News Note: Keeping an Eye on Deutsche Bank

We have long covered the potential for a "too big to fail institution" carrying a large book of derivatives to cause havoc in the global financial system. Now we clearly have a visible candidate to keep an eye on. This article shows how much trouble Deutsche Bank is in. Below are a few quotes from the article and then an added comment.

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"It’s been almost 10 years in the making, but the fate of one of Europe’s most important financial institutions appears to be sealed.

After a hard-hitting sequence of scandals, poor decisions, and unfortunate events, Frankfurt-based Deutsche Bank shares are now down -48% on the year to $12.60, which is a record-setting low.

Even more stunning is the long-term view of the German institution’s downward spiral.

With a modest $15.8 billion in market capitalization, shares of the 147-year-old company now trade for a paltry 8% of its peak price in May 2007."

. . . . 

"It’s ironic, because in 2009, the company’s CEO Josef Ackermann boldly proclaimed that Deutsche Bank had plenty of capital, and that it was weathering the crisis better than its competitors.

It turned out, however, that the bank was actually hiding $12 billion in losses to avoid a government bailout. Meanwhile, much of the money the bank did make during this turbulent time in the markets stemmed from the manipulation of Libor rates. Those “wins” were short-lived, since the eventual fine to end the Libor probe would be a record-setting $2.5 billion."

. . . . .

Deutsche Bank started the year by announcing a record-setting loss in 2015 of €6.8 billion.

Cryan went on an immediate PR binge, proclaiming that the bank was “rock solid”. German Finance Minister Wolfgang Schäuble even went out of his way to say he had “no concerns” about Deutsche Bank.

Translation: things are in full-on crisis mode.

In the following weeks, here’s what happened:

• May 16, 2016: Berenberg Bank warns that DB’s woes may be “insurmountable”, noting that DB is more than 40x levered.
• June 2, 2016: Two ex-DB employees are charged in ongoing U.S. Libor probe for rigging interest rates. Meanwhile, the UK’s Financial Conduct Authority says there are at least 29 DB employees involved in the scandal.
• June 23, 2016: Brexit decision hits DB hard. The bank is the largest European bank in London and receives 19% of its revenues from the UK.
• June 29, 2016: IMF issues statement that “DB appears to be the most important net contributor to systemic risks”.
• June 30, 2016: Federal Reserve announces that DB fails Fed stress test in US, due to “poor risk management and financial planning”.

Doesn’t sound “rock solid”, does it?

Now the real question: what happens to Deutsche Bank’s derivative book, which has a notional value of €52 trillion, if the bank is insolvent?

Please click here to read the full article & see the various related charts & graphics

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My added comments: The most concerning part of all this is the very last sentence which I put in bold type. Obviously, the financial authorities cannot allow DB to fail and trigger defaults on that huge derivatives book (which exceeds the entire GDP of the whole EU). Jim Rickards has said that he expects DB to be bailed out for this very reason (too big to fail). Clearly, we need to keep a watchful eye on this situation along with banking issues across the EU in general.

Added note: CNBC runs this article on DB. It says this about the derivatives book there:

"Reports have also pointed to Deutsche Bank's global derivatives risk in the range of $75 trillion which is 20 times greater than the German gross domestic product (GDP)."

The article we featured above mentioned a derivates book of 52 Trillion Euros while this CNBC article says $75 Trillion dollars. That's quite a big gap even converting Euros into dollars (exchange rate is about 1.1 right now). This just illustrates how no one really knows how big these derivatives exposures may be out in the system.
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Coming Monday - Former Chief of the SDR Operations Division at the IMF comments on recent IMF proposal to expand the use of the SDR. I think readers will find the quote he provided interesting and informative. Update: This article is now published - click here to read it.

Update added note 7-19-16: Italian Banking situation coming to a head?

Off topic additional note: My daughter (journalism student) did this article for our local paper related to the recent police shootings in Dallas.

Robert Pringle - Kissinger Calls for US to Save the Global Order

Robert Pringle is a highly respected economics author, editor, and commentator. He is well known to central bankers around the world and has commented on monetary policies of central banks for more than 40 years. In addition he was the Executive Director for the influential Group of 30 from 1979 to 1986. Clearly, he is a high credibility voice on these issues.

Recently, Mr. Pringle published this article on his blog site (The Money Trap) in reaction to the Brexit vote on June 23rd in the UK. Below I have selected some quotes I felt were significant (and used my own bold type for emphasis). Following that are a few added comments.

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"Henry Kissinger says that today’s international order was “founded upon conceptions that emerged from the British Isles, were carried by Europe around the world, and ultimately took deep root in North America”

He adds that “American leadership in reinvigorating the contemporary order is imperative.”

In a few words, Kissinger shows a depth of understanding and a grasp of the underlying currents and opportunities that are quite out of reach of today’s politicians on both sides of the Atlantic. Let us hope his words of wisdom bring them to their senses.

