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>>> Gold Crosses $1,800 for the First Time Since 2011 Amid Record ETF Inflows
Gold Prices Surge Amid Record ETF Inflows
Investopedia
By DEBORAH D'SOUZA
Jul 8, 2020
https://www.investopedia.com/gold-crosses-usd1-800-for-the-first-time-since-2011-amid-record-etf-inflows-5070682?utm_campaign=quote-yahoo&utm_source=yahoo&utm_medium=referral&yptr=yahoo
The price of gold has risen past $1,800 psychological level
Spot gold up 17% in the first six months of 2020
Gold ETF net inflows in H1 2020 exceeds full year record set in 2016
COVID-19 uncertainty, central bank actions, weak dollar pushing price higher
SPDR Gold Shares and iShares Gold Trust see greatest inflows
This morning the gold spot price crossed the key $1,800 an ounce level for the first time since 2011. This comes against the backdrop of bullish forecasts. Goldman Sachs expects the metal could reach $2,000 in the next 12 months, and Bank of America sees it touching $3,000 an ounce in 18 months. Its all-time record of $1,921.17 was set in September 2011.
Gold has been surging this year, despite demand for jewelry, gold bars and coins declining in big markets like India and China, due to Western investors seeking safety in the asset. The global net inflows into Gold ETFs was $39.5 billion in the first half of this year, according to the World Gold Council. This already exceeds the record set for highest annual inflows set in 2016 ($23 billion). Even going by tonnage, in just six months it beat the previous full year record of 646 tonnes in 2009 by almost 100 tonnes. The demand has been so extraordinary, inflows in the first half of 2020 significantly exceeded multi-decade record levels of net gold purchased by central banks in 2018 and 2019.
As economies confronted uncertainty related to the pandemic and central banks introduced stimulus and cut interest rates, gold-backed funds have seen seven consecutive months of positive flows as of June. "Speculation over the potential impact of a second wave of COVID-19 infections on an already fragile global economy caused a renewed wave of fear and uncertainty. Meanwhile, ongoing asset purchases by central banks to mitigate the impact of the pandemic further reduced the opportunity cost of holding non-yielding assets such as gold," said the report. Also set to possibly push prices higher is the weakening U.S. dollar.
As the price of gold rose 17% over the first half of the year, global gold ETF holdings (in tonnage terms) increased by 25%. Global daily trading volumes reached a record $233 billion per day in March and was at $156.9 billion per day in June, comfortably above the 2019 daily average of $145.7 billion. By the end of June, gold-backed ETFs held 3,620 tonnes of gold worth $206 billion.
The SPDR Gold Shares and iShares Gold Trust funds lead the ranking of funds with greatest inflows in dollar/tonnes terms during H1. See the rest below.
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>>> Central Banks Driving Gold
BY JAMES RICKARDS
JUNE 29, 2020
https://dailyreckoning.com/central-banks-driving-gold/
Central Banks Driving Gold
Gold as an asset class is confusing to most investors. Even sophisticated investors are accustomed to hearing gold ridiculed as a “shiny rock” and hearing serious gold analysts mocked as “gold bugs,” “gold nuts” or worse.
As a gold analyst, I grew used to this a long time ago. But, it’s still disconcerting when one realizes the extent to which gold is simply not taken seriously or is treated as a mere commodity no different than soy beans or wheat.
The reasons for this disparaging approach to gold are not difficult to discern. Economic elites and academic economists control the central banks. The central banks control what we now consider “money” (dollars, euros, yen and other major currencies).
Those who control the money supply can indirectly control economies and the destiny of nations simply by deciding when and how much to ease or tighten credit conditions, and when to favor (or disfavor) certain types of lending.
When you ease credit conditions in a difficult environment, you help favored institutions (mainly banks) to survive. If you tighten credit conditions in a difficult environment, you can more or less guarantee that certain companies, banks or even nations will fail.
This power is based on money and the money is controlled by central banks, primarily the Federal Reserve System. However, the money-based power depends on a monopoly on money creation.
As long as investors and institutions are forced into a dollar-based system, then control of the dollar equates to control of those institutions. The minute another form of money competes with the dollar (or euro, etc.) as a store of value and medium of exchange, then the control of the power elites is broken.
This is why the elites disparage and marginalize gold. It’s easy to show why gold is a better form of money, why it’s more reliable than central bank money for preserving wealth, and why it’s a threat to the money-monopoly that the elites depend upon to maintain power.
Not only is gold a superior form of money, it’s also not under the control of any central bank or group of individuals. Yes, miners control new output, but annual output is only about 1.8% of all the above-ground gold in the world.
The value of gold is determined not by new output, but by the above-ground supply, which is 190,000 metric tonnes. Most of that above-ground supply is either owned by central banks and finance ministries (about 34,000 metric tonnes) or is held privately either as jewelry (“wearable wealth”) or bullion (coins and bars).
The floating supply available for day-to-day trading and investment is only a small fraction of the total supply. Gold is valuable and is a powerful form of money, but it’s not under the control of any single institution or group of institutions.
Clearly gold is a threat to the central bank money monopoly. Gold cannot be made to disappear (it’s too valuable), and it would be almost impossible to confiscate (despite persistent rumors to that effect).
If gold is a threat to central bank money and cannot be made to disappear, then it must be discredited. It becomes important for central bankers and academic economists to construct a narrative that’s easily absorbed by everyday investors that says gold is not money.
The narrative goes like this:
There’s not enough gold in the world to support trade and commerce.(That’s false: there’s always enough gold, it’s just a question of price. The same amount of gold supports a larger amount of transactions when the price is raised).
Gold supply cannot expand fast enough to keep up with economic growth.(That’s false: It confuses the official supply with the total supply. Central banks can always expand the official supply by printing money and buying gold from private hands. That expands the money supply and supports economic expansion).
Gold causes financial panics and crashes.(That’s false: There were panics and crashes during the gold standard and panics and crashes since the gold standard ended. Panics and crashes are not caused or cured by gold. They are caused by a loss of confidence in banks, paper money or the economy. There is no correlation between gold and financial panic).
Gold caused and prolonged the Great Depression.(That’s false: Even Milton Friedman and Ben Bernanke have written that the Great Depression was caused by the Fed. During the Great Depression, base money supply could be 250% of the market value of official gold. Actual money supply never exceeded 100% of the gold value. In other words, the Fed could have more than doubled the money supply even with a gold standard. It failed to do so. That’s a Fed failure not a gold failure).
You get the point. There’s a clever narrative about why gold is not money. But, the narrative is false. It’s simply the case that everyday citizens believe what the economists say (usually a bad idea) or don’t know enough economic history to refute the economists (and how could you know the history if they stopped teaching it fifty years ago).
The bottom line is that economists know that gold could be a perfectly usable form of money. The reason they don’t want it is because it dilutes their monopoly power over printed money and therefore reduces their political power over people and nations.
To marginalize gold, they created a phony narrative about why gold doesn’t work as money. Most people were too easily impressed by the narrative or simply didn’t know enough to challenge it. Therefore the narrative wins even if it is false.
If gold is viable as a form of money, what does gold’s recent price trading range combined with fundamental factors tell us about its investment prospects?
Right now, my models are telling me that gold is poised to breakout of its recent narrow trading range.
As always in technical analysis, the term “breakout” can mean sharply higher or sharply lower prices. Using fundamental analysis, a breakout to sharply higher prices is the expected outcome. This may be the last opportunity to buy gold below $2,000 per ounce.
For the past three months, gold has been trading in a range between $1,685 per ounce and $1,790 per ounce (it’s trading at about $1,782 today). For most of those three months gold was trading in a fairly narrow band.
When trading a volatile asset narrows to that extent, it’s a sign that the asset is ready for a material technical breakout. The question is will gold breakout to the upside or downside?
To answer that question, we can turn to fundamental analysis. (Technical analysis is data rich and is useful for spotting patterns, but it has low predictive analytic power).
One of the most important fundamental factors forcing gold higher is shown in Chart 1 below. This shows central bank purchases of gold bullion from 2017 to 2020 (each year is shown as a separate line measured in metric tonnes on the left scale).
Chart 1 – Central Bank purchases of gold
(in metric tonnes) 2017 – 2020
Chart 1 shows significant purchases of gold with 2019 running ahead of 2017 and 2018 at about 500 metric tonnes.
The chart also shows over 150 metric tonnes of gold purchases through April 2020, which puts 2020 on track to show 450 metric tonnes purchased for the year if present trends hold.
Of course, the actual result could be higher or lower. Cumulative central bank purchases from January 2017 to April 2020 are approximately 2,050 metric tonnes.
In fact, central banks went from being net sellers to net buyers of gold in 2010, and that net buying position has persisted ever since. The largest buyers are Russia and China, but significant purchases have also been made by Iran, Turkey, Kazakhstan, Mexico and Vietnam.
Here’s the bottom line:
Central banks have a monopoly on central bank money. Gold is the competitor to central bank money and most central banks would prefer to ignore gold. Yet, central banks in the aggregate are net buyers of gold.
In effect, central banks are signaling through their actions that they are losing confidence in their own money and their money monopoly. They’re getting ready for the day when confidence in central bank money will collapse across the board. In that world, gold will be the only form of money anyone wants.
Central banks are voting with their printing presses in favor of gold. What are you waiting for?
Here’s a once in a lifetime opportunity to front run central banks and acquire your own gold at attractive prices before the curtain drops on paper money.
Regards,
Jim Rickards
for The Daily Reckoning
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>>> Central Banks: Gold’s Greatest Ally
BY JAMES RICKARDS
JUNE 29, 2020
https://dailyreckoning.com/central-banks-golds-greatest-ally/
Central Banks: Gold’s Greatest Ally
You’re likely aware of the price action in gold lately. Gold has rallied from $1,591 per ounce on April 1 to $1,782 per ounce as of today. That’s a 12% gain in less than three months.
My earlier forecast was that gold would hit $1,776 by the Fourth of July. I guess I was a bit early!
Today’s price of $1,782 per ounce is the highest since 2012 and a 70% gain from the low of $1,050 per ounce at the end of the last bear market in December 2015.
The history of gold bull markets (1971–80 and 1999–2011) shows that the most powerful gains come toward the end of the bull market, not at the beginning.
That means even if you’ve missed out on the gold rally so far, you could still score huge gains as gold trends toward $10,000 per ounce or higher over the next four years.
As I’ve stated on multiple occasions, I didn’t just come up with that number out of the blue or to be controversial.
It’s simply the implied nondeflationary price of gold based on the M1 money supply and assuming it will have a 40% gold backing.
What’s driving this bull market in gold?
It’s not retail investors (apart from a small number who understand the dynamics) and it’s not institutional investors (institutional portfolio allocations to gold are typically about 1–2%).
Instead, the steady buying is coming from central banks (especially Russia and China) and from the super-rich, who typically store their gold in private nonbank vaults in Switzerland and other good rule-of-law jurisdictions.
The drive toward larger portfolio allocations to gold (in some cases up to 10%) is coming not just from the rich themselves but from their wealth managers and portfolio advisers.
This is a sea change.
For decades, wealth managers have rejected gold and pushed their clients into stocks, corporate credit and alternative investments including private equity. Recently all of those portfolio allocations have backfired. Equity markets crashed in March and are set for another fall soon after recovering over half the losses.
Corporate credit downgrades are at an all-time high and that market is being propped up by the Fed in nonsustainable ways. Private equity looks increasingly illiquid as IPO markets dry up and most hedge fund investors have badly underperformed.
This leaves gold as one of the best performing asset classes around.
But it’s still early. Here’s how I expect the process to play out…
As confidence in the dollar is eroded due to Fed money printing and congressional super-deficits, investors gradually look for alternative stores of wealth including gold.
These trends begin slowly and then gather momentum. As the dollar price of gold begins to soar, investors take notice. Even more people invest in gold, driving the price still higher.
Investors like to say that the price of gold is going up. But what is really happening is that the value of the dollar is going down (it takes more dollars to buy the same amount of gold).
This is the real inflation and the real dollar collapse most investors miss at the early stages.
Eventually, confidence in the dollar is lost completely, central bankers need to restore confidence, and they turn to some type of gold standard to do so.
We’re a long way from that point right now.
But if central banks, the super-rich and their advisers are all jumping on the gold bandwagon, what are you waiting for?
Gold’s worst ever bear market (2011–15) is behind us and gold is positioned for new highs of over $2,000 per ounce in the short run and much higher over the next several years.
The time to go for the gold is now.
Regards,
Jim Rickards
for The Daily Reckoning
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>>> Fed Is All In: Here Are the Key Features of Its Lending Programs
Bloomberg
By Christopher Condon
Updated June 30, 2020
https://www.bloomberg.com/news/articles/2020-05-14/fed-is-all-in-here-are-the-key-features-of-its-lending-programs?srnd=premium
Total lending stable through much of June near $100 billion
All nine emergency lending programs now open for business
The Federal Reserve has announced a raft of emergency lending programs, with approval from the Treasury Department, to help the U.S. economy weather the devastating impact of the coronavirus pandemic. These could ultimately deploy trillions of dollars in lending.
The programs seek to keep financial markets functioning and, in unprecedented steps, provide direct loans to businesses, states and local governments.
Here’s a round-up of the nine programs -- all of which are now up and running -- with details on their current status. Lending totals are as of June 24, with the exception of the corporate credit and municipal facilities which reflect totals as of June 23. Holdings will be updated every Thursday:
Commercial Paper Funding Facility (CPFF)
Announced: March 17
Launched: April 14
Treasury backstop: $10 billion
Program limit: none
Deployed: $4.3 billion (excluding $8.5 billion from backstop)
Purchases short-term company IOUs directly from U.S. corporate and municipal issuers. Eligible securities about $1.1 trillion. Demand has been low as the Fed’s mere pledge to backstop the market drew normal lenders back in.
Primary Dealer Credit Facility (PDCF)
Announced: March 17
Launched: March 20
Treasury backstop: none
Program limit: none
Deployed: $3.6 billion
Buys a wide range of securities -- with an agreement to sell back at a future date -- including investment-grade corporate debt, municipal debt, and mortgage- and asset-backed securities from primary dealers, which are the big banks and broker-dealers licensed to transact with the Fed. Its lending peaked in mid-April at around $33 billion, then faded as the short-term funding markets calmed.
Money Market Fund Liquidity Facility (MMFLF)
Announced: March 18
Launched: March 23
Treasury backstop: $10 billion
Program limit: none
Deployed: $22.9 billion
Finances the purchase of high-quality assets from U.S. money market mutual funds, including government debt, commercial paper and municipal debt. Eligible securities estimated at $600 billion to $700 billion, according to Fed officials. Lending peaked in early April at around $53 billion as withdrawals from prime money funds halted and then reversed.
Primary Market Corporate Credit Facility (PMCCF)
Announced: March 23
Launched: June 29
Treasury backstop: $50 billion
Program limit: $500 billion
Deployed: $0
Will buy investment-grade corporate debt with maturities of up to four years directly from U.S. issuers, and debt from some issuers downgraded after March 22.
Secondary Market Corporate Credit Facility (SMCCF)
Announced: March 23
Launched: May 12
Treasury backstop: $25 billion
Program limit: $250 billion
Deployed: $8.7 billion (excluding $31.9 billion from backstop)
Purchase investment-grade corporate debt from U.S. issuers with maturities up to five years in the secondary market, debt from some issuers downgraded after March 22 and some ETFs that buy corporate debt. The New York Fed began ETF purchases on May 12 and eligible corporate bonds after June 15.
Term Asset-Backed Securities Loan Facility (TALF)
Announced: March 23
Launched: June 16
Treasury backstop: $10 billion
Program limit: $100 billion
Deployed: $0 (excluding $8.5 billion from backstop)
Will purchase securities backed by credits to consumers and small businesses, including credit-card receivables, student loans, auto loans and leases, equipment loans and some small business loans.
Paycheck Protection Program Liquidity Facility (PPPLF)
Announced: April 6
Launched: April 16
Treasury backstop: none
Program limit: none
Deployed: $62.6 billion
Finances lending to small businesses that qualify for the Treasury’s Paycheck Protection Program. Congress appropriated a total of $669 billion for the loans, which can turn into grants if companies retain or hire back workers.
Municipal Liquidity Facility (MLF)
Announced: April 9
Launched: June 2
Treasury backstop: $35 billion
Program limit: $500 billion
Deployed: $1.2 billion (excluding $14.9 billion from backstop)
Will purchase municipal debt maturing in less than 36 months directly from states, counties and cities. After initial criticism, the Fed lowered the population thresholds for eligible counties and cities to 500,000 and 250,000, respectively. Issuers must have held an investment-grade rating as of April 8.
Main Street Lending Program
Announced: April 9
Launched: June 15
Treasury backstop: $75 billion
Program limit: $600 billion
Deployed: $0 (excluding $37.5 billion from backstop)
Will finance full recourse bank lending to U.S. companies with fewer than 15,000 employees or less than $5 billion in annual revenue. The four-year loans will be extended through three distinct facilities: one for new loans, another for increasing existing debt and a third for more heavily leveraged borrowers.
New Loan Facility: Maximum loan size of $25 million or four times 2019 adjusted EBITDA. Lenders retain a 5% stake in each loan. Minimum loan size is $500,000.
Expanded Loan Facility: Maximum loan size $200 million, 35% of a borrower’s outstanding debt or six times 2019 adjusted EBITDA. Lenders retain a 5% stake. Minimum loan size is $10 million.
Priority Loan Facility: Maximum loan size of $25 million or six times 2019 adjusted EBITDA. Lenders retain 15% stake. Minimum loan size is $500,000.
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>>> Have the BRICS hit a wall?
China is the world's second-largest economy and is fast catching up on the US amid a trade war, while Russia is, well, still Russia. So, as the BRICS meet up, we ask what is the point of this oddly divergent group.
DW
Nov 13, 2019
https://www.dw.com/en/have-the-brics-hit-a-wall/a-51182058
BRICs leaders
Cooperation among the five BRICS (Brazil, Russia, India, China, and South Africa) has set an example of a new type of international relations, Chinese State Councilor and Foreign Minister Wang Yi said recently.
The BRICS meet this week in Brasilia under the banner of "Economic Growth for an Innovative Future," with a focus on strengthening cooperation in science, technology and innovation, enhancing cooperation in the digital economy, more cooperation in the fight against transnational crime, money laundering and drug trafficking.
Wang went on to say that the BRICS had served as a stabilizer in international volatility and an example of a new type of international relations. "The BRICS should continue to promote multilateralism, take the lead in safeguarding the international system with the UN as its core and uphold the purposes and principles of the UN Charter."
Great hopes
The acronym BRIC (then excluding South Africa) was created by Goldman Sachs' analyst Jim O'Neill in 2001 for the emerging powers he believed would be, alongside the US, the five biggest economies of the world in the 21st century. Nobel Prize laureate Michael Spence soon after predicted the BRICS would replace the US and Europe as the key engines of the world economy. In a decade, Spence predicted, the BRICS' share of global GDP would exceed 50%.
Read more: Russia's comeback in Africa
Lacking access to the top jobs in international financial and development institutions, the BRICS set up the New Development Bank (NDB) in 2014 to finance infrastructure projects in the developing world. The institution was intended to rival the US- and Europe-dominated IMF and World Bank and were explicitly aimed to break the West's hold on finance and development. The bank had a total authorized capital of $100 billion (€91 billion) and was open to all members of the UN.
China's growth comes at a cost
Four years after starting operations, it had a $10.2 billion loan book and is one of the word's biggest multilateral development banks. Since then, the bank has lent over $5 billion in 21 projects. The BRICS at the same time created a Contingency Reserve Arrangement which would be accessed by BRICS members in need of funds.
Divergence
BRICS makes little sense today, S&P Global Ratings said in an emailed note in late October. It said the BRICS had lost relevance due to their diverging long-term economic trajectory. The economic performance of China and India over the past two decades contrasts with poor results in Brazil, Russia and South Africa, whose shares of global output have shrunk since 2000. India and China have exceeded the rating firm's growth predictions since the turn of the century. Russia and South Africa have failed to meet them since about 2005, Brazil since 2010.
"The diverging long-term economic trajectory of the five countries weakens the analytical value of viewing the BRICS as a coherent economic grouping," O'Neill wrote recenly. "I myself have occasionally joked that perhaps I should have called the acronym 'IC' based on the clear disappointment of the Brazilian and Russian economies in the current decade since 2011, where both have clearly significantly under-performed compared with what the 2050 scenario path laid out."
The five countries' economic models and policies are also divergent, as are their credit ratings. China's has gone up four rungs on the S&P ladder to A+, while the others have never got that high: Russia and India are five steps below and South Africa and Brazil seven and eight below respectively.
Facts and figures
South Africa was the last to enter the bloc and is the smallest of the countries with a population of about 50 million, compared to the 143 million of Russia, the 1.2 billion of India, the 1.34 billion in China and the estimated 210 million in Brazil.
BRICS together represent 42% of the global population, 23% of GDP, 30% of the territory and 18% of trade. Combined, they are bigger than the eurozone and unless China slows dramatically, the collective size of the BRICS countries will soon be as big as the US. Over the past decade, the combined BRICS' GDP has grown 179% and total trade of the member nations has risen 94%. From 2008 to 2017, the world's average growth rate was around 1%, but that of BRICS nations was about 8%.
What's it for?
"The significant question will be: How and to what extent will the BRICS take the next step in underwriting the rules of the game in an international order that is seeking leadership and direction?" Sanusha Naidu, senior researcher, University of South Africa, asked this year.
Read more: Why India pulled out of the RCEP free trade deal
The first official summit in 2009, held in Yekaterinburg, Russia, came up with a short declaration containing 15 commitments, according to the BRICS Research Group, based at the University of Toronto and the Russian Presidential Academy of National Economy and Public Administration. According to the BRICS Research Group's analysis, they show a surprisingly high rate of compliance: 77% on average, The Economist calculated. China keeps its word the most; South Africa the least, the weekly reported.
The BRICS have retained a certain credibility as "middle power," but in 2019, with Brazilian president Jair Bolsonaro's new rightwing agenda coming into focus, the situation appears fluid. His Finance Minister Paulo Guedes was named chair of NDB in April.
But one should also bear in mind that three of the five leaders head very authoritarian states, some of those most keen on an alternative to the global dominance of the US: Xi Jinping, Vladimir Putin, Jair Bolsonaro and Narendra Modi.
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>>> IMF's special drawing rights to the rescue
Peterson Institute for International Economics
by Christopher G. Collins (PIIE) and Edwin M. Truman (PIIE)
April 10, 2020
https://www.piie.com/blogs/realtime-economic-issues-watch/imfs-special-drawing-rights-rescue
Part of a series of proposals for the G20's* agenda on the COVID-19 pandemic.
The International Monetary Fund (IMF) has been the central institution of monetary cooperation for 75 years. It is again in the COVID-19 pandemic. However, its financial resources are limited to about $790 billion. Unlike a central bank, the Fund cannot expand its balance sheet with the click on a keyboard. It does, however, have one tool to augment instantaneously the international reserves of its members: allocating special drawing rights (SDR). G20 leaders should agree to support a $500 billion SDR allocation, which would instantly increase each IMF member’s international reserves. It would significantly benefit poorer countries and help build confidence at a time of global crisis, dramatically demonstrating international cooperation.
The IMF created the SDR in 1969 to supplement other reserve assets of member countries. It is not a currency but is based on a basket of international currencies comprising the US dollar, Japanese yen, euro, pound sterling, and Chinese renminbi. SDR are both assets and liabilities of the IMF. They are allocated to members in proportion to their shares of IMF quotas. A member can transfer SDR to another member and receive credit in a convertible or hard currency, for example, US dollars or euros.[1] The current interest rate on this credit is at its minimum of 0.050 percent.[2] An SDR allocation is a low cost way of adding to members' international reserves, allowing members to reduce their reliance on their limited reserves at a time of crisis.
ARGUMENTS AGAINST SDR ALLOCATIONS
Critics make four classic arguments against SDR allocations.
First, there is no general need to increase international liquidity. However, the international scramble for US dollars in the COVID-19 pandemic demonstrates that there is a general need. The Federal Reserve’s liquidity facilities are available mostly to advanced-country and emerging-market central banks, but that leaves out much of the developing world.
Second, the allocation would lead to an increase in inflation as countries spend their SDR. We learned from the global financial crisis of 2007–09 and developments since then that inflation is not likely to be an important issue for years to come.
Third, SDR would be allocated to countries without imposing any conditions on recipient countries’ economic policies. In the COVID-19 pandemic, providing financial assistance without strings attached is the number one approach being used by countries. Why should the IMF be different?
Fourth, the SDR would be allocated to countries that do not need a boost to their international reserves. Such countries would not need to use their SDR, but along with no benefit there would be no cost.
These last two arguments amount to a cynical statement that an SDR allocation would go to countries that either do not need or do not deserve a boost to their reserves. Nothing could be farther from the truth.
ARGUMENTS IN FAVOR OF SDR ALLOCATIONS
Set against these unconvincing arguments are strong arguments for an SDR allocation.
First, unlike most other large, fresh initiatives, an SDR allocation can be implemented quickly. A decision by the IMF executive board, for example, on May 1, 2020, to allocate $500 billion of SDR can be implemented by early August when the economic effects of the pandemic will still be raging.
SDR should be allocated quickly to maximize their positive impact on global economic confidence and their usefulness to recipient countries. Consequently, the proposal should confront the minimum of legal barriers in member countries. For the United States, the law limits to the size of the US quota in the IMF the amount of an SDR allocation during one basic period of five years that the Treasury secretary can vote for after giving a 90-day notice to Congress without receiving advance congressional approval.
The US IMF quota is $113.3 billion.[3] The US share of IMF quotas is 17.45 percent. Therefore, today the Treasury secretary could vote for an SDR allocation of up to $649 billion without receiving explicit congressional approval. These calculations suggest that the allocation could be as large as $600 billion and still be safely under the congressional limit. However, we stick with the illustrative figure of $500 billion in this blog.
The United States must approve any SDR allocation because an 85 percent majority vote is required, and the United States’ voting share is 16.51 percent of the total.
Second, the allocation of $500 billion of SDR would boost total international reserves, excluding gold, of the 189 IMF members by 4.5 percent from $11.2 trillion at the end of 2019. For many countries, this increase would be significant on average. SDR allocations are distributed based on quota shares, with the consequence that the countries with the largest quotas receive the largest allocations. However, IMF quotas are less skewed in the direction of large wealthy countries than reserve holdings. Consequently, an allocation of $500 billion of SDR would boost the international reserves of 77 IMF members by 10 percent or more. Emerging-market and developing economies would receive 38.45 percent of a $500 billion SDR allocation.[4] Fifty-six of these members would receive at least a 10 percent boost and 17 of them would receive increases of more that 50 percent. For advanced-country members, 21 would receive a boost of at least 10 percent and 4 would get increases of more than 50 percent (figures 1 and 2).
Figure 1 A $500 billion IMF allocation would provide substantial drawing rights to some advanced economies
Figure 2 Low-income countries would benefit most from a $500 billion IMF allocation
Third, the 76 low-income and other countries that are potentially eligible for loans from the World Bank’s International Development Association (IDA) would receive $22 billion in SDR. This amount might look tiny, but it would amount to a 9.4 percent boost to their combined international reserves. For 22 of the 76 countries the boost would be 20 percent or more. The $22 billion total compares favorably with average annual IDA commitments over the past three years of $21.2 billion and disbursements of $14.9 billion.
