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Yeats' gyre -
(1919)
>>> The Second Coming
by William Butler Yeats
Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.
Surely some revelation is at hand;
Surely the Second Coming is at hand.
The Second Coming! Hardly are those words out
When a vast image out of Spiritus Mundi
Troubles my sight: somewhere in sands of the desert
A shape with lion body and the head of a man,
A gaze blank and pitiless as the sun,
Is moving its slow thighs, while all about it
Reel shadows of the indignant desert birds.
The darkness drops again; but now I know
That twenty centuries of stony sleep
Were vexed to nightmare by a rocking cradle,
And what rough beast, its hour come round at last,
Slouches towards Bethlehem to be born?
<<<
>>> Globalist elites don’t trust you to make the right choice
BY JAMES RICKARDS
OCTOBER 25, 2021
https://dailyreckoning.com/globalist-elites-dont-trust-you-to-make-the-right-choice/
Globalist elites don’t trust you to make the right choice
When the U.K. voted for Brexit in June 2016, the globalists were stunned. They couldn’t believe it. They then did everything they could to delay and fight Brexit.
Then when Donald Trump won the election as president in November 2016, the globalists were even more stunned. They went into complete denial and put their heads in the sand. They comforted themselves with the convenient myth that Russian interference lost them the election, not a popular rejection of their ideology.
Yet it kept getting worse for globalists. Both China and Russia have become more nationalistic and completely turned their backs on globalism. The pandemic only strengthened the trend away from globalism, and the fractured supply chains we’re now seeing expose globalism’s fragile underbelly.
These chains may be efficient and economical, but when they break down, it has a rippling effect on the global economy. It’s like pulling on one strand on a carpet. The entire thing is affected.
Globalists worship at the altar of free trade. But free trade is a myth. It doesn’t exist outside classrooms. France subsidizes agriculture. The U.S. subsidizes electric vehicles. China subsidizes a long list of national champions with government contracts, cheap loans and currency manipulation. Every major economy subsidizes one or more sectors using fiscal and monetary tools and tariffs and nontariff barriers to trade.
America grew rich and powerful from 1787–1962, a period of 175 years, using tariffs, subsidies and other barriers to trade to nurture domestic industry and protect high-paying manufacturing jobs.
In fact, tariffs are as American as apple pie.
Beginning in 1962, the U.S. turned its back on a successful legacy of protecting its jobs and industry and embraced the free trade theory. This was done first through the General Agreement on Tariffs and Trade, or GATT, one of the original Bretton Woods institutions in addition to the World Bank and IMF.
Against the mercantilist system was a theory of free trade based on comparative advantage as advocated by British economist David Ricardo in the early 19th century. Ricardo’s theory said that trading nations are endowed with attributes that gave them a relative advantage in producing certain goods versus others.
These attributes could consist of natural resources, climate, population, river systems, education, ports, financial capacity or any other factor of production. Nations should produce those goods as to which they have a natural advantage and trade with other nations for goods where the advantage was not so great.
Countries should specialize in what they do best, and let others also specialize in what they do best. Then countries could simply trade the goods they make for the goods made by others. All sides would be better off because prices would be lower as a result of specialization in those goods where you have a natural advantage.
It’s a nice theory often summed up in the idea that Tom Brady should not mow his own lawn because it makes more sense to pay a landscaper while he practices football.
For example, if the U.K. had an advantage in textile production and Portugal had an advantage in wine production, then the U.K. and Portugal should trade wool for wine. But if the theory of comparative advantage were true, Japan would still be exporting tuna fish instead of cars, computers, TVs, steel and much more.
The problem with the theory of comparative advantage is that the factors of production are not permanent and they are not immobile.
If labor moves from the countryside to the city in China, then suddenly China has a comparative advantage in cheap labor. If finance capital moves from New York banks to direct foreign investment in Chinese factories, then China has the comparative advantage in capital also.
Before long, China has the advantage in labor and capital and is running huge trade surpluses with the U.S., putting Americans out of work and shutting down U.S. factories in the process.
Worse yet, countries such as China can pull comparative advantage out of thin air with government subsidies.
We’ve been living in a world where the U.S. has been a free trade sucker and everyone else breaks the rules. In a world where a few parties are free traders but most are mercantilists, the mercantilists win every time. They are like parasites sucking the free traders dry.
But to globalists, the moral arc of the universe bends in one direction, and that’s toward increasing globalization. Populism and protectionism are therefore moral evils that must be condemned.
But globalists have slowly realized that the nationalist trend is not an anomaly but a powerful force that is reversing globalist policies that have been ascendant since 1989, or even since the end of World War II, when institutions like the IMF and World Bank were established to promote globalist goals.
But right now, free trade is on the ropes, currency wars are rampant and geopolitical hotspots like Taiwan are becoming more dangerous. What happened to globalism?
The globalist-in-chief is Columbia University academic Jeffrey D. Sachs. He led the charge for “market” solutions in Russia in the 1990s, which backfired into a takeover by oligarchs and the rise of Putin. He also led the charge for “opening” China in the early 2000s, which led to the rise of Xi Jinping and the strongest form of Communism since the death of Mao Zedong.
Is Sachs willing to admit any mistakes? No. Like most globalists who are too arrogant to question their own worldviews and assumptions, Sachs instead says the problem is democracy itself.
Essentially, Sachs wants to abandon traditional voting in the U.S. and U.K. to create a system more favorable to globalists. Sure, you can let voters choose center-right candidate x or center-left candidate y, who might be 10% apart on many issues. Neither of them will really rock the boat and have no fundamental disagreement with globalism in general.
As far as globalists are concerned, voters cannot be trusted to vote on fundamental issues like Brexit. They also can’t be trusted to vote against presidential candidates like Trump. Such decisions should be beyond democratic control, globalists believe.
In fact, Time magazine ran an article gloating about how corporate and media elites essentially conspired to prevent Trump from winning the election. Media refusal to cover the Hunter Biden laptop scandal was just one example. Former intelligence officials joined in by claiming it bore all the trademarks of “Russian disinformation.” Of course, we all know the laptop was real. But they wouldn’t allow it to influence the election.
When elites don’t like the potential outcome, just change the rules.
Another issue that unites globalists is climate change. Globalists argue that climate change is too important to trust to voters in individual countries. Climate change is the perfect cover for globalism because combating it requires an internationally coordinated policy run by elites.
Their real agenda is to define a “global problem” so they can advance “global solutions” such as world governance, world taxation and world rule by elites. It doesn’t matter that the actual science behind hysterical climate alarmism is extremely weak.
Unfortunately, the media, corporations, governments and international organizations are run mostly by globalists.
And many of them are working hard to silence dissent. We’re in a Brave New World.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> China’s Killer Debt
BY JAMES RICKARDS
OCTOBER 26, 2021
https://dailyreckoning.com/chinas-killer-debt/
China’s Killer Debt
The success side of the Chinese economic equation is well-known. It is the world’s second-largest economy after the U.S. It has experienced the highest compound annual growth rate of any economy in history over the past 30 years. Literally several hundred million people have been lifted from poverty and are now able to enjoy a reasonable standard of living even if it seems spartan from the perspective of the developed world.
Living five to a room, eating one meal per day and taking a crowded bus to work through polluted skies may not seem luxurious to Westerners but it’s a huge leap compared with the near-starvation peasant life in China’s impoverished rural areas. Of course, this is a comparison of everyday Chinese in the urban vs. rural environments. China has more than its share of oligarchs and billionaires who are living with mind-boggling wealth and amenities.
Still, there’s a dark side to this economic growth. The dangers from that dark side now threaten to overwhelm the economic success. The dark side is debt. Chinese debt has compounded annually by over 19% for the past 20 years and now stands at about $50 trillion. That’s almost twice the national debt of the United States.
The debt-to-GDP ratio of China is also higher than that of the U.S., and the Chinese money supply is greater. Whatever criticism we might aim at the Federal Reserve, the Chinese central bank — the People’s Bank of China — is an even worse offender when it comes to money printing, monetary ease and currency manipulation.
In theory, there’s nothing wrong with debt provided it’s used for productive investment and the returns on those investments are more than enough to pay the interest. That’s how economies grow and that’s how creditworthiness is enhanced. The productive investor can roll over maturing debt and borrow more with the help of its bankers.
China has not invested its debt productively. Literally trillions of dollars have been invested in white elephant projects, ghost cities that stand empty and speculative residential real estate projects far in excess of actual demand.
If normal accounting principles were applied to these investments, they would be written down by half or more immediately upon completion. China’s historic growth would be far less impressive if such write-downs were actually taken. They have not been. The real estate values are phony. The debt burden is all too real.
China’s mountain of debt is now collapsing. This dynamic is crystallized in the insolvency of Evergrande, the largest property development and real estate finance firm in China and one of the largest in the world.
To comprehend the scale of the Evergrande collapse, you would need to combine the failures of Fannie Mae, Freddie Mac and Lehman Bros. in a single entity with financial tentacles extending to every corner of the Chinese financial system and around the world.
Evergrande will not implode in a single weekend as happened with Lehman Bros. There will be no “Lehman moment.” Instead, this collapse will move slowly but inexorably. The financial and economic damage will be far greater than Lehman Bros. but it will take time and there will be lots of happy talk and false reassurance along the way.
The exact amount of Evergrande debt is unknown. The company lacks transparency and financial controls. It’s likely the CEO and top officers of Evergrande don’t even know how much debt they have. But it is easily in the hundreds of billions of dollars and perhaps a trillion dollars or more. Most of that debt will go unpaid; some will pay off at 20 cents on the dollar but not much more.
The damage doesn’t stop there. Vendors will go unpaid for work on existing projects. The unfinished projects themselves will remain steel skeletons, and some of those will be dynamited into rubble because they made no sense to begin with.
Some creditors are being offered deeds to unfinished real estate in lieu of payments on their bonds. Those who take the deeds in lieu of cash will immediately turn around and try to dump the real estate for pennies on the dollar just to get some cash. This will put even more downward pressure on real estate prices and suck more real estate developers into the vortex of crashing property prices.
Hundreds of billions of dollars of Evergrande debt was issued in the form of dollar-denominated bonds to U.S. and European investors. Have you checked the contents of any emerging-markets ETFs you may happen to have bought from Wall Street?
Don’t be surprised if you own some Evergrande bonds inside those ETFs. Of course, the Chinese Communist Party doesn’t care about Western investors; so holders of those bonds can expect to receive nothing.
Did you know that Evergrande is listed on the Hong Kong Stock Exchange and that it trades over the counter in U.S. markets? The New York pink sheets ticker is EGRNY.PK. Again, U.S. investors may own this stock and not even know it if it’s buried inside some ETF. Trading in the stock is currently suspended. The likely value is zero.
The ripple effects don’t end with Evergrande’s investors and vendors. Employees will be laid off by the thousands in construction and related industries. Demand for steel, glass and copper used in construction will drop.
The biggest risk to financial stability in China comes from the market in wealth management products, WMPs. These are unsecured IOUs sold by banks (and often mistaken by customers for bank deposits, which they are not). These are funneled into firms such as Evergrande in what amounts to a trillion-dollar Ponzi scheme.
Until now, WMP investors who wanted their money back would be paid with money raised from new investors buying new WMPs. That’s how Ponzis work, and they work fine as long as more money is coming in than going out. As soon as everyone wants her money back at once, the Ponzi collapses quickly.
So far, the Communist Party of China is acting as if everything can be brought in for a soft landing. The Communists have a trillion dollars in liquid reserve assets to prevent social unrest by offering something to the WMP holders.
The history of financial panics suggests the Communists are mistaken. As I noted earlier, the U.S. has seen many financial panics and we have a playbook used in 1994, 1998, 2008 and 2020. This is the Communists’ first financial fiasco of this magnitude. They literally don’t know what they’re doing and grossly underestimate the risks.
The greatest risk of all in a financial panic is what you don’t know. It’s the unknown linkages that emerge seemingly from nowhere that overwhelm the efforts of governments to truncate a crisis. We’re not there yet in China, but the acute stage of the panic is coming fast.
For now, the best approach is to get out of Chinese stocks entirely if you have any and avoid the market entirely if you’re not already exposed. Sooner rather than later the Chinese yuan (CNY) will devalue sharply against the dollar in a desperate attempt to promote exports and export-related jobs.
But it will be too little, too late.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> Towards a Single World Currency
BY JAMES RICKARDS
NOVEMBER 4, 2021
https://dailyreckoning.com/towards-a-single-world-currency/
Towards a Single World Currency
Is the move toward central bank digital currencies real? And, if so, is it the first step toward a global reserve currency that will replace the dollar and euro as currencies of choice in reserve positions of major economies?
Well, yes and no.
Before I expand on that answer and explain the impact central bank digital currencies will have on the more familiar world of foreign exchange, it’s helpful to say a bit more about what central bank digital currencies (CBDCs) are.
CBDCs are not cryptocurrencies. The CBDCs are digital in form, are recorded on a ledger (maintained by a central bank or Finance Ministry), and the message traffic is encrypted. Still, the resemblance to cryptos ends there.
The CBDC ledgers do not use blockchain, and CBDCs definitely do not embrace the decentralized issuance model hailed by the crypto crowd. CBDCs will be highly centralized and tightly controlled by central banks.
CBDCs are not new currencies. They are the same currencies you already know (dollars, yuan, euros, yen, sterling) in a new form, using new payment channels. They are a technological advance, but they do not replace existing reserve currencies.
CBDCs are currently being introduced by major central banks around the world. Countries are at different stages of deployment. China is the furthest along. They have a working prototype of a digital yuan that will be showcased at the Beijing Winter Olympics in February 2022.
If you’re there and want to buy tickets, meals, souvenirs or pay for hotel rooms, you’ll be expected to pay with the new digital yuan using a mobile phone app or other digital payment channel.
The European Central Bank has also moved quickly on a CBDC version of the euro. They are not yet at the prototype stage, but they have made material advances and are getting close to that stage. Japan and the U.S. are at the back of the line.
The Fed has a research and development project underway with MIT to study how a digital dollar might intersect with or even replace the existing dollar payments system (which is already digitized, albeit without a centralized ledger).
The U.S. is probably several years away from its own CBDC at best.
So, yes, the move toward central bank digital currencies is real. How does this relate to what is sometimes called The Great Reset? This would be the movement toward a single global reserve currency.
This movement would be nominally led by the International Monetary Fund acting as a kind of world central bank. Still, the IMF cannot make decisions of this magnitude without U.S. approval. (The U.S. has just enough voting power in the IMF to veto any material decisions it does not like).
In turn, U.S. approval would require a global consensus among major economies including China, the UK, Germany, France, Italy, and other members of the G7 and G20.
This desire to create true world money would involve the creation of a digital special drawing right (SDR). SDRs are issued by the IMF to member nations and may be issued to other multilateral institutions such as the United Nations.
In effect, the IMF has a printing press as powerful as the Fed and ECB printing presses and can flood the world with their world money. Displacing the dollar would involve a meeting and agreement similar to the original Bretton Woods agreement of 1944. The agreement could take many forms. Still, the process would conform to what many call The Great Reset.
This process has been underway since 1969 when the SDR was created. Several issues of SDRs were distributed between 1970 and 1981, then none were issued until 2009 in the aftermath of the Global Financial Crisis of 2008. A new issue was distributed earlier this year.
Global elites see the COVID pandemic and climate alarm as a two-headed Trojan Horse that can be used to foist SDRs on a global population who have suddenly become accustomed to following government orders.
The recent COP26 meeting of elite climate alarmists and heads of state in Glasgow highlighted the use of central bankers and financial regulation to push the alarmist agenda by cutting off lending and underwriting services to energy companies that don’t promote renewables or that pursue oil and gas exploration (go here to learn all about a coming global climate tax, and also, how you can actually profit from it).
So, yes, the trend toward a single world currency is real also.
Still, things don’t happen that quickly in elite circles. Even Bretton Woods took over two years to design and another five years to implement even under the duress of World War II. The transition from sterling to the U.S. dollar as the leading reserve currency took thirty years from 1914 to 1944. As they say, it’s complicated.
At one level, there is no immediate change. A CBDC dollar is still a dollar. A CBDC euro is still a euro. Absent a new Bretton Woods type fixed-exchange rate regime, these currencies would still fluctuate against each other. Our analyses would continue as before. Still, there are three huge changes that could emerge from The Great Reset.
The first is that a new global currency regime would be an opportunity to devalue all major currencies in order to promote inflation and steal wealth from savers. All currencies cannot devalue against all other currencies at the same time; that’s a mathematical impossibility.
Yet, all currencies could devalue simultaneously against gold. This could easily drive gold prices to $5,000 per ounce or much higher to achieve the desired inflation. EUR/USD might remain around $1.16, but both EUR and USD would be worth far less when measured by weight of gold. This would be an accelerated version of what happened in stages between 1925 and 1933, between 1971 and 1980, and again between 1999 and 2011.
The second change would be that CBDCs make it much easier to impose negative interest rates, confiscations, and account freezes on some or all account holders. This can be used for simple policy purposes or as a tool of the total surveillance state. Surveillance of incorrect behavior as defined by the Communist Party is the real driver of the digital yuan more than any aspirations to a yuan reserve currency role.
The third change would be the widespread issuance of SDRs and their adoption as the sole global reserve currency. A new Bretton Woods could force countries to hold 100% of their reserves in SDRs, and major corporations could be forced to maintain their books in SDRs. This could lead to a fixed-exchange rate regime with a peg based not on gold but on SDRs.
All of these shifts are now underway. Whether they play out over years or mere months remains to be seen. Exact outcomes are uncertain. What is certain is that I will watch developments closely and keep you ahead of the power curve as the elites continue their push toward digital money, world money, and the end of cash.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> Crypto CEO: A viable central bank digital currency would have to be 'the law'
Yahoo Finance
by Jennifer Schonberger
October 16, 2021
https://finance.yahoo.com/news/tech-ceo-a-central-bank-digital-currency-would-have-to-be-the-law-175027438.html
The year after Satoshi Nakamoto put out a white paper on a concept for a new peer-to-peer currency called bitcoin (BTC-USD), Jonathan Dharmapalan realized that digital currencies are the future.
The entrepreneur, a trained electrical engineer, spotted companies involved in electronic money flourishing all over, as people learned to transact electronically using apps and mobile phones. It occurred to him that governments around the world would eventually want to get in the game and create their own digital currencies.
Dharmapalan is chief executive of eCurrency – a firm at the forefront of creating technology to execute a central bank digital currency (CBDC), part of cryptocurrency's next frontier. His company has been advising the U.S. Treasury and the Federal Reserve for nearly a decade on how to create a CBDC.
With investors ranging from Ray Dalio to Vikrim Pandit, Dharmapalan advises central banks around the world like the Banks of England and Jamaica, the latter having just launched its own central bank digital currency.
As the Federal Reserve weighs whether to launch a CBDC with a forthcoming paper on the pros and cons of a digital dollar, Dharmapalan says designing a central bank digital currency depends on the existing legal framework.
“Our perspective is that currency is the law,” Dharmapalan said in an interview with Yahoo Finance.
“Every nation or monetary union has a foundational law that defines what their currency is. So if you’re thinking about a digital form of currency then the law must accommodate its existence,” the executive added.
Under his interpretation, if the U.S. were to pursue a digital dollar, then Congress would have to authorize the Treasury and the Federal Reserve to issue and distribute it first.
'Cook up a different set of rules'
According to Dharmapalan, Treasury and the Fed have said a central bank digital currency would probably work in the same way paper money is created and issued, the thinking goes — though there’s no consensus within the U.S. government yet about how to go about doing it.
Dharmapalan thinks the odds are the current law will be extended to apply to a digital form of the dollar and that the existing infrastructure should be used.
“Could we cook up a different set of rules for digital currency? Maybe,” he suggested. “But the odds are we’ll rely on how currency has been defined in the past,” he added.
Under the current currency system, the Treasury prints the money and hands it over to the Fed, which circulates the currency in the economy, leaning on banks – from Bank of America to local banks – to get cash into the hands of people.
Likewise, with a digital dollar using the current system, Treasury would need to securely mint it, then hand it off to the Fed to circulate, most likely through commercial banks and other financial players. It would then float to people through digital ATMs or cards or smartphones.
If we want it to be ubiquitous, digital currency must be available through ATMs, cards, smartphones and anything new we can think of. Creating access to anyone is key.
A CBDC likely wouldn’t use blockchain or even a ledger: Dharmapalan says it would function like a physical dollar, which has no ledger. The Treasury would create a secured digital instrument that’s so cryptographically secured that it could float around digitally, where the value is contained in itself.
Dharmapalan says the best way to think of it is as a photograph that can’t be counterfeited or changed. “If I’m holding a photo and I send it to you, once it’s sent then I don’t hold the photo anymore,” he says.
Maintaining Americans’ privacy with a CBDC is key. The currency is secured through something called a cryptogram, that’s secured with multiple layers of cryptography — i.e. lots of public and private keys that enable high levels of security.
While not impossible to duplicate, it would be very difficult, similar to paper bills. Physical currency has signatures from the Treasury Secretary and the Comptroller of the Currency, various colored threads, a reflective portion and a digital watermark make it difficult to counterfeit.
“If we want it to be ubiquitous, digital currency must be available through ATMs, cards, smartphones and anything new we can think of. Creating access to anyone is key,” he explained.
One way, Dharmapalan suggested, is creating accessibility via inexpensive smart cards that aren’t any more sophisticated than a transit card — so that everyone from school children to someone without a bank account can use them.
The card could have a magnetic strip or smart chip and the person could just stick it into a machine to put money on it. Another option is putting Bluetooth on the cards so that people can bump cards, and send money directly to each other between cards.
It also has to perform the same thing in all hands and have the ubiquity and the fungibility to settle debts between two parties instantaneously, by executing that value and moving it in the blink of an eye.
“A $5 bill in my hand needs to buy the same thing that your $5 would buy,” he says. He added, “If you give me bananas and they’re $3.85, I should be able to give you $3.85 and then be able to walk away – it must exchange on a person to person basis. Right now, the only thing that works that way is paper bills and coins.”
Unlike private cryptocurrencies like bitcoin, a U.S. central bank digital currency would be issued by and backed by the Fed, just as U.S. paper dollar bills and coins.
Dharmapalan explained that Jamaica is a good model for the U.S. to follow. The government is in the process of creating new laws to authorize its central bank to issue a digital currency.
The Bank of Jamaica minted its first batch of digital currency in August, which it is testing. Next, it will issue that batch to commercial banks, which will test with consumers before establishing new criteria by December. Officials are looking to the first quarter of 2022 for the national roll out.
Initially, Jamaica’s virtual currency will be offered through an app on the phone, and citizens will access through a digital wallet.
So how long it could take the U.S. to adopt a CBDC?
Dharmapalan stated the technology is ready now, it’s just a matter of Congress and government agencies coalescing around a concept. Yet Fed officials are divided on whether to adopt a central bank digital currency.
Advocates, including Fed Governor Lael Brainard, say a CBDC will help get relief payments to Americans and states hit with natural disasters faster, while also helping the unbanked. The Fed plans to launch the review by releasing a paper analyzing the issue and seeking public comment, but it is unlikely to include a firm policy recommendation.
<<<
“The Revenge of the Fossil Fuels”
BY JAMES RICKARDS
OCTOBER 12, 2021
https://dailyreckoning.com/the-revenge-of-the-fossil-fuels/
“The Revenge of the Fossil Fuels”
What have the climate alarmists been screaming about for the past 40 years or so? Their agenda is well-known. They want to close nuclear plants; shut down coal electric generators; eliminate natural gas and oil-fired electrical plants; and substitute wind, solar and hydropower in their place.
According to the fanatics, this substitution of renewable energy sources for so-called “fossil fuels” and uranium-powered plants would reduce CO2 emissions and save the planet from the existential threat of global warming.
Everything about this climate alarmist agenda is a fraud.
The evidence that the planet is warming is slight and the effect is likely temporary with global cooling in the forecast. The contribution of CO2 emissions to any global warming is not clear and is at best unsettled science and at worst another fraud.
Most importantly, global energy demand is growing much faster than renewables can come online, meaning that oil, natural gas, clean coal and nuclear energy will be needed whether renewables grow or not.
Wind and Solar Won’t Cut It
Wind turbines and solar panels cannot be the backbone of a modern energy grid because they are intermittent sources. Wind turbines require continual wind and solar panels require continual sunlight. Turbines don’t produce when the wind stops. Solar panels don’t produce at night or on cloudy days.
I have firsthand experience with this because I once built the largest off-grid noncommercial solar panel array in New England. You learn quickly to do laundry, run the dishwasher and use other high-energy electrical appliances on sunny days because you’ll need to conserve your batteries through the snow and rain.
A grid can’t run on intermittent sources; it needs continuous sources of energy that only come from oil, gas, coal and nuclear.
Despite these scientific and practical hurdles, the climate alarmists have been very effective politically. Many countries such as Germany and Japan have shut down nuclear and coal plants in an effort to substitute renewables in major industrial economies.
Now the day of reckoning has arrived.
Billions of People Freezing in the Dark
China is quickly running out of electrical-generating capacity. China gets more than 50% of its electricity from coal, but it is running out of coal. China has had to lift its ban on Australian coal imports (arising from a dispute about tracing the source of the COVID outbreak) and it’s now taking as much Australian coal as it can get.
A similar situation exists in Germany where the failure of renewables to provide a reliable source of supply combined with a shutdown of nuclear plants have led to dependence on Russian natural gas.
Putin is slowly closing the taps to increase Europe’s desperation. The price of natural gas in Europe is skyrocketing. In Lebanon, the two power plants that supply 40% of that country’s electricity have shut down due to oil shortages. There is no electricity and probably won’t be for days.
Many will die this winter as power outages spread and as heating systems fail. The global economy will also suffer due to decreased output as China and Europe both close factories in order to conserve electricity for homes.
This is what the climate alarm fanatics have produced — billions of people freezing in the dark and a slowing global economy — all in pursuit of the false dogma of global warming.
Thanks, Biden
It turns out the world still needs fossil fuels, and lots of them. “Green” energy just isn’t ready for prime time, and probably won’t be for decades.
The International Energy Agency has said that if the world hopes to meet a net-zero carbon emissions target in 2050, it should stop investing in oil, gas and coal production now.
The Biden administration, along with European leaders primarily, has sought to cripple the fossil fuel industries while incentivizing wind and solar. The result is serious underinvestment in oil and natural gas exploration.
As journalist Noah Rothman writes, you can point a finger at policymakers:
The intended consequence of these [Biden] policies was to create artificial energy scarcity and incentivize alternative fuel producers to enter the marketplace. “If you restrict the supply (of oil and gas), you alter the market and you create a better environment for more sustainable fuels,” New York University professor Max Sarinsky told The Associated Press. This was all part of the plan, to the extent there was a plan.