Here on earth, Brexit is throwing all the dice up in the air. Economists and politicians now try to push their agendas – whether (on the right) for free trade, or a return to gold, or a bonfire of “burdensome regulations” and curbs on immigration, or (on the left) more employment protection, curbing corporate power, income redistribution and other interventionist policies."

. . . . .

Leaders should use this crisis to reinvigorate the world order, as Kissinger says.

"Europe’s crisis is an opportunity for the US. It can lead in restoring such a global order. Europe cannot sort out its existential crisis except within such a truly global order.

EU leaders will never admit this if left to themselves. Yet they would eagerly seize the chance if the US held out a helping hand across the Atlantic 

In this endeavour, we need to re-establish a sound monetary order. It has been done before. It is not impossible!

The classical gold standard provided a good monetary framework for globalisation. We must learn from that, not reject it out of prejudice. But so did the dollar-based Bretton Woods system (which retained a residual gold link).

I locate the roots of our discontents in the collapse of that international monetary order, which has led since the 1970s to excessive volatility in global money and capital markets, and in exchange rates, and as the old banking order collapsed also, to falling moral standards in finance, ending in an era of gross irresponsibility in banking – a free for all that has not been brought under control by financial regulation, despite increasingly burdensome and punitive restrictions.

Post Brexit leaders seems unable to find the largeness and generosity of vision demanded by Kissinger.

People retreat to traditional Left vs Right squabbles. Yet how boring is the exchange between extreme free marketeers and the socialist rump!  It irritates me to find them all using the Brexit chaos to regress to infantile pleading for old, tired and discredited solutions.

The question is whether governments will finally under the pressure of repeated crises – not only in the EU but the US, Japan and China as well – come together and bind themselves to a system of rules and institutions, as at Bretton Woods, that would serve the long-term interests of their citizens. They  are really no more than a codified book of good international manners. But at their heart must be a return to stable exchange rates, since only with such a mechanism is it possible to monitor the way in which and extent to which an individual country is keeping its house in order or imposing costs on its neighbours.

The IMF is the natural advocate of such a system, but it has been barred by the US from advocating or even researching how such a system would work in modern conditions. The US wants to retain the appearance that is has full freedom of action. The EU also is obsessively focussed on its internal problems – Greece, Brexit, etc. The same goes for China and India. Yet all lose from such a national free-for-all."

I encourage readers to click here and read the full article here

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My added comments - Here is a bullet point list of takeaways for me from this article:

- Mr. Pringle is expressing genuine concern that the stability of the present system is increasingly at risk after many years of "excessive volatility"

- He sees it being difficult to form a consensus to solve monetary system issues and problems due to the tendency of economists and politicians (on both sides) to "push their agendas". He also laments "falling moral standards in finance, ending in an era of gross irresponsibility in banking"

- He says that he believes in "a sound monetary order" and mentions that we can learn from the classical gold standard as " a good monetary framework for globalisation". Please note that he is not calling for a return to the classical gold standard, but he is calling for "a sound monetary order" and says it can be done. He has proposed ideas for new ways to achieve this which you can review here and here and here. He has also told me by email that he could easily support the Real SDR proposal by Dr. Warren Coats if policy makers were to consider that idea. We discussed this in an earlier blog article here.

- He calls on governments to "come together and bind themselves to a system of rules and institutions" (similar to Bretton Woods) designed to serve their citizens.

- He says the IMF is the natural body to bring about such a system of rules but has been "barred by the US from advocating or even researching how such a system would work"

This article is filled with interesting information and comes from a source highly respected within the present financial and monetary system. I am particularly struck by the statement that the IMF has been barred by the US from advocating or even researching a new system for "rules of the game". I think this would surprise some who believe that plans for such a system are already agreed to and ready to implement at any time. 

My own research (examples here and here and here) indicates that Mr. Pringle is correct on this point. I find that at the present time momentum for major monetary system reforms does not exist nor has a consensus for how those reforms should look been achieved.

On the other hand, we have also pointed out that if we were to get another major financial crisis (worse than 2008) as Jim Rickards has predicted, this could change the landscape and policy makers might become more engaged in system reform.

Also, it is possible that momentum for major change might come from Russia and China in the future. Dutch author Willem Middelkoop (OMFIF Advisory Board) told me this by email:

Larry,

Brexit can be seen as part of a world wide revolt against the establishment, which gave us the British and American empire (together with a few dozen wars). 

People are 'Fed' up with elites and their game plans (EU being one of them). Desintegration of EU has started now. Had to happen anyway. But I am afraid of the other unintented consequences. 

Sure, insiders know this debt fueled growth model can't go on forever. Stating this in the past was a step out of the official 'party line'. But without anymore QE the whole system (house of cards) will simply start to collapse. 

