Congress Eyes Rules for the Fed - New York Sun

The New York Sun runs this article which has some interesting ideas regarding the US FED. The article notes that none of these bills are likely to pass, but they have been introduced in Congress. We'll review a couple of items in the list that would impact the monetary system if implemented.

-Free Competition in Currency Act, H.R. 77, which was introduced by a Republican of Georgia, Paul Broun, and would codify Nobel laureate Friedrich Hayek’s idea of the deantionalization of money by ending legal tender status of United States fiat scrip and open the system to privately-issued competing currencies, and end any tax arising from the spending of gold or silver;

Sound Money Promotion Act, S. 768, offered by Senator Mike Lee of Utah, would exempt from taxation any gold and silver coins declared to be legal tender by either the federal government or any state government, extending nationally the most radical monetary measure to be enacted anywhere in recent years, the Utah Sound Money Act, which makes gold and silver coins legal tender in the Beehive State and removes state taxes arising from spending them.

Sound Dollar Act, or H.R. 1174, another Brady project, which would, among other things, including on the Open Market Committee more presidents of the regional Federal Reserve Banks, get tougher with the International Monetary Fund, and focus monetary policy on price stability;

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my comments: Obviously if the US Congress passed legislation that opened up

competing currencies to the US dollar as legal tender, that would have a huge

impact on the monetary system. It should be noted that these first two bills have

very little chance of being passed and signed into law.

The last one is interesting because of this statement:

"get tougher with the International Monetary Fund"

A story we have covered all year on this blog is the failure of the IMF to get the US Congress to pass IMF reforms that would change the quota system and allocate more influence to the BRIC nations. Of course this has led to the BRIC's seemingly going their own way as we have also noted. Next week the BRIC summit will take place and a lot of eyes will be watching that.

But the point to make here is to notice that the current US Congress is just not friendly towards the IMF (note the phrase "get tougher with the IMF"). Right now polling suggests the US Congress will remain in Republican control and, if anything, is likely to be even less inclined to be supportive of the IMF. This bill likely will not pass in Congress, but it does reflect how the Republican majority probably feels about the IMF. The BRIC nations will probably keep moving away as a result since they see little hope for change anytime soon.

What we don't know is if the BRIC nations are really going to split and form their own competing system or not. Whether they are serious about replacing the US dollar based system. Right now Russia is clearly leading that charge. 

What remains to be seen is if the split is real or if the BRIC's just want to pressure the US Congress to go along with the IMF reforms. Time will probably tell. 

Voice of Russia: Ruble and Yuan to pave the way for US dollar substitution

Voice of Russia is running so many articles related to what we are covering here it is hard to keep up with them all. Here is a new one that presents the idea of a new Yuan-Ruble currency to replace the US Dollar.

Since it is obvious that open warfare has been declared on the US Dollar based system, we have to cover this story in depth. Let's try to get some perspective since we are reading articles that are from the point of view of Russia.

The Voice of Russia can be assumed to present views that are at least in line with what the Russian government would approve. So we can probably assume that what we read in Voice of Russia has been at least vetted by Russian officials. Especially if the articles relate to what amounts to an attack on the US dollar. This is intense rhetoric that could lead to further break down of US-Russian relations so I can't imagine the Russian governement would want this published unless they were OK with the content. I think it is reasonable to believe they would publicly denounce this if they were in sharp disagreement.

Now let's take a quick look at the expert cited in this new article (Peter Koenig). Mr. Koenig is a contributor to Voice of Russia and also writes for an internet site callled Global Research. Here is an example of one of his articles on that site. Below the article it provides this biographical info on Mr. Koenig. So this will give you an idea of what his views are.

"Peter Koenig is an economist and former World Bank staff. He worked extensively around the world in the fields of environment and water resources. He writes regularly for Global Research, ICH, the Voice of Russia and other internet sites. He is the author of Implosion – fiction based on facts and on 30 years of experience around the globe."


There is a lot to digest in this new Voice of Russia article, but I will focus on this new idea presented of a new combined Yuan-Ruble currency. Here is the part of the article that talks about this:

"By and large, the combination of Ruble and Yuan may soon become one currency – maybe the ‘Yuanru ’ or the ‘Ruyuan ’ – that could substitute for the dollar as a reserve currency and eventually together with other international trading currencies like the Euro, replace the dollar altogether,"he said.

"Ideally, the BRICS and BRICS-associate candidates, at least a dozen countries are on that list, would issue a common currency, based on a weighted average of their economic output, a basket of currencies, similar to the SDR – Special Drawing Rights – used among other currencies by the IMF to indebt countries with their so-called ‘rescue packages’. Greece is an example this IMF strategy, among other southern European states. Greece has become Europe’s basket case and Ukraine is on the best way to become another one very soon."


Did you catch that? A new "Yuanru"? A combined currency from Russia and China?
That seems unlikely, but it does illustrate that Russia is not alone in this battle. China is clearly behind them even though China does not prefer to make headlines.

