Yanis Varoufakis (former Greek FM) Imagines a New Bretton Woods + a New Global Currency

In a new article appearing on Project Syndicate former Greek Finance Minister Yanis Varoufakis proposes both a new International Clearing Union (ICU) and a new concept for global reserve currency to go with it (he calls it a Kosmos). Below are a few quotes from his article.

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"The financial meltdown of 2008 prompted calls for a global financial system that curtails trade imbalances, moderates speculative capital flows, and prevents systemic contagion. That, of course, was the goal of the original Bretton Woods system. But such a system today would be both untenable and undesirable. So, what might an alternative look like?

The 1944 Bretton Woods conference featured a clash of two men and their visions: Harry Dexter White, President Franklin Roosevelt’s representative, and John Maynard Keynes, representing a fading British Empire. Unsurprisingly, White’s scheme, founded on the United States’ post-war trade surplus, which it deployed to dollarize Europe and Japan in exchange for their acquiescence to full monetary-policy discretion for the US, prevailed. And the new post-war system provided the foundation for capitalism’s finest hour – until America lost its surplus and White’s arrangement collapsed.

The question asked periodically during much of the last decade is straightforward: Would Keynes’s discarded plan be more appropriate for our post-2008 multipolar world?

Zhou Xiaochuan, the governor of China’s central bank, suggested so in early 2009, lamenting that Bretton Woods had not embraced Keynes’s proposal. Two years later, Dominique Strauss Kahn, then-Managing Director of the International Monetary Fund, was asked what he thought the IMF’s post-2008 role ought to be. He replied: “Keynes, 60 years ago, already foresaw what was needed; but it was too early. Now is the time to do it. And I think we are ready to do it!”

Within weeks, however, Strauss Kahn fell from grace, without ever explaining what he meant by “it.” But it is not too hard to sketch out what “it” might be."

Click here to read the full article on Varoufakis proposal for the Kosmos

(see Dr. Warren Coats thoughts on it below)

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My added comments: Every time we see another serious proposal for a new global currency of one kind or another, it adds weight to the idea that this concept is an ongoing topic of discussion around the world. Please notice that virtually every article on this talks about support from China for some kind of new global reserve currency in the future (usually the SDR itself is referenced). In this case we have a proposal from Mr. Varoufakis for a new digital global reserve currency administered by the IMF using a "transparent digital distributed ledger", but clearly not the SDR itself. He calls it the "Kosmos" just to give it a name. This is more along the lines of the original Bancor proposed by Keynes or the "Phoenix" mentioned in an Economist article way back in 1988 (see our 2014 article here). Interestingly, the Economist article suggested such a currency might come into existence by 2018. Here is the last sentence of that 1988 Economist article:

"Pencil in the phoenix for around 2018, and welcome it when it comes."

Added note: Former head of the SDR Division at IMF (Dr. Warren Coats) had this comment about the proposal from Mr. Varoufakis for readers here:

"The asymmetric adjustment pressures (BOP deficit countries must adjust while surplus ones don’t have to) have remained a problem since the establishment of the gold exchange standard under the IMF. Dissatisfaction with the existing system of international payments is growing. Yanis Varoufakis has proposed a modern version of Keynes’ International Clearing Union to replace the US dollar as the international reserve asset and restore the symmetric adjustment pressures of the gold standard. These are desirable objectives, but Varoufakis’ scheme (regulation of the supply of his new currency by a computer administered rule with taxes on both BOP surpluses and deficits) is more complicated than is necessary to achieve these objectives. Moreover, with floating rates visa vise the Kosmos and no intervention rules, his system is under specified. My Real SDR Currency Board scheme is both simpler and more market sensitive."    --------------    Dr. Warren Coats

Additional added note: A thank you to Willem Middelkoop for a mention of this article on his twitter feed.

Dr. Warren Coats (former IMF) - Why the World Needs a Reserve Currency with a "Hard Anchor"

This is an article I will repost monthly.

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Our article featuring the video discussion about the future potential for the SDR as a global reserve currency has generated a lot of interest and some good questions from readers around the world. Some readers here are advocates of a monetary system backed by gold so they wonder why the world would be better off using the SDR as a global reserve currency as Dr. Coats has proposed.

These are all good questions and encourage me that this blog is reaching one of its goals. A goal here is to present a variety of credible views on the important issues that relate to future potential monetary system change. In this case we have featured a presentation on how the SDR might eventually replace the US dollar as the world's global reserve currency and thoughtful readers raised some questions about why Dr. Coats thinks this is a good idea (see example here).  

In this followup article we will direct readers to a paper written by Dr. Coats where he explains in more detail why he thinks his proposal would make things better. Below I have pasted in the Conclusion section of his paper titled "Why the World Needs a Reserve Asset with a Hard Anchor". It may provide more insight into Dr. Coats thinking for readers here. Of course, you need to read the full paper to get the proper context. You can download the full paper here. Items that are underlined below are points I felt should have extra emphasis.

