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."

The Observer (Uganda) Calls for Reform of the SDR Allocation Process at the IMF - Dr. Warren Coats Comments

The COVID-19 pandemic has led to economic hardship all over the world, not just in the US or other western nations. One of the issues that has been raised around the world is whether or not the IMF should consider doing some kind of SDR allocation to increase SDRs to member nations. This happened before in the last financial crisis with the IMF itself noting that a main goal was to offer help to low income countries, per this statement in the official IMF release:

"About $110 billion of the combined allocations will go to emerging market and developing countries, including over $20 billion to low-income countries. Many of these countries currently face difficult spending decisions as they decide how to address the fallout from the global crisis. For them, the SDR allocation means potential access to unconditional financial resources that could limit the need for adjustment through contractionary policies and allow greater scope for countercyclical policies in the face of recession and rising unemployment."

Recent calls for another similar new SDR allocation were met with resistance from the US and India, with the US stating that most of the SDR allocation would end up going to nations that don't need it rather than the nations who might need it the most. In the previous IMF allocation linked above, they made this comment about that issue:

“The general SDR allocation is a key part of our response to the global crisis, demonstrating the value of a cooperative multilateral approach,” IMF External Relations Director Caroline Atkinson said. “The Fund’s low-income members will benefit significantly,” she added. Despite a smaller number of SDRs going to the IMF’s low-income members, the allocation will result—in most cases—in a proportionately bigger increase in reserves for them than it will for the advanced economies, which already have a substantial cushion of reserves."

With this backgrond, an article by Louis Namwanja Kizito recently appeared in The Observer (in Uganda) calling upon the IMF to issue new SDRs to lower income nations in need, specifically in Africa. The article notes that it is true that most of such an SDR allocation would go to developed nations such as the US that can use the global reserve status of its own currency in a way other nations cannot to obtain liquidity during a crisis. The article even notes that ever since the US left the gold standard in 1971, it has "gone on a money printing spree without a gold limit". The Observer article also calls for a reform of the SDR allocation system at the IMF and describes it as unfair. 

The SDR is something we have covered here on this blog for years. Our leading expert on this topic is Dr. Warren Coats who at one time was the head of the SDR Division at the IMF. Dr. Coats has been kind to offer his extensive knowledge of the SDR to readers here over the years including an interview he did here to explain his Real SDR proposal for monetary system reform. 

I asked Dr. Coats to review this new article in The Observer and offer any thoughts he might have on it. Once again he kindly took time to do just that for readers here. These were his thoughts on the article he sent me by email:

"Almost all central bank laws make the stability of the value of its currency the primary mandate of the central bank. This is the best contribution that monetary policy can make to an economy.  Giving a central bank the additional fiscal goal of redistributing income to the poor is a very dangerous idea. Rather than taking from the “rich” to give to the poor with traditional taxes, printing money and giving it to the poor takes from those that have to give to those that don’t via inflation. While I disagree with the U.S. opposition to an SDR allocation at this time, Mr. Kizito misunderstands how the SDR system works. The allocation of SDRs to countries is, in effect, the allocation of lines of credit. If a country uses any of its allocated SDRs (spends them), it must pay interest on such uses at the SDR interest rate. The purchaser or acceptor of these SDRs is, in effect, lending dollars to the user, though without the policy conditions that normally accompany IMF loans.  The size of allocations are related to the size of the recipient countries economy and thus its capacity to repay."   -   Warren Coats

Dr. Warren Coats

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My added comments: A thank you to Dr. Coats for taking time to review this article and offer his comments on it. When I read many articles about the SDR, I often find there is quite a bit of misunderstanding about how SDRs actually work at the IMF. Dr. Coats is without question one of the leading experts in the world on the SDR and the SDR allocation process and an excellent source to explain how it works for us.

Added note 9-21-2020: Dr. Coats has announced he has a new book out based on his travels to Afganistan after 9-11. He worked with a team trying to establish a more modern monetary system in Afganistan. You can find the book here.