I will be waiting for insiders to start calling for Debt Restructurings and moves towards creating much more SDR-liquity to know real changes are being prepared.

Until that point more of the same is to expected. But more QE and ever lower rates will increase the flight to gold, which could lead to a paper-gold-default (and silver) on the COMEX (Chicago) and/or LBMA (London) exchanges/systems.

On a side note; Russia and Chinese leaders met twice during last week and called (again) for an end to the current (dollar) system. From my contacts with Chinese insiders I know they really understand our problems well and are clearly preparing for The Next Phase (a monetary and geopolitical reset) 

Time has come to become very defensive now. A new worldwide financial and political crisis could just have been started. When Trump will be elected it's time for the real fire works. It will be the American equivalent of a Brexit. A huge shift from the political past.

regards,

Willem

Note: Willem gave permission to publish the quote above dated 6-26-16, bold emphasis is mine.

Willem also posted these interesting comments on his twitter feed here and here and here. I will monitor Willem's blog site to see if he provides more details on this. It could be quite significant news. The IMF just released a new report with some interesting comments on the SDR we will look at in a few days.

Update from Willem Middelkoop: Willem just posted this on his twitter feed. I will watch this to see if he follows up with more. He suggests some momentum for monetary system reform may come from China this September at the G20 meeting.

Additional update: George Soros writes this article suggesting that Brexit may lead to reforms in the EU instead of an actual Brexit. This is in line with what we reported here earlier when we said one of our most reliable sources suggested this very same idea (see here - first paragraph)

Added note: A thank you to a reader here for pointing out this article where the chief economist for Duetsche Bank calls for a new 150 Billion Euro bailout program for EU banks. It's important to keep a watchful eye on the banking situation over there.

Off Topic: Condolences to Victims of the Shootings in Dallas

No commentary here. Just sympathy and condolences for the victims and families of the tragic ambush shootings in Dallas last night and a thank you to those who risk their lives every day for others.


Added note: My daughter covered the local prayer service held at noon for the fallen for our hometown paper on their social media here and here and in this online article here.

BIS Banking Department Head Peter Zollner - The Renminbi in the SDR

Here we have a speech by the Head of the Banking Department of the Bank for International Settlements (BIS), Peter Zollner. This speech looks at the upcoming transition of the Renminbi into the SDR currency basket and also the possible future role for the Renminbi in the International Financial System. Below are some quotes from the speech and then a few added comments.

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"I will approach this talk by first outlining some basic facts about the SDR and its origins. I will then move to an analysis of the major steps in the renminbi's progress towards becoming an international currency worthy of SDR status. Finally, I will discuss what inclusion in the basket means for the renminbi as a reserve currency. Here, I will also touch on how the BIS has been preparing for this change."

1. Introduction: the SDR

"The SDR is a synthetic currency created in 1969 by the IMF. Its value was initially expressed in terms of gold, as it was conceived in a monetary system where the link between currencies and gold set limits on how far the growing demand for reserves could be met.

With the end of the Bretton Woods system in 1971, the SDR's composition changed to include the currencies of countries with the largest shares of exports of goods and services. From 1974, it comprised 16 currencies (the US dollar's weighting was 33%, a percentage already higher than the country's share of world exports), but in 1981 the synthetic currency was downsized to include just the G5 currencies, being the US dollar, Japanese yen, Deutsche mark, pound sterling and French franc. In 1999, the euro replaced the former European currencies, and the SDR became a four-currency basket."

. . . . . 

2. The renminbi's road to the SDR basket: how did we get here?

"The first aspect to consider when looking at the renminbi's path towards the SDR basket is China's extraordinary economic growth over the last 30 years.

No other country in modern history has achieved such high rates of growth for so long. From 1980 to 2010, China grew at an average rate of 10% every year. In terms of rankings, China is today the world's second largest economy (using GDP at market exchange rates), and when measured at purchasing power parity, it accounts for 17.1% of global GDP, surpassing the United States (15.8%), in 2015.3

This rapid growth was prompted by market-oriented reforms that opened the Chinese economy to the world. Two drivers are often cited as main factors behind this growth, namely exports and investment."  

. . . . . 

3. The renminbi's future role in the international financial system

"All the steps described above have helped the renminbi to establish itself as an international currency, traded both on- and offshore in increasing volumes. In 2013, the renminbi was the ninth most traded foreign currency in the world8 and by 2014, the fifth most used world payment currency in terms of volumes reported by SWIFT.

According to more recent data for offshore foreign exchange turnover in London, daily average turnover in renminbi more than doubled in the last two years (from $19 billion in April 2013 to $43 billion in April 2015).9 Data for Hong Kong also show further growth there, with a daily turnover of $93 billion up by 88% from $49 billion in April 2013.

In terms of bond and equity markets, Chinese markets have reached a considerable size. However, in terms of turnover, these markets remain behind those belonging to the other four currencies in the SDR."

