BRICSPOST: Yuan Becomes the 4th Most Used Currency Globally

The BRICSPOST runs a couple of recent articles related to China. One article notes that SWIFT announced the yuan is now the 4th most used currency in the world moving ahead of the yen. Another article points out that China's foreign exchange (forex) reserves fell again in September. Quotes from both articles are just below.

---------------------------------------------------------------------------------------

China’s yuan overtakes yen to become 4th most-used currency 

"China’s yuan overtook the Japanese yen to ascend to fourth place among the most-used currencies in the global payment system in August, according to the Society for Worldwide Financial Telecommunications (SWIFT).

On Tuesday, Swift, the financial-messaging service said the yuan is now only after the U.S. dollar, the euro and the sterling in currency rankings.

The announcement boosts China’s attempts to promote the yuan as an international reserve currency.

Global yuan payments increased in value by 9.13 per cent in August, Swift said on Tuesday.

The Chinese currency reached a record high market share of 2.79 per cent in global payments for the month.

More than 100 countries used the yuan for payments in August, of which over 90 percent of flows were concentrated in 10 countries. Singapore processed 24.4 percent followed by the United Kingdom with 21.6 percent.

More than 1,700 financial institutions made worldwide payments in the yuan, up 14 percent from a year earlier.

China has called for the International Monetary Fund to add the yuan to its basket of four reserve currencies, known as Special Drawing Rights, or SDRs."

China forex reserves continue to fall in September 

"China’s foreign exchange reserves fell to $3.51 trillion at the end of September, the country’s central bank announced on Wednesday.

The reserves decreased by $43.26 billion in September, marking the fourth consecutive month of declines, according to the People’s Bank of China.

But the decrease was not as sharp as in August. The reserves dropped by a record $93.9 billion in August.

“There have been two main reasons for the decline: the USD strength and capital outflows. China’s FX reserves are in USD and affected by the general USD movements. As the USD has gained 25% between Q2 2014 and Q2 2015, other currencies can be assumed to have weakened 25%, all else equal. Thus, the non-USD assets in China’s FX reserves (estimated to be 40% of total) have lost 25% in value,” according to Amy Yuan Zhuang, senior Asia analyst at Noredea Research.

“Capital outflows have intensified in Q2 and Q3 this year as a result of growth concerns and the financial market turmoil during the summer. According to our estimates, after taking into account the trade account flows and FDI flows, a total of USD 180bn has flowed out of China in Q2 and USD 272bn in July and August,” said a Nordea statement."

More New Warnings on Systemic Risk from the IMF

The IMF just released a new Global Financial Stability Report (GFSR) that issues more new warnings for both emerging nations and advanced economies. The Sydney Morning Herald says that the report states that "emerging market have over-borrowed by an estimated $4 Trillion in the last decade" and "there are also risks to advanced economies where a messy withdrawal of stimulus measures could start a vicious cycle of fire sales, redemptions, and more volatility." 

Below are some quotes from the Sydney Morning Herald article. We can add this new IMF warning to our list of systemic risk warnings page.

-----------------------------------------------------------------------------------------

"Governments and central banks risk sparking a fresh global financial crisis, the International Monetary Fund has said, as it called time on a corporate debt binge in the developing world.

Emerging market companies have over-borrowed by an estimated $US3 trillion ($4.2 trillion) in the last decade, threatening to trigger a sharp capital crunch and capital outflows in economies that have already been hit hard by low commodity prices, the fund warned on Wednesday in its latest Global Financial Stability Report.

And there are also risks to global stability from advanced economies, where a messy withdrawal of stimulus measures could start a "vicious cycle of fire sales, redemptions, and more volatility", according to the Fund. The US Federal Reserve has said it is on track to raise rates for the first time in almost a decade by the end of this year.

"The global financial outlook is clouded by a triad of policy challenges: emerging market vulnerabilities, legacy issues from the crisis in advanced economies, and weak systemic market liquidity," the IMF concluded in its report.

