United Nations. This aversion extended even to universities. So when I received an offer from Berkeley, University of California, as an assistant to a professor with prospects of research and secure employment, I rejected it after I got impatient with the ton of forms they expected me to fill in. Yet, it was the leading academic centre for sociology, the subject I was interested in, in a stunning location as well as the world centre of radical thought. My whole life would have taken a different course if I had accepted the offer. Instead, after graduating in economics at Cambridge, I went to the London School of Economics to study sociological theory and the implications for economics. But I dreaded the prospect of another three years study to obtain a PhD so I applied for and got a post where I could learn the craft of economic and financial journalism. I liked it - especially the opportunity to get to know leading figures from the worlds of economics, banking, central banking and politics - and to write about what they were doing. The 1970s and 1980s were exciting, pivotal times for anybody interested in the character and fate of our societies and the drivers of social and economic change. Soon I found my vocation as an editor and travelled the world meeting and exchanging views with influential people without being part of some awful bureaucracy like a central bank, inter-governmental organisation - or university!"

Q: How have your views about policy evolved over time?

A:  "I was educated into Keynesianism - I studied Keynes at King’s, his own college, with some of his great disciples  such as Nicholas Kaldor and Joan Robinson. Ironically, however, though Keynes was a monetary economist, I was taught little about money and banking at Cambridge. All that came when I had to start writing about it. In the 1970's as editor of The Banker (a monthly journal) I became a passionate monetarist, as traditional stop-go ‘demand management’ policies were failing, and was privileged to be one of a close circle in a group started by Karl Brunner and Allan Meltzer that tried to disseminate monetarist thought in Europe. This was a time when leading economists and commentators believed you could raise the long-term rate of growth by keeping the pressure of aggregate monetary demand continuously  at a high level - complete nonsense. When I went to the United States to set up the Groupof 30, I was shocked to find many unreconstructed Keynesians on the group. They let their aversion to President Reagan infect their economics; they basically missed the whole point of the Volcker revolution in monetary policy. 

I disliked the way that governments, central bankers and mainstream academics then in the 1990's turned the insights of monetarism into the doctrine of inflation targeting - an effort to do without money in the models used to frame policy choices. This would leave too much room for discretion, which I thought would be abused. I also objected to Alan Greenspan's use of Fed powers to support the banking system in the crash of October 1987 - it started the era of extreme moral hazard.

We live with the results of the use of excess discretion and lack of rules in these two fields of policy-making. They are not good results."

Q: You have some interesting thoughts on money and how it may change over time. Can you share some of your thoughts on that topic? (see The Power of Money for an in depth exploration of this topic).

A: "Certainly - they have evolved in response to influences and pressures such as those mentioned already. Now I shall indicate a few of my conclusions.

Money has to change to reflect the needs of a changing society;  at its best, it embodies and projects the best aspirations of that society. Money is part of the effort to better the human condition. True, it is foolish to expect too much from it. It cannot eliminate the business cycle. It often needs to be left to take its natural course. There are worse evils than a gradual, long drawn-out deflation. People adjust as long as they have confidence in the long term stability of the monetary unit.

The state should define the monetary unit - what counts as money in a given territory  or monetary space and let the private sector create money - as much as society needs - to the standard. There is no such thing as a perfect money, ideal for all times and places; the search to realise such a dream can do more harm than good."

Q: Central banks have played a huge role in guiding the present monetary system for many years now. Can you discuss some of the pros and cons you have seen over time of the role central banks have played?

A: "The central bankers I have known have been decent, honourable and conscientious. Events thrust their institutions into positions of high authority and status. Even the smallest central bank makes decisions of crucial importance for its country and people. Their elevated position exposes them to high risks and what they often call ‘headwinds’. This is an understatement. 

If central banking were classed as an Olympic event, it would join such sports as surfing, skateboarding, karate, and rock climbing, at the extreme end of the sporting spectrum. 

Central banks served as midwives of our current monetary and economic regime. They helped to shape its present form.

Now they service and maintain critical financial networks that span the globe. Far from being detached bystanders, they have facilitated revolutionary changes - changes that affect the life chances of men and women everywhere. We are all inter-connected through this intricate and ever-expanding monetary spider-web. 

They have managed multiple crises as agents of governments. The costs have been high, but not catastrophic - not yet.