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from the Conclusion section of "Why the World Needs a Reserve Asset with a Hard Anchor":

Conclusion 

Since the collapse of the Bretton Woods/Gold standard system, the impressive growth of cross border trade and finance has been restrained by costly exchange rate volatility. An expensive industry has developed to hedge the related risks. Exchange rate manipulation, if not out right currency wars, have created political tensions and produced large international payments imbalances. Given the size of the U.S. economy and the depth and breadth of its financial markets, the use of the dollar has remained and even grown as the world’s primary reserve asset. But the continued failure of the U.S. government to address its unfunded liabilities, the traditional lack of concern by the Federal Reserve for the monetary needs of foreign users of the dollar, and faltering American leadership of the post WW II world order have increased discontent with and reduced confidence in the current arrangements. While gaining the exorbitant privilege of borrowing abroad in its own currency and the seigniorage from foreign holdings of its currency, the U.S. incurs the cost of deindustrialization caused by the chronic balance of payments deficits needed to supply the world’s demand for its currency, and the entire world incurs the cost of weakened monetary and fiscal discipline and hard to predict exchange rates. 

A much better system would replace national currencies for pricing and settling cross border transactions with an internationally issued currency, whose value was anchored to a small basket of real goods, and to which the exchange rates of all or most national currencies where firmly fixed. In 1969 the IMF created the Special Drawing Right (SDR) to supplement or replace the U.S. dollar in international reserves. Initially its value was fixed to gold but after the closing of the U.S. gold window, its valuation was fixed to a basket of key currencies. The Second Amendment to its Articles of Agreement obligated Fund members to make the SDR “the principal reserve asset in the international monetary system” (IMF Article XXII). 

However, the SDR suffered from several deficiencies and never caught on. The initial failure (since corrected) to charge interest for using SDRs (and to pay interest for holding them) tainted the SDR as a development aid instrument rather than a reserve asset. More importantly, the regulation of the supply of SDRs via the approval of periodic allocations to all members in proportion to their IMF quotas made it very unlikely that their supply would match their demand at their officially fixed value (based on a basket of key currencies). This necessitated administrative rules for their use, which seriously undercut their attractiveness as a reserve asset. 

While many simple and practical steps can and should be taken to promote the use of the existing SDR as proposed by one of us in many earlier articles and by Governor Zhou in his speech in 2009, we believe (along with Governor Zhou) that the SDR could be made a much better (and less political) unit of account by replacing its valuation basket of currencies with a basket of goods. All of this could be done under the IMF’s existing Articles of Agreement. 

However, with an amendment to the Articles of Agreement that replaced the allocation of SDRs with issuing them under currency board rules, the attractiveness of SDRs could be dramatically transformed. Rather than buying and selling SDRs for the items in its valuation basket (ala the gold or other traditional commodity standards), the IMF would sell and redeem these “real SDR” for the basket indirectly (against government or other AAA financial assets of equivalent value). Such an SDR, with a relatively constant real value, is likely to be adopted as the anchor currency for fixing the exchange rates of many if not most national currencies and to augment or replace the U.S dollar and Euro in countries’ foreign exchange reserves. The entire existing stock of central bank FX reserves could be swapped (substituted) for real SDR in one go.

So why haven’t such reforms been embraced? The United States is thought to want to hang on to the seigniorage it earns from supplying its currency to foreign holders while indulging in its exorbitant privilege despite the instability of its exchange rate as capital flows in and out in response to Federal Reserve monetary policy and world developments plus the growing risk of a Triffin Dilemma like loss of confidence. We argue here that the U.S. has not given enough weight to the cost of supplying its currency in the form of deindustrialization nor the cost in the form of global financial instability from excess leverage encouraged by unanchored monetary policies.

Claudio Borio and Piti Disyatat “have argued that the fundamental weaknesses in the international monetary and financial system stem from the problem of “excess elasticity”: the system lacks sufficiently strong anchors to prevent the build-up of unsustainable booms in credit and asset prices (financial imbalances) which can eventually lead to serious financial strains and derail the world economy. Reducing this elasticity requires that anchors be put in place in the financial and monetary regimes, underpinned by prudent fiscal policies.”  Our real SDR currency board proposals could remedy this excess elasticity. 

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My added comments: 

If you are interested in getting a better idea for Dr. Coats thinking you can do so by reading his papers written over the years which you can find here. Also, we have covered Claudio Borio (BIS) that Dr. Coats mentions above here on this blog. Readers might find this paper by Mr. Borio of interest as well.