The fund warned that there was no margin for error for policymakers navigating these hazardous risks."

Click here to read the full Sydney Morning Herald article

--------------------------------------------------------------------------------------------------------------

My added comments:

The IMF is making it very clear that they oppose any raising of interest rates by the US Fed any time soon and they state in this report that "monetary policies in key advanced economies must remain accomodative and responsive." The US is of course a key advanced economy. 

This is a direct warning to the Fed to hold off on raising rates. My take on this report is that the IMF is saying to the Fed that if you raise rate and we get another major financial crisis as a result, it's on you and we warned you ahead of time.

Given all that we have followed here on this blog for nearly two years now, one has to wonder if the US Fed is being somewhat "setup" to take the fall if we do get another major crisis. Keep in mind Jim Rickards ongoing forecast about all this. He says that we will get another major crisis that the US Fed will not see coming. He says it will be too big for the US Fed to handle this time and that the IMF will step forward using a massive creation of new SDR's to deal with the crisis. 

The continual warnings from the IMF to the US Fed seem to support the idea that the IMF will be willing the blame the US Fed if another crisis unfolds. Would the IMF then use these warnings to promote the idea that they should handle the next crisis because they warned about the risk ahead of time and the US Fed ignored them?

Of course, if the Fed simply does not raise rates until after the 2016 US elections, they will be able to avoid a scenario where the IMF, World Bank, and BIS can blame them for causing a crisis. On the other hand, you have to wonder if this will destroy what credibility the US Fed has left after telling markets forever that an interest rate hike is coming soon if they don't do one. The Fed is in a very tough position that I don't know how they are going to escape if everything does not go well.

All we can do is follow events and see what actually does happen.

Jim Rickards: Gold, SDR's and Crying Wolf

In a recent new article for Daily Reckoning, Jim Rickards touches on gold and the future for the SDR used by the IMF. He also calls out some blogs and financial newsletters for "dire predictions about how the SDR is poised to replace the dollar as the global reserve currency." Below are some quotes from this new article and then a few added comments.

-----------------------------------------------------------------------------------------------
. . . . .

"My class (at Johns Hopkins SAIS) marked a turning point. Many observers believe the gold standard of Bretton Woods ended on Aug. 15, 1971, when President Nixon gave his surprise speech shutting the gold window.

That is not quite correct. Nixon ordered the conversion of dollars into gold to be “temporarily” suspended. It was expected that the world might be able to return to some kind of gold standard once new parities of paper money to gold were established. Of course, that never happened.

In 1975, the IMF declared that gold was dead as a form of money. Yet from 1971-74, the world of international finance still considered gold to be money. That’s when I received my technical graduate training. Mine was the last class to study gold as a form of money in international finance.

Today, for the first time in decades, gold is once again being discussed as an international reserve asset. This is because Russia, China, Iran and other nations have been acquiring thousands of tons of gold to add to their reserves.

Equally important, other central banks that already have gold, such as Germany, France, Italy and the U.S., have completely stopped selling. It looks like the scramble for gold is back after decades of official dumping by the central banks.

Another topic that is in the news is the role of the SDR. Financial blogs and newsletters are filled with dire prognostications about how the SDR is poised to replace the dollar as the global reserve currency.

Even more digital ink has been spilled on the topic of including the Chinese yuan in the so-called “basket” of currencies that make up the SDR.

The technical nature of SDRs has led to ill-informed speculation, hysteria and dire forecasts that have no basis in reality.

This is not surprising. Most of the people who are expert on SDRs actually work at the IMF or finance ministries of IMF member nations.

They have no interest in commenting publicly about what is really going on. Most of those who are commenting lack the expertise to know what they are talking about. This is why the blogs are filled with misinformation and hyperbole that only serves to alarm and confuse investors."

. . . . . 

"SDRs are the coming reserve currency of the world. Massive issuance of SDRs in a future liquidity panic will be highly inflationary. These outcomes have enormous implications for investors with assets in U.S. dollars. Yet the process will be gradual and proceed in ways that markets barely notice, at least at first.

