SDR - New World Money

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>>> Time for a great reset of the financial system


A 30-year debt supercycle that has fueled inequality illustrates the need for a new regime


Financial Times

Chris Watling

MARCH 18 2021


https://www.ft.com/content/39c53b9f-f443-4dde-9cdb-07e8999ec783


On average international monetary systems last about 35 to 40 years before the tensions they create becomes too great and a new system is required.

Prior to the first world war, major economies existed on a hard gold standard. Intra-wars, most economies returned to a “semi-hard” gold standard. At the end of the second world war, a new international system was designed — the Bretton Woods order — with the dollar tied to gold, and other key currencies tied to the dollar.

When that broke down at the start of the 1970s, the world moved on to a fiat system where the dollar was not backed by a commodity, and was therefore not anchored. This system has now reached the end of its usefulness.

An understanding of the drivers of the 30-year debt supercycle illustrates the system’s tiredness. These include the unending liquidity that has been created by the commercial and central banks under this anchorless international monetary system. That process has been aided and abetted by global regulators and central banks that have largely ignored monetary targets and money supply growth.

The massive growth of mortgage debt across most of the world’s major economies is one key example of this. Rather than a shortage of housing supply, as is often postulated as the key reason for high house prices, it’s the abundant and rapid growth in mortgage debt that has been the key driver in recent decades.

This is also, of course, one of the factors sitting at the heart of today’s inequality and generational divide. Solving it should contribute significantly to healing divisions in western societies.

With a new US administration, and the end of the Covid battle in sight with the vaccination rollout under way, now is a good time for the major economies of the west (and ideally the world) to sit down and devise a new international monetary order.

As part of that there should be widespread debt cancellation, especially the government debt held by central banks. We estimate that amounts to approximately $25tn of government debt in the major regions of the global economy.

Whether debt cancellation extends beyond that should be central to the negotiations between policymakers as to the construct of the new system — ideally it should, a form of debt jubilee.

The implications for bond yields, post-debt cancellation, need to be fully thought through and debated. A normalisation in yields, as liquidity levels normalise, is likely.

High ownership of government debt in that environment by parts of the financial system such as banks and insurers could inflict significant losses. In that case, recapitalisation of parts of the financial system should be included as part of the establishment of the new international monetary order. Equally, the impact on pension assets also needs to be considered and prepared for.

Secondly, policymakers should negotiate some form of anchor — whether it’s tying each other’s currencies together, tying them to a central electronic currency or maybe electronic special drawing rights, the international reserve asset created by the IMF.

As highlighted above, one of the key drivers of inequality in recent decades has been the ability of central and commercial banks to create unending amounts of liquidity and new debt.

This has created somewhat speculative economies, overly reliant on cheap money (whether mortgage debt or otherwise) that has then funded serial asset price bubbles. Whilst asset price bubbles are an ever-present feature throughout history, their size and frequency has picked up in recent decades.

As the Fed reported in its 2018 survey, every major asset class over the 20 years from 1997 through to 2018 grew on average at an annual pace faster than nominal GDP. In the long term, this is neither healthy nor sustainable.

With a liquidity anchor in place, the world economy will then move closer to a cleaner capitalist model where financial markets return to their primary role of price discovery and capital allocation based on perceived fundamentals (rather than liquidity levels).

Growth should then become less reliant on debt creation and more reliant on gains from productivity, global trade and innovation. In that environment, income inequality should recede as the gains from productivity growth become more widely shared.

The key reason that many western economies are now overly reliant on consumption, debt and house prices is because of the set-up of the domestic and international monetary and financial architecture. A Great Reset offers therefore opportunity to restore (some semblance of) economic fairness in western, and other, economies.

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>>> Digital Yuan Gives China a New Tool to Strike Back at Critics


Bloomberg News

April 20, 2021


https://www.bloomberg.com/news/articles/2021-04-20/digital-yuan-gives-china-a-new-tool-to-strike-back-at-critics?srnd=premium


Beijing could have clear picture of financial transactions

‘That currency can be turned off like a light switch’


Even as China grows in economic and military power, perhaps nothing reveals Beijing’s weaknesses more than the U.S.’s control of the global financial system.

China has recently sought ways to counteract U.S. sanctions after the Trump administration targeted Chinese officials and companies over policies from the South China Sea to Xinjiang. Hong Kong’s leader can’t access a bank account and a top executive at Huawei Technologies Co. is detained in Canada. Even China’s state-run banks are complying with U.S. sanctions.

That’s one reason the Biden administration is starting to study whether China’s development of a digital currency will make it harder for the U.S. to enforce sanctions, Bloomberg reported earlier this month. The digital yuan, which could see a wider roll out at the 2022 Winter Olympics in Beijing, is also spurring the U.S. to consider creating a digital dollar.

China New Silk Road

But instead of challenging U.S. dollar dominance and neutralizing sanctions, the digital yuan appears potentially more geopolitically significant as leverage over multinational companies and governments that want access to China’s 1.4 billion consumers. Since China has the ability to monitor transactions involving the digital currency, it may be easier to retaliate against anyone who rebuffs Beijing on sensitive issues like Taiwan, Xinjiang and Hong Kong.

“If you think that the United States has a lot of power through our Treasury sanctions authorities, you ain’t seen nothing yet,” Matt Pottinger, former U.S. deputy national security adviser in the Trump administration, said last week at a hearing of the government-backed U.S.-China Economic and Security Review Commission. “That currency can be turned off like a light switch.”

So far China has mostly resisted hitting foreign firms in response to U.S. actions on companies like Huawei, holding off on releasing an “unreliable entity list” designed to punish anyone who damages national security. Any move to cut off access to the digital yuan would carry similarly high stakes, potentially prompting foreign investors to pack up and leave.

But Beijing has gone after companies like Hennes & Mauritz AB for statements on human-rights issues, even while government officials have been careful to avoid directly endorsing a boycott. In a Weibo post last month, the Communist Party Youth League declared: “Want to make money in China while spreading false rumors and boycotting Xinjiang cotton? Wishful thinking!”


READ MORE ABOUT CHINA’S DIGITAL YUAN:

How China Is Closing In on Its Own Digital Currency: QuickTake
Biden Team Eyes Potential Threat From China’s Digital Yuan
China Digital Yuan Will Co-Exist With Alipay, WeChat, PBOC Says
China Says It Has No Desire to Replace Dollar With Digital Yuan
A Digital Currency to Fight Data Overlords: Andy Mukherjee


Controlling access to China’s massive market remains the best way for Beijing to hit back at the U.S.: As long as Chinese companies still want access to the broader financial world dominated by the U.S. and its allies, Washington can effectively wield sanctions against nearly anyone who doesn’t operate exclusively in China’s orbit. And Beijing has little incentive to shun the dollar.

While President Xi Jinping has called for greater self-sufficiency in key technologies like advanced computer chips, a financial decoupling from the U.S. would only hurt China’s economy and potentially leave the Communist Party more exposed to destabilizing attacks. After Xi effectively ended Hong Kong’s autonomy last year with a sweeping national security law, the U.S. refrained from cutting off the territory’s ability to access U.S. dollars due to the potential devastation to the global financial system.

‘Great Commercial Risk’

Widespread use of the digital yuan -- also known as the e-CNY -- could potentially give China’s central bank more data on financial transactions than the big tech giants, allowing the Communist Party to both strengthen its grip on power and fine-tune policies to bolster the economy. While that level of control may boost growth in the world’s second-biggest economy, it also risks spooking companies and governments already wary of China’s track record on intellectual property rights, economic coercion and rule of law.

China’s state-endorsed boycott of H&M shows “great commercial risk” for companies that use the digital yuan, Yaya Fanusie, adjunct senior fellow at the Center for a New American Security in Washington, told the U.S.-China Economic and Security Review Commission hearing. If foreign merchants had to use the e-CNY, he said in a separate email, the government could prohibit transactions with H&M wallets and the store could disappear from digital yuan apps.

“This is the other side of the coin -- Beijing not as a sanctions evader, but more empowered to enforce its own financial muscle,” said Fanusie, who has written extensively on how central bank digital assets may impact U.S. financial sanctions. “China’s digital currency is as much about data as it is about money,” he added. Foreign firms that use the digital yuan “might end up handing over to the Chinese government lots of real-time data that it could not access efficiently through conventional banking technology.”

China’s ability to see every transaction may make it difficult for foreign banks to use the digital yuan and still comply with confidentiality rules in their home countries, according to Emily Jin, a research assistant at the Center for a New American Security. But, she added, the currency might appeal to some regimes that prioritize control over privacy protection.

Limited Role

Yuan's share of foreign exchange reserves tiny compared to size of economy

“They might find it easier to convince governments more authoritarian in their leaning that it helps monitor elicit activities or stop them quickly or stop them before they happen,” Jin said. “They aren’t going to market it to everyone.”

The digital yuan would serve as a back-up to Ant Group Co.’s Alipay and Tencent Holdings Ltd.’s WeChat Pay, which together make up 98% of the mobile-payments market, according to Mu Changchun, director of the central bank’s Digital Currency Research Institute. Last month he said the electronic yuan has the “highest level of privacy protection” and the central bank wouldn’t directly know the identity of users, but the government could get that information from financial institutions in cases of suspected illegal activity.

Dollar Challenge

Chinese policy makers have also repeatedly emphasized that the digital yuan isn’t meant to challenge the dollar, with People’s Bank of China Deputy Governor Li Bo saying last weekend the motivation for the e-CNY is primarily for domestic use. The Chinese currency now makes up about 2% of global foreign exchange reserves compared with nearly 60% for the U.S. dollar, and most of Beijing’s trade and loans in Xi’s Belt-and-Road Initiative are disbursed in dollars.

Any serious challenge to the dollar’s position as the world’s reserve currency would also require significant policy changes from China, including lifting capital controls that help the Communist Party keep a lid on sudden outflows that could trigger a financial crisis. Even if the digital yuan could be transacted more cheaply outside of U.S.-controlled global payment systems, it’s unclear if anyone would use it.

“The dollar is not the dominant reserve currency because the Americans say it must be,” said Michael Pettis, finance professor at Peking University and senior fellow at the Carnegie-Tsinghua Center in Beijing. “The dollar is the dominant reserve currency because the Chinese, the Europeans, the Japanese, the South Koreans etc. say it must be. It’s the rest of the world that imposes that because they think its the safest place to park money.”

Digital Ambitions

Central banks are at varying stages of developing digital currencies

The U.S. still has an incentive to set standards for digital currencies. In a survey last year of 65 central banks representing 91% of global economic output, the Bank of International Settlements found more than half were experimenting with digital currencies and 14% were moving forward to pilots. The U.S. itself is taking a cautious approach: Federal Reserve Chair Jerome Powell said last month policy makers must understand the costs and benefits of a digital dollar, and wouldn’t rush the “very, very large, complex project.”

‘Wake Up Call’

China began research on the digital yuan back in 2014, right after the price of Bitcoin surged from $13.40 to more than $1,000, raising the risk that digital currencies could impact Beijing’s control of monetary policy. It has begun technical testing with Hong Kong for cross-border payments, and is working with Thailand and the United Arab Emirates on real-time foreign exchange settlements. Authorities are also studying how the digital yuan can be combined with 5G networks and the internet of things.

This kind of research allows China a greater say in how other countries across the globe design digital currencies, particularly when it comes to questions of surveillance, privacy and anonymity, according to Josh Lipsky, director of the Atlantic Council’s GeoEconomics Center.

“China is really leading in this area and it should be a wake up call to the U.S. and to Europe,” Lipsky said. “There is a serious first mover advantage not because of what China will do, but what other countries are doing.”

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>>> UK to explore issuing its own digital currency amid bitcoin boom


CNBC

APR 19 2021

by Ryan Browne


https://www.cnbc.com/2021/04/19/uk-to-explore-issuing-its-own-digital-currency-amid-bitcoin-boom.html


The U.K. Treasury and Bank of England have launched a joint taskforce to explore a potential central bank digital currency.

It comes as several central banks race to figure out their own strategies for central bank digital currencies, or CBDCs.

China is charging ahead, having carried out a number of tests with its digital yuan in major cities.



LONDON — Britain is the latest country to join a global race toward central bank digital currencies.

“We’re launching a new taskforce between the Treasury and the Bank of England to coordinate exploratory work on a potential central bank digital currency,” U.K. Finance Minister Rishi Sunak said at a fintech industry conference on Monday.

In a separate statement, the Bank of England said such a currency would be a “new form of digital money issued by the Bank of England and for use by households and businesses” that exists alongside cash and bank deposits rather than replacing them.

The U.K. government hasn’t yet decided whether to introduce a digital version of the British pound, but said it would explore the “objectives, use cases, opportunities and risks” involved if it were to proceed. The Bank of England will also set up a unit within the institution dedicated to exploring a central bank digital currency.

It comes as several central banks race to figure out their own strategies for central bank digital currencies, or CBDCs. The rise of bitcoin and other cryptocurrencies has given new impetus to such initiatives, as well as the broader trend of declining cash usage.

Bitcoin surged to a record high of $64,829 last week ahead of the highly-anticipated debut from cryptocurrency exchange Coinbase. But the world’s most popular digital coin sank sharply over the weekend due to fears around regulation.

A spike in the value of meme-inspired token dogecoin, meanwhile, has led to concerns of a potential bubble in the cryptocurrency market. As of Monday, bitcoin was trading at about $56,740, up 3% in the last 24 hours.

Another factor driving central banks’ work on CBDCs is private stablecoin projects such as the Facebook-backed Diem Association and a controversial token known as tether. Such currencies attempt to peg their market value to some external reference, such as the U.S. dollar, to avoid volatile price swings that are common in most cryptocurrencies.

China appears to be charging ahead of other major countries on CBDCs. The People’s Bank of China has been carrying out a number of tests with the digital currency in major cities and a top official said Sunday that the central bank could trial the digital yuan with foreign visitors at the 2022 Beijing Winter Olympics.

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>>> Should Wall Street Brace for a Tobin Tax?

A new paper from Nobel laureate George Akerlof — the husband of Treasury Secretary Janet Yellen — provides a powerful clue.


Bloomberg

By Aaron Brown

April 19, 2021


https://www.bloomberg.com/opinion/articles/2021-04-19/should-wall-street-brace-for-a-tobin-tax?srnd=premium


Is U.S. Treasury Secretary Janet Yellen mulling a tax on Wall Street?

Uncertainty about federal economic policy is greater today than any time in the last 40 years. On one hand we have senior policy makers calling for increasing already massive budget deficits, locking in the loosest imaginable monetary policy for the foreseeable future, and boosting taxes on businesses, Wall Street and the rich if inflation rates spike higher. On the other hand we have a President and senior economic officials who are solid members of an alliance among mainstream liberal academic economists and Wall Street executives who have dominated Democratic party economic thinking since the Carter administration. 1

In the absence of clear, credible pronouncements by top officials, a recent paper co-authored by Treasury Secretary Janet Yellen’s husband, Nobel laureate economist George Akerlof, may be our best insight into the Biden administration’s intentions. While the paper represents no official policy, it’s telling that Yellen is thanked in the acknowledgements, and Akerlof has collaborated with many Democratic-insider economists in the past. 2

The paper is particularly valuable because it centers on one issue of dispute between academic liberal economists and Wall Street executives: Tobin taxes. The idea goes back to a 1972 lecture by Nobel laureate economist James Tobin. Tobin suggested that a tax on short-term financial transactions could make markets more stable and efficient. 3 Many liberal economists find the idea appealing. Wall Street hates it.

So while Akerlof might have written about Tobin taxes without thinking of the political reaction, and his wife might have helped only with technical comments, this might be a suggestion that Wall Street input will be excluded from policy making and liberal economists will try to find common ground with progressives. 4

In arguing for a Tobin tax, the paper considers scheduled release of information about a security, like a corporate earnings announcement. It assumes dealers, market makers and proprietary trading firms will buy if the news is good and sell if it is bad. 5 Despite the oversimplifications, the model correctly predicts that dealers and market makers position their inventories before scheduled announcements to best accommodate expected order flow. This is normally considered a good thing as it smooths the market impact of events. One of the complaints about the Dodd-Frank rules is that they discouraged holding long or short positions, leading to less efficient markets and widening bid/ask spreads.

The paper then introduces some transparent rhetorical tricks to make inventory positioning seem bad. The market makers holding inventory are called “front runners.” Front running is a crime where a broker or other agent transacts for itself before executing a client order. Akerlof stretches the definition to mean any pre-emptive action by a broker. This is no minor lapse, with the phrase used 100 times in the short paper. So the entirely legal and ethical practice of inventory management is labeled with a phrase referring to a criminal act.

Most market makers manage inventory passively. If they wish to accumulate a positive inventory, for example, they get slightly more aggressive in filling sell orders, and slightly less aggressive in filling buy orders. 6 In the Akerlof model, market makers build inventory by seeking out “unsophisticated” investors. It seems to imagine that retail investors are ignorant about the scheduled information release and can be enticed to part with their securities by bids fractionally above the last transaction price. Anyway, whoever these people are, we’re supposed to want them to make more money. When “front runners” reduce their transaction costs by spreading out their orders, the “unsophisticated” investors make less money.

Finally, the paper points out that a tax on short-term transactions would discourage inventory positioning and deliver larger profits to the “unsophisticated” investors. Aside from all the other objections, taxing all financial transactions for the tiny fraction that represent market maker inventory positioning trades with unsophisticated retail investors is wildly out of proportion.

I can’t think of any scheduled information releases of the type the paper considers. Earnings announcements and other big news are usually scheduled when the market is closed, or are done during trading halts. Government statistics released during the trading day affect thousands of securities, and no market maker is adjusting inventory positions in thousands of securities a few minutes before release.

But it is the absurdity of the paper’s policy arguments that lead me to suspect it is a signal. Economists who read the paper will laugh and dismiss it. Non-economists who read second-hand accounts will seize on a paper by a Nobel laureate that supports financial transaction taxes. Liberal economists can shut up, and let the progressives get a win on an issue that many of them think isn’t a bad idea — certainly not as crazy as modern monetary theory or $25 per hour minimum wage.

Most presidents have clear economic policy positions at the core of their campaigns. They may not adhere to them in office, but at least they give a baseline for prediction. Joe Biden, by contrast, juggled campaign statements that sounded like radical progressive modern monetary theory with conventional Clinton/Obama ideas. Since taking office there hasn’t been much clear talk, although policy proposals and leaked ideas seem to be pointing in the progressive direction.

There are other indications. When Democratic economic club member Larry Summers calls Biden’s fiscal policies “substantially excessive,” that likely means that many long-time party economists are uncomfortable. Further evidence of dissension is Janet Yellen admirer John Cochrane penning an open letter asking, “Why is the Janet Yellen I know and respect giving voice to such nonsense?”

Originally, currency transactions but the idea has been extended to all financial markets.

Progressives love Tobin taxes not because of the claims about stability and efficiency, but in hopes they can raise large amounts of money from rich people and "shady" Wall Street operators.

The paper posits a simple model in which dealers can hold only zero or one share, and points out that some of them will buy before an announcement since — with no ability to short — that’s the only way to make money if the news is bad. If you hold zero shares before an announcement and the news is bad you can’t sell. In the paper’s model, some market markets are long before announcement, some short, and therefore there are always some in a position to profit. The model also implies that total transaction costs will be lower if some of the dealers buy before announcement. In the model the reason is the transactions are spread out. In reality the reason is bid/ask spreads are higher and trading more competitive after the announcement.

That is, they are still providing liquidity to the market, only in a slightly biased way. If they are forced to act more quickly and take liquidity, that comes at a cost, which they prefer to avoid. Market makers and dealers make livings selling liquidity, not buying it.

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Understanding Central Bank Digital Currency (CBDC) -


>>> Central Bank Digital Currency (CBDC)


Investopedia

By SHOBHIT SETH

Apr 6, 2021


https://www.investopedia.com/terms/c/central-bank-digital-currency-cbdc.asp


What Is a Central Bank Digital Currency (CBDC)?

A central bank digital currency (CBDC) uses an electronic record or digital token to represent the virtual form of a fiat currency of a particular nation (or region). A CBDC is centralized; it is issued and regulated by the competent monetary authority of the country.

KEY TAKEAWAYS

A central bank digital currency (CBDC) utilizes technology to represent a country's official currency in digital form.

Unlike decentralized cryptocurrency projects like Bitcoin, a CBDC would be centralized and regulated by a country's monetary authority.

While several governments are looking into the viability of creating and issuing CBDCs, no country has officially launched such money.


Understanding Central Bank Digital Currencies

Over the years, there has been growing interest in cryptocurrencies like Bitcoin and Ethereum, which work on a distributed ledger technology known as the blockchain network. Such virtual currencies have gained immense popularity, owing to their decentralized and regulation-free nature; with some seeing their rise as a possible threat to the traditional banking system that operates under the purview and control of a country’s regulatory authority, such as a central bank.

There is no clarity about any suitable reserve maintenance to back up the valuations of cryptocurrencies. Additionally, the continued launch of new cryptocurrencies has also raised concerns about the possibility of scams, thefts, and hacks.

Unable to control the growth and influence of such cryptocurrencies, many leading central banks across the globe are working on or contemplating launching their own versions of cryptocurrencies. These regulated cryptocurrencies are called central bank digital currencies and will be operated by the respective monetary authorities or central banks of a particular country.

Also called digital fiat currencies or digital base money, CBDC will act as a digital representation of a country’s fiat currency, and will be backed by a suitable amount of monetary reserves like gold or foreign currency reserves.

Each CBDC unit will act as a secure digital instrument equivalent to a paper bill and can be used as a mode of payment, a store of value, and an official unit of account. Like a paper-based currency note that carries a unique serial number, each CBDC unit will also be distinguishable to prevent imitation. Since it will be a part of the money supply controlled by the central bank, it will work alongside other forms of regulated money, like coins, bills, notes, and bonds.

CBDC aims to bring in the best of both worlds—the convenience and security of digital form like cryptocurrencies, and the regulated, reserved-backed money circulation of the traditional banking system. The particular central bank or other competent monetary authority of the country will be solely liable for its operations.

Examples of CBDCs

To date, no country has officially launched a central bank-backed digital currency. Many central banks, however, have launched pilot programs and research projects aimed at determining a CBDC's viability and usability.

The Bank of England (BOE) was the pioneer to initiate the CBDC proposal. Following that, central banks of other nations, like China’s People’s Bank of China (PBoC), Bank of Canada (BoC), and central banks of Uruguay, Thailand, Venezuela, Sweden, and Singapore, among others, are looking into the possibility of introducing a central bank-issued digital currency.

Russia has been moving forward with its creation of the "crypto-ruble," announced by Vladimir Putin in 2017. It is speculated that one of the main reasons for Putin's interest in blockchain is that transactions are encrypted, and thus easier to discreetly send money without worrying about sanctions placed on the country by the international community. This theory gained traction after the Financial Times reported in Jan. 2018 that one of Putin's economic advisors, Sergei Glazyev, said during a government meeting that "This instrument (i.e., the CryptoRuble) suits us very well for sensitive activity on behalf of the state. We can settle accounts with our counterparties all over the world with no regard for sanctions."

Glazyev himself was placed under sanctions by President Obama that prevented him from trading in or traveling to America in 2014.

Venezuela has been purported to be working on a CBDC called the "petro" since 2017, which would be backed by physical stocks of crude oil. The Venezuelan government also announced "petro gold" in 2018, allegedly pegged to the value of oil, gold, and other precious metal.

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>>> Central bank digital currency


From Wikipedia, the free encyclopedia


https://en.wikipedia.org/wiki/Central_bank_digital_currency


Not to be confused with Digital currency or Virtual currency.

The phrase "central bank digital currency" (CBDC) has been used to refer to various proposals involving digital currency issued by a central bank. A report by the Bank for International Settlements states that, although the term "central bank digital currency" is not well-defined, "it is envisioned by most to be a new form of central bank money [...] that is different from balances in traditional reserve or settlement accounts."[1]

Central bank digital currencies are also called digital fiat currencies[2] or digital base money.[3]

The present concept of CBDCs was directly inspired by Bitcoin, but CBDC is different from virtual currency and cryptocurrency, which are not issued by the state and lack the legal tender status declared by the government.[1][4][5][6]

Implementations will likely not need or use any sort of distributed ledger such as a blockchain.[7][8]

CBDCs are presently in the hypothetical stage, with some proof-of-concept programmes, although a survey in early 2020 found that more than 80% of central banks were studying the subject.[9] China's digital RMB was the first digital currency to be issued by a major economy.[10][11]


Contents

1 History
2 Implementation
3 Characteristics
4 Benefits and impacts
5 Risks
6 References

History

Although central banks have directly released e-money previously - such as Finland's Avant stored value e-money card in the 1990s[12] - the present concept of "central bank digital currency" may have been partially inspired by Bitcoin and similar blockchain-based cryptocurrencies. It is also a known concept in the field of economics, whereby the central bank enables citizens to hold accounts with it, providing a reliable and safe public savings or payments medium ("retail" or "general-purpose" CBDC).

One of the earliest examples of retail CBDC was in Ecuador from 2014-2018, when the central bank created a broadly accessible pilot retail CBDC that operated through citizens' mobile phones (it did not employ blockchain technology). The program closed in part due to low citizen adoption.[13]

The Bank of England discussed a blockchain-based central bank currency in a September 2015 speech by chief economist Andrew G. Haldane, on possible ways to implement negative interest rates.[14] A March 2016 speech by Ben Broadbent, the bank's deputy governor of monetary policy, appears to be the first use of the phrase "central bank digital currency", and notes direct inspiration by Bitcoin.[15][16]

The central bank of Sweden proposed an "e-krona" in November 2016,[12] and started testing an e-krona proof of concept in 2020.[17][18][19]

In November 2017, the central bank of Uruguay announced to begin a test to issue digital Uruguayan pesos.[20][21]

In March 2019, the Eastern Caribbean Central Bank announced it would engage in a pilot CBDC project with Barbados-based FinTech company Bitt.[22]

In the Eurozone, the Bank of Spain's former governor Miguel Angel Fernandez Ordoñez has called for the introduction of a digital euro, but the European Central Bank (ECB) has so far denied such possibility.[23] Nevertheless, in December 2019, the ECB stated that "The ECB will also continue to assess the costs and benefits of issuing a central bank digital currency (CBDC) that could ensure that the general public will remain able to use central bank money even if the use of physical cash eventually declines".[24] On 2 October 2020 the ECB nonetheless published a report on the proposed digital euro and kickstarted a phase of experiments to consider the merits of minting such a central bank digital currency. Based on this, it will then decide whether to pursue or abandon plans to issue a digital euro toward mid-2021.[25][26][27][28]

On 20 October 2020, the Central Bank of the Bahamas introduced the "Sand Dollar" as a digital legal currency equivalent to the traditional Bahamian dollar.[29][30]

Since 2014, China’s central bank has been working on a project called DCEP (Digital Currency Electronic Payment).[7] The DCEP is often referred to as the "digital yuan" as it would be backed by the yuan.[31]

At the end of 2017, the People's Bank of China organized a number of banks and institutions to jointly develop Digital Currency Electronic Payment (DCEP) system.

In April 2020, Digital Currency Electronic Payment began to be tested in 4 Chinese big cities, including Shenzhen, Suzhou, Xiong'an, and Chengdu.[32]

After the successful CBDC pilot, Suzhou City Municipal has signed on a Memorandum of understanding (MoU) with the New York based third generation blockchain startup, Cypherium. The company will help the city in the development of products within the city's ecosystem.[33][34][35][36][37]

It is aimed to have the currency in use in time for the 2022 Winter Olympics[38]

The Bank for International Settlements published a report in December 2020 listing the known CBDC wholesale and retail projects at that time.[39]

Implementation

A central bank digital currency would likely be implemented using a database run by the central bank, government, or approved private-sector entities.[7][8] The database would keep a record (with appropriate privacy and cryptographic protections) of the amount of money held by every entity, such as people and corporations.

In contrast to cryptocurrencies, a central bank digital currency would be centrally controlled (even if it was on a distributed database), and so a blockchain or other distributed ledger would likely not be required or useful - even as they were the original inspiration for the concept.[7][8]

Researchers propose multiple ways that a retail CBDC could be technologically implemented.[40]

Characteristics

CBDC is a high-security digital instrument; like paper bank notes, it is a means of payment, a unit of account, and a store of value.[41] And like paper currency, each unit is uniquely identifiable to prevent counterfeit.[42]

Digital fiat currency is part of the base money supply,[43] together with other forms of the currency. As such, DFC is a liability of the central bank just as physical currency is.[44] It's a digital bearer instrument that can be stored, transferred and transmitted by all kinds of digital payment systems and services. The validity of the digital fiat currency is independent of the digital payment systems storing and transferring the digital fiat currency.[45]

Proposals for CBDC implementation often involve the provision of universal bank accounts at the central banks for all citizens.[46][47]

Benefits and impacts

Digital fiat currency is currently being studied and tested by governments and central banks in order to realize the many positive implications it contributes to financial inclusion, economic growth, technology innovation and increased transaction efficiencies.[48][49] Here is a list of potential advantages:

Technological efficiency: instead of relying on intermediaries such as banks and clearing houses, money transfers and payments could be made in real time, directly from the payer to the payee.

Financial inclusion: safe money accounts at the central banks could constitute a strong instrument of financial inclusion, allowing any legal resident or citizen to be provided with a free or low-cost basic bank account.

Preventing illicit activity: A CBDC makes it feasible for a central bank to keep track of the exact location of every unit of the currency (assuming the more probable centralized, database form); tracking can be extended to cash by requiring that the banknote serial numbers used in each transaction be reported to the central bank. This tracking has a couple of major advantages:[50]

Tax collection: It makes tax avoidance and tax evasion much more difficult, since it would become impossible to use methods such as offshore banking and unreported employment to hide financial activity from the central bank or government.

Combating crime: It makes it much easier to spot criminal activity (by observing financial activity), and thus put an end to it.[50] Furthermore, in cases where criminal activity has already occurred, tracking makes it much harder to successfully launder money, and it would often be straightforward to instantly reverse a transaction and return money to the victim of the crime.

Protection of money as a public utility: digital currencies issued by central banks would provide a modern alternative to physical cash – whose abolition is currently being envisaged.[51]

Safety of payments systems: A secure and standard interoperable digital payment instrument issued and governed by a Central Bank and used as the national digital payment instruments boosts confidence in privately controlled money systems and increases trust in the entire national payment system[52][53] while also boosting competition in payment systems.

Preservation of seigniorage income: public digital currency issuance would avoid a predictable reduction of seigniorage income for governments in the event of a disappearance of physical cash.[54]

Banking competition: the provision of free bank accounts at the central bank offering complete safety of money deposits could strengthen competition between banks to attract bank deposits, for example by offering once again remunerated sight deposits.

Monetary policy transmission: the issuance of central bank base money through transfers to the public could constitute a new channel for monetary policy transmission[55][56][57] (ie. helicopter money[58]), which would allow more direct control of the money supply than indirect tools such as quantitative easing and interest rates, and possibly lead the way towards a full reserve banking system.[59]

Financial safety: CBDC would limit the practice of fractional reserve banking and potentially render deposit guarantee schemes less needed.[60]

Risks

A general concern is that the introduction of a CBDC would precipitate potential bank runs[61][62] and thus make banks' funding position weaker. However, the Bank of England found that if the introduction of CBDC follows a set of core principles the risk of a system-wide run from bank deposits to CBDC is addressed.[63]

Since most CBDCs are centralized, rather than decentralized like most cryptocurrencies, the controllers of the issuance of Central Bank Digital Currency can add or remove money from anyone's account with a flip of a switch. In contrast, cryptocurrencies such as Bitcoin prevent this unless a group of users controlling more than 50% of mining power is in agreement.[64]

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Silva, Matthew De. "What China could gain from a digital yuan". Quartz. Retrieved September 28, 2019.
"Speech by Jen Weidmann at the Bundesbank Policy Symposium "Frontiers in Central Banking – Past, Present and Future"". www.bundesbank.de. Retrieved November 9, 2017.
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Yang, Yuan; Lockett, Hudson. "What is China's digital currency plan?". www.ft.com. Financial Times.
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"Will central-bank digital currencies break the banking system?". The Economist. December 5, 2020. ISSN 0013-0613. Retrieved December 7, 2020.
Areddy, James T. (April 5, 2021). "China Creates its Own Digital Currency, a First for Major Economy". Wall Street Journal. ISSN 0099-9660. Retrieved April 6, 2021.
Popper, Nathaniel; Li, Cao (March 1, 2021). "China Charges Ahead With a National Digital Currency". The New York Times. ISSN 0362-4331. Retrieved April 6, 2021.
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Bjerg, Ole (June 13, 2017). "Designing New Money - The Policy Trilemma of Central Bank Digital Currency". Rochester, NY. SSRN 2985381.
"Sweden's Riksbank eyes digital currency". Financial Times. Retrieved November 9, 2017.
Riksbanken. "The E-krona project – First interim report". www.riksbank.se. Archived from the original on November 1, 2017. Retrieved November 10, 2017.
Riksbank. "The Riksbank to test technical solution for the e-krona". www.riksbank.se. Retrieved February 25, 2020.
Uruguayan central bank to test digital currency - Agencia EFE, 20 September 2017
El BCU presentó un plan piloto para la emisión de billetes digitales - Central Bank of Uruguay, 3 November 2017
Eastern Caribbean Central Bank CBDC - March 2019
"ECB rejects implementation of "digital euro" for wrong reasons". Positive Money Europe. September 28, 2018. Retrieved September 28, 2018.
"Innovation and its impact on the European retail payment landscape" (PDF). European Central Bank. December 2019.
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"??:???????????". Xinhua Net. Archived from the original on August 18, 2020. Retrieved August 18, 2020.
"Chinese city to hand out 20 million yuan in latest digital yuan trial". South China Morning Post. December 6, 2020. Retrieved December 18, 2020.
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Kharpal, Arjun (December 7, 2020). "China hands out $3 million of digital yuan as JD.com becomes first online platform to accept it". CNBC. Retrieved December 18, 2020.
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"Medium Term Recommendations to Strengthen Digital Payments Ecosystem" (PDF). Committee on Digital Payments: Ministry of Finance, Government of India. Archived from the original (PDF) on July 9, 2017. Retrieved July 17, 2017.
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Bindseil, Ulrich (January 2020). "Tiered CBDC and the financial system" (PDF). ECB Working Paper (ECB Working Paper Series No 2351 / January 2020): 6–7. Retrieved February 2, 2020.
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Pfister, Christian (September 2017). "Monetary Policy and Digital Currencies: Much Ado about Nothing?" (PDF). Banque de France.
Smets, Jan (2016). "Fintech and Central Banks" (PDF). National Bank of Belgium.
Kumhof, Michael; Noone, Clare (May 2018). "Central bank digital currencies — design principles and balance sheet implications" (PDF). Bank of England. Retrieved January 10, 2019.
Frankenfield, Jake (May 2019). "51% Attack". Investopedia. Retrieved October 28, 2020.

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>>> Final Nail in the Coffin


BY JAMES RICKARDS

APRIL 12, 2021


https://dailyreckoning.com/final-nail-in-the-coffin/


Final Nail in the Coffin

The stock market was down today, but it’s still trading at record highs. The mainstream financial media will tell you it’s because the market is anticipating a robust recovery as the economy continues to reopen and vaccination numbers grow.

But don’t buy into the happy talk that all is well with the U.S. economy.

The unemployment rate has indeed dropped. But initial unemployment claims are on the rise again. That’s a trend that will show up as weaker job creation in the months ahead.

The declining headline unemployment rate ignores over 10 million able-bodied Americans between the ages of 25 and 54 who don’t have jobs but are not counted as unemployed because they haven’t looked for a job recently.

If you’re a waitress, why would you look for a job if half the restaurants in town are closed or out of business?

You can judge the health of the economy based on a few key metrics: the labor force participation rate, real wage increases, and initial unemployment claims. Right now, all three point to slower growth and a recovery that is running out of steam.

Of course, some claim the cure is more government spending.

Under 10% To Actual Infrastructure

No sooner had Biden signed the $1.9 trillion COVID relief bailout bill, than his administration proposed another $4 trillion of deficit spending for “infrastructure.”

Proponents of the bill claim the spending is for “infrastructure.” But most of what they’re saying about this legislation is phony.

Most Americans understand infrastructure to mean bridges, tunnels, roads, railroads, airports and other needed additions and improvements to the transportation network. But the bill only provides about $400 billion for those types of projects, under 10% of the proposed total.

The rest goes to windmills, solar panels, subsidies to electric vehicles, and school repairs (as a payoff to teachers’ unions).

