Jim Rickards Latest Article on "The Money Illusion"

Readers here know that Jim Rickards is one of the sources we cite here often. The reasons are simple. He has the background and credentials that provide credibility. He has worked inside the system so he knows what he is talking about from personal experiences. When he provides an opinion or analysis, he backs up his views with data that you can verify on your own. All this makes him a valuable information source in our view here.  Please read the full article linked below to get full context.

Here is a link to his latest article titled "Beware the Money Illusion Coming to Destroy your Wealth".  This is a typical well written Jim Rickards article where he takes a complex topic and breaks it down so those of us without his background can understand the main points. In this article he explains how inflation is used to transfer wealth from savers to debtors in a way that the public does not really grasp. He uses some simple illustrations to show you how the public can be made to accept the this transfer of wealth without complaining.  

It's basically because of human nature. In one example he shows you that if you get a 2% salary cut, you are likely to be unhappy and complain. But if you get a 2% raise (but inflation rises 4%  at the same time) you will probably be OK with that. It's because a 2% raise feels better than a 2% pay cut even though you end up in exactly the same position either way.

But for a Central Bank and the government, the 4% inflation is way better for them since they have enormous debts built up (as it is for all debtors). They can payoff the debts with cheaper future dollars. On the other hand, deflation is a nightmare because they have to payoff the debts with more expensive future dollars. This is why governments and Central Banks will fight deflation to the death.

Here are the first three paragraphs of this new article by Jim Rickards. Just click the link above to read the full article.

"Amoney illusion sounds like something a prestidigitator performs by pulling $100 bills from a hat shown to be empty moments before. In fact, money illusion is a longstanding concept in economics that has enormous significance for you if you’re a saver, investor or entrepreneur.

Money illusion is a trick, but it is not one performed on stage. It is a ruse performed by central banks that can distort the economy and destroy your wealth.

The money illusion is a tendency of individuals to confuse real and nominal prices. It boils down to the fact that people ignore inflation when deciding if they are better off. Examples are everywhere."

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Added note: Jim Rickards appeared on Bloomberg TV this week. They broke his interview down into 5 parts. You can view any of them that interest you using the links below:

Islamic State's Ability to Mint Money

Review of the G20 Communique

Japan in a Depression

Oil Price Plunge and OPEC

Why Merger Activity has Picked Up

Deflation Battle Still Raging

Monday Japan announces it has fallen into recession. This was a big surprise as growth was forecasted. And the NY Times article linked above points out the Eurozone is in danger of following suit and must decide what to do soon. Then we have this news that the US money supply has started to decline in growth on a year to year basis. We have noted here on the blog that the falling oil and commodity prices could be signs of deflation taking hold. This news adds to that trend. 

This is a very serious situation that all readers here should be following closely. If Japan is falling into recession, recall that a problem anywhere can lead to a problem everywhere. Japan has already tried massive stimulus. If that is failing this could become a serious problem for Japan, and then the world. 

The Eurozone is already concerned with low inflation and fear of falling into recession as well. If both Japan and the Eurozone head into recession, the risk of global contagion goes way up. Will the ECB crank up a massive QE of its own? If they do, what happens to the Euro? 

Keep in mind the Fed just finished up its QE stimulus program so that funding support is gone now. Everyone following all this understands that a lot of the Fed stimulus money ended up in the US stock market and in the US bond markets. The IMF and BIS (Bank of International Settlements) have both issued a number of recent warnings that stocks and bonds could be overvalued and are watching closely to see what withdrawal of QE does to those markets. The BIS even warned of possible panic selling if things go wrong. You can find these recent warnings in links to articles about them on the right hand side of this blog. Just look for article links for the past few months that have IMF and BIS in the titles. Jim Rickards went on Bloomberg TV today and warned of the possibility of a global depression picking up steam.

It should be clear to any readers who have been following this blog that we need to watch all this very closely. If things start to go south anywhere it can set off a derivatives chain reaction around the world. All this can happen very quickly even as we have had a fairly long period of stability and relative calm in the markets. Central Banks fear deflation like the plague because once it gets started it can move too fast for them to react. And of course if the public senses it that can lead to panic that makes things even worse.

What we need to watch is what happens in Japan and Europe. And how the central banks react there. If we see more massive money stimulus it will be a red flag. At some point the danger becomes that markets lose confidence in the currency (say the yen for example). If that ever happens we will see the central banks move into crisis control mode very quickly I would guess.

Of course let's hope none of this happens. Be we know from all we have been following here the threat is real and we must stay alert and informed. It is critical.

Added update: The Guardian runs this new warning from UK Prime Minister David Cameron. Lead paragraph from the article below.

" David Cameron has issued a stark message that “red warning lights are flashing on the dashboard of the global economy” in the same way as when the financial crash brought the world to its knees six years ago."