Readers on this blog need to read this whole article because it is full of provocative statements like these. We have been following this BRIC's split with the IMF all year long and this is just another clear example of how it appears these BRIC nations are serious about leaving the existing global fianancial system and starting a new one.

As we have said before, it is impossible for us to know if this split is real or it is just an attempt by these BRIC nations to gain more leverage within the current system by threatening to leave it. But we now have serious real problems in the Ukraine that are ramping up tensions between Russia and the US (and the EU). The potential for a disruption of the current system clearly exists so we have to take it seriously and cover the story. If this conflict spreads into a major war, this will clearly have major ramifications on the global monetary system.

I don't what all this is leading up to, but we will try to follow it all here. The BRIC summit is just a few days from now and we will have a number of articles leading up to that event that cover the BRIC's and try to give readers some background on who they are and what their goals are.

So much for July being a lazy summer month (at least so far).

Voice of Russia asks: Kiev Declares War Against Russia?

Right now there are several "hot spots" around the world where military conflict is ongoing or where tensions are somewhat elevated. The Middle East, the South China Sea, and the Ukraine quickly come to mind. Later this month we will post an article which updates all these since a major military conflict that spreads can turn into something that impacts the monetary system. None of these hot spots has more potential to get serious than the Ukraine as we see in this Voice of Russia article.

The tone of this article is very serious. Below we paste in the headline summary and some key parts of the article and then add a few comments after that.

The dangerous bellicose rhetoric and saber rattling declarations by the Kiev authorities continue to reach newer and higher levels with the new minister of defense wasting no time to issue yet another wild and dangerous statement. During his confirmation hearing to the post of defense minister in front of the Ukrainian post-coup parliament Valeriy Heletey boldly declared that there would be "… a victory parade in Ukraine's Sevastopol." Such a statement for all intents and purposes might be seen as being tantamount to a declaration of war against Russia.
Read more: http://voiceofrussia.com/2014_07_06/Kiev-promises-war-on-Russian-Federation-9088/

"Given that Crimea is part of Russia, as is Sevastopol, which has a special federal status, such a statement by the leader of the armed forces of Ukraine can in no way be taken lightly. The implication that somehow the Ukrainian army will in the future be in a position to hold a victory day parade on Russian soil, something that could only take place after the military defeat of Russia, is a direct promise of war against Russia."

"Counting on the full support of their masters in the United States and NATO, Kiev continues to carry out actions that in any other context would bring about an open state of warfare between states."

"Since the armed coup in December we have seen Dmitry Yarosh, the leader of the Right Sector, seizing Russian assets and properties in Ukraine, killing and kidnapping Russian journalists and citizens, hundreds of verbal attacks by "officials" on Russia’s President Vladimir Putin and top Russian leaders, death threats against officials of all levels, sanctions applied against Russian officials and even journalists by the Kiev, ethnic Russians killed and bombed on a daily basis, attacks on an embassy with the participation of the foreign minister, military incursions into Russian territory, the bombing of Russian border checkpoints, the stealing of Russian resources including 4.5 billion dollars in gas, false flag operations staged to blame Russia, continuous wild claims against Russia by top officials... and the list goes on."

"Russia continues to attempt being patient and pursue a path of peace, diplomacy and negotiation, always taking the threat to civilians' lives into account as a matter of the highest import, but there may soon come a time when the delusional Kiev will eventually force Russia to respond with force."

"So, Ukraine is now being run by traitors, criminal oligarchs, billionaires and CIA assets and the people, who oppose them, are being eradicated and terrorized into submission. But then who else would sell their own country down the river and kill their own citizens? Who else would sign agreements, giving away the country's resources and industries? Who else would provoke Russia, stealing billions of dollars' worth Russian gas, destroying entire towns and regions? Who else would agree to place NATO elements on their land and completely give up their sovereignty for a few bucks? Who else would send all of the country’s gold to be kept in the US? Well, the current line-up, of course."

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my added comments: This article is another in a series in the Voice of Russia that sound like a nation that is preparing to fight. Note that the author sees the current government in the Ukraine as puppets to the US and the West. He includes a long list of grievances against Russia committed by the Ukraine and suggests the US and NATO share blame. There are even more serious accusations against the US and the West in the rest of the article not pasted above.

Of course this paragraph in the article jumps out at you:

"Russia continues to attempt being patient and pursue a path of peace, diplomacy and negotiation, always taking the threat to civilians' lives into account as a matter of the highest import, but there may soon come a time when the delusional Kiev will eventually force Russia to respond with force."

If this really does happen, the situation in the Ukraine could erupt into a much larger military conflict. The whole area could become even more unstable depending on the reaction by NATO. The Ukraine situation is already serious enough for the people living there. But a broad military conflict there could also start to impact the whole monetary system. Let's hope it does not come to that and that a peaceful solution can be found there for all the people living in that area.

Silver Doctors runs our article on the BIS Report Warning about Asset Bubbles

Today alternative media site Silver Doctors ran our story on the Bank for International Settlements annual report which warns of building asset bubbles. We always appreciate it when another site picks up any of our articles and try to aknowledge it with a thank you.

