Some News Notes from the IMF, The Fed, Etc

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

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

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

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

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

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

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

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


IMF Blog: A Weakening Global Expansion Amid Growing Risks

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

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

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

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

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

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

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

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Conclusion

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

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

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

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

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

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

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

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

 

The Case for The Fed and Central Banks Creating Market Bubbles

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

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

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

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

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

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

. . . . .

Click here to read the full article on MarketWatch

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

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

News Note: Newmont Mining Buys Goldcorp

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

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

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

. . . . . .

  Click here to read the full article on CNBC

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

BIS Survey on Central Bank Digital Currencies

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

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

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

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Conclusion

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

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

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

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

Click here to read the full article from the BIS

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

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

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

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

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

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

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

What to Watch for in 2019

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

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

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

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

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

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

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

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

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

Conclusion:

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

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

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

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

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

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

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

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

. . . . .

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

. . . . 

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

Click here to read the full article on Reuters

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

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

News Note: Treasury Secretary Calls Major Banks

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

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

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Jim Rickards Twitter Feed Comments:

Comment #1

Comment #2

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

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

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

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

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

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

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

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

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

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

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

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

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


Regarding a Future for Cryptocurrencies in Central Banks:


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

. . . 

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

. . .


What’s next? 


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

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

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

Click here to read the full text of the speech

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

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

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

Claudio Borio (BIS) - Cato Institute Speech

Recently, Claudio Borio of the Bank for International Settlements (BIS) gave this speech at a Cato Institute Monetary Conference in Washington DC. Below I have pasted in the Conclusion section of the speech and then a few added comments.

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Conclusion


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

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

Please Click Here to Read the Full Text of the Speech

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My added comments: My take on these comments is that Mr. Borio is not calling for any kind of radical change to the existing monetary system. He seems more to indicate it should just stay as is with some continued tweaking at the margins now and then. This is consistent with what we have reported here for some time now.

Please also note that he sees no significant future for cryptocurrencies. 

Added note: I also continue to believe that neither the IMF nor any major central bank is on the verge of trying to implement any kind of cryptocurrency or blockchain based system at this time. I base this on information from sources I view as highly credible. I will have an additional article along these same lines in a week or so based on a new speech from the BIS.

2019/2020 - Will the Blame Game Ramp Up?

Things have been pretty calm in terms of overall market activity despite some occasional bouts of volatility. Despite hundreds of forecasts across the spectrum of economic views that we are about to see a huge new major crisis, that has yet to emerge. The 2018 elections are over now and will results in predictable gridlock which markets don't normally find too bothersome.

Lately though, a few indications that we might be about to see some kind of rollover in the economy have begun to show up. The stock market is now struggling and more and more view as overpriced. The housing market is showing some signs of a slow down with mortgage rates creeping higher. Same with auto sales. So we continue to monitor things to see if these are just minor pullbacks or the start of something more significant.
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Unfortunately, it is impossible to try and analyze the potential for future economic conditions without taking into account the political ramifications. So what follows below is an attempt to try and project what we might see in 2019/2020 given the current political landscape.

From 2016-2018, the Republican Party controlled The White House, the Senate, and the House of Representatives. While its true that the slim majority held in the Senate did place some limits on what Republicans could get passed into legislation, for political perception purposes, the public would view whatever happened economically during 2016-2018 as being owned by Republicans. I think this view is not entirely proper because there are many longer term factors that impact the economy (good and bad) unrelated to whatever the political party in power does. But in general, the public probably does not view things that way which is what matters in terms of political fallout.

For the most part, the general perception is that the economy did well during 2016-2018 which probably allowed the Republican Party to limit its losses in Congress in the recent mid term election. It is also probably true that if we had seen the new major financial crisis many are still expecting to arrive during 2016-2018, President Trump would have taken most of the blame for it just as he claimed most of the credit for what most viewed as a good economy. With total control of The White House and Congress, it would have been pretty hard to shift blame elsewhere in the public perception.

So what happens now in 2019-2020?

Now the political perception situation has been altered. The Democrats will now control the House of Representatives. We can be pretty sure they will use this new found power both to impose gridlock on any new legislation President Trump would want and to harass him with various investigations for the next two years. Without control of the Senate, this will mostly be just noise, but will certainly insure that no further major agenda items for President Trump will go anywhere (the possible exception being some kind of infrastructure bill).

How will this impact markets and the economy?

It is too early to say right now. We will consider two alternatives in this analysis:

1) Gridlock along with continuing rising interest rates slows down the economy and cause some correction in the stock market, but not a severe decline.