Latest Interview for Bo Polny

Readers here know we are following the predictions of Bo Polny over time to see how they turn out. His big picture forecast was a move up in gold prices above $2000. He first predicted this would happen by year end 2014 but now says his cycle analysis allows up until the summer of 2015 for gold to hit this price. His other big picture prediction is that we will get a very sharp drop in the US stock market.  You can access links to all his free to the public updates at his web site here. 

Mr. Polny did a new online audio interview released on 11-14-14 which gives his latest comments on his forecast. You can listen to that new interview here. 

As promised, we will follow his forecasts up to the middle of next year to see how they turn out. Friday was a good day for his gold forecast as gold rallied sharply to go back above a key support/resistance price of $1180 per oz. There are only a few weeks left in 2014, so gold will have to make a spectacular move up to go above $2000 by then. But Mr. Polny says his cycle analysis allows up until the summer of 2015 at the latest to meet that price target.

For now we will just see if gold continues a sharp move up or stalls out between now and year end of 2014. If gold does make a move above $2000 by mid 2015, you can expect that his stock market forecast is likely to pan out as well which is a big reason we are following it here. 

Obviously if he hits these forecasts, something big will be happening that could result in major monetary system changes sooner rather than later. That is our goal here. To watch for anything leading to such change (either quickly due to crisis or over time in a more controlled manner).

Update Added note:

While we are talking about gold these two interesting articles appear:

Central Banks - The New Gold Bugs?

ECB Might Buy Gold to Revive Economy

In regards to these articles, we wrote this blog article here a few months ago:

Dispelling the Myth that Central Banks Hate Gold 
(Mario Draghi says clearly he views gold as a good thing for Central Banks to hold)

Update 11-20-14: Rueters reports that support for the Swiss gold initiative has fallen and now it is not expected to pass.

Nomi Prins: QE Isn't Dying, It's Morphing

Nomi Prins is one of the best indendent thinkers out there these days. Here is some background bio information on her. Her experience in banking at Goldman Sachs, Chase, and Lehman Brothers qualifies her as someone who has worked inside the system. In this article on her blog, she discusses how QE is not really ending. She shows how the big banks are simply stepping in to take over QE from the Fed. Below are a few quotes from her article. Please read the entire article for full context.

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"A funny thing happened on the way to the ‘end’ of the multi-trillion dollar bond buying program known as QE - the Fed chronicles. Aside from the shift to a globalization of QE via the European Central Bank (ECB) and Bank of Japan (BOJ) as I wrote about earlier, what lingers in the air of “post-taper” time is an absence of absence. For QE is not over. Instead, in the United States, the process has simply morphed from being predominantly executed by the Federal Reserve (Fed) to being executed by its major private bank members. Fed Chair, Janet Yellen, has failed to point this out in any of her speeches about the labor force, inflation, or inequality."

. . . . . 

"Banks only started buying US Treasuries in earnest when the Fed announced its tapering plans. Thus, not only are they participants in the ZIRP game as recipients of cheap money, they are complicit in effecting monetary policy. As the data analyzed so expertly by Bill Moreland at www.BankRegData.com makes clear, there has been no taper.  Thus, the publicized reason for tapering – better job and economic growth – is also bogus."

"During the third quarter, Wells Fargo and Bank of America matched Fed purchases of US Treasuries, keeping the total amount of US Treasuries in QE land neutral. With such orchestration to keep rates down and the prices of US Treasury securities up, all the talk about whether the labor force is strengthening or inflation exists or not is mere show. Banks haven’t even propped up the labor market in their own industry. They chopped 11,400 jobs last quarter. In the past two years, they cut 57,236 jobs."

"No sucessful candidate in either political party mentioned any of this during the mid-term elections. Yet, our political-financial system has gone from the dysfunctional to the failed to the surreal. Speculation, once left to individuals and investors, is now federally sponsored, subsidized and institutionalized.  When this sham finally buckles and the next shoe falls and rates do eventually rise, the stock market will tank, liquidity will die, and the broader economy will plunge into a worse Depression than before. We are not there yet because of these coordinated moves and the political force behind them. But we are on a precarious path to that inevitability." 

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My added comments: 

This is a very thought provoking and well written article. It also talks about something we noted here on this blog. QE has simply been moved to new players. Japan is taking the baton from the US Fed and will be flooding world stock markets to help keep those from falling. This article also points out how the big US banks will now step in to make sure US bonds keep being purchased to keep interest rates low. This allows the Fed to act as if it has successfully solved the financial crisis and keeps markets calm.

All of these manuevers are why we do not try to predict any timing as to when a new crisis might emerge here on this blog. Those who have tried to predict the timing have learned that there are many ways to keep the present system going for much longer than they thought was possible. And this may continue for quite awhile longer. No one knows the future for sure.