When another site runs one of our aticles it gives a broader audience for the information. Obviously we think the information is important so the more people who read it the better.

We have noted that this blog is free and will always remain free. In that regard we want to let other sites know that running any article we publish here is fine with us. No need to get permission if you think readers will find the information useful. That is the purpose of this blog.

We only ask that the article not be edited in such a way as to change the actual content. And that has not been a problem at all with other sites that have run our articles.

We thank them for helping us reach a broader audience!

Is the US Dollar Under Attack Now? - Part II

There is so much news coming out right now on this topic (US Dollar under attack) that I decided to make a Part II on this. It appears that the recent move by the US to levy sanctions on a French bank has added some momentum to the Russian led BRIC's campaign to attack the US dollar based monetary system. Since this is what this whole blog is devoted to, we have to cover this as fully as we can.

First let's get a little more background on the recent US sanctions against the French bank. Here is a story run by Reuters when the nearly $9 Billion fine was announced. At first glance this story seems unrelated to any BRIC effort to bypass the US dollar. 

But France's reaction to the US fine has added momentum to the "anti-dollar" alliance as the Voice of Russia called it in the article we linked in Part I below. The alternative media site Zerohedge ran this article explaining how French officials fired back at the US by talking about how this US action will cause many countries to view the US dollar as more risky to use. The Zerohedge article cites this Q&A with a Bank of France official (Noyer) in a recent interview:

"Q. Doesn't the role of the dollar as an international currency create systemic risk?

Noyer: Beyond [the BNP] case, increased legal risks from the application of U.S. rules to all dollar transactions around the world will encourage a diversification from the dollar. BNP Paribas was the occasion for many observers to remember that there has been a number of sanctions and that there would certainly be others in the future. A movement to diversify the currencies used in international trade is inevitable. Trade between Europe and China does not need to use the dollar and may be read and fully paid in euros or renminbi.Walking towards a multipolar world is the natural monetary policy, since there are several major economic and monetary powerful ensembles. China has decided to develop the renminbi as a settlement currency. The Bank of France was behind the popular ECB-PBOC swap and we have just concluded a memorandum on the creation of a system of offshore renminbi clearing in Paris. We have very strong cooperation with the PBOC in this field. But these changes take time. We must not forget that it took decades after the United States became the world's largest economy for the dollar to replace the British pound as the first international currency. But the phenomenon of U.S. rules expanding to all USD-denominated transactions around the world can have an accelerating effect.
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So we have Bank of France governor Christian Noyer saying "Trade between Europe and China does not need to use the dollar and may be read and fully paid in euros or renminbi".

Putin seized on this event to accuse the US of trying to blackmail France in this Bloomberg article. Here are some quotes from this Bloomberg article:

"President Vladimir Putin accused the U.S. of seeking to blackmail France into scrapping a contract to sell Mistral warships to Russia by offering to cut a record $8.97 billion fine against BNP Paribas SA.(BNP)

“We know about the pressure which our U.S. partners are applying on France not to supply the Mistrals to Russia,” Putin told Russian diplomats in Moscow today. “And we even know they hinted that if the French don’t deliver the Mistrals, they would quietly get rid of the sanctions against the bank, or at least minimize them,” he said without naming BNP Paribas.“What is that if not blackmail?” Putin said."
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A Russian official that was quoted in the Voice of Russia article linked in the post just below said that this US action against France was causing countries in Europe to think about bypassing the dollar more often. So it appears there is some backlash against the US on this.

Now we have this article in Reuters that came out yesterday. It quotes the the Chief Executive of oil major Total as saying "There is no reason to pay for oil in dollars". Here is the full Reuters article with some key parts in bold type:

"(Reuters) - Oil major Total's chief executive said on Saturday the euro should have a bigger role in international trade although it was not possible to do without the U.S. dollar.

Christophe de Margerie was responding to questions about calls by French policymakers to find ways at EU level to bolster the use of the euro in international business following a record U.S. fine for BNP.

"Doing without the (U.S.) dollar, that wouldn't be realistic, but it would be good if the euro was used more," he told reporters.

"There is no reason to pay for oil in dollars," he said. He said the fact that oil prices are quoted in dollars per barrel did not mean that payments actually had to be made in that currency.

French Finance Minister Michel Sapin said on Thursday that euro zone finance ministers would discuss ways of boosting use of the euro in international trade in their next monthly meeting on Monday.

"It would be a way to protect businesses when, outside of U.S. territory, they carry out transactions that are perfectly legal in the country they belong to," he said."

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That last quote from French Fiance Minister Michel Sapin is apparently in reference to French unhappiness with the US decision to hit BNP Paribas, SA. with the huge fine. It seems like the US may have crossed a line here that has at least some in Europe upset. It also appears that this could play into the hands of the BRIC nations "anti-dollar" alliance talked about in the Voice of Russia article. The Chief Executive of Total goes out of his way to question the need for using US dollars for oil trade which attacks the so called "petrodollar".
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And don't overlook China. While Russia is clearly leading this anti dollar effort, China is quietly and steadily helping out by pushing the yuan. This China Daily article is about further steps China is taking to make the yuan more convertible (and thus more able to compete with the US. Here is an interesting quote from this article: 

"The world's 2nd largest economy is seeking to increase the use of the yuan in global trade and investment to reduce China's dependence on the US dollar. 

