Three Important Things I Have Learned Doing This Blog

#1 - Gotta Have This

Longtime readers here know that this blog was started years ago in an effort to offer a free resource to the public for anyone interested in issues that relate to the long term sustainability of our present financial and monetary system. I write this blog from the perspective of the average person who must try to sort through reams of often conflicting and confusing information about the state of our economy and monetary system while trying to make the best personal financial decisions for themselves and their families 

After doing this now for years and having an opportunity to get input and information both from mainstream and alternative media sources along with some excellent direct input from leading experts on these issues from around the world, I certainly have learned some things along the way. 

In this article, I wanted to share what to me are the three most important things I feel I have learned working on this blog for all these years. I will add that every effort has been made here to avoid any political agenda and instead try to focus on just reporting what I understand to be factual information and then let readers use the information to form their conclusions and opinions. Of course I have my own opinions, but the truth is that they don't really matter in terms of impacting anything that will actually happen (this is a main theme of the three most important things I have learned below)

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1 - If something wants to be viewed as money, it MUST have the trust and confidence of the overwhelming majority of the general public.  

This probably seems obvious and yet I constantly see articles and opinions all across the broad spectrum of views that imply that many people don't fully understand this basic principle. Just during the lifetime of this blog, I have read literally hundreds (perhaps even thousands) of articles and opinions explaining how our present system couldn't last more than just a few more years, or months, or in some cases weeks. The common theme seems to be that with all the enormous debt overhang and explosion of created money (including the US as a prime example of course) that there is simply no way the US dollar can continue to hold on to its position as the global reserve currency very much longer. They say people simply won't accept it as they see all the exploding debt and enormous amounts of created US dollars by the Federal Reserve and the US Treasury. Interestingly, most of those who take this position also scratch their heads and say they can't believe the public has not already rejected the dollar and that the system has not already collapsed. They express confusion as to why it has not already happened.

First, if you follow these issues, all these concerns are perfectly valid and no one can seriously say with a straight face that we have not seen debt explode higher and hugely expansive monetary policy at the Fed (both before and even more after the COVID pandemic). So why hasn't both the US dollar and the present system collapsed so far?

I believe it is because for whatever reasons, the overwhelming majority of people still do have trust and confidence in the US dollar and gladly accept it in payment for goods and services. Until something causes a much larger % of the general public to actually lose confidence in US dollars (and therefore not only not want to accept them, but start trying to exchange them for something else), the US dollar continues to get public trust and confidence (despite its flaws). So far, a desire to abandon the dollar by most of the public simply has not happened. Despite all kind of efforts to get people to move away from US dollars (Bitcoin, precious metals, cryptocurrencies, alternative currencies, etc), only a very small % of the general public prefers those alternatives to US dollars. That is just a fact. Even people who are sure the US dollar is or soon will be worthless still accept them and use them. It's perfectly reasonable to raise questions as to how long this will continue, but it is also important to understand that until there is a big change in what most of the general public trusts, we should not be surprised that the US dollar has not yet collapsed. That leads us directly to observation #2.

2- What Matters is What Actually Happens

This may be the hardest truth for most people to accept, but it is a mantra I have repeated here many times on the blog and something I have learned that is beyond question for me. It's human nature to believe that how we want things to be or how we are sure things must be is how they actually are. This can lead to some great frustration when over time it becomes clear that somehow things are not happening "the way they should be happening" based on my own understanding, which of course has to be right. When it comes to making personal financial decisions, this mentality can be destructive. If there is any point I would emphasize to anyone interested in these issues, it is to not get locked in to one viewpoint of how things have to unfold and especially any kind of defined time frame for events to unfold. I would encourage readers not to get so married to one "source" that they are sure can predict a future timeline that they close their minds to other points of view; and for sure don't close your mind to observable facts that contradict what you are sure "has to happen". 

I am prepared to make the following statement after years of reading thousands of articles on these issues and hearing from leading experts all over the world directly.  --- No one on this earth knows for sure how future events are going to play out in terms of when our monetary system may see major changes and when the public might lose confidence and trust in the US dollar. It is reasonable to examine facts, look at trends, and draw conclusions that our present system is not sustainable at some point in the future. But no one can tell you when it might actually change. I recall the late 1970's. At that time, concerns over the sustainability of the system were probably as high as they are today. Inflation was off the charts into double digits. I recall my father telling me that he could see no way the US could avoid bankruptcy in the next 10 years or less because of the way the national debt was getting out of control. Fast forward to 2020. The US still has not defaulted and the US dollar still holds its position as global reserve currency. The point is that my father was sure "it had to happen the way he saw it happening", but he passed away before anything like he expected actually happened. Does this mean it can't happen or won't happen? Certainly not. As we have documented here for years, there are all kinds of systemic risks out there that can lead to major monetary system changes at any time. My main point is that no one knows for sure when "any time" may be. The wisest plan in our view here is to have a plan in mind for a further extended period of time where the present system continues in place and a backup plan in mind in case it fails anywhere along the way. Because, no matter how much I believe something is going to happen or how much I might want something to happen -- when it comes to making a financial plan -- what matters is what actually happens. Here we will always try to focus on reporting what is actually happening as best we can determine it.

3- It is much harder to get consensus for any kind of major change to a system than many people realize

Without a doubt this is one of the three most important things I have learned over the years working on this blog. I see article after article assuring me that "blockchain is the next revolution in the financial system" or that "the IMF has a master plan to issue a global digital currency next year" or "China will replace the US dollar with a gold backed yuan" or "China will replace the US dollar with something else" or "the COVID crisis was created to provided cover to implement a new global monetary system"  etc. etc.  Let me be clear, there are valid reasons why people talk about these kinds of changes and many very intelligent people believe one or the other of them are about to happen. I can also report that there is absolutely legitimate concern about the sustainability of our present monetary system I have gotten directly by email from experts around the world. I have tried to discover and understand all kinds of ideas on how to reform and/or replace our present monetary system if the day comes when that has to happen (some are documented here). 