We think a better approach is to stay informed (something we try to help with here). Make reasonable plans and preparations for another crisis so as to be ready when it arrives. If it does not arrive, be happy. That's a good thing. If there is another crisis, you will have made reasonable preparations. Having done that, don't spend time worrying about everything. Don't allow fear to run your life. Stay informed, make reasonable preparations, enjoy life, and lend a helping hand to a neighbor when you can. We will try to follow events here as change unfolds, whatever time frame is involved.

G20 and BRICS Talk about Next Move on IMF Reforms

Another G20 Summit has come and gone with no indication that the 2010 IMF reform package is likely to pass the US Congress any time soon. As we would expect, this summit was filled with expressions of disappointment that the reforms have not passed. 

Christine Lagarde issued another statement expressing regret. The G20 included an expression of disappointment in its official communique along with a vague comment about going forward with other options. If you wonder what that means, maybe we have an answer below. Some articles and quotes below and then some comments.

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First the language in the communique:

15. The G20 must be at the forefront in helping to address key global economic challenges. Global economic institutions need to be effective and representative, and to reflect the changing world economy. We welcome the increased representation of emerging economies on the FSB and other actions to maintain its effectiveness.We are committed to maintaining a strong, quota-based and adequately resourced International Monetary Fund (IMF). We reaffirm our commitment in St Petersburg and in this light we are deeply disappointed with the continued delay in progressing the IMF quota and governance reforms agreed in 2010 and the 15th General Review of Quotas, including a new quota formula. The implementation of the 2010 reforms remains our highest priority for the IMF and we urge the United States to ratify them. If this does not happen by year-end, we ask the IMF to build on its existing work and stand ready with options for next steps.

The BRICS weigh in with their statement of disappointment

"BRICS countries’ leaders are disappointed by the US block on IMF reforms to help developing countries have more influence internationally. They called for the G20 to ratchet up pressure if America doesn’t ratify the 2010 IMF reform by the end of the year.

“The leaders have called for G20 to plan a discussion of options the IMF will present in January 2015 in case the US doesn’t ratify the 2010 reform by the end of this year," said a joint statement released by the BRICS countries at the G20 summit."

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My added comments: 

We have now established that everybody is once again disappointed. We have noted on this blog that many prior "deadlines" have come and gone from those who continue to be disappointed about this issue. But nothing ever really seems to happen when the deadline arrives.

Now, as the new year end 2014 deadline nears, we have a "joint statement" about "options" the IMF will present in January 2015 assuming Congress does not approve the reforms (a pretty safe assumption at this point). But no explanation of what these options might be appears in these post summit statements. 

Is there any indication of what those options might be? Perhaps. Take a look at this recent article in Russia Behind the Headlines  quoting a Russian official on this issue. Here is what she had to say about some options that might be available:

"The most important thing for us is the still unresolved G20 problem of the IMF reform," Lukash said. She recalled the U.S. Congress has yet to ratify the 2010 resolution. "Not only does it thwart the process of renewing the IMF in accordance with the current reality where we see a big rise in the role of emerging economies. It also prevents the decisions to double the IMF capital from coming into force," she said "We are expecting Russia, as well as our BRICS partners, to propose serious concrete solutions on how to reach alternative solutions, if the U.S. does not ratify this decision before the end of this year," the Russian sherpa said."

"One of the simplest options is "to untie the decision (over the IMF reform of 2010) into various parts. Since the 2010 resolution is a complex packet of agreements, which includes, among other things, amendments to the IMF charter and a decision to double its capital, and each such decision, according to the IMF rule, requires a certain number of votes for them to become effective," the sherpa said."

"These two decisions can be untied, i.e. this packet can be split into several ones, without an approval of the U.S. Congress but at the administration's decision. We will break up the packet and start implementing its parts accordingly, so that all agreements come into force," the Russian Sherpa said about possible solution to the problem of reforming the IMF."

Hmmmmm. The reforms can be split into individual "packets" and approved by the Obama Administration without bothering to get approval from Congress. Let's see, Congress is already upset that the Obama Administration is going to declare a new immigration policy without the approval of Congress. They are threatening to cut off funding for that. This new idea of bypassing Congress to get the IMF reforms approved should go over real well in the new Congress (that believes it was elected to stop the President's agenda). I'm sure they will be happy to just accept another end run around Congress with no blowback of any kind (sarcasm intended). If this really does happen in January 2015, all I can say is, grab your popcorn. This could get interesting.

G20 Summit Review - Gunboats and Koala Bears

The G20 wraps up another summit. This year the summit was somewhat overshadowed by all the uproar over the arrival of Russian warships and tense exchanges with Russian leader Putin. Also reports that Putin was leaving the summit early due to all the blowback surfaced, but were denied by Russia. So did anything impacting monetary system change take place. Let's take a look. Below are some articles on the summit with some quotes just below the links. Then a few comments. Finally a little video to recap the summit.