Repost: IMF Officials Discuss Potential for the SDR as a Global Reserve Currency

Note: This is an article I will repost monthly as it contains valuable information

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We featured an interview with Dr. Warren Coats here on the blog in January. Dr. Coats has a proposal designed to encourage adoption of the SDR used at the IMF as a true global reserve currency. In February Dr. Coats and current IMF official Dr. Thomas Krueger were the featured speakers at a presentation on SDRs sponsored by the Chicago Economics Society in Washington, DC. You can watch the presentation on the video embedded just below. Following that is a brief summary of the contents of the presentation.

This presentation along with the Q&A session that followed with the audience has a wealth of important information about the prospects for the SDR some day becoming a true global reserve currency that could even replace the US dollar. This is a must see video for readers here and anyone you know who may have interest. Also, please note the quote Dr. Coats provided us to use for this article below.

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Here is a brief summary of just some of the important information covered in this video:

- introduction to IMF official Dr. Thomas Krueger who works with SDRs currently

- introduction to former IMF Head of SDRs - Dr. Warren Coats

- some history and background on SDRs

- an explanation of the distinction between official SDRs used at IMF and "private SDRs"

- Dr. Krueger talks about some realistic ways SDRs could be more widely used while also noting some of the factors inhibiting broader use of them (mainly the dominance of the US dollar)

- Dr. Coats reviews his "Real SDR" Currency Board proposal to explain how the use of private SDRs could expand the role of SDRs as a global reserve currency

- both speakers discuss the process in detail of various ways the SDR could gain broader adoption both within the existing IMF rules and with some changes to those rules

-the potential timing for adoption of the SDR as a global reserve currency is discussed (the time frame may surprise you)

- Dr. Coats notes that some changes to increase adoption of the SDR just require the "political will" to make some changes. He hopes that China might be willing to look at broader SDR adoption by issuing SDR bonds in the AIIB. Looks like China was paying attention in this Wall Street Journal article.

- The speakers (Dr. Krueger and Dr. Coats) were followed by a very interesting Q&A session with the audience where some excellent questions were raised and answered

- In the Q&A session (around the 1 hour mark in the video) Dr. Coats notes that Donald Trump is attracting support in his campaign by expressing concern over the offshoring of US manufacturing jobs. He adds that perhaps public concern with the loss of manufacturing jobs could lead to more interest in the future in the US for an international reserve currency. Dr. Coats feels that the loss of these jobs is tied in part to the US dollar being the global reserve currency (leading to payments imbalances globally over time)

-at around the 57 minute mark in the Q&A session they are asked what "event" could trigger the use of the SDR as a global currency. In the answer Dr. Coats explains how the issuance of private SDR's by banks could be done. Both Dr. Krueger and Dr. Coats agree that a major crisis involving the value of the US dollar (and loss of confidence in it) would have to take place for the SDR to step forward as a viable alternative

In addition we asked Dr. Coats if he had any thoughts on this presentation and any progress he sees towards broader adoption for the SDR as discussed in this video. He offered us this comment:

“In this presentation we were able to outline why it would be a good thing to replace national currencies as international reserves with an international one such as the SDR and to outline some steps toward that goal. It is generally believed that only an international financial crisis will precipitate a change in the international monetary system. Perhaps, but if so it is important to have a strong SDR waiting in the wings to take on that role when the crisis hits.”

Added notes: Dr. Coats answers some questions on this video presentation from a blog reader here.

Dr. Coats explains why he thinks the world needs a reserve asset with a "hard anchor" here

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My added comments:

Having covered SDRs here on this blog now for quite some time we know that there are a couple of huge questions in the minds of people all over the world on this topic. They are:

1) Will we get another major financial crisis worse than 2008 as predicted by Jim Rickards and other credible analysts in the next few months or years?

2) If we get the crisis, will that event lead to a more prominent role for the SDR in replacing the US dollar as the leading global reserve currency.?

I feel we have covered these questions here on this blog as well as any media publication on earth. We have dug into everything we can find to help readers learn more on this. Our search has led us to some of the leading experts in the world bar none. Included is Dr. Warren Coats featured in this video. This video will provide you with answers to many questions directly from an IMF official who works with SDRs currently (Dr. Krueger) and the former head of the SDR Division at the IMF (Dr. Coats). 

There is simply no better information available on this topic anywhere in our view here. It is important that more people learn about these issues and gain an understanding of the SDR because it could play a much more prominent role in the global monetary system in the future. Especially if we do get another major crisis. We have said that here on this blog for quite some time primarily based on Jim Rickard's work on this topic along with the work of Willem Middelkoop. (Dr. Coats mentions Jim Rickards at around the 59:30 mark in the video above). 

Now we have direct confirmation from a current and a former IMF official who are experts on SDRs related to what we have been covering here (see Dr. Coats quote he provided us above). Please take time to watch this video and encourage anyone interested in these issues to do so as well. It is loaded with valuable information.