So yes, there’s a lot of blame to go around if… a dark, cold and scary winter materializes. No small share of that blame should be apportioned out to the central planners who sought to kneecap the existing energy market in favor of an insufficient alternative.
As our senior analyst, Dan Amoss, affirms:
If predictions of oil’s demise are off the mark by a decade or three, there will be very painful, real-world consequences in the form of underinvestment in the oil patch. Underinvestment in oil projects as oil companies chase wind and solar could lead to trade-crippling, market-crashing gasoline and diesel prices.
“This Is the Revenge of the Fossil Fuels”
The ironic part, as others have noted, is that the suppression of oil, natural gas and nuclear energy has led to a dramatic increase in the dirtiest fossil fuel of all — coal. As Bloomberg reports:
For nearly a decade, it appeared in terminal decline as investors shunned miners and European countries shut down coal-fired power plants.
And yet the world’s dirtiest fossil fuel won’t go away. Global consumption peaked in 2014, but rather than fall rapidly, as many expected, it stabilized in a gentle plateau. And now, just as the fight against climate change intensifies, it’s growing again, with the resurgence largely driven by China.
“This is the revenge of the fossil fuels,” said Thierry Bros, an energy expert and professor in Paris.
So much for the Great Reset and “building back better.”
This is just another example of how bureaucratic central planning often backfires and produces the very outcome it’s supposed to prevent. You can look to the endless five-year plans of the Soviet Union for examples.
And it’s even worse at the global level because there’s no escape valve. Countries must follow the same policies, no matter how destructive they turn out to be.
As With Vaccine Dissent, Google Bans Climate Dissent
It’s all part of the climate change hysteria that global elites have embraced. And of course, Big Tech is all too eager to suppress dissent.
The Big Tech companies have suppressed information about the widespread side effects and several thousand deaths of the experimental gene-therapy COVID vaccines. These companies have become censors.
Now they’re extending the practice to climate change…
Google is banning ads featuring content that contradict what it considers “inaccurate” information on climate change and will no longer allow ad revenue to come from them.
“Inaccurate” information includes content such as “denying that long-term trends show the global climate is warming, and claims denying that greenhouse gas emissions or human activity contribute to climate change.”
But as I explained earlier, the science is far from settled. The best data indicates that carbon dioxide has a limited warming effect, and that the planet may be approaching a cooling trend.
And just as Google has relied on the WHO and CDC for information about COVID and the vaccines (which have often proven disastrously wrong), Google will rely on climate information from “authoritative sources.”
In other words, from sources like the United Nations’ Intergovernmental Panel on Climate Change (IPCC), which has been a major source of climate alarmism.
Unfortunately, these dangerous climate policies are having real-world consequences. I can only imagine how many people they will kill.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> A Trillion-dollar Game of Chicken
BY JAMES RICKARDS
OCTOBER 11, 2021
https://dailyreckoning.com/a-trillion-dollar-game-of-chicken/
A Trillion-dollar Game of Chicken
Most of my readers have followed the ongoing debates in Washington, D.C., about the $1 trillion infrastructure bill and the $3.5 trillion welfare bill now pending in Congress. Here’s a quick recap of the state of play:
The infrastructure bill is only about one-third related to real infrastructure such as tunnels, bridges, roads and airports. The rest involves welfare for union workers and pork-barrel projects that do not benefit the public at large.
Still, the real infrastructure provisions are popular, and this bill has received bipartisan support. Republicans and Democrats both want to pass the bill so they can run on this accomplishment in the 2022 midterm elections.
As of now, the bill has passed the Senate and has been sent to the House of Representatives. It could be passed easily by the House and become law except that Speaker Nancy Pelosi has decided to hold the bill hostage while she pushes the $3.5 trillion welfare bill.
Her goal is to pass both bills at once and send them as a package to President Biden. But the Senate will never pass the welfare bill in its current form.
Stalemate
The Democrats need all 50 Democratic senators to agree on the bill. That would give them a 50-50 tie in the Senate (since none of the 50 Republicans will vote for it), but Vice President Kamala Harris could break the tie, which would give Democrats a win.
Two Democratic senators, Joe Manchin and Kyrsten Sinema, have said they will not vote for the $3.5 trillion bill. They might vote for something like a $2 trillion bill, but even that is not clear.
Meanwhile, progressive radicals in the House say they will not vote for the infrastructure bill unless the Senate clears the $3.5 trillion welfare bill. And they threaten to vote against the welfare bill if it is presented in the $2 trillion version that’s favored by the Senate.
There you have it. The entire process is in stalemate, and nothing is getting done. The stalemate may be cleared in the weeks ahead with some compromise, but right now it looks like a trillion-dollar game of chicken where no one is ready to blink.
With all of this political noise, not many have taken the time to look inside the $3.5 trillion welfare package to see what it would actually provide.
The Most Radical Transformation Since the Great Society
This bill will be the most radical transformation of U.S. society since the Great Society days of the 1960s under Lyndon Johnson or FDR’s New Deal of the 1930s before that.
The Pelosi welfare bill calls for the following: Low-income first-time home buyers would get a free $20,000 down payment with no strings attached. Homeowners would get a $14,000 rebate for installing new home heating and air conditioning systems provided they use union labor.
Another $1.48 billion is awarded to union community organizers. Union dues would become tax deductible, a disguised government subsidy.
Companies that resist union efforts would see penalties increased 1,000%. The list of welfare and union subsidies goes on.
What does an everyday, hardworking taxpayer get out of this bill? Absolutely nothing.
This bill would only put an enormous burden of more regulation, higher taxes and higher costs on the economy. The Biden administration will slow U.S. and global growth with a combination of higher taxes, more regulation and wasteful spending on programs such as the Green New Deal.
“Stimulus”
Biden administration deficit spending, which will approach $6 trillion of new authorizations in fiscal 2021, is continually claimed as stimulus.
In fact, there is no stimulus from such spending because the U.S. debt-to-GDP ratio is now approaching 130%. There is good evidence that debt-to-GDP ratios in excess of 90% produce less growth than the amount of new debt itself.
In other words, there is no stimulus and only an increasing debt-to-GDP ratio that makes the situation worse.
Let’s hope the impasse in Washington continues. But don’t count on it. Investors should expect slower growth ahead if this bill becomes law.
But the U.S. was facing slower growth in the years ahead with or without the Biden administration’s policies because of high debt and a central bank that does not understand monetary economics.
The New Depression Continues
Now that Biden’s policies are fully revealed and becoming law, it is clear that growth will be even worse than would otherwise be expected.
As I’ve explained before, this is characteristic of a new Great Depression.
A recession is technically defined as two or more consecutive quarters of declines in GDP. A depression is not technically defined but is understood as a prolonged period of growth that is either below the long-term trend or below potential growth.
We are in a new depression now. Growth declined in 2008. The 2009–2019 recovery averaged annual growth of about 2.2%, well below the long-term trend of 3.5–4.5%. GDP declined again by 3.4% in 2020, the steepest one-year decline since 1946.
The December 2019 level of output was not recovered until July 2021. Annualized growth for the first half of 2021 is 6.4%, but that is slowing quickly. The Atlanta Fed’s latest forecast for annualized Q3 growth is 1.3%.
Forget the high growth, reopening and inflation narratives. We’re back in the same rut we were in before the pandemic, and it will get worse.
This is characteristic of a new Great Depression that can last for many years. Once the inflation narrative fades and the disinflation narrative comes to the fore, we can expect a stock market correction as asset prices adjust to the return of an era of slow growth.
Looking out even further ahead, the effects of the pandemic on the economy will be intergenerational. Most financial panics or recessions are followed by recovery within a year or less.
Pandemics produce different patterns.
30 Years to Recover
One study from the Federal Reserve Bank of San Francisco in collaboration with outside academics showed that of the 15 highest-fatality pandemics since the Black Death in the mid-1300s, the average time needed to return to normal levels of interest rates, growth and employment is more than 30 years.
In the shorter term, things are about to get worse because of the Fed. The economy’s slowing down and supply disruptions are producing shortages, some of which are serious and will probably get worse.
Friday’s disappointing employment report (194,000 new jobs, far short of the 500,000 predicted) will not impact the Fed’s plan to taper in November. The Fed never reacts to one report; they like to see three or more in a row. They never do anything quickly, except in a crisis.
So the taper will start in November. It’s a mistake but that’s the Fed for you. They make one mistake after another.
Get ready for a new recession in 2022.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> A Blessing or a Curse?
BY JAMES RICKARDS
OCTOBER 5, 2021
https://dailyreckoning.com/a-blessing-or-a-curse/
A Blessing or a Curse?
Friends sometimes offer the old saying “May you live in interesting times.” After taking a beat, they quickly add, “That’s not a blessing, it’s a curse.”
Of course, it’s not intended as either; it’s an ironic take on the news of the day. However intended, it’s certainly true. We are living in most interesting times.
And that’s a challenge for investors. On the one hand, we can recite good news such as positive economic growth, low unemployment, low interest rates, strong gains in home prices, a strong dollar and declining new cases in the pandemic.
On the other hand, we can offer a litany of bad news, including the U.S. humiliation in Afghanistan, an out-of-control U.S. southern border, declining labor force participation, a market meltdown and slowing growth in China and increased tensions with Iran, North Korea and Russia.
Stocks have reached new highs in many markets, especially the United States, it’s true. However, these high levels are based on exaggerated expectations of future growth. In fact, the economy of the U.S. is slowing rapidly, and the slowdown is even more clear in China.
We could easily expand both the good-news and bad-news lists. That’s the point.
Is the Sky Falling or Not?
Most analysts pick sides and beat the drum shouting either that it’s all good or the sky is falling. Investors can’t be blamed for being confused at best or deeply frustrated at worst. “Which is it?” they ask.
Obviously if the good-news case were the prevailing trend, investing would be easy. You’d buy stocks, real estate and corporate bonds, use leverage and sit back and enjoy the ride.
Likewise, if the bad-news case were the prevailing trend, investing would also be easy. You’d buy Treasury notes and gold, lighten up on stocks, reduce leverage and increase your allocation to cash. Then you would wait out the storm and come back into the market to pick up bargains when the smoke clears.
Of course, investing is never that easy. You have to take the data as it comes and put it into a broader context. It’s not good enough just to pick sides in the growth-versus-slowdown debate and shout your opinions into the nearest microphone. That approach is for amateurs and TV talking heads.
The more rigorous approach is to ask why conflicting data appears, ask what the data is really saying and most importantly put all the data into a single dynamic model to determine which trend will prevail in the intermediate-to-long-term time frame that investors really care about.
Let’s consider some of the bad news…
Humiliated
The humiliation of the United States in August 2021 was nearly complete. We surrendered in Afghanistan, stranded U.S. citizens behind enemy lines, handed over $90 billion worth of high-tech weapons to terrorists and most tragically lost 13 Marines, soldiers and sailors, dead to a terrorist attack that we should have seen coming.
The incompetent blunders of U.S. leadership were even worse than that sketch. We closed a secure air base (Bagram) while relying on an insecure airport too close to Kabul to control. We extricated the military first and left civilians behind when any novice knows you get the civilians out first and the military last.
Following the Afghanistan fiasco, it was reported that four-star Gen. Mark Milley, chairman of the Joint Chiefs of Staff, essentially committed treason just prior to the 2020 election and again after the Jan. 6, 2021, riot in the Capitol. That’s a strong term, I realize.
But he did this by undermining the chain of command and warning the Chinese Communist leadership that the U.S. would not attack. He also said he would give the Communists advance warning if we did. That’s not his job.
Can things get any worse? Unfortunately, yes.
Nature Abhors a Vacuum
Enemies of the U.S. are on the march…
China is threatening to invade Taiwan and is sending fighter jets through Taiwanese airspace (nearly 150 planes over the past four days, according to reports).
Russia has completed the Nord Stream 2 pipeline to Germany and now has Western Europe totally at its mercy through the control of natural gas supplies. North Korea has tested new long-range cruise missiles for the first time, which can easily be fitted with nuclear warheads, which North Korea is also working on.
Unlike long-range ballistic missiles, cruise missiles are highly maneuverable and can go through mountain passes and densely populated cities to reach their targets. These missiles are also potent against vessels at sea, which makes U.S. sea power less effective at deterring further North Korean actions.
Aristotle said nature abhors a vacuum. As applied to politics, this means that when a power is weak or absent, other powers will rush in to fill the void. Right now, there is no functioning president in the Oval Office, and the U.S. is perceived as weak.
Russia, China, North Korea, Iran and others are rushing in to fill the void.
Aristotle was right, at least in the political realm. It will take the U.S. years, possibly decades, to recover from the debacle of August 2021 and the collapse of American prestige. All of these geopolitical events combine to undermine confidence in U.S. power.
When that happens, a loss of confidence in the U.S. dollar is not far behind. But we’re not there quite yet…
The Dollar Paradox
It may seem counterintuitive given geopolitical developments, soaring deficits and out-of-control spending, but the dollar has been strengthening. Why?
The answer is that the U.S. dollar is more than just a national currency. It’s the global reserve currency. It’s used worldwide for trade, investment and payments, and it is created outside the U.S. in the form of eurodollars by U.S. and foreign banks operating in London, Frankfurt and Tokyo, among other money centers.
In short, the dollar has a life of its own independent of the Federal Reserve, the White House and the U.S. Congress. It’s the lifeblood of the international monetary system regardless of whether U.S. policymakers are reckless in fiscal and monetary policy or not.
That’s why former French Finance Minister Valéry Giscard d’Estaing called dollar hegemony the “exorbitant privilege” (a term falsely attributed to Charles de Gaulle).
Banks need dollars to buy Treasury bills to pledge as collateral and keep the system afloat whether U.S. domestic policies are sound or not.
How will the paradox of profligate fiscal and monetary policy by the U.S. and increased demand for U.S. dollars by international banks be resolved?
In the short run, the paradox will not be resolved.
Enjoy It While It Lasts
I expect continued record deficits from the U.S. Congress and continued demand for dollars by highly leveraged international banks.
Still, that condition is nonsustainable. Possible remedies include a new dose of fiscal responsibility in Congress (unlikely before 2023 if ever), direct Treasury intervention in foreign exchange markets to weaken the dollar (unlikely until it’s too late) or a global financial crisis that leads to major reforms in the international monetary system, possibly including a new Bretton Woods-style agreement (quite possible).
That kind of collapse followed by reform is the most likely outcome. It’ll happen because policymakers will have no other choice. No central banker would ever willingly choose to go back on a gold standard. They would only do it as a last resort to restore confidence in the system.
Over the past century, monetary systems have changed about every 30–40 years on average. The existing monetary system is 50 years old, so the world is long overdue for a new monetary system.
We’re probably in for some very interesting times. Are you prepared?
Regards,
Jim Rickards
for The Daily Reckoning
<<<
Rickards - >>> Contagion!
BY JAMES RICKARDS
OCTOBER 4, 2021
https://dailyreckoning.com/contagion-2/
Contagion!
There has been a litany of bad news recently, including the U.S. August humiliation in Afghanistan, China’s aggressive actions against Taiwan and increased tensions with Iran, North Korea and Russia.
It will take the U.S. years, possibly decades, to recover from the debacle of August 2021 and the collapse of American prestige. All of these geopolitical events combine to undermine confidence in U.S. power.
When that happens, a loss of confidence in the U.S. dollar is not far behind.
And, perhaps most importantly of all recent bad news, is a market meltdown and slowing growth in China.
Greatest Ponzi Ever
I’ve long advised my readers that the Chinese wealth management product (WMP) system is the greatest Ponzi in the history of the world. Retail investors are led to believe that WMPs are like bank deposits and are backed by the bank that sells them. They’re not.
They’re actually unsecured units in blind pools that can be invested in anything the pool manager wants.
Most WMP funds have been invested in the real estate sector. This has led to asset bubbles in real estate (at best) and wasted developments that cannot cover their costs (at worst). When investors wanted their money back, the sponsor would simply sell more WMPs and use the money to pay back the redeeming investors.
That’s what gave the product its Ponzi characteristic.
The total amount invested in WMPs is now in the trillions of dollars used to finance thousands of projects sponsored by hundreds of major developers. Chinese investors are all-in with WMPs.
Now the entire edifice is collapsing as I predicted it would.
The largest property developer in China, Evergrande, is quickly headed for bankruptcy. That’s a multibillion-dollar fiasco on its own. Evergrande losses will arise in WMPs, corporate debt, unpaid contractor bills, equity markets and unfinished housing projects.
China’s entire property and financial system is on the verge of a world-historic crack-up. And it won’t remain limited to China.
It comes back to contagion.
Financial Contagions Are Like Biological Contagions
Unfortunately, since early last year, the world has learned a painful lesson in biological contagions. A similar dynamic applies in financial panics.
It can begin with one bank or broker going bankrupt as the result of a market collapse (a “financial patient zero”).
But the financial distress quickly spreads to banks that did business with the failed entity and then to stockholders and depositors of those other banks and so on until the entire world is in the grip of a financial panic as happened in 2008.
Disease contagion and financial contagion both work the same way. The nonlinear mathematics and system dynamics are identical in the two cases even though the “virus” is financial distress rather than a biological virus.
And unfortunately, each crisis is bigger than the one before and requires more intervention by the central banks.
The reason has to do with the system scale. In complex dynamic systems such as capital markets, risk is an exponential function of system scale. Increasing market scale correlates with exponentially larger market collapses.
Today, systemic risk is more dangerous than ever because the entire system is larger than before. This means that the larger size of the system implies a future global liquidity crisis and market panic far larger than the Panic of 2008.
Too-big-to-fail banks are bigger than ever, have a larger percentage of the total assets of the banking system and have much larger derivatives books.
Contagion and The Old Man and the Sea
To understand the risk of contagion, you can think of the marlin in Hemingway’s The Old Man and the Sea. The marlin started out as a prize catch lashed to the side of the fisherman Santiago’s boat.
But once there was blood in the water, every shark within miles descended on the marlin and devoured it. By the time Santiago got to shore, there was nothing left of the marlin but the bill, the tail and some bones.
An even greater danger for markets is when these two kinds of contagion converge. This happens when market losses spill over into broader markets, and then those losses give rise to systematic trading against a particular instrument or hedge fund.
When the targeted instrument or fund is driven under, credit losses spread to a wider group of fund counterparts that then fall under suspicion themselves. Soon a marketwide liquidity panic emerges in which “everybody wants his money back.”
This is exactly what happened during the Russia/Long Term Capital Management (LTCM) crisis in 1998.
To the Brink of Collapse
It was an international monetary crisis that started in Thailand in June 1997, spread to Indonesia and Korea and then finally to Russia by August 1998. It was exactly like dominoes falling.
LTCM wasn’t a country, although it was a hedge fund as big as a country in terms of its financial footings.
I was right in the middle of that crash. I was the general counsel of that firm. I negotiated that bailout. The importance of that role is that I had a front-row seat.
I was in the conference room, in the deal room, at a big New York law firm. There were hundreds of lawyers. There were 14 banks in the LTCM bailout fund.
There were 19 other banks in a $1 billion unsecured credit facility. Included were Treasury officials, Federal Reserve officials, other government officials, Long Term Capital and our partners.
I was on point for one side of the deal and had to coordinate all that.
Wall Street Bailed out Itself
It was a $4 billion all-cash deal, which we put together in 72 hours with no due diligence. Anyone who’s raised money for his or her company or done deals can think about that and imagine how difficult it would be to get a group of banks to write you a check for $4 billion in three days.
Systematic pressure on LTCM persisted until the fund was almost broke. As Wall Street attacked the fund, they missed the fact that they were also the creditors of the fund. By breaking LTCM, they were breaking themselves. That’s when the Fed intervened and forced Wall Street to bail out the fund.
Those involved can say they bailed out Long Term Capital. But if Long Term Capital had failed, and it was on the way to failure, $1.3 trillion of derivatives would’ve been flipped back to Wall Street.
In reality, Wall Street bailed out itself.
The panic of 2008 was an even more extreme version of 1998. We were days, if not hours, from the sequential collapse of every major bank in the world. The 2008 panic had its roots in subprime mortgages but quickly spread to debt obligations of all kinds, especially money market funds and European bank commercial paper.
Think of the dominoes again. What had happened there? You had a banking crisis. Except in 2008, Wall Street did not bail out a hedge fund; instead, the central banks bailed out Wall Street.
Systemic Risk Is Greater Than Ever
The point, again, is that today systemic risk is more dangerous than ever, and each crisis is bigger than the one before.
Remember, too-big-to-fail banks are bigger than ever, have a larger percentage of the total assets of the banking system and have much larger derivatives books.
The ability of central banks to deal with a new crisis is highly constrained by low interest rates and bloated balance sheets, which have exploded even higher in response to the pandemic.
The Fed’s balance sheet is currently about $8.5 trillion. Last March it was $4.2 trillion. In September 2008, it was under $1 trillion, so that just shows you how bloated the Fed’s balance sheet has become since the Great Financial Crisis.
The threat of contagion is a scary reminder of the hidden linkages in modern capital markets.
The conditions are in place.
But you can’t wait for the shock to occur because by then it will be too late. You won’t be able to get your money out of the market in time because it’ll be a mad rush to the exits.
The solution for investors is to have some assets outside the traditional markets and outside the banking system.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> The Great Crypto Crackdown
BY JAMES RICKARDS
SEPTEMBER 28, 2021
The Great Crypto Crackdown
https://dailyreckoning.com/the-great-crypto-crackdown/
It was another bad day for the stock market today. The major indexes were down big on fears of rising Treasury yields (I don’t believe they’ll continue to rise, but that’s a story for a different day).
Are you thinking of parking your money in cryptocurrencies like Bitcoin as an alternative to stocks?
I’m not here to tell anyone what to do with their money, but you might want to think twice…
China just made cryptocurrencies illegal in the world’s second-largest economy. No transactions in cryptos are to be allowed, nor is cryptocurrency “mining.”
The all-out ban is a departure from China’s previous attempts to simply regulate cryptocurrencies as a means to control them.
The People’s Bank of China (PBOC) said the ban is necessary to “maintain national security and social stability.”
China’s crackdown on cryptos is best understood in the broader context of the rise of central bank digital currencies (CBDCs).
Total Surveillance
China is very far along in its roll-out of a digital yuan: the Chinese CBDC. China will use the 2022 Winter Olympics in Beijing as a major showcase for this. They will try to cause all transactions for vendors, hotels, tickets, souvenirs, etc., to be conducted in the digital yuan.
The European Central Bank (ECB) is also working on a prototype CBDC, and the Fed is doing research and development work on its own CBDCs, in conjunction with MIT.
So CBDCs are coming fast.
The benefits of CBDCs are obvious, including faster transaction times and lower transaction costs. No more 2.5% merchant acquirer fees for Visa!
But the dark side of CBDCs includes the following: easy to monitor citizens’ whereabouts and buying habits, easy to impose negative interest rates, easy to seize and freeze accounts, etc.
This is why China is pushing so hard on its own CBDC. They want total surveillance of their people. They can then determine if they are buying prohibited books or supporting prohibited causes or traveling to sensitive areas such as Xinjiang.
In a U.S. version of this dystopia, your account might be frozen if you donate to the wrong political causes, groups or “extremist” political candidates (basically, anyone who disagrees with the preferred narrative).
If You Can’t Stop It, Control It
People will seek freedom from this digital-monetary dystopia by going to alternatives. What are they? The answer is cash, gold and cryptos.
Cash is already fighting for its life, thanks to people like Harvard Professor Ken Rogoff and his book The Curse of Cash. Cryptos are next to the guillotine. That’s the way to understand what’s happening in China.
If you want to push CBDCs (and the surveillance that goes with them), you have to eliminate cryptocurrencies first so people have nowhere to hide. Governments may have been planning that all along…
Here’s the thing: Governments don’t want to kill the blockchain; they want to control it.
Governments enjoy a monopoly on money creation, and they’re not about to surrender that monopoly to cryptocurrencies like Bitcoin.
But governments know they cannot stop the technology platforms on which the cryptocurrencies are based. Blockchain technology has come too far to turn back.
They have sought to do so using powers of regulation, taxation, investigation and ultimately more coercive powers, including arrest and imprisonment of individuals who refuse to obey government mandates with regard to blockchain. That’s what we’re seeing in China today.
Governments, regulators, tax authorities and the global elite are moving in for the crypto-kill. The future of Bitcoin may be a dystopia in which Big Brother controls the blockchain and decides when and how you can buy or sell anything and everything. That’s the logic of CBDCs.
Furthermore, cryptocurrency technology could be the very mechanism used by global elites to replace the dollar-based financial system.
Government Sets the Trap
In 1956, Mao Zedong, the leader of the Communist Party of China and China’s dictator, was confronted with demoralized intellectuals and artists who were alienated by Communist rule. As a policy response, he declared a new policy of intellectual freedom.
Mao declared, “The policy of letting a hundred flowers bloom and a hundred schools of thought contend is designed to promote the flourishing of the arts and the progress of science.”
This declaration is referred to as the “Hundred Flowers Campaign” (often misquoted as the “Thousand Flowers Campaign”).
The response to Mao’s invitation was an enthusiastic outpouring of creative thought and artistic expression.
What came next was no surprise to those familiar with the operation of state power. Once the intellectuals and artists emerged, it was easy for Mao’s secret police to round them up, kill and torture some and send others to “reeducation camps” where they learned ideological conformity.
The Hundred Flowers Movement was a trap for those who placed their trust in the state. It was also a taste of things to come in the form of the much more violent and comprehensive Cultural Revolution of 1966–1976 in which all traces of Chinese bourgeoisie culture and much of China’s historical legacy were eradicated.
Something similar is going on with Bitcoin and distributed ledger technology (DLT) today. Governments have been patiently watching blockchain technology develop and grow outside their control for the past several years.
Libertarian supporters of blockchain celebrate this lack of government control. Yet their celebration has proven to be premature, and their belief in the sustainability of powerful systems outside government control is naive.
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.
Basically, Big Brother is coming to the blockchain.
Canary in the Coal Mine
China is the canary in the coal mine. The U.S. will not be far behind in strict regulation of cryptocurrencies. The SEC’s Gary Gensler and Treasury Secretary Janet Yellen are already working on it.
With CBDCs as the new world money and cash and cryptos eliminated, gold is the only form of money left if you want to avoid the surveillance state.
The obvious attraction (apart from 5,000 years of history) is that it is nondigital and not issued by central banks. It cannot be hacked, frozen or seized online.
Bottom line: The news from China is the thin end of the wedge. It’s part of a much larger effort to substitute CBDCs for other forms of money.