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BBC News Australia - A Summary of the Summit

This article just gives a summary of the main talking points from the summit. The headline
is a global agreement to try and boost global GDP by 2% to create more jobs. Other issues mentioned were global tax avoidance and a vague statement about climate change. This article was as much about all the drama surrounding Russian leader Putin as anything else.


News.com AU - G20 Summit, Was it all Worth it?

This article discusses whether the summit will actually achieve much. It also lists the main bullet points of the "Brisbane Action Plan" which are listed just below.

THE BRISBANE ACTION PLAN AT A GLANCE

GLOBAL GROWTH — Raising growth to deliver better living standards is the highest priority. Nations said recovery is slow but committed to working together to boost resilience and strengthen institutions.

LIFT GDP — They announced a target to lift GDP by 2 per cent by 2018 for all the G20 nations. This is expected to add more than US$2 trillion to the global economy.

INFRASTRUCTURE — Create a Global Infrastructure Initiative to lift investment and match investors with projects. It will also include a hub based in Sydney.

TRADE — To lower costs of trade, reduce regulatory burdens and promote competition and innovation.

PARTICIPATION — Reduce the gap in participation rates between men and women in the workforce by 25 per cent by 2025.

YOUTH UNEMPLOYMENT — Create plans to get more youth in jobs and encourage entrepreneurship and apprentices.

POVERTY — Lifting investment in food supply systems and increase income inequality and jobs.

FINANCIAL SYSTEMS — Strengthen financial systems by making derivatives markets safer, delivering a framework on shadow banking and implementing regulatory reforms.

INSTITUTIONS — Strengthen institutions to represent emerging economies and ensure the IMF is well resourced. Create a strong trading system through bilateral and regional agreements to deliver growth and jobs.

ENERGY — Improve efficiency of energy markets and access to energy for those who don’t have it. Support effective action on climate change and work to create a global agreement in Paris in 2015.

EBOLA — Call on international institutions to assist countries in dealing with economic impacts and have “committed to do all we can to contain and respond to this crisis’.

My addded comment: Time will tell if the above is just a list of lofty talking points or some results are actually achieved. For example, it is not clear how the G20 will insure that a gap in the labor force between men and women will be reduced by 25% by the year 2025. Also, the IMF reforms mentioned yet again in the "Institutions" bullet point don't appear likely to happen any time soon as another example. The G20 says if the US Congress fails to pass them, the IMF should proceed ahead with other options without giving any idea what that means.

The Guardian - Final G20 Communique lists 800 measures for Growth

This article goes more into detail on the official communique. It also points out the "high degree of uncertainty" in quantifying the actual impact of these policies. Each country has to implement them and the outcome is uncertain as to how many will really be implemented and how effective they will be.

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My added comments:

Before the summit Bloomberg ran an article which we noted here quoting a Zero Hedge article that said the G20 would announce new banking rules that would leave regular bank accounts in excess of FDIC protected amounts ($250,000) unprotected if a bank went into bankruptcy. This article in the Examiner also appeared on this topic also citing the Zero Hedge article. 

Here is the actual G20 Summit communique they issued. There is no direct mention of these banking rule changes in this document. There is however a reference to a report from the Financial Stability Board (FSB) attached to the communique with a link at the bottom.

The G20 communique says " We welcome the Financial Stability Board (FSB) proposal as set out in the Annex requiring global systemically important banks to hold additional loss absorbing capacity that would further protect taxpayers if these banks fail."

The link to the FSB report mentioned above (in the annex) is provided at the bottom of the G20 Summit Communique and you can go to it by clicking here. This is a very long and somewhat hard to read report for the average person. However, my take on it is that they want to impose new rules on banks that force them to hold a certain amount of capital at all times to be used in case the bank suffers sudden unexpected losses (what they call TLAC). 

This loss reserve capital is defined in the report as to what can be included in it. Basically it appears they want banks to issue long term bonds to raise this capital (I don't want to own any of these bonds). On page 16 of the FSB report linked above, they state that "insured deposits" should not be used as part of this reserve bank capital to cover losses. 

However, there is nothing suggesting that "uninsured deposits" are protected. In addition, earlier in the FSB report on page 7 they state:

"TLAC (the capital reserved for losses) should consist only of liabilities that can be effectively written down or converted into equity during resolution of a bank without disrupting the provision of critical functions or giving rise to material risk of successful legal challenge or compensation claims. To this end, the FSB term sheet proposes a set of specific criteria that liabilities must meet to be eligible as TLAC (see sections 8 to17 of the term sheet). However, recognizing that losses in resolution may exceed a banks TLAC, liabilities that are not eligible as TLAC or that are not included in a  banks TLAC remain subject to potential exposure to loss in resolution, in accordance with the applicable resolution law.' 