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Below is a picture of a theoretical 100 SDR currency note used as a backdrop at the SDR discussion meeting. No such notes actually exist at this time. During the discussion Dr. Coats explained the difference between official SDRs issued at the IMF and private SDRs. This is a complex topic and it's hard to find high quality information on it anywhere, especially from experts like these.

One other added note: China gets a mention of the SDR into the recent G20 communique as this Wall Street Journal article notes. They call for broader use of the SDR.

SDR talk/UC alums Dr. Krueger & Dr.Coats w/@pdacosta Career trek, connecting to Alums @ChicagoHarris #ChicagoHarris

David Marsh (OMFIF) - China Accelerates SDR Bond Platform

David Marsh of the OMFIF has released a new commentary suggesting that China is moving ahead with steps to create SDR bonds. He describes it as a slow and steady process. Below are some quotes from his new commentary.

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"China appears likely to speed up promotion of the International Monetary Fund's special drawing right under a plan to prepare a platform this summer for SDR borrowing by Chinese and foreign entities on China’s onshore capital market.

The initiative will help fulfil several strategic Beijing monetary and economic objectives. These include boosting international acceptance of the renminbi, which enters the IMF’s composite currency unit in October with a weighting of around 10.9%, joining the dollar (41.7%), euro (30.9%), yen (8.3%) and sterling (8.1%) as officially recognised reserve currencies.

Beijing’s SDR capital market initiative will allow domestic Chinese investors to subscribe to domestic bond issues with a significant foreign currency component, a means of helping dampen capital outflows that have gained prominence in the last 18 months as a result of progressive capital liberalisation.

The SDR borrowing platform seems likely to be set up as early as July, earlier than expected, in advance of the Chinese currency’s formal SDR adherence. This will necessitate creating a synthetic SDR that can be related, through forward pricing, to the ‘new’ SDR being created in October. This step could lead the IMF to update its procedures for fixing the SDR, which at present is set daily, but in future may need to be established on a 24 hours a day basis."

. . . . . .

"The Chinese SDR initiative, depending on the market response, could allow the SDR to become a currency in its own right, rather than an artificial, narrowly used aggregation of leading currencies. But this is a long journey that faces many hurdles and may never be completed.   . . . . . "


"Zhou Xiaochuan, governor of the People’s Bank of China, has been the public face of Beijing’s SDR campaign. He said at the end of March in Paris that China intended issuing domestically orientated SDR-denominated bonds to promote the composite currency’s use.

A nascent market in SDR bonds started in the early 1980s but never took off, because of the wide gulf between the official use of the SDR as a reserve currency unit and the virtually non-existent private market for the SDR in market transactions. As a result of latest Chinese action, the gap could narrow in future years."

Click here to read the full commentary by David Marsh

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My added comments: Please note that while Mr. Marsh says this initiative is happening sooner than expected and "could allow the SDR to become a currency in its own right", he adds that "this is a long journey and faces many hurdles." Once again, this is in line with what we have been reporting here. 

The wild card that is always out there on this issue is if we do get another major financial crisis worse than 2008 as some are predicting. We can expect based on all the evidence we have presented here that this would lead to a global proposal to use the SDR as a new global reserve currency to replace the US dollar under "new rules of the game." Without a crisis like that, all the evidence so far indicates the process would unfold gradually rather than quickly.

Another note to add here. There has been a ton of speculation in the alternative media that China is about to officially back the yuan with gold and refuse to exchange the gold backed yuan for US dollars. This appears to be based on an unsubstantiated report on this site. It seems to have been accepted as true by many on alternative media sites despite no confirmation of this on any mainstream media and no indication from any Chinese official that anything like this has actually happened. 

All the available public evidence from China indicates that they support the SDR as an eventual replacement for the US dollar as the leading global reserve currency, but in a process that would unfold over a long time period (as David Marsh describes in the commentary posted above). China is definitely building up its gold reserves a lot, but has not stated in public that they intend to use the gold to officially back the yuan. This has led to speculation by some that China secretly intends to do this at some point and the unsubstantiated report linked just above created a stir for some who take this view. If you look at the update to the original report, it states that the original story is still unconfirmed. (see update 4-19-16 - "No word yet on a gold-backed Yuan currency."). It's now past the end of April with no further update. I do not find any credibility for this report at this point in time.

Jim Rickards says that China is simply building up gold reserves to hedge the very large US dollar position in their official reserves and to prepare for an eventual global "reset" conference where the "rules of the game" will be changed for the global monetary system. He says each country will need gold reserves at that time to be a serious player in those discussions which explains the big buildup of gold reserves by both Russia and China.  We will follow this over time and see what actually does happen

Crisis Watch - Latest Array of Information (May 2016)

We have concluded here on this blog that really the only thing left to watch for is another major financial crisis so large that it could lead to major monetary system change. Because such an event is impossible to predict from a timing standpoint, I decided to end daily articles here since it could be a long time before another crisis unfolds. 

