Excellent Discussion on Silver

The topic of gold and silver often leads to somewhat emotional reactions from those who follow it. The debate often seems to focus on whether or gold and silver are "money" or whether they should be "money" once again. 

These days I feel like that discussion is a bit off base because neither gold or silver are currently used like money for daily medium of exchange and the US removed silver from the monetary system completely in 1965 (except for the last 40% silver based Kennedy half dollars produced until 1970).

There is no indication at all that there is any official movement towards going back to using gold and silver in the official monetary system like they were in the past. Of course anyone can speculate what might happen if the present monetary system were to fail (which we watch for here), but no one can really know what might emerge in that situation. 

Given the above, when I do find an excellent discussion on precious metals (in this case silver) that I think readers might benefit from, I am happy to post it here. There is a lot of good discussion on silver in this recent debate/discussion and for those who are younger there is some worthwhile history presented during the discussion. Below is the interview and then a few added comments.

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My added comments: This discussion was interesting for me because I watch the precious metals space as part of the overall monitoring for possible monetary system change. Without question, precious metals (especially gold) can act as a kind of alternative currency whenever confidence in the stability of the present system wanes. And both gold and silver have a long history of being used as money. 

In this digital era, the current younger generation coming up is not familiar with history or the concept of precious metals as money to any significant degree. It is obvious that the rise of cryptocurrencies has been, at least in part, due to an effort to convince a generation raised on cell phones that this "new concept of money" is the wave of the future. 

However, as we have noted here, that is still very much an open question. My take on this is that we have an older (baby boomer) population that still values precious metals and can remember when they functioned in daily use as money alongside younger generations that are more inclined to think of cryptocurrencies as some kind of "new technology money" and don't have much interest in precious metals.

Within this dynamic, we are now seeing efforts to try and marry the two eras by making historic forms of money (gold and silver) function more like digital money. Obviously, the goal is to try and attract users from both eras of time. In addition, I suspect the hope is that younger users will be attracted by the technology aspect and in the process learn something about the history of precious metals as forms of money.

We are kind of in the middle of all this transition and it is hard to tell what will emerge in the future. This is why we try to monitor what official institutions are doing (central banks, IMF, etc) as well as private ventures trying to create viable alternative monetary systems. Here we are talking about ventures like Goldmoney, OneGold, Glint, and the more comprehensive Kinesis alternative monetary system proposal set to launch in May 2019.

Here are the variables I can think of to follow in the months and years ahead:

1- Will the present monetary system remain stable and change gradually?

2- Will a massive new crisis collapse the present monetary system opening the door for more rapid and radical change?

3- Under #1 above, what alternatives to the official monetary system are most likely to gain some market share traction over time?

4- Under #2 above, who will the public blame for any crisis that collapses the present system?

5 - Based on the response of the public in #4 above, what is most likely to replace the present system? 

a) a new global monetary system using a new global reserve currency (perhaps the SDR) administered by the IMF?

b) national or regional monetary systems run either by existing reformed central banks or new similar entities?

c) a private initiative alternative monetary system that capitalizes successfully on the collapse of the present system?

d) Other? You can go all the way down to some kind of barter system here if things got really bad (think of some kind of disaster that wiped out the electric grid like an EMP etc)

Having followed this in much detail now for a decade and having gotten excellent input from some leading experts in the world on this whole topic, I still cannot predict the future and don't even try. 

What I can report is that at the present time the evidence suggests that the present system will change gradually over time unless some kind of major new crisis forces things to change more rapidly. 

In that event, who the public blames for the crisis is likely to determine what the new system looks like and who is trusted to administer it. In a complex system (such as Jim Rickards suggests we have), I don't believe anyone can know what the outcome would be under crisis conditions leading to a new monetary system. We will just follow it and see what actually happens. For now, the pace of change is slow even as all kinds of new technology is being market tested. 

News Notes: New Fed Nominee? Problems at a Crypto Exchange

Below are some links to a couple of news articles that may be of interest appearing recently. One is on some news about a major problem for a cryptocurrency exchange where the owner apparently died taking the passwords for access to all the funds in they system with him. 

The other article says that President Trump may soon fill a vacant slot at the Federal Reserve and suggests Dr. Judy Shelton could be one of the candidates under consideration.

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Coindesk - Government Death Certificate Says Exchange CEO Died in India


"An Indian government-issued death certificate obtained by CoinDesk corroborates QuadrigaCX’s account of the passing of CEO Gerald Cotten in early December.

Cotten’s death is at the center of the turmoil surrounding the Canada-based crypto exchange, which went offline last week owing $190 million to its thousands of customers and is now seeking creditor protection in a Novia Scotia court." . . .

