SDR - New World Money

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>>> Secretary-General Welcomes IMF Decision Allowing Rechannelling of Special Drawing Rights to Multilateral Development Banks through Hybrid Capital Instruments

https://press.un.org/en/2024/sgsm22232.doc.htm

The following statement was issued today by the Spokesman for UN Secretary-General António Guterres:

The Secretary-General welcomes the 15 May decision by the board of the International Monetary Fund (IMF) to allow its members to rechannel their special drawing rights (SDRs) to multilateral development banks through the purchase of hybrid capital instruments.

This is an important and innovative step towards expanding finance for sustainable development, in line with the Secretary-General’s proposed Sustainable Development Goals (SDG) Stimulus. It could immediately unlock up to $80 billion in desperately needed resources for developing countries, including to help tackle the climate crisis.

The Secretary-General calls on countries in a position to do so to seize this opportunity to rechannel their SDRs, which can then be leveraged to increase lending to developing countries.

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Rickards - >>> Did the Saudis Just Kill the Dollar?


BY JAMES RICKARDS

JUNE 17, 2024


https://dailyreckoning.com/did-the-saudis-just-kill-the-dollar/


Did the Saudis Just Kill the Dollar?

There’s been a lot of talk over the past several days that Saudi Arabia is ending the petrodollar deal it’s had with the U.S. for 50 years. This story has been highly exaggerated. Today I want to address the misinformation you’re seeing right now, and show you what really happened.

News services of dubious accuracy reported that Saudi Arabia had ended the petrodollar deal on June 9, after 50 years. This report was quickly followed by claims that oil would now be priced in everything from Chinese yuan to Indian rupees, Russian rubles and other currencies without strong claims to being reserve currencies.

The implication of these stories was that the U.S. dollar’s long reign as the leading global reserve currency was over. New reserve currencies would come to the fore, most prominently the BRICS planned currency.

The crypto crowd wasn’t far behind shouting that the demise of the dollar proved that cryptocurrencies were the way of the future. The internet was on fire with these and other histrionic claims.

Don’t Buy It

In fact, almost everything you just read is nonsense. There have been some very important developments in international finance and monetary policy in recent days but they’re far more nuanced and ultimately more important than stories grabbing the headlines.

As the saying goes, it’s complicated. Let’s deconstruct what’s actually going on.

The petrodollar deal was concluded in June 1974 under the Nixon administration. It was a tense time following the 1973 Yom Kippur War and the Saudi oil embargo of exports to the U.S.

I played a role in the run-up to the deal when I went to the White House to meet with Helmut Sonnenfeldt, Henry Kissinger’s most trusted aide. We discussed a plan to invade Saudi Arabia in case the Saudis didn’t agree to what the Nixon administration had put on the table.

The deal had four main parts.

The Petrodollar Deal

Saudi Arabia would price oil in U.S. dollars. Saudi Arabia would take the dollars it earned through oil sales and invest them in U.S. Treasury securities or in large bank CDs. The Treasury and the banks would lend those dollars to developing economies that would purchase equipment and agricultural products from the U.S. Finally, the U.S. offered Saudi Arabia military protections against the Soviets and regional rivals. The security agreements and the financial agreements were put into writing but have never been revealed.

The petrodollar deal was a win-win for the participants and the world. The U.S. found a reliable prop for the dollar’s reserve currency status (since other countries would need dollars to buy their own oil) and Saudi Arabia enhanced its national security.

Recycling the Saudi dollars to developing country buyers was a boost to world trade and commodity prices and helped pull the world out of the severe 1974 recession. At the Saudi’s request, the U.S. kept a veil of secrecy over the exact amount of Treasuries owned by Saudi Arabia; their holdings were lumped in with other OPEC members from the region and were not reported separately.

Did the Saudis just end the petrodollar deal as reported? Not exactly.

Less Than Meets the Eye

The deal was never a formal treaty ratified by the Senate, which would rise to the level of law. It was a non-binding executive agreement; not much more than a written handshake. It contained annual renewal provisions and could be terminated at any time by either party.

The Saudis held up their end by pricing oil in dollars and buying U.S. Treasuries. The U.S. held up its end by sending troops and repelling Iraq’s invasion of Kuwait in Operations Desert Shield and Desert Storm in 1990–91. The agreement suited both sides and so it continued.

The agreement never had an explicit “expiration date” so reports that the deal has expired are overstated. The Saudis have notified the U.S. that they’re not extending the deal, but that decision has to be put in the context of other U.S.-Saudi discussions.

The U.S. and Saudi Arabia are currently in negotiations on a new financial and security arrangement that would supersede the old petrodollar deal. The new agreement will provide that Saudi Arabia will recognize Israel as part of the broader Abraham Accords initiated during the Trump administration.

The U.S. will continue to offer security protections to the Saudis, but those will be expanded to include uranium enrichment technology. Ostensibly this technology would be used to fuel nuclear reactors but might later be used to build nuclear weapons. Saudi Arabia wants this technology because it feels threatened by Iran’s own uranium enrichment capability.

Not Much Is Different

On the financial side, Saudi Arabia would continue to price oil in dollars but could agree to be paid in other currencies, primarily euros, as is the case today. The Saudis would continue to purchase Treasury securities alongside its holdings of gold.

In short, not much would change from the current petrodollar deal except for the enhanced security guarantees.

The reason Saudi Arabia allowed the existing deal to lapse was to gain leverage in the new negotiations and because the old deal would be replaced by the new deal in all events.

The new deal will not be completed for six months, perhaps longer. It’ll be handed off from the Biden administration to the new Trump administration in January 2025 if Trump wins the election, which I believe he will.

The reason for the delay is that Saudi Arabia cannot recognize Israel until the Gaza War is over. That’ll take a few more months at least. There’s an irony there because the Trump administration created the Abraham Accords and may be the one to complete the process by including Saudi Arabia under that umbrella.

That’s a summary of what’s going on. Here’s what’s not going on…

Not a Dollar Death Blow

Oil will not be priced in rupees, rubles, yuan or other emerging-market currencies except in very small quantities. About 20% of oil purchases today are in euros and that can be expected to continue.

The new arrangement between Saudi Arabia and the U.S. doesn’t mark the end of the dollar as the world’s leading reserve currency. It doesn’t imply the collapse of the global market in U.S. Treasury securities, which a lot of people have been claiming in recent days.

The oil and dollar markets will be business as usual. Ties between the Saudis and the U.S. will be even closer because of the nuclear enrichment aspect of the new deal.

None of which is to say that there have not been important developments in international financial and monetary markets away from the Saudi situation. There have.

In particular, there were major policy initiatives announced at the St. Petersburg International Economic Forum (SPIEF) hosted by Vladimir Putin from June 5–8.

Incremental Steps

Russia announced they were working with other BRICS+ members to develop a global payments system completely independent of existing Western systems including SWIFT, Fedwire and other clearinghouses.

That’s critical because payments through Western systems are subject to seizure and interdiction, whereas payments through an independent system should be safe from Western interference.

Putin also met with Dilma Rousseff, former president of Brazil and current president of the New Development Bank, which is a de facto central bank and development lender to the BRICS+ and associated members.

That meeting was to discuss the roll-out of the new BRICS currency. It will be called the Unit and its value will be based on a weight of gold (40%) and a basket of BRICS+ currencies (60%).

The key to implementation of the BRICS currency plan is an expansion of the membership. A bilateral currency arrangement between two weak emerging markets will never be successful because there’s not much for the seller of goods to buy once it receives the currency.

But a currency union with 20 members or more using the Unit can be successful because the seller of goods can “go shopping” in many other markets and is likely to find goods or services that meet its needs. The success of the euro with 20 members and worldwide acceptance is the model for this.

The Unit won’t be launched for another year or longer although some formal announcements may come at the BRICS leaders’ summit in Kazan, Russia, this October. It’ll still take a few years to add members, build out the infrastructure and firm up some valuation issues. Still, this currency is coming.

Not a Reserve Currency

Importantly, the BRICS Unit will initially be a payment currency, not a reserve currency. Payment currency arrangements are fairly straightforward. Reserve currency status is far more difficult because it requires a large, liquid bond market; good rule of law; and an infrastructure of dealers, hedging tools, repurchase agreements, auctions and settlement procedures.

That can take 10 years or longer to put in place with rule of law perhaps being the most difficult element.

Even as a payment currency, the BRICS Unit could be used in a material percentage of global trade, giving the dollar a run for its money. The BRICS Unit doesn’t mark the end of the dollar as a widely accepted currency.

Still, in conjunction with the badly misguided weaponization of the dollar by Joe Biden and Janet Yellen it could mark the beginning of the end.

The latest Saudi action won’t destroy the dollar. The Biden administration seems determined to accomplish that all by itself.

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Rickards - >>> Dollar Takes a “Pounding”


BY JAMES RICKARDS

JUNE 24, 2024


https://dailyreckoning.com/dollar-takes-a-pounding/


Dollar Takes a “Pounding”

You’ve probably heard that the U.S. economy is heavily “financialized.” What does that really mean? What is financialization?

It’s a big topic and not very well defined. It can refer to the dominance of financial activity over traditional business activity in goods and services. It can refer to market bubbles. It can refer to the use of financial instruments in non-traditional arenas such as warfare or political witch hunts.

In fact, it refers to all the above and more. Investors need to understand financialization in order not to be blindsided by market activity that defies fundamental analysis.

We can begin our review of financialization with a look at the role of the U.S. dollar in global transactions.

This is not a technical article detailing the plumbing of the financial system. But in considering the role of currencies in global finance, it’s important to distinguish between reserves (basically a nation’s savings account) and payments (transactions, trade, etc.).

The Dollar Still Dominates

The denomination of global reserves today is approximately:

58% U.S. dollars and 20% euros

The remaining 22% is divided among yen (6%), sterling (5%), Canadian dollars or CAD (2.5%)
And other currencies are each less than 2% (AUD, CNY, CHF).
In payments (measured in SWIFT message traffic), the U.S. dollar is about 59% of payments, with the euro at 13%, yen at 6%, sterling at 5% and yuan and CAD at about 3% each. All other currencies are less than 3% each.

The relatively larger role of the dollar in payments is due to higher oil prices and oil being denominated in dollars. SWIFT message traffic is almost exclusively interbank payments among large banks. There are many bilateral payments (for example, Russian payments to India in local currencies) that do not go via SWIFT.

There is no immediate threat to the role of the U.S. dollar in either reserves or payments.I recently debunked the fake news that Saudi Arabia has just ended the petrodollar deal that’s been in place since 1974.

Instead there’s a slow, steady erosion in the role of the dollar that could accelerate in the future. A good case study is the decline of sterling. In 1914, it was the dominant reserve and trade currency. By 1944, it had largely been displaced by the U.S. dollar as a result of Bretton Woods.

Slow Death

Today, sterling is barely a footnote in global reserves and payments. Still, that decline took 30 years (1914–1944) and continued for another 80 years (1944–2024). Major currencies don’t simply disappear overnight, but they are subject to these types of declines and gradual displacement by alternatives.

Contrary to what you hear from a lot of fringe analysts, the Russian ruble and Chinese yuan will not displace the U.S. dollar. Neither currency is widely accepted outside its home country. Those currencies have limited uses and lack large liquid bond markets, and their source countries lack a rule of law. Notions of a “gold-backed yuan” are nonsense. China simply doesn’t have enough gold.

A BRICS currency is a more likely alternative to the dollar for global payments. It won’t be issued for several more years. The BRICS are currently expanding their membership and will expand it further at their summit in Kazan, Russia in October.

That’s critical because a larger membership increases the trading zone where the currency can be used. Non-BRICS members can also agree to accept the new BRICS currency if they wish.

If you receive the BRICS currency in trade, it’s more useful if you can spend it or invest it in 20 or 30 other countries rather than just one trading partner as is the case with rubles, yuan and rupees.

This process of expanding the currency zone with new members will take a few more years, but the infrastructure is being put in place now. The development of the euro (which took eight years from the 1992 Maastricht Treaty to launch in 2000) is a good model for this.

The Great Leap to Reserve Status

While a BRICS currency will be used in trade in a few years, it will take longer to develop as a reserve currency. That requires the creation of a large, liquid bond market, which takes a legal code, issuers, dealers, settlement channels, hedging tools and much more. That process can take 10 years or longer.

What we should expect is not a sudden collapse of the U.S. dollar and the U.S. Treasury market in payments and reserves, but rather a slow, steady diminution in the role of the dollar similar to what happened with sterling after World War I.

In the short run, the main alternative to the U.S. dollar in reserve positions is not another currency, but gold. Central banks have been net purchasers of gold since 2010, reversing their status as net sellers that had prevailed since 1970.

These net purchases of gold are reflected in increases in gold as a percentage of total reserves. Gold now represents over 70% of U.S. reserves, 25% of Russian reserves and 8% of Chinese reserves.

Curiously, gold isn’t even reported in the IMF’s official reserve asset reports, despite the fact that the IMF itself owns over 1,000 metric tonnes of gold. Gold has the added attraction of being a physical, non-digital asset that cannot be frozen or seized by the United States.

The Weaponized Dollar

The most conspicuous example of financialization is the use of financial sanctions in warfare. This might better be called the weaponization of the dollar. U.S. sanctions against Russia have failed badly (as I predicted in 2022) to the point that the Russian economy is now outperforming the U.S. economy by every important metric. The U.S. hasn’t learned its lesson and is moving to more dangerous methods.

The U.S. froze Russian assets (about $300 billion in U.S. Treasury securities) at the start of the war in Ukraine. Now the U.S. is moving to steal those assets. This plan was recently unveiled on June 13 at the G7 summit in Apulia, Italy.

Russia will retaliate by seizing over $300 billion of Western assets still in Russia. Since the Russian assets are mostly in custody at Euroclear (about $200 billion), Russia can sue Euroclear for wrongful conversion in Russia-friendly jurisdictions where Euroclear has offices including Dubai and Hong Kong.

Euroclear has about $40 trillion in assets under custody. With a court judgment in hand, Russia could proceed to freeze and seize Euroclear assets on a global basis. This could throw the global financial system into complete chaos.

Financialization in its many forms is no longer a sideshow. It has become the main event in many arenas. Investors need to follow developments closely in order not to get caught in the political and military crossfire.

You need to take cover.

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The growing rift between India and China is good news for the US, and will help throw a wrench into BRICS (see article previous post). Other good news this year is that Argentina decided not to join BRICS, and the Saudis have also apparently put the brakes on their plans to join. Also, distrust between India and China has been noted as a key obstacle in developing the BRICS gold linked currency, which has been delayed.

So good news for the US. Now, if we can somehow drive a wedge between China and Russia (the Kissinger strategy), the US might prolong its dominant global position for some time. The 'unipolar' world that the US enjoyed in the decades following the collapse of the Soviet Union is gone, but hopefully (for us) the sun doesn't set on US Empire too quickly.

Imo, what the US needs to do is to use 'the carrot' side more, and try to outcompete China's Belt + Road strategy. The reason so many countries have been gravitating to join BRICS is that China has been helping them build infrastructure --> roads, powerplants, etc. In particular, along with Russia, China is building nuclear powerplants in many emerging countries, which is a huge draw for these countries to ally with China-Russia-BRICS.

The US needs to move away from only 'the stick' (war, sanctions, de-Swifting, etc), and use 'the carrot' more. That's the way to win back the developing countries of the world to the US side. How these countries decide to align themselves will determine the future of the US.



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>>> Third term for Modi likely to see closer defense ties with US as India's rivalry with China grows


Associated Press

by DAVID RISING and ASHOK SHARMA

6-7-24


https://www.msn.com/en-us/news/world/third-term-for-modi-likely-to-see-closer-defense-ties-with-us-as-india-s-rivalry-with-china-grows/ar-BB1nMmRe?cvid=3eb38174dbf5497ee68dc3a8df607ad9&ei=54


NEW DELHI (AP) — Fresh from declaring victory in India's election, Prime Minister Narendra Modi offered few details on the agenda for his third term, but went out of his way to underline he would continue to focus on raising the country's military preparedness and clout.

That should come as good news to the United States and its other allies, as they focus increasingly on keeping China’s sweeping maritime claims and growingly assertive behavior in the Indo-Pacific region in check.

"The government will focus on expanding defense production and exports,” Modi told a crowd of supporters at his party's headquarters after election results came in. He spoke of his plan to increase security by lowering India's dependence on arms imports. “We will not stop until the defense sector becomes self sufficient.”

Defense cooperation with the U.S. has greatly expanded under Modi, particularly through the so-called Quad security grouping that also includes Australia and Japan.

It’s a two-way street, giving the U.S. a strong partner neighboring China, which Washington has called its “pacing challenge,” while strengthening India’s defense credibility against a far more powerful rival.

"India is currently a frontline state as far as the Americans are concerned,” said Rahul Bedi, a New Delhi-based defense analyst. “The Indian navy is a major player in the Indian Ocean region.”

The defense relationship was also at the top of U.S. President Joe Biden's agenda when he congratulated Modi on the election results

In a call, “the two leaders emphasized their deepening the U.S.-India comprehensive and global strategic partnership and to advancing their shared vision of a free, open and prosperous Indo-Pacific region,” the White House said.

It added that National Security Advisor Jake Sullivan would soon travel to New Delhi “to engage the new government on shared U.S.-India priorities.”

It was about a year into Modi's second term when India's defense focus took a sharp turn toward China, when troops from the two nuclear neighbors clashed in 2020 in the Galwan Valley in the disputed northern border region of Ladakh and 20 Indian soldiers were killed.

"China really is India's long term strategic challenge, both on the border and in the Indian Ocean as well,” said Viraj Solanki, a London-based expert with the International Institute for Strategic Studies.

"This has resulted in a number of defense partnerships by India shifting, or just focusing on countering China's growing influence in the Indo-Pacific region,” he said.

Beijing has a close relationship with Pakistan, India's traditional rival, and China has been increasing defense cooperation with India's neighbors, including Nepal and Bangladesh, as well as the Maldives and Sri Lanka.

"China is really trying to engage more with these countries and develop its own influence and presence,” Solanki said. “I think that is a concern for New Delhi and something that will lead to increased competition in the Indian Ocean over the next few years.”

In congratulating Modi on the election results, Chinese Foreign Ministry spokesperson Mao Ning said that a “sound and stable ” relationship between India and China was “in the interest of both countries and conducive to the peace and development of the region."

She also added that China stood “ready to work with India,” but her comments were significantly more muted than the Foreign Ministry's remarks on Modi's last win in 2019 — before the border fight. At that time, the Foreign Ministry called the two nations “important neighbors” and said China wanted to "deepen political mutual trust, carry out mutually beneficial cooperation and push forward the closer partnership between the two countries.”

Modi has always governed with his party in the majority, but after a lackluster performance in the election will now be forced to rely on coalition partners, and will face a stronger and invigorated opposition.

The main opposition Congress party is unlikely to challenge Modi's defense reforms, but has been critical of how he has handled the border issue with China and may pressure him on that front, Bedi said.

"Modi has not been entirely truthful, or very economical with the truth as far as the situation in Ladakh is concerned,” he said. He referred to a Defense Ministry document that was published online, and quickly removed, which had suggested Chinese troops entered Indian territory during the 2020 confrontation.

“The opposition, I am sure, will raise questions and ask the government to come clean on what the real situation is.”

Under Modi's program of military modernization and reform, his government has sought to grow the private defense manufacturing sector, a space previously occupied solely by the government-run organizations, and has eased foreign direct investment regulations to try and encourage companies to establish themselves in India.

In a flagship project, the country launched its first home-built aircraft carrier in 2022, part of a plan to deploy two carrier battle groups to counter China’s rising maritime power.

Much of India's military equipment is of Russian origin, and delays on delivery and difficulties of procuring spare parts due to Russia's invasion of Ukraine has also provided impetus for India to diversify defense procurement, looking more to the U.S., France, Israel and elsewhere, Solanki said.

As it seeks to strengthen ties with India, Washington has agreed to a deal that will allow General Electric to collaborate with Hindustan Aeronautics to produce fighter jet engines.

Speaking at the Shangri-La defense conference in Singapore last weekend, U.S. Defense Secretary Lloyd Austin said the countries were also co-producing armored vehicles.

“The relationship that we enjoy with India right now is as good or better than our relationship has ever been,” he said. “It's really strong.”

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Rickards - >>> $27,000 Gold


BY JAMES RICKARDS

MAY 13, 2024


https://dailyreckoning.com/27000-gold/


$27,000 Gold

I’ve previously said that gold could reach $15,000 by 2026. Today, I’m updating that forecast.

My latest forecast is that gold may actually exceed $27,000.

I don’t say that to get attention or to shock people. It’s not a guess; it’s the result of rigorous analysis.

Of course, there’s no guarantee it’ll happen. But this forecast is based on the best available tools and models that have proved accurate in many other contexts.

Here’s how I reached that price level forecast…

This analysis begins with a simple question: What’s the implied non-deflationary price of gold under a new gold standard?

No central banker in the world wants a gold standard. Why would they? Right now, they control the machinery of global currencies (also called fiat money).

They have no interest in a form of money they can’t control. It took about 60 years from 1914–1974 to drive gold out of the monetary system. No central banker wants to let it back in.

Still, what if they have no choice? What if confidence in command currencies collapses due to some combination of excessive money creation, competition from Bitcoin, extreme levels of dollar debt, a new financial crisis, war or natural disaster?

In that case, central bankers may return to gold not because they want to, but because they must in order to restore order to the global monetary system.

What’s the Proper Gold Price?

That scenario begs the question: What is the new dollar price of gold in a system in which dollars are freely exchangeable for gold at a fixed price?

If the dollar price is too high, investors will sell gold for dollars and spend freely. Central banks will have to increase the money supply to maintain equilibrium. That’s an inflationary result.

If the dollar price is too low, investors will line up to redeem dollars for gold and then hoard the gold. Central banks will have to reduce the money supply to maintain equilibrium. That reduces velocity and is deflationary.

Something like the latter case happened in the U.K. in 1925 when it returned to a gold standard at an unrealistically low price. The result was that the U.K. entered the Great Depression several years ahead of other developed economies.

Something like the former case happened in the U.S. in 1933, when FDR devalued the dollar against gold. Citizens weren’t allowed to own gold, so there was no mass redemption of gold. But other commodity prices rose sharply.

That was the point of the devaluation. Resulting inflation helped lift the U.S. out of deflation and gave the economy a boost from 1933–1936 in the midst of the Great Depression. (The Fed caused another severe recession in 1937–1938 with their customary incompetence.)

The policy goal obviously is to get the price “just right” by maintaining the proper equilibrium between gold and dollars. The U.S. is in an ideal position to do this by selling gold from U.S. Treasury reserves, about 8,100 metric tonnes (261.5 million troy ounces), or buying gold in the open market using freshly printed Fed money.

The goal would be to maintain the dollar price of gold in a narrow range around the fixed price.

What price is just right? This question is easy to answer, subject to a few assumptions.

$27,533 Gold

U.S. M1 money supply is $17.9 trillion. (I use M1, which is a good proxy for everyday money).

What is M1? This is the supply that is the most liquid and money that is the easiest to turn into cash.

It contains actual cash (bills and coins), bank reserves (what’s actually kept in the vaults) and demand deposits (money in your checking account that can be turned into cash easily).

One needs to make an assumption about the percentage of gold backing for the money supply needed to maintain confidence. I assume 40% coverage with gold. (This was the legal requirement for the Fed from 1913–1946. Later it was 25%, then zero today).

Applying the 40% ratio to the $17.9 trillion money supply means that $7.2 trillion of gold is required.

Applying the $7.2 trillion valuation to 261.5 million troy ounces yields a gold price of $27,533 per ounce.

That’s the implied non-deflationary equilibrium price of gold in a new global gold standard. Of course, money supplies fluctuate; lately they’ve been going up sharply, especially in the U.S.

There’s room for debate about whether a 40% backing ratio is too high or too low. Still, my assumptions are moderate based on monetary economics and history. A dollar price of gold of over $25,000 per ounce in a new gold standard is not a stretch.

Obviously, you get around $12,500 per ounce if you assume 20% coverage. There are many variables in play.

The Fundamental Model

This model is also straightforward. It relies on factors we learned about in our first week of Intro to Economics — supply and demand.

The most significant development on the supply side is the decrease of new mining output. As the chart shows below, mine production of gold in the U.S. has been decreasing steadily since 2017.



image 1

These figures reveal a 28% decrease over seven years, at the same time gold prices were rising and miners were motivated to expand output.

That’s not to argue that the world has reached “peak gold,” (output could expand in future for a variety of reasons). Still, my contacts in the mining community consistently report that gold is becoming more difficult to source and the quality of newly discovered ore is low-to-medium at best.

Flat output, all things equal, tends to put a floor under prices and to support higher prices based on other factors.

The Demand Side

The demand side is driven largely by central banks, ETFs, hedge funds and individual purchases. Traditional institutional investors are not large investors in gold. Much of the demand from hedge funds is conducted in derivatives such as gold futures.

Derivatives generally don’t involve physical delivery of gold. They involve “paper gold” that far exceeds the actual, physical gold supply. It’s this paper gold market that accounts for volatility in the gold market, not gold itself.

Meanwhile, central bank demand for gold has surged from less than 100 metric tonnes in 2010 to 1,100 metric tonnes in 2022, a 1,000% increase in 12 years. Central bank gold demand remained strong in 2023 with 800 metric tonnes acquired through Sept. 30.

That puts central bank gold demand on track for a new record. There’s no sign of that demand slowing in 2024.

Overall, the picture is one of flat supply and increasing demand, mostly in the form of official purchases by central banks.

A Math Lesson

Finally, a bit of elementary math is helpful in understanding how the dollar price of gold can move past $25,000 per ounce in the next two years. For this purpose, we’ll assume a baseline price of $2,000 per ounce (although gold has been in the $2,300 range lately with no signs of falling back to the $2,000 level).

But for our purposes, we’ll keep it simple.

A move from $2,000 per ounce to $3,000 per ounce is a heavy lift. That’s a 50% increase and could easily take a year or more. Beyond that, a further increase from $3,000 to $4,000 is a 33% increase: another large rally. A further gain from $4,000 per ounce to $5,000 per ounce is a further gain of 25%.

But notice the pattern. Each gain is $1,000 per ounce, but the percentage increase drops from 50% to 33% to 25%. That’s because the starting point is higher while the $1,000 gain is constant. Each $1,000 jump represents a smaller (and easier) percentage gain than the one before.

This pattern continues. Moving from $9,000 per ounce to $10,000 per ounce is only an 11% gain. Moving from $14,000 per ounce to $15,000 per ounce is only a 7% gain. Gold can move 1% in a single trading day, sometimes 2% or more.

As an extreme example, a move from $99,000 per ounce to $100,000 per ounce is about a 1% move. Those $1,000 pops get even easier as we approach my calculated gold price of $27,533.

The lesson for you as an investor is to buy gold now.

As prices continue to rally, you’ll get more gold for your money at the outset and high-percentage returns as gold rallies from a lower base. Toward the end of the long march past $25,000 per ounce, you’ll have bigger dollar gains because you started with more gold.

Others will jump on the bandwagon, but you’ll already have a comfortable seat.

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SDR, US Dollar, war, overpopulation, and more -


1) Covid as a race-specific bioweapon to weaken China.

While this would have made a lot of sense, it turned out to be incorrect. When Covid originally appeared in late 2019, one potential scenario was that it was a US bio engineered virus targeting Asians, with the goal of weakening China. This would make a lot of sense to the US/Western globalists, since in their view they desperately need to halt / reverse the rise of China and BRICS. So they simply 'do in' China with a race specific bioweapon. But it soon became apparent that Covid is not race-specific, so this proposed scenario was obviously incorrect. It's not impossible that the virus was intended to be race-specific, but the Deep State scientists had bungled the job, but except for that distant possibility, we can reject the 'Covid as a race specific bioweapon' hypothesis.


2) Covid as the first step in a larger process, with the goal of global population reduction.

The bigger picture that may be emerging is that Covid was merely the first step in a longer process, with population control vaccines to be the main thrust. It's no secret that the globalists have long had an obsession with overpopulation, so the use of a vaccine for population control, or series of vaccines, makes a lot of sense. This approach would be ideal since the perpetrators (global elites) can avoid the effects themselves by simply not getting the vaccine. In this case, Covid was simply the justification for the government to get vaccine mandate power. So Covid was engineered to be like a bad case of the flu, just serious enough to be hyped into justifying national vaccine mandates, and ultimately global vaccine mandates (coming May 2024 vote on the WHO's global mandate authority).

Once in place, a future vaccine (or series of vaccines) can be mandated globally, and in these will contain the population control agent. By then, compliance with the mandates can also be enforced by the CBDCs that are being rolled out worldwide.


