What Went Wrong in 1971 Authors Say This Explains Wealth Inequality

Income and wealth inequality has become a huge issue in the United States. There is no doubt that this issue will be a factor in the upcoming US elections. Most everyone agrees that a gap exists and that the middle class has been under pressure for some time. The debate centers around what conditions have led to the gap and what are the best policies to try and reduce the gap.

Recently, the authors of a new theory on this issue did an interview with Jan Nieuwenhuijs of Voima. They argue that events you can trace back to 1971 have had a major impact on our monetary system and have greatly contributed to the wealth gap the most everyone agrees exists today. Does their theory have merit? Readers can assess that for themselves by reviewing this interview. Below are some excerpts.

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Jan: "The “Nixon Shock”—as the unilateral suspension of Bretton Woods is often referred to—brought about a sea of change in economies and societies around the world, because from that moment on all national currencies stopped having an anchor. Fiat currencies could be created boundlessly. To get an understanding of the changes since 1971, I decided to interview the gentlemen behind the website “What Happened in 1971?”

. . . .

"Jan: What do you say are the most significant developments that have occurred since 1971.

Collin: Monetary expansion—but we get a lot of criticism on this. People say, “oh you're not taking into account many of the regulatory changes, or the socio-cultural changes that happened around that same time period, that caused some of these second and third order effects that you attribute to this one 1971 data point.” If you were to sit down and talk with us, we'd tell you that the story goes back much further. We would trace it back to 1944 and 1933, and we would look at the Great Depression in America in 1929. We'd look at the creation of the Federal Reserve in 1913, and then ideally, we'd go all the way back to the birth of fiat currencies in the United States before the U.S. was even a country. We'd look at the early fiat experiments, we'd go back to the bi-metal standards, we'd look at the process of coin clipping under the feudal lords. The story obviously doesn't start in 1971, but certainly that's when there's an interesting inflection in the data that you can point to and say: “look what happened here, everything went crazy.”  

Please click here to read the full interview article on Voima

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My added comments: The issue of the the wealth gap is a major issue for millennials who are directly impacted by this phenomenon. The authors of "What Happened in 1971?" say they can explain what led to this problem. Their views are a legitimate contribution to this discussion, so we are happy to feature them here.

Added related news note: Reuters - Fed's $3 Trillion Virus Rescue Inflates Market Bubbles

Followup from Q&A Interview with Robert Pringle

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Pre Holiday Update

As we head into the Holiday Season, I expect that there is not likely to be much new information to report here related to any kind of major monetary system reform. This post will attempt to serve as an update on things based on the information available at this time. Below is a Q&A style format to discuss the status of the issues as they appear at this time.
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Q: Do you see any indications that some kind of major change in the monetary system is likely?

A: Not right now. We have been reporting here for some time that we do not see any signs of major change unless some kind of new major financial crisis were to emerge that basically forced the system to make major changes or even be fully reset. That is still what we would report for now. This analysis is based on following news reports and from direct input I get from a number of experts around the world that I view as highly credible.

Q: So what could trigger the kind of major crisis that might prompt major change?

A: There are a number of potential triggers that are always out there that we have covered here extensively. Global debt (private and public) is at all time highs. We still have trillions in derivatives contracts in an interconnected global banking system. Geo political negative surprises are always possible at any time (trade wars, currency wars, etc.) So far the powers that be (mostly central banks) have managed to keep the system functioning in a way that most people don't sense an imminent crisis is coming. Perhaps the most noticed event recently is the ongoing efforts by the US Fed to support overnight lending markets with liquidity and an apparent resumption in their policy to expand their balance sheet. The Fed says there is nothing worrisome to see here, while Fed critics and skeptics are suspicious that the Fed may be trying to hide something going seriously wrong behind the scenes. It is certainly worth following to see what happens. As always, time will tell us the answer.

Q: How does the ongoing political war in the US impact the chances for some kind of financial system or monetary system disruption?