Commentators who “cry wolf” about SDRs are doing a disservice to investors because markets may be complacent by the time the wolf actually arrives."

Click here to read the full article

----------------------------------------------------------------------------

My added comments:

This is an interesting article for several reasons. Jim clearly continues to view gold as an important part of the future. He talks about it in this article and recently announced he will have a new book out on gold next April. 

He repeats his statement that "SDRs are the coming reserve currency of the world" while at the same time chastising some blogs and newsletters for issuing "dire predictions about how the SDR is poised to replace the dollar as the global reserve currency." You may ask, doesn't he contradict himself with these statements? My answer would be no. 

If you listen carefully to Jim Rickards when he talks about the SDR becoming a kind of world money and the "coming reserve currency of the world", he does not say the US dollar will be done away with or will not still be a part of the monetary system. I think the blogs and newsletters he mentions probably present this idea differently than Jim has in mind. Notice how Jim says, "the process will be gradual and proceed in ways the markets will barely notice, at least at first."

Some of the blogs and newsletters I see when doing research for this blog talk in terms of some kind of sudden overthrow of the US dollar (either with the SDR at the IMF or with the Chinese yuan replacing the dollar very rapidly). I think the key Jim is trying to emphasize is that the transition process for the monetary system is more likely to be a gradual process that will make it less noticeable to the average person. The constant hyperbole you do see out on the internet calling for some kind of dramatic virtually overnight change in the system tends to come across to many people as "crying wolf" when they don't see these changes taking place at various predicted points in time.

For what its worth, on this blog we make no predictions regarding the timing of any coming future changes. Instead, we attempt to try and educate readers about SDR's in case they do take a more prominent place in a future monetary system. We make no claim here to be an expert on the subject, but we do have a page of articles about SDR's here on the blog for anyone interested in them. They are mostly just basic facts about SDR's with some added speculation about how they could be used some day in the future. As regards timing of the SDR becoming a reserve currency, this is what we said months ago on our blog page with articles about the SDR (linked above):

"Right now, I don't know of anything that would suggest the SDR is about to become a global reserve currency any time soon. However, over time, I do think it becomes more likely that this will be possible."

I will add that other sources I hear from agree that the changes we have discussed here on this blog are more likely to take place in a gradual way in steps. We have said this many times. Of course, if a major global crisis does erupt, that could always speed up the pace for transition and change. But absent such a crisis, we have repeatedly said here that the best information we can find suggests the pace of change will most likely be gradual and also likely to happen in steps on a regional basis instead of suddenly on a global basis. So Jim's comments in this article about this being a gradual process agree with the other sources I mentioned that work inside the system. We plead "not guilty" here to making dire predictions or crying wolf on this topic. 

BIS Looks at Cross Border Financial Linkage and Global Interconnectedness

We have note many times here on this blog that the global financial system is now highly interconnected and that a problem anywhere in the world can lead to a problem everywhere. Apparently the Bank for International Setttlements (BIS) agrees as they have just wrapped up two major events related to this topic. Below are links to the BIS web site on this topic. After that I have pasted in the agenda for the recent conference on interconnectedness so you can see how important this issue clearly is to the BIS.

----------------------------------------------------------------------------------------------------

Cross Border Financial Linkages

"Ever more extensive global financial linkages are changing in ways that have significant implications for policy. Asia-Pacific countries have experienced a particularly rapid growth in financial flows since the crisis. Against this background, the BIS's Representative Office for Asia and the Pacific and the Reserve Bank of New Zealand (RBNZ) co-hosted a conference on cross-border financial linkages with a view to fostering research on implications of these important developments. The conference marked the completion of the BIS Asian Office's research programme in this area."