Even more spending goes to items that have nothing to do with infrastructure, such as day care, tuition, unemployment benefits, community organizers and other welfare-style programs.

In other words, it’s more of a political project than an economic package to provide good jobs and stimulate the economy.

One difference between Biden’s $4 trillion infrastructure spending binge and the $1.9 trillion of COVID relief is that the White House is at least going through the motions of trying to pay for the new spending with massive tax increases.

Phony Talking Points on Taxes

In round numbers, today’s view is that Biden will have $4 trillion of new “infrastructure” spending combined with $2.1 trillion of tax increases, making the net new deficit spending on infrastructure $1.9 trillion.

But the tax increases are the subject of even more phony talking points.

Biden proclaimed that he would not raise taxes on anyone making less than $400,000. But now, “anyone” is being redefined to include a married couple filing a joint return with $400,000 combined income.

This means that if one spouse makes $220,000 and the other spouse makes $180,000, then the combined income of $400,000 would be subject to the new top bracket of 39.6% that Biden wants.

A spouse making $220,000 may sound like a lot of money, unless you happen to live in New York, San Francisco, Los Angeles or Miami and have two or more children. In this case, it’s barely enough to get buy after income taxes, property taxes, sales taxes, gasoline taxes and a generally high cost of living.

Additionally, much of the tax increase burden will fall on U.S. corporations, which will hurt our international competitiveness and force corporations to move businesses and jobs offshore to avoid the higher taxes in the U.S.

So, Biden’s tax plans will drive U.S. jobs offshore and punish the middle-class, not just the “rich.” It will be just one more headwind for economic growth in the years ahead.

Modern Monetary Theory Is Here Now

The real takeaway from the avalanche of new spending is that the last vestiges of fiscal constraint are vanishing.

I’m sure you’ve heard about Modern Monetary Theory (MMT) by now.

Biden may or may not understand what MMT is, but it doesn’t matter. The point is, it’s here.

MMT is now the law of the land in the form of extreme deficit spending.

There’s a complete disregard for the size of the deficit or whether spending is paid for with taxes. The resulting unprecedented growth in the debt-to-GDP ratio has now put the U.S. in the same super-debtor league as Lebanon, Greece and Italy.

Bernie Sanders is chair of the Senate Budget Committee, and his muse is Professor Stephanie Kelton, the bright light of MMT advocates.

Presidents and members of Congress have always been addicted to spending; but now, they have intellectual air cover in the form of the callow analytics of MMT.

At this stage of the process, there is no stimulus or real growth, just more debt. The already slow recovery will slow further, and the debt will remain.

That’s what rising initial claims for unemployment benefits are telling us.

Biden Wants to Be the Next FDR or LBJ

The infrastructure spending bill may be broken into two pieces so that part of it can be passed under a process called “reconciliation” that requires no Republican votes. The tax bill itself may be separated for the same reason.

The result is that the entire program may require three separate bills and lots of horse-trading behind the scenes, but the Democrats are determined to get it all done by the end of the summer.

Democrats want at least large parts of this new spending plan out of committee by the end of May and passed by the entire House of Representatives by the Fourth of July.

Then they hope the Senate will act quickly and get the entire package done before the August recess.

There’s a method to the madness.

Biden and Democrat party leaders know that 2022 is an election year for the House and Senate. The Democrats may very well lose the House; they currently have a slim nine-vote margin (222-213), and it would only take five losses to flip the House to a 218-217 Republican majority.

New administrations typically lose 20 or more House seats in their first mid-term election, so the Democratic majority is definitely in danger.

The Republicans could eke out a slim majority in the Senate as well. Either result (or both) would put an end to the Democrats’ ability to ram through their agenda.

The window for Democrats’ plans such as the New Green Deal, free tuition, free healthcare, free child care, increased unemployment benefits, student loan forgiveness, and so-called infrastructure is brief.

By August, we’ll know if the country has held the line on reckless spending and more welfare or if Biden will get to make history by permanently pushing America to the left in the manner of FDR’s original New Deal and Lyndon Johnson’s Great Society.

The difference for investors in terms of portfolio construction and asset allocation is huge. I’ll be watching closely and keeping you ahead of the curve. We won’t have long to wait.

Regards,

Jim Rickards

for The Daily Reckoning

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>>> Archegos: Snowflake That Triggers the Avalanche?


BY JAMES RICKARDS

APRIL 5, 2021


https://dailyreckoning.com/archegos-snowflake-that-triggers-the-avalanche/


Archegos: Snowflake That Triggers the Avalanche?


Archegos was not a household name until about two weeks ago when it made headlines all over the world.

Archegos Capital Management is a family office controlled by Bill Hwang, a former hedge fund trader. Family offices can be conservative in their investment approach, but they can also be as highly leveraged and as risky as any hedge fund, or even more so. It’s up to the person managing the family office.

In Hwang’s case, the money was mostly his own, so he ran his family office the way he used to run his hedge fund – with high leverage and almost no transparency. Hwang made huge bets in stocks, often buying as much as 10% of a company.

He avoided legal reporting requirements on positions of 5% or more because they were mostly held through complicated financial instruments called derivatives. Instead of actually owning the stock (which would require reporting), he bought equity swaps from big banks.

That gives you the same economic exposure as owning the stock but without actual stock ownership and the regulatory reporting requirements that come with ownership.

The Death Spiral

Many of Hwang’s positions were in Chinese highfliers, including RLX Technologies and GSX Techedu. Chinese stocks started to decline due to a combination of the strong dollar and the internal efforts in China to reign in corporate oligarchs and reduce risk-taking by banks.

This led to margin calls at Archegos, which caused Hwang to skip a new offering of Viacom-CBS stock in which he was also a large holder. That caused dumping in Viacom-CBS, which led to more margin calls on Archegos: a classic Wall Street death spiral.

The big dealers such as Goldman, Morgan Stanley and Credit Suisse began closing out leveraged positions in Archegos at fire sales prices. The dealers lost billions of dollars, and Archegos lost even more as its cash and positions disappeared, and dealers made demands for balances due.

All of this was a walk down memory lane for me.

A Near Disaster

I was on the front lines of the Long-Term Capital Management (LTCM) bailout in 1998. I negotiated the $4 billion rescue by 14 Wall Street banks, prompted by the Federal Reserve Bank of New York.

The causes of the LTCM meltdown were the same as the Archegos meltdown – too much leverage and not enough transparency. Each bank knew what its individual exposures were, but none of the banks knew what the total risk in the fund was. The banks could see their slice of the risk, but not the big picture.

Now that the financial meltdown is over, the regulatory crackdown begins. But don’t expect any changes soon. In 1998, there were immediate calls for regulation changes. Regulators wanted to limit leverage and require holders of equity derivative positions to provide transparency exactly as if they held the positions in outright stock form.

Those regulatory changes never happened in 1998, and I don’t expect them to happen now. Wall Street makes enormous profits by selling derivatives, and hedge funds can make even bigger profits by trading them.

Don’t Expect Changes

The occasional meltdown may appear, but Wall Street still comes out ahead even if an individual hedge fund or family office melts down. Despite the public hearings and calls for regulation, Wall Street controls Washington. And what Wall Street wants, Wall Street gets. That’s not some wild conspiracy theory; it’s just the way things work.

The problem for everyday investors is this: What happens when a future meltdown spirals out of control to the point that no rescue is possible, and the entire global system of exchanges and banks begins to collapse?

That did not happen in the Archegos case (yet), but it did almost happen in the case of LTCM.

How long will banks, investors and hedge funds keep rolling the dice? It appears they’re continuing to roll the dice in other ways since they’re pouring money into stocks when it looks like we’re near a market top…

You Don’t Want to Short a Bubble

Calling a market top or bottom is difficult. Even when you see sure signs of a bubble (they are easy to spot on price charts), there’s no assurance that the bubble won’t continue.

The 1999 dot.com bubble was seen for what it was at the time, but investors couldn’t get enough of Pets.com (remember the sock puppet spokesperson?) or Space.com (it’s still around but only after a nasty stock price crash in 2000).

The same was true of the Nikkei Stock Index in Japan. As it pushed to 40,000 in late 1989, it was widely viewed as a bubble, but the momentum continued. Finally, it crashed and bottomed at 7,570 in 2009. It only recently made it back to 30,000 after a 30-year recovery.

You don’t want to short a bubble because if momentum continues, you can lose a lot of money being right. There’s usually plenty of money to be made on the way down once the bubble bursts. Still, there are certain indicators of a market nearing a top that are more reliable than others.

One such indicator is called “distribution” by Wall Street insiders. It refers to a process of insiders and banks dumping stock on unsuspecting retail investors. The retail investors often don’t have access to the best deals, such as IPOs, so they snap up any such Wall Street offerings readily.

Lambs to Slaughter

Little do they know that the insiders see the crash coming and are dumping high-priced stocks on the little guy so they can escape the collapse with profits in hand…

You’ve probably heard of Robinhood by now. Robinhood is an online trading platform available as a mobile phone app that is favored by many retail investors, especially first-time traders and millennials using government handout checks to place leveraged bets using options.

RobinHood has announced that their platform will now be available for IPOs, which are among the most prized offerings and often soar in price on the first day of trading.

Because of that first-day dynamic, Wall Street generally keeps the IPO allocations for their most favored clients, especially large institutions. If IPOs are now being distributed to small retail accounts, it means that the Wall Street banks don’t expect them to perform particularly well.

They just want to get the IPOs done so entrepreneurs can get rich, and the banks can collect fees. If retail investors get burned, well that’s just too bad for them. Distribution is most common near market tops.

And that may be just where we are right now. It’s a good time to reduce your exposure to equities and increase your cash holdings.

There will be plenty of opportunities to profit on the way down.

Again, I’m not definitively calling a market top right now. But it’s better to get out a little too early than a little too late.

Regards,

Jim Rickards

for The Daily Reckoning

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>>> War on Cash: The Next Phase


BY JAMES RICKARDS

APRIL 2, 2021


https://dailyreckoning.com/war-on-cash-the-next-phase/


War on Cash: The Next Phase

With so much news about an economic reopening, a border crisis, massive government spending and exploding deficits, it’s easy to overlook the ongoing war on cash.

That’s a mistake because it has serious implications not only for your money, but for your privacy and personal freedom, as you’ll see today.

Cash prevents central banks from imposing negative interest rates because if they did, people would withdraw their cash from the banking system.

If they stuff their cash in a mattress, they don’t earn anything on it; that’s true. But at least they’re not losing anything on it.

Once all money is digital, you won’t have the option of withdrawing your cash and avoiding negative rates. You will be trapped in a digital pen with no way out.

What about moving your money into cryptocurrencies like Bitcoin?

Governments Won’t Surrender Their Monopoly Over Money

Let’s first understand that governments enjoy a monopoly on money creation, and they’re not about to surrender that monopoly to digital currencies like Bitcoin.

Libertarian supporters of cryptos celebrate their decentralized nature and lack of government control. Yet, their belief in the sustainability of powerful systems outside government control is naïve.

Blockchain does not exist in the ether (despite the name of one cryptocurrency), and it does not reside on Mars.

Blockchain depends on critical infrastructure, including servers, telecommunications networks, the banking system, and the power grid, all of which are subject to government control.

But governments know they cannot stop the technology platforms on which cryptocurrencies are based. The technology has come too far to turn back now.

So central governments don’t want to kill the distributed ledger technology behind cryptos. They’ve been patiently watching the technology develop and grow — so they could ultimately control it.

Anyone who controls the money controls political power, the economy, and people’s lives.

Enter the central bank digital currency, known as CBDC…

Not Exactly Cryptos

CBCDs use the same underlying distributed ledger technology that cryptocurrencies use. But they’re different from cryptocurrencies like Bitcoin, although the differences are often overlooked by the crypto crowd.

Unlike cryptos, CBCDs aren’t new currencies. They’ll still be dollars, euros, yen or yuan, just as they are today. But these currencies will only be digital; there won’t be any paper money or cash allowed. Only the format and payment channels will change.

Balances can be held in digital wallets or digital vaults without the use of traditional banks. A blockchain is not needed; the CBDC ledger can be maintained in encrypted form by the central bank itself without the need for bank accounts or money market funds.

Their greatest appeal is their convenience and lack of credit card transaction fees. Payments can be done with an iPhone or other device with no need for credit cards or costly wire transfers.

Who needs bank accounts, checks, account statements, deposit slips and the other clunky features of a banking relationship when you can go completely digital with the Fed?

An individual Fed account on your mobile phone could also eliminate the 2.5% fees that merchant acquirers charge retailers to process credit card transactions. Payments, in general, would be faster, cheaper, easier and more secure than they are today.

The Federal Reserve has been working with scientists at the Massachusetts Institute of Technology to develop a dollar form of CBDC.

Big Banks Beware

The roll-out of this new digital dollar may still be a few years away, but the implications are enormous. There’s more at stake than just customer convenience.

Railroads were one of the largest sectors of the economy from 1870 to 1930 but were mostly bankrupt by the 1970s. General Motors has been rescued from bankruptcy more than once by the U.S. government.

General Electric was once an industrial giant and now is a shell of what it once was. Oil company stock prices have taken a beating from the threats of the Green New Deal. Things change.

Today banks and other financial institutions dominate stock market valuations alongside the tech sector. CBDCs may be coming for the banks.

A reaction to the proposed change has already begun. Major banks fear they will be completely cut out of the payments system. MasterCard and VISA are also concerned that their payment channels will be made redundant.

Trillions of dollars of wealth in the form of financial institutions’ stock prices for JPMorgan, Citi, MasterCard and VISA could be wiped out as the new digital payments technology takes hold.

Goodbye, Privacy

You might not have much sympathy for JPMorgan, Citi, MasterCard and VISA, but what do you think would happen to the stock market if they crash?

That’s not the only potential fallout from CBCDs. There’s a dark side. If there is no cash, there is no anonymity.

Governments will know your whereabouts and habits at all times simply by tracking your use of funds through the CBDC payment system.

This can already be done, to some extent, by tracking credit card transactions, but the CBDC system will make state surveillance more pervasive.

China is leading the way with CBDCs. And this kind of surveillance is the real driving force behind the Chinese CBDC.

China already uses facial recognition software, mobile phone GPS tracking and the purchase of plane or train tickets to track their citizens. This surveillance can be used to detect anti-state activities and to arrest dissidents or anyone who doesn’t strictly follow government orders.

Global Control

Now, China wants to take its CBDC rules and make them the global standard.

Even if the U.S. and Europe don’t agree, it’s likely that many Asian and African countries might agree in exchange for aid from China. That aid can take the form of access to scarce COVID vaccines, for example.

Once China’s totalitarian surveillance software is perfected, they can make it the standard for much of the world and facilitate intrusive 24/7 surveillance by every dictator and autocratic leader in the world.

No doubt China would arrange to have access to the same surveillance information it was providing to client states. The end game would closely resemble George Orwell’s dystopian novel, 1984.

If cash is gone, there is only one way to escape digital surveillance of wealth — physical gold.

Regards,

Jim Rickards

for The Daily Reckoning

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>>> MMT Is a Disaster Waiting to Happen


BY JAMES RICKARDS

MARCH 26, 2021


https://dailyreckoning.com/mmt-is-a-disaster-waiting-to-happen/


MMT Is a Disaster Waiting to Happen

MMT is the most potentially damaging economic doctrine I have ever encountered, with the exception of communism.

Let’s begin with the idea that the Fed and Treasury should be merged in practice so that the Fed will monetize any amount of spending or borrowing the Treasury wants.

The reason markets have any confidence at all in the Fed is precisely because they are perceived as independent of congressional spending plans. MMT takes this confidence for granted and assumes the Fed can just crank up the printing press whenever the Treasury likes.

But, as soon as this kind of coordinated effort appears, markets will lose confidence, inflation expectations will soar and interest rates will skyrocket. The plan would collapse before it really began. This is exactly the type of adaptive behavior by investors and markets that MMT academics do not understand.

MMT says that a currency issuer such as the U.S. can never go broke because it can simply print money to pay off the debt (provided the borrowings are in the same currency as the printed money). This may be true in some narrow, literal sense, but it does not mean investors have to wait around for the trainwreck.

The evidence is strong that debt-to-GDP ratios above 90% are a major headwind for growth. Today that ratio is 130% and heading higher. More borrowing does not produce growth; it simply makes the debt problem worse.

At some point, investors abandon the dollar for alternatives, such as land, oil, gold, silver, or alternative assets. Interest rates rise sharply, which only increases the deficit. The fact that the U.S. can print the money to pay the debt is irrelevant if the money itself is being repudiated.

Something like this happened in 1978 when the U.S. Treasury issued bonds denominated in Swiss Francs and West German Deutschmark because investors did not want exposure to U.S. dollars.

An even more extreme version happened in 1922-23 in the German Weimar Republic. The Weimar Republic could print Reichsmarks to pay off bonds denominated in Reichsmarks, but nobody wanted the bonds or the currency. The printing press is not the answer when it’s used promiscuously. The printing press is the problem.

The MMT claim that U.S. citizens cannot repudiate the dollar because they need it to pay taxes is also nonsense. Nothing is easier than the legal avoidance of taxes.

For example, take any one of Silicon Valley’s tech billionaires. A company founder, such as Mark Zuckerberg of Facebook or Larry Page of Google, can issue shares tax-free. After years of hard work and success, that stock may be worth $100 billion.

How much tax do you owe? The answer is zero. As long as you do not sell the stock, you do not owe any tax no matter how much the stock goes up in value.

Not everyone is a co-founder of Google, but the analysis is no different if you’re just an everyday investor with 100 shares. As long as you don’t sell the stock, you don’t owe any tax. Americans who contribute funds to 401(k)s or IRAs also avoid taxes on those amounts until they take distributions, which can be decades later.

The list of tax avoidance methods goes on. I was formerly International Tax Counsel to Citi, so I know exactly how the game is played. Only an academic sitting in a faculty lounge would believe that taxes force anyone to use any particular currency. Once the currency becomes debased, citizens will drop it like a hot rock.

Who Needs the Bond Market?

Another baseless claim of MMT is that government bonds are not needed to finance government spending. The Treasury can just spend what it wants by ordering the Fed to send funds to suppliers and contractors.

In fact, the government bond market is the benchmark for every fixed income market in the world. Interest rates on government bonds are a critical signal of whether government policies are working (or not), whether inflation is gaining a foothold, and whether monetary policy is too tight or too loose.

The existence of a liquid government bond market signals that private investors regard the government as creditworthy. The idea that the Treasury market is an unnecessary frill shows how out of touch the MMT academics are and how little monetary history they have absorbed.

One of the more bizarre MMT claims is that “a government deficit is an individual’s surplus.” The idea is that the government is the sole source of money, and if the government didn’t spend it, you wouldn’t have any. The corollary is that the more the government spends, the more money you have.

But if the dollar becomes dysfunctional, as has happened with many currencies in the past, people abandon it for a better substitute.

Gresham’s Law, “bad money drives out good,” is an explicit recognition that citizens are always ready to dump one type of money and hoard another when they are being shortchanged by the former. So, just because the Treasury spends money, it does not mean citizens have any confidence in the money being spent.

What About the Banks?

The idea that government is the sole source of money is just wrong. This ignores the role of the banking system. In fact, the literature on MMT focuses almost exclusively on the government and individuals while largely ignoring the banking system.

But, banks are the intermediaries between the government and individuals and businesses. Banks create money just as surely as the Fed by making loans. That money comes out of thin air in a manner similar to Fed printing in the conduct of open market operations.

The Treasury may be the creator of the dollar, but they are not the sole issuer of the dollar. The dollar is continually issued by both the Fed and the commercial banks without involving the Treasury.

Money is issued by various financial intermediaries in various forms. The dollars in our wallets and purses are liabilities of the Federal Reserve System. (Read the fine print on a twenty-dollar bill, and you’ll see the words “Federal Reserve Note.” The Fed is the issuer, and a note is a liability).

It is true that the Treasury borrows money, receives taxes and spends money. But it’s just another user of money, not the sole source. MMT’s understanding is exactly backward.

The Role of Taxes

Perhaps the most pernicious idea from the MMT crowd is that taxes have nothing to do with spending. MMT says government can just spend what it wants. The purpose of taxes is not to balance the budget or even pay for anything. Taxes exist solely to cool down inflation and redistribute income from rich to poor.

If taxes are just another monetary safety valve (to reduce inflation) or a redistributionist tool, there is no reason for any American to support any level of taxation. Central banks have other ways to cool inflation, such as raising rates.

The idea that the tax code is nothing more than a cattle prod to fight inflation is exactly the kind of mindlessness one expects from academics whose business or real-world experience is practically nil.

This view of the tax code treats citizens like Pavlov’s dogs. We’re not Pavlov’s dogs. We understand the monetary and tax systems better than any MMT proponent because we live with them every day.

In conclusion, MMT proponents ignore human nature, adaptive behavior and unintended consequences. That’s a recipe for failure.

The Future of MMT

MMT will fail and cause great economic hardship in its wake. The issue for investors is to discern how and when it will fail.

Investors should expect the following sequence: continuing deflation or disinflation in the short-run, accelerating inflation in late 2021, then out-of-control inflation by mid-2022.

The short-run winners will be cash and Treasury notes. The winners during the inflationary stages will be gold, silver, residential real estate, and commodities. Stocks will perform well during the early stages of inflation, but they will crash badly once the dual impact of high inflation and high interest rates puts the economy in a new recession.

It’s not too soon to invest in inflation hedges. They tend to be more forward-looking than stocks, so they will move higher ahead of the actual inflation. Oil, silver and real estate are already showing signs of life.

Gold is facing headwinds right now because of higher real rates. When inflation kicks in, even high nominal rates will be negative in real terms because of inflation. That’s when gold (and gold stocks) will skyrocket. The current price level for gold is an excellent entry point.

Investors may not be able to stop MMT, but they are not helpless. Once you understand the damage MMT will cause, you can prepare accordingly.

Regards,

Jim Rickards

for The Daily Reckoning

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>>> Epic Disaster in the Making


BY JAMES RICKARDS

MARCH 26, 2021


https://dailyreckoning.com/epic-disaster-in-the-making/


Epic Disaster in the Making

If you have not yet heard of Modern Monetary Theory (MMT), you will soon. If you’ve heard of it but don’t know what it means, join the club. There are only a handful of experts who really understand MMT.

Those who do understand it fall into two camps – the true believers, who see MMT as the answer to practically every social policy issue facing the U.S. today and the skeptics, who view MMT as intellectual snake oil that will lead the U.S. down a path to financial ruin.

I place myself in the latter category. Still, I recognize that you cannot effectively oppose a doctrine unless you understand it better than the advocates.

MMT is now the leading theory driving fiscal and monetary policy in the United States. A failure to understand MMT is equal to a failure to understand what’s driving U.S. economic policy, capital markets and investment performance.

In its simplest form, MMT says that money has value because it is issued by a state, and the state will only accept that money in the payment of taxes. Citizens need to earn “state money” because they have to pay taxes.

Therefore, the money has value because the state says so.

A state can run unlimited deficits simply by issuing more debt. The state can pay off the debt by issuing more currency, more debt, and so on. There is no limit to the size of deficits, the size of the national debt or interest costs because the state can always print more money to pay the debt and interest.

There is a corollary to the idea that a country can have unlimited debt. The debt must be in the same currency that the country prints. If you borrow money in a currency that you do not print, you can suffer a serious debt crisis.

In theory, this would never happen in the U.S. because we borrow in dollars and print dollars. The U.S. can always print the dollars to pay the debt, so it can never go broke.

The MMT advocates take these ideas a step further. They argue that the U.S. Treasury and the Federal Reserve should be viewed as a consolidated entity. The Treasury exists to spend government money and collect taxes. The Fed exists to print government money.

By combining operations, the Fed simply monetizes whatever the Treasury spends.

The MMT crowd says individuals and families who spend more than they earn and can go bankrupt. But that same idea does not apply to countries, according to MMT. Individuals cannot print money, but governments can. So, everyday personal finance rules simply do not apply.

Every dollar the government spends goes into someone’s pocket. A government deficit is an individual surplus.

What if the bond market balks at all the debt issuance? What if interest rates skyrocket?

MMT has easy answers to these concerns. MMT says that the government bond market is practically irrelevant.

The Fed can simply put money in the Treasury’s account at the Fed and wire the money directly at the Treasury’s instruction. No bonds are needed for deficit finance.

What if individuals lose confidence in the dollar because of money printing and deficit spending?

MMT says you need dollars to pay your taxes, so you must keep working for dollars for that reason. Your level of confidence is irrelevant.

Just as the Fed can pay the Treasury’s bills with direct transfers and no bond market, the Treasury can also pay its bills without any tax collections. I repeat, no actual tax collections are needed.

If taxes aren’t needed to pay government bills, what is the point of the tax system? MMT gives three reasons.

The first is that it forces you to accept dollars because you need them to pay the taxes. The second is that progressive taxes can reduce income inequality by taking from the rich and giving to the poor. The third is that taxes are a good way to fight inflation if it should emerge.

If inflation happens, a large tax increase will cool the economy and end the inflation.

That’s the overview. Once you accept the ideas that spending and money printing can be unlimited (I don’t, but MMTers do), then it follows that there is no social need that has to go unmet. Money is literally no object.

The political class may be plunging headlong into MMT without knowing what it is. But we have to understand MMT to see its impact on markets and the dangers it may present if it is pursued much longer.

Remember, you can’t oppose a policy you don’t understand.

Regards,

Jim Rickards

for The Daily Reckoning

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>>> Don’t Let China Mint the Money of the Future


U.S. policy makers need to wake up to the potential of digital currency and electronic payments and the peril of allowing China to dominate them.


Bloomberg

By Niall Ferguson

April 4, 2021


https://www.bloomberg.com/opinion/articles/2021-04-04/don-t-let-china-mint-the-digital-currency-of-the-future


What is the money of the future? My nine-year-old son thinks it will be Robux. For those of you trapped in the human museum known as adulthood, Robux is the currency used by players of Roblox computer games. If I offer Thomas grimy dollar bills for household chores, he shows an almost complete lack of interest and motivation. But if I offer him Robux, it’s a different story.

The current exchange rate is around 80 to the dollar. So, in order to incentivize my son to do the dishes, I need to go online and buy 2,000 Robux for $24.99. This I do by entering my credit card details on a website, an act of self-exposure that never fails to make me feel sick. However, the dishes get cleaned and, later, my son blows some of his Robux on a cool new outfit and a pair of wings for his avatar, earning the admiration of his friends.

Robux is just one of the new forms of money that exist in the parallel world of online gaming. If your kids play Fortnite, then you’ve probably had to buy them V-Bucks (short for VinderBucks). And gamer money is, in turn, just a subset of the myriad means of payment that now exist on the internet.

Writers of science fiction got many things right about the future, from pandemics to flying cars to artificial intelligence. None, so far as I know, got the future of money exactly right. In William Gibson’s seminal Neuromancer (1984), paper money (the “new yen” or N¥) has survived but is used only for illicit transactions. In Neal Stephenson’s Snow Crash (1992), hyperinflation has ravaged the value of the dollar so much that, in Compton, California, “Street people push … wheelbarrows piled high with dripping clots of million- and billion-dollar bills that they have raked up out of storm sewers.” A trillion-dollar bill is known colloquially as an “Ed Meese.” A quadrillion is a “Gipper.” (Only we Boomers now get the allusions to the former attorney general and the president he served in the 1980s.) In other dystopian futures, readily available commodities such as bullets or bottle caps serve as makeshift money, rather like cigarettes in occupied Germany in the immediate aftermath of World War II. My favorite imagined currency are the “merits” in the British TV show Black Mirror, which have to be earned by pedaling on exercise bikes.

If some other author predicted the future of money accurately, I missed it. Unfortunately, this lack of foresight now seems also to afflict U.S. policymakers, leaving the world’s financial hegemon vulnerable to a potentially fatal challenge. Not only are the American monetary authorities underestimating the threat posed to dollar dominance by China’s pioneering combination of digital currency and electronic payments. They are also treating the blockchain-based financial innovations that offer the best alternative to China’s e-yuan like gatecrashers at their own exclusive party.

Let’s begin with the future of money that no one foresaw.

In 2008, in a wonkish paper that bore no relation to any sci-fi, the enigmatic Satoshi Nakamoto launched Bitcoin, “a purely peer-to-peer version of electronic cash” that allows “online payments to be sent directly from one party to another without going through a financial institution.” In essence, Bitcoin is a public ledger shared by an acephalous (leaderless) network of computers. To pay with bitcoins, you send a signed message transferring ownership to a receiver’s public key. Transactions are grouped together and added to the ledger in blocks, and every node in the network has an entire copy of this blockchain at all times. A node can add a block to the chain (and receive a bitcoin reward) only by solving a cryptographic puzzle chosen by the Bitcoin protocol, which consumes processing power.

Nodes that have solved the cryptographic puzzle — “miners” — are rewarded not only with transaction fees, but also with more bitcoins. This reward will get cut in half every four years until the total number of bitcoins reaches 21 million, after which no new Bitcoins will be created. As I argued here last November, there were good reasons why Bitcoin left gold for dead as the pandemic was wreaking havoc last year. Scarcely over a year ago, when just about every financial asset sold off as the full magnitude of the pandemic sank in, the dollar price of a Bitcoin fell to $3,858. As I write, the price is $58,746.

The reasons for Bitcoin’s success are that it is sovereign (no one controls it, not the “whales” who own a lot, and not the miners who mine a lot), scarce (that 21 million number is final), and — above all — smart. With every day that the system works — not being hacked, not crashing — the predictions that it would prove to be a “shitcoin” look dumber, and the pressure on people to affirm their smartness by owning bitcoins grows stronger. Last year, a bunch of tech companies, including Square, PayPal and Tesla, bought a pile. Several legendary investors — Paul Tudor Jones, Stan Druckenmiller, Bill Miller — came out as long Bitcoin. Perhaps most importantly, Bitcoin began to be treated like a legitimate part of the financial system. BNY Mellon now handles Bitcoin. So does Mastercard. There are now well functioning Bitcoin futures and options markets. This kind of adoption and integration is what has driven the price upward — a process that has much further to run. My $75,000 target price back in 2018 (assuming that every millionaire would one day want 1% of his or her portfolio in XBT) now looks a bit conservative.

Meanwhile, as Bitcoin has grown more respectable, the cool kids have moved on to decentralized finance (“DeFi”), “an open, permissionless, and highly interoperable protocol stack built on public smart contract platforms” such as the Ethereum blockchain, to quote a recent and excellent St. Louis Fed paper by Fabian Schaer. Like Bitcoin, DeFi has no centralized third-party system of verification and regulation. But it is a much looser, more variegated system, with multiple coins, tokens, exchanges, debt markets, derivatives and asset management protocols. As Schaer puts it:

This architecture can create an immutable and highly interoperable financial system with unprecedented transparency, equal access rights, and little need for custodians, central clearing houses, or escrow services, as most of these roles can be assumed by ‘smart contracts.’ … Atomic swaps, autonomous liquidity pools, decentralized stablecoins, and flash loans are just a few of many examples that show the great potential of this ecosystem. … DeFi may lead to a paradigm shift in the financial industry and potentially contribute toward a more robust, open, and transparent financial infrastructure.

(I told you it was cool.)

For the true believers, Bitcoin and DeFi are the first steps toward a libertarian Nirvana. In a widely quoted tweet, crypto guru Naval Ravikant added steps three to seven:

Bitcoin is an exit from the Fed.

DeFi is an exit from Wall Street.

Social media is an exit from mass media.

Homeschooling is an exit from industrial education.

Remote work is an exit from 9-5.

Creator economy is an exit from employment.

Individuals are leaving institutions.

We are on our way, according to Pier Kicks, to the “Metaverse” — a “self-sovereign financial system, an open creator economy, and a universal digital representation and ownership layer via NFTs (non-fungible tokens).” Yes, even art is now on the blockchain: Witness the sale by Christie’s last month of “Everydays: the First 5000 Days,” by Mike Winkelmann, aka Beeple, for $69.3 million.

What is the right historical analogy for all this? Allen Farrington argues that Bitcoin is to the system of fiat currencies centered around the dollar what medieval Venice once was to the remnants of the western Roman Empire, as superior an economic operating system as commercial capitalism was to feudalism. Another possibility is that the advent of blockchain-based finance is as revolutionary as that of fractional reserve banking, bond and stock markets in the great Anglo-Dutch financial revolution of the 18th century.

Like all such revolutions, however, this one, too, has produced its haters. Well-known economists such as Nouriel Roubini continue to predict Bitcoin’s demise. Bridgewater founder Ray Dalio has warned that, just as the U.S. government prohibited the private ownership of gold by executive order in April 1933, so the same fate could befall Bitcoin. Perhaps most ominously, the central bankers of the western world remain sniffy. A new line of attack (highly appealing to monetary officials eager to affirm their greenness) is that the electricity consumed by Bitcoin miners makes crypto dirty money.

Are we therefore heading for a collision between the old money and the new? Perhaps. As we approach the end of the first 100 days of Joe Biden’s presidency, I am tempted to paraphrase his former boss’s jab at Mitt Romney back in 2012: “The twentieth century is calling to ask for its economic policy back.” There is something very old-school about the Biden administration.

It believes in Keynesian demand management and stimulus. It is proposing a massive infrastructure investment plan. The result is that fiscal and monetary expansion triggered by a public health emergency seems set to continue beyond the duration of the emergency. The administration’s economists tell us there is nothing to fear from inflation. Meanwhile, in foreign policy, Team Biden seems committed to Cold War II against China. All of this hinges on the enduring credibility of the U.S. dollar as the preeminent international reserve currency and U.S. Treasury bonds as the safest of all financial assets — not to mention the enduring effectiveness of financial sanctions as the ultimate economic weapon. Yet precisely these things are threatened by the rise of an alternative financial system that essentially bypasses the Federal Reserve and potentially also the U.S. Treasury.

So you can see why Ray Dalio might expect the U.S. government at some point to outlaw Bitcoin and other cryptocurrency. The last administration occasionally muttered threats. “Cryptocurrency … provides bad actors and rogue nation states with the means to earn profits,” stated the report of Attorney General William Barr’s Cyber-Digital Task Force last year. Treasury Secretary Steven Mnuchin considered forcing U.S. exchanges to gather more information about individuals withdrawing their Bitcoin. Pro-Bitcoin politicians, such as Miami mayor Francis Suarez, are still in a minority.

Abroad, too, there are plenty of examples of governments moving to limit cryptocurrencies or ban them altogether. “We must do everything possible to make sure the currency monopoly remains in the hands of states,” declared German Finance Minister Olaf Scholz at a G-7 finance ministers meeting in December. The European Commission shows every sign of regulating the fledgling sector with its customary zeal. In particular, the European Central Bank has stablecoins (crypto tokens pegged to fiat currencies) in its sights. China is even more stringent. In 2017, the Chinese Communist Party restricted the ability of its citizens to buy Bitcoin, though Bitcoin mining continues to thrive close to sources of cheap hydroelectricity like the Three Gorges Dam.

But is it actually true that the state should have a monopoly on money? That is a distinctly German notion, stated most explicitly in Georg Friedrich Knapp’s State Theory of Money (1905). History begs to differ. Although states have sometimes sought to monopolize money creation, and although a state monopoly on the enforcement of debt contracts is preferable, a monopoly on money is far from natural or even necessary. For most of history, states have been satisfied with determining what is legal tender — that is, what can be used to discharge contractual obligations, including tax payments. This power to specify legal tender drove the great monetization of economy and society in Ming China and in Europe after the Black Death.

Money, it is conventional to argue, is a medium of exchange, which has the advantage of eliminating inefficiencies of barter; a unit of account, which facilitates valuation and calculation; and a store of value, which allows economic transactions to be conducted over long time periods as well as geographical distances. To perform all these functions optimally, the ideal form of money has to be available, affordable, durable, fungible, portable and reliable. Because they fulfill most of these criteria, metals such as gold, silver and bronze were for millennia regarded as the ideal monetary raw material. Rulers liked to stamp coins with images (often crowned heads) that advertised their authority. But in ancient Mesopotamia, beginning around five thousand years ago, people used clay tokens to record transactions involving agricultural produce like barley or wool, or metals such as silver. Such tablets performed much the same function as a banknote. Often, through the centuries, traders have devised such tokens or bills without government involvement, especially at times when coins have been in short supply or debased and devalued.

In the modern fiat monetary system, the central bank, itself supposedly independent of the state, can influence the money supply, but it does not monopolize money creation. In addition to state-created cash — the so-called high-powered money or monetary base — most money is digital credits from commercial banks to individuals and firms. As I argued in The Ascent of Money (2008), money is trust inscribed, and it does not seem to matter much whether it is inscribed on silver, on clay, on paper — or on a liquid crystal display. All kinds of things have served as money, from the cowrie shells of the Maldives to the stone discs used on the Pacific island of Yap.

