More Frustration but no answers on IMF reforms

This article in the Financial Times updates us to say that there is massive frustration but no agreement on what to do about lack of US approval of the IMF reforms. Here is the article.

A few key points:

-frustration continues to grow

-even Australia is talking about bypassing the US

-Christine Lagarde is not ready to go the route of bypassing the US (what she calls Plan B)

-the article points out that right now approval in this US election year seems unlikely

There are hints in this article that some kind of effort to bypass the US within the IMF is being discussed. Lagarde seems worried about that prospect. The potential for this to break down into a major global dispute seems possible here. If that happens, I think the more likely outcome will be the BRIC nations moving forward on their own outside the IMF to bypass the the US dollar and to setup global financial institutions that do not need US approval.

All this could certainly lead to disruption in the currency markets and the US dollar at some point. If they cool down, they may just decide to wait out the US Congress another year. We'll follow it here.

IMF Issues Global Policy Agenda for April 2014 Meeting

This is a report issued by the IMF Managing Director that sort of summarizes the overall work and plans for the IMF.  Here is introductory paragraph for the report:

"The Global Policy Agenda (GPA), presented semi-annually to the International Monetary Fund and the Financial Committee (IMFC), identifies the policy challenges faced by the membership and outlines policy responses that are needed at the global and country level to address these challenges."

There really is not much new in this report but on page 13 they do address the ongoing disappointment over the IMF reforms not being approved. Here are those comments:

"The delay in making effective the 2010 reform package is utterly disappointing. The IMF remains fully committed to support the implementation of the 2010 reforms and to finalize the 15th General Review of Quotas. These reforms are essential to ensure the continued legitimacy, relevance, financial strength, and effectiveness of the Fund.   Next steps will build on the advice of the Chairman of the International Monetary and Financial Committee (IMFC) in his consultations with the membership regarding available options to complete the current round of the quota and governance reform process, with the objective of completing the 15th Review by January 2015. The 15th Review is expected to result in further increases in the quota shares of dynamic economies in line with their relative positions in the global economy, and hence likely in the share of emerging market and developing countries as a whole, while steps will be taken to protect the voice and representation of the poorest members."

So here we see that the IMF is pretty much giving up any hope for these reforms until at least January 2015. There is nothing right now that would suggest the US Congress is going to change on this since this is an election year and Republicans opposed to the IMF reforms are expecting to win this fall. If that does happen, it calls into question whether the reforms will be approved anytime before the 2016 elections.

We have the BRIC's led by Russia and China openly upset that these reforms are not being approved in the US. They say they will look for options to bypass the US and get the IMF reforms approved anyway. But they have yet to put forward any public plan on how that would be accomplished.

It appears to be an ongoing stalemate unlikely to change unless:

1) The BRIC's try to force some kind of overhaul to the IMF over US objections

2) Some kind of new global financial crisis emerges that prompts major change to take place quickly (derivatives blowup, too big to fail bank goes under, major war, etc)

3) The BRIC's essentially just forget the IMF and move forward with their own regional institutions to replace the traditional role of the IMF in their areas of the world. They continue to work on bypassing the US dollar and expansion of the yaun and ruble in trade deals and especially energy deals impacting the petrodollar.

Right now, #3 seems the most likely unless #2 comes into play.

We will watch the G20 and BRIC comments following the meetings this weekend to se if they talk publicly about what will be done about this situation, if anything.

More rhetoric on petrodollar out of Russia

This artcile out of Russia Today quotes a member of the Russian Parliament as introducing legislation to do away with pricing oil and gas transactions in US dollars. The article notes however that other Russian authorities say this is not possible in the short term.

A few things to note from this article:

-Russia seems to be taking the lead right now in efforts to bypass the US dollar

-The article mentions using the Ruble instead of the dollar and backing it with gold

-The article notes Russia and China are already moving in this direction

-The article appears right before the April G20 and IMF meetings


It is clear that the movement away from the US dollar as sole global reserve currency continues, but the pace of that movement remains unclear. Some think it will take years while others think by the end of this year the dollar will be in sharp decline.