Click here for full article

Added note on this story - Jim Rickards raises a question that many seem to be asking about this story:

https://twitter.com/JamesGRickards/status/1092837895646384128

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NY Sun - Trump's Ideal Nominee for the Fed

"It looks like this could be the moment at which President Trump makes his move in respect of the Federal Reserve. We say that because the chatter we hear is that he’s considering nominating to its board of governors the economist Judy Shelton. The Sun endorses her heartily." . . .

Click here for full article

Dr. Shelton notes the article on her Twitter feed and says she is honored to be mentioned:

https://twitter.com/judyshel/status/1092511708369899520

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A few added comments: Regarding the article on Dr. Judy Shelton, I can add that Dr. Shelton kindly did a short Q&A interview for us here some time back that you can read here. I can also add that I do hear from a number of outstanding experts from time to time that help me out here and some of them know Dr. Shelton. All of them have had nothing but kind things to say about her. She did these two interviews recently on CNBC as well:

CNBC Interview with Rick Santelli

CNBC Interview along with Jim Grant

Regarding the cryptocurreny news - It's really been a tough year for the cryptocurrency space after flying high for awhile. Where it goes in the future is still an unknown, but I would think stories like this will not help inspire more confidence. It looks like the Kinesis project we have mentioned on here is hoping to follow behind these early crypto projects and market their product as a more "stablecoin" since it is anchored by actual physical gold and silver and does not rely on the "technology" alone to provide a store of value.

Also, after a lot of initial "buzz" about central banks adopting either some kind of cryptocurrency or the blockchain technology, momentum for that seems to have dropped off for now as we have reported here for some time. There are still many doubts about whether this has a future or not and certainly does not appear to anytime soon right now. Articles I see are much like this one:

Cointelegraph - Survey Reveals Chinese Divided on Future of Blockchain, Crypto

"China’s economics experts fail to agree on the future of blockchain and digital currency, according to a survey from internet giant Tencent, cited by local news outlet Jiemian Feb. 1."

Over and over I see this same message from central banks. They seem far from moving towards any kind of implementation of either blockchain technology or even towards a central bank digital currency for a host of reasons and issues. 

All this just confirms the information we received here from an expert in this field some time ago that has proven to be very accurate over time and is why we have reported what we have on this topic. No central bank or an institution like the IMF can move forward on something like this unless they are sure they have the functioning technology that is real world tested well ahead of time. There is nothing I have seen or know of that indicates this is the case at this time. The closest thing I know of to a real world tested system using blockchain (potentially usable by central banks) for cross border payments and also currency conversion is the one operated by KlickEx in the South Pacific (KlickEx CEO Robert Bell did this interview with us here awhile back)

I am thankful to the experts who have helped me out here repeatedly and have allowed me to be able to report very accurately on these kinds of issues early on despite an enormous amount of news articles seeming to suggest major change was just around the corner. If we do hear of something that would qualify as major change (or even just realistic potential major change), we will certainly report it here for readers.

The Strange Case of The Venezuelan Gold

Venezuela is making a lot of news lately and of course has been going through a lot of unrest and turmoil for some time. Now nations are lining up for and against support for the existing leader with the US now recognizing a new leadership.

Meanwhile, a string of odd articles has popped up lately related to what is going on with some gold owned by Venezuela. I am not really sure what is happening, but clearly their gold is important to a lot of powerful interests. Below are links to just some of the articles that may be of interest on the subject.

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RT - Refusal to hand over Venezuelan gold means end of Britain as a fianancial center

"The freezing of Venezuelan gold by the Bank of England is a signal to all countries out of step with US interests to withdraw their money, according to economist and co-founder of Democracy at Work, Professor Richard Wolff. He told RT America that Britain and its central bank have shown themselves to be “under the thumb of the United States.”  . . .   click here for full article


Reuters - Don't Deal in Venezuelan Gold White House Says

"The White House warned traders on Wednesday not to deal in Venezuelan gold or oil following its imposition of stiff sanctions aimed at forcing socialist President Nicolas Maduro from power." . . .  click here for full article



Bloomberg - In Maduro's Venezuela, Even Counting Gold Bars is a Challenge

"Venezuela is home to rich gold deposits and holds billions of dollars of foreign reserves in gold bars in the central bank’s vaults. The question is, how much is there?" . . .   click here for full article


Reuters - Venezuela Plans to Fly Central Bank gold reserves to UAE

"Venezuela will sell 15 tonnes of gold from central bank vaults to the United Arab Emirates in coming days in return for euros in cash, a senior official with knowledge of the plan said, as the crisis-stricken country seeks to stay solvent." . . .  click here for full article



