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BIS / CBDC - >>> Crypto fears now materialising, central bank body BIS says
Reuters
June 21, 2022
By Marc Jones
https://www.reuters.com/business/finance/crypto-fears-now-materialising-central-bank-body-bis-says-2022-06-21/
LONDON, June 21 (Reuters) - Recent implosions in the cryptocurrency markets indicate that long-warned-about dangers of decentralised digital money are now materialising, the Bank for International Settlements has said.
The BIS, the global umbrella body for central banks, sounded the warning in an upcoming annual report, in which it also urged more effort in developing appealing central bank digital currencies.
BIS general manager Agustin Carstens pointed to recent collapses of the TerraUSD and luna 'stablecoins', and a 70% slump in bitcoin, the bellwether for the crypto market, as indicators that a structural problem exists.
Without a government-backed authority that can use reserves funded by taxes, any form of money ultimately lacks credibility."
"I think all these weaknesses that were pointed out before have pretty much materialised," Carstens told Reuters. "You just cannot defy gravity... At some point you really have to face the music".
Analysts estimate that the overall value of the crypto market has slumped more that $2 trillion since November as its troubles have snowballed. read more
Carstens said the meltdown was not expected to cause a systemic crisis in the way that bad loans triggered the global financial crash. But he stressed losses would be sizeable and that the opaque nature of the crypto universe fed uncertainty.
"Based on what we know, it should be quite manageable," Carstens said. "But, there are a lot of things that we don't know."
CENTRAL BANK DIGITAL CURRENCIES (CBDCs)
The BIS is a long-term sceptic of cryptocurrencies and its report laid its vision for the future monetary system - one where central banks utilise the tech benefits of bitcoin and its ilk to create digital versions of their own currencies.
Roughly 90% of monetary authorities are now exploring CBDCs as they are known. Many hope it will equip them for the online world and fend off cryptocurrencies. But the BIS wants to coordinate key issues such as making sure they work across borders.
The immediate challenges are mainly technological, similar to how the mobile phone world needed standardised coding in the 1990s. But there is also the geopolitical issue as relations between the West and countries such as China and Russia wane.
"This (interoperability) is a topic that has been on the G20 agenda for quite some time.. so I think there is a good chance for this to move forward," Carstens said, adding how there had been a number of "real-life" trials with different CBDCs over the last year.
Asked how long before international standards for CBDC interoperability might be agreed, he said: "I think in the next couple of years. Probably 12 months is too short."
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>>> U.S. banking stress indicator could worsen after Fed hike
Reuters
June 16, 2022
By Mehnaz Yasmin
https://finance.yahoo.com/news/u-banking-stress-indicator-could-222209460.html
(Reuters) -An indicator of credit risk in the U.S. banking system may be showing signs of stress, as the Federal Reserve's aggressive rate hike path ratchets up expectations of economic pain.
The so-called FRA-OIS spread, which measures the gap between the U.S. three-month forward rate agreement and the overnight index swap rate, increased to 29.55 basis points on Thursday, its widest since May 23, according to data from Refinitiv. The measure was at -11.66 bps earlier in the week.
Widely viewed as a proxy for banking sector risk, a higher spread reflects rising interbank lending risk.
"The recent spike in the spread between forward rate agreement and overnight index swap rate is concerning," said Jordan Jackson, a global market strategist at J.P. Morgan Asset Management. "As the Fed turns more hawkish, there is a rise in recession concerns and that is increasing the underlying credit risk."
The central bank this month also began allowing bonds to mature off its more than $8 trillion balance sheet without replacing them, a process called quantitative tightening that can potentially sap liquidity in the financial system.
"Now that quantitative tightening has officially started, we have seen reserve drainage pretty persistent over the last several months," Jackson said, adding that he expects the FRA-OIS spread to widen even further.
The Fed raised rates by 75 basis points on Wednesday, its biggest increase since 1994, and expectations of more drastic tightening ahead have shaken markets and increased worries over a potential recession.
That echoes concerns of some other investors, who have worried that market conditions could worsen as the world’s largest holder of U.S. government debt reduces its presence in the market.
Wall Street is also pricing in a greater risk of default by major U.S. banks.
Spreads on five-year credit default swaps (CDS) of JP Morgan, Goldman Sachs, Morgan Stanley, Citigroup, Wells Fargo and Bank of America peaked to fresh two-year highs on Thursday.
Some strategists are concerned that these might point to "stress under the surface".
"The overall underpinnings of the economy are quite shaky," said Ryan Detrick, senior strategist at LPL Financial. "The next six months could be quite perilous."
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Rickards - >>> Putin Should Send Biden “Thank You” Note
BY JAMES RICKARDS
JUNE 7, 2022
https://dailyreckoning.com/putin-should-send-biden-thank-you-note/
Putin Should Send Biden “Thank You” Note
I’ve said from the start that Russia will win the kinetic war in Ukraine and the global financial war as well.
That doesn’t mean I’m pro-Russian or condone Putin’s invasion. It’s just my objective analysis based on the facts.
Of course, winning is a subjective term in both contexts. As applied to the kinetic war, winning does not mean a complete conquest of Ukraine. That was never Putin’s goal.
It means Russia will control the Donbas region in the south and east and the coastline of Ukraine, including the Sea of Azov and the Black Sea. Russia has already secured a land bridge from Russian territory to Crimea and likely plans to extend its coastwise control to Odessa.
Russia’s occupation of Snake Island gives it de facto control of Black Sea access to Ukraine already. Russia also occupies Kherson, which controls access to the Dnieper River in central Ukraine, which is the main access to the sea from the capital Kyiv.
What Good Are Weapons if There’s Nobody Left to Use Them?
None of this has been easy. It has been slow, brutal and costly. But Russia is not losing militarily, no matter how many videos you may see of destroyed Russian tanks.
Ukraine’s President Zelenskyy is now admitting that he’s losing up to 100 men a day, with many more wounded. The actual figures are probably significantly higher.
The U.S. and its allies can send all the advanced weapons they want to Ukraine, but given Ukrainian casualty rates there won’t be anyone on the front lines left to use them.
Then there are the economic sanctions…
Biden Should Send Putin a “Thank You” Note
On the financial front, Russia is making $25 billion per month in oil and natural gas sales due in large part to higher world prices as a result of economic sanctions.
Efforts to seize assets such as yachts and townhouses from Russian oligarchs also play into Putin’s hands because he had tried for over a decade to clip the oligarchs’ wings.
The fact is Putin despises the oligarchs. Putin’s base of power is the military, intelligence services and the Orthodox Church. The U.S. and its allies are actually doing Putin’s dirty work for him by going after the oligarchs.
Russia has also captured 55 million tons of coal in the Donbass region of Ukraine, which gives Russia added leverage when it comes to sanctions related to oil and natural gas.
Europe Has Few Options
The G7 climate and environmental ministers recently met in Berlin and agreed to phase out the use of coal. That sounds like a worthy goal from the perspective of climate alarmists. The problem is that most of the EU (with the exception of France) has already phased out their use of nuclear power.
At the same time, steps are being taken to ban exports of oil and natural gas from Russia to Europe because of the war in Ukraine. If you eliminate nuclear and coal, and curtail oil and natural gas, what’s left to power the homes and factories of Europe?
The ministers claim that they will arrange substitutes for the Russian oil and gas. But there aren’t any.
Qatari natural gas is mostly pre-sold to China. U.S. natural gas output has been knee-capped by Biden administration limitations on leasing and fracking. U.S. oil output is also declining for the same reasons.
The U.S. has moved from being a net exporter to a net importer of oil and natural gas in the past two years, so it cannot practically be a source for Europe.
None of this does any harm to Russia, which will simply sell its oil and gas output to China at world prices.
Green Fantasies
The G7 and EU have a fantasy that they can substitute wind and solar power for the oil, gas and coal that they are scaling back. The problem is that wind turbines and solar panels are expensive and not scalable. They depend on enormous battery farms to store power and those batteries make the entire plan even more expensive.
It’s also impossible to run a modern power grid on wind and solar alone because those sources are intermittent. There’s no solar power at night or on cloudy days, and there’s no wind power when the wind’s not blowing. Wind and solar can supplement other energy sources on the grid, but they cannot power the grid on their own.
This leads back to oil and natural gas (or coal), which the G7 has just agreed to do without. None of this makes sense. There are no ready substitute supplies of oil and natural gas. Wind and solar cannot power the grid.
Europe’s choices will be rationing and blackouts, not a green new deal.
The worst case is that the EU and G7 actually move forward with these nonsensical and unnecessary plans, in which case Europe will freeze in the dark next winter.
The U.S. Tells Africa to Starve
Meanwhile, many major trading partners of Russia have remained neutral in the war including China, India and Brazil, which gives Russia many outlets for its exports of strategic materials and energy and imports of manufactured goods.
It also looks like Russia nicked $150 billion of plutonium from Ukraine’s nuclear power plants. Plutonium runs about $6,000 per gram and the Russians got 30 tons. That leaves Russia with a nice profit in the sanction war.
With respect to grain exports, Russia has destroyed a major Ukrainian grain export terminal in Mykolaiv that plays a crucial role in global grain distribution. But after the West seized the assets of the Central Bank of Russia, what did you expect?
Putin doesn’t play patty-cake. This is war and he plays to win.
The U.S. is warning African nations not to buy Russian grain seized from Ukraine. But if the Africans don’t buy it, their people will starve. Talk is cheap, while starvation focuses the mind. They’ll buy the grain. Why wouldn’t they? Mark this as another failure for mindless U.S. sanctions.
In all, Russia will be OK.
Still, investors who believe the western and Ukrainian propaganda amplified by legacy media such as the New York Times and Washington Post are being badly misled.
The war could be ended through a negotiated settlement that addresses Russia’s security concerns, while still maintaining Ukraine’s independence.
But the U.S. and its allies want the fighting to drag along as much as possible in order to weaken Russia militarily.
They’re willing to fight to the last Ukrainian to do so.
Regards,
Jim Rickards
for The Daily Reckoning
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>>> Nowhere to Hide
BY JAMES RICKARDS
MAY 16, 2022
https://dailyreckoning.com/nowhere-to-hide-2/
Nowhere to Hide
Investors don’t need to be told about the recent stock market crashes. The Dow Jones index is down 12.5% since early January. The S&P 500 is down 16.1% in the same period. The Nasdaq Composite is down an even more spectacular 26.5% this year. It lost more ground today.
This puts the Nasdaq solidly into a bear market (down 20% or more from an interim peak) while the Dow and S&P 500 are both in correction territory (down 10% or more from an interim peak).
The Dow was up slightly today, but the S&P was down again. On current trends, the S&P 500 may break into bear market territory in a matter of days with the Dow not far behind.
This collapse coming so soon after the market crash of March 2020 may surprise some investors, although this outcome was predicted in my last book The New Great Depression, published last year.
We could get into the reasons for the recent market swoon, like the Fed’s taking away the punch bowl, but the reasons almost don’t matter at this point.
What truly is surprising is that the stock market is not alone in its recent dismal performance.
The Great Crypto Crash
U.S. Treasury bonds, foreign currencies, gold and other commodities have all declined sharply side by side with stocks. There are good reasons for this, including the prospect of a recession that could cause stocks, gold and commodities to fall in sync.
Still, the market carnage doesn’t end there. The biggest collapse among major asset classes is in Bitcoin and other cryptocurrencies.
The price of Bitcoin has fallen over 55% since last November, when Bitcoin peaked at around $69,000. As I write this article, Bitcoin is trading at $29,647.
As is so often the case, gullible investors jumped in when Bitcoin was riding high. Now, 40% of all Bitcoin investors are underwater on their holdings. Like the saying goes, nobody blows a whistle at the top.
So much for Bitcoin being the new inflation hedge!
And the damage is by no means limited to Bitcoin. Huge losses have arisen in other popular crypto currencies such as Ethereum (down 57% over the same period), XRP (known as Ripple) and Solana.
Still, neither of those crypto collapses was the most spectacular. A crypto currency called Luna fell from $116.84 on April 5, 2022, to $0.0062 on May 16, an incredible 99.9% crash in less than six weeks.
That’s not just a crash, it’s a complete wipe-out. It just shows you how crazy speculative manias can become, completely unhinged from reality.
Contagion
The danger in these types of collapses goes beyond the losses to individual investors who happen to hold the coins. Such losses are indicative of a wider global liquidity crisis emerging. It’s a reminder of how deeply interconnected today’s markets are.
It comes back to contagion.
Unfortunately, over the past couple of years, 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.
As one market crashes, investors in other markets sell assets to raise cash and the collapse virus quickly spreads to those other markets. In a full-scale market panic of the kind we saw in 1998 and again in 2008, no asset class is safe.
Investors sell stocks, bonds, gold, cryptos, commodities and more in a mad scramble for cash.
Each Crash Is Bigger Than the Last
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.
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.
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 Fed Has No Answers
The ability of central banks to deal with a new crisis is highly constrained by low interest rates and bloated balance sheets, which exploded even higher in response to the pandemic. You see how much damage the Fed’s recent rate hikes and end of quantitative easing have caused.
The Fed’s balance sheet is currently about $9 trillion, which it’s just beginning to reduce. 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.
How much the Fed can drain from the balance sheet without triggering another serious crisis is an open question, but we’ll likely get the answer at some point.
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 best description I’ve ever heard of the dynamic of a financial panic is, “Everybody wants his money back.”
We seem to be headed to that state of affairs at a rapid rate.
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
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>>> IMF lifts weighting of dollar, Chinese yuan in SDR basket
Reuters
May 14, 2022
https://www.reuters.com/markets/us/imf-lifts-weighting-dollar-chinese-yuan-sdr-basket-2022-05-15/
BEIJING, May 15 (Reuters) - The International Monetary Fund said on Saturday it has increased the weighting of the dollar and Chinese yuan in its review of the currencies that make up the valuation of its Special Drawing Rights (SDR), an international reserve asset.
The review is the first since the yuan, also known as the renminbi, joined the basket of currencies in 2016 in what was a milestone in Beijing's efforts to internationalise its currency.
The IMF raised the U.S. currency's weighting to 43.38% from 41.73% and the yuan to 12.28% from 10.92%. The euro's weighting declined to 29.31% from 30.93%, the yen's fell to 7.59% from 8.33% and the British pound fell to 7.44% from 8.09%.
The IMF said in a statement its executive board had determined the weighting based on trade and financial market developments from 2017 to 2021.
"Directors concurred that neither the COVID-19 pandemic nor advances in Fintech have had any major impact on the relative role of currencies in the SDR basket so far," the IMF said.
Although the yuan's value has declined recently, it has risen roughly 2% against the dollar since 2016, and appreciated about 6% against its major trading partners.
In a statement on Sunday, the People's Bank of China said China will continue to promote the reform and opening of its financial market.
The updated weightings take effect on Aug. 1.
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>>> BRICS Bank To Move Away From US Dollar Loans
Aug 06, 2019
by Silk Road Briefing
https://www.silkroadbriefing.com/news/2019/08/06/brics-bank-move-away-us-dollar-loans/
The New Development Bank, commonly referred to as the “BRICS Bank” as it is co-owned equally by the 5 BRICS nations of Brazil, Russia, India, China and South Africa, is to scale back its use of the US dollar and concentrate instead of loans designated in national currencies, it has been reported in the Financial Times.
To date, the bank has approved more than US$9 billion in loans to its member countries since being founded in July 2014, and plans to double that to US$16 billion this year. The bank is seen as a challenger to established lenders such as the World Bank, Asian Development Bank and IMF. So far it has mainly relied on its dollar paid-in capital for funding, but in the future “50 per cent (of projects) should be local currency financed”, K.V. Kamath, the bank’s president, said in an interview. “We will raise dollars, we will raise euros, but at the same time there will be a significant reliance on local currencies. That would allow the bank to move away from loans denominated in dollars” Mr.Kamath stated.
RELATED NEWS
More Self Reliance than US Reliance Promoted as BRICS 2018 Summit also Calls for Expansion
The bank is headquartered in Shanghai, and issued a second RMB3 Trillion Chinese currency bond this year. It received a AA+ rating from Fitch and S&P Global in August 2018, and also plans to tap bond markets in the United States. The bank’s lending so far has mostly gone back to its founder countries, which have a collective credit rating of BBB-. This allows them to borrow at lower rates though the NDB.
There are downsides to moving away from the US dollar however, with the FT quoting an unnamed source as saying “The bank will not be able to move away from dollars entirely. There’s a constraint that you can’t disrupt the US dollar system. If you did [the US] would find a way to go after you.”
RELATED NEWS
BRICS Nations Contemplate Independent Credit Agency
BRICS New Development Bank on Course to Lend US$40 Billion in Green Infrastructure Projects
However, as we pointed out in the article China Manipulates Its Currency, Is Caught Out, So Gold Rises In Value. Who’s Been Buying Gold? China. Countries such as China and Russia are already caught up in spats with the United States and are developing alternative strategies to dealing with the US dollar, while bilateral trade between the 5 BRICS members is also increasingly being conducted in non-dollar mechanisms. Other, new tech solutions are also being found; a BRICS Cryptocurrency has been discussed, while all five nations are pushing ahead with a cloud based payment system, BRICS Pay a smartphone accessible app that will allow users in these countries access to a common system for retail payments and transactions between the member countries – using only the respective currencies and not the US dollar. These developments come after the BRICS 2018 summit called for “more self reliance” among the member states.
Whichever way the wind blows in these uncertain trade and economic times, it appears apparent that the US dollar is increasingly expected to be heading for unpredictable territory in the next year or so, with gold and several Asian currencies seen as a better hedge against this.
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>>> As Fortress Russia crumbles, the global economy faces a new world order
The Telegraph
by Tom Rees
April 22, 2022
https://finance.yahoo.com/news/fortress-russia-crumbles-global-economy-082411869.html
As Russia’s economy teeters on the brink of collapse, its fallout could prove even more consequential than perhaps initially thought.
The freezing of the Russian Central Bank’s assets and the weaponisation of the US dollar has not only caused Vladimir Putin’s “Fortress Russia” plan to crumble, but also stoked worries that the world economy has crossed the Rubicon.
Some in global finance, including the International Monetary Fund, fear the onslaught of Western sanctions means the global economy is splitting into camps in the wake of Russia’s invasion, one led by the US and the other by China, with disastrous consequences.
They believe the world economy is fracturing into two parts. Russia will be forced to move away from Western finance, tech and the US dollar, perhaps into Chinese President Xi Jinping’s arms, while others could follow to avoid being next.
“The war also increases the risk of a more permanent fragmentation of the world economy into geopolitical blocks with distinct technology standards, cross-border payment systems, and reserve currencies,” IMF chief economist Pierre-Olivier Gourinchas said last week as he delivered a grim set of global economic forecasts in the wake of the invasion of Ukraine.
He said this “tectonic shift” where trade and standards separate into blocks would be a “disaster” for the global economy. It would be “a major challenge to the rules-based framework that has governed international and economic relations for the last 75 years”, Gourinchas added.
While the big thinkers in economics appear to agree that a fundamental shift is underway in the global economy, they remain divided over what kind of post-Covid, post-Ukraine war world will emerge. Some believe the war will cause economic fragmentation and the demise of the dollar as the world’s reserve currency; others swat away the idea that such a seismic shift is underway.
Dario Perkins, managing director of global macro at TS Lombard, says: “We always thought this splintering of the global economy into different trade blocs - the US, Asia and Europe in the middle - was going to happen but we’ve had that accelerated.
“Some of these trends will be accelerated, particularly [given] you are drawing Russia, China, India and other countries closer together. They're starting to use the renminbi in bilateral trade instead of the dollar.”
Government-imposed financial sanctions taken against Russia by the West have been sweeping and devastating, while individual companies have delivered a blow by pulling their operations out of the country. There are worries this could force Russia and others to seek alternatives to a global financial system dominated by the West and its financial heavyweights.
In addition to personal sanctions against Putin and his inner circle of oligarchs and ministers, the West targeted its lenders and central bank.
Once considered a “nuclear” option, a number of Russian banks were ejected from the Swift global payments messaging system, making it far harder for them to do business and make cross-border payments. Visa and Mastercard also suspended their operations in the country, blocking access to new cards issued by the payment giants.
Meanwhile, following the invasion, the West froze half of the Russian central bank’s foreign currency and gold reserves, hindering Moscow’s ability to prop up the rouble and its banking system.
Under Putin’s Fortress Russia plan to insulate it from sanctions, Moscow had built up a $640bn war chest of foreign reserves. The freezing of these reserves was considered a game-changing move, in an unexpected and powerful escalation of the financial siege on Russia. It prompted a plunge in the rouble and the introduction of capital controls in the country.
Some fear this weaponisation of finance and the US dollar has long-term consequences, perhaps luring countries to a new rival sphere headed by China.
Russian banks are turning to alternatives to the Belgium-based Swift in order to smooth cross-border payments. Its central bank has its own system it has already offered India for rouble payments, while China also has an alternative that could rival Swift.
Moscow’s lenders have turned to China’s payment giant UnionPay to help them issue debit and credit cards after Visa and Mastercard joined the mass exodus of Western brands from Russia. The two American payment heavyweights accounted for 70pc of the Russian debit card market but the Kremlin created its own system, Mir, following the Crimea annexation.
Following the departure of Visa and Mastercard, Russian banks and Mir hoped to team up with UnionPay, which has been fast gaining ground outside of China in recent years, to issue cards. However, reports suggested last week that UnionPay is getting cold feet, fearing that it will be dragged into Western sanctions.
Fears of a split have also rekindled the long-running debate over whether the US dollar is at risk of losing its status as the world’s reserve currency.
“After this war is over, ‘money’ will never be the same again,” said Zoltan Pozsar at Credit Suisse as he declared a “new world (monetary) order” following the freezing of the Russian central bank’s reserves.
The US dollar has been dominant across the globe since the second world war, becoming the world’s reserve currency. This is the currency held most by central banks as part of foreign reserves and financial institutions to help facilitate global trade.
Countries, including China, have amassed almost $13 trillion in foreign reserves - around 60pc in dollars. As the sanctions on Russia have shown, however, those reserves could suddenly become useless if they are paralysed by the West.
Dollars have also been vital for global trade, being used for everything from invoicing in international business to buying commodities, such as oil.
Russia, however, claims several buyers have agreed to pay for its gas in roubles, while Saudi Arabia is reportedly considering accepting China’s currency instead of dollars for oil sales to Beijing amid tensions with Washington.
“This was a weapon that the US had been increasingly using,” says Perkins. “There's always been warnings going back at least a decade, saying ‘you can't keep doing this over and over again’ because eventually you get to a point where you change the status of the dollar. It’s just this is so high profile.”
He says there is now a “turning point”, but highlights that any move away from the dollar would be slow moving.
Others are sceptical that such a major transformation is in the works, however.
Prof Barry Eichengreen, an expert at University of California, Berkeley, says the odds of this weaponisation threatening the dollar’s status are low given the lack of a credible alternative.
“The US was joined by the euro area, the UK, and Japan, among others, in imposing financial sanctions,” he says, adding that the Chinese renminbi is “an unattractive alternative to most countries”.
“Only governments in extremis, such as Russia's, are likely to significantly increase their reliance on China's currency.”
Meanwhile Paul Donovan, chief economist of UBS Global Wealth Management, says the concept of a reserve currency will become less important as world trade “is likely to become less global over time”.
“If you are doing less global trade, then the importance of a global invoicing currency is less and central banks don't need to hold quite so much in foreign exchange reserves.”
He believes the global economy is not going through a splintering but a localisation effect where digitisation reduces the need for physical trade and production moves closer to consumers, such as clean energy over imported gas.
“A localisation process is something which doesn’t necessarily split the world into two, it splits the world into 196.”
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Rickards - >>> You Can’t Blame the Fed
BY JAMES RICKARDS
APRIL 13, 2022
https://dailyreckoning.com/you-cant-blame-the-fed/
You Can’t Blame the Fed
What is money? Everyone thinks they know what money is, but the Fed doesn’t even know what money is. They have three or more different definitions of money (M0, M1 and M2, etc.).
For example, money includes cash and checking deposits. But then there’s “near money,” which includes such things as savings deposits and money market mutual funds. They can be converted into cash or checking deposits, so they’re considered near money.
So even the institution that creates the money doesn’t quite know what money is. And if you don’t know what money is, can you really grasp what inflation is?
Today I want to clarify what money and inflation really are.
First off, you have to understand what money printing is. How does the Fed actually do it? And where does the money go?
When the Fed “prints” money, of course it’s all digital. Yes, there is some physical currency that people carry around in their wallets, but 90% of money is created by an electronic entry in a computer.
Money From Nothing
When the Fed creates money, it must first buy U.S. government bonds (also certain mortgage-backed securities from primary dealers like Goldman Sachs, Morgan Stanley, Citi and Bank of America).