3) Variation on Jim Rickards' 'Ice-9' scenario which -- a) derails Chiina and BRICS expansion, b) restores the waning US dollar reserve system, with possible supplementation by the SDR of the IMF, and - c) gets population reduction rolling

With de-dollarization and the rapid expansion of BRICS, the hegemony of US/West is increasingly on the ropes. So a new version of Covid is released that severely disrupts the global economy, thus impeding the move away from the dollar reserve system, and the SDRs of the IMF can also be rolled out as the co-savior, in some combination of US dollar system and SDRs. This brings the world back into the fold of a financial system controlled by the US/West.


4) As strategic vehicles, Covid and vaccines are put on the back burner, replaced by War -

War is increasingly used in desperation to retain US global hegemony. Europe wants to gravitate away from the US in favor of China-Russia-BRICS, so the Ukraine war is launched. Saudi Arabia and Iran decide to join BRICS, so the Middle East war is launched to derail things. Argentina joins BRICS, so they are on the hit list.




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Rickards - Petrodollar - >>> Kissinger Created the Doomsday Deal


BY JAMES RICKARDS

DECEMBER 4, 2023


https://dailyreckoning.com/kissinger-created-the-doomsday-deal/


Kissinger Created the Doomsday Deal

As I’m sure you know by now, Henry Kissinger died last week at the age of 100. He leaves a complex legacy, which is certainly understandable because he operated in a complex geopolitical environment.

But Henry Kissinger was a master strategist and political scientist. With his recent passing, I thought I’d retell the story of one of his most brilliant plans, and explain how it relates to the demise of the dollar.

In February 1974, I was asked by Professor Robert W. Tucker of the Johns Hopkins School of Advanced International Studies to join him and four other foreign policy experts for a meeting at the White House.

At the time, confidence in the dollar was on shaky ground because President Nixon had ended gold convertibility of dollars in 1971.

The price of oil was skyrocketing, partly due to inflationary policies pursued by the Federal Reserve, and partly due to an Arab oil embargo in response to U.S. aid to Israel in the Arab-Israeli Yom Kippur War of 1973.

Saudi Arabia was receiving dollars for their oil shipments, but they could no longer convert the dollars to gold at a guaranteed price directly with the U.S. Treasury. The Saudis were secretly dumping dollars and buying gold on the London market. This was putting pressure on the bullion banks receiving the dollar.

Confidence in the dollar began to crack. Anyway, back to my meeting at the White House…

Should We Invade Saudi Arabia?

We were ushered through the security gate on Pennsylvania Avenue near West Executive Avenue, closest to the West Wing. We were then escorted to the office of Dr. Helmut Sonnenfeldt, Secretary of State Henry Kissinger’s deputy on the National Security Council.

There, we engaged in a strategy discussion. Our focus that night was debating a full-scale military invasion of Saudi Arabia.

The idea was we’d then secure their oil fields, pump enough oil to supply Western and Japanese needs and price it however we wanted. We debated the pros and cons of this plan, including potential supply disruptions and international reactions until well into the evening.

Now, it may not be covered in the history books, but a military takeover of Saudi Arabia was very much on the table. In fact, the planning was well underway. But the Nixon administration under Henry Kissinger decided to try one other approach first. And what they came up with was absolute genius.

A few months after my meeting, in June 1974, President Nixon met with King Faisal in Saudi Arabia. A month later, he sent his representatives to offer a new deal. The deal was as straightforward as it was brilliant.

Birth of the Doomsday Deal

The Saudis would agree to sell their oil only for U.S. dollars. These dollars for oil were called “petrodollars.” And the Saudis would then reinvest these petrodollars in U.S. Treasury securities and deposits in U.S. banks.

In return, the U.S. would sell advanced weapons and military hardware to the Saudis and we’d promise U.S. military support to protect Saudi oil fields and the royal family.

This would effectively guarantee the House of Saud long-term rule over the country.

The final twist was that U.S. banks would then “recycle” the petrodollars deposited by Saudi Arabia as loans to emerging markets in Latin America, South Asia and Africa.

In turn, those developing countries would purchase U.S., European and Japanese exports. That would ignite global growth. And, of course, to do that they’d need lots of oil. That meant oil demand would grow endlessly as would demand for dollars. It was the ultimate win-win.

And the 1974 “Petrodollar Accord” was born. Or as I call it, the Doomsday Deal. Behind this “deal” was a not so subtle threat to invade Saudi Arabia and take the oil by force, which I was invited to the White House to consider.

BRICS and the End of the Doomsday Deal

Now, almost 50 years later, the wheels are coming off. The world is losing confidence in the dollar again, and the cracks in the dollar are already getting larger.

It’s important to understand all of this concerning BRICS.

If you’re unfamiliar with BRICS, I’m talking about the economic alliance between Brazil, Russia, India, China and South Africa. I wrote a lot about it this past summer and fall. I explained the changes in the global monetary system that will send shock waves throughout markets.

The BRICS nations represent almost one-third of the entire global GDP. Their economies are bigger than the United States, Germany, Japan, the U.K., France, Canada and Italy combined.

And thanks to Biden’s weakness and foreign policy failures our enemies — and even our allies — are emboldened and the Doomsday Deal is cracked wide open.

The BRICS countries have been running circles around blundering Biden lately.

Blunders

Here’s a quick rundown of some of Biden’s recent failures. On Jan. 17 of this year, shots were fired when Saudi Arabia humiliated Biden and thumbed its nose at America by announcing it is considering accepting other currencies for its oil.

And that announcement opened the floodgates.

On March 8, 2023, Reuters reported another massive blow as India and Russia are now ditching the dollar and trading oil in non-dollar currencies. On March 28, Brazil and China announced an agreement to conduct all future trade transactions using their own currencies.

And it gets even worse. Even our so-called allies saw the writing on the wall.

That same day, French oil giant Total Energies announced they had bought liquefied natural gas from a Chinese oil company using the Chinese currency, the yuan.

Now, other U.S. allies like India, Pakistan and the United Arab Emirates have made deals with Russia or China to buy oil or other commodities in their own currencies.

With Biden in the White House, they’re laughing at us now.

The Beginning of a Seismic Shift

Iraq announced earlier this year they’re now trading their oil for Chinese yuan. Recently it’s only gotten worse…

In August of this year, it was announced Saudi Arabia — our old partner in the Doomsday Deal — will be joining the BRICS group of nations starting in 2024.

And more recently, China and Saudi Arabia agreed to a currency swap deal.

Our enemies were already salivating, and now with this most recent news they are ready to pounce.

In a global political economy long dominated by the petrodollar, this could be the beginning of a seismic shift.

Eventually a tipping point will be reached where the dollar collapse suddenly accelerates as happened to the British pound sterling last century.

My background inside the U.S. intelligence community, investment banks and global currency markets has shown me how smart investors could profit from the failure of the Doomsday Deal.

One of the best ways investors can anticipate this monetary earthquake is by buying gold.

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Rickards - >>> Why’s the Dollar So Darn Strong?


BY JAMES RICKARDS

NOVEMBER 7, 2023


https://dailyreckoning.com/whys-the-dollar-so-darn-strong/


Why’s the Dollar So Darn Strong?

The dollar has been extremely strong over the past two years. This persistent dollar strength has been a mystery to many. After all, the dollar’s problems are well known.

The ratio of government debt to GDP for the United States is at a record high approaching 130% (a prudent level is considered 30%, and anything over 90% is a headwind to any economic growth at all).

The U.S. is running multitrillion-dollar deficits year after year. The Congress and White House seem in the grip of Modern Monetary Theory, which claims that the U.S. can run unlimited deficits and accumulate unlimited debt without economic harm because it can print money in unlimited quantities to finance the debt and spending.

Meanwhile, projected annualized interest payments on the U.S. national debt exceeded $1 trillion at the end of October, according to Bloomberg. The cost of debt service has doubled in the past 19 months as interest rates have risen.

This fiscal profligacy comes against a backdrop of social unrest and political dysfunction. We’re facing a presidential election next year in which one candidate, Biden, is senile and the other candidate, Trump, may be behind bars on Election Day.

Take your pick. But the dollar keeps on chugging along. How can the dollar be so strong against such a dismal landscape?

There are two answers to this question.

Answer No. 1

The first is that the dollar has its problems, but other currencies are in even worse shape. For example, the Chinese yuan is on the brink of collapse being held aloft by non-sustainable intervention by Chinese banks.

The Japanese yen is joined at the hip with the yuan because of the extent of Japanese investment in China financed by Japanese banks. With the yuan going down, the yen will go down in sync.

So that’s two major currencies with problems.

Meanwhile, Europe and the U.K. have deindustrialized under the sway of the greeniacs pushing the Green New Scam policies. Now Europe faces a winter of freezing in the dark if cold weather is extreme and Russia decides to turn off the energy taps.

Germany, the largest economy in the eurozone, is heading for recession if it isn’t already in one, and the same is true for the U.K. That’s two more major currencies facing troubles.

So yes, the dollar has its problems, but as an investor do you really prefer sterling, euros, yen or yuan?

Answer No. 2

The second reason for the dollar’s strength is much more technical and not well understood, but it’s critical to grasp. You don’t need to nail down the technical details; it’s enough that you understand the bigger picture.

It involves the so-called Eurodollar.

Eurodollars are dollar-denominated deposits held at foreign offices of major banks, and therefore fall outside the jurisdiction of the Fed and U.S. banking regulations.

The Fed actually has very little influence over the global dollar market and the exchange value of the dollar. The old currency metrics of balance of trade and moves in capital accounts are leftovers from the world of fixed exchange rates, which have been gone for decades.

What drives the dollar is the Eurodollar market, as conducted by the world’s largest banks in London, New York and Tokyo. It’s here where global liquidity and interest rates are actually determined.

The Eurodollar market needs a constant supply of depositors parking their money in offshore offices of major banks.

Right now, this market is in contraction.

Derivatives are being unwound, balance sheets are being trimmed and interbank overnight lending is being financed with collateral.

And these banks are demanding the best collateral. They won’t accept corporate debt, mortgages or even intermediate-term U.S. Treasuries. The only acceptable collateral consists of short-term U.S. Treasury bills, the shorter the better. This means 1-month, 3-month and 6-month bills.

Those are denominated in dollars, of course. In order to get the bills to post as collateral, banks have to buy dollars to buy the bills. This has created enormous demand for dollars. And that partly accounts for the strength of the dollar.

Again, it’s not important that you understand the intricacies of the eurodollar system, just that high dollar demand in the Eurodollar market is contributing to dollar strength.

The fundamental dollar shortage problem is not going away soon, and will continue to support the dollar.

What About a New BRICS Currency?

What about the prospect of a BRICS currency union and the move toward a new currency? I wrote a lot about that ahead of the BRICS Leadership Summit that took place back in August.

This new currency would be gold-linked and would displace the dollar in time as a major player in world trade.

Shouldn’t that be weakening the dollar?

After all, the prospect of a BRICS currency should pose a severe threat to the petrodollar, which is a pillar of dollar strength.

But this movement is still in its infancy and, unsurprisingly, is experiencing growing pains.

It’s not yet as unified as it needs to be if it’s going to seriously threaten the dollar. And one of those BRICS nations — India — seems to be playing both sides.

It was recently reported that India’s government is expected to reject demands from Russian oil companies to pay for Russia’s crude oil imports in Chinese yuan.

Russia currently has a surplus of rupees and is having trouble spending them. At the same time, demand for yuan has grown as Russia trades more with China.

Meanwhile, India mostly uses the dirham and U.S. dollar to pay for Russian oil imports. Basically, India is currently in a balancing act. They consider Russia an important economic ally while they consider China a geopolitical rival.

India fears popularizing the yuan will hurt its own efforts to internationalize the rupee. In fact, India was the only BRICS nation to oppose the introduction of a common currency, fearing it would benefit the yuan.

India’s refusal to give in to Russia’s demands leaves a significant role for the dollar, which is another reason to believe the dollar will retain its strength for the foreseeable future.

The Golden Ruler

Now, don’t get me wrong. I’m not saying the dollar is strong. It isn’t, for all the reasons I listed above. It’s just stronger than its competitors, and that’s why it appears strong.

Is there some way to tell if the dollar is actually getting stronger or weaker without making reference to other currencies?

Yes. The answer is gold. Think of gold as a ruler that measures dollar strength or weakness.

Gold has gained close to 10% over the past month or so. I expect gold to become much stronger, despite some temporary setbacks along the way.

Investors should consider today’s prices a gift and perhaps a last chance to acquire gold at these prices before the real safe haven race begins.

Below $2,000, gold is so cheap right now, it’s practically a steal. I strongly urge you to take advantage.

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Rickards - >>> Something “Big and Stupid” Is Coming…


BY JAMES RICKARDS

OCTOBER 3, 2023


https://dailyreckoning.com/something-big-and-stupid-is-coming/


Something “Big and Stupid” Is Coming…

With debt levels reaching all-time highs in major developed and developing economies, and with debt-to-GDP ratios also in record territory (not including contingent liabilities such as Social Security, health care and other entitlements, which make matters worse), it seems time to consider just how nations will deal with this problem.

The debt crisis may not be imminent, but it is unavoidable. When it happens, it may present the greatest financial disaster of all time. It’s never too soon for investors to consider the fallout.

When you issue debt in a currency you print, there’s no need for default in the sense of non-payment.

You can just have the central bank buy the debt (by printing money). This is the situation today in the U.S., Japan, the U.K. and the European Monetary Union (the countries that use the euro). They all have huge debt burdens, but they all have central banks that can simply buy the debt by printing money to avoid default.

Non-Payment Is Not the Issue

There are many bad consequences to printing money and storing up debt on central bank balance sheets, but non-payment of debt is not one of them. This is the mantra of the Modern Monetary Theorists (MMT) and their thought leader Stephanie Kelton.

In my view, MMT is garbage as economic policy, but the no-default tenet is valid. George Soros says the same thing.

That said, we are well past the point where the debt can be managed with real growth. That threshold is about a 90% debt-to-GDP ratio. A 60% debt-to-GDP ratio is even more comfortable and can be managed.

Unfortunately, the major reserve currency economies are all well past the 90% ratio as are those of many smaller countries. The U.S. ratio is 134%, an all-time high. The U.K. ratio is 102%. France is 111%. Spain is 112%. Italy is 145%.

China reports a figure of 77% but this is highly misleading because it ignores provincial debt for which Beijing is ultimately responsible. China’s actual figure is over 200% when provisional debt is included.

The champion debtor is Japan at 261%. The only major economy with a halfway respectable ratio is Germany at 67%. It’s Germany’s misfortune that they are probably responsible for the rest of Europe through the ECB Target2 system.

All these countries are headed for default. But we must consider the different ways to conduct a default.

There are three basic ways to default: non-payment, inflation and debt restructuring. You can take non-payment off the table for the reason mentioned above — you can always just print the money.

The same goes for restructuring. Inflation is clearly the best way to default. You pay back the money in nominal terms, but it’s worth very little in real terms. The creditor loses and the debtor countries win.

Nice and Easy Does It

The key to inflating away the real value of debt is to go slowly. It’s like stealing money from your mother’s purse. If she has $50 and you take $40, she’ll notice. If you take one dollar, she won’t notice. But a dollar stolen every day adds up over time.

This is what the U.S. did from 1945–1980. At the end of World War II, the U.S. debt-to-GDP ratio was 120% (about where it is now). By 1980, the ratio was 30%, which is entirely manageable.

Of course, nominal debt and GDP soared, but nominal GDP went up faster than nominal debt, so the ratio fell. If you can keep inflation around 3% and interest rates around 2% and exert fiscal discipline (which we did under Eisenhower, Kennedy, Nixon and Ford), the nominal GDP will grow faster than nominal debt (due to the Fed capping rates).

If you improve the ratio by, say, 2% per year and keep it up for 35 years (1945–1980), you can cut the ratio by 70%. That’s what we did.

The key was to do it slowly (like stealing from your mom’s purse). Almost no one noticed the decline in the real value of money until we got to the blow-off stage (1978–1981). But by then it was mission accomplished.

So there are two ways to deal with excessive debt: fiscal discipline and inflation. From 1945–1980, the U.S. did just that. If you run inflation at 3% and interest rates are 2%, you melt the real value of debt. If you exert fiscal discipline relative to GDP, you decrease the nominal debt-to-GDP ratio.

We did both.

The reason the debt-to-GDP ratio is back up to 134% is that Bush45, Obama, Trump and Biden ignored the formula. Since 2000, fiscal policy has been reckless so the formula doesn’t work. The problem isn’t really “money printing” (most of the money the Fed prints just comes back to the Fed as excess reserves, so it doesn’t do anything in the real economy).

The problem is that nominal debt is going up faster than nominal GDP, so the debt-to-GDP ratio goes up. This dynamic will be made much worse by the huge increase in interest rates over the past 18 months.

You can’t borrow your way out of a debt crisis. We have also been unable to generate much inflation. Inflation ran below 2% for almost all of the 2009–2019 recovery.

Japan Writ Large

Looking at the global picture, it’s important to understand that Japan is just a bigger version of the U.S. They don’t have fiscal discipline and they can’t get inflation to save their lives. The only way out for Japan is hyperinflation, which will come but not yet.

Japan can probably keep the debt game going for a while. The crash will come when the currency collapses. When I started in banking, USD/JPY was 400. Those were the days!

A debt crisis is on the way. Something big and stupid (in the words of the brilliant analyst Stephanie Pomboy) is coming from policymakers to address the issue. But the solution won’t be a policy and it won’t be a plan. A crisis will just happen almost overnight and seem to come from nowhere.

But it will come.

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>>> The BRICs Go For Gold


Forbes

by Nathan Lewis

Jul 16, 2023


https://www.forbes.com/sites/nathanlewis/2023/07/16/the-brics-go-for-gold/?sh=5b386765eb35;


After months of debate about various currency and commodity baskets, a Russia- and China-led consortium has apparently settled on using gold as the basis of a planned new international currency system separate from the US dollar and euro. As recently reported by state-funded Russia Today, an upcoming meeting of leaders from Brazil, Russia, India and China in August may include the formal introduction of the new initiative.

This would be similar to the Bretton Woods meeting in 1944, where, after the floating currency chaos of the Great Depression, a new gold-based international currency architecture was laid out. The centerpiece was the US dollar, which in turn would be linked to gold at $35/oz., its gold parity since 1933. This laid the foundation for two decades of peace, prosperity, and fixed exchange rates, which sadly came to an end when the US dollar was floated from its golden anchor in 1971.

Since then, various governments have attempted to move back toward an international arrangement based on gold. In 2019, Malaysia's prime minister Mahathir Mohammad proposed a Pan-Asian currency based on gold. "At the moment we have to depend upon the U.S. dollar but the U.S. dollar is also not stable. So the currency that we propose should be based on gold because gold is much more stable," Mahathir described. This too mirrored the Bretton Woods debates, where John Maynard Keynes' "bancor" proposal, which amounted to a global floating fiat currency, was abandoned in favor of the gold-based U.S. dollar at the heart of the system.

In 2009, Libya's Muammar Gaddafi proposed a Pan-African currency, the gold dinar, echoing the gold dinar coins of the Arab Caliphates that once ruled North Africa. But, unrest in Libya in 2011 put an end to such ambitions.

Also in 2009, the head of China's central bank, Zhou Xiaochuan, wrote: "An international reserve currency should first be anchored to a stable benchmark and issued according to a clear set of rules … [Its] adjustments should be disconnected from economic conditions and sovereign interests of any single country. The acceptance of credit-based national currencies, as is the case in the current system, is a rare special case in history."

Although Xiaochuan did not say how these goals might be achieved, we can assume it would be done exactly the same way that Mao Zedong ended hyperinflation in China in 1950: By fixing the yuan to gold.

In Moscow, leading intellectual Sergey Glazyev recently proposed a "Gold Ruble 3.0," referencing the gold-based rubles of both the Czarist era, and then the Soviet Union. Russian media reported that Russia and Iran are in talks to establish a gold-based cryptocurrency for international trade.

All of this rumbling may have come to nothing, if not for the outbreak of hostilities in Ukraine. This was immediately followed by the isolation of Russia from the entirety of the Western financial system, including US and EU banks, and the SWIFT system for international bank payments. The Russian government was ready to make interest and principal payments on its euro-based bonds, but it literally could not do so. To add both insult and injury, roughly $600 billion of foreign reserves, held in custody in the US and EU, were "frozen," and likely to be confiscated.

This was a wake-up-call to all governments worldwide that held dollar or euro foreign reserves, or used the SWIFT banking system. The time had come to set up alternative arrangements.

This would also require a degree of independence from the International Monetary Fund. Although the IMF was set up at Bretton Woods in 1944 explicitly to reinforce the system built around the golden dollar, by 1978 that mission had become obsolete. In a 1978 revision to its Articles, the IMF allowed governments to link their currencies' value to anything "other than gold" (Article IV, Sec. 2a). The IMF itself would follow "the objective of avoiding the management of the price, or the establishment of a fixed price, in the gold market." (Article V, Sec. 12a) In other words, the IMF banned the gold standard among all member countries. The effect was to maintain the floating fiat dollar's primacy in international affairs.

Today, a "gold standard" proposal comes with a cloud of fallacious ideas, having to do with the "balance of payments" and other odd notions. It is best understood as simply a means to stabilize currency value. Today, many countries' currencies are linked to the euro, including Bulgaria, which uses a euro currency board. A gold standard system is the same basic idea, but using gold instead of a floating fiat euro. All of today's electronic payment systems would remain the same.

This was the principle that all of the Western World (and actually the Eastern World as well) followed for the past 600 years since the Renaissance. It worked very well. Gold was indeed tolerably stable in value, in the short and long term — stable enough that countries that stuck to it suffered no ill consequences as a result. They may have suffered for other reasons: Mao's Great Leap Forward (1958-1962) resulted in mass starvation, even though the yuan remained linked to gold. But, gold never failed to serve its role as a reliably stable standard of value.

"The only adequate guarantee for the uniform and stable value of a paper currency is its convertibility into specie [gold or silver] — the least fluctuating and only universal currency," said President James Madison, the primary author of the US Constitution. Today, much of the world wants a basis for their currencies that is stable in value, and also "universal" — that is, something everyone can agree on. Just as at Bretton Woods in 1944, there is only one thing that meets this need, and we all know what it is.


(--> GOLD baby !! But what happens to the value of my Treasuries, gulp)



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>>> Global public debt hits record $92 trillion - UN report


by Jorgelina do Rosario

Reuters

July 12, 2023


https://www.msn.com/en-us/money/companies/global-public-debt-hits-record-92-trillion-un-report/ar-AA1dLyzw?OCID=ansmsnnews11


LONDON (Reuters) - Global public debt surged to a record $92 trillion in 2022 as governments borrowed to counter crises such as the COVID-19 pandemic, with the burden being felt acutely by developing countries, a United Nations report said.

Domestic and external debt worldwide has increased more than five times in the last two decades, outstripping the rate of economic growth, with gross domestic product only tripling since 2002, according to the Wednesday report, released in the run up to a G20 finance ministers and central bank governors' meeting July 14-18.

Developing countries owe almost 30% of the global public debt, of which 70% is represented by China, India and Brazil. Fifty-nine developing countries face a debt-to-GDP ratio above 60% - a threshold indicating high levels of debt. (US debt/GDP is 130%!!)

"Debt has been translating into a substantial burden for developing countries due to limited access to financing, rising borrowing costs, currency devaluations and sluggish growth," the UN report added.

Furthermore, the international financial architecture made access to financing for developing countries both inadequate and expensive, the UN said, pointing to net interest debt payments exceeding 10% of revenues for 50 emerging economies worldwide.

"In Africa, the amount spent on interest payments is higher than spending on either education or health," the report found with 3.3 billion people living in countries that spend more on debt interest payments than on health or education.

"Countries are facing the impossible choice of servicing their debt or serving their people."

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BRICS currency in August - >>> Rickards Drops Bombshell


BY JAMES RICKARDS

JUNE 6, 2023


https://dailyreckoning.com/rickards-drops-bombshell/


Rickards Drops Bombshell


On Aug. 22, about 2½ months from today, the most significant development in international finance since 1971 will be unveiled.

It involves the rollout of a major new currency that could weaken the role of the dollar in global payments and ultimately displace the U.S. dollar as the leading payment currency and reserve currency.

It could happen in just a few years.

The process by which this will happen is unprecedented, and the world is unprepared for this geopolitical shock wave.

This monetary shock will be delivered by a group called the BRICS.

The acronym BRICS stands for Brazil, Russia, India, China and South Africa.

This play for global reserve currency status by the BRICS will affect world trade, direct foreign investment and investor portfolios in dramatic and unforeseen ways.

The most important development in the BRICS system concerns the expansion of BRICS membership. This has led to the informal adoption of the name BRICS+ for the expanded organization.

There are currently eight nations that have formally applied for membership and 17 others that have expressed interest in joining. The eight formal applicants are: Algeria, Argentina, Bahrain, Egypt, Indonesia, Iran, Saudi Arabia and the United Arab Emirates.

The 17 countries that have expressed interest are: Afghanistan, Bangladesh, Belarus, Kazakhstan, Mexico, Nicaragua, Nigeria, Pakistan, Senegal, Sudan, Syria, Thailand, Tunisia, Turkey, Uruguay, Venezuela and Zimbabwe.

There’s more to this list than just increasing the headcount at future BRICS meetings.

If Saudi Arabia and Russia are both members, you have two of the three largest energy producers in the world under one tent (the U.S. is the other member of the energy Big Three).

If Russia, China, Brazil and India are all members, you have four of the seven largest countries in the world measured by landmass possessing 30% of the Earth’s dry surface and related natural resources.

Almost 50% of the world’s wheat and rice production as well as 15% of the world’s gold reserves are in the BRICS.

Meanwhile, China, India, Brazil and Russia are four of the nine highest-population countries on the planet with a combined population of 3.2 billion people or 40% of the Earth’s population.

China, India, Brazil, Russia and Saudi Arabia have a combined GDP of $29 trillion or 28% of nominal global GDP. If one uses purchasing power parity to measure GDP, then the BRICS share is over 54%. Russia and China have two of the three largest nuclear arsenals in the world (the other leader is the United States).

By every measure — population, landmass, energy output, GDP, food output and nuclear weapons — BRICS is not just another multilateral debating society. They are a substantial and credible alternative to Western hegemony.

BRICS acting together is one pole of a new multipolar or even bipolar world.

When the new currency launch is announced in August, the currency will not fall on an empty field. It will fall into a sophisticated network of capital and communications. This network will greatly enhance its chances of success.

The BRICS are also developing an optical fiber submarine telecommunications system that would connect its members. It is being developed under the name BRICS Cable. Part of the motivation for BRICS Cable is to foil spying by the U.S. National Security Agency on message traffic carried through existing cable networks.

What’s behind this quest to ditch the dollar? In no small part the answer is U.S. weaponization of the dollar through the use of sanctions.

On numerous occasions from 2007–2014, I warned U.S. officials from the Treasury, Pentagon and intelligence community that overuse or abuse of dollar sanctions would lead adversaries to abandon the dollar to avoid the impact of sanctions.

Such abandonment would lead to the diluted potency of sanctions, unforeseen costs imposed on the U.S. and eventually to the collapse of confidence in the dollar itself. These warnings were mostly ignored.

We have now reached the first and second stages of this forecast and are dangerously close to the third.

For years, the U.S. has used sanctions to punish nations like Iran. But the sanctions the U.S. and its allies imposed on Russia after it invaded Ukraine last year went far beyond previous sanctions regimes. They were unprecedented.

Many other nations began to conclude that they could be next if they run afoul of the U.S. on certain issues. And that fear has greatly accelerated the push to opt out of the dollar system entirely.

This desire is not limited to current targets such as Russia but is shared by potential targets including China, Iran, Turkey, Saudi Arabia, Argentina and many others.

The BRICS+ present a realistic effort to de-dollarize global payments and eventually global reserves.

For years, I’ve argued that the dollar would remain the world’s leading reserve currency for longer than most people think.

But below, I show you why a new BRICS+ currency could greatly accelerate the demise of the dollar as the world’s leading reserve currency.

How could it happen so much faster than I previously thought? Read on.


The Coming Shock to the Global Monetary System

By Jim Rickards

The global desire to move away from the dollar as a medium of exchange for international trade in goods and services is hardly new. The difference today is that it’s gone from a discussion point to a novelty to a looming reality in a remarkably short period of time.

Dubai and China have recently concluded an arrangement whereby Dubai will accept Chinese yuan in payment for oil exports from Dubai. In turn, Dubai can use the yuan to buy semiconductors or manufactured goods from China.