Bloomberg - Maduro's 20 Ton pile of gold is stuck in Limbo

"With 20 tons of gold stacked up for loading and shipping out of Venezuelan vaults, the mystery surrounding them -- and the saber-rattling they’re sparking -- is intensifying." . . . 
click here for full article



Bloomberg - Maduro's Bid to Fly Gold out of Venezuela is Blocked

"The embattled Nicolas Maduro regime halted plans to ship 20 tons of Venezuelan gold overseas as a growing international push to ring-fence the country’s dwindling hard assets unnerved those handling the transaction, according to a person with direct knowledge of the matter." . . . .  click here for full article

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My added comments: With the world becoming potentially more volatile (sanctions, trade wars, central bank tightening, ramped up political division, etc), it appears that gold once again is gaining some favor as insurance around the world, and not just with individuals. This CNBC news article confirms that central banks are buying gold at the highest level in a half century. Russia and China have been doing that for some time. Looking for ways to get around the US dollar and US sanctions undoubtedly are contributing to this trend.  

Today I listened in on a new webinar update from Kinesis which still plans to launch its gold and silver backed currency in May 2019. There are more and more new ways being made available to people to buy and sell gold and silver more easily over the internet in real time. Goldmoney and OneGold are other examples already live now. This will be something to keep an eye on in 2019-2020 -- to see if gold and silver start a new up leg and to understand why they are doing so if that does happen. 

Some News Notes from the IMF, The Fed, Etc

Below are links to some recent news that may be of interest related to various things that can impact the financial and monetary system. Overall, the consensus seems to be that the global economy is starting to slow down and central banks may be preparing to try and adjust to that situation once again.
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The Telegraph UK: IMF fears political rage will block Federal Reserve's rescue efforts when the next crisis hits

"The International Monetary Fund has warned the system of global cooperation that saved world finance in the 2008 crisis may break down if there is another major shock or a deep recession.

David Lipton, the IMF’s second-highest official, said it is unclear whether the US Federal Reserve would again be able to extend $1 trillion of dollar "swap lines" to fellow central banks - the critical measure that halted a dangerous chain-reaction after the collapse of Lehman Brothers and AIG.   . . . "

Wall Street Journal: Fed Officials Weigh Earlier-Than-Expected End to Bond Portfolio Runoff

"Federal Reserve officials are close to deciding they will maintain a larger portfolio of Treasury securities than they'd expected when they began shrinking those holdings two years ago, putting an end to the central bank's portfolio wind-down closer into sight.

Officials are still resolving details of their strategy and how to communicate it to the public, according to their recent public comments and interviews. With interest rate increases on hold for now, planning for the bond portfolio could take center stage at a two-day policy meeting of the central bank's Federal Open Market Committee next week.   ..."

RT (Russia Today): Let's Replace US dollar with Russian gold, Moscow Exchange chief suggests

“Let’s offer an alternative to the US dollar in the form of Russian gold, which we produce… investment gold,” CEO Alexander Afanasiev suggested, speaking in the Lower House of Russia’s parliament on Monday.   . . ."


IMF Blog: A Weakening Global Expansion Amid Growing Risks

"While global growth in 2018 remained close to postcrisis highs, the global expansion is weakening and at a rate that is somewhat faster than expected. This update of the World Economic Outlook (WEO) projects global growth at 3.5 percent in 2019 and 3.6 percent in 2020, 0.2 and 0.1 percentage point below last October’s projections.  . . ."

Bank for Internaional Settlements (BIS): Risk Exposure at the lender/investor of last resort

"We address to what extent a central bank can de-risk its balance sheet through unconventional monetary policy operations. To that end, we propose a novel risk measurement framework to empirically study the time variation in central bank portfolio credit risks associated with such operations.  . . ."
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Added note: Here is a link to an alternative media take on the situation that argues that the Federal Reserve may be leading the US back into a new recession with its QT policy. It is a pretty in depth look at that point of view for anyone interested:

The Great Recession Blog: How the Federal Reserve's Unwind is Unwinding the Recovery

"The Fed is also tightening as global trade is tightening and as tariffs are going up, making things more expensive to consumers. It’s also doing something that makes a lot of people feel unsettled, rather than something that makes them feel happier. No one is likely to enjoy unwinding as much as they enjoyed economic stimulus. The Fed is unwinding in an unforgiving environment that might be more reactive to withdrawal than a stifled economy is to stimulus."