Fourth, countries that do not immediately need their SDR can lend or give them to other countries or lend or give them to the IMF.
A $500 billion SDR allocation would not solve all the challenges facing the IMF and its members from the COVID-19 pandemic, but it would help significantly. Most important, it would build confidence in countries to seek cooperative solutions in this difficult time.
NOTES
* The members of the G20 are Argentina, Australia, Brazil, Canada, China, the European Union, France, Germany, Japan, India, Indonesia, Italy, Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, and the United States.
1. Countries that issue convertible or hard currencies can provide their currencies. Countries that do not can provide such currencies from their reserves. In the latter case, the SDR mechanism permits the redistribution of reserves from countries with excess reserves to those with low reserves.
2. Interest is charged on the difference between a country’s allocation of SDR and its holdings. That rate is based on a weighted average of representative rates on short-term government debt instruments in money markets of countries issuing the five currencies in the basket valuation of the SDR subject to a minimum of five basis points.
3. Using 1 SDR = 1.36563 US dollars, the rate on April 3, 2020.
4. This analysis uses the IMF World Economic Outlook classification of countries into 34 advanced and 155 emerging-market and developing countries, rather than the historical classification used in quota negotiations. In the latter classification, emerging-market and developing countries receive a 42 percent share.
Note: Updated April 13. In the blog posted on April 10, some numbers and the associated figures for the increases in countries’ reserves from a $500 billion allocation of SDR were distorted due to a programming error.
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>>> A Crash in the Dollar Is Coming
The world is having serious doubts about the once widely accepted presumption of American exceptionalism.
Bloomberg
By Stephen Roach
June 8, 2020
https://www.bloomberg.com/opinion/articles/2020-06-08/a-crash-in-the-dollar-is-coming?srnd=premium
The U.S. government needs to take better care of the dollar.
The era of the U.S. dollar’s “exorbitant privilege” as the world’s primary reserve currency is coming to an end. Then French Finance Minister Valery Giscard d’Estaing coined that phrase in the 1960s largely out of frustration, bemoaning a U.S. that drew freely on the rest of the world to support its over-extended standard of living. For almost 60 years, the world complained but did nothing about it. Those days are over.
Already stressed by the impact of the Covid-19 pandemic, U.S. living standards are about to be squeezed as never before. At the same time, the world is having serious doubts about the once widely accepted presumption of American exceptionalism. Currencies set the equilibrium between these two forces — domestic economic fundamentals and foreign perceptions of a nation’s strength or weakness. The balance is shifting, and a crash in the dollar could well be in the offing.
The seeds of this problem were sown by a profound shortfall in domestic U.S. savings that was glaringly apparent before the pandemic. In the first quarter of 2020, net national saving, which includes depreciation-adjusted saving of households, businesses and the government sector, fell to 1.4% of national income. This was the lowest reading since late 2011 and one-fifth the average of 7% from 1960 to 2005.
Lacking in domestic saving, and wanting to invest and grow, the U.S. has taken great advantage of the dollar’s role as the world’s primary reserve currency and drawn heavily on surplus savings from abroad to square the circle. But not without a price. In order to attract foreign capital, the U.S. has run a deficit in its current account — which is the broadest measure of trade because it includes investment — every year since 1982.
Covid-19, and the economic crisis it has triggered, is stretching this tension between saving and the current-account to the breaking point. The culprit: exploding government budget deficits. According to the bi-partisan Congressional Budget Office, the federal budget deficit is likely to soar to a peacetime record of 17.9% of gross domestic product in 2020 before hopefully receding to 9.8% in 2021.
A significant portion of the fiscal support has initially been saved by fear-driven, unemployed U.S. workers. That tends to ameliorate some of the immediate pressures on overall national saving. However, monthly Treasury Department data show that the crisis-related expansion of the federal deficit has far outstripped the fear-driven surge in personal saving, with the April deficit 5.7 times the shortfall in the first quarter, or fully 50% larger than the April increment of personal saving.
In other words, intense downward pressure is now building on already sharply depressed domestic saving. Compared with the situation during the global financial crisis, when domestic saving was a net negative for the first time on record, averaging -1.8% of national income from the third quarter of 2008 to the second quarter of 2010, a much sharper drop into negative territory is now likely, possibly plunging into the unheard of -5% to -10% zone.
And that is where the dollar will come into play. For the moment, the greenback is strong, benefiting from typical safe-haven demand long evident during periods of crisis. Against a broad cross-section of U.S. trading partners, the dollar was up almost 7% over the January to April period in inflation-adjusted, trade-weighted terms to a level that stands fully 33% above its July 2011 low, Bank for International Settlements data show. (Preliminary data hint at a fractional slippage in early June.)
But the coming collapse in saving points to a sharp widening of the current-account deficit, likely taking it well beyond the prior record of -6.3% of GDP that it reached in late 2005. Reserve currency or not, the dollar will not be spared under these circumstances. The key question is what will spark the decline?
Look no further than the Trump administration. Protectionist trade policies, withdrawal from the architectural pillars of globalization such as the Paris Agreement on Climate, Trans-Pacific Partnership, World Health Organization and traditional Atlantic alliances, gross mismanagement of Covid-19 response, together with wrenching social turmoil not seen since the late 1960s, are all painfully visible manifestations of America’s sharply diminished global leadership.
As the economic crisis starts to stabilize, hopefully later this year or in early 2021, that realization should hit home just as domestic saving plunges. The dollar could easily test its July 2011 lows, weakening by as much as 35% in broad trade-weighted, inflation-adjusted terms.
The coming collapse in the dollar will have three key implications: It will be inflationary — a welcome short-term buffer against deflation but, in conjunction with what is likely to be a weak post-Covid economic recovery, yet another reason to worry about an onset of stagflation — the tough combination of weak economic growth and rising inflation that wreaks havoc on financial markets.
Moreover, to the extent a weaker dollar is symptomatic of an exploding current-account deficit, look for a sharp widening of America’s trade deficit. Protectionist pressures on the largest piece of the country’s multilateral shortfall with 102 nations – namely the Chinese bilateral imbalance — will backfire and divert trade to other, higher-cost, producers, effectively taxing beleaguered U.S. consumers.
Finally, in the face of Washington’s poorly timed wish for financial decoupling from China, who will fund the saving deficit of a nation that has finally lost its exorbitant privilege? And what terms — namely interest rates — will that funding now require?
Like Covid-19 and racial turmoil, the fall of the almighty dollar will cast global economic leadership of a saving-short U.S. economy in a very harsh light. Exorbitant privilege needs to be earned, not taken for granted.
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>>> What Is the Difference Between Blockchain and DLT?
What exactly is the difference between a blockchain and distributed ledgers? Here is a full guide on what each technology does and how.
Cointelegraph
by Simon Chandler
8-2-19
https://cointelegraph.com/news/what-is-the-difference-between-blockchain-and-dlt
What Is the Difference Between Blockchain and DLT?
"Blockchain" and "distributed ledger technology." Many of us have been guilty of confusing these two terms and using them interchangeably. But even though their meanings overlap in a number of areas, and even though they've both reached similar levels of public notoriety since the 2017 cryptocurrency bull market, they aren't quite identical.
Yes, they both generally refer to a record of information that's distributed across a network, and yes, they both foster a greater degree of transparency and openness than had been enabled by earlier, centralized databases or digital records. But this is where the analogies end, since blockchains and distributed ledger technology (DLT) each come with their own important distinguishing features.
Openness, decentralization, cryptography
There are two big distinctions, and depending on where you sit on the Bitcoin vs. blockchain spectrum, some qualify Bitcoin-style blockchains as largely superior to and more innovative than their distributed ledger counterparts while others qualify DLT as more useful for everyday commercial purposes.
The illustration below outlines how the two technologies relate to each other, showing that one way to implement DLT is through a blockchain:
The relationship between blockchain and DLT
Firstly, blockchains are generally public, meaning that anyone can view their transaction histories and that anyone can participate in their operations by becoming a node. They are, as cryptocurrency parlance puts it, “permissionless.” This is the key feature pointed out to Cointelegraph by Marta Piekarska, the director of ecosystem at Hyperledger. According to Piekarska:
“First and foremost: one is permission less, the other is permissioned. This means that in the first case anyone can participate in the network, in the other: only chosen participants have access to it. This also determined the size of the network: Bitcoin wants to grow infinitely, while in a permissioned blockchain space, the number of parties is smaller.”
Put simply, the public aspect of blockchains generally implies three interrelated things: 1) Anyone can use the blockchain, 2) anyone can serve as a validating node of the blockchain, and 3) anyone who becomes a node can, in turn, act as part of that blockchain's governance mechanism. In theory, this makes blockchains decentralized and democratic structures resistant to undue control or influence from any single party.
By contrast, a distributed ledger generally doesn't enable any or most of these public features. It restricts who can use and access it (hence the “permissioned” terminology), and it also restricts who can operate as a node. And in many cases, governance decisions are left to a single centralized company or body. Compared to the ideal of a public, decentralized blockchain, it exists solely to serve the interests of a concentrated group of commercial players and interests.
Below is an image detailing how centralized, decentralized and distributed networks are structured:
Different network types
And then there's the second main difference. As the name implies, blockchains consist in a series of time-stamped “blocks” that record the then-current state of the overall blockchain/cryptocurrency and that need to be cryptographically validated by a majority of the network in order to form the next entry in the chain. As Bitcoin Core developer Kalle Alm explained to Cointelegraph, this ensures a greater level of security for the blockchain, insofar as the need for cryptographic consensus makes it very difficult to fake transactions. Alm went on to say:
"Blockchains alleviate the trust requirement in a shared timestamped database. For a public cryptocurrency, this is obviously necessary or someone might just go and give themselves a million USD, but for a private database, especially when it is not a cryptocurrency but some more abstract form of smart contract platform, it starts to make less and less sense."
However, while some distributed ledgers aren’t cryptographically validated chains of blocks, it’s worth stressing that some are — or that they still feature cryptographic consensus. For instance, while R3’s Corda ledger doesn’t actually comprise a chain of blocks, it nonetheless relies on its notaries (i.e., nodes) reaching consensus over time-stamped transactions. Because of this, it should be emphasized that there’s really only one essential difference between blockchains and distributed ledgers, which is simply that one is permissionless and the other is permissioned. Michal Zajda, the blockchain architect at Aeternity blockchain, told Cointelegraph:
“The only difference between private and public blockchains is the range of availability. I can easily imagine deploying the Bitcoin protocol in a private cloud serving just a small group of users. The fundamental difference here is between permissionless blockchains — like Bitcoin, and permissioned ones. For permissionless ones, we do not need to trust any third party company to run it fairly and honestly.”
But assuming that a distributed ledger is private and isn't a time-stamped chain of blocks that results from cryptographic consensus, it often just amounts to a fairly conventional database that just happens to be shared among a select group of participants. This is the point made by Phil Chen, the decentralized chief officer at HTC Exodus. He told Cointelegraph that the difference between public and private blockchains is vast:
"In the enterprise space, people are talking about private blockchains, which technically are not blockchains but a better database management system. Nevertheless, it does have productivity gains; I call it a 9 to 10 innovation, whereas public blockchains like Bitcoin and Ethereum are 0 to 1 innovations that completely change the way we think and use money and computation. Bitcoin is a true public blockchain that is open, neutral, censorship resistant and borderless. And distributed ledgers are simply permissioned databases."
Privacy, scalability
But as Chen's explanation indicates, even though blockchains are arguably superior to distributed ledgers, DLT can still be a useful addition to the global economy's technological arsenal, particularly in cases in which it would be unwise to harness a truly public and decentralized blockchain. Alm added that:
"The strongest argument for a private blockchain seems to be when a bunch of banks get together to create a system for transferring money between each other. In this case, no bank would be content letting any of the other banks 'maintain' the database on their own, so a shared blockchain controlled by no one would make sense."
Added to this, the privacy of private ledgers is an obvious benefit for any company protective of its business or customer data. Still, the chief commercial officer at the Energy Web Foundation, Jesse Morris, contends that, even here, the privacy of public blockchains can actually be much stronger than some people realize. He told Cointelegraph that:
"A common criticism of public chains has to do with privacy (e.g., the details of every transaction are known to all). This criticism does not recognize two simple facts: 1) any dApp can shield certain transactional details by only transmitting the bare minimum of information necessary across any blockchain while keeping sensitive data off-chain and 2) even in private networks, privacy-preserving features are applied to protect sensitive information from participants on a private blockchain, and these same privacy preservation measures (e.g. EY Nightfall, other zero knowledge proofs) are beginning to be utilized on public blockchains as well."
In other words, there is a recognition that public blockchains potentially offer many of the privacy benefits promised by their more private rivals, and then some. Of course, private ledgers still generally have the advantage of being controlled by the companies that use them — and for big multinational banks that want to have control over their processes, this is obviously a big plus.
There's also the very salient benefit of improved scalability, since, as mentioned above, distributed ledgers are often shared yet largely centralized databases. As such, they can process hundreds — if not thousands — of transactions per second, while decentralized blockchains such as Bitcoin struggle to top seven transactions per second, all the while consuming vast quantities of electricity. This is perhaps the main benefit offered by distributed ledgers, and even if they don't offer much decentralization and transparency beyond previous database systems, it's one reason why they'll continue being used in the future.
<<<
>>> World Economic Forum 2021 Will Incorporate a Virtual Summit, Themed ‘The Great Reset’
Barron's
By Fang Block
June 3, 2020
https://www.barrons.com/articles/world-economic-forum-2021-will-incorporate-a-virtual-summit-themed-the-great-reset-01591217380
Next year's WEF will look at how the world can address the Covid-19 crisis and the political, economic, and social disruptions it has caused.
The 51st World Economic Forum (WEF) Annual Meeting is looking to be more inclusionary, incorporating a virtual summit to engage younger generations worldwide, alongside its in-person summit in Davos that brings together global leaders from government, business, and civil society, the Switzerland-based NGO announced Wednesday.
The theme for the twin summits, set for next January, will be the “Great Reset”—looking at how the world can address the Covid-19 crisis and the political, economic, and social disruptions it has caused.
“A Great Reset is necessary to build a new social contract that honors the dignity of every human being,” Klaus Schwab, founder and executive chairman of the WEF, said during a virtual meeting Wednesday. “We need to build into this new social contract our intergenerational responsibility to ensure that we live up to the expectations of young people.”
The WEF will set up hubs in more than 400 cities around the world to allow young people, or anyone interested, to interact with the leaders in Davos. This will also open up to more global media and social media input, while also providing them with access to the Annual Meeting discussions in Davos, the organization said.
“In order to secure our future and to prosper, we need to evolve our economic model and put people and the planet at the heart of global value creation,” said Charles, Prince of Wales, during the virtual announcement together with Schwab.
The WEF will also host a virtual series—the Great Reset Dialogues—leading up to the Annual Meeting in January, a joint initiative of the NGO and the Prince of Wales.
<<<
Rickards - >>> Why gold?
BY JAMES RICKARDS
JUNE 2, 2020
https://dailyreckoning.com/why-gold/
Why gold?
That’s a question I’m asked frequently. It’s usually followed by a comment along the lines of, “I don’t get it. It’s just a shiny rock. People dig it out of the ground and then put it back in the ground. What’s the point?”
I usually begin my reply by saying, “It’s not a rock, it’s a metal” and then go from there.
I have a lot of sympathy in these conversations. The fact that people don’t know much about gold today is not exactly their fault. The economics establishment of policymakers, academics and central bankers have closed ranks around the idea that gold is a taboo subject.
You can teach it in mining colleges, but don’t dare teach it in economics departments. If you have a kind word for gold in a monetary context, you are immediately labeled a “gold nut,” “gold bug,” “Neanderthal” or something worse. You are excluded from the conversation. Case closed.
Your correspondent holding a gold bar in a vault near Zurich, Switzerland. The bar is a so-called “good delivery” bar under the rules of the London Bullion Market Association. That means the bar weighs approximately 400 ounces, is 99.9% purity (or higher), and has a specified shape and dimensions. The bar I’m holding is worth about $700,000 at current market prices. In 1971 it was worth $14,000.
It wasn’t always this way. I was a graduate student in international economics in 1973-1974. Many observers believe that the gold standard “ended” on August 15, 1971 when President Nixon suspended the redemption of dollars for gold by foreign trading partners. That’s not exactly what happened.
Nixon’s announcement was a big deal. But, he intended the suspension to be “temporary” and he said so in the announcement. The idea was to call a kind of “time out” on redemptions, hold a new international monetary conference similar to Bretton Woods in 1944, devalue the dollar against gold (and other currencies such as the German Deutschemark and Japanese Yen), and then return to the gold standard at the new exchange rates.
I was able to confirm this plan with two of Nixon’s advisors who were with him at Camp David in 1971 when he made the announcement. I spoke to Kenneth Dam (an executive branch lawyer) and Paul Volcker (at the time, the Deputy Secretary of the Treasury). They both confirmed that the suspension of gold redemptions was meant to be temporary, and the goal was to return to gold at new prices.
Some of what Nixon wanted did happen, and some did not. The international conference took place in Washington, DC in December 1971 and resulted in the Smithsonian Agreement. The dollar was devalued from $35 per ounce to $38 per ounce (it was later devalued again to $42.22 per ounce), and the dollar was devalued against the major currencies of Germany, Japan, the UK, France and Italy.
Yet, the return to a true gold standard never happened. This was a chaotic time in the history of international monetary policy. Germany and Japan moved to floating exchange rates under the misguided influence of Milton Friedman who did not really understand the role of currencies in international trade and direct foreign investment. France dug in her heels and insisted on a return to a true gold standard.
Also, Nixon got caught up in his 1972 reelection campaign to be followed closely by the Watergate scandal, so he lost focus on gold. In the end, the devaluation was on the books but official gold convertibility never returned.
All of this monetary wrangling took a few years to play out. It was not until 1974 that the IMF officially declared that gold was not a monetary asset (although the IMF carried thousands of gold on its books in the 1970s, and still has 2,814 tons of gold, the third largest holding in the world after the U.S. and Germany).
The result was that my Class of 1974 was the last class to be taught gold as a monetary asset. If you took economics after that, gold had been consigned to the history books. No one taught it and no one learned it. Gold was still a “commodity” and something that was taught in mining colleges, but not in economics.
No wonder most people today don’t understand gold.
Maybe gold was banned from the classroom, but it was not banned from the real world. In fact, there was another major development just one year after I graduated. In 1974, President Ford signed a law that reversed President Franklin Roosevelt’s notorious Executive Order 6102. FDR made ownership of gold bullion by American citizens illegal in 1933. Gold was contraband like heroin or machine guns.
President Ford legalized it again. For the first time in over 40 years, it was once again legal for Americans to own gold coins and bars. The official gold standard was dead, but a new “private gold standard” had just begun.
That’s when things got interesting.
Now that gold traded freely, we saw the beginning of bull and bear markets, something that doesn’t happen on a gold standard where the price is fixed.
The two great bull markets were 1971-1980 (gold up 2,200%) and 1999-2011 (gold up 760%). In between these bull markets were the two bear markets (1981-1998 and 2011-2015), but the long-term trend is undeniable. Since 1971, gold is up 5,000% even after the bear market setbacks.
Now the third great bull market is underway. It began on December 16, 2015 when gold bottomed at $1,050 per ounce at the end of the 2011-2015 bear market. Since then, gold is up over 65%. That’s a nice gain, but it’s small change compared to 2,200% and 760% gains in the last two bull markets.
When it comes to capital and commodity markets, nothing moves in a straight line, especially gold.
But this pattern suggests the biggest gains in gold prices are yet to come. And right now, my models are telling me that gold is poised for historic gains as the third great bull market gains steam.
Right now gold’s trading at over $1,700. What could push it firmly over $2,000 per ounce and headed higher? There are three main drivers:
The first is a loss of confidence in the U.S. dollar in response to massive money printing to bail out investors in the pandemic. If central banks have to use gold as a reference point to restore confidence, the price will have to be $10,000 per ounce or higher. Any lower price would force central banks to reduce their money supplies to maintain parity, which would be highly deflationary.
The second driver is a simple continuation of the bull market. Using the prior two bull markets as reference points, a simple average of those gains during those durations would put gold at $14,000 per ounce or higher by 2025.
The third driver is panic buying in response to a new disaster. This could take the form of a “second wave” of infections from the Wuhan Virus, a failure of a gold ETF or the COMEX exchange to honor physical delivery requirements, or a victory by Joe Biden in the presidential election.
The gold market is not priced for any of these outcomes right now. It won’t take all three events to drive gold higher. Any one would do just fine. But, none of the three can be ruled out.
These events (and others) would push gold well past $2,000 per ounce, on its way to $3,000 per ounce and ultimately much higher along the lines described above.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
Rickards - >>> You May Never See “Normal” Again
BY JAMES RICKARDS
JUNE 2, 2020
https://dailyreckoning.com/you-may-never-see-normal-again/
You May Never See “Normal” Again
American cities are burning, there’s a lethal pandemic and we’re in a new Great Depression.
Other than that, everything’s fine.
People often ask me when things will “get back to normal.” Well, the answer could be never (or at least not for a long time).
Germany was not “normal” from 1914–54, for example. Social disorder is like a virus; it goes away eventually but not necessarily soon.
Meanwhile, we’re now in our third month of a national lockdown, with perhaps another month to go, depending on your locality.
Some states and cities are beginning to reopen, but they’re doing it in “phases,” so maybe your hair stylist reopened last week and your favorite restaurant will reopen next week.
The lockdown has certainly been painful for many. Even under the best of circumstances, anxiety levels went up, patience wore thin and tempers flared at trivial things. Cabin fever is a real disease.
Was it all worth it?
I’ve done a deep dive on this and the answer is almost certainly no.
The lockdown did slow the spread of the virus and did save some lives, that’s true. Yet the gains may only be temporary.
“Flattening the curve” does not mean reducing total infections and deaths. It just means stretching them out over a longer period so the hospital system is not overwhelmed.
There were much better solutions for this, including temporary hospitals and sending doctors and nurses from low-infection areas to those areas most in need, like New York City.
The biggest problem with the lockdown was that everyone counted the benefits but no one calculated the costs.
Many may have died and still could die from suicide, drug overdoses, alcoholism, domestic violence and other untreated medical conditions like cancer and heart attacks because patients were afraid to go to hospitals for fear of getting the virus.
In short, the lockdown may end up costing more lives than were saved.
That’s on top of trillions of dollars of lost wealth and lost economic output. That’s what happens when you put doctors in charge of the economy. Next time, it might be a good idea to let a few economic analysts into the room also.
But don’t worry, the optimists say. We’ll see a “V”-shaped recovery once the lockdowns are fully lifted.
You probably know the theory of a “V”-shaped recovery. The idea is that the economy fell sharply in March and April 2020 but it’s ready to bounce back with a record recovery this summer and fall.
The crash is one side of the “V” and the recovery is the other. The result is you end up recovering all of your losses and are ready for new growth from the old levels.
You’ll hear this a lot, but don’t believe it.
Remember “green shoots” in 2009 and 2010? They turned out to be brown weeds. Yes, the economy eventually recovered and the stock market went on to new highs, but it was the weakest recovery in U.S. history and those stock market highs took almost seven years to appear.
Things are much worse now.
Yes, we will hit a bottom this summer. And yes, a recovery will begin. But it will be long and hard.
Output may not get back to 2019 levels until 2022 or later. Unemployment will come down, but it is still expected to be higher than the worst of the 2008 crisis in 2023. The bankruptcies are just starting.
We’ve seen J. Crew, J.C. Penney, Neiman Marcus, Pier 1 Imports and Hertz all file for bankruptcy in recent weeks. There is a long line of name-brand companies right behind them preparing to go bankrupt also.
Not only will we not have a V-shaped recovery, but it will probably be an “L” (down and then sideways).
The 2009–2020 recovery was an “L” where the new trend for growth was 2.2% instead of the post-1980 trend of 3.2%.
Now the new recovery (when it begins) may have output of only 1.9% or less.
When each recovery is weaker than the one before and debt goes up faster than growth, it’s just a matter of time before you go broke — or eventually break out in inflation.
We probably won’t see inflation for a while because inflation has a strong psychological component and right now a deflationary mindset prevails.
That may change — it probably will — but we’re not there at this point.
Meanwhile, people are looking for “safe havens” right now.
Stock and Treasury market behavior can be explained as much by “safe haven” demand as fundamentals. But what happens when the safe haven doesn’t look so safe?
There’s still one place to go — gold.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> Hong Kong Headed for Crisis Again
BY JAMES RICKARDS
MAY 22, 2020
https://dailyreckoning.com/hong-kong-headed-for-crisis-again/
Hong Kong Headed for Crisis Again
I’ve been visiting Hong Kong for over 35 years. My first visit was in 1982 and my most recent was in May 2018.
All large cities change over time. New districts are developed. New buildings are erected and some old ones torn down.
Cities on the water, like Hong Kong, can use landfills to build more land and transform colourful (if dangerous) dockside alleys into sleek convention centres and hotel districts. None of that is unexpected, especially in dynamic cities like Hong Kong.
Yet in addition to physical infrastructure (which changes), cities have a kind of soul or zeitgeist, which is less susceptible to change.
St Mark’s Square in Venice, the Louvre in Paris and the Houses of Parliament in London are all defining and, if not eternal, at least help to keep a place rooted over time.
My visits to Hong Kong in the late 1990s and early 2000s were characterised by the same energy and dynamism I had encountered decades earlier.
I had routinely described Hong Kong to friends as the most energetic city in the world after New York.
The ‘One country, two systems’ seemed to work well together.
Yet as China’s growth ‘miracle’ gathered steam from 2002-2007, a legal heavy hand and gloomy administrative culture directed from Beijing descended on Hong Kong. You could feel it in the air.
At first, I noticed the lack of energy. The city was still rich and active, but there was a ‘business as usual’ attitude that was less driven than the energetic venue I had always known. Then I noticed a more depressed attitude among the bankers, investors and event planners I associated with.
They still made money, but the typical upbeat smile had been replaced with a more worried look.
This was accompanied by a rise in street protests against the heavy hand of Beijing on matters such as free speech, government autonomy and the relative importance of Hong Kong in the Chinese master plan.
Clearly, Shanghai had come into its own as the financial centre of China, so Hong Kong’s special role had been greatly diminished. The starkest evidence of change came during my last visit in May 2018…
I was presenting to a group of elite policymakers and property developers at the prestigious Asia Society local headquarters. At one point, one of the local elites took me aside, looked over his shoulder and at a near whisper said, ‘Be careful what you say.’
Global investors are accustomed to treating Hong Kong as a bastion of free markets and fair dealing. Those assumptions were suddenly no longer true, as Beijing began to treat Hong Kong as just another piece on a chessboard of market manipulation and geopolitical ambition.
The Chinese authoritarianism evident in Hong Kong last year only cemented that policy shift. What developments can we expect now that the freewheeling Hong Kong we knew from 1960-2005 has come to an end?
Last year’s unrest in Hong Kong was another symptom of the weakening grip of the Chinese Communist Party on civil society. The unrest spread from street demonstrations to a general strike and shutdown of the transportation system, including the cancellations of hundreds of flights.