Saudi Arabia and China have been discussing similar oil-for-yuan arrangements but nothing definitive has yet been put in place. These discussions are made complicated by Saudi Arabia’s long-standing petrodollar deal with the U.S. Still, some progress along these lines is widely expected.

China and Brazil have recently reached a broad-based bilateral currency deal where each country accepts the currency of the other in trade. Meanwhile, there’s a growing strategic relationship between China and Russia as the two superpowers jointly confront the United States. In the trading relationship between the two nations, Russia can pay in rubles for Chinese manufactured goods and other exports while China pays in yuan for Russian energy, strategic metals and weapons systems.

Yet all these arrangements may soon be superseded by a new BRICS+ currency, which will be announced in Durban, South Africa, at the annual BRICS Leaders’ Summit Conference on Aug. 22–24.

The currency will be pegged to a basket of commodities for use in trade among members. Initially, the BRICS+ commodity basket would include oil, wheat, copper and other essential goods traded globally in specified quantities.

In all likelihood, the new BRICS+ currency would not be available in the form of paper notes for use in everyday transactions. It would be a digital currency on a permissioned ledger maintained by a new BRICS+ financial institution with encrypted message traffic to record payments due or owing by participating parties. (This is not a cryptocurrency because it is not decentralized, not maintained on a blockchain and not open to all parties without approval.)

The latest information from the BRICS working groups is that this basket valuation methodology is encountering the same problems that John Maynard Keynes encountered at the Bretton Woods meetings in 1944.

Keynes initially suggested a basket of commodities approach for a world currency he called the bancor. The difficulty is that global commodities included in any basket are not entirely fungible (there are over 70 grades of crude oil distinguished by viscosity and sulfur content among other attributes).

In the end, Keynes saw that a basket of commodities is not necessary and that a single commodity — gold — would better serve the purpose of anchoring a currency for reasons of convenience and uniformity.

Based on the impracticality of commodity baskets as uniform stores of value, it appears likely that the new BRICS+ currency will be linked to a weight of gold.

This plays to the strengths of BRICS members Russia and China, who are the two largest gold producers in the world and are ranked sixth and seventh respectively among the 100 nations with gold reserves.

These and related developments are frequently touted as the “end of the dollar as a reserve currency.” Such comments reveal a lack of understanding as to how the international monetary and currency systems actually work.

The key mistake in almost all such analyses is a failure to distinguish between the respective roles of a payment currency and a reserve currency. Payment currencies are used in trade for goods and services. Nations can trade in whatever payment currency they want — it doesn’t have to be dollars.

Reserve currencies (so-called) are different. They’re essentially the savings accounts of sovereign nations that have earned them through trade surpluses. These balances are not held in currency form but in the form of securities.

When analysts say the dollar is the leading reserve currency, what they actually mean is that countries hold their reserves in securities denominated in a specific currency. For 60% of global reserves, those holdings are U.S. Treasury securities denominated in dollars. The reserves are not actually in dollars; they’re in securities.

As a result, you cannot be a reserve currency without a large, well-developed sovereign bond market. No country in the world comes close to the U.S. Treasury market in terms of size, variety of maturities, liquidity, settlement, derivatives and other necessary features.

So the real impediment to another currency as a reserve currency is the absence of a bond market where reserves are actually invested. That’s why it’s so difficult to displace Treasuries as reserve assets even if you wanted. Again, no country in the world can come close to the U.S. in that regard.

But here’s where it gets interesting, and why the dollar could lose its leading reserve status much faster than previously thought.

That’s because the BRICS+ currency offers the opportunity to leapfrog the Treasury market and create a deep, liquid bond market that could challenge Treasuries on the world stage almost from thin air.

The key is to create a BRICS+ currency bond market in 20 or more countries at once, relying on retail investors in each country to buy the bonds.

The BRICS+ bonds would be offered through banks and postal offices and other retail outlets. They would be denominated in BRICS+ currency but investors could purchase them in local currency at market-based exchange rates.

Since the currency is gold backed it would offer an attractive store of value compared with inflation- or default-prone local instruments in countries like Brazil or Argentina. The Chinese in particular would find such investments attractive since they are largely banned from foreign markets and are overinvested in real estate and domestic stocks.

It will take time for such a market to appeal to institutional investors, but the sheer volume of retail investing in BRICS+-denominated instruments in India, China, Brazil and Russia and other countries at the same time could absorb surpluses generated through world trade in the BRICS+ currency.

In short, the way to create an instant reserve currency is to create an instant bond market using your own citizens as willing buyers.

The U.S. did something similar in 1917. From 1790–1917, the U.S. bond market was for professionals only. There was no retail market. That changed during World War I when Woodrow Wilson authorized Liberty Bonds to help finance the war.

There were bond rallies and Liberty Bond parades in every major city. It became a patriotic duty to buy Liberty Bonds. The effort worked, and it also transformed finance. It was the beginning of a world where everyday Americans began to buy stocks, bonds and securities as retail investors.

If the BRICS+ use a kind of Liberty Bond patriotic model, they may well be able to create international reserve assets denominated in the BRICS+ currency even in the absence of developed market support.

This entire turn of events — introduction of a new gold-backed currency, rapid adoption as a payment currency and gradual use as a reserve asset currency — will begin on Aug. 22, 2023, after years of development.

Except for direct participants, the world has mostly ignored this prospect. The result will be an upheaval of the international monetary system coming in a matter of weeks.

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Ever closer to CBDC, cashless society - >>> India's culling of its 2000-rupee notes is driving hoarders to realty and gold


Quartz

by Mimansa Verma

May 22, 2023


https://finance.yahoo.com/news/indias-culling-2000-rupee-notes-084500521.html


India has witnessed a spurt in demand for gold since the Reserve Bank of India (RBI), last week, announced that the 2,000-rupee currency notes will be pulled out of circulation.

These high-value notes must be deposited in bank accounts or exchanged for other denominations by Sept. 30, the RBI declared on May 19. It has set a deposit limit of Rs 20,000 per day starting tomorrow (May 23).

“People who have been using these notes as a store of value may face inconvenience,” Rupa Rege Nitsure, group chief economist at L&T Finance Holdings told Reuters. There is a high chance of hoarded cash returning to the banking system.

However, cash-driven sectors such as agriculture and construction, and small businesses are likely to face hiccups in the near term, economists said.

A spur in demand for gold and real estate

Policymakers have assuaged concerns similar to the ones that followed the shock demonetization of Rs 500 and Rs 1,000 currency notes in November 2016.

Yet, gold jewelry sales rose by 10-20% over the weekend, the Hindustan Times reported today. Those with unaccounted wealth are expected to fuel demand for such high-value purchases like real estate and precious metals like gold and silver, according to economists at QuantEco Research.

“Many customers made small-ticket purchases of 10-gram and 20-gram coins, whereas there were certain others who opted for 100-gram coins and bars as well. About 80% of customers have made cash payments...” Hemant Choksi, an Ahmedabad jeweler told The Times of India.

Purchase of gold, silver, jewelry, or precious gems and stones below $2,415 does not require know-your-customer documentation in India.

The use of the Rs 2,000 notes has also reportedly spiked at petrol pumps and electronic goods stores.

What prompted RBI to pull the Rs 2,000 notes?

The 2016 demonetization had sucked out 86% of the economy’s currency in circulation overnight.

The Rs 2,000 notes were introduced back then. Their withdrawal now, however, is expected to be less disruptive as the circulation of these notes has dwindled significantly over the years.

The RBI stopped printing them in 2018-19. At the end of the financial year 2023, their share in the economy’s currency note circulation stood at only 10.8%—or $44.27 billion, the RBI said.

While authorities have not specified the reasons for the move, Nitsure of L&T Finance Holdings believes it was a “wise decision” ahead of state and general elections. She noted that cash usage typically spikes at the time of elections.

India’s next general election will be held around May 2024, with a string of polls to state legislative assemblies scheduled in the preceding months.

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>>> De-Dollarization Is Happening at a ‘Stunning’ Pace, Jen Says


Bloomberg

by Matthew Burgess

April 18, 2023


https://finance.yahoo.com/news/dollarization-happening-stunning-pace-jen-082144378.html


(Bloomberg) -- The dollar is losing its reserve status at a faster pace than generally accepted as many analysts have failed to account for last year’s wild exchange rate moves, according to Stephen Jen.

The greenback’s share in global reserves slid last year at 10 times the average speed of the past two decades as a number of countries looked for alternatives after Russia’s invasion of Ukraine triggered sanctions, Jen and his Eurizon SLJ Capital Ltd. colleague Joana Freire wrote in a note. Adjusting for exchange rate movements, the dollar has lost about 11% of its market share since 2016 and double that amount since 2008, they said.

“The dollar suffered a stunning collapse in 2022 in its market share as a reserve currency, presumably due to its muscular use of sanctions,” Jen and Freire wrote. “Exceptional actions taken by the US and its allies against Russia have startled large reserve-holding countries,” most of which are emerging economies from the so-called Global South, they said.

Jen is the former Morgan Stanley currency guru who coined the dollar smile theory.

Last year, Bloomberg’s gauge of the greenback surged as much as 16% as the conflict helped fuel a rise in global inflation that triggered widespread interest rate hikes which sank bond and currency markets alike. It finished the year up 6%.

Biden’s Dollar Weaponization Supercharges Hunt for Alternatives

Smaller nations are experimenting with de-dollarization while China and India are pushing to internationalize their currencies for trade settlement after the US and Europe cut Russian banks from the global financial messaging system known as SWIFT. There’s also concern the dollar may become a permanent political tool, or be used as a form of economic statecraft to put extra pressure on countries to enforce sanctions that they may disagree with.

The US currency now represents about 58% of total global official reserves, down from 73% in 2001 when it was the “indisputable hegemonic reserve,” the Eurizon pair said.

That said, the dollar’s role as an international currency won’t be challenged anytime soon as developing countries don’t yet have the ability to divest from the greenback for transactions due to its large, liquid and well-functioning financial markets, Jen and Freire wrote.

Still, the persistence of those conditions “is not preordained” and there may come a time when the rest of the world actively avoids using the dollar, they wrote.

“The prevailing view of ‘nothing-to-see-here’ on the US dollar as a reserve currency seems too innocuous and complacent,” the two wrote. “What needs to be appreciated by investors is that, while the Global South is unable to totally avoid using the dollar, much of it has already become unwilling to do so.”

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Rickards - >>> Goodbye, King Dollar


BY JAMES RICKARDS

APRIL 10, 2023


https://dailyreckoning.com/goodbye-king-dollar/


Goodbye, King Dollar

I’ve written for years about different nations’ persistent efforts to dethrone the U.S. dollar as the leading global reserve currency and the main medium of exchange.

At the same time, I’ve said that such processes don’t happen overnight; instead, they happen slowly and incrementally over decades.

While that’s true, the process is accelerating in ways no one could have anticipated just over a year ago.

The extreme economic sanctions against Russia, including its ejection from the SWIFT global messaging system, have revealed to other nations that the U.S. can do something similar to them if the U.S. disapproves of their conduct.

None of the sanctions would be effective or even possible without the use of the dollar and the dollar payments system.

So, after 79 years under the Bretton Woods arrangements, 52 years since Nixon closed the gold window, and 49 years since the petrodollar agreement with Saudi Arabia, the reign of King Dollar as the world’s leading payment currency is rapidly coming to an end.

The building de-dollarization movement represents a global sea change, which will only accelerate in the coming years. This should come as no surprise since global monetary arrangements usually change every 40 years or so.

We’re long overdue.

The Trend Is Not the Dollar’s Friend

Announcements of bilateral and multilateral agreements among countries to trade for goods and services in currencies other than the U.S. dollar are coming thick and fast. One key arrangement has taken place, in which China and Brazil have agreed to accept each other’s currency for goods and services traded between them.

China is now Brazil’s largest trading partner. China buys enormous amounts of soybeans from Brazil along with aircraft, sugar, beef, and oil. Brazil buys manufactured goods from China as well as rare earths, semiconductors, and solar panels. Meanwhile, both countries offer extensive travel and leisure venues to citizens of the other.

This is one of many such bilateral trading arrangements springing up in which one party or the other will pay or accept currencies other than the U.S. dollar.

For example, Dubai has a deal with China whereby it accepts yuan for oil. Saudi Arabia is discussing a similar deal with China. The BRICS+ (Brazil, Russia, India, China, South Africa and about 20 other invited countries) are developing a new currency, possibly backed by a basket of commodities to be used on a multilateral basis for trade among participating members.

Russia and China are far down the road in terms of using their respective currencies for bilateral trade. Russia can buy Chinese manufactured goods and technology using rubles, and China can buy Russian oil and natural gas as well as wheat, weapons, and strategic metals using yuan.

Do you think this is all unrelated?

Even the Smaller Economies Want a Dollar Alternative

The desire to abandon U.S. dollars for use in many forms is not limited to those large trading relationships. Even relatively small economies such as Kenya have now joined the anti-dollar crusade.

In the past, Kenya valued the dollar as a means of payment for Kenyan exports such as coffee, and in its valuable tourism sector. As a result, many Kenyan individuals and enterprises have hoarded dollars, often in physical form as $100 bills, because of their perceived value and as a hedge against the devaluation of the local currency, the Kenyan shilling.

Now the government is declaring war on the hoarders and the dollar itself. The government has announced plans to allow oil importers to use shillings to pay for the oil. These new arrangements will eliminate the need for dollars in much of the economy, since the oil sector represents 30% of Kenyan imports.

At the same time, the government is trying to flush out hoarders. For the time being, this is being done on a voluntary basis. The government is saying since the economy will need fewer dollars as a result of the new shilling arrangements, there is less reason for the private sector to hoard dollars.

Beyond the invitation to the hoarders to cash in their dollars is an implied threat that the government will either seize the dollars or make them non-convertible in the near future.

The president of Kenya said, “I am giving you free advice that those of you who are hoarding dollars, you shortly might go into losses. You better do what you must do because this market is going to be different in a couple of weeks.”

The president did not define what he meant by “different”, but the threat of confiscation is a reasonable inference. The move away from dollars is visible everywhere, even in the backstreets of Nairobi.

Don’t Confuse a Payment Currency With a Reserve Currency

It’s important to note that these developments in the use of new payment currencies for trade are not the same as changes in the world of reserve currencies, which perform a different role. There’s a difference between a payment currency and a reserve currency.

A reserve currency refers to the unit of denomination of securities held in reserve by countries. It’s something like your savings account but it’s controlled by the treasury or finance ministry of each country.

These reserves are not actual currency deposits. They’re securities such as US Treasury notes or German government notes (bunds). They’re denominated in Dollars or Euros but they’re securities, not cash. That’s the key.

If you don’t have a large, liquid government securities market with a good rule of law then you can’t qualify as a reserve currency. The US Treasury market is the only market in the world large enough to absorb the savings of major trading powers such as China, Japan and Taiwan, so the dollar is the leading reserve currency.

That won’t change in the near future. When the dollar replaced Sterling, it took 30 years from 1914 to 1944 to complete the process.

A payment currency is different. It’s the unit of account for paying for imports and exports, but it’s really just a way of keeping score. Periodically the trading partners settle the score with a transfer of assets that can include commodities, dollars, euros or gold.

It’s much easier to launch a new payment currency than a new reserve currency because you don’t need a large securities market. You just need a reliable ledger system and willing partners.

I want to draw the distinction between a payment currency and a reserve currency because many people confuse them, while there are important differences.

Still, the world is saying to the U.S.: “Dollars? We don’t need no stinking dollars.” Indeed.

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>>> De-dollarization Has Begun


MSN.com

American Institute for Economic Research

by Peter C. Earle

4-4-23


https://www.msn.com/en-us/money/markets/de-dollarization-has-begun/ar-AA19sD7N?ocid=hpmsn&cvid=087b3fcc7a5e4ea083cc43ceb2825f16&ei=36


Last week, China and Brazil reached an agreement to settle trades in one anothers' currencies. Over the past 15 years, China has replaced the United States as the main trading partner of resource-rich Brazil, and as such that shift may have been inevitable. But within the context of recent circumstances, this appears to be another in a series of recent blows to the central role of the dollar in global trade.

As the world's reserve currency, the US dollar is essentially the default currency in international trade and a global unit of account. Because of that, every central bank, Treasury/exchequer, and major firm on Earth keeps a large portion of their foreign exchange holdings in US dollars. And because holders of dollars seek returns on those balances, the ubiquity of dollars drives a substantial portion of the demand for US government bonds in world financial markets.

The switch from dollars to a yuan-real settlement basis in Chinese-Brazilian trade is only the latest in a growing trend. Discussions of a more politically neutral reserve currency have gone on for decades. The profound economic disruption experienced by Iran, and more recently Russia, after being evicted from dollar-based trading systems like SWIFT, however, have led many nations to consider imminent contingency plans. India and Malaysia, for example, have recently begun using the Indian Rupee to settle certain trades, and there have been perennial warnings about Saudi Arabia and other energy exporters moving away from the dollar. On that note, China also recently executed a test trade for natural gas with France settled in yuan.

It's not just the conscription of the dollar in economic warfare, but increasingly error-fraught monetary policy regimes that are driving various interests away from the greenback. The monetary policy response to the 2008 financial crisis saw the dollar's value whipped around unpredictably, and the response to the outbreak of COVID was even more frenetic. The massively expansionary response to the pandemic in 2020 was followed by an initially dismissive posture toward the outbreak of inflation, which reached four-decade highs before an aggressive contractionary shift in policy that destabilized precarious financial institutions was implemented.

Simply replacing the fiat currency of the largest economy in the world with the fiat currency(s) of (a) smaller economy(s) is hardly a viable replacement strategy. Moving away from the dollar brings substantial barriers to exit as well as network effects to overcome, owing to historical, technological, financial, and habitual obstacles. The US dollar is the de facto currency of East Timor, Ecuador, El Salvador, the Federated States of Micronesia, the Marshall Islands, Palau, Panama, and Zimbabwe. Further, the (comparatively, relatively) transparent conduct of monetary policy in the US has led no less than 22 foreign central banks and currency boards to peg their currencies to it. And dollars are the cheapest means of access to acquire nominally risk-free US Treasury instruments.

Some of the "twists" being discussed to provide alluring dollar replacements are cryptocurrencies, central bank digital currencies, or baskets of commodities representative of a given nation or region's competitive advantage. The latter scenario, in which (for example) certain African nations would trade in currencies backed by titles to rare earth metals, some South American nations in currencies backed by copper deposits, and so on, is interesting but faces substantial hurdles. Nevertheless, a conference in New Delhi last week focusing on increased cooperation between Brazil, Russia, India, China, and South Africa touched on just such a plan. Variations of such a currency order have been dubbed "Bretton Woods III", and some non-commodity proposals bear a curious similarity to the since-discarded Facebook currency plan first called Libra (later, ‘Diem').

Owing to the role that dollar pervasiveness plays in the international appetite for US Treasuries, a side effect of the long-term attempt to establish alternative reserve currencies may be decreasing interest in tradable US debt. Over shorter time frames, that would likely result in higher yields and higher levels of debt service on securities issued by the US Treasury. Over generational time frames, that shift could force a reduction in US government spending. Should that scenario play out, the long-term effect of using access to dollars as a bludgeon of American foreign policy could well be higher average inflation and/or higher taxes on American citizens.

The dollar, in some shape or form, will likely be around for a long time. Perhaps very long. But by weaponizing dollar dominance and permitting expanding mandates to disorient US monetary policy, the dollar's fate as the lingua franca of world commerce over the long haul may already be sealed. So long as the political will to moor US fiscal and monetary policies to those consistent with the constitution of sound money remain an inconversable matter, de-dollarization will proceed. And slower or more quickly, the dollar will lose ground abroad.

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>>> Here Are 7 Signs That Global De-Dollarization Has Just Shifted Into Overdrive


APR 04, 2023

by Michael Snyder

The Economic Collapse blog


https://www.zerohedge.com/geopolitical/here-are-7-signs-global-de-dollarization-has-just-shifted-overdrive


For decades, the U.S. dollar was the undisputed king of global currencies, but now dramatic changes are happening. China, Russia, India, Brazil, Saudi Arabia and other nations are making really big moves which will enable them to become much less dependent on the U.S. dollar in the years ahead. This is really bad news for us, because having the primary reserve currency of the world has enabled us to enjoy a massively inflated standard of living. Once we lose that status, our lifestyles will be much different than they are today. Unfortunately, most Americans don’t understand any of this. Even though our leaders have treated the stability of our currency with utter contempt in recent years, most Americans just assume that the dollar will always reign supreme. Meanwhile, much of the planet is preparing for a future in which the U.S. dollar will be far less important than it is right now.

The following are 7 signs that global de-dollarization has just shifted into overdrive…


#1 The BRICS nations account for over 40 percent of the total global population and close to one-fourth of global GDP. So the fact that they are working to develop a “new currency” should greatly concern all of us…

The Deputy Chairman of Russia’s State Duma, Alexander Babakov, said on 30 March that the BRICS bloc of emerging economies – Brazil, Russia, India, China, and South Africa – is working on developing a “new currency” that will be presented at the organization’s upcoming summit in Durban.

“The transition to settlements in national currencies is the first step. The next one is to provide the circulation of digital or any other form of a fundamentally new currency in the nearest future. I think that at the BRICS [leaders’ summit], the readiness to realize this project will be announced, such works are underway,” Babakov said on the sidelines of the Russian-Indian Strategic Partnership for Development and Growth Business Forum.

Babakov also stated that a single currency could likely emerge within BRICS, and this would be pegged not just to the value of gold but also to “other groups of products, rare-earth elements, or soil.”


#2 Two of the BRICS nations, China and Brazil, have just “reached a deal to trade in their own currencies”…

The Chinese renminbi is speeding up in expanding its global use, a trend that will help build a more resilient international monetary system, one that is less dependent on the US dollar and more conducive to trade growth, experts said on Thursday.

They commented after China and Brazil — two major emerging economies and BRICS members — reportedly reached a deal to trade in their own currencies, ditching the US dollar as an intermediary.

The deal will enable China and Brazil to conduct their massive trade and financial transactions directly, exchanging the RMB for reais and vice versa, instead of going through the dollar, Agence France-Presse reported on Wednesday, citing the Brazilian government.


#3 During a meeting last week in Indonesia, finance ministers from the ASEAN nations discussed ways “to reduce dependence on the US Dollar, Euro, Yen, and British Pound”…

An official meeting of all ASEAN Finance Ministers and Central Bank Governors kicked off on Tuesday (March 28) in Indonesia. Top of the agenda are discussions to reduce dependence on the US Dollar, Euro, Yen, and British Pound from financial transactions and move to settlements in local currencies.

The meeting discussed efforts to reduce dependence on major currencies through the Local Currency Transaction (LCT) scheme. This is an extension of the previous Local Currency Settlement (LCS) scheme that has already begun to be implemented between ASEAN members.


#4 In a move that has enormous implications for the “petrodollar”, Saudi Arabia just agreed to become a “dialogue partner in the Shanghai Cooperation Organization”…

The state-owned Saudi Press Agency said that, in a session presided by King Salman bin Abdulaziz, the Saudi cabinet on Tuesday approved a memorandum awarding Riyadh the status of dialogue partner in the Shanghai Cooperation Organization — a political, security and trade alliance that lists China, Russia, India, Pakistan and four other central Asian nations as full members.

The organization further tallies four observer states — including Iran — and nine dialogue partners, counting in Saudi Arabia, Qatar and Turkey. It is headquartered in Beijing and served by China’s Zhang Ming as secretary-general.


#5 The Chinese just completed their very first trade of liquefied natural gas that was settled in Chinese currency instead of U.S. dollars…

China has just completed its first trade of liquefied natural gas (LNG) settled in yuan, the Shanghai Petroleum and Natural Gas Exchange said on Tuesday.

Chinese state oil and gas giant CNOOC and TotalEnergies completed the first LNG trade on the exchange with settlement in the Chinese currency, the exchange said in a statement carried by Reuters.

The trade involved around 65,000 tons of LNG imported from the United Arab Emirates (UAE), the Shanghai Petroleum and Natural Gas Exchange added.


#6 The government of India is offering their currency as an “alternative” to the U.S. dollar in international trade…

India will offer its currency as an alternative for trade to countries that are facing a shortage of dollars in the wake of the sharpest tightening in monetary policy by the US Federal Reserve in decades.

Facilitating the rupee trade for countries facing currency risk will help “disaster proof” them, Commerce Secretary Sunil Barthwal said during an announcement on India’s foreign trade policy Friday in New Delhi.


#7 Saudi Arabia has actually agreed to accept Kenyan shillings as payment for oil shipments to Kenya instead of U.S. dollars…

Kenyan President William Ruto signed an agreement with Saudi Arabia to buy oil for Kenyan shillings instead of US dollars.

As the US currency exchange rate hit 145.5 shillings due to increased demand by importers, President Ruto accused oil cartels of stockpiling American dollars in response to the crisis, sparking fuel shortages throughout Kenya.

10 years ago, none of these things would have happened.

But now change is happening at a pace that is absolutely breathtaking.

At this point, John Carney is warning that a fracturing of global currency reserves is “inevitable”…

“[It’s] not only a serious threat, I think it is inevitable. We went through three stages, as you said, after World War II. The U.S. was the biggest economy in the world. In the 1970s, global banking became basically dollar central. With the fall of the Soviet Union, the entire world, more or less, came under the domination of the U.S dollar…”

“That is now drifting away. China and Russia are starting to build an alternative block of currency,” John Carney explained Sunday.

Sadly, I agree with him.

As U.S. relations with both Russia and China continue to go downhill, both of those nations will have a very strong incentive to push de-dollarization even further.

And that is really bad news for the United States, because our currency is the source of our economic power and it is the most important thing that we export.

This is a story of monumental importance, but unfortunately most Americans still believe that our leaders know exactly what they are doing and that they have everything fully under control.

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Rickards - >>> Get Lost, Uncle Sam


BY JAMES RICKARDS

MARCH 6, 2023


https://dailyreckoning.com/get-lost-uncle-sam/


Get Lost, Uncle Sam

The U.S. has led the most aggressive sanctions regime ever in its efforts to punish Russia for invading Ukraine.

The first round of financial targets included obvious attacks such as freezing the U.S. dollar accounts of Russian banks and oligarchs. The second round raised the ante by freezing the dollar accounts of the Central Bank of Russia itself. This was unprecedented except in the case of rogue states such as Iran, North Korea and Syria.

Suddenly the central bank of the world’s ninth largest economy and third largest oil producer with over $2.1 trillion in GDP found itself shut out of the global payments and banking systems.

The sanctions went beyond finance and banking to include bans on Russian exports, freezing Russia out of insurance markets (as a way to effectively prohibit oil shipments) and bans on critical exports to Russia including high-tech equipment, semiconductors and popular consumer goods.

Major U.S. and other Western companies from Shell Oil to McDonalds were pressured to shut down operations in Russia, and many did.

Leave Me Out of It

But, a large part of the rest of the world has refused to join the U.S./EU/NATO financial sanctions. This was best evidenced at the recent G20 finance ministers summit conference held in Bengaluru, India.

Financial sanctions are difficult to impose at the best of times. They require large-scale cooperation from many nations to prevent leakage and workarounds that defeat the purpose of the sanctions.

The U.S. knew that it could count on vassal states such as Germany, France, Japan, and the UK to go along with the sanctions. The G20 finance ministers conference was the perfect place to firm up the cooperation and gain consensus from important countries such as Brazil, India, China, and Saudi Arabia.

U.S. Treasury Secretary Janet Yellen attended the G20 event and pushed hard to form a united front of all participants against Russia. She failed.

Key economic players such as China and India refused to endorse the proposed final statement. For only the second time in its history, the G20 was unable to issue a final communique reflecting the consensus of the participants. There was no consensus.

Strength In Numbers

The U.S. may be the world’s largest economy ($25 trillion), but its share of global GDP measured as a percentage of the total has been shrinking even as large developing economies including India, Brazil, China and Indonesia keep coming up in the ranks.

In fact, the world’s four largest developing economies (China, India, Russia and Iran) have a combined GDP larger than the United States. When the next three (Brazil, Mexico and Indonesia) are included as part of this developing economy G7, the gap over the U.S. grows by another $4.6 trillion. Collectively, they’re far too big to ignore.

And it’s not all about size. Those same developing economies and a few others can influence world prices in key commodities such as oil, natural gas, soybeans, and manufactured goods including automobiles and communications technology. That’s why the participation of these economies in the financial sanctions against Russia led by the United States is critical.

If these developing economies don’t participate, that leaves far too many trading partners with Russia for sanctions ever to be effective. And these nations aren’t participating.

Sorry U.S., Business Is Business

The fact is, the world is far more fractured than the U.S. anticipated. It’s not that these countries necessarily support Russia’s invasion. It’s just that they don’t want U.S. sanctions to disrupt their trading relationships with Russia, which they depend on. They’re not willing to harm their economies over something that has no bearing on them, on the other side of the world in many instances.