These concerns comes from every direction. People who think we need to return to gold standard are concerned. People who think we need move towards some kind of cryptocurrency based system (gold backed or otherwise) are concerned, people who like Bitcoin are concerned. People who have worked inside the present system for decades and are leading experts in the world on these issues have concerns. Today, even many people in the general public who don't normally pay much attention to these issues are also concerned. They see the US debt exploding higher and the Federal Reserve expanding its balance sheet to over $7 Trillion. We can easily agree that lots of people are concerned.

Unfortunately, based on what I have seen here studying this for years, that is pretty much where the agreement ends. How to change the system, how to actually implement some kind of new system, how to have a system that promotes fairness and justice, and any kind of actual detailed plan to really implement a new working system are all areas of huge disagreement everywhere I look. 

First, let's understand that nothing changes in a system without the political will and power to make it happen. So how is that going in the US for example? We have the most divided population ever. Trust in all kinds of institutions is at all time lows. Trust for most politicians is based mostly on whether they agree with your views or not and even if they do, trust is still very low. I cannot imagine any kind of consensus in the US coming together for any kind of major changes to our present monetary system without massive opposition from one group or the other (up to and including possible civil unrest). Let's move on to the global community. Let's look at the IMF since so many people feel they will be implementing some kind of new global monetary system any day now. The IMF has (if I recall correctly) 190 member nations.  The US has a 16% vote at the IMF which requires 86% total voting approval for any major rule to be adopted or changed. So the US essentially has veto power. On the flip side, the combined voting power of the BRICS nations can also total up to a veto power. This is a perfect combination for the same kind of deadlock we see in the US political arena. While the IMF does manage to get approval from time to time on various proposals, any kind of major changes are likely to involve nations lining up to protect their own national interests first. Just recently, we noted in a blog article here that the US and India were opposed to the IMF doing a new allocation of SDRs in response to the COVID pandemic. This US has historically been determined to protect the interests of the US dollar at the IMF and everywhere else it can, and there is nothing to suggest that will change. Does all of this suggest to you that we can expect some kind of grand plan to remake the global monetary system to emerge any time soon that will have the consensus required to succeed? If so, I would refer you to point #2 above for a reality check.

Conclusions

The three points listed above are what have led me to report here for a long time on this blog that:

1- Changes in the system tend to be gradual and incremental rather than fast and major

2- Unless we get a huge global financial crisis so large that the present system simply cannot be preserved, the tendency will be to try and preserve the present system for as long as possible despite all the systemic risks that clearly exist to it

3-Obtaining consensus on some kind of new monetary system is almost impossible under the current US and global political atmosphere. Not in the US or globally. Nothing suggests this will change soon.

I believe the biggest reason the above three conclusions are valid is that the risk of trying to change from the present monetary system to something new with no ability to obtain the kind of general public consensus needed is simply too great. Until something changes that equation, I believe authorities are unlikely to take that kind of risk. Not only do you have to have the public buying in to point #1 above (overwhelming majority of people trust it), you have to actually have some kind of new system/currency that can actually be implemented and the technology ready to go to make it happen. None of that exists in any kind of real world tested environment. I am quite sure on that point. There are all kinds of ideas, proposals, and studies on technology changes, but they are nowhere near ready to be implemented in an actual real world situation even if you could get some kind of major consensus on which one to implement (which does not exist now). All this tends to promote stasis (not much change) as the only realistic option left for those in power until something happens out of their control that forces major change away from the US dollar .

I offer this article with the goal of trying to help people like myself sort through an enormous amount of information and disinformation that exists on this important topic. It's prudent and right to raise concerns about the sustainability of the system we have now. A problem can arise however, if you get married to one idea of how this will all play out and make personal financial decisions on the assumption that it has to play out the way you believe it will. I can say that if the leading experts in the world are not sure where all this is going, we can't be either, and we need to keep open minds and be flexible in financial decision making. It's foolish not to try and insure against this kind of uncertainty in any way you can. 

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Added note: A long time friend and blog reader reviewed this article and sent the comment below. I thought it was an excellent summary:

"This is what I think you are saying (in my own words):

Why is the US dollar still the global reserve currency today? Because there is not any better alternative today. Why has the astronomical US debt and huge FED balance sheet not caused any financial instability so far? Because all nations around the world have dramatically increased their national debt and Central Bank balance sheets in a very coordinated fashion since 2008. In theory, they can continue to do this and leave interests rate at zero forever. In practically, they cannot do it forever. Run away inflation may be beyond the Central Banks’ ability to continue financial control. The next major crisis may cause the problem. The most recent crisis COVID has not done it (so far). I am confident that the status quo will not last indefinitely, but I don’t pretend to know the timing on the inevitable change."

News Note - Federeal Reserve Officials Concerned About Potential Asset Bubbles

This is something we have long covered here. Several news articles are referencing a recent article in the Financial Times that offers quotes from two Federal Reserve officials. Below is a one of the quotes from this Reuters article. Further below is an added comment. It should be noted that the original article in the Financial Times quotes other Fed officials as being less concerned.

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Minnesota Federal Reserve President Neel Kashkari:

"I don't know what the best policy solution is, but I know we can't just keep doing what we've been doing," he told the newspaper.

"As soon as there's a risk that hits, everybody flees and the Federal Reserve has to step in and bail out that market, and that's crazy. And we need to take a hard look at that," he said."