On the other hand, we have established from many highly credible sources that the conditions for another major crisis do exist and are pretty much present all the time. There are many credible analysts who expect this kind of crisis, but we have just listed many of the warnings issued by both the IMF and the BIS here on this blog. You can see that list here. Most people accept these as highly credible sources.

This creates a dilemma for me in trying to serve readers here responsibly. I need to make sure readers are aware of the legitimate warnings and forecasts of credible sources that believe another major crash is either possible or will actually happen. At the same time, I need to make sure that I am not presenting fear based hyperbole if no new major crisis arises any time soon. It's the most difficult issue I struggle with here on this blog.

I have given this problem a lot of thought and my solution is to try and do periodic updates I will title as "Crisis Watch". I will provide a brief summary of all the primary sources of information I follow as to what they are saying regarding the prospects for a new major crisis/crash/collapse. This will hopefully assist readers in a responsible way without me having to make any kind of prediction myself because I freely admit that I have no way to forecast a major event like this unless someone inside the system gives me direct input that they see such a crisis ready to unfold. So far, no one inside the system has done so.

With all that said, here is the rundown for May on what I see from a variety of sources on this issue.
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Jim Sinclair/Bill Holter - These two have begun a subscription service that I won't have access to so all I can do is present what I can see from any public comments they make. I believe both Jim and Bill still firmly believe we will see the kind of major crisis we have talked about here this year. In fact, I think Bill Holter thinks it is actually underway now, but is simply unfolding in waves over time rather than in one big sudden event. Bill Holter released this interview recently (he says we may not make it until October).


Jim Rickards - Jim still believes we will see a major crisis that will lead to a big monetary system change (the SDR replacing the US dollar as global reserve currency). However, it is virtually impossible to get Jim to commit to any kind of hard time frame for the crisis. He has said for a couple of years now that it can happen at any time or could take several years, but has always indicated he felt it would not be later than the 2018-2020 time frame. Jim is doing a ton of free interviews now in promotion of his new book on gold so I have heard him quite a bit lately. He has clearly hedged on the timing for the crisis, saying in some interviews it could still be years away, but he is still always warning it could also happen much sooner than people expect. Basically, Jim admits he cannot predict the precise timing so he advises people to prepare as soon as possible because once such a crisis did unfold, it would likely be too late to take any meaningful actions to help weather the storm. Jim says everyone should try to own at least some physical gold. For those who cannot afford gold, I think he would advise them to try and own some physical silver.

Various precious metals advocates - Here we include a number of analysts who regularly do interviews on alternative media sites such as King World News. This group remains virtually unanimous that a huge crisis is coming and most think it will be sooner rather than later. They all advise people to acquire physical precious metals as insurance against such a crisis. In this group would be people like Eric Sprott, John Embry, James Turk, Egon Von Greyerz, Andrew Maguire, David Morgan, and many others. We can assume this group will not change their view. No change with this group in May.

Former IMF Chief Economist Olivier Blanchard - Mr. Blanchard attracted a lot of attention in this UK Telegraph article when he talked about the possibility of debt problems in Japan spilling over into the global economy with some level of crisis potential in the global bond markets. 

Bo Polny - Bo is a cycles forecaster who uses methods some find questionable to try and predict future market highs and lows. He has a mixed track record having made some remarkably accurate forecasts while also missing on some major forecasts (which to his credit he admits). In this recent interview with Greg Hunter he puts everything on the line by forecasting that we absolutely will see a major financial crisis by this fall which will see the US stock market take an enormous dive downward and will see gold and silver prices sky rocket higher. Bo has missed on similar calls for gold in both 2014 and 2015, but admits that in this interview and makes his case as to why he thinks he will be right this year. I don't know if Bo will be right or wrong, but if he is right, it will be important to start thinking about some kind of backup plan right away. If you are considering acquiring any precious metals as an insurance policy and Bo is right, you only have a few weeks to months left at most. Jim Rickards basically says that same thing, but is not suggesting that he thinks a crisis will emerge this year. This interview is a perfect example of how hard it is to try and decide what to present to readers here. If Bo is off base, his forecast will seem like needlessly worrying people. But if he were to be right, people would ask why no one one gave them the opportunity ahead of time to try and make some preparations. All I can say is I don't know at all, but I do know that having some kind of insurance plan is wiser than assuming nothing could ever happen. That's just common sense. Here is the latest Youtube release from Bo. No change for him.