News Note: India Joins US in Opposition to an Increased Allocation of SDR's

The global pandemic which has fed into a global economic crisis has renewed an old debate within the IMF. Some have called for a new increased allocation of SDR's in an effort to boost global liquidity. The US was one of the first major nations to oppose any new increased allocation of SDR's and according to this article appearing in Livemint, has been joined by India. Below are a couple of excerpts from the article followed by some added comments.

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"IMF is contemplating redistributing the existing unused special drawing rights (SDRs) of rich member countries to low income countries in dire need for assistance. The move comes following opposition from countries like India and the US to the proposal by the multi-lateral agency to issue fresh SDRs to member countries to empower them to fight the economic fallout of the coronavirus pandemic.

Speaking at a webinar organized by Princeton Bendheim Center for Finance, IMF chief economist Gita Gopinath said the SDR allocation issue is being discussed and that there is no consensus on it at this point. “Let’s be clear what the SDR can do. When you do a general SDR or increase SDR allocations, most of it goes to the countries that don’t need it. Because it is proportional to your quota, it goes to the very large economies. It does not go to the low income countries in very large numbers," she said.

Gopinath said IMF is discussing an alternative mechanism with its members under which wealthy countries that don’t need it can loan their existing SDRs to low income countries. “There is certainly a lot of appetite for this second strategy and that’s something we are working on at the IMF," she added."

Please click here to read the full article on Livemint

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My added comments: In recent months issues like this have moved to the back burner in the US due to the media focus on the pandemic, the economic fallout from the pandemic, recent tensions in race relations, and of course how all that will impact the upcoming US Presidential election.

Our view here is that we are not likely to see any new major dramatic changes at the IMF or at the major central banks at least until after the US elections. The US election contest is viewed as a close race that most likely will stay close with both sides claiming a path to victory. Institutions like central banks and the IMF are not going to want to "take sides" in this kind of environment because they don't know who is going to emerge in power. The safest play is to just try and keep the status quo functioning with massive injections of liquidity by the major central banks. This is now an established policy with the public and my take would be that the belief is that the present system can be "held in place" until the election to see who wins. (note that the current IMF strategy described above is to encourage the use of existing SDR's in loans between member nations rather than any kind of substantial increase in new SDR's)

How would we expect "who wins" to impact things? 

This is a fairly easy forecast to make based on what we know at this time. If President Trump is re-elected, he no doubt will simply continue his America First populist agenda. He is not likely to defer important systemic changes to international organizations like the IMF or The World Bank. We can expect that he would not propose major monetary system changes until and unless the present system completely fails and there is no other alternative available.

If former Vice President Joe Biden is elected, we can expect a shift back to a more "globalist" policy approach. All of the policy initiatives that were disrupted by the election of President Trump likely return, but with a more progressive tone due to the makeup of the new base of the Democratic Party. A Biden Administration is far more likely to look to the IMF for major monetary system changes if the present US dollar based system falters.

This analysis is supported by a recent statement by the World Economic Forum that hosts its annual summit in Davos. The theme for its 2021 conference is - The Great Reset .

It is clear from the statement from the WEF that an economic reset is considered a key part of this initiative. It is clear that the thought leaders for the event will come from organizations like the IMF. Here are a couple of excerpts from the statement:

“In order to secure our future and to prosper, we need to evolve our economic model and put people and planet at the heart of global value creation."

. . . . .

"The announcement of the Great Reset was made by HRH The Prince of Wales and Professor Schwab during a virtual meeting, followed by statements by UN Secretary-General António Guterres and IMF Managing Director Kristalina Georgieva."

We can expect that a Trump Administration will be opposed to most of the policy proposals coming out of this Great Reset summit while a Biden Administration is likely to be much more favorable.

All this supports the analysis that we are likely to see a waiting game until the Novermber elections are over and a winner has emerged. The results of that election are likely to determine how much support the World Economic Forum gets from the US for its Great Reset proposal.