And that is part of an even larger effort to control dissent and maintain social order. The COVID lockdowns are just one example.
It might be a good idea to buy your gold now… while you still can.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> The Next “Lehman Moment”
BY JAMES RICKARDS
SEPTEMBER 27, 2021
https://dailyreckoning.com/the-next-lehman-moment/
The Next “Lehman Moment”
The happy talk out of Wall Street would have you believe that the Evergrande financial collapse in China is under control and that responsible parties have taken steps to avoid a “Lehman moment” in Chinese capital markets.
Almost everything about that narrative is factually wrong. It’s Wall Street happy talk at its finest, assuring investors that things are under control while the smart money runs for the hills. Something closer to the truth was reported the same day in The Wall Street Journal. Here’s their summary:
Chinese authorities are asking local governments to prepare for the potential downfall of China Evergrande Group, according to officials familiar with the discussions, signaling a reluctance to bail out the debt-saddled property developer while bracing for any economic and social fallout from the company’s travails…
Local governments have been ordered to assemble groups of accountants and legal experts to examine the finances around Evergrande’s operations in their respective regions, talk to local state-owned and private property developers to prepare to take over local real estate projects and set up law enforcement teams to monitor public anger… a euphemism for protests, according to the people.
China’s Bogus Plan
This actual crisis management plan is the worst possible playbook. Why?
Any response to a financial crisis has to be centralized so that decisions about how to deploy limited resources can be made rapidly. Some lenders must be saved, some should be allowed to fail. Equity holders should be wiped out. Foreign investors in dollar-denominated debt of Evergrande will be left to fend for themselves and possibly seek relief in their home countries.
The point is these types of decisions cannot be made by “local governments” as proposed by the Chinese. The government plan is not a serious effort to truncate a financial crisis. It seems designed more to suppress social unrest and perhaps arrest “troublemakers.”
Western analysts don’t understand this dynamic because they view events through the lens of Wall Street and Washington norms.
But the Communist Party of China does not care if Chinese oligarchs or investors in BlackRock ETFs lose money. That suits them fine. They’re communists.
The Good News and the Bad News
The good news is that the China myth has now been revealed to be a fraud. The globalist dream for China has crashed and burned. Good riddance.
Chinese regulators believe they have the resources to bail out or restructure Evergrande with some haircuts for creditors.
They probably do, but that misses the point.
Evergrande investors are now staging protests at banks after learning that their loans to Evergrande will not pay out for two years. Of course, Evergrande will be bankrupt long before that, and the investors will get nothing in the end.
This is another fiasco in the making because those investors will dump that unwanted real estate, which will collapse the property market in turn. Essentially, Chinese regulators are so desperate that they are trying to pay off creditors in kind with deeds to real estate that no one wants.
The Chinese are only looking at what’s inside the four walls of Evergrande and ignoring the fact that their entire property and financial system is on the verge of a world-historic crack-up.
But here’s the real problem: The damage will not be confined to Evergrande. It will spread quickly to counterparties of Evergrande, including other developers and banks.
This unprecedented combination of a financial crisis and Communist indifference could result in full-blown contagion that could emerge as a crisis in the U.S. and Europe within a few months.
I’ve predicted this all along, but in reality, it wasn’t that hard to predict. The Chinese economy is basically a debt-driven Ponzi scheme.
Up to half of China’s investment is a complete waste. It does produce jobs and utilize inputs like cement, steel, copper and glass. But the finished product, whether a city, train station or sports arena, is often a white elephant that will remain unused. The Chinese landscape is littered with “ghost cities” that have resulted from China’s wasted investment and flawed development model.
And as I’ve explained before, that has serious implications for China’s leadership…
The “Mandate of Heaven” in Jeopardy
China’s economy is not just about providing jobs, goods and services. It is about regime survival for a Chinese Communist Party that faces an existential crisis if it fails to deliver.
It is an illegitimate regime that will remain in power only so long as it provides jobs and a rising living standard for the Chinese people. The overriding imperative of the Chinese leadership is to avoid societal unrest.
If China’s job machine seizes, as parts of it did during the coronavirus outbreak, Beijing fears that popular unrest could emerge on a scale potentially much greater than the 1989 Tiananmen Square protests. This is an existential threat to Communist power.
President Xi Jinping could quickly lose what the Chinese call “the Mandate of Heaven.”
That’s a term that describes the intangible goodwill and popular support needed by emperors to rule China for the past 3,000 years. If the Mandate of Heaven is lost, a ruler can fall quickly.
Even before the present crisis, China has had serious structural economic problems that are finally catching up with it.
China is so heavily indebted that it is now at the point where more debt does not produce growth. Adding additional debt today slows the economy and calls into question China’s ability to service its existing debt.
Essentially, China is on the horns of a dilemma with no good way out. China has driven growth for the past eight years with excessive credit, wasted infrastructure investment and Ponzi schemes.
The Chinese leadership knows this, but they had to keep the growth machine in high gear to create jobs for millions of migrants coming from the countryside to the city and to maintain jobs for the millions more already in the cities.
Will China Try to Create a Dangerous Diversion?
The two ways to get rid of debt are deflation (which results in write-offs, bankruptcies and unemployment) and inflation (which results in theft of purchasing power, similar to a tax increase).
Both alternatives are unacceptable to the Communists because they lack the political legitimacy to endure either unemployment or inflation. Either policy would cause social unrest and unleash revolutionary potential.
The question is will China move aggressively against Taiwan, for example, to distract the people and attempt to unite them?
China does not want war at this time. But diverting the people’s attention away from domestic problems toward a foreign foe is an old trick leaders use to unite the people in times of uncertainty.
If China’s leadership decides that the risk of losing legitimacy at home outweighs the risk of conflict that would likely involve the United States, the likelihood of war rises dramatically.
I’m not making a specific prediction, but wars have started over less. This is a very dangerous time.
Regards,
Jim Rickards
for The Daily Reckoning
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>>> No Recovery Until 2045?
BY JAMES RICKARDS
SEPTEMBER 14, 2021
https://dailyreckoning.com/no-recovery-until-2045/
No Recovery Until 2045?
The economy is now at a perilous point of departure. There was no V-shaped recovery, and one should not be expected. There was a severe contraction in March–April 2020, followed by a recovery in July–September 2020. However, the recovery only made up part of the lost ground, not all of it.
We had a partial V or a truncated V. The economy recovered somewhat, but growth is not back to the prior trend, bearing in mind that the prior trend (from 2009–2019) was itself below the long-term trend.
Now we are experiencing slowing growth and metrics in employment and wages that are moving sideways or down without having recovered previous highs.
For the past 18 months, the economic damage of the pandemic has been papered over with federal handouts of various kinds. We had a $2 trillion bailout under Trump in June 2020, followed by another $900 billion bailout during Trump’s final days as president in December 2020.
President Biden followed with another $2 trillion bailout bill in February 2021 and is still pushing for an additional $1 trillion infrastructure bill and a $3.5 trillion welfare bill now pending before Congress. We got $1,200 and $600 checks from Trump and another $1,400 check from Biden.
We had Paycheck Protection Program loans, $50 billion airline bailouts and similar large-scale bailouts for cruise ships, resorts, casinos and other affected industries. Everyday Americans could receive an additional $600 per week on top of regular unemployment benefits, and the benefits period was extended.
Other programs included rent moratoria, eviction moratoria and extended grace periods on repayment of student loans. The list goes on. The total tab could easily exceed $10 trillion in relief-type deficit spending before all is said and done.
No doubt some of this spending was needed; especially in the initial March–June 2020 period when there was so much uncertainty and the economy was locked down tight.
Still, economists question whether this much relief was actually needed and whether the $4.5 trillion of additional spending still on the drawing boards is needed also.
The immediate problem is that the economy is clearly slowing right now, just as many of these programs expire and before new programs come online. New York state will not fill the gap as federal unemployment benefit boosters expire.
The federal unemployment benefit addition of $600 per week expired on Sept. 6. States have the ability to make up the difference from their own resources, but most don’t have the money. New York is clearly a state that has a huge budget deficit on its own and is not allowed by law to engage in more deficit spending to undertake new programs.
Other states may have the funds but are choosing not to spend the money because they believe that unemployment recipients should be motivated to get a job. Apart from the merits of these debates, there is no doubt that the federal supplement to incomes is expiring at the same time the economy is slowing for other reasons.
Already Too Much Debt
The Biden administration will slow U.S. and global growth with a combination of higher taxes, more regulation and wasteful spending on programs such as the Green New Deal.
Biden administration deficit spending, which will approach $6 trillion of new authorizations in fiscal 2021, is continually claimed as stimulus.
In fact, there is no stimulus from such spending because the U.S. debt-to-GDP ratio is now approaching 130%. There is good evidence that debt-to-GDP ratios in excess of 90% produce less growth than the amount of new debt itself.
In other words, there is no stimulus and only an increasing debt-to-GDP ratio that makes the situation worse.
The U.S. was facing slower growth in the years ahead with or without the Biden administration’s policies because of high debt and a central bank that does not understand monetary economics.
Now that Biden’s policies are fully revealed and becoming law, it is clear that growth will be even worse than would otherwise be expected.
This is characteristic of a new great depression.
A recession is technically defined as two or more consecutive quarters of declines in GDP. A depression is not technically defined but is understood as a prolonged period of growth that is either below the long-term trend or below potential growth.
Technical recessions can occur during depressions. There were two technical recessions (1929–1933 and 1937–1938) during the Great Depression (1929–1940), yet the entire period was characterized by below-trend growth, high unemployment and deflation. Stock markets and commercial real estate prices did not recover their 1929 highs until 1954, a full 25 years later.
The New Depression Continues
We are in a new depression now. Growth declined in 2008. The 2009–2019 recovery averaged annual growth of about 2.2%, well below the long-term trend of 3.5–4.5%. GDP declined again by 3.4% in 2020, the steepest one-year decline since 1946.
Annualized growth for the first half of 2021 is 6.4%, but that is slowing quickly; the latest estimate for the third quarter of 2021 from the Atlanta Fed is annualized growth of 3.7%.
The December 2019 level of output was not recovered until July 2021. Interest rates have been declining sharply. That’s a sign of disinflationary expectations and may be an early warning of a new recession in 2022.
This is characteristic of a new great depression that can last for many years. Once the inflation narrative fades and the disinflation narrative comes to the fore, we can expect a stock market correction as asset prices adjust to the return of an era of slow growth.
Looking out even further ahead, the effects of the pandemic on the economy will be intergenerational. Most financial panics or recessions are followed by recovery within a year or less.
Pandemics produce different patterns.
No Recovery Until 2045?
One study from the Federal Reserve Bank of San Francisco in collaboration with outside academics showed that of the 19 highest fatality pandemics since the Black Death in the mid-1300s, the average time needed to return to normal levels of interest rates, growth and employment is more than 30 years.
This pattern of recovery from extreme events was seen in the aftermath of the Great Depression (although that was an extreme economic collapse, not a pandemic). While the Great Depression was over in 1940 (partly because of war spending as the U.S. moved toward World War II), the behavioral changes it produced did not fade until the late 1960s.
The 1950s were a period of peace and prosperity in the U.S. Still, Americans maintained high savings rates, mostly avoided conspicuous consumption and lived frugally as they had learned to do in the 1930s and during World War II.
This did not change until the baby boomers became young adults and teenagers in the late 1960s. The behavioral changes induced by the Great Depression did not fade until 30 years after the Depression was over. Such is the staying power of social trauma whether it be war, depression or pandemic.
We will not recover from this pandemic fully until 2045 or later in terms of savings, consumption, disinflation, low interest rates and low growth.
The only exception to this estimate would be if the pandemic were followed by another equally shocking event such as war or a financial panic.
Isn’t that reassuring?
Regards,
Jim Rickards
for The Daily Reckoning
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>>> IMF Governors Approve a Historic US$650 Billion SDR Allocation of Special Drawing Rights
IMF
August 2, 2021
https://www.imf.org/en/News/Articles/2021/07/30/pr21235-imf-governors-approve-a-historic-us-650-billion-sdr-allocation-of-special-drawing-rights
Washington, DC: The Board of Governors of the IMF has approved a general allocation of Special Drawing Rights (SDRs) equivalent to US$650 billion (about SDR 456 billion) on August 2, 2021, to boost global liquidity. [1]
“This is a historic decision – the largest SDR allocation in the history of the IMF and a shot in the arm for the global economy at a time of unprecedented crisis. The SDR allocation will benefit all members, address the long-term global need for reserves, build confidence, and foster the resilience and stability of the global economy. It will particularly help our most vulnerable countries struggling to cope with the impact of the COVID-19 crisis,” IMF Managing Director Kristalina Georgieva said.
The general allocation of SDRs will become effective on August 23, 2021. The newly created SDRs will be credited to IMF member countries in proportion to their existing quotas in the Fund.
About US$275 billion (about SDR 193 billion) of the new allocation will go to emerging markets and developing countries, including low-income countries.
“We will also continue to engage actively with our membership to identify viable options for voluntary channeling of SDRs from wealthier to poorer and more vulnerable member countries to support their pandemic recovery and achieve resilient and sustainable growth”, Ms. Georgieva said.
One key option is for members that have strong external positions to voluntarily channel part of their SDRs to scale up lending for low-income countries through the IMF’s Poverty Reduction and Growth Trust (PRGT). Concessional support through the PRGT is currently interest free. The IMF is also exploring other options to help poorer and more vulnerable countries in their recovery efforts. A new Resilience and Sustainability Trust could be considered to facilitate more resilient and sustainable growth in the medium term.
Additional information:
SDR Landing: https://www.imf.org/en/Topics/special-drawing-right
Q&As : https://www.imf.org/en/About/FAQ/special-drawing-right
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Yellen -> new SDR allocation, and global taxation rules -
>>> Yellen sees progress on U.S. tax reforms; urges support for vulnerable countries
Reuters
September 9, 2021
https://finance.yahoo.com/news/yellen-sees-progress-u-tax-143000876.html
WASHINGTON, Sept 9 (Reuters) - U.S. Treasury Secretary Janet Yellen on Thursday underscored the importance of finalizing and swiftly implementing new international tax rules agreed by 134 countries, and said the U.S. Congress was making progress on strengthening U.S. international tax rules, her office said.
Yellen told her counterparts from the Group of Seven advanced economies that the Biden administration was seeking to achieve a U.S. minimum tax rate on foreign earnings of at least 21% on a per-country basis.
She also emphasized the need for continued G7 efforts to enhance support for low-income countries hit hard by the COVID-19 pandemic, and urged major economies to lend their newly allocated Special Drawing Rights from the International Monetary Fund to further support vulnerable countries.
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>>> The Great Dollar Paradox
BY JAMES RICKARDS
AUGUST 30, 2021
https://dailyreckoning.com/the-great-dollar-paradox/
The Great Dollar Paradox
The greatest paradox in foreign exchange markets today is the U.S. dollar (USD).
U.S. fiscal responsibility is in ruins. In the past two years, the U.S. has authorized $11.5 trillion of new deficit spending and increased its base money supply by over $4 trillion. The U.S. debt-to-GDP ratio now stands at 130%, comparable to Lebanon, Italy and Greece, among the most profligate countries in the world.
Meanwhile, U.S. growth is slowing rapidly.
The Atlanta Fed GDPNow forecasting tool showed projected annualized growth slowing from 13% in April to 11% in May to 7.5% in June. The actual GDP growth figure for the second quarter of 2021 was 6.5%.
Third-quarter growth is now projected at 5.1%.
Actual growth will come in even lower because those projections do not take into account the full extent of new lockdowns, mask mandates and vaccine mandates, which are damaging travel, entertainment, resorts, restaurants and retail sales. Consumer confidence just recorded the steepest one-month drop in the history of that data.
So the U.S. is experiencing soaring debt, reckless money printing, slowing growth and a new wave of COVID. That sounds like a recipe for full-scale flight from the U.S. dollar.
But that’s not happening.
The dollar has been getting progressively stronger. The U.S. dollar index (DXY) has rallied from 89.64 on May 25, 2021, to 93.57 as recently as Aug. 19. Other dollar indexes show comparable gains.
How does the dollar soar in the face of fiscal and monetary failure and slowing growth?
The Dollar Isn’t Just a National Currency
The answer is that the U.S. dollar is more than just a national currency. It is the global reserve currency. It is used worldwide for trade, investment and payments, and it is created outside the U.S. in the form of eurodollars by U.S. and foreign banks operating in London, Frankfurt and Tokyo, among other money centers.
The eurodollar market relies on dollar-denominated securities such as U.S. Treasury bills and notes for collateral in leveraged transactions.
In short, the dollar has a life of its own independent of the Federal Reserve, the White House and the U.S. Congress. It’s the lifeblood of the international monetary system regardless of whether U.S. policymakers are reckless in fiscal and monetary policy or not.
Banks need dollars to buy Treasury bills to pledge as collateral and keep the system afloat whether U.S. domestic policies are sound or not.
How will the paradox of profligate fiscal and monetary policy by the U.S. and increased demand for U.S. dollars by international banks be resolved?
In the short run, the paradox will not be resolved.
I expect continued record deficits from the U.S. Congress and continued demand for dollars by highly leveraged international banks.
Still, that condition is non-sustainable. Possible remedies include a new dose of fiscal responsibility in Congress (unlikely before 2023 if ever), direct Treasury intervention in foreign exchange markets to weaken the dollar (unlikely until it’s too late) or a global financial crisis that leads to major reforms in the international monetary system, possibly including a new Bretton Woods-style agreement.
That kind of collapse followed by reform is the most likely outcome. It’ll happen because policymakers will have no other choice.
Long Overdue for a New Monetary System
My research has led me to one conclusion — we’re going to see the collapse of the international monetary system. When I say that, I specifically mean a collapse in confidence in paper currencies around the world. It’s not just the death of the dollar or the demise of the euro. It’s a collapse in confidence of all paper currencies.
Over the past century, monetary systems have changed about every 30–40 years on average. The existing monetary system is 50 years old, so the world is long overdue for a new monetary system.
When confidence is lost, central banks may have to revert to gold either as a benchmark or an actual gold standard to restore confidence. That wouldn’t be by choice. No central banker would ever willingly choose to go back on a gold standard.
But in a scenario where there’s a total loss of confidence, they’ll likely have to go back to some form of a gold standard.
Few remember that Nixon explicitly said that the suspension of gold convertibility by trading partners was being done “temporarily.”
I spoke to two members of the Nixon administration, Paul Volcker and Kenneth Dam, who were with the president at Camp David the weekend the suspension was announced. They both confirmed to me that the intention was for the suspension to be temporary.
The plan was to convene a new international monetary conference, devalue the dollar against gold and other currencies, primarily the Deutsche mark, Swiss franc and the Japanese yen and then return to the gold standard at the new exchange rates.
The first part did happen. There was an international monetary conference in Washington, D.C., in December 1971. The dollar was devalued against gold (from $35.00 per ounce to $42.22 per ounce in stages) and other major currencies by about 10–17%, depending on the currency.
Yet the second part never happened. There was never a return to a gold standard. While countries were negotiating the new official exchange rates, they also moved to floating exchange rates on international currency markets.
The cat was out of the bag.
Why Do Central Banks Cling to a “Barbarous Relic”?
We’ve been living with floating exchange rates ever since. The creation of the euro in 1999 was a way to end currency wars among the European nations, but the EUR/USD currency wars continue.
The temporary closing of the gold window by Nixon has become permanent, though it was only intended to be temporary…
Still, gold is always lurking in the background. I consider gold a form of money rather than a commodity. Central banks and finance ministries around the world still hold 35,000 metric tonnes of gold in their vaults, about 17.5% of all the aboveground gold in the world.
Why would they hold onto all that gold if gold was just a barbarous relic?
Looking at the price of gold in any major currency tells you as much about the strength or weakness of that currency as any cross-rate. Gold still has a powerful role to play in the international monetary system with or without a gold standard.
The timing of any financial crisis is always uncertain, but the probability of an eventual crisis is high. New signs of liquidity stress are emerging every day.
No investor should be surprised if the crisis happens sooner rather than later.
Regards,
Jim Rickards
for The Daily Reckoning
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>>> Gundlach: We're running our economy 'like we're not interested in maintaining global reserve currency status'
Yahoo Finance
Julia La Roche
August 24, 2021
https://finance.yahoo.com/news/jeffrey-gundlach-view-on-the-us-dollar-decline-154813067.html
Billionaire bond investor Jeffrey Gundlach, the founder and CEO of $137 billion DoubleLine Capital, says his number one conviction over several years is that the U.S. dollar will decline as a consequence of current economic policies, resulting in the U.S. losing its sole reserve currency status.
"My number one conviction looking forward a number of years — I'm not talking about the next few months at all, I'm talking about several years — is that the dollar is going to go down," Gundlach told Yahoo Finance Live in an exclusive interview on Monday afternoon.
It's Gundlach's view that the "places to be in the long-term" are emerging markets and "non-U.S entities." While Gundlach has already rotated into European equities, the investor expects to "aggressively rotate into emerging markets," but notes it's "too early for that right now."
"So the dollar is going down is another reason why ultimately — we touched on gold — I think ultimately gold is going to go a lot higher, but it's really in hibernation right now," he added.
The 61-year-old "Bond King" later highlighted that the United States' status of the global reserve currency is in jeopardy.
"[The] U.S. has enjoyed the status of sole reserve currency globally for decades, and it's an incredible benefit," Gundlach said.
He pointed that in the aftermath of the global coronavirus pandemic and lockdowns, China's economy has been "the strongest economy in the world by far." While U.S. GDP has "bounced back with a lot of consumption, a lot of that consumption is going to China," he added.
"That's one of the reasons why China has such a strong economy. So, what we're seeing in the United States is starting to fall behind in economic growth. That's not a new thing. That's been going on for a generation, the U.S. falling behind," Gundlach said.
The investor also pointed out that estimates for when China's economy will be the largest "keep getting pulled forward," noting some economists' projections show China's economy will surpass the U.S. by 2028.
"We have debt-to-GDP that is fueling the majority of our so-called economic growth. So, is it really economic growth when you borrow money or print money, send checks to people who turn around and buy goods on Amazon in addition to maybe paying down debt and speculating and these goods come in from China?" Gundlach said.
He added: "We're running our economy in a way that is almost like we're not interested in maintaining global reserve currency status or the largest military or global call it superiority or control. As long as we continue to run these policies, and we're running them more and more aggressively, we're not pulling back on them in any way, we are looking at a road map that is clearly headed towards the U.S. losing its sole reserve currency status."
According to Gundlach, with the current economic policies in place, it's "almost certain" the U.S. dollar should be going down.
"The value of the dollar is so high because we enjoy global reserve currency status, and we don't really respect it enough. We take it for granted, I guess. We seem to take a lot of things for granted these days in the United States relative to how we thought about things in prior decades and generations. And, I believe we are setting the stage for us to, unfortunately… experience the consequences of our actions the way we have been running a non-serious economic program now, really since 1980, but it's really accelerated so much in the past decade and there's no signs of it abetting," he said.
It's Gundlach's view that the U.S. dollar has "already peaked" when the U.S. Dollar Index hit 103.
"I believe the dollar will take out the lows of the past down cycle. The dollar has been in a series of declining highs for decades — it goes back to the '80s. For that reason, I think when we get to the next break to the lower level, the dollar will go past the most recent low of around 80 and even take out the low of 70. So, I think there's easily 25% downside in the U.S. dollar."
<<<
>>> Jerome Powell's Jackson Hole Gamble Runs the Risk of Backfiring
Bloomberg
By Rich Miller
August 23, 2021
https://www.bloomberg.com/news/articles/2021-08-23/jackson-hole-2021-us-inflation-rate-covid-upend-powell-fed-policy-revolution?srnd=premium
It seemed like a good idea at the time.
When Federal Reserve Chairman Jerome Powell rolled out a new modus operandi for running monetary policy at the elite Jackson Hole economic symposium a year ago, the economy was just coming out of a pandemic-driven nosedive. That was after a decade of disappointingly slow growth, with inflation stubbornly below target.
Powell and his colleagues opted for a radical new strategic framework that Morgan Stanley economist Ellen Zentner says is now embedded in the Fed’s DNA: Use super-loose monetary policy to try to push unemployment down to levels previously thought unsustainable, and commit to letting inflation overshoot their 2% goal by a bit, for a while.
As policy makers prepare for another Jackson Hole conference — the second straight one Powell will address virtually rather than traveling to Wyoming — the economic picture looks much different. Thanks in no small part to a $1.9 trillion, front-loaded budget boost from President Joe Biden that caught Fed officials flatfooted, the economy has roared ahead, with employers complaining they can’t find enough workers. And inflation has taken off, as the unleashing of pent-up demand combined with disruptions to production and shipment schedules to push up the Fed’s favorite price gauge by 4%.
That’s far more than the moderate overshoot that policy makers were seeking. Concerns are now rising that the one-year-old policy blueprint has already passed its sell-by date, and that sticking with it will end up being bad for the health of the economy. The big fear: The Fed will be slow to rein in inflation, paving the way for a sustained take-off in prices, along with a housing bubble that policy makers will eventually have to deal with by jacking up interest rates and derailing the recovery.
“The Fed’s new framework was designed for a world of deficient aggregate demand where supply was not an issue,” says Mohamed El-Erian, the chief economic adviser at Allianz SE and a Bloomberg Opinion columnist. “Coming out of the pandemic, we live in a world of ample demand where the main problem is on the supply side.”
He sees a roughly 40% probability that the Fed will stick with the strictures of the framework too long and ultimately have to slam on the brakes, risking throwing the economy into a recession.
There’s a lot at stake for Powell — and Biden — in the Fed getting it right. Powell’s four-year reign as central bank chair ends in February. The president has yet to announce whether he’ll nominate the veteran monetary policy maker for another term or choose to replace him, in the middle of the debate over how long to keep ultra-stimulative policy in place. Treasury Secretary Janet Yellen has told senior White House advisers that she supports reappointing Powell, Bloomberg reported Saturday.
Biden is facing increasing flak from Republicans accusing him of igniting the inflation surge by ramming his big aid package through Congress in March. And they’re warning of worse to come if Democrats pass an even more ambitious $3.5 trillion program to extend the government’s reach into the economy.
Powell and administration officials alike have stuck with the line that much of the run-up in inflation will prove to be temporary, as kinks in the supply chain from reopening the $23 trillion American economy are worked out. An eventual increase in the availability in semiconductors, for example, should help automakers feed demand for new cars, bringing down prices.