Claudio Borio (BIS) - On Money, Debt, Trust, and Central Banking

Following his recent speech which we noted here, Claudio Borio of the Bank for International Settlements releases this new working paper. The conclusion section of this new paper (shown just below) sounds very much like the conclusion of his recent speech. (I added the underlines for emphasis)

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Conclusion

"Let me conclude. The monetary system is the cornerstone of an economy. Not an outer facade, but its very foundation. The system hinges on trust. It cannot survive without it, just as we cannot survive without the oxygen we breathe. Building trust to ensure the system functions well is a daunting challenge. It requires sound and robust institutions. Lasting price and financial stability are the ultimate prize. The two concepts are inextricably linked, but because the underlying processes differ, in practice price and financial stability have often been more like uncomfortable bedfellows than perfect partners. The history of our monetary system is the history of the quest for that elusive prize. It is a journey with an uncertain destination. It takes time to gain trust, but a mere instant to lose it. The present system has central banks and a regulatory/supervisory apparatus at its core. It is by no means perfect. It can and must be improved. But cryptocurrencies, with their promise of fully decentralised trust, are not the answer. 

Paraphrasing Churchill’s famous line about democracy, “the current monetary system is the worst, except for all those others that have been tried from time to time”.

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My added comments: These remarks illustrate the very cautious nature of central bankers and why change tends to take place very gradually over time. Unless there is some external force that creates the incentive for a rapid response by central banks, they tend to stick with the status quo with occasional tweaks to the system.

So, are there any challengers to the existing system that might emerge to offer an alternative? Right now, the answer would seem to be no. So long as the overall global financial system is perceived as being orderly and reasonably stable, the overwhelming majority of the general public is not actively looking for alternatives. We see some offered in the cryptocurrency venue, but with nowhere near widespread public adoption.We see some new and creative ideas emerging (like SAGA and Kinesis that we have noted here) but those are still in their infancy.

The big question will arise if and when we get a new global financial crisis so large that the stability of the present system is truly shaken. In that event, the public will be awakened. Two major factors will be important in such a crisis scenario:

1) Who does the public blame for the crisis disrupting their daily lives?

2) If the public blames the existing power structure (the central banks and the associated regulatory apparatus mentioned in the paper above), will the public then seek out radical new alternatives?

If we live in a complex system as Jim Rickards describes, the answers to the above two questions seem unknown. But one thing that we can observe is that absent a major crisis, the status quo tends to prevail and radical changes don't seem likely.

 

The Case for The Fed and Central Banks Creating Market Bubbles

There has been much ongoing debate over the past 10 years about whether or not central bank monetary policies (led by the US Fed) have really solved problems in the long term or not. Most everyone agrees that without the central bank intervention that took place, the world was probably facing some very hard times and even a deep depression.

The debate that has endured is about whether or not the policies used to stave off a potential deep depression and even possible collapse of the entire system have really solved anything going forward from here. The question hanging over markets all these years since the QE and low interest rate policies were implemented is: What happens when the monetary stimulus ends?

This is still hotly debated and we are all still watching closely to see how that question will be answered. In this recent article on MarketWatch, Sven Henrich lays out his case for the argument that all the central bank stimulus has just propped up markets and created the false impression of growth rather than real GDP growth. Now that world markets are showing signs of fatigue, this argument will likely pick up momentum if things keep going south during 2019. Below are a few excerpts from the article.

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"For years critics of U.S. central-bank policy have been dismissed as Negative Nellies, but the ugly truth is staring us in the face: Stock-market advances remain a game of artificial liquidity and central-bank jawboning, not organic growth. And now the jig is up.

As I’ve been saying for a long time: There is zero evidence that markets can make or sustain new highs without some sort of intervention on the side of central banks. None. Zero. Zilch.

And don’t think this is hyperbole on my part. I will, of course, present evidence.

. . . . .

Click here to read the full article on MarketWatch

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My added comments: It is important to watch this situation closely because markets have moved into bear market status recently. If this trend continues and we start to see signs of more severe problems in both markets and the actual main street economy as well, the huge blame game is likely to ramp up and who the public blames for the problem will be very important in terms of how the problem is addressed. Of course there will be huge political ramifications as to who is blamed as well.

If all we are seeing is normal market corrections off of all time highs, perhaps this issue goes away at least for awhile longer. But if the storm gets worse, we must pay close attention to it. 

News Note: Newmont Mining Buys Goldcorp

Today we get this news on CNBC that major gold miner Newmont will be buying out Goldcorp creating "the world's biggest gold producer by output". Below are a couple of excerpts and then some added comments.

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"Newmont Mining said on Monday that it would buy smaller rival Goldcorp in a deal valued at $10 billion, creating the world’s biggest gold producer by output.

The deal is the second high-profile merger in the mining industry since Barrick Gold agreed to buy Randgold Resources Ltd in September last year to cut costs."

. . . . . .