A: That has been an interesting irony so far. Despite three years of intense political fighting virtually daily and constant news stories that well known officials may be indicted for crimes, the markets have almost completely ignored it all. We have told readers here that perhaps the best thing to do is just monitor market reactions. They are more likely to let you know if anything truly disruptive to the present system is really going on. So far the stock market has been strong, the US dollar has been strong, and gold and silver prices have been trading in a range with upward, bias but are not indicating any kind of major crisis is at hand yet. If you see gold move sharply up to or above all time highs around $2000, that would be a possible signal. The same for a move in silver above the $25-$26 level or even back up to all time highs around $50. Until you see things like that, the markets are not indicating they are too concerned with all the political maneuvering we see virtually daily now. It's always possible something truly significant could arise. However, the sources I hear from do not expect the impeachment process to result in a removal of President Trump from office and the markets also seem to view things that way. While rumors have persisted for years now that some former high officials in the Obama Administration could be charged with crimes related to efforts to remove President Trump, nothing has happened yet on that front either. So far, everything seems to be more related to political strategies to try and gain an advantage in the 2020 elections If anything major does emerge from this, it will be obvious to us all. For now, the markets are not the least bit concerned about it. One prediction that seems pretty safe is that we will see the political war continue and even escalate into the elections and that will probably suck all the oxygen out of the room until the 2020 elections are over. If President Trump is re elected, not much is likely to change unless a crisis forces change. If a Democrat is elected, change is more likely and the US will likely move more sharply towards socialism. That is pretty easy to predict.

Q: What will this blog do if nothing much changes any time soon?

A: Just continue as we are now. Try to watch for any major signs of trouble. Post a few articles when we can find something relevant to our mission here. Report any change in the situation if we hear of that from any of the experts that provide input from time time. We try to report things (like input from some experts we hear from) you are not likely to see reported in mainstream news since those stories are already widely reported. We do also monitor several alternative media sites in case something of note appears there. We will pass along anything we see that we think might be useful information.
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Added note: If all the political fighting has you thinking we are a nation with no hope for the future, take a look at this short video and perhaps you will change your mind:

https://twitter.com/dcexaminer/status/1190335635078467584

Added note 11-14-2019: After the first impeachment hearings in the US Congress, we are still seeing no market reaction that would suggest anything disruptive is going on or that markets think the President will be removed from office. So no change from the analysis posted above for now.

"Digital Currencies" Innovation - Is Anything Significant Really Happening?

This blog has covered this topic extensively over the years and has monitored events related the potential for so called "digital currencies" (either privately issued or issued by central banks) to make some kind of significant impact on the current monetary system. 

Now Bloomberg has published this article "Fed Drags Feet as Digital Money Challenges Central Banks" that implies that the IMF is concerned that central banks are falling behind the innovation curve and that "it is just a matter of time before we see massive disruption" according to Tobias Adrian of the IMF. 

Readers here know that we have been reporting for some time that the reality is that there is no indication that any kind of significant new "digital money" innovation that could shake up the existing monetary system is on the near term horizon. Instead, we have steadfastly reported that any changes we do see are more likely to be very gradual and incremental over long periods of time unless some kind of new major financial crisis disrupts the present monetary system.

The first thing to note here is that the money we have now issued by the Fed and other central banks is already "digital money" for the most part. So the term "digital currency" being used to imply something new and innovative is arriving can be misleading. Usually, it is actually the ledger system used to record and track the transactions of the money that is really being talked about which is where things like "blockchain" enter the picture. But even there, there is no indication at this time that central banks are ready to suddenly plunge into using a blockchain ledger system on any kind of major scale. Honestly, what we see is a lot of use of buzz words and some hype, but not very much actual innovation or major changes so far to our present system. 

However, I encourage readers not to just take my word for this analysis. I have often mentioned that I do get input from leading experts on these kinds of issues and that my analysis is mostly based on the credible information I get from these sources. 