But the Fed chair has confessed that he’s anxious about the outlook as complaints about rising prices pile up. And he’s hedged his bets in case he’s proven wrong, warning that policy makers would shift course to assure, as he said last month, “we won’t have an extended period of high inflation.” Powell has already initiated formal talks on a path toward pulling back on the central bank’s massive bond buying program, a schedule he may offer more perspective on this week. Most Fed officials last month judged that it likely would be appropriate for the reductions to start this year.
Called “flexible average inflation targeting,” the stratagem Powell unveiled last year turned the Fed’s traditional approach to managing the economy on its head. The central bank’s focus has shifted from trying to contain inflation at 2% to actually fostering it, with the explicit objective of having it run moderately above that pace for a time to make up for years of being below it.
The framework also does away with the Fed’s long-standing tactic of launching pre-emptive strikes against inflation — a strategy that dates back to the late William McChesney Martin, who ruled the Fed from 1951 to 1970 and famously quipped that it was the central bank’s job to “take away the punch bowl just as the party gets going.”
William McChesney with Fingers on Temple
Chairman William McChesney Martin of the Federal Reserve Board famously quipped that it was the central bank’s job to “take away the punch bowl just as the party gets going.”
No longer will the Fed raise interest rates to head off higher inflation as the job market tightens. Instead, it will allow unemployment to fall as far as possible, and only seek to slow things down when it’s clear that faster inflation is becoming a problem. In a nod to racial and other inequities plaguing the economy, the Fed also explicitly expanded its definition of what constitutes maximum employment, saying job gains should be broad-based and inclusive.
“The new framework all but guarantees that the Fed will be behind the curve when it starts fighting inflation,” says ex Fed Vice Chairman Alan Blinder. The Princeton University professor sees the Fed starting to lift interest rates from near zero in 2022 — a year earlier than most policy makers had projected in their last set of forecasts in June.
What’s more, the Fed has doubled-downed on its dovish approach by pledging to hold off on changing its policy settings until certain conditions are met, something referred to as forward guidance. It has pledged to keep buying $120 billion of bonds per month — in the process flooding financial markets with liquidity — until “substantial further progress” is made toward its goals of maximum employment and average 2% consumer-price gains. And it’s set out a three-part litmus test for lifting interest rates from zero: achieving full employment and a 2% inflation rate, along with securing an outlook for inflation to moderately exceed 2% for some time.
“The implementation of the framework in this Covid environment has really accentuated the ‘wait until we see the whites of their eyes’ part of the strategy, particularly when it comes to the forward rate guidance,” says Donald Kohn, another former Fed vice chairman, who’s now a Brookings Institution senior fellow. “How the framework is being implemented raises the upside inflation risk.”
Former Treasury Secretary Lawrence Summers sees a new normal with U.S. inflation above 3%. The Fed will then have to decide whether to accept that or attempt to slow down the economy — something which is “rarely a controlled process,” Summers, a paid Bloomberg contributor, says.
Powell initiated the framework review at the start of 2019, well before the pandemic struck. The aim was to avoid the deflationary morass that’s enveloped Japan off and on during the past three decades. When prices overall are falling, consumers tend to hold back on spending and companies put off investing. The result has been a stagnant Japanese economy that has proved resistant to monetary-policy measures — including a promise to seek higher inflation, which presaged the path now being taken by the Fed.
Powell is well aware that the situation the U.S. now finds itself is far different from that envisaged when the framework was hatched. It’s not a world where inflation is quiescent even as unemployment plumbs new lows. Instead, it’s a world where inflation is climbing and unemployment is still well above pre-pandemic levels, posing an acute dilemma for policy makers. Raise interest rates to stem price pressures, and you risk throwing more Americans out of work. Do nothing, and you court the danger of a take-off in inflation akin to what happened in the 1960s and ’70s.
Powell acknowledges that he’s been surprised by how rapidly prices have risen and that the run-up is far bigger than the moderate overshoot of 2% envisioned in the framework.
In one sense, Powell and the Fed have had some bad luck, former Bank of England policy maker Adam Posen says. “A policy that was appropriate and still is fundamentally right is being tested by the extreme supply swings from Covid and the very large fiscal stimulus,” Posen, who now heads the Peterson Institute for International Economics, says.
The Fed chief argues that the new strategy is not the policy strait-jacket that El-Erian and other critics say it is, and insists the central bank will act to slow the economy if the burst of inflation threatens to turn into something more long-lasting and pernicious. To back that up, he invokes the letter, if not the spirit, of the operating regime, pointing to a little-commented-on escape hatch in the governing document. In the rare cases when the Fed’s twin goals of maximum employment and stable prices are in conflict — as is the case now — policy makers will weigh the pros and cons of which they should tackle and act accordingly.
But that doesn't give much of a clue on what the Fed will do about the surge in inflation.
“While I am supportive of the new regime, one must recognize that it has both strengths and weaknesses," former Fed Vice Chairman Roger Ferguson says. "It seems to me that it is challenging to decide and communicate how much overshooting is allowable and for how long.”
Rolling back — and eventually eliminating — the stimulus the Fed is pumping into the economy is in one sense the easy part. With unemployment falling rapidly — it dropped to 5.4% in July from 5.9% in June — the Fed is well along in meeting its metric for beginning to taper its asset purchases. In so doing, it will be gradually taking its foot off the accelerator, not stepping on the brake, according to Zentner, Morgan Stanley’s chief U.S. economist.
Powell believes that the real test of the framework will come when the Fed has to decide to raise interest rates — a move that he says is still a long ways off. The crunch would occur if he’s wrong about inflation and it proves more persistent than he expects, forcing the Fed to increase rates before the economy reaches the promised, if somewhat nebulous, land of maximum employment.
The success of the new strategy may ultimately rest with Fed’s ability to convince Americans that it’s got it right when it comes to inflation. If workers and companies think otherwise and are fearful of prices spiraling upwards, they’ll act in ways that will help bring that about. Employees will press for out-sized wage gains, while companies will be quick to jack up prices to cover their rising costs, and then some.
“Bottom line, the critical element is inflation expectations,” former Fed Chairman Ben Bernanke says. “As long as they stay in the vicinity of 2%, the Fed’s strategy will achieve its goals. If inflation expectations were to move significantly higher, the Fed would be forced to tighten more quickly and probably slow the economy more than they would like.”
The evidence on that front so far is mixed, with investors less worried about inflation than consumers seem to be.
Another key question, according to incoming Bank of England policy maker Catherine Mann: Will the wage gains that some workers are now winning and the pricing power that some companies are now enjoying spread more widely throughout the economy? She thinks probably not, as an anticipated slowdown in growth next year helps to check any upward wage-price spiral.
In the end, it will come down to what Powell considers the bigger longer-term risk for the U.S.: Become trapped in a disinflationary spiral like that experienced by Japan as the forces of technological advances and globalization continue to press down on prices, or enter an inflationary zone of escalating cost pressures akin to what the U.S. suffered a half century ago.
Right now, he’s betting that the former is the bigger long-run danger, and holding off from tightening credit.
“The new framework is not so much about what kind of monetary policy you would expect right now, but what you might expect over the next year or perhaps longer as this recovery continues,” Wendy Edelberg, director of The Hamilton Project at the Brookings Institution, says. “They have made a pretty convincing argument they are going to keep monetary policy accommodative for longer than they would have under a different policy rule.”
But the path ahead will be far from easy as the Fed seeks to softly land the economy in the neighborhood of on-target inflation and maximum employment.
“It’s going to very difficult,” says Blinder, who was at the Fed when it achieved what many economists consider its only perfect landing for the economy, in the mid 1990s. “If they can achieve that, they deserve more than a pat on the back.”
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>>> BlackRock Authored the Bailout Plan Before There Was a Crisis – Now It’s Been Hired by three Central Banks to Implement the Plan
Wall Street On Parade
By Pam Martens and Russ Martens
June 5, 2020
https://wallstreetonparade.com/2020/06/blackrock-authored-the-bailout-plan-before-there-was-a-crisis-now-its-been-hired-by-three-central-banks-to-implement-the-plan/
It’s called “Going Direct.” That’s the financial bailout plan designed and authored by former central bankers now on the payroll at BlackRock, an investment manager of $7 trillion in stock and bond funds. The plan was rolled out in August 2019 at the G7 summit of central bankers in Jackson Hole, Wyoming – months before the public was aware of any financial crisis. One month later, on September 17, 2019, the U.S. Federal Reserve would begin an emergency repo loan bailout program, making hundreds of billions of dollars a week in loans by “going direct” to the trading houses on Wall Street.
The BlackRock plan calls for blurring the lines between government fiscal policy and central bank monetary policy – exactly what the U.S. Treasury and the Federal Reserve are doing today in the United States. BlackRock has now been hired by the Federal Reserve, the Bank of Canada, and Sweden’s central bank, Riksbank, to implement key features of the plan. Three of the authors of the BlackRock plan previously worked as central bankers in the U.S., Canada and Switzerland, respectively.
The authors wrote in the white paper that “in a downturn the only solution is for a more formal – and historically unusual – coordination of monetary and fiscal policy to provide effective stimulus.”
We now understand why, for the first time in history, the U.S. Congress handed over $454 billion of taxpayers’ money to the Fed, without any meaningful debate, to eat losses on toxic assets produced by the Wall Street banks it supervises. The Fed plans to leverage the $454 billion into a $4.54 trillion bailout plan, “going direct” with bailouts to the commercial paper market, money market funds, and a host of other markets.
The BlackRock plan further explains why, for the first time in history, the Fed has hired BlackRock to “go direct” and buy up $750 billion in both primary and secondary corporate bonds and bond ETFs (Exchange Traded Funds), a product of which BlackRock is one of the largest purveyors in the world. Adding further outrage, the BlackRock-run program will get $75 billion of the $454 billion in taxpayers’ money to eat the losses on its corporate bond purchases, which will include its own ETFs, which the Fed is allowing it to buy in the program.
Helicopter money is also spelled out in the BlackRock plan, which explains why simultaneously with the $454 billion Congress carved out for the Fed under the CARES Act, fiscal stimulus was also “going direct” with $1200 checks and direct deposits to the little people of America and Paycheck Protection Program loans and grants “going direct” to small businesses.
One feature of the BlackRock plan that is certain to get wide public pushback in the U.S. is the proposal for central banks to buy stocks (equities). The authors write this:
“Any additional measures to stimulate economic growth will have to go beyond the interest rate channel and ‘go direct’ – [with] a central bank crediting private or public sector accounts directly with money. One way or another, this will mean subsidizing spending – and such a measure would be fiscal rather than monetary by design. This can be done directly through fiscal policy or by expanding the monetary policy toolkit with an instrument that will be fiscal in nature, such as credit easing by way of buying equities. This implies that an effective stimulus would require coordination between monetary and fiscal policy –be it implicitly or explicitly.”
In the United States, approximately 85 percent of the stock market is owned by the richest 10 percent of Americans. Buying stocks would simply expand and accelerate the wealth and income inequality which is already at the highest levels since the 1920s – a time when Wall Street also owned large deposit-taking banks.
The Swiss National Bank, the central bank of Switzerland, where one of the BlackRock authors previously worked, already has massive holdings of individual stocks, including $94 billion in publicly traded stocks in the U.S. according to its March 31, 2020 report that was filed with the Securities and Exchange Commission.
The BlackRock authors of the “Going Direct” plan are the following:
Stanley Fischer: Fischer was Vice Chairman of Citigroup from 2002 to 2005. Citigroup received the largest bailout in global banking history, getting $2.5 trillion cumulatively in revolving loans from the Fed and billions more from taxpayers in the financial crisis of 2007 to 2010. Fischer went from Citigroup to serve as Governor of the central bank of Israel (Bank of Israel) from 2005 to 2013. (He holds dual citizenship in Israel and the U.S.) One year later, Fischer became a Governor on the U.S. Federal Reserve Board, advancing to Vice Chairman on June 16, 2014. He resigned his position at the Fed October 13, 2017 and joined BlackRock as a Senior Advisor in January 2019.
Philipp Hildebrand: Hildebrand was Chairman of the Governing Board of the Swiss National Bank from 2010 until he abruptly resigned in early 2012. (There was a scandal over his wife, a former hedge fund trader, making trades in currencies while he had inside information on interest rates.) Hildebrand is now Vice Chairman of BlackRock and a member of the firm’s Global Executive Committee.
Jean Boivin: Boivin is the Head of the BlackRock Investment Institute. He joined BlackRock in 2014. Prior to joining BlackRock, Boivin was appointed Deputy Governor of the Bank of Canada in March 2010 where he served for two years. Boivin left the Bank of Canada in October 2012 to become Associate Deputy Minister at the Department of Finance, and to serve as Canada’s Finance Deputy at the G-7, G-20 and the Financial Stability Board.
Elga Bartsch: Bartsch heads up economic and markets research at the Blackrock Investment Institute. Prior to joining BlackRock, Bartsch was Global Co-Head of Economics and Chief European Economist at Morgan Stanley in London. According to the government audit of the Fed’s bailout programs during the 2007-2010 financial crisis, Morgan Stanley was the second largest recipient of the Fed’s bailout programs, behind Citigroup, receiving $2.04 trillion cumulatively in revolving, below-market rate loans.
On May 15, the central bank of Sweden, the Riksbank, announced that it would be using BlackRock to conduct “an analysis of the Swedish corporate bonds market and an assessment of possible design options for a potential corporate bonds asset purchase programme.”
The Bank of Canada announced in April that BlackRock has been hired as an adviser for its commercial paper, provincial bond, and corporate bond buying programs.
The Federal Reserve has given a no-bid contract to BlackRock to manage all of its corporate bond programs.
Peter Ewart, a writer based in Prince George, British Columbia, wrote the following in the Prince George Daily News about BlackRock’s role in herding central bank actions:
“The situation also shows how the economic system in both Canada and the U.S. is not classical capitalism but rather state monopoly capitalism, where giant enterprises are regularly backstopped with public funds and the boundaries between the state and the financial oligarchy are virtually non-existent.”
In the U.S., 30 nonprofits, including Friends of the Earth, U.S. Greenpeace, Public Citizen, Rainforest Action Network, the Sierra Club and Take On Wall Street, wrote a letter to Fed Chairman Jerome Powell on March 27 regarding BlackRock’s role in the bailout. The groups called out the Fed on the following:
“By giving BlackRock full control of this debt buyout program, the Fed is further entwining the roles of government and private actors. In doing so, it makes BlackRock even more systemically important to the financial system. Yet BlackRock is not subject to the regulatory scrutiny of even smaller systemically important financial institutions.”
The groups also assailed the Fed for its “no strings attached” oversight of how BlackRock was spending the money, writing:
“As far as is known publicly, there are no conditions or restrictions on what debt is purchased or what companies must do to qualify for debt purchases outside of their credit rating. This could mean that those companies could engage in stock buybacks or provide enormous CEO compensation packages, despite these practices exacerbating imbalances in corporate balance sheets and being a significant reason why these companies are so susceptible to the current crisis. This also means that industries that actively harm the climate – and by extension the financial system – could get unconditional support…”
BlackRock is not only a major marketer of corporate bond products. Its iShares brand includes a giant roster of stock-based ETFs. The Chairman and CEO of BlackRock is Laurence (Larry) Fink. Reuters reported last July that Fink was lecturing the European Central bank that it “will need to purchase equities to stimulate Europe’s economy, and that leaders should find ways to have investors embrace an ‘equity culture’ there.”
The “equity culture” is code for what Senator Bernie Sanders calls “socialism for the rich, and rugged, you’re on-your-own individualism for everyone else.”
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'Going Direct Reset' -
Catherine Fitts basically says it's a planned 'takedown', an engineered event, and the green light was given at the G-7 central bankers meeting in Jackson Hole on Aug 22, 2019 -
https://home.solari.com/coming-thursday-2020-annual-wrap-up-theme-the-going-direct-reset-the-central-bankers-make-their-move/
The G-7 called the plan the 'Going Direct Reset' (ie direct money infusions from the central banks to the public and corporations, instead of just QE and ZIRP, NIRP). A month after that G-7 meeting the Fed suddenly re-started QE/Quantitative Easing in response to the 'Repo Market' problems. At the time I figured something might be up, but had no idea that Covid would be next.
Fitts basically says it's all a coordinated plan. The pandemic brings down the world economy, the central banks swoop in with direct money infusions ('Going Direct Reset') to buy up all the cheap assets, and there's a concerted crash effort to advance the control grid infrastructure (all electric everything, the smart grid, etc), while the CBDC/Central Bank Digital Currencies are fast tracked. It's looking like Covid is to become the 'Forever Virus' (as the recent CFR 'Foreign Affairs' article puts it), to keep the perma-crisis going.
>>> Hackers return $260 million to cryptocurrency platform after massive theft
Reuters
by Tom Wilson, Tom Westbrook and Alun John
August 11, 2021
https://finance.yahoo.com/news/defi-platform-poly-network-reports-064756815.html
LONDON/SINGAPORE/HONG KONG (Reuters) - Hackers behind one of the biggest ever cryptocurrency heists have returned more than a third of $613 million in digital coins they stole, the company at the center of the hack said on Wednesday.
Poly Network, a decentralised finance platform that facilitates peer-to-peer transactions, said on Twitter that $260 million of the stolen funds had been returned but that $353 million was outstanding.
The company, which allows users to swap tokens across different blockchains, said on Tuesday it had been hacked and urged the culprits to return the stolen funds, threatening legal action.
The hackers exploited a vulnerability in the digital contracts Poly Network uses to move assets between different blockchains, according to blockchain forensics company Chainalysis.
A person claiming to have perpetrated the hack said they did it "for fun" and wanted to "expose the vulnerability" before others could exploit it, according to digital messages shared by Elliptic, crypto tracking firm, and Chainalysis.
It was "always the plan" to return the tokens, the purported hacker wrote, adding: "I am not very interested in money."
The hackers or hacker have not been identified, and Reuters could not verify the authenticity of the messages.
Tom Robinson, co-founder of Elliptic, said the decision to return the money could have been prompted by the headaches of laundering stolen crypto on such a scale.
An executive from cryptocurrency firm Tether said on Twitter the company had frozen $33 million connected with the hack, and executives at other crypto exchanges told Poly Network they would also try to help.
"Even if you can steal cryptoassets, laundering them and cashing out is extremely difficult, due to the transparency of the blockchain and the broad use of blockchain analytics by financial institutions," said Robinson.
Poly Network did not respond to requests for more details. It was not immediately clear where the platform is based, or whether any law enforcement agency was investigating the heist.
The size of the theft was comparable to the $530 million in digital coins stolen from Tokyo-based exchange Coincheck in 2018. The Mt. Gox exchange, also based in Tokyo, collapsed in 2014 after losing half a billion dollars in bitcoin.
The Poly Network attack comes as losses from theft, hacks and fraud related to decentralised finance (DeFi) hit an all-time high, according to crypto intelligence company CipherTrace.
At $600 million, however, the Poly Network theft far outstripped the $474 million in criminal losses CipherTrace said were registered by the entire DeFi sector from January to July. The thefts illustrated risks of the mostly unregulated sector and may attract the attention of regulators.
DeFi platforms allow parties to conduct transactions, usually in cryptocurrency, directly without traditional gatekeepers such as banks or exchanges. The sector has boomed over the last year, with platforms now handling more than $80 billion worth of digital coins.
Proponents of DeFi say it offers people and businesses free access to financial services, arguing that the technology will cut costs and boost economic activity. But technical flaws and weaknesses in their computer code can make them vulnerable to hacks.
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>>> Skepticism builds within the Fed over the need for a digital dollar
Yahoo Finance
Brian Cheung
August 5, 2021
https://finance.yahoo.com/news/skepticism-builds-within-the-fed-over-the-need-for-a-digital-dollar-155332561.html
A second top Federal Reserve official on Thursday voiced his opposition to the creation of a Fed-issued digital currency that could be used by the general public.
Fed Governor Christopher Waller added that a central bank-issued digital currency (CBDC) may be costly to implement, arguing that privately issued stablecoins may better handle the need for faster payments.
“After careful consideration, I am not convinced as of yet that a CBDC would solve any existing problem that is not being addressed more promptly and efficiently by other initiatives,” Waller said in remarks at the American Enterprise Institute Thursday.
The Fed is currently in the early stages of evaluating the pros and cons of a CBDC, which could take the form of a digital dollar held in digital wallets managed by the central bank. The central bank plans on issuing a paper on the prospects of a CBDC and the broad cryptocurrency space in September.
But Waller has already joined his colleague, Fed Vice Chairman of Supervision Randal Quarles, in publicly criticizing the need for a CBDC. Quarles said in late June that a CBDC could be a serious target for hackers, arguing that issuing one would “pose significant and concrete risks.”
Waller similarly said that the “extreme cybersecurity risk” is the biggest downside concern, in his view.
Proponents of a CBDC argue that it could serve as a lower-cost way for users to make payments and transfer money, particularly for the roughly 5.4% of U.S. households that are unbanked (as of 2019).
The likes of former Federal Deposit Insurance Corp. Chair Sheila Bair have also argued that a CBDC, in future crises, would allow the Fed to bypass the banking system and provide monetary stimulus directly to American wallets.
Private stablecoins
Waller pushed back on the potential benefits of a Fed-issued digital dollar, questioning the central bank’s ability to build the technology at a cheaper cost than private issuers.
The Fed governor, who joined the central bank’s board in December 2020, said private stablecoins are already offering the “attractive payment instrument” of an asset that is pegged one-to-one to the dollar.
Stablecoins tie their values to one or more other assets, such as sovereign currencies, and serve as a less volatile asset compared to unbacked cryptocurrencies like bitcoin.
Still, Waller said stablecoins would benefit from some regulation, as Fed Chairman Jerome Powell has also suggested.
“It’s not clear that the stablecoin issuer is going to honor that 1:1 exchange rate in a run — if a run were to occur,” Waller said Thursday. He cited Tether as an example, suggesting that the nature of its commercial paper holdings are not transparent enough.
Waller proposed some liquidity test on the balance sheets of privately-issued stablecoins, which could evaluate the holdings of short-term government bonds and other securities widely regarded as highly liquid.
Bank of America wrote last week that stablecoins, whether private or central bank-issued, “seem inevitable and the only question is how soon and with what kinks along the way.”
An escalating debate within the Fed will raise further questions about the right balance between public and private players.
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>>> Fed Takes Big Step Toward Preventing More Repo-Market Blowups
Bloomberg
By Alex Harris
July 28, 2021
https://www.bloomberg.com/news/articles/2021-07-28/fed-establishes-domestic-and-foreign-standing-repo-facilities?srnd=premium
It’s been discussing a standing repo facility since 2019
Fed is making sure repo turmoil is ‘never repeated,’ TD says
The Federal Reserve has toyed for years with opening something called a standing repo facility to prevent short-term rates markets from blowing up. Following a 2019 disruption and another early in the pandemic, the central bank finally took that step.
The permanent repurchase-agreement facility, one for domestic firms and another for foreign ones, will backstop money markets, which were hobbled last year as Covid gripped the global economy. The decision to create the facilities followed several years of discussion within the market about whether they are needed and what form they might take. The Fed already has temporary repo facilities.
The Fed is taking action at a time when the market is being pressured by problems that are essentially opposite to the ones it faced during the turmoil seen in recent years. Fed asset purchases, the Treasury cutting its cash balance because of the debt ceiling and other issues have created a glut of cash at the front-end. That’s suppressed rates on repo, Treasury bills and related instruments.
The September 2019 tumult was marked by a huge, sudden spike in rates.
“The Fed is making hay while the sun shines and making sure 2019 is never repeated,” said Gennadiy Goldberg, senior U.S. interest rates strategist at TD Securities. “They can alter the facility details in the future if needed, but realize that it will take time to set up and expand to other counterparties, so they are setting it up long before they need it.”
Key Insights
Fed policy makers have been discussing a standing repo facility since the beginning of 2019, well before rates on overnight repurchase agreements spiked as high as 10% in September of that year.
The repo turmoil renewed calls for permanent action, though the Fed had been conducting daily overnight repo operations since September 2019, though the operations have gone unused since July 2020 as the Federal Reserve and Treasury flooded funding markets with liquidity in response to the pandemic.
Discussions of a standing repo facility ramped up in 2021, when the minutes from the April Federal Open Market Committee meeting showed that a substantial majority of officials “saw the potential benefits of an appropriately calibrated facility as outweighing the potential costs.”
And at the May 4 Treasury Borrowing Advisory Committee, a presenting member said one of the most promising policy proposals to improve Treasury market functioning would be a standing repo facility.
Minutes from the June 15-16 FOMC showed a resumption of the discussion of a standing repo facility, with Fed Chairman Jerome Powell asking staff to work on a proposal that reflects the views expressed by participants.
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>>> A Fed-issued digital dollar could print money — for the people
Yahoo Finance
by Sheila Bair
July 27, 2021
https://finance.yahoo.com/news/fed-issued-digital-dollar-could-print-money-for-the-people-174238842.html
The writer is former Chair of the FDIC and former Assistant Secretary of the U.S. Treasury for Financial Institutions.
More and more informed observers are asking why, after 13+ years of the Federal Reserve’s increasingly aggressive monetary interventions, the benefits remain so skewed toward Wall Street over Main Street. The answer is simple: follow the money. Using its traditional tools, the Fed pumps money into the financial system, hoping it will make its way into the broader economy. But the Fed can’t control where the money goes or who financial institutions decide to lend to, and clearly, the primary beneficiaries have been investors and the ultra-rich.
Fortunately, new technology in the form of a Central Bank Digital Currency (CBDC) provides a mechanism for the Fed to distribute cash directly to working families. This would be a profound shift in the way the Fed has traditionally responded to economic crises, largely bypassing the financial system and channeling increases in money supply to the people who need it the most.
For over a decade after the 2008-2009 financial crisis, the Fed kept money cheap and plentiful in a well-intentioned effort to revive the economy from that debacle. But the money wasn’t getting to consumers, which is why the Fed could never sustain its 2% inflation goal.
That started to change last year when the government stepped up fiscal spending for pandemic relief programs such as supplemental employment insurance, economic impact payments (EIP), rental assistance, and others. These programs were largely funded by deficit spending enabled by the Fed’s purchases of massive amounts of government debt.
As those trillions in new fiscal spending were absorbed into Main Street, voila, consumer prices started picking up (perhaps too much). This fiscal spending was more effective in getting help to working families. But even these fiscal programs were fraught with unnecessary political wrangling, overly complex requirements, and payment delays which stemmed from reliance on an inefficient and costly payments system to distribute the funds.
A better way to get cash to people who need it
CBDC would provide a better way.
By utilizing distributed ledger technology, the Fed could quickly and cheaply get digital dollars to households in times of crisis. To be sure, such a system would need to be authorized by Congress and utilized only in severe economic conditions, triggered perhaps by a precipitous drop in employment or GDP.