Please click here for the full Reuters article

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My added comments: I had not planned to post but one more article before the upcoming US elections since those are dominating all news right now. But these quotes in this article seem potentially significant so I wanted to make sure I alerted readers to them. It is interesting to see quotes like this coming from some Fed officials just a couple of weeks ahead of the elections. 

Since this is a news note, I'll try to pass on other bits of news I see out there in bullet point form below:

- Both sides in the upcoming US election seem sure they will win. At this time my earlier election analysis article still seems appropriate with any of the five scenarios listed still possible as best I can tell.  I have seen a number of pieces of information across the political spectrum indicating the election is much closer than most polls have been indicating, so scenario #5 is still not out of the question.

-There is significant concern across a broad variety of analysts that the potential for civil unrest after the upcoming election exists. All this could impact markets at any time although so far the markets have been calm. Since the grass roots on both sides feel sure they will win, one side is going to be very disappointed which may add to an already divisive atmosphere.

-Fed Chairman Powell to Speak About Digital Currencies at the IMF - see this CoinDesk article. Fed nominee Judy Shelton puts out this note about this on her Twitter feed.

-Atlanta Fed Now is still projecting GDP to be over 30% for the 3rd quarter. In a recent TV interview, Trump Administration spokesman Larry Kudlow said he would project 4th quarter GDP will push 10% for that quarter.

There are all kinds of cross currents out there even as the US election results will surely dominate the news for the next few weeks. I plan to post one more article before the election titled - 'Three Important Things I Have Learned Doing This Blog'. This blog started in January 2014 in an effort to try and monitor news across a wide variety of news and opinion formats and watch for any signs of major monetary system change. The reason this is important is that all of us have to make personal financial decisions and it is critical to understand what rules we are playing under to make those decisions. It is important to be aware of any potential major changes to the rules so as not to be taken by surprise.

So far, we have not seen that kind of major change. But recent events are certainly more conducive to the potential for change even as I have learned that it is very hard to make major changes to an existing system for a number of reasons. It seems as though it may take an event like Neel Kashkari talks about above ("a risk hits and everybody flees") to create an atmosphere where change is forced to take place. It is unlikely that anyone will enjoy forced change under these conditions which is why I suspect the desire to preserve the present system is still so pervasive. Also, there is no political consensus on what changes to make.

I talk about all that in the next upcoming article. 

Jim Rickards and Lyn Alden Discuss Inflation/Deflation Monetary Polices and More

One question I see over and over again that people ask is why haven't we seen hyperinflation with all the monetary stimulus and money creation in the US and around the world over the last ten years. It's a good question and the answer may be a bit more complex than many might expect. In this recent panel discussion, Lyn Alden and Jim Rickards tackle this question and offer some interesting thoughts on the answer. Below I have pasted in the video an further below a few bullet points on the full discussion which runs over an hour.

Panel Discussion on 10-5-2020

• Inflation/Deflation Discussion
• What causes Inflation - Not Just One Thing
• Why are monetary policies increasingly failing to achieve their objectives?
• Thoughts on the upcoming US elections and their Impact on markets
• Prospects for the Gold Market with all the uncertainty ahead of us

This is a discussion I think readers here can appreciate and learn from, I recommend taking time to listen to the full discussion if possible

Pre Election Analysis - A Deeper Dive

Readers here understand that the purpose of this blog is not to promote any particular political agenda. The view here is that readers are very capable of making their own political decisions and that there are legions of sites already available to them that do focus on trying to influence political views.

Here, the goal is to try and analyze information that may be important and useful to readers in making their own personal financial decisions. What happens with our financial and monetary system is the primary focus, but we cannot ignore what happens in the political arena. So this article will attempt to do a deeper dive into the upcoming US election so that readers are as informed as possible about the various possible outcomes. We will list the various possible outcome scenarios below and attempt to assess their potential impact on the current financial and monetary system.

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Scenario #1 - President Trump is re-elected and joined by a fully Republican Congress

In this scenario, we can expect that President Trump will simply just carry on the same policies he has implemented during his first term and would have a more supportive Congress to do so. Most people already know what his policies are so no need to explain those here. The "Resistance" against President Trump would continue. but would have less political power available to it.

Potential impact on the system - Unless something external happened to force major changes, we would expect very little change to the present system to be proposed by a Trump Administration and a fully Republican Congress. 

Scenario #2 - President Trump is re-elected and faces a Congress fully or partially controlled by the Democrats

This is pretty easy to analyze. Simply more of what we have seen over the last two years with very little consensus on most issues and constant continued fighting between the President and the "Resistance" to the President.

Potential impact on the system - Again, unless some external force arose to provide impetus for major changes, we would expect not much major change to the present system. It is possible the ongoing political warfare might add to systemic risk for stability of the system if markets believed that the US political system was highly dysfunctional.

Scenario #3 - VP Biden is elected and joined by a fully Democratic Congress

In this scenario, we surely will see major fiscal policy changes. Higher wealth and net income individuals along with corporations will no doubt see significant tax increases and the stated national policy would likely shift so that income and wealth redistribution became a national priority backed up by legislation. These are the stated policy objectives from the Democratic Party and there is no reason to think they would not be implemented. A resistance movement similar to that currently faced by President Trump would surely be ramped up, but would have less political power available to it.

Potential impact on the system - Unless some kind of focus on major changes to the present monetary system emerged that is not currently being proposed, it is not likely we would see major changes to the monetary system (a change away from a US dollar based system with the Federal Reserve in charge of all monetary policy). It is more possible that the fiscal policy changes proposed by the Democratic Party could lead to disruption in the financial system and markets. If markets perceive that the government will become more intrusive and involved, they may react with greater volatility. If the reaction were severe, it could impact systemic stability. Anything that increases systemic instability can lead to a situation where major changes come in to play for the system. We would probably know within 6 months if this kind of market reaction was in play or not. It is difficult to project this at this time.