Look at India and China. They’re the biggest buyers of the oil that Russia might otherwise have sold to Europe. China itself is selling automobiles, semiconductors, and machinery to Russia.

Meanwhile, Turkey has greatly expanded its exports to Russia, while Iran is selling weapons to Russia including “kamikaze” drones that act like slow-motion cruise missiles that can linger over targets.

Apart from inherent flaws and limitations in the U.S.-led sanctions process, this lack of cooperation by major developing economies severely weakens the impact of the sanctions.

The Sanctions Boomerang

And importantly, the more these neutral economies trade with Russia, the less any of them will need U.S. dollars as a medium of exchange. So, the U.S. sanctions are not only failing, they’re contributing to the long-term decline of the dollar as the world’s leading payment currency.

This is a good example of what I warned about a year ago shortly after the Russian invasion. Not only have the sanctions failed (Russian growth has greatly exceeded expectations and the Russian ruble is stronger than before the war began), but they have boomeranged on the U.S. and its partners.

They’re causing damage to western economies and fracturing the multilateral institutions that have been carefully built over the past fifteen years since the global financial crisis of 2008. So what is the U.S. getting ready to do next? Double down on failure…

Where Are the Adults?

In keeping with a dangerous pattern of escalation, the U.S. is considering secondary boycotts. This is where the sanctions target is not the enemy but is doing business with the enemy in ways the U.S. does not approve. One of the highest profile secondary boycott targets is China.

China is considering providing military aid to Russia including drones, which have proven highly effective on the battlefield.

The U.S. has warned China that if it provides such aid to Russia it will face “serious consequences,” and that the U.S. will impose “real costs” on China.

It’s not clear how effective U.S. sanctions on China would be considering that Russia and China have cooperated closely in recent years and that China is actively decoupling its economy from the U.S. economy (and vice versa) in any case.

More likely, secondary sanctions imposed on China will simply drive Russia and China closer together and marginalize the U.S. even more. We all know that escalation on the military front is highly dangerous and could provoke a nuclear war.

But escalation on the financial and economic fronts is equally dangerous and could contribute to a global recession. U.S. policymakers seem to be too dumb and too shortsighted to consider either prospect.

Where are the adults?

<<<



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>>> US explores central bank digital currency to preserve dollar's reserve status


Yahoo Finance

by Jennifer Schonberger

March 1, 2023


https://finance.yahoo.com/news/us-explores-central-bank-digital-currency-to-preserve-dollars-reserve-status-205604087.html


The U.S. is studying options for adopting a retail or wholesale central bank digital currency, Under Secretary of Treasury Nellie Liang said in a speech Wednesday.

Liang said a consortium of government agencies will meet regularly in the coming months to discuss whether to adopt a central bank digital currency, or CBDC.

"We are thinking about whether a U.S. CBDC, to the extent it has functionality that traditional forms of central bank money lack, could help to preserve the dollar's global role," Liang said in a speech at the Atlantic Council on Wednesday. "We are also thinking about whether a U.S. CBDC could help reduce undesirable frictions in cross-border payments or other activities."

The U.S. dollar is considered the world's "reserve currency," accounting for well over half of the world's central bank reserves and playing a key role in settling international transactions.

Liang's comments mark the most comprehensive insight and reveal the administration's latest thinking on a CBDC. The remarks also come at the one-year mark since President Biden issued an executive order directing agencies to study a central bank digital currency, and come up with a government-wide approach to regulating digital assets.

U.S. policymakers are continuing to deliberate about whether to have a CBDC, and, if so, what form it would take.

According to Liang, a CBDC would be legal tender, convertible one-for-one into other forms of central bank money — reserve balances or paper currency — and would clear and settle nearly instantly. A U.S. CBDC would also need to both protect the privacy of users and minimize the risk of illicit financial transactions.

Liang said deliberations will take "some time to complete," but that a group of government agencies, including the Treasury, Fed, and White House offices will meet regularly in the coming months and offer interim updates to the public.

Public support for adoption of CBDC

The Federal Reserve has emphasized that it would only issue a CBDC with the support of the executive branch and Congress, and more broadly the public. Liang said interest and support from the public will be a key factor in deciding whether to adopt a CBDC.

"A digital dollar is just a digital form of a current central bank liability," Liang said. "It's just a different form of money. Some of the main reasons countries do implement one is if they feel like they need to have a connection with the public as they stop using cash regularly. In the U.S., it is not entirely clear that's needed and that's why this space is still open and the discussions are ongoing."

Liang said she didn’t think there was necessarily a first mover advantage, as China has adopted a CBDC and the UK looks to adopt one.

The U.S. is considering a CBDC as the Fed has indicated it expects to launch its 24-7, instantaneous payment service, dubbed FedNow, this spring or summer, using an existing form of central bank money — central bank reserves — as an interbank settlement asset.

A CBDC would involve both a new form of central bank money and, potentially, a new set of payment rails.

Wholesale vs. retail CBDC

Liang said the U.S. is also deciding whether to issue a wholesale CBDC, a retail CBDC, or both.

She said authorities are thinking about how each would differ through the lens of looking at central bank reserves and whether those differences would be technological in nature or access driven.

For a wholesale CBDC, Liang said the basic difference would relate to technology. Liang said a wholesale CBDC could be a tokenized central bank lability, which potentially could support around-the-clock payment activity and secure settlement of transactions.

Liang said a retail CBDC would complement, not replace, cash as a digital liability of the central bank that is accessible to the general public.

A wholesale CBDC could be accessible to financial institutions that are currently eligible for central bank accounts, or to a wider range of financial intermediaries.

"But while policymakers might consider granting access to a wholesale CBDC to institutions not currently eligible for central bank accounts, that decision would be an independent choice, rather than a necessary consequence of having a wholesale CBDC," said Liang.

Liang said a wholesale CBDC might also be used as a backing asset for stablecoins, which could make it easier to transfer value between stablecoins.

<<<



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Rickards - >>> The Accelerating Countdown to Armageddon


BY JAMES RICKARDS

FEBRUARY 27, 2023


https://dailyreckoning.com/the-accelerating-countdown-to-armageddon/


The Accelerating Countdown to Armageddon

Get ready for screaming headlines beginning in about two months. Why? Because the U.S. will be coming up on a double deadline of debt and deficit inflection points.

The budget deficit issue will be hotly debated from March to next September and may result in a government shutdown at midnight on Sept. 30, 2023, if progressive Democrats in the Senate and conservative Republicans in the House can’t agree on a budget for fiscal year 2024, which begins Oct. 1, 2023.

But there’s another train wreck coming even sooner.

This one involves the debt ceiling and the infamous “X-Date” when the U.S. could default on the national debt.

What exactly is the “debt ceiling”?

It’s a numeric limit on the total debt that the U.S. Treasury is allowed to issue. To be clear, the debt ceiling does not mean the Treasury cannot issue any new debt. It means that the Treasury cannot issue debt that increases the total outstanding above the ceiling.

With over $31 trillion of debt outstanding in maturities from four weeks to 30 years, there’s always some existing debt that’s maturing. The Treasury can issue new debt to pay off the old debt. It just can’t increase the total.

So if $20 billion of debt matures this week, the Treasury can issue $20 billion of new debt to keep the total constant. They just can’t issue $30 billion without breaking the ceiling. Treasury is at the ceiling now. The U.S. is still running deficits. How are the new deficits being financed if Treasury can only conduct the “rollover” operations described above?

The Treasury has to resort to “extraordinary measures” to keep paying the bills. You may have heard of the “trillion-dollar coin” idea. It won’t happen, but here’s how it works.

One Big Gimmick

The Treasury would ask the U.S. Mint to produce a solid platinum coin. The Treasury would give the coin to the Federal Reserve and simply declare that the coin was worth $1 trillion. (Assuming a one-ounce coin, the actual market price is about $1,000.)

The Fed would put the coin in a vault and credit the U.S. Treasury general account with $1 trillion. The Treasury could spend that newly printed money as it wished. The Treasury would not violate the debt ceiling because no new debt would be issued; the Fed would just create the dollars out of thin air. Easy-breezy.

Of course, the trillion-dollar coin policy would be disastrous. The arbitrary valuation of the coin would show the true Ponzi nature of the Treasury market today. Fed efforts to supply the cash would radically increase the money supply and probably trigger more inflation. The Fed and Treasury would be laughingstocks.

That’s dangerous for two institutions that rely on public confidence to go about their business. Only the simpletons in financial media believe this idea is worth discussing, but it’s good to understand it because you will be hearing more about it.

Each Side Will Try to Scare Voters

How long can this shell game go on? No one knows exactly. There are estimates that are referred to as the “X-Date.” That’s the day the Treasury really does run out of cash and can’t pay bills or pay off Treasury note holders. Right now the X-Date is estimated to be around June 5, 2023, but even that is a guess.

The real X-Date will depend on how much positive cash flow the Treasury generates during tax season around mid-April. As the day approaches, Democrats will try to scare voters with claims of debt default, lost Social Security payments and lost benefits such as pre-K.

On the other side of the aisle, Republicans will scare voters with claims of runaway deficits, higher interest rates, lost confidence in the dollar and money printing as far as the eye can see.

We’ll have better estimates of the X-Date by April, and a kind of “countdown to default” will begin.

In the meantime, get ready for more volatility in stocks, along with higher interest rates. But let’s look at the larger picture…

“The United States Is Going Broke”

Those who focus on the U.S. national debt (and I’m one of them) keep wondering how long this debt levitation act can go on.

The U.S. debt-to-GDP ratio is at the highest level in history (about 125%), with the exception of the immediate aftermath of the Second World War. At least in 1945, the U.S. had won the war and our economy dominated world output and production. Today, we have the debt without the global dominance.

The U.S. has always been willing to increase debt to fight and win a war, but the debt was promptly scaled down and contained once the war was over. Today, there is no war comparable to the great wars of American history (though there are many who’d like to drag us into one in Ukraine), and yet the debt keeps growing.

We’re accumulating debt at a substantially greater rate than we’re growing the economy. Basically, the United States is going broke.

I don’t say that to be hyperbolic. I’m not looking to scare people. It’s just an honest assessment, based on the numbers.

Right now, the United States is roughly $31.5 trillion in debt. Now, a $31.6 trillion debt would be fine if we had a $50 trillion economy. The debt-to-GDP ratio in that example would be manageable.

But we don’t have a $50 trillion economy. We have about a $25 trillion economy, which means our debt is bigger than our economy.

When is the debt-to-GDP ratio too high? When does a country reach the point that it either turns things around or reaches the point of no return?

The Danger Zone

Economists Ken Rogoff and Carmen Reinhart carried out a long historical survey going back 800 years, looking at individual countries, or empires in some cases, that have gone broke or defaulted on their debt.

They put the danger zone at a debt-to-GDP ratio of 90%. Once it reaches 90%, they found, a turning point arrives…

At that point, a dollar of debt yields less than a dollar of output. Debt becomes an actual drag on growth. Again the current U.S. debt-to-GDP ratio is about 125%.

We are deep into the red zone, in other words. And we’re only going deeper. The U.S. has a 125% debt-to-GDP ratio, trillion-dollar deficits and more spending on the way.

Ultimately, we’re heading for a sovereign debt crisis. That’s not an opinion; it’s based on the numbers.

Got Gold?

Monetary policy won’t get us out because the velocity of money, the rate at which money changes hands, is dropping. Printing more money alone will not change that.

Fiscal policy won’t work either because of the high debt ratios I just discussed. At current debt-to-GDP ratios, each additional dollar spent yields less than a dollar of growth. But because it must be borrowed, it does add a dollar to the debt. Debt becomes an actual drag on growth.

No one can say when the clock will strike midnight — people have been warning about an impending collapse for decades, and it hasn’t happened.

Many have seen that as a license to keep going deeper into debt, as if it can continue forever. Well, it can’t go on forever.

And the more debt we add, the faster the day of reckoning will arrive.

Got gold?

<<<



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Rickards - >>> Warning Shot Fired!


BY JAMES RICKARDS

JANUARY 31, 2023


https://dailyreckoning.com/warning-shot-fired/


Warning Shot Fired!

Another warning shot across the bow just happened…

I warned my readers a few weeks ago about how the Federal Reserve, in cooperation with giant global banks, has launched a 12-week pilot project to test the message systems and payment processes on the new CBDC dollar.

A pilot project is not research and development. That’s already done. The pilot means that what I call “Biden Bucks” are here, and the backers just want to test the plumbing before they roll the system out on the entire population.

That project is due to be completed next month. In other words, Biden Bucks are getting closer to becoming a reality for us all. Now there is another big development to keep you up to speed…

This month, the Digital Dollar Project (DDP) released an updated version of its white paper called “Exploring a U.S. CBDC.”

The project expanded the paper in order to examine central bank digital currency projects internationally, though its focus is still on the United States. Since its original white paper release in 2020, CBDC projects worldwide have increased from 35 to 114.

Here is one statement in the updated paper:

It [is] imperative that the U.S. government consider ways to maintain the use of the dollar in digital global payment systems and develop a strategy related to the use of alternative payment systems.

Pigs in the Digital Slaughterhouse

“Alternative payment systems” is simply a technical term for Biden Bucks, which means replacing the cash (“fiat”) dollar we have now. What’s this mean for you?

Let’s first consider the kind of freedom that physical cash offers you. Above all, cash is untraceable and anonymous. When you buy something with cash, there’s no way to trace the purchase to you individually. In that sense, cash is like gold or silver. It doesn’t leave a digital fingerprint.

And that’s why the government wants to eliminate cash — with cash out of the way, it can trace anything and everything.

At that point, the pigs (all of us) will be in the slaughterhouse ready for the digital slaughter of negative interest rates. All of your money will be locked in the banking system. If you don’t want to spend your money, the government can punish you by imposing negative rates. It doesn’t want you saving your money.

And in a completely digital world, what would stop the government from having individualized interest rates for every citizen?

Biden Bucks would also allow for account freezes, tax withholding and outright confiscation in some cases. After all, this is a government-approved digital wallet without any access to physical cash as you know it now.

You’re Just a Pawn

When the government is in full control of your money, it opens up the door for manipulating the economy by using you as a pawn and your assets as chess moves.

If they need to slow down the economy (as they are attempting to do now with increasing interest rates), they could freeze a certain percentage of your cash so you can’t spend it.

If they feel the economy is too slow and needs a jolt of spending, they could punish people who are saving too much with a “spend it or lose it” policy. That’s the reality behind negative interest rates.

It would make your money less truly your own and under government control. We are already seeing how many retailers are not accepting cash across America.

Another thing about physical cash: It’s not hackable.

Under Biden Bucks, all the data that the government will have on every aspect of your life would be a dream come true for hackers. Identity theft would become commonplace.

And forget privacy. That would be a thing of the past.

“Sorry, We Really Don’t Want to Do This to You, But We Have No Choice”

What happens when physical cash is eliminated from any payment transactions? Imagine this alarming possibility…

To further advance the climate change agenda, what if Joe Biden or his successor decided that gasoline needed to be rationed?

Your Biden Bucks could be made to stop working at the gas pump once you’ve purchased a certain amount of gasoline in a week! They could justify it based on “national security concerns” or whatever, and that it’s something they just have to do.

They’ll say, “We really don’t have a choice. We have to do it!”

In other words, Biden Bucks would create new ways for the government to control how much you could buy of an item, or even ban certain purchases altogether. Government would keep score of every financial transaction you made.

In a world of Biden Bucks, the government will even know your physical whereabouts at the point of purchase. It’s a short step from putting you under FBI investigation if you vote for the wrong candidate, buy the “wrong” reading material or give donations to the wrong political party.

The Slippery Slope

They may deny that this is part of some grand plan to control the population, that it’s just a way to make the financial system more efficient. The rest of it is just a conspiracy theory that only kooks believe. And they may mean it. They may not have bad intentions.

But history clearly shows that once the government acquires a specific power, it will eventually use it to the fullest extent it can. And when corrupt people are running the government, they’ll use that power for political purposes, even if they might not set out to originally. The temptation is just too strong.

If any of this sounds extreme, fantastical or otherwise far-fetched, well, it’s not. I simply invite you to look at what’s happening around the world.

China is already using its CBDC to deny travel, employment and educational opportunities to political dissidents. Canada seized the bank accounts and crypto accounts of nonviolent trucker protesters last year. Nigeria put a cap on ATM cash withdrawals at $45 to promote digital payments.

Don’t think that other governments, including the U.S. government, haven’t noticed. They have.

The simple fact is “social credit scores” and political suppression will be even easier to conduct when Biden Bucks are completely rolled out in the U.S. With Biden Bucks, the government will be able to force you to comply with its agenda, like with the climate change example I mentioned above.

Because if you don’t, they could turn off your money. But you can fight back. How?

Get Physical

One, I recommend keeping some physical cash at home or in a safe place. I wouldn’t recommend too much cash because the time may come when cash is declared illegal and you have 60 days to hand in your cash for digital credit.

Handing in too much cash may cause you to be put on a watchlist from a tax or money laundering perspective, even though the money is yours and you obtained it legally.

Second, buy some gold. Gold is a non-digital, non-hackable, non-traceable form of money you can still use.

Also, one-ounce silver American Eagles are the best form of money for day-to-day transactions.

These are ways to protect your freedom and your savings. The time to prepare is now, before it all hits.

<<<



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[gfp927z]

Rickards - >>> Warning Shot Fired!


BY JAMES RICKARDS

JANUARY 31, 2023


https://dailyreckoning.com/warning-shot-fired/


Warning Shot Fired!

Another warning shot across the bow just happened…

I warned my readers a few weeks ago about how the Federal Reserve, in cooperation with giant global banks, has launched a 12-week pilot project to test the message systems and payment processes on the new CBDC dollar.

A pilot project is not research and development. That’s already done. The pilot means that what I call “Biden Bucks” are here, and the backers just want to test the plumbing before they roll the system out on the entire population.

That project is due to be completed next month. In other words, Biden Bucks are getting closer to becoming a reality for us all. Now there is another big development to keep you up to speed…

This month, the Digital Dollar Project (DDP) released an updated version of its white paper called “Exploring a U.S. CBDC.”

The project expanded the paper in order to examine central bank digital currency projects internationally, though its focus is still on the United States. Since its original white paper release in 2020, CBDC projects worldwide have increased from 35 to 114.

Here is one statement in the updated paper:

It [is] imperative that the U.S. government consider ways to maintain the use of the dollar in digital global payment systems and develop a strategy related to the use of alternative payment systems.

Pigs in the Digital Slaughterhouse

“Alternative payment systems” is simply a technical term for Biden Bucks, which means replacing the cash (“fiat”) dollar we have now. What’s this mean for you?

Let’s first consider the kind of freedom that physical cash offers you. Above all, cash is untraceable and anonymous. When you buy something with cash, there’s no way to trace the purchase to you individually. In that sense, cash is like gold or silver. It doesn’t leave a digital fingerprint.

And that’s why the government wants to eliminate cash — with cash out of the way, it can trace anything and everything.

At that point, the pigs (all of us) will be in the slaughterhouse ready for the digital slaughter of negative interest rates. All of your money will be locked in the banking system. If you don’t want to spend your money, the government can punish you by imposing negative rates. It doesn’t want you saving your money.

And in a completely digital world, what would stop the government from having individualized interest rates for every citizen?

Biden Bucks would also allow for account freezes, tax withholding and outright confiscation in some cases. After all, this is a government-approved digital wallet without any access to physical cash as you know it now.

You’re Just a Pawn

When the government is in full control of your money, it opens up the door for manipulating the economy by using you as a pawn and your assets as chess moves.

If they need to slow down the economy (as they are attempting to do now with increasing interest rates), they could freeze a certain percentage of your cash so you can’t spend it.

If they feel the economy is too slow and needs a jolt of spending, they could punish people who are saving too much with a “spend it or lose it” policy. That’s the reality behind negative interest rates.

It would make your money less truly your own and under government control. We are already seeing how many retailers are not accepting cash across America.

Another thing about physical cash: It’s not hackable.

Under Biden Bucks, all the data that the government will have on every aspect of your life would be a dream come true for hackers. Identity theft would become commonplace.

And forget privacy. That would be a thing of the past.

“Sorry, We Really Don’t Want to Do This to You, But We Have No Choice”

What happens when physical cash is eliminated from any payment transactions? Imagine this alarming possibility…

To further advance the climate change agenda, what if Joe Biden or his successor decided that gasoline needed to be rationed?

Your Biden Bucks could be made to stop working at the gas pump once you’ve purchased a certain amount of gasoline in a week! They could justify it based on “national security concerns” or whatever, and that it’s something they just have to do.

They’ll say, “We really don’t have a choice. We have to do it!”

In other words, Biden Bucks would create new ways for the government to control how much you could buy of an item, or even ban certain purchases altogether. Government would keep score of every financial transaction you made.

In a world of Biden Bucks, the government will even know your physical whereabouts at the point of purchase. It’s a short step from putting you under FBI investigation if you vote for the wrong candidate, buy the “wrong” reading material or give donations to the wrong political party.

The Slippery Slope

They may deny that this is part of some grand plan to control the population, that it’s just a way to make the financial system more efficient. The rest of it is just a conspiracy theory that only kooks believe. And they may mean it. They may not have bad intentions.

But history clearly shows that once the government acquires a specific power, it will eventually use it to the fullest extent it can. And when corrupt people are running the government, they’ll use that power for political purposes, even if they might not set out to originally. The temptation is just too strong.

If any of this sounds extreme, fantastical or otherwise far-fetched, well, it’s not. I simply invite you to look at what’s happening around the world.

China is already using its CBDC to deny travel, employment and educational opportunities to political dissidents. Canada seized the bank accounts and crypto accounts of nonviolent trucker protesters last year. Nigeria put a cap on ATM cash withdrawals at $45 to promote digital payments.

Don’t think that other governments, including the U.S. government, haven’t noticed. They have.

The simple fact is “social credit scores” and political suppression will be even easier to conduct when Biden Bucks are completely rolled out in the U.S. With Biden Bucks, the government will be able to force you to comply with its agenda, like with the climate change example I mentioned above.

Because if you don’t, they could turn off your money. But you can fight back. How?

Get Physical

One, I recommend keeping some physical cash at home or in a safe place. I wouldn’t recommend too much cash because the time may come when cash is declared illegal and you have 60 days to hand in your cash for digital credit.

Handing in too much cash may cause you to be put on a watchlist from a tax or money laundering perspective, even though the money is yours and you obtained it legally.

Second, buy some gold. Gold is a non-digital, non-hackable, non-traceable form of money you can still use.

Also, one-ounce silver American Eagles are the best form of money for day-to-day transactions.

These are ways to protect your freedom and your savings. The time to prepare is now, before it all hits.

<<<



---

[gfp927z]

>>> Saudi Arabia Is Open To Discuss Non-Dollar Oil Trade Settlements


OilPrice.com

By Charles Kennedy

Jan 17, 2023


https://oilprice.com/Energy/Energy-General/Saudi-Arabia-Is-Open-To-Discuss-Non-Dollar-Oil-Trade-Settlements.html


Saudi Arabia, the world’s largest crude oil exporter, is open to discussing oil trade settlements in currencies other than the U.S. dollar.

Saudi Minister of Finance Al-Jadaan: “I don’t think we are waving away or ruling out any discussion that will help improve the trade around the world,”.

During a visit to Saudi Arabia last month, Xi Jinping pledged to ramp up efforts to promote the use of the yuan in energy deals.


Saudi Arabia, the world’s largest crude oil exporter, is open to discussing oil trade settlements in currencies other than the U.S. dollar, Saudi Minister of Finance, Mohammed Al-Jadaan, told Bloomberg TV in an interview in Davos on Tuesday.

The Saudi signal that it could be open to talks about oil trade arranged in non-dollar currencies could be another threat to the current dominance of the U.S. dollar in global oil trade.

“There are no issues with discussing how we settle our trade arrangements, whether it is in the US dollar, whether it is the euro, whether it is the Saudi riyal,” Al-Jadaan told Bloomberg TV.

“I don’t think we are waving away or ruling out any discussion that will help improve the trade around the world,” the Saudi minister added.

The Saudi riyal has been pegged to the U.S. dollar for decades, while the Saudi oil exports continue to support the petrodollar system from the 1970s in which the world’s top oil exporter prices its crude in U.S. dollars.

However, Saudi Arabia is willing to deepen its strategic cooperation in oil trade with China, the world’s largest crude oil importer.

Last month, China and Saudi Arabia agreed to expand crude oil trade as they upgraded their relations to a strategic partnership during the visit of Chinese President Xi Jinping in the Saudi capital Riyadh.

China, for its part, plans to make its own currency, the yuan, more prominent in international oil trade.

During a visit to Saudi Arabia last month, Xi Jinping pledged to ramp up efforts to promote the use of the yuan in energy deals, suggesting at a summit in the Saudi capital that the Gulf Cooperation Council (GCC) countries should make full use of the Shanghai Petroleum and Natural Gas Exchange to carry out its trade settlements in yuan.

By Charles Kennedy for Oilprice.com

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>>> A Dollar Collapse Is Now In Motion, Saudi Arabia Signals The End Of 'Petro' Status


Zero Hedge

BY TYLER DURDEN

JAN 27, 2023

Authored by Brandon Smith via Alt-Market.us,


https://www.zerohedge.com/markets/dollar-collapse-now-motion-saudi-arabia-signals-end-petro-status


The decline of a currency’s world reserve status is often a long process rife with denials. There are numerous economic “experts” out there that have been dismissing any and all warnings of dollar collapse for years. They just don’t get it, or they don’t want to get it. The idea that the US currency could ever be dethroned as the defacto global trade mechanism is impossible in their minds.

One of the key pillars keeping the dollar in place as the world reserve is its petro-status, and this factor is often held up as the reason why the Greenback cannot fail. The other argument is that the dollar is backed by the full force of the US military, and the US military is backed by the US Treasury and the Federal Reserve – In other words, the dollar is backed by…the dollar; it’s a very circular and naive position.

These sentiments are not only pervasive among mainstream economists, they are also all over the place within the alternative media. I suspect the main hang-up for liberty movement analysts is the notion that the globalist establishment would ever allow the dollar or the US economy to fail. Isn’t the dollar system their “golden goose”?

The answer is no, it is NOT their golden goose. The dollar is just another stepping stone towards their goal of a one-world economy and a one-world currency. They have killed the world reserve status of other currencies in the past, why wouldn’t they do the same to the dollar?

Globalist white papers and essays specifically outline the need for a diminished role for the US currency as well as a decline in the American economy in order to make way for Central Bank Digital Currencies (CBDCs) and a new global currency system controlled by the IMF. I warned about this years go, and my position has always been that the derailment of the dollar would likely start with the end of its petro status.

In 2017 I published an article titled ‘Saudi Coup Signals War And The New World Order Reset’. I noted at the time that the sudden power shift over to crown prince Mohammed Bin Salman indicated a change in Saudi Arabia’s relationship to the US. I stated that:

“To understand how drastic this coup has been, consider this — for decades Saudi Kings maintained political balance by doling out vital power positions to separate, carefully chosen successors. Positions such as Defense Minister, the Interior Ministry and the head of the National Guard. Today, Mohammed Bin Salman controls all three positions. Foreign policy, defense matters, oil and economic decisions and social changes are now all in the hands of one man.”

The rise of MBS was backed by the Public Investment Fund (PIF), a fund comprised of trillions of dollars supplied by globalists within Carlyle Group (Bush family, etc.), Goldman Sachs, Blackstone and Blackrock. MBS garnered the favor of the globalists for one specific reason – He openly supported their “Vision For 2030”, a plan for the dismantling of “fossil fuel” based energy and the implementation of carbon controls. Yes, that’s right, the head of Saudi Arabia is backing the eventual end of oil based energy, and part of that includes the end of the dollar as the petro currency.

In exchange for their cooperation, the Saudis are being given access to ESG-like funding as well as access to AI advancements and the so-called “digital economy.” It sounds crazy, but there is much talk of AI developments to cure numerous health problems and extend lifespan. With those kinds of promises, it’s not surprising that Saudi elites would be willing to dump the dollar and even oil.

In 2017 I noted that:

“I believe the next phase of the global economic reset will begin in part with the breaking of petrodollar dominance. An important element of my analysis on the strategic shift away from the petrodollar has been the symbiosis between the U.S. and Saudi Arabia. Saudi Arabia has been the single most important key to the dollar remaining as the petrocurrency from the very beginning.”

I believed that the threat to petro status would ultimately be spurred on by a proxy war between East and West:

“World economic war is the real name of the game here, as the globalists play puppeteers to East and West. It is a geopolitical crisis they will have created to engineer public support for a solution they predetermined.”