Washington Times: Russia, China leading efforts to bypass US as IMF reforms stall

Right on cue as the G20 meeting looms we have this article from the Washington Times which states Russia and China are losing patience with the stalled IMF reforms.

We will find out soon if they can or will do anything about the situation. Is this just another round of ramped up rhetoric before the meeting or will they actually do something substantial to try and bypass the US at the IMF?

Here are some quotes from the article:

"Russia, China and other major developing countries — angry about the stalemate on Capitol Hill that has blocked approval of a reform plan that would give them a bigger voting share at the International Monetary Fund — are pushing to go ahead with the reforms without waiting for the United States."

"Russia reportedly is leading efforts by the emerging nations to steer around the U.S. In February, Moscow secured a pledge from the Group of 20 major industrialized nations to move ahead if the legislation doesn’t pass before the annual meeting of the IMF, which starts in Washington this week."

"Meanwhile, the international lending agency is under the gun to begin exploring what one IMF official speaking on background said were various “bad options” of moving ahead without the U.S., to avoid further upsetting China and other major emerging countries. Whether the IMF will break ground may depend on how hard Russia, China and the bloc of emerging countries press their demands."

So again, will they "press their demands" or not?

As we head towards the next G20 Meeting

Things ought to be interesting at this coming G20 meeting. There are a number or articles suggesting that the US, Russia, and China are moving farther apart rather than closer together. Below are links to several articles which show that there seems to be a lot of manuvering and positioning taking place on several possible points of conflict. Time will tell if they are significant or not.

Here are the links:

Moscow, Beijing taking on the dollar

Russia prepares to attack the petrodollar

Hagel reaffirms US Strong Commitment to Protect Japan

Russia to back Iran in nuclear talks


If the US and the BRIC's are at odds on all these issues, forming a consensus at the IMF will be pretty hard to accomplish I would think. The BRIC nations issued an April deadline for progress on the IMF reforms. So far, no progress has been made. And there has been little news on this leading up to the April meeting. We will watch to see what happens.

Rickards says watch Saudia Arabia and Petrodollar

Here is another interview with Jim Rickards in Australia while on tour for his new book debut this month. He repeats many of his points in this interview, but I post it because he adds a very significant watch post for us for major monetary system change. That being if Saudi Arabia moves away from pricing oil sales in US dollars.

There are some keys to change we will watch here that we feel are significant. Some involve events within the IMF. Most notably the approval of the 2010 reforms as a first step towards a bigger more involved IMF. Any crisis which elevates the role of the IMF as a "global lender of last resort" would be another big key to watch. 

Change could be coming outside the IMF (from frustrated BRIC nations). Keys we watch are the value of the US dollar index as it trades against other currencies. And  a big key to US dollar dominance and stability has been the US petrodollar. The petrodollar is where most major global energy deals are done using the US dollar as the unit of exchange. This insures a huge ongoing demand for US dollars that keeps it from falling in value. If the bulk of world energy trading moves away from using the US dollar, that demand drops and a key support for the dollar goes with it. If Saudi Arabia were to move away from the US dollar, that would be a KEY signal that the days of US dollar dominance are running out. 

All these various trade deals we mention here around the world bypassing the dollar are part of a slow and steady erosion of dollar dominance. Energy deals are especially important due to their large size and the fact that they are essential to commerce. Nations have to have energy.

Our job here is it present what we think could lead to major monetary system changes in the future. Anything that  leads to a diminished role for the US dollar is a key to watch for. Change at the IMF is key to watch for. Russia and China setting up payment and banking systems that bypass the dollar are also keys to watch for. All these things are in progress so we have plenty to keep an eye on in the coming months.

One other commment on this interview: 

Notice how the interviewer wants Rickards to give a time frame for the coming big changes. He goes ahead and gives a 3-5 year window while stating that no one can give precise timing. 
This is important for readers here to remember. 

This change could happen rapidly at any time triggered by any one of many different events. But it could also just gradually play out over time (several years). This is impossible to predict. But it is possible to project that it is coming one way or another based on all the available evidence.

Therefore, it is important to stay engaged and stay informed. Don't let the passage of time keep you from staying alert and watchful for the signposts along the way. We'll cover it here whether we see major change in one month, one year or over several years. We don't feel a need to be bound by a specific date for the change. The date is not as important as understanding what is happening when the change takes place.