The Fed calls the dealers and offers to buy the securities. The dealers send those securities to the Fed, and the Fed pays for them with money that it creates out of thin air.
One keystroke of a computer is all it takes. Contrary to what many believe, the Fed doesn’t have a printing press. The Treasury Department does, but that’s a different story. It’s all digital.
So that’s money printing. The Fed creates money out of thin air to pay for the securities it buys from the primary dealers. The question is what happens next?
The Money Merry-Go-Round
The banks now have the money the Fed created to pay for the bonds. The banks then take the money and deposit it at the Fed in their reserve accounts (primary dealers have accounts at the Fed).
So the banks take the newly created money and send it right back to the Fed in the form of excess reserves, where it earns a small amount of interest.
The money doesn’t go anywhere. It doesn’t get into circulation, and it’s not loaned out. In effect, it’s sterilized, just sitting in dealer accounts at the Fed collecting a bit of interest.
That’s why the orgy of money-creation we’ve seen over the past dozen years or so never led to serious consumer price inflation.
So how does money supply affect the real economy? How can it possibly cause inflation? Well, that happens at the commercial bank level, including these big dealers, but also any other bank.
Create a Loan, Create Money
Essentially, banks create money when they make you a loan. They put the money in your account. You can spend it, save it or invest it, whatever. The key point is it’s not just the Fed that creates money. Commercial banks also create money when they make a loan.
Of course, that money also comes out of thin air. Neither the Fed nor the commercial banks “print” money. It’s all computer entries.
Commercial bank lending can be inflationary. If the banks are making new loans, people are taking the money and buying new cars or appliances, going out to dinner, taking vacations, etc., that has some inflationary potential.
But that’s not happening. The banks aren’t making many loans, which means they’re not creating much money.
The missing ingredient in all this is what’s called velocity. Velocity sounds technical, but it’s a pretty simple concept. It’s the turnover of money.
It’s All About the Velocity
If you have a money velocity of five, that means every dollar in the money supply gets turned into $5 of goods and services. Someone borrows it and spends it, say, at a restaurant. The restaurant then takes the money and spends it on supplies, the supplier spends it on something else and so on.
But velocity has been crashing. Not just going down, but crashing. Today’s velocity is about 1.5, meaning a dollar is barely producing any goods and services over and above the money supply itself.
The point being, all the money printing, whether by the Fed buying bonds from dealers or by commercial banks making loans to customers, isn’t producing the inflation because money velocity is minimal.
The key takeaway is that inflation has nothing to do with Fed “money printing.”So why are we seeing today’s soaring inflation?
Two Kinds of Inflation
We first need to understand that there are two kinds of inflation. One is called demand-pull inflation and the other’s called cost-push inflation.
What is demand-pull inflation? Demand-pull inflation is when consumers believe that inflation has arrived and it’s going to get worse. They decide to stock up now because prices are only going up. We saw that in the late 1970s.
So what does that rising demand do? It creates shortages. Producers are cranking the goods out, selling as fast as they can. Prices rise. There’s almost a frenzy, and velocity skyrockets. Then you get inflation. That’s demand-pull inflation.
Cost-Push Inflation
The other kind of inflation is called cost-push inflation. This doesn’t come from the demand side, but the supply side. It means whether the economy is strong, whether there’s an inflation fear or not, prices are going up because producers are causing the prices to go up.
It’s not price gouging. It’s not a conspiracy, just basic economics. That’s what’s driving inflation right now. Supply chains were already disrupted by the pandemic. Now you have the war in Ukraine, leading to even more disruptions.
For example, Russia and Ukraine together produce about 25% of all the wheat exports in the world. Well, Ukraine can’t export the wheat because there’s a war going on and Russia can’t export wheat because of the sanctions.
With that much supply coming off the market, it’s bound to raise the price of wheat. That’s just one example.
There are also energy shortages, exacerbated by the war in Ukraine. But a lot of it is policy-driven.
Self-Inflicted Wounds
The Biden administration killed the Keystone pipeline. The pipeline would have connected to the U.S. pipeline system in the Midwest. Then the oil could have been distributed all over the United States to refineries or places where it’s needed. But Biden killed it.
His administration also ended new leases on federal lands and handicapped the fracking industry. Jen Psaki, the president’s spokesperson, tried to downplay these policies’ impact, saying there are already 9,000 leases but they’re not being used.
Well, the reason they’re not being used is because oil companies drilled samples and found no oil. So it’s true that these leases aren’t being used, but it doesn’t mean there’s untapped oil there.
In fact, the opposite.
It means there’s no oil, because they already tested it and didn’t find anything. Companies need new leases to explore, which they’re not getting. It’s just propaganda, but they think the American people are going to buy into it.
The bottom line is the inflation we’re seeing so far is cost-push inflation resulting from supply chain disruption, bad policy, the pandemic and the war in Ukraine.
And nothing the Fed can do will change any of that.
Regards,
Jim Rickards
for The Daily Reckoning
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>>> Here’s How Much Cash You Need Stashed if a National Emergency Happens
Yahoo Finance
Jaime Catmull
April 10, 2022
https://finance.yahoo.com/news/much-cash-stashed-national-emergency-190022760.html
You've probably heard time and again that it's important to have a rainy day fund set up "just in case" something unexpected were to happen. But we're now at a time when having an emergency fund is more vital than ever.
The coronavirus pandemic was a prime example of how something unexpected can have devastating effects on the economy at large and on an individual level, too. While we all hope the worst of it is over, here's how to be prepared in case it's not -- plus how to set up a fund for unexpected future national emergencies.
Why You Need a National Emergency Fund
Part of being prepared for any contingency, big or small, is having a reserve of emergency cash at your disposal at all times. When you can't rely on accessing your funds electronically, you'll need some legal tender to buy food, gas or other necessities. "Whether it's Mother Nature or some other disaster out of your control, you always want to be prepared by having some emergency cash on hand," said Annalee Leonard, an investment advisor representative and president of Mainstay Financial Group. "Banks and ATMs may not be up and running for days after a strong storm. I recommend my clients have three to five days' worth of spending money, just in case."
How To Decide How Much To Save
To decide how much to save for an emergency fund, you'll need to ask yourself a couple of questions: How much will I need for an extreme catastrophic event?
How much can I afford to save?
"It's wise to have a small amount of physical cash at home for the truest of emergencies when banks are not operating," said Priyanka Prakash, managing editor at Fit Small Business, a company that finds the best small-business software, services and financing options.
Aim To Save $2,000
"Individuals should be prepared to pay for essential or non-discretionary expenses out-of-pocket," said Brett Tharp, CFP and financial planning education consultant at eMoney Advisor. "Temporary lodging or shelter, fuel, food, water and necessary medications fall into this category. This will differ for each person depending on their level of preparedness or perception of how likely a catastrophic event might be.
"Two-thousand dollars should cover those costs. "The rule of thumb I advise my clients is to keep $1,000 to $2,000 in cash in case banking operations are shut down due to a national emergency or catastrophe," said Gregory Brinkman, president of Brinkman Financial in Tulsa, Oklahoma.
There's No 'Magic Number' for How Much To Save in Your Emergency Fund
Despite these suggestions and what some other experts might advise, though, there's no magic amount you should have nestled away in your emergency fund. The answer for how much you should save for an emergency situation is that you should do what feels right to you. No matter the amount, an emergency fund is absolutely necessary — so make it a priority to build one.Even if you can't afford to save much, it's better to save something rather than nothing, Prakash said. So if you can only afford to set aside $1,000 for an emergency fund, that's better than not saving at all.
The Cost of an Emergency Kit
You should already have some kind of emergency kit that includes these recommendations from Money.com:
Batteries and tools: $122
First aid supply kit: $48
Nonperishable food: $120
Medication: $38
Spare clothing: $44
How Is a National Emergency Fund Different From Other Savings?
Unlike a regular emergency fund — which should be used to cover things like unemployment, medical or car emergencies, emergency home repairs or bereavement-related expenses — a national emergency fund should be reserved for catastrophes in which you cannot use credit cards.Regular emergency savings should be stashed in some kind of savings, money market or certificate of deposit account. Your savings for a national emergency fund should be kept mostly in cash."Avoid the stock market because you can lose (your national emergency money) right when you need it the most," Prakash said.Neither type of emergency fund is meant to be dipped into or spent like disposable income, and creating one takes the same approach as that for a rainy-day fund, a nest egg or any other savings.
How To Start an Emergency Fund
The first step in saving for a national emergency fund is creating a budget, said Rachel Cruze, author and host of The Rachel Cruze Show and The Rachel Cruze Show podcast."A zero-based budget is best," she said. "This is where your income minus expenses equals zero, so you are giving every dollar a name. Even if your income has changed or you've lost your job, list out any possible income you could have coming in and all your expenses. This will help you to see what can be cut from your budget so you can stretch your money further and find ways to save."Good To Know: How Much Money You Should Keep in Each Type of Banking Account?
Set Savings Goals
Once you set your budget and see how much money you can realistically dedicate toward savings, it's time to start setting some goals. Financial author Dave Ramsey and many other experts suggest starting small. If you're looking to set aside $3,000 in one year, that would mean you'll have to save $250 per month over the next 12 months. Extend your savings goal to 18 months, and that's $166 per month.Or you can automate saving a percentage of your income. "Put aside about 10% of your monthly take-home income for your emergency fund," Prakash said.
Make Saving for Your Emergency Fund a Priority
It's especially vital right now to focus on saving, with job insecurity at a high and stock values plummeting."It's important to not panic but to be proactive in planning your finances over the next few months, considering different strategies for saving more money and having cash on hand," said Chalmers Brown, CTO and co-founder of Due. "I recommend doing a review of your new budget, considering your current job situation as well as accounting for reductions in spending. For example, since you are quarantined, you are most likely spending considerably less on gas, eating out and entertainment. Take that money out of your bank that you would have spent and put it in a lockbox as cash."
Put Other Contributions on Hold While You Build Your Emergency Fund
When you're in the process of building your emergency fund, limit other saving contributions or debt repayments to only the necessary amount, Tharp said."For example, contribute enough to your company's 401(k) to get the full company match and allocate the additional funds to your emergency savings," he said. "Additionally, maintain the minimum payments on outstanding debt to keep loan balances steady while directing additional money toward your emergency fund. Once you've built up enough savings, you can continue to contribute money to other longer-term goals."
Should Your National Emergency Fund Be All Cash?
If you've managed to save up $15,000 in emergency funds over time, for example, it might not be a prudent idea to have all that money in cold hard cash sitting around your house. For one reason, it's unsafe, and two, it might actually be more than you need."There is a price to putting away a large amount of money for a rainy day: That price is inflation, which has averaged about 1 to 2% per year in the last few years," Prakash said. "To minimize loss from inflation, it's wise to not keep too much of your emergency fund at home in physical cash. By keeping the bulk of the money in a savings account or a certificate of deposit, you can at least earn some interest on it to counteract inflation."
Consider Opening a Separate Savings Account To Serve as a National Emergency Fund
While it's smart to have up to $2,000 in cash in case of a bank shutdown, the rest of your emergency fund should be kept in a bank. Depositing your savings into an interest-bearing checking account or high-yield savings account can help multiply your savings over time."When you set aside savings — whether for a vacation or for life's emergencies — you want to be able to get to it quickly but not keep it somewhere that's too easy to access," said Chris Hogan, author, financial expert and host of The Chris Hogan Show. "Your money is safe inside a bank. Bank deposits are insured by the FDIC and are protected up to at least $250,000. The best place for your emergency fund is a money market account or savings account. If you want to keep some cash at home, that's fine, but I don't recommend cashing out your savings."Find Out: 9 Bills You Should Never Put on Autopay
Consider Having Some Cash Saved in the Form of Alternative Assets
"Cash is still king across all kinds of crises. Therefore, you want to ensure you have an amount on hand to help you in case it's necessary for purchasing some necessities," said Jason Powell, real estate and securities attorney at EstateInvesting.com. "However, you may also want to look into trading some of the cash you have for silver, gold and other assets that may be valuable in the coming year or near future."
How To Hide Money at Home
Many people are reluctant to keep large amounts of money in their homes for fear of theft or misplacement. Keeping cash at home is risky, especially when it's in large denominations. A home break-in is the type of emergency you won't have money for if your cash supply is stolen — physical money isn't insured and it's unlikely to be recovered. Finding secure and clever places to hide your emergency fund can safeguard the security of your assets; think of it as making a bank within your home. Common advice is to keep some cash at your house, but not too much. The $1,000 cash fund Prakash recommended for having at home should be kept in small denominations. "Favor smaller bills like twenties because some retailers won't accept larger notes," she said. However, when looking to store your money in a compact fashion, larger bills in fewer quantities take up less space — so it's up to your discretion. Whatever you decide, stash your cash away in a practical, yet unorthodox way. "If you're going to have cash at home, make sure it's in a quality, fireproof safe," Hogan said. "This is more secure than the usual suspects — under the mattress or the coffee container! Be reasonable with how much you put in the safe. It's OK to keep a couple thousand at home, but I want you to keep the bulk of your money secure and protected in a bank."
Other Options for Hiding Your Cash Stash
More options for hiding your emergency cash funds include:
A bottle of aspirin in your medicine cabinet
A hollowed-out book
Between the cardboard backing of a framed picture and the photo itself
Encased in weatherproof material and buried in your backyard or the soil of a potted plant
Enclosed in a plastic sandwich bag and hidden in the freezer among frozen foods
Why It's a Good Idea To Have Cash on Hand During an Emergency
Cash can be your biggest protection against a national emergency or disaster if circumstances prevent you from withdrawing cash from the bank. It's kind of like insurance — you pay for it hoping you will never need it. The suggested hiding places should keep your money safe just in case that emergency should unexpectedly pop up.
What To Do Right Now If You Don't Have a National Emergency Fund
For some people, this advice is coming a little too late. Many have already lost their jobs and are in a place where they are struggling to pay for necessary expenses. If this is the case for you and you don't have a national emergency fund, it's important to know how to best prioritize your spending."The expenses that should be your priority right now are the things you need to survive," Cruze said. "Whatever money or income you have should be dedicated to paying for what I call the 'four walls.' This is your food, utilities, housing and transportation. If you're struggling to put food on the table, cut anything that is not essential like subscriptions or cable. Right now, needs come first. But crisis or no crisis, do not use debt to cover emergencies! Debt will only add to your problems. If you've lost your job, find extra ways to earn cash. Amazon is hiring 100,000 people. Food delivery services, grocery shopping services, grocery stores and online learning are all industries that are in need of help right now."
Talk to Your Lenders
If you have outstanding debts that you are now unable to pay because of job loss or a reduction in hours, and you don't have an emergency fund to help fill in these gaps, call your lenders directly. The last thing you want to have to worry about is penalties and fees for missed or late payments on top of your other financial strains."Call lenders and ask them if they'll let you miss payments without penalty," Cruze said. "Lots of companies are giving grace periods. The President just suspended student loan payments for 60 days. Take advantage of these things if you're struggling and save all the cash you can."
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>>> Major clearing house tests how to settle a CBDC
Yahoo Finance
by Jennifer Schonberger
April 12, 2022
https://finance.yahoo.com/news/clearing-house-cbdc-142923910.html
A major clearing house is working on a prototype to explore how a central bank digital currency could be settled if adopted, as the Federal Reserve and Biden administration explore the pros and cons of a CBDC.
The Depository Trust & Clearing Corporation, which clears and settles trades for stocks and bonds, is teaming up with the Digital Dollar Project, a nonprofit led by former U.S. regulators, to test the design of a CBDC and settling delivery and payment at the same time in a project dubbed Project Lithium.
One of the keys to a central bank digital currency is that it’s instantaneous and settled immediately. Project Lithium is looking at using distributed ledger technology to create the best design that allows the most efficient instantaneous settlement.
“A CBDC could improve time and cost efficiencies, provide broader accessibility to central bank money and payments, and all while emulating the features of physical cash in an increasingly digital world,” said Christopher Giancarlo, co-founder and executive chairman of The Digital Dollar Project and former chairman of the Commodities Futures Trading Commission.
The use of printed U.S. currency is on the decline as markets become more digitized and securities are tokenized. Unlike private cryptocurrencies like bitcoin, a CBDC would be issued and backed by the Federal Reserve, just like U.S. paper dollars and coins.
The pilot will also look into how it can use DTCC’s clearing and settlement capabilities to realize the potential benefits of a CBDC, including improving capital efficiency, lowering counter-party risk, transparency for regulators, and guaranteeing cash and securities are delivered to the proper parties.
This comes as the Federal Reserve Bank of Boston and the Massachusetts Institute of Technology’s Digital Currency Initiative have come up with an initial design for a central bank digital currency. The theoretical coin, which was unveiled as the Federal Reserve explores the pros and cons of adopting one, could handle 1.7 million transactions per second, and settle in under two seconds, the Boston Fed and MIT estimated.
The Federal Reserve hasn’t made a decision on whether to adopt a CBDC yet. But Treasury Secretary Janet Yellen said a CBDC could help create a more efficient payment system and could become a form of trusted money comparable to physical cash. She says she’s not sure what conclusions the administration will reach, but that issuing a CBDC would present a “major design and engineering challenge that would require years of development — not months.”
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>>> Bretton Woods III? China Begins Buying Russian Coal And Oil In Yuan
Zero Hedge
BY TYLER DURDEN
APR 07, 2022
The old economic order, in which the dollar's centrality to global trade remains king, is beginning to fade. The latest example of the dollar's demise comes as China purchases coal and oil from Russia in yuan due to Western sanctions isolating Russian banks from the SWIFT payment system.
Chinese commodity firms purchased Russian coal in local currency in March, and the first shipments are expected to arrive in China this month, according to Bloomberg, citing Chinese consultancy Fenwei Energy Information Service Co. Traders said this coal shipment paid in yuan would be the first since the U.S. and Europe unleashed harsh sanctions severing some top Russian banks from SWIFT.
Traders are also reporting Russian crude bought in yuan. The first Eastern Siberia Pacific Ocean grade crude shipment will arrive at Chinese refiners in May.
Russia and China trading yuan for commodities is just one example of a new emerging economic order.
Premium subs should recall former N.Y. Fed repo guru and current Credit Suisse strategist Zoltan Pozsar's stunning note last week that said the consequences of the Ukraine war are ushering in "the birth of the Bretton Woods III - a new world (monetary) order centered around commodity-based currencies in the East that will likely weaken the Eurodollar system and also contribute to inflationary forces in the west."
Fast forwarding to the punchline, Poszar wrote that if the framework he has laid out previously (and again, in his latest note) is the right framework to think about how to trade interest rates in coming years, inflation will be higher; the level of rates will be higher too; demand for commodity reserves will be higher, which will naturally replace demand for FX reserves (Treasuries and other G7 claims); Meanwhile, demand for dollars will be lower too as more trade will be done in other currencies; and as a result of this, the perennially negative cross-currency basis (the dollar premium) will naturally fade away and potentially become a positive cross-currency basis.
Translation: the dollar is on its way out as the world's undisputed reserve currency, a consequences of events that put in motion when Putin invaded Ukraine (with the implicit blessing of China and India) and when the West decided to expel Russia from the entire western financial system.
It is this chain of events that Pozsar calls Bretton Woods III and the reports of China's purchases of oil and coal in yuan (not dollars) suggesting the path to that new world order is accelerating faster that many hoped (as the surge in the Ruble may also suggest).
Pozsar spoke with Bloomberg's Joe Weisenthal and Tracy Alloway this week and recited his Bretton Woods III thesis, suggesting:
"Instead of a Volcker moment, we got a Putin moment and we basically have war and out of this war, something will also emerge.
"Out of this, I think this 'Bretton Woods III' that I started to kind of develop and run with, is a world where we are, again, going to go back to commodity-backed money — where gold, once again, is going to play a big role. And not just gold, but I think all forms of commodities," Pozsar said.
To the Credit Suisse strategist's point, the global financial system's plumbing is being reworked, and the dollar's dominance in global trade is being challenged.
As Pepe Escobar recently noted, Iran has shown how to do it.
Persian Gulf traders confirmed to The Cradle that Iran is selling no less than 3 million barrels of oil a day even now, with no signed JCPOA (Joint Comprehensive Plan of Action agreement, currently under negotiation in Vienna). Oil is relabeled, smuggled, and transferred from tankers in the dead of night.
All the blather about “crashing Russian markets,” ending foreign investment, destroying the ruble, a “full trade embargo,” expelling Russia from “the community of nations,” and so forth –that’s for the zombified galleries. Iran has been dealing with the same thing for four decades, and survived.
Moscow is also considering a rupee-ruble payment system for Indian oil traders, while Saudi Arabia could start pricing some of its brent in yuan for Chinese traders.
“The oil market, and by extension the entire global commodities market, is the insurance policy of the status of the dollar as reserve currency,” said economist Gal Luft, co-director of the Washington-based Institute for the Analysis of Global Security who co-wrote a book about de-dollarization.
“If that block is taken out of the wall, the wall will begin to collapse.”
A drop in the demand for dollars would be bad news for a US government that depends on dollar demand to fund its out-of-control spending. As Michael Maharrey recently wrote, imagine a world in which the Chinese didn’t need dollars.
China ranks as the biggest foreign holder of US debt. If it continues to divest itself of dollars, who will pick up the slack? The Federal Reserve has been buying Treasuries hand over fist for the last two years, keeping its big fat thumb on the bond market. But it’s tapering purchases and supposedly planning on shrinking its balance sheet. If global demand for Treasuries drop precipitously — and it would in a world without the petrodollar — the US government would either have to drastically cut spending or the Fed would have to continue printing money to monetize the debt.
Even if this is nothing but talk, it underscores the fact that the dollar is on shaky ground. US policymakers would be wise to consider future dollar weaponization carefully.
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Bloomberg/Dudley article - >>> If Stocks Don’t Fall, the Fed Needs to Force Them
Tightening financial conditions will be key to getting inflation under control.
Bloomberg
By Bill Dudley
April 6, 2022
https://www.bloomberg.com/opinion/articles/2022-04-06/if-stocks-don-t-fall-the-fed-needs-to-force-them
It’s hard to know how much the U.S. Federal Reserve will need to do to get inflation under control. But one thing is certain: To be effective, it’ll have to inflict more losses on stock and bond investors than it has so far.
Market participants’ heads are already spinning from the rapid change in the outlook for the Fed’s interest-rate policy. As recently as a year ago, they expected no rate increases in 2022. Now, they foresee the federal funds rate reaching about 2.5% by the end of this year and peaking at more than 3% in 2023.
Whether that proves right will depend on a number of hard-to-predict developments. How quickly will inflation come down? Where will it bottom out as the economy reopens, demand shifts from goods to services, and supply-chain disruptions ease? What will happen in the labor market, where annual wage inflation is running at more than 5% and the unemployment rate is on track to reach its lowest level since the early 1950s within a few months? Will more people come off the sidelines, boosting the labor supply? Together with moderating inflation, this could allow the Fed to stop raising rates at a neutral level of about 2.5%. Or a tightening labor market and stubborn inflation could force the Fed to be a lot more aggressive.
Among the biggest uncertainties: How will the Fed’s tightening affect financial conditions, and how will those conditions affect economic activity? This is central to Fed Chair Jerome Powell’s thinking about the transmission of monetary policy. As he put it in his March press conference: “Policy works through financial conditions. That’s how it reaches the real economy.”
He’s right. In contrast to many other countries, the U.S. economy doesn’t respond directly to the level of short-term interest rates. Most home borrowers aren’t affected, because they have long-term, fixed-rate mortgages. And, again in contrast to many other countries, many U.S. households do hold a significant amount of their wealth in equities. As a result, they’re sensitive to financial conditions: Equity prices influence how wealthy they feel, and how willing they are to spend rather than save.
So far, the Fed’s removal of stimulus hasn’t had much effect on financial conditions. The S&P 500 index is down only about 4% from its peak in early January, and still up a lot from its pre-pandemic level. Similarly, the yield on the 10-year Treasury note stands at 2.5%, up just 0.75 percentage point from a year ago and still way below the inflation rate. This is happening because market participants expect higher short-term rates to undermine economic growth and force the Fed to reverse course in 2024 and 2025 — but these very expectations are preventing the tightening of financial conditions that would make such an outcome more likely.
Investors should pay closer attention to what Powell has said: Financial conditions need to tighten. If this doesn’t happen on its own (which seems unlikely), the Fed will have to shock markets to achieve the desired response. This would mean hiking the federal funds rate considerably higher than currently anticipated. One way or another, to get inflation under control, the Fed will need to push bond yields higher and stock prices lower.