  Click here to read the full article on CNBC

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My added comment: Having worked in the oil and gas industry for many years at a company that buys oil and gas reserves from other companies, I can observe that these large mergers/buyouts in the gold industry suggest that the executives for those companies think that gold is near a bottom for it's price cycle and likely to start into a longer term move higher (start a new upleg cycle). If you believe that, you would be very aggressive in trying to buy up as many reserves as possible before prices go somewhat higher. So I would tend to interpret this news in that way.

BIS Survey on Central Bank Digital Currencies

One area of potential change for the existing monetary system relates to the possibility of central banks moving towards the creation of so called central bank digital currencies (CBDC's) for their national currencies. We have watched this space because if central banks were to move in that direction it might indicate that a new global digital currency using the SDR at the IMF could arise as competition for the US dollar. The SDR is a logical choice for such a currency since it already is sanctioned for use globally by IMF member nations.

In addition to the above, there have been a lot of articles in various media written suggesting that a new digital global currency based on the SDR is near at hand from the IMF. We have worked hard here to follow that story as best we can. We have reported that although the IMF has talked about and studied this idea, we find no evidence that something like this is near at hand. Also, very credible sources have told us that while all kinds of studies about the potential use of a blockchain based global currency have been done, there is no movement so far towards this by the major central banks or the IMF at this time. 

Now we have direct confirmation of what we have been reporting here from a new survey done by the Bank for International Settlements. The survey clearly shows that what we have reported here has been accurate and that our sources were well informed on the current status of this issue. Below I have pasted in the Conclusion section of the BIS survey article followed by a few comments. (I added the underlines below for emphasis)

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Conclusion

"Most central banks are conducting research into CBDC. Many are progressing from conceptual work into experimentation and proofs-of-concept, including in cooperation with other central banks. Nonetheless, motivations for issuing a CBDC are largely idiosyncratic (eg falling availability of cash in a jurisdiction). This has meant that only a limited number of central banks are proceeding to the pilot stage with CBDCs, and even fewer see issuance of a CBDC as likely in the short or medium term.

At this stage, most central banks appear to have clarified the challenges of launching a CBDC but they are not yet convinced that the benefits will outweigh the costs. Those that do see clear benefits are predominantly from EME jurisdictions. From survey responses, this seems to be because financial inclusion projects create a clear mandate for central bank action, and a lack of current infrastructure limits the disruption a CBDC could create while simultaneously encouraging the use of new technology.

The trends identified in the survey are likely to continue. Different central banks will continue to move at different speeds. This creates a potential risk for spillover effects across borders (CPMI-MC (2018)). However, the evidence from this survey is that central banks are proceeding cautiously, and also that they are collaborating and  sharing the results of their work. Caution and collaboration will reduce the likelihood of unintended consequences.

To meet the payment needs of the future, physical cash is unlikely to be the main answer. Yet, most people will have to wait to use a CBDC. However, central banks are working hard to make sure the wait is worth it."

Click here to read the full article from the BIS

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My added comments: Please note the underlined portions of the Conclusion quoted above. This new BIS survey confirms that what has been reported here is accurate. We have said here that unless we get a new major financial crisis (perhaps worse than the 2008 crisis), we should expect changes to the existing monetary system to move along gradually. 

The most logical path towards some kind of new global reserve currency to replace the US dollar within the existing system would be for the major central banks to implement digital currencies for their own national currencies first. This would allow for the real world testing of new technology on a case by case basis. After the technology has been tested and proven to work, perhaps the IMF could then move towards using it for the SDR later on. (note: one expert told me he thinks there may actually a stronger case for a digital SDR than for central bank digital currencies).

However, at this time, global demand for use of the SDR to replace the US dollar is very limited. China and Russia have talked about this, but no serious movement towards that has taken place so far. I believe that a project to try and promote increased demand for using the private SDR as a unit of account and for invoicing in global trade would be a logical first step towards tying to increase global demand for using the concept of the SDR more broadly in the private sector. But this would still be outside the IMF and would not directly involve the use of the official SDR used at the IMF. 

The BIS does mention that eventually we may see reduced demand for the use of physical cash and in fact in some nations this is already happening (Sweden is an example). However, this NYT article notes that even in Sweden officials are not sure this is the best path to take and that some are trying to slow the process down to keep cash in circulation.

Critics of the existing monetary system as run by the central banks view the removal of cash  as a negative development for personal privacy in business transactions and most central bank studies on central bank digital currencies list this as one of the challenges for implementing a CBDC. The US Fed has shown no urgency in moving towards the removal of cash in the US. 

There is no indication at this time that we are close to the so called "cashless society" we see discussed and debated, but we are slowly moving in that direction naturally as more and more people just use debit and credit cards to make payments. 