Back then I thought that such a proxy war would be initiated in the Middle East, possibly in Iran. However, it’s clear that Ukraine is the powderkeg the globalists have chosen, at least for now, with Taiwan being the next shoe to drop.

In the years since I made these predictions the relationship between Saudi Arabia, Russia and China has grown very close. Arms deals and energy deals are becoming a mainstay of trade and this has led to a quiet but steady distancing of the Saudis from the dollar. This past week, the dominoes were set in motion for dollar collapse when Saudi Arabia announced at Davos that they are now willing to trade oil in alternative currencies.

In response, Xi Jinping pledged to ramp up efforts to promote the use of the Chinese yuan in energy deals. This falls in line with another article I wrote in 2017 titled ‘The Economic End Game Continues,’ in which I described how conflict with Eastern nations (China and Russia) would be exploited to create a catalyst for the end of the dollar’s petro status.

The importance of the Saudi announcement cannot be overstated; this is the beginning of the end of the dollar. The dollar’s world reserve status is largely dependent on its petro-status. Without one, you cannot have the other. This is almost the exact same dynamic that led to the implosion of the British Sterling decades ago as the global petro currency which resulted in the rise of the dollar to take its place.

This time, though, it will not be a single foreign currency that takes on the role of world reserve, it will be a basket currency system controlled by the IMF called Special Drawing Rights, along with a single global digital currency that is yet to be named but is now under development.

The consequences of the loss of reserve status will be devastating to the US economy. It is the only glue holding our system together – The ability to defer inflation by exporting it overseas is a superpower only the US enjoys. The Fed can print money perpetually if it wants to in order to fund the government or prop up US markets, as long as foreign central banks and corporate banks are willing to absorb dollars as a tool for global trade. If the dollar is no longer the primary international trade mechanism, the trillions upon trillions of dollars the Fed has created from thin air over the years will all come flooding back to the US through various avenues, and hyperinflation (or hyperstagflation) will be the result.

This dynamic is already in play, as foreign holders of US debt and dollars have been dumping them at record pace since 2017. The process continues at a time when the Federal Reserve is cutting it’s balance sheet and raising interest rates, which means there is no longer a buyer of last resort.

This may be why multiple foreign central banks have renewed their purchases of gold reserves and are once again stockpiling precious metals. They seem to be well aware of what is about to happen to the dollar, while the American public is kept in the dark.

The effects of the decline of the dollar may not be immediately felt, or become obvious for another year or two. What will happen is consistent inflation on top of the high prices we are already dealing with. Meaning, the Federal Reserve will continue to hold interest rates higher and prices will barely budge or they may climb in spite of monetary tightening. Even in the face of a major recessionary contraction, which I predict will be triggered starting in April, prices will STILL remain higher.

All the while the mainstream media and government economists will say they have “no idea” why inflation is so persistent, and that “nobody could have seen this coming.” Some of us saw it coming, but only because we accept the reality that the dollar’s days are numbered.

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>>> Gold’s Breakout: It’s Not the Inflation


BY JAMES RICKARDS

JANUARY 23, 2023


https://dailyreckoning.com/golds-breakout-its-not-the-inflation/


Gold’s Breakout: It’s Not the Inflation

Most assets have a poor record over the past year. Gold is one of the few assets that posted a gain — not a major gain, but a gain.

Gold has really taken off since late October, from below $1,630 to almost $1,930 today. That’s a major move. What’s going on?

You might want to argue that it has to do with inflation. The trouble with that argument is that (official) inflation has been coming down for the past few months. Meanwhile, gold seemed to massively underperform with respect to the very serious inflation we saw earlier last year.

So again, why are we seeing a gold spike now? The most likely answer lies with central banks and geopolitics.

Central banks as a whole, led by Russia and China, purchased 399 metric tonnes of gold in the third quarter of 2022. (Fourth-quarter data are not yet available.)

That’s the most gold ever purchased by central banks in a single calendar quarter. It represents over 1% of all the gold held by all central banks combined.

If that pace continues or increases, it would amount to an increase of over 4% per year in central bank gold reserves.

Gold in China’s SAFE

Let’s take a look at China. China’s State Administration of Foreign Exchange (SAFE) announced on Jan. 7 that China had added 30 metric tonnes to its official gold reserves in December 2022. This announcement came on top of a prior announcement that China added 32 metric tonnes in November. That’s a 62 metric tonne increase in just the past few months.

This announcement is significant not only because of the size of those increases, but because this is the first time China has announced increases in its official gold reserves since September 2019 — over three years ago. Why now?

The first thing to grasp is that China did not simply buy that much gold in the market over the past two months and then report it in a timely way. China had the gold all along. They just held it off the books inside SAFE.

This announcement was simply a policy decision to make some accounting entries to allow the gold to appear on the books instead of off the books. There is no doubt that China has at least 1,000 metric tonnes of gold held off the books in this manner, perhaps much more.

So the question investors need to ask is not where did China get the gold (they had it all along), but why did China decide to go public with an increase in their holdings at this time? As with everything in China, the real reasons are hidden and the public announcements are mostly lies.

Still, we can use inferential methods to get at what the Chinese are up to.

The Dollar: Victim of Its Own Success

This gold announcement comes at a time when there is a growing dollar shortage in China and around the world. The Chinese may simply want to bolster confidence in their reserve position.

Then there’s the geopolitics of it. There’s a growing movement to move away from dollar reserves because the U.S. has abused financial sanctions to freeze assets including central bank reserves of Russia, Syria, Iran, North Korea, Venezuela and others.

They’re working to reduce dollar reserves and invent new forms of currency for international payments. That’s why countries like China, Brazil and India are moving away from dollars for fear that they will be next on the sanctions list.

In that context, Bloomberg recently reported about a recent meeting of Southeast Asian officials and experts hosted by a think tank in Singapore. The report revealed that participants were just as fearful as the major countries that the U.S. has gone too far in weaponizing the dollar to apply pressure in geopolitical disputes.

George Yeo, the former foreign minister of Singapore, went so far as to say that “the U.S. dollar is a hex on all of us.” He went on to say, “If you weaponize the international financial system, alternatives will grow to replace it.”

The former trade minister of Indonesia, Thomas Lembong, praised Southeast Asia central banks that have developed digital payments systems using local currencies. He also urged government officials to find new ways to avoid relying extensively on the U.S. dollar.

“I have believed for a very long time that reserve currency diversification is absolutely critical,” said Lembong.

Even U.S. “Friends” Have Had Enough

What’s amazing about this report is that the criticism of U.S. dollar policies is coming from reliable allies and countries that have traditionally favored dollars. There was a huge buildup of U.S. dollar reserves throughout Southeast Asia in the aftermath of the global currency crisis of 1997–98.

This policy of building precautionary reserves was designed to prevent another run on local banks and to provide a rainy day fund for essential imports such as food and oil.

Now the asset seems more like a potential liability as the U.S. uses the dollar to threaten countries that don’t support Biden administration warmongering in Ukraine or other U.S. policies such as the Green New Scam.

If friendly countries in places like Southeast Asia join serious rivals such as Russia and China in reducing their reliance on the U.S. dollar, it can only mean a weaker dollar and possibly more inflation ahead.

It will also mean much higher gold prices because gold is the only alternative to dollars or other currencies such as the euro that can be weaponized against them.

That’s because stocking up on gold is a defensive move that helps insulate them against sanctions. Physical gold in secure custody cannot be frozen or seized or digitally banned. It’s just gold — and it’s money good in the hands of the holder.

Russia and China Place Floor Under Gold Price

Returning briefly to China, China’s announcement comes just weeks after Russia announced it had doubled the ceiling on permitted gold holdings of its sovereign wealth fund, from 20% to 40%. This will create demand for perhaps 100 metric tonnes over the coming year.

If China continues to add 30 metric tonnes or so to its reserves at the same time that Russia is out to buy 100 metric tonnes it will put a de facto floor under the gold price, while supporting the 20% rally in gold prices we’ve seen over the past few months.

Russia and China could be acting in concert to send a message to the world that dollars are yesterday’s news, and gold is the new foundational reserve asset (as it was for centuries prior to 1971). We could be witnessing a critical turning point in the international monetary system.

In short, Russia, China and the other nations I’ve mentioned are “weaponizing” gold as another weapon in the ongoing financial war that surrounds the war in Ukraine. Since Russia and China are among the top five gold producers in the world, they can buy gold from their own mines using local currency.

This tactic minimizes their need for dollars since they are paying with money they print themselves. At the same time, it increases the hard currency value of their own gold because they are depriving world markets of substantial output.

Great for Gold Investors

For gold investors, that’s excellent news. Here’s why…

While demand for gold is accelerating, total global production of gold has been flat for the past six years. That combination of flat output and increasing demand will put upward pressure on gold prices and act as a de facto floor under gold. Central banks tend to be opportunistic buyers and will definitely buy if any dips emerge.

That’s a recipe for consistently higher prices. It’s not too late for astute investors to acquire gold if you are not fully allocated already.

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>>> Central Bank’s $143 Billion Record Loss Costs Swiss Government Usual Payout


Bloomberg

by Bastian Benrath

January 9, 2023


https://finance.yahoo.com/news/central-bank-132-billion-record-063017399.html


Central Bank’s $143 Billion Record Loss Costs Swiss Government Usual Payout

(Bloomberg) -- Switzerland’s government will not receive a payout from the Swiss National Bank for 2022, as the central bank projects the biggest loss in its 116-year history.

The SNB expects an annual loss of about 132 billion francs ($143 billion), more than five times the previous record, it said Monday in preliminary results. The largest part of this, 131 billion francs, stems from collapsed valuations of its large pile of holdings in foreign currencies, accrued as a result of decade-long purchases to weaken the franc.

The value of the SNB’s foreign-exchange reserves fell some 17% last year. As of December, it held 784 billion francs, down from 945 billion francs a year earlier. Still, the year-end number exceeds the gross domestic product of Saudi Arabia.

Positions in Swiss francs saw a valuation loss of around 1 billion francs, while the SNB earned about 400 million francs on its gold holdings.

It is only the second time since the SNB was established in 1906 that it has to skip its yearly payment to the federal government and Swiss cantons, forcing many of the 26 administrative districts to adjust their spending plans. For 2021, the institution had paid out 6 billion francs.

The conference of cantonal finance chiefs told SDA that while the loss is “regrettable,” interim earnings had suggested such an outcome. “It’s an established fact that SNB profits fluctuate widely and distributions cannot be taken for granted,” the body was cited as saying.

Broader Trend

The 2022 loss in Switzerland is one of the most startling examples of how the global environment of rising interest rates has shifted the financial backdrop for central banks with associated fiscal consequences.

In the neighboring euro zone, national central bank governors face increasing pressure to explain why contributions to domestic public finances from their activities are ceasing. In the UK, the Bank of England is no longer paying into the public purse and instead is receiving transfers from the Treasury to cover projected losses in its bond-buying program.

The SNB’s private shareholders will not receive a dividend for 2022 either. Unlike other central banks, the Swiss institution is a publicly traded joint-stock company, with about half the shares held by the public sector and the rest by companies and private individuals.

Earnings from the SNB’s operations don’t influence monetary policy. Final results are due on March 6.

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>>> On the Cusp of a Global Liquidity Crisis


BY JAMES RICKARDS

JANUARY 3, 2023


https://dailyreckoning.com/on-the-cusp-of-a-global-liquidity-crisis/


On the Cusp of a Global Liquidity Crisis

Is there a financial calamity worse than a severe recession in early 2023? Unfortunately, the answer is “yes” and it’s coming quickly.

That greater calamity is a global liquidity crisis. Before considering the dynamics of a global liquidity crisis, it’s critical to distinguish between a liquidity crisis and a recession. A recession is part of the business cycle.

It’s characterized by higher unemployment, declining GDP growth, inventory liquidation, business failures, reduced discretionary spending by consumers, reduced business investment, higher savings rates (for those still employed), larger loan losses, and declining asset prices in stocks and real estate.

The length and depth of a recession can vary widely. And although recessions have certain common characteristics, they also have diverse causes. Sometimes the Federal Reserve blunders in monetary policy and holds interest rates too high for too long (that seems to be happening now).

Sometimes an external supply shock occurs which causes a recessionary reaction. This happened after the Arab Oil Embargo of 1973, which caused a severe recession from November 1973 to March 1975. Recessions can also arise when asset bubbles pop such as the stock market crash in 1929 or the bursting of a real estate bubble caused by the Savings & Loan crisis in 1990.

Whatever the cause, the course of a recession is somewhat standard. Eventually asset prices bottom, those with cash go shopping for bargains in stocks, inventory liquidations end, and consumers resume some discretionary spending. These tentative steps eventually lead to a recovery and new expansion often with help from fiscal policy.

Global financial crises are entirely different. They emerge suddenly and unexpectedly to most market participants, although there are always warning signs for those who know where to look. They usually become known to the public and regulators through the failure of a major institution, which could be a bank, hedge fund, money market fund or commodity trader.

While the initial failure makes headlines, the greater danger lies ahead in the form of contagion. Capital markets are densely connected. Banks lend to hedge funds. Hedge funds speculate in markets for stocks, bonds, currencies and commodities both directly and in derivative form.

Money market funds buy government debt. Banks guarantee some instruments held by those funds. Primary dealers (big banks) underwrite government debt issues but finance those activities in repo markets where the purchased securities are pledged for more cash to buy more securities in long chains of rehypothecated collateral.

You get the point. The linkages go on and on.

The Federal Reserve has printed $6 trillion as part of its monetary base (M0). But the total notional value of the derivatives of all banks in the world is estimated at $1 quadrillion. For those unfamiliar, $1 quadrillion = $1,000 trillion. This means the total value of derivatives is 167 times all of the money printed by the Fed.

And the Fed money supply is itself leveraged on a small sliver of only $60 billion of capital. So, the Fed’s balance sheet is leveraged 100-to-1, and the derivatives market is leveraged 167-to-1 to the Fed money supply, which means the derivatives market is leveraged 16,700-to-1 in terms of Fed capital.

Nervous yet?

Experts say, so what? These numbers are not new and have been even more stretched at certain times in the past. Simply because the financial system is highly leveraged and densely connected does not mean it’s ready to collapse. That’s true. Still, it does mean the system could collapse catastrophically and unexpectedly at any time. All it takes to collapse the system is a shock failure leading quickly to panic.

Margin calls are issued on losing position and immediate payment is demanded. Overnight repos are not rolled over. Overnight deposits are not renewed, and repayment is required. Everyone wants his money back at once. Assets are dumped to meet repayment obligations, which causes collapses in stock and bond markets, which causes even more losses and liquidations among banks and traders.

Suddenly all eyes are on the Fed for easy money and on Congress for bailouts, guarantees and more spending. We’ve seen this pattern in 1994 (Mexico Tequila Crisis), 1998 (RussiaLTCM crisis), and 2008 (Lehman Brothers-AIG crisis).

Note that two of those three most recent financial crises were not accompanied by a recession. There was no recession in 1994 and none in 1998. Only the 2008 global financial crisis happened to coincide with a severe recession.

The point is that recessions and financial crises are both bad, but they are different and do not always come together. When they do, as in 2008, stocks can easily decline 50% or more. We may be looking at such a situation today. This brings us to the key question:

If financial markets are almost always highly leveraged but financial crises occur once every eight years on average, what signs can investors look for that indicate a crisis is coming and conditions are not just business as usual for financial markets?

One of the most powerful warning signs is an inverted yield curve. This signal was last seen in 2007 just ahead of the 2008 financial crisis. A normal yield curve slopes upward from left to right reflecting higher interest rates at longer maturities. That makes sense.

If I lend you money for ten years, I want a higher interest rate than if I lend it for two years to compensate me for added risks from the longer maturity such as inflation, policy changes, default, and more.

When a yield curve is inverted, that means that longer maturities have lower interest rates. That happens, but it’s rare. It means that market participants are expecting economic adversity in the form of recession or liquidity risk. They want to lock in long-term yields even if they’re lower than short-term yields because they expect yields will be even lower in the future.

In a nutshell, investors see trouble ahead.

Other ominous signs include sharp declines in the dollar-denominated reserve positions in U.S. Treasury securities of China, Japan, India and other major economies. Naïve observers take this as a sign that those countries are trying to “dump dollars” and dislike the role of the dollar as the leading global reserve currency.

In reality, the opposite is true. They’re desperately short of dollars and are selling Treasuries as a way to get cash to prop up their own banking systems.

These are some of the many signs pointing to a global liquidity crisis. As we’ve learned in the past, these liquidity crises seem to emerge overnight, but that’s not true. They actually take a year or more to develop until they hit a critical stage at which point, they burst into the headlines.

The 1998 Russia-LTCM crisis started in June 1997 in Thailand. The 2008 Lehman Brothers crisis started in the spring of 2007 with reported mortgage losses by HSBC. The warning signs are always there in advance. Most observers either don’t know what the signs are or are simply not looking.

Well, I am looking and what I see is a rare convergence of a severe recession and a liquidity crisis at the same time as happened in 2008.

It’s coming.

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>>> Zoltan Pozsar: G7 Investors Should Worry About Gold-Backed Renminbi Eclipsing Dollars, Commodity Encumbrance


The Deep Dive

December 29, 2022


https://thedeepdive.ca/zoltan-pozsar-g7-investors-should-worry-about-gold-backed-renminbi-eclipsing-dollars-commodity-encumbrance/


Credit Suisse contributor Zoltan Pozsar has continued his ongoing series about Bretton Woods III where commodities will dictate the new world order. For his last dispatch of the year, he described how the world is now shifting to a multipolar order “being built not by G7 heads of state but by the ‘G7 of the East’ (the BRICS heads of state).”

BRICS stands for the group of five nations: Brazil, Russia, India, China, and South Africa. But Pozsar said that with the poised expansion via rumored applications for Saudi Arabia, Turkey, or Egypt, he took the liberty to round up the current “G5.”

The author focused on Chinese President Xi Jinping’s speech at the recent summit in the Arab states, which for Pozsar is very telling on how Beijing plans to outmaneuver the West in global economy.

“Fixed income investors should care – not just because the invoicing of oil in renminbi will hurt the dollar’s might, but also because commodity encumbrance means more inflation for the West,” Pozsar said.

In the next three to five years, China is ready to work with GCC [Gulf Cooperation Council] countries in the following priority areas: first, setting up a new paradigm of all-dimensional energy cooperation, where China will continue to import large quantities of crude oil on a long-term basis from GCC countries, and purchase more LNG. We will strengthen our cooperation in the upstream sector, engineering services, as well as [downstream] storage, transportation, and refinery. The Shanghai Petroleum and Natural Gas Exchange platform will be fully utilized for RMB settlement in oil and gas trade, […] and we could start currency swap cooperation and advance the m-CBDC Bridge project.

Pozsar quoted Xi’s speech

In dissecting Xi’s timeline of “three to five years,” Pozsar explained that in market terms, this means that five-year forward five-year inflation breakevens should discount a world in which oil and gas are invoiced not only in dollars but also in renminbi, and in which some oil and gas are not available at low prices (and in dollars) for the West because they have been encumbered by the East.

“My sense is that the market is starting to realize that the world is going from unipolar to multipolar politically, but the market has yet to make the leap that in the emerging multipolar world order, cross-currency bases will be smaller, commodity bases will be greater, and inflation rates in the West will be higher,” the author explained.

He added that inflation traders “should be paranoid, not complacent,” saying that “inflation breakevens do not seem to price any geopolitical risk.”

The dusk of petrodollar, the dawn of petroyuan

Striking a major comparison between Xi’s approach and then-president Franklin Roosevelt with King Abdul Aziz Ibn Saud, Pozsar highlighted that United States was at the time dealing “with a Middle East that had just started to develop.” The West was essentially securing oil flow from the Arab states in exchange for security through arms and revenue stability.

But now, US-Saudi Arabia relations are strained, America is now less reliant on oil from the Middle East owing to the shale revolution, and China ended up being the largest importer of oil.

“Back then, ‘liquidity and security’ were more important for an emerging region; today ‘equity and respect’ are more important for what has become an eminent region,” he described. China, he added, is now offering the latter through what Xi described as “a new paradigm of all-dimensional energy cooperation.”

The synergy put forth as a proposal by the Chinese leader “means not just taking oil for cash and arms but investing in the region in the ‘downstream sector’ and leveraging the regional know-how for cooperation in the ‘upstream sector’.”

“Put differently, ‘oil for development’ (plants and jobs) crowded out ‘oil for arms’ – the Belt and Road Initiative met Saudi Arabia’s Vision 2030 in a big win-win,” Pozsar concluded.

The icing on the proverbial cake? All these will be renminbi exclusive, starting with Xi’s promise that “the Shanghai Petroleum and Natural Gas Exchange platform will be fully utilized for RMB settlement in oil and gas trade.”

“China, already the largest buyer of oil and gas from GCC countries, will buy even more in the future, and wants to pay for all of it in renminbi over the next three to five years.” Pozsar also noted that the Chinese leader communicated this “not during the first day of his visit – when he met only the Saudi leadership – but during the second day of his visit – when he met the leadership of all the GCC countries.”

“GCC oil flowing East + renminbi invoicing = the dawn of the petroyuan,” he summed up.

Renminbi perks: projects, gold, CBDC

There will be numerous opportunities for GCC countries to decumulate the renminbi earned from selling oil and gas to China. Referring to Xi’s remarks, these could range from “the sale of clean energy infrastructure, big data and cloud computing centers, 5G and 6G projects, and cooperation in smart manufacturing and space exploration.”

“Cooperation in the upstream sector” could potentially also include “the joint exploration of oil in the South China Sea.”

Pozsar also noted that the People’s Bank of China (PBoC) reported an increase in its gold reserves for the first time in more than three years.

“Why do China’s gold purchases matter in the context of renminbi settlement? Because at the 2018 BRICS Summit, China launched a renminbi-denominated oil futures contract on the Shanghai International Energy Exchange, and since 2016 and 2017, the renminbi has been convertible to gold on the Shanghai and Hong Kong Gold Exchanges, respectively,” Pozsar explained.

He added: “Money is as money does, and convertibility to gold beats convertibility to dollars.”

READ: Zoltan Pozsar: Gold At $3,600 Is Not Improbable If US Refill Reserves With Russian Oil

Xi also referred specifically to the m-CBDC Bridge project in his speech. The central bank digital currency project, “enables real-time, peer-to-peer, cross-border, and foreign exchange transactions,” and is being undertaken by the central banks of China, Thailand, Hong Kong, and United Arab Emirates. This would conduct exchanges “without involving the US dollar or the network of Western correspondent banks that the U.S. dollar system runs on.”

“In a very Uncle Sam-like fashion, China wants more of the GCC’s oil, wants to pay for it with renminbi, and wants the GCC to accept e-renminbi on the m-CBDC Bridge platform, so don’t hesitate – join the mBridge fast train,” said Pozsar.

To make things sweeter for the GCC, Xi also highlighted starting “currency swap cooperation,” facilitating an easier way for the countries to buy the stuff it needs with China extending loans in renminbi. This can be repaid via the swap lines when China buys oil for renminbi.

“Do take a step back and consider… that since the beginning of this year, 2022, Russia has been selling oil to China for renminbi, and to India for UAE dirhams; India and the UAE are working on settling oil and gas trades in dirhams by 2023; and China is asking the GCC to ‘fully’ utilize Shanghai’s exchanges to settle all oil and gas sales to China in renminbi by 2025,” Pozsar wrote. “That’s dusk for the petrodollar… and dawn for the petroyuan.”

China and the OPEC+

The ascension of petroyuan is not something that is just about to start, it has already been set in motion. Among the OPEC+ countries, Russia and Venezuela are already accepting payments for oil in renminbi at steep discounts.

China also inked the Comprehensive Strategic Partnership with Iran – “a 25-year ‘deal’ under which China committed to invest $400 billion into Iran’s economy in exchange for a steady supply of Iranian oil at a steep discount.” It stipulates $280 billion toward developing downstream petrochemical sectors (refining and plastics) and $120 billion toward Iran’s transportation and manufacturing infrastructure in exchange for energy exports at a minimum guaranteed discount of 12% to the six-month rolling mean price.

The China-Iran agreement has the same spirit to what Xi’s speech is saying at the summit with GCC: “investments in downstream petrochemical projects, manufacturing, and infrastructure… [in exchange for] renminbi settlement.”

“Russia, Iran, and Venezuela account for about 40 percent of the world’s proven oil reserves… the GCC countries account for 40 percent of proven oil reserves as well (with Saudi Arabia accounting for half)… and are being courted by China to accept renminbi for their oil in exchange for transformative investments,” Pozsar summed up.

“To underscore, the U.S. has sanctioned half of OPEC with 40 percent of the world’s oil reserves and lost them to China, while China is courting the other half of OPEC with an offer that’s hard to refuse,” he added.

READ: China Makes Historic Economic Partnership With Saudi Arabia

The remaining 20% of proven oil reserves are located in North and West Africa, as well as Indonesia. North Africa is currently dominated by Russia, West Africa by China, and Indonesia has its own agenda with battery metals, according to Pozsar.

Commodity encumbrance

In a nutshell, that is how China is softly imposing the use of yuan in the oil markets, in so-called “three to five years.”

“China will not only pay for more oil in renminbi (crowding out the U.S. dollar), but new investments in downstream petrochemical industries in Iran, Saudi Arabia, and the GCC more broadly mean that in the future, much more value-added will be captured locally at the expense of industries in the West,” Pozsar said.

This has played well for China in other non-oil exporting countries. Called “debt trap diplomacy,” many nations are forced into allegiance or giving preference to mainland China in the geopolitical landscape after being unable to repay borrowed investments from Beijing to finance their respective countries’ development projects.

Forbes reported that 97 countries throughout the world are in debt to China, using World Bank data. Countries that owe China a lot of money are largely in Africa, although they can also be found in Central Asia, Southeast Asia, and the Pacific. Pakistan owes Beijing the most money: $77.3 billion, Angola $36.3 billion, Ethiopia $7.9 billion, Kenya $7.4 billion, and Sri Lanka $6.8 billion.

But, it has a different effect to what China is essentially offering the richer GCC nations: “emancipation,” as Pozsar puts it.

“Think of this as a ‘farm-to-table’ model: I used to sell my chicken and vegetables to you, and you sold soup for a markup in your five-star restaurant, but from now on, I’ll make the soup myself and you’ll get to import it in a can – my oil, my jobs, your spend, ‘our commodity, your problem’,” Pozsar explained.

Pozsar cites the first “casualty” of the commodity encumbrance tactic is the decision of the world’s largest chemicals group, BASF, to downsize “permanently” in Europe after it opened the first part of its new €10bn plastics engineering facility in China.

And like anything else, if it can be pledged to be encumbered, it can be rehypothecated.

Pozsar describes how rehypothecation will add value to the budding system: “heavily discounted oil and locally produced chemicals invoiced in renminbi mean encumbrance by the East, and the marginal re-export of oil and chemicals also for renminbi to the West means commodity rehypothecation for a profit.”

This has already started to manifest. For instance, China has suddenly become a big exporter of Russian LNG to Europe and India has become a big exporter of Russian oil and refined products such as diesel to Europe.

BRICS coin

But China is not the only party playing the commodity encumbrance game. On June 22, 2022, at the BRICS Business Forum, Russian President Vladimir Putin noted that “the creation of an international reserve currency based on a basket of currencies of our countries is being worked on.”

The project is poised to challenge the International Monetary Fund’s Special Drawing Rights (SDR)–an international reserve asset created in 1969 to supplement its member countries’ official reserves. In 2016, renminbi joined the US dollar, euro, yen, and British pound in the SDR basket.

On July 29, 2022, the Executive Board decided on the amounts (number of units) of each currency in the SDR valuation basket. These amounts will be effective for a period of five years, starting from August 1, 2022

Source: IMF

Pozsar cited the Minister-in-charge of Integration and Macroeconomics of the Eurasian Economic Commission, Sergei Glazyev, who’s also in charge of developing BRICS’s “international reserve currency”, in determining how the new asset would be measured.

“Should [a nation] reserve a portion of [its] natural resources for the backing of the new economic system, [its] respective weight in the currency basket of the new monetary unit would increase accordingly, providing that nation with larger currency reserves and credit capacity,” Pozsar quoted Glazyev. “In addition, bilateral swap lines with trading partner countries would provide them with adequate financing for co-investments and trade financing.”

The project is similar in spirit to Xi’s proposal to the GCC countries (and its debt trap diplomacy): currency swap and downstream development for renminbi settlement.

“The BRICS and other interested nations need to talk about setting up their own independent global financial system – whether it would be based on the Chinese currency or they will agree on something different. They need to debate this,” said Sergey Storchak, chief banker of Russian bank VEB.RF, in an interview at the BRICS summit.