But with such a system of “auto-stabilizers,” families would not need to wait for the political system to wrangle over ad hoc relief programs, nor suffer costs and delays inherent in our outdated payments system. The Fed could distribute funds directly to digital wallets held by households, and/or use regulated digital payment providers to help consumers set up digital wallets and custody their CBDC.
This would also promote financial inclusion. Digital wallets could be more accessible to unbanked or underbanked populations, who fear the complexity and fees too often tied to checking accounts. Congress could authorize the Fed to provide initial “seed money” to households as an incentive to set them up.
While payments would be limited to households, indirect benefits would accrue to businesses, as they would provide emergency income for struggling families to pay rent, buy food, and other essential goods and services. By using a Fed-sponsored distributed ledger, the Fed could know the identity of the recipient, and track the money to make sure it reached its intended beneficiaries, providing strong controls against fraud.
Importantly, the Fed would no longer be trying to boost the economy by lowering interest rates to incentivize more borrowing. When people lose their jobs and incomes, they don’t need more debt, they need cash to tide them over. Providing cash assistance could help wean our economy off the use of debt to sustain growth, and hopefully lead to an eventual normalization of interest rates, ending the economic distortions caused by so many years of ultra-low interest rates.
Banking industry advocates such as the Bank Policy Institute argue against CBDC, fearing that it would disrupt banking by drawing money out of deposit accounts and into CBDC digital wallets. But this should not be a risk, particularly if the amount of CBDC per household was capped and was issued solely for government emergency support payments. Such a system could actually prove beneficial to banks as it would reduce the risk of consumer defaults during severe economic downturns. Moreover, CBDC could always be converted to traditional fiat currency and deposited into bank accounts, if banks offered households with sufficiently attractive terms. And of course, businesses and other institutions would still need banks to hold their deposits and service their needs.
Stablecoins can co-exist with CBDC
Another argument, used both for and against CBDC, is that it would undermine privately-sponsored stablecoins — a form of cryptocurrency whose value is tied to and backed by fiat currency. Some fear that privately-sponsored stablecoins could eventually displace central bank money. Thus, they support CBDC as a way to crowd out these private initiatives. For the same reason, supporters of private stablecoins advocate against a CBDC in the U.S.
I support properly regulated private stablecoins. (Disclosure, I am on the board of Paxos, a regulated trust which has one.) But I also think they can co-exist with CBDC, particularly if CBDC issuance is limited to household emergency payments. Our payments system has always relied on a combination of private and Fed-sponsored facilities. There is no reason to think CBDC would kill responsible innovation among private stablecoin issuers. Indeed, parallel private sector efforts to develop stablecoins could help inform and complement the Fed’s use of this technology.
A final argument against CBDC as a monetary tool is that it could increase the risk of inflation. To be sure, the impact on consumer spending would be much more direct than the Fed’s current tools. But that is a strength, not a weakness. Given the greater efficiency of CBDC, smaller increases in money supply would be necessary to boost consumer demand. And should consumer price inflation escalate, CBDC would provide the Fed with an elegant solution: pay interest on CBDC to give households an incentive to save, not spend it.
It is time for a fundamental rethink of how we use monetary policy to support our economy. Incentivizing borrowing with cheap money is inherently unstable. We can see the results: unprecedented levels of government and corporate borrowing, reckless speculation, and nosebleed valuations across a broad spectrum of assets. We all hope (pray) that accelerating consumer price inflation is transitory. But if the Fed is forced to raise rates to tame it, the impact on corporate and government borrowing costs could be disastrous, as would the negative impact on asset prices to financial stability.
It’s hard to see how we get out of our current predicament. But it’s easy to see how technology can, over the longer term, give us an alternative to low interest rates that can get our country out of this debt trap. If we are going to print money to support our economy, then let’s print it for the people. CBDC can provide the way.
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>>> Tether Executives Said to Face Criminal Probe Into Bank Fraud
Bloomberg
By Tom Schoenberg, Matt Robinson, and Zeke Faux
July 26, 2021
DOJ examining whether banks were misled about crypto business
Tether says it’s committed to cooperating with law enforcement
https://www.bloomberg.com/news/articles/2021-07-26/tether-executives-said-to-face-criminal-probe-into-bank-fraud
A U.S. probe into Tether is homing in on whether executives behind the digital token committed bank fraud, a potential criminal case that would have broad implications for the cryptocurrency market.
Tether’s pivotal role in the crypto ecosystem is now well known because the token is widely used to trade Bitcoin. But the Justice Department investigation is focused on conduct that occurred years ago, when Tether was in its more nascent stages. Specifically, federal prosecutors are scrutinizing whether Tether concealed from banks that transactions were linked to crypto, said three people with direct knowledge of the matter who asked not to be named because the probe is confidential.
Criminal charges would mark one of the most significant developments in the U.S. government’s crackdown on virtual currencies. That’s because Tether is by far the most popular stablecoin -- tokens designed to be immune to wild price swings, making them ideal for buying and selling more volatile coins. The token’s importance to the market is clear: Tethers in circulation are worth about $62 billion and they underpin more than half of all Bitcoin trades.
“Tether routinely has open dialogue with law enforcement agencies, including the DOJ, as part of our commitment to cooperation and transparency,” the company said in a statement. Its corporate structure consists of a tangled web of entities based in the British Virgin Islands and Hong Kong.
The Justice Department declined to comment.
Read More: Why Yellen and Powell Cast a Wary Eye on Stablecoins
Federal prosecutors have been circling Tether since at least 2018. In recent months, they sent letters to individuals alerting them that they’re targets of the investigation, one of the people said. The notices signal that a decision on whether to bring a case could be made soon, with senior Justice Department officials ultimately determining whether charges are warranted.
The probe is reaching a tipping point as stablecoins attract intense scrutiny from regulators. The U.S. Treasury Department and Federal Reserve are among agencies concerned that the tokens could threaten financial stability, and are obscuring transactions tied to money laundering and other misconduct because they allow criminals to make payments without going through the regulated banking system. Treasury Secretary Janet Yellen said last week that watchdogs must “act quickly” in considering new rules for stablecoins.
Tether's Dominance
The token is by far the most popular stablecoin
A hallmark of Tether is that its creators have said each token is backed by one U.S. dollar, either through actual money or holdings that include commercial paper, corporate bonds and precious metals. That has triggered concerns that if lots of traders sold stable coins all at once, there could be a run on assets backstopping the tokens. Fitch Ratings has warned that such a scenario could destabilize short-term credit markets.
Read More: Crypto Lode of $100 Billion Stirs U.S. Worry Over Hidden Danger
Tether was first issued in 2014 as a solution to a problem plaguing the crypto market: banks didn’t want to open accounts for virtual-currency exchanges because they feared touching funds tied to drug trafficking, cyberattacks and terrorism. By accepting Tether, exchanges could give traders a way to park their balances without being exposed to Bitcoin’s price gyrations. And funds could be transferred instantaneously from exchange to exchange.
But Tether’s corporate side still needed banks to hold its money and process customer transactions. One early relationship that soured was with Wells Fargo & Co. In 2017, the Tether Ltd. affiliate and Bitfinex -- a crypto exchange with common owners and executives -- sued Wells Fargo for blocking wire transfers that had been sought through Taiwanese banks.
In the lawsuit, Tether Ltd. and Bitfinex said Wells Fargo knew, or should have known, that the transactions were being used to obtain U.S. dollars so clients could purchase digital tokens. The companies dropped the case shortly after filing it.
Wells Fargo declined to comment.
In the course of its years-long investigation, the Justice Department has examined whether traders used Tether tokens to illegally drive up Bitcoin during an epic rally for cryptocurrencies in 2017. While it’s unclear whether Tether the company was a target of that earlier review, the current focus on bank fraud suggests prosecutors may have moved on from pursuing a case tied to market manipulation.
Tether has already drawn the ire of regulators. In February, Bitfinex and several Tether affiliates agreed to pay $18.5 million to settle claims from New York Attorney General Letitia James that the firms hid losses and lied that each token was supported by one U.S. dollar. The companies had no access to banking in 2017, making it impossible that they had reserves backing the tokens, James said. The firms settled without admitting or denying the allegations.
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>>> A Digital Money Rush Is Great. A Run, Not So Much
Stablecoins will become much more widely used and need balanced regulation before they’re too big to fail.
Bloomberg
By Andy Mukherjee
July 22, 2021
https://www.bloomberg.com/opinion/articles/2021-07-22/fed-needs-to-regulate-stablecoins-before-they-become-too-big-to-fail-in-a-crisis?srnd=premium
In Hong Kong, money has been privately issued since 1846. The bill in my wallet is a promise from HSBC Holdings Plc’s local banking unit to pay the value written on it. In accepting it, I gave no thought to the creditworthiness of the lender. Whoever it’s passed on to will also take the banknote at face value, and won’t ask for Hong Kong dollars printed by Standard Chartered Plc instead.
Not requiring due diligence on cash sounds commonsensical, but it’s actually a highly valuable property of money everywhere. Indeed NQA, or “No Questions Asked,” is so important that Yale School of Management finance professor Gary Gorton and Federal Reserve attorney Jeffery Zhang have made it the centerpiece of their new paper, titled “Taming Wildcat Stablecoins.”
Blockchain-based stablecoins such as Tether and the upcoming Diem are the latest form of private money: Tokens that don’t offer Bitcoin-type speculative thrills but seek acceptance instead as one-to-one clones of national currencies. They could become a powerful part of the modern digital economy, provided we know how to prevent a run on them.
Trust in physical cash is supplied by regulators. Since the value of Hong Kong’s currency is pegged to the U.S. dollar, the city’s three note-issuing institutions 1 buy certificates of indebtedness from the monetary authority by paying it 1 dollar for every 7.8 local units they print. Hong Kong’s 7.5 million people don’t have to ask any further questions about the worth of their money.
However, as digital stablecoins proliferate globally, NQA may not hold. That’s what happened during the free banking era in the U.S., when notes issued by a lender in Tennessee would sometimes be discounted by 20% in Philadelphia. “There was constant haggling and arguing over the value of notes in transactions,” Gorton and Zhang write. “Private bank notes were hard to use in transactions.”
Things changed because of the Civil War. President Abraham Lincoln wanted desperately to raise money for the war effort by selling bonds to newly chartered national lenders. The law Congress passed in 1863 also ushered in a uniform currency. Thereafter, banks were taxed for paying out other types of notes, driving them out of existence.
The researchers argue that stablecoins are in a similar situation. In the current regulatory vacuum, they’ll struggle to become no-questions-asked money. For NQA, they’ll need the state’s blessing — and oversight. That’s been in short supply because rapid growth of the novel product has taken regulators by surprise.
But while blockchain technology is new, the economic logic of stablecoins isn’t. Buying $100 worth of these tokens is no different from a depositor parking $100 in a checking account, which preserves its value because of deposit insurance and regulatory scrutiny. Stablecoins will need a similar setup. Or, if the issuers want to avoid the cost of being a commercial bank, regulators will have to insist on transparent, one-to-one backing of liabilities with safe assets. Only then can the public reliably trust tokens claiming to mimic official units of account — dollar, euro, pound, yen, yuan and so on.
Without these safeguards, allowing stablecoins to compete with bank deposits could spawn another combustible financial product. Money market mutual funds, which have avoided being regulated as bank deposits, had to be bailed out twice in a dozen years: during the 2008 crisis, and then again last year when Covid-19 struck. Gorton and Zhang caution that if policy makers wait a decade, stablecoin issuers will become the money market funds of the future. Doubts about a token’s ability to honor its promise of 1:1 exchange into fiat money could prompt users to make a beeline for redemption. Fire sales of assets by the coin issuer could afflict other corners of finance, forcing governments “to step in with a rescue package whenever there’s a financial panic,” the researchers say.
At a little over $100 billion, the combined market value of the top five coins tracking the dollar — Tether, USD Coin, Binance USD, Dai and Terra USD — is modest at present. But that’s because stablecoin users have mostly come from cryptocurrency investors. With Visa Inc. starting to accept USD Coin to settle card payments, it’s only a matter of time before usage goes mainstream. The Diem Association, a consortium of Facebook Inc. and other companies and nonprofits, has tied up with a bank. Diem’s dollar stablecoin can thus be launched from within the the U.S. banking system, and Facebook’s enormous reach could make it take off. Given the rapid pace at which the landscape is changing, Treasury Secretary Janet Yellen is right to tell U.S. regulators to hurry up and put in place a regulatory framework for stablecoins.
If the rules strike the right balance between supporting innovation and maintaining stability, the U.S. may not need to follow China into offering an official digital currency, a possibility that a top Fed official raised recently.
Will the Fed choose regulated private stablecoins, a central bank-issued digital currency, or both? Even as the rest of the world awaits answers, some decisions should be made right away. Tether, the most used dollar coin, is owned by Hong Kong-based iFinex Inc. Every country could potentially have a crypto or fintech firm mirror their official unit of account. Trying to regulate entities once they’re already too big to fail would be pointless.
Money in the 21st century may not need to be official. But it still has to be no-questions-asked, like the Hong Kong dollars in my wallet. That’s a power that only regulators can bestow. They should use it well.
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>>> China’s digital yuan could pose challenges to the U.S. dollar
July 25, 2021
CNBC
by Dain Evans
https://www.cnbc.com/2021/07/24/the-us-is-deciding-how-to-respond-to-chinas-digital-yuan.html
China is beating the U.S. when it comes to innovation in online money, posing challenges to the U.S. dollar’s status as the de facto monetary reserve. Nearly 80 countries — including China and the U.S. — are in the process of developing a CBDC, or Central Bank Digital Currency. It’s a form of money that’s regulated but exists entirely online. China has already launched its digital yuan to more than a million Chinese citizens, while the U.S. is still largely focused on research.
The two groups tasked with this research in the U.S., MIT’s Digital Currency Initiative and the Federal Reserve Bank of Boston, are parsing out what a digital currency might look like for Americans. Privacy is a major concern, so researchers and analysts are observing China’s digital yuan rollout.
“I think that if there is a digital dollar, privacy is going to be a very, very important part of that,” said Neha Narula, director of the Digital Currency Initiative at the MIT Media Lab. “The United States is pretty different than China.”
Another concern is access. According to the Pew Research Center, 7% of Americans say they don’t use the internet. For Black Americans, that rises to 9%, and for Americans over the age of 65, that rises to 25%. Americans with a disability are about three times as likely as those without a disability to say they never go online. That is part of what MIT is researching.
“Most of the work that we’re doing assumes that CBDC will coexist with physical cash and that users will still be able to use physical cash if they want to,” Narula said.
The idea of a CBDC in the U.S. is aimed, in part, at making sure the dollar stays the monetary leader in the world economy.
“The United States should not rest on its current leadership in this area. It should push ahead and develop a clear strategy for how to remain very strong and take advantage of the strength of the dollar,” said Darrell Duffie, professor of finance at Stanford University’s Graduate School of Business.
Others see the digital yuan as insidious.
“The digital yuan is the largest threat to the West that we’ve faced in the last 30, 40 years. It allows China to get their claws into everyone in the West and allows them to export their digital authoritarianism,” said Kyle Bass of Hayman Capital Management.
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>>> Do You Have This Smartphone App?
BY JAMES RICKARDS
JULY 20, 2021
https://dailyreckoning.com/do-you-have-this-smartphone-app/
Do You Have This Smartphone App?
The stock market bounced back today after yesterday’s major losses. “Buy the dip” is alive and well.
But today, I want to revisit a topic I haven’t addressed much lately due to the pandemic, the inflation debate, and many other topics that have taken center stage.
I’m talking about the war on cash.
I’ve warned for a long time that governments are forcing citizens into digital forms of money so that they can more easily freeze accounts, seize assets and impose negative interest rates. As long as cash is an option, you can take your cash outside the system and avoid digital freezes.
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.
The movement toward a cash-free society is gathering momentum, but it’s not entirely here yet.
Access Denied!
That’s not stopping some financial institutions from taking your money anyway. For example, a banking app called Chime has been seizing customer accounts and not allowing them to log on or access their funds.
Chime has 12 million customers. So far, 970 customer complaints have been filed, of which 197 specifically mention “closed account” as the cause of the complaint. Many of the remaining 723 complaints involve closed accounts, although the regulatory records do not categorize them that way.
In some cases of individual retail customers, the amount frozen was $10,000 or more. The complaints are being resolved slowly and inconsistently. In the meantime, the customers’ funds are blocked.
The only surprise in this story is that these kinds of account blocks have not happened sooner or on a larger scale. Still, this is the tip of the spear; far more account freezes of this kind are coming.
Chime is a retail application used mainly on smartphones. But, central banks are working from the top down to create central bank digital currencies (CBDCs) that will enable bank regulators to do the same thing.
Your $1,000 Deposit Is Only Worth $975
CBCDs use the same underlying distributed ledger technology that cryptocurrencies use. But 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.
In the future, customers will discover that paper money deposits will be accepted at a discount to face value when depositing to the new digital system. A deposit of $1,000 may be credited as $975.00 when put into the digital system, if it was after an arbitrary cut-off date, for example.
A system of such discounts (really taxes or penalties) was actually suggested by a prominent economist at a Fed symposium a few years ago. That economist was later nominated for a seat on the Fed board of governors.
As always, the new digital banking system will be promoted on the basis of convenience, ease of use and lower costs. Who needs bank accounts, checks, account statements, deposit slips, and the other clunky features of a banking relationship when you can go completely digital?
In reality, customers will discover that their digital assets are at risk for seizure or taxation not only for criminal reasons (that’s true today) but for political, medical or social reasons.
Could China’s Social Credit System Come to the U.S.?
Such a “social credit” system is being implemented in China. 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.
Elements of China’s social credit system could end up being used here in the U.S. It might not be exactly the same, but it would nonetheless punish those who don’t comply with government decrees.
“Hmmm, the official record says you haven’t been vaccinated. That’s unfortunate. We’re sorry, but…”
An all-digital cash system could be used to impose fees on those who cannot prove they have received a COVID vaccine or some other medicine. This would amount to universal forced vaccination, although it would surely be imposed under some other more benign-sounding name.
If cash is no longer permitted, savers will be forced into buying land, gold, silver, or other tried-and-true ways of preserving wealth without exposing it to government pirates. The Chime account freezes are the shape of things to come.
Meanwhile, the big banks are also happy to kick you out of the banking system.
Wells Fargo Finds a New Way to Shaft Customers
The mega-bank Wells Fargo has just announced that it is shutting down all personal lines of credit and retail overdraft facilities.
These lines of credit range from $3,000 to $100,000 and they will all be closed within 60 days. Having a line of credit shut-down can negatively affect your credit score, but Wells Fargo doesn’t care. The bank also doesn’t care that many of these personal lines of credit are actually used as working capital facilities for small businesses.
Many small business owners operate as sole proprietors, in which case there is no sharp line between business and personal expenses. Even when a business is formed as a company, the owner often acts as a swing lender to provide cash to her own company.
The personal lines of credit Wells Fargo is closing may result in small businesses having to shut their doors or scale-back on operations, including possible loss of jobs.
Again, Wells Fargo doesn’t care.
Wells Fargo said it could meet customer credit needs with credit cards instead of the lines of credit being closed. Of course, credit cards have high interest, annual fees and 2.5% merchant acquirer fee on each transaction.
This solution offered by Wells Fargo is transparently an effort to charge higher fees and impose tighter restrictions on its customers in comparison with the personal lines of credit.
At what point does a bank cease to be a business offering financial products at a fair rate and morph into a parasite that sucks customers dry using every means at its disposal?
We’re probably already past that point.
Regards,
Jim Rickards
for The Daily Reckoning
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>>> Yellen urges federal agencies to 'act quickly' on stablecoin regulation
Yahoo Finance
Brian Cheung
July 19, 2021
https://finance.yahoo.com/news/yellen-urges-federal-agencies-to-act-quickly-on-stablecoin-regulation-203653004.html
The top U.S. financial regulators convened on Monday to expand discussions on a regulatory framework for stablecoins, a type of digital currency that bills itself as a less volatile asset class than other cryptocurrencies.
Treasury Secretary Janet Yellen held a meeting with five federal regulatory agencies to discuss the “rapid growth” of stablecoins, according to a Treasury readout of the meeting Monday afternoon.
The nation’s top regulators acknowledged the potential for stablecoins to be a useful means of payment, but advocated for setting up guardrails to protect stablecoin users, the financial system, and national security.
“The Secretary underscored the need to act quickly to ensure there is an appropriate U.S. regulatory framework in place,” the Treasury reported.
The meeting brought together the heads of the Securities and Exchange Commission, Federal Reserve, Commodities Futures Trading Commission, Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency.
The officials were briefed by Treasury staff on a forthcoming report on stablecoins, which will include recommendations for addressing “any regulatory gaps” in the current regulatory framework.
Risks ahead?
Whereas many cryptocurrencies are not backed by a specific asset, stablecoins tie their values to one or more other assets, such as sovereign currencies. One selling point for stablecoins: facilitating cross-border payments.
Stablecoins have been growing in popularity, taking some steam out of prime money market funds. The concern is that if left unregulated, stablecoins may be riskier than advertised.
A chart from the Boston Fed, using data from Coin Metrics and iMoneyNet, notes that stablecoins have been growing in popularity against prime money market mutual funds. Source: Federal Reserve Bank of Boston
More
In a December 2020 statement, regulators said they wanted to encourage “responsible payments innovation.” But the statement also raised concerns over the possible financial stability risks that could come from “large-scale, potentially disorderly redemptions” on stablecoins.
If stablecoins continue to attract attention away from money market funds, short-term credit markets could be exposed to any stablecoin event.
“I think we have a tradition in this country where [if] the public’s money is held in what is supposed to be a very safe asset, we have a pretty strong regulatory framework,” Fed Chairman Jerome Powell told Congress last week.
The regulators in December proposed reserve requirements to ensure stablecoin liquidity. The regulators also emphasized that stablecoins must comply with all relevant laws concerning anti-money laundering and countering the financing of terrorism measures.
“Bringing together regulators will enable us to assess the potential benefits of stablecoins while mitigating risks they could pose to users, markets, or the financial system,” the Treasury noted last week when it publicly announced the Monday meeting.
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Blackrock - >>> Time for policy to go direct
https://www.blackrock.com/corporate/insights/blackrock-investment-institute/publications/coronavirus-policy-response
>>> Time for policy to go direct
We outline the need for a decisive, pre-emptive and coordinated policy response to the coronavirus shock.
Key views
The depth and duration of the coronavirus economic impact is uncertain but should be temporary as the outbreak will eventually dissipate.
To deal with the shock, a decisive, pre-emptive and coordinated policy response is required to avoid the disruptions to income streams and financial flows.
We believe it is time to go direct: a joint monetary and fiscal response that more directly relieves the cash flow pressures facing some sectors of the economy.
The future evolution and global spread of the coronavirus outbreak is highly uncertain. What we know is that containment and social distancing are ultimately achieved by reducing economic activity. Faced with resource constraints in healthcare systems, there are strong incentives to take aggressive containment measures to slow the spreading. The impact on economic activity will likely be sharp – and could be deep.
Coronavirus calls for coordinated policy action
Central banks have started cutting interest rates to mitigate coronavirus concerns, but we see more to come. Our latest episode of the BlackRock Bottom Line explains why.
The depth and duration of the economic impact is uncertain but should be temporary as the outbreak itself will eventually dissipate. That requires a decisive, pre-emptive and coordinated policy response to avoid the disruptions to income streams and financial flows that could cause persistent economic damage – and end the cycle.
“
Authorities in all major economies have to fast-track sizeable, comprehensive and flexible support programs.
”
We wrote in August 2019 about the nearly exhausted monetary policy toolbox and the challenges it poses for dealing with the next downturn. This has now come to the fore – and that’s why it is time to go direct with policy support. Simply using up the limited monetary policy space remaining – interest rates, forward guidance or even quantitative easing – could quickly put the macro focus on the lack of tools left and thus backfire. The only way to address this is to add further lines of defense and make fiscal policy an explicit part of the crisis response toolkit.
The first step is to provide frontline public health agencies with necessary financial resources. But a joint effort between monetary and fiscal policy is required to avoid a raft of financial failures at the grassroot level due to demand shortfalls, production disruptions or payment delays that can all lead to cash flow squeezes. Small- and medium-sized enterprises, for example, risk having cash flows cut off if they have to rely solely on support through financial markets. That is why any solutions will need to involve “going direct” with policy – that is, more directly relieving the cash flow pressures facing some sectors of the economy.
Authorities in all major economies have to fast-track sizeable, comprehensive and flexible support programs to pre-emptively provide direct financial support to companies and households facing a short-term loss of income. That would prevent these temporary disruptions from turning into a full-blown global recession. Deploying these programs will involve coordination of monetary and fiscal policy. Recognizing that these measures will be temporary justifies an aggressive policy response. The experience of the global financial crisis and aftermath shows that the policy effectiveness would be greatly enhanced if the international community approached these measures as a deliberate package delivered in a coordinated fashion.
A comprehensive global response should have the following elements:
First, to support households, fiscal measures could also include generous sick-pay support and short-time work schemes to stabilize incomes and to limit job losses – especially where such arrangements were not available before. Several countries are already preparing such measures. Income support can come via adjustments to welfare and labor market programs, such as unemployment insurance. Welfare programs could also be tweaked by temporarily enhancing benefits and reducing waiting times until citizens become eligible. Direct payments to affected households are also an option.
Second, to support companies, fiscal authorities could suspend collection of tax revenues and social security contributions to provide temporary cash flow relief to firms and the self-employed while at the same time accelerating outgoing public payments and reducing unpaid bills to the private sector. In some instances, cash grants via local governments and natural disaster relief agencies might be required beyond loans. These are ways to directly provide some relief to company balance sheets that can be quickly implemented within current government programs. Automatic fiscal stabilizers should be allowed to work fully and, if needed, existing fiscal rules could be temporarily suspended.
Third, monetary authorities should also be ready to deploy more direct and targeted liquidity support, including expanding funding-for-lending facilities – providing liquidity to commercial banks that is earmarked specifically for lending to corporates hurt by the virus outbreak. Government guarantees can help cover any bank lending at preferential rates to meet the corporate sector’s need for additional working capital. Alternatively, state-owned development banks could be used as a conduit for such lending. In countries with weaker public finances, asset purchase programs could safeguard the government’s funding conditions.