Robert Bell (CEO of KlickEx), is one example of these kinds of high credibility sources. Robert does not have to speculate on these kinds of issues because he lives it every day and is one of the leading experts in the world on payment systems and the related technologies used to operate them. Robert has worked with many central banks and met with institutions like the IMF and BIS to discuss these kinds of issues over the years. He was kind to do an interview for this blog and has provided very valuable input here over the years based on his real world experiences. When Robert tells me what is really going on around the world, I simply know that I can trust his analysis to be accurate and up to date.

I showed the Bloomberg article linked above to Robert and he was kind to reply with his thoughts on it as a kind of update on things for readers here. Robert was in Washington DC at the time attending the IMF and World Bank fall meetings.

Here is what he said in his email reply in regards to anything significant happening any time soon related to "digital money"

"As far as real systemic change... There's nothing on the cards for the monetary system. The digital services spoken of (in the Bloomberg article) will not change anything fundamental, and the IMF and BIS are even further behind where most central banks are. 

The central banks will implement real time slowly, and banks will reduce cross border prices slowly. 

Swift and their GPI project is already doing this work, but banks are taking a long time to reduce prices, that's all. 

Open Banking, is speeding things up a bit, but not much."    ---- Robert Bell (KlickEx)

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My added comments: Readers sometimes wonder how I am able to offer analysis on these issues with my having no personal background in banking or macro economics. The answer is simple. I get input from highly credible sources who are experts in their field like Robert Bell. Usually, their input and insights are right on target. I see that borne out over time over and over again. 

Many times they prefer I do not directly attribute quotes in their names which I honor. In that case, I try my best to summarize the information for readers without attributing it to any specific expert. But I do want to clearly credit them for helping to greatly improve the analysis offered here and the reason why we have been able to correctly predict that despite constant articles that some kind of major change is about to happen to disrupt the current US dollar based monetary system; the reality has been slow and gradual change as we have been reporting here for some time.

If I do hear anything to change that analysis, I will certainly let readers know. However, it is more likely that if something does quickly arise to disrupt the present system, none of us will really know much ahead of time as Jim Rickards has said for many years. There are always potential risks to the current system and we have documented many of them here, but those running the system are not looking to make sudden major changes. They prefer stability and for any changes to be gradual over time. The US Fed in particular, moves very slowly and cautiously.

Jim Rickards: In Depth Discussion of How He Sees the Aftermath of the Next Financial Crisis

Readers here know that we have long featured interviews and writings from Jim Rickards here on this blog. There are some simple reasons why. Jim is a recognized expert on financial and monetary systems and the problems that can result in major changes over time to those systems. Of course that this what this blog is all about. 

Beyond that, Jim has worked with various government agencies that try to anticipate how things might change in the financial system under different possible future scenarios. This means he is well versed on the thinking behind the scenes on that and also has been asked to provide input into that process. All of this makes him a valuable resource for anyone trying to learn about these issues.

Below I have embedded a very recent in depth interview Jim did while in Australia to deliver a presentation. This is very good discussion for those who want to hear Jim's latest thoughts on where things stand and what he continues to see coming at some point in the future (with the timing unknown to anyone per Jim).

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link to video (from Smallcaps.com)

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My added comments: This interview is somewhat of summary of Jim's most recent book Aftermath (available here), but with some interesting add on questions from the interviewer that you may enjoy. 

In the last half of this interview, in reply to questions about his work with various government agencies that try to anticipate future possible problems and scenarios in the financial system, Jim offers an interesting observation.

Jim says that while he has no problem in getting meetings with officials who are concerned about these issues, for the most part they do not really have any serious contingency plan ready if the kind of crisis he talks about does eventually come to pass. He says they will listen and even do financial war games, but don't really believe a crisis of the nature he talks about will actually happen.