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>>> Shrinking Role for U.S. Money
Time Magazine
Oct. 15, 1979
https://web.archive.org/web/20081207071708/http://www.time.com/time/magazine/article/0,9171,916948-1,00.html
Frenzy in the gold and currency markets heightens an urgent issue
From the harried canyons of Wall Street to the outwardly calm boardrooms of Zurich, the world's financial centers experienced a whiff of panic last week. In two days of frantic trading, the price of gold on the London exchange soared a breathtaking $50 per oz. to $447 at one point; then it plunged back down almost as steeply, closing the week at $385. Silver, platinum and copper also gyrated wildly. Said a New York bullion trader: "The market's gone bananas."
The madness, as usual, was not over precious metals so much as money—specifically the battered U.S. dollar. Once again greenbacks were being sold off heavily in world markets in exchange for more robust currencies. Struggling to keep the buck from plunging further, which would hurt West German exports, the Bundesbank spent $1.2 billion in deutsche marks to buy up unwanted dollars last week. By happenstance, as the buck was worrying down again, central bankers, finance ministers and some 6,000 other leading moneymen were gathering in Belgrade, Yugoslavia, for the annual meeting of the 138-nation International Monetary Fund. Treasury Secretary G. William Miller and Federal Reserve Chairman Paul Volcker had hardly arrived when they were besieged with calls for U.S. action to stem the panic.
Volcker promptly returned to Washington to draft plans for what could be the second massive dollar-rescue program the U.S. has had to mount in eleven months. Among the steps under discussion:
LARGER GOLD SALES. The 750,000 oz. of Fort Knox bullion the U.S. now sells monthly might be doubled, in hopes that this might help drive prices down. Hinting at such a strategy, Under Secretary of the Treasury Anthony Solomon said last week that the gold boom was "extremely unhealthy for the world economy."
BROADER DOLLAR PROPPING. Until now, in their efforts to keep the dollar from falling too sharply against the muscular mark, the U.S. and West German central banks have confined their buck-bolstering efforts mainly to the New York and Frankfurt markets. Now they have agreed to intervene in all financial centers. Reason: the world money markets have become so sensitive and intertwined that a drop in, say, Hong Kong ripples rapidly throughout the world.
MORE "CARTER BONDS." Since last November the U.S. has sold $4.2 billion of so-called Carter bonds in West Germany in order to raise marks for the dollar defense. Plans have been worked out to issue more such bonds.
The latest turmoil in the gold and currency markets shook the Belgrade meeting like an Adriatic earthquake. The moneymen hovered over telex machines to catch the latest gold fixings and dollar-mark exchange rates, and swapped anxious rumors. Inter-continental Arab finance ministers ducked quietly into Bill Miller's first-floor suite at the Inter-continental Hotel to get his assurances that the dollar would be defended. Reported TIME Correspondent Friedel Ungeheuer: "An undercurrent of fear and confusion about what has been happening on the money markets ran through the corridors of the modern Sava Center, where the I.M.F. sessions were held. Cecil de Strycker, governor of Belgium's central bank, confided: 'The only thing that is certain is that nothing is certain any more.' Many delegates joined in what Britain's Chancellor of the Exchequer, Sir Geoffrey Howe, aptly described as a kind of 'competitive gloominology.' "
The delegates had ample cause to be gloomy. A forecast by the IMF staff said that the combination of higher OPEC oil prices and the U.S. recession will force the rest of the industrial world into a stagflation swamp next year. Average inflation in industrial countries will rise to about 8.7%, and growth will fall to a meager 1.8%.
Whether even that prediction might prove optimistic depended to a great extent on the strength of the U.S. economy, and there the portents were mostly bad.
Despite record interest rates and a business slowdown, U.S. inflation continues to gather force.
Producers' wholesale prices rose 1.4% in September, an annual increase of 18.2% and the highest jump in almost five years. That probably foreshadows a further rise in consumer prices, which are already growing at a 13% rate. The week's only good news: instead of rising from its August level of 6%, unemployment dropped in September to 5.8%. But many economists believe joblessness will still increase sharply in the months ahead as the recession bites deeper.
The foreign moneymen worry about the Carter Administration's resolve to hold down inflation at the cost of higher unemployment as the 1980 political campaign picks up steam. They found fresh reason for skepticism last week: it was revealed that to get the unions to join in the Carter anti-inflation program, the Administration agreed not to try to penalize any violators of the "voluntary" wage and price guidelines. Miller attempted to soothe his colleagues in Belgrade by promising that the Administration would "stay the course" in battling inflation, but doubt remained. Said one West German Cabinet minister: "The problem is Carter's chaotic leadership."
The central bankers were especially doubtful about the President's ability to cut U.S. oil imports, a chief cause of the dollar's weakness. Only last week did Congress step up work on the energy program that Carter presented in July. Overriding objections from environmentalists, the Senate voted to create an Energy Mobilization Board that will be empowered to cut through the federal, state and local regulatory barriers that delay key energy projects. This week the Senate Finance Committee is expected to pass its version of the important windfall profits tax that will finance the new projects. The Senate is likely to approve a tax one-third smaller than the $104 billion House version: President Carter originally demanded a $142 billion tax.
The urgency for action on the energy program becomes clearer all the time. Brandishing the oil weapon in Belgrade, Saudi Arabia's Finance Minister Mohammed Ali Abdul Khail warned that continued depreciation of the dollars that the OPEC countries are paid for their oil might very well "evoke reactions." By that he presumably meant that the OPEC countries might force buyers to pay in a "basket" of many currencies rather than just in dollars; if this were to happen, demand for dollars would decline and they would slide further in value.
Though the greenback strengthened a bit late last week as the markets anticipated new dollar defense moves, worry remains deep about the future of the monetary system that helped create the world's postwar prosperity. The central problem is the roughly 1 trillion footloose dollars that slosh around banks and currency markets outside the U.S. For many years during the 1950s and 1960s, Europeans complained about a "dollar gap." Greenbacks were the only currency that was accepted everywhere, though there were not enough of them around to finance world trade and development. But the dollar gap has since become a dollar glut. Due to heavy foreign spending, first to pay for the Viet Nam War, more recently for oil imports, the U.S. has exported enough dollars in the past decade to boost the reserves held by foreign central banks from $24 billion to $300 billion. Private international banks hold another $600 billion in Eurodollars, which are dollars loaned abroad.
Central banks and private holders are reluctant to accept any more dollars, whose value declines almost daily. OPEC countries in particular are attempting to put new oil earnings into marks, yen or gold. Says Washington Economic Consultant Harald Malmgren: "The Arabs have learned that they pump oil out of the sand, hold the dollars, and the dollars turn back to sand." Nervous central bankers also fear that dollar holders will suddenly try to move large funds into another currency or into gold. Warns Karl Otto Pohl, president-designate of the German Bundesbank: "If this mass of dollars ever begins to crumble, it could start an avalanche that would bury all other currencies."
The best-selling novel The Crash of 79 described just such an avalanche. The result was a thumping destruction of all the foundations of industrial society as nations returned to barter economies. Financial experts tirelessly insist that in the nonfiction world such a collapse would be impossible. One reason is that well over half of foreign trade, including sales of oil, metals and grain, is billed in dollars.
And despite attempts by central banks to diversify their currency holdings, 77% of all official reserves are still dollars; thus many governments have an interest in holding up the value of the dollar.
Ministers in Belgrade took a step to ensure that the crash of '79 remains fiction by reducing the hazardous excess of dollars. They agreed to press work on a plan to replace perhaps as much as $40 billion in dollars with bonds denominated in a basket of 16 currencies, including two from OPEC countries—Saudi Arabia and Iran. This could be approved at a meeting in April.
As the dollar is being eased out of the cornerstone position it has held since World War II, gold and some strong currencies are moving in. The American campaign to remove gold from the world money system has failed;, as one example of bullion's continuing monetary role, the seven-month-old European Monetary System that links seven Common Market currencies has gold as a centerpiece. Fritz Leutwiler, the president of the Swiss National Bank, quotes from the Book of Job: "I have made gold my hope or have said to the fine gold, Thou art my confidence." Some leading Americans are even beginning to challenge Carter's policy of selling off the U.S. gold reserve. Former Federal Reserve Chairman William McChesney Martin says that if he were still in office, the U.S. would sell gold only "over my dead body."
The Bundesbank's Pohl sees the world "moving inexorably toward a multicurrency arrangement." The European Monetary System is anchored on the German mark, while the Japanese yen is developing an important role in Asia as a trading currency. The oil-backed Saudi Arabian riyal could be a new powerhouse, but the Saudis have been reluctant to let it play a role in international loans.
While world moneymen continue slouching toward a new financial Bethlehem, it becomes clearer that the only real way to restore the dollar's health is to cut America's inflation. As long as prices continue climbing at a rate of 13% in the U.S., compared with 6% in West Germany, the dollar will sink and the mark will rise. In such circumstances the dollar is lost, and attempts to save it will only ruin the nation's industry by making such exports as computers, airplanes and chemicals vastly too expensive in Japan or Germany, and imports like autos far too cheap at home. Former Fed Chairman Arthur Burns told the Belgrade conference that the turmoil in world exchange markets would not end until "reasonably good control over inflationary forces has been achieved, especially in the U.S."
The long-playing saga of the declining dollar has demonstrated —that a weakening currency fosters a vicious circle. The dollar's decline not only causes more inflation in the U.S. but also gives OPEC an excuse to push petroleum costs still higher, because oil prices are set in dollars. As the latest run on the dollar continued to lose momentum, officials in Bonn and Washington recalled that in the battle of the buck the next round of speculation has always come more quickly and been more ferocious than the last.
<<<
>>> Fed Unleashing “Triple Whammy”
BY JAMES RICKARDS
MARCH 16, 2022
https://dailyreckoning.com/fed-unleashing-triple-whammy/
Fed Unleashing “Triple Whammy”
As widely expected, the Fed raised its target rate today, its first rate hike since December 2018. As you may recall, that hike crashed the stock market in what became known as the Christmas Eve Massacre.
Today’s hike was only 25 basis points, not the 50-point hike some were predicting prior to the Russian invasion of Ukraine. In a sense, Putin took the pressure off Jay Powell to make a bolder move.
The market rallied today, closing up big, but that’s not really a surprise. Markets were expecting a 25-basis-point hike, and they got one. What the stock market doesn’t like is surprises.
But what happens to the market going forward could well be a different story.
Although today’s hike was minor, up is up. Importantly, this rate hike is the first of many more to come. We don’t have to guess at that. The Fed has already told us that’s their intention.
The Fed also confirmed today that the taper is over. A so-called taper is the process of slowing the rate at which the money supply is expanding.
How Is Money Printing Tightening?
When the Fed buys Treasury securities from banks, they pay for the securities with money printed from thin air. That’s called quantitative easing, or QE. The Fed has been doing that since early 2020 when the pandemic began.
The Fed gets out of QE in stages by reducing the amount of securities they buy each month; that’s the so-called taper. They’re still printing money, but the amount printed is reduced until it hits zero.
It may seem odd to call money printing tightening, but everything in markets happens at the margins. If the Fed is printing less, they are tightening even though they’re still printing. The amount of QE hit zero last week, so QE is now officially over, the taper is done and the Fed is contemplating their next move.
The Fed also signaled they intend to actually reduce the money supply in the near future. This is the opposite of QE and is called quantitative tightening, or QT. This has not yet begun, but the Fed has made it clear they will start QT soon.
A Triple Whammy
So we have three forms of tightening at once: the end of QE, a rate hike and the beginning of QT. This is a triple whammy that will slam the U.S. economy and send stock markets down sharply in the days ahead.
That’s not what the Fed wants, but that’s what they’re going to get.
When the Fed started QT in late 2017, they urged market participants to ignore it. They said the QT plan was on autopilot, the Fed was not going to use it as an instrument of policy and that it would “run on background” just like a computer program that’s open but not in use at the moment.
It’s fine for the Fed to say that, but markets had another view. Analysts estimate that QT is the equivalent of two–four rate hikes per year over and above the explicit rate hikes.
Not surprisingly, we had the Christmas Eve Massacre in December 2018, and Powell was forced to begin easing policy again.
The key takeaway is that tightening policy in a weak economy is almost certainly a recipe for a recession.
When the recession does arrive, the Fed won’t have enough “dry powder” to fight it. The Fed needs rates to be at least 3%, and preferably higher, when recession begins. That gives it plenty of room to cut rates.
But recession will hit long before the Fed can get rates that high, so cutting rates won’t be much help.
The Fed Is Far Behind the Curve on Inflation
Today’s actions are all in response to raging inflation. But it’s too late. The Fed is far behind the curve. The inflation is here and it’s about to get worse. Even worse, the Fed doesn’t understand why.
They’re used to models that focus on “demand pull” inflation where consumers are buying in anticipation of even higher inflation to come. But the data shows that consumers actually don’t expect much inflation after this initial wave.
Medium-term expectations are still anchored. The best research shows that expectations are overrated anyway. What affects behavior is what’s happening right now, not the expected future.
The inflation we’re seeing is called “cost push” inflation. This comes from the supply side, not the demand side. It consists of higher oil prices due to Biden policies of shutting down domestic oil production. It also comes from global supply chain disruption, and now the war in Ukraine.
Since the Fed has misdiagnosed the disease, they are applying the wrong medicine. Tight money won’t solve a supply shock. Higher prices will continue. But tight money will hurt consumers, increase savings and raise mortgage interest rates, which hurts housing.
The Fed is tightening into weakness.
The Fed’s Nothing if Not Consistent
The Fed’s track record of using the wrong models, using flawed models and doing the wrong thing at the wrong time remains intact. Today’s Fed announcement is the beginning of a chain of tightening that will sink stock markets and slow the economy.
Those rate hikes are a huge mistake, but the Fed will do it anyway. It really has no clue about the real world. I’m a big critic of the Fed models because they’re obsolete and they don’t accord with reality. When the Fed realizes its mistake of tightening into economic weakness, it will have to turn on a dime and shift to an easing policy.
What would cause the Fed to back off? A market meltdown. If the stock market sells off 5%, which would be over 1,700 points on the Dow, that would not be enough to throw them off. But if it goes down 15%, or over 5,000 points from current levels, that’s a different story. Ben Bernanke actually told me that once.
Easing will come first through forward guidance and pauses in the rate hike tempo, then possibly actual rate cuts back to zero and finally reversing their balance sheet reductions by expanding the balance sheet through more QE if needed.
But by then, the damage will have been done. We can see the damage coming and plan accordingly.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> Saudi Arabia Considers Accepting Yuan Instead of Dollars for Chinese Oil Sales
Talks between Riyadh and Beijing have accelerated as the Saudi unhappiness grows with Washington
Talks between Saudi Arabia and China over yuan-priced oil contracts have been off and on for six years.
The Wall Street Journal
By Summer Said in Dubai and Stephen Kalin in Riyadh, Saudi Arabia
March 15, 2022
https://www.wsj.com/articles/saudi-arabia-considers-accepting-yuan-instead-of-dollars-for-chinese-oil-sales-11647351541#:~:text=Saudi%20Arabia%20is%20in%20active,top%20crude%20exporter%20toward%20Asia.
Saudi Arabia is in active talks with Beijing to price some of its oil sales to China in yuan, people familiar with the matter said, a move that would dent the U.S. dollar’s dominance of the global petroleum market and mark another shift by the world’s top crude exporter toward Asia.
The talks with China over yuan-priced oil contracts have been off and on for six years but have accelerated this year as the Saudis have grown increasingly unhappy with decades-old U.S. security commitments to defend the kingdom, the people said.
The Saudis are angry over the U.S.’s lack of support for their intervention in the Yemen civil war, and over the Biden administration’s attempt to strike a deal with Iran over its nuclear program. Saudi officials have said they were shocked by the precipitous U.S. withdrawal from Afghanistan last year.
China buys more than 25% of the oil that Saudi Arabia exports. If priced in yuan, those sales would boost the standing of China’s currency. The Saudis are also considering including yuan-denominated futures contracts, known as the petroyuan, in the pricing model of Saudi Arabian Oil Co. , known as Aramco.
It would be a profound shift for Saudi Arabia to price even some of its roughly 6.2 million barrels of day of crude exports in anything other than dollars. The majority of global oil sales—around 80%—are done in dollars, and the Saudis have traded oil exclusively in dollars since 1974, in a deal with the Nixon administration that included security guarantees for the kingdom.
China introduced yuan-priced oil contracts in 2018 as part of its efforts to make its currency tradable across the world, but they haven’t made a dent in the dollar’s dominance of the oil market. For China, using dollars has become a hazard highlighted by U.S. sanctions on Iran over its nuclear program and on Russia in response to the Ukraine invasion.
China has stepped up its courtship of the Saudi kingdom. In recent years, China has helped Saudi Arabia build its own ballistic missiles, consulted on a nuclear program and begun investing in Crown Prince Mohammed bin Salman’s pet projects, such as Neom, a futuristic new city. Saudi Arabia has invited Chinese President Xi Jinping to visit later this year.
Meanwhile the Saudi relationship with the U.S. has deteriorated under President Biden, who said in the 2020 campaign that the kingdom should be a “pariah” for the killing of Saudi journalist Jamal Khashoggi in 2018. Prince Mohammed, who U.S. intelligence authorities say ordered Mr. Khashoggi’s killing, refused to sit in on a call between Mr. Biden and the Saudi ruler, King Salman, last month.
It also comes as the U.S. economic relationship with the Saudis is diminishing. The U.S. is now among the top oil producers in the world. It once imported 2 million barrels of Saudi crude a day in the early 1990s but those numbers have fallen to less than 500,000 barrels a day in December 2021, according to the U.S. Energy Information Administration.
By contrast, China’s oil imports have swelled over the last three decades, in line with its expanding economy. Saudi Arabia was China’s top crude supplier in 2021, selling at 1.76 million barrels a day, followed by Russia at 1.6 million barrels a day, according to data from China’s General Administration of Customs.
“The dynamics have dramatically changed. The U.S. relationship with the Saudis has changed, China is the world’s biggest crude importer and they are offering many lucrative incentives to the kingdom,” said a Saudi official familiar with the talks.
“China has been offering everything you could possibly imagine to the kingdom,” the official said.
MORE ON RELATIONS BETWEEN THE U.S., SAUDI ARABIA AND CHINA
Saudi Arabia Invites China’s Xi to Visit Kingdom Amid Strained U.S. Relations (March 14, 2022)
Saudi, Emirati Leaders Decline Calls With Biden During Ukraine Crisis (March 8, 2022)
Saudis Begin Making Ballistic Missiles With Chinese Help (Dec. 23, 2021)
Biden Administration Urged to Penalize Saudi Crown Prince Over Khashoggi Killing (Feb. 28, 2021)
A senior U.S. official called the idea of the Saudis selling oil to China in yuan “highly volatile and aggressive” and “not very likely.” The official said the Saudis had floated the idea in the past when there was tension between Washington and Riyadh.
It is possible the Saudis could back off. Switching millions of barrels of oil trades from dollars to yuan every day could rattle the Saudi economy, which has a currency, the riyal, pegged to the dollar. Prince Mohammed’s aides have been warning him of unpredictable economic damage if he moves ahead with the plan hastily.
Doing more sales in yuan would more closely connect Saudi Arabia to China’s currency, which hasn’t caught on with international investors because of the tight controls Beijing keeps on it. Contracting oil sales in a less stable currency could also undermine the Saudi government’s fiscal outlook.
Some officials have cautioned Prince Mohammed that accepting payments for oil in yuan would pose risks to Saudi revenues tied in U.S. Treasury bonds abroad and the limited availability of the yuan outside China.
The impact on the Saudi economy would likely depend on the quantity of oil sales involved and the price of oil. Some economists said moving away from dollar-denominated oil sales would diversify the kingdom’s revenue base and could eventually lead it to repeg the riyal to a basket of currencies, similar to Kuwait’s dinar.
“If it is (done) now at a time of strong oil prices, it would not be seen negatively. It would be more seen as deepening ties with China,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.
The Saudis still plan to do most oil transactions in dollars, the people familiar with their talks say. But the move could tempt other producers to price their Chinese exports in yuan as well. China’s other big sources of oil are Russia, Angola and Iraq.
The Saudi move could chip away at the supremacy of the U.S. dollar in the international financial system, which Washington has relied on for decades to print Treasury bills it uses to finance its budget deficit.
“The oil market, and by extension the entire global commodities market, is the insurance policy of the status of the dollar as reserve currency,” said economist Gal Luft, co-director of the Washington-based Institute for the Analysis of Global Security who co-wrote a book about de-dollarization. “If that block is taken out of the wall, the wall will begin to collapse.”
Talks with China over pricing oil in yuan started before Prince Mohammed, the de facto leader of the kingdom, made his first official visit to China in 2016, people familiar with the matter said. The crown prince asked the kingdom’s then-energy minister Khalid al-Falih to study the proposal, the people said.
Mr. Falih instructed Aramco to prepare a memo that heavily focuses on the economic challenges of switching to the yuan pricing.
“He really did not think that was a good idea but he could not stop the talks as the ship had already sailed,” said another person familiar with the meetings.
Saudi officials in favor of the shift have argued the kingdom could use part of yuan revenues to pay Chinese contractors involved in mega projects domestically, which would help mitigate some of the risks associated with the capital controls over the currency. China could also offer incentives such as multibillion-dollar investments in the kingdom.
Another official familiar with the talks said yuan pricing could give the Saudis more influence with the Chinese and help convince Beijing to reduce support for Iran.
Ali Shihabi, who sits on the board of Neom and formerly ran a pro-Saudi think tank in Washington, said the kingdom can’t ignore China’s desire to pay for oil imports in its own currency, particularly after the U.S. and EU blocked the Russian central bank from selling foreign currencies in its reserves stockpile.
“Any doubts countries had about the need to diversify into Yuan and other currencies/geographies would have ended with that huge step,” Mr. Shihabi tweeted in response to this article.
<<<
>>> Petrodollar Cracks: Saudi Arabia Considers Accepting Yuan For Chinese Oil Sales
Zero Hedge
BY TYLER DURDEN
MAR 15, 2022
https://www.zerohedge.com/markets/petrodollar-cracks-saudi-arabia-considers-accepting-yuan-chinese-oil-sales
One of the core staples of the past 40 years, and an anchor propping up the dollar's reserve status, was a global financial system based on the petrodollar - this was a world in which oil producers would sell their product to the US (and the rest of the world) for dollars, which they would then recycle the proceeds in dollar-denominated assets and while investing in dollar-denominated markets, explicitly prop up the USD as the world reserve currency, and in the process backstop the standing of the US as the world's undisputed financial superpower.
Those days are coming to an end.
One day after we reported that the "UK is asking Saudis for more oil even as MBS invites Xi Jinping to Riyadh to strengthen ties", the WSJ is out with a blockbuster report, noting that "Saudi Arabia is in active talks with Beijing to price its some of its oil sales to China in yuan," a move that could cripple not only the petrodollar’s dominance of the global petroleum market - something which Zoltan Pozsar predicted in his last note - and mark another shift by the world’s top crude exporter toward Asia, but also a move aimed squarely at the heart of the US financial system which has taken advantage of the dollar's reserve status by printing as much dollars as needed to fund government spending for the past decade.
According to the report, the talks with China over yuan-priced oil contracts have been off and on for six years but have accelerated this year as the Saudis have grown increasingly unhappy with decades-old U.S. security commitments to defend the kingdom.
The Saudis are angry over the U.S.’s lack of support for their intervention in the Yemen civil war, and over the Biden administration’s attempt to strike a deal with Iran over its nuclear program. Saudi officials have said they were shocked by the precipitous U.S. withdrawal from Afghanistan last year.
China buys more than 25% of the oil that Saudi Arabia exports, and if priced in yuan, those sales would boost the standing of China’s currency, and set the Chinese currency on a path to becoming a global petroyuan reserve currency.
As even the WSJ admits, a shift to a (petro)yuan system, "would be a profound shift for Saudi Arabia to price even some of its roughly 6.2 million barrels of day of crude exports in anything other than dollars" as the majority of global oil sales—around 80%—are done in dollars, and the Saudis have traded oil exclusively in dollars since 1974, in a deal with the Nixon administration that included security guarantees for the kingdom. It appears that the Saudis no longer care much about US "security guarantees" and instead are switching their allegiance to China.
As a reminder, back in March 2018, China introduced yuan-priced oil contracts as part of its efforts to make its currency tradable across the world, but they haven’t made a dent in the dollar’s dominance of the oil market, largely because the USD remained the currency of choice for oil exporters. But, as Pozsar also noted recently, for China the use of dollars has become a hazard highlighted by U.S. sanctions on Iran over its nuclear program and on Russia in response to the Ukraine invasion.
Today's historic transition is not exactly a surprise: China has been stepping up its courtship of the Saudi kingdom in recent years, helping Saudi Arabia build its own ballistic missiles, consulting on a nuclear program and investing in Crown Prince Mohammed bin Salman’s pet projects, such as Neom, a futuristic new city.