A decisive and pre-emptive policy response is essential given the uncertainty around what will likely be material near-term disruptions due to the coronavirus outbreak. For the most part these measures will be fiscal in nature – and some will require coordination between fiscal and monetary authorities. Monetary policy should focus on preventing an unwarranted tightening in financial conditions and ensure the functioning of financial markets. Central banks going it alone with interest rate cuts risk wasting precious policy ammunition. We believe decisive policy action now would help avoid opening the door to more radical ideas and uncontrolled fiscal spending.
Authors:
Elga Bartsch – Head of Macro Research, BlackRock Investment Institute
Jean Boivin – Head, BlackRock Investment Institute
Tom Donilon – Chairman, BlackRock Investment Institute
Stanley Fischer – Senior Advisor, BlackRock
Rupert Harrison – Head of Research for Diversified Strategies, BlackRock
Philipp Hildebrand – Vice Chairman, BlackRock
George Osborne – Senior Advisor, BlackRock Investment Institute
Mike Pyle – Chief Investment Strategist, BlackRock Investment Institute
<<<
>>> Yellen to Convene U.S. Regulators to Discuss Stablecoins
Bloomberg
Joe Light and Jesse Hamilton
July 16, 2021
https://finance.yahoo.com/news/yellen-convene-u-regulators-discuss-160000948.html
(Bloomberg) -- Treasury Secretary Janet Yellen will convene top U.S. financial-market and bank regulators on Monday to discuss rules for so-called stablecoins, a key part of the cryptocurrency market where government officials are increasingly fretting about a lack of oversight.
The meeting of the President’s Working Group on Financial Markets will “discuss interagency work on stablecoins,” the Treasury Department said in a statement Friday. In addition to the Treasury secretary, the working group is comprised of the heads of the Federal Reserve, Securities and Exchange Commission and Commodity Futures Trading Commission, and this session will also include two bank regulators: the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp.
“Bringing together regulators will enable us to assess the potential benefits of stablecoins while mitigating risks they could pose to users, markets, or the financial system,” Yellen said in the statement. “In light of the rapid growth in digital assets, it is important for the agencies to collaborate on the regulation of this sector and the development of any recommendations for new authorities.”
The working group “will examine the current regulation of stablecoins, identify risks, and develop recommendations for addressing those risks,” and expects to “issue written recommendations in the coming months,” the Treasury said.
Regulators are increasingly worried about this new kind of cryptocurrency, which has a fixed price and is backed by real-money reserves, because of risks it poses to investors and the financial system broadly. Lawmakers and officials from the Fed and the administration have expressed alarm both in public and private that some consumers won’t actually be protected should one of the firms not have the backing they purport to have.
They also say the growing size of stablecoins has created a situation where huge amounts of U.S. dollar-equivalent coins are being exchanged without touching the U.S. banking system, potentially blinding regulators to illicit finance.
The market value of U.S.-dollar-backed stablecoins has grown rapidly in the past year and surpassed $100 billion in May. The largest, called Tether, has faced scrutiny from regulators for not always having the backing that it has claimed to have.
Powell Warning
The planned meeting follows comments by Fed Chair Jerome Powell this week warning that stablecoins lack needed regulatory oversight.
“They are like money funds, they’re like bank deposits and they’re growing incredibly fast but without appropriate regulation,” Powell said in answering questions before the Senate Banking Committee on Thursday. “And if we’re going to have something that looks just like a money market fund or a bank deposit or a narrow bank and it’s growing really fast, we really ought to have appropriate regulation. And today, we don’t.”
Fed officials including Boston Fed President Eric Rosengren have highlighted potential growing risks from stablecoins including Tether.
In December, the government warned firms behind stablecoins to tighten protections against money laundering. The Treasury and other agencies said at the time they should be used in a way that “effectively manages risk and maintains the stability of the U.S. domestic and international financial and monetary systems.”
There’s also the question of whether Congress should step in and write new laws that would give regulators more authority to regulate cryptocurrencies. One bill introduced in Congress last year would require stablecoin issuers to have a banking charter and get approval from the Fed, among other agencies.
The concept of a stablecoin is closely linked to the difficult decision the Fed faces on whether to someday launch a digital currency. Powell suggested this week that the best-case scenario for a Fed-run digital dollar would involve Congress issuing a legislative directive rather than letting the regulators pick through existing “ambiguous law” to back up any future moves.
The Fed has already been working on a digital-currencies report that Powell said could be released as soon as September. Among other things, that document will include a discussion on the risks and benefits of stablecoins, he said.
In recent years, the OCC has set itself up as the most aggressive banking agency when it comes to prepping the financial system for the influx of cryptocurrencies. The agency’s former acting head Brian Brooks, a Trump administration pick, made a series of rapid moves to accelerate digital currencies in U.S. banking. But Brooks left and took a job running the cryptocurrency exchange Binance.US, and the OCC’s work is expected to slow under Michael Hsu, the agency’s current temporary chief.
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Rickards - >>> It’s NOT a Conspiracy
BY JAMES RICKARDS
JULY 12, 2021
https://dailyreckoning.com/its-not-a-conspiracy/
It’s NOT a Conspiracy
Philosophers and analysts use a principle called Occam’s Razor (sometimes Ockham’s Razor) to solve difficult problems. It says that when you are confronted with two possible solutions to a problem, one complicated and one simple, it’s usually better to select the simple solution.
There’s always some attraction to the complicated solution because humans like intrigue and plot twists. But statistically, the simple solution is more likely to be correct and therefore the one that analysts should prefer unless contrary evidence presents. This approach is useful in dealing with conspiracy theories.
Yes, real conspiracies exist (such as the plot to assassinate JFK), and analysts must be alert to the possibility. But most so-called conspiracies have much simpler explanations that are more likely to be correct.
One of the most potent drivers of coordinated political action is not a deep, dark conspiracy. It’s usually just the result of like-minded individuals cooperating to achieve the same goal.
It’s Groupthink, Not Conspiracy
If the political players all think alike and agree on goals, you don’t need a conspiracy. Just let them go to work every day and communicate with each other, and you’ll get the coordinated result without the inevitable twists and turns of a conspiracy.
That’s a good thing to bear in mind when considering the current administration. 23, top Biden administration officials all worked at the same consulting firm called WestExec Advisors. These officials include Press Secretary Jen Psaki, Secretary of State Tony Blinken and Director of National Intelligence Avril Haines.
For those who may be unfamiliar, “WestExec” is a reference to West Executive Avenue, a non-public road that runs between the West Wing of the White House and the Eisenhower Executive Office Building.
The West Wing is not that large and only has a few choice offices plus the Situation Room, the Roosevelt Room (for larger meetings) and the Cabinet Room, which is smaller. Most officials who say they “work in the White House” actually work in the Eisenhower Building, which means they walk across West Executive Avenue when they have meetings with top Biden officials.
The WestExec Advisors name is a play on that kind of insider status of the long list of former WestExec principals who are now running the country. (Don’t look to Biden as the source of power; he’s not mentally competent and does what the WestExec crowd or the rest of the Biden family tell him to do).
A Threat to National Security
So, with all of this power emerging from one firm, does that mean there’s a conspiracy among the alums to control the world?
Not really. But, it points to a bigger problem, which is the lack of cognitive diversity. The WestExec crowd all went to top schools, had top jobs in previous administrations, exhibit high IQs, and boast lots of credentials.
If you look at their resumes, you’ll see they all went to the same schools, had the same professors and pursued the same career paths. With few exceptions, it’s all Harvard, Yale and Columbia with a small dose of Stanford or Chicago for good measure.
They all went to law school or got PhDs and worked for the same small set of law firms or consulting firms. Then they all worked in a small set of government agencies, including the State Department, National Security Council or the Intelligence Community.
They all think alike. That’s an acute weakness because if they all look at things the same way, they will all miss the real dangers coming that don’t fit into their mental molds. Lack of cognitive diversity is a fatal weakness.
As a leader, you should always be willing to lower the average IQ if it means you can increase the range of viewpoints. At least someone might point out it’s raining to a group that’s too buried in briefing books to look out the window. This uniform mindset is itself a danger to national security. Sooner than later, a threat will arise that none of them will see coming.
On the Verge of the Most Destructive War Since WWII?
And there’s no shortage of threats in the world. Perhaps the most pressing right now is China’s aggressive posturing in East Asia. It’s not just China and the U.S.
The world’s three largest economies — the U.S., China and Japan — may be squaring off for the most destructive and costly war since the end of World War II.
The main protagonists will be China and the U.S. The cause of war will be a Chinese invasion of Taiwan, which may be coming much sooner than the world expects.
China would start the war with an invasion across the Taiwan Strait. The U.S. would be obliged to come to the defense of Taiwan and take measures to disable the Chinese fleet and its air support. But, Japan is no bystander.
A glimpse at a map shows that if Taiwan were in Communist China’s hands, Japan’s own sea lanes would be threatened, including its access to imported oil. Japan has its own island disputes with China. If China were to capture Taiwan, Japan’s islands in the East China Sea would likely be the next to fall.
The U.S. could fall back to a line of islands, including Guam, Hawaii and the Aleutians, but no fallback is possible for Japan. If China seizes Taiwan and the U.S. falls back, Japan would be under the thumb of China, and they know it.
Of course, a fallback by the U.S. would be an enormous blow to U.S. credibility, as well as its economic power. That’s why an alliance of the U.S. and Japan against China to defend Taiwan (along with Taiwan’s own formidable defense capability) is the most likely response to a Chinese amphibious assault.
“Wolf Warrior” Diplomacy
The question for the world is whether China will get the message and refrain from attacking Taiwan. Unfortunately, signs point in the opposite direction. China has left its non-threatening style of diplomacy in the past.
Today, China pursues “Wolf Warrior diplomacy,” named after a popular Chinese movie that features aggressive Navy SEAL-style tactics as practiced by Peoples’ Liberation Army commandos.
China has come out of its shell and seeks regional hegemony to be followed by global hegemony. It is aggressively pushing on its neighbors in India, Myanmar, and the six nations that surround the South China Sea. Taiwan is the prize, and China is preparing to seize it.
This attack will be Xi Jinping’s legacy and his attempt to rival the reputation of Mao Zedong. Will Team Biden be able to see it coming?
U.S. investors should not take Chinese restraint for granted. Allocations to cash, gold and U.S. Treasury notes will preserve wealth when the worst happens.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> The Crypto Revolution Will Not Be Public
Is a central bank digital currency, or CBDC, a solution in search of a problem?
Bloomberg
By Tyler Cowen
July 13, 2021
https://www.bloomberg.com/opinion/articles/2021-07-13/the-crypto-revolution-will-not-be-public?srnd=premium
A revolution is pending in finance, and the world is only beginning to realize the transformations it is likely to bring. Financial institutions will have to take a radically different approach to information technology just to stay in business.
Bullish Global, a crypto firm, is planning to go public this year, with an expected valuation of $9 billion. Circle Internet Financial Inc., the company behind stablecoin, is also planning to be publicly listed, as is cryptocurrency platform Bakkt Holdings. Financial markets are difficult to predict, but at this point, 12 years after the inauguration of Bitcoin, it is hard to argue that this is all a bubble.
To understand why, ask yourself a simple question. Why shouldn’t finance and payments be as easy as sending an email? Anyone who grew up on computer games and texting probably thinks that running a financial system should be equally frictionless and cheap, especially if there were a mature central bank digital currency. There’s no reason money couldn’t be transferred by a simple act of communication.
Due to the large amount of money at stake, there would need to be higher levels of security than with email. But some mix of bioscans, multi-factor authorization and hardware security (you need more than a password) ought to suffice. These safeguards shouldn’t cost very much once they are in place.
One vision is that governments and central banks will run these systems, making governments and central banks far more important in finance. For many institutions, private banks would not be needed to get access the payments system, and so the role of private banks would shrink. The central bank in turn would have more funds to deploy, and inevitably it would apply some amount of discretion to those funds.
If the role of government is to expand, and if private banks are to suffer, it would create significant issues of the sort that the U.S. political system is often not very good at resolving. The U.S. Federal Reserve has made it clear it won’t create a digital currency without approval from Congress, but Congress is notorious for being slow or even unable to act, especially on issues involving the role of the government in the economy.
And these squabbles are not purely partisan. Given the government’s record with technology — remember the botched rollout of the Obamacare website? — can we be so sure that a central bank digital currency would be hack-proof and well-functioning from the start?
In a remarkably honest yet radical speech last month about stablecoins, Fed Governor Randal Quarles argued that current payments systems already incorporate a great deal of information technology — and they are improving rapidly. The implication is that a central bank digital currency, or CBDC, is a solution in search of a problem.
Quarles also suggested that the Fed tolerate stablecoins, just as central banking has coexisted and indeed thrived with numerous other private-sector innovations. Stablecoins can serve as a private-sector experiment to see if individuals and institutions truly desire a radically different payments system, in this case based on crypto and blockchains. If they do, the system can evolve by having some but not all transactions shift toward stablecoin.
There need not be any “do or die” date of transition requiring a perfectly functioning CBDC. But insofar as those stablecoins can achieve the very simple methods of funds transfer outlined above, market participants will continue to use them more.
Quarles argued that with suitable but non-extraordinary regulation of stablecoin issuers, such a system could prove stable. He even seems to prefer the private-sector alternative: “It seems to me that there has been considerable private-sector innovation in the payments industry without a CBDC, and it is conceivable that a Fed CBDC, or even plans for one, might deter private-sector innovation by effectively ‘occupying the field.’”
In essence, Quarles is willing to tolerate a system in which privately issued dollar equivalents become a major means of consummating payments outside of the Fed’s traditional institutions. Presumably capital requirements would be used to ensure solvency.
For many onlookers, even hearing of innovation in finance raises worries about systemic risk. But perhaps the U.S. would do better by letting information technology advance than trying to shut it down. And if you are afraid of instability, are you really so keen to see foreign central bank digital currencies fill up this space?
If you are still skeptical, ask yourself two final questions. First, which has been more innovative on these issues: the private sector or the public sector? Second, how realistic are the prospects that Congress takes any effective action at all?
This is now a world in which radical monetary ideas are produced and consumed like potato chips. I say, pass the bag.
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>>> Can IMF Currency Replace the Dollar?
CATO Institute
APRIL 5, 2009
By Swaminathan S. Anklesaria Aiyar
https://www.cato.org/commentary/can-imf-currency-replace-dollar
This article appeared in the Times of India on April 5, 2009.
World leaders at the G-20 meeting agreed to create new international money worth $250 billion. The IMF will oversee the new money called SDRs (Special Drawing Rights). Some people believe — and China fervently hopes — that SDRs will in due course replace the dollar as the main world reserve currency.
I, however, am a sceptic. I doubt if the amount of SDRs will ever rival the dollar, euro or yen. Far from becoming a separate international currency, the SDR will remain a derivative of the dollar and a few other major national currencies.
Before World War I, most countries were on the gold standard: currency issue was tied to the gold held in their reserves. A country whose gold holdings fell, had to shrink its money supply too. Such stiff discipline meant inflation was close to zero: governments could not print notes at will. But governments needed huge spending in World War I and so gave up the gold standard for the printing press. Besides, the bulk of gold production came from Russia and South Africa, and others refused to be at the mercy of those two countries for future money supply.
Resort to printing presses started a century of unprecedented inflation. Today, governments cannot contemplate being anchored to gold — that would leave them no flexibility to do things that voters demand. Voters also complain about inflation. But they prefer do-?something governments plus inflation to do-?nothing governments with stable prices.
The abandonment of the gold standard was not exactly a success. The Great Depression arrived in 1929. Competitive devaluations by different countries caused world trade to sink by almost 80%. So, in 1944, major market economies gathered at Bretton Woods to devise a post-?war monetary system. British economist J M Keynes favoured a new international currency, Bancor, anchored in 30 commodities. But there was no political will to give up the printing press. Instead, the new international system was anchored in the dollar, the only currency convertible to gold, with the exchange rates of other currencies overseen by the IMF.
However, the US resented being the only country tied to gold, and gave up that link in 1971. After that, all currencies floated against one another. Countries kept forex reserves mainly in dollars, but also in sterling, yen, and euros.
Recently, the US has ceased to dominate the world economy. It has run up record trade deficits and gargantuan foreign debt. China and other countries hold trillions of dollars in their forex reserves. With Obama printing trillions of dollars to stimulate the US economy, China fears that the dollar — and China’s own reserves — will crash. Hence, China wants SDRs as a rival reserve currency, phasing out the dollar.
Others like India are also keen on a fresh issue of SDRs to improve cash availability at a time when global lenders have withdrawn from developing countries. New SDRs could be one more stimulus for the sagging world economy.
The IMF has since 1970 issued only 21.4 billion SDRs, worth $32 billion at today’s exchange rate. The proposed new issue worth $250 billion will be far larger. Yet, it pales in comparison with trillions of dollars held in forex reserves globally.
SDRs will probably be issued to countries in proportion to their IMF quotas. If so, two-?thirds of new SDRs will go to rich developed countries. India will get just 2%, China just 3.7%. Hence, SDRs will hardly dent dollar dominance in global reserves or liquidity.
Many US and German politicians oppose SDR creation saying it is “funny money” that will ultimately cause inflation. The Wall Street Journal opposes SDR creation because this will benefit political foes like Venezuela ($840 million), Iran ($465 million), Sudan ($100 million), Zimbabwe ($115 million), Syria ($90 million) and Myanmar ($80 million). Even if Obama persuades US Congress to approve the proposed $250 billion worth of SDRs, Congress will strongly oppose SDR creation on a scale big enough to rival the dollar as a reserve currency.
Finally, readers should understand that the SDR is not a currency at all. It is simply a potential claim on four national currencies. The SDR is linked to a basket of currencies with a weight of 44% for the dollar, 34% for the euro, and 11% each for the yen and pound sterling. If India wants to use its SDRs, it will typically ask the IMF for dollars in exchange. The IMF will debit India’s SDR account, credit America’s SDR account, ask the US for the corresponding dollars, and hand these to India.
So, SDRs are anchored in four existing currencies, and do not constitute an independent new currency. Nor will major powers allow the IMF to create a new currency independent of existing ones, anchored perhaps in gold. No politician wants to grant supra-?national status to the IMF in money creation. The SDR is allowed in small quantities as a derivative of existing currencies. That’s all.
For now, the dollar remains supreme. One day the Chinese yuan and Indian rupee may become fully convertible, and join the list of reserve currencies. That may diminish dollar dominance. But SDRs will remain peripheral.
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>>> How to Keep Crypto From Crashing the Financial System
What used to be a sideshow is becoming a systemic risk.
Bloomberg
By Editorial Board
July 8, 2021
https://www.bloomberg.com/opinion/articles/2021-07-08/how-to-keep-crypto-from-crashing-the-financial-system?srnd=premium
Once upon a time, the realm of cryptocurrencies was a curious sideshow, a place where criminals did business and enthusiasts dabbled at their own peril. Not anymore. It’s rapidly evolving into a veritable Westworld of finance, where glitchy simulacra of investment funds, banks and derivatives allow visitors to take on immense risks — risks that could ultimately spill over into traditional markets and the broader economy.
Regulators have been struggling to get a grip on all this. It’s increasingly important that they succeed, and soon.
Whether crypto will prove to be, on balance, a good thing is still unclear. As money, it has so far failed: The volatility, transaction costs and carbon footprint of Bitcoin, for example, have made it largely useless for purposes other than speculation and ransomware (and even there it has flaws). That said, the underlying blockchain technology — which allows people anywhere to transact and create indelible records without relying on a trusted intermediary — may yet have uses beyond selling “official” copies of video clips and commemorating the torching of valuable artwork. In due course, it might help sovereign states improve their official currencies.
Lately, though, the denizens of crypto have been replicating the work of traditional financial institutions, without any of the regulatory guardrails designed to keep them in check. Left unattended, this is not likely to end well.
Exhibit 1 is stablecoins, representations of fiat currencies that operate on the blockchain. They mimic bank deposits by purporting to be worth, say, exactly one U.S. dollar per coin. But unlike banks, the organizations that manage them have no deposit insurance, no recourse to emergency loans from the Federal Reserve, and no limits on where to invest the reserves of fiat money that allegedly back them. Tether, the outfit behind one of the most popular stablecoins, has already been caught lending its dollar reserves to its affiliated crypto exchange, and still claims to hold potentially volatile assets such as precious metals and other digital tokens.
History has repeatedly demonstrated how dangerous such a naked combination of deposit-like liabilities and risky investments can be. Even the rumor of losses can trigger a rush to redeem before the money is gone, with systemic consequences. Suppose, for example, stablecoins became large buyers of commercial paper, short-term debt that companies issue for purposes such as buying supplies and paying employees. (Tether says it already holds tens of billions of dollars of such paper.) A sudden wave of redemptions could starve the market of cash, rendering companies unable to make payroll — similar to what happened in 2008, when the bankruptcy of Lehman Brothers triggered a run on money-market funds that devastated the commercial paper market (a vulnerability that itself has yet to be fully addressed).
Exhibit 2 is the burgeoning world of decentralized finance, or DeFi. Working on the Ethereum blockchain, using “smart contracts” capable of automating transactions, often-amorphous teams of developers have set into motion a panoply of applications. These include exchanges, bank-like platforms and derivatives dealers where people can lend, borrow and make highly leveraged bets. Many of the services have decentralized governance systems that leave decision-making to a constantly changing community of users. Scams abound. Hackers frequently find ways to drain funds, as famously happened with the original autonomous blockchain organization, the DAO. Think of it as full-service shadow banking with nobody in charge.
So far, the sums involved are relatively small — the equivalent of tens of billions of dollars, compared with the hundreds of trillions coursing through global capital markets. But this could change quickly, with far-reaching repercussions — particularly given the amount of leverage involved.
Imagine a group of hedge funds making a large bet on cryptocurrency. In DeFi, an algorithm would typically determine how much of their own money, or “margin,” they would have to commit to get a given amount of exposure. This might be 20%, enough to cover a $20 billion loss on a $100 billion investment. In the highly volatile realm of crypto, though, setting margins is a tricky business. An error, a hack or a sharp market move could cause the algorithm to recalculate, suddenly requiring the hedge funds to deliver billions more by selling assets in other markets — precisely the kind of contagion that tends to trigger broader meltdowns. And that’s just one of many possible scenarios.
What’s a regulator to do?
One promising solution for stablecoins: Require them to deposit their reserves only in traditional banks, which would in turn park the cash at the Federal Reserve. This would make them equivalent to federally insured deposits, leaving them to compete on the quality of the payment services they provide, as opposed to profiting from unduly risky investments.
Properly regulated, stablecoins could have beneficial uses, such as making it easier and cheaper for migrant workers to send money to their families back home. The payment “rails” they help develop might even someday serve as infrastructure for digital cash issued directly by sovereign central banks.
DeFi will be more complicated. One challenge will be defining what a platform actually does — is it like a bank, an exchange, a securities dealer, something else? Another will be figuring out whom to hold accountable in a decentralized organization — the developers, the users? Multiple agencies will have to cooperate, and new legislation will probably be needed to give them the necessary powers.
The overarching goal should be to ensure similar services are competing on the merits, rather than on the degree of regulation they face or their tolerance for crime. In cases where that’s not possible, some may have to be outlawed.
To their credit, global regulators are aware of the issues and are starting to engage. They’ve thought deeply about the options for addressing stablecoins. They’ve met with DeFi participants to better understand the risks. They’ve set forth concrete proposals to keep traditional banks safe. But they need to act quickly. This could get very big, and very dangerous, very fast.
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Blackrock - >>> Going direct: How central banks could deal with the next downturn
BLACKROCK INVESTMENT INSTITUTE
Elga Bartsch
Oct 3, 2019
https://www.blackrock.com/us/individual/insights/going-direct-how-central-banks-could-deal-with-the-next-downturn
Going direct: How central banks could deal with the next downturn
Elga discusses how central banks could “go direct” and use unprecedented coordination between monetary and fiscal policy to deal with the next downturn. This is the fourth and final blog in a series on the topic of “Dealing with the next downturn.”
How will central banks tackle the next downturn? We believe an unprecedented response is needed when monetary policy is exhausted and fiscal space is limited. That response could involve “going direct” – finding ways to get central bank money directly in the hands of public and private sector spenders.
We believe policymakers should lay the groundwork for a credible plan to navigate the next economic shock that includes the coordination between monetary and fiscal measures. We lay out the contours of such a framework in our latest Macro and market perspectives. Absence of a credible plan is contributing to market anxiety and adding to the rush into the perceived safety of government bonds, in our view.
A practical approach would be to stipulate a contingency where monetary and fiscal policy would become jointly responsible for achieving the inflation target.
An emergency fiscal facility
To be sure, agreeing on the proper governance for such cooperation would be politically difficult and take time. That said, here are the contours of a framework:
An emergency fiscal facility – that we refer to as the standing emergency fiscal facility (SEFF) – would operate on top of automatic stabilisers and discretionary spending, with the explicit objective of bringing the price-level back to target.
The central bank would activate the SEFF when interest rates cannot be lowered and a significant inflation miss is expected over the policy horizon. See the SEFF funding level in the stylised chart at top above.
The central bank would determine the size of the SEFF based on its estimates of what is needed to get the medium-term trend price level back to target and would determine ex ante the exit point. Monetary policy would operate similar to yield curve control, holding yields at zero while fiscal spending ramps up – see the yield at zero in the middle chart above. (The charts help sketch out the concept but are not intended to be a precise representation of how it might work.)
The central bank would calibrate the size of the SEFF based on what is needed to achieve its inflation target – the red dotted line in the bottom chart above.
This proposed framework could include former Federal Reserve Chair Ben Bernanke’s temporary price-level target where the central bank commits to not only reach its inflation target but make up for past shortfalls (see Bernanke 2017 and our June 2019 work on inflation make-up strategies). Importantly, it complements it by specifying the mechanism – the SEFF – to push inflation higher. This is inspired by Bernanke’s 2016 proposal for a money-financed fiscal programme.
This approach improves on other fiscal approaches to providing stimulus when rates are at the effective lower bound (the minimum level of interest rates that the central bank can feasibly set), we believe. Similar to Furman and Summers (2019) and Blanchard (2019), it argues for the use of fiscal policy – yet it does not rely on rates staying below growth for the entire time needed to stimulate the economy.
Our proposal stands in sharp contrast to the prescription from proponents of modern monetary theory (MMT). They advocate the use of monetary financing in most circumstances and downplay any impact on inflation. Our proposal is for an unusual coordination of fiscal and monetary policy that is limited to an unusual situation – a liquidity trap – with a pre-defined exit point and an explicit inflation objective. Quasi-fiscal credit easing, such as central bank purchases of private assets, could be operated by the SEFF rather than the central bank alone to separate monetary and fiscal decisions.