These comments caught my attention because I have gotten the same impression from experts around the world that I do get input from now and then. There are many very bright people who constantly work on ideas and proposals for how a new or reformed monetary system might best serve the public (whether in a crisis situation or not), but my take on things is that they all pretty much agree that no consensus plan for what to do (that is ready to be implemented) actually exists at this time in the event of a failure of the present monetary system.

Jim talks in this interview about what he sees as being possible in the next big crisis. However, my take is that he also does not see that there is any real contingency plan on hand that could get the broad consensus needed to move forward very quickly. He notes that gaining consensus between IMF member nations is unlikely to be an easy task.

I believe this is why we are seeing more and more discussion of a future world where there are perhaps at least two major global blocs in competition to reform the present system. The western bloc led by the US and including the UK and the EU and the eastern bloc led by China and including the BRICS nations and Asia in general. Jim talks about the kind of negotiations that might take place between these two major blocs to try and move forward with some kind of new monetary system in the event the present one did fail and suggests the IMF is the most likely place for that to happen. He further explains how the member voting system at the IMF comes into play in any kind of effort to get a consensus plan. This is something we have emphasized here for some time based on input from experts who know how the IMF system works.

The primary point  to emphasize here is that we should not assume that there is some kind of agreed upon grand monetary system reset plan lurking in the background waiting to emerge in the next major crisis. All of the available evidence I have indicates that at this time, there is no global consensus for anything like that. 

This means it is important for all of us to monitor events, stay as informed as possible, and also have some kind of personal plan in mind in case some kind of temporary disruption of the existing system does eventually take place. If there is some kind of agreed upon transition plan ready to help us move smoothly forward out of a new major financial crisis, I am not aware of it. No expert that I hear from has advised that such a thing exists.


Added note: Later this week I will run an article that provides further evidence that China may be trying to move forward independently with its own monetary system reform with a new sense of urgency because of the proposed Facebook Libra project.

The Economist Ponders What Will Come After the Present Monetary System

It seems that the primary focus of this blog, watching for major changes in the present monetary system, is no longer just a non mainsream media activity. The very mainstream Economist runs this article wondering how much longer the present system can hold together and what is going to eventually replace it. Below are a couple of excerpts and then some added comments.

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History repeats

"A minimally disruptive end to Bretton Woods II remains within the realms of possibility. Its fate might resemble that of Bretton Woods I, especially if Mr Trump loses office in 2020. Democrats are more economically nationalistic than they used to be, but still mindful of the value of global co-operation. President Bernie Sanders or Elizabeth Warren might seek a one-off depreciation of the dollar while recommitting America to a rules-based system of global trade. A recession in China could scare its leadership into offering concessions on trade that America would accept.

But the experience of the 1930s may prove a more apt guide. In the absence of a co-ordinated adjustment to exchange rates and a peaceful end to trade hostilities, the world could stumble into a cycle of competitive devaluations and tariff rises. As trading relationships unravel, countries may organise themselves into rival economic blocs. It is hard to imagine the world repeating such an ugly era of history. But not as hard as it used to be."

Please click here and read the full article in The Economist

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My added comments: I am struck by how much the last paragraph quoted above sounds like something Jim Rickards would say. If you have followed these issues for a long time, you realize that the world is simply moving in an unpredictable fashion in ways that what we might call "the establishment" never likely imagined possible not too long ago.

The political landscape has been significantly altered in the last 3-4 years such that it now seems more likely that the world is moving in this direction stated in the article above:

"In the absence of a co-ordinated adjustment to exchange rates and a peaceful end to trade hostilities, the world could stumble into a cycle of competitive devaluations and tariff rises. As trading relationships unravel, countries may organise themselves into rival economic blocs."

A few years back we talked about this being one of the very real potential outcomes back in a time when many were expecting some kind of a new one world global currency issued by some kind of global central bank to be the future. Now, that seems like a very remote possibility any time soon as achieving any kind of political consensus nationally or globally has disappeared.  