This social unrest died down after the proposed bill to extradite Hong Kong citizens to China was pulled off the table. But now Beijing is clamping down hard with its proposed legislation to punish dissent.
Expect the pro-democracy protests to resume again. They may even grow larger. How will China react?
A direct Chinese invasion cannot be ruled out if local authorities cannot squash the unrest.
Of course, that would be the last nail in the coffin of the academic view of China as a good global citizen.
That view was always false, but now even the academics have started to understand what’s really going on. The situation in Hong Kong today is eerily reminiscent of the days leading up to the Tiananmen Square massacre on 4 June 1989.
In both cases, a particular cause for complaint gave rise to demonstrations, which soon grew and led to wider demands for political liberty and justice. Tiananmen started as a demonstration against inflation, which drew college students and housewives.
At its height, over one million protestors were active in Beijing, while demonstrations sympathising with the Tiananmen protestors appeared in over 400 Chinese cities.
Tiananmen Square is immediately adjacent to the Forbidden City and the Chinese leadership compound, so the demonstrators posed a potential threat to the government itself. Finally, hard-line Communist Party leaders ordered tanks and troops to attack the demonstrators.
No one knows the exact number killed, but estimates range from the low thousands to the tens of thousands. The entire incident has been covered up and is never mentioned in official communications or taught in Chinese schools…
As I described earlier, Last year’s Hong Kong demonstrations began on a small scale to protest a proposed law that would allow extradition of Hong Kong people to Beijing for trial on charges that arose in Hong Kong.
That would have deprived Hong Kong people of legal protections in local law, and could have subjected prisoners to torture and summary execution. The demonstrations grew exponentially and involved hundreds of thousands of protestors.
The list of demands also grew to include more democracy and freedom, and adherence to Hong Kong’s rule of law. Now the protests look like they’re starting again, and rightly so. Here’s China’s dilemma…
If Beijing tolerates more protests (and they succeed), they may lead to greater autonomy for Hong Kong at a time when Beijing is trying to strengthen and centralise its control. But if Beijing cracks down on the protestors, it will have another Tiananmen Square massacre on its hands with two important differences.
Hong Kong is a major city and will not be as easy to control as a confined square in Beijing.
And the rise of social media, mobile devices and live streaming guarantee that Beijing will not be able to hide or cover up any atrocities.
The jury is out on which path the Communists would take. But with China’s increasing belligerence in the region, don’t count out a strong response.
Unfortunately, the resolution may not be the peaceful one hoped for but another bloody massacre.
With the U.S. warning China against strong action in Hong Kong, let’s just hope the situation doesn’t light a powder keg resulting in a shooting war.
In case investors didn’t have enough to worry about with the coronavirus, they may have a whole lot more to deal with before too long.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> IMF Special Drawing Rights: A key tool for attacking a COVID-19 financial fallout in developing countries
Brookings Institution
by Kevin P. Gallagher, José Antonio Ocampo, and Ulrich VolzThursday,
March 26, 2020
https://www.brookings.edu/blog/future-development/2020/03/26/imf-special-drawing-rights-a-key-tool-for-attacking-a-covid-19-financial-fallout-in-developing-countries/
When the world economy was starting to face financial fragility, the external shock of the COVID-19 pandemic put it into freefall. In response, the United States Federal Reserve launched a series of facilities, including extending its swap lines to a number of other advanced economy central banks and to two emerging economies. Outside of the 14 countries that receive Fed swap lines, the rest of the world is left to fend for itself.
In 2017, the International Monetary Fund (IMF) considered a multilateral swap facility that would be open and unconditional to all countries. This was rejected by a minority of creditor shareholders that have a disproportionate share of voting rights at the IMF. To fend for themselves, the poorer countries of the world were essentially told that they should go to the IMF for loan packages. At the time of this writing, over 80 countries were discussing programs with the IMF.
Last week, we put forward a proposal for a major issuance of the IMF’s Special Drawing Rights (SDRs) as a key tool to attack the worldwide spread of the financial fallout. In essence, we proposed that IMF members agree to an allocation of the equivalent of at least $500 billion as part of the global response to the crisis generated by the coronavirus pandemic.
The proposal has been echoed by other experts. It is also supported by the G-24, and following an emergency G-20 ministerial call on Monday, IMF Managing Director Kristalina Georgieva stated that the IMF was exploring with the membership the proposal made by several low- and middle-income countries for a new SDR allocation—“as we did during the Global Financial Crisis.”
But some analysts, including Mark Sobel and Ousmène Mandeng, argue that an SDR allocation should not be part of the toolkit to combat the COVID-19 and subsequent financial crisis. In the following, we address the main concerns that those critics have raised around our proposal.
First, our critics rightly point out that the allocation would be made according to IMF quotas, which means that only a fraction of the allocated SDRs would go to developing and emerging economies. We recognized this in our proposal, indicating that slightly under two-fifths would be allocated to these countries. This is certainly too low, and reason why reform of IMF quotas is necessary. Yet a new SDR issuance is the only case in which these countries share in the “seignorage” of creating international money.
The new SDRs will become additional international reserves for emerging and developing countries, which are also their main users. Historically, they have also been utilized by advanced countries: In 1980, for example, the U.S. was the major user of its SDR allocations, followed by the U.K. Countries that want to use these assets can settle payments with central banks or sell the SDRs to them. Since their creation, there has always been an active internal market for these assets, and so IMF management has never had to exercise the power it has to force some of its members to buy the SDRs that some countries want to sell.
This raises two major contributions that developed countries can make to emerging and developing countries during the current crisis. One is that developed countries should be ready to exchange SDRs for their national currencies—dollars, euros, or other internationally-accepted money. The second is that, as we suggested, a new mechanism should be created by which those countries that do not use their SDRs can lend them to the IMF to increase the institution’s lending capacity.
SDRs are, of course, an unconditional resource, and the case for such an allocation is very strong during an exogenous shock such as the current one. Our critics worry that countries could use them as a substitute for “sound policies,” mixing structural adjustment and austerity. A global health emergency and liquidity crunch is not the time for those policies, but rather for the massive countercyclical monetary and fiscal policies that are being adopted by developed countries.
It is true that IMF members have agreed that SDRs should complement existing reserve assets. A major problem, however, is that they have been created in very small amounts through history, and generally during crises, when they in fact strongly complement the supply of other emergency resources. During the current crisis, they would complement the massive issuance of dollar assets by the Fed, which is already underway.
In fact, a traditional argument by many analysts is that SDRs should be allocated in a countercyclical way, as it is during crises that countries need additional reserves. It is true that they would have a cost for countries using them and that those costs would be higher for low-income countries than borrowing today from the IMF at zero interest. But the advantage is that the use of SDRs would be unconditional, allowing countries to avoid an IMF program.
A new SDR allocation would require an 85 percent vote, which means positive U.S. and European votes. We should remember, however, that the U.S. was not only a great supporter of the creation of SDRs in the 1960s, but also of later allocations, and notably that of 2009. There is no reason why they should see this as antagonistic to their role in the global monetary system, which will continue to be dominated by U.S. dollar assets. Indeed, voting for an issuance will dampen demand for swap lines from the Fed.
A multilateral swap facility at the IMF is also sorely needed, and versions have been proposed by Ted Truman, the G-20 Eminent Persons Group, and the IMF staff, among others. We also support the creation of such a facility in the IMF, which could be funded by an SDR allocation, again with countries not using their allocations making the funds available to the IMF to finance such a facility. As noted, this proposal was rejected by a minority of creditor countries at the IMF in 2017.
Lastly, we refute the notion that the IMF’s current firepower of $1 trillion—parts of which are already committed—will be enough to support its membership through this crisis. We hope to be proven wrong, but we are facing a global crisis of unprecedented proportions. Eighty countries have already approached the IMF for support, and this number is likely to rise as the crisis deepens. The international community needs to extend support so that public responses to the health crisis are not imperiled by financial crises.
COVID-19 does not discriminate between rich and poor countries, and until the virus is eradicated it will imperil the health of the world’s people and the global economy alike. This is a time for bold thinking and action. All solutions have trade-offs and limitations, but we hold that a large SDR allocation is part of the solution.
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>>> An emerging market debt crisis could be the next front in U.S.-China conflict
MarketWatch
May 23, 2020
By Chris Matthews and Sunny Oh
https://www.marketwatch.com/story/an-emerging-market-debt-crisis-could-be-the-next-front-in-us-china-conflict-2020-05-22?siteid=yhoof2&yptr=yahoo
China seeks to collect Belt-and-Road debt payments as other G20 countries announce a moratorium
Rising tensions between the U.S. and China over culpability for the coronavirus pandemic have helped reignite debates over trade, technology transfer and whether Chinese companies should be able to raise money in public U.S. markets, but the next front in the conflict between the world’s two largest economies could be over a brewing emerging-market debt crisis.
As a deepening global economic downturn threatens the ability of poorer nations to service sovereign debt, the G20 group of wealthy nations agreed in April to freeze loan repayments on bilateral loans, China is trying to make sure that its Belt and Road Initiative that has driven at least $350 billion in infrastructure loans to poorer nations is not threatened, according to Benn Steil, director of international economics at the Council on Foreign Relations .
“China signed on to the G-20 pledge, but later said that loans that are issued by China’s Export-Import Bank were not part of it,” Steil told MarketWatch, pointing to statements by Song Wei, a Chinese Ministry of Commerce Official in the Global Times, a newspaper aligned with the Communist Party of China. “You would have to be expert enough to know that Exim bank is effectively the piggy bank for BRI.”
U.S. Secretary of State Mike Pompeo criticized China’s lending policy with respect to Africa in particular in a recent telephone press conference. “There’s an enormous amount of debt that the Chinese Communist party has imposed on African countries all across the region,” he said adding that African nations should seek relief “on some deals that have incredibly onerous terms that will impact the African people for an awfully long time.”
Meanwhile, a group of 16 Republican Senators issued a letter to Pompeo and U.S. Treasury Secretary Steve Mnuchin calling on them to “pressure Chinese institutions to renegotiate the underlying debt of developing countries without a political quid pro quo,” and alleging that BRI loans are not made based on economic considerations alone, but for political leverage, calling the program “debt-trap diplomacy”
The senators cited the example of the takeover of the Sri Lankan Port of Hambantota by a state-owned Chinese firm under a 99-year lease after the country was unable to “repay over $1 billion of Chinese debt” related to its construction.
Others argue that the BRI program is a benign effort to boost economic growth at home and in the Greater China region, and that most of these deals are mutually beneficial. Deborah Bräutigam, director of the China Africa Research initiative at Johns Hopkins University has argued that China has long welcomed foreign investment and expertise, and Belt and Road is simply China exporting the very same tools to poorer countries around the world.
“BRI slots neatly into low-income countries’ development aspirations. China has excess foreign exchange, construction capacity, and mid-level manufacturing and needs to send all of these overseas,” she wrote in the American Interest. “The developing countries of Asia alone require infrastructure investments of about $1.7 trillion per year to maintain growth, reduce poverty, and mitigate climate change. In Africa, on the periphery of the BRI, the African Development Bank estimates annual infrastructure requirements to be $130 to $170 billion.”
Total emerging and frontier market debt has risen from roughly 75% of GDP to more than 100% in 2020, according to the International Monetary Fund, at the same time that credit ratings for issuers have fallen and the share of foreign owners of emerging market debt has risen.
“A majority of low-income economies were moving to a high risk of debt distress toward the end of last year, so it just stands to reason that any strain — let alone the kind of economic shock that we expect from this crisis — would lead to a reckoning of some sort,” Scott Morris, senior fellow at the Center for Global Development told MarketWatch.
After the onset of the most recent economic downturn, $100 billion in capital has fled emerging-market economies, while remittances from wealthy countries to poor is expected to fall another $100 billion over the course of the year, according to the IMF.
These dynamics have caused the interest rates at which poorer countries can borrow money to skyrocket and raised concerns over a looming emerging market debt crisis. Interest rates investors demand for emerging market debt have risen in recent months, with the spread between the yield on the JP Morgan Emerging Market Bond index and 10-year U.S. Treasury note TMUBMUSD10Y, 0.660% rising from 2.9% in December to 5.4% Thursday, according to Bloomberg.
China’s One Belt One Road Project has been a major driver of emerging market debt, particularly in Africa, according to Andrew Davenport, chief operating officer of international affairs consulting firm RWR Advisory Group.
Davenport said that the ongoing coronavirus epidemic could be a moment of truth for BRI. “What China doesn’t want to have happen, even if attributed to the virus, is for these countries to be unable to repay their debts, and that be seen as the epilogue to the Belt and Road experiment,” he said.
”The U.S. has long said that these loans weren’t driven by market principles, were not constructive, and in many instances, were serving the strategic power projection purposes of Beijing,” he added. “The inability of some of these countries to repay their Chinese loans could be seen as legitimizing that message. That’s the narrative China is anxious to avoid.”
Harvard University economist Kenneth Rogoff said, however, that to view the coming emerging-market debt crisis through the lens of U.S.-China power politics is to underestimate the scope of the problem. While the G20 moratorium on emerging market debt was a start, even if China engages in widespread BRI loan restructuring, more will have to be done, including by U.S.-led institutions like the World Bank.
“This is an opportunity” for the U.S. to counter China’s “agenda of projecting world power,” he said, by taking the lead on this issue and making a massive push for debt restructuring by governments, multinational institutions and private lenders.
“There’s so little recognition in Washington there may need to be massive humanitarian relief around the world. We see all these trillion dollar budgets, but I’ve seen nothing about foreign aid,” Rogoff added. “We’re almost certainly looking at the great depression in emerging markets.”
<<<
>>> Don’t Believe the Happy Talk
BY JAMES RICKARDS
MAY 11, 2020
https://dailyreckoning.com/dont-believe-the-happy-talk/
Don’t Believe the Happy Talk
Nothing like what we’re witnessing has ever happened before. Even the savviest analysts cannot yet internalize what happened.
As I explained earlier, comparisons to the 2008 crisis or even the 1929 stock market crash that started the Great Depression fail to capture the magnitude of the economic damage of the virus. You may have to go back to the Black Plague of the mid-14th century for the right comparison.
Unfortunately the economy will not return to normal for years. Some businesses will never return to normal because they’ll be bankrupt before they are even allowed to reopen.
Businesses like restaurants, bars, pizza parlors, dry cleaners, hair salons and many similar businesses make up 44% of total U.S. GDP and 47% of all jobs. This is where many of the job losses, shutdowns and lost revenues occurred.
The U.S. government response to the economic collapse has been unprecedented in size and scope. The U.S. has a baseline budget deficit of about $1 trillion for fiscal year 2020. Congress added $2.2 trillion to that in its first economic bailout bill. A second bailout bill added an additional $500 billion. Another bill may add another $2 trillion to the deficit.
Combining the baseline deficit, enacted legislation and anticipated legislation brings the fiscal 2020 deficit to $5.7 trillion. That’s equal to more than 25% of GDP and will push the U.S. debt-to-GDP ratio to as high as 130% once the lost output ($6 trillion annualized) is taken into account. The previous record debt for the U.S. was about 120% of GDP at the end of World War II.
This puts the U.S. in the same category as Greece, Lebanon and Japan when it comes to the most heavily indebted countries in the world.
The Federal Reserve is also printing money at an unprecedented rate. The Fed’s balance sheet is already above $6.7 trillion, up from about $4.5 trillion at the end of QE3 in 2015. The first rescue bill for $2.2 trillion included $454 billion of new capital for a special purpose vehicle (SPV) managed by the U.S. Treasury Department and the Fed.
Since the Fed is a bank, it can leverage the SPV’s $454 billion in equity provided by the Treasury into $4.54 trillion on its balance sheet. The Fed could use that capacity to buy corporate debt, junk bonds, mortgages, Treasury notes and municipal bonds and to make direct corporate loans.
Once the Fed is done, its balance sheet will reach $10 trillion.
That much is known. What is not known is how quickly the economy will recover. The best evidence indicates that the economy will not recover quickly, and an age of low output, high unemployment and deflation is upon us.
Here’s why the economic recovery will not exhibit the “pent-up demand” and other happy-talk traits you hear about on TV…
The first reason the economic downturn will persist is the lost income for individuals. Unemployment compensation and PPP loans will only scratch the surface of total lost income from layoffs, pay cuts, reduced hours, business failures and individuals who are not only unemployed but drop out of the workforce entirely.
In addition to lost wages through layoffs and pay cuts, many other workers are losing pay in the form of tips, bonuses and commissions. Even a fully employed waitress or salesperson cannot collect tips or sales commissions if there are no customers. This illustrates how the economy is tightly linked so that problems in one sector quickly spread to other sectors.
In addition to lost individual income, there is a massive loss of business income. Earnings per share of publicly traded companies are not only declining in the second quarter (and likely the third quarter) but many are negative.
Lost business income will be another source of lower stock valuations and a source of dividend cuts. Reduced dividends are also a source of lost income for individual stockholders who rely on dividends to pay for their retirements or medical expenses.
Programs such as PPP and other direct government-to-business loans will not come close to compensating for the losses described above. The loans (which can turn into grants) will help for a month or two but are not a permanent solution to lost customers.
For still other firms, the loans won’t help at all because the firms are short of working capital and will simply close their doors for good and file for bankruptcy. This means the jobs in those enterprises will be permanently lost.
From these straightforward events (lost individual income, lost business income, dividend cuts and bankruptcies) come a host of ripple effects.
Once the government aid is distributed, many recipients will not spend it (as hoped) but will save it. Such savings are called “precautionary.” Even if you are not laid off, you may worry that your job is still in jeopardy. Any income you receive will either go to pay bills or into savings “just in case.”
In either case, the money will not be used for new spending. At a time when the economy needs consumption, we will not get it. The economy will fall into a “liquidity trap” where saving leads to deflation, which increases the value of cash, which leads to more saving. This pattern was last seen in the Great Depression (1929–40) and will soon be prevalent again.
Even if individuals were inclined to spend, there would be reduced spending in any case because there are fewer things to spend money on. Shows and sporting events are called off. Restaurants and movie theaters are closed. Travel is almost nonexistent, and no one wants to hop on a cruise ship or visit a resort until they can be assured that the risk of COVID-19 is greatly reduced.
This will guarantee a continued slow recovery and persistent deflation, which makes the slow recovery worse.
In addition to these constraints on demand, there are serious constraints on supply. Global supply chains have been seriously disrupted due to shutdowns and transportation bottlenecks. Social distancing will slow production even at those facilities that are open and can get needed inputs.
One case of COVID-19 in a factory can cause the entire factory to be shut down for a two-week quarantine period. Companies that depend on the output of that factory to manufacture their own products will also be shut down.
Beyond these direct effects of lost income and lost output, there are significant indirect effects on the willingness of entrepreneurs to invest and of individuals to spend.
First among these is the “wealth effect.” When stock values drop 20–30% as they have recently, investors feel poorer even if they have substantial net worth after the drop. The psychological effect is to cause people to reduce spending even if they can afford not to.
This means that spending cutbacks come not only from the middle class and unemployed but also from wealthier individuals who feel threatened by lost wealth even if they have continued income.
Finally, real estate values will collapse as tenants refuse to pay rent and landlords default on their mortgages, putting properties into foreclosure.
None of these negative economic consequences of the New Depression are amenable to easy fixes by the Congress or the Fed.
Deficit spending will not “stimulate” the economy as the recipients of the spending will pay bills or save money. The Fed can provide liquidity and keep the lights on in the financial system, but it cannot cure insolvency or prevent bankruptcies.
The process will feed on itself expressed as deflation, which will encourage even more savings and discourage consumption. We’re in a deflationary and debt death spiral that has only just begun.
Based on this analysis, investors should expect the recovery from the New Depression to be slow and weak. The Fed will be out of bullets. Deficit spending will slow growth rather than stimulate it because the unprecedented level of debt will cause Americans to expect higher taxes, inflation or both.
The U.S. economy will not recover 2019 levels of GDP until 2022. Unemployment will not return even to 5% until 2026 or later.
This means stocks are far from a bottom. The S&P 500 Index could easily hit 1,870 (it’s 2,943 as of this writing) and the Dow Jones Index could fall to 15,000 (it’s 24,360 as of this writing).
Those are levels at which investors might want to consider investing in stocks.
Any effort to “buy the dips” in the meantime will just lead to further losses when the full impact of what’s described above begins to sink in.
Got gold?
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> Rickards: This Time IS Different
BY JAMES RICKARDS
MAY 11, 2020
https://dailyreckoning.com/rickards-this-time-is-different/
Rickards: This Time IS Different
Stocks stumbled out of the gate today, at least partially on fears about a resurgence in coronavirus cases.
South Korea, which did an excellent job containing the virus, has reported a new batch of cases. Japan and Singapore also reported new cases. Infections are increasing in Germany as well, where lockdown restrictions are being lifted.
We can also expect a rise in U.S. cases as several states lift their own restrictions.
From both epidemiological and market perspectives, the pandemic has a long way to go. Its economic effects are already without precedent…
In the midst of this economic collapse, many investors and analysts return reflexively to the 2008 financial panic.
That crisis was severe, and of course trillions of dollars of wealth were lost in the stock market. That comparison is understandable, but it does not begin to scratch the surface.
This collapse is worse than 2008, worse than the 2000 dot-com meltdown, worse than the 1998 Russia-LTCM panic, worse than the 1994 Mexican crisis and many more panics.
You have to go back to 1929 and the start of the Great Depression for the right frame of reference.
But even that does not explain how bad things are today. After October 1929, the stock market fell 90% and unemployment hit 24%. But that took three years to fully play out, until 1932.
In this collapse the stock market fell 30% in a few weeks and unemployment is over 20%, also in a matter of a few weeks.
Since the stock market has further to fall and unemployment will rise further, we will get to Great Depression levels of collapse in months, not years. How much worse can the economy get?
Well, “Dr. Doom,” Nouriel Roubini, can give you some idea.
Roubini earned the nickname Dr. Doom by predicting the 2008 collapse. He wasn’t the only one. I had been warning of a crash since 2004, but he deserves a lot of credit for sounding the alarm.
The factors he lists that show the depression will get much worse include excessive debt, defaults, declining demographics, deflation, currency debasement and de-globalization.
These are all important factors, and all of them go well beyond the usual stock market and unemployment indicators most analysts are using. Those economists expecting a “V-shaped” recovery should take heed. That’s highly unlikely in the face of all these headwinds.
I’ve always taken the view that getting a Ph.D. in economics is a major handicap when it comes to understanding the economy.
They teach you a lot of nonsense like the Phillips curve, the “wealth effect,” efficient markets, comparative advantage, etc. None of these really works in the real world outside of the classroom.
They then require you to learn complex equations with advanced calculus that bear no relationship to the real world.
If economists want to understand the economy, they should talk to their neighbors and get out of their bubble.
The economy is nothing more than the sum total of all of the complex interactions of the people who make up the economy. Common sense, anecdotal information and direct observation are better than phony models every time.
So what are everyday Americans actually saying?
According to one survey, 89% of Americans worry the pandemic could cause a collapse of the U.S. economy. This view is shared by Republicans and Democrats alike.
Ph.D. economists dislike anecdotal information because it’s hard to quantify and does not fit into their neat and tidy (but wrong) equations. But anecdotal information can be extremely important.
With so many Americans fearing a collapse, it could create a self-fulfilling prophesy.
If enough people believe something it becomes true (even if it was not true to begin with) because people behave according to the expectation and cause it to happen.
The technical name for this is a recursive function, also known as a “feedback loop.” Whatever you call it, it’s happening now.
Based on that view and a lot of other evidence, we can forecast that the depression will get much worse from here despite the initial severity.
But as usual, the Ph.D. crowd will be the last to know.
Below, I show you why you shouldn’t believe the happy talk. We’re in a deflationary and debt death spiral that has only just begun. Read on for details.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> China: More Bark Than Bite
BY JAMES RICKARDS
MAY 6, 2020
https://dailyreckoning.com/china-more-bark-than-bite/
China: More Bark Than Bite
I’ve made many visits to China over the past thirty years and have been careful to move beyond Beijing (the political capital) and Shanghai (the financial capital) on these trips.
My visits have included Chongqing, Wuhan (the origin of the coronavirus outbreak), Xian, Nanjing, new construction sites to visit “ghost cities,” and trips to the agrarian countryside.
My trips included meetings with government and Communist Party officials and numerous conversations with everyday Chinese people.
In short, my experience with China goes well beyond media outlets and talking heads. In my extensive trips around the world, I have consistently found that first-hand visits and conversations provide insights that no amount of expert analysis can supply.
These trips have been supplemented by reading an extensive number of books on the history, culture and politics of China from 3,000 BC to the present. This background gives me a much broader perspective on current developments in China.
An objective analysis of China must begin with its enormous strengths. China has the third largest territory in the world, with the world’s largest population (although soon to be overtaken by India).
China also has the fifth largest nuclear arsenal in the world with 280 nuclear warheads, about the same as the UK and France, but well behind Russia (6,490) and the U.S. (6,450). China is the largest gold producer in the world at about 500 metric tonnes per year.
Its economy is the second largest economy in the world, behind only the U.S. China’s foreign exchange reserves (including gold) are the largest in the world.
By these diverse measures of population, territory, military strength and economic output, China is clearly a global super-power and the dominant presence in East Asia.
Yet, these blockbuster statistics hide as much as they reveal.
China’s per capita income is only $11,000 per person compared to per capita income of $65,000 in the United States. Put differently, the U.S. is only 38% richer than China on a gross basis, but it is 500% richer than China on a per capita basis (of course the massive economic fallout from the coronavirus will have an impact).
China’s military is growing stronger and more sophisticated, but it still bears no comparison to the U.S. military when it comes to aircraft carriers, nuclear warheads, submarines, fighter aircraft and strategic bombers.
Most importantly, at $11,000 per capita GDP, China is stuck squarely in the “middle income trap” as defined by development economists.
The path from low income (about $5,000 per capita) to middle-income (about $10,000 per capita) is fairly straightforward and mostly involves reduced corruption, direct foreign investment and migration from the countryside to cities to pursue assembly-style jobs.
The path from middle-income to high-income (about $20,000 per capita) is much more difficult and involves creation and deployment of high-technology and manufacture of high-value-added goods.
Among developing economies (excluding oil producers), only Taiwan, Hong Kong, Singapore and South Korea have successfully made this transition since World War II. All other developing economies in Latin America, Africa, South Asia and the Middle East including giants such as Brazil and Turkey remain stuck in the middle-income ranks.
China remains reliant on assembly-style jobs and has shown no promise of breaking into the high-income ranks.
To escape the middle income trap requires more than cheap labor and infrastructure investment. It requires applied technology to produce high-value added products. This explains why China has been so focused on stealing U.S. intellectual property.
China has not shown much capacity for developing high technology on its own, but it has been quite effective at stealing such technology from trading partners and applying it through its own system of state-owned enterprises and “national champions” such as Huawei in the telecommunications sector.
But now the U.S. and other countries are cracking down on China’s technology theft and China cannot generate the needed technology through its own R&D.
In short, and despite enormous annual growth in the past twenty years, China remains fundamentally a poor country with limited ability to improve the well-being of its citizens much beyond what has already been achieved.