The BIS Research Network Meeting on Global Interconnectdeness

Thursday 1 October
09:15-09:30	Welcoming remarks by Jaime Caruana, General Manager
09:30-10:50	Session 1:	Global liquidity
		Chair: Christian Upper "Global liquidity and external bond issuance in emerging markets and developing economies", E Feyen*, S Ghosh, K Kibuuka and S Farazi Discussant: Adrian van Rixtel "Global liquidity and drivers of cross-border bank flows", E Cerutti, S Claessens and L Ratnovski* Discussant: Bob McCauley
11:15-12:00	Keynote address by Richard Berner (US Office of Financial Research)
13:15-15:15	Session 2:	International interbank markets
		Chair: Michael Devereux "Banks interconnectivity and leverage", A Barrattieri*, L Moretti and V Quadrini Discussant: Martin Summer "Crisis transmission in the global banking network", G Hale*, T Kapan and C Minoiu Discussant: Linda Goldberg "The euro area money market network during the financial crisis: a look at cross-border fragmentation", C Hidalgo, F Heider and G Rünstler* Discussant: Iman van Lelyveld
15:45-16:30	Keynote lecture by Darrell Duffie (Stanford University)
16:30-17:50	Session 3:	Information and risk sharing in networks
		Chair: Morten Bech "A network map of information percolation", B Hagströmer and A Menkveld* Discussant: Andrei Kirilenko "Distress dispersion and systemic risk in networks", J Wang* Discussant: Tanju Yorulmazer
Friday 2 October 09:00-11:00 Session 4: International spillovers Chair: Thorsten Beck "Learning externalities in opaque asset markets: evidence from international commercial real estate", R Füss and  D Ruf* Discussant: Andreas Joseph "Comovement or safe haven? The effect of corruption on the market risk of sovereign bonds of emerging economies during financial crises", M Paserman* Discussant: Harald Hau "The bank-sovereign nexus across borders", J Breckenfelder* and B Schwaab Discussant: Jorge Cruz Lopez 11:20-13:00 Session 5: Harnessing new data sources Chair: Iman van Lelyveld "Currency networks in cross-border bank lending", S Avdjiev and E Takáts* Discussant: Cédric Tille "Passing the hot potato: how does credit risk flow in the CDS market?", S Battiston, M D'Errico, T Peltonen and  M Scheicher* Discussant: Silvia Pezzini Presentation on "Exploring supervisory data", C Georg* 14:00-15:20 Session 6: International interconnectedness Chair: Goetz von Peter "Interconnectedness of the banking sector as a vulnerability to crises", T Peltonen, M Rancan and P Sarlin* Discussant: Kartik Anand "Syndication interconnectedness and systemic risk", J Cai, A Saunders and S Steffen* Discussant: Vlad Sushko 15:20-15:50 Closing remarks by Hyun Shin, Economic Adviser and Head of Research

Recent Speech by NY Fed President William C. Dudley

Below I have pasted some key quotes from a recent speech made by NY Fed President William C. Dudley. The speech is talking about whether the US can improve financial stability by adding on "macroprudential tools." While the speech looks at the pros and cons of the issue, the concluding paragraphs are what I selected to quote here. They give you a feel for how those inside the system believe things are going in terms of financial stability.

---------------------------------------------------------------------------------------------------

"We have a very complex financial system in the United States. I think we need to do much more work in developing a coherent macroprudential framework before we start contemplating putting a number of countercyclical measures in place. Such a framework needs to take into consideration how it interacts with other policies, such as microprudential policies - to ensure the safety and soundness of individual institutions and monetary policy - designed to help ensure a stable macroeconomy. When are these policies substitutes? When are they complements? How will they interact? How will the governance work in coordinating across these three realms?

In the meantime, while we work to sort all this out, we should take considerable solace from the fact that we have made the financial system more resilient to shocks. We may not be able to anticipate the next area of excess. But with higher capital and liquidity requirements and the use of stress tests to assess emerging vulnerabilities, I think we are much better placed than we have been in the past."

Click here to read the full speech

--------------------------------------------------------------------------------------------------------
My added comments: 

This is the view I see inside the system for the most part. A concern that there are risks to financial stability, but a feeling that the measures taken since the 2008 crisis "have made the financial system more resilient to shocks." Note Mr. Dudley adds that "I think we are much better placed than we have been in the past."