Scenario #4 - VP Biden is elected and faces a Congress fully or partially controlled by the Republicans

This scenario is pretty similar to Scenario #2 above, just in reverse. Continued deadlock likely prevails with a President Biden now facing the ongoing "Resistance" movement currently faced by President Trump. It is likely most issues would die in Congress without legislation to make major changes being passed.

Potential impact on the system - Basically the same as Scenario #2 above. It would take an external force to create conditions leading to major systemic changes. It is not likely to arise from policy initiatives from within the system itself.

Scenario #5 - No one is able to be certified as President by the electoral college because the election results are in question and no clear winner can be declared

This scenario is more likely this year than it has been for a long time. We already have major disputes over mail in ballots and hundreds of lawyers lined up on both sides to challenge election results. Unless one side or the other can establish such a landslide that the challenged votes can't change the outcome, this scenario is actually quite possible.

In an effort to provide a public service, we will delve into how this is resolved in the US under its Constitution. We will focus on the procedure to declare someone as President. 

A contingent election means no one gets enough electoral college votes to be declared President. Here is what happens in that event:

"A contingent election for the president is decided by a vote of the United States House of Representatives, and the contingent election for the vice president is decided by a vote of the United States Senate."

. . . .

"Pursuant to the 12th Amendment, the House of Representatives is required to go into session immediately after the counting of the electoral votes to vote for president if no candidate for the office receives a majority of the electoral votes. In this event, the House is limited to choosing from among the three candidates who received the most electoral votes. Each state delegation votes en bloc, with each state having a single vote. A candidate is required to receive an absolute majority of state delegation votes (currently 26 votes) in order for that candidate to become the president-elect. The District of Columbia, which is not a state, does not receive a vote. The House continues balloting until it elects a president."

If this situation were to arise, it is logical to ask which political party is likely to control the 26 state votes needed to elect a President (who would have to be either President Trump or VP Joe Biden). I did a fairly deep dive analysis into this to try and answer that question. Here are the facts. 

- Currently, the Republicans control the majority of state delegations in the US House as they have more Congressional seats in 26 states. The Democrats control 23 states and Michigan is tied with 7 seats each.

-The newly elected House of Representatives is the one who chooses the President, so we have to attempt to project the outcome of the November elections to see which party is more likely to control a majority of the states after the election results in November.

-There is a chance that enough Congressional races would be in doubt (due to mail in voting etc) that it also might not be possible to determine which political party controls enough state delegations to have the required majority to elect the President. If this happens, it gets even more complicated and it is even possible that no one can be elected President for some period of time, but we will not go that far into the analysis here. We will assume that enough Congressional races can be called to establish that one party has a majority of the state delegations. I looked at the 25-30 seats most likely to be tightly contested and it appears that most of these seats are in states where the outcome would not matter in determining which party controlled that state's delegation.

With these facts established, I tried to look at what the most likely outcome might be based on the number and state location of the Congressional races that are considered as "in play" or "too close to call". Here is what I discovered doing that analysis:

The Republicans appear to have an advantage even though the Democrats currently have a majority in the House of Representatives and could continue to have that after the November elections. This is because the states where Republicans are in control have almost no Congressional seats viewed as "in play" heading into the election. The one exception is in Florida where the Republicans have a slim one seat advantage (14-13). If the Democrats were to flip one seat in Florida and gain control, they could pick up one state. Since Michigan is currently tied with 7 seats each, the Democrats could reach the needed total of 26 by picking up a seat in Michigan along with Florida. So that is the path forward for the Democrats.

Republicans are seemingly in a little better position There are several states with seats in play that are currently held by Democrats (Iowa, Pennsylvania, and Minnesota are examples) where a change of one or two seats can flip the state from Democratic to Republican control for the purpose of electing a President under these rules. In total, I count at least six states where there is a possibility of a flip from Democrat to Republican control (or a tie). In many of these seats, President Trump won the district by 5% or more in 2016, but the Democrats captured the seats in 2018 when President Trump was not on the ballot. So, there appear to be multiple opportunities for Republicans to flip control of that state compared to just two for the Democrats. If the Republicans simply hold on to the current status quo, they already have 26 states in control. So my overall conclusion is that the Republicans are more likely to emerge with 26 states after the November elections based on the available information I can find at this time. It also makes sense Republicans would want to fill the open seat on the Supreme Court given the above analysis.

Potential impact on the system - I think it probably goes without saying that if we get into Scenario #5, we have great potential for market disruption due to uncertainty which markets hate. We have great potential for high market volatility. We have a higher increased risk for systemic instability, etc. This is pretty easy to project. Until a winner is declared and more certainty returned, we would remain in these conditions.

Overall Observations:

In three of our five listed scenarios above, we see little potential for any kind of major changes to our present monetary system to emerge from legislative changes within the system. Either deadlock or lack of political will to make any major changes is more likely to prevail. In one scenario (#3), there is more potential for some major changes. This is because of the certain major fiscal policy changes that would take place and the unknown impact of those changes on markets and eventually financial stability. Under Scenario #5, we have the greatest potential for significant market disruption which could then lead to systemic instability if uncertainty prevailed for an extended period of time. Under all five scenarios, external forces (overhanging debt, banking system insolvencies, derivatives issues, central bank monetary expansion, loss of public trust in institutions, etc.) remain as ongoing potential risks to systemic stability we have long noted here.

Looking at this overall analysis, I will leave it to readers to decide how best to make their own personal financial decisions in this environment. Personally, I want to have a plan based on continued extension of the present system for some time into the future along with a backup insurance plan in case something goes off the rails along the way. This seems prudent.