Here is my interpretation of the above paragraph. Banks should not include insured bank account deposits in their so called "TLAC" (as stated on page 16). The TLAC is the capital reserves to be used to offset losses if the bank gets into trouble. However, see the part in bold above from page 7. Even liabilities that are not included in the TLAC of the bank are "subject to potential exposure to loss in resolution, in accordance with the applicable resolution law".

My bottom line take on all this: 

Under these proposed rules by the FSB (endorsed by the G20 Communique), if your bank goes under, your bank account deposit should be protected for any insured amount. But any amount above the insured limit is not protected. However, even the insured amount could be subject to losses if a bank goes under depending on the "applicable resolution law". One assumes that in the US the "applicable resolution law" would protect insured deposits. But in a crisis, who knows what the prevailing "applicable resolution law" might be at that time.

It is also interesting that this report is basically buried in the official G20 Summit Communique with very little fanfare or attention given to it. You have to work hard to find it. Once you do find it, it is hard to read if you are the average person. But the average person could certainly be impacted by how these rules might be implemented if a banking crisis does happen and their bank goes under.



Update 11-17-14: I ran across this article written by former Kremlin adviser Alexander Nekrassov and published in Aljazeera if you want to read a Russian view of what happened at the G20 summit. 

Finally a fun video to summarize the Brisbane G20 Summit
(we'll call it Gunboat and Koala Bear Diplomacy)

What's Russia Up to Lately?

Russia seems to be in the news more and more lately. Russian leader Putin is seen closing trade deals with China. Speculation runs rampant that Russian troops and equipment have moved into the Ukraine. The US and Russia seem to be locked in a new kind of financial war with the US pushing sanctions and (some say) pressuring the Saudi's to let oil prices drop (which hurts major oil producer Russia). 

Russia appears to retaliate with random cyber attacks (even on the White House) and buying large amounts of gold. Both Russia and China are seeking to displace the US dollar as sole reserve currency where ever they can. Russia has been been projecting military power all over the world by sending out war planes and ships. Below are links to articles on all these issues.

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Bloomberg View - Putin is the Biggest Gold Bug


Russia Direct - Now Comes the Moment of Truth for the Russian Ruble


Russia Today - Building Alternative to SWIFT


Russian Jet Forced Out of Baltic Air Space


Russian Military Planes Buzz Canadian Warship


Russian Bombers Reach to Gulf of Mexico


Russia Stations Warships Off Australian Coast Ahead of G20 Summit


NY Times - Russia Behind Cyber Attacks


CNN - Russian Troops Move into the Ukraine


Business Insider - Russia and China Gas Deal


Bloomberg - Russia Signals Ruble Defense Amid Currency Rout


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My Added Comments:

By now you get the idea. Russia and the West (especially the US) are engaged in a global chess match. War is being waged in a new and modern way. No bullets or missles are being used, but war is clearly ramping up. 

If you follow the news articles on all this from both the western media and Russian media perspective, you will find that the western media emphasizes how badly the sanctions are hurting Russia. They talk about the fall of the ruble and how falling oil and gold prices are hurting Russia and Putin. The Russian media emphasizes all the trade agreements being done between Russia and China and how the US dollar is losing its reserve status around the world. 

Western media projects Putin in a negative way while Russian media projects him in a postiive light. For example, here is a Russian media article talking about how the west "demonizes" Russia and Putin. Contrast that with this Australian media article where western leaders call him a bully trying to "recreate the lost glories of the Soviet Union".

So what is Russia up to lately?   A lot.

What should readers here take away from all this? 

Readers here should realize that both sides in this war are going to constantly spin whatever happens to try and get public opinion on their side. The media is just another weapon of war in this type of conflict. Readers should look at the source of any media coverage of events and factor that into the way the coverage is spun. It's pretty easy to see if you are watching for it. Here on this blog, we will follow the events to see how they may impact major monetary system change over time.

Bloomberg: Cash Under Mattress Safer Than a Bank Account?

This is something that has been talked about for awhile now and could certainly be a factor related to major monetary system change. This Bloomberg article actually points out that new rules for bank accounts could make them less safe to hold than cash under your mattress. This is the type of article that most people will ignore, but shouldn't. Below are some quotes, then a comment. As always, readers are advised to read the entire article for full context.

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"With the G-20 summit coming up this weekend in Brisbane, Australia, it might be worth wondering when or whether you can have too much money in the bank.

Citing information from uber-analyst Russell Napier, the blog Zero Hedge writes that Napier is declaring Nov. 16 as “the day money dies.” (That’s their headline, anyway.)

According to Zero Hedge, Napier says the G-20 will announce “that bank deposits are just part of commercial banks’ capital structure, and also that they are far from the most senior portion of that structure,” and as such, following a bank failure, “a bank deposit is no longer money in the way a banknote is.”

"If this is the case, depositors with more on account than would be covered by deposit insurance would find themselves in line with everyone else trying to recoup what they can from an insolvent institution."