As hard as we try to stay out of any political discussions here, we have to admit that political agendas are clearly driving the world forward. Using the US as a major example, it seems clear that US voters are going to be offered a choice to continue on with President Trump or move hard left to a very different kind of more socialistic economic agenda that is now controlling the Democratic Party. The idea that somehow these opposing forces will join together in some kind of middle of the road compromise seems completely unrealistic. No matter who wins the next election, the US is badly divided politically and that is not going to change.

So, in attempting to provide an analysis for readers here, what should we watch for heading into the 2020 elections which are obviously going to suck all the oxygen out of the room from now until they are over. Here are some thoughts:

1- The most important factor to watch closely is the health of the economy, period. This is most likely going to be the biggest factor in determining the outcome of this election which will then determine what happens going forward in the economy and eventually our monetary system. 

2- If there is an economic downturn, how severe will it be? This is the huge question in my mind. Continued growth (even mild growth) will most likely favor President Trump because most people are not anxious to roll the dice on major change so long as things seem reasonably stable. Even a mild recession may not have much impact. But if we get another big crisis (like the 2008-2009 GFC), the door opens wide for all kinds of unpredictable election outcomes. To me, it's a fairly simple analysis. Who will the majority of the voting public trust if we get "the big one" between now and November 2020?

 a) President Trump? - We know his loyal base will stick with him and will simply ignore any effort to blame him for any crisis as a "deep state" project to get rid of him. Trump will clearly blame the Federal Reserve and probably even call for major reform of it if we get a huge crisis (see this article - Former Fed Pres fires back). His followers will accept that as most of them already distrust central banks. They will believe him over his opponents without any doubt. But how big will that loyal base be and will it include enough independents to insure his re election? Maybe. I don't know. We'll see.

b) The Democratic Opposition to President Trump? - We know the loyal base of voters on this side will blame President Trump for any economic crisis period. They will say that the global economic order which they will say has built global prosperity for decades was ruined by President Trump's sanctions, tariffs, and trade wars. The more progressive wing of the party will probably say the major crisis proves capitalism has failed and now socialist style policies are required to solve the problem. Can they convince enough of the people "in the middle" that Trump is to blame to get him out of office?  Maybe. I don't know. We'll see.

In my mind, the above is pretty easy to predict if you are paying any attention at all to what is going on politically in the US and around the world for that matter.

In my view, what is missing from this shallow "debate" (that actually is just an effort on each side to divert blame to the other side to gain political advantage from any crisis that arises) is the transparent telling of the truth to the general public. Really, until that happens, it seems very unlikely that any kind of reasonable consensus to fix the problems in the present system can ever happen. 

Unfortunately, it seems that a transparent telling of the truth is viewed as political suicide by the leaders on all sides of the debate so it just is not going to happen. We have wanted to create the impression for a long time that we can go on forever by expanding an economy based on explosive ongoing debt creation with no long term consequences. We have somehow convinced ourselves that if a major problem does arise, we can just print our way out of it and keep stumbling forward. If trillions won't cover up the problem, I guess the thinking is that we just move on to quadrillions. It never matters how big the debts get so long as we can pay the interest, right? So long as the US can create unlimited amounts of "the global reserve currency", all is good, right?

So far, that has been right so no one wants to rock the boat and suggest this might not be sustainable forever. That's political suicide, right?

I honestly hope it somehow could be right. So long as everyone just keeps pretending no amount of additional creation of money and debt will ever matter, I guess the game can just keep rolling along. Right?

But, we are beyond foolish if we don't ask ourselves these honest questions:

What if some day people don't keep believing? What if markets don't keep believing? What if we finally do cross the threshold where all confidence and trust in the system is lost? What if central banks lose all credibility with the public as they create trillions in new money and push for negative interest rates around the world? Nothing to worry about and everything is great, right?