And that has serious implications for China’s leadership…
China’s economy is not just about providing jobs, goods and services. It is about regime survival for a Chinese Communist Party that faces an existential crisis if it fails to deliver.
It is an illegitimate regime that will remain in power only so long as it provides jobs and a rising living standard for the Chinese people. The overriding imperative of the Chinese leadership is to avoid societal unrest.
If China’s job machine seizes, as parts of it did during the coronavirus outbreak, Beijing fears that popular unrest could emerge on a potentially scale much greater than the 1989 Tiananmen Square protests. This is an existential threat to Communist power.
President Xi Jinping could quickly lose what the Chinese call, “The Mandate of Heaven.”
That’s a term that describes the intangible goodwill and popular support needed by emperors to rule China for the past 3,000 years. If The Mandate of Heaven is lost, a ruler can fall quickly.
Even before the crisis, China has had serious structural economic problems that are finally catching up with it.
China is so heavily indebted that it is now at the point where more debt does not produce growth. Adding additional debt today slows the economy and calls into question China’s ability to service its existing debt.
Meanwhile, China’s real year-over-year growth tumbled 6.8% in the first quarter.
Besides the slowdown from the pandemic, China confronts an insolvent banking system and a real estate bubble.
Up to half of China’s investment is a complete waste. It does produce jobs and utilize inputs like cement, steel, copper and glass. But the finished product, whether a city, train station or sports arena, is often a white elephant that will remain unused. The Chinese landscape is littered with “ghost cities” that have resulted from China’s wasted investment and flawed development model.
Chinese growth has been reported in recent years as 6.5–10% but is actually closer to 5% or lower once an adjustment is made for the waste. Again, that was before the crisis.
Essentially, China is on the horns of a dilemma with no good way out. China has driven growth for the past eight years with excessive credit, wasted infrastructure investment and Ponzi schemes.
The Chinese leadership knows this, but they had to keep the growth machine in high gear to create jobs for millions of migrants coming from the countryside to the city and to maintain jobs for the millions more already in the cities.
The two ways to get rid of debt are deflation (which results in write-offs, bankruptcies and unemployment) or inflation (which results in theft of purchasing power, similar to a tax increase).
Both alternatives are unacceptable to the Communists because they lack the political legitimacy to endure either unemployment or inflation. Either policy would cause social unrest and unleash revolutionary potential.
The question is, will China pursue an aggressive posture against the U.S. to distract the people?
China does not want war at this time. But diverting the people’s attention away from domestic problems toward a foreign foe is an old trick leaders use to unite the people in times of uncertainty.
If China’s leadership decides that the risk of losing legitimacy at home outweighs the risk of conflict with the United States, the likelihood of war rises dramatically.
I’m not making a specific prediction, but wars have started over less. This is a very dangerous time.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> China, Iran Are on the March
BY JAMES RICKARDS
MAY 6, 2020
https://dailyreckoning.com/china-iran-are-on-the-march/
China, Iran Are on the March
There is so much focus on the COVID-19 pandemic right now that Americans can’t be blamed if they’re not spending much time studying other developments.
That’s understandable, but inattention may be as dangerous as the virus itself. That’s because America’s adversaries are taking advantage of the situation by challenging U.S. interests in a set of geopolitical hot spots.
They believe we’re too distracted by the virus containment effort to mount a firm response.
At the same time, geopolitical confrontation is a classic way to rally a population against an outside threat, especially when they’re still hurting from the pandemic and the economic consequences. It’s one of the oldest tricks in the books to get the people behind the government.
This appears to be the case with China and Iran right now.
China in particular is trying to divert attention away from its own cover-up of the pandemic, which allowed it to spin out of control. So it’s engaging in a global propaganda campaign to try to blame the U.S. for the spread of the virus.
Both China and Iran have lied about the damage caused by the virus in their own countries. China officially reported about 4,600 fatalities and Iran officially reported about 6,200. But reliable sources suggest that the actual count of fatalities may be at least 10 times greater in both countries.
This could put actual fatalities in China and Iran about equal to the U.S. (over 70,000 dead).
Meanwhile, the U.S. has been reeling economically, and there’s no reason to believe that China and Iran are feeling any less pain. Let’s first consider China…
Not surprisingly, China has tried to take advantage of the situation by acting aggressively in the South China Sea and threatening Taiwan.
The South China Sea is a large arm of the Pacific Ocean surrounded by China, Vietnam, the Philippines, Malaysia, Brunei and Indonesia.
All six countries have claims to exclusive economic zones that extend several hundred miles from their coastlines.
Parts of the sea are international waters governed by the Law of the Sea Convention and other treaties. All of the other nations around the South China Sea have rejected China’s claims. But they’ve been pushed back to fairly narrow boundaries close to their coastlines.
China has ignored all of those claims and treaties and insists that it is in control of the entire body of water including islands, reefs and underwater natural resources such as oil, natural gas, undersea minerals and fisheries.
China has also become even more aggressive by designating the South China Sea reefs as city-level administrative units to be administered by mainland China.
And China has pumped sand onto reefs to build artificial islands that have then been fortified with airstrips, harbors, troops and missiles.
China has said it will never seek hegemony, but that’s clearly not true. It most certainly seeks hegemony in the region.
And it’s willing to enforce it. Several encounters have happened lately where Chinese coast guard vessels have rammed and sunk fishing boats from Vietnam and the Philippines.
But China’s aggression in the South China Sea can also jeopardize U.S. naval vessels.
The U.S. operates “freedom of navigation” cruises with U.S. Navy ships to demonstrate that the U.S. also rejects China’s claims. It’s not difficult to envision an incident that could rapidly escalate into something serious.
It’s also fair to assume that a weakened U.S. Navy has emboldened Chinese actions recently.
The two aircraft carriers the Navy has in the western Pacific, the Theodore Roosevelt and Ronald Reagan, were both taken out of action due to outbreaks of the coronavirus among their crews. That’s been a dramatic reduction in power projection in the region.
But neither side will back down, as neither wants to appear weak. This makes warfare a highly realistic scenario. It’s probably just a matter of time.
Meanwhile, Iran has harassed U.S. naval vessels in the Persian Gulf, launched new missiles and continued its support of terrorism in Iraq, Yemen and Lebanon.
These actions are more signs of weakness than strength, but they are dangerous nonetheless.
In the past 10 years, we’ve been through currency wars, trade wars and now pandemic.
Are shooting wars next? Pay attention to China, Iran and, yes, North Korea. They haven’t gone away either.
The world is a dangerous place — and the virus has only made it more dangerous.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> This “Cure” for the Economy Could Kill It
BY JAMES RICKARDS
MAY 4, 2020
https://dailyreckoning.com/this-cure-for-the-economy-could-kill-it/
This “Cure” for the Economy Could Kill It
The economy remains under lockdown, although some states are beginning to relax restrictions. As with so many other aspects of American life, there’s been a red state/blue state divide.
Red states are generally more willing to reopen their economies, while harder-hit coastal blue states are generally more reluctant to open theirs.
Regardless, the economic consequences of the lockdown have been devastating, and we’ll be feeling their effects for a very long time. We’ll also be feeling the effects of the massive monetary and fiscal responses to the crisis for a long time.
There are so many government “stimulus” programs underway to deal with the New Depression it’s hard to keep track.
The Federal Reserve has at least 10 asset purchase programs going including purchases of corporate debt, Treasury debt, municipal bonds, commercial paper, mortgages and more.
Many of these are being done in a “special-purpose vehicle” using $425 billion given to the Fed by the Treasury as a kind of Fed bailout. (Of course, the Treasury money comes from the taxpayers, so you’re paying for all of this.)
Regardless of the legal structure, the Fed is on its way to printing $5 trillion of new money on top of the $5 trillion it has already printed to keep the lights turned on at the banks.
On the fiscal side, Congress has authorized $2.2 trillion of new spending on top of the baseline $1 trillion deficit for fiscal year 2020, and just authorized another $600 billion last week.
A new bill for $1.5 trillion of added spending is now being debated. Added together, that’s $5 trillion of deficit spending for this year, and possibly more next year.
Meanwhile, stimulus supporters hope that the checks Americans are getting from the government will give the economy a boost by way of increased consumer spending.
But a recent survey showed that 38% of recipients saved the money and 26% paid off debt. So the stimulus really isn’t stimulating. It’s main effect is to increase the deficit and the national debt.
But don’t worry, say the supporters of Modern Monetary Theory (MMT). We know how to stimulate the economy and who cares about the debt? It hasn’t been a problem yet and we can expand it a lot more.
Until a few months ago, MMT was a quirky idea known to very few and understood by even fewer.
It actually wasn’t modern (the idea has been around for over 100 years) and it wasn’t much of a theory because there was no way to test it in a controlled environment.
The basic idea is that the U.S. government could merge the balance sheets of the Treasury and the Federal Reserve and treat them as if they were a consolidated entity. (That’s not legally true, but never mind.)
The Treasury could spend as much money as it wanted on anything it wanted. MMT asks, if the Treasury doesn’t spend money, how are people supposed to earn any?
Ideas like hard work, innovation and entrepreneurship don’t enter the discussion. In MMT, all wealth comes from the government and the more they spend, the richer we get.
The Treasury finances this spending by issuing bonds. That’s where the Fed comes in.
If the private sector won’t buy the bonds or wants too high an interest rate, the Fed can just crank up the printing press, buy the bonds with money created from thin air, stick the bonds on its balance sheet and wait.
So the Fed can just give the Treasury an unlimited line of credit to spend as much as it wants.
When the bonds come due in 10 or 30 years, the Treasury can repeat the process and use new printed money to pay off the old printed money.
It all sounds nice in theory, but it’s an invitation to disaster.
If inflation breaks out, it will be too late to get it under control. You can’t just flip a switch. Inflation is like a tiger. Once it gets out of its cage, it’s very difficult to get it back in.
If confidence in the dollar is lost (something the Fed and Treasury can’t control), hyperinflation could wreck the economy. That could lead to social unrest, riots and looting, especially if the wealth disparities created by the Fed’s support of the stock market continue to grow.
Would there be any winners if MMT ran off the rails? There would be one big winner – gold.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> War on Cash Kicking Into Overdrive
BY JAMES RICKARDS
APRIL 27, 2020
https://dailyreckoning.com/war-on-cash-kicking-into-overdrive/
War on Cash Kicking Into Overdrive
In the depths of the 2008–09 financial crisis, Obama’s first chief of staff, Rahm Emanuel, remarked that one should never let a good crisis go to waste. You probably recall him saying that.
He was referring to the fact that crises may be temporary but hidden agendas are permanent.
The global elites and deep state actors always have a laundry list of programs and regulations they can’t wait to put into practice. They know that most of these are deeply unpopular and they could never get away with putting them into practice during ordinary times.
Yet when a crisis hits, citizens are desperate for fast action and quick solutions. The elites bring forward their rescue packages but then use these as Trojan horses to sneak their wish list inside.
The War on Cash Is Decades Old
The USA Patriot Act that passed after 9/11 is a good example. Some counterterrorist measures were needed, of course. But the Treasury had a long-standing wish list involving reporting cash transactions and limiting citizens’ ability to get cash.
They plugged that wish list into the Patriot Act and we’ve been living with the results ever since, even though 9/11 is long in the past.
Obviously, the effort to eliminate cash is hardly new. It has been going on for many years and in many forms.
The U.S. discontinued the use of large-denomination bills in the late 1960s. Until 1969, $500, $1,000, $5,000 and even $10,000 bills were issued, even though they were printed decades earlier.
Today the largest bill is a $100 bill, but it has lost 80% of its purchasing power since 1968, so it’s really just a $20 bill from those days. Europe has ended the 500-euro note and today the largest note in euros is 200 euros.
Ignore the Official Reasons
Harvard professor Ken Rogoff has a book called The Curse of Cash, which calls for the complete elimination of cash. Many Bitcoin groupies say the same thing. Central banks and the IMF are all working on new digital currencies today.
The reasons for this are said to include attacks on tax evasion, terrorism and criminal activity. There’s some truth to these claims. Cash is anonymous, so it can’t be tracked.
But the real reason is because the elimination of cash would allow elites to impose negative interest rates, account freezes and confiscation.
They can’t do that as long as you can go to your bank and withdraw your cash. That’s the key.
In other words, it’s much easier for them to control your money if they first herd you into a digital cattle pen. That’s their true objective and all the other reasons are just a smokescreen.
And now, predictably, the latest attack on cash comes courtesy of the COVID-19 pandemic.
Crisis Meets Opportunity
This crisis is even larger and scarier than the 2008 crisis, which gives elites even more opportunity to ram their agendas through without serious opposition. They don’t intend to let it go to waste.
Sure enough, government agents and tech vendors are now claiming that cash is “dangerous” because it could contain traces of the coronavirus.
While that’s not impossible, it’s highly unlikely and no more likely than getting the virus from 100 other sources including package deliveries and shopping carts.
Should we ban cardboard boxes and shopping carts too?
If you’re really concerned about getting coronavirus from cash, it’s simple to wear sanitary gloves during any transactions (I do). Then put the cash to one side. The virus cannot live more than 10 hours or so on an inorganic surface. After a while, your cash is safe.
But if you get scared into giving up cash because of COVID-19, then don’t complain when you find that your financial freedom is also gone when the world moves to 100% digital money.
Because that’s the endgame here.
How to Protect Your Wealth
The time to protect yourself is now. The best way is to keep a portion of your wealth outside of the banking system.
I strongly recommend that you own physical gold (and silver). I recommend you allocate 10% of your investable assets to gold. If you really wanted to be aggressive, maybe 20%. But no more.
Just make sure you don’t store it in a bank, because it would be subject to confiscation. That defeats the whole purpose of having this sort of protection in the first place.
One Small Positive
As bad as the COVID-19 crisis is, and it is that bad, there’s one small positive to come out of it: It’s finally snapped investors out of their complacency regarding gold.
I recommended gold at $1,100 per ounce, $1,200 per ounce, $1,300 per ounce, $1,400 per ounce, $1,500 per ounce and so on… you get the picture.
But few people cared. They just yawned. Now that gold is $1,750 per ounce (up 75% since 2015), everyone wants gold!
There’s only one problem. You may not be able to get any.
That’s also something I predicted. I said years ago that when you most want your gold, you won’t be able to get it because everyone will want it at the same time and the dealers will be back-ordered and the mints and refiners will shut down.
Now it appears that’s exactly what’s happening.
The U.S. Mint at West Point is closing. That mint produces 1-ounce American Gold Eagle coins, so this will add to the shortage of Gold Eagles. The Royal Canadian Mint also closed for coin production temporarily a few weeks ago.
Gold refiners in Switzerland are either closed or are operating on reduced hours. Gold logistics firms like Brink’s are also cutting back hours and reducing distribution of gold bullion.
You Still Have a Chance
It’s still possible to find some gold bars or coins from dealers who have inventory, but delays are long and commissions are high. The scarcity factor will only get worse as gold prices continue their rally in this third great bull market in history that began in 2015.
Gold is difficult to get now but not impossible. If you don’t have yours yet, don’t wait any longer.
If you have to pay a bit of a premium for physical gold over the officially listed gold price, don’t worry about that. It means nothing in the long run.
I see gold going to at least $10,000 an ounce ultimately, so paying a little more right now is not an issue. It’s just an indication of the skyrocketing demand for physical gold right now.
When the next panic hits, and it will hit, there won’t be any gold available at any price.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> Trump Says “No” to World Money
BY JAMES RICKARDS
APRIL 20, 2020
https://dailyreckoning.com/trump-says-no-to-world-money/
Trump Says “No” to World Money
Over the course of 13 years as a media commentator and nine years as a bestselling author, I’ve had frequent occasion to state the following:
“In 1998, Wall Street came together to bail out a hedge fund. In 2008, the Federal Reserve stepped forward to bail out Wall Street. Each crisis was worse than the one before. In the next crisis, who will bail out the Fed?”
This was more than just rhetoric. It was a clinical description of a pattern of worsening crises on an approximately 10-year tempo, along with escalating bailouts.
Now the worst economic crisis in U.S. history is here and the Fed itself is in need of a bailout.
But what is the source of that bailout?
We now know part of the answer. A few weeks ago, the U.S. Congress passed a $2.2 trillion bailout bill called the CARES Act. This is the law that provided $349 billion in small-business loans, which are forgivable if the employer does not lay off its employees.
That fund has dried up already with most businesses getting either no money or not enough to survive more than a few weeks.
Also buried in that law was a $425 billion bailout fund for the Treasury to recapitalize the Fed. Since the Fed operates like a bank, they will leverage that $425 billion of new capital into $4.25 trillion of new money printing to buy corporate debt, municipal bonds, mortgages and other assets in order to keep liquidity in the system.
Still, that’s also a temporary solution when many more trillions of dollars of new money will be needed.
U.S. GDP is expected to lose an annualized $6 trillion or more in output in the second quarter. I estimate that 50% of retail and 90% of office rents aren’t being paid right now. Many small businesses will fail and probably never reopen.
I had always suggested that the IMF has the only clean balance sheet and would be the only source of liquidity in the world once the Fed was tapped out.
That’s exactly what we’re seeing now. The world is turning to the IMF for help. And that means printing the world money called special drawing rights (SDRs) to bail out the global financial system in the current economic and financial crisis.
SDRs were used in a small way during the 2008 financial crisis. They did not have much impact because the quantity was relatively small (about $250 billion equivalent) and it took a long time to get done. The SDRs were issued in August 2009, almost a year after the acute phase of the crisis and after a recovery had already begun.
Still, the 2009 issuance was a good dry run in preparation for the next crisis. Now the next crisis is here.
The world has never been so deeply in debt.
Societies with low debt burdens are robust to disaster. They can mobilize capital, raise taxes, increase spending and rebuild when the crisis is over.
But heavily indebted societies are much more brittle. They just don’t have that flexibility. Meanwhile, panicked creditors demand repayment that causes distressed sales of assets, falling markets and default.
That’s the situation we’re facing today.
Still, nothing this momentous happens without a heavy injection of politics, especially while Donald Trump and his “America First” agenda are in place.
A normal SDR printing exercise requires that the total SDRs be issued to all IMF members in proportion to their voting rights in the IMF. This means that U.S. adversaries such as Iran and China would get part of the bailout money along with more needy countries in Africa and Latin America.
The U.S. is now holding up the new issuance of new SDRs for exactly this reason.
We’ll see how this impasse gets resolved. Perhaps new SDRs will be issued right away. But as the depression lingers and the Fed’s impotence is exposed, the issue of printing a trillion SDRs will be back on the table.
China may have their own conditions such as a diminution in the role of the dollar as a global reserve currency. The U.S. may be more desperate when the time comes. Either way, this issue will not go away.
SDRs were originally intended as a kind of “paper gold.” Once the IMF starts the printing presses, investors will probably favor real gold as the proper antidote.
Below, I show you why gold is coming back to the global monetary system. As you’ll see, It can be done either in an orderly fashion, or a chaotic fashion. Read on.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> The Fed Is Buying $41 Billion of Assets Daily and It’s Not Alone
Bloomberg
By Matthew Boesler and Yuko Takeo
April 21, 2020
https://www.bloomberg.com/news/articles/2020-04-21/the-fed-is-buying-41-billion-of-assets-daily-and-it-s-not-alone?srnd=premium
Fed leads charge as new players take up large-scale purchases
Focus will eventually shift from liquidity to borrowing costs
Central-bank balance sheets are expanding to record levels amid their latest buying spree, raising questions about how big they can get and whether those assets can ever be sold back to markets.
Policy makers didn’t have much luck paring down much smaller portfolios in the decade since the financial crisis. And now they have to bankroll a coronavirus economy that’s putting government budgets under unprecedented strain and threatening to drive companies everywhere out of business.
Assets pile up on central bank balance sheets in resurgent buying programs
“The amounts being purchased are enormous, and it just tells you how much support is needed when the economy is closed down,” said Torsten Slok, Deutsche Bank’s chief economist. “Just have a look at how long it took to unwind from the financial crisis of 2008 and 2009. Now we are adding at a pace that is multiples faster.”
Central banks in Group of Seven countries purchased $1.4 trillion of financial assets in March, nearly five times as much as the previous monthly record set in April 2009, according to a Bloomberg Economics analysis. Morgan Stanley analysts estimate that the Federal Reserve, European Central Bank, Bank of Japan and Bank of England will expand their balance sheets by a cumulative $6.8 trillion when all is said and done.
Quantitative Easing
Net asset purchases for G-7 central banks approached $1.4 trillion in March
The Fed has led the charge, offering to buy unlimited amounts of U.S. government bonds and mortgage-backed securities -- and lend trillions more to corporations and municipalities through temporary purchases of their obligations -- as global investors seek to unwind years worth of accumulated leverage in their own portfolios. In the week through April 15, it expanded its balance sheet at a pace of about $41 billion per day.
Central bankers in the euro area, Japan and the U.K. -- old hands at so-called quantitative easing programs by now -- have all ramped up buying, while those in Canada, New Zealand and Australia have embarked on large-scale purchases for the first time, joining Sweden among smaller economies to do so. There’s even talk that some emerging markets like Thailand may get in on the game.
“They’re all moving in the same direction,” said Aditya Bhave, an economist at Bank of America in New York. “At some point, unconventional easing stops being unconventional.”
In the coming months, as market liquidity is replenished, monetary authorities will shift their focus to the long haul of keeping borrowing costs low to facilitate a recovery and make it easier for governments to fund their budgets. While that may involve a slower pace of asset purchases, it certainly won’t mark a reversal, so the great balance-sheet expansion will roll ever onward.
Japanese Precedent
When it comes to the question of whether there’s any effective limit on how much central banks can buy, Japan’s experience may offer a guide.
The QE pioneer first embarked on a program of large-scale asset purchases in 2001 after bubbles in its stock and property markets burst, plunging the economy into a deflationary spiral. It has made a couple of attempts to unwind in the intervening years, only to find itself repeatedly dragged back into more purchases.
Today, the BOJ’s balance sheet is 604 trillion yen ($5.6 trillion) --more than the nation’s annual economic output. The Fed, at $6.4 trillion or roughly 30% of GDP, seems modest by comparison while the ECB figure is around 39%.
Where Japan’s central bank is running into problems is market functioning. Its huge bond holdings, 43% of the total, impose limits on liquidity. The BOJ had to start selling and lending bonds recently due to the scarcity of supply, when investors demanded more of them as safe investments or as collateral to obtain U.S. dollars.
The BOJ also owns about 5% of the nation’s corporate bonds and around 5% of the stock market through exchange-traded funds. And while the Fed has said it will also buy ETFs under its new temporary corporate credit purchase programs -- including some junk debt -- it may not be inclined to buy much if volatility in credit markets remains relatively low.
“For now, both the Fed and the ECB will continue to ramp up their buying,” said Yoshinori Shigemi, a global market strategist for JPMorgan Asset Management Japan Ltd. in Tokyo, but they won’t get anywhere near Japan’s levels. “If the market eventually starts calming down, they don’t need to force themselves to buy more.”
QE Critics
When QE swept up much of the developed world after the financial crisis, critics warned of unintended consequences, like runaway inflation and moral hazard for financial institutions and even governments that had fewer reasons to balance the books. The first of those never materialized and the second is the last thing on the minds of policy makers grappling with one of the darkest economic outlooks since the Great Depression.
Richard Clarida, the Fed’s vice chair, said in a recent Bloomberg TV interview that if anything, the central bank is trying to guard against disinflation as demand plummets, adding that moral hazard concerns “aren’t relevant considerations” because the pandemic “is an entirely exogenous event.”
The buying so far has helped stabilize financial markets, shining a spotlight on another longstanding criticism levied against central bankers: their actions ensure swift relief for investors, while working people dependent on labor income have to wait for the help to trickle down.
Providing companies with a stable source of funding helps many of them stay afloat, but it doesn’t ensure that those companies retain employees. Indeed, market volatility has receded in recent weeks even as unemployment soars.
Lasting Legacy
Once the dust settles, the balance sheets of monetary authorities will probably remain pumped up and benchmark interest rates will stay low for the foreseeable future. And if history is a guide, they’ll need to tread lightly as they slow purchases, let alone reverse them.
In 2013, U.S. Treasury yields shot higher in the ‘Taper Tantrum’ as the Fed contemplated stepping down the pace of purchases. It was only able to begin unwinding its balance sheet in 2017 -- nine years after it initially began expanding it. But it didn’t get very far and even the small, gradual reduction it achieved was met with occasional bouts of market turmoil.
This time around, with more and more assets on more and more monetary authorities’ ledgers, the prospect of any rapid sell-down seems distant.
“We just have to get used to a new world where central bank balance sheets are so much bigger,” Deutsche Bank’s Slok said.
<<<
>>> U.S. opposition seen stalling major IMF liquidity boost
Reuters
by David Lawder, Andrea Shalal
4-15-20
https://www.reuters.com/article/imf-worldbank-sdrs/u-s-opposition-seen-stalling-major-imf-liquidity-boost-idUSL2N2C300P
WASHINGTON, April 15 (Reuters) - U.S. opposition is expected to prevent the International Monetary Fund this week from deploying one of its most powerful tools to help countries fight the coronavirus: creating a new allocation of Special Drawing Rights.
The move, akin to a central bank “printing” new money, has been advocated by economists, finance ministers and non-profit groups to provide as much as $500 billion in urgently-needed liquidity for the IMF’s 189 member countries.
SDRs, based on dollars, euro, yen, sterling and yuan, are the IMF’s official unit of exchange. Member countries hold them at the Fund in proportion to their shareholdings.
The IMF last approved a $250-billion new allocation of SDRs in 2009, during the last financial crisis, boosting liquidity for cash-strapped countries.
Doing so again now could provide more flexibility to the 100 countries that have already sought IMF emergency loans and grants, and allow new lending to countries with “unsustainable” debt burdens, such as Argentina.
An SDR expansion has attracted some celebrity advocates, such as investor George Soros and U2 lead singer Bono’s ONE anti-poverty organization, along with trade unions and faith-based groups.
Finance officials will debate the issue during this week’s virtual IMF and World Bank Spring Meetings, but multiple sources familiar with the Fund’s deliberations say the United States, the IMF’s dominant shareholder, actively opposes such a move.
The Trump administration opposes providing countries such as Iran and China with billions of dollars in new resources with no conditions, two of the sources said.
The opposition comes at a time when U.S. tension with China is running high over the causes of the virus and a long-running trade war. U.S.-Iran tension nearly boiled over into armed conflict in January.
The U.S. Treasury Department would prefer to see the IMF focus on using its $1 trillion in existing resources, including $100 billion in emergency loans and grants, to aid countries’ health responses to the crisis, the sources said.
IMF Managing Director Kristalina Georgieva first raised the prospect of an SDR allocation last month, but was quickly rebuffed by U.S. officials, who hold an effective veto over major IMF decisions.
"There hasn't been interest in pursuing SDRs from the U.S. side, in fact they went that far to say that they are not favoring SDRs," she said on Friday in a podcast here produced by the Economist magazine.
LENDING SDRs
Georgieva said the United States wanted the IMF to use all available tools and she did not expect Washington to block countries from “donating” existing SDRs to supplement IMF lending facilities for poor countries.
Such a deal to “lend” existing SDRs is more likely this week, the sources familiar with the Fund’s deliberations said.