The move is also aimed to reduce the exposure to the economic policy decisions made by global financial institutions (like the IMF), in which Washington has a big influence."

China is quietly reaching out all over Europe to expand its influence as seen in this article.

Everywhere we look we see Russia and China doing everything they can to move the world away from the US dollar based system. Russia is more openly aggressive, but China is clearly behind the Russians on this issue. All this suggests that right now the East vs. West scenario is heating up. The BRIC nations seem united at least in their desire to bypass the US dollar and to send a message that they will no longer accept a back seat at the IMF. They are working all over the globe to get allies.

Whether this is a genuine split that will leave the world permanently divided (BRICs vs. West) or just an effort to gain leverage within the existing global monetary system is unknown to us. We just know all this is very relevant news for this blog to cover and should be watched closely to see how it plays out. We'll see what happens at the upcoming BRIC's summit in mid July.

added note 3:40 pm: Relevant Bloomberg Article - France wants to Boost use of Euro

Update 7-8-14 2pm (CST): US now targeting German Banks?

Is the US Dollar Under Direct Attack Now?

In just a little over a week the BRIC summit will take place in Brazil. A couple of key topics at the summit will be the promotion of two major projects, the BRIC Development Bank and the establisment of an emergency reserve fund for the BRIC nations.  While these events are US dollar negative, we can expect not much will be said at the summit about the dollar. In fact, the talk leading into the summit is that the BRIC bank is still 1-2 years from lending money. But if you look elsewhere, a direct attack on the US Dollar appears to be underway right now. 

This Voice of Russia article is bluntly titled "BRICS Morphing into Anti-Dollar Alliance". And the article does not mince words that a direct attack is underway led by Russia with the blessing of the other BRIC nations. Here is headline summary (in bold)  and some key quotes from the article.

"Before the crucial visit to Beijing next week, the governor of the Russian Central Bank, Elvira Nabiullina met Vladimir Putin to report on the progress of the upcoming ruble-yuan swap deal with the People's Bank of China and the Kremlin used the meeting to let the world know about the technical details of its international anti-dollar alliance."

On June 10th, Sergey Glaziev, Putin's economy advisor published an article outlining the need to establish an international alliance of countries willing to get rid of the dollar in international trade and refrain from using dollars in their currency reserves. The ultimate goal would be to break the Washington's money printing machine that is feeding its military-industrial complex and giving the US ample possibilities to spread chaos across the globe, fueling the civil wars in Libya, Iraq, Syria and Ukraine.

"Glaziev's critics believe that such an alliance would be difficult to establish and that creating a non-dollar-based global financial system would be extremely challenging from a technical point of view. However, in her discussion with Vladimir Putin, the head of the Russian central bank unveiled an elegant technical solution for this problem and left a clear hint regarding the members of the anti-dollar alliance that is being created by the efforts of Moscow and Beijing:

"We've done a lot of work on the ruble-yuan swap deal in order to facilitate trade financing. I have a meeting next week in Beijing," she said casually and then dropped the bomb: "We are discussing with China and our BRICS parters the establishment of a system of multilateral swaps that will allow to transfer resources to one or another country, if needed. A part of the currency reserves can be directed to [the new system]."

"It seems that the Kremlin chose the all-in-one approach for establishing its anti-dollar alliance. Currency swaps between the BRICS central banks will facilitate trade financing while completely bypassing the dollar. At the same time, the new system will also act as a de facto replacement of the IMF, because it will allow the members of the alliance to direct resources to finance the weaker countries. As an important bonus, derived from this "quasi-IMF" system, the BRICS will use a part (most likely the "dollar part") of their currency reserves to support it, thus drastically reducing the amount of dollar-based instruments bought by some of the biggest foreign creditors of the US."

"If the current trend continues, soon the dollar will be abandoned by most of the significant global economies and it will be kicked out of the global trade finance. Washington's bullying will make even former American allies chose the anti-dollar alliance instead of the existing dollar-based monetary system. The point of no return for the dollar may be much closer than it is generally thought. In fact, the greenback may have already past its point of no return on its way to irrelevance."

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 My added comments: 

This Voice of Russia article could not be more clear. Just look at the concluding paragraph which states:

"soon the dollar will be abandoned by most of the significant global economies and it will be kicked out of the global trade finance. Washington's bullying will make even former American allies chose the anti-dollar alliance instead of the existing dollar-based monetary system. The point of no return for the dollar may be much closer than it is generally thought. In fact, the greenback may have already past its point of no return on its way to irrelevance". 