This pretty much sums up what we follow here on the blog. The contrast between what we see inside the system (a view that things are relatively stable now) versus the view of those like Jim Rickards, Nomi Prins, and others who think that we are headed for another major crisis that those inside the system will not see coming. They think this crisis will be worse than 2008 and force a "reset" of the global financial system (new global rules of the game).

Of course we have a full page here on the blog of financial systemic risk warnings that have been issued by both the IMF and the BIS over the past year. A reader may ask, if the feeling is that things are stable, why all the warnings? 

I believe the warnings are issued to cover the IMF and the BIS in case another crisis does emerge (we warned you it was possible). At the same time I think the general feeling inside those organizations is that another crisis is not looming on the near horizon. However, they know they have missed seeing them coming in the past so they issue the warnings just in case. We on the outside of the system have to be prepared for any possible scenario and that we are not likely to get a heads up if another major crisis does emerge suddenly. It is likely we will be directed to the warnings that have been issued if that does happen.

All we can do here is follow events and see what actually does happen.

World Bank's Kim: Growth Slowing for Emerging Markets

The Bretton Woods Committee web site runs this article quoting World Bank Presdent Kim as agreeing with the IMF that there are risks to growth for emerging markets. Below is the article that appears here. After that some comments.

---------------------------------------------------------------------------------------------

World Bank's Kim: Growth slower for emerging markets

CNBC, Oct 2, 2015 
by Fred Imbert

Jim Yong Kim said Thursday that emerging markets will experience slower growth in the near future.
"There are a lot of headwinds," the World Bank president told CNBC's "Squawk Alley." "A big part of it is the fact that commodity prices are down and continue to be down, and a lot of it has to do with the slowing growth rate in China."

Earlier on Thursday, the Caixin/Markit PMI index showed manufacturing in the region dropped to a new 6 1/2-year low of 47.2, ticking down from August's reading of 47.3 but still better than an earlier flash estimate of 47.

Kim also said that a possible Federal Reserve rate hike would limit the access to capital for emerging markets. "All these things are giving us a sense that growth will be slower globally, but especially in the emerging markets."

Kim echoed the remarks made by IMF Managing Director Christine Lagarde, who on Wednesday told CNBC that emerging markets will likely see their fifth-consecutive year of declining growth rates.

Still, Richmond Fed President Jeffrey Lacker, a voting member, told The Wall Street Journal that the central bank could still raise interest rates this month.

"I don't see why not," he said. "We will have another labor market report. Presumably that will move us further toward labor market improvement."

The Fed kept interest rates low at its last meeting, a decision that gave emerging markets some breathing room to reform their economies further, Kim told The Associated Press on Sept. 24.

However, Kim warned that raising rates this year could have dire consequences for emerging market economies, especially those tied closely to commodities.

"Any of the oil and gas producers are already in a terrible situation [and] it looks like, to us, that the price will be down for a long time," he said. "And when Iran goes online, we expect the price of oil to go down another $10 a barrel."

U.S. crude prices have fallen more than 45 percent in the last year and over 20 percent in 2015.

Click here to view this article as it originally appeared on CNBC

------------------------------------------------------------------------------------------------------------------------------------

My added comments:

To say that comments from US Fed members on raising rates have been confusing is an understatement. Every few days we have one member or another saying that it looks like they should be able to raise rates soon while others say just the opposite. It's very clear from recent public statements from the IMF and World Bank that they do not believe the US Fed should raise rates. It seems like we may have a conflict developing there we need to keep an eye on.

The comment above from Richmond Fed President Jeffrey Lacker appeared in the orginal CNBC article on Thursday before the latest jobs report. One has to wonder what is going on at the Fed in this regard. One day after President lacker is quoted as follows:

Still, Richmond Fed President Jeffrey Lacker, a voting member, told The Wall Street Journal that the central bank could still raise interest rates this month.