Added notes: The recent new vacancy on the Supreme Court just adds more uncertainty. It sets up the potential for a 4-4 tie in the Supreme Court if key legal challenges to the election end up in the Supreme Court. It also ramps up even more the intensity of both sides to win with the future of the Supreme Court more clearly in voters minds as they vote. Nothing happening in the US indicates the country will heal from its enormous political divide any time soon no matter how this election turns out. It does not appear the first debate will have any significant impact on the result and mostly just illustrated how bitterly divided the US is politically.  Also, it appears both sides have figured out this could end up in Scenario #5 above per this recent news article.

Added note update 12-14-20: Republicans did retain control of more state delegations in the 2020 elections, so they would have the opportunity to elect the next President in the event of Scenario #5 (Contingent Election). Republicans actually increased the number of state delegations they control. Also, the Supreme Court vacancy has of course been filled so any rulings should not result in a tie vote now.

Digital Currency and the New Cold War

This followup article at the OMFIF delves into the implications of China working hard to implement its version of a central bank digital currency at the PBOC. The article suggests one key objective would be to disrupt the current US dollar based monetary system and reduce the ability of the US to use "soft power" at SWIFT. Below are a couple of excerpts.

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"Just as the US Treasury was mailing out physical stimulus cheques, the People’s Bank of China began its beta testing of a national digital currency in four cities. Future economists will look back on these counterpoints as the start of the digital currency era.

Discussions about alternatives to fiat currency were speculative, until last August. At the 2019 Jackson Hole Symposium, Bank of England Governor Mark Carney stated that a new form of global digital currency could be ‘the answer to the destabilising dominance of the dollar in today’s global monetary system’."

. . . . . 

"As Robert Kaplan, president and chief executive officer of the Federal Reserve Bank of Dallas said last year, "The dollar may not be the world’s reserve currency forever, and if that changes, and you tack on 100 basis points to $20tn, [that is] $200bn a year and all of a sudden we’ve got a tremendous problem."

. . . . 

. . . . . "The dollar’s ‘destabilising dominance’ gives the US the ability to use the international payments system as an arm of its foreign policy. The real and serious implication of replacing the existing payments systems with the new infrastructure based on digital currency is that no clearing and settlement means no transactions going through the international banking system. . . . "

Please read the full article at OMFIF here

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Added comment: In an earlier blog article we noted that relations between the US and China are clearly strained heading into the US elections. One of the bullet points we listed talked about the desire of China to set up an alternative payments system to bypass SWIFT and reduce dependence on the US dollar around the world.

Reader note: In October I will post one article that takes a deeper look into what happens in the US if no one is able to claim enough electoral votes to be declared a winner on November 3rd. There is an actual Constitutional set of rules that could come into play. Also, I plan to offer an article titled - The Three Most Important Things I Have Learned Doing This Blog some time in October. Unless there is some kind of relevant news that needs to be covered, that may be all the articles to post here until after the November elections.

OMFIF Updates on Central Bank Digital Currency Initiatives

Below are some featured pieces from the monthly OMFIF update on central bank activities related to studying the implementation of central bank digital currencies. I have pasted in video discussion that focuses on efforts underway in Asia for those interested in this topic.

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Video: Central bank digital currencies and blockchain Following technology breakthroughs by private cryptocurrencies, central banks are considering the use of distributed ledger technology and blockchain to develop their own digital currency. However, there remains much debate over the ideal technological infrastructure to operate CBDCs. This discussion addresses how blockchain could benefit CBDC. In cashless Sweden, for example, concerns about the marginalisation of cash are the main driver for exploring the potential of an e-krona. Watch the full discussion on our YouTube channel.

News: Algorand joins OMFIF's DMI OMFIF is pleased to welcome Algorand, a technology company dedicated to removing the friction from financial exchange, as the latest member of the Digital Monetary Institute. Algorand joins other leading financial institutions and technology companies to help inform a range of discussions and research on the adoption of digital currencies by central banks You can learn more here.

Central Bank Digital Currency Activity in Asia Discussion

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Added note: If you want to explore this topic in depth, you may want to visit the Digital Monetary Institute section of the OMFIF web site here. So far most central banks still are just in the evaluation process rather than any implementation process with the possible exception of China which is discussed in the video just above. Coming up in a couple of days will be an article that looks deeper into the effort by China to reduce dependence on the US dollar and bypass the SWIFT network.

Robert Pringle Comments on The Telegraph Article -- "When Money Dies, Gold Comes into its Own"

Earlier this year, we did a fascinating interview with Robert Pringle who had just released his new book The Power of Money. Robert has decades of experience working with central bankers from around the world. At one time he was the Director for the Group of 30. He was also the head of The World Gold Council's public policy unit. Robert can talk about events and decision makers from direct first-hand experience which makes his observations extremely valuable. Anyone who has followed the monetary system issues we cover here, which includes the impact of gold over time on that system, will obviously be interested in what Robert has to say. 

With that in mind, we will feature a recent article appearing here in The Telegraph (UK). The article talks about how recent events and central bank monetary policies are causing gold to once again attract attention around the world. We all know gold just recently reached an all time high price in US dollars. This article in The Telegraph makes some interesting statements and we encourage readers to read the full article. Below are a couple of selected excerpts and a few bullet point observations from the article. I sent this article to Robert Pringle and he kindly offered to provide some interesting historical perspective on one of the events mentioned in the article since he was there as a first hand observer. 