. . . . .

For the renminbi to develop the status of reserve currency, much will depend on whether and how the Chinese authorities will continue to open up their markets and modernise their market infrastructure. It is reasonable to expect that the liberalisation of the last few years will continue, allowing even greater access to the renminbi both offshore and onshore. As we have seen, significant steps have been taken to remove restrictions on investing in the renminbi. On top of this, the authorities are trying to promote the use of the renminbi indirectly through initiatives aimed at supporting the SDR, including a proposal to set up an SDR-denominated bond platform.

. . . . 

"Overall, it is possible that the renminbi's inclusion in the SDR will serve to continue or accelerate initiatives to support the currency. However, doubts still remain. The renminbi is still not fully convertible for capital account transactions. How and when capital controls will be removed will test the macroeconomic resilience of the Chinese economy to uncontrolled flows of funds. Additionally, the coexistence of two exchange rates for the renminbi, one for onshore (CNY) and one for offshore (CNH) transactions, still poses potential operational issues, especially at times when the divergence between these two rates widens."   . . . .

The renminbi's arrival in the SDR basket will not mechanically drive a change in the currency allocation. Other currencies, such as the Canadian dollar and the Swiss franc, enjoy the status of reserve asset without being included in the SDR.

Moreover, even though the SDR was conceived with the idea of diversifying reserve allocations, it is still dominated by the dollar, with that currency's weight well above the weight of the others in the basket. In fact, the renminbi's share of the basket has been accommodated by a larger reduction in the weights of the euro and the pound (by 6.47 and 3.21 percentage points, respectively) while the dollar's weight remains virtually unchanged (from 41.9% to 41.73%).

The BIS and the SDR

To conclude, I would like to turn to the role of the SDR for the BIS, and the Bank's involvement in the renminbi market.

Let me begin this last part by saying that - for the BIS - the SDR has been the unit of account since 2003 when it replaced the so-called gold franc. Furthermore, official institutions are relying on us to provide banking products and services in SDR as well as in all its basket currencies.

From this, it becomes clear that the BIS is undertaking significant efforts to prepare for a smooth switch over to the new SDR basket. We have, for example, acquired direct access to the CNY FX market by installing a trading terminal a few months ago. We are updating our systems, reviewing our procedures and extending our product range.

In this endeavour, we are profiting from the continuous dialogue with our customers, from the tremendous support of the People's Bank of China, from our regional Representative Office in Hong Kong SAR, opened in 1998, and - not least - from our lengthy experience in both the onshore and in the offshore renminbi markets.

For a number of years, the BIS has been investing in the renminbi onshore and offshore markets and has provided customer services in CNH.

In 2004, we started engaging in the Chinese fixed income market as the administrator of the Asian Bond Fund 2, an investment fund launched by the EMEAP central banks which invests in the domestic currency bonds of eight Asia-Pacific markets, including China.

In 2012, the BIS acquired a quota for the onshore renminbi market and started proprietary investments in the CNY. 

Our first CNY product was a BIS Investment Fund invested in CNY government securities, which we launched in March 2014 at the specific request of a number of central banks. As of today, 23 institutions from the Americas, Asia-Pacific, Europe and Africa are invested in the fund.

Recently, we have started providing foreign exchange services in CNY, with CNY sight accounts and deposits to follow. We see the rising importance of the renminbi for reserves managers worldwide reflected in the strength of customer demand for these products - a demand that the BIS will do its utmost to meet, committed as we are to accommodating the full range of evolving central bank requirements.

Click here to read the full text of the speech

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My added comments: A couple of notes to mention. One is that Mr. Zollner confirms in this speech that China does have interest in issuing SDR denominated bonds. Secondly, he states that the BIS has been using the SDR as its unit of account since 2003 (see items I put in bold type above).

These are a couple of indicators that efforts to expand the use of the SDR do exist and will probably continue going forward. On the other hand, there is nothing in this speech that suggests we are close to the SDR replacing the US dollar as global reserve currency any time soon. Please note this section of the speech:

"Moreover, even though the SDR was conceived with the idea of diversifying reserve allocations, it is still dominated by the dollar, with that currency's weight well above the weight of the others in the basket. In fact, the renminbi's share of the basket has been accommodated by a larger reduction in the weights of the euro and the pound (by 6.47 and 3.21 percentage points, respectively) while the dollar's weight remains virtually unchanged (from 41.9% to 41.73%).

In part, this merely reflects the US dollar's bellwether role in reserves managers' portfolios since World War II. Currently, the US dollar accounts for 60% of global foreign exchange reserves and for one side of almost 90% of all FX transactions.

Globally, demand for dollars is still strong, even after the financial crisis. Indeed, demand for dollars was even stronger during those stressful times.