A U.S. Treasury spokeswoman declined to comment specifically on the SDR allocations, but said the agency supported a variety of efforts at the IMF to provide rapid, targeted assistance to countries in need.
“We support accelerating IMF procedures, higher access from the IMF’s emergency lending facilities, and support from donors for the IMF’s assistance to low income countries, including grants to help these countries make debt payments to the IMF,” the spokeswoman said in an emailed statement.
On Tuesday, the IMF said the recession sparked by the virus would be far deeper than the Great Recession of 2008 and 2009, shrinking the global economy by 3.0% in 2020.
CELEBRITY ADVOCATES
French Finance Minister Bruno Le Maire argued in favor of a new SDR allocation of about $500 billion, saying in a statement to the IMF’s steering committee it would provide an extra $16 billion to low-income nations.
“It was a success in 2009 to provide liquidity and it would send a strong signal to markets,” Le Maire said.
Columbia University professor Joseph Stiglitz, a former World Bank chief economist, said new SDRs would not cost U.S. taxpayers anything.
“And if we can help emerging markets and developing countries, it will rebound to us in terms of health and in terms of the economic recovery,” he said.
IMF officials, while acknowledging that a deal for a new SDR allocation is unlikely this week, are taking a patient approach, hoping to eventually persuade U.S. Treasury officials of the merits of the move.
“Nothing is off the table,” IMF chief economist Gita Gopinath told Reuters on Tuesday.
<<<
>>> IMF Works to Speed Support for Record Developing-Nation Requests
Bloomberg
By Eric Martin and Saleha Mohsin
April 8, 2020
Lender of last resort looks to boost fast-acting loan measures
About half of the fund’s 189 countries seek funds for pandemic
The International Monetary Fund is going into overdrive heading into its spring meetings next week as the global pandemic spurs urgent aid requests from a record number of developing countries.
IMF Managing Director Kristalina Georgieva is focused on winning board approval for tools to lend money as quickly as possible. One plan would double the $50 billion available through two emergency financing mechanisms because countries have requested about half the existing resources already. Another would make available short-term loans to a small group of strongest nations to avoid a cash crunch.
Georgieva has pledged to deploy the IMF’s $1 trillion lending capacity to counter a recession that she says will be far worse than the 2008-09 global financial crisis. The IMF last month approved changes to provide up to two years of debt relief on its lending to low-income countries via grants from donor nations.
“The challenge to the fund is to provide money quickly,” said Brad Setser, an economist at the U.S. Treasury Department during the Obama administration who is now at the Council on Foreign Relations. “There’s a need for more reserves throughout the world in the face of a bigger than expected and truly global shock.”
Debt Standstill
A third plan championed by Georgieva and World Bank President David Malpass calls on in wealthier governments who have lent to poorer nations to place a temporary pause on demands for debt repayment. That would help poor nations and make sure IMF resources are used for crisis response rather than to pay off creditors, according to Anna Gelpern, Sean Hagan and Adnan Mazarei at the Peterson Institute for International Economics.
The World Bank last month estimated that $14 billion in service payments are due this year, with less than $4 billion owed to the Paris Club of nations that coordinate sustainable solutions in times of trouble for debtor countries. That means getting cooperation from China, the biggest official creditor not in that group and a major lender to poor nations through its Belt and Road Initiative, is key to getting an agreement among the G-20, who represent 85% of global gross domestic product and a vast majority of lending.
“China to date has not been willing to do so within a Paris Club context, but may be willing to do so in the context of a broader coordination framework,” Hagan said in a phone interview. “I’m relatively optimistic.”
Private creditors also would need to be included to make sure governments don’t simply end up supporting repayment to investment firms that hold bonds from poorer nations, Hagan said.
Drawing Rights Debate
The IMF is currently looking at various options. One which Georgieva supports is to create a short-term lending or liquidity line, much like the Federal Reserve’s dollar swap lines for foreign central banks, to provide greenbacks where the Fed cannot.
Another idea that’s proving more controversial: boost fund resources by creating more reserve assets called special drawing rights, or SDRs, as the IMF did in the 2009 global financial crisis. While Georgieva has called on the G-20 to back it, experts disagree on the idea’s efficacy.
For one thing, it isn’t the most targeted way to get money to the neediest countries, because the assets are automatically granted to all IMF members in proportion to their voting stake. Top shareholders including the U.S., Japan and China would automatically get the most SDRs, with few going to the low-income nations most in need.
“It’s not particularly practical or efficient, because the money ends up where you don’t need it,” said Mark Sobel, a longtime Treasury official and former U.S. IMF executive director.
IMF Power Players
The top countries ranked by voting share at the IMF
US ---------- 16.5%
Japan -------- 6.2%
China -------- 6.1%
Germany ------ 5.3%
France ------- 4.0%
UK ----------- 4.0%
Italy -------- 3.0%
India -------- 2.6%
Russia ------- 2.6%
Brazil ------- 2.2%
Canada ------- 2.2%
Saudi Arabia - 2.0%
Data provided by the International Monetary Fund.
The short-term liquidity line, however, would be better targeted. And it has the support of the U.S. Treasury. Georgieva said Friday that the IMF board will be reviewing it urgently.
With emerging markets facing “substantial liquidity problems,” the swap line “seems a more relevant tool for the moment in that it is better targeted, theoretically would provide more liquid assets, and is probably more usable,” according to Tim Adams, a former Treasury undersecretary in the George W. Bush administration and president of the Institute of International Finance, a lobbying group of the world’s biggest banks..
<<<
>>> G-20 to Freeze Sovereign Debt Payments for Poor Countries: FT <<<
(Note - What will probably come out this is a swap of the dollar denominated debt of these countries for SDRs. The IMF has reportedly received many requests from emerging countries for a new issuance of SDRs, and the IMF says they are considering it. Last year the IMF apparently set up a 'substitution fund' mechanism by which central banks can swap their dollars for SDRs directly, without having to dump them on the market)
>>> G-20 to Freeze Sovereign Debt Payments for Poor Countries: FT
Bloomberg
By Matthew G Miller
April 12, 2020
https://www.bloomberg.com/news/articles/2020-04-12/g-20-to-freeze-sovereign-debt-payments-for-poor-countries-ft?srnd=premium
The G-20 is close to a deal to allow lower income countries to freeze their government debt repayments, the Financial Times reported. The deal would put a moratorium on payments for at least six to nine months, with the possibility of going through to 2021.
The move would be part of a plan to help the nations grapple with the coronavirus pandemic, and stave off an emerging markets debt crisis, according to a senior G-20 official the newspaper cited.
“What is immediately needed is to give these people space so they don’t need to worry about the cash flow and debt servicing going to other countries, and they can use that money for their immediate needs,” the senior official said, according to the FT.
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>>> IMF Mulls Fed-Like Program to Get Dollars to More Economies
Bloomberg
By Saleha Mohsin and Eric Martin
April 6, 2020
https://www.bloomberg.com/news/articles/2020-04-06/imf-mulls-fed-like-program-to-supply-dollars-to-more-economies
Georgieva pitches new short-term liquidity line for dollars
IMF ready to use $1 trillion in lending capacity in pandemic
The International Monetary Fund may launch a new program to help address the global shortage of dollars, providing a backup to the Federal Reserve’s campaign to keep greenbacks flowing around the world economy.
IMF Managing Director Kristalina Georgieva is preparing to offer short-term dollar loans to countries that lack enough Treasuries to participate in a Fed program that enables foreign central banks to temporarily exchange U.S. debt for dollars.
The initiative has the support of the U.S. Treasury and may be launched within weeks, according to people familiar with the matter. The U.S. is the fund’s largest shareholder. The IMF next week is scheduled to hold virtual meetings of members at a time when more than 90 countries have already asked for its assistance in shielding their economies from the coronavirus and global recession.
“Our board is going to review a proposal in the next days on creating a short-term liquidity line that is exactly targeted to countries with strong fundamentals, strong macroeconomic fundamentals, that may be experiencing short-term liquidity constraints,” Georgieva said in an online briefing for reporters on Friday.
“We’re short of one instrument to provide short-term liquidity to countries that are basically strong but find themselves in a tight place,” she said, noting that Indonesia was among countries urging the IMF to look into additional ways to help with liquidity in emerging markets.
A spokesman for the IMF declined to comment, while a Treasury spokeswoman didn’t respond to a request for comment.
Dollar Rush
The coronavirus prompted a worldwide rush into dollars by wreaking havoc on a global economy that is heavily dependent on the greenback as its linchpin and relies on it as a haven at times of stress. Georgieva warned on April 3 that the world recession is “way worse than the global financial crisis.”
Emerging-market borrowers who tend to rely on the IMF for aid are particularly at risk of the lack of dollars. Encouraged by low U.S. interest rates, they’ve loaded up on dollar-denominated debt in recent years. They now face a squeeze as their exports plummet, with economies shutting down worldwide to combat the pandemic.
A significantly stronger dollar can also hurt the U.S. by tightening financial conditions and making American exports more expensive on world markets.
Georgieva has repeatedly touted the IMF’s readiness to deploy its $1 trillion lending capacity to fight a virus it initially failed to identify as the massive threat to global growth it now poses.
Fed Moves
The Fed has revived or introduce a series of programs aimed at supporting the international supply of dollars. Just last week it announced a temporary facility that can then be made available to companies in those countries that hold dollar-denominated debt. It had already increased the number of central banks that can borrow dollars from it on a short-term basis.
Some analysts and former fund officials have previously raised concerns about the IMF launching a traditional “swap” program and putting IMF assets at risk. In December 2017, members of the lender’s executive board said such a facility would “depart significantly from current fund principles and policies.”
Critics say that if the IMF provides an unsecured line of credit without conditions, it risks the possibility that countries cannot repay the loan.
That shouldn’t be a problem if the IMF limits the loans to only its strongest members who have sound macroeconomic fundamentals, said Mark Sobel, a longtime Treasury official and former IMF executive director from the U.S.
“These are going to be for your best performers with a proven track record,” he said. “I don’t see the big risk.”
The IMF is probing other ways to increase its firepower. It has already asked Group of 20 leaders to support creating a sizable quantity of reserve assets called SDRs, or special drawing rights, as it did in the 2009 global financial crisis.
<<<
>>> Markets and Black Swans
BY JAMES RICKARDS
APRIL 9, 2020
https://dailyreckoning.com/markets-and-black-swans/
Markets and Black Swans
I began studying complexity theory as a consequence of my involvement with Long-Term Capital Management, LTCM, the hedge fund that collapsed in 1998 after derivatives trading strategies went catastrophically wrong.
After the collapse and subsequent rescue, I chatted with one of the LTCM partners who ran the firm about what went wrong. I was familiar with markets and trading strategies, but I was not expert in the highly technical applied mathematics that the management committee used to devise its strategies.
The partner I was chatting with was a true quant with advanced degrees in mathematics. I asked him how all of our trading strategies could have lost money at the same time, despite the fact that they had been uncorrelated in the past.
He shook his head and said, “What happened was just incredible. It was a seven-standard deviation event.”
In statistics, a standard deviation is symbolized by the Greek letter sigma. Even non-statisticians would understand that a seven-sigma event sounds rare. But, I wanted to know how rare. I consulted some technical sources and discovered that for a daily occurrence, a seven-sigma event would happen less than once every billion years, or less than five times in the history of the planet Earth!
I knew that my quant partner had the math right. But it was obvious to me his model must be wrong. Extreme events had occurred in markets in 1987, 1994 and then 1998. They happened every four years or so.
Any model that tried to explain an event, as something that happened every billion years could not possibly be the right model for understanding the dynamics of something that occurred every four years.
From this encounter, I set out on a ten-year odyssey to discover the proper analytic method for understanding risk in capital markets. I studied, physics, network theory, graph theory, complexity theory, applied mathematics and many other fields that connected in various ways to the actual workings of capital markets.
In time, I saw that capital markets were complex systems and that complexity theory, a branch of physics, was the best way to understand and manage risk and to foresee market collapses. I began to lecture and write on the topic including several papers that were published in technical journals.
I built systems with partners that used complexity theory and related disciplines to identify geopolitical events in capital markets before those events were known to the public.
Finally I received invitations to teach and consult at some of the leading universities and laboratories involved in complexity theory including The Johns Hopkins University, Northwestern University, The Los Alamos National Laboratory, and the Applied Physics Laboratory.
In these venues, I continually promoted the idea of inter-disciplinary efforts to solve the deepest mysteries of capital markets. I knew that no one field had all the answers, but a combination of expertise from various fields might produce insights and methods that could advance the art of financial risk management.
I proposed that a team consisting of physicists, computer modelers, applied mathematicians, lawyers, economists, sociologists and others could refine the theoretical models that I and others had developed, and could suggest a program of empirical research and experimentation to validate the theory.
These proposals were greeted warmly by the scientists with whom I worked, but were rejected and ignored by the economists. Invariably top economists took the view that they had nothing to learn from physics and that the standard economic and finance models were a good explanation of securities prices and capital markets dynamics.
Whenever prominent economists were confronted with a “seven-sigma” market event they dismissed it as an “outlier” and tweaked their models slightly without ever recognizing the fact that their models didn’t work at all.
Physicists had a different problem. They wanted to collaborate on economic problems, but were not financial markets experts themselves. They had spent their careers learning theoretical physics and did not necessarily know more about capital markets than the everyday investor worried about her 401(k) plan.
I was an unusual participant in the field. Most of my collaborators were physicists trying to learn capital markets. I was a capital markets expert who had taken the time to learn physics.
One of the team leaders at Los Alamos, an MIT-educated computer science engineer named David Izraelevitz, told me in 2009 that I was the only person he knew of with a deep working knowledge of finance and physics combined in a way that might unlock the mysteries of what caused financial markets to collapse.
I took this as a great compliment. I knew that a fully-developed and tested theory of financial complexity would take decades to create with contributions from many researchers, but I was gratified to know that I was making a contribution to the field with one foot in the physics lab and one foot planted firmly on Wall Street. My work on this project, and that of others, continues to this day.
This approach stands in stark contrast to the standard equilibrium models the Fed and other mainstream analysts use.
An equilibrium model like Fed uses in its economic forecasting basically says that the world runs like a clock. Every now and then, according to the model, there’s some perturbation, and the system gets knocked out of equilibrium. Then, all you do is you apply policy and push it back into equilibrium. It’s like winding up the clock again. That’s a shorthand way of describing what an equilibrium model is.
Unfortunately, that is not the way the world works. Complexity theory and complex dynamics explain it much better.
Distress in one area of financial markets spread to other seemingly unrelated areas of financial markets. In fact, the mathematics of financial contagion are exactly like the mathematics of disease or virus contagion. That’s why they call it contagion. One resembles the other in terms of how it’s spread.
What are examples of the complexity?
One of my favorites is what I call the avalanche and the snowflake. It’s a metaphor for the way the science actually works but I should be clear, they’re not just metaphors. The science, the mathematics and the dynamics are actually the same as those that exist in financial markets.
Imagine you’re on a mountainside. You can see a snowpack building up on the ridgeline while it continues snowing. You can tell just by looking at the scene that there’s danger of an avalanche.
You see a snowflake fall from the sky onto the snowpack. It disturbs a few other snowflakes that lay there. Then, the snow starts to spread… then it starts to slide… then it gains momentum until, finally, it comes loose and the whole mountain comes down and buries the village.
Some people refer to these snowflakes as “black swans,” because they are unexpected and come by surprise. But they’re actually not a surprise if you understand the system’s dynamics and can estimate the system scale.
Question: Whom do you blame? Do you blame the snowflake, or do you blame the unstable pack of snow?
I say the snowflake’s irrelevant. If it wasn’t one snowflake that caused the avalanche, it could have been the one before or the one after or the one tomorrow.
The instability of the system as a whole was a problem. So when I think about the risks in the financial system, I don’t focus on the “snowflake” that will cause problems. The trigger doesn’t matter.
In the end, it’s not about the snowflakes, it’s about the initial critical state conditions that allow the possibility of a chain reaction or avalanche. The coronavirus was just the snowflake that triggered the current crisis.
So now we’ve got the avalanche. And digging out won’t be easy.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> It Likely Came From Chinese Biowarfare Lab
BY JAMES RICKARDS
APRIL 6, 2020
https://dailyreckoning.com/it-likely-came-from-chinese-biowarfare-lab/
It Likely Came From Chinese Biowarfare Lab
The stock market was up big today on news that the COVID-19 outbreak may be slowing in the U.S. That would be good news. But it’s still far too early to draw any conclusions and make no mistake — this crisis has a long way to go.
All we can do is wait and hope for the best.
Meanwhile, gold topped $1,700 per ounce today. That’s nice for gold, but it’s better understood as an early warning of declining confidence in the dollar.
I’ll have much more to write about that in the days ahead.
This is not my first financial crisis, although it’s shaping up to be the worst. I’m a veteran of the October 1987 crash, when markets crashed 22% in one day, the 1994 Tequila Crisis, the 1998 Russia/LTCM crisis (I negotiated the Fed/Wall Street bailout), the 2000 dot-com crash and, of course, the 2008 mortgage-Lehman-AIG meltdown.
These crises have different causes and played out in different ways, but they all have one thing in common — failures of financial firms on the wrong side of the trade.
It can be a bank, broker or hedge fund. Whatever the structure, there is always a leveraged player who is betting on a market that happens to be crashing. In 1987, some firms were selling put options when the options went deep in the money.
The First Domino Falls
In 1998, LTCM was short volatility when the price of volatility exploded. In 2008, Lehman had billions in securitized commercial mortgages when real estate crashed. Sooner rather than later, the market losers wash up on the beach like dead whales. And there’s never just one.
The first firm that fails is a sign of many more to come. And now, one firm, EJF Capital, has put up “gates” on withdrawal of capital from its flagship credit fund. This does not mean that the fund is bankrupt, but it does mean that investors cannot get their money out as expected.
Their money is “locked” in the fund until the manager decides to release it… which could be years away.
Of course, this is bad news for EJF investors, but there’s no need to single them out. Many other funds will do the same thing in the coming days.
These failures will keep popping up like poison weeds in a garden. Get ready for more.
I’ve warned about this eventuality for years. Now it’s happening. That’s why you should have a sizable allocation of cash. There’s no guarantee you’ll be able to access your money if it’s tied up in the financial system during a crisis.
Questions
Meantime, while COVID-19 ravages the world, most officials and everyday citizens are more focused on surviving and on how to stop the spread than on where the virus originated. That’s the right priority.
But the origin of the virus cannot be ignored if we want to avoid another, even worse pandemic.
The official Chinese narrative has been that the virus was transmitted from animals to humans through bats and other wildlife available as food in the “wet markets” of Wuhan.
(There’s another narrative spouted by some Chinese officials that the virus came from U.S. troops visiting Wuhan. That’s an outright lie and falls into the category of propaganda, but some pro-Chinese U.S. media are reporting that version).
But is the “wet market” theory just another form of propaganda? Why did the Chinese not report the outbreak earlier? Why did the Chinese arrest and detain doctors and nurses who tried to sound the alarm last December? Why did the Chinese destroy the early records of the virus spread and hide other clinical evidence?
Probably Leaked From a Bioweapons Lab
The evidence is mounting that the virus leaked from a biological laboratory in Wuhan. That would be compatible with long-standing Chinese efforts to embrace “asymmetric warfare.”
This involves financial, cyber and biological weapons in addition to conventional kinetic weapons such as ships, tanks and planes. In fact, there is a bioweapons laboratory in Wuhan. There are also two other virus laboratories in Wuhan that were working on coronavirus strains.
The idea that there are three coronavirus labs in Wuhan and the virus emerged in Wuhan independently is beyond belief. It is almost certainly the case that the virus leaked from one of these labs.
The “wet market” story is sheer propaganda.
We’ve all been inundated with the coronavirus propaganda put out by the Communist Party of China. It goes like this:
Thanks to the heroic efforts of the Chinese leadership, the virus was contained in Wuhan and a few other cities. Total cases in China were about 82,000 with fatalities of about 3,500.
This compares with 315,000 cases in the U.S. and 8,500 fatalities. Things are now almost back to normal in China, while the rest of the world struggles with far worse results. That’s the Chinese narrative.
And every part of it is a lie.
Evidence China Is Lying
The Chinese infection rate and number of fatalities were probably 10 times what they reported. Bodies were swept up off the streets of Wuhan and burned in crematoria without counting them in the official numbers.
People were captured in nets and dragged to detention centers where many died, also without being counted.
Hospital floors were covered in blood, vomit and bodily fluids. Doctors and nurses were traumatized by what they experienced to the point of tears and nightmares.
There’s ample proof that the Chinese are lying. Here’s strong evidence: China’s Ministry of Industry and Information Technology reported that the number of cellphone users dropped by 21 million in February 2020 compared with November 2019.
Cellphone use in China has expanded exponentially for years, but suddenly it dropped by 21 million. This does not mean that 21 million people died. But it allows a reasonable inference that millions either died or were infected or were associated with businesses that closed their doors and discontinued service.
Whatever the particulars, it paints an entirely different picture than the 82,000 “official” infections.
When truth is suppressed in one venue, it usually pops up in another. The Chinese Ministry of Industry was not on the front lines of health reporting. They made the mistake of telling the truth. We can draw strong inferences from that.
You can bet that the ministry won’t be allowed to make that mistake again. In their next report, they’ll start lying like the rest of the Chinese government.
None of this means that the virus was a bioweapon (it may have been, but there are other medical reasons to study coronavirus). It does not mean that the virus was leaked intentionally.
The Chinese are notorious for lack of quality control, so an accidental leak is most likely. Yet a laboratory source would explain China’s strenuous efforts to cover up the origin and push alternative propaganda.
U.S. intelligence has confirmed the Chinese lies and cover-up.
Accountability
China needs to be held accountable or this will surely happen again. In any case, the China-U.S. economic relationship will never be the same. It’s not too late to get out of Chinese stocks and China investment.
The supply chain is coming home. It was never a good idea to outsource so much critical industry to a nation like China. China is not Canada.
But that’s something we’ll have to deal with later. In the meantime, we’re all just trying to survive.
Let’s pray that we do, both physically and economically.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> IMF Managing Director Kristalina Georgieva’s Statement Following a G20 Ministerial Call on the Coronavirus Emergency
IMF website
March 23, 2020
https://www.imf.org/en/News/Articles/2020/03/23/pr2098-imf-managing-director-statement-following-a-g20-ministerial-call-on-the-coronavirus-emergency
International Monetary Fund Managing Director Kristalina Georgieva made the following statement today following a conference call of G20 Finance Ministers and Central Bank Governors:
“The human costs of the Coronavirus pandemic are already immeasurable and all countries need to work together to protect people and limit the economic damage. This is a moment for solidarity—which was a major theme of the meeting today of the G20 Finance Ministers and Central Bank Governors.
“I emphasized three points in particular:
“First, the outlook for global growth: for 2020 it is negative—a recession at least as bad as during the global financial crisis or worse. But we expect recovery in 2021. To get there, it is paramount to prioritize containment and strengthen health systems—everywhere. The economic impact is and will be severe, but the faster the virus stops, the quicker and stronger the recovery will be.
“We strongly support the extraordinary fiscal actions many countries have already taken to boost health systems and protect affected workers and firms. We welcome the moves of major central banks to ease monetary policy. These bold efforts are not only in the interest of each country, but of the global economy as a whole. Even more will be needed, especially on the fiscal front.
“Second, advanced economies are generally in a better position to respond to the crisis, but many emerging markets and low-income countries face significant challenges. They are badly affected by outward capital flows, and domestic activity will be severely impacted as countries respond to the epidemic. Investors have already removed US$83 billion from emerging markets since the beginning of the crisis, the largest capital outflow ever recorded. We are particularly concerned about low-income countries in debt distress—an issue on which we are working closely with the World Bank.
“Third, what can we, the IMF, do to support our members?
We are concentrating bilateral and multilateral surveillance on this crisis and policy actions to temper its impact.
We will massively step up emergency finance—nearly 80 countries are requesting our help—and we are working closely with the other international financial institutions to provide a strong coordinated response.
We are replenishing the Catastrophe Containment and Relief Trust to help the poorest countries. We welcome the pledges already made and call on others to join.
We stand ready to deploy all our US$1 trillion lending capacity.
And we are looking at other available options. Several low- and middle-income countries have asked the IMF to make an SDR allocation, as we did during the Global Financial Crisis, and we are exploring this option with our membership.
Major central banks have initiated bilateral swap lines with emerging market countries. As a global liquidity crunch takes hold, we need members to provide additional swap lines. Again, we will be exploring with our Executive Board and membership a possible proposal that would help facilitate a broader network of swap lines, including through an IMF-swap type facility.
“These are extraordinary circumstances. Many countries are already taking unprecedented measures. We at the IMF, working with all our member countries, will do the same. Let us stand together through this emergency to support all people across the world.”
<<<
>>> The Fed Brings the Global Financial System Back From the Abyss
By Molly Smith, Alex Harris, and Matthew Boesler
March 28, 2020
https://www.bloomberg.com/news/articles/2020-03-28/the-fed-brings-the-global-financial-system-back-from-the-abyss?srnd=premium
Easing dollar shortage, corporate bond issuance signal success
Questions remain about health of riskier debt markets
Sitting calmly in front of a bookshelf filled with thick volumes of the “Federal Reserve Bulletin,” Jerome Powell this week set out to offer a simple explanation for the complicated steps the U.S. central bank is taking to relieve dire stresses in the global financial system.
“Many places in the capital markets, which support borrowing by households and businesses -- I’m talking about mortgages and car loans and things like that -- have just stopped working,” the Fed chair told NBC’s “Today” show, in a rare television interview. “So we can step in and replace that lending under our emergency lending powers.”
Powell’s typical mild-mannered delivery belied the historic actions underway to put out various fires raging in the financial system because of the novel coronavirus pandemic. The system is still far away from normal, and troubling stress points remain. However, this week it became clear that the rapid response alleviated a variety of issues that threatened to exacerbate economic damage being inflicted by attempts to halt the spread of the virus.
“If there’s one thing I’ve learned in my 20 years of trading it’s that you don’t fight the Fed,” said Patrick Leary, chief market strategist and former trader at independent broker-dealer Incapital. “Not if the Fed is a buyer, and especially not a Fed that is going to buy unlimited amounts.”
The central bank added more than $1 trillion to the system in recent weeks, with untold trillions still to come. The effort underscores the main lesson policy makers learned from the 2008 experience: Act fast and go big.
The Fed has rapidly expanded its balance sheet in recent weeks
Unlike that crisis, in which the Fed focused solely on propping up the banking system, the central bank’s support is much more widespread this time around. And for good reason: almost every sector of fixed income, from Treasuries to municipal bonds to money-market mutual funds, has come under stress this month.
In the last two weeks alone, the central bank has purchased $942 billion in Treasuries and mortgage-backed securities, dwarfing its previous efforts and restoring a semblance of order to those markets. The Fed this week also provided more than $50 billion in cheap loans to banks through its discount window.
High-grade spreads tighten after Fed pledges support
Its Primary Dealer Credit Facility, which takes as collateral investment-grade corporate bonds, municipal debt and mortgage- and asset-backed securities in exchange for cash loans, provided $27.7 billion as of Wednesday. Its Money Market Mutual Fund Liquidity Facility, which finances purchases of assets from U.S. money market funds, added another $30.6 billion. Borrowing by foreign central banks soared to $206 billion -- the highest since 2009.
