Jim Rickards: The Fix is In

This is a new article from Jim Rickards appearing on the Daily Reckoning web site. Jim is launching a newsletter service associated with this site. This article touches on some sensitive new ground so we will take a look at it in depth. Below are some key quotes and then some comments. To read the full article, click the link above.

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One of the biggest issues discussed on alternative media sites by those who are advocates for precious metals is whether or not the gold market is a manipulated market. There is a lot of data on this topic available at the web site of the Gold Anti Trust Action Committee (GATA). Here is a link to that site for those interested.

We don't take a position on that issue here on the blog. But Jim Rickards has made it a key feature of this article so we will take a look at what he is proposing for readers to consider. Here are a few quotes from his new article:

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"A lot of people think about gold as a percentage of total reserves. So countries have reserves. What percentage of your reserves consist of gold? For example, a lot of people are surprised to learn that the United States has 70 percent of its reserves in gold. China has about 1 percent of its reserves in gold. So people look at that and think that’s the imbalance. But that’s not a very meaningful figure in my view."

. . . . .

". . .  to me, a better metric, a better way of thinking about how much gold a country has is to look at gold as a percentage of GDP. Your GDP’s your economy — How big is your economy? That’s just the gross value of all the goods and services."

. . . . .

"The US has about 8,000 tons. We haven’t sold a significant amount of gold since 1980. We dumped a lot of gold in the late ’70s to suppress the price, but none after that. We’ve held onto the gold. So one of my questions for central bankers is, if it’s such a ridiculous thing to have, why are we hanging onto it? But that’s a separate question."

"So the point is, China does not have enough gold to have a seat at the table right now. Think of it as a game of Texas Hold’em. What do want in a poker game? You want a big pile of chips. Gold are gonna be your chips. It doesn’t mean that you automatically have a gold standard, but the gold that you have will kind of give you your voice at the table."

"For example, Russia has one-eighth the gold of the United States. It sounds like they’re a small gold power, but their economy’s only one-eighth as big. So they have about the right amount of gold. The U.S. gold reserve at the market is about 2.7 percent of GDP. That number varies because the price of gold varies, but it’s about 2.7 percent. For Russia, it’s about 2.7 percent. But Europe, it’s even higher. It’s over 4 percent. That’s one of the reasons I’ve been very bullish on the euro and continue to be."

. . . . . . 

"So here’s the problem: If you took the lid off and ended the gold price manipulation and let gold find its level, China would be left in the dust. It wouldn’t have enough gold relative to the other countries, and because their economy’s growing faster and because the price of gold would be skyrocketing, they could never acquire it fast enough. They could never catch up. All the other countries would be on the bus. The Chinese would be off the bus."

"So, when you have this reset, and when everyone sits down around the table, China’s the second largest economy in the world. They have to be on the bus. So the global effort is to keep the lid on the price through manipulation, which is very obvious. I tell people, if I were running the manipulation, I’d be embarrassed because it’s so obvious at this point."

"So the price is being suppressed until China gets the gold that they need. Once China gets the right amount of gold, then you can take the cap off."               . . . . 
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My added comments:

This article contains a number of hotly debated issues. First, some will question Jim Rickards statement that the US has 8,000 tons of gold. Critics believe that the US has sold or leased much of its gold to hold the price down. They claim this is why the US will not allow an audit of gold reserves to be conducted. 

Next, we have Jim's statement that the manipulation of the gold price is so obvious that he would be embarrassed if he were in charge of running it. So he clearly states he believes official manipulation is happening. 

We are not going to delve into either of these controversial areas because we cannot prove whether the US really has 8,000 tons of gold or not. We could look at the evidence cited to support price suppression/manipulation, but it would be way too much information for a simple blog post. You can use the link to GATA above if you have interest in that or read Jim's book (he mentions 300 footnotes of documentation in his book).

What we will focus on here is Jim Rickard's statement that the reason gold is being held down is so that the global gold reserves can be re-balanced and get China caught up with the rest of the world. He says that once that is accomplished, we can expect a "reset" of the global monetary system. He says that gold can be allowed to seek a true market price at that time once China has enough gold reserves (what they have now is unknown).

I don't know if Jim Rickards is speculating or speaking from inside knowledge when he makes these comments. But the possibility of a reset of the global monetary system is what started this blog in the first place. Clearly, if this happens it will be a historic change that will impact everyone. Of course we are going to cover Jim Rickards talking about that here.

This idea of a global monetary system reset is why we continue to follow the status of the 2010 IMF reform package. If there is to be a global gathering around the table some day like Jim Rickards talks about in this article, it will have to happen at the IMF where all the nations are members. But as things stand today, the IMF is not in a position to step into a global crisis and be the leader to work out whatever solution might be put forward. 

So, connecting all the dots, here is what readers here need to watch for. First, a new global crisis much bigger than the 2008 GFC. This is followed by immediate pressure on the Republican controlled US Congress to approve the 2010 IMF reforms. The Republican led Congress is setup right now to take the blame for a crisis if they don't respond as the public would most likely tie lack of action to them since they have not approved the IMF reforms and recently rolled back some of the Dodd Frank legislation. The media can also easily associate the Republican Congress as favoring the 1% if the 99% are suffering. President Obama added to this public perception with with his State of the Union address.

