IBM/OMFIF Report on Central Bank Digital Currencies

Recently, I ran across this web page describing a report issued jointly by IBM and the OMFIF last fall (September 2018). This blog article will feature this report in some detail because it is a pretty comprehensive summary of where things stand in terms of central banks looking into using central bank digital currencies (CBDC's). 

I obtained a copy of the full report by providing a name and email address so I assume anyone can do the same if they want a copy of the report. Since they ask for that information to receive the report, I won't provide a direct link to the pdf version of the report, but will extract a few excerpts below for some analysis and comments. 

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Below I have pulled out a few excerpts from the report to give you a feel for it. The report is laid out in six main sections. Below I excerpted a comment from the summary of each of the six sections with my analysis (if any) just below the excerpt. Below that I tried to list some bullet point observations from the report. One point of interest to me is that on page 22 of the report, we find these comments under the title "Digital Tokens as Reserves" (I added underlines for emphasis).

Digital tokens as reserves 

(from page 22 of the IBM/OMFIF report):

"The impact on monetary policy would further depend on whether the digital tokens in question have the status of reserves. As one respondent put it, "If these tokens are considered as reserves, and the blockchain system is a new medium for recording transactions, then there should be no impact on monetary policy, and the existing tools may continue to be used.’ Around 80% of survey respondents shared this opinion. 

In today’s system, the International Monetary Fund’s aspiration for its special drawing right to become a global reserve currency has been held back by conflicting geopolitical interests and priorities of the reserve-issuing central banks of the US, euro area, China, Japan and UK. CBDCs can circumvent such hurdles by enabling the private sector to work directly with the central banks to create a digital SDR to use as a unit of account and store of value. 

Such an e-SDR would be the quintessential reserve asset, because it would be fully backed by the reserve currencies in the IMF- determined ratio. The supply of e-SDRs would in turn be dependent on market demand. This would require the creation of a sufficiently large e-SDR-denominated money market."

Readers here may recall that this concept is one we have mentioned here before quite some time ago, so it's interesting to me to see it talked about in this report. The report does not say that the IMF is currently testing an "e-SDR" (see further comments below). Also, it's interesting to note that the report says "the supply of e-SDR's would be dependent on market demand". This fits in with the currency board rules proposal of former IMF Dr. Warren Coats that we recently covered here that issues currency based on market demand.

Now lets look at some excerpts from the six major sections of the report.

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Section 1 - Defining CBDC's

"A WHOLESALE central bank digital currency may lead to significant improvements in efficiency, speed and resilience, as well as lower the cost and complexity associated with existing payments systems."

. . . .

"Central banks concluded that blockchain systems must improve before they can overcome issues of scalability and speed."

My comments: Wholesale means that the currency would be issued to banks but not the general population (which would be a "retail" CBDC). This report concludes that a wholesale CBDC is far more likely than a retail one based on input from the central banks they surveyed. A wholesale CBDC woud not represent significant change from the present system in my view.

Section 2 - Technology Considerations


"A WHOLESALE CBDC would have to preserve the existing capabilities of RTGS (Real Time Gross Settlement) systems without significant degradation. The system must also preserve confidentiality of payment transactions, the ability to pay interest, monitor compliance against regulatory reserve requirements, change the composition of participants and run liquidity savings mechanisms."

. . . .

"The challenge that remains for the main vendors of wholesale CBDC systems is to construct a convincing RTGS replacement that can be properly benchmarked against existing systems and meet the high standards for security, robustness, efficiency and speed."

My comments:  This section lays out the technology challenges for any central bank that may want to think about implementing a CBDC system. It mentions several including privacy issues for partcipating banks and security against cyber attacks.


Section 3 - Praticalities

"CENTRAL BANKS addressed critical design and technological questions, including who will have management responsibility, what a possible design of a wholesale CBDC would look like, and how new systems will interoperate with legacy ones."

. . . .

"Overall, respondents underscored that wholesale CBDC research and trials are still in their infancy, and that doubts remain over DLT’s ability to deliver on its promise."

My comments:  This last sentence is consistent with what we have reported here for some time and also with the recent update from BIS General Manager Agustin Carstens that we featured here.


Section 4 - Policy Implications
 (I added underline below for emphasis)

"THE BROAD regulatory and policy implications of a potential wholesale CBDC depend on design and management choices, such as whether it would be backed by a single sovereign currency or a basket of assets.

Based on survey responses, the likeliest outcome is a central bank-issued, fiat currency-backed digital token. This would have no significant monetary policy implications."

. . . .

"A wholesale CBDC could be expanded to serve as a digital global reserve asset along the lines of the International Monetary Fund’s special drawing right. This would have profound geopolitical and regulatory implications."