Dollar Squeeze Eases
The most-obvious sign of success in easing financial stresses can be seen simply in exchange rates for the dollar itself. Intercontinental Exchange Inc.’s U.S. Dollar Index, a measure of the U.S. currency against major counterparts, ended last week at a three-year high in a reflection of the overwhelming global demand for dollars from corporations and investors. This week it sank 4.3%, the most since 1985, as the Fed’s liquidity flowed around the world.
The market for high-grade corporate bond saw a massive turnaround, especially in shorter-dated securities that the Fed has pledged to buy in essentially unlimited quantities. Credit risk, as measured by derivatives indexes, eased nearly all week and encouraged a rush of issuance that was met with strong demand.
U.S. investment-grade supply this week surpassed $109 billion, smashing a previous record set in September. Massive investor orders helped drive down borrowing costs and secondary spreads, which compressed 71 basis points through Thursday from Monday’s peak. ETFs that buy shorter-dated bonds have also been trading better since the Fed stepped in.
“The tools are in place, now you need to run the machine,” said Matt Toms, chief investment officer of fixed income for Voya Investment Management. “You need time for system to heal, and it is healing.”
Stresses Remain
It hasn’t all gone smoothly. The Fed’s announcement Friday afternoon that it will slow the pace at which it buys Treasuries was blamed by some for extending losses in stocks that afternoon, with the Standard & Poor’s 500 Index trimming its best weekly advance since 2009 to 10%. The equity benchmark is still down 25% from its last record in February.
And the Fed’s efforts aren’t a panacea to cure all the system’s ills. The crucial U.S. commercial paper market, which many businesses turn to for short-term funding sourced from money market funds, remains stressed. The spreads between commercial paper interest rates and overnight index swaps -- the so-called risk-free rate -- are at records. A program meant to aid that market won’t become operational until the first half of April.
CP spreads reach record levels
“There are very encouraging signs of a thaw but we’re not quite there yet,” said Mark Cabana, head of U.S. interest rates strategy at Bank of America Corp. “As soon as money funds become more comfortable on where their asset base is, then they can start spending. This is the first step on getting the wholesale funding market started again. We’re still far from normal but a lot of the illiquidity has already come out.”
Risky Debt
It’s also unclear to what extent the Fed’s efforts will help riskier areas of debt markets like high-yield bonds and leveraged loans, which the Fed isn’t buying. Those parts of leveraged finance could see default rates rise to 15% this year and next, according to Fitch Ratings. The biggest buyers of leveraged loans, collateralized-loan obligations, are also struggling, further delaying a recovery to the underlying asset class.
The Fed’s move to buy an unlimited amount of mortgage-backed securities with government backing has helped support that market, but the program doesn’t apply to the smaller market for private-label MBS that’s not sponsored by government-linked agencies. Those bonds, which include debt issued even before the 2008 financial crisis, have been under pressure amid concerns that millions of borrowers could fall behind on payments as the economy grinds to a halt.
The revival of the Fed’s Term Asset-Backed Securities Loan Facility may help support the market for asset-backed securities backed by consumer debt. In that program, the Fed will purchase top-rated newly issued notes backed by debt like small business loans, credit card debt and auto loans. Risk premiums on those bonds have widened to near 2008 crisis levels as investors sell to meet redemptions and fret over borrowers’ ability to pay.
Investors in riskier debt products may see more of an impact from Congress’s $2 trillion fiscal-stimulus package that’s meant to bolster the real economy. The hope is that as governments take action and rates are slashed across the world, investors will gradually return to put money into funds that buy riskier debt. But so far, it’s been consistent weeks of outflows, even in higher-quality investment-grade funds.
“You need the plumbing of the credit markets to work and the Fed has helped significantly on that front,” said Niklas Nordenfelt, co-head of Wells Fargo Asset Management’s U.S. high yield fixed income team. “But you also need a functioning economy.”
<<<
>>> The Great Dollar Shortage
BY JAMES RICKARDS
MARCH 25, 2020
https://dailyreckoning.com/the-great-dollar-shortage/
The Great Dollar Shortage
The coronavirus pandemic is a human tragedy. It’s also an economic tragedy, as the global economy is collapsing around us.
Second-quarter U.S. GDP may drop as much as 30%, which is a staggering figure. Many economists predict a third-quarter recovery, but there are still so many unknowns that it’s impossible to say.
It’s still too soon to say when America will reopen for business. And you can’t just flip a switch and return things to normal. That’s not how economies function.
Many industries may never recover and millions may be out of work for extended periods.
At the very least, we’re heading into a severe recession. And we could well be heading for a full-scale depression.
That’s not being alarmist.
The crisis will also accelerate the collapse of the dollar as the world’s leading reserve currency. So you need to prepare now. What do I mean?
The U.S. dollar is at the center of global trade.
The dollar represents about 60% of global reserve assets, 80% of global payments and almost 100% of global oil sales. About 40% of the world’s debt is issued in dollars.
The Bank for International Settlements (BIS) estimates that foreign banks hold over $13 trillion in dollar-denominated assets.
All this, despite the fact that the U.S. economy only accounts for about 15% of global GDP.
The reason the dollar is the world’s leading reserve currency is because there’s a very large liquid dollar-denominated bond market. Investors can go buy 30-day 10-year, 30-year Treasury notes, etc. The point is there’s a deep, liquid dollar-denominated bond market.
But the coronavirus crisis is creating a massive problem for foreign nations dependent on the dollar.
That’s because the world is facing a critical dollar shortage.
Many observers are surprised to hear about a dollar shortage. After all, didn’t the Fed print almost $4 trillion to bail out the system after 2008?
Yes, but while the Fed was printing $4 trillion, the world was creating $100 trillion in new debt.
This huge debt pyramid was fine as long as global growth was solid and dollars were flowing out of the U.S. and into emerging markets.
But that’s no longer the case, and that’s an understatement. Global growth was anemic before the crisis hit. Now it’s contracting rapidly.
If dollars are in short supply, China can’t control its currency and emerging markets can’t roll over their debts.
But again, you might say, isn’t the Fed engaged in its most massive liquidity injections ever and extending swap lines to foreign central banks to ensure they can access dollars?
Yes, but it’s not nearly enough to meet global funding needs.
Foreign nations are scrambling to acquire dollars right now. And that surging demand for dollars only drives up the value of the dollar, which puts additional strain on their ability to service debt.
When those debt holders want their money back, $4 trillion is not enough to finance $100 trillion, unless new debt replaces the old. That’s what causes a global liquidity crisis.
We’re facing a global liquidity crisis far worse than the one that occurred in 2008. In fact, the world is heading for a debt crisis not seen since the 1930s.
The trend away from the dollar was already underway before the latest crisis, led by China and Russia. Now that trend will greatly accelerate as the world seeks to eliminate, or greatly reduce, its dependence on the dollar.
That’s not just my opinion, by the way. Here’s what Eswar Prasad, former head of the IMF’s China team, says:
“The dollar’s surge will renew calls for a shift from a dollar-centric global financial system.”
It can happen much faster than you think. And the dollar’s days are more numbered now than ever.
But what will replace it? And why can you expect the dollar to lose up to 80% of its value in the years ahead?
Regards
Jim Rickards
for The Daily Reckoning
<<<
>>> Get Ready for World Money
BY JAMES RICKARDS
MARCH 25, 2020
https://dailyreckoning.com/get-ready-for-world-money/
Get Ready for World Money
Since Federal Reserve resources were barely able to prevent complete collapse in 2008, it should be expected that an even larger collapse will overwhelm the Fed’s balance sheet.
That’s exactly the situation we’re facing right now.
The specter of a global debt crisis suggests the urgency for new liquidity sources, bigger than those that central banks can provide. The logic leads quickly to one currency for the planet.
The task of re-liquefying the world will fall to the IMF because the IMF will have the only clean balance sheet left among official institutions. The IMF will rise to the occasion with a towering issuance of special drawing rights (SDRs), and this monetary operation will effectively end the dollar’s role as the leading reserve currency.
The Federal Reserve has a printing press, they can print dollars. The IMF also has a printing press and can print SDRs. It’s just world money that could be handed out.
The IMF could function like a central bank through more frequent issuance of SDRs and by encouraging the use of “private SDRs” by banks and borrowers.
What exactly is an SDR?
The SDR is a form of world money printed by the IMF. It was created in 1969 as the realization of an earlier idea for world money called the “bancor,” proposed by John Maynard Keynes at the Bretton Woods conference in 1944.
The bancor was never adopted, but the SDR has been going strong for 50 years. I am often asked, “If I had 100 SDRs how many dollars would that be worth? How many euros would that be worth?”
There’s a formula for determining that, and as of today there are five currencies in the formula: dollars, sterling, yen, euros and yuan. Those are the five currencies that comprise in the SDR calculation.
The important thing to realize that the SDR is a source of potentially unlimited global liquidity. That’s why SDRs were invented in 1969 (when the world was seeking alternatives to the dollar), and that’s why they will be used in the imminent future.
At the previous rate of progress, it may have taken decades for the SDR to pose a serious challenge to the dollar. But as I’ve said for years, that process could be rapidly accelerated in a financial crisis where the world needed liquidity and the central banks were unable to provide it because they still have not normalized their balance sheets from the last crisis.
“In that case,” I’ve argued previously, “the replacement of the dollar could happen almost overnight.”
Well, guess what?
We’re facing a global financial crisis worse even than 2008. That’s because each crisis is larger than the previous one. The reason has to do with the system scale. In complex dynamic systems such as capital markets, risk is an exponential function of system scale. Increasing market scale correlates with exponentially larger market collapses.
This means a market panic far larger than the Panic of 2008.
SDRs have been used before. They were issued in several tranches during the monetary turmoil between 1971 and 1981 before they were put back on the shelf. In 2009 (also in a time of financial crisis). A new issue of SDRs was distributed to IMF members to provide liquidity after the panic of 2008.
The 2009 issuance was a case of the IMF “testing the plumbing” of the system to make sure it worked properly. With no issuance of SDRs for 28 years, from 1981–2009, the IMF wanted to rehearse the governance, computational and legal processes for issuing SDRs.
The purpose was partly to alleviate liquidity concerns at the time, but also partly to make sure the system works in case a large new issuance was needed on short notice. The 2009 experience showed the system worked fine.
Since 2009, the IMF has proceeded in slow steps to create a platform for massive new issuances of SDRs and the creation of a deep liquid pool of SDR-denominated assets.
On Jan. 7, 2011, the IMF issued a master plan for replacing the dollar with SDRs. This included the creation of an SDR bond market, SDR dealers, and ancillary facilities such as repos, derivatives, settlement and clearance channels, and the entire apparatus of a liquid bond market. A liquid bond market is critical.
The IMF study recommended that the SDR bond market replicate the infrastructure of the U.S. Treasury market, with hedging, financing, settlement and clearance mechanisms substantially similar to those used to support trading in Treasury securities today.
In November 2015, the Executive Committee of the IMF formally voted to admit the Chinese yuan into the basket of currencies into which an SDR is convertible.
In July 2016, the IMF issued a paper calling for the creation of a private SDR bond market. These bonds are called “M-SDRs” (for market SDRs) in contrast to “O-SDRs” (for official SDRs).
In August 2016, the World Bank announced that it would issue SDR-denominated bonds to private purchasers. Industrial and Commercial Bank of China (ICBC), the largest bank in China, will be the lead underwriter on the deal.
In September 2016, the IMF included the Chinese yuan in the SDR basket, giving China seat at the monetary table.
Over the next several years, we will see the issuance of SDRs to transnational organizations, such as the U.N. and World Bank, to be spent on climate change infrastructure and other elite pet projects outside the supervision of any democratically elected bodies. (I call this the New Blueprint for Worldwide Inflation.)
The SDR can be issued in abundance to IMF members and can also be used in the future for a select list of the most important transactions in the world, including balance-of-payments settlements, oil pricing and the financial accounts of the world’s largest corporations, such as Exxon Mobil, Toyota and Royal Dutch Shell.
So the international monetary elite has been awaiting the global liquidity crisis that we’re facing right now. In the not-too-distant future, there will be massive issuances of SDRs to return liquidity to the world. The result will be the end of the dollar as the leading global reserve currency.
SDRs will perhaps never be issued in bank note form and may never be used on an everyday basis by citizens around the world. But even such limited usage does not alter the fact that the SDR is world money controlled by elites.
But monetary resets have happened three times before, in 1914, 1939 and 1971. On average, it happens about every 30 or 40 years. We’re going on 50.
So we’re long overdue.
You’ll still have dollars, but they’ll be local currency like the Mexican peso, for example. But its global dominance will end.
Based on past practice, we can expect that the dollar will be devalued by 50–80% in the coming years.
A devaluation of this magnitude will wipe out the value of your life’s savings. You’ll still have just as many dollars, but they won’t be worth nearly as much.
Individuals will not be allowed to own SDRs, but you can still protect your wealth by buying gold — if you can find any.
Regards,
Jim Rickards
for The Daily Reckoning
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>>> Fed’s Anti-Virus Lending Firepower Could Reach $4.5 Trillion
Bloomberg
By Craig Torres
March 25, 2020
https://www.bloomberg.com/news/articles/2020-03-25/fed-s-anti-virus-lending-firepower-could-reach-4-5-trillion?srnd=premium
Stimulus earmarks $454 bln to back more Fed emergency lending
Fed programs seen as a bridge to sustain firms during virus
The Federal Reserve could now have as much as $4.5 trillion to keep credit flowing and make direct loans to U.S. businesses through the massive coronavirus stimulus bill being considered by U.S. lawmakers.
Balance Sheet
The bipartisan agreement, which still needs to be passed by the Senate and House and signed into law by President Donald Trump, will include $454 billion in funds for the Treasury to backstop emergency actions by the Fed to support the U.S. economy, Senator Patrick Toomey said on Wednesday.
The central bank will work with the U.S. Treasury to use that money as a backstop against credit risk as it supports markets for corporate and short-term state and local debt, while also loaning directly to large and medium-sized businesses.
Its lending facilities have typically required a loss-absorbing cushion of around 10% from the Treasury to protect it from loans that don’t get paid back, a feature that Toomey indicated he wanted preserved. On that basis, every dollar from the Treasury can stand behind $10 dollars lent by the Fed.
Fed's balance sheet rockets above previous high in one week
“It is a very, very big thing; it is unprecedented,” the Pennsylvania Republican told reporters Wednesday on a conference call, adding it was an opportunity to lever up “the unlimited balance sheet of the Fed.”
Toomey’s comments suggest Fed facilities could be expanded with the new funds, in effect doubling the Fed’s current $4.7 trillion balance sheet if necessary. On Sunday, Treasury Secretary Steven Mnuchin said the bill would provide up to $4 trillion in liquidity through broad-based lending programs operated by the Fed.
A Fed spokesperson declined to comment.
The central bank has launched a dramatic range of emergency measures to shelter the blow from the virus, which has brought important parts of the economy to a grinding halt as governors in several states ordered a stop to all but the most essential activity. It has slashed interest rates to almost zero and is pumping hundreds of billions of dollars into financial markets to keep credit flowing.
Those actions were ramped up on Monday, when the Fed also announced it was also working hard on a Main Street Business Lending Program to support medium-sized businesses.
Corporate Debt
It also launched two other facilities -- one to support the secondary market for corporate debt, and a second to lend or buy bonds directly from large corporations, an unprecedented bypass of the banking system that has redefined the Fed’s role in economic emergencies. With these moves, the Fed has surpassed actions it took during the 2008 financial crisis and has become the nation’s bridge lender of last resort.
Constance Hunter, chief economist at KPMG in New York, said the Fed’s credit facilities are in effect short-term bridge loans critical to keeping both small and large businesses afloat so they can hire back furloughed or laid-off workers when the pandemic subsides.
Chain Reaction
“There is a transmission channel from large corporations, to small- and medium-sized enterprises and to households” as each tries to extend temporary credit or keep paying staff, Hunter said, adding that the Fed programs will be vital.
“What I am hearing business leaders say is, ‘We don’t want to shut out our customers. If they have a temporary decline in ability to pay, we want to extend credit to bridge them to the other side of the crisis as much as possible,” she said.
The U.S. banking system has already been tapped for hundreds of millions of dollars via credit lines as companies try and shore up short-term cash positions.
To keep credit flowing in the financial markets, the Fed has also launched facilities to support the issuance of commercial paper and asset-backed securities, as well as programs to lend to bond dealers and backstop money market funds.
<<<
>>> Rickards: It’ll Get Worse it Before It Gets Better
BY JAMES RICKARDS
MARCH 23, 2020
https://dailyreckoning.com/rickards-itll-get-worse-it-before-it-gets-better/
Rickards: It’ll Get Worse it Before It Gets Better
We’re well into the coronavirus pandemic at this point. As of this writing, there are 360,765 reported infections and 15,491 deaths worldwide.
Over the next few days, you may be certain that those numbers will be significantly higher.
That’s how pandemics work. The cases and fatalities don’t grow in a linear fashion; they grow exponentially.
It’s widely acknowledged that this pandemic will get much worse before it gets better. There’s no doubt about that.
It didn’t take long for the coronavirus crisis to turn into an economic and financial crisis.
The Worst Collapse Since the Great Depression
The U.S. is falling into the worst economic collapse since the Great Depression in 1929. This will be worse than the dot-com collapse of 2000–01 and worse than the Great Recession and global financial crisis of 2008–09.
Don’t be surprised to see second-quarter GDP drop by 10% or more and for the unemployment rate to race past 10% on its way to 15% or higher.
The questions for economists are whether the lost output will be permanent or temporary and whether U.S. growth will return to trend or settle on a new path that is below the pre-virus trend.
Some lost expenditure may just be a timing difference. If I plan to buy a new car this month and decide not to buy it until August, that’s just a timing difference; the sale is not permanently lost.
But if I don’t go out for dinner tonight and then do go out a month from now, I’m not going to order two dinners. The skipped dinner is a permanent loss.
Unfortunately, 70% of the U.S. economy is based on consumption and the majority of that consists of services rather than goods. This suggests that much of the coronavirus impact will consist of permanent losses, not timing differences.
More important is the question of whether growth returns to trend by next year or follows a new lower trend. (Bear in mind that “trend” for the past 11 years has been 2.2% growth compared with average growth in all recoveries since 1980 of 3.2%; any decline in trend growth would be from an already low base.)
This is unknown, but the result will be as much psychological as policy driven.
The Fed’s Bazooka Is Empty
In situations like this, the standard policy response is for the Fed to cut rates, which it has certainly done.
The Fed has also launched massive amounts of quantitative easing.
In addition, they have guaranteed or offered credit facilities to banks, primary dealers, money market funds, the municipal bond market and commercial paper issuers so far.
Now the central bank has taken the unprecedented step of committing to buy as many U.S. government bonds and mortgage-backed securities as needed to keep the market functioning.
The problem is that the Fed’s programs won’t work as a form of stimulus. We’re seeing a supply shock as the economy grinds to a standstill. What’s everyone going to buy with all the money?
Still, they may have done things exactly backward.
Mohamed El-Erian, chief economic adviser at Allianz, says that the Fed should have focused on payment system problems and liquidity first but should not have cut rates.
Interest rates were already quite low. Once the Fed goes to zero as they did, they are incapable of cutting rates further (leaving aside negative rates, which also don’t provide stimulus).
El-Erian argues the Fed should have saved their rate cuts in case they are needed more acutely in the weeks ahead. Too late now. The interest rate bullets were fired. Now the Fed’s bazooka is empty at the worst possible time.
No Stimulus Bill
Meanwhile, Congress is working to pass a “stimulus” bill to fight the economic effects of the coronavirus pandemic.
Negotiations stalled this morning as Democrats want to insert provisions that would give tax credits to the solar and wind industry, give more power to unions and introduce new emissions standards for the airline industry.
“Democrats won’t let us fund hospitals or save small businesses unless they get to dust off the Green New Deal,” said Senate Majority Leader Mitch McConnell.
Once again, I need to emphasize the point: The economic impact of coronavirus could be devastating.
If consumers get used to not spending and decide that increased savings and debt reduction are the best ways to prepare for another virus or natural disaster, then velocity will fall and growth will be weak no matter how much money the Fed prints or the Congress spends.
The bottom line is that these spending bills provide spending but they do not provide stimulus. That’s up to consumers. And right now consumers are hunkered down.
It may be that the last of the big spenders just left town.
Gold Roars $75
Markets were down again today, what a surprise. The Dow lost another 600 points, finishing the day at 18,591.
Meanwhile, gold was up about $75 today. Physical supply is drying up and dealers are running out.
That’s why I’ve been warning my readers for years to get their gold before the crisis hits. Once it does (and it has), you won’t be able to get any.
What about silver?
You Should Get a “Monster Box”
Silver’s dynamics are a little bit different than gold because there are some industrial applications, but there’s no question that it’s a monetary metal.
And I always recommend that people have a “monster box.” A monster box is 500 American Silver Eagles, fine pure silver that comes directly from the Mint. It comes in a green case and is sealed.
The 500 coins at retailer commission will run you about $12,000 right now, but everybody should have one.
You ought to have a monster box of silver because if the power grid goes down, which could happen for a lot of reasons, the ATMs won’t work and neither will credit cards.
But if you walk into a store with five or six silver coins, you’ll be able to get groceries for your family.
Believe me, that’ll be legal tender when the time comes, so I definitely recommend silver.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> IMF Sees a Recession at Least as Bad as Global Financial Crisis
By Eric Martin
March 23, 2020
https://www.bloomberg.com/news/articles/2020-03-23/imf-sees-recession-at-least-as-bad-as-global-financial-crisis
Contraction to be followed by recovery in 2021, Georgieva says
Almost 80 countries have asked for emergency financial help
The International Monetary Fund said it expects a global recession this year that will be at least as bad as the downturn during the financial crisis more than a decade ago, followed by a recovery in 2021.
Nearly 80 countries have asked the Washington-based IMF for emergency finance, Managing Director Kristalina Georgieva said in a statement Monday following a conference call of Group of 20 finance ministers and central bankers. Georgieva said the fund strongly supports extraordinary fiscal actions already taken by many countries and welcomes the moves of major central banks to ease monetary policy.
“These bold efforts are not only in the interest of each country, but of the global economy as a whole,” she said in the statement. “Even more will be needed, especially on the fiscal front.”
The statement followed the G-20 officials convening an emergency call on Monday to discuss the global economic fallout from the pandemic and work toward a joint response. Also Monday the Federal Reserve unveiled a sweeping series of measures including for households and employers that push it deeper into uncharted territory.
The IMF said it’s working closely with other international financial institutions to provide a strong coordinated response, and reiterated that it’s ready to deploy all of its $1 trillion lending capacity.
To have a rebound next year, “it is paramount to prioritize containment and strengthen health systems -- everywhere,” Georgieva said. “The economic impact is and will be severe, but the faster the virus stops, the quicker and stronger the recovery will be.”
The IMF noted that major central banks that have initiated bilateral swap lines with emerging economies may need to provide more. The fund said it’s also exploring a possible proposal that would help facilitate a broader network of swap lines, including through an IMF-swap type facility.
<<<
>>> Dire Dollar Shortage Shows World Failed to Fix Key Crisis Flaw
Bloomberg
By Chris Anstey and Enda Curran
March 22, 2020
https://www.bloomberg.com/news/articles/2020-03-22/dire-dollar-shortage-shows-world-failed-to-fix-key-crisis-flaw?srnd=premium
Dollar jump to renew calls for financial-system reform: Prasad
Yuan’s comparative resilience stands out as possible takeaway
We’re tracking the latest on the coronavirus outbreak and the global response. Sign up here for our daily newsletter on what you need to know.
The global rush for dollars that’s been roiling the $6.6 trillion a day foreign-exchange market has showcased a missing piece of financial-safety architecture that world policy makers never addressed in the aftermath of the 2008 crisis.
The financial system’s reliance on one keystone currency proved to be an amplifier of shocks more than a decade ago. Yet since then, the greenback’s role has climbed even further as borrowers outside of America ramped up dollar-denominated debt. That’s again adding an enormous layer of stress on markets.
“It’s precisely what the global economy does not need at this moment,” Alexander Wolf, head of Asia investment strategy at JPMorgan Private Bank and a former U.S. diplomat in China, said of a strong dollar. “It tightens financial conditions, make servicing dollar debt more expensive, and can cause pass-through inflation just when that is not needed.”
As often occurs during bouts of extreme currency fluctuation, there’s been speculation about something akin to the 1985 Plaza Accord that sought to rein in a runaway dollar. Observers discount that possibility now. But one of the key takeaways from the current episode may be that one important currency finds itself burnished: China’s yuan.
Currency volatility leapt up from a record low in February
The salve for emergency dollar demand that the Federal Reserve came up with during the global financial crisis -- giving other central banks the power to deploy greenbacks abroad via swaps with the U.S. -- has been applied again. The Fed broadened the group of counterparts on Thursday, including some emerging economies, though not China or India.
Any Intervention to Weaken Dollar Seen Futile Amid Funding Woes
That decision came after an explosion in volatility in the foreign-exchange market. Traders stampeded into the dollar this month in a mass liquidation of positions triggered by the intensifying economic shutdowns associated with battling the coronavirus.
Some moves have hinted at markets veering toward dysfunction:
At one point Thursday, Britain’s pound registered its deepest eight-day slide since 1992, when it was infamously ejected from the European exchange rate mechanism.
Australia’s dollar hit its weakest since 2002, suffering its biggest two-week decline since the aftermath of Lehman.
The Japanese yen, Swiss franc and gold, which usually gain when fear grips markets -- and did so until recently -- have been sliding the past two weeks as the dollar stood alone as a haven.
Mexico’s peso and India’s rupee hit record lows. The Korean won slid the most in a decade on Thursday.
“The dollar’s surge will renew calls for a shift from a dollar-centric global financial system,” said Eswar Prasad, who once led the International Monetary Fund’s China team, and is now at Cornell University. “But the pandemic has also fractured global governance, making it harder to envision the G-20 devising a viable alternative.”
A similar surge in the dollar occurred back in 2008, prompting China’s then-central bank chief, Zhou Xiaochuan, to call for a super-sovereign reserve currency in early 2009. The following year, South Korean officials tried to get the Group of 20 to consider permanent exchange-market architecture to address vulnerabilities.
relates to Dire Dollar Shortage Shows World Failed to Fix Key Crisis Flaw
All of that was to no avail: even before the advent of the America-first Trump administration, the U.S. government and Federal Reserve weren’t prepared either for a broad pledge to supply of dollars in an emergency or to abandon having the dollar as the world’s main currency.
While the euro has increasingly become a funding currency in its own right, the dollar’s outsized role continues. Total dollar credit extended to borrowers, excluding banks, climbed to a record $12.1 trillion by last September, Bank for International Settlements data show. That’s more than double the level a decade before. It amounted to almost 14% of global GDP; the ratio back in 2009 was under 10%.
Read here why dollar strength is a big headache for the global economy.
While the dollar snapped an eight-day rally in Asian trading Friday, the continued spread of the coronavirus threatens to keep roiling markets. In theory, global policy makers could coordinate actions to stem any renewed and destabilizing dollar surge. The U.S. and four other key developed nations agreed to do that in 1985, with the Plaza Accord.