The crisis will also have to be too big for national central banks to handle. Interestingly, with the move by the Swiss National Banks, criticism of central banks is now showing up everywhere in the media. Here is a blog article that talks about that .

Once the IMF reforms are approved, then you could look for the IMF to convene a new global "Bretton Woods" type conference. This is where the "reset" might come into play that he mentions in this article. With the reforms passed, look for the BRICS nations to be quite willing to participate. The Yuan may also be in the SDR basket later this year as well.

This scenario is by no means a prediction. It is just an attempt to connect a number of dots that seem to be isolated, but could possibly connect to form a clearer picture over time. 

Conversely, if the 2010 IMF reforms don't pass and/or we do not have another big global financial crisis, an IMF led conference to preside over a "reset" of the monetary system will not be a very credible scenario. This is why I think the most likely time frame for this scenario is before the next US elections in November 2016 so that the Republican controlled Congress can be blamed for the problem. After 2016, the Democrats will probably have more power in the Senate or retake it. The political timing favors sometime before the 2016 elections. This is my reasoning for that time frame.

So, these are the big keys we will watch for the next two years to see if this scenario is plausible or not. As always, time will tell us the answer.

added note: Jim Rickards follows up this article with another one at Daily Reckoning you can read by clicking here. In this one he warns we are at real risk of a new financial crisis as much as six times the size of the 2008 crisis. I had already written this blog post when I saw this new article. Interestingly, he talks about a time frame of the next two years for this crisis to unfold. I can't help but notice how this time frame ties to what I wrote above. Another coincidence? We'll see.

Quotes from this second article:

"The good news for investors is that this fiasco will not happen overnight. It will take a year or two to play out. "

"This new junk debt fiasco started in the summer of 2014 but will not reach its peak until 2016 or later. Even companies and countries with dim prospects often have enough cash on hand to make payments for a while before they actually default."

additional added note: Dutch researcher Koos Jansen writes this new article supportive of Jim Rickards comments on gold above. The article is lengthy, but does provide a lot of docmentation to support the idea which some readers may want to explore. Koos Jansen is viewed as an expert on tracking movement of gold reserves from the west to the east and China. Here is the concluding paragraph of his article:

"Not so long ago I published a Wikileaks cable from 1976 wherein China expresses its particular interest in gold and SDR’s. Of course this is all just a theory, but it seems as if the redistribution of the chips, physical gold flowing form West to East, is all part of orchestrated preparations for the next international monetary system, anchored by gold. This system would require gold to be spread among the major economic power-blocks proportionally."

additional added note: Silver Doctors runs this article on their site. We always appreciate it when one of our articles here is run on another site. Thanks! 

Swiss Seal Yuan Trading Agreement with China - What does this Mean?

Fresh off its decision to abandon its peg against the Euro, Switzerland signs a new agreement with China that sets up a Chinese bank branch for the purpose of increasing the use of the renminbi (Yuan) in Switzerland. This article in BRICSPOST explains the deal.

This is just another step along the path for China to get the Yuan into the SDR basket of currencies later this year at the IMF. First some quotes from the article, then a few comments.

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"China has agreed to give Switzerland an $8 billion investment quota under its Qualified Foreign Institutional Investor (QFII) program as Chinese Premier Li Keqiang met President Simonetta Sommaruga of the Swiss Confederation at a ski resort on Wednesday.

The agreement is part of a memorandum of understanding signed by the central banks of the two countries in Davos and aids China’s attempts to diminish the dollar’s dominance in global trade and finance.

Switzerland’s central bank also said it had agreed with the People’s Bank of China (PBOC) to establish clearing arrangements in Switzerland for renminbi (yuan) trading.

“We are willing to make Switzerland one of the centres of offshore RMB business,” said Li.

Pending regulators’ approval, the deal will see the set up of the first branch of a Chinese bank in the Swiss financial hub of Zurich for future yuan clearance.

The deal is set to materialize Beijing and Bern’s pledge for closer financial ties and accelerate the establishment of a Zurich offshore yuan market."

. . . . 

"China’s currency will probably be more widely used than the yen and the pound in financial markets and trade in a few years, and the government should lobby other countries to have it included in the SDR (Special Drawing Rights) basket, the Shanghai Development Research Foundation said in a report in 2014.

"An upcoming review of the basket of currencie members can count toward their official reserves could see official IMF endorsement for the yuan as a global reserve currency alongside the dollar and euro in 2015."

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My added comments:

The last two paragraphs of this artice (in bold above) are the key information in the article. The reason China is establishing these offshore Yuan trading centers all over the world is more than just to diminish the global use of the US dollar. It's even more than just to increase China's influence around the world. 

The driving force behind all this is to "see official IMF endorsement for the yuan as a global reserve currency alongside the dollar and euro in 2015." The way to get that official IMF endorsement is for the Yuan to be included in the SDR basket of currencies when that review is done later this year.

You see many articles and analysts taking the view that Russia and China intend to overthrow the western financial system and replace the US dollar with their currency (usually the Yuan is cited). Let's think about that and ask this question:

If that is really the Chinese objective, why are they so anxious to get "official IMF endorsement for the yuan" by having it included in the SDR currency basket alongside the dollar, the yen, the euro, and the pound?