Meanwhile the Saudi relationship with the U.S. has deteriorated under President Biden, who said in the 2020 campaign that the kingdom should be a “pariah” for the killing of Saudi journalist Jamal Khashoggi in 2018. Prince Mohammed, who U.S. intelligence authorities say ordered Mr. Khashoggi’s killing, refused to sit in on a call between Mr. Biden and the Saudi ruler, King Salman, last month.
It also comes as the U.S. economic relationship with the Saudis is diminishing: the U.S. is now among the top oil producers in the world, a stark reversal from the 19980s when it imported 2 million barrels of Saudi crude a day but those numbers have fallen to less than 500,000 barrels a day in December 2021. By contrast, China’s oil imports have swelled over the last three decades, in line with its expanding economy. Saudi Arabia was China’s top crude supplier in 2021, selling at 1.76 million barrels a day, followed by Russia at 1.6 million barrels a day, according to data from China’s General Administration of Customs.
“The dynamics have dramatically changed. The U.S. relationship with the Saudis has changed, China is the world’s biggest crude importer and they are offering many lucrative incentives to the kingdom,” said a Saudi official familiar with the talks.
“China has been offering everything you could possibly imagine to the kingdom,” the official said.
In retrospect, we now know the reason why MBS wasn't taking Biden's phone calls.
Needless to say, the US is not happy with this historic transformation: a senior U.S. official told the WSJ that the idea of the Saudis selling oil to China in yuan “highly volatile and aggressive” and “not very likely.” The official said the Saudis had floated the idea in the past when there was tension between Washington and Riyadh.
It is, of course, possible that the Saudis could back off. Switching millions of barrels of oil trades from dollars to yuan every day could rattle the Saudi economy, which has a currency, the riyal, pegged to the dollar. Prince Mohammed’s aides have been warning him of unpredictable economic damage if he moves ahead with the plan hastily. Or perhaps, Saudi Arabia is merely preparing for the day when the peg will be broken to sever the last major linkage to the US.
Doing more sales in yuan would more closely connect Saudi Arabia to China’s currency, which hasn’t caught on with international investors because of the tight controls Beijing keeps on it. Contracting oil sales in a less stable currency could also undermine the Saudi government’s fiscal outlook.
As the WSJ adds, the impact on the Saudi economy would likely depend on the quantity of oil sales involved and the price of oil. Some economists said moving away from dollar-denominated oil sales would diversify the kingdom’s revenue base and could eventually lead it to repeg the riyal to a basket of currencies, similar to Kuwait’s dinar.
“If it is (done) now at a time of strong oil prices, it would not be seen negatively. It would be more seen as deepening ties with China,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.
Still, the Saudis still plan to do most oil transactions in dollars, but the transition has begun, and the move could tempt other producers to price their Chinese exports in yuan as well. China’s other big sources of oil are Russia, Angola and Iraq.
“The oil market, and by extension the entire global commodities market, is the insurance policy of the status of the dollar as reserve currency,” said economist Gal Luft, co-director of the Washington-based Institute for the Analysis of Global Security who co-wrote a book about de-dollarization. “If that block is taken out of the wall, the wall will begin to collapse.”
* * *
While nothing new to regular ZH readers (see this from 2017, "The World's New Reserve Currency? Everything You Need To Know About PetroYuan"), the idea of a new global reserve currency was reintroduced last week by none other than former NY Fed staffed Zoltan Pozsar who wrote in his latest must read note that "when this crisis (and war) is over, the U.S. dollar should be much weaker and, on the flipside, the renminbi much stronger, backed by a basket of commodities. From the Bretton Woods era backed by gold bullion, to Bretton Woods II backed by inside money (Treasuries with un-hedgeable confiscation risks), to Bretton Woods III backed by outside money (gold bullion and other commodities)."
And so the pieces of the endgame are falling into place: Russia starving the western world of much needed resources, sending commodity prices ever higher, while its silent partner China quietly picks up the monetary pieces and takes advantage of the Western scramble to secured resources at all costs, and approach all those other "non-western" former petrodollar clients - who are also rich in other resources - to offer them a new product, the yuan, which Beijing is now actively and aggressively pushing to dethrone the dollar as a global reserve currency.
<<<
>>> As Russia nears a debt default, talk now turns to global contagion
CNBC
MAR 14 2022
Elliot Smith
https://www.cnbc.com/2022/03/14/as-russia-nears-a-debt-default-talk-now-turns-to-global-contagion.html
KEY POINTS
International Monetary Fund Managing Director Kristalina Georgieva said Sunday that Russian sovereign debt default is no longer an “improbable event.”
The Russian state has a host of key payment dates coming up, the first of which is a $117 million payment of some U.S. dollar-denominated eurobond coupons on Wednesday.
Russia is on the brink of defaulting on its debt, according to ratings agencies and international bodies, but economists do not yet see a global contagion effect on the horizon.
International Monetary Fund Managing Director Kristalina Georgieva said Sunday that sanctions imposed by western governments on Russia in response to its invasion of Ukraine would trigger a sharp recession this year. She added that the IMF no longer sees Russian sovereign debt default as an “improbable event.”
Her warning followed that of World Bank Chief Economist Carmen Reinhart, who cautioned last week that Russia and ally Belarus were “mightily close” to defaulting on debt repayments.
Despite the high risk of default, however, the IMF’s Georgieva told CBS that a wider financial crisis in the event of a Russian default was unlikely for now, deeming global banks’ $120 billion exposure to Russia “not systematically relevant.”
However, some banks and investment houses could be disproportionately affected. U.S. fund manager Pimco started the year with $1.1 billion of exposure to credit default swaps — a type of debt derivative — on Russian debt, the Financial Times reported last week. A spokesperson for Pimco wasn’t immediately available for comment when contacted by CNBC.
The Russian state has a host of key payment dates coming up, the first of which is a $117 million payment of some U.S. dollar-denominated eurobond coupons on Wednesday.
Credit ratings agency Fitch last week downgraded Russian sovereign debt to a “C” rating, indicating that “a sovereign default is imminent.”
S&P Global Ratings also downgraded Russia’s foreign and local currency sovereign credit ratings to “CCC-” on the basis that the measures taken by Moscow to mitigate the unprecedented barrage of sanctions imposed by the U.S. and allies “will likely substantially increase the risk of default.”
Moody’s downgrades Russia’s credit rating in an ‘unprecedented’ way
“Russia’s military conflict with Ukraine has prompted a new round of G7 government sanctions, including ones targeting the foreign exchange reserves of The Central Bank of Russia (CBR); this has rendered a large part of these reserves inaccessible, undermining the CBR’s ability to act as a lender of last resort and impairing what had been – until recently – Russia’s standout credit strength: its net external liquidity position,” S&P said.
Moody’s also slashed Russia’s credit rating earlier this month to its second-lowest tier, citing the same central bank capital controls likely to hinder payments in foreign currencies, resulting in defaults.
Moscow moved to strengthen its financial position following a suite of western sanctions imposed in 2014, in response to its annexation of Crimea. The government ran consistent budget surpluses and sought to scale back both its debts and its reliance on the U.S. dollar.
Scholar discusses China’s position on U.S. and EU sanctions on Russia
The accumulation of substantial foreign exchange reserves was intended to mitigate against the depreciation of local assets, but reserves of dollars and euros have been effectively frozen by recent sanctions. Meanwhile, the Russian ruble has plunged to all-time lows.
“To mitigate the resulting high exchange rate and financial market volatility, and to preserve remaining foreign currency buffers, Russia’s authorities have – among other steps – introduced capital-control measures that we understand could constrain nonresident government bondholders from receiving interest and principal payments on time,” S&P added.
Grace periods
Russian Finance Minister Anton Siluanov said Monday that Russia will use its reserves of Chinese yuan to pay Wednesday’s coupon on a sovereign eurobond issue in foreign currency.
Alternatively, Siluanov suggested the payment could be made in rubles if the payment request is rebuffed by western banks, a move Moscow would view as fulfilling its foreign debt obligations.
Although any defaults on upcoming payments would be symbolic – since Russia has not defaulted since 1998 – Deutsche Bank economists noted that nonpayments will likely begin a 30-day grace period granted to issuers before defaults are officially triggered.
We could be heading for World War III if Russia joins forces with China, investor says
“Thirty days still gives time for there to be a negotiated end to the war and therefore this probably isn’t yet the moment where we see where the full stresses in the financial system might reside,” Jim Reid, Deutsche Bank’s global head of credit strategy, said in an email Monday.
“There has already been a huge mark to market loss anyway with news coming through or write downs. However, this is clearly an important story to watch.”
Russian assets pricing in defaults
Trading in Russian debt has largely shut down since the web of sanctions on central banks and financial institutions was imposed, with government restrictions and actions taken by investors and clearing exchanges freezing most positions.
Ashok Bhatia, deputy chief investment officer for fixed income at Neuberger Berman, said in a recent note that investors will be unable to access any liquidity in Russian assets for some time. Bhatia added that prices for Russian government securities are now pricing in a default scenario, which Neuberger Berman strategists think is a likely outcome.
“It’s unclear why Russia would want to use hard currency to repay these securities at the moment, and we expect much of this debt to enter ‘grace periods’ over the coming month,” he said.
Russia’s economy will limp on without much deeper dislocation, strategist says
“Russian hard currency sovereign securities are indicated at 10 – 30 cents on the dollar and will likely remain there.”
Bhatia suggested that the key macroeconomic risk arising from the conflict in Ukraine is energy prices, but the spillover pressure to global credit markets will be “relatively muted” with recent volatility across asset classes continuing.
“But given that Russian securities have been repriced to default levels, we believe those immediate impacts are largely over,” he said.
“Debates about the economic impacts and central bank responses will now become front and center.”
<<<
>>> Putin's Options
BY JAMES RICKARDS
MARCH 8, 2022
https://dailyreckoning.com/putins-options/
Putin’s Options
There’s no doubt that the financial sanctions put on Russia by the U.S., the U.K., EU members and others are the most severe ever imposed. The U.S. Treasury has announced 15 separate sanctions programs in recent days and no doubt more are on the way.
The targets of these sanctions include Russian banks, Russian stocks and bonds and various payment channels. Most significantly, the U.S. froze the accounts of the Central Bank of Russia. That’s the first time a major central bank’s assets have been frozen since the Cold War, and possibly ever.
Yet the financial attacks on Russia go far beyond official sanctions.
Numerous private companies including Microsoft, Exxon Mobil, Shell and some major airlines have ceased their business activities in Russia. Visa and Mastercard have stopped accepting credit card charges from Russia. Google and Apple have turned off the mobile payment apps on phones held by Russian citizens.
Shipping giant Maersk has stopped its vessels from unloading or taking cargo from Russian ports. Stock index funds are pushing Russian companies out of their indexes and the Norwegian sovereign wealth fund is divesting Russian stocks. The list of public and private embargoes and boycotts goes on.
The financial impact on Russia will be extreme. The Russian economy may be expected to collapse by 20% or more in the first half of 2022, an amount comparable to the economic collapses in the second quarter of 2020 during the first lockdown stage of the pandemic.
The Sanctions Boomerang
But Russia has not stood still. The Central Bank of Russia imposed capital controls so that Russian companies cannot pay interest or principal on international debts. That means those loans and bonds may soon go into default.
Many such securities may be stuffed into 401(k) plans of Americans under the umbrella of “emerging markets” funds or ETFs. Even more important is the possibility that interbank lending may start to dry up as Russian banks are frozen and Western banks reduce leverage and shrink balance sheets in order to reduce risk.
This will lead to defaults in the West and could even mark the beginning of a global liquidity crisis that can only be contained by Federal Reserve currency swap lines, like we saw in the early stages of the pandemic when markets were collapsing.
But even that technique may not work since there are no swap arrangements in place between the Fed and the Central Bank of Russia. The shooting war may or may not be over soon, but the financial war has just started and will continue after the shooting stops.
For that matter, a global financial panic may emerge even before the shooting stops. We all see what’s happening on the surface. Here’s what you don’t see: Someone is on the wrong side of every one of those trades. Hedge funds and banks are losing billions and are sinking. It takes about a week for bodies to float to the surface.
And foreign investors who try to sell Russian companies will find that their sales are blocked. Russia imposed capital controls so that Russian borrowers cannot pay their creditors in dollars or euros.
So yes, sanctions will hurt Russia. But like a boomerang, those same sanctions can hurt the U.S. economy, which is on shaky ground as it is.
It’s almost like cutting off your nose to spite your face.
Russia Still Has Options
And Russia can work around the sanctions to obtain at least some access to the global financial system. The main loophole is that Russia may still receive dollar payments for oil and natural gas. Those payments may be frozen inside the central bank, but they can still be received and added to Russia’s reserves.
Russia can also transact outside the SWIFT messaging system using older technologies such as telex and internet channels outside of SWIFT. Russians can also transact through Chinese and other banks that have not joined the sanctions.
Also, Russia’s official media report that Putin seeks to establish a ban on the export of certain products and raw materials outside the country by the end of 2022.
Besides oil and natural gas, Russia exports substantial amounts of food crops and precious metals used in industrial production like aluminum, titanium, palladium, platinum, nickel, cobalt and copper.
This is the most important move yet. Consumers are familiar with the retail end of the supply chain. But they aren’t as familiar with the input end. If you can’t source the raw materials, you can produce finished goods.
For example, the farmers who grow food and raise livestock and the butchers and food processors who prepare that output into meat, poultry, bread and dairy products are not the source of the supply; they are intermediaries. The source of the supply chain is in fertilizers made from chemicals, especially nitrogen and phosphate.
Any break or bottleneck anywhere in this supply chain will result in either higher prices or empty shelves at the consumer end.
If Russian nitrogen exports are diminished and prices soar, that has a global impact including on U.S. farms. The impact of higher fertilizer prices does not stop with grain. Most grains are used not for direct consumption by humans but as feed grains for livestock. That means the fertilizer price increase will flow through to meat, poultry, eggs and dairy products.
These breaks are already occurring. Russia and Ukraine together provide more than 25% of the wheat supply in world trade and 20% of global corn sales. Ukrainian exports are already in disarray because of the war and Russian exports are being handicapped by the sanctions.
Don’t Forget About Russia’s Gold
Finally, Russia has $150 billion in official physical gold bullion. This gold cannot easily be sold or bartered, but it can be leased or used as collateral for hard-currency loans.
The latest dumb idea out of Washington is to freeze Russian gold. But the gold is physical and it’s inside Russia. The only way to freeze it is to leave it outside in the winter. You can freeze dollar-sale proceeds, but Russia’s a buyer not a seller. It can buy gold directly from Russian mines.
And Russia can use parallel loan structures (which haven’t been used much since the 1970s) where a lender inside Russia can also be a borrower outside Russia in a separate transaction with the obligations netted out.
None of this is efficient relative to a normally functioning system, but it does work. The bottom line is that the Russian economy will muddle through despite the sanctions, although with higher costs, more risk and less liquidity.
The main point for investors to understand is the damage will not be confined to Russia. These inefficiencies and this illiquidity will ripple out to all parts of the global financial system.
Investors should prepare now with larger allocations to cash and gold and by reducing stock market exposure. It’s a good idea to build up your own liquidity before the wave of defaults and margin calls hits home.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> Russia, Ukraine, and a Turning Point for the U.S. Dollar
Bloomberg
By Elisabeth Ponsot
March 2, 2022
https://www.bloomberg.com/news/newsletters/2022-03-02/big-take-how-will-the-russia-ukraine-war-impact-the-u-s-dollar
As fighting escalates in Ukraine, Russia has intensified capital controls to prevent a fund exodus. Officials banned residents from transferring foreign currency abroad. In response to sanctions, the central bank also slapped a temporary freeze on sales of Russian securities by foreigners, seeking to close the exit for tens of billions of dollars.
The impact on Russia’s ruble has been swift, with the currency continuing its record slide. But ongoing tensions could also mark a turning point for the U.S. dollar, according to money market guru Zoltan Pozsar.
Pozsar says that wars tend to turn into major junctures for global currencies. With Russia losing access to its foreign currency reserves, a message has been sent to all countries that they can’t count on these stashes to actually be there in a crisis.
It could mean the beginning of the end for the global dominance of the U.S. dollar.
Read The Big Take.
From today's story
on the “weaponization” of money.
"China will make it a priority to need no USD before going for Taiwan. It's a turning point in monetary history."
— Dylan Grice
Founder, Calderwood Capital
<<<
>>> If Russian Currency Reserves Aren’t Really Money, the World Is in for a Shock
Sanctions have shown that currency reserves accumulated by central banks can be taken away. With China taking note, this may reshape geopolitics, economic management and even the international role of the U.S. dollar.
The West has shut off the Russian central bank’s access to most of its foreign reserves.
The Wall Street Journal
By Jon Sindreu
March 3, 2022
https://www.wsj.com/articles/if-currency-reserves-arent-really-money-the-world-is-in-for-a-shock-11646311306?siteid=yhoof2
“What is money?” is a question that economists have pondered for centuries, but the blocking of Russia’s central-bank reserves has revived its relevance for the world’s biggest nations—particularly China. In a world in which accumulating foreign assets is seen as risky, military and economic blocs are set to drift farther apart.
After Moscow attacked Ukraine last week, the U.S. and its allies shut off the Russian central bank’s access to most of its $630 billion of foreign reserves. Weaponizing the monetary system against a Group-of-20 country will have lasting repercussions.
SDR, IMF position & others
The 1997 Asian Financial Crisis scared developing countries into accumulating more funds to shield their currencies from crashes, pushing official reserves from less than $2 trillion to a record $14.9 trillion in 2021, according to the International Monetary Fund. While central banks have lately sought to buy and repatriate gold, it only makes up 13% of their assets. Foreign currencies are 78%. The rest is positions at the IMF and Special Drawing Rights, or SDR—an IMF-created claim on hard currencies.
Many economists have long equated this money to savings in a piggy bank, which in turn correspond to investments made abroad in the real economy.
Recent events highlight the error in this thinking: Barring gold, these assets are someone else’s liability—someone who can just decide they are worth nothing. Last year, the IMF suspended Taliban-controlled Afghanistan’s access to funds and SDR. Sanctions on Iran have confirmed that holding reserves offshore doesn’t stop the U.S. Treasury from taking action. As New England Law Professor Christine Abely points out, the 2017 settlement with Singapore’s CSE TransTel shows that the mere use of the dollar abroad can violate sanctions on the premise that some payment clearing ultimately happens on U.S. soil.
To be sure, the West has frozen Russia’s stock of foreign exchange, but hasn’t blocked the inflow of new dollars and euros. The country’s current-account surplus is estimated at $20 billion a month due to exports of oil and gas, which the U.S. and the European Union want to keep buying. While these balances go to the private sector, officials have mobilized them. Stopping major banks like Sberbank from using dollars and excluding others from the Swift messaging system still plunges the economy into chaos, especially if foreign businesses are afraid to buy Russian energy despite the sector’s explicit exclusion from sanctions. But hard currency will probably keep gushing in through energy-focused lenders like Gazprombank, and can theoretically be used to pay for imports and buy the ruble.
Yet the entire artifice of “money“ as a universal store of value risks being eroded by the banning of key exports to Russia and boycotts of the kind corporations like Apple and Nike announced this week. If currency balances were to become worthless computer entries and didn’t guarantee buying essential stuff, Moscow would be rational to stop accumulating them and stockpile physical wealth in oil barrels, rather than sell them to the West. At the very least, more of Russia’s money will likely shift into gold and Chinese assets.
Indeed, the case levied against China’s attempts to internationalize the renminbi has been that, unlike the dollar, access to it is always at risk of being revoked by political considerations. It is now apparent that, to a point, this is true of all currencies.
The risk to King Dollar’s status is still limited due to most nations’ alignment with the West and Beijing’s capital controls. But financial and economic linkages between China and sanctioned countries that are only allowed to accumulate reserves—and, crucially, spend them—there will necessarily strengthen. Even nations that aren’t sanctioned may want to diversify their geopolitical risk. It seems set to further the deglobalization trend and entrench two separate spheres of technological, monetary and military power.
China itself owns $3.3 trillion in currency reserves. Unlike Russia, it cannot usefully hold them in renminbi, a currency it prints. Stockpiling commodities is an alternative. The conundrum creates another incentive for Beijing to reduce its trade surplus by reorienting its economy toward domestic consumption, though it has proven challenging.
What can investors do? For once, the old trope may not be ill advised: buy gold. Many of the world’s central banks will surely be doing it.
<<<
>>> Mystery $3.7 Billion Pushed Through BlackRock ETF Stumps Traders
Bloomberg
by Emily Graffeo
February 18, 2022
https://finance.yahoo.com/news/mystery-3-7-billion-pushed-165415802.html
(Bloomberg) -- In just a matter of weeks, $3.7 billion suddenly entered and then exited a BlackRock Inc. exchange-traded fund that barely had any day-to-day action over its 15 year life-span, leaving traders scratching their heads for clues as to what’s behind the move.
On Jan. 25, after months of recording zero inflows, the iShares MSCI Kokusai exchange-traded fund (ticker TOK) brought in $3.7 billion, according to data compiled by Bloomberg. The ETF then continued trading like normal -- with mostly zero flows -- until the billions swiftly exited the fund over two separate trading days in February.
Billions of dollars in flows is rare for a fund that had less than $200 million in total assets at the beginning of the year and has until now mostly failed to generate investor interest in its strategy to buy large and mid-cap companies around the globe, excluding Japan.
“I’m genuinely perplexed,” said James Seyffart, ETF analyst at Bloomberg Intelligence.
A spokesperson for BlackRock declined to comment on the fund activity.
The sudden influx of cash could indicate a large asset manager is tweaking a model portfolio allocation, a strategy that has been suspected in a series of other mega flows. But to Seyffart, a model trade wouldn’t take three weeks to get in and out of a fund. The three week lag between the inflow and outflow also mostly negates guesses that the flow is a tax optimization re-balancing trade, known as a “heartbeat,” said Seyffart.
And to Cinthia Murphy, director of research at the ETF Think Tank, heartbeats don’t usually exceed the net asset value of the fund.
“We can only speculate that they are either washing assets in something else, like an SMA or an offshore product, or it’s a trade for a big institutional investor looking for exposure for a day, or maybe an options-related trade, something like that. It’s hard to tell, but it’s likely not a heartbeat for TOK,” Murphy said.
TOK has returned about 165% since inception, according to data compiled by Bloomberg, compared with 148% for the MSCI All-Country World Index.
<<<
>>> Who Will Blink First?
BY JAMES RICKARDS
FEBRUARY 14, 2022
https://dailyreckoning.com/who-will-blink-first/
Who Will Blink First?
You’re certainly familiar with the Freedom Convoy in Canada by now. About a month ago, the prime minister of Canada, Justin Trudeau, imposed another vax requirement on Canadian and U.S. truckers entering Canada.
This was a mandatory vax requirement. Those who did not have the vax had to quarantine for two weeks on arrival in Canada. Many truckers live from job to job and are highly opportunistic when it comes to bidding on jobs. They self-organize in terms of destinations and the ability to pick up and drop off multiple loads in one trip.
Any sort of quarantine effectively puts them out of business, so the truckers had every reason to oppose the mandates. Their livelihoods are at stake.
In early February a trucker convoy took shape. Truckers arrived from all destinations and converged on Ottawa, the capital of Canada. One particular convoy stretched for 45 miles and included thousands of trucks.
Then, smaller groups of 100 trucks or so have paralyzed downtown Ottawa and closed the Ambassador Bridge between Detroit and Windsor, Ontario. That’s the most heavily traveled border crossing between the U.S. and Canada. About 30% of all commerce between the two major economies crosses that bridge.
Trudeau Looks to Invoke “Emergencies Act”
Yesterday, police cleared protesters from the Ambassador Bridge. Over two dozen people were peacefully arrested, and a number of trucks were towed away. Now Justin Trudeau is threatening to invoke Canada’s “Emergencies Act” to crack down on protesters.
The act would confer sweeping powers on the federal government to restore public order, though only temporarily. It could involve the banning of public assemblies and restricting travel.
How far is Trudeau willing to go? Will the truckers give in? Who will blink first? We’ll see. But the Canadian Parliament must first approve the resolution before it can go forward.
Incidentally, Trudeau isn’t opposed to all public protests. He sanctioned the BLM protests in the summer of 2020 and even took part in them. But when workers resist the forceful imposition of experimental gene therapies that don’t stop people from spreading or acquiring the virus, and the ridiculous policies that threaten their livelihoods needlessly, Trudeau draws the line.
You would think that someone who was triply vaxxed and still got COVID anyway would see the absurdity of his position. But evidently he doesn’t.