We will call this the minor impact alternative. If this is what happens, we can expect that not all that much is going to change in the next two years and that nothing terrible will happen requiring someone to be "blamed for causing the problem". In politics, perception is pretty much everything. With a divided government where nothing major happens good or bad, it is pretty hard for either side to successfully blame the other side. Further stalemate seems the most likely outcome.

2) The economy rolls on over from here into a severe decline and the stock market takes a severe drop. The possible signs of a topping out and rollover we see now pick up momentum and turn into the major crisis so many have expected now for years. The entire financial system comes under risk once again (worse than the 2008 crisis).

Here is where it gets interesting. If we really do get into a major economic decline of the kind people like Jim Rickards have been predicting for a long time, someone is going to have to be blamed in an effort to push the political fallout their way.

We don't even have to guess what President Trump will do under this scenario. He has made it clear. He has already tagged the Fed for blame due to tighter money policies. And he has already made it crystal clear he will blame Democrats for a falling stock market.
So the President already has two convenient scapegoats lined up in case things really do go south significantly the next two years.

We can expect that Democrats along with all others opposed to President Trump will do everything they can to lay the blame on President Trump. Perhaps they will argue that the last two years were just a carry over effect from years of low interest rates and easy money policies that President Trump rode to its crest. Whatever they feel will resonate best with voters is probably what they will go with. But we can be pretty sure they will blame President Trump.

In the second scenario, the Blame Game likely ramps way up in 2019-2020. An already divided nation will probably see even more intensity on both sides as the political stakes for who the public blames for the crisis would be enormous. That may be hard to imagine given what we have already seen, but in any crisis things become even more intense. Also, under severe crisis conditions, the door tends to open wider for what are normally considered more extreme views to gain momentum. This could range from the socialist agenda coming from the left to the "end the Fed" agenda on the right. If a majority of the public views the present system as failing, they tend to be more interested in listening ideas for radical change.

It is this second scenario we should watch for and monitor carefully the next two years. If we get the first scenario. nothing major is likely to change in terms of our financial system or monetary system. But under the second scenario, the potential for some kind of major change increases and what that change looked like probably would depend on who the majority of the public blamed for the crisis (an unknown in a complex system).

I offer no predictions here. I just attempt to monitor events and offer the best analysis I can based on what actually happens. If I had to guess right now, I would guess scenario #1 above is more likely than scenario #2. But who really knows? The conventional wisdom has been wrong as often as it has been right in recent years.

Added note: Unless some significant news event arises to cover, this may be the last article on the blog for the next month or so.

Christine Lagarde and the IMF - Are They Proposing a New Global Digital Currency?

The short answer is no. At least not any time soon. The IMF releases this new study on the prospects for central bank digital currencies (CBDC's) and Managing Director Christine Lagarde offered her thoughts on the subject in this recent speech. Below are a few excerpts from each and then a few added comments.

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From the speech by Managing Director Lagarde:

In this context, I would like to do three things this morning:

• First, frame the issue in terms of the changing nature of money and the fintech revolution.
• Second, evaluate the role for central banks in this new financial landscape—especially in providing digital currency.
• Third, look at some downsides, and consider how they can be minimized.

. . . . . .

Conclusion

Let me conclude. I have tried to evaluate the case this morning for digital currency.

The case is based on new and evolving requirements for money, as well as essential public policy objectives. My message is that while the case for digital currency is not universal, we should investigate it further, seriously, carefully, and creatively.

More fundamentally, the case is about change—being open to change, embracing change, shaping change.

Technology will change, and so must we. Lest we remain the last leaf on a dead branch, the others having decided to fly with the wind.

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From the newly released IMF study on Central Bank Digital Currencies:

VII. CONCLUSION

-  CBDC could be the next milestone in the evolution of money. The history of money suggests that, while the basic functions of money might not change, the form does evolve in response to user needs. Digitalization of many aspects of economic activity is prompting central banks to seriously consider the introduction of CBDC.

-  CBDC is a digital form of existing fiat money, issued by the central bank and intended as legal tender. It would potentially be available for all types of payments and could be implemented with a variety of technologies. 

- Overall, the note finds no universal case for CBDC adoption as yet. From the perspective of end user needs, it finds that demand for CBDC will depend on the attractiveness of alternative forms of money. In advanced economies, there may be scope for the adoption of CBDC as a potential replacement for cash for small-value, pseudo-anonymous transactions. But in countries with limited banking sector penetration and inefficient settlement technology, demand for CBDC may well be greater.

- From a central bank perspective, the case for CBDC is likely to differ from country to country. CBDC may reduce the costs to society that are associated with the use of cash. Moreover, CBDC may improve financial inclusion in cases of unsuccessful private sector solutions and policy efforts. It could also help central banks bolster the security of, and trust in, the payment system and protect consumers where regulation does not adequately contain private monopolies. But regulation and, where possible, novel payment solutions could offer compelling alternatives to a CBDC.