That suggests the Chinese intend to stay inside the IMF and expect to have a place of prominence there when monetary system change happens in the future. It does not suggest they plan to try and overthrow the IMF and setup their own independent system to control the global monetary system with just the Yuan.

With that in mind, come back tomorrow and read the blog post we will have on Jim Rickards new articles. He talks about how all the movement of gold from the west to the east is being done by design to get China caught up with the west in gold reserves. He says this must happen before any global monetary "reset" conference can take place. 

We always have to follow the facts and accept them. Perhaps those who say China will overthrow the US dollar and the IMF along with the other BRICS nations will be right. But for now, the facts suggest to me that is not their plan. It might be a last resort some day if they cannot get what they want at the IMF (Yuan inclusion in the SDR basket).

It seems pretty clear to me that for now they have not given up on the IMF since they are moving heaven and earth to meet the IMF requirements to get the Yuan added to the SDR basket. That is what China keeps saying they want. Until that changes, I see no indication that they plan to move forward on their own to replace the IMF or the US dollar. It's one of our big keys to watch here for this year and we will.

News: ECB announces QE program - Reaction in Davos

The ECB made its new QE program public on Thursday. There was not any real surprise in the announcement other than the amount was larger than some expected, but some analysts in Davos reacted by saying the QE program was too small or that they don't think it will have much impact in the EU. 

Below are a couple of articles on this with quotes from each. Gold reacted by moving up some. As you would expect the Euro fell against the US dollar. So, once again both the US dollar and gold moved higher together. This is a pattern we have noted here and will continue to follow.

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ECB to by sovereign debt

"The European Central Bank will launch an expanded “asset purchase program,” expanding its monthly purchases to €60 billion, said ECB President Mario Draghi Thursday."

"The announcement was made during Draghi’s press conference following the central bank’s monetary policy. He said that the purchase program will start in March and go until at least September 2016. As expected, the sovereign debt purchases will be proportional to each eurozone member country’s debt."

"As some analysts expected, the larger-than-expected purchase-program has helped gold prices jump into positive territory Thursday."

ECB Package Not Enough - Reaction at Davos WEF Conference

"Central banks have surprised markets this month, and the European Central Bank was no exception on Thursday announcing a much higher than expected stimulus package for the region."

"At a press conference on Thursday, ECB president Mario Draghi announced a €60 billion per month QE package in Europe, beginning in March 2016 and running to September 2016. Market expectations, based on leaked ECB documents on Wednesday, sat at around €50 billion."

"However, some leading economists, attending the World Economic Forum’s Annual Meeting in Davos, said quantitative easing is not enough to revive the European economy."

. . . . .

"Looking to the U.S. economy, Gary Cohn, president and chief operating officer of Goldman Sachs, said that struggling economies are currently in a race to devalue their currencies."

“We’re in a currency war. One of the easier ways to stimulate your economy is to weaken your currency,” he said, adding that if the U.S. economy’s strength continues while other economies continue to weaken; it could delay a Federal Reserve rate hike."

Angela Merkel Calls for Urgent Fiscal Reforms

" At the same time the European Central Bank was surprising markets with a €60 billion monthly asset-purchase program, Germay’s Chancellor Angela Merkel was advocating for “urgent fiscal reforms” in Europe at the 45th World Economic Forum annual meeting in Davos, Switzerland."

"In her keynote address Thursday, Merkel said that European leaders must continue to move forward with fiscal reforms if the eurozone is going to emerge strong from it latest economic crisis."

“Time is of the essence,” she said. “Every day we delay is a lost day. We need to promote growth and create long-term jobs,” she said in her speech, according to a WEF press release."

Silver is an Interesting Metal

Normally on this blog we talk about gold or silver as it may relate to the monetary system. Both metals have a long history of being used as actual money and today both are still viewed as hedges people use for various reasons. But silver is an interesting metal on its own merits because of all its unique properties and the many ways it can be used. In this article in Popular Science we learn that now Stanford University is working on clothes that contain silver nanowires. Below some quotes from this interesting article and then a followup comment.

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Instead of turning up the thermostat up this winter, why not just throw on some nanowire-coated clothing to stay toasty?

"According to the International Energy Agency, indoor heating accounts for almost half of total global energy usage, mainly on heating residential buildings. In a recent study published in Nano Letters, researchers from Stanford University describe a better way to conserve thermal energy. The nanomaterial-coated fabric they created traps heat inside a person's clothing, thereby removing the necessity to heat empty space and inanimate objects, and lowering the cost of household heating to (theoretically) almost nothing."

"The team began the research by looking for a wearable way to keep infrared radiation in the body. “Let’s say you want to make your clothes reflect heat, you need metal,” says Yi Cui, the lead scientist on the study. “But you’re not going to put metal on your body.”

"Instead of using rigid metal, the team decided to create a coating using easily bendable silver nanowires that can go on top of everyday clothing. The coating works two ways to heat up the body. For everyday wear, cloth coated with silver nanowires successfully reflects infrared radiation—something humans naturally emit—back into the body."

"To warm up even more, a person wearing the cloth can give it a charge while sitting at the computer. The movement of electricity from an electrical device across the cloth creates Joules heating, or heat generated while crossing a current."