More About Control Than Science
Now similar blockages are emerging at other key border crossings. Trucker-type protests are breaking out all over the world including in Paris, Sydney, Amsterdam and possibly soon in the United States. It’s a crisis for the ruling-class elites who seem far more concerned about control than “the science.”
The real science says that lockdowns don’t work and that the experimental vaccines have negligible overall effect, especially against the Omicron variant. There’s evidence that the vaccines may actually have negative effectiveness, as the fully vaxxed appear more likely to acquire Omicron than the unvaxxed.
The U.S. trucker convoy for freedom is planning to rendezvous in Coachella Valley in California near Palm Springs on March 5 and drive across the country to Washington, D.C. No doubt other convoys will emerge from other parts of the U.S. to join the main convoy in Washington.
The Downside to Trucker Protests
The Biden administration may try blocking access to the capital before the truckers make it that far, but that will just create massive traffic jams all over the region. Here’s what you need to understand:
While these protests make for colorful news footage, and you may fully support them, most investors may not realize how much damage is being done to global supply chains.
The supply chain crisis was well underway before the trucker protests, but the protests will make matters much worse. Under the USMCA (successor to NAFTA), the North American auto industry is distributed among manufacturing plants in Mexico, the U.S. and Canada. Those plants depend on each other for just-in-time delivery of parts and chassis to keep the assembly lines moving.
Trucker protests throw a monkey wrench into that industry, both because the protesting truckers are not available to move shipments and other truckers can’t get past the blockades. We’re already seeing weak growth in the first quarter of 2022, according to the best estimates. Strong protests will make for even weaker growth in the months ahead.
There’s a simple solution to all this, which is to end the mandates on vaccines and masks, and end other pointless pandemic policies. Politicians are too dumb to do that. We’ll all pay the price for their stupidity in the form of weaker growth and declining stock markets.
Oh, yeah, and then there’s the inflation we have to deal with…
Highest Inflation in 40 Years
Inflation in the U.S. hit a 40-year high of 7.5% in January. That comes on top of another 40-year high of 7.0% the month before. Jay Powell’s vision of “transitory” inflation is now in shreds.
It’s clear that the high inflation we are experiencing now is partly due to the 2021 package of $1.9 trillion in giveaways. If the economy is running close to short-term capacity in terms of labor markets and manufacturing ability and you throw $1.9 trillion at it, inflation is the predictable result.
The 7.5% inflation rate is an overall average calculated by the government based on about 29 main categories of goods, and thousands of individual items inside those categories.
When you look past the average to particular goods, what you see is that the prices of things people buy most often such as meat, eggs, bread, poultry and gasoline are going up at an even faster rate, sometimes 10%, 20% or even 40% (these price hikes are offset by lower prices for tuition, health care and air travel that people consume far less frequently).
This kind of inflation poses an acute dilemma for the Fed. On the one hand, the Fed must tighten monetary policy in order to snuff out inflation. On the other hand, if the Fed tightens more than slightly, there’s a danger they will throw the economy into a recession. Unfortunately, a recession is exactly what will be required to beat this kind of inflation.
The Fed Is No Goldilocks
The Fed is trying to finesse the situation with a Goldilocks approach of not too tight, not too loose, but just right. They will fail at this. The stock market gets a vote.
As the Fed tightens and the economy slows, the market will begin a steep decline in anticipation of a recession. The Fed doesn’t care much about the decline, but they do care if the decline becomes “disorderly.”
That’s hard to define, but drops of 3% or more for three–five days in a week over multiple weeks (similar to what happened in March 2020) definitely meets the definition. That’s coming.
At that point, the Fed will throw in the towel and stop cutting rates. Then the inflation will return. So here are your options (and the Fed’s): more inflation, a stock market crash or recession.
Investors are certain to have at least one, maybe two, of these outcomes in the year ahead. The odds certainly increase with the ongoing supply chain disruptions, even if the trucker protests end tomorrow.
But given the Fed’s consistent incompetence, we may get all three: more inflation, a stock market crash and recession.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> U.S. Attains Frightening Milestone
BY JAMES RICKARDS
FEBRUARY 7, 2022
https://dailyreckoning.com/u-s-attains-frightening-milestone/
U.S. Attains Frightening Milestone
Well, we did it! It took some hard work, but the United States finally managed to find itself with $30 trillion of government debt.
But if anyone is actually thinking of celebrating this dubious accomplishment, I have some advice for you — get ready for the hangover. Let’s see how we got here…
The U.S. government bond market was invented by Alexander Hamilton early in the first administration of George Washington around 1790. The newly formed United States of America was facing claims from creditors who had financed the Revolutionary War.
The Congress had a simple solution: Default! That’s the American Way. But Hamilton had a better idea.
He said the new government should borrow more money and use that to pay off the old creditors. Once we did that, we would be deemed creditworthy and we could borrow even more money to pay off the money borrowed in the first round.
This plan was so successful that the U.S. Treasury market is now celebrating its 230th anniversary! That’s how long the U.S. has been borrowing new money to pay off old debt.
In 1835, Andrew Jackson became the first and only president who cut the national debt to zero.
Inflation Is the Only Way Out
The story of U.S. debt is not one in which the debt went up steadily for 230 years. The actual history is that the debt went up in times of war and it was paid back in times of peace.
Debt went up in the War of 1812, the Mexican-American War of 1846–1848, the Civil War, World War I, World War II, Korea, Vietnam and under Reagan to win the Cold War. (The only major debt increase without war prior to 2000 was during the Great Depression).
But the war debt was paid off during times of peace including the 1820s, 1870s, 1920s and 1990s. It was only after 2000 that things went off the rails and government debt went straight up under George W. Bush, Barack Obama, Donald Trump and Joe Biden.
Now the debt is unmanageable without inflation. Inflation favors debtors because they get to pay back the debt with depreciating dollars. It’s easier to pay down debt because you’re paying back debt with dollars that are less valuable than when you originally borrowed them. So inflation eases the real value of debt.
On the other hand, deflation increases the real value of debt. With deflation, the value of money increases, making it more burdensome to pay off debt. This is why debtors hate deflation.
The other way to deal with the debt is to default. But there’s no reason for the U.S. to default because the debt is in dollars and we can print the dollars.
That’s the great advantage of having the world’s leading reserve currency, what French Finance Minister Valéry Giscard d’Estaing termed the “exorbitant privilege” in the 1960s.
The Debt Death Trap
People who say, “We can’t pay off the national debt!” don’t understand this market. There’s no need to pay off the national debt. We just have to keep rolling it over. But to do that we need to maintain our credit standing, as Hamilton understood. Once our credit is called into question, the entire house of cards collapses.
This shows up first in higher interest rates, then in a devaluation of the dollar and finally in illiquid markets where the debt just can’t be sold except to the Fed. The final stage is hyperinflation and complete collapse of the currency and the bonds.
It’s not going to happen tomorrow, but we’re getting closer to that endgame.
I’ve said before that the U.S. is caught in a debt death trap. Monetary policy won’t get us out because the velocity of money, the rate at which money changes hands, is dropping.
Printing more money alone will not change that.
Fiscal policy won’t work either because of high debt ratios. At current debt-to-GDP ratios, each additional dollar spent yields less than a dollar of growth. But because it must be borrowed, it does add a dollar to the debt. Debt becomes an actual drag on growth.
The ratio gets higher and the situation grows more desperate. The economy barely grows at all while the debt mounts. You basically become Japan.
The national debt is $30 trillion. A $30 trillion debt would not be a serious issue if we had a $50 trillion economy.
But we don’t have a $50 trillion economy. We have about a $21 trillion economy, which means our debt is bigger than our economy. And it’s stalling.
A Small Rounding Error Away From Recession
Although we’re only about one-third of the way through the first quarter of 2022, the Federal Reserve Bank of Atlanta has published its estimate for first-quarter growth using the data we have so far.
The result is a forecast of 0.1% GDP growth on an annualized basis. That’s a small rounding error away from a recession. That’s significant because the Atlanta Fed is known for its highly optimistic forecasts.
There are several reasons for this weak start to the quarter. The first is that strong fourth-quarter growth in 2021 was mostly a mirage. Almost the entire growth came from inventory accumulation. That does not represent final sales; it represents goods piling up in warehouses.
If those goods get sold in the first quarter, they don’t add much to GDP because they were already counted in GDP when the inventories were purchased.
If the goods don’t get sold, it’s even worse because supply chain managers will cancel new orders while waiting for the inventories to run off (probably at steep discounts). Also, the economic impact of Omicron is just being felt now. It hit hard in December but did not have much impact coming that late in the year.
After Jan. 1, the quarantines, hospitalizations and lockdowns started to pile up, so the first quarter will bear the brunt of it. When you combine this intrinsic weakness with Fed tightening today and rate hikes in March, you have a recipe for recession in the first quarter.
Heading for a Sovereign Debt Crisis
In basic terms, in the bigger picture, the United States is going broke. We’re heading for a sovereign debt crisis.
I don’t say that for effect. I’m not looking to scare people or to make a splash. That’s just an honest assessment based on the numbers.
Tax cuts won’t bring us out of it; neither can structural changes to the economy. Both would help if done properly, but the problem is simply far too large. You can’t grow yourself out of this kind of debt.
So an economic time bomb is ticking. Velocity is dropping. Debt is growing while growth is slowing. The explosion will come in the form of asset bubbles bursting and stocks crashing.
There’s no way out of the debt death trap except through inflation.
Say goodbye to Hamilton’s master plan. Time to buy some gold before the rush into hard assets really begins.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> The $64,000 Question
BY JAMES RICKARDS
FEBRUARY 1, 2022
https://dailyreckoning.com/the-64000-question/
By now, you probably understand the situation on the Russia-Ukraine border. Close to 100,000 Russian troops have been deployed along Ukraine’s eastern border.
Will Putin invade? What would be the U.S. and NATO response? Those are the $64,000 questions. The answers have massive implications for the economy, markets and potentially civilization itself. That’s not hyperbole.
Russia is the largest nuclear war power on Earth, with about 4,500 warheads. Besides its intercontinental missiles, Russia has intercontinental nuclear bombers and ballistic missile submarines that it can park just off U.S. coasts.
Does the U.S. really want to risk a military confrontation with Russia over Ukraine, a country that the U.S. has never considered a vital strategic interest? The experts seem to think any confrontation would be contained. But wars are unpredictable and are a lot easier to start than to stop.
Here’s how we got here…
Poking the Russian Bear
The problems began in 2008 when George W. Bush nominated Ukraine for membership in NATO. Ukraine shares a border with Russia and parts of Ukraine are actually east of Moscow, making an attack from the east feasible for the first time since Genghis Khan.
The problems grew worse in 2014 when the CIA and MI6 incited a “color revolution” that caused the democratically elected president to leave office. He was replaced in June 2014 by a pro-NATO puppet who was able to keep the money flowing to Hillary Clinton and Hunter Biden.
Putin responded by annexing Crimea and infiltrating eastern Ukraine. There’s been some fighting since then, but mostly an unstable status quo with pro-Russian elements in the east and a pro-NATO government in Kyiv.
Now Putin has moved over 100,000 troops to the border with Ukraine, backed up with air power, naval power, drones, special forces and cyberwarfare capabilities.
NATO’s response has been disordered, with Germany reluctant to intervene and the U.S. threatening “severe” sanctions. In fact, the German navy chief resigned because he said Putin deserves respect and that Ukraine would never get Crimea back.
He was right on both counts, but his comments ran afoul of official rhetoric, so he had to go.
Will Putin Invade or Not?
In the event of an invasion, you should expect a cut-off of Russian natural gas to Europe, skyrocketing natural gas and oil prices, a shutdown of European industry, disruption of supply chains as the U.S. tries to surge natural gas to Europe and the breakdown of critical infrastructure in the U.S. due to Russian cyberwarfare.
Stocks will crash and commodities like oil, natural gas and gold will soar.
All of this is easy to predict. What is not easy is to predict whether Putin will invade or not. It’s impossible to predict with any certainty, but right now my analysis leads me to believe he won’t invade.
That’s because the threat of invasion will win him the concessions he wants. Other reasons include the difficulty of actually holding onto Ukrainian territory after the initial invasion, and the possibility of guerrilla warfare by Ukrainians against a Russian occupation.
On the other hand, the pro-invasion argument is based on a variety of factors, including Biden’s weakness as a leader, American weakness as a result of the Afghanistan surrender, lack of unity in NATO, dependence on Russian gas and the failure of the West to do anything significant after the Crimean annexation in 2014.
Sanctions
What about sanctions? Sanctions are a deterrent, but the sanctions will be imposed by both sides.
Biden wants “severe” sanctions on Russia. The best way to penalize Russia is to build natural gas pipelines not controlled by Russia. The U.S. was building one with Israel, but Biden just shut down the pipeline project.
The White House is talking about what they call “non-Russian natural gas.” But natural gas is fungible, like oil. That’s why they call them commodities. If you take it from one source, there’s less somewhere else.
If Russia cuts off Europe’s energy, the U.S. says it will help Europe with Middle Eastern energy. That’s fine, but that energy was already bound for China. How do you think China would take to that?
In the end, the U.S. and Europe may suffer as much from sanctions as the Russians. Russia has been dealing with U.S. sanctions for years and has been working to inoculate itself against them.
‘Go Ahead, What Do I Care?’
Russia’s desire to break away from the hegemony of the U.S. dollar and the dollar payment system is well-known. Over 60% of global reserves and 80% of global payments are in dollars. The U.S. is the only country with veto power at the International Monetary Fund, the global lender of last resort.
So Russia has been building nondollar payments systems with regional trading partners and China.
The U.S. uses its influence at SWIFT, the central nervous system of global money transfer message traffic, to cut off nations it considers to be threats.
From a financial perspective, this is like cutting off oxygen to a patient in the intensive care unit. Russia understands its vulnerability to U.S. domination and wants to reduce that vulnerability.
But Russia has created an alternative to SWIFT.
The head of Russia’s central bank, Elvira Nabiullina, reported to Vladimir Putin that “There was the threat of being shut out of SWIFT. We updated our transaction system, and if anything happens, all SWIFT-format operations will continue to work. We created an analogous system.”
Another Russian strategy to bypass sanctions has been to stockpile gold.
You Can’t Hack Gold
Perhaps Russia’s most aggressive weapon in its war on dollars is gold. The first line of defense is to acquire physical gold, which cannot be frozen out of the international payments system or hacked.
With gold, you can always pay another country just by putting the gold on an airplane and shipping it to the counterparty. This is the 21st-century equivalent of how J.P. Morgan settled payments in gold by ship or railroad in the early 20th century.
Russia’s reserve position has hit a new all-time high of $640 billion, of which $140 billion (22%) is in physical gold bullion held inside Russia. We’ll see how Biden’s digital sanctions would do against Russia’s physical gold. Once again, you can’t hack gold.
So will Russia invade? As I said earlier, I’m skeptical that Putin will invade. It seems he can get much of what he wants just with the threat to invade.
Still, the arguments for invasion are well reasoned, and it’s still a legitimate possibility. You might want to stock up on gold yourself just in case.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> IMF warns crypto rout could lead to systemic risk, backs Fed digital coin
Yahoo Finance
by Jennifer Schonberger
January 27, 2022
https://finance.yahoo.com/news/imf-warns-crypto-winter-could-lead-to-systemic-risk-backs-fed-digital-coin-224508066.html
The International Monetary Fund says cryptocurrencies and stocks are likely to see more volatility, with the Federal Reserve set to raise interest rates, and as increasing correlations between the two asset classes create risks to the financial system.
Digital coins have gotten off to a rocky start in 2022, with a deep sell-off obliterating billions in market value. Since hitting a record high in November, the value of Bitcoin (BTC-USD) has been shaved nearly in half.
“The Fed needs to tighten financial conditions, that means that interest rates have to come up, risky asset prices have to come down, and that could be painful to some degree,” Tobias Adrian, director of the IMF’s Monetary and Capital Markets Department, told Yahoo Finance in an interview.
“That's what is going to change economic activity, which then will change inflation,” he added.
Adrian didn’t specify an exact timeline, but thinks it could be anywhere from two to six months before markets fully adjust to a new level of interest rates.
He explained that heavy leverage in crypto markets is magnifying spot price volatility – and is closely tied to leverage being taken on in the stock market, as hedge funds invest in both assets.
At the moment, banks themselves have little exposure to crypto assets, in general. Yet Adrian argued there’s little data showcasing how much risk investors overall are taking, leaving gaping holes as to what the real risks might be within digital assets, since full exposure isn’t known.
“There's very little data at the moment, data disclosures are not standardized,” he stated.
“Investors often don't know how much risk they're taking… There’s little regulation around margin setting, or around possible pitfalls around cyber risks,” Adrian added. “So there's really a lot of scope to improve the regulatory environment for the crypto space.”
Adrian says crypto is very much in the shadow banking system, but that over time he expects more regulations. He says the challenge is that crypto is so decentralized with no legal entity operating the digital coins, like Bitcoin.
Digital wallet providers, which store users’ cryptocurrencies, lend themselves to be regulated using cyber risk requirements and data disclosure requirements, the economist argued.
Why stablecoins, CBDCs make sense
When it comes to stablecoins, Adrian thinks it’s a good idea for some issuers to have a banking license and be regulated as such, because they offer services similar to that of traditional banks.
“We know that well-regulated banks and banks backstopped by the Federal Reserve work well,” he told Yahoo Finance. “When stablecoin providers don't have these kinds of regulatory setups and liquidity provisions, it's going to be difficult for them to be truly stable.”
Yet other stablecoin issuers may not be fit to have a banking license, he said, pointing to ones that operate more like money market funds.
“It depends on the business model of the stable coin as to whether they're more like a bank or more like a mutual fund,” Adrian added.
Some stablecoin issuers have bank licenses in certain states, while others have applied for banking licenses. Currently, U.S. policymakers are weighing whether stablecoin issuers should be granted banking licenses at a federal level where they could access the Fed’s system. The Biden administration has recommended that only banks should be allowed to issue stablecoins.
As the Fed mulls whether to adopt a digital dollar, Adrian said a well-designed central bank digital currency (CBDC) is a good idea. Assuming it’s properly designed, it could improve the efficiency of the payment system, allow more Americans to access the financial system and make payments with other countries cheaper and faster, according to the economist.
But he also says a CBDC is foundational to allowing cryptocurrencies to exist.
“There are many problems with crypto assets, but it's difficult to imagine them going away,” says Adrian. “A central bank digital currency is also an important bridge to the crypto asset universe and makes sure that federal reserve money is an important foundation for this emerging financial system.”
Adrian added that a CBDC should be able to coexist with private sector stablecoins.
<<<
>>> We’ve Seen This Movie Before
BY JAMES RICKARDS
JANUARY 26, 2022
https://dailyreckoning.com/weve-seen-this-movie-before/
We’ve Seen This Movie Before
As I expected, the Fed didn’t raise rates today at its January FOMC meeting.
If you were thinking the Fed would have to begin raising rates to counteract inflation, you’re probably going to have to wait until March, when the Fed’s Open Market Committee meets again.
The Fed says it “will soon be appropriate” to raise rates. It also says it will end asset purchases in March, so all signs point to a March rate hike.
How did the stock market take today’s messaging from the Fed?
Stocks traded in a fairly narrow band for much of the day, and then pretty much went south after the Fed’s 2:00 p.m. release.
The Dow lost another 129 points today, the S&P lost another six. The Nasdaq managed to pull off a minimal two-point gain.
The All-Important 10-Year Treasury
Yields on the all-important 10-year Treasury note spiked to 1.848% today, a 3.65% increase. That’s an earthquake in bond land. Ten-year yields opened the year under 1.6%, and the increase has spooked the stock market.
The 10-year note yield is a good proxy for long-term investment in mortgages, construction and infrastructure projects and therefore reflects expectations about the real economy.
Until recently, the interim high yield on the 10-year note had been 1.745% on March 31, 2021. Rates fell through the summer of 2021 and then began rising again, but the rate spikes fell short of that 1.745% level and then fell back.
That pattern prevailed until Jan. 14, 2022, when rates broke through and hit 1.794%. That was the highest level since Jan. 13, 2020, almost exactly two years ago, and before the pandemic became widespread in the U.S.
At that time, rates had declined from their pre-pandemic interim high of 2.761% on Jan. 23, 2019, almost exactly three years ago. Again, today’s yield is 1.848%.
What Are Bonds Saying About Inflation?
But if rates are not fundamentally higher than they were two years ago and are significantly lower than they were three years ago, what does that say?
If a wave of inflation is about to smash into us, why aren’t rates at 3.0% or higher? A yield of 1.848% is pretty puny if the inflation narrative is correct.
People throw the word “stimulus” around, even those who should know better, and say, “The Fed’s cut rates to zero. That’s stimulus. The Fed’s printing money. That’s stimulus.”
They then say, “If you’re going to print that much money, you’re going to get inflation.”
The Reality
But none of that is true. It’s far too simplistic. Reality is much more complicated than the simple money printing equals inflation narrative. Yes, the money printing is true. But it’s not inflationary unless the money gets put to use in the economy.
If the money gets put to use in the form of widespread lending and spending, that’s a setup where you have to think hard about inflation. But that’s not what we’re seeing.
What happens then to the money the Fed creates?
The big banks have accounts at the Fed. They take the money and they leave it at the Fed in the form of excess reserves, meaning basically more reserves than the law requires them to have.
So the money doesn’t go anywhere. It’s not being invested. It’s not being loaned out. It’s not being borrowed. It’s not being spent. So it doesn’t matter how much there is if the money doesn’t go anywhere, and that’s exactly the situation we’re facing.
It’s the Velocity, Stupid
I often refer to the velocity of money. Quite simply, velocity is the turnover of money, the rate at which money changes hands.
The Fed can create money just by buying bonds with money it creates out of thin air. But velocity is a psychological phenomenon.
It all depends how consumers feel. If they feel prosperous, if they feel that their job is secure, if they feel that their businesses are doing well, they might be more willing to borrow money to expand the business or spend money on personal consumption.
But we’re not seeing that. We’re seeing velocity drop. Some people are getting money, whether it’s in the form of government handouts or slightly higher wages, but they’re saving it. They’re not spending it. That doesn’t add up to rampant inflation.
I realize I may be in the minority, but the bond market is telling us that inflation will be much tamer than expected (I expect inflation to return with a vengeance eventually, but not yet).
In other words, the U.S. may be seeing peak inflation and peak interest rates for this cycle.
The One Thing the Fed Excels At
I expect the U.S. economy will slow from here (for many reasons including the pandemic, supply chain disruptions and excess debt), rates will level off and then decline and the dollar will weaken.
Of course, the Fed is preparing to tighten monetary policy at a time when the economy shows weakening. It’s tightening into weakness. But that’s no surprise.
Looking at the entire history of the Fed since 1913, it’s proven that it’s really good at wrecking the economy by doing the wrong thing at the wrong time. And it’s in the process of doing that again.
I feel like we’re watching the same movie that we’ve already seen. We’re seeing this movie again because the Fed did this before. From 2008–2013, the Fed did what they did the last couple of years.
“Normalizing”
They bought bonds, created money supply, blew up the balance sheet and cut rates to zero. The zero interest rate policy, the money printing, they did that from 2008–2013. They took the Fed’s balance sheet from about $800 billion to about $4 trillion (today it’s dramatically higher because of its response to the pandemic).
Then they tried to “normalize.” They began raising rates aggressively. They got the fed funds rate up to 2.25%, with nine 25-basis-point increases between December 2015 and December 2018.
They trimmed the balance sheet down. Not greatly, but they brought it down from about $4.5 trillion to about $3.7 trillion. That’s not an insignificant reduction.
Markets Have Seen This Movie Before
In other words, the Fed was trying to raise rates and reduce the balance sheet, and they were succeeding. But it all culminated on Dec. 24, 2018, in what I call the Christmas Eve Massacre.
The Fed sank the stock market. It fell 20% in 2½ months. And that was after a long bull market from 2009–2018, when stocks tripled over that time period.
The lesson is that when the Fed tries to normalize, they can’t do it. They’re caught in a trap of their own creation, with no way out, or at least no easy way out without causing a lot of pain.
They’re about to make things worse with tightening into weakness, with tapering and with rate increases. The market already sees this coming because they’ve seen the movie before. They know how it ends.
And it ends poorly.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> Rickards: Bad News, I’m Afraid
BY JAMES RICKARDS
JANUARY 18, 2022
https://dailyreckoning.com/rickards-bad-news-im-afraid/
Rickards: Bad News, I’m Afraid
The breakdown of global supply chains is well-known by now. Whether it’s finding groceries in your supermarket, buying a new car or buying appliances like dishwashers and refrigerators, goods are scarce. Also, deliveries take forever and choices are limited.