What could speed up potential for change? It would probably take a severe crisis that challenged the stability of the existing monetary system. Otherwise, as the BIS survey reports, central banks do not feel any urgency to move rapidly towards change. We can expect that they will simply move forward gradually along they path they are on now in terms of looking at CBDC's unrelated to any new crisis.

What to Watch for in 2019

As we move into 2019, we still do not have anything significant to report here in terms of major monetary system reform or even some kind of new global monetary system. We have attempted to cover this issue as in-depth as possible based on whatever we could find on the topic.

What we have learned over the last few years is changing from the status quo is something much talked about, but very much harder to actually do. It's not that there is any shortage of ideas for reform. We have covered many such ideas here. Also, the financial crisis of 2008 clearly ramped up discussion of the idea of monetary reform more than anything I can recall in my lifetime (I am now 63). There is an ongoing debate about whether the measures taken to recover from that crisis have actually worked or not and that debate will no doubt continue on. Organizations like the IMF and the BIS have issued multiple systemic risk warnings since 2008 and even today still don't rule out another major global crisis. People like Jim Rickards continue to predict that the next crisis will dwarf the 2008 crisis and that major monetary system change will be essential at that time.

Meanwhile, despite all of the above, the status quo has managed to survive and the US dollar based global monetary system just rolls along even as various efforts to move away from the US dollar continue. Efforts to challenge the central bank based system have also arisen with the "blockchain technology" buzz first surfacing around Bitcoin and then speading out to all kinds of blockchain based alternative ideas (SAGA and Kinesis are a couple of newer examples). Despite the blockchain buzz, the information we have here suggests that major central banks and the IMF are not on the verge of implementing blockchain based technology for either national currencies or the SDR at this time. They do issue a lot of studies on the topic which mostly just continue to point out the pros and cons and then conclude by saying they still see a lot a major issues and challenges for using blockchain.

Below is my best guess at some things to watch for in 2019. I won't publish many articles until there is evidence that something truly significant impacting the present monetary system is actually happening. Until that happens, we can expect the status quo to continue to prevail.

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1) Will we get a new major financial crisis? (perhaps worse than 2008) - this would be the most likely event to prompt some kind of monetary system change which is why we must watch for it. Lately, we see global stock markets possibly rolling over into bear markets and rising interest rates could add more problems for consumers and real estate (while helping out retirees with savings earning interest). Oil and other commodity prices have crashed heading into late 2018. Are these signs that the economy is rolling over? Will these problems pick up momentum or are we just seeing normal market corrections? Is the so called "everything bubble" that some say central bank easy money policies have created starting to pop? All these are questions worth asking for 2019.

2) Will the Blame Game Ramp Up in 2019-2020 heading into the next US Presidential election? We wrote an article on this in November 2018 and don't see anything that changes what we wrote in that article (in fact everything we see happening further confirms that analysis). If we get a new major financial crisis under President Trump, expect the efforts to assign the blame to him by his opponents and by him to assign the blame on the US Fed to go through the roof. Who the public does blame will be a huge factor in what happens next. I offer no predictions on that.

3) Will one of the new blockchain based initiatives (like SAGA or Kinesis noted above) emerge in 2019? I don't know, but they are worth monitoring to see what happens. Again, a new major crisis will no doubt create public doubt in the current system (central banks, etc) and this might trigger a more massive search for alternatives. Or at a minimum, there may be calls for major reform within the central banking system.

4) Will any major central banks adopt a central bank digital currency (CBDC) with or without using any kind of blockchain technology? Sources I view as credible report that the adoption of blockchain technology at major central banks or IMF is unlikely any time soon. If that should change, we will report that here. Sweden may attempt a try at a central bank digital currency during 2019, so watch for that.

5) What happens with various trade war issues (sanctions and tariffs)? I have tended to assume these are just temporary tools intended just to gain leverage in negotiations, but if they continue to drag on (or even intensify), they could certainly add to overall systemic risk and increase the incentive for other nations to try and bypass the US dollar. I appreciate the input from some experts who called this potential problem to my attention as another issue to keep an eye on in 2019.

Conclusion:

As always, the most likely trigger for some kind of major monetary system change would be a new major global financial crisis (which plenty of people are still predicting will happen). Without such a crisis, very slow and gradual change to the status quo appears most likely. In such a crisis, who the public blames for the crisis will be hugely important. Now there are some emerging proposed alternatives to the current central bank run monetary system that could become truly competitive if the public loses trust in these institutions in a new crisis. 

Also, the political ramifications of who gets blamed would play a role as well. We can expect that the solutions to a new major crisis would vary greatly across the political spectrum ranging from calls to disband the Fed to full implementation of a more socialist style economy (such as proposed by Bernie Sanders).  What President Trump might propose to deal with a new major crisis is a complete unknown.