Wide participation among global economies are expected once this project materializes as Saudi Arabia, Turkey, and Iran have all started their application to the BRICS. In addition, the Shanghai Cooperation Organization (SCO) granted dialogue partner status to Saudi Arabia and Qatar (which has half of GCC oil reserves) and began procedures to admit Iran as a member at the last summit in Samarkand.

“The China-GCC Summit is one thing, and China’s strategic partnership with Iran is another, but both Saudi Arabia and Iran applying to pillar institutions of the multipolar world order – BRICS+ and the SCO – at the same exact time, plus the idea of ‘BRICS coin’ as a commodity-weighted neutral reserve asset that encourages members to pledge their commodities to the BRICS ’cause’, should have G7 bond investors concerned, because these trends may keep inflation from slowing and interest rates from falling for the rest of this decade,” Pozsar concluded.

The new paradigm

“The ‘new paradigm’, as I see it, comes with a theme of ’emancipation’,” Pozsar explained. “Both sanctioned and non-sanctioned members of OPEC, with Chinese capital, are going to adopt the ‘farm-to-table’ model in which they will not just sell oil but will also refine more of it and process more of it into high value-added petrochemical products.”

He noted that all growth in global oil production came from US shale and other non-conventional sources such as Canadian tar sands. Saudi Arabia has already restricted boosting output by only one million barrels per day by 2025 while America’s biggest shale oil operator Pioneer Natural Resources recently said accelerating drilling would send investors fleeing and leave the sector “back at the bottom” of the stock market.

“It appears to me that unless the U.S. nationalizes shale oil fields and starts to drill for oil itself to boost production, over the next three to five years, we’re looking at an inelastic supply of oil and gas,” Pozsar noted.

This scenario opens the global oil market and makes it vulnerable for China to come in with its “emancipation” proposal.

READ: Joe Biden Prepares to Frantically Sell Oil From Reserves After Snubbed by OPEC

These supply constraints will lead, as Pozsar puts it, to a position where the “new paradigm” will likely be at the expense of refiners and petrochemical firms in the West, and also growth in the West–“much less domestic production and more inflation as steadily price-inflating alternatives are imported from the East.”

The author drew connection in that when one looks at the yield curve and think about the five-year section and then the forward five-year section, Xi may have accomplished his “next three- to five-year” goal of paying for China’s oil and gas imports exclusively in renminbi and may have advanced commodity encumbrance by developing downstream petrochemical industries in the Middle East “region” of Belt and Road and also the rollout of “BRICS coin” by the time the forward five-year section starts.

“I don’t think five-year forward five-year rates are pricing the future correctly: breakevens appear to be blind to geopolitical risks and the likelihood of the above,” said Pozsar. “Recognize two things: first, that inflation has been driven by non-linear shocks (a pandemic; stimulus; supply chain issues involving laptops, chips, and cars; post-pandemic labor shortages; and then the war in Ukraine), and second, that inflation forecasts treat geopolitics in the rearview mirror.”

Pozsar also said that central banks should think about inflation with geopolitics, resource nationalism, and “BRICS coin” in mind as the next set of non-linear shocks “that will keep inflation above target, forcing central banks to hike interest rates above 5%.”

In April, China will host the fourth Belt and Road Forum after it was postponed in 2021 due to the COVID-19 pandemic.

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Original article >>> The Unavoidable Crash


by Nouriel Roubini

Originally published at Project-Syndicate

December 2nd, 2022


https://jheconomics.com/the-unavoidable-crash/


After years of ultra-loose fiscal, monetary, and credit policies and the onset of major negative supply shocks, stagflationary pressures are now putting the squeeze on a massive mountain of public- and private-sector debt. The mother of all economic crises looms, and there will be little that policymakers can do about it.


NEW YORK – The world economy is lurching toward an unprecedented confluence of economic, financial, and debt crises, following the explosion of deficits, borrowing, and leverage in recent decades.

In the private sector, the mountain of debt includes that of households (such as mortgages, credit cards, auto loans, student loans, personal loans), businesses and corporations (bank loans, bond debt, and private debt), and the financial sector (liabilities of bank and nonbank institutions). In the public sector, it includes central, provincial, and local government bonds and other formal liabilities, as well as implicit debts such as unfunded liabilities from pay-as-you-go pension schemes and health-care systems – all of which will continue to grow as societies age.

Just looking at explicit debts, the figures are staggering. Globally, total private- and public-sector debt as a share of GDP rose from 200% in 1999 to 350% in 2021. The ratio is now 420% across advanced economies, and 330% in China. In the United States, it is 420%, which is higher than during the Great Depression and after World War II.

Of course, debt can boost economic activity if borrowers invest in new capital (machinery, homes, public infrastructure) that yields returns higher than the cost of borrowing. But much borrowing goes simply to finance consumption spending above one’s income on a persistent basis – and that is a recipe for bankruptcy. Moreover, investments in “capital” can also be risky, whether the borrower is a household buying a home at an artificially inflated price, a corporation seeking to expand too quickly regardless of returns, or a government that is spending the money on “white elephants” (extravagant but useless infrastructure projects).

Such over-borrowing has been going on for decades, for various reasons. The democratization of finance has allowed income-strapped households to finance consumption with debt. Center-right governments have persistently cut taxes without also cutting spending, while center-left governments have spent generously on social programs that aren’t fully funded with sufficient higher taxes. And tax policies that favor debt over equity, abetted by central banks’ ultra-loose monetary and credit policies, has fueled a spike in borrowing in both the private and public sectors.

Years of quantitative easing (QE) and credit easing kept borrowing costs near zero, and in some cases even negative (as in Europe and Japan until recently). By 2020, negative-yielding dollar-equivalent public debt was $17 trillion, and in some Nordic countries, even mortgages had negative nominal interest rates.

The explosion of unsustainable debt ratios implied that many borrowers – households, corporations, banks, shadow banks, governments, and even entire countries – were insolvent “zombies” that were being propped up by low interest rates (which kept their debt-servicing costs manageable). During both the 2008 global financial crisis and the COVID-19 crisis, many insolvent agents that would have gone bankrupt were rescued by zero- or negative-interest-rate policies, QE, and outright fiscal bailouts.

But now, inflation – fed by the same ultra-loose fiscal, monetary, and credit policies – has ended this financial Dawn of the Dead. With central banks forced to increase interest rates in an effort to restore price stability, zombies are experiencing sharp increases in their debt-servicing costs. For many, this represents a triple whammy, because inflation is also eroding real household income and reducing the value of household assets, such as homes and stocks. The same goes for fragile and over-leveraged corporations, financial institutions, and governments: they face sharply rising borrowing costs, falling incomes and revenues, and declining asset values all at the same time.

Worse, these developments are coinciding with the return of stagflation (high inflation alongside weak growth). The last time advanced economies experienced such conditions was in the 1970s. But at least back then, debt ratios were very low. Today, we are facing the worst aspects of the 1970s (stagflationary shocks) alongside the worst aspects of the global financial crisis. And this time, we cannot simply cut interest rates to stimulate demand.

After all, the global economy is being battered by persistent short- and medium-term negative supply shocks that are reducing growth and increasing prices and production costs. These include the pandemic’s disruptions to the supply of labor and goods; the impact of Russia’s war in Ukraine on commodity prices; China’s increasingly disastrous zero-COVID policy; and a dozen other medium-term shocks – from climate change to geopolitical developments – that will create additional stagflationary pressures.

Unlike in the 2008 financial crisis and the early months of COVID-19, simply bailing out private and public agents with loose macro policies would pour more gasoline on the inflationary fire. That means there will be a hard landing – a deep, protracted recession – on top of a severe financial crisis. As asset bubbles burst, debt-servicing ratios spike, and inflation-adjusted incomes fall across households, corporations, and governments, the economic crisis and the financial crash will feed on each other.

To be sure, advanced economies that borrow in their own currency can use a bout of unexpected inflation to reduce the real value of some nominal long-term fixed-rate debt. With governments unwilling to raise taxes or cut spending to reduce their deficits, central-bank deficit monetization will once again be seen as the path of least resistance. But you cannot fool all of the people all of the time. Once the inflation genie gets out of the bottle – which is what will happen when central banks abandon the fight in the face of the looming economic and financial crash – nominal and real borrowing costs will surge. The mother of all stagflationary debt crises can be postponed, not avoided.

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>>> Why the Fed, and Jerome Powell, should hit the pause button on rate hikes


Yahoo Finance

Sheila Bair

December 23, 2022


https://finance.yahoo.com/news/opinion-why-the-fed-and-jerome-powell-should-hit-the-pause-button-on-rate-hikes-130040613.html


“Hasten slowly and ye shall arrive” said the ancient Tibetan poet, Milarepa.

The Federal Reserve Board clearly does not share this philosophy. It has tightened monetary policy at a dizzying pace, taking short-term rates from near zero at the beginning of 2022, to above 4.25%, an increase of more than 6000%.

I applaud the Fed’s courage and determination to fight inflation, much like former Fed Chair Paul Volcker’s heroic defeat of “The Great Inflation” in the early 1980’s.

But there are key differences between the situation then—and now. Our economy, for one thing, has become much more reliant on debt. Furthermore, the new tools the Fed is using to tighten monetary policy are more powerful than those available in the Volcker era.

That’s why the Fed should hit pause to assess whether it is going too far too fast.The haste of its chair, Jerome Powell, may result in an unnecessary recession.

How so?

To measure the progress on any journey, you must look at your starting point. The Fed is raising rates after nearly 14 years of near zero to negative real rates. Government, business and households have made good use of cheap money, with levels of leverage in most sectors hovering near historic highs. In the third quarter, non-financial debt (that held by government, non-financial businesses, and households) stood at 270% of GDP. The biggest component was publicly-held federal debt, which stood at 105% of GDP.

There had not been that same build up of leverage when Paul Volcker became Fed Chair in 1979. Non-financial debt stood at 135% of GDP, half of what it is today. Publicly held Federal debt stood at a mere 26%. Monetary policy had unpredictably yo-yoed for over 15 years, as Volcker’s predecessors would raise rates to fight inflation, then bow to political pressure and lower them as the economy slowed. Interest rates were already high at 13.3% before they peaked at 22% in 1980, representing a 50% yearly increase compared to the Fed’s 6000% hike this year.

Because of these high levels of leverage, the impact of huge increases in borrowing costs has a much more profound impact on our economy than the more modest hikes of the Volcker era.

Are the Fed's sharp hikes warranted? While inflation remains a very real threat to our economy, it is a fairly recent phenomenon, having only begun to accelerate in 2021. Paul Volcker confronted a situation where Inflation had persisted for 15 years. It had become deeply entrenched in our economy. More aggressive tactics were needed. Recession was required then to beat inflation, but that is not necessarily the situation today.

There are other differences from the Volcker era that should be heeded.

The Fed is now using new, untested tools to implement its policies. Prior to 2008, the Fed carried out monetary policy primarily by buying or selling Treasury securities in the open market and occasionally by raising or lowering the “discount rate” – the minimum rate it charges for loans to banks. In 2008, the Congress granted the Fed long-sought authority to pay banks interest on the reserve accounts they hold at the Fed. Now, the Fed tightens credit by raising the risk free rate banks get by simply keeping money locked up in their reserve accounts. For nonbank financial intermediaries like money market funds, the Feds raises the rates it pays on what are called “reverse repos”, the functional equivalent of a reserve account.

This policy has a powerful tightening impact on credit, suppressing both supply and demand.

Normally, higher rates will discourage borrowing but the higher yields will also increase incentives to lend. However, now, banks and other financial intermediaries have a ready alternative to lending to the private sector. They can put their money with the Fed, risk free, while earning decent returns.

This has put tremendous pressure on short-term rates, resulting in steep yield curve inversions, a traditional harbinger of recession. In recent weeks, the yield on 2-year Treasuries has hovered between 70 and 80 basis points below the yield on 10-year Treasuries, a level not seen for four decades. Yield curve inversion further suppresses incentives to lend. By raising the costs of their own short-term borrowings, it negatively impacts the margins banks and other financial intermediaries can receive on their longer- terms loans.

This new tool is also expensive. Reserve and reverse repo balances are well over $5 trillion. At a projected policy rate of 5%, the annual cost of paying interest on $5 trillion would be $250 billion. Because of the escalating cost of these interest liabilities, the Fed’s earnings have already turned negative. So, perversely, to combat inflation using this tool, the Fed must create more money to make good on its obligations.

The Fed’s fight against inflation is not over. But in our over-leveraged world, it can go only so fast. If the Fed takes us into a deep recession, with the attendant financial disruptions and job losses, the political and market pressure to revert to ultra-low interest rates may well be too intense to resist. We would then have the worst of two worlds, the pain of recession and resurgence of inflation.

Our economic sacrifices would be for naught. Better to hasten slowly. The Fed should take a breather to assess the impact of its actions and arrive at the soft landing to which it aspires.

Simply put: Enough already!

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>>> Russia, China may be preparing new gold-backed currency, but expert assures US dollar 'safest' currency today


Fox Business

by Peter Aitken

Oct 29, 2022


https://www.foxbusiness.com/economy/russia-china-may-be-preparing-new-gold-backed-currency-expert-assures-us-dollar-safest-currency-today


China in July purchased 80.1 tons of gold valued at $4.6 billion

China and Russia may be working toward a new gold-backed currency in a move that would aim to dethrone the dollar as the primary reserve currency of the world, but any such currency would unlikely achieve that goal.

"The USD remains the safest, most convenient and most widely used currency in Asia and in the world today," Min-Hua Chiang, a research fellow and economist at the Heritage Foundation’s Asian Studies Center, told FOX Business. "No other currency (backed by gold or otherwise) is comparable, and that is unlikely to change in the near future."

Neither country has officially confirmed plans for such a currency, but China earlier this year started to buy up huge quantities of gold at the same time that Russia was forced off the dollar due to sanctions in response to the invasion of Ukraine. The war also led to the steepest discount on gold prices in years.

Some experts caution that these moves, along with the closer relationship that has developed between Moscow and Beijing as the rest of the world has isolated Russia after the invasion, point to the likelihood of China attempting to launch a new currency with gold backing it.

THE STRONGEST US DOLLAR IN 20 YEARS IS A DOUBLE-EDGED SWORD

The idea of a joint Russo-Sino currency has periodically surfaced over the past decade, especially after the Russian Central Bank opened its first overseas office in Beijing in 2017.

Craig Singleton, Senior Fellow at the Foundation for Defense of Democracies, noted that Chinese leaders have spoken for two decades about reforming the global financial system and weakening the dollar’s dominance.

"Two components in that strategy center around the development of a Yuan-based global commodities trading system and efforts by China, in partnership with Russia and other like-minded countries, to challenge dollar dominance by creating a new reserve currency," Singleton told Fox News Digital.

"In essence, Beijing and Moscow are seeking to build their own sphere of influence and a unit of currency within that sphere, in effect inoculating themselves from the threat of U.S. sanctions," he added.

But the record amount of gold that China has purchased has raised some eyebrows, even as the trend remains under the radar for mainstream media: Swiss gold exports to China hit a five-year high, with Beijing in July alone receiving 80.1 tons of gold valued at around $4.6 billion – more than double the 32.5 tons it bought in June and the second-highest monthly total since 2012, according to Reuters.

Gold bars

International Financial Statistics from March 2022 indicated that China may have the seventh-most gold stores, with more coming every month.

Francis Hunt, a trading expert, told Asia Markets that using gold to back the currency would be the best way to build confidence in said currency, and that currency may be digital in nature to give China a greater scrutiny over its citizens’ activity.

But Chiang downplayed the potential success of a new currency due to the "relatively small trade volume" that would limit its growth, and that a digital currency would prove difficult to promote.

"Even if both countries use a new currency for bilateral trade transactions, the relatively small trade volume between will limit the impact on the U.S. dollar," Chiang argued, noting that a multinational currency, like the Euro, requires "a level of political and economic coordination and integration that is not present in Asia today."

"The appeal will be limited," Chiang said. "Consider that in August 2022, 43% of global payments were conducted in USD, followed by 34% in Euro. RMB accounted for just 2% of total global payments according to RMB Tracker."

"The RMB is gaining some ground, but it is still leagues behind the USD and Euro," she concluded, adding that "foreigners’ confidence towards China’s and Russia’s economic prospects (or lack thereof) is a key limitation" to any potential joint currency.

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Rickards - >>> We Need to Talk About Ukraine


BY JAMES RICKARDS

DECEMBER 1, 2022


https://dailyreckoning.com/we-need-to-talk-about-ukraine/


We Need to Talk About Ukraine

There’s plenty to discuss, from the Fed to inflation to the supply chain issues.

But we need to talk about Ukraine. Yes, that’s right. We need to talk about Ukraine. That’s because nothing is more important in the world right now.

Why? Because Ukraine is the spider in the spider web of the global economy.

Ukraine affects geopolitics, geo-economics, energy and food shortages, supply chains and the desire of many countries to escape U.S. dollar hegemony. It may even potentially involve nuclear war.

That’s why the United States has taken such a strong post-Cold War interest in Ukraine — a region of Eastern Europe no American president would risk a drop of American blood over until the Berlin Wall fell.

Russian success in Ukraine would lead to a new international monetary system through its allies in the BRICS+, the Shanghai Cooperation Organization and the Eurasian Economic Union.

On the flip side, Russian failure in Ukraine would lead to a strengthened world economic order with the U.S. firmly in charge. NATO would be ascendant.

Where things stand today, either outcome is still possible. Much will depend upon the next few months. With that as background, let’s dive into the analysis…

First, a note on sourcing. Winston Churchill famously said, “In wartime, truth is so precious that she should always be attended by a bodyguard of lies.” That was true in World War II, and it’s no less true today.

The U.S., U.K. and EU will lie. So will Ukraine. So will Russia. That’s our starting place in any analysis.

If I read something in The New York Times. I can be quite certain it’s a lie. That’s to be expected. The New York Times is nothing more than a channel for CIA and MI6 deception.

Still, lies are valuable. They reveal what the sources are really concerned about. If you weren’t concerned about something, why bother to lie about it? Based on the lie, you can know what matters.

From there, you can use inferential methods to assume the topic of the lie is important and the opposite of the lie is probably true.

You can update your inference with what’s called all-source fusion; basically, using other intelligence sources to tweak the initial inference in one direction or another.

If enough evidence accumulates, you quickly get to a point where you can give a high probability to a certain state of affairs, even if it’s quite different from what the media are telling you.

All-source fusion can include comments from retired military and intelligence officers who have good contacts among former colleagues and who are not afraid to speak the truth because their careers are no longer at risk.

It can also include informed sources from neutral countries like Switzerland, and former U.N. peacekeepers who were on the front lines in the Donbas region of Ukraine.

Sometimes we even gain insights from what’s called pocket litter. These are scraps of paper or other objects from the clothing of prisoners or casualties that may have maps, phone numbers, notes and other commentaries on the war that provide insights not otherwise available.

But pocket litter can be used for counterintelligence. Sometimes a body is left with fake maps and battle plans in the jacket pockets intended to be discovered by the enemy.

Now you see why intelligence work is referred to as the wilderness of mirrors. You can’t trust anything to be as it appears.

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>>> ‘Huge, Missing and Growing:’ $65 Trillion in Dollar Debt Sparks Concern


Bloomberg

by Greg Ritchie

December 5, 2022


https://finance.yahoo.com/news/huge-missing-growing-65-trillion-120025349.html


(Bloomberg) -- There’s a hidden risk to the global financial system embedded in the $65 trillion of dollar debt being held by non-US institutions via currency derivatives, according to the Bank for International Settlements.

In a paper with the title “huge, missing and growing,” the BIS said a lack of information is making it harder for policy makers to anticipate the next financial crisis. In particular, they raised concern with the fact that the debt is going unrecorded on balance sheets because of accounting conventions on how to track derivative positions.

The findings, based on data from a survey of global currency markets earlier this year, offer a rare insight into the scale of hidden leverage. Foreign-exchange swaps were a flashpoint during the global financial crisis of 2008 and pandemic of 2020, when dollar funding stress forced central banks to step in to help struggling borrowers.

To be sure, the debt is backed by an equivalent amount of hard currency. To understand how the system works, consider a Dutch pension fund buying assets in the US. As part of the transaction, it will often use a foreign-currency swap to exchange euros for dollars. Then, when it’s closed out, the fund will repay dollars and receives euros. For the length of the trade, the payment obligation is recorded off-balance sheet, which the BIS calls a “blind spot” in the financial system.

It’s that opacity that puts policymakers at a disadvantage, according to BIS researchers Claudio Borio, Robert McCauley and Patrick McGuire.

“It is not even clear how many analysts are aware of the existence of the large off-balance sheet obligations,” they wrote. “In times of crises, policies to restore the smooth flow of short-term dollars in the financial system -- for instance, central bank swap lines -- are set in a fog.”

The $65 Trillion Hidden Global Debt Bomb: Paul J. Davies

Central banks have found ways to manage the demand for dollars during times of stress. The Federal Reserve has tools, such as swap lines and the FIMA Repo Facility, to help prevent markets from seizing up.

For researchers at the BIS, it’s the sheer scale of the swaps that’s worrying. They estimate that banks headquartered outside the US carry $39 trillion of this debt -- more than double their on-balance sheet obligations and ten times their capital. Accounting conventions only require derivatives to be booked on a net basis, so the full extent of the cash involved isn’t recorded on a balance sheet.

“There is a staggering volume of off-balance sheet dollar debt that is partly hidden, and FX risk settlement remains stubbornly high,” said Borio, head of the monetary and economic department at the BIS.

In a separate report on Monday, the BIS also flagged the settlement risk as another potential source of instability in the foreign-exchange market. Researchers estimate that $2.2 trillion of daily currency turnover was subject to settlement risk, the possibility that one party to a trade fails to deliver the asset.

Payment-versus-payment arrangements, a settlement mechanism that coordinates transfers to ensure no one is left holding a claim, tend to be unsuitable or too expensive for certain trades, the BIS paper said.

“There is clearly an urgent need for wholesale market participants to look for alternative ways to eradicate settlement risk exposure across a broad range of currencies outside of the traditional majors,” said Jerome Kemp, president at post-trade processing firm Baton Systems, in response to the paper.

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>>> High Global Debt Is Making Rate Hikes Trickier, BIS’s Borio Says


Bloomberg

Bastian Benrath

December 5, 2022


https://finance.yahoo.com/news/high-global-debt-making-rate-120000479.html


(Bloomberg) -- The mountain of borrowings accumulated across global economies in recent years is proving a challenge to central bankers as they fight inflation, according to a Bank for International Settlements official.

“One aspect which is complicating that task is the fact that we have very high debt levels around the world, both public and private,” Claudio Borio, head of the Basel-based organization’s monetary and economic department, told reporters.

The buildup of borrowings “suggests that the economy is more sensitive to increases in interest rates, but we don’t quite know how sensitive it is,” he added.

According to BIS data, government debt across 40 economies has risen to 90% of gross domestic product, up from 79% in the beginning of 2020.

Borio’s remarks were released on Monday in tandem with the BIS’s quarterly review, which observed that price growth has weakened internationally along with economic activity after a phase of stronger-than-expected inflation readings.

While the reaction of central banks has been “timely and forceful,” their main challenge now becomes “to find out how far to go and how long to go there,” he said.

Borio, questioned on the outlook for global interest rates, said that it’s still not clear how aggressively monetary officials will need to act to tame inflation.

“The simple answer is: One is closer than one has been in the beginning, but we don’t know exactly how far central banks will have to go,” he added.

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>>> Ghana plans to buy oil with gold instead of U.S. dollars


Reuters

November 24, 2022


https://finance.yahoo.com/news/ghana-plans-buy-oil-gold-150718243.html


ACCRA (Reuters) -Ghana's government is working on a new policy to buy oil products with gold rather than U.S. dollar reserves, Vice-President Mahamudu Bawumia said on Facebook on Thursday.

The move is meant to tackle dwindling foreign currency reserves coupled with demand for dollars by oil importers, which is weakening the local cedi and increasing living costs.

Ghana's Gross International Reserves stood at around $6.6 billion at the end of September 2022, equating to less than three months of imports cover. That is down from around $9.7 billion at the end of last year, according to the government.

If implemented as planned for the first quarter of 2023, the new policy "will fundamentally change our balance of payments and significantly reduce the persistent depreciation of our currency," Bawumia said.

Using gold would prevent the exchange rate from directly impacting fuel or utility prices as domestic sellers would no longer need foreign exchange to import oil products, he explained.

"The barter of gold for oil represents a major structural change," he added.

The proposed policy is uncommon. While countries sometimes trade oil for other goods or commodities, such deals typically involve an oil-producing nation receiving non-oil goods rather than the opposite.

Ghana produces crude oil but it has relied on imports for refined oil products since its only refinery shut down after an explosion in 2017.

Bawumia's announcement was posted as Finance Minister Ken Ofori-Atta announced measures to cut spending and boost revenues in a bid to tackle a spiraling debt crisis.

In a 2023 budget presentation to parliament on Thursday, Ofori-Atta warned the West African nation was at high risk of debt distress and that the cedi's depreciation was seriously affecting Ghana's ability to manage its public debt.

The government is negotiating a relief package with the International Monetary Fund as the cocoa, gold and oil-producing nation faces its worst economic crisis in a generation.

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>>> Can BRICS De-dollarize the Global Financial System?


Published online by Cambridge University Press

24 February 2022

by Zongyuan Zoe Liu and Mihaela Papa


https://www.cambridge.org/core/elements/can-brics-dedollarize-the-global-financial-system/0AEF98D2F232072409E9556620AE09B0


Summary

Existing scholarship has not systematically examined BRICS (Brazil-Russia-India-China-South Africa) as a rising power de-dollarization coalition, despite the group developing multiple de-dollarization initiatives to reduce currency risk and bypass US sanctions. To fill this gap, this study develops a 'Pathways to De-dollarization' framework and applies it to analyze the institutional and market mechanisms that BRICS countries have created at the BRICS, sub-BRICS, and BRICS Plus levels. This framework identifies the leaders and followers of the BRICS de-dollarization coalition, assesses its robustness, and discerns how BRICS mobilizes other stakeholders. The authors employ process tracing, content analysis, semi-structured interviews, archival research, and statistical analysis of quantitative market data to analyze BRICS activities during 2009-2021. They find that BRICS' coalitional de-dollarization initiatives have established critical infrastructure for a prospective alternative nondollar global financial system. This title is also available as Open Access on Cambridge Core.

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>>> Rocky Treasury-Market Trading Rattles Wall Street

Mounting illiquidity raises concerns over a key market’s functioning should a crisis erupt


The Wall Street Journal

By Matt Grossman and Sam Goldfarb

Oct. 30, 2022


https://www.wsj.com/articles/rocky-treasury-market-trading-rattles-wall-street-11667086782


Rising friction in the trading of U.S. government debt has investors worried about the health of a $24 trillion market that is critical to the functioning of the broader financial system.

The ranks of traders ready to buy and sell Treasurys are shrinking. Individual trades are moving prices more. Treasury securities with similar characteristics are trading at larger-than-normal price differences. Major players, including the big banks and asset managers that have long been significant buyers, are in retreat.

Investors expect to be able to buy and sell Treasurys quickly at the listed price, no matter what else is happening. Difficulty doing so reflects a lack of what traders call liquidity, and it can scramble the most basic signals that help the economy run: How much home buyers should expect to pay for a loan, what kinds of investments businesses should make, and what kinds of stocks likely will perform the best in a given period.

Climbing Treasury yields have recently sent mortgage rates above 7% for the first time in two decades, slashed stock valuations and slowed corporate borrowing. While there hasn’t been a serious breakdown in Treasury trading so far, the possibility is far from unthinkable given the tumult this year. Many traders and portfolio managers warn that such a development would tear through other markets, potentially requiring intervention from the Federal Reserve to prevent a full-blown financial crisis.

Andrew Kreicher, a director at Wells Fargo, said liquidity in Treasurys has been about the worst he has seen over a sustained period recently.

“There are so many systems in other asset classes that use Treasurys as a building block,” he said. “If you have rot in the foundation, the whole house is at risk.”

Investors rely on easy Treasury sales to obtain quick cash for debt payments, margin calls and a variety of other pressing short-term needs. When that process hits hiccups, financial trouble can spiral, said Jim Caron, a fixed-income portfolio manager at Morgan Stanley Investment Management.

“If the Treasury market isn’t working, nothing is working,” he said.

While many agree trading Treasurys remains smoother than during the worst moments of 2020’s pandemic-fueled market breakdown, the current unease has built gradually over months without a single precipitating event, said Deirdre Dunn, co-head of global rates at Citi.