A credible stimulus strategy would help investors understand what will happen once the monetary policy space is exhausted and provides a clear gauge to evaluate the systematic fiscal policy response. Spelling out a contingency plan in advance would increase its effectiveness and might also reduce the amount of stimulus ultimately needed. As former U.S .Treasury Secretary Henry Paulson famously said during the financial crisis: “If you’ve got a bazooka, and people know you’ve got it, you may not have to take it out.”
“Going direct” would provide stimulus without having to rely on rates going ever lower, and could help restore a more normal rate environment.
You can read our full paper on the subject here: Dealing with the next downturn
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>>> How U.S. Could Make China Pay for COVID
BY JAMES RICKARDS
JUNE 29, 2021
https://dailyreckoning.com/how-u-s-could-make-china-pay-for-covid/
How U.S. Could Make China Pay for COVID
As my readers know, I don’t like to get into politics in my analyses; I cover economics and capital markets. That said, there are times when politics are so focused and powerful that we have to pay attention because the impact on markets will be enormous.
This could be one of those times. House Minority Leader Kevin McCarthy, a Republican, has written an open letter calling on Congress to investigate the origins of the COVID pandemic and to hold China responsible if the evidence points in the direction of intentional or reckless conduct on the part of the Chinese.
That much is part of the normal political give and take. Republicans want to focus on Chinese wrongdoing and evidence that Dr. Anthony Fauci facilitated such wrongdoing with U.S. taxpayer dollars funneled from the National Institutes of Health through third parties.
The investigation would look at so-called “gain-of-function” research in which virus genomes are intentionally manipulated to make them more dangerous. There’s even good evidence that the Wuhan Institute of Virology, where the virus likely escaped, is run by the Communist Chinese military.
The possibility is open that the virus that caused the pandemic was a bioengineered weapon designed to kill as many people as possible.
Whether it was released on purpose or, more likely, escaped through negligence does not alter the fact that the Chinese created a killer virus and covered up the initial release.
Conspiracy!
Of course, any talk that the virus came from a Wuhan lab was dismissed as a crazy conspiracy theory peddled by Trump. To acknowledge that possibility was seen as an endorsement of Trump, so the mainstream media reflexively dismissed any such claims. Social media banned any post alleging that the virus originated in a lab.
I argued that the virus likely came from a lab in my book, The New Great Depression. I came to that conclusion a year ago. Only now is the mainstream media and their social media bedfellows acknowledging that the lab theory is plausible (see below for one possible explanation for the media’s about-face).
Regardless, the result is almost 4 million dead worldwide, including more than 600,000 dead in the U.S. alone.
In contrast to the Republican position, Democrats led by Biden are trying to downplay any investigation into China’s role by fobbing it off on the intelligence community, which will result in inaction.
Well, here’s the market angle: the McCarthy letter includes the following in his demands:
“The families of those who have died from COVID-19 should be given the option to file suit against the Chinese government for damages incurred as a result…”
How to Make China Pay
If Chinese sovereign immunity was removed from lawsuits, individual suits would quickly become a class action. Total damages could easily top $2 trillion.
Skeptics then say that even if a judgment were obtained, it would be impossible to enforce the judgment against China.
Actually, that’s the easy part. A U.S. federal judge could order the transfer of China’s $1.4 trillion in U.S. government securities to a custodian to be administered for the benefit of COVID victims.
China could not stop this because Treasury securities are held in digital form on a ledger controlled by the Treasury and the Federal Reserve. A few keystrokes could deplete China’s liquid reserve position by more than half. I wrote about this possibility last year in The New Great Depression.
Now, it could become a reality if McCarthy’s legislation is adopted. This won’t happen until after the 2022 midterm elections at the earliest. But, you can be sure China is paying attention and is already reducing its Treasury position just in case.
But the theory that the virus came from a Chinese lab may be about to receive major support, coming from a source high within China’s intelligence services…
An Intelligence Jackpot?
James Bond fans (myself included) imagine that the best intelligence comes from secret agents who move covertly in enemy countries, recruit sources, gain access to secret documents and then bring that information back to headquarters.
The name for this technique in the CIA’s clandestine service, officially the Directorate of Operations, is HUMINT, short for Human Intelligence.
There are significant collections from spies, but most intelligence actually comes from electronic signals (known as SIGINT) or from defectors. The defectors are the most valuable source. They can simply walk into a U.S. installation such as an overseas embassy or U.S. office of a branch of the intelligence community and offer to tell everything they know.
Sometimes the defection is more dangerous, such as when the defector is still in his home country and has to be smuggled out by some means to avoid arrest and certain death.
Their information is so valuable because it’s fresh, first-hand, and includes data and insights that no secret agent could ever get on his own.
The most knowledgeable defector in history may have just turned up at a U.S. agency with “terabytes of data” on portable electronic devices ready to provide inside information on the Communist Party of China.
Why the Media May Have Changed Its Tune on the Lab Theory
The defector’s name is Dong Jingwei, and he was the second-highest-ranking official in the Ministry of State Security, which is China’s internal state intelligence service.
Dong reportedly has information on the Chinese spy network in the U.S. and on the fact that the COVID-19 virus was engineered in the Wuhan Institute of Virology.
There’s some debate about the authenticity of this story. Last week, China issued a news report saying that Dong was at his desk conducting business as usual. The problem was that no photos of Dong were included with the story. Some China experts say that the absence of photos indicates that the Chinese denial is propaganda and the defection story is true.
If the story is true, it explains why the mainstream media are suddenly giving credence to the laboratory leak theory of the pandemic after a year of denial. They know the true story is coming out through the defector, so they want to cover their own tracks as puppets of Chinese propaganda.
I’ll continue to follow this. For now, it appears the defection story may be true, and the U.S. may have been handed the greatest intelligence bonanza since…. well, since James Bond.
Regards,
Jim Rickards
for The Daily Reckoning
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>>> Rickards: They’re Wrong About Inflation
BY JAMES RICKARDS
JUNE 23, 2021
https://dailyreckoning.com/rickards-theyre-wrong-about-inflation/
Rickards: They’re Wrong About Inflation
Sometimes new data can shed light on an uncertain situation, especially in financial markets. Other times it simply adds to the confusion. Such was the case with the most recent U.S. employment report released June 4 for the month of May.
The analyst world was glued to their news feeds, anxiously awaiting the latest report. The result was — bafflement.
The report showed job gains of 559,000. That’s a strong number, but it was below expectations. The market was looking for 670,000 jobs or higher. While strong April gains were revised up slightly, the stronger March gains had earlier been revised down by 131,000 jobs over the course of April and May.
The overall impact of the March-April-May data was a cooling off in new job creation.
The unemployment rate for May declined from 6.1% to 5.8%. That sounds like good news until you notice that the reason for the decline was not strong job creation but rather a decline in labor force participation.
That statistic declined from 61.7% to 61.6%; not a material drop, but still part of a long-term decline that has moved labor force participation back to levels not seen since the 1970s.
Simply put, the overall size of the labor force shrank.
The Glass Half Empty
You can be unemployed in the traditional meaning of the term without being counted as unemployed by the Labor Department. The difference has to do with whether you are actively looking for a job or not. Only the former are officially counted as unemployed. The problem is that the ranks of the latter are growing.
There are always some in the prime-age working population (ages 25 – 54) who are not looking for jobs because they are homemakers, students, early retirees, or are undergoing various life transitions. Still, the percentage of potential workers who have dropped out of the labor force is disturbingly high.
Some have given up looking for jobs because they’re sure they can’t find any that match their skills or interests. Others are content to collect the generous unemployment benefits the government keeps handing out. Some are still living in fear of COVID and don’t want to return to the workplace.
I’m not passing judgment; I’m just making the point that a low unemployment rate doesn’t mean much when it’s driven by a low labor force participation rate.
We have an army of perhaps ten-to-twenty million prime-age workers who don’t have jobs and aren’t looking. As long as that slack in the labor market is out there, the official unemployment rate doesn’t tell the whole story.
So, the bottom line on the May employment report was, meh. It wasn’t horrible, and it wasn’t great. It did point to persistent slack in labor markets and possible slowing growth. It did not point to inflation or anything close.
The Inflation Narrative
Since late last summer, the main driver of rates has been an inflation narrative. The narrative is straightforward:
The economy is recovering. Unemployment is declining. Employers can’t find enough workers. Wages are going up to attract help. Stimulus spending is coming by the trillions of dollars. The Fed is printing money. The economy is pushing up against capacity constraints.
Add it all up, and inflation is right around the corner. Therefore, rates must go up. And when rates go up, the price of gold goes down.
Markets have adopted this narrative. The yield-to-maturity on the 10-year Treasury note went from 0.508% on August 4, 2020 (about when gold peaked) to 1.745% on March 31, 2021. Gold prices went from over $2,021 per ounce to $1,686 per ounce over the same period. That’s a 16.5% drop in gold prices.
What if every part of the economic narrative is wrong?
The Numbers
The economy was bound to recover from the pandemic recession of 2020, the worst since 1946. But, it appears the recovery is now running out of steam. For the record, the economy was weak before the pandemic hit.
What if that weak growth trendline is now returning to form?
The unemployment rate is declining, but real unemployment is not. We still have 7.6 million fewer jobs than before the pandemic, not counting the 10 million or more prime-age workers out of the labor force as described above.
It’s true that wages are going up in some service industries such as restaurants and that workers are hard for some businesses to find. (McDonald’s is now offering $35,000 per year plus benefits and training for entry-level hires).
Still, overall wage levels are not rising significantly, and slack in the labor market is producing a powerful disinflationary overhang.
It’s the Velocity, Stupid
Money printing is practically irrelevant because the velocity (or turnover) of money is still declining. What good is new money if the banks just give it back to the Fed as excess reserves, so the money is never spent or lent?
Fiscal policy and handouts are not producing stimulus because debt levels are so high (the U.S. debt-to-GDP level is now 130%, the highest ever). Americans respond with precautionary savings and deleveraging.
Data shows that 75% of the government handouts have either been saved or used to pay down debt (economically the same as saving). Only 25% have been used for consumption. That’s a pathetic amount of bang-for-the-buck.
We are seeing some supply-chain disruption and capacity constraints, especially in semiconductors, which affects automobile manufacturing. Still, manufacturers have not been able to pass through those constraints in the form of higher consumer prices.
Inflation remains low once base effects from last year’s deflation are stripped out. Those base effects will disappear in the third quarter when the year-over-year comparison looks at the 2020 recovery rather than the recession.
Inflation is dead in the water.
I know that analysis puts me in the minority, but that’s OK; I’m used to that. I was also in the minority when I predicted Brexit and that Trump would win the 2016 election. The bottom line is, the consensus is often wrong.
Look to the Bond Market
The bond market already senses this, and so does gold. Rates peaked on March 31 and have been coming down since, albeit with the usual volatility. The rate on the 10-year Treasury note is 1.487% as of this writing, some 0.20% below the peak.
That’s a huge drop given how low rates are overall. The bond market is signaling that the inflation narrative is wrong.
Gold is saying the same thing. Gold hit an interim bottom of $1,678 per ounce on March 8, 2021, and has been trending up ever since. Gold is trading at $1,774 per ounce today and had a recent interim high of $1,918 per ounce on June 1, 2021.
Again, gold is signaling that the narrative is wrong, growth is slowing, and rates are coming down. That makes gold more attractive to asset allocators because gold competes with notes for investor dollars.
Stocks are forward-looking in theory, but they do an awful job of getting the forecast right in practice. Stocks missed the coming crashes of 2000, 2007 and 2020. They’ll miss the next crash too (until it’s too late to get out whole).
Bonds and gold are much better indicators of where the economy is going.
The signals are clear. The economy is slowing, labor markets are weak, disinflation and even deflation are on the horizon, rates are going down, and gold prices are at a great entry price.
Reality is catching up with the narrative. If you understand what’s going on, you’re more informed than the “experts.”
Regards,
Jim Rickards
for The Daily Reckoning
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>>> The “Great Reset” Is Here
BY JAMES RICKARDS
JUNE 15, 2021
https://dailyreckoning.com/the-great-reset-is-here-2/
The “Great Reset” Is Here
For years, currency analysts (myself included) have looked for signs of an international monetary “reset” that would diminish the dollar’s role as the leading reserve currency and replace it with a substitute, which would be agreed upon at some Bretton Woods-style monetary conference.
Now, it looks like the move towards the long-expected Great Reset is accelerating.
At the recent G7 summit in the UK, G7 leaders gave their blessings to a $100 billion allocation of IMF special drawing rights (SDRs) to help lower-income countries address the COVID-19 crisis.
President Biden fully supports the idea. The White House issued the following statement:
The United States and our G7 partners are actively considering a global effort to multiply the impact of the proposed Special Drawing Rights (SDR) allocation to the countries most in need…
At potentially up to $100 billion in size, the proposed effort would further support health needs – including vaccinations…
A separate press release from the same day continued the same sentiment, stating, “We strongly support the effort to recycle SDRs to further support health needs.”
In another development, IMF Managing Director Kristalina Georgieva said last Wednesday that she expected the fund’s governors to approve a $650 billion allocation of SDRs in mid-August.
What exactly are SDRs? Basically, they’re world money.
In 1969, the 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.
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 establish 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 creating 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.
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.
The basic idea behind the SDR is that the 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 run deficits long enough, you would eventually go broke. This was said about the dollar in the early 1960s. The SDR would solve Triffin’s Dilemma.
I wrote about SDRs and the global elite plans for them in the second chapter 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, for spending 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.
But Triffin’s Dilemma is not the only dynamic that’s pushing the world away from the dollar. Below, I show you why the weaponization of the dollar by the U.S. government is pushing the world to seek alternatives.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> The Real Russian Threat
BY JAMES RICKARDS
JUNE 14, 2021
https://dailyreckoning.com/the-real-russian-threat/
The Real Russian Threat
I’ve written for years about different nations’ persistent efforts to dethrone the U.S. dollar as the leading global reserve currency and the main medium of exchange.
At the same time, I’ve said that such processes don’t happen overnight; instead, they happen slowly and incrementally over decades.
The dollar displaced sterling as the leading reserve currency in the twentieth century, but it took thirty years, from 1914 to 1944, to happen. The decline started with the outbreak of World War I and the UK’s liquidation of assets and money printing to finance the war.
It ended with the Bretton Woods agreement in 1944 that cemented the dollar’s link to gold as the new global standard.
Even after the gold link was broken in 1971, the dollar standard remained because there was no good alternative. Then the 1974 deal with Saudi Arabia (along with other OPEC cartel members) to price oil in dollars created increased global demand for the dollar.
Because of the deal, dollars would be deposited with U.S. banks, so they could be loaned to developing economies, who could then buy U.S. manufactured goods and agricultural products.
This would help the global economy and allow the U.S. to maintain price stability. The Saudis would get more customers and a stable dollar, and the U.S. would force the world to accept dollars because everyone would need dollars to buy oil.
By the way, behind this “deal” was a not so subtle threat to invade Saudi Arabia and take the oil by force.
I personally discussed these invasion plans in the White House with Henry Kissinger’s deputy, Helmut Sonnenfeldt, at the time. But the Petro-Dollar plan worked brilliantly, and the invasion never happened.
Despite all this, nearly 50 years later, the erosion of the dollar’s role has begun and is visible in many metrics.
The dollar’s share of global reserves has fallen from 70% to 60% in the past 22-years. The dollar price of gold (an inverse measure of dollar strength) has gone from $250 per ounce to over $2,000 per ounce between August 1999 and August 2020 (it’s about $1,880 per ounce as of today).
The IMF’s special drawing right (SDR), Bitcoin, and gold (again) are waiting in the wings to step up as the dollar falters further.
The Russians, in particular, are moving quickly to protect themselves from this inevitable decline.
Russia has already increased gold as a percentage of its reserves to 20% (only the U.S., Germany, Italy, France and the Netherlands have higher percentages of gold among the twenty largest developed economies).
Now, Russia will completely eliminate dollar holdings from its $119 billion National Wellbeing Fund, a sovereign wealth fund that holds oil wealth for the future benefit of the Russian people.
Russia will be able to execute this plan without severe disruption to either the gold market or the dollar market.
By itself, this move does not mean the end of the dollar as the leading reserve currency. But, it is one more step on the slow path toward the dollar’s inevitable decline as a trusted medium of exchange.
Even though the process is gradual, it can gain a lot of momentum in the final phases. It reminds me of a line from a Hemingway novel:
“How did you go bankrupt?” asked one character. “Two ways,” responded the other. “Gradually, then suddenly.”
When the rush for the exits begins in earnest, you don’t want to be the last one out the door. It’s a good idea to diversify into gold for about 10% of your investable assets if you haven’t already.
That way you’ll be keeping up with the Russians and be one step ahead of the dollar’s decline.
I believe that the world will have to return to some version of the gold standard, not because it wants to, but because it will have to in order to restore confidence in the global monetary system.
The real question is, will it be an orderly process or a chaotic one?
Regards,
Jim Rickards
for The Daily Reckoning
<<<
De-dollarization - >>> Erdogan Says Turkey Signed New $3.6 Billion Swap Deal With China
Bloomberg
By Selcan Hacaoglu
June 13, 2021
https://www.bloomberg.com/news/articles/2021-06-13/erdogan-says-turkey-signed-new-3-6-billion-swap-deal-with-china
Turkey signed a new $3.6 billion swap agreement with China, increasing the limit on their existing currency arrangement to $6 billion, Turkish President Recep Tayyip Erdogan said Sunday.
The arrangement with one of Turkey’s biggest trading partners will allow the country to boost trade in local currency and avoid using dollars, supporting the central bank’s reserves.
Erdogan, who spoke in Istanbul before traveling to Brussels for a NATO summit, didn’t say when the latest accord was signed. Turkey first signed a swap agreement with China in 2012 and subsequent deals have allowed Turkish companies to pay for imports from China using yuan.
<<<
>>> Basel III is a 2009 international regulatory accord that introduced a set of reforms designed to mitigate risk within the international banking sector, by requiring banks to maintain proper leverage ratios and keep certain levels of reserve capital on hand.
Basel III rules move physical gold from being considered a Tier-3 asset to being considered Tier-1, which allows physical gold in bullion form to be counted at 100% value for reserve purposes. ... Beginning in June of 2021, Basel III rules will require banks to hold unencumbered physical gold valued at 100%
Pillars of Basel III accord
Pillar-1 – Enhanced Minimum Capital & Liquidity Requirements.
Pillar-2 – Enhanced Supervisory Review Process for Firm-wide Risk Management and Capital Planning.
Pillar-3 – Enhanced Risk Disclosure and Market Discipline.
The implementation date of the Basel III standards finalised in December 2017 has been deferred by one year to 1 January 2023. The accompanying transitional arrangements for the output floor have also been extended by one year to 1 January 2028.
Gold was previously viewed as a risky asset. It was classified as a Tier 3 asset, which meant that gold could only be carried on banks' balance sheet at 50% of the market value for reserve purposes. ... On the 1st of April 2019, Gold was reclassified as a Tier 1 asset and its risk-weighting was reduced to zero.
Tier 3 capital is tertiary capital, which many banks hold to support their market risk, commodities risk, and foreign currency risk, derived from trading activities. Tier 3 capital includes a greater variety of debt than tier 1 and tier 2 capital but is of a much lower quality than either of the two.
Under Basel III, the minimum capital adequacy ratio that banks must maintain is 8%. ... With higher capitalization, banks can better withstand episodes of financial stress in the economy.
The key difference between the Basel II and Basel III are that in comparison to Basel II framework, the Basel III framework prescribes more of common equity, creation of capital buffer, introduction of Leverage Ratio, Introduction of Liquidity coverage Ratio(LCR) and Net Stable Funding Ratio (NSFR).
>>> Will Basel 3 Boost Gold and Silver Prices?
Numismatic News
5-20-21
by PATRICK A. HELLER
https://www.numismaticnews.net/coin-market/will-basel-3-boost-gold-and-silver-prices
The Basel 3 accord is a set of global financial reforms developed by the Basel Committee on Banking Supervision under the domain of the Bank for International Settlements, an organization headquartered in Basel, Switzerland. These coming changes in bank system operations are to strengthen regulation, supervision and risk management within the worldwide banking industry.
Work on the Basel 3 changes began in 2008, after the onset of the Great Recession. The original version was adopted in 2010, to be implemented from 2013 to 2015.
Some changes called for in Basel 3 were so extreme that some revisions were made and implementation was repeatedly delayed. As it now stands, some of the impact of Basel 3 takes effect at the end of June this year, while all changes become effective on Jan. 1, 2023.
The goal of the forthcoming Basel regulations is to limit the levels of risk that banks take on in the pursuit of profits, which would hopefully prevent a major worldwide financial crisis if markets turn negative. It’s a wonderful idea in theory. However, in practice, some changes could be so disruptive to the actions of some governments, central banks and financial institutions that there is already pushback.
Part of the Basel 3 regulations that could be especially disruptive are those involving bank trading of precious metals.
Many of the world’s largest banks trade them for customers and for their own account. In trading these metals, they are handled as either allocated or unallocated assets.
With allocated precious metals, the customer is the owner of specifically identified and segregated coins or bars. The brand name, weight, purity and serial numbers of bars are recorded. The bank merely provides storage services. When a customer withdraws or sells these assets, the bank releases these exact same assets. Because these assets are property of the customer, the bank does not own them and they are not listed as assets of the bank or as liabilities that the bank owes to its customers.
It is an entirely different matter with unallocated storage of precious metals.
In unallocated storage, the bank’s customer does not own specifically identified coins or bars. Instead, the customer is an unsecured creditor of the bank, who has a claim against some of the assets owned by the bank. For example, a customer may have a 1,000-ounce silver bar in unallocated storage. The bank may be holding hundreds or thousands of these bars in unallocated storage, any one of which would be available to deliver on behalf of a customer if requested for withdrawal or sale.
In unallocated storage, that thousand-ounce silver bar would be owned by the bank and listed as part of its assets. To offset that, the bank would also record a liability to the customer for the same value as it uses for the asset. So long as banks actually hold sufficient assets to cover these liabilities, there is no problem.
When banks trade precious metals, the use of unallocated storage has a lot of advantages. Banks don’t have to keep track of each bar and coin by individual owner, which saves a lot of paperwork and shuffling of assets when they change hands.
However, there is a problem with unallocated storage.
Since the everyday turnover of precious metals involves only a relatively small percentage of the assets a bank may hold, the bank can fulfill the delivery needs even if it does not have physical custody and title to all of the precious metals it owes to customers.
You can think of this circumstance as similar to a bank’s cash customers. On a day-to-day basis, banks do not face a high percentage of their customers showing up to withdraw all of their funds. Therefore, the banks are able to hold only a small percentage of their assets in the form of coins and currency when compared to their liability to customers who have checking or savings accounts or certificates of deposit.
This lack of need to have title and custody to a high percentage of physical precious metals in their vaults compared to what their liabilities to customers has resulted in massive trading volumes in what I call paper assets.
So, many banks today engage in what could be called fractional precious metals trading. They hold only a small percentage of their liability to their customers in physical metals in their vaults. They theoretically cover the rest of their precious metals liabilities by leasing gold from central banks, trading derivatives contracts or using other paper forms.
Investment bank Morgan Stanley was caught in such a scam where it sold physical precious metals to customers and collected storage fees to hold them, but did not purchase the actual assets. Instead, this bank used customer funds to purchase other assets, many of them in paper form. Morgan Stanley settled a multi-million-dollar class action lawsuit on this issue in 2007 without agreeing with the charges.
How huge is this paper market, where banks may hold paper contracts to cover their liabilities to deliver physical precious metals? In a Commodity Futures Trading Commission hearing in March 2010, precious metals consultant Jeffrey Christian testified that these institutions may have sold their physical metals as much as 100 times the quantity of metal that they actually owned. Obviously, if all these owners contacted their bank to take delivery, the paper market would crash.
The world’s largest trading platform for precious metals is the London Bullion Market Association. Just in gold, it trades an average of $20 billion every day, which is more than $5 trillion annually. Virtually all of this trading is in the form of unallocated precious metals.
The New York COMEX is the world’s second largest platform for trading precious metals. The COMEX trading of gold futures and options contracts began in the mid-1970s specifically as a means for the U.S. government and the primary trading partners of the Federal Reserve Bank of New York to manipulate the price of gold.
The fractional reserve method trading of unallocated precious metals is the primary means by which the U.S. government, the primary trading partners of the Federal Reserve Bank of New York, allied central banks and the Bank for International Settlements suppresses gold and silver prices.
By selling paper contracts, without having to deliver the physical metals, there is the appearance that there is a lot more gold and silver available on the market than there actually is. The result is that prices are lower than if buyers and sellers of precious metals traded on the basis of actual supply and demand information.
As I have explained in the past, the prices of gold and silver effectively serve as a report card on the U.S. government, U.S. economy and the U.S. dollar. If precious metals prices are rising, that not only reflects poorly on the government, it also forces higher interest rates that must be paid on government debt and pushes down the purchasing power of the dollar.
Back to the Basel 3 accord. The most important change for precious metals is that banks would be required to hold reserves against their assets. Under the coming regulations, banks would count unallocated precious metals at 85 percent of their value on the bank’s books in making the determination of how much it needs to hold in reserves against these assets.
However, banks would no longer be able to consider any of the liability for unallocated precious metals as part of their required reserves.
Therefore, to comply with Basel 3 regulations, banks would have to either create a huge increase in their shareholders’ equity to provide the required reserves or they will be forced to sharply reduce or completely eliminate their trading in unallocated precious metals.
Will these banks take title and custody to many times the quantity of physical precious metals that they now hold? For all practical purposes that isn’t possible because there just aren’t enough physical metals available. Another obstacle is that these banks simply do not have the storage capacity to hold sufficient inventory to provide sufficient reserves for their precious metals assets.
The practical effect of this part of the new Basel 3 regulation would be to almost completely wipe out the trading of unallocated precious metals in the London and New York markets. About the only trade that would survive would be for allocated metals.
Banks in continental Europe will implement the changes in precious metals trading as of the end of June this year. British banks will be required to adopt the new standards by Jan. 1, 2022. At least, those are the current scheduled implementation dates.
With the elimination of most trading in unallocated storage, the U.S. government could lose its primary tactic of suppressing gold and silver prices.
Between the increased demand for physical precious metals and the elimination of the use of unallocated precious metals to suppress prices, gold and silver prices might undergo huge increases.
This impact of these forthcoming market changes is so enormous that on May 4, 2021, the London Bullion Market Association and the World Gold Council submitted a paper to the Prudential Regulation Authority, the United Kingdom’s regulator of banks and the financial sector, asking for the changes in Basel 3 standards in trading unallocated precious metals be eliminated. This paper claimed that implementing the new regulations would undermine the ability of banks to clear and settle precious metals trading, drain liquidity from this market, sharply increase financing costs of such trades and would limit central bank operations with precious metals.