Although Bitcoin currently looks to outsiders like a speculative asset, in practice it performs at least two of the three classic functions of money quite well, or soon will, as adoption continues. It can be (like gold) both a store of value and a unit of account. And, as my Hoover Institution colleague Manny Rincon-Cruz has suggested, it may be that the three classic functions of money are in fact something of a trilemma. Most forms of money can perform at least two of the three; it’s impossible or very hard to do all three. Bitcoin is not an ideal medium of exchange precisely because its ultimate supply is fixed and not adaptive, but that’s not a fatal limitation. In many ways, it is Bitcoin’s unique advantage.

In other words, Bitcoin and Ethereum, as well as a great many other digital coins and tokens, are stateless money. And the more they can perform at least two out of three monetary functions tolerably well, the less that banning them is going to work — unless every government agrees to do so simultaneously, which seems like a stretch. The U.S. isn’t going to ban Bitcoin, just tax it whenever you convert bitcoins into dollars.

The right question to ask is therefore whether or not the state can offer comparably appealing forms of digital money. And this is where the Chinese government has been thinking a lot more creatively than its American or European counterparts. As is well known, China has led the world in electronic payments, thanks to the vision of Alibaba and Tencent in building their Alipay and WeChat Pay platforms. In 2020, some 58% of Chinese used mobile payments, up from 33% in 2016, and mobile payments accounted for nearly two-thirds of all personal consumption PBOC payments. Banknotes and credit cards have largely yielded to QR codes on smartphones. The financial subsidiary of Alibaba, Ant Group, was poised last year to become one of the world’s biggest financial companies.

Yet the Communist Party became nervous about the scale of electronic payment platforms and sought to clip their wings by cancelling Ant’s planned IPO in November and tightening regulation. At the same time, the People’s Bank of China has accelerated the implementation of its plan for a central bank digital currency (CBDC). In a fascinating article in February, former PBOC governor Zhou Xiaochuan explained the fundamentally defensive character of this initiative. “Blockchain technology features decentralization, but decentralization is not a necessity for modernizing the payments system. It even has some drawbacks,” he wrote. “The possible application of blockchain … is still being researched, but is not ready at this time.”

Last year, the PBOC seized the opportunity presented by the pandemic to rush its CBDC into the hands of Chinese consumers, conducting trials in three cities — Shenzhen, Suzhou and Chengdu — as well as the Xiong’an New Area near Beijing. Crucially, its design is two-tier, with the PBOC dealing with the existing state-owned commercial banks and other entities (including telecom and tech companies), not directly with households and firms. The abbreviation “DC/EP” (with the slash) captures this dual structure. The central bank controls the digital currency, but the electronic payment platforms can participate in the system, alongside the banks, as intermediaries to consumers and businesses. However, the easiest option for consumers will clearly be to withdraw “e-CNY” from bank ATM machines onto their smartphones’ e-wallets. The system even allows transactions to happen in the absence of an internet connection via “dual offline technology.” In 2018 I predicted there would soon be “bityuan.” I only got the name wrong.

This new Chinese system not only defends the CCP against the twin threats of crypto and big tech, while ensuring that all Chinese citizens’ transactions are under surveillance; it also includes an offensive capability to challenge the U.S. dollar’s dominance in cross-border payments. And this is where the story gets seriously interesting. Today, as is well known, the dollar dominates the renminbi in foreign exchange markets, central bank reserves, trade finance and bank-to-bank payments through the Belgium-based Society for Worldwide Interbank Financial Telecommunication (SWIFT). This financial superpower, fully appreciated and utilized only after 9/11, is what makes U.S. financial sanctions so effective and far-reaching.

The Chinese are creatively exploring ways to change that. Exhibit A is the Finance Gateway Information Service, a joint venture between SWIFT and the China National Clearing Center within the PBOC, which aims to direct all cross-border yuan payments through China’s own settlement system, Cross-Border Interbank Payment and Clearing. Exhibit B is the Multiple CBDC (mCBDC) Bridge project by the Hong Kong Monetary Authority and the Bank of Thailand to implement a cross-border payments system based on distributed ledgers, again using a two-tier system. Exhibit C are the cross-border transfers between Hong Kong and Shenzhen currently being piloted. According to Sahil Mahtani of the South African investment manager Ninety One, the ultimate goal of Chinese policy is “to create a parallel pay­ments network — one beyond American oversight — thereby crippling U.S. sanctions policy.” In Mahtani’s words:

The expansion of a Chinese digital currency will ultimately pry open the U.S. grip over global payments, and therefore compromise U.S. sanctions policy and a significant measure of U.S. power in the world. … It is not that China’s digital currency is going to become the dominant standard of payments … But it could become one standard, creating a parallel system with which to avoid the long arm of U.S. regulation.

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I don't think China is ever going to go along with the SDR idea. At present, their plan is to dominate the world.

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>>> What’s the Real Price of Gold?


BY JAMES RICKARDS

MARCH 2, 2021


https://dailyreckoning.com/whats-the-real-price-of-gold/


What’s the price of gold?


That seems like a ridiculously easy question to answer. I’m looking at a trading screen right now, and it displays a price of $1,733.80 per ounce.

That price may change a bit by the time you read this, but it would only take a fresh glance at the screen to get the new price. Case closed.

What’s the price of silver? Again, the question seems easy to answer. My trading screen right now says $26.82 per ounce. That price also changes, but it only takes another look at the screen to fetch the new price. Nothing to it.

If only things were that simple. They’re not.

In fact, establishing prices for gold and silver is far more difficult than it sounds. Further, the different prices on offer and the reasons for those differences can tell us a lot about what’s going on right now in precious metals markets.

Paper, Not Metal

First off, the prices I quoted above are not for gold and silver in the traditional, physical sense.

They are the one-ounce prices for COMEX gold and silver futures contracts. COMEX, a division of the Chicago Mercantile Exchange, is the world’s largest futures and options trading market for metals.

A futures contract gives the holder price exposure, but it does not give you physical gold or silver. It is a paper contract governed by exchange rules. It can be subject to early termination under those rules in the event of disorderly markets or other market disruptions.

So we’re talking about paper gold and paper silver, not the actual metals.

There is a process for taking physical delivery at the expiration of a long contract position, but this is used in only a small number of expiring contracts. Most contracts are cash-settled, rolled-over or paired-off without any physical product being delivered.

If more than a small number of contract holders asked for physical delivery, the authorized vaults would quickly run out of bullion, and the exchange would intervene to cash-settle the contracts or order that holders “trade for liquidation only.”

Physical delivery would be denied. So why do traders prefer paper gold and silver over the real McCoy?

Leverage, Leverage, Leverage

Gold and silver futures contracts offer leverage. A trader is required to put down an initial margin, typically about 5% of the amount of bullion subject to the contract.

The initial margin rules mean that $100,000 of capital can control $2,000,000 worth of gold or silver. An upward price move of 5% in the actual metal would result in a 100% return on equity on the cash invested.

This is why hedge funds typically trade in futures rather than physical bullion because the cash-on-cash returns are much greater. Of course, the opposite is also true. It would only take a 5% price decline to wipe out the initial margin and leave the trader with a 100% loss.

Failure to meet a margin call results in the contract being terminated and the defaulting trader likely being barred from further exchange dealings.

It’s a highly complex trading process, but the main point is there’s no actual gold or silver involved.

What about gold or silver contracts with the big banks who are members of the London Bullion Market Association (LBMA)?

These purchases are also paper contracts for what is called “unallocated” bullion. That’s a fancy way of saying “no bullion.” An LBMA bank might have one metric tonne of gold and sell 100 metric tonnes of unallocated gold contracts based on that single tonne.

Again, if all of the contract holders gave notice that they wanted to convert to fully allocated bullion and take physical delivery, there would not be enough gold or silver to go around. As with futures, these LBMA contracts would be subject to early termination and cash settlement.

Ultimately, you would not get physical bullion when you most want it — during a buying panic.

Yes and No

What about the famous London Gold Fix? Surely that involves physical bullion and presents a fair market price to the public? Yes, and no.

This process does involve the purchase and sale of physical bullion, and it is done through an auction-style procedure.

There are 15 participating banks in the gold fix including, HSBC, Goldman Sachs, Citi, JPMorgan Chase, Bank of China, Koch Supply, Morgan Stanley and Toronto Dominion Bank.

The problems are that the fix is not open to the public, it involves large quantities only (minimum size is a 400-ounce gold bar worth about $720,000), and most of the gold never physically moves.

It just remains in a designated vault, and ownership changes hands through a warehouse receipt or ledger entry. There is also a London Silver Fix, by the way.

Fraud and Manipulation

In short, all of these trading venues — futures, LBMA forwards and the London Fix — have unique contract features that either have no physical bullion involved or have trading limited to big banks, which do business in large volumes and therefore are not accessible to everyday investors.

Even when the gold and silver are paper and not physical, the temptation to rig markets seems irresistible.

All of the paper gold and silver markets and the London Fix have been investigated in recent years and were found to have engaged in various kinds of front-running, market manipulation and bid-rigging.

Substantial fines and penalties have been assessed, and some actions have resulted in criminal convictions.

But what if you just want to buy physical gold and silver and take delivery for storage in a safe non-bank vault? How would you go about it?

This is where things get interesting and where the true price of gold and silver is revealed.

The first hurdle is to find a dealer. This is not as easy as it sounds.

Find the Right Dealer

There are hundreds of online dealers available. Some have fine reputations and offer outstanding service. (I like Hard Assets Alliance, which, in the interest of full disclosure, my publisher owns a stake in).

Others are sleazy and try to push you into high-priced “rare coins” (not worth it unless you’re a true collector, in which case you should look to an established rare coin dealer). Otherwise, they are likely more interested in getting your IRA business than in delivering coins and bars.

Dealer commissions also vary and can be quite steep.

Right now, the UK Royal Mint website is offering a one-troy ounce gold bar with a 9.2% mark-up or commission over the COMEX price.

Commissions or mark-ups in silver are even greater. A 15% premium on silver coins is not unusual. This would move the price of a one-ounce silver coin from $26.82 (the current COMEX price) to $30.85 or higher.

Of course, this assumes availability. The U.S. Mint has periodically announced that it will not be taking new orders from dealers due to a shortage of bullion and minting capacity. The Mint remains in operation only to fill existing orders until further notice.

So, again, what’s the price of gold or silver?

The answer depends on whether you want a paper contract or physical bullion. It depends on whether you want leverage (and margin calls) or outright ownership. It depends on whether you buy new production or older, rarer coins, etc.

Sales taxes, storage costs, insurance costs, exchange rates (if you buy from a foreign mint) and shipping costs make the calculations even more complicated.

Two Key Takeaways

Despite these variables, two things are clear.

The cost of owning bullion coins or bars you can hold in your hand is materially higher than the official “prices” you see listed on the exchanges. That tells you that actual bullion is considerably more scarce than paper bullion.

The second point is that the scarcity of physical bullion relative to paper gold and silver contracts will emerge with a vengeance in a buying panic resulting from any number of catalysts, including war, a new pandemic, a stock market crash, bank failures, or social disorder.

The paper holders will try to convert to physical and find that it’s too late. The vaults will be empty.

The lesson for investors is also clear. Get your physical gold or silver now while you still can. Don’t sweat the commissions because that’s the real price. Then rest easy.

I predict gold will ultimately go to $15,000 an ounce. Commissions are nothing when you look at the big picture.

The buying panic is just a matter of time.

Regards,

Jim Rickards

for The Daily Reckoning

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>>> Bitcoin: “There’s No There There”


BY JAMES RICKARDS

MARCH 1, 2021


https://dailyreckoning.com/bitcoin-theres-no-there-there/


Bitcoin: “There’s No There There”

I’m not some technophobe who doesn’t understand cryptocurrencies. I know them very well. I’ve been studying cryptos since before many of their current owners even heard of Bitcoin. I actually worked with the intelligence community years ago to counter ISIS’s use of cryptocurrencies to bypass the international monetary system.

I can tell you that as an asset, Bitcoin has very little to offer outside of speculation. It still has no practical use, except for gambling by speculators or the conduct of transactions by terrorists, tax evaders, scam artists and other denizens of the dark web. Bitcoin is also unsustainable due to extreme demands for electricity in the computer “mining” process.

Bitcoin has no future as “money” because the supply of Bitcoin cannot grow beyond a preset amount, which makes Bitcoin inherently deflationary and unsuitable for credit creation, the real source of any system of money.

Furthermore, Bitcoin has been subject to continual price manipulation by miners through wash sales, front-running, ramping and other tried-and-true techniques for price manipulation. The Bitcoin infrastructure has been plagued with hacking, fraud, bankruptcy and coin theft measured in the billions of dollars.

What is Bitcoin’s intrinsic worth?

It actually serves no purpose to assess Bitcoin based on “intrinsic value.” Bitcoin has no intrinsic value, and neither does any other form of money, including dollars or gold. Intrinsic value is an obsolete economic theory that was abandoned by economists in 1871. The phrase “intrinsic value” is bandied about frequently, but it is of no use in valuing Bitcoin.

Instead, economists use subjective value as a way to consider prices. The subjective value theory says that the price of something is what a willing buyer will pay a willing seller based on the utility of the goods and services to the buyer.

A few years ago, JPMorgan Chase tried to break it down by examining Bitcoin as a commodity.

To arrive at its worth, JPMorgan Chase estimated the cost of producing each individual Bitcoin by looking at factors such as electrical costs, computational power and energy efficiency.

When they crunched the numbers, what number did they come up with?

JPMorgan Chase estimated the value of Bitcoin at around $2,400. Let’s assume for now that is an accurate or reasonable approximation that still applies. Then what can you say about $50,000 Bitcoin?

Has anything fundamental changed? Not really.

Of course, Bitcoin cheerleaders cite this or that reasons why its meteoric run-up to current levels is justified.

But there’s nothing to analyze Bitcoin except the price itself. When you look at analysis applied to stocks, bonds, commodities, foreign exchange or other tradable goods, there’s an underlying asset or story embedded in the price.

Oil prices might move on geopolitical fears. Bond prices might move on inflation or disinflation fears. In both cases (and many others), the price reflects real-world factors. With Bitcoin (to paraphrase Gertrude Stein), “there is no there, there.”

Bitcoin doesn’t reflect corporate assets, national economic strength, terms of trade, energy demand or any of the myriad factors by which other asset prices are judged. Normal analysis is meaningless when the price itself is meaningless in relation to any goods, services, assets or other claims.

I also reject the utility of technical analysis when applied to Bitcoin because it has low predictive value when applied to substantial assets and no predictive value at all when it comes to an asset like Bitcoin.

If you follow technical analysis, you’ll see that every “incorrect” prediction is followed immediately by a new analysis in which a “double top” merely presages a “triple top” and so on.

Technical analysis can help clarify where the price has been and help with relative value analysis, but its predictive analytic value is low (except to the extent the technical analysis itself produces self-fulfilling prophecies through herd behavior).

Meanwhile, frauds and hacks continue to be revealed on a regular basis. It’s business as usual in the Bitcoin space. Mature cryptocurrencies such as Bitcoin have shown their inherent limitations and non-sustainability. These cryptocurrencies all have major flaws in terms of investor safety and ease of use.

Another relevant fact is that the Bitcoin price has been the target of rampant manipulation by miners in recent years. Bitcoin miners have rising costs of production due to the increasing complexity of the math problems that must be solved to validate a new block on the blockchain.

Miners have huge incentives to pump-up prices, both to cover costs of production and to create demand for undistributed coins. These price ramps are conducted through wash sales, “painting the tape,” joint action, low volume price pumps, and other classic manipulations.

The evidence is strong that this kind of activity has taken place in the past and there is no reason to believe it is not taking place now. As mentioned above, JP Morgan & Chase have estimated Bitcoin’s value at about $2,400.

The last potential contributor to the Bitcoin price spike is simple speculation. Bitcoin buyers who missed their chance to reap fortunes when the price went to $20,000 have seen another chance to ride a wave of much higher prices.

But nothing fundamental has really changed about Bitcoin. A use case for Bitcoin has yet to emerge (and probably never will). Bitcoin is still unsuitable as an investment. Count me out.

When the next financial panic happens, probably soon, will the global demand for liquidity force holders to sell Bitcoin to meet their debts and margin calls?

If so, will all of that forced selling and demand for liquidity cause the price of Bitcoin to collapse if it hasn’t already collapsed due to the normal bubble dynamics?

My estimate is that Bitcoin will suffer in a liquidity crunch as investors sell all forms of assets, including Bitcoin, for more liquid forms of money that governments and creditors are prepared to accept. A 75% or greater collapse in the dollar price of Bitcoin, therefore, seems likely.

But just because I don’t believe in Bitcoin doesn’t mean I reject cryptocurrencies or the blockchain technology behind them.

A second wave or new generation of cryptocurrencies has emerged with better governance models, more security, and vastly improved ease of use. These newer coins represent the future of cryptocurrency technology. These cryptos have much greater potential to disrupt and disintermediate established payments systems, and financial intermediaries such as banks, brokers and exchanges.

Second-generation cryptocurrencies have a much greater chance of competing successfully with existing payment channels such as Visa, MasterCard, PayPal and the traditional banking system.

The potential value of these new wave cryptos can be measured by the current franchise value of the institutions that will be disrupted.

If these cryptocurrencies can disintermediate centralized financial behemoths like Citibank and the New York Stock Exchange, their value can be measured in the trillions of dollars. The blockchain is growing up and new tokens and use cases are emerging all the time.

Crypto has a bright future. But Bitcoin doesn’t.

Regards,

Jim Rickards

for The Daily Reckoning

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>>> EXPOSED: The Bitcoin Fraud


BY JAMES RICKARDS

MARCH 1, 2021


https://dailyreckoning.com/exposed-the-bitcoin-fraud/


EXPOSED: The Bitcoin Fraud

Bitcoin crashed from $20,000 in 2017 all the way to $3,300 by December 2018 — an 83.5% collapse in one year and the greatest recorded asset price collapse in history.

That crash marked the collapse of the greatest asset price bubble in history, larger even than the Tulipmania of 1637.

Well, now Bitcoin is trading around $50,000 (the price currently is $48,595.50), 2.5 times its 2017 peak.

It’s a safe bet that it’s going to crash again. Today I’ll show you the fraud behind Bitcoin’s crazy run-up.

You don’t need a Ph.D. in finance to see that Bitcoin is a bubble. Just take a look at any price chart. The time series of prices over the past six months has been hyperbolic and almost vertical.

If you look at a chart of the Japanese Nikkei Index up to late 1989 or the NASDAQ Composite up until March 2000, you’ll see exactly the same pattern.

The Nikkei crashed over 80% beginning in 1999, and now, 32 years later, it still has not recovered its old highs. The NASDAQ crashed over 75% and did not recover its old high until April 2015, a 15-year recovery.

Bitcoin is positioned for the same kind of fall.

Based on the Nikkei and NASDAQ crashes, Bitcoin could fall from $50,000 to $10,000 or lower before establishing a new base. Still, there is one important difference between the Nikkei and NASDAQ bubbles and the new Bitcoin bubble.

The Nikkei and NASDAQ bubbles were based on a combination of investor mania, leverage and hyped-up earnings releases from companies in the index. But, there was relatively little outright fraud.

In contrast, the Bitcoin bubble is based almost entirely on fraud. Therefore, when this bubble bursts, the damage may be even greater, and the value of Bitcoin may disappear entirely.

Here’s an example of how the fraud works, as described in a legal notice from the New York State Attorney General…

A company called Bitfinex sponsors a cryptocurrency called Tether. This crypto is a so-called “stablecoin.” This means that the value of one Tether is fixed at $1.00.

When you buy a Tether for $1.00, the money is supposedly held in safe liquid assets. When you cash in your Tether, you should receive $1.00 in return (less small transaction costs).

The problem is that no one has been able to locate the liquid assets that supposedly back Tether. There has been no full audit, and there is no transparency about the whereabouts or composition of the liquid assets backing the coin.

Tether claims that its dollar reserves are held in a Bahamian bank named Deltec Bank & Trust. But independent research revealed that the assets claimed by Tether exceed the total U.S. dollar assets of the entire Bahamian banking system.

Other research shows that those who buy Tether use them overwhelmingly to buy Bitcoin from unregulated crypto-exchanges based in Africa and Asia. These exchanges offer leverage and often award “free” Tether coins for those who bring in new customers.

These Tethers have been used to bid up the price of Bitcoin and create the bubble.

Meanwhile, the dollars supposedly backing Tether are unaccounted for. If this process were to go in reverse, which it inevitably will, the Bitcoin values would collapse quickly (because of leverage) and Tether would be unable to redeem retreating Bitcoin investors (because of the unaccounted-for liquid assets).

The Tether crooks would walk away with dollars. The prices of Bitcoin and Tether would collapse catastrophically. And the Bitcoin “investors” would walk away empty-handed. This is not just a spectator sport for prudent investors.

The types of losses arising from a Bitcoin collapse would easily spill over into the brokerages and banks handling the accounts of investors who would be eager to sell everything because they’d be desperate to raise cash and avoid further losses.

Because the shady Bitcoin and Tether exchanges are unregulated, there is perhaps little that can be done to avoid this coming fiasco.

I would advise you to stay far away from Bitcoin. Don’t get sucked in by the hype. Sadly, some people never learn. And many will probably get burned all over again.

Investors should at least be alert to the potential collapse by increasing their cash allocations to help weather the storm.

Below, I show you why, when it comes to Bitcoin, “there’s no there there.” Read on.

Regards,

Jim Rickards

for The Daily Reckoning

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>>> A glossary of the Federal Reserve's full arsenal of 'bazookas'


Yahoo Finance

by Brian Cheung

March 8, 2021


https://finance.yahoo.com/news/glossary-federal-reserves-emergency-measures-coronavirus-bazookas-120337473.html


The novel coronavirus continues to grip the U.S. economy, tasking fiscal and monetary policymakers with the challenge of keeping businesses and households afloat until a vaccine arrives.

While Congress has authorized more than $4 trillion in coronavirus-related spending, the Federal Reserve has committed to using its tools to “support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals.”

Since the beginning of March 2020, the Fed has swiftly slashed rates to zero, launched an aggressive quantitative easing program, and unleashed an alphabet soup of liquidity facilities to support the flow of credit in several markets. The central bank hopes its measures will ease credit conditions and keep businesses alive through the virus-induced disruptions.

In total, Fed watchers have referred to the central bank’s measures as “bazookas,” even “going nuclear.”

The Fed is notably getting creative with its tools, dispelling any concern that the central bank was beholden to its 2008 playbook. For example, the Fed entered the businesses of offering loans through its Main Street Lending Program, an effort to get credit to small- and mid-sized businesses squeezed by shutdowns.

And for the first time, the Fed tackled financing pressures in the municipal debt market (through the MMLF, CPFF, and MLF) and the corporate debt market (through the PMCCF, SMCCF, CPFF).

Several of the Fed’s emergency loan programs are backed by money appropriated through the CARES Act and delegated by the U.S. Treasury. In an effort to provide transparency in its role as a lender of last resort, the Fed says it will publish details (participant names, amounts borrowed, interest rates charged, and costs and fees) on a monthly basis for each facility opened with Congressionally-appropriated funds.

The central bank’s balance sheet, meanwhile, has expanded well past $7 trillion.

Here’s a full breakdown of all the tools (as of March 8, 2021) announced by the Fed as it battles the economic impact of the coronavirus:

Near-zero interest rates
Date announced: March 3, March 15 (2020)

Technical details: Interest rates are the primary tool for monetary policy. The Fed broadly steers rates to support lending when the economy is in need (by lowering rates) and pulls back on lending when the economy may be running too hot (by raising rates).

The Fed began raising rates in 2015 as policymakers feared inflationary pressures; low rates are generally tied to increased inflation — which increases prices for consumers. But the Fed reversed course in 2019 as trade tensions flared up between the U.S. and China.

Coronavirus concerns pushed the Fed to cut rates by 50 basis points on March 3. Almost two weeks later, the Fed = slashed its interest rate target to between zero and 0.25%. The Fed has not expressed interest in dipping into negative interest rates, which make it costlier to hold onto money than to lend it out.

Fed forecasts in September 2020 signaled that the Fed is likely to keep interest rates at near-zero at least through the end of 2023.

How it impacts Main Street: The Fed’s interest rate target concerns overnight bank lending, so interest rates for the average household and business will still be above zero. But for businesses, lower interest rates mean cheaper borrowing costs to invest back into the business and pay workers. For individual households, lower interest rates translate to lower return on bank deposits but generally cheaper rates to finance or refinance auto loans or mortgages.

Quantitative easing (QE)
Date announced: March 15, March 23, June 10, Dec. 16 (2020)

Technical details: In mid-March 2020, the Fed said it would purchase at least $500 billion of U.S. Treasuries and $200 billion of agency mortgage-backed securities “over coming months.” On March 23, the Fed announced that it was suspending those limits and would buy assets “in the amounts needed” to support the economy, which would also now include agency commercial mortgage-backed securities. Through QE, the Fed is directly intervening as its own counterparty in the Treasury and agency MBS markets to absorb securities onto its balance sheet.

The Fed began slowing its pace of purchases in April. But in its June 10 Federal Open Market Committee meeting, the central bank said it would increase its asset purchases to a pace of “at least” $80 billion per month for Treasuries and about $40 billion per month for mortgage-backed securities. In December, the Fed committed to keeping its aggressive pace of quantitative easing until “substantial further progress” was made on the economic recovery.

How it impacts Main Street: QE is an unconventional monetary policy tool that eats up trillions in assets using central bank-printed money, effectively injecting stimulus into the economy during times of economic pullback.

In the beginning of the pandemic, the Fed insisted that its open market purchases were being done to ensure that financial markets had the liquidity they needed to function properly. But later into 2020, the Fed changed its language to add that it saw its quantitative easing program as a way to transmit accommodative policy into the economy, complementing its already near-zero interest rates.

Repurchase agreements (Repo)
Date announced: September 2019

Technical details: As the plumbing of the financial system, 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.

Since last September, the New York Fed has offered repurchase agreements to alleviate pressures in the market for interbank short-term loans, but has since increased the scale of the repos available in the wake of the novel coronavirus. Even though the Fed is offering over $5 trillion in total repo agreements (as short as overnight and as long as three months), the uptake has not been anywhere close to that eye-popping figure.

How it impacts Main Street: Stabilizing repo markets also supports money market funds that many Americans are invested in, since the funds often hold some proportion of their assets in daily liquid assets like overnight repos. The NY Fed’s repo operations are also designed to ensure that banks can find short-term financing and therefore feel comfortable continuing to provide credit to customers and businesses.

U.S. dollar swap lines
Date announced: March 15, March 19, March 20 (2020)

Date launched: March 16, 2020 (effective through September 30, 2021)

Technical details: Companies around the world disrupted by the novel coronavirus are loading up on U.S. dollars to cover currency hedge positions. As a result, the Fed announced U.S. dollar swap lines with five other major central banks (including the European Central Bank and Bank of Japan) to ensure the availability of the world’s reserve currency.

On March 19, the Fed expanded its U.S. dollar swap lines with nine other central banks and on March 20 the Fed increased the frequency of its previously-announced swaps with the five major central banks.

In July, the Fed said it would continue to leave the swap lines available through March 31, 2021. In December, the Fed again extended the end date of the swap lines, to September 30, 2021.

How it impacts Main Street: The U.S. dollar has strengthened against many global currencies, but with international travel almost all but cut off, most Americans will not see any direct effects of the Fed’s efforts to provide liquidity to foreign exchange markets. But broadly, preventing the world from running out of U.S. dollars ensures that an already exposed U.S. economy isn’t harmed further by dollar shortage-induced financial collapses in other countries.

Tapping into capital and liquidity buffers
Date announced: March 15, March 23 (2020)

Technical details: After the 2008 financial crisis, Congress passed the Dodd-Frank Act and required banking regulators to increase the amount of capital and liquidity held at U.S. banks in case another crisis struck. To withstand fluctuations, most banks hold capital and liquidity buffers well above their statutory requirements, but the Fed on March 15 encouraged banks to tap into those buffers to lend out into the economy.

The Fed also lowered reserve requirements to zero and on March 23 tweaked a bank capital regulation to more loosely allow banks to lend out retained income. In concert with liquidity facilities concerning money market instruments (MMMLF) and Paycheck Protection Program loans (PPPLF), the Fed has also tweaked the calculation of banks’ liquidity coverage ratios to account for usage of these facilities.

How it impacts Main Street: Bank capital and liquidity regulations are a tightrope; requirements that are too low could lead to fragile balance sheets but requirements that are too high could prevent a bank from lending into an economy in desperate need of more activity.

The Fed hopes that its post-crisis regulations have already beefed up the safety and soundness of the banks, and that it can allow for some slight regulatory easing to encourage them to use their capital to now support businesses and households.

Discount window
Date announced: March 15, 2020

Technical details: The Fed can directly offer short-term loans to banks and lowered the interest rate on discount window loans to 0.25% as of March 16. The Fed also joined other major banking regulators in explicitly encouraging banks to take advantage of the loans, which the eight largest U.S. banks did that same day.

How it impacts Main Street: Historically, banks have been reluctant to access the discount window because of the public perception of needing a loan from the Fed, also known as the “lender of last resort.” In the last crisis, banks accessed the discount window but feared that depositors were going to trigger a run on the bank because of the “stigma” associated with the window.

The Fed’s actions, and the fact that the banks have already accessed the discount window, are designed to show depositors and market participants that using the discount window is not necessarily a sign of bank insolvency or severe stress.

Stress Test and Sensitivity Analysis
Date announced: June 25, Dec. 18 (2020)

Technical details: Since the last financial crisis, the Fed has required the largest banks to undergo stress tests that model the impact of hypothetical economic downturns on their balance sheets. The Fed in the middle of its 2020 tests when the coronavirus hit, presenting a real-world scenario that was even worse than the stress test’s “severely adverse” scenario.

The Fed therefore ran a last-minute “sensitivity” analysis modeling the impact to bank capital under V, U, and W-shaped recoveries. Although the central bank did not report the analysis at a firm level, the Fed said that “several” of the 33 largest banks would reach minimum capital requirements under some of the scenarios.

The Fed will require the firms to re-submit their capital plans (detailing dividend and stock buybacks over the coming quarters). For the third quarter of 2020, the Fed capped dividend payments and restricted any share buybacks. The Fed extended those limitations into the fourth quarter as well.

In the second round of stress tests, the Fed found that banks continued to have "strong capital levels" and allowed banks to pay dividends and make share repurchases - as long as those distributions that do not total more than an average of the bank’s net income over the prior year.

How it impacts Main Street: Bank capital is a critical measure of a financial institution’s ability to not only lend to borrowers but absorb losses if the economy turns sour. Stress tests are the Fed’s normal check-ups on the health of the banking industry, but the coronavirus presents its own unique challenges.

By briefly restricting dividends and buybacks, the central bank sought to ensure that firms are retaining capital as opposed to paying it out to shareholders. But some, such as Fed Governor Lael Brainard, would have preferred the Fed ban dividends entirely instead of merely cap the amount that banks can pay out.

The Fed has unleashed a lot of acronyms. Credit: David Foster / Yahoo Finance
The Fed has unleashed a lot of acronyms. Credit: David Foster / Yahoo Finance
Commercial Paper Funding Facility (CPFF)*
Date announced: March 17, March 23, July 23, Nov. 30 (2020)

Date launched: April 14, 2020 (effective through March 31, 2021)

Technical details: The Fed announced that it would directly finance eligible commercial paper, a common form of short-term corporate debt. Although the Fed does not have the ability to add commercial paper directly to its balance sheet, the central bank established a special purpose vehicle (SPV) with $10 billion of equity investment from the U.S. Treasury to buy high-rated, three-month commercial paper.

On March 23, the Fed expanded the CPFF to include some short-term municipal bonds as well.

In November, Treasury Secretary Steven Mnuchin authorized a 90-day extension of the CPFF.

How it impacts Main Street: Businesses forced to shut down or significantly scale back their operations are scrambling to find financing as the U.S. tries to flatten the curve on the novel coronavirus. But with counterparties less willing to buy corporate debt, the Fed is stepping in to directly take on risk by snatching up commercial paper. In theory, the CPFF should allow businesses to keep employees on payroll and ensure that the business is still there for workers to return to once the economy starts up again.

Primary Dealer Credit Facility (PDCF)*
Date announced: March 17, Nov. 30 (2020)

Date launched: March 20, 2020 (effective through March 31, 2021)

Technical details: The PDCF offers short-term (up to 90-day) loans to primary dealers, or firms that serve as intermediaries between the government and the market. To get access to the loans, the dealers can offer up a wide variety of different types of collateral (investment grade corporate debt, commercial paper, municipal debt, mortgage-backed securities, asset-backed securities, and even some stocks). Exchange-traded funds and mutual funds are not eligible collateral under the PDCF.

In November, Treasury Secretary Steven Mnuchin authorized a 90-day extension of the PDCF).

How it impacts Main Street: The PDCF allows those dealers at the heart of the financial system to temporarily liquidate some assets that they may be unable to sell in the open market. Without assets trapped on the balance sheet, those primary dealers would then have the liquidity to lend to businesses disrupted by the virus.

Money Market Mutual Fund Liquidity Facility (MMLF)*
Date announced: March 18, March 20, Nov. 30 (2020)

Date launched: March 23, 2020 (effective through March 31, 2021)

Technical details: Much like the PDCF, the MMLF offers short-term loans, but to all U.S. banks. Under the program, banks offer up collateral in the form of U.S. Treasuries, asset-backed commercial paper, and some unsecured commercial paper. The MMLF is similar to the crisis-era Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), but the Fed on March 20 announced that it would expand the MMLF to take on short-term (with maturities of a year or less) municipal debt as eligible collateral as well.

The Treasury will provide $10 billion of credit protection.

In November, Treasury Secretary Steven Mnuchin authorized a 90-day extension of the MMLF.

How it impacts Main Street: The expansion of the MMLF to municipal debt is a new move. With businesses closed, local municipalities and states may be unable to collect tax revenue for a while. As a result, municipal debt markets have been drying up as bond buyers worry about the economic spillover of the virus onto the credit health of American towns, cities, and states. The Fed was able to retrofit the MMLF to the muni debt market in an attempt to maintain the flow of financing for localities and their public utilities.

Primary Market Corporate Credit Facility (PMCCF)*
Date announced: March 23, April 9, June 29 (2020)

Date launched: June 29, 2020

Date ended: Dec. 31, 2020

Technical details: The PMCCF will purchase investment-grade corporate bonds (with maturities of four years or less) directly from eligible issuers and offer them a loan. Like the CPFF, the facility will have the support of billions of dollars from the U.S. Treasury and will hold the bonds in an SPV. Companies accessing the PMCCF would pay the Fed interest on the loan but would be allowed to hold off on interest payments for up to six months, during which it would not be allowed to pay dividends or buyback shares.

On April 9, the Treasury expanded its support from $10 billion to $50 billion as the Fed expanded the scope of the program to cover “fallen angel” corporate debt with below investment-grade ratings of BB-/Ba3.

The program is new and was not deployed during the 2008 crisis.

At the direction of the U.S. Treasury, the PMCCF and the Secondary Market Corporate Credit Facility stopped actively buying new assets on December 31, by which point the programs had made aggregate purchases of about $14.1 billion.

How it impacted Main Street: Companies with weaker credit ratings could not access the CPFF, but strains in the investment-grade and high-yield markets raised concerns that those with a higher-risk of default were exposed. The PMCCF hoped to backstop those markets and allow companies to find financing and keep their employees on payroll while the business stoppages continue.

Secondary Market Corporate Credit Facility (SMCCF)*
Date announced: March 23, April 9, June 15 (2020)

Date launched: May 12, 2020

Date ended: Dec. 31, 2020

Technical details: As the name implies, the SMCCF will provide a backstop in the secondary market for investment-grade and some high-yield corporate debt targeted by the PMCCF. The facility would include a separate SPV with another $10 billion from the U.S. Treasury, which was expanded to $25 billion on April 9. The SMCCF can also take on some U.S.-listed ETFs with “broad exposure” to the market for U.S. investment-grade corporate bonds, in addition to some ETFs with exposure high-yield corporate bonds.

After focusing its initial purchases in ETFs, the facility was expanded on June 15 to include secondary purchases of individual corporate bonds for the purposes of creating a “broad, diversified market index” of bonds that are eligible for the program. Purchases cover bonds with remaining maturities of 5 years or less.