Among other criteria, an international reserve currency is a currency backed by a big economy with highly developed capital markets, a currency that investors can "trust", especially during periods of stress. "Trust" means that the behaviour of the forces governing the movements in that currency are mostly predictable and determined by market forces."

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Added notes: A thank you to Jim Rickards, Willem Middelkoop, Dan Popescu, Trader Stef and many others for a twitter link back to this article. Also, this article will be added to our archive page of articles on the SDR.

BIS Annual Report - Time to End the "Debt Fueled Growth Model"

In its new 2016 Annual Report, the Bank for International Settlements (BIS) has repeated warnings that it has issued before. The report says "there is an urgent need to rebalance policy in order to shift to a more robust and sustainable global expansion." The report was issued along with two new speeches by BIS Officials Claudio Borio and Jaime Caruana. 

The speeches make it clear that BIS believes there has been too much reliance on "debt fueled growth models" and monetary easing policies by Central Banks. Below are some selected quotes from the report and speeches and then a few added comments.

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Here some quotes from the overview of the Annual Report (bold emphasis is mine):

"Judged by standard benchmarks, the global economy is not doing as badly as the rhetoric sometimes suggests. Global growth continues to disappoint expectations but is in line with pre-crisis historical averages, and unemployment continues to decline. Less comforting is the longer-term context - a "risky trinity" of conditions: productivity growth that is unusually low, global debt levels that are historically high, and room for policy manoeuvre that is remarkably narrow. A key sign of these discomforting conditions is the persistence of exceptionally low interest rates, which have actually fallen further since last year.

The year under review saw the beginnings of a realignment in the forces driving global developments: partly in response to US monetary policy prospects, global liquidity conditions began to tighten and the US dollar appreciated; financial booms matured or even began to turn in some emerging market economies (EMEs); and commodity prices, especially the oil price, dropped further. However, global prices and capital flows partly reversed in the first half of this year even as underlying vulnerabilities remained.

There is an urgent need to re-balance policy in order to shift to a more robust and sustainable expansion. A key factor in the current predicament has been the inability to get to grips with hugely damaging financial booms and busts and the debt-fueled growth model that this has spawned. It is essential to relieve monetary policy, which has been overburdened for far too long. This means completing financial reforms, judiciously using the available fiscal space while ensuring long-term sustainability; and, above all, this means stepping up structural reforms. These steps should be embedded in longer-term efforts to put in place an effective macro-financial stability framework better able to address the financial cycle. A firm long-term focus is essential. We badly need policies that we will not once again regret when the future becomes today."

. . . . .

"Global growth of GDP per working age person slightly outpaced its historical average and unemployment rates generally fell in the year under review. Perceptions of economic conditions, however, were defined by further falls in commodity prices, large swings in exchange rates and lower than expected headline global growth. These developments hint at a realignment of economic and financial forces that have unfolded over many years. In EME commodity exporters, the downturn in the domestic financial cycle mostly compounded the fall in export prices and currency depreciations, with economic conditions becoming weaker. In general, tighter access to dollar borrowing amplified these developments. The anticipated rotation of growth failed to materialise, with activity in advanced economies not picking up as much as needed to offset slower EME growth, despite some upturn in domestic financial cycles in the advanced economies most affected by the Great Financial Crisis. Lower oil and other commodity prices have not yet triggered the expected fillip to growth in importers, possibly because some parts of the private sector are still nursing weak balance sheets. The scars of repeated financial booms and busts and debt accumulation also hang over global potential growth: factor misallocation appears to be holding back productivity, with debt overhang and uncertainty seemingly restraining investment."

. . . . 

Fiscal policy should be an essential part of the post-crisis macro-financial stability framework. As history shows, banking crises wreak havoc with public finances. Growing fiscal risks, in turn, weaken the financial system: directly, by undermining deposit guarantees and by weakening banks' balance sheets through losses on their public debt holdings; and indirectly, by limiting the authorities' ability to stabilise the economy through countercyclical fiscal policy. The tight two-way link between banks and public finances also creates the potential for an adverse feedback loop, in which financial and sovereign risks reinforce each other. Moving away from the present favourable treatment of domestic public debt in capital regulation to one that reflects more accurately sovereign risk is important to weaken this loop. But, by itself, it is not sufficient. Maintaining or rebuilding a sound fiscal position is key. Building sufficient buffers in a financial boom creates the room to repair balance sheets and stimulate demand if a crisis occurs. A stronger countercyclical stance may also help contain excessive growth in credit and asset prices. But the most important contribution to crisis prevention may come from removing tax provisions that unduly incentivise debt over equity, leading to too much leverage and greater financial fragility.