And the article even provides some details on how the attack will be carried out. Using new currency swaps between BRIC nations they will make sure the US dollar is bypassed in all trade agreements these countries have. China has been doing that already with this being the latest news on that.

But there is more. The article talks of a "de facto replacement of the IMF" by setting up development funds for weaker countries. The article says the BRIC nations will use their US dollar currency reserves for this purpose. This not only allows them to compete with the IMF in providing funds to nations in distress, they will basically be dumping their US dollar reserves in the process. The article says "drastically reducing the amount of dollar-based instruments bought by some of the bigger foreign creditors of the US" (Russia and China).

In case that language is a little confusing, let's try to translate. They appear to be saying they are going into full attack mode on the US dollar based monetary system by cutting the dollar out of world trade and using their US dollar reserves (like US bonds for example) to fund an IMF like lending facilitiy. And just to make sure they get the point across they state this means they will be "drastically reducing" any buying of US bonds. 

Since the US FED is already the biggest buyer of US bonds now and the US is going to continue having deficits, this is a clear and direct attack on the US. If the BRIC's stop buying US bonds (and even start dumping them to setup this IMF like fund), this will create enormous pressure on the US FED. If the FED keeps trying to taper (cut back buying US bonds) who will take up the slack? This could eventually force the US FED to reverse course and ramp up US bond buying again. That would likely cause the markets to selloff the US dollar in reaction for sure. 

So this is all very serious. Even as the BRIC leaders will probably attend the upcoming summit with smiles and no mention of the US dollar, it is clear that a full scale attack on the US dollar based system is now planned and in its beginning phase. This could certainly lead to major monetary system change. The Voice of Russia article issues an ominous warning at the end when it says "The point of no return for the dollar may be much closer than it is generally thought. In fact, the greenback may have already past its point of no return on its way to irrelevance". 

Of course we will take this seriously and cover it here as things unfold.

Read more: http://voiceofrussia.com/2014_07_03/BRICS-is-morphing-into-an-anti-dollar-alliance-6229/

Update 10:00 pm (CST): Reuters runs this article which suggests US-Russian relations are not very good right now. Here is a quote from near the end of the article:

"Another senior (Russian) official goaded the United States by challenging its domination of world affairs. "The hegemony of the U.S. on the world stage is over," Yevgeny Lukyanov, deputy head of the Russian Security Council comprising defence and security officials, told RIA news agency."

Update 10:50 pm (CST): More research related to this Voice of Russia article turns up this NY Times article where now we have French officials issuing threatening statements about the US dollar after the US hits a French bank with huge sanctions (an event mentioned in the Voice of Russia article). Below is a quote from this NY Times article:

"The dollar clearing at issue in the BNP Paribas (French bank) case was conducted in the United States. But, said a person with direct knowledge of the negotiations, there is concern that using dollars in international trade could ‘‘trigger risks even if you do things outside the United States, because one day the dollar you used may be seen as an opening for an extraterritorial application of U.S. legislation.’’

‘‘That means that using the dollar is now perceived as less safe than before the episode, and it will probably reinforce the willingness of many countries to trade as much as possible in other currencies,’’ the person added."

Update 7-6-14 2:20 pm (CST): there is so much news out on this topic we have started a Part II for this topic which you can read here.

Read more: http://voiceofrussia.com/2014_07_03/BRICS-is-morphing-into-an-anti-dollar-alliance-6229/
Read more: http://voiceofrussia.com/2014_07_03/BRICS-is-morphing-into-an-anti-dollar-alliance-6229/
Read more: http://voiceofrussia.com/2014_07_03/BRICS-is-morphing-into-an-anti-dollar-alliance-6229/

Happy Birthday America!

Every now and then we need to take a break from all the serious stuff. We in America have a lot to be thankful for even as there are always problems to contend with. 

Below is a performance of "Stars and Stripes Forever" done by the US Marine Corp Drum and Bugle Corp and filmed locally at the State Fair of Texas. Below that some fireworks to "God Bless the USA"

So have a Happy 4th of July and Enjoy!   We'll get back on the watch tomorrow.

Our daughter's birthday is July 2nd. She thinks it's cool the whole country celebrates it with fireworks for days afterwards  :)

BIS Issues Strong Warning on "Asset Bubbles"

Just when things seem relatively calm, the Bank for International Settlements releases its annual report that issues a strong warning that significant problems are still out there in the world. Who is the Bank for International Settlements (BIS)? What did they say in this report that matters to us? Let's take a look.

The BIS is sometimes called the "bank for Central Banks". Here is a link to the "about us" page on their web site. It lists these bullet points as its broad mission:

• promoting discussion and facilitating collaboration among central banks;
• supporting dialogue with other authorities that are responsible for promoting financial stability;
• conducting research on policy issues confronting central banks and financial supervisory authorities;
• acting as a prime counterparty for central banks in their financial transactions; and
• serving as an agent or trustee in connection with international financial operations.

What we can say is that when the BIS issues a warning, Central Banks around the world pay close attention and we should too. Remember that we are always on the lookout for events that could trigger a global financial crisis because that can quickly lead to major monetary system change. In a crisis, by definintion normal conditions do not exist. People are much more willing to accept policy changes that they might otherwise resist in normal times. 