Robert Pringle

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From the Telegraph article:

. . . . "It is now relatively commonplace among the super-rich to have at least some small part of their wealth diversified into gold. Call it an insurance policy against “when money dies”, the title of Adam Fergusson’s brilliant history of the Weimar hyperinflation. Few serious economists would think a repeat of this monetary meltdown remotely possible in today’s advanced economies, all of which have strong institutional frameworks to keep inflation in check. But more or less everywhere, currency debasement is now rife to help pay for the burgeoning costs of the Covid-19 crisis and that’s set alarm bells ringing."
. . . . .
"Nor is it just the wealthy who are using gold as a means of hedging themselves against a devalued dollar. The Chinese authorities have been steadily increasing their gold reserves for some years now, resulting in a massive transfer of the metal from West to East."
. . . . .
"Whatever; the fact is that gold tends to sustain its value over time. National currencies, eroded by inflation and political manipulation, do not."
. . . . .
"As I say, a rising gold price reflects, above all other things, a loss of trust in the value of fiat currencies, for which there is good reason right now."

This article, as shown above, states that gold has held up over time in terms of holding its purchasing power better than national fiat currencies in general. It also says:

- the UK sold off a large amount of its gold reserves at much lower prices years ago (see Robert Pringle's recollection of that event below)
- current central bank policies in response to COVID-19 are debasing currencies
- the least painful way of dealing with debt overhang is to "inflate it away"
-"gold bugs" may end up being right about future inflation despite the present threat of deflation that central banks are currently fighting

Robert Pringle reviewed this Telegraph article and offered these observations based on his own personal experiences:

"I was quite deeply involved in orchestrating the public opposition to these sales (1999 UK gold sales) with the slogan “Hands off our gold!” The World Gold Council took a whole page advertisement in leading popular newspapers to protest. This intensely annoyed ministers. Then I was called into Her MAJESTY’S TREASURY  for a personal reprimand by Gus O’Donnell, senior adviser to Brown and later head of the British Civil Service and top adviser to three prime ministers. He was intensely irritated. He told me: “This is not the way to influence Ministers”!

We also ran a call centre campaign. On day one the call centre, which had 20 agents answering calls, crashed in the first 20 minutes.  We also sailed a barge up the Thames and parked it outside the House of Commons. It had a banner on it saying ‘Gordon Brown & Co: Scrap Metal Merchant’ with pots and pans painted in gold colour. Pictures that appeared were on the front page of  leading national newspapers the next morning.

The sale was a personal decision by Gordon Brown on the advice of the Treasury mandarins who thought it would make him look “modern” and of course it all came unstuck. It would plague him for the rest of his career and remains one of the great blots on his reputation.

I also played a role in persuading central banks to to do something about the collapse of the gold price when they put a floor under the market later that year - but that’s a story for another day (for those who can’t wait it is told in my book The Power of Money -page 189)."   ---  Robert Pringle

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Added note: A thank you to Robert for sharing these recollections for readers here. These kinds of observations coming from someone directly involved with the event are hard to find and much appreciated here. Perhaps he will share more on the central bank agreement done in 1999 to limit gold sales. He talks about it in his book for those who recall that agreement and want to learn more about it. One thing I have learned from Robert over the years is that events like this are understood with better insight if you have input from those directly involved at the time. 

Here is a BBC article from 2019 that provides some additional historical background for the UK gold sale. It also references the 1999 central bank agreement to limit gold sales that Robert talks about above from personal recollection.

The Observer (Uganda) Calls for Reform of the SDR Allocation Process at the IMF - Dr. Warren Coats Comments

The COVID-19 pandemic has led to economic hardship all over the world, not just in the US or other western nations. One of the issues that has been raised around the world is whether or not the IMF should consider doing some kind of SDR allocation to increase SDRs to member nations. This happened before in the last financial crisis with the IMF itself noting that a main goal was to offer help to low income countries, per this statement in the official IMF release:

"About $110 billion of the combined allocations will go to emerging market and developing countries, including over $20 billion to low-income countries. Many of these countries currently face difficult spending decisions as they decide how to address the fallout from the global crisis. For them, the SDR allocation means potential access to unconditional financial resources that could limit the need for adjustment through contractionary policies and allow greater scope for countercyclical policies in the face of recession and rising unemployment."

Recent calls for another similar new SDR allocation were met with resistance from the US and India, with the US stating that most of the SDR allocation would end up going to nations that don't need it rather than the nations who might need it the most. In the previous IMF allocation linked above, they made this comment about that issue:

“The general SDR allocation is a key part of our response to the global crisis, demonstrating the value of a cooperative multilateral approach,” IMF External Relations Director Caroline Atkinson said. “The Fund’s low-income members will benefit significantly,” she added. Despite a smaller number of SDRs going to the IMF’s low-income members, the allocation will result—in most cases—in a proportionately bigger increase in reserves for them than it will for the advanced economies, which already have a substantial cushion of reserves."

With this backgrond, an article by Louis Namwanja Kizito recently appeared in The Observer (in Uganda) calling upon the IMF to issue new SDRs to lower income nations in need, specifically in Africa. The article notes that it is true that most of such an SDR allocation would go to developed nations such as the US that can use the global reserve status of its own currency in a way other nations cannot to obtain liquidity during a crisis. The article even notes that ever since the US left the gold standard in 1971, it has "gone on a money printing spree without a gold limit". The Observer article also calls for a reform of the SDR allocation system at the IMF and describes it as unfair. 

The SDR is something we have covered here on this blog for years. Our leading expert on this topic is Dr. Warren Coats who at one time was the head of the SDR Division at the IMF. Dr. Coats has been kind to offer his extensive knowledge of the SDR to readers here over the years including an interview he did here to explain his Real SDR proposal for monetary system reform. 