We have to ask these questions because it is clear that our leaders on both sides of the political aisle will not ask them, because it is political suicide to ask them. They are trapped into perpetuating a system that everyone instinctively knows is NOT sustainable, but we we just cannot afford to acknowledge that fact because the ramifications are so serious and troubling. We all have to hope they can just keep kicking the can down the road forever and it is now pretty clear that is the only plan of operation left for the present system. Even The Economist runs an article saying the present monetary system is breaking down.

So, our job here is to monitor what really does happen with no political spin if possible. We must ask people to raise these kinds of honest questions and also to think about what they should do to try and prepare if some day this current system just cannot continue to function for any reason. There are two levels to this to think about:

1- The Macro Level - what will the US and the world do to fix things if the present system does go under at some point? We have devoted literally years here trying to research that and provide some ideas and concepts that many very bright people have suggested. You can look over those ideas on this page of the blog. New ideas are always welcome and I appreciate it when readers point me to them. The more you study various ideas, the better you can voice an informed opinion on what should happen if the present system does indeed fully "break down".

2- The Personal Level - what can I do for myself and my family to try and weather the storm if we do get "the big one" some day? - We have tried to offer suggestions here realizing that every situation is unique and there is no one size fits all answer to this problem. But simple common sense says that everyone should try to the extent they can to have some kind of emergency savings that is diverse as they can make it. Some kind of emergency cash reserve. If possible, a portion of that held in physical precious metals that might be usable if the local national currency fails completely where you happen to live. Don't tell me it can't happen because it already has in some places in the world and everyone who talks about money in any way always lists trust in it as the most critical aspect money must have going for it. 

Beyond this, all we can do is try to stay as informed as we can and monitor what actually happens. At the end of the day, what actually happens is what matters, not what someone believes is going to happen (or thinks cannot possibly happen). This blog has been devoted to trying to research these issues honestly, look for creative ideas and proposals that have been put forward to try and improve things, and to offer the best analysis we can based on the information we have. That will continue to be the goal here so long as I am able to produce articles for this blog. 

Added notes: Here is an interesting article that is somewhat along the same lines as this blog post which may be of interest.

Added 3pm (CST): And now Mark Carney (BOE) joins the chorus saying that the current US dollar based system "won't hold".  Here is an excerpt from a Reuters article quoting him at Jackson Hole Wyoming:

“Even a passing acquaintance with monetary history suggests that this centre won’t hold,” Carney said. “We need to recognise the short, medium and long-term challenges this system creates for the institutional frameworks and conduct of monetary policy across the world.”

Here is the full text of the speech by Mark Carney at Jackson Hole calling for major changes in the present monetary system. 

MIT TradeCoin Currency Proposal

One of our goals here is to look for various ideas and proposals that offer alternatives to our present monetary system. A panel of experts that I hear from on these kinds of issues will sometimes point me to new ideas or proposals that I would otherwise miss.

In this case, one expert pointed me to this proposal from MIT Labs covered in The Scientific American for a blockchain based currency they call "TradeCoin". The web site for MIT TradeCoin describes summarizes the proposal this way (I added underlines for emphasis):

The Brave New World of Blockchains and Distributed Ledgers

The modern financial system has become dangerously complex. Increasing transparency would reduce risk, but that requires modeling the monetary circuit at a level of detail beyond the capacity of current technology.

New technologies such as digital currencies are now making it possible to simulate every trade and transaction. These tools could build more efficient financial networks and decentralize the control of money. People could exchange directly with one another instead of relying on banks.

The potential for sweeping change is real, but there are many uncertainties. These digital networks will only promote equity and accountability if they are properly built and responsibly used. They could just as easily lead to extreme levels of centralized control.

Towards a More Stable Financial System.