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Overview of the Jaime Caruana Speech:

"Drawing on the Annual Report, the speech discusses the realignment taking place in the global economy and the required rebalancing of policies. The large exchange rate and commodity price movements that had played out even before the recent market disturbances can only be fully understood by considering long-term trends in the global economy. Rising debt, lower productivity growth and diminishing room for policy manoeuvre have contributed to a build-up of vulnerabilities that give rise to three threats: macroeconomic instability; the adverse effects of persistently low interest rates; and a loss of confidence in policymaking. Countering these threats requires that prudential, fiscal and structural policies take on a more prominent role. More realism and clarity about what central banks can and cannot achieve would facilitate the rebalancing. Recent shocks make this task more complex, but also more necessary."

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Overview of Claudio Borio Speech: 

"Should monetary policy take financial stability into account? If so, what would such a policy look like? These questions have gained greater prominence recently as tensions between price and financial stability have increased, while new research has found that a leaning-against-the-wind strategy would yield little or no benefits in terms of output and inflation. Drawing on BIS research presented in the Annual Report, this presentation argues that a financial stability-oriented monetary policy can yield significant benefits. For this to be the case, such a policy would need to keep an eye on financial stability all the time, during the whole financial cycle, so that the economy never strays too far away from "financial equilibrium".


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My added comments: These speeches are obviously designed to tie in with the Annual Report issued by the BIS. My take on this is that the BIS wants to encourage central banks and governments to think in terms of moving away from the current reliance on debt growth models and extraordinary monetary policies to deal with problems over the longer term. 

The suggestions made here by the BIS are probably easier said than done. It's interesting that in the same week all this new information is released by the BIS, we get the Brexit vote which throws markets into turmoil and requires central banks to basically do things in the short term that the BIS is asking them to move away from in the long term (extraordinary monetary easing).

It's a striking reminder that at any time events can unfold (potential crisis) that force an immediate response that may not jive with longer term goals. Also, in the real world (versus the theoretical world of charts, graphs, and models, etc) governments have to deal with actual voters. If voters do not go along with attempted policies, that trumps (no pun intended) all the models and the projections of how those policies might work. No model can predict with certainty how people will react to various events and policies as we have just seen in the UK with the Brexit vote. It's a real factor that must be taken into account.



Below are a few news articles covering this new information from the BIS:

CNBC- Time to End Debt Fueled Growth Models

Bloomberg - BIS Warns of Overreacting to Brexit

Wall Street Journal - BIS Warns of Risks to Global Growth

OT: Fun July 4th Tweet

Saw this in a tweet -- seems appropriate for July 4th 

Crisis Watch - July Update - Significant Willem Middelkoop Quote

Because of the significant event that happened in June (Brexit vote) I am going to replace the usual Crisis Watch Update (here is last month) with the Brexit reaction update posted here a few days ago. Until we see what the short to medium term impact of this vote will be, we need to remain on alert. So far we have seen sharp market corrections, but no evidence of a systemic crisis. Also, I got an interesting comment by email from one of my most reliable sources (prefers to remain anonymous) that he thinks that the actual Brexit (Article 50) may not happen and that the UK may instead use the vote to pressure the EU to reform. (update note 7-3-16: leading candidate for PM says not to rush into Article 50 and Bloomberg runs this article)

Below I have pasted in the Brexit vote update along with some direct comments I received by email from Willem Middelkoop (OMFIF Advisory Board). As you can see from the comments by Willem, he believes this Brexit vote is an important event that needs to be watched closely. Please note his comments in bold below regarding what he is hearing from his contacts inside China.

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First, here are the comments Willem Middelkoop gave me by email with permission to publish here:

Larry,

Brexit can be seen as part of a world wide revolt against the establishment, which gave us the British and American empire (together with a few dozen wars). 

People are 'Fed' up with elites and their game plans (EU being one of them). Desintegration of EU has started now. Had to happen anyway. But I am afraid of the other unintented consequences. 

Sure, insiders know this debt fueled growth model can't go on forever. Stating this in the past was a step out of the official 'party line'. But without anymore QE the whole system (house of cards) will simply start to collapse. 

I will be waiting for insiders to start calling for Debt Restructurings and moves towards creating much more SDR-liquity to know real changes are being prepared.

Until that point more of the same is to expected. But more QE and ever lower rates will increase the flight to gold, which could lead to a paper-gold-default (and silver) on the COMEX (Chicago) and/or LBMA (London) exchanges/systems.

On a side note; Russia and Chinese leaders met twice during last week and called (again) for an end to the current (dollar) system. From my contacts with Chinese insiders I know they really understand our problems well and are clearly preparing for The Next Phase (a monetary and geopolitical reset) (note: bold emphasis is mine)

Time has come to become very defensive now. A new worldwide financial and political crisis could just have been started. When Trump will be elected it's time for the real fire works. It will be the American equivalent of a Brexit. A huge shift from the political past.

regards,

Willem

Added note 7-3-16: Willem Middelkoop adds this bit of intrigue on his twitter feed today (see here and here and here). I will follow this to see what further news may be published.