“Large deposits at banks are no longer money, as this legislation will formally push them down through the capital structure to a position of material capital risk in any ‘failing’ institution. In our last financial crisis, deposits were de facto guaranteed by the state, but from November 16th holders of large-scale deposits will be, both de facto and de jure, just another creditor squabbling over their share of the assets of a failed bank,” Zero Hedge writes."

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My added comments: 

There is a lot to consider about this article. First, it is interesting we now have a mainstream media source (Bloomberg) referencing the alternative news site Zero Hedge for this story. Next we have the obvious huge news that regular bank accounts become lower tier capital if your bank goes bust. Amounts in excess of the FDIC guaranteed balance probably go up in smoke according to this report.

This is something that people like Jim Sinclair and Jim Rickards have been warning about for a long time now. It is why they advise holding a portion of your assets in some type of hard asset insurance outside the system. So long as there is no crisis at your bank, no one will care about this. But this report makes it clear that if your bank does go under, your regular bank account funds can disappear (like Cyprus). Most people do not believe this would really happen. This article makes it clear that it can happen.

Imagine what this could mean for high net worth individuals and corporations who may have very large amounts in regular bank accounts like this. Amounts far above the FDIC guaranteed limit. A typical large corporation could easily have millions of dollars in such an account. In another widespread systemic banking crisis, this could mean these accounts are fully at risk to be lost for any amount above the FDIC limit.

We will followup on this to see if the G20 summit does produce an announcement like this on November 16th as stated in this article. It will be very significant news in our view if it does happen.

Update 11-16-14: For our followup on this issue, go to this Summit review post and go to "my added comments" at the bottom of this post.

Daily Nation: Republican Win Could Derail IMF Reforms

Here we have a new article  in Daily Nation that quotes  a former IMF official as saying what we have said here. That being that the GOP November election wins make it much less likely that the 2010 IMF reforms will be approved by the US Congress. The article also quotes a Russian official as saying the emerging nations are losing patience. Below are some quotes and then a comment. Readers should always read the full article linked for context.

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"International Monetary Fund chief Christine Lagarde might need to get to work perfecting her belly-dance.

The normally reserved head of the global crisis lender promised in October to perform for the US Congress if that would get it to endorse crucial, much-delayed reforms for the Fund.

“I will do belly-dancing if that’s what it takes to get the US to ratify,” she said.

But now the Republican victory in Tuesday’s US elections has likely placed ratification further away, and she will have to work harder to convince the IMF’s largest shareholder."

“The change in the US political landscape is not a good omen for progress on IMF reforms,” said Eswar Prasad, a former IMF official.

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my added comments: We have followed this story for nearly a full year here on this blog now. Earlier in the year we noted that a GOP election victory would probably lessen the chances for approval of the IMF reforms. This has now happened.

The BRICS nations have set several "deadlines" for the US to pass these reforms and issued many threats along the way. They have setup what we call "Plan B" to work around the IMF and World Bank. But they never actually leave the IMF or World Bank making the threats somewhat empty. We suspect the latest deadline (the end of 2014) will come and go without any real follow through from the BRICS nations. We believe they will just quit talking about it or set another deadline far into the future.

This Business Insider story goes further in depth on this topic. It actually talks about a "Plan B" by the IMF if the reforms never pass. It also says some think there should be a major push to get the current lame duck Congress to pass the reforms before year end. You can sense the desparation to get this through Congress in this article. We will follow it here to see how it turns out by year end.

As G20 Meets for Summit - The Guardian Questions its Relevance

Without much fanfare another G20 Summit is getting underway in Brisbane, Australia. The G20 is touted as more influential these days than than the G8. But this Guardian article questions both its relevance and effectiveness. Below some quotes from the article with key points underlined. Readers should read the entire article for full context.

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"Tony Abbott wants this weekend’s G20 meeting to be seen to achieve something tangible, not just to be a pointless talkfest attracting protests and disrupting Brisbane’s traffic. The same goal is critical for the future of the six-year old institution as it struggles to retain relevance.
But do the “announceables” that will be touted at close of play really amount to much? What will the meeting actually do?

Understanding what it can achieve requires a brief reprise of its history. The G20 was set up after the Asian financial crisis as an annual gathering of finance ministers and central bank governors from developed and developing countries."

. . . . . .

"Six years later, Mike Callaghan, director of the Lowy Institute’s G20 studies centre, argues that while the first three G20s leaders’ summits in Washington, London and Pittsburgh helped avert an even more severe economic crisis, the organisation now risks losing relevance."

"With no secretariat, no treaty or legal instrument to back up its decisions and no power to force member nations to do anything, the G20’s aim is to influence countries’ domestic policies, and to cooperate, in ways that boost economic growth and strengthen the institutions that oversee the global economy."
"But as former first deputy managing director of the IMF John Lipsky argued in a speech earlier this year, its recent successes have been limited."
“It is hard to say with certainty that any G20 member has altered its policy plans in the interest of achieving greater policy coherence – and therefore effectiveness – with its G20 partners.”