Russia and Iran finishing up Oil trade agreement

Thanks to a blog reader here for pointing out this article regarding a new oil trade deal between Iran and Russia. This is just another case where we have a BRIC country doing a deal that again will bypass the US dollar. In this case it is an energy deal which also is a threat to the Petrodollar.

"Iran and Russia have made progress towards an oil-for-goods deal sources said would be worth up to $20 billion, which would enable Tehran to boost vital energy exports in defiance of Western sanctions, people familiar with the negotiations told Reuters."

"The White House has said such a deal would raise "serious concerns" and would be inconsistent with the nuclear talks between world powers and Iran."

""If Washington can't stop this deal, it could serve as a signal to other countries that the United States won't risk major diplomatic disputes at the expense of the sanctions regime," he added."

my added comment: right now the indications are that the US and BRIC nations are moving farther apart rather than closer together. We'll see what happens at the G20 meetings. It is hard to see the US Congress doing anything that Russia wants right now.

While waiting on the April G20 Meeting

Here is an article some may find of interest. This is an article by Stewart Partrick which appeared in the January/February issue of Foreign Affairs magazine. This is a publication put out by the Council on Foreign Relations.

The article is not primarily about the IMF. It discusses the general state of global governance institutions in general with emphasis on the UN. It does however mention the stalled IMF reforms as part of the article. 

I won't do an indepth commentary on this article. Instead I would point out the overall tone of the article which is one of disappointment with the trend in global governance. Many times we have a picture of these somewhat elite global governing institutions as a monolithic power bloc that comes together as one force to basically run things. 

While they clearly do have tremendous influence, we can see from this article that the reality is that they break down into bickering factions as often or more as they come together. This should kept in mind when looking at any future plans or goals these organizations may have.

While they can potentially come together on issues and implement plans, more often they spend a lot of time arguing and looking after their individual self interests. This can prevent plans from ever being implemented. Or significantly delay plans.

For example, if the IMF is unable to get their reforms passed, it will be difficult for the IMF to implement any kind of global reserve currency in the future. While it appears this is a high priority event, it still has not happened 4 years after the reforms were submitted for approval. And we see the BRIC nations are becoming more vocal in their insistence that the reforms be passed indicating they are losing some patience.

Below is a segment from the article which illustrates how someone inside the establishment views the progress of global governance. It shows that they are a long ways from being a united governing force. And don't expect to it to become one in the future. Something to keep in mind when you hear that some grand plan by "the elites" will be implemented.

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"While campaigning for president in 2008, Barack Obama pledged to renovate the dilapidated multilateral edifice the United States had erected after World War II. He lionized the generation of Franklin Roosevelt, Harry Truman, and George Marshall for creating the United Nations, the Bretton Woods institutions, and NATO. Their genius, he said, was to recognize that "instead of constraining our power, these institutions magnified it." But the aging pillars of the postwar order were creaking and crumbling, Obama suggested, and so "to keep pace with the fast-moving threats we face," the world needed a new era of global institution building.

Five years into Obama's presidency, little progress has been made on that front, and few still expect it. Formal multilateral institutions continue to muddle along, holding their meetings and issuing their reports and taking some minor stabs at improving transnational problems at the margins. Yet despite the Obama administration's avowed ambition to integrate rising powers as full partners, there has been no movement to reform the composition of the UN Security Council to reflect new geopolitical realities. Meanwhile, the World Trade Organization (WTO) is comatose, NATO struggles to find its strategic purpose, and the International Energy Agency courts obsolescence by omitting China and India as members."

"The demand for international cooperation has not diminished. In fact, it is greater than ever, thanks to deepening economic interdependence, worsening environmental degradation, proliferating transnational threats, and accelerating technological change. But effective multilateral responses are increasingly occurring outside formal institutions, as frustrated actors turn to more convenient, ad hoc venues. The relative importance of legal treaties and universal bodies such as the UN is declining, as the United States and other states rely more on regional organizations, "minilateral" cooperation among relevant states, codes of conduct, and partnerships with nongovernmental actors. And these trends are only going to continue." 