We make no predictions here, but these are the major issues we can think of to watch for in 2019 that we will keep an eye on here. 

Added note: I had a number of experts from around the world review this update and the general consensus was that it seems to be a fair analysis of the issues to keep an eye on in 2019. They also called my attention to item #5 as one to add to the list which I had overlooked in my original draft.

News Note: US Dollar Share of Global Currency Reserves Falls Slightly

For some time, many have been predicting that the US dollar will lose its place as the worlds global reserve currency. Also, for many years now, Russia and China have clearly been working to try and find ways to bypass use of the US dollar. Recently, sanctions imposed by the US has added some incentive for other nations to continue to pursue this goal.

This new end of 2018 Reuters article notes that despite all of the above, the US dollar remains firmly positioned as the world's global reserve currency despite falling slightly in its allocated share against the Euro and the Yen. The Yuan has made virtually no progress in its allocated share of global reserves. Below are a couple of excerpts and then a few added comments.

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"Reserves held in U.S. dollars rose to $6.63 trillion, or 61.94 percent of allocated reserves, in the third quarter, from $6.56 trillion, or 62.4 percent, in the second quarter. The share of allocated U.S. dollar reserves declined to its smallest since the 61.27 percent in the fourth quarter of 2013, IMF data showed."

. . . . .

"Ranked second behind the greenback, the euro’s share of global reserves climbed to 20.48 percent, its biggest since the fourth quarter of 2014. It was 20.25 percent in the quarter before."

. . . . 

"The share of allocated currency reserves held in yuan, also known as renminbi, slipped to 1.80 percent in the third quarter from 1.84 percent in the prior quarter."

Click here to read the full article on Reuters

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My added comments: The headline on this article states the share of US dollar as global reserves is near a five year low, so the dollar is gradually losing a bit of global share. However, the year to year changes are still very small overall and the share of US dollar reserves is actually a bit higher now than at the end of 2013 five years ago. 

This is why we have said here that we expect very gradual changes to take place without some kind of new major global crisis. The status quo is very entrenched and it appears that only something that completely disrupts the existing monetary system would speed up the pace of change. We watch for such events and will report them if they do emerge.

News Note: Treasury Secretary Calls Major Banks

This bit of news is attracting some attention since this is the kind of activity that sometimes goes along with a fear of liquidity problems in the system. Too early to tell if this is significant or just routine. Markets are clearly in bear mode and oil is crashing so its appropriate to watch things closely now heading into next year.

Below I have linked to Jim Rickards Twitter feed comments on it for reference.

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Jim Rickards Twitter Feed Comments:

Comment #1

Comment #2

Jim Rickards - Russia, China Creating a Bypass System to the US Dollar?

In his latest interview with Alex Stanczyk, Jim Rickards describes ongoing efforts by Russia and China to create a bypass system to the US dollar. You can hear Jim detail how this might function starting at around the 23 minute mark of the video through the 30:20 minute mark.

Below I have embedded the video and pasted in the list of topics discussed. Below that are a few added comments.

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Topics Include:
*Implications of the USMCA between the US, Canada, and Mexico *The importance of Robert Lighthizer’s role in US trade negotiations *Update on tensions between Russia and Ukraine *Russia’s “buffer states” of outlying countries *How Russia’s gas pipelines running through Ukraine are critical infrastructure
*Why Russia purchasing close to 30 tons of gold per month is a strategic move (23 minute mark)
*How a decentralized permissioned ledger cryptocurrency sponsored by Russia and or China and settled in physical gold could be the next system used by sovereigns to settle net trade balances without using the US dollar
*Why Switzerland could be an ideal location to settle net payments in gold *Update on Saudi Arabia stability, succession, and world relations *Thoughts on the G20 upcoming meetings and trade negotiations *Update on Fed monetary policy and interest rates

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My added comments: This information from Jim Rickards is interesting and fits in somewhat with we understand here. It does not appear that any major western central banks or the IMF are close to implementing any kind of blockchain based "digital currency" or central bank digital currency (CBDC) unless you view the possible attempt by Sweden in 2019 as an effort by a major central bank. Of course that would just be for their own national currency.

With this in mind, we also know that Russia, China, and the other BRICS nations have been working on ways to try and bypass using the US dollar for a variety of reasons despite somewhat limited success thus far. So, the system Jim describes here does make sense. If the IMF is not ready to try and go forward with a "e-SDR" as a possible substitute for the US dollar any time soon, we would certainly expect that these nations would move forward on their own to try and figure out ways around the US dollar and SWIFT based system.