Donald Trump - Here is a fascinating new forecaster to consider. Trump is proclaiming he thinks we are in a bubble and about to enter a "major recession". He says many of the same things that those predicting a major crisis above are also saying. In his case, this is a major gamble because if we arrive at November 2016 and no major crisis or recession has happened, he will look really off base and will no doubt take a huge political hit with voters who will assume he is unable to assess things properly. On the other hand, if we do get a crisis like Bo Polny (above) is predicting by this fall, Trump will look like a genius and will no doubt reap gigantic political benefit. I believe he would be elected President if such a thing did happen. Based on that, we must assume that Janet Yellen and the Fed have a vested interest in doing everything in their power to avoid such a crisis event happening this year. The very last thing I suspect they would want is Donald Trump as President. He has already announced he favors a full audit of the Fed and would certainly blame the Fed heavily for any major crisis that unfolded this year and of course would take credit for predicting it ahead of time. Most of the Ted Cruz and Bernie Sanders followers also are skeptical of the Fed. If we get a big crisis this year, expect major political fireworks. If we don't I expect the next President will likely be the Democratic nominee. No change from Donald Trump in May.

Sources who have connections inside the system - These are sources I cannot name because comments they give me are off the record. I hate to do that, but there is no choice. If you promise someone you will keep a comment off the record, you must honor that for moral and ethical reasons. What I can say here is that no sources like this have indicated to me that they see the kind of crisis we are talking about here happening this year. In fact, all the evidence I have from these kinds of sources indicates that they feel pretty good about the stability of the system right now and don't see any reason to make any kind of major changes to it any time soon. Of course, if a crisis did happen, I'm sure they would change their view on making major changes to try and deal with the crisis. But every indication I have is that if there were a major crisis this year, these sources would be surprised by that.

Mainstream media sources (CNBC, Bloomberg, etc) - The overwhelming majority of these kinds of sources are not expecting a major crisis or forecasting one any time soon. If that changes, you probably won't need my blog to know about it.

Summing Up: Pros and Cons for a Major Crisis Event

Pros:

- virtually all the sources I follow agree a major crisis is possible at some point in the future unless somehow the current unsustainable debt growth in the US and globally is dealt with. Their time frames vary a lot.

- the IMF and BIS have issued numerous warnings about systemic risks that exist.

- many credible experts from a variety of sources genuinely believe a crisis is coming. They vary on the timing for such a crisis.

- the law of averages - since we know that a major crisis has happened in the past and that they tend to happen in somewhat regular time frames (cycles, etc) it's only common sense to assume we will get another one at some point. The question remains when and how severe.

- the US dollar has shown signs of increasing weakness and the precious metals have sustained strong moves up as well. These are some indicators to keep an eye on.

Cons:

- we can assume the US Fed and US government will do everything in their power to avoid a major financial crisis during an election year which would help their adversaries make a case against them with the general public.

-while the IMF and BIS have issued many risk warnings, neither is forecasting a crisis event at this time. Both have only expressed concern over slow global GDP growth. Christine Lagarde says this:

"She (Lagarde) said the world economy isn't in a crisis but that slow growth risks becoming ingrained as a "new mediocre." She noted the outlook for the next six months has weakened, suggesting the IMF may be revising down its forecasts."

- people have been forecasting a big crisis now every year for the past several years and have been wrong so far. This tends to lead to what I call "crisis fatigue" for the average person who quits listening to such forecasts because nothing major ever seems to happen. Another year of no crisis will just reinforce this feeling.

- mainstream media and mainstream financial analysts continue to see no major crisis coming even though there are some exceptions here and there. 

Conclusion: I will try to do an update like this every so often (at least once a month). If events indicate something significant might  be happening I will try to jump in with an article at that point. Otherwise, this will hopefully provide some useful information to readers without beating this topic to death every day. Overall, there is not much change in this report from the one last month.

Added note:  In May I will re-post some key articles on SDRs so the links to those articles will show up on the right side of the blog during the month of May. The articles with Dr. Warren Coats direct comments (given for this blog) will be re-posted every month as they are some of the best information you are going to find on the prospects for the SDR replacing the US dollar anywhere in the world that I know of. 

Here are those links:

SDR - An Emerging Global Currency (Video)

Followup - Dr. Coats Answers a readers questions

Why Dr. Coats thinks the world needs the SDR with a "hard anchor"

New Article Proposes Using SDR to "Finance Global Reflation"


List of all articles here on SDR's

US Dollar Chart Watch - Update

A week ago we ran this article noting that the US dollar index as hovering just above a key support area at 93-94. The dollar index had fallen down to the 94 level twice and weakly bounced up a little as you can see on this chart. We wondered if the 94 level would hold. This week we get our answer as the dollar did not hold the 94 level and closed Friday just barely above 93. This has some added significance since this was both a weekly and monthly close. 

When you look at the chart linked above virtually every indicator is suggesting that the dollar index is headed a lot lower soon. It will have to stage an immediately sharp rally off 93 or else it is probably headed into a deeper dive. On this longer term chart you can see that there is not much support until the 80-82 area. A drop down to there will be a major event and will send gold, silver and oil prices higher. About the only positive you can find on the charts is that the dollar index is showing to be oversold, but if 93 does not hold, that will likely just continue to be the case for awhile longer.