In this BIS report, they warn about a lot of potential problems. We will use this Boston Globe article on the report to illustrate some of them and then add some comments. First, here are some exceprts from the Boston Globe article:

"An organization representing the world’s main central banks warned Sunday that dangerous new asset bubbles are forming, even before the global economy has finished recovering from the last round of financial excess."

"Investors, desperate to earn returns when official interest rates are at or near record lows, have been driving up the prices of stocks and other assets with little regard for the risks, the Bank for International Settlements in Basel, Switzerland, said in its annual report, published Sunday."

" . . .the BIS’s language in the 2014 edition was unusually direct, as was its warning that the world could be hurtling toward a new crisis."

“There is a disappointing element of déjà vu in all this,” Claudio Borio, head of the monetary and economic department at the BIS, said in an interview ahead of Sunday’s release of the report, which he described as “a call to action.”

“The signs of financial imbalances are there,” Borio said. “That’s why we are emphasizing it is important to take further action while the time is still there.”

"The BIS report said debt levels in many emerging markets, as well as in Switzerland, “are well above the threshold that indicates potential trouble.”

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my added comments:

This report certainly does not paint a picture that all is well and the future looks bright. This Boston Globe article lists a number of potential problem areas which we noted above by underlining them. New "asset bubbles" forming. It specifically mentions stock markets in this category. They see "signs of financial imbalances" and issue "a call to action" while the time is still there". They also note that debt levels are still way too high.

Notice that all these conditions are the same as what led up to the financial crisis in 2008. In that crisis Central Banks (led by the US FED) created enormous sums of new currency to stave off a collapse of the entire system. Unfortunately, what the BIS is saying is that the problems that can lead to systemic crisis were not solved. They were merely postponed.

This is why we must keep alert all the time. Even though things appear calm on the surface right now. Taking the US as an example. We have piled up a whopping $151,000 per taxpayer national debt as shown in the linked national debt clock. Even more troubling, if you add in the future obligations for US taxpayers (future Social Security, Medical expense care, etc) the debt swells to a mind boggling number over $1 million per taxpayer. This debt exceeds the entire total of all "assets per taxpayer". Let that sink in. You could tax every taxpayer in the US everything they own and it is not enough to cover the future debt obligations that exist today. This is why everyone admits the present system is unsustainable.

Remember that last time (2008) the FED and Central Banks stepped in to stave off collapse. If a new crisis arises (what the BIS is directly warning about in their annual report) the FED can't do this again. The FED now has a huge $4 Trillion balance sheet from buying assets (and a load of US bonds) already. A new global crisis would easily dwarf what the FED had to do last time because the problems were not solved as the BIS notes. All the numbers are just bigger now. "Asset Bubbles" are still being built according to the BIS.

The FED is also now in a "Catch 22" situation. They want to be able to raise interest rates to convince markets the economy is recovering. But they really cannot do that. If interest rates rise very much the huge US bond portfolio now owned by the FED will take a huge loss in value. Also, the interest on the huge existing US debt will start going up even more making it harder and harder for the US to reduce the annual deficit. All of this has already caused the US dollar to take a beating. If the FED tries another round of massive QE in another huge crisis, we can expect the US dollar to take another huge hit. And it could all happen fairly quickly if it triggered even as things appear calm. Right now it is just happening at a steady controlled pace.

This whole problem is a main reason for this blog. We believe that the present (US dollar based) system is too unstable to be sustained. At some point it will have to end and be replaced with new "rules of the game". In that process, we can expect the US dollar will not fare well as sole global reserve currency. 

Because we live in a globally interconnected financial world filled with leverage and  derivatives, a crisis that starts anywhere can spread to one everywhere (this is called contagion). It is an ever present concern for Central Banks and other global financial institutions like the BIS. This 2014 annual report from the BIS proves that clearly.

We are trying to follow all of this and also a variety of ways the change we think is coming could take place. We have mentioned several here including:

-slow and steady change where the IMF moves into a greater role and the SDR replaces the US dollar as global reserve currency (with a possible new twist that creates an "everymans SDR") . Change over time in "non crisis" conditions. (in progress but somewhat stalled at the IMF)

-rapid change as a result of a new crisis where the IMF quickly steps in as "lender of last resort" and replaces the US dollar with the SDR as above, just in a much quicker time frame (Jim Rickards forecasts this)

-slow and steady change that takes place on a regional basis where solutions to problems are tested regionally and the best solutions are adopted globally eventually (happening right now)

-change where the BRIC nations drop out of the existing global financial institutions and form their own system  and promote their currencies globally  to compete with the US dollar (happening right now) 

-chaotic rapid change from a crisis where no central problem solving entity arises. Instead the world becomes more de centralized with nations and regions taking over to address problems. the current system collapses and existing global institutions are unable to restore order and confidence (in a world like this, Bitcoin probably thrives)

The future is impossible to predict. But we can take the BIS warning seriously and try to stay informed on this important topic. Major monetary system change is something most don't really think about, but they should because it would directly impact their lives. And we do notice that more and more people are starting to understand the importance and become informed which we think is a good thing. We also know that there are good people working on these problems which is another good thing.