The SMCCF is also a new tool.

At the direction of the U.S. Treasury, the PMCCF and the SMCCF stopped actively buying new assets on December 31, by which point the programs had made aggregate purchases of about $14.1 billion.

How it impacted Main Street: The SMCCF added extra juice to its efforts to provide liquidity to the investment-grade and some high-yield corporate debt markets by targeting the secondary market. Just as the PMCCF does, the goal was to maintain access to financing for companies hoping to survive the business disruptions from the novel coronavirus, and keep employees paid in the process. In tandem, both facilities were capable of providing up to $750 billion in support to credit markets.

Term Asset-Backed Securities Loan Facility (TALF)*
Date announced: March 23, April 9, May 12, July 23 (2020)

Date ended: Dec. 31, 2020

Technical details: The TALF was deployed in the financial crisis and is again being deployed to provide loans to U.S. companies in exchange for collateral in the form of asset-backed securities (with exposure to consumer credit like student loans, car loans, credit card receivables, and small business loans). The facility would offer the loans to U.S. companies via primary dealers, and would be supported through an SPV with $10 billion of equity investment from the U.S. Treasury.

On April 9, the Fed expanded the TALF to also accept collateral with underlying credit exposures to leveraged loans (such as collateralized loan obligations) and commercial mortgages. On May 12, the Fed offered more specifics on the types of CLOs it would accept.

At the direction of the U.S. Treasury, the TALF stopped actively buying new assets on December 31, by which point the program had made aggregate purchases of about $3.5 billion.

How it impacts Main Street: Asset-backed securities provide liquidity to the underlying availability of consumer credit categories familiar to most Americans. The TALF program was aimed at giving market-makers the confidence to package loans which in theory, should have given underwriters the confidence to extend credit to businesses and household through the crisis.

Foreign and International Monetary Authority (FIMA) Repo Facility
Date announced: March 31, 2020

Date launched: April 6, 2020 (effective through September 30, 2021)

Technical details: The Fed’s U.S. dollar swap arrangements are only available to 14 central banks, but the repo facility offers U.S. dollars to any of the over 200 foreign and international monetary authorities (FIMA) that have accounts at the New York Fed. Through the FIMA repo facility, other central banks and monetary authorities looking to liquidate their positions in U.S. Treasuries will be able to temporarily swap those securities for U.S. dollars.

The program was originally set to expire in the beginning of October but in July the Fed extended the facility through March 31, 2021. The Fed in December again extended the facility end date, to September 30, 2021.

How it impacts Main Street: The FIMA repo facility is aimed at supplying U.S. dollars to the world as global investors and companies hunker down in greenbacks. Like the U.S. dollar swap arrangements, the FIMA repo facility is designed to avoid any foreign market strains resulting from a dollar shortage, which could spillover into the U.S. if not properly addressed.

Paycheck Protection Program Liquidity Facility (PPPLF)*
Date announced: April 6, April 30, Nov. 30 (2020), March 8 (2021)

Date launched: April 16, 2020 (effective through June 30, 2021)

Technical details: The Federal Reserve committed to backstopping the $350 billion Paycheck Protection Program authorized by Congress. On April 6, the Fed released a two-sentence statement committing the central bank to providing financing to PPP lenders. Three days later, the Fed clarified that the facility will offer credit to any PPP lender and take on those PPP loans as collateral at face value.

As of April 30, the Fed expanded participation in the program to allow non-traditional lenders, like community development financial institutions and members of the Farm Credit System, to access liquidity as well.

In November, Treasury Secretary Steven Mnuchin authorized a 90-day extension of the PPPLF. In March, the Fed extended the program to run through June 30, 2021.

How it impacts Main Street: The PPP loans were set at a 1% interest rate, but banks say the rate is below “break even” for them to originate and service. By taking on the loans itself, the Fed’s PPP facility hopes to give banks a little more breathing room to originate the PPP loans that Main Street businesses desperately need to weather the coronavirus-induced shut downs.

Main Street New Loan Facility (MSNLF)*
Date announced: March 23, April 9, April 30, June 8, Oct. 30 (2020)

Date launched: June 15, 2020

Date ended: Jan. 8, 2021

Technical details: The MSNLF was one of three facilities within the Fed’s Main Street Lending program and originally sought to offer borrowers new four-year loans of at least $500,000. Pricing for all Main Street loans were set at LIBOR plus 3%.

On April 9, the Fed announced that it would support $600 billion in loans to businesses with fewer than 10,000 employees or up to $2.5 billion in annual revenues. U.S. lenders would underwrite the loans, hold 5% of the loan on its books, and sell the remaining 95% to an SPV backed by $75 billion in equity from the U.S. Treasury.

On April 30, the Fed expanded the scope of the facility to change the employee threshold to 15,000 and the revenue threshold to $5 billion. The updated terms state that the maximum loan size was the lesser of $25 million or four times 2019 adjusted EBITDA.

On June 8, the Fed lowered the minimum to $250,000 and expanded the loan term to five years. The Fed also raised the absolute maximum loan size to $35 million. MSNLF loans, in addition to all other Main Street loans, allowed borrowers to defer principal payments for the first two years.

On October 30, the Fed again lowered the minimum loan size, to $100,000.

On January 8, the Fed closed down all the Main Street programs to new loans, at the direction of the U.S. Treasury. As of closing, the programs had purchased an estimated total of $16.6 billion in loans.

How it impacts Main Street: The Small Business Administration’s Paycheck Protection Program targeted companies with fewer than 500 employees, but businesses larger than that did not have a lifeline. The Main Street Lending Facility allowed businesses to get loans as long as they “make reasonable efforts” to retain employees.

There was no minimum size for eligible companies, and businesses that took a PPP loan remained eligible for any type of Main Street loan.

Main Street Priority Loan Facility (MSPLF)*
Date announced: March 23, April 30, June 8, Oct. 30 (2020)

Date launched: June 15, 2020

Date ended: Jan. 8, 2021

Technical details: The Fed revised the the terms of its Main Street Lending Program on April 30 and created the MSPLF to cover larger, slightly riskier loans. Loans under the MSPLF were allowed to be a little larger than those originated under the MSNLF, with a ceiling as large as six times 2019 adjusted EBITDA.

Originally, the Fed sought to require lenders to hold onto a slightly larger slice of the loan (15%) to cover the higher risk.

On June 8, the Fed walked that retention requirement back, only requiring lenders to hold onto 5% of the loan (like the MSNLF and MSELF). The Fed also raised the absolute ceiling to $50 million.

The same profile of borrowers was applicable for the MSPLF: under 15,000 employees and $5 billion in revenue.

On January 8, the Fed closed down all the Main Street programs to new loans, at the direction of the U.S. Treasury. As of closing, the programs had purchased an estimated total of $16.6 billion in loans.

How it impacts Main Street: Like the MSNLF, the MSPLF hoped to keep larger businesses whole through the COVID-19 crisis.

The MSPLF was designed to appeal to riskier businesses that, for example, may have had low earnings but a need for a large loan. Because the EBITDA requirement would have allowed for a more highly levered loan relative to the MSNLF, a priority loan was senior to other debt carried by the borrower (a requirement not part of loans under the MSNLF).

Main Street Expanded Loan Facility (MSELF)*
Date announced: March 23, April 9, April 30, June 8, Oct. 30 (2020)

Date launched: June 15, 2020

Date ended: Jan. 8, 2021

Technical details: The MSELF was the third program in the Main Street Lending Facility. It differs in that it allowed banks to upsize the tranche of an existing loan to terms that would allow them to fund the loan from the $600 billion pool.

Borrowers wanting a loan (of a minimum size of $10 million) faced the same eligibility requirements: having fewer than 15,000 employees or up to $5 billion in annual revenues.

Loans under the MSELF could be as large as $200 million, but no company could take out a loan that was larger than six times its EBITDA when adding outstanding and undrawn debt (like the MSPLF). Lenders were required to hold onto 5% of the loan risk.

On June 8, the Fed expanded the program to raise the maximum loan limit under the MSELF to $300 million.

On January 8, the Fed closed down all the Main Street programs to new loans, at the direction of the U.S. Treasury. As of closing, the programs had purchased an estimated total of $16.6 billion in loans.

How it impacts Main Street: Whereas the MSNLF covered brand new loans to borrowers that may not have an outstanding loan, the MSELF allowed borrowers to work with their bank lender to restructure existing loans. The MSELF offered large borrowers massive loans of up to $300 million. Like the MSPLF loans, the expanded loans were senior in debt to all other debt carried by the borrower.

Nonprofit Organization New Loan Facility (NONLF)*
Date announced: June 15, July 17, Oct. 30 (2020)

Date launched: Sept. 4, 2020

Date ended: Jan. 8, 2021

Technical details: On June 15, the Fed proposed a carveout of the Main Street program that would make eligible any 501(c)(3) or 501(c)(19) organization with between 50 and 15,000 employees. Among the requirements: the applicant’s 2019 revenues had to be less than $5 billion and the organization had to be at least five years old.

On July 17, the Fed finalized the facility and widened the eligibility to allow nonprofits as small as 10 employees. It also broadly loosened standards to cover slightly more indebted nonprofits than in the original proposal.

The terms of the loans were modeled off of the Main Street loans. The minimum loan size for the NONLF was $250,000 and the maximum size was $35 million or the borrower’s average 2019 quarterly revenue. Similarly, the loans were five years in term and allowed the borrower to defer principal payments for two years, interest payments for one year, and were priced at LIBOR plus 3%.

The “new” loan program allowed lenders to originate a fresh line of credit, 95% of which the lender can shop to the Fed’s facility. The facility was backed from the same pool of $75 billion of equity from the U.S. Treasury dedicated to the Main Street program.

On October 30, the Fed lowered the minimum loan size available via the program, to $100,000.

On January 8, the Fed closed down all the Main Street programs to new loans, at the direction of the U.S. Treasury. As of closing, the programs had purchased an estimated total of $16.6 billion in loans.

How it impacts Main Street: As the Fed was designing its Main Street Lending Program, some Fed officials acknowledged that the facility would not meet the needs of nonprofits like universities and charitable organizations facing funding gaps amid the COVID-19 crisis.

Fed Chairman Jerome Powell noted that nonprofits provide essential services like skills development, which is why the central bank felt the need to “help them through this difficult time.”

Nonprofit Organization Expanded Loan Facility (NOELF)*
Date announced: June 15, July 17, Oct. 30 (2020)

Date launched: Sept. 4, 2020

Date ended: Jan. 8, 2021

Technical details: The NOELF offered loans of larger size than the NONLF, allowing a borrower to take out as much as $300 million (with a minimum loan size of $10 million). The loan was an upsized tranche of an existing loan and was senior in repayment priority to other debt.

Although the loan sizes under the NOELF were much larger, the nation’s largest nonprofits and universities were still at risk of being ineligible. As proposed, the facility did not cover organizations with more than 30% of its revenues coming from donations.

In its finalized term sheet, the Fed loosened the donations threshold and made eligible nonprofits with up to 40% of its revenues coming from donations.

Any organization with an endowment larger than $3 billion (requirements that also applied to the NONLF) were not eligible, and borrowers still faced a tailored maximum of their average 2019 quarterly revenue.

Otherwise, loans under the NOELF had the same terms as all the other Main Street facilities (i.e. five-year term, deferred principal payments for two years, interest payments for one year, pricing at LIBOR plus 3%, and lender retention of 5%).

On January 8, the Fed closed down all the Main Street programs to new loans, at the direction of the U.S. Treasury. As of closing, the programs had purchased an estimated total of $16.6 billion in loans.

How it impacts Main Street: Like the MSELF, the NOELF allowed borrowers to work with their bank lender to restructure their existing loans. The NOELF offered larger borrowers, such as mid-sized universities or recognizable charitable organizations, to bridge about a quarter’s worth of revenue.

However, the country’s largest nonprofits were likely not covered due to the endowment and donations-as-a-percentage-of-revenue limits.

Municipal Liquidity Facility (MLF)*
Date announced: April 9, April 27, June 3, August 11 (2020)

Date launched: May 26, 2020

Date ended: Dec. 31, 2020

Technical details: Through an SPV backed by $35 billion of investment from the Treasury, the Fed offered loans to state and local governments by buying short-term municipal debt (with maturity of less than two years) directly from the issuers. U.S. states, cities with more than one million residents, and counties with more than two million residents were eligible for the program, which was designed to support up to $500 billion in loans.

On April 27, the Fed lowered the bar on qualification to include cities with at least 250,000 residents and counties with at least 500,000 residents. The Fed also expanded the eligible maturity to three years, but municipalities had to be rated at least investment-grade to participate. The Fed released pricing details on the facility on May 11, which fixed interest rates at an overnight index rate plus a spread based on the issuer’s credit rating.

On June 3, the Fed said it would allow state governors to designate two issuers (such as public transit systems or airports) for access to the facility. The Fed also expanded the facility to allow states without large counties or cities to designate up to two cities or counties for eligibility to get MLF loans.

After having spent its first two months of existence with only one loan, the Fed on August 11 lowered the pricing of its loans by 50 basis points (for tax-exempt eligible notes).

At the direction of the U.S. Treasury, the MLF stopped actively purchasing new municipal securities on December 31, by which point the program had made aggregate purchases of about $6.3 billion. Only two borrowers tapped the program: the state of Illinois and New York’s Metropolitan Transportation Authority.

How it impacts Main Street: Similar to the expanded scope of the MMLF, the municipal liquidity facility hoped to provide a lifeline to local and state governments facing dramatic funding gaps with tax revenue collections essentially frozen. Because local and state governments were the key providers of critical services like unemployment insurance and sanitation, the Fed sought to prevent municipalities from defaulting by offering to take on their debt if counter-parties were unavailable.

(* denotes facilities opened by the Fed with approval from the U.S. Treasury under Section 13(3) of the Federal Reserve Act)

This article has been updated, it was originally published on May 14, 2020.

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>>> Yellen backs new allocation of IMF's SDR currency to help poor nations


Reuters

By Andrea Shalal, David Lawder


https://www.reuters.com/article/g20-usa/update-4-yellen-backs-new-allocation-of-imfs-sdr-currency-to-help-poor-nations-idUSL1N2KV1IA


WASHINGTON (Reuters) - U.S. Treasury Secretary Janet Yellen on Thursday threw her support behind a new allocation of the IMF’s own currency, or Special Drawing Rights, but said broad parameters were needed to boost transparency on how the reserves are used and traded.

Reversing the opposition of the Trump administration, Yellen told G20 finance officials in a letter that a new SDR allocation could boost liquidity for poor countries, which have been particularly hard hit by the global coronavirus pandemic.

The U.S. Treasury chief gave no specific size for possible allocation of SDRs, which can be converted to hard currency by IMF members. G20 finance officials will discuss the issue when they meet by video conference on Friday.

Italy, which holds the presidency of the G20 this year, and other members of the group of rich and emerging economies have backed a $500 billion allocation, but the Biden administration had been guarded about its view until now.

Yellen said an SDR allocation and steps to boost low- and zero-interest lending by the International Monetary Fund and the World Bank could aid efforts to contain the pandemic and mitigate its devastating impact, especially in poor countries.

“Without further international action to support low-income countries, we risk a dangerous and permanent divergence in the global economy,” Yellen said.

“An allocation of new Special Drawing Rights (SDRs) at the IMF could enhance liquidity for low-income countries to facilitate their much-needed health and economic recovery efforts,” she said.

“To make this tool effective, the G20 must work with a broad coalition of countries on a set of shared parameters for greater transparency and accountability in how SDRs are exchanged and used.”

IMF spokesman Gerry Rice welcomed Yellen’s letter as “very helpful”, but declined to comment on her call for parameters for the use of SDRs. The IMF’s issuance of new SDRs during the global financial crisis had “served the world very well” and could do so again, he said.

The IMF’s charter requires general allocations of SDRs to be distributed to all members in proportion to their shareholdings in the Fund, with no conditions attached. It was not immediately clear how the parameters that Yellen seeks would be structured.

Sources said U.S. and other officials have expressed concerns about poor countries cashing out the added reserves to pay off official bilateral or private debt, a move that could shield China - the biggest official bilateral creditor - from exposure to an expected wave of debt restructurings.

In her letter, Yellen encouraged G20 members to use excess SDRs to support recovery efforts in low income countries, along with continued bilateral aid. She said she looked forward to discussing potential ways of deploying SDRs.

An IMF spokeswoman said members had provided about $15 billion of their existing SDRs to the Fund’s Poverty Reduction and Growth Trust, accounting for about two-thirds of the $24 billion in loan resources mobilized for that facility.

Yellen’s statement comes amid growing pressure from international officials and non-governmental organizations for more decisive action by the United States and other rich nations to help poor countries weather the current crisis, especially given an expected lag in vaccinations for those nations.

More than 200 civil society groups, religious leaders and some Democratic lawmakers in the U.S. Congress favor a larger SDR allocation valued at $3 trillion, but sources familiar with the matter said they viewed such a large move as unlikely for now.

Eric LeCompte, executive director of Jubilee USA Network, which has coordinated letters backing an allocation, said Yellen’s letter was “incredibly positive news.”

The IMF’s board approved its last SDR allocation of $250 billion in August 2009, about five months after it was first proposed by G20 leaders during the global financial crisis.

Yellen told G20 officials that Treasury would co-chair the relaunched G20 sustainable finance group, and wanted to make it a formal working group to reflect its importance in tackling “the existential threat of our time: climate change.”

She said the group would advance and coordinate the G20’s initiatives to promote transparency around climate-related financial risks, sustainable finance, and a strong, green recovery, but said they should also support poor countries.

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>>> The Great Reset Is Here


BY JAMES RICKARDS

FEBRUARY 22, 2021


https://dailyreckoning.com/the-great-reset-is-here/


The Great Reset Is Here

The Bretton Woods conference of 1944 set the global financial system that still prevails today. The period 1969-1971 can be regarded as the First Reset, which involved the creation of Special Drawing Rights (SDR, ticker:XDR), the devaluation of the dollar and the end of the gold standard.

For years, commentators (myself included) have discussed the next global monetary realignment, which is sometimes called The Big Reset or The Great Reset.

Now, it looks like the long-expected Great Reset is finally here.

Details vary depending on the source, but the basic idea is that the current global monetary system centered around the dollar is inherently unstable and needs to be reformed.

Part of the problem is due to a process called Triffin’s Dilemma, named after economist Robert Triffin. Triffin said that the issuer of a dominant reserve currency had to run trade deficits so that the rest of the world could have enough of the currency to buy goods from the issuer and expand world trade.

But, if you ran deficits long enough, you would eventually go broke. This was said about the dollar in the early 1960s.

In 1969, the International Monetary Fund (IMF) created the SDR, possibly to serve as a source of liquidity and alternative to the dollar.

In 1971, the dollar did devalue relative to gold and other major currencies. SDRs were issued by the IMF from 1970 to 1981. None were issued after 1981 until 2009 during the global financial crisis.

“Testing the Plumbing”

The 2009 issuance was a case of the IMF “testing the plumbing” of the system to make sure it worked properly. Because zero SDRs were issued 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 it was also to make sure the system works, in case a large new issuance was needed on short notice. The 2009 experiment 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 January 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. U.S. Treasury bonds are among the world’s most liquid securities, which makes the dollar a legitimate reserve currency.

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.

China Gets a Seat at the Monetary Table

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 a seat at the monetary table.

So, the framework has been created to expand the SDR’s scope.

The SDR can be issued in abundance to IMF members and 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.

Now, the IMF is planning to issue $500 billion of new SDRs, although some Democrat senators are lobbying for an issue of $2 trillion SDRs or more.

This would be almost ten times the amount of SDRs issued in 2009 and would go a long way to increasing SDR liquidity and advancing the globalist agenda of eventually having the SDR replace the U.S. dollar as the leading reserve asset.

This proposal closely follows the global elite game plan predicted in chapter 2 of my 2016 book, The Road to Ruin.

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.

More Than Just SDRs

But there’s more to the Great Reset than the issuance of new SDRs. Here’s another breaking news story that validates the longstanding prediction of a coming reset in the global financial system.

In 1999, the euro replaced the individual currencies of Germany, France, Netherlands, Italy and other major economies in Europe. Today, the number of countries that have joined the euro is up to 19, and more countries are awaiting admission.

The euro is the second largest reserve currency asset after the U.S. dollar. The creation of the euro can be thought of as a stepping stone from national currencies to a single world currency.

Now, the euro (along with the Chinese yuan) is moving quickly to become a Central Bank Digital Currency (CBDC). A CBDC combines a traditional currency with the blockchain technology of a cryptocurrency.

It’s an important move in the direction of eliminating cash and forcing users into a 100% digital system using credit cards, debit cards, and smartphone apps.

Why are China and Europe so focused on eliminating cash?

Use It or Lose It

I’ve said all along that you cannot put negative interest rates on consumers until you eliminate cash. Otherwise, savers would just withdraw cash from the banks and stuff it in mattresses to avoid the negative rates. Implicitly, the European Central Bank (ECB) seems to agree.

One of the ECB Board members says that negative rates (really confiscation) will be applied as a “penalty” against “hoarding” cash. In plain English, that means they will create digital money, force you to spend it, and if you don’t spend it, they will take it away as a “negative rate.”

Now all of the pieces of the global elite plan are converging.

The IMF SDR issuance will reliquify global central banks that cannot print dollars. Then CBDCs will be used to eliminate cash.

Once the cattle (that’s us) have been herded into the digital slaughterhouse, we will be told to “use it or lose it” when it comes to our own money. In other words, either we spend the money, or the government will take it away.

Of course, the spending can be channeled into politically correct causes by excluding unpopular vendors such as gun dealers or conservative social media platforms from the payment system. This represents total domination of human behavior through world money + digital currencies + confiscation.

This is not speculation anymore; it’s happening in front of our eyes. The Great Reset is coming fast. The future is here.

The only solution is to use a non-digital, non-bank store of wealth that cannot be traced or manipulated. Given the planned dollar devaluation, it’s one more reason to own physical gold and silver.

Get it while you still can.

Regards,

Jim Rickards

for The Daily Reckoning

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>> Deutsche Bank’s fall from grace: how one of the world’s largest lenders got into hot water


Once the largest lender in the world by assets, Deutsche Bank’s reputation has been dented by allegations of money laundering, questions over its dealings with the US president and a series of profit warnings

Deutsche Bank CEO Christian Sewing set out a cost-cutting plan in less than a month of taking the role, with the aim of trimming down the bank’s operations and restoring it to profitability


World Finance

by Sophie Perryer

October 17, 2019


https://www.worldfinance.com/banking/deutsche-banks-fall-from-grace-how-one-of-the-worlds-largest-lenders-got-into-hot-water


On July 8, 2019, thousands of Deutsche Bank employees across the globe arrived at their offices, unaware that they would be leaving again, jobless, just a few hours later. In Tokyo, entire teams of equity traders were dismissed on the spot, while some London staff were reportedly told they had until 11am to leave the bank’s Great Winchester Street offices before their access cards stopped working.

The job cuts, which totaled 18,000, or around 20 percent of Deutsche Bank’s workforce, were the flagship element of a restructuring plan designed to save the ailing German lender. Wall Street’s top market observers have described the initiative as ambitious and radical, but it remains to be seen whether it will be enough to save the bank, which has come under intense scrutiny for dubious business practices in the wake of the 2008 financial crisis.

Chequered past

Deutsche Bank was founded in 1870 to promote Germany’s standing within the global trade market. It was the country’s first foray into international banking; prior to its establishment, German companies had to rely on British and French lenders to do business overseas, meaning they were often subject to unfavourable terms. Deutsche Bank opened its first branch in Bremen in 1871 but expanded rapidly into Asia and Europe, opening a Shanghai branch in 1872 and a London outpost the following year.

Its early growth was stalled in 1914 by the commencement of the First World War, in which the lender lost the majority of its foreign assets. It recovered quickly by pursuing a series of significant mergers, one of which, with German lender Disconto-Gesellschaft, allowed it to avoid the worst of the 1929 crash. Deutsche Bank’s role in the Second World War, however, is the source of much controversy: according to its own historians, the bank was involved in 363 confiscations of Jewish-owned businesses between 1933, when Adolf Hitler came to power, and 1938. It also loaned funds to the German Government to allow it to build the Auschwitz concentration camp, according to The New York Times.

The bank’s connection with Trump has come under intense scrutiny since his election, initially due to the investigation led by Robert Mueller into Trump’s relationship with Russia

At the end of the war, Deutsche Bank did not slink off quietly into the shadows as many businesses that had been involved with the Nazi Party did. Rather, “it [became] a leading force for the reconstruction, redevelopment and reunification of Europe”, The New York Times’ David Enrich noted. After several decades, however, the bank changed tack and began to go after the sort of riches and prowess that had, until this point, been concentrated on Wall Street. Its ploy bore fruit in the late 1990s when its $10.1bn acquisition of US investment bank Bankers Trust made it the fourth-largest financial management firm in the world. Buoyed by this success, in 2001, the German lender debuted on the New York Stock Exchange, positioning itself to take advantage of the astronomical rise of the US stock market in the mid-2000s.

Scandal upon scandal

In the aftermath of the 2008 crash, however, Deutsche Bank’s success began to unravel. It had been one of the largest purveyors of junk bonds, selling about $32bn worth of collateralised debt between 2004 and 2008, but its traders were also betting against that market in order to line their own pockets. Greg Lippmann, Deutsche’s former head of asset-backed securities trading, even referred to some bonds as “crap” and “pigs” in emails to colleagues, all the while promoting them to investors as A-grade.

The implication of this profiteering came home to roost in January 2014, when the bank was forced to pay a $1.93bn settlement to the US Federal Housing Finance Agency for its sale of subprime-mortgage-backed securities to now-defunct government agencies Fannie Mae and Freddie Mac. The sum broke the back of its profit margins; that quarter, it reported a $1.6bn pre-tax loss, heralding a loss-making era for the lender.

Since that time, the losses and lawsuits have come thick and fast. In April 2015, the bank paid a combined $2.5bn in fines to US and UK regulators for its role in the LIBOR-fixing scandal. Just six months later, it was forced to pay an additional $258m to regulators in New York after it was caught trading with Myanmar, Libya, Sudan, Iran and Syria, all of which were subject to US sanctions at the time. These two fines, combined with challenging market conditions, led the bank to post a €6.7bn ($7.39bn) net loss for 2015. Two years later, it paid a further $425m to the New York regulator to settle claims that it had laundered $10bn in Russian funds.

Questions have also been raised over Deutsche Bank’s relationship with US President Donald Trump and disgraced financier Jeffrey Epstein. The bank’s relationship with Trump dates back to the 1990s when it was attempting to get a foot in the door on Wall Street; having a high-profile property mogul like Trump on the bank’s books allowed it to chase after bigger and better clients. “Serving Donald Trump as a client was one way that Deutsche elbowed its way onto the world stage,” said Russ Mould, Investment Director at AJ Bell. The bank financed almost three decades’ worth of Trump’s deals and continued to lend to him despite multiple loan defaults until as late as 2016.

The bank’s connection with Trump has come under intense scrutiny since his election, initially due to the investigation led by Robert Mueller into Trump’s relationship with Russia, and latterly in relation to Trump’s tax returns, which the lender has so far refused to release despite being subject to a congressional subpoena. With regards to Epstein, Deutsche reportedly managed his finances long after his 2008 conviction for soliciting underage sex and only terminated its association with him in May this year, according to The Boston Globe.

Divisive vision

It was in the midst of this furore that, in April 2018, Deutsche Bank veteran Christian Sewing took up the role of CEO. In his typical pragmatic fashion, Sewing had set out a comprehensive cost-cutting plan in less than a month, aiming to trim down the bank’s operations and restore it to profitability. In a memo at the end of his first month in the job, he told staff: “It is our imperative to take tough decisions… We have to regain our credibility.”

July’s job cuts are the toughest measure to be introduced by Sewing yet, and signal to the market that he is prepared to ruffle feathers internally to achieve wider organisational goals. In a conference call to the media on the morning of the redundancies, the CEO highlighted the bank’s main errors as over-expansion, ill-thought-out capital allocation to failing corners of the business, and ignorance with regard to costs. His restructuring plan aims to tackle all of those aspects by trimming staff costs, spinning off underperforming divisions into a €50bn ($55.3bn) bad bank, and scaling back the organisation’s global network.

It certainly impressed Wall Street’s finest. JPMorgan Chase wrote in a memo: “[Deutsche Bank’s] restructuring, in our view, is bold and for the first time not half-baked but a real strategic shift giving up its Tier 1 [investment bank] ambitions. [Deutsche Bank] is rightsizing to where it came from originally.” UBS, meanwhile, commented that the plan shows a real willingness to change, writing in a note: “Progress over the coming quarters could then further increase the market confidence in the plan.”

However, the plan’s success is by no means guaranteed. Shares have fallen since the redundancies were announced as the implications of the high-risk, multi-year strategy began to sink in for investors. At the time of printing, Deutsche Bank’s shares were hovering around €7.64 ($8.48), a dramatic decline from the €32 ($35.31) highs seen in 2015 and a long way off the lender’s pre-crisis peak of €112 ($123.60).

But the greatest threat to progress is the money-laundering allegations that are currently swirling around the lender. These first emerged in November last year in connection with the Danske Bank scandal; the same month, Deutsche’s Frankfurt offices were raided as police searched for documents connecting the two lenders. The investigation is ongoing.

“The money-laundering accusations are a serious matter from a reputational, operational and financial point of view,” Mould told World Finance. “Regulators are clamping down hard and, after fines for sanctions busting, misselling toxic mortgage-backed securities, rigging LIBOR and money laundering over the past decade, investors will not be pleased if Deutsche has to pay further hefty penalties.”

Sewing is not ignorant of this possibility. In that regard, July’s restructuring is a shrewd move, as slimming the organisation will limit the damage if the money-laundering investigation does not go the bank’s way. It has also provided the opportunity to rid the bank of senior figures whose unscrupulous, profit-hungry attitude was instrumental in its fall from grace.

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>>> Green New Deal Is Underway


BY JAMES RICKARDS

FEBRUARY 11, 2021


https://dailyreckoning.com/green-new-deal-is-underway/


Green New Deal Is Underway

By now, you’ve heard of the Green New Deal, an ambitious agenda to decarbonize the economy. The overall Green New Deal calls for ending the use of oil and natural gas, moving to electric vehicles, solar, wind and geothermal power, imposing carbon taxes to reduce C02 emissions and providing government subsidies to non-carbon-based energy technologies.

The U.S. would also seek to embed these policies and priorities in new trade treaties and multilateral agreements. President Biden has already begun this process by rejoining the Paris Climate Accord, which actually doesn’t mean much; it’s mostly for show.

The Paris Accord is also a platform for pursuing the Green New Deal.

But it’s difficult to conceive of any other program that would do more harm to the U.S. economy and give more of a boost to the Chinese, Russians and Iranians.

Biden has temporarily halted all new oil and gas drilling leases and permits on federal lands. He’s moving quickly to make the ban permanent. This ban will kill the fracking industry and help to destroy what’s left of the coal industry. Because of reduced supply, it will raise energy prices globally. New carbon emission taxes will raise prices even further.

Why Kill the Keystone XL Pipeline?

Very significantly, Biden has also canceled the Keystone XL pipeline. This is a pipeline that brings oil from Alberta, in Canada, to the central United States. The pipeline would then go to Nebraska, where there would be a hub and a distribution center.

Killing the pipeline would cost tens of thousands of jobs. And when you count suppliers and subcontractors, it could be at least 100,000 high-paying lost jobs, mostly union jobs with benefits.

But the fact is, the oil is still coming anyway. That oil from Canada is still coming to the United States, except it comes by truck and train. That’s the reason you build a pipeline. It’s faster and cheaper to move the oil by pipeline than it is to move it by truck and train. What we have now is just a pipeline on wheels with one difference…

They release much greater CO2 emissions. All these trucks and all these trains are putting more CO2 into the atmosphere than a pipeline would. Again, that’s why you build a pipeline.

So if you’re doing this for economic reasons, it makes no sense because you destroyed maybe 100,000 high-paying jobs. If you’re doing it for environmental reasons, it makes no sense because you will have more CO2 emissions from the trains and trucks than you would from the pipeline. But they’ve done it anyway.

This is a good example of what I call the triumph of ideology over common sense. Common sense will say, build a pipeline for the reasons I just mentioned. But that doesn’t fit the ideology or their worldview. They’re immune to the facts. They just say pipelines are bad, so get rid of them.

A Propaganda Cover for the Real Objectives
Biden justifies the Green New Deal based on fear of climate change. I don’t want to dive into the climate change debate today. But there’s good science that says CO2 is more or less a harmless trace gas, not the existential threat that many environmentalists would have you believe.

Climate science provides almost no evidence that slight observable temperature changes have anything to do with C02 emissions. It is far more likely that any temperature changes are the result of solar flare cycles and volcanic eruptions. Some data strongly suggests that the earth is slowly cooling, not warming.

Scare tactics about the “costs” of hurricanes have more to do with expensive homes built on exposed barrier islands (subsidized by federal insurance programs) than the intensity of storms, which were actually greater and more frequent in the 1940s.

Climate change is a propaganda cover for the real goals of higher taxes, more regulation, slower growth and favors for tech entrepreneurs. It’s a globalist’s dream.

What About Congress?

When you add it all up, Biden’s proposals will destroy high-paying jobs with benefits in the energy sector, raise energy costs for consumers and help flat-line economic growth.

Still, given the ideological momentum behind the Green New Deal and the imperatives of getting policies enacted quickly, it seems likely that some of these misguided provisions will become law at great cost to consumers and the economy as a whole.

But the prospects of the most radical parts of the Green New Deal becoming law are problematic. The projected adverse economic and geopolitical results will possibly derail the program in Congress. But, there can be no assurance of that. This will be one of the legislative priorities that Biden puts on a fast track because a Republican takeover of the House in 2022 would stop it indefinitely.

But the climate change agenda is seeping into all aspects of policy, including monetary policy. The original role of central banks was to provide a sound currency, which, in turn, facilitated government borrowing.

By the late 19th century, a new mission was added, which was to be a lender of last resort to banks themselves in a financial crisis. It held that in a crisis, the central bank should lend freely to solvent banks against sound collateral at a high rate of interest. That’s been flipped on its head.

Today’s version is to lend freely to anyone without collateral at a zero rate of interest.

From Lender of Last Resort To Climate Savior
After 1934, the Federal Reserve and other central banks were given broad regulatory powers over the banks in their jurisdictions. Finally, in 1978 the Humphrey-Hawkins Act gave the Federal Reserve a dual mandate, which included price stability and job creation.

With the job creation mandate in its portfolio, the Fed was empowered to interfere with almost every aspect of the real economy, including jobs, inflation, interest rates, liquidity and financial regulation.

As if that weren’t enough, economist Barry Eichengreen now calls on central banks, especially the Fed, to use their regulatory powers to control climate change! Part of the agenda would address racial inequality, income inequality and credit access for underprivileged groups.

These may be laudable goals, but it’s a long way from the Fed’s role as lender of last resort.

What’s frightening about this push to expand the Fed’s mandate is not that it can’t work, but that it could. A central bank could require commercial banks to lend money to solar and wind generating companies and deny credit to oil companies.

A central bank could require more loans to disadvantaged neighborhoods and require that no credit be made available to gun manufacturers or gun dealers.

There is no aspect of the economy and business activity that could not be affected positively by mandatory credit or destroyed by the lack of credit and access to the payments system. This is already being done to some extent by cabals of commercial banks. It would be even more powerful if required by central banks.

This is exactly the outcome that has been warned about for centuries by philosophers and political scientists. It is exactly the reason Americans abolished two U.S. central banks in the 19th century.

Any party that controls money can control the world. One solution is to abolish the Fed. Another solution is to abandon the money and move to something the Fed cannot control — gold.

Regards,

Jim Rickards

for The Daily Reckoning

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[gfp927z]

Rickards - >>> The Only Way Out of the Death Trap


BY JAMES RICKARDS

FEBRUARY 9, 2021


https://dailyreckoning.com/the-only-way-out-of-the-death-trap/


The Only Way Out of the Death Trap

I’ve said the U.S. is caught in a debt death trap. Monetary policy won’t get us out because the velocity of money, the rate at which money changes hands, is dropping.

Printing more money alone will not change that.

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

The ratio gets higher, and the situation grows more desperate. The economy barely grows at all while the debt mounts. You basically become Japan.

The national debt is $27.8 trillion. A $27.8 trillion debt would not be an issue if we had a $50 trillion economy.

But we don’t have a $50 trillion economy. We have about a $21 trillion economy, which means our debt is bigger than our economy.