My comments:  Lots of interesting information in this section. First, note how most central banks preferred a "fiat currency-backed digital token". This is in contrast to the proposal of Dr. Warren Coats who prefers to anchor a currency to a basket of goods. Next, this section is where the reference to the concept of an "e-SDR" comes from (detailed on page 22 of the report and quoted above). Also note that the report states this (an "e-SDR" as a reserve currency) "would have profound geopolitical and regulatory implications". I believe this is because of the intense political debate that would go along with a proposal to adopt some kind of "e-SDR" as a digital global reserve asset and the fact that the US and other reserve currency issuers prefer the status quo at this time. Especially the US with the US dollar as the primary global reserve currency.

Section 5 - Case Studies
 (I added underline below for emphasis)

"OMFIF'S CASE studies span a range of projects. They include exploratory endeavours, such as the European Central Bank and Bank of Japan’s Project Stella, as well as more developed undertakings, such as the Bank of Canada’s Project Jasper."

. . . .

"The studies cover a range of technological choices, from platforms built on Linux’s Hyperledger Fabric to Ethereum. Various capabilities such as smart contracts and liquidity saving mechanisms were examined."

. . . .

"None of the central bank case studies examined included the possibility of radically overhauling their payments systems in the near future. Most are satisfied with existing RTGS platforms."


My comments:  This section looked at several case studies of actual central bank trials around the world. Please note that the last paragraph underlined above again confirms what we have reported here on this blog for some time.


Section 6 - Conclusion
(I added underline below for emphasis)

"Achieving real-time gross settlement (RTGS) for domestic and cross-border payments has traditionally been fraught with complexities, high costs and lengthy settlement times, leading to several risks in settlement finality. Central banks agree that, despite significant improvements in existing structures, these issues continue to undermine payments systems. Maintaining overall system resilience is a priority for central banks, especially as the current system remains vulnerable to single points of failure. The main motivations expressed by central banks in pursuing a wholesale central bank digital currency include potential improvements in speed, efficiency and resilience, as well as boosting system utility as non-cash assets become tokenised. However, realising these benefits depends on the success of the underlying technology.


Trials of wholesale CBDC systems illustrate how variations of distributed ledger technologies have the capacity to meet and, in some cases, exceed the performance of existing interbank systems. However, there is still a long way to go before the technology is mature enough to meet central banks’ expectations for the next generation of real-time gross settlement systems.

. . . .

"The next step would be to produce a pilot programme and move actual capital. A central bank could, in a controlled environment, issue a legal liability to a participant, have it transferred to another participant, then have it redeemed. DLT experimentation focusing on the interoperability of ledgers in cross-border payments should follow.

Collaboration between private sector participants and the central bank will determine whether these initiatives find success domestically. For cross-border success, this collaboration must expand to include various national central banks from around the world."

Readers can click here to find the OMFIF web page related to this report

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My final added comments: This report is consistent with what has been reported here for some time on this topic. While there are constantly news articles suggesting that major changes by central banks or the IMF are imminent in regards to converting to either central bank digital currencies or even an "e-SDR" at the IMF, this report clearly lays out where all this really stands as of last fall when it was issued. IBM is at the very forefront of this and I view them as a high credibility information source. 

My take is that while all of this is being studied and discussed, as noted above, most central banks do not see this kind of change happening any time soon and only after a lot more research takes place. Even then, the report states there is no guarantee that central banks will move in this direction (unless convinced there is a clear operational advantage for them to do so).

It also does not say the IMF itself is close to moving in this direction with an "e-SDR". It does mention the idea of an "e-SDR" as a concept for a global reserve currency though. Input I get from experts on this suggests to me that this article is not talking about the official SDR used at the IMF, but rather a private version of the SDR based on the component makeup of the currency basket of the actual SDR. We will cover this more in depth in a follow up article next week.

The IBM/OMFIF report does not really clarify exactly what they mean as I read it, but they mention private sector entities working with central banks to "create" this "e-SDR" as they call it. This suggests something other than the official SDR used at IMF.

In addition, one expert on the SDR that I hear from reminded me that changes in the existing rules for SDR's at the IMF must be approved by the membership and that the US has veto power in the voting at the IMF. Also, while the IMF could promote the issuance of private SDR's (not official SDR's), there is no indication that the IMF is looking into doing that at this time based on input I received that I view as highly credible.

This is a topic to keep an eye on over time, but right now there is no indication that something major is about to change in the current monetary system unless some kind of new major crisis forced an emergency decision to make changes as we have been reporting  here for some time.

Short OMFIF video summarizing the report

Dr. Warren Coats Proposes Currency Board Rules for the Federal Reserve - Includes Q&A

Readers may recall that we have previously featured the Real SDR Proposal of Dr. Warren Coats here on the blog. Dr. Coats is retired from the IMF and is widely recognized as an expert on both monetary policy and the SDR used by the IMF.