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My added comments:

This isn't going to suddenly create a massive increase in demand for silver. The article points out that one article of clothing only requires about $1 of silver at current prices. And it also notes that it will be a few years before the product can be sold commercially. 

It does however show there are many creative uses for silver and more will surely emerge over time. There is enough silver available today to meet demand for its industrial uses. But the supply is likely to begin to fall because all the larger silver reserves that have been found are already in production and are being depleted as they are mined and used up. 

Silver is used in almost all electronics (cell phones, TV's, all computers, tablets, mp3's, radios, etc). It is used in autos, weapons, x-rays, mirrors, solar panels, all kinds of medical equipment as an anti bacterial agent, and many more products including silver jewelry. In most products only a tiny amount of silver is needed so that even if silver were to triple in price, it would not great impact the total sales price of the product. And there are such tiny amounts of silver it is not worthwhile to try and salvage it. Once silver is used in most products, it leaves the supply chain for good.

Silver also has pretty healthy investment demand. Silver coins minted by the US Mint, Canadian Mint, and other mints around the world are seeing record sales. For most people who want to own some precious metals as an insurance hedge, silver is more affordable than other alternatives (like gold or art collectibles).

Silver is just an interesting metal as this Popular Science article illustrates. Based on the data available today, silver will diminsh in supply in coming years even as demand continues to grow. More global population insures demand will be there in a world where kids get a cell phone by age 12 (or even earlier in some cases). 

Here is an thought to consider in regards to the future for silver. If every family on earth were to own or use just one half ounce of silver per year, all the above ground supply of silver would quickly disappear and more than a year of future mining production would be needed to meet that demand. On the other hand, there are a few individual billionaires who could buy 10% of all the silver mined on the earth in one year by themselves at the current price. 

Sooner or later, the global demand for silver will overtake the available supply. This makes it an ideal long term store of value in a portfolio for anyone with some savings. It can even easily be passed on to future generations if not needed during the lifetime of the person who acquires it.  It's an interesting metal.

added note: Bloomberg runs this article on silver which points out some of the same things we have here. Here are a couple of quotes.

"Silver headed for a bull market in its best start to a year in more than three decades, supported by speculation that slowing global economic growth will spur demand for havens."

"Holdings in exchange-traded products backed by the metal have posted three straight weekly gains, while U.S government data show money managers raised their net-bullish wagers to the highest since August. An ounce of gold bought 71.4 ounces of silver on Thursday, compared with an average of about 58 over the past decade, signaling the white metal is inexpensive relative to gold."

An Honest Assessment from the Head of India's Central Bank

Whenever we find an article from a credible source outside the US, we are interested in featuring it here. It is easy to only focus on US media sources if you live in the US. But many times you can get a perspective that comes from outside the US that is valuable to listen to. 

In this article in Project Syndicate, Raghuram Rajan (Governor of the Central Bank of India) gives a very honest assessment of where things stand in the ongoing economic battle around the world. The article is worth the time to read and consider. Please click the link above and read the full article. Below a few quotes from the article and then a comment.

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Bracing for Stagnation

"As 2015 begins, the global economy remains weak. The United States may be seeing signs of a strengthening recovery, but the eurozone risks following Japan into recession, and emerging markets worry that their export-led growth strategies have left them vulnerable to stagnation abroad. With few signs that this year will bring any improvement, policymakers would be wise to understand the factors underlying the global economy’s anemic performance – and the implications of continued feebleness."

"In the words of  Christine Lagarde, the International Monetary Fund’s managing director, we are experiencing the "new mediocre." The implication is that growth is unacceptably low relative to potential and that more can be done to lift it, especially given that some major economies are flirting with deflation."

Conventional policy advice urges innovative monetary interventions bearing an ever expanding array of acronyms, even as governments are admonished to spend on “obvious” needs such as infrastructure. The need for structural reforms is acknowledged, but they are typically deemed painful, and possibly growth-reducing in the short run. So the focus remains on monetary and fiscal stimulus – and as much of it as possible, given the deadening effects of debt overhang.

And yet, the efficacy of such policy advice remains to be seen. It is worth noting that the Japanese checked each of these boxes over the last two decades: They held interest rates low, introduced quantitative easing, and launched massive debt-financed spending on infrastructure. Few would argue that Japan has recovered fully from its malaise.

An emerging narrative might better explain why stimulus efforts have been unsuccessful: As former US Treasury Secretary Larry Summers has argued, the world economy may be going through a sustained period of "secular stagnation."

. . . . .

"Today, debt is making it difficult for developed countries to resume pre-2008 growth rates, let alone restore the levels of GDP that would have been attained if the subsequent Great Recession had not happened. Meanwhile, industrial countries’ overall debt/GDP ratios are continuing to grow."

"In emerging markets, slow growth in the advanced economies has shut down a traditional development path: export-led growth. As a result, emerging markets have had to rely once again on domestic demand. This is always a difficult task, given the temptation to over-stimulate."

"The abundance of liquidity sloshing around the world – the result of developed countries’ ultra-accommodative monetary policies – has made the task more difficult still, as the smallest sign of growth in an emerging economy can attract foreign capital. If not properly managed, these flows can precipitate a credit and asset-price boom and drive up exchange rates."