What central bankers evidently do not know is how to prevent crises from happening in the first place. They claim to have learnt from experience, but the public is rightly skeptical. To what extent their policies are actually responsible for social ills such as rising inequality, stagnant real living standards in many countries, sluggish investment, growing monopoly power (notably of Big Tech) rising popular anger and disrespect for elites and ‘experts’ is arguable. I suspect they have been a significant factor. President Trump plays a “Punch and Judy” show with Fed chair Powell  but that’s what it is - a show. Sound money is as far away as ever."

Q: Those comments about President Trump and Chairman Powell are fascinating. My take is that you are saying that while they argue over relatively more minor issues in a media headline grabbing way, the big picture of the need for major monetary system reform continues to be ignored. Is that an accurate take away from your thoughts above on this?

A: "The President’s attacks on his own appointee at the Fed for keeping interest rates "too high" raise the whole question of the policy latitude given to the Fed by custom - an important issue. But yes, while this media circus goes on, the underlying problem of the faulty apparatus of policy making, indeed the whole way that current monetary arrangements operate - at the international as well as domestic national levels - and how they generate crises,  is overlooked.

In this context, I hope that President Trump will send his nomination of Dr Shelton to the Fed’s Board of Governors to Congress and that the nomination will receive Congressional approval.  Dr Shelton would bring a much-needed breath of fresh air to the Fed’s decision-making bodies. While I do not favour a return to a gold standard it is time for a proper debate about the anchor for money. There is no effective anchor at present. In other words,  if given the opportunity, Judy Shelton would open up the whole issue of the future of the monetary regime." (see this added news note 1-16-2020)

Q: In 2008, central banks had to face one their greatest challenges ever to the present monetary system when the GFC (Great Financial Crisis) hit. They responded with new policies that are still being debated today. How would you assess what central banks did to respond to the crisis?

A: "Their policies contributed to it and then helped to control it. They emerged with greater power over the financial system - a retrograde step. To give public officials wide discretionary powers not only over monetary policies but over the operation, structure, and functioning of the financial system is fraught with danger."

Q: Central bank critics say that the "easy money" policies used in the last few years have not solved our ongoing systemic problems. What are your thoughts on that?

A: "I agree with such criticisms. It has been business as usual - in the sense that the overall design of the policy response to the crisis follows an established pattern: bail outs, large-scale monetary and fiscal stimulus, more detailed and extensive regulation, interference in market determination of interest rates, long as well as short, resulting in the suspension of market signals normally deemed essential to the functioning of capitalism. This leads to more political pressure on the state to move in and undertake investments. The ultra low interest rates have in effect replaced inflation as a tax on the public - a tax that governments have taken full advantage of. The inevitably sluggish response of the economy then is used to justify further state borrowing - because it is thought to be “free” money. This crowds out the private sector.

This is more than a debt trap; it is, as I argued in my book of 2012, a ‘money trap’. The nature of our money is at the root of the problem. 

At a time when everybody expects another crisis, it is absurd to suggest policies have solved your systemic problem."

Q: Your comment that ultra low interest rates have replaced inflation as a tax on the public catches my attention. Is this because governments get to fund their borrowing with ultra low interest rates which are heavily borne by a middle class that in the past counted on higher interest rates to supplement income as they retired? So the interest income money that used to go to savers now subsidizes the government allowing it to avoid the unpleasant fiscal policy choices of raising taxes or cutting expenses?

A: "Yup, in effect, something like that seems to be happening. But under the current, flawed system, the central bankers may have little option: it’s wrong to blame individuals or even individual central banks, when events drive policy in this direction.  Under the present so-called ‘system’ they have little choice - they are doing their best in adverse cicumstances."

Q: One thing we have seen arise out of the crisis is cryptocurrencies along with a variety of efforts to create private sector alternative forms of money and even alternative monetary systems. What are your thoughts on these kinds of initiatives?

A: "Setting the fraudsters and snake-oil salesmen aside, who always flourish in such a permissive monetary environment, monetary innovations such as cryptocurrencies  are bright lights in a gloomy picture."

Q: Do you think they will eventually disrupt the present monetary system that is based on officially sanctioned state issued currencies?

A: "Let's hope so."

Q: You have had a long and distinguished career. Based on your experiences, what message would you like to convey to readers as to what you see happening in the future with money and our monetary system?