"The future will see not the renovation or the construction of a glistening new international architecture but rather the continued spread of an unattractive but adaptable multilateral sprawl that delivers a partial measure of international cooperation through a welter of informal arrangements and piecemeal approaches."

Final comment:  The excerpt above gives you a flavor of the tone of the entire article which is written from the perspective of someone who would prefer to see more global governance.

Sorry for lag in posts

I have picked up a flu that has had me down the past few days and will probably continue for a couple more.

I will resume posting as soon as I am feeling well again. Sorry for the delay. Fortunately, we are somewhat in waiting mode until the G20 meeting in April anyway.

If I see anything that seems urgent I will certainly try to put up an article on it.

Christine Lagarde's speech to Chinese University Students

China is big key to whatever happens with monetary system change as we go forward. In recent years China has been carrying a lot of the load for global GDP growth. Recently IMF Director Christine Largarde was in China and delivered a speech to college students there. We can look at a few parts of this speech and make some observations related to monetary system change.

We will select a few quotes from her speech and make some comments in bold type below each quote. Then we will make a few concluding remarks.

"1. The New 21st Century World 

Two defining features of today's new global economy are the rise of Asia and the power of interconnections.

Less than fifty years ago, the emerging markets and developing countries accounted for less than a quarter of global GDP. Today, it is half and rising rapidly—very likely to two-thirds of global GDP within the next decade."

Here we see why China and the BRIC nations want more influence and voting power at the IMF. When the IMF was setup China (and Asia) were only contributing 25% or less of  global GDP. The IMF quota system is supposed to be based on how much various nations contribute to the global economy. Over time the Asian share has risen to 50% and is expected to climb to 65% within 10 years according to Lagarde. This is why the BRIC's (led by China) are unhappy with the current IMF quotas (voting power and borrowing power).  In their view, if they are carrying this much of the load, they should be getting more say at the IMF. 

"Just as this new global economy will continue to expand, it will also continue to draw closer together. Countries today are interconnected in ways that would have been unimaginable to your mothers and fathers when they were your age."

This is a constant theme for all supporters of global financial institutions. In their view the fact that countries are interconnected through trade and financial oblibations (they hold each others debt for example) is why they see a need for things like the IMF. A place where nations can meet to discuss differences rather than fight with each other.

"3.  The Importance of Global Citizenship

Which brings me to my third and last point—the importance of citizenship, especially global citizenship. In our fast-paced, interconnected world, success will depend, more than ever before, on recognizing our common challenges and our common hopes."

"Global Citizenship" ties in directly to the point made just above. Supporters of global institutions prefer to see the world as a "global community" rather than as a collection of individual sovereign nation states. They promote "global solutions" to "global problems".  This is where the IMF could become much more significant in the future if there is a new "global financial crisis". Jim Rickards points out that because the US FED is over extended now, there is no one left standing to try and deal with the next global crisis except the IMF. They have the only "clean balance sheet" left as he puts it. He thinks another crisis is coming (see his new book "The Death of Money") and that the IMF will step forward as the entity to deal with the crisis. This is what we keep an eye on here.

"I have called for a stronger form of international cooperation—a "new multilateralism" for the 21st century—to help us all adapt to this new world that is more interconnected, yet more dispersed in terms of power and decision-making. Increasingly, again as I have argued, a country’s own success will depend on how effectively it cooperates with others.

Christine Lagarde makes an appeal for global cooperation in most of her public speeches. This one is not an exception. Again, if the 2010 IMF reforms are not passed by the US Congress, the entire capacity of the IMF to function in a new global crisis is threatened. This is why it is so important to them and why they will not give up on it.

What we are watching to see is how long the BRIC nations will keep waiting on the reforms. At what point do they just move forward to create a regional financial system that just ignores the US dollar completely? Remember, they are projected to be 2/3's of global GDP in 10 years. That will dethrone the US dollar as sole reserve currency even if it does not happen at the IMF through a new global reserve currency.

Concluding remarks: 

It seems we are on somewhat of a collision course between a future as envisioned by the IMF (a world viewed as a "global community") versus a future where global cooperation breaks down and nation-states go their own way. 