. . . . .

"But, overall, there is a palpable sense of gloom in the developed world, a feeling that growth is unlikely to take off in the foreseeable future. If secular stagnation persists, these countries will have to undertake painful structural reforms, figure out how to restructure their promises (debts, social-security commitments, and pledges to keep taxes low), and distribute the resulting burden."
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My added comments:

This article is filled with topics that we have talked about on this blog and that most certainly relate to the potential for monetary system change. The first thing to say is that this seems like a very open and honest assessment that the central bank easy money policies may not really be solving any problems. Instead they may just "kicking the can down the road". Mr. Rajan notes that the efficacy of the easy money polcies "remains to be seen". He goes on to use Japan as an example of a nation who has tried it for long time without success.

He adds later that the "abundance of liquidity sloshing around the world" can "precipitate a credit and asset-price boom and drive up exchange rates." We have covered all this here on the blog and listed warning after warning from both the IMF and BIS about "asset bubbles" from the various QE policies. He also notes that none of this is solving the debt overhang problem and that "industrial countries overall debt/GDP ratios are continuing to grow."

I am struck by the sense of gloom in this article coming from a highly regarded Governor of India's central bank. Usually, central bankers prefer to paint as rosy a picture as possible to the public. This article leaves you with that nagging sense that something is just not right that we have talked about here, despite US media efforts to portray a recovery being underway. It's a surreal feeling we have noted on here a few times.

We are seeing more and more signs that the problems in the global economy may be starting to overwhelm the central banks ability to manage them. The disaster that overwhelmed the Swiss National Bank was a very visible sign. But here we have a highly regarded central bank governor sounding as if there is not much hope that things are going to improve any time soon and openly questioning easy monetary policies.

All we can do here is attempt to make readers aware of all these issues and encourage them to stay alert and think about a plan to prepare for tough times should we encounter them. What we have learned in this past week is that even central banks can wave a white flag of surrender when no one is expecting it. This article seems to suggest there may be more white flags coming.

Interview with ECB Board Member ahead of January 22nd Meeting

Thursday (January 22nd) the governing council of the ECB will meet to discuss a possible ramp up of a new QE program for the EU. There is an expectation that the ECB will begin to buy government bonds of EU member nations. In this interview with ECB Board Member Benoit Coeure', he pretty much confirms that is likely to be announced. Below a few excerpts from this interview posted on the Bank of International Settlements web site. Just click either link to read the entire interview.

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Why has the euro area become a black hole for growth?

The trend of slow growth is not only affecting the euro area, but all developed countries. In Europe, it is also linked to insufficient technological innovation and a lack of dynamism and openness in the economy, and even in societies themselves.

Only six months ago the ECB dismissed any risk of deflation. Yet prices have begun to fall-

The euro area is not in deflation. But there is a risk, which got worse last summer, that growth and inflation remain weak in the long term and that we fall into a "1% economy": growth at 1% and inflation at 1%. This outlook is dangerous enough to be a concern to everybody. European leaders must mobilise all instruments (monetary, budgetary, structural reforms) so that growth picks up in a sustainable way. It's imperative that we, national governments and European institutions, take joint action to rapidly revive economic activity. This imperative has become even more pressing in light of the Paris attacks, which targeted the European values of freedom of expression, freedom of the press and freedom itself. In my opinion, the attacks have further highlighted, if possible, the fact that certain young people remain marginalised, dropouts, with no job, and at risk in extreme cases of turning to delinquency or even terrorism. Without growth, this can only get worse. Unity among Europeans is a must, including in economic matters. Europe needs a strong economy if it is to defend its values.

So the ECB is ready to pursue US-style quantitative easing, that is, repurchasing government bonds?

The Governing Council will meet on 22 January. The discussion will be about the composition and the scale of our purchases of assets on the markets and the base scenario, if we want to do more, would be to acquire public debt on a large scale on the secondary market (Editor's note: the resale market and not directly from governments). Until now, we have done it in a targeted way for securities (covered bonds and ABS), which contribute directly to financing the economy.

Will these purchases be capped and will they involve all the countries?

That's a discussion that the Governing Council will have on 22 January. We will take into account the American and British experiences in order to decide on the amount of securities to buy in order to restore confidence in inflation returning to a level close to, but below, 2%, while bearing in mind the economic and institutional specificities of the euro area. We also have to decide if the repurchases will focus on the debt of certain countries or if they should be weighted across the whole of the euro area.

If QE fails, you won't have any more ammunition.

Throughout the crisis, the ECB has devised efficient instruments to face up to new situations, while remaining within the framework of its mandate. But let's not delude ourselves: the efficiency of what we do will depend largely on what the governments are doing and will do in respect of budgets and structural reforms, quite simply because monetary policy has no impact on growth over the long term. That depends on the productivity of the economy, on human capital, the quality of education, social cohesion and also on the fact that public debt has come back under control. But note that that doesn't mean that we should expect the governments to take steps before we do what we have to do as a central bank. That would be an easy way; it is not my idea of the ethics of responsibility for those who bear public responsibilities, and this is not in accordance with the text of the European treaties, which require us to fulfil our mission whatever may happen.