Recently, Dr. Coats wrote a new article published on the Adam Smith Institute blog proposing that the US Federal Reserve should move towards the adoption of Currency Board rules in an effort to reform the present monetary system. Below are some excerpts from this new article. The concept of a Currency Board may be new to many readers so Dr. Coats kindly agreed to do a brief Q&A for readers here on some basics for how Currency Board rules would work. You can find that Q&A interview further below the excerpts quoted from his new article.

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"After years of discretionary management of monetary policy by the Federal Reserve, there is a strong case for re-fixing our fiat currency system to a hard anchor. Though the dollar was far more stable under the gold and gold exchange standard era than after it’s delinking from gold in 1971, those systems came with significant weaknesses that contributed to their ultimate abandonment. To avoid these, three key elements of the Fed’s operation should be modified. These are: 1. The monetary policy rules determining how currency fixed to a hard anchor is issued and redeemed; 2. The monetary anchor itself; and 3. What the currency is issued or redeemed for."

. . . . .

"A reformed monetary system should require the Fed to adhere strictly to currency board rules. Such rules oblige a central bank to buy and sell its currency at a set price in response to public demand. Under the Gold Standard, the price of the currency was set as an amount of gold (a gold anchor). For existing currency boards, the price is typically an amount of another currency or basket of currencies. The Fed would provide the amount of dollars demanded by the market by passively buying and selling them at the dollar’s officially fixed price for its anchor. All traditional open market operations by the Fed in the forms of active purchases and sales of T-bills or other assets or lending to banks would be forbidden."

. . . . .

"The United States could adopt the hard anchor currency board system described above on its own and others might follow by fixing their currencies to the dollar as in the past. The amendments to the historic gold standard system proposed above would significantly tighten the rules under which it would operate and strengthen the prospects of its survival."

Please click here to read the full article on the Adam Smith Institute Blog

(note: I added underlines above for additional emphasis)

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Followup Q&A Session with Dr. Coats:

I offered Dr. Coats the opportunity to expand a bit on his thoughts on Currency Board rules based on the questions listed below with the goal of providing some additional insight on how his proposal would work if implemented by the Federal Reserve.

Q: Where does a Currency Board get the money that it supplies based on market demand?      

A: "It creates it like any other central bank."

Q: Who does a Currency Board typically supply money to? 
  
A: "Currency Boards deal with the same customers as regular central banks—generally just depository institutions—banks, credit unions"

Q: What assets would a Currency Board normally accept in exchange for the money it provides?  

A: "It (a Currency Board) creates money like any other central bank, but it only issues it when purchased with the equivalent value of its anchor (The Bosnia currency is fixed to Euro and thus must be purchased with Euros)."

Q: Does a Currency Board ever loan money to either the Federal government or private banks and charge them interest?

A: "That depends on its law. Generally no. However, the Central Bank of Bosnia and Herzegovina may lend to banks (lender of last resort) to the extent that it has more than the 100% asset cover for its monetary liabilities (base money)."

Q: What impact (if any) would using Currency Board rules have on market interest rates?

A: "It would remove any central bank influence on market rates."

Q: What impact (if any) would using Currency Board rules have on US fiscal policy and/or budget deficits?

A: "Existing currency board central banks’ governments have lower public debt than most others because they cannot borrow from the central bank and thus are more disciplined."

Even though Currency Board rules are designed to bring discipline to the supply of money and provide a stable value to money over time, there are still many people who prefer to hedge against the potential abuse of any system by holding gold as a form of insurance. 

Q: If the US did adopt Currency Board rules, would you support the removal of capital gains taxes on gold and silver so that anyone who wanted to hedge themselves that way could do so without being subject to a tax penalty for holding some savings in gold or silver as a form of insurance in the event the money did lose value in relation to gold for whatever reason?

A: "People can and should be free to hedge (save) in any way they want—owning real estate, gold, GM or what ever. Gold should not be subsidized and should be treated like any other way of holding wealth. Actually I favor abolishing capital gains taxation whatever its source."

I would like to extend a thank you to Dr. Coats for taking time to respond to these questions for the benefit of readers here. Dr. Coats provided this additional comment related to the value of money:

"The value (price) of money, like everything else, is determined by its supply and demand. Fixing its price to gold, for which it can be redeemed, is a way of regulating its supply. Fixing it to anything else (such as SDR) with currency board rules does the same. Bitcoin’s supply is determined by a formula, but there is little real demand— just speculators."  -- Warren Coats



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My added comments: One thing that occurs to me is that if the US were to adopt this proposal by Dr. Coats and also do away with capital gains taxes as he said, this system might appeal to those who favor a return to an actual gold standard.