. . . . .

"Also undermining the organisation’s credibility is the fact that it has been unable to deliver on previous headline commitments.
In 2010, for example, the G20 agreed to what were widely called “historic” reforms to the governance of the International Monetary Fund to recognise the growing power of emerging markets."

"They are supported by the US administration, but remain blocked in the US congress. In the meantime the so-called Brics nations – Brazil, Russia, India, China and South Africa – became so frustrated they moved to set up a development bank of their own."

 . . . .

"A key Australian “announceable” in Brisbane will be the establishment of a global infrastructure hub, to be based in Sydney.
It would match investors with infrastructure projects and help establish uniform rules for risk assessments and other practices.
But Australia has been unable to convince other countries to make major financial contributions, and many were concerned it would duplicate work already being done by the World Bank and resisted the idea of the G20 spawning a new permanent institution."

 . . . . .

International tax avoidance

"Global companies have been legally outwitting national tax agencies for years. Google, for example, paid only $7m tax in Australia in 2013, a tenfold increase on the previous year, but still only a tiny fraction of the profits it reaps here. Apple, Starbucks and other multinationals are equally good at exploiting legal loopholes to minimise tax"

In Brisbane leaders will be asked to agree to these measures:

• A “common reporting standard” a requirement that banks identify and report on the tax affairs on non residents to their home country. Countries will also be asked to say when they will start the new rule, aimed at flushing out individuals and companies hiding their wealth in offshore tax havens. This has already been negotiated through the OECD and many countries already formally signed an agreement to automatically exchange information in Berlin last month.

• A pledge to force multinationals to report their accounts country by country to avoid tax avoidance through complicated deals and profit shifting. But the multinationals’ country by country reports will only be available to tax authorities, not publicly. And some countries, including Australia, have delayed the scheme’s implementation for a year. Claire Spoors, the G20 coordinator for Oxfam, said the recent leaked tax documents showing how thousands of major companies were legally minimising tax through tax deals involving Luxembourg proved that public reporting of country by country profits would be much a more effective deterrent.

• A pledge to force companies and other legal entities to agree to principles about disclosing the beneficial ownership of companies. Transparency International claims China has been blocking agreement on this.

 . . . . . .

"With the IMF revising down its global growth forecasts, the World Trade Organisation revising down estimated growth in global trade volumes and multilateral trade talks stalled, the G20’s “core business” is important. But it remains unclear whether the deliberations will make any real progress."
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Bottom Line:

When you read through this article you find a lot of typical lofty goals and headline announcements, but also many questions as to how effective they will end up being. Nothing at this latest G20 Summit looks like it would lead to major monetary system changes any time soon.

Added note: What does China want from this G20 Summit? You can read that here.
Note that while China again states they expect the G20 to push for approval of the 2010 IMF reforms, there is no mention at all that year end 2014 is still a "deadline" for such approval. And that China does not foresee leaving the IMF in the future. So, the reality is that the "end of 2014 deadline" for passage of the IMF reforms is basically meaningless.

IMF and US Establishment Still Worried about Deflation

We have already posted links to several articles here noting how concerned western financial institutions are about possible deflation in the global economy. Even though no such deflation has been recorded in officially reported statistics, we still get warning after warning about it. This article confirms the fear is still there. US and IMF officials are pushing hard for looser monetary policy in Europe and Japan as well as increased government spending everywhere to "promote growth". Some quotes and comments below. Readers should read all articles linked in full to get context.

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"The International Monetary Fund and the United States encouraged the European Central Bank and the Bank of Japan toward greater monetary stimulus on Friday and urged governments around the world to do their share to cultivate growth in their countries."

"Calling the world economy "fragile, brittle and fragmented", IMF Managing Director Christine Lagarde told a conference of central bankers in Paris it was "perfectly legitimate and appropriate" for the ECB and the BoJ to take unconventional steps to combat low inflation and economic stagnation."

"US Federal Reserve Chair Janet Yellen said central banks "need to be prepared to employ all available tools, including unconventional policies, to support economic growth and reach their inflation targets," especially where governments have withdrawn fiscal stimulus."

"Lagarde said governments with healthy budget positions should do more to support growth, describing as insufficient a German announcement of an extra 10 billion euros in spending on public infrastructure over the next three years."

"In this part of the world, we have to repeat over and over that monetary policy cannot be the only game in town, and that there has to be a combination of sound fiscal policies, use of fiscal space for those countries that have fiscal space in order to support growth and rejuvenate that growth," she said.

"Clearly, the announcement that was made yesterday was in the very small ballpark of what will be needed in order to do that."