I asked Dr. Coats to review this new article in The Observer and offer any thoughts he might have on it. Once again he kindly took time to do just that for readers here. These were his thoughts on the article he sent me by email:

"Almost all central bank laws make the stability of the value of its currency the primary mandate of the central bank. This is the best contribution that monetary policy can make to an economy.  Giving a central bank the additional fiscal goal of redistributing income to the poor is a very dangerous idea. Rather than taking from the “rich” to give to the poor with traditional taxes, printing money and giving it to the poor takes from those that have to give to those that don’t via inflation. While I disagree with the U.S. opposition to an SDR allocation at this time, Mr. Kizito misunderstands how the SDR system works. The allocation of SDRs to countries is, in effect, the allocation of lines of credit. If a country uses any of its allocated SDRs (spends them), it must pay interest on such uses at the SDR interest rate. The purchaser or acceptor of these SDRs is, in effect, lending dollars to the user, though without the policy conditions that normally accompany IMF loans.  The size of allocations are related to the size of the recipient countries economy and thus its capacity to repay."   -   Warren Coats

Dr. Warren Coats

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My added comments: A thank you to Dr. Coats for taking time to review this article and offer his comments on it. When I read many articles about the SDR, I often find there is quite a bit of misunderstanding about how SDRs actually work at the IMF. Dr. Coats is without question one of the leading experts in the world on the SDR and the SDR allocation process and an excellent source to explain how it works for us.

Added note 9-21-2020: Dr. Coats has announced he has a new book out based on his travels to Afganistan after 9-11. He worked with a team trying to establish a more modern monetary system in Afganistan. You can find the book here.

What Happens in 2021 Regardless of Who Wins the US Elections? Michael Oliver Interview

Massive attention is now focused on the upcoming US elections. Most everyone believes that who wins the election will have a huge impact on their daily lives. Of course both sides feel that if the other side wins, the impact will be very bad and if their side wins, the impact will be very good. We won't try to get involved with any of that here. First, we don't know who the next President will be. Next, we don't know if that person will have a Congress controlled by his own party or not. Finally, if this election turns out to be very close, we don't even know for sure how long it will be before we know who our next President will be or who will be the new members of Congress. All of that is beyond our ability to forecast here.

What we can do is try to look at all the possible outcomes and then try to assess how they might impact our economy and our monetary system which is what we focus on here. We listed three possible scenarios:

1- President Trump wins re election (but what will Congress look like?)
2- Former VP Joe Biden is elected (but what will Congress look like?)
3- We have no clear winner in November and it takes weeks to months to get a winner (both for President and in terms of which party controls the House and Senate)

That's three scenarios, but all the additional possible scenarios depending on who controls the House and Senate create a complicated matrix of possibilities.

How are we to deal with this much complexity and uncertainty in terms of trying to assess the future and make personal financial decisions? Let's look at this a bit differently in terms of how it might impact our economy and our monetary system going forward.

Obviously, which side wins will impact the fiscal policies put forward by the Federal government. Both sides have made it pretty clear what they would do if elected so that is not all that complicated. If one side or the other sweeps the election and controls Congress and The White House, you can assume they will move to implement the taxing and spending policies they have outlined. Complication sets in if neither side is able to gain control of both The White House and Congress. In that scenario, it is reasonable to expect just more of the same we have had for a long time now (deadlock) and the intensity of opposition to whoever is in The White House ramped up even higher -- as hard as that may be to imagine. The US is no longer a nation of a majority being in the middle. It has split into two very divergent camps that have made it clear they will carry on a "resistance" using all means available against the other side if they are not in power. So we should expect all the above no matter who wins this November.

Perhaps another way to look at this is to ask: Will there really be a major disruption in our economic system and our monetary system in the next four years or not? Regardless of who our next President may be?

This, we think this is the more important question to consider because if we don't see all that much major change (just tweaking of tax rates and which special interests benefit the most from government spending as usual), we can make one set of personal financial decisions based on that scenario relatively easily.

On the other hand, what if next year in 2021 (or even earlier), we really do start to see major disruption in our present system? Either from radical changes in fiscal policies, major declines ramping up in the stock and bond markets, or from lingering effects from the economic fallout from the global pandemic. This is the scenario predicted by  Michael Oliver in the interview just below. We recommend readers listen to the full interview to get his perspective on what to expect. Further below we will offer a summary of his view and some added thoughts on what that means for each of us trying to make personal financial decisions

Michael Oliver is an investment adviser who has had a very solid track record forecasting future long term market trends over time. He is now laying out a long term forecast that is in line with what others we have noted here are saying (like Jim Rickards and Ray Dalio for example). They are predicting we will start seeing events that will finally lead to disruption of our existing economic and monetary system. All of them are advising people to take a defensive position and acquire hard assets as insurance against an uncertain future. Lately, we see even Berkshire taking a more defensive position in it's portfolio.

In the interview above, Michael Oliver sees a US stock market peaking out soon (perhaps in September) and starting into a long term slow decline (not a crash, a long term slow decline). He sees the bond market following that later on next year as the Fed loses its ability to control longer term interest rates. He says the downturns in the stock and bond markets will lead to more money flowing into commodities of all kinds including gold and silver in the coming years. He says that these changes are due to decades long trends that cannot be reversed no matter who wins the elections this fall. Analyzing these kinds of long term trends is his area of expertise.

In our view here, this is what readers need to consider for personal financial decisions. Not so much who wins the upcoming elections, but what will actually happen next year regardless of who has won. If nothing much changes in the basic system, then readers can use one set of assumptions in making personal financial decisions. If Michael Oliver and others are right, readers would likely use a  different set of assumptions in making personal decisions because markets that have worked for a long time may not continue to work while others take over and move into long term up trends.

The view here is that having a plan in mind for either outcome (not much change or the major changes Michael Oliver predicts) is a good idea. We are living in possibly the most uncertain time in my lifetime in terms of projecting where things are going in the next four years after this election. This is the time to think more broadly about how to plan for that rather than more narrowly. I say this in terms of being ready for several more years of just minor tweaks to the system or being ready for big market shifts out of stocks and bonds and into hard assets. There is a growing list of credible mainstream market analysts predicting the latter. As an example, the Telegraph (UK) runs this article. (See note below for more on this article in The Telegraph)
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Note to readers: Coming up on the blog over the next week are two articles with direct input from experts. First, Dr. Warren Coats comments on a recent article calling for a new allocation of SDRs at the IMF in response to COVID-19. Dr. Coats is the former head of the SDR Division at the IMF.