It is clear that the invention of blockchain and distributed ledgers won’t eradicate problems like financial crashes and unhealthy inflation—at least not in the short term. But it does enable the creation of legitimate alternatives to the big, powerful players. Technology now makes it possible to form specialized global currency systems that previously would not have had sufficient scale, trust or political stability to compete. That is why a natural next step is for the little guys—such as emerging economies or large numbers of individual citizens—to band together to form alternatives to central banks.

With that possibility in mind, our lab at the Massachusetts Institute of Technology is working on creating a digital currency suitable for large-scale transactional purposes. Called Tradecoin, it will be indelibly logged on a blockchain and anchored at all times to a basket of real-world assets such as crops, energy or minerals. Doing so will help stabilize its value and make it easier for the public to trust it. The core idea is that a broadly useful currency needs both human trust and efficient trade systems.

A digital Tradecoin built on a distributed ledger can allow alliances of small nations, businesses, commercial traders, credit unions or even farmers to put together enough assets to back a large, liquid currency that would potentially be as trustworthy and at least as efficient as the national currencies used by the World Bank and the International Monetary Fund.

By design, the principles behind currencies such as Tradecoin are fundamentally different from cryptocurrencies like Bitcoin, which are not backed by real-world assets and do not involve alliances. Tradecoin can also avoid the energy-intensive process of mining.

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My added comments: While this project is not on the verge of going live soon, it does illustrate very well the kinds of ideas and proposals that are out there being discussed by experts and economists. Please note how the underlined portions above emphasize that the creators of this concept see it as a needed "alternative to central banks" and as a "legitimate alternative to the big, powerful players".

They go on to say that a digital Tradecoin would allow small alliances to "put together enough assets to back a large, liquid currency that would potentially be as trustworthy" as the national currencies used by the World Bank and the IMF. This description almost seems to suggest a set of "local currencies" rather than one global reserve currency that we see touted so often.

Some might argue that a currency truly backed by "real-world assets" might end up being more trustworthy than those national currencies should they lost the public trust at some point in the future. That continues to be an ongoing topic of debate.

On this blog, we like to see various ideas and proposals put forward for discussion and debate. When anything becomes monopolized, there is a risk that innovation will stagnate and customer service will suffer. The panel of experts I hear from are constantly talking about the need for future innovation and progress with regard to the concept of money and monetary systems.

So here on this blog, we view it as a good thing for the consumer (in this case the public that uses money to transact daily business activities) for some legitimate competition or even just potential competition to arise and challenge the thinking of the status quo from time to time.

We include these various ideas and proposals on our Marketplace of Ideas for Monetary System Reform page so that anyone wanting to research various ideas and proposals can find them documented with links for further research included in the articles all on one page. As far as I know, this is the best and most comprehensive collection of such ideas gathered on one page on the internet.

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Expert Reaction: After previewing the article above, one expert I hear from offered this comment to me:

"The only thing I would add is an explanation as to why any country would rather use a different unit of account than the USD. And I think you can simply say, because it is stable in real goods, which is what many countries with balance of payment constraints would like to have. Because of the volatility of exchange rates, many countries do barter with each other when making trades. I'm still not entirely sure that the small bufferstocks that a trade coin is proposing are big enough, and it might easily turn speculative. They would have to lay claim to changing the index, just as FB (Facebook) lays claim to."

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Added note: Speaking of new monetary system proposals, some readers here may wonder if we plan to further cover the Kinesis (gold and silver backed) alternative monetary system proposal expected to launch sometime this year. We do once that system fully launches assuming the launch is successful. We were advised of this recent news release that states that Kinesis plans to partner with the Post Office in Indonesia to offer its currency across the region in that area of the world. We'll continue to monitor their progress and report on it as results from the launch are available. Here are some notable quotes from their recent press release:

"In accordance with the new regulation, Kinesis, OZL and the Indonesian Government Postal Service (PT POS) are planning to develop, build and operate an international standard vaulting facility in Jakarta.