Many people wonder why the problem isn’t going away. Here’s the answer:
The supply chain is a complex dynamic system. When any complex system collapses, you can look for specific causes but that’s usually a waste of time. Systems collapse internally because they are too large and too interconnected and require too many energy inputs to keep going.
Any specific cause is more likely to be a symptom than a true cause. It’s frustrating, but that’s the answer.
Most Americans’ first encounter with the supply chain meltdown was in the spring of 2020 during the first wave of the coronavirus pandemic. Shoppers noticed that items like hand sanitizer and paper goods at Costco and other big-box stores were cleaned out.
It seemed that Americans who were locked down and quarantined at the time were hoarding these products because they had no idea when they would be allowed to venture out again.
The shortages were real, but were limited to specific products. The other aisles at Costco were stocked and so were all the other stores around (at least those that were allowed to remain open).
Now It’s Everything
But it’s not just Costco this time. It’s every supermarket, convenience store and other retail outlet from coast to coast. And it’s not just cleaning products and paper goods. Your local supermarket might have bare shelves for eggs, peanut butter, milk and other staples.
It’s not a case of being stocked out of all goods all the time. Your store is like a box of Cracker Jack – you never know what’s inside.
Many items are available, but many are not. It’s a case of stockouts of certain goods from time to time. But you can be sure that something will be missing and some of the shelves will be bare.
Still, there’s a narrative around that the crisis is temporary, that steps are being taken to alleviate shortages and backlogs and things will soon be back to normal.
The narrative blames the shortages on the pandemic and the number of workers home with COVID. It says that things will clear up when the virus is under control. That’s the narrative, but it’s not the reality.
The evidence is that the supply chain crisis is just getting started. It’ll be with us for years and have huge negative economic effects.
All Connected and All Collapsing at Once
No one doubts that the pandemic, especially the Omicron variant, has had a major impact and has caused millions to fall ill and miss work. It’s also likely that the missing employees due to illness are part of the reason shelves are not fully stocked.
But they are not a prime cause of the supply chain chaos.
Even if stores were fully staffed, there would still be shortages and delays due to everything from a shortage of truck drivers, late container cargo shipments from Asia, manufacturing delays due to lack of inputs, energy shortages and many other impediments.
That’s the point.
The supply chain is collapsing at every stage due to bottlenecks at every other stage. Commodity inputs are scarce, partly due to energy shortages at mines. Manufacturing is behind due to lack of commodity inputs. Deliveries are behind due to manufacturing delays. And finally, shelves are bare due to nondelivery of orders and a worker shortage.
It’s all connected and it’s all collapsing at once. So don’t believe the happy talk about a “temporary” supply chain crisis.
I’ll say it again: The crisis will last for years with predictable negative effects on economic growth.
The “Factory to the World” Is Closing Down
One major concern is China. China is currently pursuing a COVID Zero policy. This means that China has zero tolerance for even a single case of COVID.
If COVID appears, China will isolate the individual, do a massive track-and-trace operation and then forcibly remove entire neighborhoods to quarantine camps outside the city limits for mandatory lockdowns of 14 days or more.
If more than a few cases are detected, China will follow the same procedure but on a much larger scale. They will relocate hundreds of thousands of people if needed and shut down entire cities. This has already happened in Xi’an, a city of 1.5 million people and a major manufacturing center.
A new lockdown just arose in Henan province, which is the center of Chinese electronics production. China has also locked down the port of Ningbo, which is the second largest port in China after Shanghai, and one of the largest in the world.
China has also required that crews on arriving vessels must be confined to the vessel and are not allowed onshore for normal rest and recreation. Since these crews often spend six months or more at sea, vessel operators are starting to schedule trips that avoid China.
That means that even when goods are produced, they cannot necessarily be shipped because of a shortage of vessels and crews. The situation is getting worse, not better, and will deteriorate even more as we move toward the Beijing Olympics and the Lunar New Year holidays in China.
In effect, the “factory to the world” has decided to shut down the factory, or at least large parts of it for months to come.
This will continue to impact the U.S., which Americans are not accustomed to or prepared for.
Forced Labor
Americans associate bare shelves with Third World countries or perhaps East Germany during the Cold War. That last time Americans have had to deal with shortages on this scale were the gas crises of the 1970s and rationing during World War II.
Importantly, the phenomenon is not limited to the United States – it’s a global event. And it’s leading to extreme government measures. Take a look at Australia.
As in the U.S., Australia has large numbers of unemployed workers. They receive benefit payments similar to welfare and unemployment from an agency called Centrelink.
Well, the government has now declared that unemployed benefit recipients must work several hours per week to restock supermarket shelves in order to keep their Centrelink benefits. So, social benefits are being used to draft forced labor to deal with a supply chain problem.
Australia has become a kind of prison camp based on government dictates concerning the virus. It’s a good example of how COVID has empowered governments to dictate every aspect of citizens’ lives. This won’t be the last government mandate in Australia or here. And there’s a powerful lesson to be learned here:
Once governments get a taste of neo-fascism, they always want more. That’s true even in a liberal democracy like Australia. We’re seeing similar phenomena play out in western European democracies as well.
A Race Against Time
The other thing we can be sure of is that these mandates will slow the economy and destroy wealth.
The bad news for investors, again, is that this situation will persist for years. It’s not easy to correct and definitely not something that can be corrected quickly.
In markets, this will play out as higher costs, lower earnings and ultimately lower stock prices.
With markets still close to all-time highs, this could be a good time to lighten up on stocks before the supply chain reality catches up with the stock market bubble.
When it does, it won’t be pretty.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> Fed lays out risks and benefits of a CBDC in paper, takes no policy stance
Jan 20, 2022
Reuters
By Jonnelle Marte
https://www.reuters.com/business/fed-lays-out-risks-benefits-cbdc-paper-takes-no-policy-stance-2022-01-20/
Jan 20 (Reuters) - Creating an official digital version of the U.S. dollar could speed up payments and provide households with a safe option as payments technology evolves, but it would also present financial stability risks and privacy concerns, the Federal Reserve said in a long-awaited discussion paper released on Thursday.
The paper made no policy recommendations and offered no clear signal on where the Fed stands on whether to launch a central bank digital currency, or CBDC. Moreover, the Fed said it would not proceed on creating one "without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law."
But it sets the stage for the central bank to collect public feedback on the potential costs and benefits of the approach, which is being increasingly explored by major economies across the globe.
"While a CBDC could provide a safe, digital payment option for households and businesses as the payments system continues to evolve, and may result in faster payment options between countries, there may also be downsides," Fed officials wrote in the report.
Challenges include maintaining financial stability and making sure the digital dollar would "complement existing means of payment," the Fed said. The central bank also needs to tackle major policy questions before embarking on a CBDC, such as making sure it does not violate Americans' privacy and that the government maintains its "ability to combat illicit finance."
Even while making no recommendations, the paper did shed some light on how a CBDC might function in practice. A key finding of the analysis was that a CBDC would "best suit" U.S. needs if it were "intermediated" through the current financial system, meaning individuals would not have CBDC accounts directly with the Fed. Still, Fed officials said they are not ruling anything out.
The paper, which was announced by Fed Chair Jerome Powell last year, summarizes the payment landscape, including the emergence of stablecoins and other cryptocurrencies. Comments on the issue will be accepted for 120 days.
"The paper is not intended to advance any specific policy outcome, nor is it intended to signal that the Federal Reserve will make any imminent decisions about the appropriateness of issuing a U.S. CBDC," it says.
Powell has made it clear that he would like such a project to have broad support and to ideally be the product of congressional action. The Fed board is generally divided on the need for a CBDC.
Unlike cryptocurrencies, which are typically run by private actors and can see volatile price swings, a CBDC would be issued and backed by the central bank. It also differs from the electronic cash transactions that happen daily now through large commercial banks in that it could give consumers a direct claim to the central bank, similar to physical cash.
The paper released Thursday is separate from research the Boston Fed has been working on with the Massachusetts Institute of Technology to explore the technological aspects of a CBDC. That technical research, including coding that could be used for a potential U.S. CBDC, will be released as early as next month.
The Fed's report comes as about 90 countries, from the Bahamas to China, explore or launch their own central bank digital currencies (CBDCs), according to research from the Atlantic Council.
<<<
>>> Fed unveils paper outlining central bank digital currency pros, cons
Yahoo Finance
by Jennifer Schonberger
January 20, 2022
https://finance.yahoo.com/news/fed-unveils-paper-outlining-central-bank-digital-currency-pros-cons-192832748.html
The Federal Reserve on Thursday issued its long-awaited paper exploring the benefits and negatives of a central bank digital currency (CBDC), as the debate over cryptocurrency regulation hits its stride.
The Fed laid out a list of pros and cons associated with adopting a CBDC, but did not come to any formal conclusion on doing so.
However, it said a digital currency could help support faster and cheaper payments, expand consumer access to the financial system, and help preserve the dollar's role international status as a reserve currency, among other benefits.
<<<
CBDCs - >>> As many as 87 countries are exploring a central bank digital currency
Yahoo Finance
January 4, 2022
https://finance.yahoo.com/video/crypto-many-87-countries-exploring-172617285.html
AKIKO FUJITA: Well, China has now released a pilot version of its digital Yuan wallet app for Android and iOS, as the country's central bank moves aggressively to develop its own digital currency. The PBOC though, certainly not the only central bank that's looking to roll out their CBDC.
Let's bring in Emily Parker, CoinDesk global macro editor and CoinDesk TV anchor. Emily, I just threw in a lot of acronyms in there. But we're talking about central bank digital currencies. And dozens of countries, I mean nearly 100, now working on this.
EMILY PARKER: Absolutely. So as you mentioned, China has grabbed a lot of the headlines for taking the lead in developing a central bank digital currency. But we're seeing more and more countries getting involved. So I think, according to the Atlantic Council, which has a very cool CBDC tracker, there are something like 87 countries that are developing, or exploring rather, exploring a central bank digital currency.
And the latest, we've learned, is Mexico, which has announced that they plan to issue a CBDC within the next two years. So Mexico is joining other countries in the region, such as Peru and Brazil, who are actively exploring this. So this is something that's going on all over the world.
And if we look at those 87 countries, again according to the Atlantic Council, that accounts for over 90% of global GDP, the countries that are exploring developing this central bank digital currency. So it's definitely, definitely not just China.
ZACK GUZMAN: Yeah, although a lot of the attention has been on China, given kind of what's going to play out at the Olympics and kind of the buildup to unveiling that one. And of course, there's the big overhang and big question of whether or not anyone who's actually crypto-savvy is going to want to use any of these, or if they might beat out other stablecoins in terms of being the rails that we see used in terms of large institutions.
But when we look at maybe the other big story to watch in 2022, certainly a big one in '21, the rise of NFTs. And now in Korea, we're seeing it used politically, not just for the tech-savvy anymore. I mean, how big is that in terms of bringing on new entrants to the space?
EMILY PARKER: So CBDCs and the news item that you just mentioned are all part of a larger story, which is that cryptocurrencies in theory are supposed to be independent of governments. But what we're seeing now is just a lot of governments trying to get in on the action in some way, either by launching a central bank digital currency or, in the case of Korea, we have the ruling political party now saying that they will basically be giving NFTs in return for political donations.
And clearly what this is is it's a play for younger voters, voters in their 20s and 30s. But this is also an acknowledgment by the Korean government that crypto isn't going anywhere. And if they want to get traction with younger voters, they're going to have to play along.
ZACK GUZMAN: Yeah, I mean, that's the biggest thing too. I think we had, of course, the president of El Salvador labeling Bitcoin, and I guess stances on crypto, a major theme to watch in 2022. Of course, we have the midterms coming up.
I tend to agree with that. I think that it's something that we've seen Republicans and Democrats really start to align on on different sides now, although some of them are conflicting. I mean, how important do you think it is going to be for maybe politicians back here in the US to also-- I don't know if it's important for them to really utilize NFTs to fundraise or whatnot. But how important is it to really start setting, I guess, their stances on these things ahead of those elections?
EMILY PARKER: Yeah, I mean, 2021 was the year that Washington really woke up to crypto. And we're just going to see that trend continuing into 2022. So we're going to see lawmakers in Washington.
What they're going to have to do is learn more about crypto and how crypto works because there are a lot of regulatory actions that are being suggested out there. They're going to have to understand what those are. Whether or not they're going to start issuing NFTs is another question. But I do think we're just going to at least see an attempt to be more educated about crypto in Washington, which I think is a good thing for the industry.
<<<
>>> The Supply Chain Is the Economy
BY JAMES RICKARDS
JANUARY 5, 2022
https://dailyreckoning.com/the-supply-chain-is-the-economy/
The Supply Chain Is the Economy
The term “supply chain” is just a name that we give to a nexus of logistics, inputs, processes, transportation, packaging, distribution, marketing, customer relations, vendor relations and human capital that in the aggregate support the supply and demand for every physical, digital, intellectual or artistic artifact on the planet and in space. The supply chain is everywhere.
One way to understand the complexity and pervasiveness of supply chain dynamics is to consider yourself a one-person supply chain as suggested by MIT scholar Yossi Sheffi in his book The Resilient Enterprise (2005). Sheffi’s thought experiment goes something like this:
You wake up in the morning to the sound of an alarm clock. It may have been purchased at Walmart and made in China. You roll out of bed and make some coffee (from Brazil or Costa Rica). You prepare a nice breakfast of eggs (trucked in from a local farm), toast (from a local bakery) and orange juice (moved in refrigerated rail cars from Florida).
Once breakfast is done, you check your email and news (on a computer made in China), then hop in your car (made in Tennessee by a Japanese company) and do some shopping. You buy some clothes (made in Thailand and Vietnam), pick up your new eyeglasses ready at the optometrist (with German lenses and Italian frames) and fill up your car with gas on the way home (with gasoline refined in Philadelphia from oil pumped in Nigeria, shipped to the refinery by tanker and delivered by truck to your local gas station). And so on.
You’re surrounded with physical goods and services sourced from all over the world and delivered by truck, rail or vessel to regional distribution and processing centers and then delivered to your local stores.
You complete what’s called “the last-mile” delivery in the supply chain by shopping in your own car, or you can have goods delivered to your door through e-commerce vendors like Amazon. You are at the center of your own human supply chain.
You get an even better idea of the global complexity involved when you consider what’s called the extended supply chain. This analysis involves taking all of the suppliers in your personal supply chain and thinking about the separate supply chains of those suppliers.
The alarm clock made in China has parts from vendors all over the world (semiconductors, copper cords, plastic moldings, LED displays). Your morning coffee is made in a percolator or drip-style coffee maker with stainless steel, tempered glass, semiconductors and other components from vendors in Germany, Taiwan and Mexico.
The coffee beans were roasted abroad, packaged and delivered by container cargo on vessels owned and operated by Maersk (Denmark), COSCO (China) or Hapag-Lloyd (Germany).
The vessels themselves were likely built in Korea.
The automobile you take shopping may have been made in Tennessee, but it includes semiconductors from Taiwan Semiconductor Manufacturing. The clothes you purchased were made from cotton grown in Egypt and include plastic buttons fabricated in Malaysia.
Of course, we can continue this analysis indefinitely. The plastic resins used in the Malaysian button factory may have come from a chemical firm in Germany. That’s the point. The supply chain is really endless because every output has one or more inputs, which have their own inputs all the way back to basic industries such as mining and steel foundries.
Of course, those industries have their own inputs of machinery and electricity. Making it all work is human capital from technical expertise to manual labor. The supply chain never ends.
The breakdown in the global supply chain can be summarized in two words: efficiency and energy.
Efficiency sounds like a desirable outcome. It implies cost reductions and lower prices for consumers. How can efficiency be undesirable?
All systems require some form of energy, yet energy appears to be plentiful on a global basis notwithstanding higher energy prices. How can energy be blamed for the breakdown?
These questions present the paradox of complex dynamic systems analysis. The global supply chain is one of the most complex systems ever created. Here’s the explanation of the paradox:
We’ll begin with efficiency.
The modern science of supply chain management began in the 1980s when the rise of globalization and the expansion of computing power combined to make supply chains more complex while offering tools to deal with the complexity.
Supply chain management lowers costs by creating options, sharing information, eliminating redundancies, encouraging cooperation among supply chain participants and other innovations.
But when you increase the length of a supply chain to reach lower labor costs in Asia, for example, you also increase the number of things that can go wrong along the way.
When you reduce your trucking providers to the two that offer the lowest rates, you increase your vulnerability if one of those two suffers a strike or is disrupted by a natural disaster. If you route all of your inbound cargo to the Port of Los Angeles (instead of Houston, New York City or Tacoma) in order to be close to your distribution center, what happens when the Port of Los Angeles becomes a global bottleneck, which it has?
Put differently, the hidden cost of efficiency is vulnerability. This brings us to the second problem – energy.
Complex dynamic systems such as the supply chain run on energy. The problem is that the energy inputs rise in a superlinear fashion relative to the scale of the system. In plain English, this means that if you double the scale of a system, you may increase the needed energy (electricity, money or labor) by a factor of five.
If you double it again, you increase the energy inputs by a factor of five again. This means that after doubling the scale of the system twice, the scale is four times larger, but the energy inputs are twenty-five times larger.
When the profits from increasing the scale of the system are high and energy costs are low, these lopsided ratios of scaling functions may still be profitable on net. Yet when profits start to shrink (because of competition from disruptive technologies) and energy prices start to rise (because of government regulation and inflation) the impact of energy input costs on a highly leveraged supply chain network becomes a constraint on the operation of the system as a whole.
The rising cost of energy inputs is exacerbated by outright energy shortages as are now emerging in China and Germany. China has coal shortages; coal accounts for over 50% of China’s electricity generating capacity. Germany has natural gas shortages, which may grow worse if Russia invades Ukraine and the U.S. imposes sanctions on Russia. These energy shortages are slowing output in both countries right now.
Other factors weighing on the supply chain today include the pandemic and geopolitical stress. Major trading nations such as Australia and China are pursuing the ridiculous goal of a zero COVID policy or no new outbreaks of the infection. This is impossible. It’s tantamount to pursuing a policy in which no one catches a cold. The goal is absurd but the costs are real.
Supply chains will have to be restructured. The biggest loser will be China because it is the source of many inputs in the broken supply chain that will be abandoned. The biggest winner will be the United States because it has the greatest capacity to onshore broken links and build replacements for lost capacity elsewhere.
Still, reconfiguring the supply chain will take five to 10 years to accomplish. In the meantime, you should expect empty shelves, higher costs and slower growth in companies most affected by the breakdown.
Regards,
Jim Rickards
for The Daily Reckoning
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>>> The plumbing of the world's financial system has been replaced — and almost nobody noticed
Yahoo Finance
by Felix Salmon
December 28, 2021
https://www.yahoo.com/now/end-era-lending-120056573.html
Banks and regulators around the world have managed to replace the plumbing of the entire financial system, even as almost nobody has noticed.
Driving the news: As of Monday, Libor — the interest rate that once underpinned some $300 trillion in financial contracts from derivatives to corporate credit lines — will effectively be dead.
Why it matters: The easily-manipulable Libor was at the center of one of the biggest scandals in the history of finance, which came to light back in 2012.
Banks racked up some $9 billion in fines and a number of traders received prison sentences.
Libor has now been replaced with much more solid and reliable benchmarks.
How it works: Banks make money from lending money out at a higher interest rate than their own cost of funds. Libor was supposed to be a measure of banks' cost of funds, so if a bank priced a loan at, say, 1 percentage point over Libor, then it knew its profit margin would be 1 percentage point.
Trillions of dollars of loans and derivatives were traded based off Libor, which meant that if traders could — illegally— push it up or down by even a few hundredths of a percentage point, they could make enormous sums of money.
Because Libor was generated by surveying banks and asking them what their interbank lending rates were, it was easy for the banks to lie in the direction that would make their traders the most money.
Where it stands: Libor is being replaced by a suite of new products — Sonia for British pounds, Tona for Japanese yen, Saron for Swiss francs, and so on.
The U.S. dollar is the only currency that will still continue to publish an official Libor rate, but even that will only be used for legacy loan products. All new loans will have to be priced off something else. A long-standing but less famous benchmark called SOFR, which is published by the New York Fed, is the leading replacement.
Between the lines: Switching over from Libor to the new benchmarks was a massive undertaking. The world's financial markets couldn't just shut down for planned maintenance and come back refreshed on Monday morning.
Instead, deeply embedded infrastructure needed to be replaced while it was still being used intensively.
Even the Federal Reserve, which led the charge to end Libor in the U.S., ended up using the old benchmark for its pandemic-era Main Street Lending Program.
The bottom line: The Libor days are over. It's a testament to hard work at thousands of companies — exacerbated greatly by the pandemic — that nothing broke during the transition.
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'Going Direct' - >>> BlackRock Authored the Bailout Plan Before There Was a Crisis – Now It’s Been Hired by three Central Banks to Implement the Plan
BlackRock Authors of “Going Direct.” Top, left to right: Stanley Fischer, Philipp Hildebrand. Bottom, left to right: Jean Boivin, Elga Bartsch.
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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>>> EXCLUSIVE IMF, 10 countries simulate cyberattack on global financial system
12-9-21
Reuters
By Steven Scheer
https://www.reuters.com/markets/europe/exclusive-imf-10-countries-simulate-cyber-attack-global-financial-system-2021-12-09/
Israel financial-cyber officials take part in a simulation of a major cyber attack on the global financial system with 9 other countries, the World Bank and IMF at the Finance Ministry in Jerusalem December 9, 2021
JERUSALEM, Dec 9 (Reuters) - Israel on Thursday led a 10-country simulation of a major cyberattack on the global financial system in an attempt to increase cooperation that could help to minimise any potential damage to financial markets and banks.
The simulated "war game", as Israel's Finance Ministry called it and planned over the past year, evolved over 10 days, with sensitive data emerging on the Dark Web. The simulation also used fake news reports at in the scenario caused chaos in global markets and a run on banks.
The simulation -- likely caused by what officials called "sophisticated" players -- featured several types of attacks that impacted global foreign exchange and bond markets, liquidity, integrity of data and transactions between importers and exporters.
"These events are creating havoc in the financial markets," said a narrator of a film shown to the participants as part of the simulation and seen by Reuters.
Israeli government officials said that such threats are possible in the wake of the many high-profile cyberattacks on large companies, and that the only way to contain any damage is through global cooperation since current cyber security is not always strong enough.
"Attackers are 10 steps ahead of the defender," Micha Weis, financial cyber manager at Israel's Finance Ministry, told Reuters.
Participants in the initiative, called "Collective Strength", included treasury officials from Israel, the United States, the United Kingdom, United Arab Emirates, Austria, Switzerland, Germany, Italy, the Netherlands and Thailand, as well as representatives from the International Monetary Fund, World Bank and Bank of International Settlements.
The narrator of the film in the simulation said governments were under pressure to clarify the impact of the attack, which was paralysing the global financial system.
"The banks are appealing for emergency liquidity assistance in a multitude of currencies to put a halt to the chaos as counterparties withdraw their funds and limit access to liquidity, leaving the banks in disarray and ruin," the narrator said.
The participants discussed multilateral policies to respond to the crisis, including a coordinated bank holiday, debt repayment grace periods, SWAP/REPO agreements and coordinated delinking from major currencies.
Rahav Shalom-Revivo, head of Israel's financial cyber engagements, said international collaboration between finance ministries and international organizations "is key for the resilience of the financial eco-system."
The simulation was originally scheduled to take place at the Dubai World Expo but it was moved to Jerusalem due to the Omicron variant of COVID-19, with officials participating over video conference.
<<<
>>> IMF, World Bank & 10 Countries Held Alarming "Simulation" Of Global Financial System Collapse
Zero Hedge
BY TYLER DURDEN
DEC 21, 2021
https://www.zerohedge.com/markets/imf-world-bank-10-countries-hold-alarming-simulation-global-financial-system-collapse
Earlier this month Reuters produced a report which didn't receive nearly enough attention among the American public - its contents would be sure to alarm most people concerned with the outbreak of yet more 'global catastrophes'. At the very least it's curious timing: amid the recent pandemic induced disruption in global supply chains, powerful nations and banking institutions decided to get together to run a global economic collapse scenario.
The report described that Israel led a "10-country simulation of a major cyber attack on the global financial system in an attempt to increase cooperation that could help to minimize any potential damage to financial markets and banks." It was centered on a catastrophic scenario in which "hackers were 10 steps ahead of us," according to one official who took part.
Dubbed "Collective Strength", the exercise was held in Jerusalem (after being moved from the original proposed location of Dubai) and included the participation also of the United States, UK, United Arab Emirates, Austria, Switzerland, Germany, Italy, the Netherlands and Thailand. Officials from the International Monetary Fund (IMF), World Bank and Bank of International Settlements were also involved.