The debt-to-GDP ratio is about 130%. Before the pandemic, it was about 105% (the policy response to the pandemic caused the spike).

Already in the Danger Zone
But even a ratio of 105% is in the danger zone.

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

They put the danger zone at a debt-to-GDP ratio of 90%. Once it reaches 90%, debt becomes a drag on growth.

Meanwhile, we’re looking at deficits of $1 trillion or more, long after the pandemic subsides.

In basic terms, the United States is going broke. We’re heading for a sovereign debt crisis.

I don’t say that for effect. I’m not looking to scare people or to make a splash. That’s just an honest assessment based on the numbers.

Tax cuts won’t bring us out of it, neither can structural changes to the economy. Both would help if done properly, but the problem is simply far too large.

So, an economic time bomb is ticking. Velocity is dropping. Debt is growing while growth is slowing. The explosion will come in the form of asset bubbles bursting and stocks crashing.

There’s no way out of the debt death trap. Or is there?

There is actually a way out. It’s the only solution left, really. And that’s inflation.

Deadbeats Love Inflation

Deflation increases the real value of debt. With deflation, the value of money increases, making it more burdensome to pay off debt. This is why debtors hate deflation.

And guess who is the world’s largest debtor nation? That’s right, the U.S.

On the other hand, inflation decreases the real value of debt. It’s easier to pay down debt because you’re paying back debt with dollars that are less valuable than when you originally borrowed them.

But the Fed has failed to produce inflation for over a decade now, despite all the trillions of dollars it’s fabricated.

Then how can the government and the Fed produce inflation now?

The solution is to increase the price of gold in order to change inflationary expectations. That will increase money velocity and get the growth engine running again. The Fed could actually cause inflation in about 15 minutes if it used this method.

FDR did this to perfection in 1933, and his actions began to dig us out of the Great Depression. Jerome Powell, Biden and his Treasury Secretary Janet Yellen could do it again if they wanted to (assuming they know how, which is probably too much to assume).

But how could they increase the gold price to increase money velocity and change inflation expectations?

Inflation in 15 Minutes

I’ve written about it before, but it bears revisiting, especially since there are newer readers who may be unfamiliar with it. Here’s how they can do it:

The Fed can call a board meeting, vote on a new policy, walk outside and announce to the world that effective immediately, the price of gold is $5,000 per ounce.

They could make that new price stick by using the Treasury’s gold in Fort Knox and the major U.S. bank gold dealers to conduct “open market operations” in gold.

The Fed will be a buyer if the price hits $4,950 per ounce or less and a seller if the price hits $5,050 per ounce or higher. They will print money when they buy and reduce the money supply when they sell via the banks.

The Fed would target the gold price rather than interest rates.

The point is to cause a generalized increase in the price level. A rise in the price of gold from $1,900 per ounce to $5,000 per ounce is a massive devaluation of the dollar when measured in the quantity of gold that one dollar can buy.

There it is — massive inflation in 15 minutes: the time it takes to vote on the new policy.

It’s Happened Before

The first time this happened was in 1933 when President Franklin Roosevelt ordered an increase in the gold price from $20.67 per ounce to $35.00 per ounce, nearly a 75% rise in the dollar price of gold.

He did this to break the deflation of the Great Depression, and it succeeded. The economy grew strongly from 1934-36.

The second time was in the 1970s when Nixon ended the conversion of dollars into gold by U.S. trading partners. Nixon did not want inflation, but he got it.

Gold went from $35 per ounce to $800 per ounce in less than nine years, a 2,200% increase. U.S. dollar inflation was over 50% from 1977-1981. The value of the dollar was cut in half in those five years.

History shows that raising the dollar price of gold is the quickest way to cause general inflation. If the markets don’t do it, the government can. It works every time.

Would the government and the Fed consider the gold trick I just described? They may have no choice ultimately.

‘What Can I Do?’

The real message is that the solutions to current debt levels are inflationary. That means revaluing the dollar either through a higher gold price or marking the gold to market and giving the government money.

There are a lot of moving parts here, but they all point in one direction, which is higher inflation.

It’s the only way to keep America from going broke and falling into a sovereign debt crisis.

Unfortunately, it will also slash the value of the dollar. Your savings could quickly evaporate, and your standard of living will suffer.

That’s why I recommend you put around 10% — but no more than 20% — of your investable assets into physical gold.

I also recommend select gold stocks, which can massively leverage the spot price of gold to produce enormous returns.

That will give you the protection you need to safeguard your wealth and grow it.

Regards,

Jim Rickards

for The Daily Reckoning

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>>> DoubleLine Warns Events Are In Motion To Remove Dollar As Reserve Currency


FEB 06, 2021

Authored by Bill Campbell via DoubleLine Capital


https://investorshub.advfn.com/boards/read_msg.aspx?message_id=161576854


For every action, there is an equal and opposite reaction. In the case of international trade and global payments, the U.S. made aggressive use of sanctions and tariffs. With some merit, Washington has argued that these actions level the playing field for global trade or punish bad global actors. But a series of equal and opposite reactions are occurring as nations move to remove the role of the U.S. dollar at the center of global trade and finance.

This will have a long-lasting structural impact in ending the dominance of the dollar as the world’s reserve currency.

Over the past years, the U.S. set out to address inequities in the global trade environment by imposing tariffs and sanctions on various countries from China to Mexico and Canada with the rewriting of the North American Free Trade Agreement into the United States-Mexico-Canada Agreement. Even the countries in the European Union were affected. In addition, Washington implemented sanctions against Russia in 2014 in response to Moscow’s annexation of Crimea, and more recently against Iran and Venezuela, effectively using the dollar’s role at the center of global trade and finance to force compliance of other nations. These actions impacted nations beyond those directly targeted by the U.S. action, and today many governments around the world are taking countervailing steps to remove their reliance on the dollar-based global trade and finance system that has reigned since 1944.

In November, 15 Asian countries, comprising 30% of global GDP, signed the Regional Comprehensive Economic Partnership (RCEP), creating a free-trade zone among the signatories. This agreement attempts to provide gains to trading within the regional partnership through reduction of trade and investment barriers, and increased incentives for economic integration. It is noteworthy that RCEP came about without participation of either the U.S. or Europe, and has effectively created the world’s largest trading bloc, according to the Rand Corp. Beyond the obvious benefits for economic growth in the region, a more-subtle byproduct of this agreement is to focus on bilateral settlement of trade, effectively removing the dollar as the standard unit of transaction for regional trade, according to economist and geopolitical analyst Peter Koenig, a veteran of more than 30 years with the World Bank. Liu Xiaochun, deputy dean of the Shanghai New Finance Research Institute, recently furthered this idea, stating, “Under RCEP, currency choices for regional settlement in trade, investment and financing will increase significantly for the yuan, yen, Singapore dollar and Hong Kong dollar.” Liu’s comments were posted to the China Finance 40 Forum, a think tank comprising senior Chinese regulatory officials and financial experts.

Asia is not the only region taking steps to disentangle itself from the U.S. dollar standard in global trade and payments. The European Commission, the executive branch of the 27-country European Union (EU), released a communication explicitly stating the goal to strengthen the “international role of the euro.” This goal would “help achieve globally shared goals such as the resilience of the international monetary system, a more stable and diversified global currency system, and a broader choice for market operators.”5 The communication also highlights the use of sanctions by other countries, which hurt domestic EU interests, as an additional reason for taking action to make the EU more autonomous in the global trade-and-payments infrastructure. This document outlines specific action items to help move the EU in this direction of more autonomy from the current dollar-centric system. The implementation of a digital finance strategy will be a key component of this new EU strategy, including work on a retail central bank digital currency available to the general public.

The Society for Worldwide Interbank Financial Telecommunication (SWIFT), the largest global payment settlement network, has already experienced drop-off in dollar transactions in its most-recent readings. It is interesting that this occurred after the implementation of RCEP, although the timing also comes in the wake of the COVID-19 pandemic and resulting economic disruptions. (Figure 1)

An additional element to watch will be the allocation of global central banks’ foreign currency reserves to the dollar. Non-dollar currencies recently have strengthened as the dollar has sold off. This has given many nations the opportunity to start to intervene to help stop the appreciation of their currencies and to rebuild their reserves buffers. Historically, the bulk of international reserves has been in the dollar. Today, a close eye should be kept on these allocations. If holdings in the U.S. currency decrease as a percentage of the total currency reserves while non-U.S. countries are building those reserves, that could mark a significant change in their behavior. In fact, perhaps such a deliberate policy change might have already begun. Data published by the European Central Bank (ECB) and the International Monetary Fund (IMF) show a decline in the dollar as a percentage of total currency reserves since about 2016. (Figure 2)

The dollar was already contending with structural headwinds. One is the large stock of international savings on deposit and invested in the U.S. A decline in the value of the dollar risks creating a negative feedback loop where hedging and capital outflows can exacerbate the dollar’s decline. Another is the weakening fundamental picture for the dollar due to America’s widening of the current account deficit and a growing budget deficit. These headwinds are likely to persist for the foreseeable future – not to mention being exacerbated by the aforementioned regional trade agreements and international policy actions.

For the postwar period, the United States wielded the dollar’s central role in global trade and finance to its advantage, trying to even the playing field for trading relationships and as a sanctioning facility. The end of this powerful, unipolar advantage might be at hand. The pendulum is swinging in the direction of a new, multipolar world. Countries are reclaiming autonomy in global trade, payments and finance. With the implementation of more regional trade agreements with local currency settlements, the dollar’s once-dominant role in global finance likely will continue to erode.

As the global trade-and-payments systems move away from a single-currency standard, the U.S. dollar, to a bilateral exchange framework, countries that are the most productive, most innovative or offer the most competitive goods and services will see their currencies in greater demand. This change is coming, and we should be ready for the change as it comes.

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[Zardiw]

What I want to know is.......if they want to get rid of cash.......why does every checkout machine ask 'Do you want cash back?'........lololol...wtf is up with that......

z

[Zardiw]

One way or another they are always looking for ways to screw us. Getting rid of cash is just another way towards 2084 .......Orwell was off by 100 years.....

z

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>>> Abolishing Cash - Be Careful What You Wish For


Milken Institute

by jeffrey rogers hummel


(jeffrey rogers hummel teaches economics and history at San Jose State University in California. This article is adapted from his policy analysis written for the Cato Institute. It serves as counterpoint to the case for eliminating large-denomination currency that is advanced in Ken Rogoff’s book, The Curse of Cash, which was excerpted in the Winter, 2019 issue of the Review.)


April 26, 2019


https://www.milkenreview.org/articles/abolishing-cash


Central bankers and monetary economists have become intrigued with the idea of reducing the use of paper currency, or even entirely eliminating the circulation of large-denomination notes. Sweden has already begun the process of switching to an all-digital system in which debit cards substitute for cash, while the European Central Bank ceased issuing 500-euro notes at the end of 2018.

The Case Against Cash

Ken Rogoff of Harvard has presented the most comprehensive case for dropping cash, so the details of his approach are worth reviewing. He would phase out (over a decade or more) all large-denomination notes in developed countries. In the United States, $100, $50 and $20 bills would go, and perhaps $10 bills along with them. That would leave smaller-denomination currency in circulation — though Rogoff would consider eventually replacing even these with “equivalent-denomination coins of substantial weight” to make it “burdensome to carry around and conceal large amounts.”

To put this in perspective, $100, $50 and $20 notes make up about 97 percent of the value of U.S. currency. Rogoff acknowledges that it is far too soon to phase out cash entirely in less-developed countries — though here, too, he would still eliminate the largest notes.

Why the switch from currency? First, because cash is widely used in underground economic activity, advocates contend that the elimination of large-denomination notes would significantly diminish criminal activities such as tax evasion, illicit drug trade, illegal immigration, money laundering, human trafficking, bribery of government officials and possibly even terrorism. They also argue that suppressing such activities would have the additional advantage of generating tax revenue.

Second, they maintain that, in a future with low inflation, central banks will need to be able to push nominal interest rates below zero in order to make monetary policy effective in recessions. And this will be difficult or impossible if the public can hoard large amounts of cash as an alternative to bank deposits.

Second Thoughts

These arguments may seem compelling on their face. But a close look suggests they are at best weak — and perhaps entirely mistaken.

To show that the currency phase-out would be good public policy — in econ-speak that it would generate net gains in societal welfare — one must consider the impact on the wellbeing of all affected. For the United States, this includes nonresident users of U.S. currency as well as Americans.

Not counting currency held in bank vaults, as of December 2016, there was roughly $4,200 in cash per U.S. resident in circulation, fully 80 percent of it in $100 bills. Estimates of how much of this currency is held in other countries range between 45 and 60 percent. If (as is almost certainly the case) most of the dollar currency held abroad is in the form of $100 bills, then U.S. residents, on average, must each possess around 12 $100 bills. Yet a 2014 study from the Boston Federal Reserve suggests that only 1 in 20 adult Americans owns any $100 bills. So the bulk of these domestically held high-denomination bills must be buried in the U.S. underground economy.

Or maybe not. As Lawrence H. White of George Mason University notes, those surveyed have incentives to under-report their currency holdings, whether legal or not. A 2017 study from the San Francisco Federal Reserve concluded that “cash was the most, or second most, used payment instrument regardless of household income,” and that it is even used to make 8 percent of all payments of $100 or more. Such ongoing use of cash for these large transactions at least suggests that high-denomination bills still facilitate licit economic transactions.

No one denies that a lot of cash circulates underground. But many of these transactions are merely unreported and otherwise perfectly legal. Thus there could be real welfare losses if forcing the use of less convenient media of exchange impedes or hinders these transactions. Consider too that, while cash supports truly predatory criminal acts, in many cases it is used in illegal activities that are nonetheless welfare-enhancing — among them, evasion of exceptionally high taxes that choke off productivity, and regulation that exists only to protect rent-seeking or to enhance the power of regulators looking for bribes.

But opponents of currency use have made little effort to differentiate the impact of different sorts of cash-fueled underground transactions. To be sure, underground commerce reduces tax revenues. Keep in mind, though, that taxes do more than simply transfer funds from taxpayers to the government. They also discourage people from doing whatever transaction would be taxed. If this inhibits otherwise productive activity, taxes impose economic losses as well as generate revenue. Thus, the downside of any revenue gains from restricting cash is the potential loss from discouraging underground economic production.

Admittedly, tax evasion also distorts economic output by shifting investment into the underground economy and away from other businesses that have higher pre-tax returns. But the quantitative impact of this distortion depends on multiple factors. If phasing out cash increases tax collection, will the added revenue finance genuine public goods whose benefits offset the productivity loss linked to higher tax rates on market activities? Simply assuming that shifting income from the private to the public sector — and in the process, distorting allocation of productive resources in the private sector — generates a net gain to society seems naïve.

In any event, it isn’t clear that raising tax revenue by phasing out cash would in fact generate net gains in government claims on financial resources. Currency is like a bond issued by the government that pays no interest and can never be redeemed. Economists call the resulting benefit to the government “seigniorage.” It can be thought of as an implicit tax on people’s cash balances equal to the interest the government might have been forced to pay if the public held their safe liquid assets as short-term Treasury debt.

Phasing out cash in an economy in which unreported transactions lift the economy’s total output by as much as one-fifth would clearly be disruptive, even if the transition were slow.

Of course, this implicit tax weighs most heavily on cash-intensive underground businesses. Phasing out cash would thus not only change the amount of financial resources extracted from these unreported, productive activities. It could subject them to burdensome regulation that imposes costs without generating net revenue.

Even if the initiative did generate net government revenues, the losses (especially from eliminating smaller-denomination notes) would fall disproportionately on poor people, particularly immigrants, who lack debit cards, checking accounts, and so on. Leaving small-denomination notes or coins in circulation would help somewhat — though not forever, as inflation steadily erodes their real value. In 1950, a $5 bill had purchasing power about equal to that of a $50 bill today. And even as recently as 1980, a $5 bill had the purchasing power of about $15 in today’s prices.

Rogoff recognizes the downside for the poor and advises that any drastic scale-back in cash be compensated with subsidized debit card accounts and perhaps smartphones for all. If the government took the less costly option of merely providing 80 million free, basic electronic currency accounts for low-income individuals, he estimates the cost would be $32 billion per year. That represents another erosion of net benefits and thus needs to be included in the overall cost-benefit analysis.

The relative size of the underground economy is larger in almost all other countries than in the United States. Friedrich Schneider, an economist at Kepler University in Austria, estimates that, among high-income countries, the figures run from 22 percent of GDP in Italy to 15 percent in Sweden to 9 percent in Japan to only 7 percent in the United States. (The figures exclude clearly criminal activities.) These higher figures outside the United States are generally attributed to higher tax rates and more burdensome regulation. Thus the loss from inhibiting the shadow economy in Europe would be considerably larger than in the United States.

Although the most serious levels of tax and regulation evasion occur in less-developed countries such as Brazil and India, even in some relatively advanced economies — think Greece and Italy — the underground economy represents a wide swath of output and employment. Phasing out cash in an economy in which unreported transactions lift the economy’s total output by as much as one-fifth would clearly be disruptive, even if the transition were slow.

Schneider’s estimates are confined to underground activity that is unreported but would in most times and places be considered legitimate. He attempts to exclude criminal activity. Yet governments, hungry for revenue and regulatory authority, frequently make little distinction between the two. This makes the dividing line between productive and predatory underground activity hazy. Schneider’s estimates thus include the output produced by illegal immigrants, while excluding output from the trade in illegal drugs.

Schneider concludes that “a reduction of cash can reduce crime activities as transaction costs rise, but as the profits of crime activities are still very high, the reduction will be modest (10-20 percent at most),” with the bulk of this reduction coming out of the drug trade. Rogoff, for his part, concedes that corruption and bribery are really serious problems only in poorer countries — precisely where a premature elimination of cash would also generate serious economic dislocation. With regard to terrorism, he concludes that eliminating cash would have, at best, minor effects.

Taxes Without Tears

One major cost that opponents of cash take seriously is the lost seigniorage from issuing cash. Between 2006 and 2015, the U.S. government averaged 0.4 percent of GDP annually in seigniorage from printing new notes and spending them. To phase out all existing currency by replacing it with interest-earning Treasury securities would increase the U.S. national debt by nearly 7.5 percent (yes, 7.5 percent!). Assuming a real interest rate of 2 percent on the additional debt, the combined annual cost of eliminating both existing and future U.S. currency would be $98 billion per year, or more than 0.5 percent of GDP.

If the U.S. eliminated only $100 bills and continued to provide the remaining 20 percent of currency, lost seigniorage would fall to $77 billion annually. But no matter how you play with these numbers, phasing out cash does not render significant net gains to the Treasury.

True, developed countries that lack a foreign source of demand for their own currency have much lower rates of seigniorage than the United States. In both Canada and the United Kingdom, seigniorage from future issues of cash (and ignoring the interest cost of eliminating existing cash) potentially amounts to only 0.18 percent of GDP. Therefore, if they phased out cash, government revenue losses would be smaller than in the United States. But some developed countries generate rates of seigniorage that are as high as or higher than the U.S. because of either robust foreign demand for the currency or greater customary use of currency in the domestic economy. If Japan were to eliminate only its 10,000 yen note, which is worth about $90 and represents a remarkable 88 percent of the value of its cash in circulation, the government would lose about 19 trillion yen in seigniorage (more than 3 percent of GDP) annually.

Reducing or eliminating U.S. dollars in circulation would also have a negative effect on individuals and businesses using the approximately 50 percent of dollar notes held abroad. Of course, some of those dollars represent ill-gotten wealth and facilitate malign behavior. Yet advocates of phasing out cash have so far ignored the potential dislocation in economies that openly use the U.S. dollar as currency (Panama, Ecuador, El Salvador, East Timor, the British Virgin Islands, the Caribbean Netherlands, Micronesia and several small island countries in the Pacific), or are partially dollarized (Uruguay, Costa Rica, Honduras, Bermuda, the Bahamas, Iraq, Lebanon, Liberia, Cambodia and Somalia, among others).

The Negative Interest Rabbit Hole

The second main argument for phasing out currency is that doing so would make it easier to stimulate the economy with injections of credit during periods of very low (or negative) inflation. The reasoning is as follows: when an economy sinks into recession, the central bank normally can stimulate lagging demand for goods and services by expanding the money supply and thereby reducing interest rates. But if interest rates are already extremely low, the mechanism becomes very inefficient because banks and other financial intermediaries will choose to accumulate liquid reserves rather than making loans at little profit.

Now, central banks generally have the authority to charge negative interest rates on the reserves that commercial banks and other financial institutions hold as deposits at the central bank. Denmark, Switzerland, Sweden, the Eurozone and Japan have all attempted this. Negative rates on bank reserves in turn put pressure on commercial banks to pay negative rates on the deposits held by their customers.

But note that this gives depositors an incentive to exchange bank balances for currency. Banks can do the same by replacing their excess reserves held as deposits at the central bank with vault cash. So the elimination of cash — or even just the withdrawal of large denominations — would close off this route, making it practical to impose negative interest rates on the private sector.

The term “negative interest rates” somewhat obscures the nature of what is contemplated. If negative rates ripple through to households and businesses as negative interest on bank accounts, they would function as a tax on the public’s monetary balances. Negative rates could generate revenue as the Fed collects from banks’ reserves, and thus would partly offset the seigniorage lost from restricting cash.

Note an important distinction here, though. Inflation functions as an implicit tax on holding (non-interest-bearing) cash balances. Negative interest rates, in contrast, would directly tax money in order to encourage banks to loan out excess reserves and stimulate demand for goods and services.

But negative rates as a tool of monetary policy may be much ado about little. Research on the “zero bound” issue has not yielded a consensus about whether central banks really need to go into negative territory to do their jobs. Moreover, some economists question whether negative interest rates would do any good. Stephen Williamson, formerly at the St. Louis Fed, and John Cochrane of the Hoover Institution argue that, paradoxically, a negative nominal interest rate would actually depress inflation rather than push it back into the territory in which monetary policy becomes more effective at stimulating demand.

The evidence from the experience with negative rates on bank reserves (in Japan and Europe) when changes in the general price level turned negative has not been encouraging. The Fed considered driving rates negative in 2010 during the painfully slow recovery from the Great Recession, but opted for other unconventional approaches to make monetary stimulus work. It thus seems stretching the point to argue that blocking access to currency as a means of escaping negative rates is plainly worth foregoing seigniorage.

Then there are the nuts and bolts problems associated with implementing a negative rate policy even when buttressed by a scarcity of currency. In a world with all but the smallest denominations of currency eliminated, James McAndrews, formerly of the Federal Reserve Bank of New York, foresees complications such as “redesigning debt securities; in some cases, redesigning financial institutions; adopting new social conventions for the timeliness of repayment of debt and payment of taxes; and adapting existing financial institutions for the calculation and payment of interest, the transfer and valuation of debt securities and many other operations.”

The Policeman May Not Be Your Friend

If we grant for a moment that phasing out all but small-denomination notes would accomplish what proponents claim — a marked reduction in crime, particularly crimes that are predatory in nature — would it nonetheless be desirable? Not necessarily. Even when gains appear to be greater than losses in both efficiency and seigniorage, other political-economy considerations may tip the scales into negative territory.

Pierre Lemieux, a senior fellow at the Montreal Economic Institute, likens the protection of the underground economy to constitutional rights, such as protections against self-incrimination and “unreasonable search and seizures,” that may also be invoked by criminals but still protect a free society. “As regulation increases, more people — consumers, entrepreneurs, unfashionable minorities — move to the underground economy. Thus, government cannot regulate past a certain point.” Cash, in other words, enables people not only to escape harmful or misguided government intrusions, but also, in an indirect but effective way, to express their political concerns.

Would alcohol prohibition in the United States have been repealed without routine evasion by countless Americans? Would the United States have moved toward marijuana legalization without the underground economy to introduce it to the middle class? Obviously none of these considerations excuses human trafficking and other forms of violence or brutality that are facilitated by the underground economy. But those in favor of restricting cash offer no more than impressions about the magnitude of these acts compared to harmless or beneficial uses of cash.

One should be very cautious about drastic government impositions that indiscriminately impinge on almost the entire population, no matter how deplorable the outrages they are intended to curb. Perhaps no issue illustrates these public-choice concerns more strikingly than the threat to financial privacy.

Consider the huge quantity of personal financial information that cash’s abolition would make readily available to government. We should be wary of schemes that enhance state intrusion into the remaining spheres of anonymity, despite the advantages these spheres may give criminals.

One should be very cautious about drastic government impositions that indiscriminately impinge on almost the entire population, no matter how deplorable the outrages they are intended to curb.

Several governments have engaged in compulsory currency swaps designed to rein in the underground economy by forcing tax evaders, money launderers and others holding large sums of cash to either face government scrutiny or find their cash hordes stranded. Although not intended to eliminate large-denomination notes permanently, these currency reforms offer instructive lessons about potential pitfalls of eliminating cash.

The most noteworthy case occurred on November 8, 2016, when India’s government gave people two months to exchange the country’s two highest-denomination notes for new ones. But in the wake of the resulting economic disruption, even the government’s annual economic survey euphemistically conceded that the experiment entailed “inconvenience and hardship.” Even enthusiastic supporters of the swap were somewhat taken aback by the consequences. Jagdish Bhagwati of Columbia University and his former students, Vivek Dehejia and Pravin Krishna, acknowledged that it probably “failed in achieving its primary goal” of curtailing tax evasion and corruption.

The United States has already experienced the unfortunate consequences of two crusades to crush behavior deemed illicit: alcohol prohibition and the war on drugs. These crusades have shared some of the same justifications that are made for phasing out cash. And just as the war on drugs has inflicted untold damage outside the borders of the United States, advocates hope the elimination of hand-to-hand currency will become an international campaign as well. What guarantees do we have that this war on cash will not have parallel unintended consequences in granting an enormous range of powers to the state?

* * *

In the final analysis, it seems only prudent to put the burden on advocates of currency restrictions to show that the benefits in terms of crime suppression and the extension of monetary policy in a deflationary environment are worth the costs in terms of the loss of seigniorage. And, of course, hovering in the background is the question of whether free societies can afford to extend the reach of government and financial services corporations any farther in an era in which privacy is threatened on numerous fronts.

In my own view, advocates are far more sanguine than is justified about the benevolence and competence of governments, particularly in developed countries, and unreflectively adopt what the UCLA economist Harold Demsetz has characterized as the “nirvana approach” to public policy. Their analysis gives short shrift to the potential for unintended consequences when the public relies entirely upon the farsightedness of policymakers.

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>>> Everything Rallying But Dollar ETFs


ETF.Com

January 14, 2021

Sumit Roy


https://www.etf.com/sections/features-and-news/everything-rallying-dollar-etfs


The trillions of dollars of monetary and fiscal stimulus unleashed by the U.S. government has been a boon for most assets. Stocks, commodities and cryptocurrencies have moved in a straight line upward since last March as a deluge of liquidity has buoyed asset prices across the board.

But one important asset has moved in the complete opposite direction—the U.S. dollar.

Since reaching a three-year high on March 20, 2020, the greenback has steadily declined. The U.S. Dollar Index, which measures the buck against a basket of foreign currencies, reached a low of 89.2 last week, its cheapest level in three years. The index closed Wednesday at 90.35.

US Dollar Index



It’s obvious why the dollar has depreciated over the past 10 months. All else equal, more dollars in circulation results in a reduction in the purchasing power of the greenback. This manifests itself in the form of inflation, and indeed, market expectations for inflation are at the highest levels since 2018.

At the same time, interest-rate differentials—which often drive currency movements in the short term—have moved sharply against the buck. Whereas U.S. interest rates were significantly higher than those in other developed countries before the pandemic, the gap is almost nil today. That reduces the appeal of U.S. cash and fixed income assets vis-a-vis their international counterparts.

Dollar ETF Sags

With the greenback in retreat, ETFs that track the currency have fallen. The $359 million Invesco DB U.S. Dollar Index Bullish Fund (UUP) is down 7.4% over the past year.

On the other hand, ETFs that bet against the buck—like the Invesco CurrencyShares Euro Trust (FXE), the Invesco CurrencyShares Swiss Franc Trust (FXF) and the Invesco CurrencyShares Japanese Yen Trust (FXY)—have rallied by 8.6%, 8.3% and 5.3%, respectively, over the past year.

Currency Hedging

While currency ETFs are those most directly affected by the dollar’s movements, other funds are impacted indirectly. Commodities, for example, are denominated in dollars, and sometimes see a boost in demand on the margin as the dollar declines (and vice versa).

Another area where movements in the dollar play a big part is with international equities. Anyone invested in foreign stocks is making at least a tacit bet on currency movements.

For example, the returns for a vanilla, unhedged position in German stocks in a U.S. investor’s portfolio will be influenced both by the performance of the underlying equities and the performance of the euro against the U.S. dollar.

Investors can hedge that risk with a plethora of currency-hedged ETFs available on the market, including the Xtrackers MSCI EAFE Hedged Equity ETF (DBEF), the WisdomTree Japan Hedged Equity Fund (DXJ), the WisdomTree Europe Hedged Equity Fund (HEDJ) and the iShares Currency Hedged MSCI EAFE ETF (HEFA).

But they may not want to. Currency-hedged products tend to underperform their vanilla counterparts when the dollar is falling (and vice versa).

Also, keep in mind that it doesn’t always make sense to hedge currency risk, even when you have a strong view on a particular currency. In some cases, the cost to hedge is prohibitively expensive, such as when hedging currencies with high interest rates (e.g., emerging market currencies).

Multinationals Benefit

Even for those not invested in international stocks or commodities, the dollar’s movements still have an impact. For instance, a weaker dollar makes U.S. exporters more competitive, and increases the profits of multinational companies that conduct much of their business overseas.

That doesn’t necessarily mean investors have to make dramatic shifts to their portfolios in response to fluctuations in the buck, but they should understand how such movements may affect their returns.

Indeed, predicting where the dollar goes from here is nearly impossible, as currency markets are notoriously difficult to predict. When Democrats officially won the two Georgia Senate runoff races on Jan. 6, many had expected a steep sell-off in the dollar in anticipation of a big jump in stimulus spending.

Instead, the date marked a low for the dollar, which has climbed modestly since. Perhaps it’s too early to write the obituary for the dollar. After all, the last time the buck fell to these levels, during the spring of 2018, it proceeded to bottom out and then steadily rise over the next two years.

Bull Vs. Bear

The bullish case for the greenback is that inflation picks up, pushing the Fed to hike rates sooner than expected. The 10-year Treasury bond yield, which is set by the market (and strongly influenced by the Fed’s bond purchases), hit a 10-month high near 1.2% this week on expectations of more bond supply and building inflation pressures.

On the other hand, perhaps this week’s little bump in the dollar is just a temporary countertrend rally, and the buck will head back down as government spending picks up and rates stay low. If that’s the case, keep an eye on the 88 level in the U.S. Dollar Index. That’s the trough from 2018, below which the dollar hasn’t traded since 2014.

US Dollar Index




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>>> “The Smartest Thing We Can Do Is Act Big”


BY JAMES RICKARDS

JANUARY 19, 2021


https://dailyreckoning.com/the-smartest-thing-we-can-do-is-act-big/


“The Smartest Thing We Can Do Is Act Big”

Today, Treasury Secretary-nominee Janet Yellen addressed the Senate Finance Committee during her confirmation hearing.

In her statements, she argued that major fiscal stimulus is justified to support the economy while the pandemic still rages.

She stressed the need to address income inequality and pledged support for the incoming Biden administration’s climate change policies.

In other words, she plans to support large amounts of government spending to stimulate the economy.

She acknowledged that debt is a potential problem. “But,” she added, “right now, with interest rates at historic lows, the smartest thing we can do is act big. In the long run, I believe the benefits will far outweigh the costs, especially if we care about helping people who have been struggling for a very long time.”

Let’s just say that’s wishful thinking.

Fiscal Policy Won’t Work

We cannot spend our way out of a debt trap. As I’ve explained before, fiscal policy is not stimulus because the U.S. debt-to-GDP ratio is now over 130% and rising quickly. Extensive research shows that at debt-to-GDP ratios above 90%, the multiplier on new debt is less than one.

This means we’re in a debt trap (in addition to a liquidity trap caused by Yellen’s previous organization, the Fed).

But Janet Yellen has no real understanding of money and monetary economics. Her tenure at the Fed proves it.

The Fed and Congress may try to stimulate the economy, but they will fail. We’re likely heading for another crisis. I won’t specifically predict when, but you can see the pieces falling into place.

Yellen’s nomination greases the skids for a disastrous policy that could lead to a monster crisis down the road — Modern Monetary Theory (MMT).

The Specter of MMT

Putting former Fed Chair Janet Yellen as the new Secretary of the Treasury is a clear sign that MMT is what a Biden administration plans to do.

MMT calls for merging the Fed and the Treasury into a single spending/monetization entity.

The government can spend as much as it wants and run the deficit as high as it wants because the Fed can monetize any Treasury debt by printing money and holding the debt on its balance sheet until maturity, at which time it can be rolled over with new debt.

This theory says that the U.S. can directly stimulate the economy and pay for a raft of new social spending. Unlike quantitative easing, which mostly enriched Wall Street, MMT would help real Americans.

Its advocates argue MMT could fund Medicare for all, free tuition, free child care, guaranteed basic income and aggressive climate action.

They say the Fed printed $4 trillion from 2008–2014 to bail out the banks and help Wall Street keep their big bonuses. There was no inflation. So why not print $10 trillion or more to try out these new programs?

Well, what better way to achieve that merger than to appoint the former Fed head as the new Treasury head? With a former Fed head as new Treasury head, I’d say Mission Accomplished.

The bottom line is that MMT advocates say that the U.S. can spend as much as it wants, borrow to cover the deficits and monetize the debt with Fed money printing.

The “theory” is not much of a theory because it lacks evidence, and there’s nothing “modern” about it because it has been around for over 100 years. Still, it is all the rage in Washington, D.C. these days.

Three Main Tenets of MMT

MMT has three basic tenets. The first, as mentioned, is to treat the Treasury and the Fed as a single entity with a single balance sheet. Legally the two institutions are completely separate, but MMT insists that the government can operate as if they were one. This means merging Treasury and Fed operations into a single engine for spending, borrowing and printing.

The second idea is that citizens must accept dollars (whether they like it or not) because you need dollars to pay taxes, and if you don’t pay taxes, you’ll go to jail. In effect, the dollar is supported by the barrel of a gun, to paraphrase Mao Zedong.

The third idea is that there is no practical limit to how much debt the U.S. can issue. The U.S. debt-to-GDP ratio today is about 130% (up from 106% last year). But, MMT cheerleaders point to Japan’s ratio, which is over 250%, as proof that the U.S. can borrow a lot more.

These ideas are all badly flawed. Japan is not a good test case because the Japanese buy their own debt (the U.S. relies on foreign investors), and the Japanese economy has barely grown for 30 years (try that in the U.S.).

And if inflation looks like it could become a threat, the government would just tax the excess money out of the economy. Easy-peasy.

Badly Flawed

As I’ve explained before, MMT is a badly flawed theory. It assumes a mechanistic approach to money and inflation, which doesn’t exist in the real world. Inflation is more of a psychological phenomenon based on expectations.

You can operationally merge the Fed and Treasury, but once it becomes apparent to markets that you are monetizing all the new debt, confidence will erode, rates will climb and this pyramid scheme will collapse.

And once confidence is lost, citizens can turn to land, gold, silver, natural resources and other hard assets as dollar alternatives. You don’t owe taxes on unrealized gains, so the MMT tax police will have nothing to keep them busy.

MMT is a disaster in the making (although it may take a few years to play out). It could end in hyperinflation and the destruction of the dollar as a viable currency.

It’s OK to borrow money if you invest in highly productive assets. But, if you just spend the money to support a stagnant economy with handouts, you’re simply digging a deeper debt hole for yourself.

Multi-trillion dollar deficit spending plans will emerge soon from the new Congress. The Treasury will spend the money. The Fed will buy the Treasury debt with newly printed money.

Eventually, you end up with default, inflation, higher interest rates, higher taxes or all of the above. The U.S. will go broke.

It’s not quite the rosy scenario that the MMT crowd would have you believe. Still, it may be coming. And, a clueless Janet Yellen will supervise the entire operation.

Got gold?