If followed as proposed by Dr. Coats, there would be rules inside the system to try and enforce monetary discipline and then people would also be free to hold any other form of savings (gold or whatever) as an insurance hedge without being penalized with capital gains taxes. This would make the individual free to assume any price volatility associated with their personal savings choices with no tax implications. Also, the government/central bank would have an additional incentive to maintain monetary discipline because people could easily choose to move savings to other forms of wealth if they believed that the monetary system rules were being abused.

Note: This article will be added to our permanent page of ideas for monetary system reform that can be found here.

Two Interesting Interviews Coming Up in May on the Blog

I am pleased to announce that in May we will have two brief but excellent interviews coming up on the blog. In early May, Dr. Warren Coats (retired from the IMF) provides some insight on his recent proposal regarding some changes he thinks the Federal Reserve should make. If adopted, his proposal would certainly be monetary system change like we watch for here. Dr. Coats also provided some interesting comments on how he views capital gains taxes. This article will introduce readers to what may be a new concept for many (Currency Boards). Dr. Coats has extensive experience with Currency Boards in his years at the IMF working to construct monetary systems.

Later in mid May, I will post a Q&A style interview with Jim Rickards about his new book "Aftermath" which is coming out in July 2019. In this interview Jim provides an overview of what he talks about in the new book. He also updates us on his prediction that we will see a new financial crisis leading to major monetary system change based on the latest trends he sees. Since that is the kind of change we watch for here, this is a welcome and timely update from Jim.

One Quarter into 2019 - Anything New to Report?

Readers here know that we have been reporting for some time that unless we see some kind of new major financial crisis, we don't expect to see any major monetary system reform in the near future. For this reason, we have somewhat moved into monitoring mode here and only try to produce a few articles a month when we see something that might be worthwhile for readers.

So, now that we are one quarter of the way into 2019, is there anything new to report?

Mostly no, but perhaps a few tidbits that might be of some interest based on a variety of input sources. Below are a few bullet point items.

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- the political environment (which can impact change) seems pretty status quo. The country remains very divided and there are no signs that is likely to change any time soon. So long as President Trump remains in office, we can expect that without some kind of major economic problem, he will most likely continue along the same path without any major changes to the monetary system. 

- Modern Monetary Theory has become a hot topic lately, but more in the political arena than in actual policy making circles thus far. Without a major shift in political power, it seems unlikely that MMT will gain much traction with actual policy makers. It does appear likely that MMT will become part of the political debate heading into the 2020 election cycle. We won't cover it much here unless it gains more political traction since we try to focus on what actually happens.

- Central banks continue to study and talk about the idea of introducing central bank digital currencies, but again we have not seen much change in that direction so far. (as noted in the recent update from Agustin Carstens from the BIS). The IMF and World Bank did announce a project to explore the potential of blockchain technology.

From time to time I do hear from a variety of experts who do discuss various ideas and proposals for monetary system change. I can report that there is lot of interesting discussion that does go on related to this. Some of the issues I have seen discussed include:

- what rules should the monetary system follow?
- what is the best anchor for a currency to provide long term price stability?
- has the Fed monetary policy since the 2008 crisis been the appropriate response?
- was the initial Fed emergency response appropriate, but then carried too far later on?
- is modern monetary theory (MMT) an upcoming force for monetary system change?
- is there any real threat to the role of the US dollar as the global reserve currency?
- are Russia and China working on building a system to bypass the US dollar and the SWIFT system?
- is there any will inside the Trump Administration to propose significant monetary system reform?

One of the main goals of this blog has been to try and document a variety of ideas and proposals related to some of the questions raised above. Readers can find that here on this permanent page of the blog.

Other note: In May 2019 there will be panel discussion held in Fort Worth,Texas which will address the question of whether a free society should have a central bank, and if so, what monetary policies should it follow to be most consistent with liberty? (see 8 am panel discussion on Monday May 20th). 

The participants in this panel discussion include Warren Coats, Scott Sumner, John B. Taylor, and Lawrence H. White (not me, the Lawrence White from George Mason University). The panel discussion is part of a multi day conference co sponsored by the SMU/Cox O'Neil Center for Global Markets and Freedom and the Texas Tech University Free Market Institute.

This is obviously a great panel and the topic looks interesting in terms of what we follow here. Eliminating the Federal Reserve or significant changes to the rules it must follow would constitute the kind of monetary system change we watch for.

So, if I can find a way to obtain the contents of the panel discussion (video or text of the papers presented), I will try to cover that here for readers. Meanwhile, in May we will have two interviews upcoming that should be of interest to readers. One with Warren Coats and one with Jim Rickards.

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.

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.