Next, Robert Pringle comments on an article appearing in the The Telegraph (UK) that talks about gold's recent rise versus fiat currencies. Robert offers some insight based on his personal involvement with one of the events mentioned in this Telegraph article (the UK sale of some of its gold reserves). 

These are two upcoming articles I encourage readers not to miss.

A Wild Two Month Ride into November 3rd?

Readers here know that we try hard not to push any kind of political agenda here. The goal here is to just try to provide the best solid information we can find. However, with the electric election atmosphere we have coming up over the next couple of months in the US, it would be almost irresponsible not to try and alert readers to keep an eye out for just about any kind of wild series of events over the next two months. 

Below we will try make a bullet point list of just some of the major potential trigger points for all kinds of wild market activity between now and the election.

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First. let's try and assess the ongoing tensions between the US and China which could certainly be potential triggers for volatile market behavior. Here are just some I can think of:

-the US feels China played a role in the spread of the virus pandemic and this has hurt US-China relations significantly

-in response the US has become more aggressive in taking confrontational moves against China including restricting access to US dollars

-some have suggested the US could go further and attempt to freeze China out of the SWIFT system (international payments system) and the CHIPS system

- Jim Rickards has suggested the US can put a hold on the $1.4 Trillion in US bonds held by China legally without defaulting on the bonds as a claim for reparations from financial damage incurred from the virus

-China has been working hard to setup an alternative payments system to bypass the SWIFT system if needed and to reduce dependence globally on the US dollar

-numerous articles are appearing in both western and eastern media suggesting the US dollar is being weaponized as part of the buildup of tensions 

-some articles have appeared suggesting that China could be the entity taking large physical deliveries of gold as part of this ramped up "cold war" with the US and the west (perhaps to try to drive the gold price sharply higher and add further disruption to markets heading into the election?). This is speculation, but we know some large entity or entities have been taking large deliveries of physical gold this year in markets that usually trade mostly paper futures contracts.

If we accept news reports that US and Chinese relations have soured and that China might prefer a Biden Administration over another Trump Administration, we then have even more speculations that could increase tensions further. These include suggestions China is trying to influence the US elections. Some reports have China supporting VP Biden and Russia supporting President Trump. Whether these reports are accurate or not, the potential exists for all this to come into play in a negative way if the US election is very close (and perhaps even not quickly decided). Whoever loses the election is more likely to claim they lost because of foreign interference in the election process. No one will be surprised if the losing party refuses to accept the winner as valid (So yes, 2020 could get even worse).

I think it goes without saying that another election with no immediate clear winner (like the 2000 election) could be a significant trigger for market volatility. We are already seeing reports that both sides have hired hundreds of lawyers. Allegations of possible voter fraud won't surprise anyone. This could also mean the winner won't be known quickly after the election. 

If all that is not enough, I suspect that anyone with a pulse thinks that both sides involved in this election will pull out all the stops to win. We should not be surprised at any kind of major unsavory news that surfaces just prior to the election (or any dramatic attention grabbing events). If there was ever an election year to somewhat anticipate an "October surprise", it would have to this one. 

On top of everything else, we have the US and the world struggling with a once in a century global pandemic and all kinds of disruption to both normal economic activity and just regular social activity. Frustrations from all this continue to be high and we can expect that everyone trying to win this election will be wanting to assist voters in knowing who to blame for all this. We have seen tensions flare up from this situation all year long already.

With just 60 days until the election. all the ingredients described above (and others I didn't even think of) create the potential for a very wild ride into early November. How wild could things get? Jim Rickards forwarded me this link to an article that explains it could get wilder than than any of us might imagine. It is possible the wild ride could go well beyond November 3rd; depending upon how the election turns out and how the public accepts the results. 

I cannot stress strongly enough to readers here that you should be prepared for all kinds of unusual events and possible market volatility under these conditions. You should think carefully about some kind of plan to try and insure against very high levels of uncertainty heading into this election and beyond that into 2021. There is nothing that suggests the deep divisions that exist in the US will disappear after the election no matter who wins.

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Added note: Readers here know that this blog is not a commercial venture and that I don't promote any products for sale since the goal here is to be a free information resource to the public. I do not receive any kind of income from anything I mention on the blog such as a book. If I ever did do that, I would make readers aware of it. 

With that in mind, I do want to let readers know that Jim Rickards does have a new book coming out in October that will provide his latest analysis and  recommendations on how to deal with all the uncertainty mentioned above. I can recommend any book Jim writes because he has been very good at projecting possible future economic scenarios and the information he provides often can be helpful to people like myself in trying to decide how to prepare for uncertainty.  The goal of this blog is to try and be helpful to people like myself who are not trained in economics. 

If all goes as planned, I will get an advance copy of his new book and will do a Q&A style  interview with Jim sometime in October assuming his schedule will allow time for it. I discussed with him the idea of trying to do some interview questions around the theme of -- What can millennials do to help themselves prepare for whatever may lie ahead?  

We have tried to do some articles focused on millennials on this blog recently (here, here and here).  Of course the information in the book would apply to everyone as well as millennials, but millennials have more future to deal with than people from my generation (Boomers).

Hopefully we will be able to do this interview. Jim has been very kind over the years to offer his time and comments for readers here at no personal benefit to himself. I have no problem alerting readers to his new book and I expect they would benefit from the information that will be in it. This is especially the case as we are living in crisis conditions right now much as he has predicted we would see for many years.