In the IMF future, it becomes the new global "lender of last resort". It institutes a new global reserve currency modeled around its SDR when the next crisis arises. It may very well use a cryptocurrency that will circulate alongside national currencies to tie the "internal SDR" to an "external currency" that can be used by the general public and Central Banks alike.

On the other hand, if the nations do not cooperate, all this might never happen. Instead things could break down to where there are major regional power blocs led by China/Asia, Russia/EU, and the US/Western Hemisphere. In this world they would compete with each other for global financial and political power. Currencies would also compete.

In either future, the US dollar loses its position as sole global reserve currency and the US has a lower economic status in the world than it has had in the last century. We would expect major monetary system change under either of the above scenarios.

The wild card is if something suddenly causes a systemic global financial collapse that is unplanned and uncontrolled. In that case, chaos would rule for a time while things got sorted out.

The next key event in this process we are watching is the G20 meetings in April in Washington DC. Here we will get our next hint as to whether the IMF vision of the future is going to move forward or not. What will the BRIC's do if there is not progress on the 2010 IMF reforms?

China, Germany to build yuan center

China continues working on Plan B to bypass the US dollar while we wait to see what happens at the IMF. Germany and China announce the opening of an offshore yuan trading center to "allow the clearing and settlement of yuan trades in Frankfurt."

We have mentioned here that we think the BRIC nations (led by China) will continue to work on a Plan B they can implement in case the reforms at the IMF bog down. There is really no reason for them not to proceed setting up institutions and trade deals that bypass the US dollar. Whether they gain more power within the IMF or not, they can set themselves up to operate independently of the US dollar going forward. They gain leverage to pressure IMF reforms as well as they prove they can operate outside the US dollar dominated system.

If the IMF reforms are approved, the yuan will probably be a part of whatever basket of currencies may be included in a new global reserve currency (that replaces the dollar). If the IMF reforms are not approved, they just move forward on their own. That might slow down the process of the US dollar losing sole reserve status, but they are patient.

Either way, the balance of economic power continues to shift over time which we think will lead to a loss of sole global reserve status for the US dollar as more and more global trade takes place without using the dollar. Especially as the energy trade increasingly bypasses the dollar. We think all this is part of a process that will lead to major monetary system change.

Here are a few quotes from the article:

"Beijing and Berlin agreed to launch an offshore yuan trading center on Friday as President XiJinping visited Germany on the third leg of his European tour.

The central banks from both countries (the Bundesbank and the People's Bank of China) signed a Memorrandum of Understanding in Berlin to allow the clearing and settlement of yuan trades in Frankfurt.

It forms part of a series of deals the two countries signed on Friday, which sources say could be worth billions of euros. China will also set up a consulate in Duesseldorf.

The trading center will be a "great facilitator for both China-Germany trade and China-EU trade",said Meng Hong, an expert on Germany at Renmin University of China."

With IMF Reforms Stalled - Where do we Stand?

It is becoming pretty clear that the Ukraine aid package that Congress will pass will NOT include the IMF reforms we have discussed here in detail. Since we think this reform package is the key to the IMF moving forward with major monetary system change, where do things stand now? 

This is the big question we need to address here since our entire purpose here is to watch for potential major monetary system change which might include a global "reset" of some kind. 

First, let's define what we mean by a "global reset". When we use this term we are talking about a MAJOR event where the currencies of the world are adjusted to better reflect the current economic influence of each nation. We think such a reset will include a major drop in value for the US dollar along with a loss of its status as sole global reserve currency. 

For major change like this to happen, something big is going to have to happen to motivate this change. We watched the Ukraine situation to see if it might be such a trigger event. At this point however, it appears that situation will not be the trigger. While the IMF is coming to the rescue with a $15 Billion loan package and will be promoted in the media as the lead problem solver, this is nothing much more than the IMF has always done. That is not the kind of event that causes a major global restructuring. 

It is still possible the Ukraine could be an initial process that leads into a series of bigger events, but that remains to be seen. Right now, the situation appears pretty stable. Putin got Crimea and probably is content with that. The US/EU sanctions are so trivial they are a joke and will have no lasting effect. Unless things heat back up and an actual shooting war begins, the Ukraine looks to be mostly over.