The financial-geopolitical gaming simulation was set amid a scenario where sensitive data was leaked on the Dark Web, which combined with "fake news" reports going viral across societies, resulting in the collapse of global markets and an ensuing run on banks. Further, the simulation envisioned a series of devastating hacks targeting global foreign exchange systems, which also disrupted transactions between importers and exporters, according to Reuters.
The simulation set out a severe crisis period lasting about a week-and-a-half. Events were guided by a film and narrator which related the fast moving 'live' events...
"These events are creating havoc in the financial markets," said a narrator of a film shown to the participants as part of the simulation and seen by Reuters.
Further the report detailed of the simulation hosted under the aegis of Israel's Finance Ministry:
"The banks are appealing for emergency liquidity assistance in a multitude of currencies to put a halt to the chaos as counterparties withdraw their funds and limit access to liquidity leaving the banks in disarray and ruin," the narrator said.
The participants discussed multilateral policies to respond to the crisis, including a coordinated bank holiday, debt repayment grace periods, SWAP/REPO agreements and coordinated delinking from major currencies.
Simulation participant countries and institutions, Via Reuters
Ostensibly what was a "successful" ten day exercise was aimed toward each country being prepared to contain the global damage coming from some kind of major cyber event or threat. The key takeaway was that only through rapid global cooperation and open communication among nations, would there be opportunity to prevent total collapse of the global (or perhaps rather Western-led) financial system.
Interestingly, some participants said in reality they would in reality move faster than in the simulation in the instance of a cyber disruption of that scale. They said "in a real cyber attack situation governments would take action more quickly than in the simulation," according to Reuters. "One European financial official said that in the case of such of an attack, his country would not wait 10 days to act."
However, we doubt much of the Western public will feel "comforted" by global elites engaged in a simulated global meltdown 'readiness' scenario. Again, as if 2020 and 2021 under the pandemic weren't enough of a "real world" disaster and crisis scenario, one questions the need to game out a 'pretend' scenario in the first place.
<<<
Rickards - >>> The Neo-Fascists Among Us
BY JAMES RICKARDS
DECEMBER 14, 2021
https://dailyreckoning.com/the-neo-fascists-among-us/
The Neo-Fascists Among Us
The Omicron variant of the SARS-CoV-2 virus that causes COVID is now firmly entrenched in the United States. That’s no surprise.
There’s a significant lag between the time a mutation first infects someone and when science identifies and isolates the new strain. In that gap, infected individuals inevitably travel or come in contact with others in such a way that the mutant virus spreads around the world before science even knows it exists.
Omicron is now present in 57 countries, but that number will soon be 90 and then 120. It’s also highly infectious. In the U.K. and South Africa, for example, cases are doubling every three to four days.
The bottom line is the virus goes where it wants. If you think lockdowns are the answer, think again. Ample evidence demonstrates that lockdowns simply don’t work.
All Pain, No Gain
Lockdowns don’t work to stop the spread of the virus because they keep people indoors where the virus can spread more easily. Outdoor activity is essential for fresh air, mental and physical health and exercise.
People will find a way to gather and interact even with lockdown rules. This means that lockdowns impose all of the economic costs with few of the supposed public health benefits.
This was recognized in a paper in 2006 by D.A. Henderson, the greatest virologist and epidemiologist of the 20th century, who led the successful effort to eradicate smallpox and won the U.S. Presidential Medal of Freedom.
He said lockdowns don’t work and provided detailed reasons why. Unfortunately, his award-winning work was ignored by politicians eager to appear to be doing something.
79% Fully Vaccinated
And don’t think that vaccines are the answer, either.
There were a total of 43 U.S. Omicron cases as of Dec. 11 (there are likely many more today). What’s interesting is that 79% of them were fully vaccinated and 14 had received booster shots.
Five of the 14 who received boosters had gotten them at least two weeks prior and should have had maximum immunity. They got infected anyway.
What do the numbers tell us?
As a first approximation, the vaccinated are more likely to get COVID through Omicron than the unvaccinated, although this sample size is small. But what this data shows beyond doubt is that vaccines do not prevent COVID infections and that this is not a pandemic of the unvaccinated.
The vaccinated and unvaccinated are equally likely to become infected and to spread the virus.
The Good News
But here’s the good news: While the Omicron variant appears to be more contagious than earlier variants, it’s also less lethal. It may even mark the end of the pandemic as infections provide immunity without high costs in terms of hospitalization and death. That’s how pandemics end.
We’re at the stage where we can learn to live with COVID as we do with many other endemic diseases such as the seasonal flu. There’s no reason for fear. Unfortunately, government authorities continue to insist they can control the situation with orders and mandates.
COVID can be lethal and imposes costs, but it’s not the end of the world. Survival rates for all groups are 99.2%, and for those under 65 who are not obese or have other comorbidities, the survival rate is 99.8%.
Meanwhile, multiple studies show that early treatment with drugs like hydroxychloroquine and ivermectin (among others) slashes the chances of hospitalization and death. In other words, COVID is highly treatable unless sufferers wait until they have trouble breathing before seeking treatment, which has shamefully been the advice of the CDC.
COVID Derangement Syndrome
Still, in their obsession to force vaccinations with gene-modification therapies (mRNA) from Moderna and Pfizer, the government and mainstream media have trashed ivermectin as a “horse dewormer” and something used only by veterinarians.
This type of lying and propaganda has cost many lives, maybe hundreds of thousands.
The question is why? Besides discouraging cheap, lifesaving medications, bureaucrats and politicians are persecuting the unvaccinated, imposing unneeded vax mandates and ignoring natural immunity held by almost 50 million Americans who have recovered from COVID. Why?
The recent pandemic seems to have caused a Covid Derangement Syndrome in government leaders.
They haven’t learned any lessons from the past year. They’re reimposing useless or counterproductive policies that destroy economies, abuse children with masks and school closures and needlessly trample on individual rights.
In places like Austria and Germany, they’re imposing strict lockdowns once again.
Violating the Nuremberg Code
Ursula von der Leyen, head of the EU, is now suggesting the European countries consider mandatory vaccinations. It’s a one-size-fits-all policy.
Leaving aside the fact that vaccinations don’t stop infection and don’t stop the spread of the virus, this is a violation of the Nuremberg Code adopted after World War II to prevent involuntary experimentation on humans of the kind carried out by the Nazis.
Despite government approvals, the vaccines are still experimental because long-term studies on efficacy and side effects have not been completed. The fact that the head of the EU hasn’t learned anything from the horrors of Nazi experimentation on humans is highly disturbing.
Over in the U.K., one psychology professor likens the unvaccinated to “terrorists.” He argues that “hardcore vaccine refuseniks” need to be “deradicalized” like terrorists. They need to be “punished” and of course subjected to vaccine mandates.
I’m sure there are many politicians who agree. Why are so many politicians susceptible to Covid Derangement Syndrome?
Neo-Fascism
Some politicians are just stupid and do what they’re told by corrupt public health officials. Some politicians know better but consider it politically expedient to “do something” even if the something makes no sense.
But most disturbing are those politicians who harbor a neo-fascist impulse. They’re using the pandemic to induce fear and intimidate the population into following orders and doing what they’re told. They just can’t tolerate independent citizens making their own decisions.
I realize that “fascist” is a very strong word with powerful connotations. It may seem paranoid or hysterical, but it’s not. It perfectly describes a certain type of politician. The pandemic has merely ripped their masks off, exposing them for who they truly are.
The problem with the neo-fascist impulse is that it never goes away. That means the pandemic will never go away in the official sense because that would deprive these neo-fascists of their cover to pursue their political agenda of fear and control.
Again, that’s not being paranoid. It’s an objective assessment.
COVID and Climate: Two-Headed Trojan Horse
This neo-fascism goes beyond COVID. In some ways, the pandemic is a test run for draconian climate policies.
Global elites see the COVID pandemic and climate alarm as a two-headed Trojan Horse that can be used to foist global taxation and heavy regulations on a global population who have suddenly become accustomed to following government orders.
If populations can successfully resist vaccine mandates and other strict measures, then globalists fear they’ll rebel against restrictive climate policies.
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 lockdowns, vaccine mandates or hysterical climate alarmism is extremely weak.
It’s about control.
Intimidation or Freedom
I’m a macroeconomic analyst, so why am I writing about public health and climate policies?
The answer is because they have real-world consequences for the economy. Poor policy choices have already cost trillions of dollars, and that number will certainly grow in the future if the neo-fascists get their way.
With weak growth, government spending out of control and debt rising at alarming rates, we’re likely heading for an economic crisis sooner or later.
Until citizens stand up to the petty dictators around us, the pandemic will never be over and life will never return to normal. It’ll only set the stage for more tyranny in the future.
The choice between more intimidation and more freedom, economic and otherwise, has rarely been more clear.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> Twenty Central Banks Hold Meetings as Inflation Forces Split
Bloomberg
By Enda Curran, Jana Randow, Rich Miller, and Philip Aldrick
December 11, 2021
https://www.bloomberg.com/news/articles/2021-12-11/twenty-central-banks-hold-meetings-as-inflation-forces-split?srnd=premium
Fed is expected to taper support while others are still easing
Bank of England’s hiking hints undermined by omicron
The world’s top central banks are diverging, as some turn to tackling surging inflation while others keep stoking demand, a split that looks set to widen in 2022.
The differences will be on full display this week with the final decisions for 2021 due at the U.S. Federal Reserve, European Central Bank, Bank of Japan and Bank of England, which are together responsible for monetary policy in almost half of the world economy. They won’t be alone -- about 16 counterparts also meet this week, including those in Switzerland, Norway, Mexico and Russia.
Central Bank Decisions This Week
The latest wild-card is the omicron coronavirus variant -- how severe its impact proves to be on growth and inflation will be a crucial consideration for officials into the new year. The worry is that a strain more resistant to vaccines would force governments to impose new restrictions on business and keep consumers at home.
A shift in policy always carries risks. Tightening and then discovering the inflation threat was temporary all along -- as many central bankers have said all along -- could derail recoveries; waiting and finding that price pressures are persistent could require more aggressive tightening than otherwise.
“The likelihood of policy slip-ups is now much much greater,” said Freya Beamish, head of macro research at TS Lombard. The inflation outlook is confused by “the presence of an endemic virus,” she said.
Fed Chair Jerome Powell is tipped to confirm on Wednesday that he’ll deliver a quicker withdrawal of stimulus than planned just a month ago. He may even hint at being open to raising interest rates sooner than expected in 2022 if inflation persists near its highest in four decades.
The outlook for his central banking peers is less clear, marking an end of two years in which they largely synchronized their efforts to tackle the coronavirus recession, only to find inflation surging back stronger than anticipated in many key economies.
Stimulus at Fed, ECB, BOJ has vastly increased their balance sheets
Although she’s likely to end emergency stimulus, ECB President Christine Lagarde will stick to an expansionary policy stance on Thursday as she insists soaring prices are due to factors that won’t endure, such as energy costs, supply snags and statistical quirks. Lagarde has indicated she doesn’t expect to raise rates in 2023.
Subdued price pressures in Japan are also allowing BOJ Governor Haruhiko Kuroda to hold onto a doggedly dovish stance, even as the government rolls out another round of record spending. Japanese policy makers convene Friday.
Perhaps most strikingly, Governor Andrew Bailey’s Bank of England is now cooling on the need to hike rates, having not long ago flirted with a shift. In contrast, Norway’s central bank may hike again.
Elsewhere, while the People’s Bank of China has started to ease policy as a property-market downturn threatens to hamper growth, other emerging economies such as Brazil and Russia are aggressively tightening.
Russia may do so again this week, as may Mexico, Chile, Colombia and Hungary. Still, Turkey is set to cut again at the urging of President Recip Tayyip Erdogan.
“We are set for increasing monetary policy divergence,” said Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis SA.
What Bloomberg Economics Says...
“Rising global inflation, higher commodity prices and weaker currencies likely synchronized rate movements in emerging markets this year. Tighter U.S. monetary policy will probably provide another global force for more rate hikes next year.”
-- Ziad Daoud, chief emerging markets economist
Even if the path of rates differs, a wide-scale slowing of bond-buying programs will reduce support for economies. BofA Global Research strategists predict liquidity will peak in the first quarter of 2022, and that the Fed, ECB and BOE are on course to shrink their balance sheets to $18 trillion by the end of next year from above $20 trillion at the start of the year.
The implications for divisions in global policy could also include a rising dollar against a weakening euro and yuan, potentially stoking currency tensions as China’s exports get another lift. A stronger greenback would also lure money away from emerging markets, undermining their own fragile recoveries.
“The increase in the Fed fund rates next year and a stronger U.S. dollar will be a testing time for emerging markets,” said Jerome Jean Haegeli, chief economist at Swiss Re AG in Zurich, and previously of the International Monetary Fund. “The fault lines opened up by Covid-19 are looking more persistent.”
At the Fed, a widely-anticipated decision to wind up its bond-buying more quickly could leave it in a position to raise rates as early as March, should it deem that necessary to stem surging inflation.
U.S. consumer prices rose the fastest in almost four decades, government data showed Friday.
Fed watchers expect the central bank’s new economic forecasts to show for the first time that a majority of policy makers project at least one rate increase in 2022.
ECB’s Stimulus Exit Path Emerges With Inflation at Record Pace
Inflation Near 40-Year High Shocks Americans, Spooks Washington
Fed Seen on Track to Quicken Taper After Latest Inflation Print
The Bank of England Needs One Million Missing Workers to Return
In the U.K., traders convinced of a liftoff this year pared bets after the emergence of omicron, and they’ll likely be proved right if comments from the BOE’s most hawkish official serve as a guide. Michael Saunders recently highlighted the benefits of waiting before raising rates from 0.1% to assess the economic impact of the variant.
The U.K.’s tight labor market is nevertheless driving up wage growth, and officials are concerned that high inflation, expected to hit a decade high of 5% next year, is seeping into expectations. Unlike the Fed, the BOE’s mandate keeps it focused on prices.
At the ECB, Lagarde is also sticking to the narrative that record-high inflation will eventually subside -- even though officials acknowledge that persistent supply bottlenecks mean it may take longer than initially thought, and some policy makers are getting uncomfortable just standing by.
With the European economy close to pre-crisis levels, the institution is set to confirm that bond-buying under its signature 1.85 trillion-euro ($2.1 trillion) pandemic program will end in March as planned. Regular asset purchases will continue. Rate hikes, economists surveyed by Bloomberg agree, won’t be on the agenda until 2023.
Ultimately, the severity of omicron will play a huge role in the monetary policy story next year. Two weeks after the variant’s discovery, there are plenty of unknowns.
“If the variant dampens demand more than it exacerbates supply-chain disruptions, it could prove disinflationary,” said economist Sian Fenner of Oxford Economics. “But the reverse is equally true.”
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>>> US leads China in 'digital currency space race,' crypto exec says
Yahoo Finance
by Alexandra Semenova
December 10, 2021
https://finance.yahoo.com/news/us-beats-china-digital-currency-space-race-circle-ceo-212552244.html
As the global digital currency race heats up, Circle CEO Jeremy Allaire thinks the broader stablecoin adoption expected to come with regulatory clarity from Washington can give the United States a needed edge in minting the financial system of the future.
Testifying along with five other crypto leaders at Wednesday’s landmark congressional hearing, the digital payment provider’s chief executive officer said the U.S. is beating China in stablecoin transactions with trillions of U.S. dollar-backed payments carried out, compared to $10 billion completed by China’s central bank in its experimental digital yuan program, though clearer rules for mass use are needed to sustain this pace.
“This has the potential to grow at a very significant speed around the world and benefit the U.S. dollar and benefit American businesses,” Allaire told lawmakers. “And I think the primacy and development of this infrastructure is a national security and economics priority for the United States, and we need to get going on it right now.”
Despite larger transaction volumes, U.S. stablecoin issuers lack the key support from policymakers that is crucial for wider adoption, while China’s central bank has pushed forward with real-world trials of digital currencies. As the stablecoin market grows rapidly, reaching over $140 billion as of November, key players are eager for a nod from Washington as watchdogs inch closer towards support for institutional use.
“The United States and the U.S. dollar are winning the digital currency space race today,” Allaire, whose Circle is the second-largest stablecoin issuer, told members of Wednesday’s meeting, citing trillions in transactions.
A central bank digital currency (CBDC) tracker and database from the Atlantic Council, a nonpartisan think tank on international affairs, however, states the U.S. is the furthest behind in digital currency progress among countries with the four largest central banks.
“In the long term, the absence of U.S. leadership and standards setting can have geopolitical consequences, especially if China maintains its first-mover advantage in the development of CBDCs," Atlantic Council researchers wrote.
While Circle has come out against the launch of a centrally-managed CBDC — which differ from stablecoins because they are privately issued — the company has supported the Biden administration’s proposal to regulate stablecoin issuers as banks, viewing the move as a step forward for the industry.
“We think this represents significant progress in the growth of this industry,” Allaire previously told Yahoo Finance. “There's a real recognition that as these payment stablecoins grow, they could grow at internet scale relatively quickly."
'Viable means of payment'
Flagship financial institutions are also bracing for regulation and the potential for institutional use.
Bank of America (BAC) sees developments in the regulatory sphere around stablecoins as a good thing for payment companies, recently identifying Mastercard (MA), Signature (SBNY), Visa (V) and Western Union (WU) as potential beneficiaries.
“We expect regulatory clarity to increase stablecoin use as a viable means of payment, likely driving retail adoption,” Bank of America global research analysts wrote in a recent note.
“Stablecoin regulation is a significant first step toward a comprehensive regulatory framework that encompasses the digital asset ecosystem,” BofA said. “We view a comprehensive regulatory framework as a catalyst to mass adoption of digital assets.”
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(cont) One aspect to the dollar/SDR combo scenario is the potential for the CBDCs to throw a wrench into the paradigm. With numerous CBDCs in place for domestic use in most countries/regions of the world, what is to stop these CBDCs from being adopted for use in international trade transactions, thereby undermining the traditional role of the dollar? The dollar/SDR combo may be fine for the central bank role, but the dollar could still lose its position as the preeminent trade currency to the CBDCs, leading to a crumbling in demand for the dollar.
Also, a key advantage to the dollar reserve system is the ability to impose sanctions on countries, and also the threat of 'de-SWIFT-ing' a country (SWIFT = Society for Worldwide Interbank Financial Telecommunications system). This is viewed by globalists as the ultimate control mechanism (short of war) to keep wayward countries in line. So what will be the effect of CBDC's on the ability to impose sanctions and to 'De-Swift', I wonder?
Thinking about possible timeline scenarios for 'the great unravelling', it's possible that a big dollar to SDR transition crisis isn't the plan at all. I wonder if instead the plan might be to have a hybrid world reserve currency for an extended period, possibly for decades. They could use the SDR to gradually bolster the existing dollar reserve system, and thereby extend its lifespan almost indefinitely.
This would make a lot of sense since to actually de-throne the dollar reserve system and simultaneously replace it with the SDR seems extremely risky, and would likely involve a wrenching and dangerous period of intense crisis, which could spin out of control. On the other hand, if the plan is for a gradual transition to a shared dollar/SDR co-reserve system, the huge benefits of the existing dollar reserve hegemony would continue uninterrupted, and the SDR could be gradually ramped up to supply additional global liquidity, thereby taking the pressure off the dollar system.
Anyway, this strategy would make a lot of sense. New SDR allocations by the IMF can gradually be issued over time, in amounts that aren't so large/rapid that it undermines global confidence in the dollar reserve system. China/Russia will be fine with the greater SDR role since they'll see it as a reduction in dollar/US hegemony.
Meanwhile, each country/region in the world will be adopting their own CBDC/Central Bank Digital Currency for domestic use. The dollar/SDR combo will be the reserve system for the world's central banks.
Rickards talks about the gradual transition from the British pound to the US dollar, which occurred in the period between WW-1 and WW-2. For the two decades between the wars, the pound and dollar shared the world's reserve role, and the dollar actually extended the viability of the pound. Now that the dollar is in trouble, the SDR can be similarly be used to extend the dollar's viability.
This strategy also fits in with the gradual nature of other globalist goals, like CBDCs, electric everything, AI, smart grid, smart cities, etc.
>>> Here Comes the “Omicron” Variant
BY JAMES RICKARDS
NOVEMBER 29, 2021
https://dailyreckoning.com/here-comes-the-omicron-variant/
Here Comes the “Omicron” Variant
Last Friday, the Dow Jones Industrial Average fell 905 points, or 2.53%. The S&P 500 and Nasdaq indexes had similar falls, about 2.25% each.
It was the worst Black Friday performance in history.
Usually stocks rally on news of shoppers breaking down doors to buy bargains. The reason for the decline was reported to be new fears of the COVID pandemic in the form of the so-called omicron variant.
This omicron variant was first identified in South Africa, but it has spread widely already. The small number of actual cases is not a source of comfort. What matters is the exponential spread of the caseload, not the actual numbers.
With exponential spread, the total caseload will overwhelm public health systems in a matter of weeks.
How long will a surge of cases last? And what should be the public response to the new variant?
Clueless Politicians Will Make Things Worse
Here are a few tips to guide you through this variant outbreak: It will get worse but will fade by early February. That’s been a consistent outbreak pattern (about ten weeks start to finish) since the pandemic began.
Masks and lockdowns won’t help; they never do. But they will be imposed anyway by clueless politicians, so get ready for the economy to slow down again.
Vaccines won’t help (same with boosters). The vaccines appear to reduce symptoms and fatalities, but they don’t stop the spread. You can still become infected and spread the disease even if you’re fully vaccinated.
So don’t buy the official propaganda you’ll be hearing in the coming days and weeks.
What You Should Do
The best approach is still to get outside without a mask, get fresh air, exercise and wash your hands. And in case you get sick, there are effective therapeutics you can take to stop the virus from progressing (hydroxychloroquine and ivermectin are just a couple).
The key is to start getting treatment early. Unfortunately, the CDC has told people to wait around until they have trouble breathing before going to the hospital for treatment.
But by that point the virus is already deeply entrenched and much of the damage is done. Treatment becomes very difficult at that point.
That’s why early treatment is essential, despite what the public health authorities urge. It prevents the virus from replicating beyond control.
Other than that, we just have to wait this out. Politicians only make things worse.
The fact that the variants keep coming (the Italian Strain, Delta, now Omicron), is a sign that the original virus was bioengineered in the Wuhan laboratory.
That’s because a natural virus mutates, but it becomes weaker over time. But this virus shows a remarkable ability to mutate around antibodies and other defenses.
The Xi Variant
By the way, these variants of the original Wuhan virus have been named sequentially after the letters of the Greek alphabet. The newest variant should have been called Nu, and the one after that would have been called Xi.
The World Health Organization (WHO) skipped Nu (N) because of potential confusion with the word “new.” They also skipped Xi in order not to embarrass Chairman Xi of the Communist Party of China.
The next letter is O, called omicron and that’s the one they selected. In case you were wondering whether the WHO kowtows to Communist China, there’s your answer.
Regardless, bureaucrats and the politicians who listen to them are going to resort to the only tricks they know. Expect more lockdowns and other futile, counterproductive measures that have been proven to fail.
Add the new virus variant to an economy that’s already slowing down due to supply chain disruptions and labor shortages, and we could be heading into recession very soon.
This reality will catch up to the stock market. It’s time to lighten up your equity exposure and allocate more to cash and hard assets like gold.
Here’s another reason you should acquire hard assets like gold: Inflation.
The Highest Inflation in 30 Years
Since the COVID crash of March 2020, the Fed has printed over $5 trillion in base money (called M0).
The Trump and Biden handouts and other programs in 2020-2021 have added $6 trillion to the deficit over and above the baseline. Another $2 trillion in deficits will be on the way soon with Nancy Pelosi’s legacy entitlement bill now pending action by the Senate.
We’re now seeing the highest consumer inflation in over thirty years. The price of everything from gas at the pump to meat and milk in the grocery store is soaring.
Inflation has many causes. Both the money printing certainly contributes to it. The greatest danger is when inflation expectations rise and consumer behavior causes inflation to feed on itself in the form of bringing demand forward and hoarding goods.
That’s not a particularly rosy scenario for the U.S. economy. Then, why is the U.S. dollar so strong?
How do we reconcile U.S. economic vulnerability with the demonstrated strength of the U.S. dollar?
The answer to the strong dollar conundrum is to look for another measuring rod.
Gold, the Unchanging Yardstick
It’s true the U.S. dollar is strong against the euro, yen and Swiss franc. Yet, those are all paper currencies and none of them is backed by gold.
When you compare one paper currency to another, it tells you something about paper money capital flows, but it tells you little about the value of currencies measured in hard assets such as land, gold, silver, oil or other natural resources.