- For countries that decide to introduce CBDC, appropriate design and policies should help mitigate ensuing risks. Monetary policy transmission is unlikely to be significantly affected and may even benefit from greater financial inclusion. Moreover, though it will not eliminate illicit activity, CBDC may in some situations enhance financial integrity. However, it also entails risks for financial integrity if badly designed. In addition, although CBDC could increase the cost of funding for deposit-taking institutions and intensify run risk in some jurisdictions, design choices and policies can help ease such concerns. Nevertheless, operational and reputational risks arising from malfunctions of the digital infrastructure or cyberattacks are likely to remain as challenges.

- Looking ahead, the cross-border implications of CBDC raise a multitude of new questions that merit investigation. For instance, from a practical standpoint, how would tourists be able to make payments in a foreign country that has adopted CBDC? Should foreigners have access to CBDC? To what extent would this complicate know-your-customer and AML/CFT compliance, and could standardized information be requested across countries? Would access to CBDC in a reserve currency (such as e-dollars) facilitate currency substitution in countries that have weak institutions? And to what extent might safe-haven flows be encouraged, potentially draining resources from countries that face banking, sovereign, or currency crises? Finally, if CBDC were used for cross-border transactions, how might central banks be required to cooperate? Would they absorb some of the functions of correspondent banks and thus take on additional liquidity, credit, and foreign exchange rate risk—or might tokens be created for cross-border payments among particular central banks, commercial banks, or firms? Research on CBDC should proceed resolutely given that the questions to be explored are deep and difficult and have far-reaching implications.

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My added comments: At first glance, if you have not followed this topic for any length of time, it may appear that we have a bold new initiative from the IMF endorsing the use of central bank digital currencies within nations at first and later perhaps a new digital global reserve currency. Director Lagarde sounds somewhat like an enthusiastic supporter of the concept in her speech.

However, this is a topic we have covered here almost absurdly in depth. We even tossed out the idea of some kind of new digital global reserve currency that everyone might use from their cell phone a long time ago on this blog. Even before that we explored the idea of using the SDR for something like that. So this is not new ground here.

Digging into the conclusion section of the actual IMF study, I listed most of the key conclusions above and added bold type and underlines to some points I wanted to emphasize. Looking at these key points, it is clear that the IMF is not proposing a new global central bank currency like we have talked about here for some time any time soon. Rather this study focused on individual national central banks potentially issuing a digital version of their own national currencies and listed some pros and cons. This has been done over and over again around the world by individual central banks such as the BOE as well. 

The concept clearly gets a lot of attention and study, but nothing in these studies ever suggests that any major central bank is close to moving forward with actually implementing the idea. And it seems pretty clear from this new study that the IMF sees that as having to take place first before any kind of new global digital currency (like an e-SDR for example) might be considered. The study does go on to relist a number of problems and challenges to the idea that still have to be overcome as well.

None of this suggests to me that we are on the verge of anything like this happening soon. Clearly, the idea exists and has not been abandoned. But nothing in this new report suggests any further progress toward actual implementation has been made. 

The final words of the conclusion are: "Research on CBDC should proceed resolutely given that the questions to be explored are deep and difficult and have far-reaching implications."

Does that sound like a new digital global reserve currency is just around the corner? 

So I view this new study as just more of the same with no new information of substance provided from what we have already covered here in depth. But you can read through the entire IMF study to see if you agree or disagree with my conclusion on that.

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Added note: This CNBC article adds a bit of extra information including the fact that Sweden may test a CBDC sometime in 2019.

Jim Rickards: "The US is Going Broke"

Following up on John Bolton's recent comments that US debt may pose a "threat to society", Jim Rickards explains that the US is continuing to go broke, slowly but surely. Below is an excerpt from his article on this.
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"As Grant points out, the national debt has registered compound annual growth of 8.8%, but only 6.3% for GDP. That’s not a sustainable situation. And it’s not at all clear that GDP will close the gap.

Basically, the United States is going broke."
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Additional comments: Not to worry though. No one really cares about this and it's pretty clear no one thinks it will ever matter in any meaningful way. The only time anyone expresses "deep concern" over this situation is when their political party is out of power. 

Now both parties have some power so no one has to bother with pretending to be concerned (unless polling indicates there is some political gain to be had). And we can be sure that any concerns that are expressed will blame the "other guys" for the problem if anything bad does actually happen. Markets should be pretty happy as all this is completely predictable and markets love that.