Interestingly, no matter which side wins the US election, many analysts from a broad spectrum of opinion anticipate a diminishing role for the US dollar as the global reserve currency in the future. Their differences of opinion on this are more a matter of timing. Some believe the US election may speed up the process for change away from the present dollar based system, while others still see a gradual pace of change unfolding over many years. 

Our view here in this post is mostly short term. We don't see much major change likely until after the election. Our focus here will be to continue to monitor key news events and present content we view as educational for readers interested in these issues as we find it. Long term we will watch to see if those that say the present US dollar based monetary system is nearing an end are correct.

Added note 6-25-2020: Fox Business runs this article on the upcoming Great Reset Summit to be held in Davos next year that we talked about here just above. This article notes that this is a potential major news story somewhat under the radar. But not here.

IMF Official - There are Coutries (Including the US) Skeptical About Issuing More SDR's

We continue to monitor the topic of the potential for any increase in the allocation of SDR's (Special Drawing Rights) at the IMF. This is an important story to follow for this blog because the entire purpose for the blog is to watch for any major changes to our present monetary system. Years go by with no indication that any major changes may be forthcoming. We have reported here for many years that our sources indicated they did not expect major changes to our system unless a new major economic and financial crisis were to arise. Now we have that major crisis and there have been numerous articles calling for an increase in the allocation of SDR's at the IMF as part of the response to this crisis. Our most recent article reporting that the US was opposed to such an increase can be found here.

Readers may ask why would a seemingly low profile event like an increased allocation of SDR's would be viewed here as something major to follow over time. The reason is that some analysts like Jim Rickards have long predicted that at some point in the future, a crisis would arise so large that it would overwhelm the national central banks ability to respond without doing severe damage to their own national currencies. Jim says that he believes this could well lead to serious proposals for the IMF to step forward with a massive issuance of new SDR's (Jim says in the trillions) as "the only clean balance sheet" left in the world to try and restore liquidity to the system. Obviously, if anything close to this does happen, we have very major monetary system change facing us with major potential consequences to the US dollar as the global reserve currency. Beyond that, if all this were to happen because the credibility of the US dollar was damaged beyond repair due to the efforts of the Federal Reserve attempting to sustain the present US dollar based system, we would have huge issues to consider for every asset on earth currently valued in US dollars. The implications of all this could hardly be more significant or the potential change to the system more dramatic. Essentially, every person on earth would be directly impacted by changes of this magnitude.

Given all the above, whenever we see proposals for significant increases in the allocation of SDR's here, we take notice. This topic tends to arise over and over and the US position on it is very important to follow since the US has what amounts to veto power over such changes at the IMF. 

With all that background, we have a very recent Q&A session now posted on the IMF web site where IMF officials offer their most recent comments on the SDR allocation question. Below we have extracted some relevant excerpts from the Q&A interview to bring readers here as up to date as possible on how the IMF sees this issue. Any underline below is added here for additional emphasis.

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IMF Background Briefing Transcript (May 8,2020)

. . . .

"And then I have another question for you, IMF Official #1, about the kind of behaviors which this tool has adopted. The U.S. administration has made it very clear that they don't want to go down the SDR route, but that would provide a huge shot of liquidity for all countries that need it, including many that, you know, wouldn't be covered by this instrument. What is your thinking about how quickly there could be that change in that policy? I mean, if you think that that is something that could be embraced later on by the administration."

"IMF Official #1 : And to your second point on -- yeah, I think as I tried to frame this from the beginning, the way I tried to thematically look at -- or the way I look at the issues that we face are largely thematic, so we have a problem today of liquidity challenges almost everywhere.

So when you look around countries, looking at, even at the United States, or others, or other developing countries, they have liquidity challenges globally in many areas, whether it's official sector, corporate sector, or households, and so the things that we're trying to -- we're trying to take every idea and tool to bear on that.

And your right, SDRs are a part of that, you know, the SLL (Short-term Liquidity Line) was meant to be part of that for some countries, our emergency instruments are part of that for some countries, and SLL would also be a part of that for some countries. And I think as an institution, as the IMF, we'd still see merit in exploring what can be done in terms of SDRs.