That’s where gold comes in. It is a form of money although central bankers won’t acknowledge it.
If gold were not money, why does the U.S. hold 8,133 metric tonnes of gold? Why does Germany have 3,359 metric tonnes? Why do Italy and France have about 2,450 metric tonnes each? Even the IMF has 2,814 metric tonnes.
Central banks collectively hold 35,554 metric tonnes of gold or 20% of all of the above ground gold in the entire world.
The answer is obvious – gold is money. Central banks simply won’t admit it.
Yet, gold is a different kind of money. Gold is not paper money and cannot be issued in unlimited quantities. Paper money is a liability of the banks that issue it. (Just read a twenty-dollar bill next time you have nothing to do. It says “Federal Reserve Note” right on the front. A note is a liability).
Gold is an asset, but it’s not anyone’s liability. That’s what makes it different.
King Dollar Losing Its Golden Crown
For this reason, gold is the best way to measure the value of any currency. It gives an objective measure by weight. You’re not comparing one fiat currency to another. You’re comparing a fiat currency to real money. That’s how you know if the fiat is strong or weak.
When we use this measure, we see that the U.S. dollar is not actually getting stronger; it’s getting weaker.
On September 29, 2021 gold was $1,773 per ounce. On November 17, 2021 gold was $1,870 per ounce. That’s a 5.5% gain in the dollar price of gold in seven weeks. When measured by weight of gold, that price movement translates into a 5.3% decline in the value of the dollar.
So, there’s the answer. In the past three months, the U.S. dollar is up 4.5% when measured against a basket of currencies, but it’s down 5.3% when measured against gold. Of course, this means non-dollar currencies are down almost 10% when compared to gold.
There’s a one word explanation for this phenomenon — inflation.
Currencies may fluctuate freely against each other, but they all fall in real terms when inflation is taken into account. Gold is the yardstick that is most immune to inflation. That means it’s the best way to measure currencies in an inflationary environment.
We may be in an age of King Dollar, but the king is about to lose his golden crown.
Regards,
Jim Rickards
for The Daily Reckoning
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>>> Jan. 4: Expect an Economic Train Wreck
BY JAMES RICKARDS
NOVEMBER 22, 2021
https://dailyreckoning.com/jan-4-expect-an-economic-train-wreck/
Jan. 4: Expect an Economic Train Wreck
Today, President Biden renominated Jerome Powell to a second term as Federal Reserve Chairman.
Progressives in his party wanted Biden to nominate someone more to their liking, such as Lael Brainard, the only Democrat on the Fed’s Board of Governors.
But it really doesn’t matter, unless you somehow manage to resurrect Paul Volcker. And his options would be far more limited today than they were in 1981 when he raised interest rates to 20%.
With today’s crushing debt levels, raising rates to any significant extent would collapse the entire system. No Fed head could afford to do it, even if he or she wanted.
Whoever heads the Fed, it’s proven time and time again that it has no idea what it’s doing. There’s absolutely no reason to expect anything different from Powell the second time around. He’s a one-trick pony, and that trick is old.
And the Fed has no answers for the most urgent problem facing the economy right now: supply chain shortages.
Plenty of Blame to Go Around
By now, you’re well aware of the supply-chain fiasco unfolding across the country. Of course, it’s not just an American phenomenon; the supply-chain crisis is global. But, as the world’s largest economy driven 70% by consumption, it’s fair to say America is ground zero in this struggle.
The effects are not limited to the paper goods aisle at Costco as they were during the pandemic. The effects are everywhere. There are bare spots on shelves in every aisle of the supermarket.
Liquor stores can’t get certain kinds of wine. Garages can’t get auto parts. Doctors can’t get certain medical devices. Anyone not done with her Christmas shopping should prepare for disappointment. Santa won’t be coming to a lot of homes this season. Everyone is blaming everyone else.
Ships that can’t unload at ports blame the truckers who are supposed to remove the containers already ashore. Truckers blame state regulators who make them wait in line for days to pick up containers only to tell them to come back tomorrow. Retailers blame distributors. Customers blame retailers.
The problem is they’re all right.
The supply-chain breakdown is not at one single bottleneck. It’s up and down the supply chain at all levels from component suppliers to manufacturers to transportation providers to customers.
What is the Biden administration doing about this?
Making a Bad Situation Worse
They’re busy making things worse. First, the Biden administration ordered the Port of Los Angeles to stay open 24-hours per day and work three shifts to ease the backlog. The problem is that working longer was never the problem. The port can’t unload the vessels because there’s no place to put anything.
The piers and storage yards are full. Containers are stacked to the sky. Working longer hours does nothing when there’s no place to put the cargo. The next Biden move was even dumber.
They proposed a penalty on containers that remain on the docks for more than six days. But, no one wants the containers moved faster than the shippers. It’s just a physical impossibility when they can’t get the trucks to the ports.
The penalty does not speed up the transportation process, but it does increase the cost of goods, which makes inflation worse and could drive some retailers out of business.
The supply-chain crisis is real. The Biden administration is incompetent. That’s a bad combination for the economy.
Compounding the problem is a labor shortage, which is going to get much worse in January.
The Straw to Break the Camel’s Back
There’s already a labor shortage in America. The causes are complicated. In reality, there’s no literal shortage of potential workers, but many workers prefer to stay home because of some combination of government benefits, child-care responsibilities or inadequate pay offered by employers (who can’t afford to pay more themselves because they’ll go out of business).
A lot of this centers on lower-wage jobs such as waiters, store clerks, fast-food staff and office assistants. But, there will be a labor shortage coming soon in more high-skilled areas such as engineers, pilots, machinists and medical personnel.
This shortage will not be due to low pay but to vaccine mandates.
Joe Biden ordered that all federal contractors had to be fully vaccinated. (That’s in addition to federal workers and the military who already have no choice). This mandate is different from the OSHA vaccine mandate that applies to all employers with 100 or more employees.
The OSHA mandate has been stopped by the courts while the federal contractor mandate goes into full force and effect on Jan. 4 (pushed back from the original Dec. 8). The vaccinated rate among federal contractors is actually lower than the country as a whole.
The national vaccination rate is approaching 70%, while the federal contractor rate is closer to 60% and even lower in some specialties such as avionics. These workers know the vaccine is available, understand the risks (both ways because of side effects) and have chosen not to be vaccinated.
It’s almost impossible to change their minds at this point.
Expect a Train Wreck on Jan. 4
But the Biden administration is not backing off the mandate, despite the fact that the vaccines don’t stop you from getting the virus or from spreading it to others. Its effects also wear off after a few months, which is why they’re pushing the booster shots so aggressively.
And if you think you’re fully vaccinated after getting both jabs, you might want to think again. Dr. Fauci is warning that we may have to change the definition of “fully vaccinated” to include getting the booster.
Well, what about when the booster wears off? Are you going to need booster shots every few months to be considered fully vaccinated or else lose your job and your ability to lead a normal life?
The Federal contractor workforce is huge; it’s in the millions. So, expect an economic train wreck on Jan. 4.
Workers from Boeing to Textron and hundreds of thousands of other firms will be fired or quit that day.
The economy is already weak. The supply chain is already busted. This mass termination of skilled contractors could put the economy into a recession.
It’s a good time to lighten your equity exposure. As usual, the stock market will be the last to see this coming.
Regards,
Jim Rickards
for The Daily Reckoning
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>>> Gold Breakout Imminent!
BY JAMES RICKARDS
NOVEMBER 15, 2021
https://dailyreckoning.com/gold-breakout-imminent/
This is getting ridiculous. And that’s a good thing. By “this,” I mean the price of gold, and by “ridiculous,” I mean repetitive to the point of absurdity. That’s OK. The prospects for gold from here are highly positive.
By now, readers are tired of my description of gold trading as range-bound between $1,700 per ounce on the low side and $1,900 per ounce on the high side, with $1,800 per ounce as the central tendency. That’s completely accurate but also highly repetitive, since it has held true with only brief and minor exceptions for the past year.
This pattern emerged in November 2020 after gold fell from its all-time high of $2,069 per ounce on Aug. 6, 2020. The predictable question from investors is: “Fine, we get it. But, when does the pattern break either to the upside or downside? What’s next for gold?”
That’s where the good news begins. Yes, gold has been range-bound, but the range is getting smaller. While swings of 5% in a matter of days were common as recently as last summer, that volatility has cooled off. Gold still moves up and down in price, but the swings are much more compact.
The central tendency is still $1,800 per ounce, but the swings are more tightly bunched between $1,750 and $1,850 (again, with a few exceptions). That’s a 5.5% band to replace the prior 11.0% band.
We’re also seeing a pattern of lower highs and higher lows as compression continues. That’s a technical pattern called a pennant because it looks like a sports pennant if you draw converging lines through the highs and lows.
A pennant is a setup for a breakout. The breakout can occur in either direction, but it’s more common for the breakout to continue the trend that existed before the consolidation.
Whether we take the $1,685 price on March 30, 2021, the $1,725 price on Aug. 9, 2021, or the $1,722 price on Sept. 29, 2021, it’s clear that this pennant formed in the wake of an uptrend. This suggests that the breakout will be to the upside and it will occur soon.
There’s a run of fundamental data that supports this technical view. The first piece of evidence is that the real price of physical bullion today is not $1,864 per ounce (according to the COMEX gold futures contract price), but closer to $2,000 per ounce according to my gold bullion dealer sources.
The difference between the two prices is about 8%.
The problem with this pricing method is that a normal dealer commission is around 2.5%. Any commission higher than that is not really a commission. It’s a reflection of scarcity, delivery delays and other logistical issues in getting actual physical bullion instead of paper gold contracts.
In other words, $1,925 per ounce is the real price of real physical bullion. Everything else is just paper.
The second fundamental factor is that Russia is back in the game. As readers know, Russia has increased its gold reserves by 1,700 metric tonnes since 2009. Gold reserves were 600 metric tonnes in 2009 and are 2,298.5 metric tonnes today, a 283% increase in the past twelve years.
The Central Bank of Russia has pursued this acquisition plan in a steady and incremental way under President Putin and Central Bank Chief Elvira Nabiullina. Acquisitions of gold were regular in amounts of about 5 to 30 metric tonnes per month like clockwork to avoid disrupting the market.
In April of last year, the clock stopped. Russia reduced its holdings slightly in April, July, August, September and October 2020 and January and April 2021. Holdings were unchanged in November and December 2020 and February, March, May and June of 2021.
Now, Russia is back on the buy side. It purchased 3.1 metric tonnes in July 2021 and another 3.1 metric tonnes in September 2021 (August was unchanged). Analysts should not mistake this renewed purchasing as a buying binge by Russia. It’s something more subtle.
Russia is running the world’s most sophisticated hedging operation inside its global reserve account of hard currencies and gold. The object is to maintain gold at about 20% of total reserves. This goal was achieved in early 2020, which accounts for the fact that purchases tailed off after that.
Russia’s reserves are now bulging because of the steeply higher price of oil. This increases Russia’s dollar reserves since oil is priced in dollars. If dollar reserves are increasing and Russia wants to maintain gold at 20% of total reserves, it has to buy more gold to maintain the allocation. This is no different than what everyday investors do when they rebalance target portfolios to account for large gains or losses in a particular asset class.
It’s also consistent with Russia’s hedging objectives. If the dollar retains its value, gold may not move much in price. Still, the allocation of gold in the portfolio acts as insurance. If the dollar crashes in value, the dollar price of gold will soar and Russia’s losses on its dollar portfolio will be offset by gains on its gold portfolio.
In its current form, the dollar is losing value, at least in relation to oil. The dollar price of gold has not moved much. So, that’s an opportune time to buy gold to maintain the hedge without paying a premium. The Russians are masters of this kind of dynamic hedging (unlike Americans). They just proved it again through the combination of expensive oil (generating revenue) and steady gold prices (offering an attractive entry point at which to maintain the hedge).
But Russia’s not alone. Other major central banks that have added materially to their gold reserves in recent months are Thailand (90.20 metric tonnes), Brazil (53.75 metric tonnes), Turkey (8.67 metric tonnes), India (8.4 metric tonnes) and Qatar (3.12 metric tonnes). Some central banks were net sellers, but the total sales of the top five were less than 25 metric tonnes, far smaller than the total additions.
And of course, China has acquired massive amounts of gold in recent years, which has been part of a concerted overall strategy. And recently, Chinese gold imports from Hong Kong hit a five-month high, up nearly 60% in September.
These central bank purchases were in anticipation of a declining dollar and higher dollar inflation. The central banks are buying gold to stay ahead of the curve. Shouldn’t you do the same?
Regards,
Jim Rickards
for The Daily Reckoning
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>>> Supply Chain Disruptions Will Continue
BY JAMES RICKARDS
NOVEMBER 10, 2021
https://dailyreckoning.com/supply-chain-disruptions-will-continue/
Supply Chain Disruptions Will Continue
Forty percent of all the cargo into the United States comes through the ports of Los Angeles and Long Beach. Offshore, there are thousands of containers stacked up on vessels waiting to get in. How many containers can the ports unload on a normal day?
New containers are coming in. There are daily arrivals. When will that supply chain backlog clear?
The answer is never. If there are more coming in than you can unload and you have an existing backlog that’s getting worse, it will never clear.
But let’s just say that with no new shipments coming in, it would take 30 days just to unload what’s already waiting offshore. Thirty days, by the way, puts you into December and the Christmas rush.
And getting it offloaded in California is just the beginning of the supply chain. You’ve got to put it on a train or a truck and get it to a distribution center and put it on another truck and get it to a store.
But wait, there’s also a trucking shortage. That’s a big part of the supply chain problem. If you can unload the merchandise but can’t transport it due to a trucking shortage, what good is it?
So this is not getting better. That’s probably the understatement of the year.
You may have heard about a semiconductor shortage. But you don’t need a computer, so what’s the big deal? Well, no, there are semiconductors in everything. You have semiconductors in your refrigerator, dishwasher, home entertainment system, etc.
The point is we’re highly dependent on vulnerable supply chains that are currently breaking down. Something radical is going to have to happen. We’re just going to have to stop importing goods. And China may actually oblige us, though not for these reasons…
China now has what’s called a zero-COVID policy. That means they’re not going to tolerate any cases. If they see a case, they’re going to take extreme actions, and they are.
But this is a country of 1.4 billion people. It’s the second-largest economy in the world. You’re going to have zero COVID? Sorry, that’s not realistic. You can’t have zero COVID.
The policy is bound to fail. Ample evidence indicates lockdowns don’t work. Masks don’t work. The virus goes where it wants. It’s going to run its course and then fade, no matter what.
But if you’ve decided that your policy is zero COVID cases? You’re just going to shut down your economy, or parts of your economy, cities, hubs, transportation networks, factories, more or less randomly. That reduces economic output, obviously, but it also breaks up the supply chain.
What if the particular outbreak shuts down a factory? Sure, that’s bad for the factory. But what if that factory is a critical supplier of intermediate parts to another factory that’s not shut down?
Guess what? The other factory is going to be idle because they can’t get the parts.
The shutdown ripples, and that’s the key element. Global trade is a complex, dynamic system. It’s very efficient under normal circumstances. But what we know about complex, dynamic systems is that it takes very little to disturb them. A very small event somewhere in the system can cause the whole system to break down.
We have more than one event occurring, incidentally, and they’re not small. It’s therefore not surprising that the system is breaking down.
China has a severe energy shortage right now. Well over 50% of its total electricity generation comes from coal fire plants. It gets most of its coal from Australia. But China started a trade war with Australia because Australia was calling for an independent investigation of the source of the COVID virus, which China didn’t want. The result has been a shortage of coal in China.
So what did China do? It imposed price controls on coal. But we all know that price controls don’t work; it’s basic economics. When you cap the price of coal, you get less of it.
The coal shortages are not going away, and China is dealing with the shortages by diverting power to densely populated residential areas and housing. That’s understandable because the Chinese Communist Party doesn’t want people freezing in the dark. That’s a good recipe for social unrest.
But if there’s an energy shortage and you’re diverting it to people for political reasons, then who gets deprived? The answer is factories. And so you shut down steel mills, for example, which again causes another disruption in the supply chain. It has a ripple effect.
One of the big industries in China is lithium mining. Well, if you shut down the mining because you don’t have coal to run the electricity, where are you going to get the lithium to make the lithium-ion batteries to get a new Tesla?
The answer is you’re not. The waiting list for Teslas is about six months. I’m not going to get into a debate about Teslas, but if you want one, don’t think you’re getting one soon.
When you add it all up, we have a serious problem.
I recently spoke to the CEO of a major corporation. He said, “Jim, what you have to understand is that it took us 30 years to build these supply chains. We blew it up in three years, beginning in 2018, and you can’t put it back together. This is Humpty Dumpty. It will take at least 10 years to reconstruct the supply chains if we don’t want to do it with China and globalization.”
Building
So don’t think that any of this is going away soon.
Germany’s another example. Due to pressure from environmentalist groups, Germany got rid of all its coal mines and nuclear plants. Guess what? The Germans are going to freeze in the dark this winter because they’re utterly dependent on natural gas, which is a fossil fuel, by the way. They can’t rely on wind and solar because they’re intermittent and can’t meet demand.
Vladimir Putin controls the tap on the natural gas pipelines. He’s dialing it down. He’s saying, “You want natural gas? Be prepared to pay me a lot of money, or you’re just not getting it.”
That’s going to hurt German industrial production, which is already going down. Again, that results in more supply chain disruption.
Now let’s consider the role of vaccine mandates in supply chain disruptions…
The Biden administration is pushing mandates hard. There are also lots of state and city mandates, especially in blue states. The bluer the state, generally speaking, the stricter the mandates.
Now, these experimental mRNA vaccines don’t stop you from acquiring the virus or from spreading it to others, and their effectiveness fades with time, so mandates really have little scientific basis. But put all these considerations aside and focus on their practical effects.
Take a look at the aviation industry. There are thousands, perhaps millions, of components that go into the manufacturing of an aircraft. Those components are specialized and they’re made in different places. Then they’re shipped and assembled.
The avionics industry (aviation electronics) is very heavily concentrated in the vicinity of Wichita, Kansas, for historical and other reasons. It’s like the Silicon Valley of avionics.
But the industry has a very low participation rate in the vaccine mandates, meaning about 50%. Nationally, about 80% have received at least one dose. But in this particular industry, maybe because it’s more male-oriented, maybe because it’s more conservative, the rate is much smaller. The reason doesn’t really matter.
But if they’re not vaccinated by now, they probably aren’t going to be. It’s not like they don’t know these things are available for free at the local CVS. Since they won’t obey the mandates, they’re going to quit, get fired, take early retirement, etc. That means a shortage in critical avionics.
What does it mean when the airlines cannot get their avionics updated? It means those planes go out of service, potentially, or they put them in for service and they don’t come out for a long time. We’re talking six months for some of the more sophisticated navigation and communication systems.
The backlogs are already building in that industry. How does it help the economy if planes are sitting idle because of components shortages?
And look at the impact of mandates on pilots. Many pilots are hesitant to take the vaccine because studies indicate pilots are more susceptible to developing blood clots than the general population.
Well, guess what’s a known side effect of the vaccine? You guessed it, blood clots.
Not only can blood clots kill them, they could also end their careers because pilots must undergo rigorous health tests regularly.
Southwest Airlines recently had to cancel thousands of flights. American later canceled thousands of flights. They like to claim it’s the weather. But how come the weather only affects one airline at a time?
It wasn’t the weather, it was pilots (and air traffic controllers) conducting informal strikes because of the vaccine mandates.
Oh, and mandates extend to large air cargo carriers like FedEx and UPS that haul freight all around the world. More supply chain disruptions if these planes aren’t flying.
Supply chain disruptions are a very big deal. The problem is pervasive. It’s not going away anytime soon because it would require undoing decades of globalization.
You’re going to have to get used to it. When I say get used to it, I don’t mean tough luck. I just mean that this problem is going to continue.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
>>> First Down Payment on a Boondoggle
BY JAMES RICKARDS
NOVEMBER 9, 2021
https://dailyreckoning.com/first-down-payment-on-a-boondoggle/
First Down Payment on a Boondoggle
Thirteen Republican congressmen crossed the aisle late Friday night to help pass a $1.2 trillion infrastructure bill. The original proposal was $2.3 trillion, so some Republicans consider it a victory.
But it creates programs that will likely remain in place once the bill’s spending authorization expires in five years. Like Ronald Reagan said, “Nothing lasts longer than a temporary government program.”
And at 2,700 pages, you can be sure there’s plenty of wasteful pork in it. Only about one-third of that money goes toward actual infrastructure such as bridges, tunnels, roads and airports.
The rest is for vague causes like “human infrastructure,” which includes training, oversight and other government intrusion favored by the Democrats.
Still, there was enough real infrastructure in the bill to gain bipartisan support. But this so-called bipartisan infrastructure bill is only one part of a more ambitious “infrastructure” package.
“Don’t Move, or I’ll Shoot”
The other legislation is a $1.75 trillion welfare bill (this figure used to be $3.5 trillion, but it was scaled back at the insistence of moderate Senate Democrats).
Nancy Pelosi and House Democrats were holding the infrastructure bill hostage as leverage to get the Senate to agree to their priorities on the welfare bill.
This strategy backfired both because the Senate does not like to be played by the House and some Democrats would have been happy if the welfare bill failed entirely.
The House hostage strategy was like holding a gun to your head and saying, “Don’t move, or I’ll shoot.”
Senators say, “Go ahead.” This muddle is entirely procedural. But what about the actual substance of the bills?
103,000 Lost Jobs!
There are expert or nonpartisan panels such as the Tax Foundation and the Congressional Budget Office that render verdicts on these issues to help members of Congress understand what they’re actually doing.
The Tax Foundation estimates that the Democrat welfare bill will destroy 103,000 jobs over the next 10 years.
Many of these job losses are due to tax increases, increased regulatory burdens and energy inefficiency introduced by the Green New Deal.
The job losses projected by the Tax Foundation are in addition to hundreds of thousands of job losses facing the economy in the short run because of vax mandates and the firing of employees who refuse to be injected with the gene-modification treatments called “vaccines.”
For example, New York City has had to close 20 FDNY fire companies because of suspensions, retirements and layoffs of firefighters who chose not to be vaccinated.
The same personnel losses are being reported in the NYPD, emergency medical workers, nurses, teachers, sanitation workers and others performing critical tasks needed to keep society running.
Politicians don’t care. For them, it’s vax or be fired. For the rest of us, it means more fires, unsafe streets, rats feeding on garbage and reduced medical care.
No Temporary Blip
The economic cost of this is huge on top of the social costs. It’s one reason economic growth almost stalled out in the third quarter.
Mortgage foreclosures in the third quarter of 2021 jumped 32% compared with the second quarter and 67% compared to the third quarter of 2020. There was a high correlation between this surge in foreclosures and the termination of government moratoriums on foreclosures.
This means that the economy was weak all along and that government programs in response to the pandemic only papered over the weakness. Now that the programs have ended, the weakness has emerged.
This is more than a temporary blip.
The foreclosure wave has just begun because many state and local moratoriums were continued even as federal relief ended. One by one those other moratoriums will be ended also, and the foreclosure wave will grow.
On the whole, the pandemic may be ending, but the economic aftermath of the pandemic has only just begun.
No Full Recovery Until 2045
This new wave of weakness will impact stock markets, which rose based on a “reopening” meme of increasing sales and spending as the economy gets back to normal.
But there is no normal. We’re living in a new post-pandemic world and signs of sustainable growth are hard to find. The effects of the pandemic on the economy will be intergenerational.
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.
Accordingly, we will not likely recover from this pandemic fully until 2045 or later in terms of savings, consumption, disinflation, low interest rates and low growth.
In the shorter term, 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, such as the “infrastructure” bills, is continually claimed as stimulus.
But 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. It’s just digging a deeper hole. At some point you have to stop digging.
The U.S. was already 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. If Biden’s trying to destroy the U.S. economy, he’s off to a very good start.
The New Depression, Continued
As I’ve argued before, this is all characteristic of a new great depression. 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.
That’s the reality we’re facing.
Meanwhile, inflation has hit a 30-year high. For the month of September, inflation rose at an annual rate of 4.4%, the highest since 1991. And October’s Producer Price Index came out today.
Wholesale prices increased 8.6% since last October, the highest annual pace in nearly 11 years.
Tomorrow, the Labor Department will release October’s Consumer Price Index, which is expected to continue recent trends.
Economists debate whether this recent rise in inflation is temporary or here to stay, but in the short run it doesn’t matter. Inflation is here today and your purchasing power is going down.
It’s hopeless to expect the government to cut down on deficit spending or money printing anytime soon. It’s all they know how to do.
Unfortunately, things will probably get worse.
Regards,
Jim Rickards
for The Daily Reckoning
<<<
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.
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