The eurosceptic parties are gaining strength at each election and it shows that people are fed up with current policies, which are reflected in social decline. Isn't there a risk that the states are politically paralysed?

That they are fed up is no surprise! One cannot blame the people for that; it's a moral and democratic question. It's up to the European authorities and the governments to show that they can create growth and push down unemployment - something they haven't managed to do convincingly since the crisis started. Now the risk is that this fed-up sentiment creates a spiral of defiance: if there are no convincing results, people's confidence in European institutions and in the community construction is undermined. There is no solution without Europe: one cannot sustainably boost French growth if there's no strengthening of German and Italian growth. In some area it's even necessary to have "more" Europe. But to achieve this, it's necessary to restore people's confidence in Europe and to do that growth is needed. Hence the symbolic importance of the Juncker plan, which shows the determination of the governments to create growth.

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My added comments: 

This is a very good Q&A session with open and honest answers from Mr. Coeure'. He acknowledges that the central bank can only do so much to try and buy time and that eventually the real economy must perform. He notes if the institutions fail to create improved economic conditions, they should not be surprised when the people get frustrated and upset. 

The key ingredient that the whole current debt based monetary system relies on is confidence. People must have confidence in their leaders and their currencies. If that confidence fails for any reason, the task of regaining it becomes much harder going forward. The recent episode with the Swiss National Bank is just one example. If we see more "unexpected surprises" from more central banks, it could impact confidence that they can manage problems. Something we will need to watch closely this year. We will have a couple of articles related to that subject this weekend.

Bloomberg: Bitcoin Plummets 32% in Two Days

We have checked in on Bitcoin from time to time here on the blog. We view Bitcoin as something some people have turned to due to lack of confidence in the banking and financial system. Sort of a modern techno version of gold. But we have also noted that we felt that Bitcoin would struggle to gain mainstream adoption. There are several reasons, but one of the primary ones is that it seeks to operate outside the existing banking system. 

This article in Bloomberg provides an update on how Bitcoin is doing (price has fallen exponentially from its all time high). And the article also points out what we have noted here. That regulators around the world are making it hard for Bitcoin to gain mainstream acceptance. Below some quotes from the article and then a comment.

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"The price of bitcoin has plummeted 32 percent in two days, as the virtual currency’s volatility threatens to undermine its ability to gain mainstream use."

. . . .

"Bitcoin naysayers have been worried that governments around the world will regulate or prohibit the currency to crack down on criminals, and Russia is now moving closer to doing just that. A prolonged price drop could also, at least temporarily, put the future of the currency in question because the equipment and power needed to mine new bitcoins are so expensive. Mining new bitcoins is key to the underlying technology."

"On the flip side, many proponents of bitcoin appreciate its relative anonymity and transaction verification via a public ledger. And despite the recent drop, some of the biggest backers of bitcoin say they aren’t fleeing."

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My added comment:

One of our readers here whom I consider to be an expert on this topic warned me last year that Bitcoin would have big problems with volatility making it less attractive as a "store of value" type currency. That warning has proven to be accurate so far. Bitcoin does have a loyal following so I would expect it will not disappear. It's just that gaining broad mainstream acceptance looks like it will be very tough to accomplish. One of its features that appeals to many of its users (operates outside the existing system) does not help it gain acceptance within that system for a variety of reasons.

This is probably a good time to provide a brief update on the GSD "super currency" technology that Klickex has developed. The latest update I can provide is that this will probably be slowed down some now due to ongoing issues in the EU that need to be resolved and (ironically) due to the strength of the US dollar right now. The technology is still very much in place, but may not show up where you would see if for awhile yet. In a world that still views the US dollar as a "safe harbor" currency,  there is a less urgent need for a "store of value" super currency. If things change, we will let readers here know. Don't look for any news soon on it though is what we would expect right now.

Nomi Prins: We are in a Financial Meltdown

Former Goldman Sachs banker Nomi Prins does this new interview with Greg Hunter. She covers a broad range of topics in this interview including propects for the dollar, the Swiss Bank depeg from the Euro, and the impact of the collapsing price of oil. Just click on the link above to watch the full interview.

Here some quotes from USA Watchdog site from this interview:


"Best-selling author and financial expert Nomi Prins says, “We are in a financial meltdown.  I said 9 or 10 months ago, it hadn’t happened yet, but it should happen because of the instability of a system that is supported by central bank maneuvers and not really anything organic and leveraging and reaching for yields in places like oil and natural gas and other places on the virtue of cheap money. . . . It kind of boggles the mind.  This QE is epic.  It’s historic.  It is larger and more insane that ever in history.  It is pan-global.  The reason that things have kind of stayed in place is because there was enough cheap money coming into the system and enough corporations getting it . . . that really kept the markets artificially buoyed by virtue of this cheap money coming  in.  That’s kind of coming to a stop.  The ECB QE will help provide the markets and banks some solvency for a while and some buoy for a while.  So, therefore, there is still a little bit coming in.”

". . . I think the dollar will get weaker, but I don’t think we are going to see that plunge in the very near term because every other country is struggling right now.  That’s why there is still an advantage to the dollar and, again, not because our policies dictate that and not because this extra debt is smart.”