Our membership has had a pretty robust debate about the merits of a new SDR allocation, as you know that there are a few countries, including the United States -- but actually not limited to the United States -- that remain a bit skeptical about this. That skepticism, while it puts an SDR allocation, not in the cards specifically (inaudible) today or for tomorrow, but it's healthy because it fosters a very good dialogue about what we can do), right?

And I think one thing that we do think we have to solve within the membership is to do what we can, and what I think is a lot more with the existing SDR stock in the system. You know, there is some precedence with countries lending their Special Drawing Rights to the IMF concessional finance facilities. In my view there's a lot more that could be done even beyond that."

. . . . 

"QUESTIONER: Can I just follow up really quickly on that, the loaning of SDRs? Do you need to -- does the Institution need to establish a sort of a formal mechanism to be able to facilitate that exchange like the creation of a trust that's been discussed, that would house these SDRs? Or would you, you know, envision using the PRGT (Poverty Reduction and Growth Trust) for that? I mean, has it been done in the past? And how quickly could you come up with a new mechanism that facilitates that exchange of the existing SDR?"

"IMF Official #1: Yes. Good question. So, all this in voluntary trading of SDRs outright is still an option, and those are facilitated that's more dated as we speak. So, countries that have existing SDRs that they want to exchange, the IMF continues the facilitate that. We’ve seen -- increased demands for those transfers at a time like this, so we are willing to do that.

But the issue really is for countries that don't have any more SDRs to trade -- you know, to exchange for countries that have a very large stockpile of SDRs that they don't find much use for. So, you think about developed economies who have the vast majority of the SDRs, if you find, we don't really have any practical use for them. We tried to explore with them, ways where we can mobilize these -- if I can think of the dormant SDRs that's in the system for the benefit of poorer countries.

The established mechanism for doing that, or the precedence for doing that is countries -- a few countries in the past have loaned their SDRs to the PRGT, which they can make, you know, concessional loans available to poor countries. There's clearly a need for us to do that, because the number of countries that have now approached us for emergency financing which are now, I believe exceeds a hundred and the number of programs that we would expect in that pool to then roll into a full-fledged IMF (inaudible), that would need PRGT resources to help them be funded. The PRGT is therefore in need of additional resources. And we were quite fortunate last week to having put out the call for additional resources, that some are materializing quickly for the PRGT, so there's no -- there's no immediate, you know, danger of that, of that running out of funds.

But we are exploring every option to try and resource these instruments well, so that they can have the capacity to meet the demands that we would expect in the coming medium term, if you want to think of it that way. And one of those is getting more countries to loan their SDRs to the PRGT for that purpose.

But as I said, I don't think that has the -- that's kind of -- that's what we've done to date. I think what we're doing right now is trying to see if we can get more countries to do that. But I also think there may be other ways to get at this problem and, you know, I'm not in a position to share specifics on what we would be able to do beyond that.

But nonetheless, as I think I said before, the problem still exists, and so the team here isn't going to just sit idly by with the tools that we have, we're going to push and see what we can do with the membership to try and get what obviously we need to address the problem."

US Says No to More SDR's at the IMF (For Now)

This is an ongoing story we have covered here on this blog for years now. Every now and then we see a renewed push to increase the allocation of SDR's at the IMF which most everyone understands could eventually lead to the SDR replacing the US dollar as a global currency. The pattern thus far is that a variety of advocates for the SDR around the world urge expansion of their use in the monetary system while the US mostly remains opposed to that for one reason or another (but primarily because they don't want competition for the US dollar as the global reserve currency). 

Recently, this issue surfaced again due to the new financial crisis surrounding the coronavirus pandemic. We noted it here and continue to follow this story. Below is a kind of running account of recent news on the topic followed by some added comments.

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Our recent article covering this:

IMF Director Suggests a Boost in the SDR Allocation May Be Neeeded

"According to IMF Director Georgeiva, It appears that the US was supportive of the increased lending capacity sought by the IMF allowing it to boost it up to $1 Trillion. In this interview, the Director also indicates that further substantial increases in the allocation of SDR's may well be needed in her view."