Update 7-5-14 11:05 pm: Bloomberg runs this article saying Central Bankers are pushing back against the BIS warning about asset bubbles. The article quotes FED Chairwoman Yellen and ECB President Draghi now is not the time to raise interest rates. This is not surprising given the "Catch 22" situation we noted above where these Central Banks just cannot allow interest rates to rise very much. The last part of this Bloomberg article makes this observation:

"It’s not the first time staff at the Basel, Switzerland-based BIS, which is owned by central banks and serves as a counterparty for them, has broken with their bosses. In 2003, BIS economists Claudio Borio and William R. White warned policy makers might need to raise rates to combat asset-price bubbles.

That advice was rejected too."

Update 7-7-14 3pm (CST): Silver Doctors picked up this blog article to run on their site.

We always appreciate it when another site picks up our blog articles. It provides a broader audience for the information. We have let other sites know that our articles are available free at anytime if they think their readers will find them useful.

Added note 8-6-15: A full list of systemic risk warnings can be found on this blog page 

Article links sent in by our Readers

We have a diverse audience of readers here that have interest in our topic of monetary system change. They send links to articles they feel like are relevant and people might want to read. I am devoting this post to providing the links they sent me for anyone interested. 

The first link was sent to us from reader McBryde and can be found in the comment section of this recent post. This article contains a link to an IMF work paper on dealing with sovereign debt that I will probably make a post on sometime in the future. How the IMF might deal with a debt crisis is certainly relevant to our topic here. Here is the direct link to that working paper.

Another article link was sent in by a reader who prefers to remain anonymous. It is about a recently passed new law that makes it legal to pay with Bitcoin in the state of California. We have not mentioned Bitcoin a lot lately, but it is still popular with many people and is part of the new technologies that could bring change.

We want to again thank all our readers for coming to this blog and also sharing articles and opinions they feel are important. I try to keep my own opinions to a minimum, but I don't mind posting a strong opinion article so long as the author backs up his opinion with factual data (offers source documents) to support his or her view.

Please keep in mind that posting an article does not mean we agree or disagree with the content or the author's opinion. That is for our readers to decide for themselves. Our goal is to provide useful information and offer a forum where a wide variety of views can be presented for readers to consider. 

Added note: Sometimes we get emails from sources who have valuable information but prefer to be anonymous for good reasons. We don't publish quotes if the source prefers it to stay out of the public domain. That is only proper and courteous.

But we do attempt to use good source information we get in developing some of the content of the posts we make with the permission of the source.  The idea is to help spread accurate and hopefully useful information to readers as best we can. 

Jim Rickards in Depth on the IMF and the SDR

In this interview Jim Rickards goes into a lot of detail about what he sees as the future role of the IMF as a global central bank. He covers a lot of ground and readers should find this interview interesting. Below we post the summary introduction for the interview and a couple of excerpts. We encourage readers to read this whole interview. After that we add some comments below.

May 29, 2014 Interview with Jim Rickards on ratio of paper money to physical gold, a monetary reference back to gold to restore confidence, a $7000-$9000 gold price, the debate over gold manipulation, hedge fund stops create cascades in the gold price, the $400B Russo-China energy deal and what it means for shifting geo-politics, the IMF “Central bank to the world” and how it operates, the next liquidity crisis, the final backstop for money after the IMF, the function of the BIS, and gold/GDP ratios.


"But then a funny thing happened on the way to abolishing the IMF. We had the global financial crisis in 2008, and all of a sudden, the IMF was back in the game. It became the de facto secretariat of the G20. I think of the G20 as the board of directors and the IMF as an agency that implements the will of the board of directors. Now, the IMF has its own board of directors, but interestingly, if you look at that membership, there’s a lot of overlap. The G20 countries and the 24 members of the IMF executive committee are, by and large, the same. The G20 was a group of heads of state that didn’t have a staff while the IMF was a ready-made staff, so ever since then (2008), the G20 summits and the IMF technical abilities, staff and analysts and, most importantly, lending facilities have worked hand in glove to deal with global financial crisis."

" The IMF doesn’t have a teller window where you can make a deposit, but it does borrow money. It issues notes. Interestingly, these notes are not denominated in dollars. They’re denominated in SDRs (Special Drawing Rights). So all of a sudden the IMF has one other feature that makes it really identical to not just a bank but a central bank, which is the ability to issue money. Of course, the Federal Reserve is a printing press; they print dollars. The European Central Bank is a printing press; they print euros. Well, the IMF is also a printing press. They can print these Special Drawing Rights or SDRs."

"So when you look at the IMF, you so see they have a leveraged balance sheet, they have assets and liabilities, and they can print money. That’s a central bank in all but name."