"On gold, Prins contends, “This shift to the dollar going down, I think, will be more gradual.  For the same reason the dollar stays strong is the same reason gold has done okay very recently but hasn’t had this major outbreak. . . . Gold will increase this year–also gradually for the same reason the dollar will not dump but could decrease gradually as QE and all these maneuvers play out.  I don’t really think this is going to be that breakout year.  The markets are going to go down because of the end of all this artificial aid, but we also have been underestimating the aid that gets continually dumped into the markets and into these banks.  That’s where the timing is critical to look at. . . . There’s going to be a negative market.  There’s going to be a downward impact on the markets.  There’s going to be an upward impact on gold.  All of that will happen.  It’s just not going to be as huge this year.  It’s going to be a more gradual working into that this year.”

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My added comments:

Nomi Prins comments regarding the US dollar and gold are somewhat in agreement with what we have talked about here. That being, both the dollar and gold may remain strong for awhile as capital moves in a "flight to safety."  She predicts that the change in these markets will probably be gradual rather sudden because the US is still doing better than much of the rest of the world. This could help hold up the dollar longer than many are expecting.

Over time, if gold begins to out pace the US dollar, it would indicate the major confidence has been lost in the present financial system. For now, there appears to be confidence in both the dollar and gold so long as the dollar continues to be the global reserve currency. 

News: IMF Cuts Global Growth Forecast, China GDP comes in Below Forecast

A couple of significant news items on CNBC tonight

IMF Cuts Global Growth Forecast for 2015

"The International Monetary Fund (IMF) trimmed its global growth forecast for 2015-16, cautioning that the boost from lower crude oilprices would be offset by dimmer economic prospects for China, Russia, the euro area, Japan and oil producers."

"In its World Economic Outlook (WEO) Update published on Tuesday, the IMF projected the world economy would expand by 3.5 percent this year and 3.7 percent next year, picking up from 3.3 percent in 2014 but lower than its previous estimates. In October, it predicted global growth for this year and next at 3.8 and 4 percent, respectively."

Chinese Economy Grows at Slowest Pace in 24 Years

"China's economy grew at its slowest pace in 24 years in 2014, official data showed on Tuesday, undershooting the government's target for the first time since 1998."

"Gross domestic product (GDP) expanded 7.4 percent from 7.7 percent in 2013. Government targets have been for a print of "around 7.5 percent."

"Growth in the world's second biggest economy has not fallen below 7.6 percent since 1990, when it grew 3.8 percent as a result of international sanctions in the wake of the Tiannanmen Square massacre."

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This news just continues to confirm that both China and many other areas of the world are struggling. We already know that Japan and the EU are. Russia is in serious contraction and Greece is unsettled leading into its election.

The IMF and World Bank have had to cut growth forecasts repeatedly. The IMF and the BIS have issued multiple warnings in 2014 that at the same time the world is battling deflationary forces, QE policies have created potential "asset bubbles" in various financial markets. Markets have started off the year in very volatile fashion and we have already seen one central bank (SNB) throw in the towel trying to manage its currency. Oil and other commodities (like copper) have crashed in price suggesting global demand is falling.

There are a lot articles appearing on the internet once again in alternative media sources warning of a severe crisis this year. We will just continue to follow events here and see if things calm down and stabilize or get worse. It's important to stay tuned to events in times like these. Tomorrow a new interview by Nomi Prins.

It is pretty obvious that we have a lot to keep an eye on in 2015

Added note: We will put this in the "you can't make this stuff up" department.

Tonight on the same web site (CNBC) that runs the article we linked above "Chinese Economy Grows at Slowest Pace in 24 Years" is another story on this GDP news with this headline "Asian Stocks Higher after China beats GDP Estimate".

You ask, did China beat expectations or fall below expectations? I guess it depends on which "expectations" you use to write the article. In one article it talks about how GDP came in below the government forecast made earlier in the year. In the other article it talks about how China's GDP came in above "forecasts by analysts." Just to add a little more humor, the first (more negative article) quotes GDP for 2014 at 7.4%. The second (more positive article) quotes GDP at 7.3%. Again, you can't make this stuff up.

This is a perfect example of how the same information (nearly) can be spun in media articles differently depending on what the writer wants to project. We will just link both articles here and let readers decide for themselves. Our intent here is to have a true "no spin zone" to borrow a popular phrase.

CNBC: Which Safe Haven Asset are You Buying?

CNBC runs this poll on their web site.

"The week ahead is big in terms of market volatility, and investors are deciding on which safe haven to park their cash in."

"This week is likely to be the biggest week in terms of economic news since the announcement of QE3 by the Federal Reserve in September 2012," noted Evan Lucas, market strategist at IG, referring to Chinese fourth-quarter growth data on Tuesday and interest rate decisions from the European Central Bank, the Bank of England, the Bank of Japan and the Bank of Canada."

"Meanwhile, markets remain spooked following last week's decision by the Swiss National Bank to remove its currency cap, which sent the Swiss franc nearly 30 percent higher against the euro."

"Tell us which safe-have asset you like amid all these risk events."

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Results of the poll as of the time of this post:

Which safe-haven asset are you buying?

Swiss franc

13%

Yen

6%

Gold

81%

Total Votes: 5370

Not a Scientific Survey. Results may not total 100% due to rounding.

added note: here is a CNBC followup article on gold that supports our blog posts here about what may be going on with gold.