A: "More of the same, which is such a pity. The way forward should be clear - most of all for the United States:

Let the state and its agencies revert to their classical role - holding the ring, maintaining laws, protecting property rights, breaking up trusts and monopolies of all kinds, protecting the weak and vulnerable members of society, defending the community and providing a reliable monetary anchor. Let private initiative and enterprise do the rest."

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My added comments: This article is certainly one of the most important ever published on this blog. The insights shared above come from someone with a long and distinguished career working inside the monetary system that has prevailed during our lifetimes. 

In my view, you will not find this kind of inside look into the monetary system in most mainstream media which tend to focus on the more superficial aspects of the system (minor tweaks to interest rates, etc). They also tend to more or less ignore the big picture question of whether our present system is sustainable and how it might evolve in the future. Of course, that is the primary topic of interest of this blog.

A thank you to Robert Pringle for taking valuable time to give readers here this fascinating peek under the hood of our monetary system! This article will be added to our Marketplace of ideas for monetary system reform so that readers may more easily find it as time goes by.

The late Paul Volcker in conversation with Robert Pringle in 2014
(see full interview here)

Was Paul Volcker a central bank skeptic?

Reader Alert: Q&A Interview Coming Soon with Robert Pringle (Centralbanking.com)

The role of central banks in our monetary system is one that is sometimes hotly debated. Regardless of whether you see central banks as a positive or negative force on the system, there can be no doubt that they have had and continue to have an enormous impact on our money and the system we use to engage in commercial activity. 

Perhaps no one has had a better inside view of the impact of central banks and money on our society during out lifetimes than Robert Pringle. Here is a bit of background on his long and distinguished career which included his founding of Central Banking Publications.

The late Paul Volcker in conversation with Robert Pringle in 2014
(in this article Robert Pringle suggests Paul Volcker was a secret central bank skeptic)

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"Robert Pringle has pursued a career as an economics author, editor and commentator, specializing in money, banking and capital markets.

He is also an entrepeneur. In 1990 he founded  Central Banking Publications, a financial publisher specialising in public policy and financial markets. Central Banking journal, which he edited for 20 years, has subscribers in 120 countries including the great majority of the world’s central banks. He remains chairman of the company.

Robert has monitored and commented on changes in financial markets and the monetary policies of central banks around the world for more than 40 years.

In addition to numerous articles for a wide variety of  journals, he has published several books and edited more than 50 volumes of collected papers, surveys and training manuals for central bankers and market regulators. He has organised regular seminars and training sessions attended by more than 1,000 senior  monetary policy-makers.

After obtaining a Masters degree in economics, sociology and history from King’s College, Cambridge University and post-graduate study at the London School of Economics, Robert joined The Banker, part of the FT group, later being appointed the Editor.

He also served as deputy director of the Committee on Invisible Exports, a body representing a wide range of UK service sectors, which was set up by the Bank of England to study and publicise the contribution made by financial, business, professional and allied services to world trade and the UK economy. He led a study that made the first published estimates of the invisible earnings of UK professions such as law, medicine and accountancy.

From 1979 to 1986  he was the first executive director of the Group of 30, an influential think tank based at the time in the World Trade Centre, New York (it has since moved to Washington, DC). For the G30, Robert co-authored pioneering studies of the foreign exchange and interbank markets, and on IMF borrowing from the private markets, and the emerging profession of official reserve management.

His books and monographs include “Banking in Britain”, “The Growth Merchants”  (a polemic on the monetary policies pursued by the UK in the 1970s), and “The Contemporary Relevance of David Hume” a study of  the Scottish philosopher. With co-author Marjorie Deane, he  wrote “The Central Banks” (Hamish Hamilton, 1994), with a foreword by Paul Volcker, former chairman of the Federal Reserve.

At Central Banking (now part of Incisive Media) he represents the company at conferences around the world, and knows personally many of the leading financial statesmen, central bank governors and ministers of finance."

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After following these issues for many years, I see all kinds of views out there towards central banks and the monetary system we have today. Debate continues to rage on whether or not the system we have now is sustainable long term. Should we expect things to stay pretty much the same for a long time? Will some kind of new crisis upend our present system forcing some kind of major change? If that does happen, what will that change look like?