Some traders believe the Fed’s rapid interest-rate increases are the main cause. Treasurys—especially shorter-term notes—closely reflect expectations for the Fed’s overnight rates, so quick changes can cause choppy moves. This week, the Fed is expected to raise rates by 0.75 percentage point for the fourth straight meeting.

Other traders lay some blame on rules enacted after the global financial crisis that make it more expensive for banks to keep Treasurys on their balance sheet.

Big banks function as Treasury-market dealers, helping match buyers and sellers. When they step back, trading stalls, said Ariel da Silva, director of fixed income at Wealth Enhancement Group, a wealth-management firm. Given the current regulatory regime, “It doesn’t behoove them to take on the inventory,” he said.

Measuring the ease of trading isn’t straightforward. Some approaches gauge the differences between the prices buyers and sellers are demanding. Others look at how much deal flow the market can absorb at the current price, or, similarly, how much a single large trade swings prices for everyone else.

“We’re seeing plenty of concerns about liquidity, but it’s coming at the same time that we’re seeing real concerns about volatility, and it’s very difficult to untangle those things,” said Steven Abrahams, a senior managing director at Amherst Pierpont Securities. During the Fed’s smaller, more predictable rate increases between 2004 and 2006, trading stayed more fluid, he said.

One problem is a growing difference between yields on the newest Treasurys in the market and older vintages that are still traded among investors. Theoretically, a five-year note sold this year should trade at the same yield as a five-year-old 10-year note, because both come due in 2027. But fresh Treasurys are trading at a growing premium to older notes, a sign the older securities have become harder to find buyers for.

To address that issue, Treasury Department officials have considered buying back outstanding bonds, funding the purchases with auctions of more fresh debt. Earlier in October, the Treasury surveyed dealers for feedback on the plan, a version of which the government enacted to sustain the market during the budget surpluses of the early 2000s. Treasury Secretary Janet Yellen said the department is still studying it.

For now, doing business in Treasury markets takes more finesse than a year ago, traders say. Some report working harder than usual to shield their intentions from the broader market, lest their bids or offers send jumpy prices moving against them.

Trading conditions aren’t nearly as difficult as they were in March 2020, when dealers demanded extraordinarily large discounts to buy Treasurys from investors, said Michael Lorizio, a senior fixed-income trader at Manulife Investment Management. But he has sometimes found it necessary to make larger trades “in a more quiet way” than in the past, communicating his intentions to dealers carefully rather than “just blast it out there without any sort of qualifications.”

Upheaval in U.K. bond trading this autumn showed one scenario investors hope the U.S. can avoid. In September, a new debt-heavy British budget plan ignited such a sharp bond-price decline that U.K. pension plans had to sell bonds to cover esoteric bets on a strategy called liability-driven investment. Yields soared, forcing the Bank of England to step in as a buyer even though it had been reducing its bondholdings before the furor began.

In the U.S., the Fed’s own effort to trim its holdings of Treasurys—part of the central bank’s anti-inflation efforts—is yet another factor some traders blame for falling liquidity. The program, known as quantitative tightening, amounts to “a mechanical withdrawal of liquidity” that reduces banks’ ability to absorb government debt, said Alex Lennard, investment director at Ruffer, a British investment fund.

Still, the Treasury market continues to process massive trading volumes without disruption. Last month, an average $570.5 billion of Treasurys changed hands daily, similar to levels in recent Septembers, according to data from Sifma, a financial-industry trade group. Daily U.S. stock trading last month, by comparison, was $510.5 billion.

Trading Treasurys remains far more frictionless than trading corporate bonds or other debt securities.

“Internally, when I complain about liquidity, our corporates guys are quick to tell me to stop whining,” said Mr. Lorizio.

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>>> Yes, “Biden Bucks” Are Real


BY JAMES RICKARDS

OCTOBER 21, 2022


https://dailyreckoning.com/yes-biden-bucks-are-real/


Yes, “Biden Bucks” Are Real

I told my readers several weeks ago about how Joe Biden and the Fed’s plan to develop the digital dollar is moving from the research stage to the development stage.

Well, the Biden administration has recently released the first-ever framework for developing a U.S. central bank digital currency (CBDC) system. In other words, “Biden Bucks” is getting closer to becoming a reality for us all.

(I like to call them “Biden Bucks” because I want him to take full credit for what I consider to be a crime.)

Essentially, I believe the U.S. dollar, the standard of the world since 1792, will be replaced by a new currency, the digital dollar. It’ll also have the full backing of the Federal Reserve.

What’s this mean for you? I’ve argued it before but I can’t say it enough…

It would basically subject your money to government control. “Biden Bucks” would create new ways for the government to control how much you could buy of an item, or even restrict purchases altogether. That’s because the government would keep score of every financial decision you made.

Nowhere to Hide

Imagine if the government decides that gasoline needs to be rationed to further advance the climate change agenda?

Your “Biden Bucks” could be made to stop working at the gas pump once you’ve purchased a certain amount of gasoline in a week. How’s that for control?

And in a world of “Biden Bucks,” the government will even know your physical whereabouts at the point of purchase. Also, if you give donations to the wrong political party or make purchases the government doesn’t like, maybe the IRS will take a sudden interest in you.

Who wants to be subjected to an IRS audit?

If any of this sounds extreme, fantastical or otherwise far-fetched, it’s not. It’s already happening around the world.

China is already using its CBDC to deny travel and educational opportunities to political dissidents. Canada seized the bank accounts and crypto accounts of nonviolent trucker protesters last winter.

These kinds of “social credit” systems and political suppression will be even easier to conduct when “Biden Bucks” are completely rolled out in the U.S. In fact, it’s already starting. If you have a PayPal account, you can see that I was not exaggerating.

Misinformation — or Facts?

On Oct. 8, PayPal released an update to its user agreement that included a clause allowing PayPal to fine its users $2,500 for using the service to spread “misinformation.” PayPal quickly retracted the update and said the misinformation clause had been included in error (isn’t it always?).

In truth, this was nothing but a foreshadowing of life under central bank digital currencies.

They want to surveil us all and take our money for holding the wrong views. China has shown the world that it can control the whole population this way. PayPal was designated to be the test case.

The management at PayPal considers misinformation to be anything they disagree with even if facts and science are on your side. Well, here are some facts…

The COVID vaccines are not real vaccines; they are experimental gene-modification therapies that do not stop you from getting infected and do not stop the spread if you do get infected.

Masks don’t work because the SARS-CoV-2 virus (that causes COVID) is only 1/5,000th the size of the weave. The virus goes right through the mask.

There is no climate emergency. There is evidence that the 2020 presidential election involved extensive irregularities, including cheating.

A Test Run for Biden Bucks

Those are all facts. But if you say them, PayPal treats them as misinformation and threatens your account balance. PayPal’s terms of service show that providing “false, inaccurate or misleading information” is still on the list of prohibitions in their Terms of Service.

Misleading according to whom? Not only does PayPal threaten free speech, but they also lie about the threat when challenged. If PayPal can punish its users for speaking their minds, who is to say that the government can’t do the same thing?

I believe that the PayPal announcement was a test run of a new system of financial surveillance that could be woven into a central bank digital currency.

That in turn could be deployed to copy China’s social credit system of political surveillance and control.

The government can’t be trusted to do much of anything correctly. How can you trust them to keep your money secure once you are forced to convert it to a traceable digital currency? What happens if that digital currency gets hacked?

The government certainly isn’t going to bail you out like it did with the elites in the banking and auto industries.

Safe and Secure? Really?

Hackers recently stole around $160 million worth of cryptocurrency from crypto market maker Wintermute. This incident is only the most recent in a long-growing list of large crypto thefts so far this year.

In June of this year, hackers looted about $100 million from a so-called cryptocurrency bridge, again exposing a key vulnerability in the digital-asset ecosystem.

According to a recent article from CNN, “In the first seven months of 2022, a staggering $1.9 billion worth of cryptocurrency was stolen in hacks of various services, marking a 60% increase from the same period in the year prior, according to a report released from blockchain analysis firm Chainalysis last month.”

Meanwhile, a Federal Reserve paper from January 2022 stated:

Threats to existing payment services — including operational disruptions and cybersecurity risks — would apply to a CBDC as well. Any dedicated infrastructure for a CBDC would need to be extremely resilient to such threats, and the operators of the CBDC infrastructure would need to remain vigilant as bad actors employ ever more sophisticated methods and tactics. Designing appropriate defenses for CBDC could be particularly difficult because a CBDC network could potentially have more entry points than existing payment services.

This part is truly terrifying:

Designing appropriate defenses for CBDC could be particularly difficult because a CBDC network could potentially have more entry points than existing payment services.

If bad actors can already hack crypto platforms with ease, what’s to stop them from hacking a CBDC network with more entry points?

What could this mean for you and your life savings? How can you protect your finances from being hacked by bad actors?

Fact-Checking the Fact-Checkers

The Associated Press recently tried to fact-check me, saying that my claims are false, that the digital dollar has nothing to do with social control or the elimination of cash. The whole project is completely innocent and you can trust the government.

Yeah, OK. And I’ve got a bridge in Brooklyn to sell you!

Even the general manager of the Bank for International Settlements, which is known as the “central bank of central banks,” has admitted that CBDCs would give central banks “absolute control” of everyone’s money — and the “technology to enforce that.”

Who should you pay more attention to, some hack with the mainstream media who really has no idea what he’s talking about, or a true banking insider who knows exactly how the system would work?

Even The Economist has announced the rise of government-backed digital currencies, warning they will “shift power from individuals to the state.”

The Economist isn’t known for engaging in conspiracy theories.

You might not be able to fight back easily in the world of “Biden Bucks,” but there is one nondigital, nonhackable, nontraceable form of money you can still get your hands on.

It’s called gold.

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>>> Wary of US dollar hegemony, Chinese state researchers float idea of a pan-Asian digital currency


The digital token would be pegged to a basket of 13 currencies, including the yuan, Japanese yen, South Korean won and those of the 10 Asean countries

The government researchers said a common Asian digital currency would lower the region’s reliance on the US dollar and help safeguard financial stability


South China Morning Post

by Frank Tang

13 Oct, 2022


https://www.scmp.com/economy/china-economy/article/3195855/wary-us-dollar-hegemony-chinese-state-researchers-float-idea


China is a global leader in the development of a sovereign digital currency.

The conditions are right for the establishment of a pan-Asian digital currency that could enhance regional monetary cooperation and loosen reliance on the US dollar, Chinese state researchers say.

The idea of an Asia-wide digital token comes as Beijing tries to consolidate its economic influence in the region and its position as a global leader in digital currency development.

China is also working studiously to reduce its reliance on the US dollar system amid threats of financial decoupling from Washington.

“More than 20 years of deepened economic integration in East Asia has laid a good foundation for regional currency cooperation. The conditions for setting up the Asian yuan have gradually formed,” said researchers Song Shuang, Liu Dongmin and Zhou Xuezhi, from the Institute of World Economics and Politics under the Chinese Academy of Social Sciences.

The digital token would be pegged to a basket of 13 currencies, including the yuan, Japanese yen, South Korean won and those of the 10 member countries in the Association of Southeast Asian Nations.

Weighting for each could be similar to that of the International Monetary Fund’s special drawing rights, an international reserve asset.

Distributed ledger technology would underpin the currency, preventing the dominance of any one country and removing obstacles for regional monetary cooperation.

The article was originally published in the August issue of World Affairs journal, which is affiliated with the Chinese Ministry of Foreign Affairs, before it was posted online late last month.

The government researchers said a common Asian digital currency would lower the region’s reliance on the US dollar and help safeguard financial stability.

They pointed to the financial market volatility triggered by aggressive US rate hikes, which have negatively affected foreign exchange reserves of Asian countries.

“East Asian countries have long settled their trade in the US dollar, exacerbating currency mismatches and exchange rate risks. It was the trigger for the 1997 Asian financial crisis,” they said.

It is not the first time a super-sovereign currency has been floated for Asia. Former Malaysian prime minister Mahathir Mohamad proposed a common currency in East Asia to replace the US dollar during the 1997 Asian financial crisis, and insisted on its necessity again in 2019.

In 2006, the Japan-led Asian Development Bank also proposed the Asian Currency Unit, though it was eventually shelved.

The proposed Asian digital currency is more likely to be led by China, which is the world’s second largest economy and has carried out extensive trials of its sovereign digital currency, known as the e-CNY.

China has piloted its central bank digital currency in 23 major cities, primarily for small retail payments, with 5.6 million merchants accepting it and accumulative transactions worth 100 billion yuan (US$13.9 billion) by the end of August.

No timetable has been set for the launch of the e-CNY, but China is far ahead of neighbors Japan and South Korea, neither of which have released detailed plans for their respective central bank digital currencies.

While Beijing maintains the digital yuan is mainly for domestic use, China’s central bank is exploring cross-border use with Thailand, the United Arab Emirates and Hong Kong.

The Chinese researchers proposed that a department should be created under the Asean+3 Macroeconomic Research Office (AMRO), a Singapore-based macroeconomic surveillance organisation headed by Chinese national Li Kouqing, to coordinate creation of a digital currency. Eventually, it would be upgraded to the Asian Monetary Fund.

Cross-border payment should begin between large institutions, such as central banks, commercial banks and state-owned enterprises for areas like commodity trade, outbound investment, government aid or bond issuance.

In August, China’s former vice-minister for finance Zhu Guangyao also suggested a more formal institutional role for AMRO, as well as the Chiang Mai Initiative Multilateralisation – a US$240 billion currency swap pool formed by Asean, China, Japan and South Korea – as a way to boost the use of regional currencies, rather than US dollar.

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>>> Saudi prince sends threat to the West after Biden warns of consequences for kingdom


Fox News

by Michael Lee


https://www.msn.com/en-us/news/world/saudi-prince-sends-threat-to-the-west-after-biden-warns-of-consequences-for-kingdom/ar-AA133iU2?cvid=e3f6b62f32eb4c8bb31077dc1eb2826b


ASaudi prince related to Crown Prince Mohammed bin Salman's seemingly took aim at President Biden and the U.S., warning leaders not to threaten Saudi Arabia.

"Anybody that challenges the existence of this country and this kingdom. All of us, we are products of jihad, and martyrdom," Saudi Prince Saud al-Shaalan, who is married to one of the grandaughter's of the late King Abdulaziz Al Saud, said in a video that was posted to Twitter Saturday. "That's my message to anybody that thinks that it can threaten us."

King Abdulaziz Al Saud founded Saudi Arabia.

The video comes amid a time of unprecedented tensions between the U.S. and Saudi Arabia, with the oil-rich kingdom leading an OPEC+ decision last week to cut oil production despite American requests to increase exports.

BIDEN DROVE 'HISTORICALLY' CLOSE MIDDLE EAST ALLIES INTO THE ARMS OF AMERICA'S GREATEST ENEMIES, EXPERTS SAY

"There's going to be some consequences for what they've done with Russia," Biden said during an interview with CNN last week.

In response, Saudi Arabia released a long statement of its own denying the decision was made to help Russia.

"The Government of the Kingdom of Saudi Arabia would first like to express its total rejection of these statements that are not based on facts, and which are based on portraying the OPEC+ decision out of its purely economic context," the Saudi foreign ministry said.

The back-and-forth tensions have caused concern that the longtime security alliance between the U.S. and Saudi Arabia could be in the midst of fracturing.

But a Saudi source tells Fox News Digital that al-Shaalan's rhetoric does not represent the views of the government and there is a good chance that they will take action against the prince for posting the video.

Fox News Digital reached out to the spokesman of the Saudi Embassy in Washington, D.C., for comment.

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>>> Yellen says new IMF SDR allocation not appropriate at this time


Reuters

By Andrea Shalal and David Lawder


https://www.reuters.com/markets/asia/yellen-says-new-imf-sdr-allocation-not-appropriate-this-time-2022-10-14/


WASHINGTON, Oct 14 (Reuters) - U.S. Treasury Secretary Janet Yellen on Friday said she does not see another allocation of International Monetary Fund emergency reserves to member countries as appropriate at this time, when more existing reserves need to be channeled to poorer countries.

Yellen told a news conference that the Treasury has asked the U.S. Congress for permission to lend $21 billion in existing U.S. Special Drawing Rights (SDR) to IMF trust funds for low- and middle-income countries, and was hoping for approval.

The United States is the largest shareholder in the IMF, so its support for another SDR allocation would be crucial.

The IMF in August 2021 created and issued $650 billion in SDR assets to member countries to aid their recovery from the COVID-19 pandemic, but poor countries are clamoring for more funds due to high inflation and a mounting debt crisis.

Civil society groups and lawmakers have urged the global lender to issue another $650 billion in SDRs - something akin to a central bank printing money - to help member countries grapple with overlapping health, food, energy and inflation crises.

Experts say it would be difficult to win the 85% approval needed for another allocation given deep frustration that the Group of 20 major economies had not yet met their commitment to recycle $100 billion of their SDRs from the last one.

Yellen echoed that point, and said the United States was looking at other ways to help boost funding available to needy countries, including through grants to food security organizations and debt restructuring efforts.

The non-partisan One Campaign, which tracks SDR pledges, said only $60 billion in pledges had been made thus far, with several countries - including Ireland, Norway, Switzerland and Sweden - having failed to make any pledges.

That would amount to just over $80 billion including the U.S. pledges, but One said it did not expect congressional approval for that move to come any time soon.

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>>> How Britain's pension-scheme hedge became a trillion-pound gamble


Reuters

10-15-22

By Tommy Wilkes and Carolyn Cohn


https://www.reuters.com/business/finance/how-britains-pension-scheme-hedge-became-trillion-pound-gamble-2022-10-15/


LONDON, Oct 15 (Reuters) - It started out simply enough: British pension schemes were looking for a way to match their assets to future pension payments.

Schemes run for pharmacy Boots and bookseller WHSmith were early adopters in the 2000s of an investment strategy of dumping stocks for bonds, to shield themselves from interest rate changes.

But fifteen years later, the strategy now adopted by nearly two-thirds of pension schemes has ended up revolving around financial derivatives rather than just bonds - injecting a growing amount of risk to schemes that is only now becoming apparent as interest rates surge.

In the so-called LDI or liability-driven investment strategy that became popular, pension schemes would use derivatives - contracts that derive their value from one or more assets - to protect themselves from potential swings in interest rates. With a small amount of capital they could gain large exposures.

There is a catch: if the derivative becomes loss-making for the pension fund because of a change in underlying asset prices, for example, it can be called up for more money, sometimes at short notice.

None of this mattered for a long time and consultants predicted in 2018 that the market would soon reach the "The Age of Peak LDI" - it was so popular that the pensions industry was running out of assets to hedge.

LDI assets quadrupled in a decade to 1.6 trillion pounds ($1.79 trillion) last year.

But the strategy gradually became riskier, according to interviews with pension scheme trustees, consultants, industry experts and asset managers. Things began to unravel as Britain's Sept. 23 "mini-budget" sparked a jump in UK government bond yields, driving pension funds to race to raise cash to prop up their LDI hedges.

Those derivatives came close to imploding, forcing the Bank of England to pledge on Sept 28 to buy bonds to calm the panic.

The scale of the money using the LDI strategy, and ever higher borrowing through the derivatives, had amplified risks that appeared hidden during a decade of low interest rates.

When rates began rising in 2022 and warnings about risk got louder, schemes were slow to act, according to those interviewed.

"I do not like the term (LDI) and never did, it has been hijacked by consultants and has morphed into what we are seeing now," said John Ralfe, who in 2001 led the 2.3 billion pound Boots Pension Fund's shift into bonds. The fund didn't load up on debt, he told Reuters.

"Pension schemes were doing disguised borrowing, it's absolutely toxic," Ralfe said. "There was much greater risk in the financial system than anyone - including me - would have thought."

Boots did not respond to request for comment on Friday. WHSmith did not respond to request for comment on Thursday.

Globally, investors are worrying about other financial products predicated on low interest rates, now that rates are rising.

"The so-called LDI Crisis in the UK is just the symptom of a greater economic malaise," said Nicolas J. Firzli, executive director of the World Pensions Council.

RISKIER BETS

In the two decades since Ralfe's time at Boots, defined benefit pension schemes - which guarantee retirees a set amount of pension payments - have loaded up on LDI and derivatives, using them to borrow and invest in other assets.

If leverage in the LDI strategy was three times, for example, it meant the scheme only needed to spend 3.3 million pounds for 10 million pounds of interest rate protection.

Instead of buying bonds to protect against falling rates - a key determinant of a scheme's funding position - a scheme could cover 75% of its assets, but only tie up 25% of the money, using the rest for other investments.

The remaining money could be chanelled into higher-yielding equities, private credit or infrastructure.

The strategy worked, and schemes' funding deficits narrowed because the hedges made them less exposed to falling interest rates. Lower interest rates require pension schemes to hold more money now for future pensions payments.

This pleased companies and regulators.

Asset managers including Legal & General Investment Management, Insight Investment and BlackRock offered LDI funds in a low-margin but big volume business. The FCA, which regulates LDI providers, declined to comment.

Consultants such as Aon and Mercer pitched LDI to trustees, while The Pensions Regulator (TPR) - the government entity regulating pension funds - encouraged schemes to use liability matching to narrow deficits.

Nearly two-thirds of Britain's defined benefit pension schemes use LDI funds, according to TPR.

The strategy worked as long as government bond yields stayed below pre-agreed limits embedded in the derivatives.

"LDI had been thought of (among clients) as a fire and forget strategy," said Nigel Sillis, a portfolio manager at Cardano, which offers LDI strategies.

The industry had been "a little complacent" about the knowledge among pension trustees, he added.

The risk grew over time. A senior executive at an asset manager which sells LDI products said leverage rose, with some managers offering tailored products of five times leverage, versus a maximum of two or three times a decade ago.

Pension schemes had rarely been asked for extra collateral before 2022, and a risk-averse industry had become less prudent, the executive said, speaking on the condition of anonymity.

TPR says no scheme has been at risk of going insolvent -- rising yields actually improve the funding position of funds -- but schemes lacked access to liquidity.

Still, the regulator this week acknowledged that some funds would have suffered.

When yields surged in an unprecendented move between Sept. 23 and Sept. 28, pension schemes were left scrambling to find cash for collateral. If they did not find it in time, the LDI providers wound down their hedges, leaving schemes exposed when yields tanked following the BoE intervention.

A small minority of schemes would have seen a 10-20% worsening in their funding position, according to Nikesh Patel, head of client solutions at asset manager Kempen Capital Management.

Simon Daniel, partner at law firm Eversheds Sutherland, said pension schemes were now arranging standby facilities with their sponsoring employers to get cash for collateral.

Risks in LDI had been flagged for years.

The Bank of England's Financial Policy Committee highlighted the need to monitor risks around LDI funds' use of leverage in 2018, BoE deputy governor Jon Cunliffe said this month.

There were more warnings this year, especially as rates began to soar.

Pensions consultants Mercer warned clients in June to "act quickly" to make sure they had cash. Aon said in July that pension funds should prepare for "urgent intervention" to protect their hedges.

TPR had "consistently alerted trustees to liquidity risk", CEO Charles Counsell said this week.

Yet in the slow-moving world of pension funds, where trustees and consultants tend to draft investment strategy shifts over years, not weeks, few funds were reducing leverage or boosting collateral, according to consultants and trustees.

Some of the most sophisticated pension schemes were even bulking up on LDI this year, after rates started to rise.

The Universities Superannuation Scheme, Britain's biggest pension fund, earlier this year partly linked a decision to raise exposure to LDI to the "distinct possibility of further falls in UK real interest rates", against which it needed to protect its 90-billion-pound portfolio.

Britain's 30-year inflation linked bond yield has tripled since late June.

In a statement this week USS defended its approach, noting it had plenty of cash to meet margin calls and that it was not a forced seller of assets. It said it was comfortable if rates rose and hedging became costlier.

That discussion had barely started elsewhere.

"When people talked about interest rates, all they obsessed about was interest rates falling," said David Fogarty, an independent trustee at professional pension scheme trustee provider Dalriada Trustees.

"There were not many discussions about leverage either."

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>>> The next financial crisis may already be brewing — but not where investors might expect


MarketWatch

Sept. 14, 2022

By Joseph Adinolfi


https://www.marketwatch.com/story/the-next-financial-crisis-may-already-be-brewing-but-not-where-investors-might-expect-11663170963


As the Fed prepares to kick its balance-sheet runoff into high gear, some on Wall Street are worried that thinning Treasury-market liquidity could create a perfect storm.

The Fed’s balance-sheet unwind, which is kicking into high gear this month, could create problems for the bond market.

A growing number of traders, academics, and bond-market gurus are worried that the $24 trillion market for U.S. Treasury debt could be headed for a crisis as the Federal Reserve kicks its “quantitative tightening” into high gear this month.

With the Fed doubling the pace at which its bond holdings will “roll off” its balance sheet in September, some bankers and institutional traders are worried that already-thinning liquidity in the Treasury market could set the stage for an economic catastrophe — or, falling short of that, involve a host of other drawbacks.

In corners of Wall Street, some have been pointing out these risks. One particularly stark warning landed earlier this month, when Bank of America interest-rate strategist Ralph Axel warned the bank’s clients that “declining liquidity and resiliency of the Treasury market arguably poses one of the greatest threats to global financial stability today, potentially worse than the housing bubble of 2004-2007.”

How could the normally staid Treasury market become ground zero for another financial crisis? Well, Treasurys play a critical role in the international financial system, with their yields forming a benchmark for trillions of dollars of loans, including most mortgages.

Around the world, the 10-year Treasury yield is considered the “risk-free rate” that sets the baseline by which many other assets — including stocks — are valued against.

But outsize and erratic moves in Treasury yields aren’t the only issue: since the bonds themselves are used as collateral for banks seeking short-term financing in the “repo market” (often described as the “beating heart” of the U.S. financial system) it’s possible that if the Treasury market seizes up again — as it has nearly done in the recent past — various credit channels including corporate, household and government borrowing “would cease,” Axle wrote.

Short of an all-out blowup, thinning liquidity comes with a host of other drawbacks for investors, market participants, and the federal government, including higher borrowing costs, increased cross-asset volatility and — in one particularly extreme example — the possibility that the Federal government could default on its debt if auctions of newly issued Treasury bonds cease to function properly.

Waning liquidity has been an issue since before the Fed started allowing its massive nearly $9 trillion balance sheet to shrink in June. But this month, the pace of this unwind will accelerate to $95 billion a month — an unprecedented pace, according to a pair of Kansas City Fed economists who published a paper about these risks earlier this year.

According to Kansas City Fed economists Rajdeep Sengupta and Lee Smith, other market participants who otherwise might help to compensate for a less-active Fed are already at, or near, capacity in terms of their Treasury holdings.

This could further exacerbate thinning liquidity, unless another class of buyers arrives — making the present period of Fed tightening potentially far more chaotic than the previous episode, which took place between 2017 and 2019.

“This QT [quantitative tightening] episode could play out quite differently, and maybe it won’t be as tranquil and calm as that previous episode started out,” Smith said during a phone interview with MarketWatch.

“Since banks’ balance sheet space is lower than it was in 2017, it’s more likely that other market participants will have to step in,” Sengupta said during the call.

At some point, higher yields should attract new buyers, Sengupta and Smith said. But it’s difficult to say how high yields will need to go before that happens — although as the Fed pulls back, it seems the market is about to find out.

‘Liquidity is pretty bad right now’

To be sure, Treasury market liquidity has been thinning for some time now, with a host of factors playing a role, even while the Fed was still scooping up billions of dollars of government debt per month, something it only stopped doing in March.

Since then, bond traders have noticed unusually wild swings in what is typically a more staid market.

In July, a team of interest-rate strategists at Barclays discussed symptoms of thinning Treasury market in a report prepared for the bank’s clients.

These include wider bid-ask spreads. The spread is the amount that brokers and dealers charge for facilitating a trade. According to economists and academics, smaller spreads are typically associated with more-liquid markets, and vice-versa.

But wider spreads aren’t the only symptom: Trading volume has declined substantially since the middle of last year, the Barclays team said, as speculators and traders increasingly turn to the Treasury futures markets to take short-term positions. According to Barclays’ data, average aggregate nominal Treasury trading volume has declined from nearly $3.5 trillion every four weeks at the beginning of 2022 to just above $2 trillion.

At the same time, market depth — that is, the dollar amount of bonds on offer via dealers and brokers — has deteriorated substantially since the middle of last year. The Barclays team illustrated this trend with a chart, which is included below.

Other measures of bond-market liquidity confirm the trend. For example, the ICE Bank of America Merrill Lynch MOVE Index, a popular gauge of implied bond-market volatility, was above 120 on Wednesday, a level signifying that options traders are bracing for more ructions ahead in the Treasury market. The gauge is similar to the CBOE Volatility Index, or “VIX”, the Wall Street “fear gauge” that measures expected volatility in equity markets.