"It’s not called the central bank of the world, but it is the central bank of the world for the reasons I just described. The SDR, the special drawing right, is not called world money, but it is world money. If you started saying things like, ‘The central bank of the world just issued some world money,’ that would sound pretty scary to people, but if I say ‘The IMF just issued some SDRs,’ no one knows what the heck I’m talking about."

JW: Let’s talk about SDRs for a moment, because it is a bit of a mystery. The name is confusing. You and I can’t go to an ATM and withdraw a fistful of SDRs, and yet SDRs, as I understand your definition of money, fulfill that definition. It seems that they may play an increasingly important role as the dollar likely declines in its power in the world. Would you explain a little bit more about what an SDR really is and what role it’s playing and is likely to play in the world?

JRickards: Sure. There are three parts of a classic definition of money. When you ask ‘What is money?’ you can debate that all day long, but typically, people say it’s a medium of exchange, a store of value, and a unit of account. If all three of those criteria are met, then you arguably have money. Let’s just look at the SDR over that scorecard. We’ll start with the last one I mentioned, the unit of account. Well, it is a unit of account, because the IMF keeps their books in SDRs. If you go to the IMF website and click to find their financial statements, it’s in SDRs. When they borrow money and give you a note, what is the note denominated in? It’s denominated in SDRs. The U.S. Treasury has a standby commitment already in place that was slipped into some legislation in 2009 by Barney Frank wherein the U.S. has given the IMF a $100 billion line of credit. It’s like walking around with a credit card that you haven’t used where the line of credit is good. The IMF can, at almost any time, put in a borrowing notice and get that $100 billion from the United States. I say dollars, but in fact, it’s a dollar equivalent. If the IMF wanted the money, they would hand the U.S. Treasury a note denominated in SDRs. We would no longer have a dollar asset on the books of the Treasury. We would have an SDR asset, so it is a unit of account.

As far as the store of value is concerned, these are counted in the official reserve positions of countries around the world. Go to the website of the central bank of Russia, the People’s Bank of China or the United States, for that matter. You’ll find a certain amount of SDRs, and those are counted as money good or value, if you will, by those various countries.

The last one is a medium of exchange. Again, you can pay for things in SDRs. Now, individuals cannot, you’re right. You and I can’t get them at the ATM to pay for dinner or take a taxicab, but countries can use them between each other, and that’s the part that makes it a little more difficult to understand. In settling a balance of payments between two countries, SDRs can be used.

There’s actually a trading desk inside the IMF that has an SDR swap desk. I’ll give you a very simple example of how that works. I mentioned that in 2009 the IMF issued a bunch of SDRs. The way they issue them is in accordance with a quota. Remember, a quota is your share. If I have a 5% quota at the IMF and the IMF is issuing 100 billion SDRs, then I’m going to get five billion SDRs because that’s my 5%. A lot of countries got quotas and they didn’t need the SDRs. Let’s take Hungary as an example. Going back to the early 2000s, Hungarian banks and Hungarian customers were offered mortgages in two currencies. They could take it in local currency which is the forint or they could take them in Swiss francs because the European banks are very active in Hungary. Swiss franc mortgages were 2% and forint mortgages were about 9%, so most of the borrowers took Swiss franc mortgages at 2% assuming the exchange rate would be fixed, but it wasn’t. The forint collapsed, and all of a sudden the mortgage debt increased dramatically because the exchange rate changed and they were a lot of defaults there.

If you’re Hungary and the IMF hands you some SDRs, you say, ‘I don’t need SDRs; I need Swiss francs, because I have to pay these Swiss and Austrian intermediary banks back.’ If you call the IMF desk and say, ‘Give me dollars,’ the IMF will call a place like China and say, ‘Do you have a bid for SDRs?’ China says, ‘Yes, we do.’ China will send dollars, get SDRs in return, Hungary will get the dollar, sell them spot by Swiss francs and pay back the Swiss bank. That’s the way to turn your SDRs into something else if you need them. That’s the medium of exchange. So in all three counts – unit of account, store of value, medium of exchange – the SDR does qualify as money.

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Additional comments: The SDR is an internal unit of account that cannot be used by private banks and citizens. The IMF has published papers that talk about how this is a limiting factor for using the SDR as a global reserve currency for everyone (see pps 20-28 "Supranational Reserve Assets"). 

However, I will ask you to think outside the box on this problem. Imagine if the IMF decided to link its internal currency (ultimately backed by its gold reserves) to an "external" currency that everyone could use. 

Earlier this year we wrote this article about a 1988 article in The Economist which talked about a theoretical currency like this (that everyone could use). They called it "the phoenix" in that 1988 article. Take a look at that article and then think about the GSD (Global Stability Dollar) that Klickex is working on. 

It does not take a leap of imagination to see how the GSD might become the external link for the IMF to its internal SDR. Something to keep in mind for the future if major monetary system change does happen and the IMF takes on the central role in it.

We encourage readers to study this Jim Rickards interview and then think about this reserve currency concept for the future. This is an article we hope you will also encourage your friends to read and think about.