Regards,

Jim Rickards

for The Daily Reckoning

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>>> Dollar Is Evolving From a Haven Into a Must-Have Recovery Play


Bloomberg

By Kriti Gupta and Vincent Cignarella

January 14, 2021


https://www.bloomberg.com/news/articles/2021-01-14/dollar-is-evolving-from-a-haven-into-a-must-have-recovery-play?srnd=premium


Economic rebound could send capital to stocks, U.S. currency

Rising Treasury yields likely to make dollar bid a carry trade


The dollar has long been a safety trade for global investors. But in post-recessionary phases with the help of fiscal aid, it can double as a bet on a global recovery. With that in mind, as capital flows to the U.S. increase, so might the bid for the currency -- much to the chagrin of traders who entered 2021 with overstretched short dollar positions.

The U.S. has pumped trillions of dollars into the economy, with more to come, all of it aimed at supporting the economy through the pandemic and jumpstarting it as vaccinations take hold. The market is pricing it in, as investors increasingly favor economically sensitive assets like small-cap stocks.

“The consensus on economic forecasts already shows the U.S. as one of only two major economies expected to end this year larger than it started last year,” Elsa Lignos, RBC Capital Markets Global Head of FX Strategy, wrote in a Jan. 12 note.

As American jobs and spending bounce back, international investors are likely to rush to gain exposure to the U.S. recovery, possibly sparking a rotation out of foreign equities and into U.S. stocks. To do that, they’ll need dollars. And those capital flows are likely to boost the greenback.

“We think better economic performance in the U.S. will translate into a cyclical advantage for USD vs non-commodity producing G10 in particular,” Lignos added. “Historically the opposite has rarely been true.”

Bearish Bets

The consequences of a dollar rebound could be far-reaching. In stocks, the inverse correlation between the greenback and S&P 500 has been at multi-year highs since the start of the pandemic. Dollar weakness incentivizes global investors to buy U.S. equities, which are widely seen as expensive. With a rush to U.S. stocks, and consequently the dollar, that relationship could break down as both rise. Even commodities could become less sensitive to the greenback if there’s an infrastructure bill or broad return to work.

S&P 500 inverse correlation with dollar remains at strongest since 2016
Shorting the dollar has become an extremely crowded trade after the currency pared not only its 2020 gains but also the haven bid it received throughout the trade war with China. The Bloomberg Dollar index is now trading at its lowest level since April 2018, right before the conflict magnified.

Bank of America’s December client survey included shorting the currency as its second most crowded trade -- after going long on tech stocks. The poll in November didn’t feature the dollar at all. And CFTC data shows the most bearish bets against the greenback in nearly a decade. That said, technicals show the greenback may be looking at a reversal after a nine-month slide since the March crash. Despite the downtrend from its 2020 peak, there’s support at the 2018 low.



2018 low (pre-trade war) likely to serve as support level for dollar
Next Carry Trade

A U.S. recovery also has implications for real yields. Nominal yields have risen substantially since the Capitol Hill riots last week. Meanwhile, core inflation is expected to remain stable, in contrast to the surge being priced in breakevens. That could give real yields a boost and make the U.S. more attractive than markets with negative yielding currencies. It also gives global investors incentive to buy Treasuries and American bonds rather than their own domestic paper. That could help the dollar emerge as the next big carry trade.

“Japanese investors who have sold foreign bonds over two successive weeks for the first time since May could make their return with the JPY-hedged 10y yield of 64bps, offering a 60bps pick-up relative to domestic 10y JGBs,” a team of strategists at Societe Generale led by Kenneth Broux wrote in a Jan. 12 note.

It’s unlikely, however, to be a straight shot up. Given the influx of stimulus in the near term, the dollar could weaken first. As the economy recovers, investors are likely to abandon the dollar and metals as havens and buy risk, like emerging-markets assets. But that may not last long. The subsequent spike in yields and the potential outperformance of U.S. stocks will draw investors back to American shores. So the dollar smile trade will be shallow, with the bounce in the greenback likely to last well into 2021.

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>>> One of the Greatest Economic Blunders in History


BY JAMES RICKARDS

JANUARY 11, 2021

One of the Greatest Economic Blunders in History


https://dailyreckoning.com/one-of-the-greatest-economic-blunders-in-history/


The U.S. economy lost 140,000 jobs in December. Only about 55% of the jobs lost in March and April have returned. That’s a significant number.

Americans and others around the world who make their living as bus drivers, bartenders, waiters, hair stylists and boutique store clerks, among thousands of other jobs, make up 50% of all jobs and 45% of U.S. gross domestic product.

This is the part of the economy affected by the lockdowns. They are being destroyed.

When the pandemic passes, and we are able to look back on the experience without fear or political bias, it will be clear that the lockdowns were one of the greatest economic blunders in history. Lockdowns do not stop the spread of the virus, but they do destroy the economy. This is not merely a matter of opinion or conjecture.

The pandemic has now lasted long enough that we have solid comparative data from all 50 U.S. states and many countries around the world. This data covers states and countries that tried extreme lockdowns, moderate lockdowns or completely voluntary methods that involved no mandatory lockdown at all.

The empirical results show that the experience of all of these jurisdictions was about the same and that lockdowns have not “contributed in any meaningful way” to saving lives. In fact, there is other evidence that shows lockdowns killed more people than they saved due to suicides, drug abuse, alcohol abuse, domestic violence and depression.

This study on the ineffectiveness of lockdowns was produced by Dr. Jay Bhattacharya, a Professor of Medicine at Stanford University, and his collaborators. One TV anchor who interviewed Dr. Bhattacharya said, “California has the strictest lockdowns in the country and cases there are absolutely exploding. What am I supposed to take from the usefulness of lockdowns?”

The fact is that lockdowns do not stop the spread of the virus, but they are very good at destroying the economy. I covered this all in my new book, The New Great Depression.

People are social beings and do not like lockdowns. No matter what the rules are, people will find their way around them. And, with or without strict compliance, the virus goes where it wants.

I’ve been to the White House on official business numerous times. It’s hard to think of a more locked-down place. It has multiple security perimeters, multiple entrances before one can reach the Oval Office, and numerous security guards.

Still, the President and First Lady contracted the COVID-19 virus last October, most likely in the White House itself. As I said, the virus goes where it wants. If lockdowns don’t work, why do public health officials and government officials keep insisting on them? There are two reasons.

The first is that academic epidemiologists are just as out of touch with everyday Americans as any other elite group. They sit in their labs and ivory tower offices and have had no difficulty working from home and avoiding routine exposure that other Americans face.

They have not lost their jobs or seen their businesses destroyed. It’s easy to order a lockdown when you’re not the one whose job or business is ruined. The other reason is that politicians have to be seen doing something, even if they don’t know what they’re doing.

Everyone agrees that washing hands, social distancing and masks in crowded venues make sense. But, that’s not enough for the politicians. They want to appear to be “saving the population” even if they’re just destroying the economy.

If you think the lockdowns have been an economic disaster (I do), then get ready for something worse…

Two of the top public health advisors in the new Biden administration are Ezekiel Emanuel of the Center for American Progress and Michael Osterholm of the Center for Infectious Disease Research and Policy at the University of Minnesota.

Both Emmanuel and Osterholm have long histories of calling for lockdowns during pandemics. In June Ezekiel said, “You have to actually have people at home, close nonessential businesses, stop bars, stop indoor dining, have everyone wearing face masks. These are the things we need to do. … You need to do it nationwide.”

The evidence is clear that lockdowns don’t work. Biden’s health advisors are calling for them anyway.

Only an out of touch elite could support shutting down the economy and not realize you would destroy that economy and the jobs that go with it.

Meanwhile, the pandemic is giving the government justification to clamp down on civil liberties.

For example, Dr. Fauci is now promoting the idea that certain institutions may require individuals to get one of the new vaccines at the state level (though he isn’t sure the federal government will mandate vaccination).

Here’s how it could work: When you get the vaccine, you will receive some kind of certification that could be a QR code on your mobile phone or registration in a central government controlled database. If you want to fly, rent a car, send your children to school or do other everyday activities, you will be required to produce your vaccine registration credentials.

This method is similar to the “social credit” system used in Communist China to enforce compliance with Communist Party definitions of good behavior. Fauci also envisions “COVID-19 passports” that would be required before certain types of travel were allowed.

What Fauci does not mention is that the vaccines are still experimental. They have been approved by the FDA, but this was done on an emergency basis and some acute allergic reactions and even deaths have been reported among those who have received the vaccines.

Also, most Americans may not realize that the COVID-19 vaccines are not traditional vaccines that introduce one mild disease in order to build antibodies to a more deadly disease. Instead, these new vaccines work through genetically modified RNA sequences.

It’s not clear what the long-term effects of such genetic modification might be. But many elites and government bureaucrats seem perfectly fine with using unsuspecting Americans as guinea pigs. Would you like to be one?

New restrictions are one more reason why a new recession is upon us and why any economic recovery will be slow and weak.

Neither monetary nor fiscal policy will effectively stimulate the economy.

Monetary policy is not stimulus because the new money is going to the banks and the banks simply deposit it with the Fed as excess reserves on which they receive interest. If the money is not being loaned by banks and spent by consumers, it isn’t generating economic activity.

Fiscal policy isn’t stimulus because the U.S. debt-to-GDP ratio is now over 130% and rising quickly. Extensive research shows that at debt-to-GDP ratios above 90%, the multiplier on new debt is less than one. This means we’re in a debt trap (in addition to a liquidity trap caused by the Fed).

We cannot print our way out of a liquidity trap. We cannot spend our way out of a debt trap. The Fed and Congress may try to stimulate the economy, but they will fail.

They’ll only dig the country a deeper hole to climb out of.

Regards,

Jim Rickards

for The Daily Reckoning

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>>> They’re Coming After Trump


BY JAMES RICKARDS

JANUARY 11, 2021


https://dailyreckoning.com/theyre-coming-after-trump/


They’re Coming After Trump

The House of Representatives introduced an impeachment article against President Trump today, charging him with “incitement of insurrection” after crowds stormed the Capitol last Wednesday following his speech.

If it goes forward, Trump would be the only president in history to be impeached twice.

House Speaker Nancy Pelosi said she is giving Vice President Mike Pence 24 hours to invoke the 25th Amendment to remove Trump. If he doesn’t, the House is expected to vote on the impeachment resolution later this week, possibly as soon as Wednesday.

Should the House vote to impeach, the resolution would go to the Senate. A two-thirds Senate majority would be required to convict and remove Trump from office. That would require the support of many Republican senators.

But the Senate is currently in recess, and current Senate Majority Leader Mitch McConnell has said he won’t call the Senate back into session until January 19 — just one day before Trump leaves office.

So Trump would be out of office by the time a Senate trial could take place. Besides, the Constitution only refers to impeaching “the president” — not a former president, which Trump would be.

But, Trump would be impeached while still president if it happens before January 20. The trial in the Senate and punishment would take place later, but scholars agree this is probably constitutional. This procedure has been used before for Federal judges, so there is precedent.

What is the point of impeaching a former president?

Removal from office is irrelevant after January 20. But one of the punishments allowed is prevention from ever holding office again. That’s what the Democrats want. Their goal is to stop Trump from running again in 2024.

Around 75 million Americans voted for Trump in November (potentially more, depending on the level of election fraud). With those kinds of numbers, it’s easy to see why Democrats wouldn’t want Trump to be able to run in 2024.

Neither does the Republican Party establishment, incidentally, which never wanted to nominate Trump in the first place.

But let’s return our focus to today…

Putting the politics of it all aside, Joe Biden will take office on January 20. Unfortunately for him (and the country), he’ll likely have to deal with a recession right out of the gate in the first quarter of 2021.

The primary reason is the resurgence of the pandemic, resulting in new lockdowns throughout the nation.

Regards,

Jim Rickards

for The Daily Reckoning

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Rickards - >>> Biden Will Face New Depression

(note - Rickards defines 'depression' as an extended period of economic growth that is below the historic growth rate level. For example, average annual GDP growth of 2.5% for 5 years would represent a 'depression' if average annual GDP growth is historically 3.5%. This is what happened during the Obama years following the 2008 crisis - average GDP growth never returned to it's historic levels, so it was technically a 'depression', ie an extended period of depressed growth)


BY JAMES RICKARDS

JANUARY 8, 2021

Biden Will Face New Depression


https://dailyreckoning.com/biden-will-face-new-depression/


Economic growth or decline is the result of factors that are larger than any one administration or any one set of policies. Of course, specific policies such as tax changes or regulatory initiatives can help or hurt the economy depending on how they are designed, but they will generally not change the macro-momentum.

A tax increase may be a headwind for growth, but it will not stop a strong economy in its tracks. Likewise, a tax cut or extended unemployment benefits may be a boost for a weak economy, but they will not end a recession single-handedly.

Growth and recession are driven by larger events such as demographics, globalization, war, inflation, deflation and, yes, pandemic. Large changes in fiscal or monetary policy are the only policies that may or may not move the needle.

The recession that began in February 2020 most likely ended in July. There has been no official declaration to that effect from the National Bureau of Economic Research (NBER), the private but widely recognized arbiter of business cycles.

Still, given third quarter GDP estimates of 33.1% growth, it is almost certain that the recession is over. While the recession may be over, the new depression is not.

Annualized growth in the first quarter of 2020 was negative 5.0%. The second quarter produced negative 31.4%. The third quarter produced growth of positive 33.1%.

We won’t have the official numbers for fourth quarter growth until late January, but the best estimates as of now are growth of about 7%. Both the second quarter decline and the third quarter recovery were the highest annualized figures for decline and growth ever recorded in U.S. history.

Here’s the problem. While third quarter growth was impressive, it was working off a much lower base as a result of the second quarter decline. That 31.1% gain has to be applied to a base that was only about 65% of the level of 2019 output because of the declines in the first and second quarters.

That third quarter gain would put output back up to about 87% of that level and a further fourth quarter gain of 5% would take annual GDP up to 93% of the 2019 level.

That still leaves an estimated 7% decline in GDP for the full year 2020, the worst full year decline in GDP since 1946 when growth declined 11.6% due to the demobilization after World War II.

During the worst full year of the Great Depression (1932), growth fell 12.9%. The year 2020 marks an historic and traumatic decline in growth of a kind only seen in the context of depression or war.

It is a New Great Depression.

So, what’s the outlook for 2021? A new recession will occur in the first quarter of 2021. In fact, the economy is likely headed into another technical recession right now, which would present the first double-dip recession since 1980-1981 when a second recession began (July 1981) almost exactly one year after the prior recession ended (July 1980).

The reason is the imposition of new lockdown requirements by governors in most major states.

Investors may be encouraged by new all-time highs in the stock market, but the stock market indices are cap-weighted or formatted in favor of a small number of tech or digital economy companies (Amazon, Apple, Netflix, Microsoft, Facebook, Alphabet (Google) and a few others).

These companies are least affected by the pandemic and are not representative of the overall U.S. economy. Over 45% of GDP and 50% of all jobs are produced by small-and-medium sized businesses. These businesses include restaurants, bars, salons, gyms, dry cleaners, bodegas, boutique stores, small manufacturers and many others.

This is the part of the economy affected by the lockdowns. They are being destroyed. Many closings are no longer temporary but have become permanent as businesses fail, equipment is dumped at fire sale prices, job losses are not recovered, leases are broken and empty storefronts become a sign of the times.

You see this everywhere from Fifth Avenue in New York City to any small town near you.

The vaccines are being administered, but they won’t come fast enough to stop a new recession (and there are concerns about the effectiveness of the vaccines given viral mutation and doubts about how long the antibody response remains robust).

Lower unemployment rates reported in recent months are not quite the cause for cheer that Wall Street analysts make them out to be. Those rates do not include individuals who have lost jobs but have dropped out of the labor force and are not technically counted as unemployed.

This phenomenon shows up in the labor force participation rate, which is dropping sharply and is near the lowest rate since the 1970s when women started to enter the workforce in large numbers.

An able-bodied person without a job has zero productivity whether you’re technically counted as unemployed or not. This is another drag on growth and one more reason not to believe the Wall Street cheerleaders. Biden’s policies will not change this result, but they will make it slightly worse.

Biden supports the lockdowns despite scientific evidence that they don’t work to stop the spread of the virus. (Hand washing, social distancing and masks do work; lockdowns do not). Biden’s plans for immediate border reopenings will put downward pressure on wages. His plans for green regulation will raise costs for consumers and cost jobs in the energy sector. His tax increase plans will be another drag on growth.

The Biden plan will not cause the recession; it’s already here. His plans will make thing worse and possibly extend the new recession into the second quarter as well.

Monetary policy is not stimulus because the new money is going to the banks and the banks simply deposit it with the Fed as excess reserves on which they receive interest. If the money is not being loaned by banks and spent by consumers, there is no turnover or “velocity” of money.

That means deflation will be a bigger problem than inflation, at least for the next year. Deflation increases the real value of debt, which is another drag on growth. Fed policy is impotent; Jay Powell and his colleagues are out of the game and can safely be ignored.

Fiscal policy is not stimulus because the U.S. debt-to-GDP ratio is now over 130% and rising quickly. Extensive research shows that at debt-to-GDP ratios above 90%, the multiplier on new debt is less than one. This means we’re in a debt trap (in addition to a liquidity trap caused by the Fed).

We cannot print our way out of a liquidity trap. We cannot spend our way out of a debt trap. Neither fiscal nor monetary policy will produce stimulus given current conditions of low velocity, high savings rates, high debt, high unemployment and new lockdowns.

The Fed and the Congress may try to stimulate the economy, but they will fail.

The path for investors is clear. Equity exposure should be reduced because the gap between market perception and economic reality will close quickly once the new recession becomes apparent. Cash allocations should be increased to reduce overall portfolio volatility and to give investors flexibility and optionality once some of the political and economic uncertainty begins to clear.

Allocations to gold, silver and mining shares should be at least 10% of investor portfolios both as an inflation hedge and a hedge against declining confidence in central bank currencies.

Regards,

Jim Rickards

for The Daily Reckoning

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>>> Your Preview of the Biden Economy


BY JAMES RICKARDS

JANUARY 5, 2021


https://dailyreckoning.com/your-preview-of-the-biden-economy/


Your Preview of the Biden Economy

As you probably know, the runoff election for the two Georgia Senate seats is happening today. If Republicans win one or both elections, they retain control of the Senate, meaning they can block the more ambitious aspects of the Democratic Party agenda (I’m assuming Biden will be president, which is still not certain).

That agenda includes packing the Supreme Court, abolishing the Electoral College, making Washington, D.C. and Puerto Rico states, enacting some version of a Green New Deal, etc.

If Democrats win both elections, they effectively take the Senate (the Senate would essentially be 50-50, with Vice President Kamala Harris casting the deciding vote).

But what policies can actually be expected in a new Biden administration?

It will be an interesting mix of a continuation of many of Trump’s policies, with some abrupt departures on immigration and possibly taxes.

Let’s break it down…

Almost all of Biden’s Cabinet selections served in the Obama administration in one capacity or other. These appointments signal that there will be no place at the table for the progressive wing of the Democrat Party.

The biggest change will be in immigration policy. Biden will stop construction on the new border wall with Mexico and possibly even disassemble some recently completed sections. The Customs and Border Patrol will be ordered to stand down from enforcing border security. In effect, the U.S.-Mexican border will once again be an open border.

One effect of illegal immigrants is to reduce wages in the U.S., as many will work for as little as $5 per hour. What’s financially attractive for employers is sub-optimal for the economy as a whole.

This dynamic favors large employers, and creates a deflationary bias in the economy that hurts aggregate demand for consumer goods and services.

Part of the reason real wages rose for blacks and Hispanics during the Trump years was his aggressive polices to halt illegal immigration. That dynamic will now go in reverse.

Taxation is another policy area where Biden may implement major changes to Trump’s policies.

Biden’s tax proposals call for raising the top individual tax rate from 35% to 39.6% and increasing the long-term capital gains tax rate from 20% to 39.6% on incomes over $1 million.

Other hidden tax increases will be implemented by eliminating or capping tax deductions. This has the effect of increasing the effective tax rate without actually changing the statutory tax rate. Taxpayers pay more not because rates are higher but because deductions are fewer.

Other likely Biden initiatives will be mostly for show with little practical impact. The U.S. may rejoin the Paris Climate Agreement as a show of international cooperation on climate change.

However, the Trump administration already lowered CO2 emissions from the U.S. by more than the Paris agreement required, so the immediate impact of rejoining the agreement will be nil.

The greater danger is that Biden’s “climate czar” John Kerry and others will use climate change as an excuse to drive a globalist agenda including carbon taxes, limitations on fracking and offshore drilling, higher gasoline taxes and greater subsidies to unprofitable wind and solar initiatives.

These initiatives will have the effect of hurting high-paying energy related jobs, increasing costs to consumers and increasing budget deficits. On the whole, this climate change agenda will hurt economic growth even in the absence of the more radical Green New Deal.

But many Trump policies will remain untouched. For example, here will not be a sudden reversal in the U.S.– China trade war.

This is one of the few issues where Democrats and Republicans agree on goals even if their tactics vary slightly. The rhetoric will be dialed-down on both sides. Tariffs may be eased slightly but not eliminated.

On balance, Biden will ease restrictions on Chinese investment in the U.S. in exchange for new investment opportunities in China.

(Biden is probably heavily compromised by Chinese intelligence and the Communist Party of China because of his family kickback schemes involving Chinese energy companies and investment funds).

The trade war will continue, but the financial war and the emerging Cold War 2 scenarios will be scaled back.

Added all up, it means not much of substance will get done outside of immigration, energy and possibly tax policy.

Yet, those three areas are enough to put a substantial drag on economic growth through higher costs, higher taxes and lower wages. With that as background, we turn specifically to fiscal and monetary policy and the likely shape of the Biden economy.

Regards,

Jim Rickards

for The Daily Reckoning

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>>> Fed looks to 2013 for future strategies in tapering asset purchases


Yahoo Finance

by Brian Cheung

January 7, 2021


https://finance.yahoo.com/news/fed-looks-to-2013-for-future-strategies-in-tapering-asset-purchases-120448382.html


The Federal Reserve may dust off its playbook from 2013 if it shifts to tapering its aggressive asset purchase program.

Currently, the central bank is snatching up $80 billion in U.S. Treasury bonds and $40 billion in agency mortgage-backed securities per month.

The Fed’s latest guidance, from Dec. 16, noted that the so-called quantitative easing program would continue at least at that pace until the economy looks like it has made “substantial further progress” in the recovery.

But minutes from that December meeting note that a “number” of Fed officials are already thinking about how to wind down those purchases once that “progress” is made.

Those unnamed Fed officials said they would like to “follow a sequence similar to the one implemented during the large-scale purchase program in 2013 and 2014.”

At the time, then-Fed Chairman Ben Bernanke announced in December 2013 that it would be notching down its monthly pace of purchases from $85 billion per month to $75 billion per month. The Federal Open Market Committee (FOMC) clarified that the program was not on a “preset course,” and that further slowing those purchases would only happen if the economy was ready for it.

JPMorgan’s Michael Feroli noted that the FOMC minutes for December 2020 show that the Jerome Powell-led Fed would similarly like to have its purchases “set on cruise control.” Feroli wrote Wednesday that the 2013 and 2014 reference also means the tapering process could go on for about 10 months. Analysts at Evercore ISI project a 12-month taper.

“Guidance on asset purchases remains pretty vague at this point and it appears future decisions will remain discretionary,” Feroli said in a note.

A cautionary tale

But the 2013 experience is also a cautionary tale of the perils of Fed communication.

The Fed had been debating its approach to tapering for months leading up to the December announcement, and Bernanke in May 2013 let it slip that a “step down” in quantitative easing could happen. The remark triggered a spike in bond yields and falling stock prices in an episode now known as the “taper tantrum.”

“A taper tantrum is now a real risk,” Jefferies economist Aneta Markowska told Yahoo Finance on Wednesday, forecasting a U.S. 10-year Treasury bond reaching 2% by the end of 2021.

The 10-year broke through the 1% mark on Wednesday morning, on the heels of the Georgia runoff election results that resulted in Democratic control of the Senate.

For the Fed’s part, policymakers are not yet on the same page about the timing for when to kick off any tapering. The minutes noted that two Fed policymakers favored a more stimulative quantitative easing program that would tilt its purchases toward longer-dated bonds.

In remarks this week, Fed officials sent mixed messages on whether or not the next steps on asset purchases would be a ramping up or a winding down of the program.

“These comments created an unhelpful mini-cacophony that is more than usually problematic given subsequent political and fiscal developments,” Evercore’s Krishna Guha and Ernie Tedeschi wrote Wednesday.

The analysts advocated for Fed leadership to more clearly signal its intention on where quantitative easing is headed, marking now as a “sensitive moment” for the Fed.

The next scheduled policy-setting meeting will be Jan. 26 and 27.

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It sounds like the Fed's plan for eventually tapering QE (which is currently running at $120 bil/month) may be aided by the arrival of the free spending Dems and their MMT fiscal spending plans. This will take up the slack in stimulus as the Fed tapers QE. So that's another reason for the Feds to favor a Dem sweep in this election.

Using fiscal policy (increasing deficit spending and decreasing taxes)
would be similar to the 2014-15 period when the Fed was fairly desperate to start tapering down QE and reduce its own bloated balance sheet. They got House Speaker Paul Ryan to reverse course and end the 'Sequester', and begin running much bigger deficits. Then a few years later came Trump's big tax cuts.

The stimulating effect from these bigger budget deficits and the tax cuts provided cover for the Fed's attempt to normalize interest rates and reduce its balance sheet. Nice try, and it almost worked, but the economy began weakening, made worse by Trump's trade war with China, so the Fed had to throw in the towel on rate normalization. Then the 'repo' problem appeared in the Fall of 2019, and the Fed had to restart QE. Of course then came Covid and mega QE.

Using the spendthrift Dems and MMT while the Fed tapers QE might work for a while, but how long can the US run deficits of 2-3 trillion/year before faith is lost in the dollar? Clearly the system is circling the drain, but they can probably keep it circling for a number of years before there is a final crisis. All the trillions in liquidity may keep the stock market buoyant, but looking longer term it seems best to start transitioning to hard assets like gold, land, rural real estate, etc.

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>>> The History of Banking Control in the United States


https://www.michaeljournal.org/articles/social-credit/item/the-history-of-banking-control-in-the-united-states


by Alain Pilote

August 31, 1985


In this age of plenty - Chapter 49

The dictatorship of the bankers and their debt-money system are not limited to one country, but exist in every country in the world. They are working to keep their control tight, since one country freeing itself from this dictatorship and issuing its own interest- and debt-free currency, setting the example of what an honest system could be, would be enough to bring about the worldwide collapse of the bankers’ swindling debt-money system.

This fight of the International Financiers to install their fraudulent debt-money system has been particularly vicious in the United States of America since its very foundation, and historical facts show that several American statesmen were well aware of the dishonest money system the Financiers wanted to impose upon America and of all of its harmful effects. These statesmen were real patriots, who did all that they possibly could to maintain for the USA an honest money system, free from the control of the Financiers. The Financiers did everything in their power to keep in the dark this facet of the history of the United States, for fear that the example of these patriots might still be followed today. Here are some facts that the Financiers would like the population not to know:

The happiest population

Benjamin FranklinBenjamin Franklin

We are in 1750. The United States of America does not yet exist; it is the 13 Colonies of the American continent, forming "New England", a possession of the motherland, England. Benjamin Franklin wrote about the population of that time: "Impossible to find a happier and more prosperous population on all the surface of the globe." Going over to England to represent the interests of the Colonies, Franklin was asked how he accounted for the prosperous conditions prevailing in the Colonies, while poverty was rife in the motherland:

"That is simple," Franklin replied. "In the Colonies we issue our own money. It is called Colonial Scrip. We issue it in proper proportion to make the products pass easily from the producers to the consumers. In this manner, creating ourselves our own paper money, we control its purchasing power, and we have no interest to pay to no one."

The English bankers, being informed of that, had a law passed by the British Parliament prohibiting the Colonies from issuing their own money, and ordering them to use only the gold or silver debt-money that was provided in insufficient quantity by the English bankers. The circulating medium of exchange was thus reduced by half.

"In one year," Franklin stated, "the conditions were so reversed that the era of prosperity ended, and a depression set in, to such an extent that the streets of the Colonies were filled with unemployed."

Then the Revolutionary War was launched against England, and was followed by the Declaration of Independence in 1776. History textbooks erroneously teach that it was the tax on tea that triggered the American Revolution. But Franklin clearly stated:

"The Colonies would gladly have borne the little tax on tea and other matters, had it not been the poverty caused by the bad influence of the English bankers on the Parliament: which has caused in the Colonies hatred of England, and the Revolutionary War."

The Founding Fathers of the United States, bearing all these facts in mind, and to protect themselves against the exploitation of the International Bankers, took good care to expressly declare, in the American Constitution, signed at Philadelphia in 1787, Article 1, Section 8, paragraph 5:

"Congress shall have the power to coin money and to regulate the value thereof."

The bank of the bankers

Alexander Hamilton

But the bankers did not give up. Their agent, Alexander Hamilton, was named Secretary of Treasury in George Washington’s cabinet, and advocated the establishment of a federal bank to be owned by private interests, and the creation of debt-money with false arguments like: "A national debt, if it is not excessive, will be to us a national blessing... The wisdom of the Government will be shown in never trusting itself with the use of so seducing and dangerous an expedient as issuing its own money." Hamilton also made them believe that only the debt-money issued by private banks would be accepted in dealing abroad.

Thomas Jefferson, the Secretary of State, was strongly opposed to that project, but President Washington was finally won over by Hamilton’s arguments. A federal bank was thus created in 1791, the "Bank of the United States", with a 20 years’ charter. Although it was termed "Bank of the United States", it was actually the "bank of the bankers", since it was not owned by the nation, but by individuals holding the bank’s stocks, the private bankers. This name of "Bank of the United States" was purposely chosen to deceive the American population and to make them believe that they were the owners of the bank, which was not the case. The charter for the Bank of the United States ran out in 1811, and Congress voted against its renewal, thanks to the influence of Thomas Jefferson and Andrew Jackson:

Andrew Jackson

“If Congress," Jackson said, "has a right under the Constitution to issue paper money, it was given them to use by themselves, not to be delegated to individuals or corporations."

Thus ended the history of the first Bank of the United States. But the bankers did not play their last card.

The bankers launch the war

Nathan Rothschild, of the Bank of England, issued an ultimatum: "Either the application for the renewal of the charter is granted, or the United States will find itself involved in a most disastrous war." Jackson and the American patriots did not believe the power of the international moneylenders could extend so far. "You are a den of thieves-vipers," Jackson told them. "I intend to rout you out, and by the Eternal God, I will rout you out!" Nathan Rothschild issued orders: "Teach these impudent Americans a lesson. Bring them back to Colonial status."

The British Government launched the War of 1812 against the United States. Rothschild’s plan was to impoverish the United States through this war to such an extent that the legislators would have to seek financial aid... which, of course, would be forthcoming only in return for the renewal of the charter for the Bank of the United States. Thousands were killed, but what does that matter to Rothschild? He had achieved his objective; the U.S. Congress granted the renewal of the Charter in 1816.

Abraham Lincoln

Abraham Lincoln was elected President of the United States in 1860, under the promise of abolishing the slavery of the blacks. Eleven southern States, favourable to the human slavery of the black race, then decided to secede from the Union, to withdraw from the United States of America: that was the beginning of the Civil War (1861-1865). Lincoln, being short of money to finance the North’s war effort, went to the bankers of New York, who agreed to lend him money at interest rates varying from 24 to 36 percent. Lincoln refused, knowing perfectly well that this was usury and that it would lead the United States to ruin. But his money problem was still not settled!

His friend in Chicago, Colonel Dick Taylor, came to his rescue and put the solution to him: "Just get Congress to pass a bill authorizing the printing of full legal tender treasury notes, and pay your soldiers with them, and go ahead and win your war with them also."

This is what Lincoln did, and he won the war: between 1862 and 1863, in full conformity with the provisions of the U.S. Constitution, Lincoln caused $450 million of debt-free Greenbacks to be issued, to conduct the Civil War. (These Treasury notes were called "Greenbacks" by the people because they were printed with green ink on the back.)

Greenbacks

Lincoln said: "Government, possessing the power to create and issue currency and credit as money, and enjoying the right to withdraw both currency and credit from circulation by taxation and otherwise, need not and should not borrow capital at interest as the means of financing governmental work and public enterprise… The privilege of creating and issuing money is not only the supreme prerogative of Government, but it is the Government’s greatest creative opportunity."

Lincoln called the Greenbacks "the greatest blessing the American people have ever had." A blessing for all, except for the bankers, since it was putting an end to their racket, to the theft of the nation’s credit and issuing interest-bearing money. So they did everything possible to destroy these Greenbacks and sabotage Lincoln’s work. Lord Goschen, spokesman of the Financiers, wrote in the London Times (Quote taken from Who Rules America by C. K. Howe, and reproduced in Lincoln Money Martyred by Dr. R. E. Search):

"If this mischievous financial policy, which has its origin in North America, shall become indurated down to a fixture, then that Government will furnish its own money without cost. It will pay off debts and be without a debt. It will have all the money necessary to carry on its commerce. It will become prosperous without precedent in the history of the world. That Government must be destroyed, or it will destroy every monarchy on the globe." (The monarchy of the money lenders.)

First, in order to cast discredit on the Greenbacks, the bankers persuaded Congress to vote, in February of 1862, the "Exception Clause", which said that the Greenbacks could not be used to pay the interest on the national debt, nor to pay taxes, excises, or import duties. Then, in 1863, having financed the election of enough Senators and Representatives, the bankers got the Congress to revoke the Greenback Law in 1863, and enact in its place the National Banking Act. (Money was then to be issued interest-bearing by privately-owned banks.)

This Act also provided that the Greenbacks should be retired from circulation as soon as they came back to the Treasury in payment of taxes. Lincoln heatedly protested, but his most urgent objective was to win the war and save the Union, which obliged him to put off till after the war the veto he was planning against this Act and the action he was to take against the bankers. Lincoln nevertheless declared:

"I have two great enemies, the Southern army in front of me and the bankers in the rear. And of the two, the bankers are my greatest foe."

Lincoln was re-elected President in 1864, and he made it quite clear that he would attack the power of the bankers, once the war was over. The war ended on April 9, 1865, but Lincoln was assassinated five days later, on April 14. A tremendous restriction of credit followed, organized by the banks: the currency in circulation in the country, which was, in 1866, $1,907 million, representing $50.46 for each American citizen, had been reduced to $605 million in 1876, representing $14.60 per capita. The result: in ten years, 56,446 business failures, representing a loss of $2 billion. And as if this was not enough, the bankers reduced the per capita currency in circulation to $6.67 in 1887!

William Jennings Bryan: “The banks ought to get out”

Lincoln’s example nevertheless remained in several minds, as far along as 1896. That year, the Presidential candidate for the Democrats was William Jennings Bryan, and once again, history textbooks tell us that it was a good thing that he did not succeed in his bid for the Presidency, since he was against the bankers’ "sound money", the money issued as a debt, and against the gold standard. Bryan said:

"We say in our platform that we believe that the right to coin and issue money is a function of Government. We believe it. Those who are opposed to it tell us that the issue of paper money is a function of the bank, and that the Government ought to get out of the banking business. I tell them that the issue of money is a function of Government, and that the banks ought to get out of the Government business... When we have restored the money of the Constitution, all other necessary reforms will be possible, but until this is done, there is no other reform that can be accomplished."

The Fed: The most gigantic trust

Finally, on December 23, 1913, the U.S. Congress voted in the Federal Reserve Act, which took away from Congress the power to create money, and which handed over this power to the Federal Reserve Corporation. One of the rare Congressmen who had understood all the issue at stake in this Act, Representative Charles A. Lindbergh Sr. (Rep-Minnesota), father of the famous aviator, said:

Charles A. Lindbergh

"This Act establishes the most gigantic trust on earth. When the President (Wilson) signs this bill, the invisible government of the Monetary Power will be legalized... The worst legislative crime of the ages is perpetrated by this banking and currency bill."

The education of the people

What allowed the bankers to finally obtain the complete monopoly of the control of credit in the United States? The ignorance among the population of the money question. John Adams wrote to Thomas Jefferson, in 1787:

"All the perplexities, confusion and distress in America arise, not from defects in the Constitution, not from want of honor or virtue, so much as downright ignorance of the nature of coin, credit, and circulation."

Lincoln’s Secretary of Treasury, Salmon P. Chase, stated publicly, shortly after the passage of the National Banking Act, in 1863:

Salmon P. Chase

"My agency in promoting the passage of the National Banking Act was the greatest financial mistake of my life. It has built up a monopoly which affects every interest in the country. It should be repealed, but before that can be accomplished, the people will be arrayed on one side, and the banks on the other, in a contest such as we have never seen before in this country."

Automobile manufacturer Henry Ford said:

"If the people of the nation understood our banking and monetary system, I believe there would be a revolution before tomorrow morning."