US Reaction to the Idea of an Increased SDR Allocation per Reuters (excerpt below):

"Finance officials will debate the issue during this week’s virtual IMF and World Bank Spring Meetings, but multiple sources familiar with the Fund’s deliberations say the United States, the IMF’s dominant shareholder, actively opposes such a move.

The Trump administration opposes providing countries such as Iran and China with billions of dollars in new resources with no conditions, two of the sources said."


Project Syndicate article Calling on US to support an SDR Allocation Increase


"To be sure, any SDR allocation would require the support of at least 85% of the IMF’s membership, which means that the US, with its 17.45% quota, would wield veto power. But there is no good reason why the US would want to use it. The pandemic is generating an unprecedented contraction in the global economy, not to mention its immense costs in human lives. And besides, our proposed method of deploying SDRs would not require US taxpayer money, nor would it pose a challenge to the international status of the dollar."

"A stable and healthy global economy is in the US national interest. And in an election year, it is particularly in the interest of a certain incumbent leader."

Added informational note on the Project Syndicate article just above:

After he reviewed this Project Syndicate article, Dr. Warren Coats provided some additional information on how the SDR allocation process works that I felt would be a valuable note to add here for readers. Dr. Coats is the former head of the SDR Division at the IMF and without question a leading expert in the world on the SDR and how it is used at the IMF. He gave me permission to include his comments on this article which are quoted from his email just below:

"In “How to Use the SDR” Jim O’Neill and Domenico Lombardi propose to leverage an SDR allocation to increase the foreign exchange available to countries needing to finance the deficits of their financial sectors from the freezing of debt service payments resulting from the covid-19 epidemic. They “propose a simple scheme in which a country would stow its allocation as “equity” in an emergency vehicle, thereby avoiding the need to accrue higher net liabilities on its treasury’s balance sheet.” An SDR allocation would indeed supply a helpful addition to countries’ foreign exchange reserves and should be undertaken. However, O’Neill and Lombardi have misunderstood the functioning of the SDR system.

A country receiving an allocation of SDRs receives both a liability (net cumulative allocation) on which it pays interest, and an asset (SDRs) on which it earns interest at the same rate.  It can sell these SDRs to other IMF members for U.S. dollars and other freely useable currencies. It can also pay SDR denominated obligations, lend them, and swap them. They are used actively in member financial dealings with the IMF. SDRs can only be used with other IMF members, the 16 international and regional development banks, the ECB specifically prescribed to hold them, and the IMF itself. They cannot deposit them “as ‘equity’ in an emergency vehicle” though they can “pledge” them to other holders for specified purposes. Using SDRs in any of these ways does not reduce or change a country’s SDR liabilities (net cumulative allocation), which is usually on the books of its central bank, though sometimes its treasury.

A more promising use of these SDRs would be to pledge them as the asset backing of digital SDR currency issued by a central bank or private bank or fintec firm and useable in the market like other currencies. The limited use and role of SDR so far reflects the limited allocation among IMF members but also the limited use of the SDR unit of account to denominate the price of oil and other privately traded goods and services and to denominate cross border borrowing (SDR bonds).  Issuing digital SDRs for general market use that are fully backed by IMF issued SDRs pledged by official holders for that purpose could make a dramatic difference in the attractiveness and use of the SDR."   - Dr. Warren Coats

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My added comments: If you follow the path of the list of articles above, you see the pattern we mentioned above playing out once again (so far). A push for more SDR's followed by opposition from the US. It appears that the authors of the Project Syndicate article have noticed this same pattern. The conclusion of that article which we posted just above urges the US to change its position and even appeals to the Trump Administration to think of it in terms of improving his chances for re-election.

Readers here know that we have long covered this issue even as it is mostly ignored by the general public and in mainstream media. Jim Rickards has been talking about this for many years and we have long covered his view that eventually the US may agree to this major change in the monetary system (although perhaps being forced to that position by crisis events as Jim explained to me in this recent article here). 