Normally I don't monitor things like this on a daily basis, but in this case the dollar index is at a very key level from a technical standpoint. It must stage a stronger rally soon or we will likely see a drop (over 10% in a short time frame) that will get investor and media attention. Because we do know that governments and central banks do intervene in markets at times, it will be interesting to see if any effort is made to rally the US dollar index right here. If there isn't, it suggests to me that a decision has been made to let the dollar go for now or that market forces pulling the dollar down are too strong for attempted intervention to matter. Just keep an eye on it over the next couple of weeks and see if it rallies or breaks down into an even sharper decline. The chart right now suggests the later is more likely.

Added update 5-2-16: Here is a decent technical analysis that points out what we are saying about the dollar being at a very important point right now on its chart and the potential impact on precious metals depending on what happens next with the dollar.

New Article Proposing Using SDR to "Finance Global Reflation" Supports Jim Rickards Prediction?

Readers here know that we have followed the SDR story for quite some time here and covered it in depth. We started following this story because a few years ago Jim Rickards issued a prediction that another major financial crisis in the future will lead to the IMF issuing trillions of new SDR's in order to "reflate" the system after the crisis. In our research here, we have found evidence that this a plausible theory (although likely a gradual process absent a crisis) and have documented it here in articles with direct input from a leading expert in the world on SDR's, Dr. Warren Coats. 

Now we have a new article by Andrew Sheng (U. of Hong Kong) and Xiao Geng (U. of Hong Kong) that appears to be supportive of the idea that the SDR could be used in the future to reflate the global system. Below are quotes from this new article appearing on Project Syndicate and following that are some added comments including some by the former head of the SDR Division at the IMF (Dr. Warren Coats).

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How to Finance Global Reflation

"There is a growing awareness that, in today’s globalized world, financial markets are beyond the control of national policymakers. While a few economies do have the scale to shape interconnected global markets, they face serious constraints, political and economic. As a result, the global economy is stuck in a pro-cyclical financial cycle, with few options for escape.

As Claudio Borio (BIS) pointed out years ago, the global financial cycle is longer and larger than real economic cycles, and is closely associated with the fluctuating value of the dominant reserve currency, the US dollar. When the dollar is weak, capital flows from the United States to other countries, where it spurs growth through increased credit."

. . . . . . 

"With the US, the issuer of the world’s preeminent reserve currency, unwilling or unable to provide the liquidity needed to close the infrastructure investment gap, a new supplementary reserve currency should be instituted – one whose issuer does not have to confront the Triffin dilemma. This leaves one option: the International Monetary Fund’s Special Drawing Right (SDR).

Of course, the road to becoming a reserve currency is long, especially for the SDR, which currently functions only as a reserve asset, with an issuance size ($285 billion) that is small relative to global official reserves of $10.5 trillion (excluding gold). But an incremental expansion of the SDR’s role in the new global financial architecture, aimed at making the monetary-policy transmission mechanism more effective, can be achieved without major disagreement. This is because, conceptually, an increase in SDRs is equivalent to an increase in the global central bank balance sheet (quantitative easing)."

. . . . . 

"Consider a scenario in which member central banks increase their SDR allocation in the IMF by, say, $1 trillion. A five-times leverage would enable the IMF to increase either lending to member countries or investments in infrastructure via multilateral development banks by at least $5 trillion. Moreover, multilateral development banks could leverage their equity by borrowing in capital markets. Depending on the quality of the projects, in terms of governance and cash flows, they could subsequently be sold back to investors as asset-backed securities to fund new projects."

Click here to read the full article on Project Syndicate

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My added comments: This article clearly calls for a major expansion of the SDR and offers a proposal as to how this could be done by existing central banks. This proposal would not require another major crisis to move forward as it suggests the reserves created under this proposal could be used to finance global infrastructure projects. Jim Rickards immediately called attention to this article on his Twitter feed here. It should be noted that the authors of the article acknowledge that absent a major crisis "the road to becoming a reserve currency is long, especially for the SDR." This is also in line with what we have reported here. Willem Middelkoop writes a new blog post about this article here.

I reached out to Dr. Warren Coats (former head of the SDR Division at IMF) to get his reaction to the proposal in this article. Here is what he had to say about it:

Thanks Larry.

While the authors (of the "How to Finance Global Reflation" article) mischaracterize the operation somewhat, it is totally feasible under current rules.  They propose a large allocation of SDRs that countries would use to lend to the development banks for a large increase in infrastructure lending. This would not involve any increase in IMF lending contrary to what they state. While the SDR allocation would also relieve country reserve demand and the larger stock of SDRs would improve the resilience of the international monetary system, it would do nothing to improve the character of SDRs and how they are issued as I have proposed. 