"Mohamed El-Erian, an economic adviser to German insurer Allianz and former co-chief of bond giant Pimco, said central bankers should not underestimate the risk of currency market swings as their monetary policies take divergent paths."

"As much as these currency moves may contribute to global rebalancing on paper, I would just caution from a market perspective not to underestimate ... the speed and size of currency moves," he said.

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Then we have this article appearing on the Bretton Woods Committe web site calling on the ECB to ignore Germany and ramp up more monetary stimulus in Europe. It seems that driving inflation rates higher has now become the primary objective for western Central Bankers and the IMF. Below are some quotes from this article.

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"THE CONTRAST between the monetary policies pursued in America and the euro zone since 2012 could not be greater. Since 2012 the Fed has continued to expand its balance sheet dramatically. From 2012 to 2014 the Fed added $1 trillion to its balance sheet. In doing so, it increased the American money base (liquidity) by approximately the same amount."

"Exactly the opposite occurred in the euro zone. After having expanded its balance sheet during the period 2008-11, pretty much as the Fed had done, the ECB started a period of dramatic contraction in its balance sheet (and thus in the euro money base) from 2012 onwards. As a result, in 2014 the ECB had reduced the money base by €1 trillion. This was the period during which the Fed added $1 trillion to the money base, an increase of 25%."

"There can be little doubt that the decision of the ECB to reduce the money base by 30% at a time when the euro zone had not recovered from the sovereign-debt crisis contributed to pushing the euro zone into a deflationary dynamic, out of which it still tries to extricate itself."

"The question that arises now is what the ECB should do. At a minimum it should take its responsibility of keeping inflation close to 2% seriously. For two years it has failed to reach this objective. The only way to reach it is to increase the money base and the only practical instrument that can be used to achieve this goal is a purchase of government bonds. This is standard economics. The ECB should recognise this and should not be distracted by non-scientific objections to the use of that instrument."

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My comments: 

From the above we see that worry about low inflation/deflation is very high at the IMF and in the US elite banking circles. Falling oil and commodity prices along with signs the US housing market may be starting to roll over could be signals being watched. The recent sharp stock market selloff might be another signal. A reasonable question to ask might be, Why so much worry about low inflation? Isn't that a good thing?

The answer is probably that these officials are seeing that the US "recovery" is very weak at best (and perhaps about to get weaker) despite trillions in attempted stimulus. Add in the fact that the Fed is now going to pull back on stimulus in the US. There is clear concern as to what will happen to the US economy as that happens. Note in the article above the warning from Mohamed El-Erian (former Pimco) that officials should not underestimate the potential "size and speed of currency moves" from all this monetary policy change around the world. 

All we can do here is keep informing readers of these warnings and statements of concern being issued constantly. So far, things have held together and they have avoided a "trigger" event that starts another major crisis. But clearly, they are quite concerned that one could happen at any time despite all efforts to avoid it. It is why we have to keep watch all the time in the world we live in today.

Added note:  Here is an interesting article by Alasidair Macleod on this whole issue.

Russia to Startup Alternative to SWIFT by May 2015

This is something Russia had said they would do, but it was assumed it might take awhile to get this up and running. Per this article in Russia Today, they have set a goal to be ready by May 2015. A few quotes and then a comment. Read the whole article for context.

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"Russia intends to have its own international inter-bank system up and running by May 2015. The Central of Russia says it needs to speed up preparations for its version of SWIFT in case of possible ”challenges” from the West."

"Given the challenges, Bank of Russia is creating its own system for transmitting financial messaging... It’s time to hurry up, so in the next few months we will have certain work done. The entire project for transmitting financial messages will be completed in May 2015," said Ramilya Kanafina, deputy head of the national payment system department at the Central Bank of Russia (CBR)."

"Calls not to use the SWIFT (Society for Worldwide Interbank Financial Telecommunication) system in Russian banks began to grow as relations between Russia and the West deteriorated over sanctions. So far, SWIFT says despite pressure from some Western countries to join the anti-Russian sanctions, it has no intention of doing so."

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My added comment: 

This serves as a reminder that the situation in the Ukraine is far from over. Russia is clearly preparing to be able to continue to operate regardless of what the west might do. In just the last few weeks we have had articles stating that Russia was behind cyber attacks against US banks and the White House. There are reports that Russia may have sent troops and vehicles into parts of the Ukraine. Russia continues to solidify relations with China in all realms. Meanwhile there are some who believe that the US wants oil prices down to put more pressure on Russia. With President Obama being a lame duck President, Russia may not feel the need to worry about keeping up a relationship with him. IMF reforms appear off the table for awhile as well.

So there is plenty to continue to monitor in regards to the ongoing decline in relations between Russia and the West, the US in particular. There are ongoing chess moves all over the board.

Added note: Here are a couple of more articles on this in the Russian press.

Moscow Times

TASS                                                                                                                                                             

Update 11-13-14: Russia buying large amount of gold to add to reserves