Next, let's again show that the IMF reform package is the big deal that could lead to major changes. Here is a letter from the Bretton Woods Committee pleading with Congress to pass the reforms. This is a power list of backers for sure. Christine Lagarde and the White House have both issued statements expressing "utter disappointment" that Congress refused to pass the IMF reforms. It became a partisan issue quickly with the White House and Senate Democrats led by Harry Reid attacking House Republicans for not agreeing to pass the reforms. All this shows how badly they wanted these reforms passed. 

Then we have this article explaining how the G20 has given Washington until the next April G20 meeting to get this done. They are getting very frustrated and recently made public statements about bypassing the US to get the reforms done now. Here is an excerpt from this article.

"On Sunday, the G20, which has been a key organiser of the international financial response in recent years, strongly criticised the deadlocked reforms process. It also offered a new deadline for U.S. action.

“We deeply regret that the IMF quota and governance reforms agreed to in 2010 have not yet become effective,” the G20 stated in a  communique on Sunday, following a ministerial meeting in Australia, which is hosting the grouping this year.

“Our highest priority remains ratifying the 2010 reforms, and we urge the US to do so before our next meeting in April. In April, we will take stock of progress towards meeting this priority.”

But Christine Lagarde recently said there is nothing more she can do unless the US Congress passes the reforms. Now Congress has refused again to pass it. With elections upcoming this year it is hard to see why House Republicans would change on this. Polling shows the GOP in position to gain power. The fact that the White House and Senate Democrats backed down indicates they are in a weak position right now heading into the elections.

We can see all this is building into a situation where the G20 nations (led by the BRICS) may just decide to forget the IMF and move forward on their own to build a monetary system outside the US dollar dominated system that exists right now. Russia is talking openly about it and is completing a huge energy deal with China which will bypass the US dollar.

The next event to watch is the April G20 meetings in Washington. We will get a clearer idea if the BRICS et al are going to stay patient and keep trying to work within the IMF or start moving ahead on their own (their Plan B). We'll keep an eye on this next.

Additional comment: 

Some readers have asked what we think a new monetary system will look like. For what its worth, we think a new system brought forward within the IMF would involve a rebalancing to shift more power and resources from debt laden nations (like the US) to developing nations with surplus trade account balances (like China). If they really get serious about cleaning up the whole global debt mess, we could see them rolling all the sovereign debt into one big global account. The lenders (like China) might have to take a hit on their debt holdings (an actual write down and/or loss due to dollar devaluation). 

We think this is why gold is moving east now. We think the pre "reset" process is already underway. The US/IMF/EU have plenty of gold reserves (and other assets like natural resources). The eastern bloc needs more gold to take its rightful place in the global structure after such a "reset". An upwardly revalued gold price is also likely in our view.

We could see the IMF presiding over a one time "global reset" where global debt is resolved, currencies are revalued, and things go forward based on the total economic contributions of each nation. For example, if there were an allocation of a new global reserve currency (maybe the SDR, but also maybe a new digital asset backed global reserve currency), it might be done based on a combination of the GDP of each nation plus its assets (natural resources including gold)  less its remaining debt obligations after a one time write down on the debt. If done fairly, it might actually allow the world to move forward past the overwhelming debt problem that exists today without major social disruption. Probably easier said than done though.

The above is our speculation of course. But it is based on reasonable available news articles plus some input we have gotten from some of our more high profile blog readers here that we believe are highly credible.

We should add. No one can predict the future with certainty. Even if a plan like we described above were in progress, it might not get implemented. First of all, there will likely have to be some kind of major global financial crisis to motivate such a big change. Think of something like what happened in the US in 2008 on a much bigger global scale.

Nations could splinter apart and strike out on their own. Political issues might delay or prevent implementation. A sudden unplanned (uncontrolled) systemic collapse could make it impossible for any one entity to resolve the problem.  The world might become more decentralized instead of more centralized. 

We will just keep watching it all and see what happens. And try to keep readers here informed as best we can.