The MOVE index nearly reached 160 back in June, which is not far from 160.3 peak from 2020 seen on March 9 of that year, which was the highest level since the financial crisis.

Bloomberg also maintains an index of liquidity in U.S. government securities with a maturity greater than one year. The index is higher when Treasurys are trading further away from “fair value”, which typically happens when liquidity conditions deteriorate.

It stood at roughly 2.7 on Wednesday, right around its highest level in more than a decade, if one excludes the spring of 2020.

Thinning liquidity has had the biggest impact along the short end of the Treasury curve — since short-dated Treasurys are typically more susceptible to Fed interest-rate hikes, as well as changes in the outlook for inflation.

Also, “off the run” Treasurys, a term used to describe all but the most recent issues of Treasury bonds for each tenor, have been affected more than their “on the run” counterparts.

Because of this thinning liquidity, traders and portfolio managers told MarketWatch that they need to be more careful about the sizing and timing of their trades as market conditions grow increasingly volatile.

“Liquidity is pretty bad right now,” said John Luke Tyner, a portfolio manager at Aptus Capital Advisors.

“We have had four or five days in recent months where the two-year Treasury has moved more than 20 [basis points] in a day. It’s certainly eye opening.”

Tyner previously worked on the institutional fixed income desk at Duncan-Williams Inc. and has been analyzing and trading fixed-income products since shortly after graduating from the University of Memphis.

The importance of being liquid

Treasury debt is considered a global reserve asset — just like the U.S. dollar is considered a reserve currency. This means it’s widely held by foreign central banks that need access to dollars to help facilitate international trade.

To ensure that Treasurys retain this status, market participants must be able to trade them quickly, easily and cheaply, wrote Fed economist Michael Fleming in a 2001 paper entitled “Measuring Treasury Market Liquidity”.

Fleming, who still works at the Fed, didn’t respond to a request for comment. But interest-rate strategists at JP Morgan Chase & Co, Credit Suisse and TD Securities told MarketWatch that maintaining ample liquidity is just as important today — if not more so.

The reserve status of Treasurys confers myriad benefits to the U.S. government, including the ability to finance large deficits relatively cheaply.

What can be done?

When chaos upended global markets in the spring of 2020, the Treasury market wasn’t spared from the fallout.

As the Group of 30’s Working Group on Treasury Market Liquidity recounted in a report recommending tactics for improving the functioning of the Treasury market, the fallout came surprisingly close to causing global credit markets to seize up.

As brokers pulled liquidity for fear of being saddled with losses, the Treasury market saw outsize moves that made seemingly little sense. Yields on Treasury bonds with similar maturities became entirely unhinged.

Between March 9 and March 18, bid-ask spreads exploded and the number of trade “failures” — which occur when a booked trade fails to settle because one of the two counterparties doesn’t have the money, or the assets — soared to roughly three times the normal rate.

The Federal Reserve eventually rode to the rescue, but market participants had been put on notice, and the Group of 30 decided to explore how a repeat of these market ructions could be avoided.

The panel, which was led by former Treasury Secretary and New York Fed President Timothy Geithner, published its report last year, which included a host of recommendations for making the Treasury market more resilient during times of stress. A Group of 30 representative was unable to make any of the authors available for comment when contacted by MarketWatch.

Recommendations included the establishment of universal clearing of all Treasury trades and repos, establishing regulatory carve-outs to regulatory leverage ratios to allow dealers to warehouse more bonds on their books, and the establishment of standing repo operations at the Federal Reserve.

While most of the recommendations from the report have yet to be implemented, the Fed did establish standing repo facilities for domestic and foreign dealers in July 2021. And the Securities and Exchange Commission is taking steps toward mandating more centralized clearing.

However, in a status update released earlier this year, the working group said the Fed facilities didn’t go far enough.

On Wednesday, the Securities and Exchange Commission is preparing to announce that it would propose rules to help reform how Treasurys are traded and cleared, including making sure more Treasury trades are centrally cleared, as the Group of 30 recommended, as MarketWatch reported.

See: SEC set to advance reforms to head off next crisis in $24 trillion market for U.S. government debt

As the Group of 30 noted, SEC Chairman Gary Gensler has expressed support for expanding centralized clearing of Treasurys, which would help improve liquidity during times of stress by helping to ensure that all trades settle on time without any hiccups.

Still, if regulators seem complacent when it comes to addressing these risks, it’s probably because they expect that if something does go wrong, the Fed can simply ride to the rescue, as it has in the past.

But Bank of America’s Axel believes this assumption is misguided.

“It is not structurally sound for the U.S. public debt to become increasingly reliant on Fed QE. The Fed is a lender of last resort to the banking system, not to the federal government,” Axel wrote.

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>>> SEC set to advance reforms to head off next crisis in $24 trillion market for U.S. government debt


MarketWatch

Sept. 14, 2022

By Chris Matthews


https://www.marketwatch.com/story/sec-set-to-advance-reforms-to-head-off-next-crisis-in-24-trillion-market-for-u-s-government-debt-11663164060?reflink=mw_share_twitter&mod=article_inline


Regulator wants to force more Treasury trades to be centrally cleared

The Securities and Exchange Commission is taking another step to address concerns over stability in the markets for U.S. government debt, with the agency set to propose new rules Wednesday to encourage central clearing Treasury security trades.

U.S. government debt loads have increased rapidly in recent decades, as the federal government combatted the economic effects of the 2008 financial crisis and the COVID-19 pandemic at the same time that an aging population has led to greater spending on healthcare and Social Security.

The market for U.S. Treasuries has grown to more than $24 trillion, expanding nearly ten fold over the past 20 years at the same time that major regulatory changes have blunted the ability of some bank-owned dealers of government debt to increase their purchases.

These dynamics have contributed to a series of liquidity crunches in the market, starting with the 2014 “flash rally” in Treasuries, followed by pressures in the Treasury repo market in September of 2019 and a liquidity crisis in March of 2020 related to the outbreak of COVID-19.

SEC Chairman Gary Gensler said in a statement Wednesday that encouraging more trades in the Treasury market to go through a central clearinghouse would help to bring more liquidity and certainty to it.

“Clearinghouses and central clearing play a vital role in our capital markets,” Gensler said. “Rather than having thousands of bilateral relationships amongst market participants, clearinghouses sit in the middle as the buyer to every seller and the seller to every buyer.”

A clearinghouse facilitates trades between market participants by guaranteeing the validity of trades and ensuring that buyers and sellers honor their obligations. This reduces risk in the market and adds stability to the financial system.

The rules being considered Wednesday would force clearinghouses to change their rules to require that their members submit for clearing all eligible secondary market transactions. The hope is this will greatly increase the share of trades in the market that are centrally cleared, with a recent study by the Treasury Market Practice Group estimating that only 13% of trades are currently centrally cleared.

The rule proposal is the latest in a series of potential new regulations aimed at overhauling the Treasury market. High-frequency trading firms are already organizing to oppose new rules that would require them to register as dealers of government debt, while the agency is also considering new regulations that would increase oversight of platforms that facilitate bilateral Treasury trades.

Further adding urgency to the reforms is the Federal Reserve’s ongoing program of quantitative tightening, which involves shrinking the central banks holdings of government debt

The Fed recently began accelerating that process, adding $95 billion per month in extra Treasury and mortgage-backed security debt to the market each month, on top of the substantial borrowing the U.S. government must engage in already to meet its liabilities.

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>>> The Fed’s Next Crisis Is Brewing in US Treasuries

The central bank can’t afford to let the world’s most important market seize up. It must act now to restore liquidity for Treasuries.

The Federal Reserve needs to restore liquidity to the US government bond market.


Bloomberg

By Robert Burgess

October 14, 2022


https://www.bloomberg.com/opinion/articles/2022-10-14/fed-s-next-crisis-is-brewing-in-us-treasuries


Markets have been whipsawed in recent weeks, first by talk that a cooling labor market would allow the Federal Reserve to “pivot” away from its aggressive interest-rate hiking campaign, and then by comments from central bankers that any such move would be premature — as Thursday’s hot consumer price index report proved. Perhaps there’s a solution that would allow the Fed to continue to battle inflation while also addressing what is rapidly becoming a potential crisis in the world’s most important market — US Treasuries.

The word “crisis” is not hyperbole. Liquidity is quickly evaporating. Volatility is soaring. Once unthinkable, even demand at the government’s debt auctions is becoming a concern. Conditions are so worrisome that Treasury Secretary Janet Yellen took the unusual step Wednesday of expressing concern about a potential breakdown in trading, saying after a speech in Washington that her department is “worried about a loss of adequate liquidity” in the $23.7 trillion market for US government securities. Make no mistake, if the Treasury market seizes up, the global economy and financial system will have much bigger problems than elevated inflation.

Massive Debt Pile

America's borrowing has soared since the financial crisis to service expanding budget deficits

But rather than slow, or even stop, the pace of rate increases, which would only resurrect the notion that there’s indeed a Fed “put” designed to bail out investors, the central bank could choose to slow quantitative tightening. Whereas quantitative easing, or QE, injects liquidity into the financial system through bond purchases, QT has the opposite effect. Instead of selling bonds, the Fed is allowing the $9 trillion or so of US Treasuries and mortgage securities it has accumulated on its balance sheet since the 2008 financial crisis to mature without replacing them. The amount of QT conducted by the Fed ramped up to the maximum of $95 billion per month in September from $47.4 billion.

Bloated Balance Sheet

The Fed's quantitative easing program boosted its assets to almost $9 trillion

The thing is, just like there’s no strong evidence that many years of QE had the desired effect of sparking inflation, it’s unlikely that QT will help temper inflation. What it is more likely to do – and is probably already doing – is cause havoc in the government bond market, the benchmark for all other markets that determine the cost of money for governments, companies and consumers.

A Bloomberg index shows liquidity in the Treasury market is worse now than during the early days of the pandemic and the lockdowns, when no one knew what to expect. Similarly, implied volatility as measured by the ICE BofA MOVE Index is near its highest since 2009. And in an unusual development that shows just how dysfunctional the Treasury market has become, the newest, most liquid securities, known as on-the-run notes, trade at a discount to older, tougher-to-trade off-the-run securities, according to data compiled by Bloomberg. Daily swings in interest-rate swaps have become extreme, proving further evidence of disappearing liquidity.

Bad Combination

The US Treasury market is suffering from declining liquidity and elevated volatility

A higher Liquidity Index means liquidity is moving lower.

What should be most concerning to the Fed and the Treasury Department is deteriorating demand at US debt auctions. A key measure called the bid-to-cover ratio at the government’s offering Wednesday of $32 billion in benchmark 10-year notes was more than one standard deviation below the average for the last year, according to Bloomberg News. Demand from indirect bidders, generally seen as a proxy for foreign demand, was the lowest since March 2021, data compiled by Bloomberg show. Although the Treasury is in no jeopardy of suffering a “failed auction,” lower demand means the government is paying more to borrow.

All this is coming as Bloomberg News reports that the biggest, most powerful buyers of Treasuries – from Japanese pensions and life insurers to foreign governments and US commercial banks – are all pulling back at the same time. “We need to find a new marginal buyer of Treasuries as central banks and banks overall are exiting stage left,” Glen Capelo, who spent more than three decades on Wall Street bond-trading desks and is now a managing director at Mischler Financial, told Bloomberg News.

Backing Away

Banks have started to reduce their holdings of Treasury and agency securities

The US bond market, which sets the tone for debt markets worldwide, is hardly alone. The ructions in UK gilts the last two weeks laid bare the liquidity crisis bubbling in most major sovereign debt markets. From the Fed’s perspective, it’s probably hesitant to tinker with QT for fear of being seen as more concerned with bailing out Wall Street fat cats than taming inflation. But, again, QE and QT have been shown to have more of an impact on the smooth functioning of the financial system than the real economy. And it’s not like the Fed hasn’t tweaked its QT program before to address disruptions in the market’s plumbing. Recall that in 2019 the central bank halted QT and flooded the banking system with cash to arrest a large and unsettling rise in repo rates that led to undue stresses. Another option is for the Fed to use its standing repurchase facility to provide a liquidity backstop to the Treasury market, which Yellen said, “can be helpful.”

The thinking among market participants is that the Fed will keep raising rates until something “breaks.” That something increasingly looks like it may be the Treasury market, which would be the worst-case scenario on anyone’s scorecard. Time is running out for the Fed to act.

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>>> The Most Powerful Buyers in Treasuries Are All Bailing at Once


Bloomberg

by Liz Capo McCormick, Garfield Reynolds and Michael MacKenzie

October 10, 2022


https://www.yahoo.com/now/most-powerful-buyers-treasuries-bailing-110000179.html


(Bloomberg) -- Everywhere you turn, the biggest players in the $23.7 trillion US Treasuries market are in retreat.

From Japanese pensions and life insurers to foreign governments and US commercial banks, where once they were lining up to get their hands on US government debt, most have now stepped away. And then there’s the Federal Reserve, which a few weeks ago upped the pace that it plans to offload Treasuries from its balance sheet to $60 billion a month.

If one or two of these usually steadfast sources of demand were bailing, the impact, while noticeable, would likely be little cause for alarm. But for every one of them to pull back is an undeniable source of concern, especially coming on the heels of the unprecedented volatility, deteriorating liquidity and weak auctions of recent months.

The upshot, according to market watchers, is that even with Treasuries tumbling the most since at least the early 1970s this year, more pain may be in store until new, consistent sources of demand emerge. It’s also bad news for US taxpayers, who will ultimately have to foot the bill for higher borrowing costs.

“We need to find a new marginal buyer of Treasuries as central banks and banks overall are exiting stage left,” said Glen Capelo, who spent more than three decades on Wall Street bond-trading desks and is now a managing director at Mischler Financial. “It’s still not clear yet who that will be, but we know they’re going to be a lot more price sensitive.”

Treasuries dropped again on Tuesday in Asia. The yield on 30-year US bonds jumped nine basis points to 3.94%, the highest since 2014, while that on 10-year notes climbed seven basis points to 3.95%.

To be sure, many have predicted Treasury-market routs over the past decade, only for buyers (and central bankers) to swoop in and support the market. Indeed, should the Fed pivot away from its hawkish policy tilt as some are wagering, the brief rally in Treasuries last week may be just the beginning.

Analysts and investors say that with the fastest inflation in decades hamstringing the ability of officials to loosen policy in the near term, this time is likely to be much different.

‘Massive Premium’

The Fed, unsurprisingly, represents the largest loss of demand. The central bank more than doubled it’s debt portfolio in the two years through early 2022, to in excess of $8 trillion.

The sum, which includes mortgage-backed securities, may fall to $5.9 trillion by mid-2025 if officials stick with their current roll-off plans, Fed estimates show.

While most would agree that lessening the central bank’s market-distorting influence is healthy in the long run, it nonetheless is a stark reversal for investors who have grown accustomed to the Fed’s outsized presence.

“Since the year 2000, there has always been a big central bank on the margin buying a lot of Treasuries,” Credit Suisse Group AG’s Zoltan Pozsar said during a recent live episode of Bloomberg’s Odd Lots podcast.

Now “we’re basically expecting the private sector to step in instead of the public sector, in a period where inflation is as uncertain as it has ever been,” Pozsar said. “We’re asking the private sector to take down all these Treasuries that we are going to push back into the system, without a glitch, and without a massive premium.”

Still, if it was just the Fed -- with its long-telegraphed balance-sheet runoff -- reversing course, market angst would be much more limited.

It’s not.

Prohibitively steep hedging costs have essentially frozen Tokyo’s giant pension and life insurance companies out of the Treasury market as well. Yields on US 10-year notes have slumped well below zero for Japanese buyers who pay to eliminate currency fluctuations from their returns, even as nominal rates have jumped above 4%.

Hedging costs have surged in tandem with the dollar, which has climbed more than 25% this year versus the yen, the most in data compiled by Bloomberg going back to 1972.

As the Fed has continued to boost rates to tame inflation in excess of 8%, Japan in September intervened to support its currency for the first time since 1998, raising speculation the country may need to start selling its hoard of Treasuries to further prop up the yen.

And it’s not just Japan. Countries around the world have been running down their foreign-exchange reserves to defend their currencies against the surging dollar in recent months.

Emerging-market central banks have trimmed their stockpiles by $300 billion this year, International Monetary Fund data show.

That means limited demand at best from a group of price-insensitive investors that traditionally put about 60% or more of their reserves into US dollar investments.

Peter Boockvar, chief investment officer at Bleakley Financial Group, said Monday it’s dangerous to just assume that the US Treasury will “ultimately find buyers to take the place of the Fed, foreigners and the banks.”

Citigroup Inc. flagged concern that the drop in foreign central bank holdings may set off fresh turmoil, including the potential for so-called value-at-risk shocks when sudden market losses force investors to rapidly liquidate positions.

Investors should bet on a drop in swap spreads “to position for continued CB selling and for further dash-for-cash style liquidity events,” Jason Williams, a Citigroup strategist, wrote in a report. VaR-shock-type events are more likely “given Fed risks are still pointed hawkish,” according to the report.

Banks Bail

Over the past decade, when one or two key buyers of Treasuries has seemingly backed away, others have been there to pick up the slack.

That’s not what’s occurring this go around, according to JPMorgan Chase & Co. strategist Jay Barry.

Demand from US commercial banks has dissipated as Fed policy tightening drains reserves out of the financial system. In the second quarter, banks purchased the least amount of Treasuries since the final three months of 2020, Barry wrote in a report last month.

“The drop in bank demand has been stunning,” he said. “As deposit growth has slowed sharply, this has reduced bank demand for Treasuries, particularly as the duration of their assets have extended sharply this year.”

It all adds up to a bearish undertone for rates, Barry said.

The Bloomberg US Treasury Total Return Index has lost about 13% this year, almost four times as much as in 2009, the worst full year result on record for the gauge since its 1973 inception.

Yet as the structural support for Treasuries gives way, others have stepped in to pick up the slack, albeit at higher rates. “Households,” a catch-all group that includes US hedge funds, saw the biggest jump in second-quarter Treasury holdings among investor types tracked by the Fed.

Some see good reason for private investors to find Treasuries attractive now, especially given the risk of Fed policy tightening tipping the US into a recession, and with yields at multidecade highs.

“The market is still trying to evolve and figure out who these new end buyers are going to be,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities. “Ultimately I think it’s going to be domestic accounts, because interest rates are moving to a point where they’re going to be very attractive.”

John Madziyire, a portfolio manager at Vanguard Group Inc., said large pools of excess savings held at US banks earning next to nothing will prompt “people to shift into the short-end of the Treasury market.”

“Valuations are good with the Fed getting closer to the end of its current hiking cycle,” Madziyire said. “The question is whether you are willing to take duration risk now or stay in the front-end until the Fed reaches its policy peak.”

Still, most see the backdrop favoring higher yields and a more turbulent market. A measure of debt-market volatility surged in September to the highest level since the global financial crisis, while a gauge of market depth recently hit the worst level since the onset of the pandemic.

“The Fed and other central banks had for years been the ones suppressing volatility, and now they’re actually the ones creating it,” Mischler’s Capelo said.

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>>> Another Crack in the Dollar’s Foundation


BY JAMES RICKARDS

SEPTEMBER 19, 2022


https://dailyreckoning.com/another-crack-in-the-dollars-foundation/


Another Crack in the Dollar’s Foundation

If you’re a longtime Daily Reckoning reader, you’ve heard of numerous plans to end the role of the U.S. dollar as the leading reserve currency.

These plans go by many names including the Great Reset, Bretton Woods II and other names suggesting some kind of deep dark conspiracy. The reality is less sinister but no less important.

The main thing to understand about the role of the dollar in the international monetary system is that there’s a big difference between a reserve currency and a payment currency.

A reserve currency refers to the unit of denomination of securities held in reserve by countries. It’s something like your savings account but it’s controlled by the treasury or finance ministry of each country.

These reserves are not actual currency deposits. They’re securities such as U.S. Treasury notes or German government notes (bunds). They’re denominated in dollars or euros but they’re securities, not cash. That’s the key.

If you don’t have a large, liquid government securities market with a good rule of law then you can’t qualify as a reserve currency. The U.S. Treasury market is the only market in the world large enough to absorb the savings of major trading powers such as China, Japan and Taiwan, so the dollar is the leading reserve currency.

That won’t change in the near future. When the dollar replaced sterling, it took 30 years from 1914 to 1944 to complete the process.

The Critical Difference Between a Reserve Currency and a Payment Currency

A payment currency is different. It’s the unit of account for paying for imports and exports, but it’s really just a way of keeping score. Periodically the trading partners settle the score with a transfer of assets that can include commodities, dollars, euros or gold.

It’s much easier to launch a new payment currency than a new reserve currency because you don’t need a large securities market. You just need a reliable ledger system and willing partners.

There are efforts underway to introduce new payment currencies and new payment channels, a process that was accelerated by the sanctions regime against Russia.

Following the Russian invasion of Ukraine, the U.S. ejected Russia from the SWIFT international banking payments system, froze dollar deposits around the world held by Russians, froze the dollar-denominated assets held by the Central Bank of Russia and prohibited U.S. investors from making new dollar investments in Russia.

None of these sanctions would be effective or even possible without the use of the dollar and the dollar payments system.

Now, Russia and China are working on a new system to replace SWIFT (the leading international payments communication channel) that would allow payments of yuan and rubles between them. From there it’s a short step to creating a new digital token as a way to keep score.

Who Needs Dollars?

If Russia receives yuan for oil it will be able to use the yuan to buy other goods from China including semiconductors and manufactured goods. If China earns rubles by selling goods to Russia it will be able to put those rubles to good use by buying Russian oil and natural gas with them.

This will lead to expanded trade ties between Russia and China and will begin a process of sidelining the U.S. dollar since it will no longer be the unit of account in Russian-Chinese trade.

In this regard, Russia is working quickly to build new payment channels to allow its commerce to proceed without reliance on the dollar. Meanwhile, Russia is still earning over $21 billion per month in hard currency payments for its oil and natural gas and Russia has found new customers in India and China to make up for lost customers in Western Europe.

Such trading relationships have a way of growing and including other trading partners to whom the ruble and yuan can prove useful. Other countries from the BRICS+ and elsewhere would be invited to join.

The dollar can be used for regime change by creating hyperinflation, bank runs and domestic dissent in countries targeted by the U.S. The U.S. can depose the governments of its adversaries, or at least blunt their policies, without firing a shot.

Nations around the world realize that as long as they are dependent on dollars for holding assets or purchasing global commodities, they will be under the thumb of those who control the dollar payments systems, which are basically the U.S. with some help from big European and Japanese banks.

Nations also know that while Russia is the current target of sanctions, others could easily be next. The only way to escape the sanctions is to escape the dollar.

A New OPEC

I recently reported that a new effort has begun to form a natural gas cartel with participation by Russia and Iran and eventually other countries.

This new organization could function like OPEC except that the strategic asset would be natural gas rather than oil. Other countries that could join this new cartel include Qatar and Azerbaijan. Russia, Iran and Qatar alone control about 60% of the world’s natural gas reserves.

Such a cartel would be in a position to strike exclusive deals with favored buyers like China, and to freeze out the dollar. It could introduce a new digital currency backed by a basket of commodities including gold.

This has geopolitical implications as well.

Imagine a three-way trade in which North Korea sells weapons to Iran, Iran sells oil to China and China sells food to North Korea. All of these transactions can be recorded on a blockchain and netted out on a quarterly basis with the net settlement payment made in gold shipped to the party with the net balance due. That’s a glimpse of what a future nondollar payments system looks like.

By itself, this development is not the end of the U.S. dollar in global payments. But it could be the beginning of the end of dollar dominance in trade. The difficulty is that these small steps could accumulate and gather momentum and eventually challenge the dollar as a reserve currency.

Nothing lasts forever, especially in international economics.

Historically such processes begin slowly but end with a rapid collapse in the role of the former champion currency. Investors should not rule out a similar process with the dollar.

The way to prepare for this is not with dollars, rubles or yuan. The way for investors to prepare is with gold.

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>>> Russia and China are brewing up a challenge to dollar dominance by creating a new reserve currency


Market Insider

by George Glover

Jun 24, 2022


https://markets.businessinsider.com/news/currencies/dollar-dominance-russia-china-rouble-yuan-brics-reserve-currency-imf-2022-6


Russia and the other 'BRICS' countries are working on an alternative reserve currency that would rival the IMF's SDR.

Russia and China are developing a new reserve currency with other BRICS countries, President Vladimir Putin said.
The basket currency would rival a US-dominated IMF alternative and let Russia widen its influence, an analyst said.

The dollar's dominance is already eroding as central banks diversify into the Chinese yuan and smaller currencies.

Russia is ready to develop a new global reserve currency alongside China and other BRICS nations, in a potential challenge to the dominance of the US dollar.

President Vladimir Putin signaled the new reserve currency would be based on a basket of currencies from the group's members: Brazil, Russia, India, China, and South Africa.

"The matter of creating the international reserve currency based on the basket of currencies of our countries is under review," Putin told the BRICS Business Forum on Wednesday, according to a TASS report. "We are ready to openly work with all fair partners."

The dollar has long been seen as the world's reserve currency, but its dominance in share of international currency reserves is waning. Central banks are looking to diversify their holdings into currencies like the yuan, as well as into non-traditional areas like the the Swedish krona and the South Korean won, according to the International Monetary Fund.

"This is a move to address the perceived US-hegemony of the IMF," ING's global head of markets Chris Turner said in a note. "It will allow BRICS to build their own sphere of influence and unit of currency within that sphere."

Russia's move comes after Western sanctions imposed over the Ukraine war all but cut the country out of the global financial system, curtailing access to its dollars and putting pressure on its economy.

"The speed with which western nations and its allies sanctioned Russian FX reserves (freezing around half) no doubt shocked Russian authorities," ING's Turner said.

"The Central Bank of Russia effectively admitted as much, and no doubt some BRICS nations — especially China — took notice of the speed and stealth at which the US Treasury moved," he added.

Those sanctions have likely encouraged Moscow and Beijing to work on an alternative to the IMF's international reserve asset, the special drawing rights, Turner suggested.

While it's not a reserve currency, the SDR is based on a basket of currencies made up of the US dollar, the euro, the British pound and Japan's yen — as well as China's yuan.

One possibility is that the BRICS basket currency could attract the reserves not just of the group's members, but also countries already in their range of influence, he suggested. These include nations in South Asia and the Middle East.

Russia has seen its currency the ruble rebound to above its pre-war level, thanks to central bank support, after it plunged 70% in less than two weeks after the Ukraine invasion. It has risen 15.2% in June to 1.87 cents. Meanwhile, the yuan has held steady at around $0.15 over the same period.

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>>> Accenture and Digital Dollar Foundation to trial United States CBDC this year


May 4 2021


https://cointelegraph.com/news/accenture-and-digital-dollar-foundation-to-trial-united-states-cbdc-this-year


Five pilot programs will gather data on a digital dollar in the United States over the next 12 months.

Accenture and Digital Dollar Foundation to trial United States CBDC this year


Fortune 500 company Accenture has teamed up with Digital Dollar Foundation to conduct Central Bank Digital Currency, or CBDC, trials in the United States.

Announced on Monday, May 3, the newly formed Digital Dollar Project will carry out five CBDC pilot programs over the next 12 months. The project’s objective is to generate data to inform U.S. policymakers on how to develop a domestic digital currency.

The Digital Dollar Project will launch three pilot programs in the next two months, generating data on the functional, sociological, and business benefits of a digital greenback.


Al Jazeera reports that former chair of the Commodity Futures Trading Commission and co-founder of the Digital Dollar Foundation, Christopher Giancarlo, emphasized the lack of U.S. data regarding CBDC:

“There are conferences and papers coming out every week around the world on CBDCs based on data from other countries. What there is not, is any real data and testing from the United States to inform that debate. We’re seeking to generate that real-world data.”

However, the Fed is taking a cautious approach as the guardian of the world’s reserve currency, the report added, with chairman Jerome Powell responding that it is far more important to get a digital dollar right than it is to be fast.

Giancarlo countered that Powell was correct to be cautious, but warned that the U.S. could fall further behind as China pushes ahead with its own CBDC testing and deployment.

While the U.S. Federal Reserve has been conducting research into the technology and applications for a CBDC, the United States lags behind the digital currency initiatives currently ongoing in numerous other jurisdictions.

China’s central bank and leading state banks have recently been preparing to test the digital yuan for a shopping festival on May 5.

Accenture has also worked on a number of CBDC projects in other countries, including Canada, Singapore, France, and Sweden — which has already completed the first phase of its pilot.

According to a study by the Bank for International Settlements, 80% of the world’s central banks are already researching central bank-issued digital currencies.

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