The education of the people, that’s the solution! It is precisely the method advocated by the "Michael" Journal: to build a force in the people through education, so that the sovereign government of each nation will have the courage to stand up to the bankers and issue its own money, as President Lincoln did. If only all those in favour of an honest money system understood their responsibilities for spreading the "Michael" Journal! Social Credit, which would establish an economy where everything is organized to serve the human person, is precisely aiming to develop personal responsibility, to create responsible people. Each mind won over to Social Credit is an advance. Each person formed by Social Credit is a force, and each force acquired is a step towards the victory. And for the last seventy years, how many forces have been acquired!… If all of them were active, it is really before tomorrow morning that we would obtain the implementation of the Social Credit proposals!

As Louis Even wrote in 1960: "The obstacle is neither the financier, nor the politician, nor any avowed enemy. The obstacle lies in the passivity of too many Social Crediters who hope for the coming of the triumph of the Cause, but who leave it up to others to promote it."

In short, it is our refusal to take on our responsibilities that delays the implementation of Social Credit, of an honest money system. "Much will be asked of the man to whom much has been given" (Luke 12:48). Examine your consciences, dear Social Crediters; personal conversion, one more step, let us take on our responsibilities: the victory has never been so close! Our responsibility is to make Social Credit known to others, by having them subscribe to the "Michael" Journal, the only publication that makes this brilliant solution known.

Social Credit bill passed by the US Congress in 1932

It is the education of the people that is necessary. Once the pressure from the public is strong enough, all the parties will agree with it. A fine example of this can be found in the Goldsborough bill of 1932, which was described by an author as a "Social Credit bill" and "the closest near-miss monetary reform for the establishment of a real sound money system in the United States":

"An overwhelming majority of the U.S. Congress (289 to 60) favored it as early as 1932, and in one form or another it has persisted since. Only the futile hope that a confident new President (Roosevelt) could restore prosperity without abandoning the credit-money system America had inherited kept Social Credit from becoming the law of the land. By 1936, when the New Deal (Roosevelt’s solution) had proved incapable of dealing effectively with the Depression, the proponents of Social Credit were back again in strength. The last significant effort to gain its adoption came in 1938." (W.E. Turner, Stable Money, p. 167.)

Even the dividend and the compensated discount, two essential parts of Social Credit, were mentioned in this bill, which was the "Goldsborough bill", after the Democratic Representative of Maryland, T. Allan Goldsborough, who presented it in the House for the first time on May 2, 1932.

Two persons who supported the bill especially hold our attention: Robert L. Owen, Senator of Oklahoma from 1907 to 1925 (a national bank director for 46 years), and Charles G. Binderup, Representative of Nebraska. Owen published an article, in March of 1936, in J. J. Harpell’s publication, "The Instructor", of which Louis Even was the assistant editor. As for Binderup, he gave several speeches on radio in the USA during the Depression, explaining the damaging effects of the control of credit by private interests.

Robert Owen

Robert Owen testified in the House, April 28, 1936: "...the bill which he (Goldsborough) then presented, with the approval of the Committee on Banking and Currency of the House — and I believe it was practically a unanimous report. It was debated for two days in the House, a very simple bill, declaring it to be the policy of the United States to restore and maintain the value of money, and directing the Secretary of the Treasury, the officers of the Federal Reserve Board, and the Reserve banks to make effective that policy. That was all, but enough, and it passed, not by a partisan vote. There were 117 Republicans who voted for that bill (which was presented by a Democrat) and it passed by 289 to 60, and of the 60 who voted against it, only 12, by the will of the people, remain in the Congress.

"It was defeated by the Senate, because it was not really understood. There had not been sufficient discussion of it in public. There was not an organized public opinion in support of it."

Once again, education is the main issue: Republicans and Democrats alike supported it, so there was no need for a third party or any sort of "Social Credit" party. Moreover, Owen admitted that the only thing that was lacking was the education of the population, a force among the people. That confirms the method used by the "Michael" Journal, advocated by Clifford Hugh Douglas and Louis Even.

The Goldsborough bill was titled: "A bill to restore to Congress its Constitutional power to issue money and regulate the value thereof, to provide monetary income to the people of the United States at a fixed and equitable purchasing power of the dollar, ample at all times to enable the people to buy wanted goods and services at full capacity of the industries and commercial facilities of the United States... The present system of issuing money through private initiative for profit, resulting in recurrent disastrous inflations and deflations, shall cease."

The bill also made provision for a discount on prices to be compensated to the retailer, and for a national dividend to be issued, beginning at $5 a month (in 1932) to every citizen of the nation. Several groups testified in support of the bill, stressing the bill provided the means of controlling inflation.

Ignorance among the population

The most ardent opponent in the Senate was Carter Glass, a fierce partisan of the Federal Reserve (private control of money) and a former Secretary of the Treasury. Besides, Henry Morgenthau, then Roosevelt’s Secretary of Treasury, who was strongly opposed to any monetary reform, said that Roosevelt’s New Deal should be given a trial first.

What mostly helped the opponents to the bill was the near ignorance of the money question among the population... and even in the Senate.

Some Senators, knowing nothing about the creation of money (credit) by banks, exclaimed: "The Government cannot create money like that! That will cause runaway inflation!" And others, while admitting the necessity for debt-free money, questioned the necessity for a dividend, or the compensated discount. But all these objections actually disappear after a serious study of Social Credit.

Quotes on money

Mayer Amschel Rothschild

"Let me issue and control a nation’s money and I care not who writes its laws." — Mayer Amschel Rothschild (1744-1812), founding father of international finance.

"History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and its issuance." — US President James Madison.

"The money power denounces, as public enemies, all who question its methods or throw light upon its crimes." — William Jennings Bryan.

"Whoever controls the volume of money in any country is absolute master of all industry and commerce." — US President James A. Garfield.

Josiah Stamp

"Banking was conceived in iniquity and born in sin. Bankers own the earth. Take it away from them, but leave them the power to create money and control credit, and with the flick of a pen, they will create enough money to buy it back again. Take this great power away from the bankers and all the great fortunes like mine will disappear, and they ought to disappear, for this would be a better and happier world to live in. But if you want to continue the slaves of bankers and pay the cost of your own slavery, let them continue to create money and to control credit." — Sir Josiah Stamp, Director, Bank of England, 1940.

"The process by which banks create money is so simple that the mind is repelled." — John K. Galbraith, in "Money: Whence it came, where it went", p. 29.

"The banks do create money. They have been doing it for a long time, but they didn’t quite realise it, and they did not admit it. Very few did. You will find it in all sorts of documents, financial textbooks, etc. But in the intervening years, and we must all be perfectly frank about these things, there has been a development of thought, until today I doubt very much whether you would get many prominent bankers to attempt to deny that banks create credit." — H. W. White, Chairman of the Associated Banks of New Zealand, to the New Zealand Monetary Commission, 1955.

Thomas Edison and Henry Ford

Let us bring an end to this lesson with the quotations of two great American citizens.

Thomas Edison: "Throughout our history some of America’s greatest men have sought to break the Hamiltonian imprint (Alexander Hamilton’s debt-money policy) on our monetary policy in order to substitute a stable money supply measured to the nation’s physical requirements. Lack of public and official understanding, combined with the power of banking interests who have imagined a vested interest in the present chaotic system, have so far thwarted every effort.

"Don’t allow them to confuse you with the cry of `paper money.’ The danger of paper money is precisely the danger of gold — if you get too much it is no good. There is just one rule for money and that is to have enough to carry on all the legitimate trade that is waiting to move. Too little and too much are both bad. But enough to move trade, enough to prevent stagnation, on the one hand, not enough to permit speculation, on the other hand, is the proper ratio...

"If the United States will adopt this policy of increasing its national wealth without contributing to the interest collector — for the whole national debt is made up of interest charges — then you will see an era of progress and prosperity in this country such as could never have come otherwise."

And a call from Henry Ford: "The youth who can resolve the money question will do more for the world than all the professional soldiers of history."

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>>> Fed, Treasury Secretary Mnuchin at odds over letting emergency lending programs expire


Yahoo Finance

by Brian Cheung

November 19, 2020


https://finance.yahoo.com/news/federal-reserve-treasury-at-odds-over-letting-emergency-lending-programs-expire-222946692.html


U.S. Treasury Secretary Steven Mnuchin has instructed the Federal Reserve to close down its emergency lending facilities and return unused money designed to support small- and medium-sized businesses and state and local governments.

The Fed counters that doing so would be a huge mistake, a rare instance of public disagreement between the two government bodies that have spent the last eight months engineering a response to the sharpest recession since the Great Depression.

“While portions of the economy are still severely impacted and in need of additional fiscal support, financial conditions have responded and the use of these facilities has been limited,” Mnuchin told Fed Chairman Jay Powell in a letter dated November 19.

In his letter, Mnuchin ordered the Fed to let nine of its 13 emergency facilities expire on December 31: two backstopping corporate bond markets (Primary, Secondary Market Corporate Credit Facilities), five offering loans to small- and medium-sized businesses (Main Street Lending Program), one offering credit to state and local government bond issuers (Municipal Liquidity Facility), and one backstopping markets for asset-backed securities (Term Asset-Backed Securities Loan Facility).

Mnuchin’s letter adds that the Fed will have to return unused money back to the Treasury, estimated to be about $429 billion, once the targeted facilities close down.

The Fed begged to differ, arguing that financial markets and the economy still need the backstops. Economists have warned of the threat of more shutdowns as COVID-19 cases break new highs across the country.

“The Federal Reserve would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy,” the central bank said in a statement Thursday afternoon.

Mnuchin said in the “unlikely event” that the facilities are needed again, the Fed could request approval to re-open them.

Low uptake: good or bad?

Twelve of the Fed’s 13 liquidity facilities were already scheduled to expire on December 31, many of which were backed by $454 billion in funding allocated to the Fed and Treasury by the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March.

By statute the Fed and the Treasury are supposed to work together on the terms of the facilities, meaning that Thursday’s public spat between the monetary and fiscal policymakers will have to be ironed out at some point.

Critics of the liquidity facilities pointed to the low uptake of the facilities, with only $25 billion in loans funded from the liquidity programs, which are capable of up to $2 trillion in capacity.

The Fed has countered that low uptake is because borrowers have been able to get credit in the private markets, possible only because of the backstops put in place by the central bank.

Fed officials have warned of the consequences of not extending the backstops. On Wednesday, Richmond Fed President Tom Barkin told Yahoo Finance that “taking [the liquidity facilities] away obviously means taking a risk.”

Meanwhile, Mnuchin ordered the Fed to extend three of the 13 facilities by an additional 90 days: two addressing short-term funding markets (Money Market Mutual Fund Liquidity Facility, Primary Dealer Credit Facility) and one allowing banks to shop Paycheck Protection Program loans to the Fed as collateral. Mnuchin also extended the Commercial Paper Funding Facility, which offers liquidity to companies looking for short-term financing.

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>>> Fed will return unused funds after Treasury orders central bank to wind down emergency loan programs


Yahoo Finance

Brian Cheung

November 20, 2020


https://finance.yahoo.com/news/federal-reserve-to-return-unused-cares-funds-to-treasury-222408824.html


The Federal Reserve says it will return the unused money allocated to it by the Treasury to set up its emergency support programs during the COVID-19 crisis.

On Friday, Fed Chairman Jay Powell said he “will work out arrangements... for returning the unused portions of the funds” appropriated to the central bank and the Treasury in March by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

The announcement comes a day after U.S. Treasury Secretary Steven Mnuchin ordered the Fed to allow nine of its 13 liquidity facilities to close on December 31. Those closures would end backstops to corporate bond markets (Primary, Secondary Market Corporate Credit Facilities), small- and medium-sized businesses (Main Street Lending Program), and state and local government bond issuers (Municipal Liquidity Facility).

The Fed responded with an unusually barbed response Thursday, protesting that the central bank “prefer that the full suite of emergency facilities...continue to serve their important role.” Powell’s letter on Friday softened in tone and acknowledged the Treasury Secretary’s “sole authority to make certain investments” in the Fed facilities.

For its part, the Treasury argued that the programs’ low uptake warrant a return of $429 billion in unused money.

The fallout between the Fed and the Treasury raised a number of questions, first about what will happen to the various liquidity facilities, but secondly about the political consequences of not having the backstops.

What’s closing down on December 31?

Since the beginning of the pandemic, the Fed opened up 13 liquidity facilities (details on each facility are detailed here), 12 of which were set up to expire on December 31. The Treasury letter from Thursday orders the Fed to allow nine of them to close:


-Primary Market Corporate Credit Facility (PMCCF)

-Secondary Market Corporate Credit Facility (SMCCF)

-Term Asset-Backed Lending Facility (TALF)

-Main Street New Loan Facility (MSNLF)

-Main Street Priority Loan Facility (MSPLF)

-Main Street Expanded Loan Facility (MSELF)

-Nonprofit Organization New Loan Facility (NONLF)

-Nonprofit Organization Expanded Loan Facility (NOELF)

-Municipal Liquidity Facility (MLF)


Mnuchin authorized a 90-day extension for the four remaining facilities:


-Commercial Paper Funding Facility (CPFF)

-Primary Dealer Credit Facility (PDCF)

-Money Market Mutual Fund Liquidity Facility (MMLF)

-Paycheck Protection Program Liquidity Facility (PPPLF)


How much will the Fed have to return?

The CARES Act appropriated $454 billion to the Fed and the Treasury to set up these facilities. The Fed has used only $25 billion of that money through its emergency facilities.

Mnuchin’s letter asks the Fed to return the remainder: $429 billion. Powell’s letter on Friday did not clarify exactly how much it will return.

Both Mnuchin and Powell insist that the Fed and Treasury could re-open some of those facilities with money from the Treasury’s Exchange Stabilization Fund (ESF). Mnuchin told CNBC Friday that combined with the Fed’s existing loans, the ESF could support over $750 billion in loans to the economy (compared to $2 trillion of potential capacity using the CARES Act funds).

What does this all mean for the markets?

Markets traded down slightly on Friday as investors digested the news, with the Dow having fallen over 200 points at the closing bell.

Markets directly backstopped by the Fed’s facilities did not appear disrupted by the news. Bloomberg reported Friday that Carnival Corp. was able to drum up $11 billion in orders for corporate bonds despite the news that the Fed’s corporate credit facility would not be operating past December 31.

Still, some worry that with rising COVID-19 cases, the lack of fiscal support and now, Fed support to financial markets, may create trouble.

Evercore ISI wrote in a note November 19 that “US credit markets will have to get through the winter months in which the surging new wave of the virus and exhaustion of savings from prior fiscal stimulus threaten a loss of economic momentum.”

Does this increase the onus on Congress to pass fiscal stimulus?

Mnuchin argued in his letter that returning the unused money will allow the government to redirect funds toward a new Paycheck Protection Program “that won’t cost taxpayers any more money.”

But Isaac Boltansky, analyst at Compass Point, wrote Friday that the Fed and Treasury development doesn’t change the fact that the White House and Congress have not appeared close to a stimulus deal for weeks.

“There is no sign whatsoever that Congress is close to a stimulus deal and [Mnuchin’s] ‘hope’ for a legislative agreement is distinct from the decision to sunset existing Fed facilities,” Boltansky said.

On the claim of redirecting money at no cost to taxpayers, the nonpartisan Congressional Budget Office did not attribute any deficit to the Fed and Treasury funds because the lent money would have to be paid back at some point. That means that reallocating the money doesn’t save the government money from an accounting standpoint.

Does this increase the onus on the Fed to do more?

Evercore wrote that this could tilt the Federal Open Market Committee toward taking action in its final policy-setting meeting of 2020 on December 15 and 16. The Fed had already been teeing up the possibility of leaning more heavily on its asset purchases, or quantitative easing, in that meeting.

The concern: with the lack of backstops and COVID-19 cases rising, the Fed may have to do more than originally planned.

“One side effect is that it increases the likelihood that the FOMC will strengthen QE in December, with additional duration and guidance, and if things get bad enough, a faster pace of purchases too,” Evercore wrote. “However, QE is a very imperfect substitute for a credit market backstop.”

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>>> Fed policy in 2021: Three things to watch


Yahoo Finance

Brian Cheung

December 28, 2020


https://finance.yahoo.com/news/federal-reserve-policy-in-2021-3-things-to-watch-113851008.html


It has been a long year for the Federal Reserve.

Since the first cases of COVID-19 in the United States, the central bank has slashed interest rates to zero, restarted its quantitative easing program, and opened up a slew of emergency loan facilities to backstop markets ranging from corporate debt to municipal bonds.

The beginning of the new year will be a critical inflection point for the U.S. economy. With case counts surging across the country, the Fed will attempt to bridge the next few months until widespread vaccination and herd immunity are achieved.

With interest rates near-zero and likely to stay there through the end of 2023, that means a need for other, unconventional monetary policy tools.

“There is more that we can do, certainly,” Fed Chairman Jerome Powell said December 16, adding that the second half of 2021 should see the economy “performing strongly.”

So what should markets be watching for from the Federal Reserve next year?

Emergency loan facilities

As COVID-19 began ripping through the country in March, the Fed moved to backstop several financial markets and stand up new programs offering credit to business borrowers.

Several of the programs will expire on December 31, at the order of U.S. Treasury Secretary Steven Mnuchin. But if economic conditions worsen next year, the Fed will face a difficult question: whether or not to re-open the facilities.

Three programs in particular will pose legal and political challenges to the Fed: the Municipal Liquidity Facility (loans to state and local governments), the Main Street Lending Program (loans to small- and medium-sized businesses), and the Corporate Credit Facilities (liquidity for corporate debt markets).

Language buried in the over 5,000-page government spending bill, which includes COVID-19 relief, would bar the Fed from either resurrecting those three programs or anything the “same as” those programs.

But current and former Fed officials have been vocal about their desire to keep those emergency programs available into 2021.

A Treasury Secretary Janet Yellen, pending Senate confirmation, could work with the Fed on other programs in the future. But the new statutory limitations may entangle the Fed in political backlash if it attempts to toe the line on re-opening something close to the three facilities in question.

"How effective that narrowing will be, in terms of freeing up the Fed to do what it most wants to do? It depends on how aggressive the Fed's lawyers want to be,” said Columbia Law professor Kathryn Judge.

Quantitative easing

The Fed’s massive pile of assets totals more than $7 trillion, the consequence of an aggressive pace of quantitative easing in the face of the crisis. The latest guidance from the Federal Open Market Committee makes it clear that its balance sheet will only get bigger until “substantial further progress” is made on the recovery.

More specifically, that means at least $120 billion in monthly purchases ($40 billion in agency mortgage-backed securities and $80 billion in U.S. Treasuries).

“Any time we feel like the economy could use stronger accommodation, we would be prepared to provide it,” Powell said on December 16.

But the Fed has not clarified exactly how it could adjust those purchases. Powell entertained the idea of, for example, targeting longer-dated purchases to push down longer-term borrowing costs.

Similarly, the Fed has not spelled out what a better-than-expected 2021 may mean for its asset purchases. “Substantial further progress” may mean a tapering of its asset purchases would come before the Fed lifts off from zero-interest rates.

The imprecise language, however, will keep Fed watchers and investors guessing on where inflation and unemployment will have to land before quantitative easing is pared back.

“It’s hard to infer when tapering will begin, but we would still pin that sometime around the end of next year,” JPMorgan’s Michael Feroli wrote on December 16.

Reflation may be around the bend

For both interest rate policy and quantitative easing, the Fed will be using inflation as its guiding star to get to the destination of an economy at maximum employment.

In the face of the downside risk of rising COVID-19 cases, the Fed hopes that widespread vaccination and a return to normal will spur consumption that could bring some modest price increases.

A new policy adopted by the Fed in August articulates that the Fed would tolerate inflation “moderately” above its 2% target, meaning that reflation in a possible second half recovery would not trigger an interest rate hike.

Core personal consumption expenditures, the Fed’s preferred measure of inflation, clocked in at just 1.4% in November.

The end game is to keep policy accommodative and give the economy ample time to pull the unemployed back into jobs. As of November, the economy remained 9.8 million jobs short of its pre-pandemic level in February.

“We are committed to allowing the economy to run until we find out what maximum employment means experientially,” San Francisco Fed President Mary Daly said in September.

Constance Hunter, chief economist at KPMG, told Yahoo Finance that she would not expect a rate hike for another year or year and a half.

“A lot of this depends on how broad-based the recovery is, but assuming we can get some reflation going then that would mean they might start changing their language and changing their asset purchases so that we can have slightly tighter monetary conditions going into 2022,” Hunter said.

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>>> Bets on World of Negative Interest Rates End With Capitulation


Bloomberg

by Ruth Carson and Greg Ritchie

December 15, 2020


https://finance.yahoo.com/news/bets-world-negative-interest-rates-084540722.html


(Bloomberg) -- At the height of the pandemic, it seemed only a matter of time before negative interest rates -- the last resort of central banks -- ruled global markets.

A controversial strategy that’s yielded mixed results in the euro-area and Japan, traders still piled on bets earlier this year that central banks from New Zealand to the U.K., and even the U.S., were destined to follow suit. The three were among those that most aggressively cut rates through the worst of the virus-induced lockdowns. Yet all ultimately stopped short of going negative.

Traders now see a sub-zero move as increasingly unlikely, with policy makers largely favoring a “new conventional” mix of bond purchases and sector-specific aid programs. Of course, trillions of dollars of debt continue to trade with negative yields, effectively guaranteeing a loss for those who hold them to maturity. But with optimism returning about global growth, bond investors are shifting their attention to bets that yields will go higher, not lower.

“Central banks who don’t already have negative interest rates are going to be very cautious about crossing that rubicon,” said James Ashley, head of international market strategy at Goldman Sachs Asset Management. If policy makers need to prop up growth, “would it not be more prudent simply to rely on the unconventional tools like large scale asset purchases.”

Bold Experiment

Considered one of the boldest monetary experiments of the 21st century, negative rates were adopted in the wake of the financial crisis to drive borrowing costs lower and penalize banks that hoard cash rather than lending it out. The consequences for bond markets were far-reaching and long-lasting as trading was stymied and yields tumbled. The world’s stockpile of negative-yielding debt climbed above $18 trillion this month, a record, with rates on Spanish 10-year bonds sliding below 0% for the first time.

But despite the sub-zero strategy, both Europe and Japan have seen muted growth and failed to boost inflation to central banks’ targets. In fact, negative rates may have eaten into bank profits and hurt savers. As Federal Reserve Chairman Jerome Powell put it in May, “the evidence on negative rates is mixed.”

“The Fed has investigated a lot of BOJ and ECB policies,” said Kenta Inoue, senior market economist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo. “At this point in time, there is no evidence suggesting that negative rates policy has a positive impact on the economy as well as markets.”

In a way, the holdout central bankers were saved from having to make the decision to go negative by both the success of alternative policies and an improvement in the global economic backdrop. The flood of liquidity to the financial system -- spearheaded by the Fed -- pushed borrowing costs lower, and rapid progress on vaccine development brought forward expectations of a return to normal.

Positive Shift

In money markets, traders have erased bets on negative rates next year in both the U.S. and New Zealand. And while their U.K. counterparts still expect rate cuts to combat the economic blow dealt by the coronavirus and Brexit, the Bank of England is seen stopping at zero.

Indeed, higher bond yields are now seen in the U.S. and New Zealand, with some strategists from Bank of America to Societe Generale looking for 10-year Treasuries to advance toward 1.5% by the end of 2021.

The vocal pushback from U.S. policy makers on the likelihood of negative rates and economic optimism have seen investors switch to bets on a steeper yield curve, albeit with limits. The benchmark Treasury yield has about tripled from its March low to 0.90% Tuesday.

“Since the Federal Reserve has signaled that it would not cut interest rates below zero, Treasuries have a floor at 0%,” said Saxo Bank strategist Althea Spinozzi. “2021 is going to be all about a yield-curve steepener.”

New Zealand Story

The situation is similar in New Zealand. China’s economic rebound, the Reserve Bank of New Zealand’s more favorable outlook on the economy and a new lending program have slashed expectations for even one more rate move in Wellington, let alone a reduction below zero. The RBNZ has a record-low rate of 0.25%.

Swap markets are pricing just a 30% chance of a 25 basis point cut by the end of 2021, after pricing in almost 50 basis points of cuts in November. And the 10-year government bond yield was trading around 0.87% on Tuesday, about double the September low of 0.44%.

“The hurdle for doing negative rates is going to be very high,” said Bank of New Zealand strategist Nick Smyth. New Zealand bonds are losing their premium to peers and there’s the potential for 10-year yields to climb to 1.5% if Treasuries retreat, he added.

Brexit Blues

Still, the risk of a no-deal Brexit could revive bets on negative rates in the U.K. Although the BOE is currently seen lowering rates by 10 basis points in early 2022, pricing has see-sawed with Brexit headlines, with traders betting on a cut as soon as May last week.

The move comes after Monetary Policy Committee member Michael Saunders flagged room for more cuts, and colleague Silvana Tenreyro said evidence is “supportive” of a sub-zero rates policy.

“We see the BOE taking the bank rate negative next year,” said Peter Schaffrik, a global strategist at RBC Europe Ltd. “Even a Brexit deal is a huge disruption from the status quo, so the odds of negative rates will be lower but not by a lot.”

To be sure, BOE Governor Andrew Bailey has made a point that doesn’t chime with the market movements: that sub-zero rates might be more effective during an economic recovery rather than a slump. Ranko Berich, head of market analysis at Monex Europe Ltd., finds bets on negative rates rising in tandem with expectations of a no-deal Brexit puzzling for this reason.

“The BOE’s own communication has made clear the MPC views negative rates as a tool best used at a time when banks are less worried about balance sheet risks, ideally the initial upswing phases of a recovery,” he said. “This suggests they would be highly unlikely to take rates negative as a knee-jerk reaction to a no-deal Brexit, which is precisely the kind of shock that would get banks worries about balance sheet risks.”

For now, though, the market is being driven by Brexit talks. Concern about the impact of no-deal on the U.K. economy has kept a lid on the nation’s bond yields, with gilts’ performance regularly out of step with peers. The 10-year benchmark yield traded at around 0.24% Tuesday, having fallen as low as 0.15% last week, and investors see more downside as a distinct possibility.

“Gilts offer limited protection, given yields are already low, but they’ll still fall further in a bad Brexit outcome as negative rates becomes the base case,” said John Roe, head of multi-asset funds at Legal & General Investment Management. “We don’t see negative interest rates as a problem per se. We just see it as an outcome that’s positive for gilts, which means it’s dangerous to be short.”

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>>> Sweden Explores Moving to a Digital Currency


Bloomberg

By Rafaela Lindeberg and Ott Ummelas

December 11, 2020


https://www.bloomberg.com/news/articles/2020-12-11/sweden-explores-the-feasibility-of-moving-to-a-digital-currency


Sweden’s government will start exploring the feasibility of having the country move to a digital currency, marking another step into the unknown for the world’s most cashless society.

Per Bolund, financial markets minister, said a review launched on Friday is expected to be completed by the end of November in 2022. Anna Kinberg Batra, a former chairwoman of the Riksbank’s finance committee, will lead the inquiry.

Sweden is among the first countries in the world to consider introducing a digital currency. Its central bank is already running a pilot project with Accenture Plc to introduce an electronic krona based on the same blockchain technology that underpins digital currencies like Bitcoin.

Governor Stefan Ingves said in October that any decision on whether to issue an e-krona needs to be taken at the political level.

From the point of view of the government, Bolund said that “it’s crucial that the digitalized payments market functions safely, and that it’s available to everybody.”

“Depending on how a digital currency is designed and which technologies are used, it can have large consequences for the entire financial system,” he said.

The Riksbank estimated in October that Sweden’s cash usage dropped to its lowest level ever, as the pandemic accelerates the shift away from bank notes and coins. Less than 10% of all payments are made with cash in Sweden, according to the bank’s research.

The Bank for International Settlements estimated back in 2018 that Sweden is the world’s most cashless society, measured as usage as a percentage of gross domestic product.

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Rickards - >>> Good News and Bad News


BY JAMES RICKARDS

DECEMBER 7, 2020


https://dailyreckoning.com/good-news-and-bad-news/


Good News and Bad News

As of yesterday, nearly 15 million Americans have tested positive for COVID-19, while over 281,000 people with the virus have died.

Caseloads are actually higher than they were in April (although fatalities are not as great because of improved treatments and new therapeutics).

The U.S. registered over 4 million infections in November alone, more than double October’s record 1.9 million infections. But here’s the good news:

Several highly effective COVID vaccines are already approved for use or are expected to be approved shortly.

The major pharmaceutical companies are geared up to produce billions of doses (and several billion doses are already produced, just waiting for the final approvals).

This vaccine campaign will start slowly and take time to have an impact. In the U.S., these vaccines will go first to health-care workers and nursing home patients. Gradually, the injections will be available for those over 60 years of age and those with comorbidities such as asthma and diabetes.

By late next year, most of the U.S. population that wants the vaccine should have it. Similar efforts are underway in Europe, Japan and Australia. Russia and China have their own vaccines. We don’t know much about them, but they are gradually being used on their own populations.

So, that’s the good news. The bad news is that vaccines won’t rescue the U.S. economy in time.

Lockdowns Aren’t Effective

Lockdowns are to be reimposed as the only remedy in the meantime (in addition to the basic advice of washing hands, social distancing and masks). Unfortunately, the evidence is clear that lockdowns don’t work well. The virus is highly contagious; it goes where it wants.

But, politicians don’t know what else to do, and they’re driven by the need to appear to be doing something, so lockdowns are the answer.

Lockdowns may not be effective against the virus, but they are very good at destroying economies.

The same pattern we saw last spring is repeating itself.

Businesses will not only lock down; they will also go bankrupt or close for good. Job losses will not be temporary; they will be permanent. There will be no pent-up demand if the lockdowns abate. A missed meal is a missed meal; I won’t order ten dinners next time I go out, I’ll order one.

The U.S. economy will probably tip into recession in the first quarter of 2021. This will mark the first “double-dip” recession since the 1980-81 period when a new recession began just one year after the prior recession ended.

This time the gap may be just six months since the last recession ended on June 30, 2020. Stock markets have not yet corrected for this coming recession. They will soon.

Meanwhile, assuming Joe Biden will be the next president, his administration will have to confront this recession. How might his economic team try to stimulate the economy and restore growth?

Get Ready for MMT

It could be telling that Janet Yellen will be the next Treasury Secretary.

Economist Stephanie Kelton has called for merging the Fed and the Treasury into a single spending/monetization entity to implement Modern Monetary Theory (MMT). She has gained influence in Democratic policy circles.

Investors need to pay attention to it, whether they agree with it or not because it will influence fiscal and monetary policy in a new Biden administration. Putting former Fed Chair Janet Yellen as the new Secretary of the Treasury is a clear sign that that’s what a Biden administration plans to do.

What better way to achieve that merger than to appoint the former Fed head as the new Treasury head with her former Deputy still in place back at the Fed? With a former Fed head as new Treasury head, I’d say Mission Accomplished.

For those unfamiliar with MMT, it says that the U.S. can spend as much as it wants, borrow to cover the deficits and monetize the debt with Fed money printing.

The “theory” is not much of a theory because it lacks evidence, and there’s nothing “modern” about it because it has been around for over 100 years. Still, it is all the rage in Washington, D.C. these days.

Three Main Tenets of MMT

MMT has three basic tenets. The first is to treat the Treasury and the Fed as a single entity with a single balance sheet. Legally the two institutions are completely separate, but MMT insists that government can operate as if it were. This means merging Treasury and Fed operations into a single engine for spending, borrowing and printing.

The second idea is that citizens must accept dollars (whether they like it or not) because you need dollars to pay taxes, and if you don’t pay taxes, you’ll go to jail. In effect, the dollar is supported by the barrel of a gun, to paraphrase Mao Zedong.

The third idea is that there is no practical limit to how much debt the U.S. can issue. The U.S. debt-to-GDP ratio today is about 130% (up from 106% last year). But, MMT cheerleaders point to Japan’s ratio, which is over 250%, as proof that the U.S. can borrow a lot more.

These ideas are all badly flawed. Japan is not a good test case because the Japanese buy their own debt (the U.S. relies on foreign investors), and the Japanese economy has barely grown for 30 years (try that in the U.S.).

You can operationally merge the Fed and Treasury, but once it becomes apparent to markets that you are monetizing all the new debt, confidence will erode, rates will climb and this pyramid scheme will collapse.

And, once confidence is lost, citizens can turn to land, gold, silver, natural resources and other hard assets as dollar alternatives. You don’t owe taxes on unrealized gains, so the MMT tax police will have nothing to keep them busy.

Disaster in the Making

MMT is a disaster in the making (although it may take a few years to play out). It’s OK to borrow money if you invest in highly productive assets. But, if you just spend the money to support a stagnant economy with handouts, you’re simply digging a deeper debt hole for yourself.

Multi-trillion dollar deficit spending plans will emerge soon from the new Congress. The Treasury will spend the money. The Fed will buy the Treasury debt with newly printed money.

Eventually, you end up with default, inflation, higher interest rates, higher taxes or all of the above. The U.S. will go broke. It’s not quite the rosy scenario that the MMT crowd would have you believe. Still, it may be coming soon.

And, a clueless Janet Yellen will supervise the entire operation.

Regards,

Jim Rickards

for The Daily Reckoning

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>>> China Opens Its Bond Market—With Unknown Consequences for World

The nation’s entry into the World Trade Organization rocked global commerce. The financial markets could be next.


Bloomberg

November 22, 2020


https://www.bloomberg.com/news/features/2020-11-22/china-s-bond-market-opening-is-set-to-reshape-the-financial-world


China’s 2001 entry into the World Trade Organization transformed the global economic order. Yet even as China became the factory to the world, its financial system remained a closed shop, with strict controls on the flow of money in and out. For years there’s been talk of a “two-way opening,” but slow progress. Now the admission of foreign investors into China’s $15 trillion bond market—cemented this year when the country rounded out its inclusion in all three of the top global indexes—may just mark the big bang equivalent to WTO entry.

Global pension funds, starved for yield in a low-growth world, will now have access to safe government debt that pays more than 3%. And if officials deliver on their pledges to open up, reinforced in the Communist leadership’s 2021-25 five-year plan outlined in October, Chinese investors may soon find it a lot easier to snap up shares in Apple, Starbucks, or Tesla—not just their phones, cappuccinos, and cars. The Chinese could join their government, which has long been a major buyer of overseas assets such as Treasuries, as a powerful source of funding.

“China will turn from an exporter of goods to an exporter of capital, with significant consequences, of course, for the world,” says Stephen Jen, who runs Eurizon SLJ Capital, a hedge fund and advisory firm in London.

But what will the consequences be? Major changes to the financial system in the past have produced some unfortunate results. The euro’s 1999 introduction sowed the seeds for the region’s debt crisis a decade later. A wave of overseas savings that poured into the U.S. during the 2000s helped trigger the mortgage boom that catastrophically burst in 2007-08. Bloomberg Markets gathered views on how the opening might affect the future of global finance in the years ahead. Here are some of the themes that emerged.

Chinese Savers Go Global

Jen, who started his career at Morgan Stanley covering the impact of the Asian financial crisis on the foreign exchange market, sees China’s capital market opening as the biggest structural change to international finance since the launch of the euro.

Sustained inflows of foreign capital could make Beijing comfortable about loosening the controls that have bottled up domestic money in China for so long. Indeed, it would probably have to; otherwise the yuan would strengthen, eroding the country’s export competitiveness. That would let loose a wave of Chinese savings on the world—Jen estimates there’s as much as $5 trillion of pent-up Chinese demand for investments outside China. That could resemble the petrodollars that flowed from oil-exporting countries in the 1970s, which ended up financing a huge, and tragically unsustainable, borrowing spree by Latin American nations.

“Outflows will probably be offset by the inflows for a few more years,” Jen says of China. Petrodollar-like net outflows might take a few more years to materialize, “but that is definitely a scenario we will need to deal with,” he says.

A Slice of the Action

To gain exposure to China’s rapid economic expansion, global investors generally have had to buy proxy assets such as the Australian dollar, commodities, or a small range of Hong Kong-listed Chinese shares. China’s bond market opening gives them direct exposure. It also provides an alternative to Japanese government bonds and other low- or negative-yielding sovereign debt, says Ed Al-Hussainy, a senior analyst for global rates at Columbia Threadneedle in New York, which had $476 billion under management in October and has been stepping into the China market recently.

“The demand is off the charts for anything liquid with a little bit of pickup in yield over Treasuries,” he says. “People are willing to pay up for liquidity, and that’s the key thing that’s improving in the Chinese onshore market. So inevitably we’ll be pushed in that direction.”