Senate Reverses Course - Drops IMF Reforms from Ukraine Aid Bill

In the latest news on this topic, the US Senate is going to drop the IMF reforms out of its bill to provide loan assistance to the Ukraine. The US House apparently was not going to budge on this issue. Below are a couple of links to articles on this latest news. Once a final bill is passed, we will review how this may impact what we are watching here (anything that could trigger major monetary system change).

Politico - Harry Reid to drop IMF from Ukraine Bill

NY Times - Senate Democrats Drop IMF Reforms from Ukriane Aid 

Below is a quote from the first article linked above:

"The tussle in Congress over reforming the IMF has threatened the unified message officials in Washington had hoped to send to Russian President Vladimir Putin and those responsible for the invasion of Ukraine. And the administration did not hide its disappointment Tuesday afternoon over the removal of the IMF language. “We are deeply disappointed by the news that Republican opposition has forced the Senate to remove the [IMF] reforms from the Ukraine assistance package,” said Treasury Department spokeswoman Holly Shulman."

my added comment: This confirms what we noted in an earlier blog post. The failure to get the IMF reforms approved is a major disappointment for IMF supporters. It also is likely a setback in terms of perception for the IMF. It indicates a lack of confidence in the IMF by the US House. 

Since this is an election year in the US, it seems doubtful the House will change its stance on this unless some kind of major financial crisis arises. We will comment more on this once a final bill is passed by Congress.

addendum:

for a more detailed look at how the IMF is organized and how the proposed reforms would change the IMF,
go here.
 

IRS issues rules on tax treatment for Bitcoin

This Bloomberg article covers the new IRS ruling on tax treatment for Bitcoin. For most people Bitcoin would be taxed similar to someone buying or selling stock. Bitcoin dealers have to report Bitcoins earned at their value on the date earned though as income. Retailers also have to report Bitcoins as income at their value on the date a customer makes a purchase.

Here a a few quotes from the article, then my added comments.


"The U.S. government will treat Bitcoin as property for tax purposes, applying rules it uses to govern stocks and barter transactions, the Internal Revenue Service said in its first substantive ruling on the issue.

Today’s IRS guidance will provide certainty for investors, along with potential income-tax liability. Under the ruling, purchasing a $2 cup of coffee with Bitcoins bought for $1 would trigger $1 in capital gains for the coffee drinker and $2 of income for the coffee shop."


"Under the IRS ruling, Bitcoin investors would be treated like stock investors. Bitcoins held for more than a year and then sold would pay the lower tax rates applicable to capital gains -- a maximum of 23.8 percent compared with the 43.4 percent top rate on property sold within a year of purchase.

For investors with losses, U.S. tax law allows taxpayers to subtract capital losses from any capital gains. They can also subtract up to $3,000 of capital losses a year from ordinary income.

As with stocks, Bitcoin dealers would be subject to different rules that wouldn’t allow for capital gains treatment.

Bitcoin miners would have to report their earnings as taxable income with a value equal to the worth on the day it was mined. If they mine as part of a business, they would have to pay payroll taxes as well."

"The IRS will require information reporting similar to how the tax agency receives notification of stock transactions and payments to independent contractors."


my added comments:

There is nothing surprising to me in this IRS ruling. I would have expected them to treat Bitcoin like other property bought and sold for a gain or loss. It does mean that retailers who accept Bitcoin will bear risk immediately for a drop in the price of Bitcoin from a tax standpoint. In the example used above, a coffee shop that sells a cup of coffee for $2 in Bitcoins owes taxes on $2 income even if the Bitcoin received drops in value the next day.

This makes Bitcoin very different from a currency. If the coffee shop sells a cup of coffee for $2 in US dollars, the dollars will have essentially the same value for at least some period of time. Inflation impacts the dollars, but at a less volatile pace than could happen with Bitcoin.

In addition, those who are attracted to Bitcoin with the idea that they will not disclose transactions to the government will clearly be violating tax law now. Every Bitcoin acquired or used (bought or sold) is required to be reported. Records for the price on the date of acquisition and the date used would have to be maintained (like you would for buying and selling stock).

This also makes it awkward for trying to use it like a currency. Imagine the reporting burden if Bitcoins were actually used like dollars. It would be like having to keep track of the date you acquired and used every dollar you spend each month.