Christine Lagarde Speech to the Counil on Foreign Relations

On January 15th IMF Managing Director Christine Lagarde gave a speech to the Council on Foreign Relations. You can view the speech here. In addition here is a link to the text of the speech. This speech is absolutely full of interesting comments and a hint about where things stand on the 2010 IMF reforms. Below are some selected quotes from the speech. Below that we will add some concluding comments about what we think are some key takeaways.

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"Good teamwork and strong leadership will be needed this year. The latest update of our World Economic Outlook – with all the specific numbers – will be formally presented next week. But I can already say this: despite the boost from cheaper oil and stronger U.S. growth, we see the global recovery continuing to face a very strong headwind."

. . . . 

"The obvious question is this: should lower oil prices and a stronger recovery in the United States make us more upbeat about the prospects for the global economy? The answer is most likely “No,” since there are still powerful factors that weigh on the downside."

"Certainly, the drop in oil prices is a welcome shot in the arm for the global economy. Cheaper oil increases consumers’ purchasing power and private demand in oil-importing countries. Depending on how long oil prices will remain at low levels, this could provide a positive contribution to global growth for some time."

. . . . 

"So what is the catch? The oil price and U.S. growth are not a cure for deep-seated weaknesses elsewhere. Too many countries are still weighed down by the legacies of the financial crisis, including high debt and high unemployment. Too many companies and households keep cutting back on investment and consumption today because they are concerned about low growth in the future."

Risks

Overall, we believe that global growth is still too low, too brittle, and too lopsided. Moreover, there are significant risks to the recovery. What are these? 

1- First, the asynchronous normalization (central banks going different directions) of monetary policies in advanced economies. There has been a lot of talk about this, but this year we should expect it to actually begin. The U.S. could see its first rise in short-term interest rates since 2006 – an important moment.

2- Second, emerging and developing economies could face a triple hit of a strengthening U.S dollar, higher global interest rates, and more volatile capital flows.

3- Third, there is a risk that the Euro Area and Japan could remain stuck in a world of low growth and low inflation for a prolonged period.

4- Fourth, there are increased geopolitical risks. In Ukraine, for example, increased international support to complement IMF support is crucial. At the same time, there is a palpable sense that the forces of intolerance and fragmentation are gaining strength.

Ms. Lagarde goes on to offer ideas on how to address these risks. Please read the full text of the speech to see those. In her concluding remarks she says this:

"The new multilateralism also requires institutions that are efficient, credible, and representative of a changing global economy. This is why the international community agreed to reform the IMF to increase the representation of emerging market countries. The 2010 quota and governance reforms would also help sustain the Fund’s financial firepower to meet the challenges ahead.

The IMF’s membership had called on the United States to ratify the 2010 reforms by the end of last year, which did not happen. As I have spoken much about leadership today, I cannot but express my profound disappointment in the political powers who have so far failed to grasp the benefits of the reform both for their own country and for the world at large. We have seen better from the United States over the last 70 years.

We will now be working on interim solutions to address some of the concerns of our other 187 member countries. But let me be clear: given the challenges that 2015 and the following years will bring, there is no alternative to completing the 2010 reforms – and we continue to call on Congress to approve them without delay."

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My added comments:

In this speech Ms. Lagarde lists four risks the global economy faces in 2015. We have covered all those risks extensively here on the blog. The fact that she lists them in this important speech means they are real risks and should be taken seriously.

In her conclusion, she once again expresses "profound disappointment" over the failure of the US Congress to approve the 2010 IMF reforms that would boost the "financial firepower" of the IMF and give the BRICS nations more voting power. Her comments on this are very interesting. Just last month the IMF issued a statement that in January 2015 they would begin meetings to discuss "alternative options" on how to implement the IMF reforms.

Please note the wording she uses in this speech regarding that:

"We will now be working on interim solutions to address some of the concerns of our other 187 member countries. But let me be clear: given the challenges that 2015 and the following years will bring, there is no alternative to completing the 2010 reforms . . ."

Yet another "deadline" passed without the reforms being passed. In these comments she says they are "working on interim solutions to address some of the concerns" of the other 187 member nations. Then she adds "there is no alternative to completing the 2010 reforms" and again calls on Congress to pass them.

Some fair questions here might be: 

Does this mean that she is telling the 187 member nations that the IMF will do something to try and appease them, but that the reforms will not be implemented unless passed by the US Congress? Is she hinting that the IMF will NOT try to bypass the US Congress on this issue?  If so, how will the BRICS nations take that if Congress does not act? 

Having covered this now for over a year, here is what we have seen. Continued expressions of frustration and disappointment by the IMF and the BRICS nations over this issue. This led to the setting of "deadlines" for the US to pass the reforms. The deadlines pass. More disappointment and frustration are expressed and then a new "deadline" is set. Nothing significant actually happens.

At some point, endless "deadlines" lose all meaning and credibility. For now it appears that the US Congress is in full control of this situation and that despite frustration and disappointment, all we will see is more meetings and more future deadlines set. We will have to see what Ms. Lagarde means by "interim solutions to address some of the concerns of the other 187 member nations" to see if any real significant change takes place.