This is a legitimate potential disruption to the present monetary system to keep an eye on in our view here. Another different one is the Kinesis project that will attempt to launch in the spring of 2019 and will be based on stable coins tied directly to physical gold and silver. That project continues to move forward slowly but surely, but won't attempt to go live until May of 2019 according to their current timeline.

We'll continue to monitor events and watch for any potential disruptive events to the present monetary system even as we have nothing to report right now that anything is on the near term horizon. (note: Jim does suggest that the system he describes in the video might be able to function within the next twelve months).

Agustin Carstens (BIS) -- Money and Payment Systems in the Digital Age

This recent speech by Agustin Carstens of the Bank for International Settlements (BIS) is further confirmation of what we have been reporting here for some time. He talks about money and payment systems and looks forward to what we might see in the future in terms of "digital money". Please note that he does not see any immediate future for either cryptocurrencies or Blockchain/DLT technology implementation at central banks. Below are a few excerpts from the speech. (I added some bold type and underline for emphasis)

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Regarding the use of  Blockchain/BLT technology in central banks:

"One interesting development in the central banking community is ongoing experimentation with distributed ledger technology (DLT) as a means to enhance operational robustness. People often use DLT and Bitcoin interchangeably, but they are not the same! It is important to emphasise that DLT is the underlying technology for Bitcoin, which is just one use case. DLT is simply a set of processes and technologies that enable multiple computers to maintain collectively a common database. DLT does not mean mining of coins, public ledgers and open networks. And no central bank that I’m aware of is contemplating these properties in its DLT experimentation.

While central banks play around more with DLT, I think it would be useful to highlight two findings. The first is a Bank of Canada study noting that a DLT-based payment system meeting central bank requirements would be similar to what we have today (ie private ledgers, closed networks and a central operator). The difference is that a network of computers would be used to settle a transaction instead of one computer. The second is an ECB and Bank of Japan study concluding that processing times would be three times longer using DLT versus current systems. This may not seem like much when processing times are measured in seconds, but today’s standard is instant. My take is that current versions of DLT are not any better than what we already have today."


Regarding a Future for Cryptocurrencies in Central Banks:


"As a means of payment, the acceptance of cryptocurrencies has not reached critical mass and is unlikely to do so for a number of reasons. First, the system is highly inefficient and expensive. As highlighted in the BIS’s Annual Economic Report, the energy and computing costs associated with cryptocurrencies amount to an environmental disaster."

. . . 

"All evidence to date points to the conclusion that cryptocurrencies face inherent limits in terms of efficiency and scalability."

. . .


What’s next? 


"Money and payments continue to evolve, and I think the future is promising. I see more robust and resilient systems from central banks offering immediate settlement. I see foundations being laid for new, innovative front-end user interfaces that provide convenience, promote financial inclusion and permit increased economic activity. I see infrastructure being developed that will allow for more efficient and cheaper crossborder payments and remittances. I see central banks continuing to play a critical role in pushing the boundaries of how technology can enhance the payment landscape.

 In doing so, central banks will need to monitor and manage new and different risks arising from the latest technologies. The use of DLT and other technologies, such as artificial intelligence and quantum computing, comes with new challenges. We still need to address questions related to the use of newer technologies, including reliability and security; interoperability between new and existing systems; the legal underpinnings of the processes associated with the technology; and data integrity and privacy. These issues are not easy, and addressing them will probably take some time given their complexity. 

What I struggle to see, however, is cryptocurrencies taking off in any major way. Cryptocurrencies, as a unit of account and payment instrument, simply cannot compete with the value proposition offered by central banks and their systems. It is hard to compete with human intelligence and experience in managing processes and systems. It is hard to beat instantaneous settlement, which many central bank  payment systems provide. It is hard to replicate the enormous network that exists with today’s payment infrastructure."

Click here to read the full text of the speech

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My added comments: For some time now, we have reported here that despite constant news articles proclaiming the age of blockchain based digital currencies has arrived, central banks and organizations like the IMF and BIS have not endorsed the technology as anything particularly new and innovative for their needs. At least none of the currently available versions. They mention ongoing studies of the technology, but also always include all the challenges and complicated problems associated with it. They include a statement along the the lines of "this will require further study and will take some time" etc.

This has gone on for years now with no indication that anything major is on the near term horizon. We hear that Sweden may attempt to try a central bank digital currency sometime in 2019.

All this is in line with what I hear from highly credible sources who work directly in this field on the front lines on a daily basis. Therefore, we continue to report that we find no evidence that any kind of blockchain based digital currency is on the near term horizon for either any major central bank or the IMF. If we hear new information, or the situation changes, we will of course report it.