"I don't see why not," he said. "We will have another labor market report. Presumably that will move us further toward labor market improvement."

we get a very bad jobs report that in no way moved us "further toward labor market improvement." Is it really possible he had no idea what the report would say until Friday? If so, it would appear whatever models the Fed are using are somewhat useless for making forecasts if they have to wait like we do for the public release of information like this.

Meanwhile. Jim Rickards (who correctly predicted the Fed would not raise rates in September when most predicted they would) not only continues to predict no rise in interest rates, he doubles down and predicts the next move will be easing.

Added note: NY Times article on jobs report 

Jim Rickards: The Fed's Next Move is Easing

The information below comes from a new article by Jim Rickards. This article is available to those who provide an email address to West Shore Fund so I will not quote the full article. Below are a few quotes to give you a feel for the article. Jim repeats his forecast that the Fed will not raise rates this year and goes on to say their next move will be to ease. He now feels there may be no increase in rates until after the 2016 elections.

---------------------------------------------------------------------------------------------
"This time last year Wall Street was telling you that the Fed would raise interest rates in March 2015. After March, the street moved its forecast to June. After June, the street moved its forecast to September. Now that September has come and gone, the street is talking about a rate increase in December. Hope springs eternal!

But, hope is not analysis. Wishful thinking does not make a forecast come true. Not only will the Fed not be raising rates in the foreseeable future, the next move will be toward easing.

I was one of the few analysts who had this right from the start. Here’s a link to my interview on CNBC from November 2014 where I said the Fed would not raise rates in all of 2015: http://cnb.cx/1uGQXTD. Why was this so plain to see when almost every analyst on Wall Street saw the opposite? The key is understanding the flaws in the Fed’s forecasting models. 

The Fed uses obsolete partial equilibrium models, mean reversion, and regressions from over thirty recovery cycles since the end of World War Two. The problem is that the economy is not an equilibrium system; it’s a complex system. Also, we are not in a cyclical recovery, we are in a growth depression, the first since the 1930’s."
--------------------------------------------------------------------------------------------------
My added comment:

Added note: Jim's appearance on Fox Business to discuss the Fed

Former Fed Governor Mishkin points out the box the Fed is in now in regards to interest rates.

Additional added note: Jim has a new book coming in April 2016

Willem Middelkoop: Update on the Status of a Reset

Willem Middelkoop just did a new video presentation in late September 2015. In this speech he provides an update on his latest findings related to a coming Big Reset which he has written about extensively. You can see this new video presentation below.

-------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------

My added comments:

In this presentation Mr. Middelkoop repeats his belief that we will see a big reset of the current monetary system, but I did note that he also told the audience not to expect this reset to be one sudden event. Instead, he suggested the changes will take place "over the next 10 to 20 years."

This is consistent with other sources I have heard from as well. If the changes take place at that pace, most people will probably not notice them in their daily lives even though looking backwards in 10 years would see a lot of overall change.

Added note:  Willem Middelkoop tweet on this blog post:

 

willem middelkoop‏@wmiddelkoop

Larry get's it: 'not to expect this reset to be one sudden event, will take place over the next 10 to 20 years.' - http://lonestarwhitehouse.blogspot.nl/2015/10/willem-middelkoop-update-on-status-of.html?m=1 …

Additional added comment (10-9-15): Readers should pay attention to this tweet from Mr. Middelkoop because he confirms that it's very possible that the events we talk about here on this blog might take years to unfold. It's one thing If I say that. It's much more significant when a source like Willem Middelkoop says it. And once again I will add that other sources I do hear from also tend to think in terms of a long time period for changes to unfold. 

That does not mean any of us are ruling out a crisis. That could always happen at any time as has been stated here many times because we have a highly interconnected system loaded with derivative contracts. The point is that if we do not get another major crisis event (or at least get one any time soon), the available evidence suggests that monetary system change is more likely to unfold over a longer time period in way less noticeable to the average person. 

That does not mean people should not stay alert and informed. It just means they should not be surprised if changes take place gradually instead of in a sudden event.