I suspect most people would be very interested to hear what someone who has worked inside this system for decades thinks about these kinds of questions. Most of us would love to get a chance to ask questions like this to someone who has seen how things work (and sometimes don't work) inside the system now primarily run by the major central banks around the world.

Readers here will soon get that opportunity. Robert Pringle has offered to share some of his insights into all these issues with us based on his direct observations of how the system operates. Mr. Pringle does not have to speculate about how things work because he has seen it all unfold from the inside.

I plan to run three articles for readers here in January 2020:

1) The Q&A interview with Robert Pringle - will publish on January 2, 2020.

2) A summary of some key points from his new book The Power of Money that Robert Pringle provided me by email. 

3) A followup article where I select a couple of his answers in the Q&A interview that I want to emphasize as important points for readers here

I hope this interview article will get as many readers as possible so please feel free to pass it along to anyone who may have any interest in these kinds of issues.

Why Hasn't Debt Collapsed the System? -- Some Experts Offer Some Thoughts

In 2008 the world was rocked by what is now called the Great Financial Crisis (GFC). The crisis brought down some banking institutions, prompted emergency action by the US government, and triggered an unprecedented reaction from central banks around the world led by the US Federal Reserve. New and never before tried monetary policies were implemented and literally trillons of units of various fiat currencies were created in a global effort to keep the system from imploding due to contagion.

Now, its 2018. So far a systemic collapse has been avoided and most people have slowly released concerns about the stability of the system from their minds. Despite this, there is a nagging problem that most everyone acknowledges; and yet nothing serious is done about it. We are talking the huge debt burden that overhangs both the US and the world. The National Debt clock is still documenting the ever expanding US debt burden (now over 21 Trillion and don't even ask about unfunded liabilities).

As noted above, virtually everyone describes this growing debt as a true systemic risk. Not only for the US, but for the world as well. Just this year both the IMF and the BIS repeated warnings on debt as a systemic risk for the world in general. A chart from the World Ecnomic Forum captures the total global debt picture as of early 2018.

For years and years now, these kinds of warnings have been issued not only by the IMF and the BIS, but also policy makers, politicians, think tanks, and various organizations concerned about the issue (here is one example and here is another). In the US, politicians from both major political parties speak in dire terms about how awful the debt problem is, especially when the other political party is in power. All this, and yet no serious efforts are undertaken to actually do anything about the problem.

It's not hard to understand why. The policy decisions required to contain debt (raising taxes or cutting spending or both) are essentially political suicide at this point. People have a sense of entitlement now that says no one will ever have to make any sacrifices. Central banks stepping in to create all the money needed to prevent widespread economic contraction after the last crisis has simply re enforced that sense of entitlement.

None of this is ground breaking news. Most people kind of know instinctively that the above is basically true and just don't think about it much since the system still rocks along and their daily lives are not disrupted.

This situation creates a couple of key questions in my mind:

1) Given the above situation - how has the US (and by extension the world) been able to avoid a systemic crisis resulting from the overhang of outstanding sovereign debt?


2) How long can the US (and by extension the world) avoid a debt related systemic crisis?

a) less than two more years?
b) two to ten years?
c) more than ten years?
d) a new international system (a reset if you will) will emerge on its own before we get a major systemic crisis (debt related or otherwise)
e) none of the above or a different answer

These are the key questions to consider in my view. If no new major systemic crisis is coming for years and years, not much is likely to change very quickly. If a new major systemic crisis arrives in the not too distant future, all kinds of potential for highly disruptive change (good and bad) will exist. The latter impacts everyone in their daily lives, the former probably goes mostly unnoticed.

I decided to put these two questions to some experts to see what their thoughts are on it. Below are the unedited comments they sent me.
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From a reader who works in this arena who prefers to be unattributed:

To respond to your question (#1) ...

"Over the past decade, many boundaries of sound monetary management have been crossed, with favourable marketing (of the lipstick-on-a-pig variety) working its charm to drown out the protests of those who would have respected the rules.

Many monetary system-level changes since 2007 have been clever 'back room' sophisticated survival methods that are typically rather difficult to describe. 