Dollar appreciation came after calm in 2019
But such notions may be unrealistic nowadays, with top officials criticizing each other over the epidemic response. China for its part has looked poorly on the Plaza Accord’s history, viewing it as a contributor to Japan’s subsequent economic stagnation.
In any case, the dollar’s recent appreciation still pales in comparison to the scale of the early 1980s strengthening. One element that’s held the U.S. currency back some has been the relative resilience of China’s yuan.
CURRENCY MARCH 6-19 CHANGE VERSUS DOLLAR
Yuan offshore -3.2%
Japanese yen -4.8%
Euro -5.3%
British pound -12%
China’s stock and credit markets have also not been hit as hard as others this month, thanks in part to seeing its coronavirus cases crest earlier.
Concerns about ready convertibility and the legacy of a messy devaluation in 2015 have held back the yuan, also known as the renminbi, from being a universally regarded reserve currency. But the current period of turmoil suggests something of a return to its role as an anchor of relative stability during the 1990s Asian financial crisis, as well as in 2007-09.
“Normally, by this stage of a bear market, these currencies would have blown out already,” Stephen Jen, who runs hedge fund and advisory firm Eurizon SLJ Capital, said of emerging market exchange rates including the Indonesian rupiah. “A key reason is the stability of the renminbi.”
<<<
>>> Italy joins China's New Silk Road project
BBC News
23 March 2019
https://www.bbc.com/news/world-europe-47679760
Italy has become the first developed economy to sign up to China's global investment programme which has raised concerns among Italy's Western allies.
A total of 29 deals amounting to €2.5bn ($2.8bn) were signed during Chinese President Xi Jinping's visit to Rome.
The project is seen as a new Silk Road which, just like the ancient trade route, aims to link China to Europe.
Italy's European Union allies and the United States have expressed concern at China's growing influence.
What is the Chinese project about?
The new Silk Road has another name - the Belt and Road Initiative (BRI) - and it involves a wave of Chinese funding for major infrastructure projects around the world, in a bid to speed Chinese goods to markets further afield. Critics see it as also representing a bold bid for geo-political and strategic influence.
China v the US: Not just a trade war
It has already funded trains, roads, and ports, with Chinese construction firms given lucrative contracts to connect ports and cities - funded by loans from Chinese banks.
The levels of debt owed by African and South Asian nations to China have raised concerns in the West and among citizens - but roads and railways have been built that would not exist otherwise:
- In Uganda, Chinese millions built a 50km (30 mile) road to the international airport
- In Tanzania, a small coastal town may become the continent's largest port
- In Europe too, Chinese firms managed to buy 51% of the port authority in Piraeus port near Athens in 2016, after years of economic crisis in Greece
What projects were signed in Rome?
On behalf of Italy, Deputy Prime Minister Luigi Di Maio, leader of the populist Five Star Movement, signed the umbrella deal (memorandum of intent) making Italy formally part of the Economic Silk Road and The Initiative for a Maritime Silk Road for the 21st Century.
Ministers then signed deals over energy, finance, and agricultural produce, followed by the heads of big Italian gas and energy, and engineering firms - which will be offered entry into the Chinese market.
China's Communications and Construction Company will be given access to the port of Trieste to enable links to central and eastern Europe. The Chinese will also be involved in developing the port of Genoa.
What's in it for Italy?
Italy is the first member of the G7 group of developed world economies to take money offered by China.
It is one of the world's top 10 largest economies - yet Rome finds itself in a curious situation.
The collapse of the Genoa bridge in August killed dozens of people and made Italy's crumbling infrastructure a major political issue for the first time in decades.
And Italy's economy is far from booming.
The country slipped into recession at the end of 2018, and its national debt levels are among the highest in the eurozone. Italy's populist government came to power in June 2018 with high-spending plans but had to peg them back after a stand-off with the EU.
Mr Di Maio told a news conference: "Italy has arrived first on the Silk Road and therefore other European countries at this moment have taken a stance on our trade decisions.
"They have taken a critical view and they have the right to this opinion."
"We do not want to override our European partners. We firmly remain in the Euro-Atlantic alliance and we remain allies of the United States in Nato," he added.
There is, however, dissent within the Italian government. Mr Di Maio's coalition partner, the other Deputy Prime Minister, Matteo Salvini, who heads the right-wing League, was conspicuously absent from all official ceremonies.
Mr Salvini has warned that he does not want to see foreign businesses "colonising" Italy.
"Before allowing someone to invest in the ports of Trieste or Genoa, I would think about it not once but a hundred times," Mr Salvini warned.
What's in it for China?
Italy's move is "largely symbolic", according to Peter Frankopan, professor of Global History at Oxford University and a writer on The Silk Roads.
But even Rome admitting the BRI is worth exploring "has a value for Beijing", he said.
"It adds gloss to the existing scheme and also shows that China has an important global role."
"The seemingly innocuous move comes at a sensitive time for Europe and the European Union, where there is suddenly a great deal of trepidation not only about China, but about working out how Europe or the EU should adapt and react to a changing world," Prof Frankopan told the BBC.
"But there is more at stake here too," he added. "If investment does not come from China to build ports, refineries, railway lines and so on, then where will it come from?"
Grappling with China's growing power
Explorer Marco Polo's travels along the Silk Road were immortalised in the "Book of Marvels"
The "made in Italy" label carries a reputation for quality worldwide, and is legally protected for products items processed "mainly" in Italy.
In recent years, Chinese factories based in Italy using Chinese labour have been challenging that mark of quality.
Better connections for cheap raw materials from China - and the return of finished products from Italy - could exaggerate that practice.
'Predatory' investment
The agreements signed in Rome come amid questions over whether Chinese firm Huawei should be permitted to build essential communications networks - after the United States expressed concern they could help Beijing spy on the West.
That was not part of the negotiations in Italy.
But a little over a week before the deal was due to be signed, the European Commission released a joint statement on "China's growing economic power and political influence" and the need to "review" relations.
As President Xi toured Rome, EU leaders in Brussels considered their approach for relations with China.
"Our aim is to focus on achieving a balanced relation, which ensures fair competition and equal market access," Donald Tusk, President of the European Council, said.
In March, US National Security Council spokesman Garrett Marquis pointed out that Italy was a major economy and did not need to "lend legitimacy to China's vanity infrastructure project".
<<<
>>> Fed opens dollar swap lines for nine additional foreign central banks
Reuters
Howard Schneider, Lindsay Dunsmuir
3-19-20
https://www.reuters.com/article/us-health-coronavirus-fed-swaps-idUSKBN2162AX
WASHINGTON (Reuters) - The U.S. Federal Reserve opened the taps on Thursday for central banks in nine additional countries to access dollars in hopes of preventing the coronavirus epidemic from causing a global economic rout.
The Fed said the swaps, in which the Fed accepts other currencies in exchange for dollars, will for at least the next six months allow the central banks of Australia, Brazil, South Korea, Mexico, Singapore, Sweden, Denmark, Norway and New Zealand to tap up to a combined total of $450 billion, money to ensure the world’s dollar-dependent financial system continues to function.
Those countries were given swap lines during the 2007 to 2009 crisis, and the Fed has permanent swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank.
The new swap lines “like those already established between the Federal Reserve and other central banks, are designed to help lessen strains in global U.S. dollar funding markets, thereby mitigating the effects of these strains on the supply of credit to households and businesses, both domestically and abroad,” the Fed said in a statement.
The central banks of South Korea, Singapore, Mexico and Sweden all said in separate statements they intended to use them.
It is the latest in a series of emergency steps the Fed has taken since Sunday to try to limit the economic harm from a health crisis that is forcing large parts of the global economy to shut down in rapid fashion.
“We have had some pretty bold moves by the Fed in the last week or two and most of them have had a very short-lived impact on the market so hopefully this one will help,” said Randy Frederick, vice president of trading and derivatives at Charles Schwab in Austin, Texas.
The virus has infected more than 200,000 people globally, but may just be in its early stages in the United States. It has prompted governments around the world to order businesses to close and restrict movements of whole populations to limit its spread.
Dollars have been in huge demand - and tight supply - in markets outside U.S. borders as banks, companies and governments scramble to secure them to service the dollar-denominated debts many have accumulated. That has sent dollar-funding costs spiraling and has led to a historic run-up in the dollar’s value against other currencies. The dollar index =USD has gained more than 7% in eight sessions, a run not seen since the early 1990s. Several of the currencies targeted by the new swap lines saw immediate relief from the Fed’s action.
The Mexican peso MXN= and Australian AUD= and New Zealand NZD= dollars all gained more than 1% after the announcement. The peso had been at a record low, while the Aussie and Kiwi had been at their lowest levels in a decade or more.
Economists anticipate a dramatic hit to world economic output in coming weeks, and much of the Fed’s effort has been to keep credit flowing so households and firms can prevent what is hoped to be a temporary collapse of wages and income from triggering waves of bankruptcies, loan defaults, and business failures.
That goes for foreign markets as well, as the U.S. dollar functions as the world’s reserve currency, involved in nearly 90% of all foreign exchange trades last year, according to the Bank for International Settlements.
Many foreign companies and institutions also borrow in dollars, and economists worry that a sudden stop in the flow of funds to foreign economies could leave them unable to re-fund debts or get new loans.
U.S. dollar credit to non-bank borrowers outside the United States grew by 4% year-on-year at end-June 2019 to reach $11.9 trillion, according to the BIS.
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>>> Nightmare on Wall Street Was All About Liquidity
Bloomberg
By Emily Barrett, Liz McCormick, and Chikako Mogi
March 14, 2020
https://www.bloomberg.com/news/articles/2020-03-14/traders-nightmare-liquidity-vanished-when-they-needed-it-most?srnd=premium
Stresses everywhere as virus triggers unprecedented repricing
Havens stop performing as investors, companies hoard cash
Ian Burdette stared at his computer screens on Thursday afternoon in New York and could hardly believe his eyes. Everywhere that the head of term-rates trading at Academy Securities Inc. looked, there were massive anomalies and signs of unprecedented stresses in markets.
Ultra Long Term U.S. Treasury Bond Futures, which moved about 1.3 points per day on average in January, were down more than seven points on the day and off 36 points from Monday’s high. Italian sovereign debt had simply imploded. An index of costs to insure corporate debt with credit-default swaps surged the most since Lehman Brothers collapsed, and the CBOE Volatility Index measuring costs to hedge against losses in U.S. stocks was the highest since November 2008.
In almost every single market, the difference between bid prices from buyers and ask prices from sellers was soaring. The spreads had become, Burdette said, “astonishingly wide.”
“There are so many flashing sirens on my monitors, I don’t know which is the worst,” said Burdette.
As the novel coronavirus continued to spread this week to become a pandemic, financial markets went into a tailspin and rekindled concerns about their ability to function in times of crisis. This is the first major test for the markets since reforms that were introduced after the financial crisis curtailed banks and brokerages from being able to provide liquidity during a turmoil –- in other words, to be a buyer and seller to clients when they need it most.
The market upheaval is exacerbating volatility across assets as investors struggle to determine what they’re actually worth, while the economic outlook grows more dire by the day and uncertainty still surrounds the real impact of the virus.
Credit-default swaps index and VIX surge as virus roils markets
The evaporation of liquidity was evident across virtually all asset classes, but its absence was most stark in securities which normally serve as havens and see their prices increase during a turmoil. That caused strange, unsettling moves as traders watched long-established cross-market relationships disintegrate.
Treasury 30-year yields unexpectedly rose after their swiftest declines on record, while gold tumbled, even as stocks suffered their sharpest one-day plunge since 1987. The cost to trade Treasuries spiked and order books thinned out to a degree last seen during the 2008 financial crisis.
“We were just trying on Monday to trim a long position in the 30-year Treasury because it had moved so far in our favor and we were unable to get bids from several major dealers,” said Mark Holman, chief executive officer at TwentyFour Asset Management in London, who has been working in the business since 1989. “Dealers don’t have the risk appetite and budget they normally have. But I’ve never seen that before, the inability to trade a U.S. Treasury. And I’m pretty sure I’m not the only one who experienced this.”
Fixed-income exchange-traded funds became unhinged from the value of the assets they invest in, often at unprecedented rates. The top five largest bond ETFs traded with discounts to their net asset values that were either records or the biggest since 2008. The $23 billion iShares 20+ Year Treasury Bond fund’s price ended Wednesday 5% below the value of its assets. In the almost 18-year history of the product, the average difference between its price and the value of its assets has been 0.03%.
Even the usually quiet world of municipal bonds saw eye-popping volatility. Vanguard mutual funds that invest in municipal bonds from New Jersey and California suffered their worst one-day declines on record, while a New York state muni fund had its worst decline since 1987. The VanEck Vectors High Yield Municipal Index ETF, which holds the debt of hospitals, nursing homes, airports and other borrowers, closed Thursday at a price that was 19% below the value of its assets.
High-yield muni ETF traded at 19% discount to its net asset value
Untangling all of the causes of the various stresses in markets may prove to be difficult, if not impossible. Still, an overwhelming demand for U.S. dollars from corporations and investors is blamed for drying up liquidity. Many companies are being forced to tap emergency credit lines from banks to ensure they have enough cash on hand to continue operating as their revenue streams threaten to dry up.
That is being exacerbated as investor demand for new corporate debt offerings disappears. Funds that invest in U.S. investment-grade corporate bonds suffered their worst outflow on record while investors also retreated from U.S. high-yield and leveraged-loan funds, according to Refinitiv Lipper data. The combined cash withdrawal reached $14.3 billion, exceeding last week’s $12.2 billion record.
“Thursday was a perfect paradigm of the situation we are in,” said Tad Rivelle, chief investment officer for fixed income at asset manager TCW Group Inc. “Basically everything was sold: stocks, all forms of debt, Bitcoin, gold. It looked like a big margin call. You are seeing a large shift in investor preference away from anything besides cash.”
The mad dash for U.S. dollars introduced rarely seen levels of stress into foreign exchange and funding markets. Currency volatility nearly touched levels last seen in 2008 and demand to bet on a rally in the yen over the coming week in the options market hit a record. Rates in cross-currency basis swaps, in which one party borrows in one currency while simultaneously lending the same amount in another currency to a counterparty, are signaling overwhelming demand for dollars. Similar stresses are being seen in swap spreads that exchange fixed rates for floating rates on bonds.
Treasuries Liquidity Drying Up Puts $50 Trillion in Question
“This is a liquidity squeeze I haven’t seen since the Lehman crisis, not even during the European debt crisis,” said Shinji Kunibe, general manager of global strategies investment department at Sumitomo Mitsui DS Asset Management Co. in Tokyo. “Strategy is for flight-to-cash, flight-to-liquidity.”
Some of the stresses were alleviated Thursday and Friday after the Federal Reserve said it’s prepared to inject a total of more than $5 trillion in cash into funding markets over the next month to ease the cash crunch. It also started to purchase Treasuries across the yield curve.
While the Fed’s moves may not prove to be a panacea that cures all of the various markets’ ills, it should at the very least alleviate the need for banks, corporations and investors to hoard dollars.
“We don’t think this can turn around risk sentiment; it can’t prevent the upcoming slowdown in consumption and economic activity,” said Elsa Lignos, global head of FX strategy at RBC in London. “But it does mean that financial markets don’t need to hoard liquidity in the way consumers have been hoarding tissue paper and pasta. It shows the Fed has learned the lesson of 2008: pump in liquidity.”
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>>> Fed announces over $1 trillion liquidity operation as bond market churns
Brian CheungReporter
Yahoo Finance
March 12, 2020
https://finance.yahoo.com/news/federal-reserve-announces-halftrillion-liquidity-operation-as-bond-market-churns-181357372.html
The Federal Reserve has launched an over $1 trillion liquidity operation to support money markets amid the new coronavirus outbreak, and is now one step closer to resuming its crisis-era policy of purchasing assets in a process called quantitative easing.
The liquidity is being offered through temporary repurchase agreement operations based out of the Federal Reserve Bank of New York.
The repo market provides financing for banks and broker-dealers at the center of the economy, allowing the levered institutions to cover positions on their balance sheet by lending sums of cash to one another.
Amid market volatility stemming from the new coronavirus and an oil price shock, the market for U.S. Treasuries showed signs of cracking.
In a normal risk-off dynamic, yields on U.S. government debt tend to fall as the stock market falls. But in recent days, Treasury yields have risen despite extended sell-offs in equities, signaling concerns that liquidity was drying up in a critical corner of finance largely seen as among the more liquid markets.
On Thursday afternoon, the New York Fed announced that it would expand the scope of its repurchase agreement market operations to offer $500 billion in three-month operations, another $500 billion in one-month operations, and at least $220 billion in operations with durations of two weeks or fewer.
“These changes are being made to address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak,” the New York Fed said in a statement.
Notably, the Fed also announced that it was changing its plan on asset purchases to include a “range of maturities” of Treasuries. Prior to the announcement, the Fed had been buying $60 billion a month of short-term T-bills. The New York Fed now says it will buy “coupons” that would have comparatively longer maturity.
Wall Street analysts now say the Fed is likely to announce a full QE4, a fourth version of quantitative easing, which may also include agency mortgage-backed securities, in its meeting next Wednesday.
BofA wrote Thursday morning that the Fed needed to step in to support the Treasury market, which had volatility levels comparable to the European Union breakup concerns in 2011 and the financial crisis in 2008.
Evercore ISI wrote Wednesday that the Fed needs to “aggressively” expand its asset purchases.
“This is overdue,” Evercore’s Krishna Guha and Ernie Tedeschi wrote. “It should now be imminent.” They added that the funding pressures increase the likelihood that the Fed would get back to zero interest rates soon.
BofA, Barclays, and Morgan Stanley are now among the Wall Street firms with research teams predicting resumption of QE in the Fed’s next meeting on March 17 and 18.
Pinpointing the problem
Analysts are scratching their heads trying to figure out why counter-parties are sidelining themselves from the Treasury market. In any event, dealers appear to be shifting their focus away from the U.S. Treasury market in favor of deploying their balance sheets somewhere else.
In the face of financial turmoil, banks and broker-dealers may be choosing to preserve their own funding as opposed to do market-making. Goldman Sachs CFO Stephen Scherr said Tuesday that his firm is comfortable providing liquidity but did not deny that firms are pulling back.
“It is far from broken, but we've seen liquidity dry up in a lot of markets. Price action [is] reflective of it,” Scherr said. “In certain markets and in certain geographies, you've seen people withdraw from the provision of liquidity in the context of risk and otherwise.”
Guha and Tedeschi added that the coronavirus itself could exacerbate the issue, as employees at dealers and banks are forced to work from home. They pointed out that a lot of the market movements are done in the morning, warning that slower activity as a result of teleworking set-ups may worsen “inefficiencies and diminished market functioning.”
What can the Fed do?
Since last September’s flare-up in money markets, the Fed has relied on its own repo operations to provide liquidity to banks and broker-dealers.
The actions could provide dealers with funding to confidently support trading in the U.S. Treasury market. But when the New York Fed opened its doors to term repos on Thursday morning, dealers flooded the repo facilities with more submitted bids than the repo operation could accept.
That suggests that the Fed may want to expand the size of its term repos or offer repos of longer duration sometime soon. Hours later the Fed announced the over $1 trillion repo operation.
Calls are increasing for the Fed to step in as its own counter-party through a fourth round of quantitative easing. Already, the Fed is buying short-term T-bills at a pace of $60-billion-per-month, but the Thursday announcement that it was shifting the target duration of its asset purchases hints at more flexibility in its balance sheet policy.
“We think the Fed will announce a QE program that targets buying $75 billion a month of Treasuries, focused on the back-end,” Morgan Stanley’s research team wrote Thursday.
Barclays wrote Thursday that it expects the Fed to buy $55 billion of agency mortgage-backed securities each month “to rein in credit and equities too.”
The Fed’s next policy-setting announcement, where the expectation is to lower rates further, is scheduled for March 18.
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>>> Fed to Widen Treasury Buying, Expand Repo to Ease Market Strain
Bloomberg
By Matthew Boesler
March 12, 2020
https://www.bloomberg.com/news/articles/2020-03-12/n-y-fed-to-conduct-purchases-across-range-of-maturities-k7ozy3u5?srnd=premium
The Federal Reserve took aggressive steps Thursday to ease what it called “temporary disruptions” in Treasury financing markets, flooding the market with liquidity and widening its purchases of U.S. government securities in a measure that recalls the quantitative easing it used during the financial crisis.
The Federal Reserve Bank of New York said in a statement that the moves were “to address temporary disruptions in Treasury financing markets” at the direction of Fed Chairman Jerome Powell in consultation with the Federal Open Market Committee.
U.S. stocks trimmed staggering losses of more than 8% earlier in the day as investors absorbed the Fed’s muscular decision.
The buying will include coupon-bearing notes and match the maturity composition of the Treasury market, it said. Ten-year U.S. Treasury yields fell sharply to trade around 0.68%.
“The Treasury securities operation schedule includes a change in the maturity composition of purchases to support functioning in the market for U.S. Treasury securities,” the New York Fed said.
Term repo operations in large size have also been added to help markets function, it also said. The New York Fed said it would offer $500 billion in a three-month repo operation at 1:30 p.m. and repeat the exercise tomorrow, along with another $500 billion in a one-month operation, and continue on a weekly basis for the rest of the monthly calendar.
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Some of the possible economic and financial outcomes for the US from the virus -
Economy -
1) GDP does not go negative for a quarter
2) GDP goes negative for 1 quarter
3) GDP goes negative for 2 quarters ('recession')
4) GDP goes negative for 3 or more quarters (deeper recession)
Stock Market -
1) Stock market down 10% ('correction')
2) Stock market down 20% (bear market)
3) Stock market down 20-30%
4) Stock market down 30-50%
Financial System, Derivatives -
1) Crisis develops but resolves without a bailout
2) Crisis develops requiring a Fed bailout
3) Crisis develops globally requiring Fed bailout
4) Crisis develops requiring IMF bailout using dollars
5) Crisis develops requiring IMF bailout using SDRs
6) Crisis develops requiring IMF bailout using SDRs and Ice-9 (financial freeze)
>>> Heading Into Negative (Real) Interest Rates
BY JAMES RICKARDS
MARCH 5, 2020
https://dailyreckoning.com/heading-into-negative-real-interest-rates/
Heading Into Negative (Real) Interest Rates
Last July I was in Bretton Woods, New Hampshire, along with a host of monetary elites, to commemorate the 75th anniversary of the Bretton Woods conference that established the post-WWII international monetary system. But I wasn’t just there to commemorate the past —I was there to seek insight into the future of the monetary system.
One day I was part of a select group in a closed-door “off the record” meeting with top Federal Reserve and European Central Bank (ECB) officials who announced exactly what you can expect with interest rates going forward — and why.
They included a senior official from a regional Federal Reserve bank, a senior official from the Fed’s Board of Governors and a member of the ECB’s Board of Governors.
Chatham House rules apply, so I still can’t reveal the names of anyone present at this particular meeting or quote them directly.
But I can discuss the main points. They essentially came out and announced that rates are heading lower, and not by just 25 or 50 basis points. Rates were 2.25% at the time. They said they have to cut interest rates by a lot going forward.
Well, that’s already happened. The Fed cut rates last September and October (each 25 basis points), bringing rates down to 1.75%. And now, after Tuesday’s emergency 50-basis point rate cut, rates are down to 1.25%.
That’s a drop of one full percentage point. If the Fed keeps cutting (which is likely), it’ll soon be flirting with the zero bound. And if the economic effects of the coronavirus don’t dissipate (very possible), the Fed could easily hit zero.
But then what?
These officials didn’t officially announce that interest rates will go negative. But they said that when rates are back to zero, they’ll have to take a hard look at negative rates.
Reading between the lines, they will likely resort to negative rates when the time comes.
Normally forecasting interest rate policy can be tricky, and I use a number of sophisticated models to try to determine where it’s heading. But these guys made my job incredibly easy. It’s almost like cheating!
The most interesting part of the meeting was the reason they gave for the coming rate cuts. They were very relaxed about it, almost as if it was too obvious to even point out.
The reason has to do with real interest rates.
The real interest rate is the nominal interest rate minus the inflation rate. You might look at today’s interest rates and think they’re already extremely low. And in nominal terms they certainly are. But when you consider real interest rates, you’ll see that they can be substantially higher than the nominal rate.
That’s why the real rate is so important. If you’re an economist or analyst trying to forecast markets based on the impact of rates on the economy, then you need to focus on real rates.
Assume the nominal rate on a bond is 4%; what you see is what you get. But the real rate is the nominal rate minus inflation. If the nominal rate is 4% and inflation is 2%, then the real rate is 2% (4 – 2 = 2).
That difference between nominal and real rates seems simple until you get into a strange situation where inflation is higher than the nominal rate. Then the real rate is negative.
For example, if the nominal rate is 4% and inflation is 5%, then the real rate of interest is negative 1% (4 – 5 = -1).
The U.S. has never had negative nominal rates (Japan, the eurozone and Switzerland have), but it has had negative real rates.
By the early 1980s, nominal interest rates on long-term Treasury securities hit 13%. But inflation at the time was 15%, so the real rate was negative 2%. The real cost of money was cheap even as nominal rates hit all-time highs.
Nominal rates of 13% when inflation is 15% are actually stimulative. Rates of 3% when inflation is 1% aren’t. In these examples, nominal 2% is a “high” rate and 13% is a “low” rate once inflation is factored in.
What is the real rate today?
The yield to maturity on 10-year Treasury notes is currently at a record low of under 1% (it actually fell to 0.899% today before edging slightly higher). That’s never happened before in history, which is an indication of how unusual these times are.
Meanwhile, inflation as measured by the PCE core deflator (the Fed’s preferred measure) is currently about 1.6% year over year, below the Fed’s 2% target.
Using those metrics, real interest rates are in the neighborhood of -.5%. But believe it or not, that’s actually higher than the early ’80s when nominal rates were 13%, but real rates were -2%.
That’s why it’s critical to understand the significance of real interest rates.
And real rates are important because the central banks want to drive real rates meaningfully negative. That’s why they have to lower the nominal rate substantially, which is what these central bank officials said at Bretton Woods.
So you can expect rates to go to zero, probably sooner or later. Then, nominal negative rates are probably close behind.
The Fed is very concerned about recession, for which it’s presently unprepared. And with the coronavirus, now even more so. It usually takes five percentage points of rate cuts to pull the U.S. out of a recession. During its hiking cycle that ended in December 2018, the Fed was trying to get rates closer to 5% so they could cut them as much as needed in a new recession. But, they failed.
Interest rates only topped out at 2.5%, only halfway to the target. The market reaction and a slowing economy caused the Fed to reverse course and engage in easing. That was good for markets, but terrible in terms of getting ready for the next recession.
The Fed also reduced its balance sheet from $4.5 trillion to $3.8 trillion, but that was still well above the $800 billion level that existed before QE1 (“QE-lite” has since taken the balance sheet up above $4 trillion, and it’s probably going higher since new cracks are forming in the repo market).
In short, the Fed (and other central banks) only partly normalized and are far from being able to cure a new recession or panic if one were to arise tomorrow.
The Fed is therefore trapped in a conundrum that it can’t escape. It needs to rate hikes to prepare for recession, but lower rates to avoid recession. It’s obviously chosen the latter option.