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Now here is the Brexit Reaction Update re-posted with a few updated links:

I think the best way I may be able to serve readers here in regards to this Brexit event is to simply list below links to articles from some of the various sources I cover on the monthly Crisis Watch update. This will give you a feel for how a variety of sources are reacting to the news and readers can form their own opinions from there. 

The only comment I would have is that this event is a clear example of why it is critical to stay alert and informed. We live in a globally interconnected financial system. There are systemic risks present in it all the time as we have thoroughly documented here from high credibility sources. It's not really fun to have to monitor this all the time, but we simply have no other choice given the world we live in today. Below are links to a variety of Brexit reactions I see out there.

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Bill Holter article on Brexit - Bill gives his take on it here on Jim Sinclair's blog site

Here is another Brexit vote discussion with Bill and Jim Sinclair

Eric Sprott Audio Interview - Brexit Impact on the Gold and Silver Market

CNBC Analyst Art Cashin Interview - Brexit an "economic earthquake"

Alasdair Macleod - The Consequences of Leaving the Party

Harold James (on Project Syndicate) - The Brexit Revolt (vote of no confidence in leaders)

Jim Rickards on Gold & Brexit (taped on BNN Thursday morning (6-23-16) during the vote) - (note: in this interview Jim laid out almost perfectly how markets would react to a Brexit vote). Here is a post Brexit review by Jim in a new interview - he says markets have repriced and now you should watch for any large failures that may surface later and that the impact from Brexit will last for awhile.

Jeffrey Gundlach (on CNBC) - "we are in a bear market in confidence"

CNBC Interview - Brexit vote puts Fed in a Difficult Position

Robert Pringle Blog - Brexit Shows Need for New Rules on Globalization (note: a thank you to Robert Pringle for a link back to this blog contained in this article). Here is a another new blog article on this by Robert Pringle.

Dr. Warren Coats Thoughts on the Brexit

CNBC Interview - Alan Greenspan - Brexit may be just tip of the iceberg (note: I saw this interview live on CNBC - Greenspan was as somber as I have ever seen him and actually said we are in the worst shape he has ever seen during his time of public service)

James Turk Interview - he talks about Brexit & banking problems in the EU including DB which just failed its stress test. He gives his thoughts on both the short term and long term
outlook for a systemic crisis.

Bloomberg article - Brexit Casts Shadow on World Move to Openness

CNBC - Larry Summers - Warns against "complacency" on market risk 

UK Telegraph - Ambrose Evans-Pritchard - The Sky Has not Fallen

David Marsh (OMFIF) - Interview on CNBC

Bo Polny - reviews Brexit and says he called the current move in gold and silver

The Street.com - Central Bank and IMF Response to Brexit - Christine Lagarde states directly here that Brexit could impact global financial system stability and urges "clarity in the negotiation process in the weeks and months ahead" indicating the impact of this vote will not be just a short term blip on the radar

Christine Lagarde (IMF) - IMF Stands Ready to moderate Brexit effects

IMF Deputy Director David Lipton on Brexit - sees need for multi lateral cooperation

Update 6-26-16: The BIS has issued its Annual Report alongside new speeches by BIS officials Claudio Borio and Jaime Caruana. They repeat earlier warnings from BIS that the system is too reliant on a debt based growth model and easy monetary policy. Despite the Brexit vote (which will make it even harder to pull back on easy monetary policies) they call for a move away from reliance on monetary policy to solve the structural problems. They also call on countries to implement reforms that would be very hard to enact politically. I will cover all this new information from BIS in a full blog article soon. 

Keys to watch for:

- price of gold - will it keep moving higher, stabilize, or pull back? - also, any signs that demand for delivery of actual gold (or silver) at exchanges like the Comex exceeds available metal for physical delivery as supplies are tight and this vote has cause a surge in demand (in other words, watch for a failure to deliver). So far gold has moved up, but does not indicate a systemic crisis is underway. (update note 7am on 7-1-16 - silver has broken out above a key resistance point at $18.50 which confirms the move up in gold, this could be a signal both gold and signal are moving into a bull market phase, just continue to watch these as important signals)

- currency exchange rate volatility - remain high or settle down? (has settled down for now)

- global stock markets - continue in a free fall or stabilize? (have stabilized for now)

- any signs that one (or more) so called "too big to fail" has had a derivatives related failure (this could take days or weeks to show up). No rerports of a large derivatives failure yet but Deutsche Bank did fail its stress test. DB is a bank to keep an eye on along with other EU banks.

- signs of central bank intervention in markets, liquidity injections, emergency meetings, etc. & public statements from IMF & BIS if any are issued (official statement issued 6-25-16) - see new information just released from the BIS. Clearly the system stands ready to intervene if need be.

Added notes: A thank you to Willem Middelkoop for a twitter mention of this article and Dan Popescu as well.