The claim that the London Bullion Market Association may be almost forced to cease operations without this waiver also means that the COMEX trading of unallocated metals would also come to a virtual standstill.
How likely is it that the near-term implementation of the Basel 3 standards for trading unallocated precious metals will occur? Not enough to eventually matter, as the most likely difference would simply be another delay in the implementation date.
But, even if the implementation dates are once more postponed, that deferral might only apply to British banks.
Another possible change suggested in the LBMA and WGC paper is to instead adopt the Swiss interpretation which considers it applicable only to unbalanced positions on both sides of a bank’s balance sheet. That might not provide much leeway.
Still, time is running out to try to change the regulations before the first of these standards applies to continental European banks at the end of June this year.
Right now, the COMEX currently has about $24 billion in short sales of gold futures contracts and another $1.6 billion in short sales of silver futures. There will almost certainly be pressures for short sellers to cover these COMEX contracts as continental European banks scramble to cover their short positions.
However this eventually turns out, the ultimate result is almost certain that gold and silver prices will climb far higher, perhaps multiples of current levels, within the next six months to two years.
<<<
>>> 'Britcoin': Central bank digital currencies explained
Yahoo Finance
Lucy Harley-McKeown
April 22, 2021
https://uk.finance.yahoo.com/news/britcoin-central-bank-digital-currency-explainer-pound-bitcoin-cryptocurrency
The buzz surrounding a potential central bank-backed digital currency grew louder this week, as the Bank of England and Treasury announced they would launch a taskforce to look into a potential digital pound.
Dubbed "Britcoin" by the press, the BoE said any UK digital currency would be a new form of digital money that could be used by both households and businesses. It would exist alongside cash and bank deposits, rather than replacing them. Both the BoE and Treasury stressed they were simply exploring the idea and are not committed to launching "Britcoin".
Interest in central bank digital currencies — often abbreviated to just CBDC – has evolved from the growth of decentralised digital currencies such as bitcoin (BTC-USD) and ethereum (ETH-USD), which have taken markets by storm.
Dutch bank ING said discussions of national digital currencies began with the emergence of bitcoin but were "mostly academic" until Facebook's decision to launch its own digital currency in 2019.
"All of a sudden, the prospect of a private stablecoin crowding out fiat currencies and pushing central banks into irrelevance turned into a real possibility, given Facebook’s vast global user base," Teunis Brosens, ING's head economist for digital finance and regulation, wrote in a research note.
What is Central Bank Digital Currency (CBDC) and how does it work?
Like other forms of cryptocurrency, CBDCs are a form of virtual money that uses an electronic record or digital token to represent cash. It is issued and regulated by a country’s monetary authority, which in the UK is the Bank of England. This is a key difference to cryptos like bitcoin, which are decentralised and unregulated.
Retail CBDC can be directly held by citizens and businesses. This is a step change from the current system where money is held at a bank. Instead of going to a cash machine to withdraw money from, say, Barclays, your money would instead be held directly on your mobile phone.
Interbank or wholesale CBDC is restricted to use by financial institutions like banks. It is used for big ticket bank-to-bank transfers and financial settlement processes.
CBDCs represent a new frontier for central bank stimulus, potentially acting as a conduit for policies such as stimulus checks, emergency loans, and UBI (universal basic income). Central banks could induce more powerful, directed "money drops" to stimulate the economy rather than tinkering with interest rates.
Which countries are looking at CBDCs and why?
According to PwC, retail CBDC projects appear to be more advanced in emerging economies.
China, Cambodia and The Bahamas are leading the pack, although the UK, Europe and the USA have all expressed an interest in developing their own CBDC.
Financial inclusion is often stated as a motivation, given that CBDC users do not need to be part of the banking ecosystem. With traditional money, people must have a bank account and a debit or credit card. With CBDCs, all they need is a phone.
READ MORE: Bank of England and UK Treasury explore 'digital pound'
PwC found that more than 60 central banks around the world have entered the central bank digital currency race since 2014, with 88% of the ongoing projects using blockchain as the underlying technology.
"As cryptocurrency investors ride a wave of speculation, the government will be keen to distance itself from what is still seen as the wild west of the payments world," said Susannah Streeter, senior investment and market analyst at Hargreaves Lansdown.
"However, officials clearly believe they can’t ignore the surge of interest in digital currencies, as a means of faster and more efficient money transfers, particularly internationally."
Streeter said there was a do or die environment in the adoption of digital currency. Not developing a policy could mean more power falls into the hands of big tech companies as consumers drift further towards crypto.
Which country might be first to launch?
China is close to becoming the first major economy to launch a digital currency. Pilots began regionally last year and there are rumours of a national launch in 2022.
The Bahamas has also been tipped by PwC's CBDC global index as a frontrunner in the race, followed closely by Cambodia.
No wholesale CBDC projects have launched yet but nearly 70% are running pilots. Only 23% of retail projects have reached this stage.
Two projects are currently live and piloting: the Sand Dollar in the Bahamas and project Bakong in Cambodia.
The UK's taskforce has made clear that its project is in early stages. The European Central bank has said any possible "digital euro" will take several years.
Pros and cons
Many backers of digital currencies say banking this way is more efficient. Instead of relying on intermediaries such as commercial banks, money can be transferred directly to the recipient and payments can be made in real time.
There is also an argument that CBDC helps prevent illicit or fraudulent activity. CBDCs make it easier for central banks to keep track of the exact location of a unit of currency. Cash, meanwhile, can be laundered or 'lost' more easily.
Potential drawbacks include the invasion of privacy associated with this sort of surveillance. Governments could obtain access to private individual spending data, for example.
Another fear is that CBDCs could herald the onset of a fully cashless society, which could harm poor, rural, and elderly communities who largely rely on cash.
Central banks are also unsure of what the monetary policy implications would be of a fully cashless society. For example, if people can transfer money instantly and with zero friction, would bank runs be more common? Would commercial banks even still exist? And how powerful — or not — would interest rate adjustments become?
Questions like these are why governments around the world — particularly in major economies — are taking it slow when it comes to CBDCs.
<<<
>>> Federal Reserve is likely to create a digital currency: Goldman Sachs
Yahoo Finance
Brian Sozzi
May 24, 2021
https://finance.yahoo.com/news/federal-reserve-is-likely-to-create-a-digital-currency-goldman-sachs-164256832.html
Goldman Sachs Chief Economist Jan Hatzius thinks it will be some time before the Federal Reserve creates a digital currency to compete with the dollar, but it's likely to happen.
"The Fed I think partly because of the pre-eminent international role of the dollar is going to be slower than other central banks in introducing a digital currency. And there are quite a number of central banks globally that are hedged at this point and the Fed is still in the research stage. But ultimately, I think there is an appetite for introducing a digital currency," Hatzius said on Yahoo Finance Live. "I think we will move cautiously because there is no appetite on the part of the Fed or other central banks to really potentially undermine the current payment system and financial system.
Fed chief Jerome Powell is fresh off showing his hand a bit on the future for a digital currency, lending support to Hatzius' outlook.
Powell said in a presentation last week the governing body would continue its work on a digital dollar.
“The effective functioning of our economy requires that people have faith and confidence not only in the dollar, but also in the payment networks, banks, and other payment service providers that allow money to flow on a daily basis,” Powell said. “Our focus is on ensuring a safe and efficient payment system that provides broad benefits to American households and businesses while also embracing innovation.”
At the moment, crypto traders aren't liking talk of competition from the Fed and fears of greater regulation out of China.
Bitcoin prices were under massive pressure on Sunday, plunging more than 15% by afternoon trading. At $32,652, bitcoin prices have crashed about 50% from their mid-April peak of $64,829. Ether nosedived another 18% on Sunday, bringing its drop from an all-time high this month to roughly 60%. Early Monday morning, crypto recovered.
Ultimately, Hatzius doesn't think a digital currency from the Fed would create major risks to the financial system. That's provided the Fed takes its time on its research on digital currencies and how they would fit into the financial system.
"I think small steps are not likely to be very disruptive [to the financial system]. Large steps could be disruptive. That's why I think you need to move slowly, and gain a lot more experience before you ramp it up," Hatzius said.
<<<
>>> Bitcoin is officially a new asset class: Goldman Sachs
Yahoo Finance
Brian Sozzi
Mon, May 24, 2021
https://finance.yahoo.com/news/bitcoin-is-officially-a-new-asset-class-goldman-sachs-103540636.html
It's time to take bitcoin way more seriously as an investable asset, says Goldman Sachs.
"Bitcoin is now considered an investable asset. It has its own idiosyncratic risk, partly because it’s still relatively new and going through an adoption phase," said Mathew McDermott, Goldman Sachs' global head of digital assets, in a new piece of research. "And it doesn’t behave as one would intuitively expect relative to other assets given the analogy to digital gold; to date, it’s tended to be more aligned with risk-on assets. But clients and beyond are largely treating it as a new asset class, which is notable—it’s not often that we get to witness the emergence of a new asset class."
Despite Goldman's rubber stamp of approval on bitcoin (BTC-USD) and other cryptocurrencies have traded anything like a typical stock of a credible company or bond in May. In truth, if bitcoin is to be considered a new asset class it has a lot in common with one area in the stock market: often very volatile penny stocks that see wild gyrations on the tiniest bit of news.
Bitcoin prices continued to be under massive pressure on Sunday, plunging more than 15% by afternoon trading. At $32,652, bitcoin prices have crashed about 50% from their mid-April peak of $64,829. Ether nosedived another 18% on Sunday, bringing it's drop from an all-time high this month to roughly 60%. Early Monday morning, crypto recovered slightly.
'A key concern is inconsistent regulatory actions'
The serious price correction in cryptos come amid a groundswell of negative news mostly from government officials worldwide.
Authorities in China said last Friday that it would be necessary to crack down on bitcoin mining and trading behavior to limit investment risks.
Meanwhile, Federal Reserve Chairman Jerome Powell said in a presentation last week the governing body would continue its work on a digital dollar. Any digital dollar would likely weigh on the bullish sentiment for bitcoin and other cryptos.
“The effective functioning of our economy requires that people have faith and confidence not only in the dollar, but also in the payment networks, banks, and other payment service providers that allow money to flow on a daily basis,” Powell said. “Our focus is on ensuring a safe and efficient payment system that provides broad benefits to American households and businesses while also embracing innovation.”
Goldman's McDermott acknowledges regulation of the crypto space looms large as a significant risk to further price appreciation.
"A key concern is inconsistent regulatory actions around the globe that impede the further development of the crypto space, or the ability of more regulated entities to engage within it. It feels like the regulatory tone has turned more constructive, but I certainly wouldn’t want to be complacent," McDermott said.
Even in the face of such risk, McDermott said institutional clients remain keen on adding some form of crypto exposure to portfolios.
"As a whole, discussions with institutional clients revolve around how they can learn more on the topic and get access to the space—as opposed to questions around what bitcoin or cryptocurrencies are—which was really the main topic just a few years ago. But beyond that, asset managers and macro funds are interested in whether or not crypto fits into their portfolios, and if it does, how to get access to either the physical—by trading the spot instrument on a blockchain— or exposure through other types of products, typically futures," McDermott explained. "Hedge funds, perhaps unsurprisingly, are more active in this space, and are particularly interested in profiting from the structural liquidity play inherent in the market—earning the basis between going long either the physical or an instrument that provides access on a spot basis to the underlying asset and shorting the future."
<<<
>>> U.S. regulators signal stronger risk, tax oversight for cryptocurrencies
Reuters
by Howard Schneider and David Lawder
May 20, 2021
https://finance.yahoo.com/news/fed-citing-crypto-risk-open-180231257.html
WASHINGTON (Reuters) - U.S. Federal Reserve chief Jerome Powell turned up the heat on cryptocurrencies on Thursday, saying they pose risks to financial stability, and indicating that greater regulation of the increasingly popular electronic currency may be warranted.
The Treasury Department, meanwhile, flagged its concerns that wealthy individuals could use the largely unregulated sector to avoid tax and said it wanted big crypto asset transfers reported to authorities.
The back-to-back announcements came in a week when Bitcoin, the most popular cryptocurrency, took a wild ride, falling as much as 30% on Wednesday after China announced new curbs on the sector, underscoring the volatility of the sector.
Powell underlined cryptocurrency risks in an unusual video message that also laid out a clearer timetable as the Fed explores the possibility of adopting a digital currency of its own.
https://www.federalreserve.gov/newsevents/pressreleases/other20210520b.htm
While highlighting the potential benefits of advances in financial technology, Powell said cryptocurrencies, stablecoins and other innovations "may also carry potential risks to those users and to the broader financial system."
As the technology advanced, "so must our attention to the appropriate regulatory and oversight framework. This includes paying attention to private-sector payments innovators who are currently not within the traditional regulatory arrangements applied to banks, investment firms, and other financial intermediaries."
Powell's comments signaled how seriously the Fed has been forced to reckon with the surge in popularity and market values of non-traditional currency options such as Bitcoin, especially as it looks at developing a digital version of the U.S. dollar, the world's reserve currency.
SPECULATIVE ASSETS
The Fed and Treasury consider cryptocurrencies, which now have a market capitalization of about $2 trillion, to be more like art, gold or other highly speculative assets.
A central bank digital currency, though, offers whoever holds it - a person, a business, even another government - a direct claim on that central bank, which is exactly what holding a paper dollar bill does now.
Powell said the Fed would release a discussion paper this summer on digital payments, with a focus on the benefits and risks of establishing a central bank digital currency, and will also seek public comment.
He noted that "to date, cryptocurrencies have not served as a convenient way to make payments, given, among other factors, their swings in value."
The Treasury also flagged cryptocurrency risks, including opportunities for wealthy individuals to move taxable assets into the largely unregulated crypto sector.
"Cryptocurrency already poses a significant detection problem by facilitating illegal activity broadly including tax evasion," the Treasury said.
Its proposal, disclosed as part of a policy report detailing the Biden administration's $80 billion IRS enforcement proposal to boost revenue collection, would provide additional resources for the IRS to address crypto assets,
https://home.treasury.gov/system/files/136/The-American-Families-Plan-Tax-Compliance-Agenda.pdf
In addition to the reports of $10,000-plus cryptocurrency transfers that would parallel bank reports of similarly sized cash transfers, the Treasury also proposed that crypto asset exchanges and custodians also report transactions to the IRS related to bank interest, dividend and brokerage transactions.
The reporting requirements, depending on how they are structured, could also allow the government to gain insight about U.S. companies that are extorted to pay hackers ransoms, almost invariably in cryptocurrency, to regain control of their IT systems.
Law enforcement and private sector cybersecurity experts alike have complained that a lack of transparency around these ransomware incidents contributes to their continued occurrence.
The Treasury disclosure took the wind out of a rally in the dollar value of Bitcoin on Thursday that followed steep plunges for Bitcoin and etherium on Wednesday. Bitcoin was up 8.7% in afternoon trade after an earlier gain of 10%.
CAUTIOUS APPROACH
While the Fed and some other developed economies are still conducting research on what a central bank digital currency would look like, China is moving ahead at a fast clip and is currently piloting a digital version of the yuan, with plans to ramp up usage before the 2022 Winter Olympics in Beijing.
Powell said last month that the Fed would not rush its efforts in response to China’s more aggressive pace, noting that the approach taken there would not work in the United States.
"It is far more important to get it right than it is to do it fast," Powell said after the April policy setting meeting.
The Boston Fed is currently working with the Massachusetts Institute of Technology to research the technology that could be used for a central bank digital currency and will be releasing those findings in the third quarter.
Congressional action would be required before a digital currency could be developed.
Also on Thursday, U.S. Securities and Exchange Commission Chair Gary Gensler said he would like to see more regulation around cryptocurrency exchanges, including those that solely trade bitcoin and do not currently have to register with his agency.
"This is a quite volatile, one might say highly volatile, asset class, and the investing public would benefit from more investor protection on the crypto exchanges," he said at the Financial Industry Regulatory Authority's annual conference.
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>>> Gundlach: Stimulus checks are opening the door to universal basic income
Yahoo Finance
Julia La Roche
May 15, 2021
https://finance.yahoo.com/news/gundlach-on-stimulus-and-ubi-120022461.html
Billionaire bond investor Jeffrey Gundlach believes stimulus checks are distorting the labor market.
The founder and CEO of $135 billion DoubleLine Capital added his thoughts to a vigorous debate over the brewing labor shortage that's causing a mismatch between surging demand, and companies desperate to hire.
"We have this strange thing of 8 million job openings, and everywhere you go…people are saying, 'I can't fill them. No one will take them,'" Gundlach told Yahoo Finance in an interview this week. He blasted the "money giveaways" baked into COVID-19 relief, such as stimulus checks and generous supplemental unemployment benefits.
Gundlach added that the end result is "people are making more money sitting at home watching Netflix, than they are at work, and they don't want to go back. I think one of the dangers that we've opened the door to is these stimulus checks are starting to feel like they might not go away," Gundlach added.
The California resident pointed to Gov. Gavin Newsom's proposal to send $600 stimulus checks to residents making up to $75,000, due to the state's budget surplus.
"In the state of New York and the state of California, a lot of people are getting $57,000 per year, tax-free, by not working. So there's a lot of distortions there," Gundlach said.
The bond investor asserted that the stimulus checks are opening up the door to universal basic income.
"I think we're already there. We had basic income, way back in the 1960s; it's still with us with welfare programs and the like. And now we've been expanding it and expanding it," Gundlach added.
With the increase in the federal deficit and U.S. debt pushing $29 trillion, "it's almost like they're moving into UBI and even sort of a wealth tax sort of situation by having the deficit so big that where you're going to get it from?" he asked.
The additional income provided via COVID-19 stimulus appeared temporary at first, then was supplemented by a boost to unemployment.
Now, "it's been extended and extended, and that was being extended is being increased... [by] California, and the federal government. My guess is that they're, they're ready to roll out another one because that's just been the pattern," he added.
With workers effectively being paid to sit out a labor force that critics say needs to pay more, Gundlach believes "people's behavior is going to, is already, I think, partly modified to kind of factor in ongoing government assistance."
He added: "And the government doesn't seem to be discouraging them from thinking that it's going to be here for a long time."
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>>> The Fed's $16 Trillion Bailouts Under-Reported
Forbes
by Tracey Greenstein
Sept 20, 2011
https://www.forbes.com/sites/traceygreenstein/2011/09/20/the-feds-16-trillion-bailouts-under-reported/?sh=e16925f26b00
The media’s inscrutable brush-off of the Government Accounting Office’s recently released audit of the Federal Reserve has raised many questions about the Fed’s goings-on since the financial crisis began in 2008.
The audit of the Fed’s emergency lending programs was scarcely reported by mainstream media - albeit the results are undoubtedly newsworthy. It is the first audit of the Fed in United States history since its beginnings in 1913. The findings verify that over $16 trillion was allocated to corporations and banks internationally, purportedly for “financial assistance” during and after the 2008 fiscal crisis.
Sen. Bernie Sanders (I-VT) amended the Wall Street Reform law to audit the Fed, pushing the GAO to step in and take a look around. Upon hearing the announcement that the first-ever audit would take place in July, the media was bowled over and nearly every broadcast network and newspaper covered the story. However, the audit’s findings were almost completely overlooked, even with a number as high as $16 trillion staring all of us in the face.
Sanders press release, dated July 21st, stated:
“No agency of the United States government should be allowed to bailout a foreign bank or corporation without the direct approval of Congress and the president.”
The report serves as a clear testimony of the Fed’s emergency action plan to bailout foreign corporations and banks in a time of crisis, but the GAO report does not berate the Fed; rather, it provides a lucid explanation of where the money was allocated and why.
According to The Washington Post, “The GAO report did not condemn the Fed’s actions, it simply illuminated them. The GAO also recommended that the Fed make clearer and more rigorous its policies for hiring independent contractors to manage investment programs."
A wider investigation of the Fed is due on October 18th, which will provide more thorough details. The GAO report said that the Fed issued "conflict of interest waivers to employees and private contractors so they could keep investments in the same financial institutions and corporations that were given emergency loans." The audit will inspect the "conflicts of interest" and the inner-workings of the Fed's emergency-lending programs.
For Sanders, one thing is clear: "The Federal Reserve must be reformed to serve the needs of working families, not just CEOs on Wall Street."
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Excellent discussion with Jim Rickards on gold, the state of the economy, CBDC/Central Bank Digital Currencies, and related topics by Jim Rickards -
>>> Gold Is Right
BY JAMES RICKARDS
MAY 7, 2021
https://dailyreckoning.com/gold-is-right/
Gold Is Right
Is the gold skid over? There are encouraging signs that the answer is yes. And, that’s great news for patient gold investors (especially those who bought the lows, as I recommended to my subscribers a few weeks ago).
First, some facts. Gold hit an all-time high of $2,069 per ounce on August 6, 2020. Since then, it has been on the skids, despite occasional rallies. The low in this cycle was $1,678 per ounce on March 8, 2021.
The reason for the skid was not hard to discern.
It’s often the case that gold prices get pushed around by a number of factors, including real rates, nominal rates, geopolitical concerns, inflation and simple supply and demand.
But, this decline had only one factor — rising nominal rates on the ten-year Treasury note.
Ten-year note rates hit an interim low of 0.508% on August 4, 2020, right around the same time gold peaked. From there, rates began a relentless march higher. The nominal yield on the ten-year note peaked at 1.745% on March 31, 2021.
The rate/gold inverse correlation was extremely high. As rates climbed from August to March, gold fell. Nothing else mattered, including the election, the Capitol Hill riots or Biden’s confiscatory tax plans.
Rates rose, gold fell, enough said. The question for analysts was, why were rates rising?
Gold Isn’t Supposed to Offer Yield
Again, the explanation was simple. Markets were watching the $900 billion Trump bailout in December, the $1.9 trillion Biden bailout in early March, and the announcement of plans for another $3 trillion bailout later this year.
The reasoning was, with that much money being pumped into the economy and with output capacity still limited by the pandemic shutdowns, inflation must be right around the corner. Rates rose in anticipation of inflation from all of the bailout spending.
When rates rise, gold often falls because Treasury securities and gold compete for investor dollars. As rates rose, the Treasury notes became more attractive, and gold less so because gold has no yield.
By the way, some people criticize gold because it doesn’t offer any yield. But gold is not supposed to have any yield because it’s money; you only get yield when you take risks on securities, money markets or bank deposits. But that’s a story for another day.
Still, there was a conundrum at the heart of this inverse correlation.
Sure, rising rates might make for competition for investor allocations that hurts the price of gold. But, if rates were rising because of inflationary expectations, wouldn’t gold rally because of the inflation?
Ah, the plot thickens…
Gold Sees Further Than Any Other Asset
To resolve the conundrum, we have to bear in mind that gold has a better track record of predicting economic developments than any other asset class. Gold looks so far ahead that investors often cannot see what the gold price is saying.
The point is that rates were rising on inflationary expectations, but there was no actual inflation. Hard data (as opposed to Wall Street analysis) showed that most of the bailout money was not being spent.
Over 76% of the bailout money was used either for savings or to pay down debt (which is economically the same thing as saving). Neither saving nor debt repayment constitutes new consumption. And, without consumption, there is no velocity and no upward pressure on prices.
In short, interest rates were predicting inflation, but gold prices were saying: Not so fast!
This wasn’t our first interest rate fake-out. The 10-year note hit 3.96% on April 2, 2010. It then fell to 2.41% by October 2, 2010. It spiked again to 3.75% on February 8, 2011, before falling sharply to 1.49% on July 24, 2012.
It spiked again, hitting 3.22% on November 2, 2018, before plummeting to 0.56% on August 3, 2020, one of the greatest rallies in note prices ever.
There’s a pattern in this time series called “lower highs and lower lows.” The highs were 3.96%, 3.75% and 3.22%. The lows were 2.41%, 1.49% and 0.56%.
The point is that the note market does back up from time to time. And when it does, it cannot hold the prior rate highs and eventually sinks to new rate lows.
So Much for One Million New Jobs
Starting several months ago, my forecast predicted that eventually, markets would see that inflation was not emerging, interest rates would beat a retreat and gold prices would regain their former shine.
That appears to be happening. Recent data shows the core PCE deflator (the Fed’s preferred inflation measure) was only 1.6%, well short of the Fed’s 2% goal (which they’ve failed to hit on a sustained basis for 13 years).
The 1.6% showing was well within the range that core PCE has exhibited for years. In other words, no inflation.
Other economic signs have been disturbing, including a fourth wave of coronavirus cases and rising initial claims for unemployment insurance.
The April 15 measure showed improvement, but today’s jobs report was a huge miss. Economists expected the economy would add at least one million jobs in April. The numbers out today only showed a gain of 266,000.
Interest rates dropped from 1.745% on March 31 to 1.579% today. That’s an almost 17 basis point drop in just over two weeks, an earthquake in bond land.
Gold responded right on cue, rallying from $1,686 per ounce on March 30 to $1,832 per ounce today. That’s a solid 5.5% gain in the same two-week span.
Heads, Gold Wins; Tails, Gold Doesn’t Lose
The rate/gold inverse correlation continues, except now it’s working in reverse with rates down and gold prices up. I expect this trend to continue because there are still no signs of inflation on the horizon.
Inflation will come, but not right away. Looking further ahead, gold is poised for major gains in response to the rise of inflation expected in 2022 and later.
This inflation will not be caused by so-called money printing. An expansion of the money supply without accompanying changes in saver psychology that affect velocity or other exogenous catalysts has little impact on consumer prices.
The driver of inflation is velocity, the turnover of money caused by lending and spending, which has been plunging for over ten years.
Still, an external catalyst of velocity will arrive soon and last for decades in the form of higher wages needed to offset declining working-age populations in China, Japan, Europe, Russia and the U.S. This wage increase will be driven in part by the diversion of workers to healthcare for seniors, which is needed work but not amenable to productivity increases.
Once this demographic wave hits, saver psychology will shift quickly, and cost-push inflation will feed on itself. Inflation combined with decreased confidence in central bank command money will move gold to $10,000 per ounce or higher. That is the implied non-deflationary price of gold needed to act as a backstop for command money.
As a reality check, I always ask myself what would happen if I’m wrong? In the event that inflation does roll in, gold would go up as it always does in inflation.
The worst position was rising rates on inflation expectations with no actual inflation. That’s over. Now it appears we have declining rates and no inflation. That’s good for gold. If inflation shows up, that’s good for gold too.
It’s heads we win, tails we don’t lose. It doesn’t get any better for gold investors.
Regards,
Jim Rickards
for The Daily Reckoning
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