An interesting paper by Philip Bougen and Joni Young called "Fair value accounting: Simulacra and simulation" explains: "Values are being assigned to financial instruments which do not reflect some external accounting reality that is ‘out there’ merely awaiting discovery. Rather this reality is being imagined and might be reimagined in a multiplicity of ways at the intersection of different calculations and different assumptions. ... ... it is precisely because of their application in an accounting context categorized as fair value accounting, one with a market focus, yet one with an absent market reality, that the use of simulacra need to be highlighted. Reference to an absent market as an authoritative basis for simulation, invests the market (albeit absent) and the associated simulacra with a reality they do not possess. Indeed, many of these instruments have never actually been traded on an organized secondary exchange. ...  ... the construction of a reality of various clearly delineated levels of inputs and a stylized market focus for valuation purposes evaporated as quickly as it was formulated, as ‘anomalous’ circumstances and considerations intervened, requiring connections between the various levels of inputs. Given the brokered transaction basis of OTC derivatives we suggest that the anomalies associated with ‘market prices’ might in the future prove more common than previously considered." (pg 399)

Source: https://pdfs.semanticscholar.org/480b/de2ba0a2dda42ff4cc914bc81d5e9fdeb547.pdf

Here also is a good explanation of one of the methods, called a "Currency Swap Line":

https://www.ecb.europa.eu/explainers/tell-me-more/html/currency_swap_lines.en.html

Presenting this method in a formal respectable article from the ECB (etc) makes it seem entirely coherent. Well, it is. But one can also readily imagine a Monty Python skit called "Currency Swap Line" which would equally reveal it for what it is: a system-level hack. Perhaps one should rewrite the words of "I'm my own grandpa" into a song about this method of monetary system management. For some detail on how things have come about, see this paper from the Federal Reserve Bank of Cleveland -- and the references therein. Some choice phrases are...

• "Increasingly controversial, the Exchange Stabilization Fund is used to influence the international value of the U.S. dollar.
• "This impedes an informed public discussion of ESF operations.
• "...explicitly authorized it to operate without congressional oversight and accountability.
• "...the Fed warehousing arrangement allows the ESF to take a leveraged position in foreign assets that is not reflected on the ESF’s balance sheet.

Swaps are not new, nor are they 'bad'. Back in 1990 the World Bank funded development of  methods for the valuation of "Debt-for-Nature Swaps". That was a clever (fully transparent and within-rules) bankruptcy-management arrangement for massively indebted governments, led by some bright people at the World Wildlife Fund and the Natural Resources Defence Council. They thought up a way to adapt the currency swap method. Bad debt title in USD was sold to environmental organizations at hugely discounted rates, and payment of the remainder was carried out in local currencies to fund large-scale ecological protection through counterpart organizations in those countries." 

In response to Question #2

A little like (d) but rephrased as (e): a new international system is continually emerging by fits and starts through a combination of hasty patch-ups and thoughtful novel designs, as we lurch along from crisis to crisis, with a bright idea here and a bright idea there. Economies as a whole (like ecosystems as a whole) don't really die; they just rot. See Joseph Schumpter's work on creative destruction.

From Dr. Warren Coats (former IMF Assistant Director):

"My comments on your two questions are that I don’t think the U.S. will ever be driven to default on its debt for three reasons.  First, our financial markets are so deep and broad that they will take a lot of stress. Think of Japan with a much higher debt burden than we now have. Second, we have no foreign currency debt as we are able to borrow in our own currency. Third, we almost always wake up and fix problems before they destroy us. On the other hand we have also gotten used to big deficits and don’t take them as seriously as we should so we might stay asleep too long. If we reach the tipping point, the rapid evaporation of confidence would be almost impossible to stop or reverse.

If the U.S. federal government ever defaults (not likely as I argued earlier), it will most likely take the form of inflation. While inflation is a tax, unlike other taxes it reduces the real value of existing debt public and private. Other forms of default and the resulting  financial restructuring would reduce the real value of specific, targeted debt such as federal bonds etc."