After that article, Jim wrote this recent article where he pointed out that "Trump Says No" to more SDR's.

In discussing this a bit more by email with Jim Rickards, I think we both have the same view on where this situation stands for now. It seems unlikely that President Trump will agree to an increase in the allocation of SDR's at this time. The Administration made it clear (as noted in the Reuters article above) that the US does not want China and Iran to benefit from an increased SDR allocation. It also appears likely that President Trump will center his campaign around the idea that China failed the world by mishandling the virus and the US must demand that a price be paid by China. So it is very unlikely that the Administration would support anything that is perceived to benefit China economically at this time. (see this recent polling on this issue) - excerpt below:

"Yet a new poll shows that, outside the Beltway, the coronavirus crisis is actually bringing Americans together on the China issue. Republicans and Democrats now largely agree that the Chinese government bears responsibility for the spread of the pandemic, that it can’t be trusted on this or any other issue, and that the U.S. government should maintain a tough position on China on trade and overall, especially if Beijing again falters in its commitments."

If President Trump is re-elected, it will be interesting to see if the US position changes or softens during a second term. If former Vice President Joe Biden is elected, the prospects for an increasing role for the SDR likely go up for sure. Our view here is that we would not expect to see any dramatic changes on this issue until 2021 after the US election results are in. 

Is This It? - Part III -- Jim Rickards Offers His Thoughts

We have raised the question as to whether this new global crisis could be the "trigger event" that eventually leads to major changes in our monetary system. This blog has covered that topic now for many years. One person who has consistently predicted that at some point a new major crisis would lead to major monetary system changes is Jim Rickards. 

Jim has now written this new article and apparently seems to believe this new crisis will be the trigger event that leads to major changes. Below are a couple of excerpts from his new article. We have covered this topic extensively and have compiled an archive of various proposals for major monetary system reform or even a complete reset of the system. You can review that information here.  (note: I added underline below for emphasis)

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"Since Federal Reserve resources were barely able to prevent complete collapse in 2008, it should be expected that an even larger collapse will overwhelm the Fed’s balance sheet.

That’s exactly the situation we’re facing right now.

The specter of a global debt crisis suggests the urgency for new liquidity sources, bigger than those that central banks can provide. The logic leads quickly to one currency for the planet.

The task of re-liquefying the world will fall to the IMF because the IMF will have the only clean balance sheet left among official institutions. The IMF will rise to the occasion with a towering issuance of special drawing rights (SDRs), and this monetary operation will effectively end the dollar’s role as the leading reserve currency."                  

 . . . . . .

"Over the next several years, we will see the issuance of SDRs to transnational organizations, such as the U.N. and World Bank, to be spent on climate change infrastructure and other elite pet projects outside the supervision of any democratically elected bodies. (I call this the New Blueprint for Worldwide Inflation.)"

Please click here to read the full article

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My added comments: I have gotten input from other high credibility sources that suggest it is possible this crisis event might eventually lead to a new monetary system. Those sources also talked about this being the start of a process that could take some time (not a rapid event in terms of changing the monetary system).  Here, we just monitor events and watch for what actually happens. But given the high credibility of the sources, I did want to alert readers that there is a belief that this crisis could start the process for major change from more than one source I view as credible. 

Added note: Jim also has this new interview just out that dives into a variety of topics from what is happening in the gold market to the virus to the longer term impact from the current crisis. You can watch that interview here or just below.

Added news note 3-29-2020: The link below goes to the virus projection curve reportedly being used by The White House task force as a guide. This site also has a projection for each state. Using this guide, you can compare actual numbers over the coming weeks to see if the real numbers are coming in above or below this projected curve:

https://covid19.healthdata.org/projections


As some added information, my brother (who was to have an elective surgery procedure in Dallas, Texas) was told by his doctors that they hope to schedule him in about 3 weeks which would fit in with this projection curve and suggests his doctors are also using it as a timeline guide.