Monetary System Reform - Various Ideas Exist

This blog is dedicated to following events that might eventually lead to major change in the present global financial and monetary system. My research on this topic indicates that there is much widespread agreement that the present system is at risk from a stability and sustainability point of view. As time goes by I see more and more highly respected economists and monetary system officials (present and former) discuss the risks to the stability of the current system. Also, highly regarded fund managers and investors are speaking out.

We have documented the many warnings along these lines that have been issued by officials at the IMF and the BIS (Bank for International Settlements) over the past 2 plus years. We have discovered that many very high credibility experts including William White, Robert Pringle, Warren Coats, Mervyn King and others have concerns about stresses on the current system including stress caused by the US dollar being the world's primary reserve currency. We have long covered the forecasts by Jim Rickards and Willem Middelkoop that a reset of the present system will be needed under "new rules of the game."

All of this suggests that it is reasonable to suspect that at some point in the future the stress on the current system may lead to reforms/changes to some kind of new system. The whole point of this blog is to watch for that kind of change. 

Another interesting aspect of the research I have done on this topic is that there are a variety of ideas on how to reform the current system should that be needed in the future. Below I will do a bullet point list with examples of some of the various ideas I have seen along with links to where you can find more information if you like.

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- Dr. Warren Coats (former IMF) - Real SDR Proposal - Dr. Coats proposes that the SDR used at the IMF might be able to serve as a global reserve currency if it were issued by a Currency Board and with what he calls a "hard anchor". He proposes that a basket of goods be used for the anchor. (see the links for more information and this Q&A interview we did earlier this year with Dr. Coats)

- Robert Pringle - (former Director at The Group of 30) - Mr. Pringle has written an interesting book (The Money Trap) and has a blog also titled The Money Trap. On his blog he talks about an idea for a new global reserve currency (the IKON) based upon the work of the German economist Wolfram Engels. The IKON would be anchored to the global equities market as I understand this proposal. Mr. Pringle also has a fascinating article (read it here) comparing a variety of ideas that have been proposed for a stable monetary system well worth reading. He looks at the pros and cons of several ideas. (note: Robert Pringle advised me by email that he is more concerned that monetary policy makers realize reforms need to take place than anything else. He says he could easily support Dr. Coats SDR proposal if it would lead to some momentum towards reforms. He is concerned that right now there is not much momentum for change in Washington D.C. or in the EU. He has a new blog article out on this today)

- Yanis Varoufakis (former Greek Minister) - proposes a new global currency he calls the Kosmos. We covered his idea here earlier this year. Dr. Warren Coats offered us some comments on this idea in our blog article (click here)

- A return of gold to the monetary system - This idea takes various forms ranging from a return to an actual gold standard (where currency can be directly exchanged for a fixed amount of gold) to more modern ideas for using gold as a type of "hard anchor" in one way or another. Here is an article that provides one example of this concept by F. William Engdahl. Some holding this view see Russia and/or China being proponents of a return to gold in the monetary system (note: Hugo Salinas Price recently made this presentation in Russia at the invitation of the Russian Deputy Prime Minister) 

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My added comments: What strikes me in researching this topic is how many high credibility experts see a need to think about future changes to the present monetary system. Clearly, no one idea for reform has yet achieved a consensus of opinion. That has become clear to me from reading the comments of current officials and based on the ongoing discussion we see about various proposals with no indication that any consensus for major change exists right now. Along these lines, in a recent speech to the Bretton Woods Committee IMF Deputy Director David Lipton says:

Let me end by observing that the new normal in global economics has a parallel in global politics. Ian Bremmer of the Eurasia Group has dubbed this a “G-zero”, a world characterized by a “vacuum of global governance”.


It could be that impetus for global change may come from China and Russia. In a recent email I received from OMFIF Advisory Board member Willem Middelkoop, he told me this (and gave permission to publish):

"Russia and Chinese leaders met twice during last week and called (again) for an end to the current (dollar) system. From my contacts with Chinese insiders I know they really understand our problems well and are clearly preparing for The Next Phase (a monetary and geopolitical reset)"

All of this suggests to me that those of us who do not have a background in macro economics, monetary systems, etc. need to learn all we can. If events do some day lead to major changes, we need to understand the various proposals being suggested for reform. The goal of this blog is to provide the average person with the best information we can find from the best sources we can find on this important subject. 

We encourage readers to learn as much as possible and dig deeper into the various ideas. The more we understand, the better the chance that decisions on reform can be made that will improve the system for more people. More and more experts seem to think that will become necessary at some point even if that point in time is still unknown and no clear momentum for major change exists right now.

Added notes: A thank you to Willem Middlekoop and Dan Popescu for a re-tweet link to this article on their twitter feeds. Also, a thank you to Robert Pringle for a link back to our page here listing our articles on SDR's.