If a recession hit now, the Fed would cut rates by another 1.25% in stages, but then they would be at the zero bound and out of bullets.
Beyond that, the Fed’s only tools are negative rates, more QE, a higher inflation target, or forward guidance guaranteeing no rate hikes without further notice.
Of course, negative nominal interest rates have never worked where they’ve been tried. They only fuel asset bubbles, not economic growth. There’s no reason to believe they’ll work next time.
But the central banks really have no other tools to choose from. When your only tool is a hammer, every problem looks like a nail.
Now’s the time to stock up on gold and other hard assets to protect your wealth.
Regards,
Jim Rickards
for The Daily Reckoning
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IMF Substitution Fund -- The US Fed is the only main central bank not already at zero % interest rates. Everyone is talking about fiscal stimulus, ie deficit spending, tax cuts, and helicopter money, which is about all you can do if you can't lower interest rates.
However, once all monetary and fiscal tools are exhausted, the IMF could step in and begin bailing out smaller countries using SDRs, and work their way up from there. So in the beginning the SDR transition could be gradual and piecemeal.
In Q2 last year they apparently activated the IMF's 'Substitution Fund', which allows central banks to swap their dollar denominated debt for SDRs without having to use the financial markets to sell the dollars. This ominous development coincided almost exactly with gold's sudden breakout and big surge (late May 2019). Within 3 months gold had zoomed 20%.
The activation of the IMF Substitution Fund was a clear signal that the transition to the SDR would be coming. The Substitution Fund approach allows central banks to replace their dollar reserves for SDRs without involving the financial markets and thus avoids tanking the dollar.
>>> Why Is Gold Tanking?
BY JAMES RICKARDS
FEBRUARY 25, 2020
https://dailyreckoning.com/why-is-gold-tanking/
Why Is Gold Tanking?
The coronavirus continues to take its toll on the stock market.
If you were expecting a major recovery today after yesterday’s bloodbath, you were very disappointed.
Stocks opened higher this morning but soon fell back into red territory again, where they stayed throughout the day.
The Dow ended up losing another 879 points today after yesterday’s 1,031-point hammering.
The S&P and Nasdaq were also big losers today, down 98 and 256 points respectively.
For investors accustomed to “buying the dip,” this is quite a change. As noted macroeconomic analyst Mohamed El-Erian said earlier today:
I understand the inclination to buy on the dip. I understand that the path of least resistance in this market is to bounce up… but I stress, this is different.
Meanwhile, the all-important 10-year Treasury yield fell to a record low this morning as investors continue to pour into safe-haven assets.
The 10-year yield dropped to 1.32%, falling beneath its previous record low of 1.325%, which it set in July 2016 following Brexit.
That means the bond market is projecting a poor outlook for the global economy. And over the long haul, the bond market has an excellent track record of being right.
Gold was down big today, losing $45.20. But that’s not because of gold itself. It’s all about the falling stock market.
When you think about it, it doesn’t make sense.
After all, if investors are fleeing for safety, which we’re seeing in the Treasury market, why wouldn’t they be buying up gold as well?
Gold was up close to $30 yesterday, before the price began dropping late in the day.
Here’s the likely reason why gold is falling right now when it should be rising…
With the stock market plummeting, hedge funds and other institutional investors have had to suddenly raise cash to meet margin calls on their positions in the equity markets. And they had to get the cash from somewhere.
Gold is a very liquid asset that can quickly be traded for cash.
They can either sell the actual gold bullion they own or they can unload their positions in gold ETFs (like GLD).
So my estimate is that they dumped their gold positions to raise the money. And that’s been driving the listed gold price lower.
It has nothing to do with gold’s fundamentals, which are actually very strong. Demand is increasing, central banks are hoarding record amounts of gold and new supplies are dwindling.
That’s a recipe for skyrocketing prices, and the bull market in gold is still very much intact.
The latest selling is just a quirk of the market, in which institutions have to raise cash in order to cover their positions when the market’s dropping.
Again, it has really nothing to do with gold itself. This is just a temporary blip.
If you haven’t bought gold yet, this is an ideal opportunity to scoop up gold at a bargain-basement price. Or, if you already own gold, to stock up on more.
For gold at least, it’s an ideal opportunity to “buy the dip.”
Gold is going much, much higher.
I’m not sure how many more opportunities like this we’re going to see. I urge you to take advantage of it while you can.
Regards,
Jim Rickards
for The Daily Reckoning
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>>> “1984” Has Come to China
BY JAMES RICKARDS
FEBRUARY 24, 2020
https://dailyreckoning.com/1984-has-come-to-china/
“1984” Has Come to China
You’re probably familiar with George Orwell’s classic dystopian novel Nineteen Eighty-Four; (it’s often published as 1984). It was written in 1948; the title comes from reversing the last two digits in 1948.
The novel describes a world of three global empires, Oceania, Eurasia and Eastasia, in a constant state of war.
Orwell created an original vocabulary for his book, much of which is in common, if sardonic, usage today. Terms such as Thought Police, Big Brother, doublethink, Newspeak and memory hole all come from Nineteen Eight-Four.
Orwell intended it as a warning about how certain countries might evolve in the aftermath of World War II and the beginning of the Cold War. He was certainly concerned about Stalinism, but his warnings applied to Western democracies also.
When the calendar year 1984 came and went, many breathed a sigh of relief that Orwell’s prophesy had not come true. But that sigh of relief was premature. Orwell’s nightmare society is here today in the form of Communist China…
China has most of the apparatus of the totalitarian societies described in Orwell’s book. China uses facial recognition software and ubiquitous digital surveillance to keep track of its citizens. The internet is censored and monitored. Real-life thought police will arrest you for expressing opinions opposed to the government or its policies.
Millions of Chinese have been arrested and sent to “reeducation” camps for brainwashing (the lucky ones) or involuntary organ removal without anesthetic (the unlucky ones who die in excruciating pain and are swiftly cremated as a result).
While these atrocities are not going to happen in the U.S. or what passes for the West these days, the less extreme aspects of China’s surveillance state could well be. And while you might not be arrested for expressing unpopular opinions or challenging prevailing dogmas (at least not yet), you could face other sanctions. You could even lose your job and find it nearly impossible to find another.
You can certainly be banned from social media…
Anything seems to go on social media (primarily Facebook, Twitter, Instagram, Snapchat, YouTube and a few other platforms) — unless you’re a conservative personality or politico. That’s where the censorship begins.
Many conservative social media participants have had their acco?unts closed or suspended, not for threats or vulgarity but for criticism of “progressive” views (albeit criticism with some sharp edges).
Meanwhile, those with progressive views can say almost anything on social media, including the implicit endorsement of violence. But nothing happens.
Other conservatives report being the targets of “shadow banning.” That’s where your acco?unt is open and seems to operate normally, but unbeknownst to you, much of the network is being blocked from seeing your posts and popular features such as “likes” and “retweets” are being truncated and not distributed.
It’s like being a pro athlete who finds out the stadium is empty and no tickets are being sold. That’s bad enough. But Twitter took the war on conservatives a step further.
Well, one of the most widely followed acco?unts on Twitter is none other than Donald J. Trump’s, with 68 million followers. President Trump uses Twitter to announce policy initiatives and personnel changes and to offer pointed criticism of political opponents. It’s a major platform for him.
Last month Trump issued a tweet that identified the so-called “whistleblower” of the Ukraine phone call that led to his impeachment. That’s not as big a deal as it sounds because everyone in Washington knew who the whistleblower was (you can look his name up on the web), and he wasn’t even a real whistleblower because he didn’t meet statutory requirements.
Still, Twitter blocked Trump’s tweet. Twitter blamed a temporary system “outage,” but that claim was highly suspicious. Later, Trump’s tweet was restored, but the original acco?unt that Trump linked to had been deleted. No one ever said that politics was fair.
But Twitter’s blatant interference in the election could have adverse consequences for the company in Trump’s second term.
And a few social media companies are now de facto censors, taking over the job from the government. Given their massive media footprint, they wield extraordinary influence over the American public.
They’re in essence becoming propaganda outfits.
It’s not just here of course. Canada, for example, is actively pursuing digital surveillance to track the activities of law-abiding citizens.
A report for the Bank of Canada says that financial information gathered from digital transaction records could be used for “sharing information with police and tax authorities.”
If all transactions are digital (including credit and debit cards), authorities can track your whereabouts, buying habits, restaurant choices and much more. They could also reveal your political orientation and personal associations.
It’s not difficult to imagine the police and tax authorities using that power to make life extremely difficult for those who criticize the government or sacred ideologies like “climate change.” If you think that sounds extreme, some have actually advocated jailing climate change “deniers.”
Do you think I’m making that up?
Well, the executive director of an outfit called Climate Hawks Vote said “Put officials who reject science in jail.”
The Nation also ran an article called, “Climate Denialism Is Literally Killing Us: The victims of Hurricane Harvey have a murderer — and it’s not the storm.”
“How long,” its author asked, “before we hold the ultimate authors of such climate catastrophes accountable for the miseries they inflict?”
And Robert F. Kennedy Jr. said the Koch brothers “should be in jail,” “with all the other war criminals.”
Well, David Koch has since died, so he’ll escape Kennedy’s justice.
But their “war crimes” consisted of funding organizations that question the climate change alarmism the media is constantly feeding us.
But guess what? There’s plenty of hard scientific evidence that refutes the alarmist view. This article isn’t the venue to get into it, but the scientific case against climate alarmism is much stronger than the case for it.
But if you dissent against the official view, today’s tech censors will silence or marginalize you, no matter how valid your point.
The problem is, the trend is moving very quickly in this direction and it’s difficult to stop. And sophisticated surveillance technology to monitor citizens is already in place…
For example, cameras with the latest surveillance technology can spot and match millions of faces in real time with an accuracy rate of over 99%. They’re touted as anti-terrorism and anti-crime tools, which they certainly are.
But as Stalin’s ruthless secret police chief Lavrentiy Beria said, “Show me the man and I’ll show you the crime.” It’s easy to see that power being abused to target everyday citizens.
(By the way, Beria would ultimately prove his own point, as he was later arrested and executed for treason).
And actually, many people welcome intrusive surveillance technology on the grounds of convenience. As an example, look at microchipping, where people are injected with a small microchips beneath their skin. Microchipping has been associated with an Orwellian nightmare in which Big Brother constantly monitors your every move.
Well, over 4,000 Swedes have already happily volunteered to have it done.
In addition to acco?unt information that negates the need to carry cash or credit cards to pay for goods, these chips can contain personal information. It’s all happened fairly quickly. Just a few years ago, the very idea of it would have sent chills down the spines of most people.
But that’s how fast Big Brother can go from nightmare to reality, and appear benign or even beneficial.
Big Brother’s on full display in China right now, but he could be on his way here before too long.
Regards,
Jim Rickards
for The Daily Reckoning
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>>> The World’s Biggest Economies Get a Jolt of Government Spending
Bloomberg News
February 20, 2020
https://www.bloomberg.com/news/articles/2020-02-21/the-world-s-biggest-economies-get-a-jolt-of-government-spending?srnd=premium
Governments across the world are starting to use more fiscal firepower to boost economies, though the shift may not be happening fast enough to appease central bankers who say they’re sick of carrying the burden of stimulus alone.
In more than half of the world’s 20 biggest economies, analysts now expect looser budgets this year — in other words, bigger deficits or smaller surpluses — than they did six months ago, according to a Bloomberg survey of economist forecasts.
Who’s Stimulating?
Economists expect looser budgets in most of the world’s top economies
Asian economies like China and South Korea are using fiscal policy to counter the menace of the coronavirus, which has shut down swaths of industry and devastated supply chains, while governments in the U.K. and Russia have ditched long-held commitments to austerity.
The world remains far from an across-the-board easing. Japan recently raised sales taxes, Germany still holds its surplus sacred, and U.S. policy is gridlocked by upcoming elections. And some of the change in budget forecasts are a consequence of weaker growth expectations, rather than higher spending or lower taxes.
Where’s the Stimulus?
2020 budget balance forecast as percent of GDP
As finance ministers from the Group of 20 major economies prepare to meet in Riyadh, here’s a roundup of budget forecasts and recent policy shifts in some key countries.
U.S.
U.S. Budget Balance
2020 forecast: -4.8% of GDP (deficit)
2021 forecast: -4.8%
President Donald Trump has delivered stimulus in the form of tax cuts and higher government outlays, and got a bump in growth as a result. This month, Trump submitted a budget proposal to Congress that would pare back some of the spending, though he’s also dangling a promise of more tax cuts targeted at the middle-class. But neither proposal is expected to get past House Democrats who control the purse strings, so any major fiscal initiative is likely on ice until after November’s elections.
China
China Budget Balance
2020 forecast: -4.8% (deficit)
2021 forecast: -4.6%
With entire industries and regions in lockdown because of the virus, and the government adamant that it won’t lower growth targets, China is set for more fiscal stimulus. The government said this week it’s preparing additional measures including cuts in corporate taxes and fees. There’s already some strain on the budget as a result of trade war with the U.S., and Finance Minister Liu Kun acknowledged there’ll be “short-term challenges.” But he said China must “take a longer-term view and take resolute steps.”
Japan
Japan Budget Balance
2020 forecast: -2.9% (deficit)
2021 forecast: -2.7%
Japan was already in danger of recession even before the scale of the coronavirus threat became clear – partly because it tightened fiscal policy. An increase in sales taxes in October 2019 contributed a plunge in output, just as it did the last two times the policy was tried. Lawmakers approved a supplementary budget worth about $29 billion last month, and on paper that extra stimulus should arrive by the end of March — but history suggests the government probably won’t manage to spend it all within the allotted time.
Germany
Germany Budget Balance
2020 forecast: 0.7% (surplus)
2021 forecast: 0.2%
Europe’s biggest economy has long been seen as a prime candidate for fiscal easing, since it has significantly less public debt than many neighbors. The European Central Bank and the French government are among those calling for action. But while Chancellor Angela Merkel’s coalition has begun limited stimulus focused on green projects, there’s no appetite to open the fiscal floodgates in a country where budget discipline remains a symbol of political virility. A lingering manufacturing recession and the coronavirus outbreak probably aren’t enough to revisit that stance.
U.K.
U.K. Budget Balance
2020 (fiscal year) forecast: -2.4% (deficit)
2021 forecast: -2.6%
Fresh from an unexpectedly decisive election win, Prime Minister Boris Johnson has signaled he’s ready to open the taps of government spending — and has already ditched a finance minister seen as less enthusiastic about that project. Johnson aims to cement support among the working-class voters who helped deliver his landslide. He’s outlined plans for infrastructure investment that skew toward poorer areas in northern England, and his new chancellor may be more amenable to relaxing the fiscal rules that would cap borrowing. It’s a departure for his Conservative party, which has prided itself on a reputation for fiscal discipline — and been slammed by critics for embracing austerity.
France
France Budget Balance
2020 forecast: -2.4% (deficit)
2021 forecast: -2.3%
France heeded the call for fiscal stimulus before central bankers even made it. Under pressure from the prolonged and often violent disruption of the Yellow Vest protests, President Emmanuel Macron tacked away from consolidating finances at the end of 2018 by unleashing around 17 billion euros of tax cuts. That has contributed to keeping public debt near 100% of economic output, leaving France with little margin for further stimulus should it be needed.
India
India Budget Balance
2020 forecast: -3.7% (deficit)
2021 forecast: -3.5%
India has heeded its central bank’s call for easier fiscal policy to a boost a flagging economy. In February, it announced cuts in personal taxes that will cost the government $5.6 billion in revenue, a few months after a similar $20 billion handout to companies. The tax cuts will likely lead to India missing the targets on what it calls a fiscal “glide path,” which is supposed to bring the central government’s deficit below 3% of GDP by March next year.
Italy
Italy Budget Balance
2020 forecast: -2.5% (deficit)
2021 forecast: -2.4%
Italy has increased tax revenues even as the economy struggled, and has plans for a fiscal overhaul starting in the next quarter. It has also introduced a tax on digital sales. But it’s unlikely that the extra money will all be spent. Italy has repeatedly run up against EU-imposed budget limits, and keeping this year’s deficit in line with commitments will be difficult if the country falls into recession.
Brazil
Brazil Budget Balance
2020 forecast: -5.5% (deficit)
2021 forecast: -5.3%
Brazil’s government is committed to trimming deficits, with last year’s overhaul of state pensions as the plan’s long-term centerpiece. The budget shortfall in 2019 was the smallest in five years, though that was partly due to one-time injections of cash, including an oil auction. And while ministers are promising more belt-tightening measures, such as lower salaries for new public servants, they may struggle to persuade lawmakers ahead of municipal elections in October.
Canada
Canada Budget Balance
2020 forecast: -0.9% (deficit)
2021 forecast: -0.9%
Prime Minister Justin Trudeau’s government has already delivered a dose of fiscal stimulus in recent years, providing enough of a boost to allow the Bank of Canada to refrain from cutting interest rates. But the federal government’s ability to continue feeding growth is expected to fade in coming years, given Trudeau’s pledge to keep the country’s public-debt-to-GDP ratio on a declining path.
Russia
Russia Budget Balance
2020 forecast: 1.1% (surplus)
2021 forecast: 0.8%
Russia’s government is gearing up to spend from its $124 billion rainy day fund, after five years of some of the world’s toughest budget austerity. The shift is aimed at boosting the stagnant economy and improving living standards in President Vladimir Putin’s final term as president. Extra spending this year on infrastructure and social support could reach 1.3% of gross domestic product. Further stimulus may be capped by Russia’s budget law, which says revenue from oil above $42 a barrel (it currently trades around $60) must be saved, not spent.
South Korea
South Korea Budget Balance
2020 forecast: -1.3% (deficit)
2021 forecast: -1.4%
South Korea is set to post its first deficit since the global financial crisis as the government tries to support a recovery in exports and consumer spending. The Moon Jae-in administration is front-loading its budget in the first half of this year, and bolstering support for firms hurt by the coronavirus outbreak in China, South Korea’s biggest trading partner. Some lawmakers from the ruling party are calling on the government to go further and draw up a supplementary budget.
Australia
Australia Budget Balance
2020 forecast: 0.3% (surplus)
2021 forecast: 0.2%
Australia’s government is seeking to return its budget to surplus for the first time since 2008. It’s been resisting calls for more spending from central bank chief Philip Lowe, who argues that historically low interest rates offer a chance to finance infrastructure. But the recent wildfires, which devastated the east coast, have forced Treasurer Josh Frydenberg to loosen the purse strings in order to fund reconstruction.
Mexico
Mexico Budget Balance
2020 forecast: -2.4% (deficit)
2021 forecast: -2.3%
As Mexico’s economy stagnated over the last year, President Andres Manuel Lopez Obrador has kept fiscal policy tight. His government has been cutting spending on salaries, helping to deliver a budget surplus before interest payments of 1.1% in 2019 – and the goal is to stay in primary surplus this year. That likely leaves the central bank, which has cut interest rates at five straight meetings, carrying the burden of stimulus for now.
Indonesia
Indonesia Budget Balance
2020 forecast: -2.2% (deficit)
2021 forecast: -2.1%
Indonesia will front-load spending in the first half of 2020 to boost an economy growing at its slowest pace in four years. Its ability to inject more fiscal stimulus is limited by a hard ceiling on the budget deficit of 3% of GDP. That may leave the heavy lifting to the central bank — which delivered another rate cut this week, even though governor Perry Warjiyo insists that the bank “cannot be the only game in town.”
Saudi Arabia
Saudi Arabia Budget Balance
2020 forecast: -6.8% (deficit)
2021 forecast: -6.1%
Saudi Arabia’s budget outcomes usually depend on the price of oil, the kingdom’s main source of revenue. Even before crude slumped this year, the government was expecting a bigger budget deficit in 2020. In an effort to limit the shortfall, it plans to reduce spending by about 3% in 2020 and continue cutting through 2022, part of a wider plan for the private sector to take a more prominent role in the state-dominated Saudi economy.
Turkey
Turkey Budget Balance
2020 forecast: -3.6% (deficit)
2021 forecast: -3.3%
Fiscal easing has propped up growth in Turkey as President Recep Tayyip Erdogan’s preferred engine of stimulus — credit expansion supported by low interest rates — foundered amid a corporate-debt crisis. The government posted an annual deficit of about 3% of GDP last year, when back-to-back elections drove a spending spree, and expects a similar ratio in 2020.
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>>> “Mandate of Heaven” in Jeopardy
BY JAMES RICKARDS
FEBRUARY 17, 2020
https://dailyreckoning.com/mandate-of-heaven-in-jeopardy-2/
“Mandate of Heaven” in Jeopardy
The U.S. markets are closed today for Presidents Day. If you have the day off, I hope you’re enjoying your long weekend.
But one event is taking center stage in the world that affects not only basic survival for millions of people, but the health of the global economy overall.
Of course, I’m talking about the coronavirus outbreak currently playing out before our eyes in China.
China’s economy was slowing substantially before the outbreak of the highly contagious and deadly virus last fall. This slowing was the predictable result of excessive debt levels, Trump’s retaliation in the trade wars, and China’s encounter with what development economists call the “middle-income trap.”
Developing economies can grow at double-digit rates as they move from low-income (about $3,000 annual per capita income) to middle-income (about $10,000 annual per capita income).
The main requirements are limits on corruption, a large pool of available labor, and an attractive legal environment for foreign direct investment. Once investment is used for infrastructure and labor is mobilized, large-scale basic manufacturing can commence.
This powers growth and the accumulation of hard currency reserves from export earnings.
The difficulty begins when an economy tries to move from middle-income to high-income (about $18,000 annual per capita income). That move requires more than cheap labor and infrastructure investment. It requires applied technology to produce high-value added products.
Only Taiwan, South Korea and Singapore have made this transition, (excluding Japan after World War II, and oil-exporting nations).
This explains why China has been so focused on stealing U.S. intellectual property.
Trump has been closing that avenue. China cannot generate the needed technology through its own R&D. China is stuck in the middle-income trap and a slowdown in growth is the inevitable result.
The story gets worse for China.
As of Friday, the total reported number of people infected by the coronavirus was 64,435. And the death toll was up to 1,383, including three people outside of China.
Those figures are official statistics released by China and other countries around the world where the virus has spread.
However, there is substantial medical, anecdotal, and model-based evidence that the actual infection rate and death rate may be ten to twenty times higher than those official statistics.
Over 60 million Chinese in several major cities are under “lock-down” where individuals are confined to their homes and may only leave once every three days to buy groceries.
Streets are empty, stores are closed, trains and planes are not moving, and factories are shut. The Chinese economy is slowly grinding to a halt.
This not only affects China’s economy as a whole, but the contagion filters down into individual companies that are dependent on China both for supply chain inputs and final sales.
And it will have a rippling effect on the U.S. economy also. This story has a long way to run.
Regards,
Jim Rickards
for The Daily Reckoning
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>>> Powell Suggests the Fed May Lack Ammo to Combat Next Recession
Bloomberg
By Rich Miller and Craig Torres
February 12, 2020
https://www.bloomberg.com/news/articles/2020-02-12/powell-suggests-the-fed-may-lack-ammo-to-combat-next-recession?srnd=premium
Fed chief says it’s important for fiscal policy to help out
Federal Reserve Chairman Jerome Powell came close to acknowledging that the central bank may not have the firepower to fight the next recession and called on Congress to get ready to help.
The current low level of interest rates “means that it would be important for fiscal policy to support the economy if it weakens,” he told the House Financial Services Committee on Tuesday.
The remark, which came in opening testimony that Powell is due to repeat to a Senate panel on Wednesday, was an unusual appeal by the head of a politically independent institution that is used to combating economic contractions on its own.
But it highlights the difficulties that the Fed and other major central banks face in a world of historically low interest rates and why tax cuts and government spending increases may also be needed to fight future downturns.
Fed has little room to cut rates in a recession
“There is very little central banks can do” when both short- and longer-term rates are near zero, said Mark Spindel, a co-author of a book about the Fed’s relations with Congress. “We are much closer to a fiscal-monetary collaboration. They are out of optimal monetary policy tools.”
Speaking in Strasbourg on Tuesday, European Central Bank President Christine Lagarde was more explicit than Powell about the limits to central bank power. “Monetary policy cannot, and should not, be the only game in town,” she told European lawmakers. Admitting he was “straying a bit” from his remit, Bank of England Governorr Mark Carney also backed the U.K. government’s new spending program.
The Fed is engaged in an in-depth review of its policies and practices that is aimed at finding ways to enhance its recession-fighting abilities.
Powell’s comment on Tuesday though suggests he recognizes that there’s just so much the central bank can do in that regard.
After three reductions last year, the Fed’s target for short-term interest rates now stands at 1.5% to 1.75%, less than half the 500 basis points in cuts it has made to fight past downturns.
Policy Toolkit
Powell said that the Fed would resort to tools it used in the last recession if it’s again forced to lower short-term interest rates to zero.
They are quantitative easing -- in which the Fed buys Treasury bonds to drive down long-term interest rates -- and forward guidance on the future direction of short rates.
The Fed chief though made clear that the central bank would not follow the lead of its counterparts in the euro zone and Japan and push rates below zero. “In the U.S. context, that’s not a tool we’re looking at,” he said.
He also dismissed a suggestion that the central bank consider directly funding the government so it can cut taxes and boost spending in a recession.
“That’s really an untested and not widely supported perspective,” he said.
Policy Coordination
Some economists though think the Fed might have to go that far if the economy turns bad enough.
In a paper last year, former Fed Vice Chairman Stanley Fischer and ex-Swiss National Bank chief Philipp Hildebrand said “unprecedented policy coordination” may be needed to deal with the next downturn, including central banks explicitly financing bigger government budget deficits.
To make room for future fiscal actions to aid the economy, Powell urged lawmakers on Tuesday to rein in budget deficits now.
“Putting the federal budget on a sustainable path when the economy is strong would help ensure that policy makers have the space to use fiscal policy to assist in stabilizing the economy during a downturn,” he said.
His comment came in the wake of the release on Monday of President Donald Trump’s latest budget plans, which would push the gross federal debt above $30 trillion over the next decade.
Some economists argue fiscal policy isn’t a decent substitute for monetary policy when trying to boost economies in the short-term. Harvard University Professor Kenneth Rogoff wrote recently that government stimulus “inevitably involves messy, hard-fought compromises” that limit its effectiveness.
Political Independence
There are dangers for the Fed in collaborating too closely with elected officials because it could undermine its political independence.
Breaking with recent presidential tradition, Trump has repeatedly attacked the central bank for keeping interest rates too high, including posting a tweet on Tuesday that delivered a dig at Powell for his performance on Capitol Hill.
But the president is not alone in seeking favors from the Fed. At Tuesday’s hearing, Democratic Representative Rashida Tlaib from Michigan repeatedly pressed Powell to explain why the central bank hadn’t helped Detroit avoid bankruptcy as it did during the crisis for major U.S. banks.
In the end, economists said there may be no alternative for the Fed in the next contraction but to accept some form of disciplined fiscal-monetary cooperation.
“They are running low on ammunition,” given that they are unlikely to use negative interest rates, said David Beckworth, a senior research fellow at the Mercator Center at George Mason University. “It does seem like they are going to be in a bind in a next recession.”
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