Hidden Gems from Experts on Monetary Policy and System Reform

Over the past few years this blog has endeavored to explore the potential for monetary system change that could impact the daily lives of all us. This whole topic arose due to the last great financial crisis of 2008. That crisis took most of the mainstream experts by surprise and resulted in a mad scramble by central banks (with some assistance from the IMF) to stabilize the current monetary system.

Now we are a decade removed from 2008. There is still much debate about whether or not the unprecedented and experimental monetary policies employed by central banks around the world have been successful or not.

On the one hand, they did manage to prevent the system from imploding and the world from falling into complete chaos economically. Some view that as success. On the other hand, skeptics and critics say that the policies adopted only delayed the crisis and the asset bubbles that have arisen from those policies insure that when the next crisis does arrive, it will be much bigger than 2008 and likely will take out the present monetary system during the fallout.

All of this is why this blog was launched. The average person who is simply working hard to make a living and provide for a family does not have the time and the expertise to try and keep up with all the various views on the stability of the present system or the odds for a new major crisis. Beyond that, it takes time to try and understand the ideas and proposals out there to fix the mess if we do get "the big one" that so many people from all across the spectrum of views still think is coming some day.

This blog was started in an effort to better understand these issues and to try and assess what the risks to the present system are and to learn what ideas and proposals exist to "fix the mess" if and when we do get the mess. Along the way, an opportunity arose to get direct input from some of the leading experts in the world on this whole situation. That input has been documented here over the last few years, but time has passed. The articles are now what I would call "hidden gems" of information that most people probably won't know about, but I think would find interesting.

This article reviews some of those "hidden gems" so that new readers will know about them and because the input given is still quite relevant today. Below is a summary of some of these gems and bit of background about the experts who offered them.

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Jim Rickards - Jim is probably the most well known expert who has managed to reach the largest audience of people on these issues. Jim has maintained for years that when the next big financial crisis arrives (and he believes it will arrive), that it is likely that a proposal to replace the US dollar with the SDR issued by the IMF will be put forward to "fix the crisis". This thesis is what started the effort here to learn as much as possible about the SDR and any proposals on the table to use it as the new global reserve currency. Here are some articles from this blog where Jim offered direct input for readers here:

Jim offers a comment on the IMF becoming the global central bank of last resort

Jim discusses what he calls the "civil war" going on in Wasington DC

Jim suggests an SDR peg to gold may be in play

Dr. Warren Coats (former IMF - Head of the SDR Division) - There has been lots of discussion in recent years about the prospects for the SDR to eventually become the new global reserve currency. As noted above, Jim Rickards has really brought this issue into public view. But what is the SDR? How could it replace the US dollar? My thinking was that if you want to understand the SDR and how it functions, why not just ask one of the leading experts in the world about it? So, that is what we did here. Below are articles featuring Dr. Coats explaining both the SDR and his "Real SDR" proposal to use as a global reserve currency. You simply are not going to find a better expert on the SDR than Dr. Coats. Here are some articles with his direct input for readers here:

Dr. Coats provides his first insight here on this blog on the SDR

Dr. Coats provides more input in a Q&A style interview

Dr. Coats answers questions from blog readers

Dr. Coats says an SDR proposal is important in case we do get a another crisis

Dr. Coats comments on Cladio Borio (BIS) speech related to SDRs

Dr. Coats explains why allocating SDRs to finance development is a bad idea

Dr. Coats presentation at the Kemp Forum on Exchange Rates and the US dollar

Robert Pringle  - (former Director for the Group of 30) - Robert Pringle is to central banking as Dr. Warren Coats is to the IMF and the SDR. One of the leading experts in the world without question. As Founder of Central Banking publications, he knows and has known central bankers from around the world and written extensively on the subject. After the 2008 crisis Robert, like many, had concerns about policies being implemented to deal with the crisis. He published his book The Money Trap to express his thoughts on the problem and his ideas for solutions. He has been kind to share his wealth of experience and knowledge here from time to time. Here are some articles with his direct input for readers here:

Robert Pringle on why he felt recent monetary policies are immoral 

Robert Pringle offers a proposal for a new global reserve currency - The Ikon

Robert Pringle and Allan Meltzer debate monetary system reform - Part I  --- Part II

Robert Pringle on -- The Necessary Illustionists

Dr. Lawrence White - We happen to share the same name, but Dr. White is the expert on economics and monetary policy. He is a Senior Fellow at the Cato Institute and Professor of Economics are George Mason University. He is also widely respected as a student of the classical gold standard. Here is an article where he pointed me to his work on the gold standard:

Dr. White on Experts and the Gold Standard

Dr. White on how Bitcoin is Like and Unlike a Gold Standard

John D. Mueller - a blog reader connected me to John D. Mueller. Mr. Mueller is the Lehrman Institute Fellow in Economics at the Ethics and Public Policy Center in Washington DC. He offered some direct input for readers on the gold standard and on Lewis Lehrman:

John D. Mueller on Lewis Lehrman and the Gold Standard

Dr. Judy Shelton - Dr. Shelton is currently US Director for European Bank for Reconstruction and Development (EBRD) having accepted that appointment from President Trump. She has long been an advocate for monetary system reform and also has spoken favorably towards the classical gold standard. She recently offered her thoughts on the potential for monetary system reform to readers here in the article linked just below and recently called on President Trump to work towards a new international monetary system:

Dr. Judy Shelton on The Potential for Monetary System Reform

Dr. Shelton Calls on President Trump to initiate a new international monetary system

Dr. Shelton's presentation at the Kemp Forum on Exchange Rates and the US Dollar

Keith Weiner - CEO of Monetary Metals - Keith has proposed a new kind of gold standard that he calls an "Unadulterated Gold Standard". We covered it here and he added some additional thoughts for readers on why he thinks it is realistic that we might see something like this emerge in the future. Keith is also working with the State of Nevada on the idea of issuing gold backed bonds payable in actual gold.

Robert Bell, Founder and CEO of KlickEx - Robert Bell is a widely respected expert on Fintech innovation as it relates to both central banking and the potential to use technology to reform the monetary system. In the fall of 2017, he announced that he was partnering with IBM and Stellar to implement what he called the first institutional scale blockchain based payments system in the South Pacific. Robert has provided ongoing input and acted somewhat as a mentor over the past few years. He has shared his knowledge and experience picked up directly on the front lines of what his happening currently with regards to Fintech. Here is a recent interview he did for readers here with thoughts on the both the current monetary system and what its future may look like:

Robert Bell Comments on the Current and Future Monetary System

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My added comments: There you have it. Direct input from experts on the monetary system we have and ideas on how it could be reformed or even replaced eventually. I will add that I have also gotten of lot of direct input and feedback by email from these experts not intended for use in a public article, but very valuable to me in helping to understand these issues. Hopefully, it has helped me improve the quality of the information presented here.

There are truly some hidden gems of wisdom and information in these articles from some of the leading experts in the world on the topic of monetary policy and the potential for monetary system reform. I would challenge readers to try and find a better collection of experts on these issues anywhere. I don't think it exists and it is my hope that as many people as possible will find this information and share it with anyone interested. 

Readers who want to explore these idea further should go to our market place of ideas for monetary system reform page. It contains all the articles linked above along with some articles with input from some additional experts. There are articles that take a deeper dive into some of these issues there as well.

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Added note - 9-4-18: Today CNBC runs this article saying the the "top quant" at J.P. Morgan (Marko Kalonovic) is warning that in the next financial crisis we will see:

"Sudden, severe stock sell-offs sparked by lightning-fast machines. Unprecedented actions by central banks to shore up asset prices. Social unrest not seen in the U.S. in half a century." 

Mr. Kolanvic is quoted in this article as saying the chances of such a crisis happening are "low until at least the second half of 2019."

I forwarded this article to one expert to see what he thought about this article. He agreed with the magnitude of the crisis talked about in this article, but felt that no one could predict timing and also that the crisis will be too big for the Fed and other central banks to control. He said there is no reason to assume we are "safe" until the second half of 2019.