China’s central government bonds are now included, or on a phased path to inclusion, in the three key international bond indexes that investors use as benchmarks compiled by FTSE Russell, JPMorgan Chase, and Bloomberg Barclays (part of Bloomberg LP, the owner of Bloomberg Markets). About $5.3 trillion in assets tracks these indexes, according to estimates from Goldman Sachs Group Inc. Passive index-tracking funds will need to buy Chinese bonds to match the benchmarks. Some active managers, concerned about transaction costs, may steer clear; others are likely to overweight China because of the attractive yields.

Flow on Effect

China’s bond yields look more like those of emerging markets—in the FTSE World Government Bond Index benchmark they will be second highest after Mexico’s—yet investors will probably view them as developed-market securities, Goldman analysts say. After pulling in $230 billion from foreign investors to its fixed-income market in the past five years, China will see about $770 billion more in the next five, Goldman analysts including Kenneth Ho estimated in October.

A Class by Itself

Market players don’t expect the resulting shifts in asset allocation to increase bond yields much elsewhere—but the money will need to come from somewhere. Overseas investors held almost 13% of Japanese government bonds and more than 30% of Treasuries at the end of June. About one-quarter of euro region government bonds are held by investors outside the currency union, according to estimates from Commerzbank AG.

“We have a huge overhang of JGBs and European bonds—and a lot of that is dead weight,” says Columbia Threadneedle’s Al-Hussainy.

Competitor for Capital

Washington, in particular, could find itself competing with Beijing for overseas capital. China’s current account is barely positive relative to the size of its economy, even with its large trade surpluses with the U.S. It runs vast deficits in the trade of services, and some economists predict it will in the future run current-account deficits. If that happens, China would need to pull in money from abroad, just as the U.S. has for decades.

“China could enter structural current-account deficits, which will force it to open the market and import capital from abroad,” says Aidan Yao, a senior economist at AXA Investment Managers in Hong Kong who previously worked for the Hong Kong Monetary Authority. With China and the U.S.—sometimes referred to as the G2—both competing for savings, “either the rest of the world has to step up savings to finance G2’s shortfalls, or G2 will have to adjust themselves,” Yao says.

Competition could be all the fiercer if Washington expands on moves in 2020 to reduce Chinese borrowers’ access to American capital. Lawmakers from the Republican and Democratic parties have both proposed rules that would make it tougher for China’s companies to issue stock in the U.S., for example.

“The harder the U.S. tries to isolate China, the more efforts China should make in opening up,” says Yao Wei, chief China economist at Société Générale SA in Paris. “Allowing in more foreign investments will further deepen China’s integration into global financial markets, which will make decoupling more difficult.”

Better Credit Allocation and Transparency

Chinese regulators hope that opening their bond market will improve how credit gets allocated. The nation’s Communist leadership has sought to transition the economy to a more market-based system in which investors and credit analysts price funding for different borrowers according to their risk. Policymakers hope that will stem the buildup of stressed and defaulting loans, reduce excess capacity, and result in more productive investment.

That helps explain why the People’s Bank of China and other regulators worked so hard to win acceptance into the benchmark bond indexes. That approval required addressing a wide variety of complaints about the local market, such as the excessive paperwork required from foreigners and the slow pace of trade completion. Regulators also provided more hedging options, and the government boosted the size of individual bonds to increase their liquidity. After a messy 2015 yuan devaluation, the PBOC has also tried to reassure overseas investors by conducting exchange rate management with greater transparency and stability.

The Chinese Communist Party’s five-year plan, outlined in October, recommitted to opening up. Han Wenxiu, a senior official involved in drafting the plan, said at a briefing that “China will see the scale of foreign trade, foreign capital utilization, and outbound investment continue to expand.” PBOC Governor Yi Gang has also highlighted the value of financial opening, saying it improves efficiency and aids higher-quality economic development.

“Foreign institutions can be a source of fresh blood that can introduce innovative and mature ways of doing business to the local market, which has long been dominated by Chinese banks and brokerages,” says Becky Liu, head of China macro strategy at Standard Chartered Plc.

“The authorities may end up with domestic investors who are being crowded out of the government bond market”

Unintended Consequences

There’s always a risk that things won’t go as planned. For instance, what if, instead of disciplining the Chinese fixed-income market, the opening gave China’s riskiest borrowers even cheaper credit?

Here’s how that might happen: Foreign investors stick primarily to buying bonds sold by the central government and three state-owned lenders known as policy banks that are closely associated with government objectives. As of mid-2020, overseas managers held 8.5% of central government bonds, up from just 2.4% in February 2016. By contrast, their share of corporate bonds, at 0.7%, was barely changed from 0.6%, Goldman analysts estimated.

“The authorities may end up with domestic investors who are being crowded out of the government bond market,” says Michael Spencer, chief Asia-Pacific economist at Deutsche Bank AG in Hong Kong. “By pushing down yields on the risk-free assets, these foreign inflows may be forcing the Chinese investors even further out the credit curve. So if you think they are not very good to begin with in pricing credit, then these inflows actually may be making that problem worse.”

Spreads across China’s domestic corporate debt market are less differentiated than in the U.S. bond market. Top-grade corporate bonds yielded about 70 basis points, or 0.70 percentage point, more than China’s government bonds in late October. High-yield securities had rates 329 basis points higher, according to the ChinaBond platform. By contrast, investment-grade U.S. corporate spreads were at 123 basis points over Treasuries and junk bonds had a 488 basis-point premium.

Record Holdings

Losing Control

The more open the market is, the more difficult it will be for Chinese policymakers to maintain their grip on interest and exchange rates. Moves that drive up yields—such as monetary tightening to control inflation—could spur a wave of inflows that sends the currency climbing, making exports less competitive. Similarly, measures that undermine the confidence of overseas investors could prompt a destabilizing exodus.

China’s policymakers are cautious and patient. That helps explain why they kept the financial system cordoned off even as they opened the economy in myriad other ways starting in the late 1970s. They welcomed investment in manufacturing, but portfolio inflows were another matter. After all, emerging-market crises in the 1980s and 1990s showcased the danger of “hot money” that can quickly exit a country, causing wrenching financial turmoil.

“With an open financial market with easier inflow and outflow, the Chinese government and central bank will have to be more cautious managing those funding costs and interest rates,” says Lu Ting, chief China economist at Nomura Holdings Inc. in Hong Kong. “And of course, it will make it more challenging to manage the exchange rate.”

China might need to reestablish controls and limits if the financial market opening spurs excessive volatility. Authorities in recent years have managed swings in the currency by introducing or removing curbs on the foreign exchange market. So while China’s policymaking elite seemingly agree on the benefits of opening, the process is likely to be a stop-start one.

Pros Outnumber Cons

China wants and needs overseas capital to fund its growth and promote the global use of its currency, which remains a bit player in international transactions. The country’s growth rate has steadily decelerated in recent years, even before the pandemic, and the era of outsize current-account surpluses is over. With an aging and shrinking labor force, China risks falling into the “middle-income trap”—stagnating before it reaches rich-world levels of development. Improved financial transparency, a diverse funding mix, and more productive investment will be key to ensuring that doesn’t happen.

For the rest of the world, China’s financial integration will bring unpredictable change, just as the country’s entry into the global trading system did. Its giant labor force made goods more affordable around the world, improving the lives of millions. But it also hollowed out manufacturing towns from Michigan to northern England, imposing social costs with political consequences that are still playing out. Similarly, the coming shift of trillions of dollars of capital across borders seems likely to create winners and losers around the globe.

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>>> Why Gold?


BY JAMES RICKARDS

OCTOBER 19, 2020


https://dailyreckoning.com/why-gold-2/


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.

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 the late 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 has nearly doubled. 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 $1,900. What could push it firmly over $3,000 per ounce in the short run and $10,000-$14,000 in the long run? 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 2026, as I mentioned earlier.

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 (we’re still experiencing the first), a failure of a gold ETF or the COMEX exchange to honor physical delivery requirements, or post-election chaos.

The gold market is not really 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 $3,000 per ounce, on its way to $4,000 per ounce and ultimately much higher along the lines described above.

Regards,

Jim Rickards

for The Daily Reckoning

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>>> The dollar remains vulnerable to ‘significant depreciation,’ warns Standard Chartered


CNBC

OCT 21 2020

Eustance Huang


https://www.cnbc.com/2020/10/22/the-dollar-remains-vulnerable-to-significant-depreciation-standard-chartered.html


KEY POINTS

The sovereign fundamentals for the dollar appear to be “pointing south,” according to Standard Chartered Bank’s Eric Robertsen.

Election Day is less than two weeks away and Robertsen said the outcome would determine “the path to the end result.

Robertsen said he sees a “pretty good dollar depreciation trend” over the next few years.

A ‘blue wave’ would be a ‘perfect storm’ for global and emerging market assets: StanChart

SINGAPORE — One Standard Chartered Bank analyst warns that the greenback is vulnerable to a “significant depreciation” as sovereign fundamentals appear to be “pointing south.”

“You have the twin deficits in the U.S. getting worse, you have the trade balance at the worst in 15 years,” Eric Robertsen, global head of research at Standard Chartered Bank, told CNBC’s “Squawk Box Asia” on Wednesday.

Election Day is less than two weeks away and Robertsen said the outcome would determine “the path to the end result.”

The analyst said a victory for former Vice President Joe Biden would mean any dollar depreciation is set to be “very clear and very pronounced.” If President Donald Trump is reelected, Robertsen said it will be “a little bit more messy in the short term.”

As of Thursday morning Singapore time, the dollar index which tracks the greenback against a basket of its peers sat at 92.743 — down more than 3% for the year so far.

Dollar depreciation trend

Robertsen said he sees a “pretty good dollar depreciation trend” over the next few years.

He argued the outperformance of U.S. assets has been a “big driver” of dollar appreciation over the last 10 years, with the S&P 500 beating the MSCI Emerging Markets equity index by 100 percentage points in that period.

“If you were to see a reversal of that — either because of global trade or a change in the United States’ domestic economic agenda — and combined with the fact that the U.S. no longer has an interest rate advantage over its G-10 peers, I think you can make a very compelling case for a multi-year dollar depreciation,” Robertsen said.

On Tuesday, prominent economist Stephen Roach told CNBC that conditions are ripe for a sharp weakening in the greenback in the coming year, as he forecast a 35% decline of the U.S. dollar decline by the end of 2021.

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>>> EU to introduce crypto-assets regime by 2024, EU documents say
Huw Jones


Reuters

September 18, 2020

By Huw Jones


https://finance.yahoo.com/news/eu-introduce-crypto-assets-regime-144112910.html


LONDON, Sept 18 (Reuters) - The European Union will introduce new rules within four years to make cross-border payments quicker and cheaper through the use of blockchain and crypto assets like stablecoins, two EU documents showed.

The European Commission is due to set out its strategy for encouraging greater use of digital finance at a time when 78% of payments in the euro zone are in cash. It also wants a rapid shift to "instant" payments generally as pandemic lockdowns showed the growing role of cashless payments.

The EU executive will present a draft law to clarify how existing rules apply to crypto assets and set out new rules where there are gaps, the documents said.

"By 2024, the EU should put in place a comprehensive framework enabling the uptake of distributed ledger technology (DLT) and crypto-assets in the financial sector," the documents said. "It should also address the risks associated with these technologies."

Stablecoins, a type of cryptocurrency often backed by traditional assets, leapt onto policymakers' agendas last year when Facebook revealed plans for its Libra token. Central banks are now studying whether to launch their own.

Brussels also wants to make it easier to share data within the financial sector to encourage competition and a wider range of services, while upholding the principle of "same risk, same rules, same regulation", the documents say.

The bloc should also have rules in place within four years to allow new customers to start using financial services quickly once anti-money laundering and identity checks have been completed, it said.

"By 2024, the principle of passporting and a one-stop shop licensing should apply in all areas which hold strong potential for digital finance," it said. Instant payment systems should become the "new normal" by the end of 2021.

Instant payments are suitable for many uses beyond traditional credit transfers, in particular for physical and online purchases, which are currently dominated by payment card schemes, the documents said.

Europe has long sought "home grown" alternatives to the likes of MasterCard and Visa, the U.S. payments firms heavily used in the region.

The Commission will assess the impact of charges levied on consumers for instant payments and to could require that they are no higher than those for regular credit transfers.

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>>> This Is How Long the Bubble Will Last


BY JAMES RICKARDS

SEPTEMBER 14, 2020


https://dailyreckoning.com/this-is-how-long-the-bubble-will-last/


This Is How Long the Bubble Will Last

THE underlying economy (U.S. and global) has a strong deflationary bias. Central banks can’t tolerate deflation, so they respond with inflationary measures such as money printing, zero rates and guarantees of all major securities markets.

Those policies won’t actually cause inflation, for reasons explained below. But, they will cause bubbles in certain asset classes, especially stocks.

There’s a serious question as to whether the central bank “inflationary measures” will actually work. They won’t.

Powell can talk all he wants about asymmetric inflation targeting and letting the economy run a little “hot” for longer than expected, as he did in his Jackson Hole speech on August 27, but he doesn’t actually know how to make inflation happen.

As I’ve stated repeatedly, money printing alone doesn’t cause inflation without velocity. And right now velocity is dropping sharply, as it has since 1998.

Nobody Understands Inflation!

Libertarians, Austrian School economists, Monetarists and Neo-Keynesians all got it wrong. They yelled that Fed “money printing” would lead straight to inflation. What they missed is that money printing does not cause inflation. It’s velocity (the turnover of money) that causes inflation.

Velocity is a psychological phenomenon outside the Fed’s control (unless the Fed wants to bid up the price of gold, which is not even remotely being considered at the moment). Not only is inflation not a danger; deflation is much more likely and is a much greater danger to the financial system.

Deficit spending also does not cause inflation when government debt levels are over 90%; right now they’re 135% and climbing. Inflation also does not happen when there’s slack in the economy, such as 30 million unemployed.

So, there’s no real inflation threat on the horizon.

There’s no doubt that inflation will emerge in the end. But, the timing is tricky; it could take several years of monetary ease and dollar debasement (mostly relative to gold) before inflation finally takes off.

It took a long time to switch the consumer mentality from inflation to deflation and it will take a long time to switch it back again.

This does not mean that money printing has no impact. It does. Money printing may not cause price inflation, but it does create asset bubbles in stocks, bonds, real estate, commodities and other asset classes.

The most likely impact of Powell’s new Fed policies is therefore not consumer inflation, but asset bubbles. These have already emerged.

Of the various assets, real estate is a mixed-bag now because low interest rates, which help values, are being offset by mass migration from the cities, which hurts commercial real estate values.

There’s a lot of skepticism in the bond markets because interest rates are already so low. Rates will go lower, even negative, but skepticism puts a break on the bond bubble.

The one clear winner is the stock market.

How Long Can the Bubble Last?

With a fundamentally weak economy and a continuing pandemic, how much longer can the stock market melt-up continue?

Right now, my models are telling me that the stock market rally will continue as long as the Fed monetary ease continues or gets even easier.

There’s no end in sight for Fed ease, so there’s also no end in sight for the stock market rally. That doesn’t mean there won’t be bumps along the way. There will be, and stocks have pulled back since September 2.

But the trend is up.

Chart 1 below reveals this stock melt-up dynamic with great precision. The chart shows the three major U.S. stock market indices on a year-to-date basis.

The S&P 500 (SPX) is shown in orange. The NASDAQ 100 (NDX) is shown in purple and the Dow Jones Industrial Average (DJI) is shown in green.

All three major indices traced a similar pattern over the course of 2020, albeit with less volatility in the NASDAQ 100. All three achieved new all-time highs between February 12 and February 19 before the full-impact of the COVID-19 pandemic had been internalized by market participants.

All three also crashed sharply from February 21 (when the Italian data began to reveal that the disease was not contained in China) until March 23.

Chart 1 – S&P 500 (orange), Dow Jones (green), NASDAQ 100 (purple) – 2020 YTD



Then all three began historic rallies that ended the shortest bear market in history. The SPX and NDX reached new all-time highs on June 5 (NDX) and August 18 (SPX). SPX and NDX have continued to even higher levels since those dates.

The DJI has not yet achieved a new all-time high (it was at 29,551 on February 12), but is within striking distance and can also be expected to reach a new all-time high soon.

March 23 Is the Magic Date

What happened on March 23? Why was that date the turning point for all three stock indices?

March 23 was the day the Federal Reserve announced what it called “extensive new measures to support the economy.” These measures included the following:

Purchases of Treasury notes, residential mortgage-backed securities, and commercial mortgage-backed securities.

Creation of the Primary Market Corporate Credit Facility (to support new corporate debt) and the Secondary Market Corporate Credit Facility (to support liquidity in secondary market trading of corporate debt).

Creation of the Term Asset-Backed Securities Loan Facility (to support student loans, auto loans, credit card loans and other assets).

Creation of the Money Market Mutual Fund Liquidity Facility (to support municipal notes and bank certificates of deposit).

Creation of the Commercial Paper Funding Facility (to support the commercial paper market including the use of commercial paper in certain money market funds).

What the Fed was saying was that it would use its printing press to support the government bond market, the mortgage market, the municipal debt market, the corporate debt market, commercial paper, money market funds and consumer loans through a combination of secured lending (repo), direct purchases or guarantees.

In the months following March, the Fed piled on even more trillions of dollars of programs and guarantees on top of those announced March 23. The announcement was like the starting gun in the 100-yard dash. The markets took off like a rocket and never looked back.

Still, the Fed wasn’t finished. In recent months, the Fed announced even more programs to support sectors of the market they missed in March including junk bonds, foreign central banks, municipal bonds and commodities.

In short, the Fed sent a loud and clear signal that no financial institutions would fail and no markets would be allowed to crash. None have.

Stock market investors correctly concluded they had a one-way bet. If markets went up, they made money. If markets fell, the Fed would prop them up and they would make money. There was practically no way to lose money, at least in the short run.

“A Day of Reckoning Will Arrive, But Not Yet”

The stock market bubble will not continue forever. The easiest way to pop the bubble is for the Fed to reverse course and tighten monetary policy with reductions in its balance sheet, termination of its rescue facilities or interest rate hikes.

None of these are on the horizon. In fact, the Fed recently announced that investors could expect zero interest rates for years to come.

The other way the stock market bubble could end is if the gap between market perception and reality suddenly closes. The perception is that the Fed can prop up markets with monetary ease.

The reality is that the economy is in the worst depression since the Great Depression.

Output in the second quarter of 2020 fell by the greatest amount in history. (Third quarter output will show a strong bounce, but not nearly enough to recover the losses in the first half).

Unemployment is the highest since the late 1940s, and may go higher in the months ahead as a second wave of layoffs emerges after the termination of the Payroll Protection Plan, a loan program geared to keeping employees on the payroll.

Small businesses are failing by the hundreds of thousands and associated job losses will be permanent, not temporary.

When a gap opens up between perception (the stock market) and reality (a new depression), reality always wins. But, it can take time.

The perception that the stock market can be propped up by the Fed will prevail at least through Election Day, possibly longer.

A day of reckoning will arrive, but not yet.

Regards,

Jim Rickards

for The Daily Reckoning

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>>> Ray Dalio Warns of Threat to Dollar as Reserve Currency


Bloomberg

By Katherine Burton and Erik Schatzker

September 15, 2020


https://www.bloomberg.com/news/articles/2020-09-15/ray-dalio-warns-of-threat-to-dollar-as-reserve-currency


Fiscal spending, monetary injections debasing dollar, he says

Says prospect U.S. will go too far with government stimulus


The dollar’s decades-long position as the global reserve currency is in jeopardy because of steps the U.S. has taken to support its economy during the Covid-19 pandemic, according to Ray Dalio, founder of hedge fund giant Bridgewater Associates.

While equities and gold benefited from the trillions of dollars in fiscal spending and monetary injections, those efforts are debasing the currency and have raised the possibility that the U.S. will go too far in testing the limits of government stimulus, Dalio said Tuesday in an interview with Bloomberg Television.

“There is so much debt production and debt monetization,” Dalio said.

Dalio Says There's a Threat to the Dollar as Reserve Currency

The Bloomberg Dollar Spot Index has dropped 10% from its peak in late March as investors responded to the pandemic and efforts by central bank and government officials to contain the economic fallout. All of the world’s major developed currencies have gained against the dollar as have precious metals such as gold, silver and platinum.

Dalio said in July that investors should favor stocks and gold over bonds and cash because the latter offer a negative rate of return and central banks will print more money. Bridgewater has been moving into gold and inflation-linked bonds in its All Weather portfolio, diversifying the countries it invests in and finding more stocks with stable cash flow.

Bridgewater’s flagship Pure Alpha II hedge fund has had a tough year, tumbling 18.6% through August, amid the market turmoil fueled by the pandemic. The firm took a hit at “the worst possible moment” because its portfolios were positioned at the start of the year to benefit from rising markets, Dalio told clients in mid-March.

The Westport, Connecticut-based firm manages about $148 billion, down from roughly $160 billion at the start of the year.

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>>> Human Freedom Rests on Gold Redeemable Money


By HON. HOWARD BUFFETT

U. S. Congressman from Nebraska


Reprinted from The Commercial and
Financial Chronicle

5/6/48


https://buygoldandsilversafely.com/wp-content/uploads/2018/04/human-freedom-rests-on-gold-redeemable-money.pdf


Congressman Buffett stresses relation between
money and freedom and contends without a
redeemable currency, individual's freedom to
sustain himself or move his property is
dependent on goodwill of politicians. Says
paper money systems generally collapse and
result in economic chaos. Points out gold
standard would restrict government spending
and give people greater power over public
purse. Holds present is propitious time to
restore gold standard.


Is there a connection between Human Freedom and A
Gold Redeemable Money? At first glance it would seem
that money belongs to the world of economics and
human freedom to the political sphere.

But when you recall that one of the first moves by
Lenin, Mussolini and Hitler was to outlaw individual
ownership of gold, you begin to sense that there may be
some connection between money, redeemable in gold,
and the rare prize known as human liberty.
Also, when you find that Lenin declared and
demonstrated that a sure way to overturn the existing
social order and bring about communism was by
printing press paper money, then again you are
impressed with the possibility of a relationship between
a gold-backed money and human freedom.

In that case then certainly you and I as Americans
should know the connection. We must find it even if
money is a difficult and tricky subject. I suppose that if
most people were asked for their views on money the
almost universal answer would be that they didn't have
enough of it.

In a free country the monetary unit rests upon a fixed
foundation of gold or gold and silver independent of the
ruling politicians. Our dollar was that kind of money
before 1933. Under that system paper currency is
redeemable for a certain weight of gold, at the free
option and choice of the holder of paper money.

Redemption Right Insures Stability

That redemption right gives money a large degree of
stability. The owner of such gold redeemable currency
has economic independence. He can move around either
within or without his country because his money
holdings have accepted value anywhere.

For example, I hold here what is called a $20 gold
piece. Before 1933, if you possessed paper money you
could exchange it at your option for gold coin. This gold
coin had a recognizable and definite value all over the
world. It does so today. In most countries of the world
this gold piece, if you have enough of them, will give
you much independence. But today the ownership of
such gold pieces as money in this country, Russia, and
all divers other places is outlawed.

The subject of a Hitler or a Stalin is a serf by the mere
fact that his money can be called in and depreciated at
the whim of his rulers. That actually happened in Russia
a few months ago, when the Russian people, holding
cash, had to turn it in -- 10 old rubles and receive back
one new ruble.

I hold here a small packet of this second kind of money
-- printing press paper money -- technically known as
fiat money because its value is arbitrarily fixed by rulers
or statute. The amount of this money in numerals is very
large. This little packet amounts to CNC $680,000. It
cost me $5 at regular exchange rates. I understand I got
clipped on the deal. I could have gotten $2½ million if I
had purchased in the black market. But you can readily
see that this Chinese money, which is a fine grade of
paper money, gives the individual who owns it no
independence, because it has no redemptive value.
Under such conditions the individual citizen is deprived
of freedom of movement. He is prevented from laying
away purchasing power for the future. He becomes
dependent upon the goodwill of the politicians for his
daily bread. Unless he lives on land that will sustain
him, freedom for him does not exist.

You have heard a lot of oratory on inflation from
politicians in both parties. Actually that oratory and the
inflation maneuvering around here are mostly sly efforts
designed to lay the blame on the other party's doorstep.
All our politicians regularly announce their intention to
stop inflation. I believe I can show that until they move
to restore your right to own gold that talk is hogwash.

Paper Systems End in Collapse

But first let me clear away a bit of underbrush. I will not
take time to review the history of paper money
experiments. So far as I can discover, paper money
systems have always wound up with collapse and
economic chaos.

Here somebody might like to interrupt and ask if we are
not now on the gold standard. That is true,
internationally, but not domestically. Even though there
is a lot of gold buried down at Fort Knox, that gold is
not subject to demand by American citizens. It could all
be shipped out of this country without the people having
any chance to prevent it. That is not probable in the near
future, for a small trickle of gold is still coming in. But
it can happen in the future. This gold is temporarily and
theoretically partial security for our paper currency. But
in reality it is not.

Also, currently, we are enjoying a large surplus in tax
revenues, but this happy condition is only a
phenomenon of postwar inflation and our global WPA.
It cannot be relied upon as an accurate gauge of our
financial condition. So we should disregard the current
flush treasury in considering this problem.
From 1930-1946 your government went into the red
every year and the debt steadily mounted. Various plans
have been proposed to reverse this spiral of debt.
One is that a fixed amount of tax revenue each year
would go for debt reduction. Another is that Congress
be prohibited by statute from appropriating more than
anticipated revenues in peacetime. Still another is that
10% of the taxes be set aside each year for debt
reduction.

All of these proposals look good. But they are
unrealistic under our paper money system. They will not
stand against postwar spending pressures. The accuracy
of this conclusion has already been demonstrated.

The Budget and Paper Money

Under the streamlining Act passed by Congress in 1946,
the Senate and the House were required to fix a
maximum budget each year. In 1947 the Senate and the
House could not reach an agreement on this maximum
budget so that the law was ignored.

On March 4 this year the House and Senate agreed on a
budget of $37½ billion. Appropriations already passed
or on the docket will most certainly take expenditures
past the $40 billion mark. The statute providing for a
maximum budget has fallen by the wayside even in the
first two years it has been operating and in a period of
prosperity.

There is only one way that these spending pressures can
be halted, and that is to restore the final decision on
public spending to the producers of the nation. The
producers of wealth -- taxpayers -- must regain their
right to obtain gold in exchange for the fruits of their
labor. This restoration would give the people the final
say-so on governmental spending, and would enable
wealth producers to control the issuance of paper money
and bonds.

I do not ask you to accept this contention outright. But if
you look at the political facts of life, I think you will
agree that this action is the only genuine cure.
There is a parallel between business and politics which
quickly illustrates the weakness in political control of
money.

Each of you is in business to make profits. If your firm
does not make profits, it goes out of business. If I were
to bring a product to you and say, this item is splendid
for your customers, but you would have to sell it
without profit, or even at a loss that would put you out
of business. -- well, I would get thrown out of your
office, perhaps politely, but certainly quickly. Your
business must have profits.

In politics votes have a similar vital importance to an
elected official. That situation is not ideal, but it exists,
probably because generally no one gives up power
willingly.

Perhaps you are right now saying to yourself: "That's
just What I have always thought. The politicians are
thinking of votes when they ought to think about the
future of the country. What we need is a Congress with
some 'guts.' If we elected a Congress with intestinal
fortitude, it would stop the spending all right!"

I went to Washington with exactly that hope and belief.
But I have had to discard it as unrealistic. Why?
Because an economy Congressman under our printing press money system is in the position of a fireman running into a burning building with a hose that is not connected with the water plug. His courage may be
commendable, but he is not hooked up right at the other
end of the line. So it is now with a Congressman working for
economy. There is no sustained hookup with the taxpayers
to give him strength.

When the people's right to restrain public spending by
demanding gold coin was taken from them, the
automatic flow of strength from the grass-roots to
enforce economy in Washington was disconnected. I'll
come back to this later.

In January you heard the President's message to
Congress. or at least you heard about it. It made Harry
Hopkins, in memory, look like Old Scrooge himself.
Truman's State of the Union message was "pie-in-thesky" for everybody except business. These promises were to be expected under our paper currency system. Why? Because his continuance in office depends upon
pleasing a majority of the pressure groups. Before you judge him too harshly for that performance, let us speculate on his thinking. Certainly he can persuade himself that the Republicans would do the
same thing if they were In power. Already he has
characterized our talk of economy as "just
conversation." To date we have been proving him right.
Neither the President nor the Republican Congress is
under real compulsion to cut Federal spending. And so
neither one does so, and the people are largely helpless.
But it was not always this way.

Before 1933 the people themselves had an effective way
to demand economy. Before 1933, whenever the people
became disturbed over Federal spending, they could go
to the banks, redeem their paper currency in gold, and
wait for common sense to return to Washington.

Raids on Treasury

That happened on various occasions and conditions
sometimes became strained, but nothing occurred like
the ultimate consequences of paper money inflation.
Today Congress is constantly besieged by minority
groups seeking benefits from the public treasury. Often
these groups. control enough votes in many
Congressional districts to change the outcome of
elections. And so Congressmen find it difficult to
persuade themselves not to give in to pressure groups.
With no bad immediate consequence it becomes
expedient to accede to a spending demand. The
Treasury is seemingly inexhaustible. Besides the
unorganized taxpayers back home may not notice this
particular expenditure -- and so it goes.

Let's take a quick look at just the payroll pressure
elements. On June 30, 1932, there were 2,196,151
people receiving regular monthly checks from the
Federal Treasury. On June 30, 1947, this number had
risen to the fantastic total of 14,416,393 persons.
This 14½ million figure does not include about 2
million receiving either unemployment benefits of soil
conservation checks. However, It includes about 2
million GI's getting schooling or on-the-job-training.
Excluding them, the total is about l2½ million or 500%
more than in 1932. If each beneficiary accounted for
four votes (and only half exhibited this payroll
allegiance response) this group would account for 25
million votes, almost by itself enough votes to win any
national election.

Besides these direct payroll voters, there are a large
number of State, county and local employees whose
compensation in part comes from Federal subsidies and
grants-in-aid.

Then there are many other kinds of pressure groups.
There are businesses that are being enriched by national
defense spending and foreign handouts. These firms,
because of the money they can spend on propaganda,
may be the most dangerous of all.

If the Marshall Plan meant $100 million worth of
profitable business for your firm, wouldn't you Invest a
few thousands or so to successfully propagandize for the
Marshall Plan? And if you were a foreign government,
getting billions, perhaps you could persuade your
prospective suppliers here to lend a hand in putting that
deal through Congress.

Taxpayer the Forgotten Man

Far away from Congress is the real forgotten man, the
taxpayer who foots the bill. He is in a different spot
from the tax-eater or the business that makes millions
from spending schemes. He cannot afford to spend his
time trying to oppose Federal expenditures. He has to
earn his own living and carry the burden of taxes as
well.

But for most beneficiaries a Federal paycheck soon
becomes vital in his life. He usually will spend his full
energies if necessary to hang onto this income.
The taxpayer is completely outmatched in such an
unequal contest. Always heretofore he possessed an
equalizer. If government finances weren't run according
to his idea of soundness he had an individual right to
protect himself by obtaining gold.

With a restoration of the gold standard, Congress would
have to again resist handouts. That would work this
way. If Congress seemed receptive to reckless spending
schemes, depositors' demands over the country for gold
would soon become serious. That alarm in turn would
quickly be reflected in the halls of Congress. The
legislators would learn from the banks back home and
from the Treasury officials that confidence in the
Treasury was endangered.

Congress would be forced to confront spending
demands with firmness. The gold standard acted as a
silent watchdog to prevent unlimited public spending.
I have only briefly outlined the inability of Congress to
resist spending pressures during periods of prosperity.
What Congress would do when a depression comes is a
question I leave to your imagination.

I have not time to portray the end of the road of all
paper money experiments.

It is worse than just the high prices that you have heard
about. Monetary chaos was followed in Germany by a Hitler; in Russia by all-out Bolshevism; and in other nations by more or less tyranny. It can take a nation to communism without external influences. Suppose the
frugal savings of the humble people of America continue to deteriorate in the next 10 years as they have in the past 10 years? Some day the people will almost certainly flock to "a man on horseback" who says he will stop inflation by price-fixing, wage-fixing, and rationing. When currency loses its exchange value the processes of production and distribution are
demoralized.

For example, we still have rent-fixing and rental
housing remains a desperate situation.

For a long time shrewd people have been quietly
hoarding tangibles in one way or another. Eventually,
this individual movement into tangibles will become a
general stampede unless corrective action comes soon.

Is Time Propitious

Most opponents of free coinage of gold admit that that
restoration is essential, but claim the time is not
propitious. Some argue that there would be a scramble
for gold and our enormous gold reserves would soon be
exhausted.

Actually this argument simply points up the case. If
there is so little confidence in our currency that
restoration of gold coin would cause our gold stocks to
disappear, then we must act promptly.
The danger was recently highlighted by Mr. Allan
Sproul, President of the Federal Reserve Bank of New
York, who said:

"Without our support (the Federal Reserve
System), under present conditions, almost
any sale of government bonds, undertaken
for whatever purpose, laudable or
otherwise, would be likely to find an almost
bottomless market on the first day support
was withdrawn."

Our finances will never be brought into order until
Congress is compelled to do so. Making our money
redeemable in gold will create this compulsion.
The paper money disease has been a pleasant habit thus
far and will not he dropped voluntarily any more than a
dope user will without a struggle give up narcotics. But
in each case the end of the road is not a desirable
prospect.

I can find no evidence to support a hope that our fiat
paper money venture will fare better ultimately than
such experiments in other lands. Because of our economic strength the paper money disease here may

take many years to run its course.

But we can be approaching the critical stage. When that
day arrives, our political rulers will probably find that
foreign war and ruthless regimentation is the cunning
alternative to domestic strife. That was the way out for
the paper-money economy of Hitler and others.
In these remarks I have only touched the high points of
this problem. I hope that I have given you enough
information to challenge you to make a serious study of
it.
I warn you that politicians of both parties will oppose
the restoration of gold, although they may outwardly
seemingly favor it. Als o those elements here and abroad
who are getting rich from the continued American
inflation will oppose a return to sound money. You must
be prepared to meet their opposition intelligently and
vigorously. They have had 15 years of unbroken
victory.

But, unless you are willing to surrender your children
and your country to galloping inflation, war and slavery,
then this cause demands your support. For if human
liberty is to survive in America, we must win the battle
to restore honest money.

There is no more important challenge facing us than this
issue -- the restoration of your freedom to secure gold in
exchange for the fruits of your labors.


________________________________________________________

[gfp927z]

>>> China may dump U.S. Treasuries as Sino-U.S. tensions flare: Global Times


Reuters

9-4-20


https://www.reuters.com/article/us-china-economy-treasury/china-may-dump-u-s-treasuries-as-sino-u-s-tensions-flare-global-times-idUSKBN25V179


SHANGHAI (Reuters) - China may gradually cut its holdings of U.S. Treasury bonds and notes, in light of rising tensions between Beijing and Washington, state-backed newspaper Global Times cited experts as saying.

With Sino-U.S. relations deteriorating over various issues including coronavirus, trade and technology, global financial markets are increasingly worried if China would sell the U.S. government debt it holds as a weapon to counter rising U.S. pressure.

“China will gradually decrease its holdings of U.S. debt to about $800 billion under normal circumstances,” Xi Junyang, a professor at the Shanghai University of Finance and Economics, was quoted as saying on Thursday, without giving a detailed timeframe.

“But of course, China might sell all of its U.S. bonds in an extreme case, like a military conflict.”

China, the second largest non-U.S. holder of Treasuries, held $1.074 trillion in June, down from $1.083 trillion the previous month, according to latest official data.

China has steadily decreased its holdings of the U.S. bonds this year, although some market watchers suspect China may not have necessarily sold U.S. Treasuries as it may have used other custodians to purchase Treasuries.

Dropping to $800 billion from the current level could mean shrinking its holdings by more than 25%. Analysts say large-scale Chinese selling, often referred to as the “nuclear option”, could trigger turmoil on global financial markets.

Another reason the state newspaper cited was the potential default risk in the United States as the debt of the world’s largest economy has surged sharply to about the same size of its gross domestic product, a level not seen since the end of the World War Two and well above the internationally recognized safety line of 60%.

China is heavily exposed to the U.S. dollar and dollar-denominated assets. Its official foreign exchange reserves stood at $3.154 trillion at the end of July.

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