From Robert Pringle (former Director - Group of 30)

"I just keep on thinking of what Adam Smith said when somebody came to tell him that the American colonists had defeated the British army and that this would be the ruin of our nation:  “Young man,” said Adam Smith, “there is a great deal of ruin in a nation.” The US of A ain’t ruined yet. "

From Joseph Potvin (Executive Director -  Xalgorithms Foundation)

"You never can tell what types of events might conspire to become the change, or when these might occur. System-level transformation can go unrecognized even by attentive participants within, until it's effectively the norm. The following is from a paper I did a quarter century ago on investment appraisal criteria (extending a list by systems design engineer Dr. James Kay, U Waterloo):

"Complex systems are: 

• Unique - Each evolves through distinctive physical and historical circumstances;
• Nonlinear - Several controlling variables interact through multiple feedback loops;
• Discontinuous - Catastrophes and irreversible bifurcations can be internally generated;
• Not Predictable - Pivotal phenomena may not always be statistically significant;
• Pluralistic - At any moment several succesional configurations coexist;
• Fickle - From any state there are innumerable alternative developmental pathways; and,
• Self-Organizing -  An open system enduring a persistent but moderate disturbance can, under some conditions, respond by establishing new stable structures to accommodate it."

From Dr. Leanne Ussher (Affiliate Scholar -  Institute for Advanced Sustainability Studies)

"I actually don't agree with your premise.

 I believe it is extremely important that there to be a clear distinction between US Federal government debt, and private debt (especially emerging market debt, which could be both private and sovereign). The fact that the federal government is NOT going to default on its debt (banning a political hijacking from the tea party) means that its debt excesses do not have the same impact as private debt. (Even US state debt and government sponsored enterprise debt could be easily taken over by the Federal Government in an emergency – e.g. the bailout  of Fannie Mae).   US Federal debt is quite different than private debt, since ultimately they can monetize their debt.

Federal government debt if used correctly can even save a financial crisis from escalating. It is true that this may cause moral hazard, or inflation, but this is something quite different from what you are inferring in your blog: excess US sovereign debt and a portending financial crises.

Conflating private debt with Federal Debt is a common mistake – and I believe it is common due primarily to ideological reasons.  The famous ‘debt clock’ that you cite, only concerns itself with government debt, and was switched off when the national debt was decreasing in the Clinton years. Highlighting its ideological motivations. 

The rising debt I’m concerned about is the rise in emerging market corporate debt, emerging market US dollar carry trades being reversed, and potentially private student debt, corporate debt, and financial corporation procyclical capital  requirements.

The US is still currently the issuer of the world's reserve currency. What was of concern in the 2008/09 crisis was US private debt of financial firms, household mortgage owners, and a few non-financial firms. Too big to fail among private financial institutions (which to bail out -- not GSEs which were always going to be bailed out), and contagion across the national and international financial community.

The Federal Reserve was and will be rescuing private markets in the next crises (or overseas governments and their central banks extending USD swap lines). The Fed was not rescuing federal US debt markets, which is where everyone was running to, and they will run there again. Not until there is an alternative will the US suffer from its exhorbitant debt privilege, and even then it will be a slow burn (like Japan).

The US Federal government (like any federal government that issues debt in its own currency) can readily monetize and deflate its debt. This may cause inflation, and I’m not arguing for inflation. But inflation is a tax like any other. It is often levied on the poorest in a society, those holding assets or wages that are not indexed to inflation, and not  debtors. But it is across the board.

I think, if you really want to blame Federal Debt for our next financial crisis, you would need to build a much more systemically related story of twin deficits, but even then I don't think I would be there.

US Federal debt and inflation is not going to be the next financial crisis. Rather, the debt deleveraging spiral that brings down private entities and their counter parties, across international borders, especially in the emerging markets, and here at home, will be a problem, but they will be running into US Treasuries when the crash occurs, not out of it."

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Added note: Recently, former Bear Stearns Director  Nomi Prins wrote this article in which she attributes what she calls "dark money" from the Fed and other central banks as helping to prop up the system and avert collapse. Here is the concluding statement from her article:

"Dark money rules the world, and it could keep the bull market running longer than most people expect, even though the eventual turnaround could be ugly."

It appears that our panel of experts mostly agree that central banks can and do use the tools available to them to keep the system afloat and can do this much longer than many people would expect. The first comment in the list above provides some specific examples of some of the tools available. Dr. Ussher makes a distinction between privately held debt and sovereign debt and feels the former is where the most risk lies in the financial system. 

If the consensus of the views above is correct, it seems that what we should watch for is if the transition from the system we have today into whatever evolves in the future can be managed in an incremental way to avoid the sudden collapse so many watch for and expect at some point in the future (whether from sovereign debt or from private sector debt). Of course, only time will provide the answer as to what actually happens.