Moreover, the spending stimulus they propose comes totally from increased project funding by the development banks. This financing could come directly from member countries rather than by allocating and then investing SDRs in the development banks. The proposed approach probably avoids the need for national budget approval for increased funding of the development banks. The bottom line question is whether the development bank chosen and directed infrastructure lending by the development banks is the best way to go. I am skeptical.

Warren

note: Dr. Coats gave permission to quote his email comments.

additional added note: It is interesting that this whole idea of using SDR's in the future as a global reserve currency was virtually unheard of (at least in general media) when Jim Rickards first talked about it. Having followed this now for some time, it is noteworthy that you now see this mentioned more often in serious media articles (like this one linked above). I give Jim full credit for bringing this whole topic to my attention as I would not have known about it at all had I not heard him talk about it years ago. Also, my curiosity to learn more about this led me to Dr. Coats and others who I view as leading experts in the world. I feel this has benefited readers here who want to learn more about this topic.

This may seem like an off the radar subject now, but if the SDR is eventually seriously proposed as a global reserve currency to replace the US dollar, it will be very important for people to have the best information available. I think some of that can be found here thanks to Jim Rickards, Dr. Coats and others who have helped point the way to more accurate information.

added note from Willem Middelkoop: Willem posts this link on his twitter feed which goes to a 2012 Chatham House gold study group report on the idea of using gold to "anchor" the SDR at some point. The report looks at the idea, but says it believes it is unlikely to happen for reasons listed on pages 18-19.

Developments in the Gold and Silver Markets

I don't do many articles on the gold and silver markets here because the topic seems to generate a lot of emotions for some reason and this blog is trying to attract the interest of people new to the topics covered here. Constant controversy makes it hard to discuss issues with someone trying to learn about these topics for the first time.

With that said, the precious metals markets are a key part of what we do cover here. When we see sharply rising prices for gold and silver in terms of what they cost in US dollars, it is an important signal to keep an eye on. We have said many times that if we do get the kind of new major financial crisis that Jim Rickards and others are expecting, the potential for major systemic change that will impact all of us will greatly increase. A sharply falling US dollar and/or sharply rising prices in US dollars for gold and silver could indicate the conditions for such a crisis are in play.

Below is a bullet point list of some of the recent developments in the gold and silver markets and after that a few comments.

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- Deutsche Bank settles gold and silver price fixing litigation - the signifigance here is that DB not only will settle for price fixing, they agreed to point a finger at other major banks involved in price fixing in gold and silver. GATA views this news as partial vindication for their claims that the gold and silver markets have been manipulated. They still believe the major manipulation (gold price suppression) is done by central banks.Russia chimes in with this article in The Sputnik News.

- Opening of new Shanghai gold exchange - this news was mostly ignored in mainstream financial media in the west, but gold and silver advocates view this as an important change in the market for the future. Andrew Maguire talks about that in this interview. John Embry of Sprott Assets also talks about it in this interview. Money manager Stephen Leeb also talks about it here. These interviews will give you a feel for the importance that gold and silver advocates are placing on this event. It will be interesting to see if it has the impact these advocates are anticipating.

- The massive rally no one knows about (in the general public). It's always interesting to me how financial media will talk endlessly about the US stock market going up, but seems to completely miss gigantic moves up in the gold and silver markets when they do happen. If there were a stock sector that has gone up around 100% in about three months, would you be interested to know about it? I bet most people would be surprised to know that the HUI index that measures gold and silver mining stocks has gone up that much since January of this year ( doubled from 100 to 200 - see this chart as of 4-22-16). Meanwhile the Dow Jones index is up a little over 15% during the same time. Which one got all the media coverage?

- Silver moving to take the lead in the gold and silver market. While gold has made a strong move up so far in 2016, we are starting to see silver outperform gold quite a bit lately. This has resulted in the gold to silver ratio dropping from a high near 84 (84 ounces of silver to buy one ounce of gold) to around 72 as of 4-22-16 (see this chart). I expect to see this ratio continue to fall in the future meaning that silver would go up more in % terms than gold. Retail demand for silver eagles from the US mint also is on a record breaking pace this year so far. Other mints around the world are experiencing similar high demand.

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My added comments: Earlier this year I noted that it seemed as though the silver market may have bottomed out in late 2015 (see silver chart here). The upward trend this year is beginning to add confirmation to that possibility. What that means for the average person is that if you want to include some actual physical silver as part of an emergency cash reserve fund you may want to not wait a lot longer. I am NOT talking about trying to trade silver (or gold) short term. They are volatile markets at times and will go up and down all the time in the short term. A long term physical holding as part of an insurance emergency cash reserve is a completely different idea and is perfectly reasonable option for the average person to consider.

Added note 4-26-16: 40 year veteran precious metals dealer Bill Haynes is reporting very high retail demand for gold and silver which he says means prices will be heading higher. In the past Bill has demonstrated that he has a pretty good feel for how the retail market will impact prices so his comments are worth listening to.