Additional stakeholders in the project include, Jakarta Futures Exchange (JFX), government clearinghouse Kliring Berjangka Indonesia (KBI) and religious organisation – Nahdlatul Ulama (NU) who have 100+ million members."

. . . .

"POS Indonesia have indicated they will facilitate and contribute significant resources and support for the project, including the contribution of land; licenses for Free Zone/Bonded Warehouse designation, and duty-free imports; permits for expedited building, construction and utilities; as well as significant post-launch marketing and logistical support.

PT POS Indonesia is the state-owned postal service in Indonesia and third largest postal service in the world, in terms of number of offices and sales outlets (over 58,000). In addition to delivering postal services, they are also the largest non-bank financial institution in Indonesia, providing payments, cross border remittances, micro-loans and other financial services."

Vox: How Close Are We to Another Financial Crisis? 8 Experts Offer Their Thoughts

A big thank you to a blog reader who pointed me to this article appearing in Vox that was recently featured in this weekly newsletter from the Cato Institute. Below are a couple of excerpts from the Vox article.

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"It’s been 10 years since Lehman Brothers collapsed, setting off a global financial meltdown that would take years to correct. A decade later, there are some guardrails in place to prevent a Great Recession 2.0 — but another crisis at some point is essentially inevitable.

. . . .

A decade later, there’s been a lot of reflection on what happened in the financial crisis — and whether a repeat could be on the horizon. I reached out to eight experts to ask how far we’ve come, specifically in terms of government policy, in guarding against another financial and economic calamity. Simply put, are the guardrails in place to prevent another financial crisis like what happened in 2008?"

Here are some of the comments of one of the eight experts interviewed as an example of the type of input they offer:

Bill Emmons, assistant vice president and economist at the Federal Reserve Bank of St. Louis:

"The guardrails are not in place to prevent another crisis like 2008. However, I don’t think another crisis like that is likely anytime soon. The underlying conditions in the economy and financial markets are very different today, in large part because the crisis occurred and left lots of damage in its wake. . . . . "

Click here to read the full article in Vox

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Added note: Claudio Borio offers these comments in the most recent quarterly update from the BIS (Bank for International Settlements):

"If we take a further step back, the bout of volatility engulfing EMEs should not come as a surprise. As noted in the BIS Annual Economic Report, these developments are symptoms of a broader malaise. The highly unbalanced post-GFC recovery has overburdened central banks. The powerful medicine of unusually and persistently low interest rates has served to boost economic activity, but some side effects were inevitable. The financial vulnerabilities that we now see are, to some extent, one such example. The market ructions are akin to a patient's withdrawal symptoms.

What happens next is, as always, hard to tell. Will the patient continue to mend, as looked likely until the first quarter of this year, or will there be a relapse? What one can say is that the patient's full recovery will not be smooth. On the financial side, things look rather fragile. Markets in advanced economies are still overstretched and financial conditions still too easy. Above all, there is too much debt around: in relation to GDP, globally, overall (private and public) debt is now considerably higher than pre-crisis. Ironically, too much debt was at the heart of the crisis, and now we have more of it - although, fortunately, banks have reduced their leverage thanks to financial reform. With interest rates still unusually low and central banks' balance sheets still bloated as never before, there is little left in the medicine chest to nurse the patient back to health or care for him in case of a relapse. Moreover, the political and social backlash against globalisation and multilateralism adds to the fever.

Policymakers and market participants should brace themselves for a lengthy and eventful convalescence."

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My added comments: The comments in this Vox article are pretty much in line with what I have heard from other experts. The thinking seems to be that the potential for another major crisis does exist, but most do not see any signs that one is on the near term horizon. The most frequently mentioned potential triggers for another crisis I see mentioned are:

- trade wars & currency wars leading to actual wars

- shadow banking where regulators are not able to assess systemic risks very easily

- derivatives within a highly interconnected banking and financial system

- emerging market problems with a rising US dollar

- consumer debt and student loan related debt (too high a default rate)